UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2010

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 (State or other jurisdiction of		34-0577130 (I.R.S. Employer
incorporation or organization)		Identification No.)
1835 Dueber Ave., SW, Canton, OH		44706-2798
(Address of principal executive offices)		(Zip Code)

330.438.3000
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ                    No o

     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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     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

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

Class		Outstanding at March 31, 2010
Common Stock, without par value		96,822,937 shares

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE TIMKEN COMPANY AND SUBSIDIARIES

Consolidated Statement of Income (Unaudited)

		Three Months Ended
		March 31,
		2010				2009
(Dollars in thousands, except per share data)
Net sales		$	913,690			$	866,616
Cost of products sold			690,999				712,002
Gross Profit			222,691				154,614
Selling, administrative and general expenses			133,057				123,411
Impairment and restructuring charges			5,525				13,755
Operating Income			84,109				17,448
Interest expense			(9,558	)			(8,429	)
Interest income			559				366
Other (expense) income, net			(601	)			7,973
Income from Continuing Operations Before Income Taxes			74,509				17,358
Provision for income taxes			45,854				18,793
Income (Loss) From Continuing Operations			28,655				(1,435	)
Income (loss) from discontinued operations, net of income taxes			336				(3,643	)
Net Income (Loss)			28,991				(5,078	)
Less: Net income (loss) attributable to noncontrolling interest			374				(5,948	)
Net Income Attributable to The Timken Company		$	28,617			$	870
Amounts Attributable to The Timken Company’s Common Shareholders:
Income from continuing operations		$	28,281			$	4,513
Income (loss) from discontinued operations, net of income taxes			336				(3,643	)
Net Income Attributable to The Timken Company		$	28,617			$	870
Net Income (Loss) per Common Share Attributable to The Timken Company Common Shareholders
Earnings per share — Continuing Operations		$	0.29			$	0.05
Earnings (loss) per share — Discontinued Operations			0.01				(0.04	)
Basic earnings per share		$	0.30			$	0.01
Diluted earnings per share — Continuing Operations		$	0.29			$	0.05
Diluted earnings (loss) per share — Discontinued Operations			0.01				(0.04	)
Diluted earnings per share		$	0.30			$	0.01
Dividends per share		$	0.09			$	0.18

See accompanying Notes to the Consolidated Financial Statements.

Consolidated Balance Sheet

		(Unaudited)
		March 31,				December 31,
		2010				2009
(Dollars in thousands)
ASSETS
Current Assets
Cash and cash equivalents		$	709,301			$	755,545
Accounts receivable, less allowances: 2010 — $34,103; 2009 — $41,605			489,054				411,226
Inventories, net			689,372				671,236
Deferred income taxes			60,877				61,508
Deferred charges and prepaid expenses			11,624				11,758
Other current assets			98,763				111,287
Total Current Assets			2,058,991				2,022,560
Property, Plant and Equipment—Net			1,302,542				1,335,228
Other Assets
Goodwill			221,038				221,734
Other intangible assets			129,762				132,088
Deferred income taxes			236,144				248,551
Other non-current assets			39,637				46,732
Total Other Assets			626,581				649,105
Total Assets		$	3,988,114			$	4,006,893
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Short-term debt		$	29,958			$	26,345
Accounts payable			221,852				156,004
Salaries, wages and benefits			161,567				142,471
Deferred income taxes			9,199				9,233
Other current liabilities			163,734				189,345
Current portion of long-term debt			14,679				17,035
Total Current Liabilities			600,989				540,433
Non-Current Liabilities
Long-term debt			471,229				469,287
Accrued pension cost			579,449				690,889
Accrued postretirement benefits cost			601,419				604,250
Deferred income taxes			6,611				6,091
Other non-current liabilities			98,928				100,375
Total Non-Current Liabilities			1,757,636				1,870,892
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) (2010 — 97,717,490 shares; 2009 — 97,034,033 shares)
Stated capital			53,064				53,064
Other paid-in capital			858,131				843,476
Earnings invested in the business			1,422,782				1,402,855
Accumulated other comprehensive loss			(699,291	)			(717,113	)
Treasury shares at cost (2010 — 894,553 shares; 2009 — 179,963 shares)			(23,567	)			(4,698	)
Total Shareholders’ Equity			1,611,119				1,577,584
Noncontrolling Interest			18,370				17,984
Total Equity			1,629,489				1,595,568
Total Liabilities and Shareholders’ Equity		$	3,988,114			$	4,006,893

See accompanying Notes to the Consolidated Financial Statements.

Consolidated Statement of Cash Flows
(Unaudited)

		Three Months Ended
		March 31,
		2010				2009
(Dollars in thousands)
CASH PROVIDED (USED)
Operating Activities
Net income attributable to The Timken Company		$	28,617			$	870
Net (income) loss from discontinued operations			(336	)			3,643
Net income (loss) attributable to noncontrolling interest			374				(5,948	)
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization			47,748				50,148
Impairment charges			—				3,795
Loss (gain) on sale of assets			941				(492	)
Deferred income tax provision			21,659				(254	)
Stock-based compensation expense			4,547				4,409
Pension and other postretirement expense			25,204				26,938
Pension contributions and other postretirement benefit payments			(118,702	)			(14,720	)
Changes in operating assets and liabilities:
Accounts receivable			(82,134	)			55,429
Inventories			(22,533	)			59,948
Accounts payable and accrued expenses			60,405				(133,863	)
Other — net			19,994				(20,165	)
Net Cash (Used) Provided by Operating Activities — Continuing Operations			(14,216	)			29,738
Net Cash Provided by Operating Activities — Discontinued Operations			336				3,388
Net Cash (Used) Provided by Operating Activities			(13,880	)			33,126
Investing Activities
Capital expenditures			(13,981	)			(32,710	)
Acquisitions			—				(42	)
Proceeds from disposals of property, plant and equipment			167				2,359
Other			(1,261	)			1,332
Net Cash Used by Investing Activities — Continuing Operations			(15,075	)			(29,061	)
Net Cash Used by Investing Activities — Discontinued Operations			—				(509	)
Net Cash Used by Investing Activities			(15,075	)			(29,570	)
Financing Activities
Cash dividends paid to shareholders			(8,690	)			(17,424	)
Net proceeds from common share activity			8,250				1,648
Purchase of treasury shares — net			(13,986	)			—
Proceeds from issuance of long-term debt			2,051				—
Payments on long-term debt			(2,471	)			(207	)
Short-term debt activity — net			4,119				6,241
Net Cash Used by Financing Activities			(10,727	)			(9,742	)
Effect of exchange rate changes on cash			(6,562	)			(3,086	)
Decrease In Cash and Cash Equivalents			(46,244	)			(9,272	)
Cash and cash equivalents at beginning of year			755,545				133,383
Cash and Cash Equivalents at End of Year		$	709,301			$	124,111

See accompanying Notes to the Consolidated Financial Statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands, except per share data)

Note 1 — Basis of Presentation

The accompanying Consolidated Financial Statements (unaudited) for The Timken Company (the Company) have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by the accounting principles generally accepted in the United States (U.S. GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to the Consolidated Financial Statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Certain amounts in the 2009 Consolidated Financial Statements have been reclassified to conform to the 2010 presentation.

During the first quarter of 2009, the Company recorded two adjustments related to its 2008 Consolidated Financial Statements. Net income (loss) attributable to noncontrolling interest increased by $6,100 (after-tax) due to a correction of an error related to the $18,385 goodwill impairment loss the Company recorded in the fourth quarter of 2008 for the Mobile Industries segment. In recording this goodwill impairment loss, the Company did not recognize that a portion of the loss related to two separate subsidiaries in India and South Africa of which the Company holds less than 100% ownership. In addition, income (loss) from continuing operations before income taxes decreased by $3,400, or $0.04 per share, ($2,044 after-tax or $0.02 per share) due to a correction of an error related to $3,400 of in-process research and development costs that were recorded in other current assets with the anticipation of being paid for by a third-party. However, the Company subsequently realized that the balance could not be substantiated through a contract with a third party. As a result of these errors, the Company’s first quarter 2009 results were overstated by $4,056 (after-tax). Management concluded the effect of these adjustments was immaterial to the Company’s 2008 and first-quarter 2009 financial statements as well as the full-year 2009 financial statements.

Note 2 — New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued new accounting guidance that amended the accounting and disclosure requirements for the consolidation of variable interest entities. The implementation of the new accounting guidance related to variable interest entities, effective January 1, 2010, did not have a material impact on the Company’s results of operations and financial condition.

Note 3 — Inventories

		March 31, 2010				December 31, 2009
Inventories, net:
Manufacturing supplies		$	56,187			$	53,022
Work in process and raw materials			298,652				269,075
Finished products			334,533				349,139
Total Inventories, net		$	689,372			$	671,236

An actual valuation of the inventory under the last-in, first-out (LIFO) method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these calculations are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation. The LIFO reserve at March 31, 2010 and December 31, 2009 was $243,795 and $237,669, respectively. The Company’s recognized an increase in its LIFO reserve of $6,126 during the first quarter of 2010 compared to a decrease in its LIFO reserve of $11,832 during the first quarter of 2009.

Note 4 — Property, Plant and Equipment

The components of property, plant and equipment were as follows:

		March 31,				December 31,
		2010				2009
Property, Plant and Equipment:
Land and buildings		$	594,881			$	611,670
Machinery and equipment			2,825,392				2,786,444
Subtotal			3,420,273				3,398,114
Less allowances for depreciation			(2,117,731	)			(2,062,886	)
Property, Plant and Equipment — net		$	1,302,542			$	1,335,228

At March 31, 2010 and December 31, 2009, machinery and equipment included approximately $110,000 and $104,300, respectively, of capitalized software. Depreciation expense for the three months ended March 31, 2010 and 2009 was $45,250 and $46,764, respectively. Depreciation expense on capitalized software for the three months ended March 31, 2010 and 2009 was approximately $5,300 and $5,000, respectively.

Note 5 — Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2010 were as follows:

		Beginning Balance				Acquisitions				Impairment				Other				Ending Balance
Segment:
Process Industries		$	49,505			$	—			$	—			$	(410	)		$	49,095
Aerospace and Defense			162,588				—				—				(286	)			162,302
Steel			9,641				—				—				—				9,641
Total		$	221,734			$	—			$	—			$	(696	)		$	221,038

Other primarily includes foreign currency translation adjustments.

Note 5 — Goodwill and Other Intangible Assets (continued)

The following table displays intangible assets as of March 31, 2010 and December 31, 2009:

		As of March 31, 2010												As of December 31, 2009
		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			$	15,390			$	63,749			$	79,139			$	14,321			$	64,818
Engineering drawings			2,000				2,000				—				2,000				2,000				—
Know-how			2,099				938				1,161				2,110				917				1,193
Land-use rights			7,950				3,036				4,914				7,948				2,964				4,984
Patents			4,432				3,034				1,398				4,432				2,936				1,496
Technology use			35,000				4,418				30,582				35,000				3,944				31,056
Trademarks			6,463				4,998				1,465				6,597				5,023				1,574
PMA licenses			8,792				2,320				6,472				8,792				2,207				6,585
Non-compete agreements			2,710				1,377				1,333				2,710				1,200				1,510
Unpatented technology			7,625				5,519				2,106				7,625				5,338				2,287
		$	156,210			$	43,030			$	113,180			$	156,353			$	40,850			$	115,503
Intangible assets not subject to amortization:
Goodwill		$	221,038			$	—			$	221,038			$	221,734			$	—			$	221,734
Tradename			1,400				—				1,400				1,400				—				1,400
Industrial license agreements			962				—				962				965				—				965
FAA air agency certificates			14,220				—				14,220				14,220				—				14,220
		$	237,620			$	—			$	237,620			$	238,319			$	—			$	238,319
Total intangible assets		$	393,830			$	43,030			$	350,800			$	394,672			$	40,850			$	353,822

Amortization expense for intangible assets was $2,375 for the three months ended March 31, 2010. Amortization expense for intangible assets is estimated to be approximately $11,400 for 2010; $11,000 in 2011; $10,600 in 2012; $8,100 in 2013 and $7,700 in 2014.

Note 6 — Financing Arrangements

Short-term debt at March 31, 2010 and December 31, 2009 was as follows:

		March 31,				December 31,
		2010				2009
Variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 1.98% to 4.86% and 1.98% to 5.05% at March 31, 2010 and December 31, 2009, respectively		$	29,958			$	26,345
Short-term debt		$	29,958			$	26,345

The lines of credit for certain of the Company’s foreign subsidiaries provide for borrowings up to $303,875. At March 31, 2010, the Company had borrowings outstanding of $29,958, which reduced the availability under these facilities to $273,917.

Note 6 — Financing Arrangements (continued)

The Company has a $100,000 Accounts Receivable Securitization Financing Agreement (Asset Securitization Agreement), which expires on November 15, 2010. Under the terms of the Asset Securitization Agreement, which expires on November 15, 2010, 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 this agreement are limited to certain borrowing base calculations. Any amounts outstanding under the Asset Securitization Agreement would be reported on the Company’s Consolidated Balance Sheet in short-term debt. Although the Company had no outstanding borrowings under the Asset Securitization Agreement as of March 31, 2010, certain borrowing base limitations reduced the availability under the Asset Securitization Agreement to $97,096. The cost of this credit facility, 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.

Long-term debt at March 31, 2010 and December 31, 2009 was as follows:

		March 31,				December 31,
		2010				2009
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%			249,697				249,680
Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.22% at March 31, 2010)			12,200				12,200
Variable-rate State of Ohio Air Quality Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.24% at March 31, 2010)			9,500				9,500
Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (0.24% at March 31, 2010)			17,000				17,000
Variable-rate credit facility with US Bank for Advanced Green Components, LLC, maturing on July 17, 2010 (1.35% at March 31, 2010)			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 (4.813% at March 31, 2010)			3,320				5,620
Other			13,071				11,202
			485,908				486,322
Less current maturities			14,679				17,035
Long-term debt		$	471,229			$	469,287

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 of the notes were used for the repayment of the Company’s fixed-rate 5.75% unsecured Senior Notes, which were due to mature on February 15, 2010.

On July 10, 2009, the Company entered into a new $500,000 Amended and Restated Credit Agreement (Senior Credit Facility). At March 31, 2010, 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 March 31, 2010, the Company was in full compliance with the covenants under the Senior Credit Facility.

Advanced Green Components, LLC (AGC) is a joint venture of the Company. The Company is the guarantor of $3,320 of AGC’s $9,440 credit facility with US Bank.

Note 7 — Product Warranty

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 accruals for the three months ended March 31, 2010 and the twelve months ended December 31, 2009:

		March 31,				December 31,
		2010				2009
Beginning balance, January 1		$	5,420			$	13,515
Expense			1,358				4,699
Payments			(783	)			(12,794	)
Ending balance		$	5,995			$	5,420

The product warranty accrual at March 31, 2010 and December 31, 2009 was included in other current liabilities on the Consolidated Balance Sheet.

Note 8 — Equity

						The Timken Company Shareholders
														Earnings				Accumulated
										Other				Invested				Other
						Stated				Paid-In				in the				Comprehensive				Treasury				Noncontrolling
		Total				Capital				Capital				Business				Income				Stock				Interest
Balance at December 31, 2009		$	1,595,568			$	53,064			$	843,476			$	1,402,855			$	(717,113	)		$	(4,698	)		$	17,984
Net income			28,991												28,617												374
Foreign currency translation adjustment			(13,187	)															(13,187	)
Pension and postretirement liability adjustment (income tax benefit of $8,907)			29,419																29,421								(2	)
Unrealized loss on marketable securities (net of income tax of $28)			69																55								14
Change in fair value of derivative financial instruments, net of reclassifications			1,533																1,533
Total comprehensive income			46,825
Dividends — $0.09 per share			(8,690	)											(8,690	)
Tax benefit from compensation			69								69
Stock-based compensation expense			4,547								4,547
Tender of 714,590 shares to treasury			(17,011	)							1,858												(18,869	)
Issuance of 683,457 shares from authorized			8,181								8,181
Balance at March 31, 2010		$	1,629,489			$	53,064			$	858,131			$	1,422,782			$	(699,291	)		$	(23,567	)		$	18,370

The total comprehensive loss for the three months ended March 31, 2009 was $39,688.

Note 9 — Earnings Per Share

The following table sets forth the reconciliation of the numerator and the denominator of basic earnings per share and diluted earnings per share for the three months ended March 31, 2010 and 2009:

		Three Months Ended March 31,
		2010				2009
Numerator:
Income from continuing operations attributable to The Timken Company		$	28,281			$	4,513
Less: distributed and undistributed earnings allocated to nonvested stock			115				31
Income from continuing operations available to common shareholders for basic earnings per share and diluted earnings per share		$	28,166			$	4,482
Denominator:
Weighted average number of shares outstanding — basic			96,360,137				96,028,860
Effect of dilutive options			340,119				—
Weighted average number of shares outstanding, assuming dilution of stock options			96,700,256				96,028,860
Basic earnings per share from continuing operations		$	0.29			$	0.05
Diluted earnings per share from continuing operations		$	0.29			$	0.05

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 2,367,304 and 4,938,146 during the first quarter of 2010 and 2009, respectively.

Note 10 — Segment Information

The primary measurement used by management to measure the financial performance of each segment is adjusted EBIT (earnings before interest and taxes, excluding the effect of amounts related to certain items that management considers not representative of ongoing operations such as impairment and restructuring, manufacturing rationalization and integration costs, one-time gains and losses on disposal of non-strategic assets, allocated receipts or payments made under the U.S. Continued Dumping and Subsidy Offset Act (CDSOA) and gains and losses on the dissolution of subsidiaries).

		Three Months Ended
		March 31,
		2010				2009
Net sales to external customers:
Mobile Industries		$	367,489			$	300,623
Process Industries			205,901				224,174
Aerospace and Defense			92,093				109,254
Steel			248,207				232,565
		$	913,690			$	866,616
Intersegment sales:
Process Industries		$	669			$	922
Steel			22,120				16,003
		$	22,789			$	16,925
Segment EBIT, as adjusted:
Mobile Industries		$	42,454			$	(2,345	)
Process Industries			26,939				43,492
Aerospace and Defense			12,801				18,108
Steel			19,902				(7,262	)
Total EBIT, as adjusted, for reportable segments		$	102,096			$	51,993
Unallocated corporate expenses			(13,779	)			(12,317	)
Impairment and restructuring			(5,525	)			(13,755	)
Rationalization and integration charges			(1,475	)			(1,465	)
Other			(205	)			1,222
Interest expense			(9,558	)			(8,429	)
Interest income			559				366
Intersegment adjustments			2,396				(257	)
Income from continuing operations before income taxes		$	74,509			$	17,358

Intersegment sales represent sales between the segments. These sales are eliminated in consolidation.

Note 11 — Impairment and Restructuring Charges

Impairment and restructuring charges by segment were comprised of the following:

For the three months ended March 31, 2010:

		Mobile				Process				Aerospace &
		Industries				Industries				Defense				Steel				Corporate				Total
Impairment charges		$	—			$	—			$	—			$	—			$	—			$	—
Severance expense and related benefit costs			2,253				1,527				630				19				570				4,999
Exit costs			394				30				102				—				—				526
Total		$	2,647			$	1,557			$	732			$	19			$	570			$	5,525

For the three months ended March 31, 2009:

		Mobile				Process				Aerospace &
		Industries				Industries				Defense				Steel				Corporate				Total
Impairment charges		$	769			$	3,026			$	—			$	—			$	—			$	3,795
Severance expense and related benefit costs			6,738				959				54				446				1,200				9,397
Exit costs			—				562				—				1				—				563
Total		$	7,507			$	4,547			$	54			$	447			$	1,200			$	13,755

The following discussion explains the major impairment and restructuring charges recorded for the periods presented; however, it is not intended to reflect a comprehensive discussion of all amounts in the tables above.

Selling and Administrative Reductions

In March 2009, the Company announced the realignment of its organization to improve efficiency and reduce costs as a result of the economic downturn. During the first quarter of 2010 and 2009, the Company recorded $1,348 and $2,307, respectively, of severance and related benefit costs related to this initiative to eliminate approximately 25 employees and 26 employees, respectively. Of the $1,348 charge recorded during the first quarter of 2010, $570 related to Corporate, $375 related to the Process Industries Segment, $292 related to the Mobile Industries segment, $90 related to the Aerospace and Defense segment and $21 related to the Steel segment. Of the $2,307 charge recorded during the first quarter of 2009, $1,200 related to Corporate, $472 related to the Mobile Industries segment, $446 related to the Steel segment, $180 related to the Process Industries segment and $9 related to the Aerospace and Defense segment.

Manufacturing Workforce Reductions

During the first quarter of 2010, the Company recorded $3,319 in severance and related benefit costs to eliminate approximately 60 associates to properly align its business as a result of the continued downturn in the economy and expected market demand. Of the $3,319 charge, $1,627 related to the Mobile Industries segment, $1,152 related to the Process Industries segment and $540 related to the Aerospace and Defense segment. During the first quarter of 2009, the Company recorded $6,515 in severance and related benefit costs, including a curtailment of pension benefits of $1,850, to eliminate approximately 800 associates to properly align its business as a result of the continued downturn in the economy and expected market demand. Of the $6,515 charge, $5,709 related to the Mobile Industries segment, $761 related to the Process Industries segment and $45 related to the Aerospace and Defense segment.

Mobile Industries

In March 2007, the Company announced the closure of its manufacturing facility in Sao Paulo, Brazil. The Company completed the closure of this facility on March 31, 2010. The Company expects to incur pretax costs of 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 $25,292 as of March 31, 2010 related to this closure. During the first quarter of 2010 and 2009, the Company recorded $312 and $557, respectively, of severance and related benefit costs associated with the closure of this facility.

In addition to the above charges, the Company recorded impairment charges of $769 during the first quarter of 2009 related to impairment of fixed assets at one of its facilities in France as a result of the carrying value of these assets exceeding expected future cash flows.

Note 11 — Impairment and Restructuring Charges (continued)

Process Industries

In May 2004, the Company announced plans to rationalize the Company’s three bearing plants in Canton, Ohio within the Process Industries segment. The Company expects to incur pretax costs of approximately $70,000 to $80,000 (including pretax cash costs of approximately $50,000), by the middle of 2010.

During the first quarter of 2009, the Company recorded impairment charges of $3,026 and exit costs of $562 as a result of Process Industries’ rationalization plans. Including rationalization costs recorded in cost of products sold and selling, administrative and general expenses, the Process Industries segment has incurred cumulative pretax costs of approximately $69,761 as of March 31, 2010 for these rationalization plans.

The following is a rollforward of the consolidated restructuring accrual for the three months ended March 31, 2010 and the twelve months ended December 31, 2009:

		March 31,				December 31,
		2010				2009
Beginning balance, January 1		$	33,967			$	17,021
Expense			5,525				55,598
Payments			(14,469	)			(38,652	)
Ending balance		$	25,023			$	33,967

The restructuring accrual at March 31, 2010 and December 31, 2009 is included in other current liabilities on the Consolidated Balance Sheet. The accrual at March 31, 2010 includes $18,578 of severance and related benefits, with the balance primarily representing environmental exit costs. The majority of the $18,578 accrual relating to severance and related benefits is expected to be paid by the end of 2010.

Note 12 — Retirement and Postretirement Benefit Plans

The following table sets forth the net periodic benefit cost for the Company’s retirement and postretirement benefit plans. The amounts for the three months ended March 31, 2010 are based on actuarial calculations prepared during 2009. Consistent with prior years, these calculations will be updated later in the year. These updated calculations may result in different net periodic benefit cost for 2010. The net periodic benefit cost recorded for the three months ended March 31, 2010 is the Company’s best estimate of the period’s proportionate share of the amounts to be recorded for the year ending December 31, 2010.

		Pension								Postretirement
		Three Months Ended								Three Months Ended
		March 31,								March 31,
		2010				2009				2010				2009
Components of net periodic benefit cost
Service cost		$	9,525			$	8,622			$	679			$	789
Interest cost			39,749				39,409				9,144				10,599
Expected return on plan assets			(49,290	)			(47,328	)			—				—
Amortization of prior service cost (credit)			2,267				2,861				(385	)			(544	)
Amortization of net actuarial loss			12,204				9,444				1,312				1,256
Pension curtailments and settlements			—				1,850				—				—
Amortization of transition asset			(1	)			(20	)			—				—
Net periodic benefit cost		$	14,454			$	14,838			$	10,750			$	12,100

Note 13 — Income Taxes

		Three Months Ended
		March 31,
		2010				2009
Provision for income taxes		$	45,854			$	18,793
Effective tax rate			61.5	%			108.3	%

The Company’s provision for income taxes in interim periods is computed in accordance with interim period income tax accounting rules by applying the appropriate annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items, including interest on prior year tax liabilities, are recorded during the period in which they occur.

The effective tax rate in the first quarter of 2010 was higher than the U.S. federal statutory tax rate primarily due to a $21,621 charge to income tax expense to record the deferred tax impact of the recently enacted U.S. Patient Protection and Affordable Care Act (as amended), losses at certain foreign subsidiaries where no tax benefit could be recorded and U.S. state and local taxes. These increases were partially offset by the earnings in certain foreign jurisdictions where the effective tax rate is less than 35%.

The first quarter of 2009 resulted in $18,793 of income tax expense, or an effective tax rate of 108.3%. This tax rate was caused by an application of the interim period accounting rules for income taxes, as income tax expense on earnings from profitable affiliates exceeded tax benefits that could be recorded on losses from unprofitable affiliates.

In the first quarter of 2010, the Company recorded a $14,096 adjustment to other comprehensive income for deferred taxes on postretirement prescription drug benefits, specifically the employer subsidy provided by the U.S. government under the Medicare Part D program (the Medicare subsidy). During the first quarter of 2010, the Company determined it had provided deferred taxes on postretirement benefit plan accruals recorded through other comprehensive income net of the Medicare subsidy, rather than on a gross basis. The cumulative impact of this error resulted in a cumulative understatement of deferred tax assets totaling $14,096 and a corresponding understatement of accumulated other comprehensive loss. Management concluded the effect of the adjustment was not material to the Company’s prior three fiscal years and first quarter 2010 financial statements, as well as the estimated full-year 2010 financial statements.

Note 14 — 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 million in cash proceeds for these operations and retained certain receivables, 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. Results for 2009 for the NRB operations are presented as discontinued operations.

Note 14 — Divestitures (continued)

The following results of operations for this business have been treated as discontinued operations for all periods presented.

		Three Months Ended March 31,
		2010				2009
Net sales		$	—			$	93,762
Cost of goods sold			—				96,250
Gross profit			—				(2,488	)
Selling, administrative and general expenses			—				15,584
Impairment and restructuring charges			—				989
Interest expense, net			—				21
Other (expense) income, net			—				(505	)
(Loss) before income taxes on operations			—				(19,587	)
Income tax benefit on operations			—				15,944
Gain on divestiture			777				—
Income tax expense on disposal			(441	)			—
Income (loss) from discontinued operations		$	336			$	(3,643	)

As of March 31, 2010, there were no assets or liabilities remaining from the divestiture of the NRB operations. Working capital adjustments associated with the sale will be finalized during 2010.

Note 15 — Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB provides accounting rules that classify the inputs used to measure fair value into the following hierarchy:

	Level 1 —		Unadjusted quoted prices in active markets for identical assets or liabilities.
	Level 2 —		Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
	Level 3 —		Unobservable inputs for the asset or liability.

The following table presents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2010:

		Fair Value at March 31, 2010
		Total				Level 1				Level 2				Level 3
Assets:
Available-for-sale securities		$	7,286			$	7,286			$	—			$	—
Foreign currency hedges			4,490				—				4,490				—
Total Assets		$	11,776			$	7,286			$	4,490			$	—
Liabilities:
Foreign currency hedges		$	7,710			$	—			$	7,710			$	—
Total Liabilities		$	7,710			$	—			$	7,710			$	—

The Company uses publicly available foreign currency forward and spot rates to measure the fair value of its foreign currency forward contracts.

The Company does not believe it has significant concentrations of risk associated with the counterparties to its financial instruments.

Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, commercial paper, short-term borrowings and accounts payable are a reasonable estimate of their fair value due to the short-term nature of these instruments. The fair value of the Company’s long-term fixed-rate debt, based on quoted market prices, was $446,060 and $440,090 at March 31, 2010 and December 31, 2009, respectively. The carrying value of this debt was $454,089 and $430,610 at March 31, 2010 and December 31, 2009, respectively.

Note 16 — Derivative Instruments and Hedging Activities

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are commodity price risk, foreign currency exchange rate risk, and interest rate risk. Forward contracts on various commodities are entered into to manage the price risk associated with forecasted purchases of natural gas used in the Company’s manufacturing process. Forward contracts on various foreign currencies are entered into to manage the foreign currency exchange rate risk on forecasted revenue denominated in foreign currencies. Other forward exchange contracts on various foreign currencies are entered into to manage the foreign currency exchange rate risk associated with certain of the Company’s commitments denominated in foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s fixed and floating-rate borrowings.

The Company designates certain foreign currency forward contracts as cash flow hedges of forecasted revenues, and certain interest rate hedges as fair value hedges of fixed-rate borrowings. The majority of the Company’s natural gas forward contracts are not subject to any hedge designation as they are considered within the normal purchases exemption.

The Company does not purchase or hold any derivative financial instruments for trading purposes.

As of March 31, 2010, the Company had $264,415 of outstanding foreign currency forward contracts at notional value. The total notional value of foreign currency hedges as of December 31, 2009 was $248,035.

Note 16 — Derivative Instruments and Hedging Activities (continued)

Cash Flow Hedging Strategy

For certain derivative instruments that are designated as and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion), or hedge components excluded from the assessment of effectiveness, are recognized in the Consolidated Statement of Income during the current period.

To protect against a reduction in the value of forecasted foreign currency cash flows resulting from export sales over the next year, the Company has instituted a foreign currency cash flow hedging program. The Company hedges portions of its forecasted intra-group revenue or expense denominated in foreign currencies with forward contracts. When the dollar strengthens significantly against the foreign currencies, the decline in the present value of future foreign currency revenue is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts.

Fair Value Hedging Strategy

For derivative instruments that are designated and qualify as fair value hedges (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in the same line item associated with the hedged item (i.e., in “interest expense” when the hedged item is fixed-rate debt).

The following table presents the fair value and location of all assets and liabilities associated with the Company’s hedging instruments within the unaudited Consolidated Balance Sheet:

				Asset Derivatives								Liability Derivatives
		Balance Sheet		Fair Value				Fair Value				Fair Value				Fair Value
		Location		at 3/31/10				at 12/31/09				at 3/31/10				at 12/31/09
Derivatives designated as hedging instruments
Foreign currency forward contracts		Other non-current liabilities		$	1,922			$	675			$	761			$	1,849
Total derivatives designated as hedging instruments				$	1,922			$	675			$	761			$	1,849
Derivatives not designated as hedging instruments
Foreign currency forward contracts		Other non-current assets/liabilities		$	2,568			$	1,976			$	6,949			$	4,004
Total derivatives				$	4,490			$	2,651			$	7,710			$	5,853

Note 16 — Derivative Instruments and Hedging Activities (continued)

The following tables present the impact of derivative instruments and their location within the unaudited Consolidated Statement of Income:

				Amount of gain or (loss)
		Location of gain or		recognized in income
Derivatives in fair value		(loss) recognized in		on derivative
hedging relationships		income on derivative		March 31, 2010				March 31, 2009
Interest rate swaps		Interest expense		$	—			$	(706	)
Natural gas forward contracts		Other (expense) income, net			—				(1,326	)
Total				$	—			$	(2,032	)

				Amount of gain or (loss)
Hedged items in		Location of gain or		recognized in income
fair value hedging		(loss) recognized in		on derivative
relationships		income on derivative		March 31, 2010				March 31, 2009
Fixed-rate debt		Interest expense		$	—			$	706
Natural gas		Other (expense) income, net			—				1,106
Total				$	—			$	1,812

										Amount of gain or
		Amount of gain or (loss)								(loss) reclassified from
		recognized in OCI on								AOCI into income
		derivative								(effective portion)
		March 31,								March 31,
Derivatives in cash flow hedging relationships		2010				2009				2010				2009
Foreign currency forward contracts		$	1,554			$	(299	)		$	880			$	806
Total		$	1,554			$	(299	)		$	880			$	806

				Amount of gain or (loss)
				recognized in income on
Derivatives not		Location of gain or		derivative
designated as		(loss) recognized in		March 31,
hedging instruments		income on derivative		2010				2009
Foreign currency forward contracts		Cost of sales		$	(28	)		$	(88	)
Foreign currency forward contracts		Other (expense) income, net			(2,324	)			1,394
Total				$	(2,352	)		$	1,306

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Introduction

The Timken Company is a leading global manufacturer of highly engineered anti-friction bearings and assemblies, high-quality alloy steels and aerospace power transmission systems as well as a provider of related products and services. 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, including the aftermarket, and to achieve a leadership position in Asia.

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.

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 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 March 31, 2010, the Company has incurred costs of approximately $211.4 million, of which approximately $124.2 million have been capitalized to the Consolidated Balance Sheet. The total costs incurred were reduced from prior disclosure due to the removal of post-implementation expenses that were not part of the project. During 2008 and 2007, the Company completed the installation of Project O.N.E. for the majority of the Company’s domestic Bearings and Power Transmission Group 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 May 2010. With the completion of the May 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.

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, 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 had 2009 sales of approximately $407 million and approximately 80% of these sales were previously included in the Company’s Mobile Industries segment with the remainder included in the Process Industries and Aerospace and Defense reportable segments. Results for 2009 for the NRB operations are presented as discontinued operations. 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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview:
		1Q 2010				1Q 2009				$ Change				% Change
(Dollars in millions, except earnings per share)
Net sales		$	913.7			$	866.6			$	47.1				5.4	%
Income (loss) from continuing operations			28.7				(1.4	)			30.1			NM
Income (loss) from discontinued operations			0.3				(3.6	)			3.9				108.3	%
Income (loss) attributable to noncontrolling interest			0.4				(5.9	)			6.3				106.8	%
Net income attributable to The Timken Company			28.6				0.9				27.7			NM
Diluted earnings (loss) per share:
Continuing operations		$	0.29			$	0.05			$	0.24			NM
Discontinued operations			0.01				(0.04	)			0.05				125.0	%
Diluted earnings per share		$	0.30			$	0.01			$	0.29			NM
Average number of shares — diluted			96,700,256				96,028,860				—				0.7	%

The Timken Company reported net sales for the first quarter of 2010 of $913.7 million, compared to $866.6 million in the first quarter of 2009, an increase of 5.4%. Higher sales were driven by improved demand from automotive markets across the Mobile Industries and Steel segments, as well as higher surcharges, partially offset by lower sales in the Process Industries and Aerospace and Defense segments. For the first quarter of 2010, net income per diluted share was $0.30 compared to $0.01 per diluted share for the first quarter of 2009. Income from continuing operations per diluted share for the first quarter of 2010 was $0.29 compared to $0.05 per diluted share for the first quarter of 2009.

The Company’s first quarter results reflect the improvement in the mobile market sectors, higher surcharges, improved manufacturing performance and the favorable impact of restructuring initiatives, partially offset by lower demand from industrial and aerospace markets, higher LIFO expense and higher expense related to incentive compensation plans. Results for the first quarter of 2010 also reflect a one-time charge of $21.6 million to record the deferred tax impact of recently-enacted U.S. health care legislation.

Outlook

The Company’s outlook for 2010 reflects a modest improvement in the global economy following the deteriorating global economic climate that occurred throughout 2009. The Company expects sales in 2010 to be approximately 20% to 25% higher than 2009, primarily driven by stronger sales volume and higher surcharges in the Steel segment, as well as higher sales from the Mobile and Process Industries segments, offset by a slight decline in the Aerospace and Defense segment. The Company expects to leverage increases in sales through improved operating performance and its 2009 cost reduction initiatives. The strengthening margins will be partially offset by higher expense related to incentive compensation plans.

The Company expects to continue to generate cash from operations in 2010 as a result of higher earnings in 2010, compared to 2009. In addition, the Company expects to increase capital expenditures by approximately 20% in 2010 compared to 2009. Pension contributions are also expected to increase to approximately $135 million in 2010, including over $100 million of discretionary U.S. contributions, compared to $65 million in 2009.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The Statement of Income

Sales by Segment:
		1Q 2010				1Q 2009				$ Change				% Change
(Dollars in millions, and exclude intersegment sales)
Mobile Industries		$	367.5			$	300.6			$	66.9				22.3	%
Process Industries			205.9				224.2				(18.3	)			(8.2	)%
Aerospace and Defense			92.1				109.3				(17.2	)			(15.7	)%
Steel			248.2				232.5				15.7				6.8	%
Total Company		$	913.7			$	866.6			$	47.1				5.4	%

Net sales for the first quarter of 2010 increased $47.1 million, or 5.4%, compared to the first quarter of 2009, primarily due to higher volume of approximately $30 million primarily across the Mobile Industries’ light vehicles market sector and the Steel business segment, higher surcharges of $22 million and the effect of foreign currency exchange rate changes of approximately $20 million, partially offset by unfavorable pricing and sales mix of approximately $25 million.

Gross Profit:
		1Q 2010				1Q 2009				$ Change				Change
(Dollars in millions)
Gross profit		$	222.7			$	154.6			$	68.1				44.0	%
Gross profit % to net sales			24.4	%			17.8	%			—			660		bps
Rationalization expenses included in cost of products sold		$	1.2			$	1.2			$	—				0.0	%