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, 2008

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

For the transition period from                      to                     

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.

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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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, 2008, the aggregate market value of the registrant’s common shares held by non-affiliates of the registrant was $2,857,443,306 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, 2009
Common Shares, without par value		96,565,923 shares

DOCUMENTS INCORPORATED BY REFERENCE

Document		Parts Into Which Incorporated
Proxy Statement for the Annual Meeting of Shareholders to be held May 12, 2009 (Proxy Statement)		Part III

 

 

 

THE TIMKEN COMPANY
INDEX TO FORM 10-K REPORT

						PAGE
I.		PART I.
		Item 1.		Business			1
				General			1
				Industry Segments			1
				Geographical Financial Information			2
				Products			2
				Sales and Distribution			4
				Competition			4
				Trade Law Enforcement			5
				Joint Ventures			5
				Backlog			6
				Raw Materials			6
				Research			6
				Environmental Matters			7
				Patents, Trademarks and Licenses			7
				Employment			7
				Available Information			7
		Item 1A.		Risk Factors			8
		Item 1B.		Unresolved Staff Comments			12
		Item 2.		Properties			13
		Item 3.		Legal Proceedings			13
		Item 4.		Submission of Matters to a Vote of Security Holders			13
		Item 4A.		Executive Officers of the Registrant			14
II.		PART II.
		Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			15
		Item 6.		Selected Financial Data			18
		Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
		Item 7A.		Quantitative and Qualitative Disclosures about Market Risk			45
		Item 8.		Financial Statements and Supplementary Data			46
		Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			79
		Item 9A.		Controls and Procedures			79
		Item 9B.		Other Information			81
III.		Part III.
		Item 10.		Directors, Executive Officers and Corporate Governance			81
		Item 11.		Executive Compensation			81
		Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			81
		Item 13.		Certain Relationships and Related Transactions, and Director Independence			81
		Item 14.		Principal Accountant Fees and Services			81
IV.		Part IV.
		Item 15.		Exhibits and Financial Statement Schedules			82
EX-10.11
EX-10.12
EX-10.19
EX-10.28
EX-10.42
EX-12
EX-21
EX-23
EX-24
EX-31.1
EX-31.2
EX-32

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 has broadened its portfolio to include a wide array of friction management products and maintenance services to improve customers’ machinery and equipment operation, 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 customized to meet specific performance requirements, and finished and semi-finished steel components.

The Company’s business strategy is to grow by optimizing the capabilities and unique value Timken brings to the marketplace, as well as through acquisitions. The Company is focused on those markets that offer attractive opportunities for growth and customers who place a premium on Timken’s capabilities.

Timken’s global footprint consists of 61 manufacturing facilities, 12 technology centers, 15 distribution centers and more than 25,000 associates. Timken operates in 26 countries.

Industry Segments

Beginning with the first quarter of 2008, the Company began operating 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 14 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, 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 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, acquisition-related currency exchange gains, 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 U.S. 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

(Dollars in thousands)		United States				Europe				Other Countries				Consolidated
2008
Net sales		$	3,625,470			$	1,098,050			$	940,140			$	5,663,660
Long-lived assets			1,256,891				229,933				257,042				1,743,866
2007
Net sales		$	3,392,065			$	963,908			$	880,047			$	5,236,020
Long-lived assets			1,228,399				264,531				229,151				1,722,081
2006
Net sales		$	3,370,244			$	849,915			$	753,206			$	4,973,365
Long-lived assets			1,152,101				275,094				174,364				1,601,559

Products

The Timken Company manufactures two basic product lines: anti-friction bearings and steel products. Differentiation in these two product lines comes in two different ways: (1) differentiation by bearing type or steel type and (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.

Needle Bearings. Timken produces a broad range of radial and thrust needle roller bearings, as well as bearing assemblies, which are sold to original equipment manufacturers and industrial distributors worldwide. Major applications include automotive, consumer, construction, agriculture and general industrial.

Bearing Reconditioning. 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, 2008.

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, gears 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. Customizing of products is an important component of the Company’s steel business.

Sales and Distribution

Timken’s products in the Bearings and Power Transmission Group are sold principally by their 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 bearings products, and associates 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 was launched in April 2001 and 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. 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. Timken’s worldwide competitors for steel bar products include North American producers such as Republic, Gerdau MacSteel (a wholly owned subsidiary of The Gerdau Group), Mittal Steel USA (a wholly-owned subsidiary of ArcelorMittal), Steel Dynamics, Nucor and a wide variety of offshore steel producers who export into North America. Competitors for seamless mechanical tubing include Dofasco Tubular Products (a wholly-owned subsidiary of ArcelorMittal), Michigan Seamless Tube, Plymouth Tube, V & M Tube, Sanyo Special Steel, Ovako and Tenaris. Competitors in the precision steel components sector include Formtec, Linamar, Jernberg and overseas companies such as Tenaris, Ovako, Stackpole and FormFlo.

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.

Trade Law Enforcement

The U.S. government has six antidumping duty orders in effect covering ball bearings from five countries and tapered roller bearings from China. The five countries covered by the ball bearing orders are France, Germany, Italy, Japan and the United Kingdom. The Company is a producer 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.

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 $10.2 million, $7.9 million and $87.9 million in 2008, 2007 and 2006, 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 U.S. 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 possible distributions in years beyond 2007, with distributions eventually ceasing.

In 2006, the U.S. Court of International Trade (CIT) ruled that the procedure for determining recipients eligible to receive CDSOA distributions is unconstitutional. In February 2009, the United States 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 legislation 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 CIT rulings might prevent the Company from receiving any CDSOA distributions in 2009 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 $13.6 million and $14.4 million at December 31, 2008 and 2007, respectively.

During 2002, the Company’s Mobile Industries segment formed a joint venture, AGC, with Sanyo Special Steel Co., Ltd. (Sanyo) and Showa Seiko Co., Ltd. (Showa). AGC is engaged in the business of converting steel to machined rings for tapered bearings and other related products. The Company has been accounting for its investment in AGC under the equity method since AGC’s inception. During the third quarter of 2006, AGC refinanced its long-term debt of $12.2 million. The Company guaranteed half of this obligation. The Company concluded the refinancing represented a reconsideration event to evaluate whether AGC was a variable interest entity under FIN 46 (revised December 2003). The Company concluded that AGC was a variable interest entity and the Company was the primary beneficiary. Therefore, the Company consolidated AGC, effective September 30, 2006. At December 31, 2008, net assets of AGC were $2.9 million, primarily consisting of the following: inventory of $6.0 million; property, plant and equipment of $22.2 million; short-term and long-term debt of $18.2 million; and other non-current liabilities of $7.4 million. All of AGC’s assets are collateral for its obligations. Except for AGC’s indebtedness for which the Company is a guarantor, AGC’s creditors have no recourse to the general credit of the Company.

Backlog

The backlog of orders of Timken’s domestic and overseas operations is estimated to have been $2.2 billion at December 31, 2008 and $2.5 billion at December 31, 2007. Actual shipments are dependent upon ever-changing production schedules of the customer. 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 its demanding specifications.

The principal raw materials used by Timken in steel manufacturing are scrap metal, nickel 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 7.9% from 2005 to 2006, increased 14.7% from 2006 to 2007, and increased 56.2% from 2007 to 2008. 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 has developed a significant global footprint of technology centers.

The Company operates two corporate innovation and development centers. The largest technical center is located in North Canton, Ohio, near Timken’s world headquarters, and it supports innovation and development know-how for all friction management and power transmission product lines. It is the lead center specifically for taper bearing capabilities. The other technical center is in Greenville, South Carolina. It is the lead center specifically for needle bearing products.

In addition, Timken’s business groups operate several technology centers for product excellence within the United States in Mesa, Arizona, Canton, Ohio and Keene and Lebanon, New Hampshire. Through the 2007 acquisition of The Purdy Corporation, Timken has gained additional competence at a center in Manchester, Connecticut. Within Europe, technology is developed in Ploiesti, Romania; Colmar, France; Halle-Westfallen, Germany; and Brno, Czech Republic. In Asia, the Company supports related technical capabilities in Bangalore, India.

The Company’s technology commitment is to develop new and improved friction management and power transmission product designs with a heavy influence in related steel materials and lean manufacturing processes.

Expenditures for research, development and application amounted to approximately $61.6 million, $60.5 million, and $67.9 million in 2008, 2007 and 2006, respectively. Of these amounts, $5.1 million, $6.2 million and $8.0 million, respectively, were funded by others.

Environmental Matters

The Company continues its efforts to protect the environment and comply with environmental protection laws. Additionally, it has invested in pollution control equipment and updated plant operational practices. The Company 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 2008, 28 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 United States 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, 2008, Timken had 25,662 associates. Approximately 19% of Timken’s U.S. associates are covered under collective bargaining agreements.

Available Information

Timken’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available, free of charge, on Timken’s website at www.timken.com as soon as reasonably practical after electronically filing or furnishing such material with the SEC.

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.

Changes in global economic conditions, weakness in any of the industries in which our customers operate or changes in financial markets, could adversely impact our revenues and profitability by reducing demand and margins.

Our results of operations are materially affected by the conditions in the global economy generally and in global capital markets. The current global economic downturn has caused extreme volatility in the capital markets and in the end markets in which our customers operate. Our revenues may be negatively affected by changes in customer demand, changes in the product mix and negative pricing pressure in the industries in which we operate. 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 can be materially affected by the conditions in the global financial markets. If an end user cannot obtain financing to purchase our products, either directly or indirectly contained in machinery or equipment, demand for our products will be reduced, which could have a material adverse effect on our financial condition and earnings.

Certain automotive industry companies have recently experienced significant financial downturns. In 2008, we increased our reserve for accounts receivable relating to our automotive industry customers. If any of our automotive industry customers becomes insolvent or files for bankruptcy, our ability to recover accounts receivable from that customer would be adversely affected and any payment we received in the preference period prior to a bankruptcy filing may be potentially recoverable by the bankruptcy estate. 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.

We may not be able to realize the anticipated benefits from, or successfully execute, Project O.N.E.

During 2005, we began implementing Project O.N.E., a multi-year program designed to improve business processes and systems to deliver enhanced customer service and financial performance. During the second quarter of 2007, we completed the first major U.S. implementation of Project O.N.E. During the second quarter of 2008, we completed the installation of Project O.N.E. in additional U.S. operations and a major portion of our European operations. We may not be able to efficiently operate our business after the implementation of Project O.N.E., which could have a material adverse effect on our business and financial performance and could impede our ability to realize the anticipated benefits from this program. If we are not able to successfully operate our business after implementation of this program, we may lose the ability to schedule production, receive orders, ship product, track inventory and prepare financial statements. Our future success will depend, in part, on our ability to improve our business processes and systems. We may not be able to successfully do so without substantial costs, delays or other difficulties. We may face significant challenges in improving our processes and systems in a timely and efficient manner.

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 August 2007, we announced the realignment of our operations. We will now operate under two major business groups: the Steel Group and the Bearings and Power Transmission Group.

The Canton bearing operations and the Mobile Industries segment initiatives 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.

We may incur further impairment and restructuring charges that could materially affect our profitability.

We have taken approximately $144.2 million in impairment and restructuring charges, during the last four years, for the Canton bearing operations, Mobile Industries segment and Bearings and Power Transmission Group initiatives. We expect to take additional charges in connection with the Canton bearing operations and Mobile Industries segment 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 $10.2 million, $7.9 million and $87.9 million in 2008, 2007 and 2006, 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 2008, with distributions eventually ceasing.

In separate cases in July and September 2006, the U.S. Court of International Trade (CIT) ruled that the procedure for determining recipients eligible to receive CDSOA distributions is unconstitutional. In February 2009, the United States 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 2009 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.

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; and
	•		difficulty in staffing and managing geographically diverse 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.

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 increase in our defined benefit pension obligations, as well as our ongoing practice of managing our funding obligations over time, may require us to make large contributions to our pension plans. We made cash contributions of approximately $1 million, $80 million and $243 million in 2008, 2007 and 2006, respectively, to our U.S.-based pension plans and currently expect to make cash contributions of approximately $70 million in 2009 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 plan had assets with an estimated value of approximately $1.8 billion and liabilities with an estimated value of approximately $2.6 billion, both as of December 31, 2008. 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.

The collective bargaining agreement covering substantially all of our hourly employees in the Canton, Ohio bearing and steel plants expires in September, 2009. 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.

Item 1B. Unresolved Staff Comments

None.

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 14,527,000 square feet, all of which, except for approximately 1,429,000 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; Cairo, Sylvania, Ball Ground and Dahlonega, Georgia; Carlyle, Illinois; South Bend, Indiana; Lenexa, Kansas; Randleman, Iron Station, North Carolina; Gaffney, Union, Honea Path and Walhalla, South Carolina; Pulaski and Knoxville, Tennessee; Ogden, Utah; and Altavista, Virginia. These facilities, including research facilities in Canton, Ohio and Greenville, South Carolina, and warehouses at plant locations, have an aggregate floor area of approximately 5,412,000 square feet.

Timken’s Mobile Industries and Process Industries manufacturing plants outside the United States are located in Benoni, South Africa; Villa Carcina, Italy; Colmar, Vierzon, Maromme and Moult, France; Northampton and Willenhall, England; Bilbao, Spain; Halle-Westfallen, Germany; Olomouc, Czech Republic; Ploiesti, Romania; Mexico City, Mexico; Sao Paulo and Belo Horizonte, Brazil; Singapore, Singapore; Jamshedpur and Chennai, India; Sosnowiec, Poland; St. Thomas and Bedford, Canada; and Yantai and Wuxi, China. These facilities, including warehouses at plant locations, have an aggregate floor area of approximately 4,408,000 square feet.

Timken’s Aerospace and Defense manufacturing facilities in the United States are located in Gilbert, 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 1,060,000 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.

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 warehouses and steel distribution facilities in the United States, United Kingdom, France, Singapore, Mexico, Argentina, Australia, Brazil, Germany and China, and leases several relatively small warehouse facilities in cities throughout the world.

The plant utilization for the Mobile Industries segment was between approximately 70% and 80% in 2008, lower than 2007. The plant utilization for the Process Industries segment was between 85% and 95% in 2008, higher than 2007. The plant utilization for the Aerospace and Defense segment was between approximately 80% and 90% in 2008, the same as 2007. Finally, the Steel segment plant utilization was between approximately 80% and 90% in 2008, lower than 2007.

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, 2008.

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 24, 2009 are as follows:

Name		Age		Current Position and Previous Positions During Last Five Years
Ward J. Timken, Jr.		41		2004		Executive Vice President and President - Steel Group; Director
				2005		Chairman of the Board
James W. Griffith		55		2002		President and Chief Executive Officer; Director
Michael C. Arnold		52		2000		President – Industrial Group
				2007		Executive Vice President and President – Bearings & Power Transmission
William R. Burkhart		43		2000		Senior Vice President and General Counsel
Glenn A. Eisenberg		47		2002		Executive Vice President – Finance and Administration
J. Ted Mihaila		54		2000		Controller, Industrial Group
				2006		Senior Vice President and Controller
Salvatore J. Miraglia, Jr.		58		2000		Senior Vice President – Technology
				2005		President – Steel Group

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, 2008 was 6,114. The estimated number of beneficial shareholders at December 31, 2008 was 47,742.

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.

		2008												2007
		Stock prices								Dividends				Stock prices								Dividends
		High				Low				per share				High				Low				per share
First quarter		$	33.16			$	25.82			$	0.17			$	30.79			$	27.43			$	0.16
Second quarter		$	38.74			$	29.52			$	0.17			$	36.73			$	30.35			$	0.16
Third quarter		$	37.46			$	24.22			$	0.18			$	38.25			$	30.63			$	0.17
Fourth quarter		$	28.73			$	10.96			$	0.18			$	38.78			$	28.95			$	0.17

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities (continued)

Assumes $100 invested on January 1, 2004, in Timken Common Stock, S&P 500 Index and Peer Index.

		2004				2005				2006				2007				2008
Timken		$	132.68			$	166.85			$	155.13			$	178.36			$	109.83
S&P 500			110.88				116.32				134.69				142.09				89.52
80% Bearing/20% Steel			128.69				192.57				258.70				263.18				125.28

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, 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, JTETK (formerly Koyo Seiko), NSK, NTN and SKF Group. The last four are non-US bearing companies that are based in Japan (JTETK, NSK, NTN), and Sweden (SKF Group).

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, 2008 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)
10/1/08 - 10/31/08			64			$	21.51				—				4,000,000
11/1/08 - 11/30/08			155				16.20				—				4,000,000
12/1/08 - 12/31/08			1,061				16.70				—				4,000,000
Total			1,280			$	16.88				—				4,000,000

Item 6. Selected Financial Data

Summary of Operations and Other Comparative Data

		2008				2007				2006				2005				2004
(Dollars in thousands, except per share data)
Statements of Income
Net Sales		$	5,663,660			$	5,236,020			$	4,973,365			$	4,823,167			$	4,287,197
Gross profit			1,241,469				1,053,834				1,005,094				999,957				824,376
Selling, administrative and general expenses			724,987				695,283				677,342				646,904				575,910
Impairment and restructuring charges			64,383				40,378				44,881				26,093				13,538
(Gain) loss on divestitures			(8	)			528				64,271				—				—
Operating income			452,107				317,645				218,600				326,960				234,928
Other income (expense) — net			12,452				251				80,416				67,726				12,100
Earnings before interest and taxes (EBIT) (1)			464,559				317,896				299,016				394,686				247,028
Interest expense			44,934				42,684				49,387				51,585				50,834
Income from continuing operations			267,670				219,389				176,439				233,656				134,046
Income from discontinued operations, net of income taxes			—				665				46,088				26,625				1,610
Net income		$	267,670			$	220,054			$	222,527			$	260,281			$	135,656
Balance Sheets
Inventories — net		$	1,145,695			$	1,087,712			$	952,310			$	900,294			$	799,717
Property, plant and equipment — net			1,743,866				1,722,081				1,601,559				1,474,074				1,508,598
Total assets			4,536,050				4,379,237				4,027,111				3,993,734				3,942,909
Total debt:
Short-term debt			91,482				108,370				40,217				63,437				157,417
Current portion of long-term debt			17,108				34,198				10,236				95,842				1,273
Long-term debt			515,250				580,587				547,390				561,747				620,634
Total debt:			623,840				723,155				597,843				721,026				779,324
Net debt:
Total debt			623,840				723,155				597,843				721,026				779,324
Less: cash and cash equivalents			(116,306	)			(30,144	)			(101,072	)			(65,417	)			(50,967	)
Net debt: (2)			507,534				693,011				496,771				655,609				728,357
Total liabilities			2,895,753				2,418,568				2,550,931				2,496,667				2,673,061
Shareholders’ equity		$	1,640,297			$	1,960,669			$	1,476,180			$	1,497,067			$	1,269,848
Capital:
Net debt			507,534				693,011				496,771				655,609				728,357
Shareholders’ equity			1,640,297				1,960,669				1,476,180				1,497,067				1,269,848
Net debt + shareholders’ equity (capital)			2,147,831				2,653,680				1,972,951				2,152,676				1,998,205
Other Comparative Data
Income from continuing operations/Net sales			4.7	%			4.2	%			3.5	%			4.8	%			3.1	%
EBIT /Net sales			8.2	%			6.1	%			6.0	%			8.2	%			5.8	%
Return on equity (3)			16.3	%			11.2	%			12.0	%			15.6	%			10.6	%
Net sales per associate (4)		$	222.8			$	207.0			$	191.5			$	186.7			$	170.0
Capital expenditures		$	271,776			$	313,921			$	296,093			$	217,411			$	143,781
Depreciation and amortization		$	230,994			$	218,353			$	196,592			$	209,656			$	201,173
Capital expenditures /Net sales			4.8	%			6.0	%			6.0	%			4.5	%			3.4	%
Dividends per share		$	0.70			$	0.66			$	0.62			$	0.60			$	0.52
Basic earnings per share — continuing operations (5)		$	2.80			$	2.32			$	1.89			$	2.55			$	1.49
Diluted earnings per share — continuing operations (5)		$	2.78			$	2.29			$	1.87			$	2.52			$	1.48
Basic earnings per share (6)		$	2.80			$	2.33			$	2.38			$	2.84			$	1.51
Diluted earnings per share (6)		$	2.78			$	2.30			$	2.36			$	2.81			$	1.49
Net debt to capital (2)			23.6	%			26.1	%			25.2	%			30.5	%			36.5	%
Number of associates at year-end (7)			25,662				25,175				25,418				26,528				25,128
Number of shareholders (8)			47,742				49,012				42,608				54,514				42,484

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. Beginning with the first quarter of 2008, the Company began operating 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. Segment results for 2007 and 2006 have been reclassified to conform to the 2008 presentation of 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 by allocating assets to serve the most attractive market sectors and restructuring or exiting those businesses where adequate returns can not 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. The Company has been increasing large-bore bearing capacity in Romania, China, India and the United States to serve heavy industrial market sectors. The Process Industries segment began to benefit from this increase in large-bore bearing capacity during the latter part of 2007. In December 2007, the Company announced the establishment of a joint venture, Timken XEMC (Hunan) Bearings Co., Ltd., in China, to manufacture ultra-large-bore bearings for the growing Chinese wind energy market. In October 2008, the joint venture broke ground on a new wind energy plant to be built in China. Bearings produced at this facility are expected to be available in 2010. In April 2008, the Process Industries segment began shipping product from its new industrial bearing plant in Chennai, India. In October 2008, the Company announced that it would expand production at its Tyger River facility in Union, South Carolina to make ultra-large-bore bearings to serve wind-turbine manufacturers in North America.

The Aerospace and Defense segment manufactures bearings, helicopter transmission systems, rotor head assemblies, turbine engine components, gears and other precision flight-critical components for commercial and military aviation applications. The Aerospace and Defense segment also provides aftermarket services, including repair and overhaul of engines, transmissions and fuel controls, as well as aerospace bearing repair and component reconditioning. In addition, the Aerospace and Defense segment also manufactures bearings for original equipment manufacturers of health and positioning control equipment. The Company’s strategy for the Aerospace and Defense segment is to: (1) grow the businesses by adding power transmission parts, assemblies and services, utilizing a platform approach; (2) develop new aftermarket channels; and (3) add core bearing capacity through manufacturing initiatives in North America and China. In October 2007, the Company completed the acquisition of the assets of The Purdy Corporation (Purdy), located in Manchester, Connecticut. This acquisition further expands the growing range of power-transmission products and capabilities that the Company provides to aerospace customers. In addition, the Company opened a new aerospace precision products manufacturing facility in China in April 2008. In November 2008, the Company completed the acquisition of the assets of EXTEX Ltd. (EXTEX), located in Gilbert, Arizona. EXTEX is a leading designer and marketer of high-quality replacement engine parts for the aerospace aftermarket.

The Steel segment manufactures more than 450 grades of carbon and alloy steel, which are produced in both solid and tubular sections with a variety of lengths and finishes. The Steel segment also manufactures custom-made steel products for both industrial and automotive applications. The Company’s strategy for the Steel segment is to focus on opportunities where the Company can offer differentiated capabilities while driving profitable growth. In January 2007, the Company announced plans to invest approximately $60 million to enable the Company to competitively produce steel bars down to 1-inch diameter for use in power transmission and friction management applications for a variety of customers, including the automotive transplants. The new bar mill officially became operational during the fourth quarter of 2008. During the first quarter of 2007, the Company added a new induction heat-treat line in Canton, Ohio, which increased capacity and enabled the Company to provide differentiated product to more customers in its global energy markets. 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.

Financial Overview

2008 compared to 2007

Overview:

		2008				2007				$ Change				% Change
(Dollars in millions, except earnings per share)
Net sales		$	5,663.7			$	5,236.0			$	427.7				8.2	%
Income from continuing operations			267.7				219.4				48.3				22.0	%
Income from discontinued operations			—				0.7				(0.7	)			(100.0	)%
Net income			267.7				220.1				47.6				21.6	%
Diluted earnings per share:
Continuing operations		$	2.78			$	2.29			$	0.49				21.4	%
Discontinued operations			—				0.01				(0.01	)			(100.0	)%
Net income per share		$	2.78			$	2.30			$	0.48				20.9	%
Average number of shares — diluted			96,272,763				95,612,235				—				0.7	%

The Timken Company reported net sales for 2008 of $5.66 billion, compared to $5.24 billion in 2007, an increase of 8.2%. 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 $2.78, compared to $2.30 for 2007. Income from continuing operations per diluted share was $2.78 for 2008, compared to $2.29 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 also 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. 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.

On April 1, 2008, the Company completed the next installation of Project O.N.E. for the majority of the Company’s remaining domestic operations and a major portion of its European operations. Project O.N.E. is a multi-year program, which began in 2005, designed to improve the Company’s business processes and systems. The Company expects to invest approximately $210 million to $220 million, which includes internal and external costs, to implement Project O.N.E. As of December 31, 2008, the Company has incurred costs of approximately $196.0 million, of which approximately $113.5 million have been capitalized to the Consolidated Balance Sheet. During 2007, the Company completed the installation of Project O.N.E. for a major portion of its domestic operations. With the completion of the April 2008 installation of Project O.N.E., approximately 75% of the Bearings and Power Transmission Group’s global sales flow through the new system.

Outlook

The Company’s outlook for 2009 reflects a deteriorating global economic climate that is expected to last throughout the year, impacting most of the Company’s market sectors. Lower sales, compared to 2008, are expected in all business segments except for the Aerospace and Defense segment. A large portion of the decrease in Steel segment sales is expected to be due to significantly lower surcharges to recover raw material costs, which were at historically high levels during the middle of 2008, but declined significantly by the end of 2008. The Company’s results will reflect lower margins as a result of the lower volume and surcharges, partially offset by improved pricing, lower raw material costs and lower selling, administrative and general expenses. The Company expects to continue to take actions to properly align its business with current market demand.

From a liquidity standpoint, the Company expects to continue to generate cash from operations in 2009 as working capital management improves. In addition, the Company expects to decrease capital expenditures by approximately 25% in 2009, compared to 2008. However, pension contributions are expected to increase to approximately $90 million in 2009, compared to $22 million in 2008, primarily due to recent negative asset returns in the Company’s defined benefit pension plans during 2008.

The Statement of Income

Sales by Segment:

		2008				2007				$ Change				% Change
(Dollars in millions, and exclude intersegment sales)
Mobile Industries		$	2,264.2			$	2,426.7			$	(162.5	)			(6.7	)%
Process Industries			1,274.4				1,080.9				193.5				17.9	%
Aerospace and Defense			431.1				313.3				117.8				37.6	%
Steel			1,694.0				1,415.1				278.9				19.7	%
Total Company		$	5,663.7			$	5,236.0			$	427.7				8.2	%

Net sales for 2008 increased $427.7 million, or 8.2%, compared to 2007, primarily due to higher steel surcharges, improved pricing across all segments and favorable sales mix of approximately $535 million, the favorable impact from acquisitions of approximately $115 million and the effect of currency-rate changes of approximately $65 million, partially offset by lower volume of approximately $235 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.

Gross Profit:

		2008				2007				$ Change				Change
(Dollars in millions)
Gross profit		$	1,241.5			$	1,053.8			$	187.7				17.8	%
Gross profit % to net sales			21.9	%			20.1	%			—			180		bps
Rationalization expenses included in cost of products sold		$	4.2			$	31.3			$	(27.1	)			(86.6	)%

Gross profit margins increased in 2008, compared to 2007, as a result of higher surcharges, improved pricing and favorable sales mix of approximately $535 million, lower rationalization expenses of $27 million and the favorable impact of acquisitions of $20 million, partially offset by higher raw material costs and related LIFO expense of approximately $300 million, the unfavorable impact of lower overall volume of $50 million and higher logistics costs of approximately $30 million.

In 2008, rationalization expenses of $4.2 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 $31.3 million included in cost of products sold primarily related to certain Mobile Industries’ domestic manufacturing facilities, 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		$	725.0			$	695.3			$	29.7				4.3	%
Selling, administrative and general expenses % to net sales			12.8	%			13.3	%			—			(50		) bps
Rationalization expenses included in selling, administrative and general expenses		$	1.5			$	3.2			$	(1.7	)			(53.1	)%

The increase in selling, administrative and general expenses of $29.7 million in 2008, compared to 2007, was primarily due to an increase in the allowance for doubtful accounts of approximately $14 million, higher performance-based compensation of approximately $12 million and higher depreciation on capitalized Project O.N.E. costs of $9 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.

Impairment and Restructuring Charges:

		2008				2007				$ Change
(Dollars in millions)
Impairment charges		$	51.8			$	11.8			$	40.0
Severance and related benefit costs			8.3				23.1				(14.8	)
Exit costs			4.3				5.5				(1.2	)
Total		$	64.4			$	40.4			$	24.0

In 2008, impairment and restructuring charges were $58.8 million for the Mobile Industries segment, $3.8 million for the Process Industries segment, $1.5 million for the Steel segment and $0.3 million for Corporate. Corporate represents corporate administrative expenses that are not allocated to any of the reportable segments. In 2007, impairment and restructuring charges were $23.3 million for the Mobile Industries segment, $7.1 million for the Process Industries segment and $10.0 million for the Steel segment.

Workforce Reductions

In December 2008, the Company recorded $4.2 million in severance and related benefit costs to eliminate approximately 110 associates 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 2005, the Company announced plans to restructure the former automotive segment that is now part of its Mobile Industries segment to improve performance. These plans included the closure of a manufacturing facility in Clinton, South Carolina and engineering facilities in Torrington, Connecticut and Norcross, Georgia. In February 2006, the Company announced additional plans to rationalize production capacity at its Vierzon, France bearing manufacturing facility in response to changes in customer demand for its products. During 2006, the Company completed the closure of its engineering facilities in Torrington, Connecticut and Norcross, Georgia. During 2007, the Company completed the closure of its manufacturing facility in Clinton, South Carolina and the rationalization of its Vierzon, France bearing manufacturing facility.

In September 2006, the Company announced further planned reductions in its Mobile Industries’ workforce. In March 2007, the Company announced the planned closure of its manufacturing facility in Sao Paulo, Brazil. However, the closure of the manufacturing facility in Sao Paulo, Brazil has been delayed temporarily to serve higher customer demand. The Company currently believes it will close this facility sometime before the end of 2010.

These plans were targeted to collectively deliver annual pretax savings of approximately $75 million, with expected net workforce reductions of approximately 1,300 to 1,400 positions and pretax costs of approximately $115 million to $125 million, which include 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 $101.8 million as of December 31, 2008 for these plans. As of December 31, 2008, the Company has realized approximately $50 million in annual pretax savings for these plans. The Company now believes it will only realize annual pretax savings of approximately $55 million for these plans. The reduction in the savings to be delivered by these plans is lower than original estimates due to the reduced market activity as a result of the global recession compared to 2005 and 2006, when these plans were developed. Due to the delay in the closure of the manufacturing facility in Sao Paulo, Brazil, the Company expects to realize the remaining $5 million of annual pretax savings before the end of 2010, once this facility closes.

In 2008, the Company recorded $1.5 million of severance and related benefit costs, $1.1 million of exit costs and $1.0 million of impairment charges associated with the Mobile Industries’ restructuring and workforce reduction plans. Exit costs of $0.8 million recorded during 2008 were the result of environmental charges related to the planned closure of the manufacturing facility in Sao Paulo, Brazil. In 2007, the Company recorded $11.7 million of severance and related benefit costs, $2.5 million of exit costs and $1.6 million of impairment charges associated with the Mobile Industries’ restructuring and workforce reduction plans. Exit costs of $1.7 million recorded during 2007 were the result of environmental charges related to the planned 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. In accordance with Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets,” 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 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. 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.

In 2007, the Company recorded an impairment charge of $5.3 million related to an impairment of fixed assets at one of the Mobile Industries’ foreign entities as a result of the carrying value of these assets exceeding expected future cash flows due to the then-anticipated sale of this facility. In 2008, the Company recorded an additional impairment charge of $0.3 million related to this foreign entity. In 2008, the Company also recorded $0.9 million of environmental exit costs related to a former plant in Columbus, Ohio.

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 $20 million through streamlining operations and workforce reductions, with pretax costs of approximately $45 million to $50 million, by the end of 2009.

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. 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 $36.4 million as of December 31, 2008 related to these rationalization plans. As of December 31, 2008, the Process Industries segment has recognized approximately $15 million in annual pretax savings.

Steel

In April 2007, the Company completed the closure of its seamless steel tube manufacturing facility located in Desford, England. The Company recorded 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.

Rollforward of Restructuring Accruals:

		2008				2007
(Dollars in millions)
Beginning balance, January 1		$	24.5			$	32.0
Expense			12.6				28.6
Payments			(18.2	)			(36.1	)
Ending balance, December 31		$	18.9			$	24.5

The restructuring accrual at December 31, 2008 and 2007 is included in Accounts payable and other liabilities on the Consolidated Balance Sheet. The accrual at December 31, 2008 includes $11.1 million of severance and related benefits, with the remainder of the balance primarily representing environmental exit costs. Approximately half of the $11.1 million accrual relating to severance and related benefits is expected to be paid by the end of 2009, with the remainder paid before the end of 2010, pending the closure of the manufacturing facility in Sao Paulo, Brazil.

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		$	44.9			$	42.7			$	2.2				5.2	%
Interest income		$	6.0			$	7.0			$	(1.0	)			(14.3	)%

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		$	10.2			$	7.9			$	2.3				29.1	%
Other income (expense) – net:
Gain on divestitures of non-strategic assets		$	19.5			$	4.2			$	15.3			NM
(Loss) gain on dissolution of subsidiaries			(0.4	)			0.4				(0.8	)			(200.0	)%
Other			(16.9	)			(12.2	)			(4.7	)			(38.5	)%
Other income (expense) – net		$	2.2			$	(7.6	)		$	9.8				128.9	%

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 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. 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, partially offset by losses of $2.0 million recognized on the sale of assets at the Company’s bearing manufacturing facility in Clinton, South Carolina, which closed in October 2007.

For 2008, other expense primarily included $6.9 million of losses on the disposal of fixed assets, $6.4 million of foreign currency losses, $3.9 million of minority interests and $3.9 million of donations, partially offset by gains on equity investments of $1.4 million. For 2007, other expense primarily included $5.9 million of losses on the disposal of fixed assets, $3.6 million for minority interests, $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.

Income Tax Expense:

		2008				2007				$ Change				Change
(Dollars in millions)
Income tax expense		$	157.9			$	62.9			$	95.0				151.0	%
Effective tax rate			37.1	%			22.3	%			—			1,480		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, the goodwill impairment charge recorded in the fourth quarter of 2008 and higher U.S. state and local taxes in 2008. These increases were partially offset by the net impact of higher earnings in 2008 in certain foreign jurisdictions where the effective tax rate is less than 35%.

Discontinued Operations:

		2008				2007				$ Change				% Change
(Dollars in millions)
Gain on disposal, net of tax		$	—			$	0.7			$	(0.7	)			(100.0	)%

In December 2006, the Company completed the divestiture of its Latrobe Steel subsidiary and recognized a gain on disposal, net of tax, of $12.9 million. Discontinued operations for 2007 represent an additional $0.7 million gain on disposal, net of tax, primarily due to a purchase price adjustment. Refer to Note 2 — Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional discussion.

Business Segments:

The primary measurement used by management to measure the financial performance of each segment is adjusted EBIT (earnings before interest and taxes, excluding the effect of amounts related to certain items that management considers not representative of ongoing operations such as impairment and restructuring, manufacturing rationalization and integration charges, one-time gains or losses on disposal of non-strategic assets, allocated receipts received or payments made under CDSOA and gains and losses on the dissolution of subsidiaries). Refer to Note 14 — Segment Information in the Notes to Consolidated Financial Statements for the reconciliation of adjusted EBIT by segment to consolidated income before income taxes.

Effective January 1, 2008, the Company began operating under new reportable segments. The Company’s four reportable segments are: Mobile Industries, Process Industries, Aerospace and Defense and Steel.

Mobile Industries Segment:

		2008				2007				$ Change				Change
(Dollars in millions)
Net sales, including intersegment sales		$	2,264.2			$	2,426.7			$	(162.5	)			(6.7	)%
Adjusted EBIT		$	16.5			$	50.7			$	(34.2	)			(67.5	)%
Adjusted EBIT margin			0.7	%			2.1	%			—			(140		) 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.

		2008				2007				$ Change				Change
(Dollars in millions)
Net sales, including intersegment sales		$	2,264.2			$	2,426.7			$	(162.5	)			(6.7	)%
Currency			38.1				—				38.1			NM
Net sales, excluding the impact of currency		$	2,226.1			$	2,426.7			$	(200.6	)			(8.3	)%

The Mobile Industries segment’s net sales, excluding the effects of currency-rate changes, decreased 8.3% in 2008, compared to 2007, primarily due to lower volume of approximately $300 million, partially offset by improved pricing, higher surcharges and favorable sales mix of approximately $100 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 lower in 2008 compared to 2007, primarily due to the underutilization of manufacturing capacity as a result of lower volume of approximately $100 million, higher raw material costs and related LIFO expense of approximately $70 million and higher logistics costs of approximately $15 million. These decreases were partially offset by improved pricing, higher surcharges and favorable sales mix of approximately $100 million and the favorable impact of restructuring of approximately $40 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.

The Mobile Industries segment’s sales are expected to decrease approximately 10 to 20 percent in 2009 as demand is expected to be down across all of the Mobile Industries’ market sectors, primarily driven by a 20% decline in North American light-vehicle demand, a 30% decline in global heavy-truck demand and a 50% decline in North American rail demand. These decreases will be partially offset by improved pricing. In addition, adjusted EBIT for the Mobile Industries segment is also 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:

		2008				2007				$ Change				Change
(Dollars in millions)
Net sales, including intersegment sales		$	1,277.5			$	1,082.7			$	194.8				18.0	%
Adjusted EBIT		$	246.8			$	142.8			$	104.0				72.8	%
Adjusted EBIT margin			19.3	%			13.2	%			—			610		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		$	1,277.5			$	1,082.7			$	194.8				18.0	%
Currency			23.3				—				23.3			NM
Net sales, excluding the impact of currency		$	1,254.2			$	1,082.7			$	171.5				15.8	%

The Process Industries segment’s net sales, excluding the effects of currency-rate changes, increased 15.8% for 2008, compared to 2007, primarily due to improved pricing, higher surcharges and favorable sales mix of approximately $95 million and higher volume of approximately $75 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 $95 million and the impact of higher volumes of approximately $40 million, partially offset by higher raw material costs and related LIFO expense and higher manufacturing costs of approximately $35 million.

The Company expects lower Process Industries segment sales and adjusted EBIT for 2009 due to significantly decreased demand across most Process Industries’ market sectors. In reaction to the current and anticipated lower demand, the Process Industries segment reduced total employment levels by approximately 400 positions in 2008. The Process Industries segment’s sales are expected to decrease approximately 10 to 15 percent in 2009, compared to 2008, primarily driven by a 25% decline in global gear drive markets, a 25% decline in global metals and mining markets and a 25% decline in global construction and infrastructure markets. The Company expects to continue to take actions in the Process Industries segment to properly align its business with market demand by removing variable costs where appropriate.

Aerospace and Defense Segment:

		2008				2007				$ Change				Change
(Dollars in millions)
Net sales, including intersegment sales		$	431.1			$	313.3			$	117.8				37.6	%
Adjusted EBIT		$	50.4			$	21.7			$	28.7				132.3	%
Adjusted EBIT margin			11.7	%			6.9	%			—			480		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 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		$	431.1			$	313.3			$	117.8				37.6	%
Acquisitions			69.8				—				69.8			NM
Currency			1.5				—				1.5			NM
Net sales, excluding the impact of acquisitions and currency		$	359.8			$	313.3			$	46.5				14.8	%

The Aerospace and Defense segment’s net sales, excluding the effect of acquisitions and currency-rate changes, increased 14.8% 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. The Company expects the Aerospace and Defense segment to see a modest increase in sales in 2009 as it continues to integrate the Purdy acquisition, which has a strong defense oriented profile, and the benefits from the inclusion of a full year of sales from the EXTEX acquisition. The Aerospace and Defense segment’s adjusted EBIT is expected to improve slightly in 2009, leveraging improved manufacturing performance and the integration of acquisitions.

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 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		$	1,852.0			$	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. 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. 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.

The Company expects the Steel segment to see 30 to 40 percent decreases in sales in 2009 primarily due to lower average selling prices. The average selling prices are expected to decline in 2009 primarily driven by lower surcharges as scrap steel and alloy costs have fallen substantially from historically high levels in 2008. The index on which the scrap steel surcharge mechanism is based hit a record of $870 per ton during the middle of 2008 and decreased to $245 per ton in December. The Company also expects lower demand across most markets, primarily driven by a 25% decline in energy markets and a 20% decline in industrial markets. The Company also expects the Steel segment’s adjusted EBIT to be significantly lower in 2009 primarily due to the lower average selling prices, partially offset by lower raw material costs. Scrap costs are expected to remain at current levels, as are alloy and energy costs. In light of the current market demands, the Steel segment reduced total employment levels by approximately 30 positions in late 2008 and early 2009. The Company will continue to take actions in the Steel segment to properly align its business with market demand.

Corporate:

		2008				2007				$ Change				Change
(Dollars in millions)
Corporate expenses		$	68.4			$	65.9			$	2.5				3.8	%
Corporate expenses % to net sales			1.2	%			1.3	%			—			(10		) bps

Corporate expenses increased in 2008, compared to 2007, as a result of higher performance-based compensation.

Financial Overview

2007 compared to 2006

Overview:

		2007				2006				$ Change				% Change
(Dollars in millions, except earnings per share)
Net sales		$	5,236.0			$	4,973.4			$	262.6				5.3	%
Income from continuing operations			219.4				176.4				43.0				24.4	%
Income from discontinued operations			0.7				46.1				(45.4	)			(98.5	)%
Net income			220.1				222.5				(2.4	)			(1.1	)%
Diluted earnings per share:
Continuing operations		$	2.29			$	1.87			$	0.42				22.5	%
Discontinued operations			0.01				0.49				(0.48	)			(98.0	)%
Net income per share		$	2.30			$	2.36			$	(0.06	)			(2.5	)%
Average number of shares — diluted			95,612,235				94,294,716				—				1.4	%

The Company reported net sales for 2007 of $5.24 billion, compared to $4.97 billion in 2006, an increase of 5.3%. Higher sales were driven by continued strong industrial markets primarily across the Process Industries, Aerospace and Defense and Steel segments and the favorable impact of currency, partially offset by lower automotive sales in the Mobile Industries segment due to the divestiture of its steering operations in December 2006 and the closure of the Steel segment’s seamless steel tube manufacturing operations located in Desford, England in April 2007. In December 2006, the Company completed the divestiture of its Latrobe Steel subsidiary. Discontinued operations for 2006 represent the operating results and related gain on sale, net of tax, of this business. For 2007, net income per diluted share was $2.30, compared to $2.36 for 2006. Income from continuing operations per diluted share was $2.29 for 2007, compared to $1.87 for 2006.

The Company’s results for 2007 reflect the strength of global industrial markets and the performance of the Steel segment, partially offset by expenses related to growth initiatives, restructuring activities and higher raw material and manufacturing costs. Additionally, the Company’s 2007 results reflect lower disbursements received under the CDSOA, compared to 2006. The Company continued its focus on increasing production capacity in targeted areas, including major capacity expansions for industrial products at several manufacturing locations around the world.

The Company’s results for 2007 also reflect a lower tax rate, compared to 2006, primarily due to favorable adjustments to the Company’s accruals for uncertain tax positions.

The Statement of Income

Sales by Segment:

		2007				2006				$ Change				% Change
(Dollars in millions, and exclude intersegment sales)
Mobile Industries		$	2,426.7			$	2,412.1			$	14.6				0.6	%
Process Industries			1,080.9				973.7				107.2				11.0	%
Aerospace and Defense			313.3				259.7				53.6				20.6	%
Steel			1,415.1				1,327.9				87.2				6.6	%
Total Company		$	5,236.0			$	4,973.4			$	262.6				5.3	%

Net sales for 2007 increased $262.6 million, or 5.3%, compared to 2006. Acquisitions of the assets of Purdy, acquired in the fourth quarter of 2007, and Turbo Engines, Inc., acquired during the fourth quarter of 2006, contributed $29.7 million to the increase in net sales. In addition, the effect of currency-rate changes contributed $110.1 million to the increase in net sales for 2007. The remaining increase in net sales for 2007, compared to 2006, was primarily due to higher surcharges and improved pricing, as well as higher volume across most market sectors, particularly energy, heavy industry, aerospace and rail. These increases were partially offset by lower demand from North American heavy truck customers and lower sales as a result of the Company’s divestitures of the Mobile Industries’ former steering operations and Steel’s former Timken Precision Steel Components — Europe business, as well as the closure of Steel’s seamless steel tube facility in Desford, England. Net sales in 2006 included $96.8 million of sales related to the Company’s former steering operations, which were divested in December 2006. The Timken Precision Steel Components — Europe business, which was divested in June 2006, and the seamless steel tube facility accounted for $62.6 million of the change in sales.

Gross Profit:

		2007				2006				$ Change				Change
(Dollars in millions)
Gross profit		$	1,053.8			$	1,005.1			$	48.7				4.8	%
Gross profit % to net sales			20.1	%			20.2	%			—			(10		) bps
Rationalization expenses included in cost of products sold		$	31.3			$	18.5			$	12.8				69.2	%

Gross profit margin decreased slightly in 2007 compared to 2006, due to higher raw material costs across the Company’s four segments, higher costs associated with the Process Industries and Aerospace and Defense segments’ capacity additions, higher manufacturing costs in the Steel segment, as well as higher rationalization expenses, partially offset by favorable sales volume from the Process Industries, Aerospace and Defense and Steel segments, improved pricing and increased productivity in the Steel segment.

In 2007, rationalization expenses included in cost of products sold primarily related to certain Mobile Industries’ domestic manufacturing facilities, 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 Process Industries’ Canton, Ohio bearing facilities. In 2006, rationalization expenses included in cost of products sold related to Process Industries’ Canton, Ohio bearing facilities, certain Mobile Industries’ domestic manufacturing facilities, certain facilities in Torrington, Connecticut and the closure of the Company’s seamless steel tube manufacturing operations located in Desford, England. Rationalization expenses in 2007 and 2006 primarily included accelerated depreciation on assets and the relocation of equipment.

Selling, Administrative and General Expenses:

		2007				2006				$ Change				Change
(Dollars in millions)
Selling, administrative and general expenses		$	695.3			$	677.3			$	18.0				2.7	%
Selling, administrative and general expenses % to net sales			13.3	%			13.6	%			—			(30		) bps
Rationalization expenses included in selling, administrative and general expenses		$	3.2			$	5.9			$	(2.7	)			(45.8	)%

The increase in selling, administrative and general expenses in 2007 compared to 2006 was primarily due to higher costs associated with investments in Project O.N.E. and higher costs associated with ramping up new facilities in Asia, partially offset by reductions in the Mobile Industries’ selling, administrative and general expenses as a result of restructuring initiatives, as well as lower performance-based compensation.

In 2007, the rationalization expenses included in selling, administrative and general expenses primarily related to Mobile Industries’ engineering facilities, Process Industries’ Canton, Ohio bearing facilities and the closure of the Steel segment’s seamless steel tube manufacturing operations located in Desford, England. In 2006, the rationalization expenses included in selling, administrative and general expenses primarily related to the Mobile Industries segment’s engineering facilities.

Impairment and Restructuring Charges:

		2007				2006				$ Change
(Dollars in millions)
Impairment charges		$	11.8			$	15.3			$	(3.5	)
Severance and related benefit costs			23.1				25.8				(2.7	)
Exit costs			5.5				3.8				1.7
Total		$	40.4			$	44.9			$	(4.5	)

Bearings and Power Transmission Reorganization

During 2007, the Company recorded $3.5 million of severance and related benefit costs related to the Company’s Bearings and Power Transmission reorganization initiative.

Mobile Industries

In 2007, the Company recorded $11.7 million of severance and related benefit costs, $2.5 million of exit costs and $1.6 million of impairment charges associated with the Mobile Industries’ restructuring and workforce reduction plans. Exit costs of $1.7 million recorded during 2007 were the result of environmental charges related to the planned closure of the manufacturing facility in Sao Paulo, Brazil. In 2006, the Company recorded $16.5 million of severance and related benefit costs, $1.6 million of exit costs and $1.6 million of impairment charges associated with the Mobile Industries’ restructuring and workforce reduction plans.

In November 2006, the Company announced plans to vacate its Torrington, Connecticut office complex. In 2006, the Company recorded $0.7 million of severance and related benefit costs and $0.3 million of impairment charges associated with the Mobile Industries segment vacating the Torrington complex.

In 2007, the Company recorded an impairment charge of $5.3 million related to an impairment of fixed assets at one of the Mobile Industries’ foreign entities as a result of the carrying value of these assets exceeding expected future cash flows due to the then-anticipated sale of this facility. In 2006, the Company recorded $1.4 million of environmental exit costs related to a former plant in Columbus, Ohio.

In addition, the Company recorded impairment charges of $11.9 million in 2006 representing the write-off of goodwill associated with the former automotive segment that is now part of the Mobile Industries segment in accordance with SFAS No. 142.

Process Industries

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. In 2006, the Company recorded $1.0 million of impairment charges and $0.6 million of exit costs associated with the Process Industries’ rationalization plans.

In 2006, the Company recorded $1.5 million of severance and related benefit costs and $0.1 million of impairment charges associated with the Process Industries segment vacating the Torrington complex.

Steel

In April 2007, the Company completed the closure of its seamless steel tube facility located in Desford, England. The Company recorded $7.3 million of severance and related benefit costs and $2.4 million of exit costs during 2007 compared to $6.9 million of severance and related benefit costs in 2006 related to this action.

In 2006, the Company recorded an impairment charge and removal costs of $0.6 million in 2006 related to the write-down of property, plant and equipment at one of the Steel segment’s facilities.

Loss on Divestitures:

		2007								2006				$ Change
(Dollars in millions)
Loss on Divestitures		$	0.5							$	64.3			$	(63.8	)

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:

		2007				2006				$ Change				% Change
(Dollars in millions)
Interest expense		$	42.7			$	49.4			$	(6.7	)			(13.6	)%
Interest income		$	7.0			$	4.6			$	2.4				52.2	%

Interest expense for 2007 decreased compared to 2006 due to lower average debt outstanding in 2007 compared to 2006 and lower interest rates. Interest income increased for 2007 compared to 2006 due to interest received on higher cash balances.

Other Income and Expense:

		2007				2006				$ Change				% Change
(Dollars in millions)
CDSOA receipts, net of expenses		$	7.9			$	87.9			$	(80.0	)			(91.0	)%
Other expense — net:
Gain on divestitures of non-strategic assets		$	4.2			$	7.1			$	(2.9	)			(40.8	)%
Gain on dissolution of subsidiaries			0.4				0.9				(0.5	)			(55.6	)%
Other			(12.2	)			(15.5	)			3.3				21.3	%
Other expense — net		$	(7.6	)		$	(7.5	)		$	(0.1	)			(1.3	)%

In 2007, the Company received CDSOA receipts, net of expenses, of $7.9 million. In 2006, the Company received CDSOA receipts, net of expenses, of $87.9 million.

In 2007, the gain on divestitures of non-strategic assets primarily related to the sale of assets operated by the Steel segment’s seamless steel tube facility located in Desford, England, which closed in April 2007, partially offset by losses recognized on the sale of assets at the Company’s former bearing manufacturing facility in Clinton, South Carolina, which closed in October 2007. In 2006, the gain on divestitures of non-strategic assets primarily related to the sale of assets of PEL Technologies (PEL). In 2000, the Company’s Steel segment invested in PEL, a joint venture to commercialize a proprietary technology that converted iron units into engineered iron oxide for use in pigments, coatings and abrasives. The Company consolidated PEL effective March 31, 2004 in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46). In 2006, the Company liquidated the joint venture. Refer to Note 12 — Equity Investments in the Notes to Consolidated Financial Statements for additional discussion.

For 2007, other expense primarily included $5.9 million of losses on the disposal of fixed assets, $3.6 million for minority interests, $3.0 million of donations, $1.3 million of losses from equity investments, offset by $1.3 million of foreign currency exchange gains. For 2006, other expense primarily included $5.7 million of losses from equity investments, $3.7 million of donations, $3.3 million for minority interests, $1.3 million of losses on the disposal of fixed assets and $0.5 million of foreign currency exchange losses.

Income Tax Expense:

		2007				2006				$ Change				Change
(Dollars in millions)
Income tax expense		$	62.9			$	77.8			$	(14.9	)			(19.2	)%
Effective tax rate			22.3	%			30.6	%			—			(830		) bps

The decrease in the effective tax rate for 2007 compared to 2006 was primarily caused by higher tax benefits in 2007 resulting from adjustments to the Company’s accruals for uncertain tax positions, partially offset by increased losses in 2007 at certain foreign subsidiaries where no tax benefit could be claimed.

Discontinued Operations:

		2007				2006				$ Change				% Change
(Dollars in millions)
Operating results, net of tax		$	—			$	33.2			$	(33.2	)			(100.0	)%
Gain on disposal, net of tax			0.7				12.9				(12.2	)			(94.6	)%
Total		$	0.7			$	46.1			$	(45.4	)			(98.5	)%

In December 2006, the Company completed the divestiture of its Latrobe Steel subsidiary and recognized a gain on disposal, net of tax, of $12.9 million. Discontinued operations for 2006 represent the operating results and related gain on sale, net of tax, of this business. Discontinued operations for 2007 represent an additional $0.7 million gain on disposal, net of tax, due to a purchase price adjustment. Refer to Note 2 — Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional discussion.

Business Segments:

Mobile Industries Segment:

		2007				2006				$ Change				Change
(Dollars in millions)
Net sales, including intersegment sales		$	2,426.7			$	2,412.1			$	14.6				0.6	%
Adjusted EBIT		$	50.7			$	31.4			$	19.3				61.5	%
Adjusted EBIT margin			2.1	%			1.3	%			—			80		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 divestitures completed in 2007 and 2006 and currency exchange rates. The effects of 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 December 2006, the Company completed the divestiture of the Mobile Industries’ steering business located in Watertown, Connecticut and Nova Friburgo, Brazil. Divestitures in 2007 represent the decrease in sales, year over year, for this divestiture. The year 2006 represents the base year for which the effects of currency are measured; as a result, currency is assumed to be zero for 2006.

		2007				2006				$ Change				Change
(Dollars in millions)
Net sales, including intersegment sales		$	2,426.7			$	2,412.1			$	14.6				0.6	%
Divestitures			(96.8	)			—				(96.8	)		NM
Currency			68.5				—				68.5			NM
Net sales, excluding the impact of divestitures and currency		$	2,455.0			$	2,412.1			$	42.9				1.8	%