UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

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

Commission file number: 1-1169

THE TIMKEN COMPANY

(Exact name of registrant as specified in its charter)

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

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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 June 30, 2011
Common Stock, without par value		98,144,509 shares

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

THE TIMKEN COMPANY AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
(Dollars in millions, except per share data)
Net sales		$	1,329.6			$	1,011.4			$	2,583.7			$	1,925.1
Cost of products sold			979.1				743.1				1,899.9				1,434.1
Gross Profit			350.5				268.3				683.8				491.0
Selling, general and administrative expenses			153.7				140.7				304.0				273.7
Impairment and restructuring charges			6.2				1.0				7.3				6.5
Operating Income			190.6				126.6				372.5				210.8
Interest expense			(9.3	)			(10.0	)			(19.1	)			(19.6	)
Interest income			1.4				0.9				2.9				1.5
Other income (expense), net			1.1				2.7				(1.3	)			2.1
Income From Continuing Operations Before Income Taxes			183.8				120.2				355.0				194.8
Provision for income taxes			61.5				38.2				118.9				84.1
Income From Continuing Operations			122.3				82.0				236.1				110.7
Income from discontinued operations, net of income taxes			—				4.2				—				4.5
Net Income			122.3				86.2				236.1				115.2
Less: Net income attributable to noncontrolling interest			0.8				0.6				1.9				1.0
Net Income Attributable to The Timken Company		$	121.5			$	85.6			$	234.2			$	114.2
Amounts Attributable to The Timken Company’s Common Shareholders:
Income from continuing operations, net of income taxes		$	121.5			$	81.4			$	234.2			$	109.7
Income from discontinued operations, net of income taxes			—				4.2				—				4.5
Net Income Attributable to The Timken Company		$	121.5			$	85.6			$	234.2			$	114.2
Net Income per Common Share Attributable to The Timken Company’s Common Shareholders
Earnings per share — Continuing Operations		$	1.24			$	0.84			$	2.39			$	1.13
Earnings per share — Discontinued Operations			—				0.04				—				0.05
Basic earnings per share		$	1.24			$	0.88			$	2.39			$	1.18
Diluted earnings per share — Continuing Operations		$	1.22			$	0.84			$	2.36			$	1.13
Diluted earnings per share — Discontinued Operations			—				0.04				—				0.04
Diluted earnings per share		$	1.22			$	0.88			$	2.36			$	1.17
Dividends per share		$	0.20			$	0.13			$	0.38			$	0.22

See accompanying Notes to the Consolidated Financial Statements.

Consolidated Balance Sheets

		(Unaudited)
		June 30,				December 31,
		2011				2010
(Dollars in millions, except share data)
ASSETS
Current Assets
Cash and cash equivalents		$	632.8			$	877.1
Restricted cash			4.8				—
Accounts receivable, less allowances: 2011 - $21.8 million; 2010 - $27.6 million			718.8				516.6
Inventories, net			928.9				828.5
Deferred income taxes			100.5				100.4
Deferred charges and prepaid expenses			12.4				11.3
Other current assets			72.6				65.3
Total Current Assets			2,470.8				2,399.2
Property, Plant and Equipment — Net			1,243.1				1,267.7
Other Assets
Goodwill			226.5				224.4
Other intangible assets			124.2				129.2
Deferred income taxes			68.0				121.5
Other non-current assets			42.5				38.4
Total Other Assets			461.2				513.5
Total Assets		$	4,175.1			$	4,180.4
LIABILITIES AND EQUITY
Current Liabilities
Short-term debt		$	22.9			$	22.4
Accounts payable			314.6				263.5
Salaries, wages and benefits			203.1				233.4
Income taxes payable			23.5				14.0
Deferred income taxes			0.9				0.7
Other current liabilities			183.5				176.3
Current portion of long-term debt			7.4				9.6
Total Current Liabilities			755.9				719.9
Non-Current Liabilities
Long-term debt			490.6				481.7
Accrued pension cost			154.0				394.5
Accrued postretirement benefits cost			448.7				531.2
Deferred income taxes			6.2				6.0
Other non-current liabilities			113.4				105.3
Total Non-Current Liabilities			1,212.9				1,518.7
Shareholders’ Equity
Class I and II Serial Preferred Stock without par value:
Authorized - 10,000,000 shares each class, none issued			—				—
Common stock without par value:
Authorized - 200,000,000 shares
Issued (including shares in treasury) (2011 - 98,375,135 shares; 2010 - 98,153,317 shares)
Stated capital			53.1				53.1
Other paid-in capital			883.2				881.7
Earnings invested in the business			1,823.5				1,626.4
Accumulated other comprehensive loss			(559.4	)			(624.7	)
Treasury shares at cost (2011 - 230,626 shares; 2010 - 350,201 shares)			(11.7	)			(11.5	)
Total Shareholders’ Equity			2,188.7				1,925.0
Noncontrolling interest			17.6				16.8
Total Equity			2,206.3				1,941.8
Total Liabilities and Equity		$	4,175.1			$	4,180.4

See accompanying Notes to the Consolidated Financial Statements.

Consolidated Statements of Cash Flows

(Unaudited)

		Six Months Ended
		June 30,
		2011				2010
(Dollars in millions)
CASH PROVIDED (USED)
Operating Activities
Net income attributable to The Timken Company		$	234.2			$	114.2
Earnings from discontinued operations			—				(4.5	)
Net income attributable to noncontrolling interest			1.9				1.0
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			93.8				95.2
Impairment charges			3.2				—
(Gain) loss on sale of assets			(0.6	)			2.3
Gain on divestiture			(0.5	)			—
Deferred income tax provision			42.2				17.1
Stock-based compensation expense			9.2				8.5
Pension and other postretirement expense			37.2				45.9
Pension and other postretirement benefit contributions and payments			(331.8	)			(133.6	)
Changes in operating assets and liabilities:
Accounts receivable			(191.7	)			(103.8	)
Inventories			(86.6	)			(45.7	)
Trade accounts payable			46.9				67.5
Other accrued expenses			(38.8	)			15.4
Income taxes			19.8				66.1
Other — net			(1.3	)			13.9
Net Cash (Used) Provided by Operating Activities — Continuing Operations			(162.9	)			159.5
Net Cash Provided by Operating Activities — Discontinued Operations			—				4.5
Net Cash (Used )Provided By Operating Activities			(162.9	)			164.0
Investing Activities
Capital expenditures			(59.6	)			(39.0	)
Proceeds from disposals of property, plant and equipment			5.2				0.5
Divestitures			4.8				—
Investments in short-term marketable securities			(13.3	)			—
Other			1.9				1.1
Net Cash Used by Investing Activities			(61.0	)			(37.4	)
Financing Activities
Cash dividends paid to shareholders			(37.1	)			(21.3	)
Net proceeds from common share activity			23.2				19.4
Purchase of treasury shares — net			(25.3	)			(29.2	)
Proceeds from issuance of long-term debt			9.2				11.0
Payments on long-term debt			(3.1	)			(9.0	)
Short-term debt activity — net			0.1				(20.8	)
Increase in restricted cash			(4.8	)			—
Other			(4.1	)			—
Net Cash Used by Financing Activities			(41.9	)			(49.9	)
Effect of exchange rate changes on cash			21.5				(36.0	)
(Decrease) Increase In Cash and Cash Equivalents			(244.3	)			40.7
Cash and cash equivalents at beginning of year			877.1				755.5
Cash and Cash Equivalents at End of Period		$	632.8			$	796.2

See accompanying Notes to the Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in millions, except share and per share data)

Note 1 — Basis of Presentation

The accompanying Consolidated Financial Statements (unaudited) for The Timken Company (Timken or the Company) have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by accounting principles generally accepted in the United States (U.S. GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to the Consolidated Financial Statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Certain amounts in the 2010 Consolidated Financial Statements have been reclassified to conform to the 2011 presentation.

Note 2 — Recently Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05 Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which includes new accounting rules related to the presentation of comprehensive income. The new accounting rules require that entities present a statement of other comprehensive income within the consolidated financial statements in one of two manners: a single statement approach or a two-statement approach. The single statement approach consists of a single statement presenting the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income. The two-statement approach allows for the components of net income and total net income to be presented in a financial statement, immediately followed by another financial statement presenting the components of other comprehensive income and a total for comprehensive income. The new accounting rules are effective, on a retrospective basis, for fiscal years beginning after December 15, 2011. The adoption of the new accounting rules related to the presentation of other comprehensive income is not expected to have a material impact on the Company’s results of operations and financial condition, but it will affect how the Company reports other comprehensive income. Management is currently evaluating which presentation method to adopt after the new rules are effective.

In May 2011, the FASB issued new accounting guidance updating ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The new accounting rules do not extend the use of fair value accounting; they only provide additional guidance on the application and disclosure of fair value accounting where its use is currently permitted. The new accounting rules also expand the required disclosures about fair value measurement. The provisions for the new accounting rules are effective, on a prospective basis, for interim and fiscal periods beginning after December 15, 2011. The adoption of the new accounting rules for fair value measurements is not expected to have a material impact on the Company’s results of operations and financial condition.

Note 3 — Inventories

		June 30,				December 31,
		2011				2010
Inventories, net:
Manufacturing supplies		$	59.0			$	57.9
Work in process and raw materials			425.9				371.9
Finished products			444.0				398.7
Inventories, net		$	928.9			$	828.5

An actual valuation of the inventory under the last-in, first-out (LIFO) method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these calculations are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation. The LIFO reserve at June 30, 2011 and December 31, 2010 was $280.3 million and $264.6 million, respectively. The Company recognized an increase in its LIFO reserve of $9.7 million and $15.7 million during the second quarter and first six months of 2011 compared to an increase in its LIFO reserve of $0.5 million and $6.6 million during the second quarter and first six months of 2010.

Note 3 — Inventories (continued)

Based on current expectations of inventory levels and costs, the Company expects to recognize approximately $32 million in LIFO expense for the year ended December 31, 2011. The expected increase in the LIFO reserve for 2011 is a result of higher costs, especially scrap steel costs, as well as higher quantities. A 1.0% increase in costs would increase the current LIFO expense estimate for 2011 by approximately $5.9 million. A 1.0% increase in inventory quantities would only have a minor effect on the current LIFO expense estimate for 2011.

Note 4 — Property, Plant and Equipment

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

		June 30,				December 31,
		2011				2010
Property, Plant and Equipment:
Land and buildings		$	634.9			$	623.2
Machinery and equipment			2,872.7				2,830.8
Subtotal			3,507.6				3,454.0
Less allowances for depreciation			(2,264.5	)			(2,186.3	)
Property, Plant and Equipment — net		$	1,243.1			$	1,267.7

At June 30, 2011 and December 31, 2010, machinery and equipment included approximately $92.9 million and $99.7 million, respectively, of capitalized software. Depreciation expense for the three months ended June 30, 2011 and 2010 was $44.1 million and $44.9 million, respectively. Depreciation expense for the six months ended June 30, 2011 and 2010 was $89.2 million and $90.2 million, respectively. Depreciation expense on capitalized software for the three months ended June 30, 2011 and 2010 was approximately $3.6 million and $5.1 million, respectively. Depreciation expense on capitalized software for the six months ended June 30, 2011 and 2010 was approximately $10.5 million and $10.4 million, respectively.

Note 5 — Goodwill and Other Intangible Assets

The change in the carrying amount of goodwill for the six months ended June 30, 2011 was as follows:

		Process				Aerospace
		Industries				and Defense				Steel				Total
Beginning Balance		$	50.0			$	162.3			$	12.1			$	224.4
Other			1.3				0.3				0.5				2.1
Total		$	51.3			$	162.6			$	12.6			$	226.5

Other primarily includes foreign currency translation adjustments.

Note 5 — Goodwill and Other Intangible Assets (continued)

The following table displays intangible assets as of June 30, 2011 and December 31, 2010:

		As of June 30, 2011												As of December 31, 2010
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
Intangible assets subject to amortization:
Customer relationships		$	81.5			$	20.8			$	60.7			$	82.0			$	18.6			$	63.4
Engineering drawings			2.0				2.0				—				2.0				2.0				—
Know-how			2.1				1.1				1.0				2.1				1.0				1.1
Industrial license agreements			0.4				0.1				0.3				0.4				0.1				0.3
Land-use rights			8.4				3.6				4.8				8.2				3.3				4.9
Patents			4.4				3.4				1.0				4.4				3.3				1.1
Technology use			38.9				7.3				31.6				39.0				6.3				32.7
Trademarks			6.0				5.1				0.9				6.0				5.0				1.0
PMA licenses			8.8				2.9				5.9				8.8				2.7				6.1
Non-compete agreements			2.7				2.1				0.6				2.7				1.9				0.8
Unpatented technology			7.6				6.4				1.2				7.6				6.0				1.6
		$	162.8			$	54.8			$	108.0			$	163.2			$	50.2			$	113.0
Intangible assets not subject to amortization:
Tradename		$	2.0							$	2.0			$	2.0							$	2.0
FAA air agency certificates			14.2								14.2				14.2								14.2
		$	16.2							$	16.2			$	16.2							$	16.2
Total intangible assets		$	179.0			$	54.8			$	124.2			$	179.4			$	50.2			$	129.2

Amortization expense for intangible assets for the three months and six months ended June 30, 2011 was $2.3 million and $4.6 million, respectively. Amortization expense for intangible assets for the three months and six months ended June 30, 2010 was $2.4 million and $4.8 million, respectively. Amortization expense for intangible assets is estimated to be approximately $9.5 million for 2011; $9.1 million in 2012; $7.6 million in 2013; $7.4 million in 2014 and $7.4 million in 2015.

Note 6 — Financing Arrangements

Short-term debt at June 30, 2011 and December 31, 2010 was as follows:

		June 30,				December 31,
		2011				2010
Variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 2.44% to 6.72% and 2.40% to 5.10% at June 30, 2011 and December 31, 2010, respectively		$	22.9			$	22.4
Short-term debt		$	22.9			$	22.4

The lines of credit for certain of the Company’s foreign subsidiaries provide for borrowings up to $304.0 million. At June 30, 2011, the Company had borrowings outstanding of $22.9 million and guarantees of $2.8 million, which reduced the availability under these facilities to $278.3 million.

Note 6 — Financing Arrangements (continued)

The Company has a $150 million Accounts Receivable Securitization Financing Agreement (Asset Securitization Agreement), which matures November 10, 2012. Under the terms of the Asset Securitization Agreement, the Company sells, on an ongoing basis, certain domestic trade receivables to Timken Receivables Corporation, a wholly-owned consolidated subsidiary, that in turn uses the trade receivables to secure borrowings, which are funded through a vehicle that issues commercial paper in the short-term market. Borrowings under the agreement are limited to certain borrowing base calculations. Any amounts outstanding under this Asset Securitization Agreement would be reported in short-term debt on the Company’s Consolidated Balance Sheet. As of June 30, 2011, there were no outstanding borrowings under the Asset Securitization Agreement. The cost of this facility, which is the commercial paper rate plus program fees, is considered a financing cost and is included in interest expense in the Consolidated Statement of Income.

Long-term debt at June 30, 2011 and December 31, 2010 was as follows:

		June 30,				December 31,
		2011				2010
Fixed-rate Medium-Term Notes, Series A, due at various dates through May 2028, with interest rates ranging from 6.74% to 7.76%		$	175.0			$	175.0
Fixed-rate Senior Unsecured Notes, due September 15, 2014, with an interest rate of 6.0%			249.8				249.7
Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.18% at June 30, 2011)			12.2				12.2
Variable-rate State of Ohio Air Quality Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.47% at June 30, 2011)			9.5				9.5
Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (0.47% at June 30, 2011)			17.0				17.0
Variable-rate credit facility with US Bank for Advanced Green Components, LLC, maturing on July 17, 2011 (1.35% at June 30, 2011)			6.1				8.3
Other			28.4				19.6
			498.0				491.3
Less current maturities			7.4				9.6
Long-term debt		$	490.6			$	481.7

On May 11, 2011, the Company entered into a $500 million Amended and Restated Credit Agreement (Senior Credit Facility). This Senior Credit Facility amended and restated the former senior credit facility, which was due to expire on July 10, 2012. The Senior Credit Facility now matures on May 11, 2016. At June 30, 2011, the Company had no outstanding borrowings under the Senior Credit Facility but had letters of credit outstanding totaling $17.2 million, which reduced the availability under the Senior Credit Facility to $482.8 million. Under the Senior Credit Facility, the Company has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. At June 30, 2011, the Company was in full compliance with the covenants under the Senior Credit Facility.

Advanced Green Components, LLC (AGC) is a joint venture of the Company. As of June 30, 2011, the Company had reserved cash of $4.8 million in a collateral account to secure up to $4.8 million of the indebtedness between AGC and US Bank in the event AGC defaults on its credit facility with US Bank. The $4.8 million collateral account is classified as restricted cash on the Consolidated Balance Sheet as of June 30, 2011.

Certain of the Company’s foreign subsidiaries have facilities that also provide for long-term borrowings up to $27.3 million. At June 30, 2011, the Company had borrowings outstanding of $27.1 million, which reduced the availability under these long-term facilities to $0.2 million.

Note 7 — Product Warranty

The Company provides limited warranties on certain of its products. The Company accrues liabilities for warranty based upon specific claims and a review of historical warranty claim experience in accordance with accounting rules for contingent liabilities. Should the Company become aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. Adjustments are made quarterly to the accruals as claim data and historical experience change.

The following is a rollforward of the warranty accruals for the six months ended June 30, 2011 and the twelve months ended December 31, 2010:

		June 30,				December 31,
		2011				2010
| |
Beginning balance, January 1		$	8.0			$	5.4
Expense			2.4				6.0
Payments			(0.8	)			(3.4	)
Ending balance		$	9.6			$	8.0

The product warranty accrual at June 30, 2011 and December 31, 2010 was included in other current liabilities on the Consolidated Balance Sheets.

Note 8 — Equity

						The Timken Company Shareholders
														Earnings				Accumulated
										Other				Invested				Other
						Stated				Paid-In				in the				Comprehensive				Treasury				Noncontrolling
		Total				Capital				Capital				Business				(Loss)				Stock				Interest
Balance at December 31, 2010		$	1,941.8			$	53.1			$	881.7			$	1,626.4			$	(624.7	)		$	(11.5	)		$	16.8
Net income			236.1												234.2												1.9
Foreign currency translation adjustment			46.5																46.5
Pension and postretirement liability adjustment (net of the income tax benefit of $11.6 million)			18.5																18.5
Unrealized gain on marketable securities (net of the income tax benefit of $0.1 million)			0.3																0.2								0.1
Change in fair value of derivative financial instruments, net of reclassifications			0.1																0.1
Total comprehensive income			301.5
Change in ownership of noncontrolling interests			(1.2	)																							(1.2	)
Dividends — $0.38 per share			(37.1	)											(37.1	)
Tax benefit from stock compensation			10.0								10.0
Stock-based compensation expense			9.2								9.2
Stock purchased at cost			(25.3	)																			(25.3	)
Stock option exercise activity			16.3								(17.0	)											33.3
Restricted shares (issued) surrendered			(0.6	)							(0.7	)											0.1
Shares surrendered for taxes			(8.3	)																			(8.3	)
Balance at June 30, 2011		$	2,206.3			$	53.1			$	883.2			$	1,823.5			$	(559.4	)		$	(11.7	)		$	17.6

Note 8 — Equity (continued)

The total comprehensive income for the three months ended June 30, 2011 was $148.1 million. The total comprehensive income for the three months and six months ended June 30, 2010 was $41.7 million and $88.5 million, respectively.

Note 9 — Earnings Per Share

The following table sets forth the reconciliation of the numerator and the denominator of basic earnings per share and diluted earnings per share for the three months and six months ended June 30, 2011 and June 30, 2010:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Numerator:
Income from continuing operations attributable to The Timken Company		$	121.5			$	81.4			$	234.2			$	109.7
Less: undistributed earnings allocated to nonvested stock			0.4				0.4				0.9				0.5
Income from continuing operations available to common shareholders for basic earnings per share and diluted earnings per share		$	121.1			$	81.0			$	233.3			$	109.2
Denominator:
Weighted average number of shares outstanding — basic			97,644,773				96,305,087				97,552,528				96,336,974
Effect of dilutive options			1,255,219				716,085				1,353,328				608,675
Weighted average number of shares outstanding, assuming dilution of stock options			98,899,992				97,021,172				98,905,856				96,945,649
Basic earnings per share from continuing operations		$	1.24			$	0.84			$	2.39			$	1.13
Diluted earnings per share from continuing operations		$	1.22			$	0.84			$	2.36			$	1.13

The exercise prices for certain stock options that the Company has awarded may exceed the average market price of the Company’s common stock. Such stock options are anti-dilutive and were not included in the computation of diluted earnings per share. There were no anti-dilutive stock options outstanding for the three months ended June 30, 2011 and 1,554,605 anti-dilutive stock options outstanding for the three months ended June 30, 2010. The anti-dilutive stock options outstanding were 176,500 and 1,960,955 for the six months ended June 30, 2011 and June 30, 2010, respectively.

Note 10 — Segment Information

The primary measurement used by management to measure the financial performance of each segment is EBIT (earnings before interest and taxes).

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net sales to external customers:
Mobile Industries		$	465.1			$	400.4			$	908.0			$	767.9
Process Industries			307.5				211.0				591.6				416.9
Aerospace and Defense			83.5				82.7				162.6				174.8
Steel			473.5				317.3				921.5				565.5
		$	1,329.6			$	1,011.4			$	2,583.7			$	1,925.1
Intersegment sales:
Mobile Industries		$	0.1			$	—			$	0.2			$	—
Process Industries			0.8				0.6				1.7				1.3
Steel			31.6				20.8				65.1				42.9
		$	32.5			$	21.4			$	67.0			$	44.2
Segment EBIT:
Mobile Industries		$	66.8			$	68.6			$	134.8			$	108.2
Process Industries			70.3				28.3				137.0				52.4
Aerospace and Defense			3.3				6.1				5.5				18.0
Steel			72.1				43.0				132.1				62.9
Total EBIT for reportable segments		$	212.5			$	146.0			$	409.4			$	241.5
Unallocated corporate expenses			(20.4	)			(17.8	)			(38.4	)			(32.2	)
Interest expense			(9.3	)			(10.0	)			(19.1	)			(19.6	)
Interest income			1.4				0.9				2.9				1.5
Intersegment adjustments			(0.4	)			1.1				0.2				3.6
Income from continuing operations before income taxes		$	183.8			$	120.2			$	355.0			$	194.8

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

Note 11 — Impairment and Restructuring Charges

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

For the three months ended June 30, 2011:

		Mobile				Process				Aerospace
		Industries				Industries				& Defense				Steel				Corporate				Total
| | | | | |
Impairment charges		$	0.1			$	0.2			$	0.1			$	—			$	—			$	0.4
Severance expense and related benefit costs			0.2				—				—				—				—				0.2
Exit costs			5.4				0.2				—				—				—				5.6
Total		$	5.7			$	0.4			$	0.1			$	—			$	—			$	6.2

For the three months ended June 30, 2010:

		Mobile				Process				Aerospace
		Industries				Industries				& Defense				Steel				Corporate				Total
| | | | | |
Severance expense and related benefit costs		$	(0.6	)		$	—			$	0.8			$	(0.1	)		$	—			$	0.1
Exit costs			0.5				0.2				0.2				—				—				0.9
Total		$	(0.1	)		$	0.2			$	1.0			$	(0.1	)		$	—			$	1.0

For the six months ended June 30, 2011:

		Mobile				Process				Aerospace
		Industries				Industries				& Defense				Steel				Corporate				Total
Impairment charges		$	0.1			$	0.2			$	0.1			$	—			$	—			$	0.4
Severance expense and related benefit costs			0.1				—				—				—				—				0.1
Exit costs			6.6				0.2				—				—				—				6.8
Total		$	6.8			$	0.4			$	0.1			$	—			$	—			$	7.3

For the six months ended June 30, 2010:

		Mobile				Process				Aerospace
		Industries				Industries				& Defense				Steel				Corporate				Total
Severance expense and related benefit costs		$	1.6			$	1.6			$	1.4			$	(0.1	)		$	0.6			$	5.1
Exit costs			0.9				0.2				0.3				—				—				1.4
Total		$	2.5			$	1.8			$	1.7			$	(0.1	)		$	0.6			$	6.5

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

Note 11 — Impairment and Restructuring Charges (continued)

Mobile Industries

In March 2007, the Company announced the closure of its manufacturing facility in Sao Paulo, Brazil. The Company has substantially completed the closure of this facility as of June 30, 2011. Pretax costs associated with the closure could be as high as approximately $60 million, which includes restructuring costs and rationalization costs recorded in cost of products sold and selling, general and administrative expenses. The increase in costs from $40 million to $60 million was due to uncertainty around higher environmental remediation costs. Mobile Industries has incurred pretax costs of approximately $40.7 million as of June 30, 2011. During the second quarter and first six months of 2011, the Company recorded $4.9 million and $6.0 million, respectively, of exit costs associated with the closure of this facility. The exit costs were primarily related to environmental remediation costs and workers compensation claims for former associates. The Company accrues environmental remediation costs and workers compensation claims when they become probable and estimable.

Workforce Reductions

In 2009, the Company began the realignment of its organization to improve efficiency and reduce costs as a result of the economic downturn that began during the latter part of 2008. This initiative was completed in 2010. During the first six months of 2010, the Company recorded $4.8 million of severance and related benefit costs related to this initiative, which included both selling and administrative cost reductions, as well as manufacturing workforce reductions. Of the $4.8 million charge recorded during the first six months of 2010, $1.5 million related to the Mobile Industries segment, $1.3 million related to the Process Industries segment, $1.3 million related to the Aerospace and Defense segment and $0.7 million related to Corporate positions.

The following is a rollforward of the consolidated restructuring accrual for the six months ended June 30, 2011 and the twelve months ended December 31, 2010:

		June 30,				December 31,
		2011				2010
| |
Beginning balance, January 1		$	22.1			$	34.0
Expense			6.9				17.0
Payments			(4.2	)			(28.9	)
Ending balance		$	24.8			$	22.1

The restructuring accrual at June 30, 2011 and December 31, 2010 was included in other current liabilities on the Consolidated Balance Sheets. The accrual at June 30, 2011 included $5.6 million of severance and related benefits, which are expected to be paid by the end of 2011. The accrual for severance and related benefits at June 30, 2011 primarily related to the closure of the distribution center in Bucyrus, Ohio, which was completed during the second quarter of 2011, and the closure of the manufacturing facility in Sao Paulo, Brazil. The remainder of the restructuring accrual at June 30, 2011 primarily represented environmental exit costs, which are principally related to Sao Paulo, Brazil. As of June 30, 2011, the Company has $10.9 million reserved for environmental matters in Sao Paulo, Brazil, which is its best estimate of its environmental liability at this time. The Company adjusts environmental remediation accruals based on the best available estimate of costs to be incurred, the timing and extent of remedial actions required by governmental authorities and the amount of the Company’s liability in proportion to other responsible parties. The Company’s estimated total liability for this site ranges from a minimum of $10.9 million to a maximum of $20.9 million. It is possible that the estimate may change in the near term.

Note 12 — Retirement and Postretirement Benefit Plans

The following table sets forth the net periodic benefit cost for the Company’s retirement and postretirement benefit plans. The amounts for the three months and six months ended June 30, 2011 are based on updated actuarial calculations prepared during the second quarter of 2011. The net periodic benefit cost recorded for the three months ended and six months ended June 30, 2011 is the Company’s best estimate of each period’s proportionate share of the amounts to be recorded for the year ended December 31, 2011.

		Pension								Postretirement
		Three Months Ended								Three Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Components of net periodic benefit cost
Service cost		$	7.9			$	7.0			$	0.7			$	0.4
Interest cost			39.6				39.3				7.5				8.4
Expected return on plan assets			(57.5	)			(50.8	)			(1.5	)			—
Amortization of prior service cost (credit)			2.3				2.4				0.2				(0.4	)
Amortization of net actuarial loss			15.2				13.7				0.5				0.7
Net periodic benefit cost		$	7.5			$	11.6			$	7.4			$	9.1

		Pension								Postretirement
		Six Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Components of net periodic benefit cost
Service cost		$	16.2			$	16.5			$	1.2			$	1.1
Interest cost			79.4				79.0				16.2				17.5
Expected return on plan assets			(107.6	)			(100.1	)			(2.2	)			—
Amortization of prior service cost (credit)			4.7				4.7				(0.2	)			(0.7	)
Amortization of net actuarial loss			28.0				25.9				1.5				2.0
Net periodic benefit cost		$	20.7			$	26.0			$	16.5			$	19.9

Note 13 — Income Taxes

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Provision for income taxes		$	61.5			$	38.2			$	118.9			$	84.1
Effective tax rate			33.4	%			31.8	%			33.5	%			43.2	%

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

The effective tax rate for the second quarter of 2011 was lower than the U.S. Federal statutory tax rate of 35% primarily as a result of lower taxes related to non-U.S. earnings, and the net impact of other U.S. tax benefits, such as the U.S. research tax credit and U.S. manufacturing deduction, partially offset by U.S. state and local taxes and the net impact of other items.

Note 13 — Income Taxes (continued)

The effective tax rate on the pretax income for the second quarter of 2010 was favorable relative to the U.S. federal statutory tax rate of 35% primarily due to earnings in certain foreign jurisdictions where the effective tax rate is less than 35% and the U.S. manufacturing deduction, partially offset by losses at certain foreign subsidiaries where no tax benefit could be recorded, U.S. state and local tax and the net effect of other U.S. tax items.

The effective tax rate for the first six months of 2011 was lower than the U.S. Federal statutory tax rate of 35% primarily as a result of lower taxes related to non-U.S. earnings, and the net impact of other U.S. tax benefits, such as the U.S. research tax credit and U.S. manufacturing deduction, partially offset by U.S. state and local taxes and the net impact of other items.

The effective tax rate on the pretax income for the first six months of 2010 was unfavorable relative to the U.S. federal statutory tax rate of 35% primarily due to a $21.6 million charge recorded to reflect the deferred tax impact of the enactment of the U.S. Patient Protection and Affordable Care Act (as amended) enacted in the first quarter of 2010, losses at certain foreign subsidiaries where no tax benefit could be recorded, U.S. state and local taxes and the net effect of other U.S. tax items. These increases were partially offset by the earnings in certain foreign jurisdictions where the effective tax rate is less than 35%.

Note 14 — Fair Value

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

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

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of June 30, 2011:

		Fair Value at June 30, 2011
		Total				Level 1				Level 2				Level 3
| | | |
Assets:
Cash and cash equivalents		$	632.8			$	632.8			$	—			$	—
Short-term investments			29.0				29.0				—				—
Foreign currency hedges			0.5				—				0.5				—
Total Assets		$	662.3			$	661.8			$	0.5			$	—
Liabilities:
Foreign currency hedges		$	5.8			$	—			$	5.8			$	—
Total Liabilities		$	5.8			$	—			$	5.8			$	—

Cash and cash equivalents are highly liquid investments with maturities of three months or less when purchased and are valued at redemption value. Short-term investments are investments with maturities between four months and one year and are valued at amortized cost. The Company uses publicly available foreign currency forward and spot rates to measure the fair value of its foreign currency forward contracts.

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

Note 14 — Fair Value (continued)

The following table presents the fair value hierarchy for those assets measured at fair value on a nonrecurring basis for the six months ended June 30, 2011 using Level 3 inputs:

		Carrying				Fair Value
		Value				Adjustment				Fair Value
Assets held for sale:
Inventories		$	4.7			$	(3.2	)		$	1.5
Equity investments			6.9				(2.8	)			4.1
Total assets held for sale		$	11.6			$	(6.0	)		$	5.6
Long-lived assets held and used:
Fixed Assets		$	0.4			$	(0.4	)		$	—
Total assets		$	12.0			$	(6.4	)		$	5.6

During the second quarter of 2011, the Company made a strategic decision to exit certain non-strategic aftermarket product lines. The Company plans to exit these product lines within twelve months. The Company wrote-down inventory with a carrying value of $4.7 million to $1.5 million, which reflects management’s best estimate of the value it would receive in a sale to a third party given the quantity and timing of the plan to exit these product lines.

The Company’s equity investment in International Component Supply LTDA (ICS) was reviewed for impairment during the first quarter of 2011. This equity investment was written down to its fair value of $4.1 million, resulting in an impairment charge of $1.8 million recognized in other expense, net for the first six months of 2011. The fair value of this investment was based on the estimated sales proceeds to be received from a third party if the Company were to sell its interest in the joint venture. During the second quarter of 2011, the Company sold its investment in ICS for $4.8 million, resulting in a gain of $0.5 million. The Company’s equity investment in Endorsia International.com (Endorsia) was also reviewed for impairment during the second quarter of 2011. This equity investment was completely written down, resulting in an impairment charge of $1.0 million recognized in other expense, net for the second quarter of 2011. The fair value of this investment was based on the estimated proceeds to be received by the parties that own Endorsia from the liquidation of this joint venture.

Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, commercial paper, short-term borrowings and accounts payable are a reasonable estimate of their fair value due to the short-term nature of these instruments. The fair value of the Company’s long-term fixed-rate debt, based on quoted market prices, was $478.8 million and $468.7 million at June 30, 2011 and December 31, 2010, respectively. The carrying value of this debt was $434.3 million and $430.4 million at June 30, 2011 and December 31, 2010, respectively.

Note 15 — Subsequent Event

In July 2011, the Company completed the acquisition of the assets of Philadelphia Gear Corp. (Philadelphia Gear), a leading provider of high-performance gear drives and components with a strong focus on value-added aftermarket capabilities in the industrial and military marine sectors, for $200 million. Based in King of Prussia, Pennsylvania and employing approximately 220 people, Philadelphia Gear had trailing 12-month sales through March 2011 of approximately $85 million. The Company will report Philadelphia Gear within the Process Industries segment.

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

Overview

Introduction

The Timken Company (Timken or the Company) designs, manufactures, sells and services highly-engineered anti-friction bearings and assemblies, high-quality alloy steels and power transmission systems, as well as provides a broad spectrum of related products and services. The Company has four operating segments: (1) Mobile Industries; (2) Process Industries; (3) Aerospace and Defense; and (4) Steel. The following is a description of the Company’s operating segments:

•		Mobile Industries provides bearings, power transmission components and related products and services to original equipment manufacturers and suppliers of agricultural, construction and mining equipment, passenger cars, light trucks, medium and heavy-duty trucks, rail cars and locomotives, as well as to automotive and heavy truck aftermarket distributors.
•		Process Industries provides bearings, power transmission components and related products and services to original equipment manufacturers and suppliers of power transmission, energy and heavy industries machinery and equipment. This includes rolling mills, cement and aggregate processing equipment, paper mills, sawmills, printing presses, cranes, hoists, drawbridges, wind energy turbines, gear drives, drilling equipment, coal conveyors, coal crushers and food processing equipment. This segment also serves the industrial aftermarket through its global network of authorized distributors.
•		Aerospace and Defense provides bearings, helicopter transmission systems, rotor head assemblies, turbine engine components, gears and other precision flight-critical components for commercial and military aviation applications and also provides aftermarket services, including repair and overhaul of engines, transmissions and fuel controls, as well as aerospace bearing repair and component reconditioning. Additionally, this segment manufactures precision bearings, higher-level assemblies and sensors for equipment manufacturers of health and positioning control equipment.
•		Steel produces more than 450 grades of carbon and alloy steel, which are sold in both solid and tubular sections in a variety of chemistries, lengths and finishes. This segment’s metallurgical expertise and operational capabilities result in solutions for the automotive, industrial and energy sectors. Timken® specialty steels feature prominently in a wide variety of end products including oil country drill pipe, bits and collars, gears, hubs, axles, crankshafts and connecting rods, bearing races and rolling elements, and bushings, fuel injectors and wind energy shafts.

The Company’s strategy balances corporate aspirations for sustained growth and optimization of its business portfolio with the objective of generating strong profits and cash flows.

Specifically, the growth element of this strategy addresses differentiation and expansion.

•		For differentiation, the Company undertakes investments in new technologies to enhance existing products and services and to create new products that capture value for its customers. The Company recently broadened its product offering by introducing new housed bearings, adding to its spherical and cylindrical bearing line, developing new products and services for the wind energy market sector — including a new Timken® UltraWind P1 seal — and introducing several new grades of steel.
•		Regarding expansion, the Company’s strategy is to grow in attractive sectors, with particular emphasis on those industrial markets that test the limits of the Company’s products and create significant aftermarket, thereby providing a lifetime of opportunity in both product sales and services. The Company’s strategy also encompasses expanding its portfolio in new geographic spaces with an emphasis in Asia. The Company’s acquisition strategy is directed at complementing its existing portfolio and expanding the Company’s market position.

Simultaneously, the Company works to optimize its existing business with specific initiatives aimed at transformation and execution. This includes transforming the overall portfolio of businesses and products to create further value and profitability, which can include addressing or repositioning underperforming product lines and segments, revising market sector or geographic strategies and divesting non-strategic assets. The Company drives execution by embracing a continuous improvement culture that is charged with lowering costs, increasing efficiency, encouraging organizational agility and building greater brand equity.

The following items highlight certain of the Company’s recent significant strategic accomplishments:

•		In May 2011, the Company announced an agreement to acquire the assets of Philadelphia Gear Corp. (Philadelphia Gear), a leading provider of high-performance gear drives and components with a strong focus on value-added aftermarket capabilities in the industrial and military marine sectors, for $200 million. Based in King of Prussia, Pennsylvania and employing approximately 220 people, Philadelphia Gear had trailing 12-month sales through March 2011 of approximately $85 million. The Company completed this acquisition on July 1, 2011. Philadelphia Gear will be part of the Process Industries segment.
•		In May 2011, the Company sold its equity investment in International Components Supply LTDA (ICS) to the SKF Group for approximately $4.8 million. The Company and the SKF Group had previously purchased their 50% equity investments in ICS in early 2001. Located in Sao Paulo, Brazil, ICS manufactures forged and turned steel rings for tapered roller and ball bearings. The Company recorded a gain of approximately $0.5 million on the sale of its equity investment in ICS.
•		In May 2011, the Company announced plans to build an 18,000 square foot Wind Energy Research and Development Center in Canton, Ohio. The cost is expected to be approximately $11.8 million. This new center will be focused on advanced development of bearing systems in wind turbines.
•		In April 2011, the Company announced it will increase its annual steelmaking capacity by 120,000 tons across its steel manufacturing facilities in Canton, Ohio. The Company is achieving this increase through a series of improvements at its Harrison Steel Plant. Additional investments and crew additions will enable a further increase in output and will allow the Company to optimize production loads between its Harrison and Faircrest plants. These changes will effectively create new capacity at both of these steel facilities to support growing demand for finished bar products and billets for tubing product which serve customers in the global industrial, oil and gas, and mobile markets.

Financial Overview:

Overview :

		Three Months Ended
		June 30,
		2011				2010				$ Change				% Change
Net sales		$	1,329.6			$	1,011.4			$	318.2				31.5	%
Income from continuing operations			122.3				82.0				40.3				49.1	%
Income from discontinued operations			—				4.2				(4.2	)			(100.0	)%
Income attributable to noncontrolling interest			0.8				0.6				0.2				33.3	%
Net income attributable to The Timken Company			121.5				85.6				35.9				41.9	%
Diluted earnings per share:
Continuing operations		$	1.22			$	0.84			$	0.38				45.2	%
Discontinued operations			—				0.04				(0.04	)			(100.0	)%
Diluted earnings per share		$	1.22			$	0.88			$	0.34				38.6	%
Average number of shares — diluted			98,899,992				97,021,172				—				1.9	%

		Six Months Ended
		June 30,
		2011				2010				$ Change				% Change
Net sales		$	2,583.7			$	1,925.1			$	658.6				34.2	%
Income from continuing operations			236.1				110.7				125.4				113.3	%
Income from discontinued operations			—				4.5				(4.5	)			(100.0	)%
Income attributable to noncontrolling interest			1.9				1.0				0.9				90.0	%
Net income attributable to The Timken Company			234.2				114.2				120.0				105.1	%
Diluted earnings per share:
Continuing operations		$	2.36			$	1.13			$	1.23				108.8	%
Discontinued operations			—				0.04				(0.04	)			(100.0	)%
Diluted earnings per share		$	2.36			$	1.17			$	1.19				101.7	%
Average number of shares — diluted			98,905,856				96,945,649				—				2.0	%