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

(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 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 o      No o

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

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

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No þ

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

Class		Outstanding at March 31, 2009
Common Stock, without par value		96,796,639 shares

 

 

PART I. FINANCIAL INFORMATION

Consolidated Statement of Income
(Unaudited)

		Three Months Ended
		March 31,
		2009				2008
(Dollars in thousands, except per share data)
Net sales		$	960,378			$	1,434,670
Cost of products sold			808,252				1,123,133
Gross Profit			152,126				311,537
Selling, administrative and general expenses			138,996				177,946
Impairment and restructuring charges			14,744				2,876
Gain on divestitures			—				(8	)
Operating Income (Loss)			(1,614	)			130,723
Interest expense			(8,474	)			(10,998	)
Interest income			390				1,398
Other income (expense), net			7,468				15,467
Income (Loss) before Income Taxes			(2,230	)			136,590
Provision for income taxes			2,848				51,240
Net Income (Loss)			(5,078	)			85,350
Less: Net income (loss) attributable to noncontrolling interest			(5,948	)			885
Net Income Attributable to The Timken Company		$	870			$	84,465
Net Income per Common Share Attributable to The Timken Company Common Shareholders
Basic earnings per share		$	0.01			$	0.88
Diluted earnings per share		$	0.01			$	0.88
Dividends per share		$	0.18			$	0.17

See accompanying Notes to Consolidated Financial Statements.

Consolidated Balance Sheet

		(Unaudited)
		March 31,				December 31,
		2009				2008
(Dollars in thousands)
ASSETS
Current Assets
Cash and cash equivalents		$	112,012			$	116,306
Accounts receivable, less allowances: 2009 - $61,530; 2008 - $56,459			538,804				609,397
Inventories, net			1,060,399				1,145,695
Deferred income taxes			83,609				83,438
Deferred charges and prepaid expenses			12,359				11,066
Other current assets			63,950				67,563
Total Current Assets			1,871,133				2,033,465
Property, Plant and Equipment — Net			1,698,258				1,743,866
Other Assets
Goodwill			228,132				230,049
Other intangible assets			169,820				173,704
Deferred income taxes			309,904				314,960
Other non-current assets			40,626				40,006
Total Other Assets			748,482				758,719
Total Assets		$	4,317,873			$	4,536,050
LIABILITIES AND EQUITY
Current Liabilities
Short-term debt		$	100,165			$	91,482
Accounts payable and other liabilities			342,475				443,430
Salaries, wages and benefits			156,563				218,695
Income taxes payable			11,280				22,467
Deferred income taxes			5,142				5,131
Current portion of long-term debt			268,696				17,108
Total Current Liabilities			884,321				798,313
Non-Current Liabilities
Long-term debt			261,413				515,250
Accrued pension cost			842,172				844,045
Accrued postretirement benefits cost			611,439				613,045
Deferred income taxes			9,294				10,388
Other non-current liabilities			98,368				91,971
Total Non-Current Liabilities			1,822,686				2,074,699
Shareholders’ Equity
Class I and II Serial Preferred Stock without par value:
Authorized - 10,000,000 shares each class, none issued
Common stock without par value:
Authorized - 200,000,000 shares
Issued (including shares in treasury) (2009 - 96,940,205 shares; 2008 - 96,891,501 shares)
Stated capital			53,064				53,064
Other paid-in capital			835,432				838,315
Earnings invested in the business			1,563,530				1,580,084
Accumulated other comprehensive loss			(854,260	)			(819,633	)
Treasury shares at cost (2009 - 143,566 shares; 2008 - 344,948 shares)			(4,163	)			(11,586	)
Total Shareholders’ Equity			1,593,603				1,640,244
Noncontrolling Interest			17,263				22,794
Total Equity			1,610,866				1,663,038
Total Liabilities and Equity		$	4,317,873			$	4,536,050

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statement of Cash Flows
(Unaudited)

		Three Months Ended
		March 31,
		2009				2008
(Dollars in thousands)
CASH PROVIDED (USED)
Operating Activities
Net income attributable to The Timken Company		$	870			$	84,465
Net income (loss) attributable to noncontrolling interest			(5,948	)			885
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			57,466				57,475
Impairment charges			3,923				362
Loss (gain) on disposals of property, plant and equipment			5				(16,935	)
Deferred income tax (benefit) provision			(218	)			667
Stock based compensation expense			4,409				4,686
Pension and other postretirement expense			27,584				25,811
Pension and other postretirement benefit payments			(15,086	)			(25,867	)
Changes in operating assets and liabilities:
Accounts receivable			61,071				(71,624	)
Inventories			65,434				(68,578	)
Accounts payable and accrued expenses			(152,704	)			(2,858	)
Other — net			(9,358	)			(1,400	)
Net Cash Provided (Used) By Operating Activities			37,448				(12,911	)
Investing Activities
Capital expenditures			(33,562	)			(52,417	)
Proceeds from disposals of property, plant and equipment			2,702				29,628
Acquisitions			(42	)			(55,329	)
Other			1,332				(453	)
Net Cash Used by Investing Activities			(29,570	)			(78,571	)
Financing Activities
Cash dividends paid to shareholders			(17,424	)			(16,320	)
Net proceeds from common share activity			1,648				1,587
Proceeds from issuance of long-term debt			—				450,102
Payments on long-term debt			(207	)			(319,545	)
Short-term debt activity — net			6,241				8,999
Net Cash (Used) Provided by Financing Activities			(9,742	)			124,823
Effect of exchange rate changes on cash			(2,430	)			4,721
(Decrease) increase In Cash and Cash Equivalents			(4,294	)			38,062
Cash and cash equivalents at beginning of year			116,306				30,144
Cash and Cash Equivalents at End of Period		$	112,012			$	68,206

See accompanying Notes to the Consolidated Financial Statements.

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

Note 1 — Basis of Presentation

The accompanying Consolidated Financial Statements (unaudited) for The Timken Company (the Company) have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by the accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to the Consolidated Financial Statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Certain amounts in the 2008 Consolidated Financial Statements have been reclassified to conform to the 2009 presentation.

Note 2 — New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a framework for measuring fair value that is based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information to develop those assumptions. Additionally, the standard expands the disclosures about fair value measurements to include separately disclosing the fair value measurements of assets or liabilities within each level of the fair value hierarchy. In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, “Effective Date of FASB Statement No. 157.” FSP FAS 157-2 delayed the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008. On January 1, 2009, the Company implemented the previously delayed provisions of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities recorded at fair value, as required. The implementation of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities did not have a material impact on the Company’s results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS No. 141(R)). SFAS No. 141(R) provides revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests and goodwill acquired in a business combination. SFAS No. 141(R) also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS No. 141(R) is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. The implementation of SFAS No. 141(R), effective January 1, 2009, did not have a material impact on the Company’s results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51.” SFAS No. 160 establishes requirements for ownership interests in subsidiaries held by parties other than the Company (sometimes called “minority interests”) be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity. All changes in the parent’s ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in deconsolidated subsidiaries must be measured initially at fair value. SFAS No. 160 is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements. The implementation of SFAS No. 160, effective January 1, 2009, did not have a material impact on the Company’s results of operations and financial condition.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 161 requires entities to provide greater transparency through additional disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities,” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The implementation of SFAS No. 161, effective January 1, 2009, expanded the disclosures on derivative instruments and related hedged items and did not have a material impact on the Company’s results of operations and financial condition. See Note 16 — Derivative Instruments and Hedging Activities for the expanded disclosures.

In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP No. EITF 03-6-1 clarifies that unvested share-based payment awards that contain rights to receive nonforfeitable dividends are participating securities. FSP No. EITF 03-6-1 provides guidance on how to allocate earnings to participating securities and compute earnings per share using the two-class method. FSP No. EITF 03-6-1 is effective for fiscal years beginning after December 31, 2008, and interim periods within those fiscal years. FSP No. EITF 03-6-1 did not have a material impact on the Company’s disclosure of earnings per share. See Note 10 — Earnings Per Share for the computation of earnings per share using the two-class method.

Note 2 — New Accounting Pronouncements (continued)

In December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” FSP FAS 132(R)-1 requires the disclosure of additional information about investment allocation, fair values of major categories of assets, development of fair value measurements and concentrations of risk. FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. The adoption of FSP FAS 132(R)-1 is not expected to have a material impact on the Company’s results of operations and financial condition.

Note 3 — Inventories

		March 31,				December 31,
		2009				2008
Inventories:
Manufacturing supplies		$	83,308			$	89,070
Work in process and raw materials			419,115				474,906
Finished products			557,976				581,719
Inventories — net		$	1,060,399			$	1,145,695

An actual valuation of the inventory under the last-in, first-out (LIFO) method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management’s control, annual results may differ from interim results as they are subject to the final year-end LIFO inventory valuation. The LIFO reserve at March 31, 2009 and December 31, 2008 was $295,712 and $307,544, respectively. The Company’s Steel segment recognized a decrease in its LIFO reserve of $12,383 during the first quarter of 2009 as a result of expected lower year-end inventory quantities and material costs, especially scrap steel costs. The decrease in the Company’s Steel segment LIFO reserve compares to an increase in the LIFO reserve of $16,600 during the first quarter of 2008.

Note 4 — Property, Plant and Equipment

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

		March 31,				December 31,
		2009				2008
Property, Plant and Equipment:
Land and buildings		$	703,211			$	705,701
Machinery and equipment			3,306,772				3,323,695
Subtotal			4,009,983				4,029,396
Less allowances for depreciation			(2,311,725	)			(2,285,530	)
Property, Plant and Equipment — net		$	1,698,258			$	1,743,866

At March 31, 2009 and December 31, 2008, machinery and equipment included approximately $127,900 and $128,800, respectively, of capitalized software. Depreciation expense was $53,947 and $53,994 for the three months ended March 31, 2009 and 2008, respectively. Depreciation expense on capitalized software was approximately $5,100 and $4,400 for the three months ended March 31, 2009 and 2008, respectively. Assets held for sale at March 31, 2009 and December 31, 2008 were $4,392 and $7,020, respectively. Assets held for sale at March 31, 2009 relate to land and buildings in Torrington, Connecticut and are classified as Other current assets on the Consolidated Balance Sheet.

On February 15, 2008, the Company completed the sale of its former seamless steel tube manufacturing facility located in Desford, England for approximately $28,400. The Company recognized a pretax gain of approximately $20,200 during the first quarter of 2008 and recorded the gain in Other income (expense), net in the Company’s Consolidated Statement of Income.

Note 5 — Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2009 are as follows:

		Beginning												Ending
		Balance				Acquisitions				Other				Balance
Segment:
Process Industries		$	52,856			$	—			$	(1,547	)		$	51,309
Aerospace and Defense			167,558				36				(412	)			167,182
Steel			9,635				6				—				9,641
Total		$	230,049			$	42			$	(1,959	)		$	228,132

Acquisitions represent opening balance sheet allocation adjustments for acquisitions completed in 2008. Other primarily includes foreign currency translation adjustments.

The following table displays intangible assets as of March 31, 2009 and December 31, 2008:

		As of March 31, 2009												As of December 31, 2008
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
Intangible assets subject to amortization:
Customer relationships		$	101,099			$	17,813			$	83,286			$	101,098			$	16,470			$	84,628
Engineering drawings			5,001				5,001				—				5,001				5,001				—
Know-how			2,075				774				1,301				2,122				784				1,338
Land-use rights			7,501				2,654				4,847				7,508				2,593				4,915
Patents			22,729				14,741				7,988				22,729				14,101				8,628
Technology use			45,677				7,838				37,839				46,120				7,298				38,822
Trademarks			6,486				4,571				1,915				6,632				4,670				1,962
PMA licenses			8,792				1,867				6,925				8,792				1,753				7,039
Non-compete agreements			2,710				670				2,040				2,710				493				2,217
Unpatented technology			18,425				11,450				6,975				18,425				11,000				7,425
		$	220,495			$	67,379			$	153,116			$	221,137			$	64,163			$	156,974
Intangible assets not subject to amortization:
Goodwill		$	228,132			$	—			$	228,132			$	230,049			$	—			$	230,049
Tradename			1,400				—				1,400				1,400				—				1,400
Land-use rights			123				—				123				146				—				146
Industrial license agreements			961				—				961				964				—				964
FAA air agency certificates			14,220				—				14,220				14,220				—				14,220
		$	244,836			$	—			$	244,836			$	246,779			$	—			$	246,779
Total intangible assets		$	465,331			$	67,379			$	397,952			$	467,916			$	64,163			$	403,753

Amortization expense for intangible assets was $3,470 for the three months ended March 31, 2009. Amortization expense for intangible assets is estimated to be approximately $14,900 for 2009; $14,600 in 2010; $13,600 in 2011; $13,000 in 2012 and $9,900 in 2013.

Note 6 — Equity Investments

The Company’s investments in less than majority-owned companies in which it has the ability to exercise significant influence are accounted for using the equity method except when they qualify as variable interest entities and are consolidated in accordance with FASB Interpretation No. 46 (revised December 2003) (FIN 46(R)), “Consolidation of Variable Interest Entities — an interpretation of Accounting Research Bulletin No. 51.”

Equity investments are reviewed for impairment when circumstances (such as lower-than-expected financial performance or change in strategic direction) indicate that the carrying value of the investment may not be recoverable. If impairment does exist, the equity investment is written down to its fair value with a corresponding charge to the Consolidated Statement of Income. No impairments were recorded during the first quarters of 2009 and 2008 relating to the Company’s equity investments.

Investments accounted for under the equity method were $13,053 and $13,634 at March 31, 2009 and December 31, 2008, respectively, and were reported in Other non-current assets on the Consolidated Balance Sheet.

The Company’s Mobile Industries segment has a joint venture with Advanced Green Components, LLC (AGC). AGC is engaged in the business of converting steel to machined rings for tapered bearings and other related products. During the third quarter of 2006, AGC refinanced its long-term debt of $12,240. The Company guaranteed half of this obligation. The Company concluded the refinancing represented a reconsideration event to evaluate whether AGC was a variable interest entity under FIN 46(R). The Company concluded that AGC was a variable interest entity and that the Company was the primary beneficiary. Therefore, the Company consolidated AGC, effective September 30, 2006. At March 31, 2009 net assets of AGC were $2,721, primarily consisting of the following: inventory of $5,915; property, plant and equipment of $21,692; short-term and long-term debt of $18,120; and other non-current liabilities of $7,365. All of AGC’s assets are collateral for its obligations. Except for AGC’s indebtedness for which the Company is a guarantor, AGC’s creditors have no recourse to the general credit of the Company.

The Company has no other variable interest entities, other than AGC, for which it is a primary beneficiary.

Note 7 — Financing Arrangements

Short-term debt at March 31, 2009 and December 31, 2008 was as follows:

		March 31,				December 31,
		2009				2008
Variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 1.94% to 11.75%		$	100,165			$	91,482
Short-term debt		$	100,165			$	91,482

The lines of credit for certain of the Company’s foreign subsidiaries provide for borrowings up to $423,699. At March 31, 2009, the Company had borrowings outstanding of $100,165, which reduced the availability under these facilities to $323,534.

The Company has a $175,000 Accounts Receivable Securitization Financing Agreement (Asset Securitization Agreement), renewable every 364 days. On December 19, 2008, the Company renewed its Asset Securitization Agreement. Under the terms of the Asset Securitization Agreement, the Company sells, on an ongoing basis, certain domestic trade receivables to Timken Receivables Corporation, a wholly-owned consolidated subsidiary that in turn uses the trade receivables to secure borrowings, which are funded through a vehicle that issues commercial paper in the short-term market. Borrowings under the agreement are limited to certain borrowing base calculations. Any amounts outstanding under this Asset Securitization Agreement would be reported on the Company’s Consolidated Balance Sheet in Short-term debt. As of March 31, 2009, there were no outstanding borrowings under the Asset Securitization Agreement. Although the Company had no outstanding borrowings under the Asset Securitization Agreement as of March 31, 2009, certain borrowing base limitations reduced the availability under the Asset Securitization Agreement to $111,563. The yield on the commercial paper, which is the commercial paper rate plus program fees, is considered a financing cost and is included in Interest expense in the Consolidated Statement of Income.

Note 7 — Financing Arrangements (continued)

Long-term debt at March 31, 2009 and December 31, 2008 was as follows:

		March 31,				December 31,
		2009				2008
Fixed-rate Medium-Term Notes, Series A, due at various dates through May 2028, with interest rates ranging from 6.74% to 7.76%		$	175,000			$	175,000
Variable-rate State of Ohio Air Quality Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.64% at March 31, 2009)			12,200				12,200
Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (1.19% at March 31, 2009)			9,500				9,500
Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (0.82% at March 31, 2009)			17,000				17,000
Variable-rate Unsecured Canadian Note, maturing on December 22, 2010 (1.47% at March 31, 2009)			45,841				47,104
Fixed-rate Unsecured Notes, maturing on February 15, 2010 with an interest rate of 5.75%			251,651				252,357
Variable-rate credit facility with US Bank for Advanced Green Components, LLC, maturing on July 17, 2009 (1.40% at March 31, 2009)			12,240				12,240
Other			6,677				6,957
			530,109				532,358
Less current maturities			268,696				17,108
Long-term debt		$	261,413			$	515,250

The Company has a $500,000 Amended and Restated Credit Agreement (Senior Credit Facility) that matures on June 30, 2010. At March 31, 2009, the Company had no outstanding borrowings but had letters of credit outstanding under this facility totaling $40,963, which reduced the availability under the Senior Credit Facility to $459,037. Under the Senior Credit Facility, the Company has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. At March 31, 2009, the Company was in full compliance with the covenants under the Senior Credit Facility and its other debt agreements.

In December 2005, the Company entered into a 57,800 Canadian dollar unsecured loan in Canada. The principal balance of the loan is payable in full on December 22, 2010. The interest rate is variable based on the Canadian LIBOR rate and interest payments are due quarterly.

The Company is the guarantor of $6,120 of AGC’s $12,240 credit facility. Refer to Note 6 — Equity Investments for additional discussion. In July 2008, AGC renewed its $12,240 credit facility with US Bank that was set to expire July 18, 2008 for another 364 days. The Company continues to guarantee half of this obligation.

Note 8 — Product Warranty

The Company provides limited warranties on certain of its products. The Company accrues liabilities for warranty based upon specific claims and a review of historical warranty claim experience in accordance with SFAS No. 5, “Accounting for Contingencies.” Should the Company become aware of a specific potential warranty claim for which liability is probable and reasonably estimable, a specific charge is recorded and accounted for accordingly. Adjustments are made quarterly to the accruals as claim data and historical experience change. The following is a rollforward of the warranty accruals for the three months ended March 31, 2009 and the twelve months ended December 31, 2008:

		March 31,				December 31,
		2009				2008
Beginning balance, January 1		$	13,515			$	12,571
Expense			256				7,525
Payments			(2,784	)			(6,581	)
Ending balance		$	10,987			$	13,515

The product warranty accrual at March 31, 2009 and December 31, 2008 was included in Accounts payable and other liabilities on the Consolidated Balance Sheet.

Note 9 — Equity

An analysis of the change in capital and earnings invested in the business is as follows:

						The Timken Company Shareholders
														Earnings				Accumulated
										Other				Invested				Other
						Stated				Paid-In				in the				Comprehensive				Treasury				Noncontrolling
		Total				Capital				Capital				Business				Income				Stock				Interest
Balance at December 31, 2008		$	1,663,038			$	53,064			$	838,315			$	1,580,084			$	(819,633	)		$	(11,586	)		$	22,794
Net Income (loss)			(5,078	)											870												(5,948	)
Foreign currency translation adjustment			(44,544	)															(44,544	)
Pension and postretirement liability adjustment			10,217																10,217
Unrealized gain on marketable securities			86																69								17
Change in fair value of derivative financial instruments, net of reclassifications			(369	)															(369	)
Total comprehensive income (loss)			(39,688	)
Capital investment in Timken XEMC (Hunan) Bearings Co.			400																								400
Dividends — $0.18 per share			(17,424	)											(17,424	)
Issuance of 201,382 shares from treasury and 48,705 shares from authorized			4,540								(2,883	)											7,423
Balance at March 31, 2009		$	1,610,866			$	53,064			$	835,432			$	1,563,530			$	(854,260	)		$	(4,163	)		$	17,263

The total comprehensive income for the three months ended March 31, 2008 was $121,582.

Note 10 — Earnings Per Share

The following table sets forth the reconciliation of the numerator and the denominator of basic earnings per share and diluted earnings per share for the three months ended March 31, 2009 and 2008:

		Three Months Ended
		March 31,
		2009				2008
Earnings per share — Basic:
Numerator:
Net income attributable to the Timken Company		$	870			$	84,465
Less: distributed and undistributed earnings allocated to nonvested stock			(6	)			(606	)
Earnings available to common shareholders — basic			864				83,859
Denominator:
Weighted-average number of shares outstanding — basic			96,028,860				95,254,264
Basic earnings per share		$	0.01			$	0.88
Earnings per share — Diluted:
Numerator:
Net income attributable to the Timken Company		$	870			$	84,465
Less: distributed and undistributed earnings allocated to nonvested stock			(6	)			(606	)
Earnings available to common shareholders — diluted			864				83,859
Denominator:
Weighted-average number of shares outstanding — basic			96,028,860				95,254,264
Effect of dilutive options			—				393,754
Weighted-average number of shares outstanding, assuming dilution of stock options			96,028,860				95,648,018
Diluted earnings per share		$	0.01			$	0.88

The exercise prices for certain stock options that the Company has awarded exceed the average market price of the Company’s common stock. Such stock options are antidilutive and were not included in the computation of diluted earnings per share. The antidilutive stock options outstanding were 4,938,146 and 1,569,019 during the first quarter of 2009 and 2008, respectively.

Note 11 — Segment Information

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

		Three months ended
		March 31,
		2009				2008
Net sales to external customers:
Mobile Industries		$	372,864			$	635,252
Process Industries			242,284				312,212
Aerospace and Defense			112,665				102,132
Steel			232,565				385,074
		$	960,378			$	1,434,670
Intersegment sales:
Process Industries		$	922			$	410
Steel			16,003				39,914
		$	16,925			$	40,324
Segment EBIT, as adjusted:
Mobile Industries		$	(24,879	)		$	30,566
Process Industries			47,017				59,037
Aerospace and Defense			18,553				7,162
Steel			(7,262	)			53,379
Total EBIT, as adjusted, for reportable segments		$	33,429			$	150,144
Unallocated corporate expense			(12,330	)			(16,425	)
Impairment and restructuring			(14,744	)			(2,876	)
(Loss) gain on divestitures			—				8
Rationalization and integration charges			(1,465	)			(2,182	)
Gain on sale of non-strategic assets, net of dissolution of subsidiary			1,222				20,355
Interest expense			(8,474	)			(10,997	)
Interest income			390				1,397
Intersegment eliminations			(258	)			(2,834	)
Income (Loss) before Income Taxes		$	(2,230	)		$	136,590

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

Note 12 — Impairment and Restructuring Charges

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

For the three months ended March 31, 2009:

		Mobile				Process				Aerospace and
		Industries				Industries				Defense				Steel				Corporate				Total
Impairment charges		$	897			$	3,026			$	—			$	—			$	—			$	3,923
Severance expense and related benefit costs			7,594				959				54				446				1,200				10,253
Exit costs			4				563				—				1				—				568
Total		$	8,495			$	4,548			$	54			$	447			$	1,200			$	14,744

For the three months ended March 31, 2008:

		Mobile				Process				Aerospace
		Industries				Industries				and Defense				Steel				Corporate				Total
Impairment charges		$	310			$	52			$	—			$	—			$	—			$	362
Severance expense and related benefit costs			2,094				—				—				—				—				2,094
Exit costs			7				88				—				325				—				420
Total		$	2,411			$	140			$	—			$	325			$	—			$	2,876

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

Selling and Administrative Reductions

In March 2009, the Company announced the realignment of its organization to improve efficiency and reduce costs. The Company had targeted pretax savings of approximately $30,000 to $40,000 in annual selling and administrative costs. In light of the Company’s revised forecast indicating significantly reduced sales and earnings for the year, the Company is now expanding the target to approximately $80,000. The implementation of these savings began in the first quarter of 2009 and is expected to be significantly completed by the end of the fourth quarter of 2009, with full-year savings expected to be achieved in 2010. As the Company streamlines its operating structure, it expects to cut its salaried workforce by up to 400 positions in 2009, incurring severance costs of approximately $10,000 to $20,000. During the first quarter of 2009, the Company recorded $2,202 of severance and benefit costs related to this initiative to eliminate approximately 26 associates. Of the $2,202 charge, $1,200 related to Corporate, $420 related to the Mobile Industries segment, $409 related to the Steel segment, $166 related to the Process Industries segment and $7 related to the Aerospace and Defense segment.

Manufacturing Workforce Reductions

During the first quarter of 2009, the Company recorded $7,371 in severance and related benefit costs, including a curtailment of pension benefits of $1,850, to eliminate approximately 900 associates to properly align its business as a result of the current downturn in the economy and expected market demand. Of the $7,371 charge, $6,565 related to the Mobile Industries segment, $761 related to the Process Industries segment and $45 related to the Aerospace and Defense segment.

Bearings and Power Transmission Reorganization

In August 2007, the Company announced the realignment of its management structure. During the first quarter of 2008, the Company began to operate under two major business groups: the Steel Group and the Bearings and Power Transmission Group. The Bearings and Power Transmission Group includes three reportable segments: Mobile Industries, Process Industries and Aerospace and Defense. The Company realized pretax savings of approximately $18,000 in 2008 as a result of these changes. During the first quarter of 2008, the Company recorded $1,092 of severance and related benefit costs related to this initiative. The severance charge for the first quarter of 2008 related to the Mobile Industries segment.

Note 12 — Impairment and Restructuring Charges (continued)

Mobile Industries

In March 2007, the Company announced the planned closure of its manufacturing facility in Sao Paulo, Brazil. The closure of this manufacturing facility was subsequently delayed to serve higher customer demand. However, with the current downturn in the economy, the Company believes it will close this facility before the end of 2010. This closure is targeted to deliver annual pretax savings of approximately $5,000, with expected pretax costs of approximately $25,000 to $30,000, which includes restructuring costs and rationalization costs recorded in cost of products sold and selling, administrative and general expenses. Due to the delay in the closure of this manufacturing facility, the Company expects to realize the $5,000 of annual pretax savings before the end of 2010, once this facility closes. Mobile Industries has incurred cumulative pretax costs of approximately $18,536 as of March 31, 2009 related to this closure. During the first quarter of 2009 and 2008, the Company recorded $557 and $1,002, respectively, of severance and related benefit costs associated with the planned closure of the Company’s Sao Paulo, Brazil manufacturing facility.

In addition to the above charges, the Company recorded impairment charges of $897 during the first quarter of 2009 related to impairment of fixed assets at two of its facilities in France as a result of the carrying value of these assets exceeding expected future cash flows. During the first quarter of 2008, the Company recorded an impairment charge of $310 related to an impairment of fixed assets at its facility in Spain as a result of the carrying value of these assets exceeding expected future cash flows due to the then-anticipated sale of this facility.

Process Industries

In May 2004, the Company announced plans to rationalize the Company’s three bearing plants in Canton, Ohio within the Process Industries segment. This rationalization initiative is expected to deliver annual pretax savings of approximately $20,000 through streamlining operations and workforce reductions, with pretax costs of approximately $45,000 to $50,000, by the end of 2009.

The Company recorded impairment charges of $3,026 and exit costs of $563 during the first quarter of 2009 related to Process Industries’ rationalization plans. During the first quarter of 2008, the Company recorded impairment charges of $52 and exit costs of $88 as a result of Process Industries’ rationalization plans. Including rationalization costs recorded in cost of products sold and selling, administrative and general expenses, the Process Industries segment has incurred cumulative pretax costs of approximately $41,158 as of March 31, 2009 for these rationalization plans. As of March 31, 2009, the Process Industries segment has realized approximately $15,000 in annual pretax savings.

Steel

In April 2007, the Company completed the closure of its seamless steel tube manufacturing facility located in Desford, England. The Company recorded $325 of exit costs during the first quarter of 2008 related to this action.

The following is a rollforward of the consolidated restructuring accrual for the three months ended March 31, 2009 and the twelve months ended December 31, 2008:

		March 31,				December 31,
		2009				2008
Beginning balance, January 1		$	18,946			$	24,455
Expense			8,971				12,597
Payments			(6,716	)			(18,106	)
Ending balance		$	21,201			$	18,946

The restructuring accrual at March 31, 2009 and December 31, 2008 is included in Accounts payable and other liabilities on the Consolidated Balance Sheet. The restructuring accrual at March 31, 2009 excludes costs related to the curtailment of pension benefit plans of $1,850. The accrual at March 31, 2009 includes $14,394 of severance and related benefits, with the remainder of the balance primarily representing environmental exit costs. Approximately half of the $14,394 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 once the closure of the manufacturing facility in Sao Paulo, Brazil is completed.

Note 13 — Retirement and Postretirement Benefit Plans

The following table sets forth the net periodic benefit cost for the Company’s retirement and postretirement benefit plans. The amounts for the three months ended March 31, 2009 are based on actuarial calculations prepared during 2008. Consistent with prior years, these calculations will be updated later in the year. These updated calculations may result in a different net periodic benefit cost for 2009. The net periodic benefit cost recorded for the three months ended March 31, 2009 is the Company’s best estimate of each period’s proportionate share of the amounts to be recorded for the year ended December 31, 2009.

		Pension								Postretirement
		Three months ended								Three months ended
		March 31,								March 31,
		2009				2008				2009				2008
Components of net periodic benefit cost
Service cost		$	8,776			$	10,188			$	789			$	1,153
Interest cost			39,902				41,823				10,599				11,087
Expected return on plan assets			(47,328	)			(50,545	)			—				—
Amortization of prior service cost			2,861				3,135				(544	)			(469	)
Amortization of net actuarial loss			9,443				7,235				1,256				2,229
Curtailment loss			1,850				—				—				—
Amortization of transition asset			(20	)			(25	)			—				—
Net periodic benefit cost		$	15,484			$	11,811			$	12,100			$	14,000

Note 14 — Income Taxes

		Three Months Ended
		March 31,
		2009				2008
Provision for income taxes		$	2,848			$	51,240
Effective tax rate			(127.7	)%			37.8	%

The Company’s provision for income taxes in interim periods is computed in accordance with FIN 18, “Accounting for Income Taxes in Interim Periods — an interpretation of APB Opinion No. 28” by applying appropriate annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items, including interest on prior year tax liabilities, are recorded during the period in which they occur.

The first quarter of 2009 resulted in $2,848 of net income tax expense, or an effective tax rate of -127.7%. This tax rate was principally driven by the application of FIN 18, as income tax expense on earnings from profitable affiliates exceeded tax benefits that could be recorded on losses from unprofitable affiliates. For the full year of 2009, the Company expects its effective tax rate to be in the range of 25% to 30%.

The effective tax rate for the first quarter of 2009 was higher than the U.S. federal statutory tax rate primarily due to increased losses at certain foreign subsidiaries where no tax benefit could be recorded. These increases were partially offset by the earnings in certain foreign jurisdictions where the effective tax rate is less than 35%, the U.S. Federal research tax credit and other U.S. net tax benefits.

The effective tax rate for the first quarter of 2008 was higher than the U.S. federal statutory tax rate due to losses at certain foreign subsidiaries where no tax benefit could be claimed, U.S. state and local taxes and an unfavorable discrete tax adjustment to increase the Company’s accruals for uncertain tax positions. These increases were offset by tax benefits related to the earnings of certain foreign subsidiaries being taxes at a rate less than 35%, the U.S. domestic manufacturing deduction and other U.S. net tax benefits.

Note 15 — Fair Value

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). SFAS No. 157 classifies the inputs used to measure fair value into the following hierarchy:

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

The following table presents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2009:

		Total				Level 1				Level 2				Level 3
Assets:
Available-for-sale securities		$	25,341			$	25,341			$	—			$	—
Natural gas forward contracts			233				—				233				—
Foreign currency hedges			4,018				—				4,018				—
Interest rate swaps			1,651				—				1,651				—
Total Assets		$	31,243			$	25,341			$	5,902			$	—
Liabilities:
Foreign currency hedges		$	6,585			$	—			$	6,585			$	—
Total Liabilities		$	6,585			$	—			$	6,585			$	—

The Company uses publicly available foreign currency forward and spot rates to measure the fair value of its foreign currency forward contracts. The natural gas forward contracts are marked to market using prevailing forward rates for natural gas. The Company’s interest rate swaps are remeasured each period using observable market interest rates.

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

The following table presents the fair value hierarchy for those nonfinancial assets measured at fair value on a nonrecurring basis as of March 31, 2009:

		Fair Value at March 31, 2009
		Total				Level 1				Level 2				Level 3				Total Losses
Assets:
Long-lived assets held and used		$	244			$	—			$	—			$	244				$(3,923	)
Total Assets		$	244			$	—			$	—			$	244				$(3,923	)

In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets held and used with a total carrying value of $4,167 were written down to their fair value of $244, resulting in an impairment charge of $3,923, which was included in earnings for the first quarter of 2009. These long-lived assets, which were part of a larger group of assets, were examined and determined to no longer be of use to the Company and thus were scrapped. The remaining assets were written down to an estimated fair value based on what the Company would receive for used machinery and equipment, if sold.

Note 16 — Derivative Instruments and Hedging Activities

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

In accordance with SFAS No. 133, the Company designates certain foreign currency forward contracts as cash flow hedges of forecasted revenues, and certain interest rate hedges as fair value hedges of fixed-rate borrowings. The majority of the Company’s natural gas forward contracts are not subject to any hedge designation as they are considered within the normal purchases exemption.

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

As of March 31, 2009, the Company had $106,671 of outstanding foreign currency forward contracts at notional value. The total notional value of foreign currency hedges as of December 31, 2008 was $239,415.

Cash Flow Hedging Strategy

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

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

Fair Value Hedging Strategy

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

Note 16 — Derivative Instruments and Hedging Activities (continued)

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

				Asset Derivatives								Liability Derivatives
																Fair Value
		Balance Sheet		Fair Value				Fair Value				Fair Value				at
		Location		at 3/31/09				at 12/31/08				at 3/31/09				12/31/08
Derivatives designated as hedging instruments under SFAS No. 133
Foreign currency forward contracts		Other non-current liabilities		$	3,889			$	4,398			$	6,330			$	7,635
Interest rate swaps		Other non-current assets			1,651				2,357				—				—
Natural gas forward contracts		Other current assets			233				1,559				—				—
Total derivatives designated as hedging instruments under SFAS No. 133				$	5,773			$	8,314			$	6,330			$	7,635
Derivatives not designated as hedging instruments under SFAS No. 133 (a)
Foreign currency forward contracts		Other non-current liabilities		$	129			$	1,786			$	255			$	3,218
Total derivatives				$	5,902			$	10,100			$	6,585			$	10,853

(a)		See Footnote 15 — Fair Value for additional information on the Company’s purpose for entering into derivatives not designated as hedging instruments and its overall risk management strategies.

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

				Amount of gain or
				(loss) recognized in
		Location of gain or (loss)		income on derivative
Derivatives in SFAS No. 133 fair		recognized in income on		March 31,				March 31,
value hedging relationships		derivative		2009				2008
Interest rate swaps		Interest expense		$	(706	)		$	1,368
Natural gas forward contracts		Other income (expense)			(1,326	)			(448	)
Total				$	(2,032	)		$	920

				Amount of gain or
				(loss) recognized in
		Location of gain or (loss)		income on derivative
Hedged items in SFAS No. 133 fair		recognized in income on		March 31,				March 31,
value hedge relationships		derivative		2009				2008
Fixed-rate debt		Interest expense		$	706			$	(1,368	)
Inventory		Other income (expense)			1,106				—
Total				$	1,812			$	(1,368	)

Note 16 — Derivative Instruments and Hedging Activities (continued)

										Amount of gain or
		Amount of gain or (loss)								(loss) reclassified from
		recognized in OCI on								AOCI into income
		derivative								(effective portion) (a)
		Three months ended								Three months ended
Derivatives in SFAS No. 133 cash flow		March 31,								March 31,
hedging relationships		2009				2008				2009				2008
Foreign currency forward contracts		$	(299	)		$	553			$	884			$	148
Total		$	(299	)		$	553			$	884			$	148

All cash flow hedge contracts are 100% effective and as a result, no portion of the gain or loss reclassified from accumulated other comprehensive income into income was ineffective.

				Amount of gain or (loss)
				recognized in income on
Derivatives not designated as		Location of gain or (loss)		derivative
hedging instruments under SFAS		recognized in income on		Three months ended March 31,
No. 133		derivative		2009				2008
Foreign currency forward contracts		Cost of sales		$	(88	)		$	293
Foreign currency forward contracts		Other income (expense)			1,394				332
Total				$	1,306			$	625

Note 17 — Subsequent Events

On April 30, 2009, Chrysler LLC filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code to reorganize its business. At this time, the Company’s management is reviewing the impact of this bankruptcy filing. The Company’s accounts receivable from Chrysler LLC and its wholly-owned U.S. subsidiaries (“Chrysler”) were approximately $1.2 million as of April 30, 2009. It is possible that some or all of the Company’s accounts receivable balance from Chrysler either may not be collected or may be paid in the near term either through ordinary claims procedures or other means under the bankruptcy process.

Overview

The Timken Company is a leading global manufacturer of highly engineered anti-friction bearings and assemblies, high-quality alloy steels and aerospace power transmission systems, as well as a provider of related products and services. The Company operates under two business groups: the Steel Group and the Bearings and Power Transmission Group. The Bearings and Power Transmission Group is composed of three operating segments: (1) Mobile Industries, (2) Process Industries and (3) Aerospace and Defense. These three operating segments and the Steel Group comprise the Company’s four reportable segments.

The Mobile Industries segment provides bearings, power transmission components and related products and services. Customers of the Mobile Industries segment include original equipment manufacturers and suppliers for passenger cars, light trucks, medium and heavy-duty trucks, rail cars, locomotives and agricultural, construction and mining equipment. Customers also include aftermarket distributors of automotive products. The Company’s strategy for the Mobile Industries segment is to improve financial performance by allocating assets to serve the most attractive market sectors and restructuring or exiting those businesses where adequate returns cannot be achieved over the long-term.

The Process Industries segment provides bearings, power transmission components and related products and services. Customers of the Process Industries segment include original equipment manufacturers of power transmission, energy and heavy industries machinery and equipment, including rolling mills, cement and aggregate processing equipment, paper mills, sawmills, printing presses, cranes, hoists, drawbridges, wind energy turbines, gear drives, drilling equipment, coal conveyors and crushers and food processing equipment. Customers also include aftermarket distributors of products other than those for steel and automotive applications. The Company’s strategy for the Process Industries segment is to pursue growth in selected industrial market sectors and in the aftermarket and to achieve a leadership position in Asia. In December 2007, the Company announced the establishment of a joint venture, Timken XEMC (Hunan) Bearings Co., Ltd., 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 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 April 2008, the Company opened a new aerospace precision products manufacturing facility in China. 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 November 2008, the Company opened a new $60 million small-bar steel rolling mill to expand its portfolio of differentiated steel products. The new mill enables the Company to competitively produce steel bars down to 1-inch diameter for use in power transmission and friction management applications for a variety of customers, including foreign automakers. In February 2008, the Company completed the acquisition of the assets of Boring Specialties, Inc. (BSI), a provider of a wide range of precision deep-hole oil and gas drilling and extraction products and services.

In addition to specific segment initiatives, the Company has been making strategic investments in business processes and systems. Project O.N.E. is a multi-year program, 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 March 31, 2009, the Company has incurred costs of approximately $201.7 million, of which approximately $117.0 million have been capitalized to the Consolidated Balance Sheet. During 2008 and 2007, the Company completed the installation of Project O.N.E. for the majority of the Company’s domestic operations and a major portion of its European operations. On April 1, 2009, the Company completed the next installation of Project O.N.E. for the majority of the Company’s remaining European operations, as well as certain other facilities in North America and India. With the completion of the April 2009 installation of Project O.N.E., approximately 80% of the Bearings and Power Transmission Group’s global sales flow through the new system.

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

Financial Overview

Overview

		1Q 2009				1Q 2008				$ Change				% Change
(Dollars in millions, except earnings per share)
Net sales		$	960.4			$	1,434.7			$	(474.3	)			(33.1	)%
Net income attributable to The Timken Company			0.9				84.5				(83.6	)			(98.9	)%
Diluted earnings per share		$	0.01			$	0.88			$	(0.87	)			(98.9	)%
Average number of shares — diluted			96,028,860				95,648,018				—				0.2	%

The Company reported net sales for the first quarter of 2009 of approximately $0.96 billion, compared to $1.43 billion in the first quarter of 2008, a decrease of 33.1%. Sales were lower across all business segments except for the Aerospace and Defense segment. The decrease in sales was primarily driven by lower volume and lower steel surcharges, partially offset by the favorable impact of pricing. For the first quarter of 2009, earnings per diluted share were $0.01, compared to $0.88 per diluted share for the first quarter of 2008.

The Company’s first quarter results reflect the deterioration of most market sectors as a result of the current global economic downturn. The impact of lower volume and higher restructuring charges as a result of actions taken to align the Company’s businesses with current demand was partially offset by lower raw material costs and lower selling and administrative costs. Additionally, the Company’s results for the first quarter of 2008 reflected a pretax gain of $20.2 million on the sale of the Company’s former seamless steel tube manufacturing facility located in Desford, England.

Outlook

The Company’s outlook for 2009 reflects a deteriorating global economic climate that is expected to last throughout the year, impacting most of the Company’s market sectors. Lower sales, compared to 2008, are expected in all business segments except for the Aerospace and Defense segment. A significant portion of the decrease in the Steel segment sales is expected to be due to significantly lower surcharges to recover raw material costs, which were at historically high levels during the middle of 2008, but declined significantly towards the end of 2008. The Company’s results will reflect lower margins as a result of the lower volume and surcharges, partially offset by improved pricing, lower raw material costs and lower selling, administrative and general expenses. The Company expects to continue to take actions to properly align its business with current market demand. During 2009, the Company announced that it plans to eliminate approximately 400 salaried positions by the end of the fourth quarter of 2009, as well as implement cost savings initiatives that are targeted to save approximately $80 million in annual selling and administrative expenses.

The Company expects to continue to generate cash from operations in 2009 as a result of lower working capital levels. In addition, the Company expects to decrease capital expenditures by approximately 40% in 2009, compared to 2008. However, pension contributions are expected to increase to approximately $70 million to $75 million, including $50 million of discretionary U.S. contributions, in 2009, compared to $22 million in 2008, primarily due to negative asset returns in the Company’s defined benefit pension plans during 2008.

The Statement of Income

Sales by Segment:

		1Q 2009				1Q 2008				$ Change				% Change
(Dollars in millions, and exclude intersegment sales)
Mobile Industries		$	372.9			$	635.3			$	(262.4	)			(41.3	)%
Process Industries			242.3				312.2				(69.9	)			(22.4	)%
Aerospace and Defense			112.6				102.1				10.5				10.3	%
Steel			232.6				385.1				(152.5	)			(39.6	)%
Total Company		$	960.4			$	1,434.7			$	(474.3	)			(33.1	)%

Net sales for the first quarter of 2009 decreased $474.3 million, or 33.1%, compared to the first quarter of 2008, primarily due to lower volume of approximately $400 million across most business segments, except for the Aerospace and Defense segment, lower steel surcharges of $80 million and the effect of currency-rate changes of approximately $75 million, partially offset by improved pricing and favorable sales mix of approximately $80 million.

		1Q 2009				1Q 2008				$ Change				Change
(Dollars in millions)
Gross profit		$	152.1			$	311.5			$	(159.4	)			(51.2	)%
Gross profit % to net sales			15.8	%			21.7	%			—			(590		) bps
Rationalization expenses included in cost of products sold		$	1.2			$	1.4			$	(0.2	)			(14.3	)%

Gross profit margin decreased in the first quarter of 2009, compared to the first quarter of 2008, due to the impact of lower sales volume across most market sectors of approximately $115 million, lower steel surcharges of $80 million and higher manufacturing costs of approximately $100 million, partially offset by lower raw material costs of approximately $50 million, improved pricing and sales mix of approximately $70 million and lower logistics costs of approximately $25 million. The higher manufacturing costs were primarily driven by the Mobile Industries and Steel segments as a result of the underutilization of plant capacity. The lower raw material costs are primarily due to lower scrap steel costs as scrap steel and other raw material costs have fallen in 2009 from historically high levels in 2008.

In the first quarter of 2009, rationalization expenses included in cost of products sold primarily related to the continued rationalization of Process Industries’ Canton, Ohio bearing manufacturing facilities. In the first quarter of 2008, rationalization expenses included in cost of products sold primarily related to certain Mobile Industries segment domestic manufacturing facilities, the closure of the Company’s seamless steel tube manufacturing operations located in Desford, England and the continued rationalization of Process Industries’ Canton, Ohio bearing manufacturing facilities. Rationalization expenses in the first quarter of 2009 and 2008 primarily consisted of accelerated depreciation and relocation of equipment.

		1Q 2009				1Q 2008				$ Change				Change
(Dollars in millions)
Selling, administrative and general expenses		$	139.0			$	177.9			$	(38.9	)			(21.9	)%
Selling, administrative and general expenses % to net sales			14.5	%			12.4	%			—			210		bps
Rationalization expenses included in selling, administrative and general expenses		$	0.3			$	0.8			$	(0.5	)			(62.5	)%

The decrease in selling, administrative and general expenses in the first quarter of 2009, compared to the first quarter of 2008, was primarily due to lower performance-based compensation of approximately $18 million and restructuring initiatives and lower discretionary spending on items such as travel and professional fees of approximately $20 million.

In the first quarter of 2009, the rationalization expenses included in selling, administrative and general expenses primarily related to the rationalization of Process Industries’ Canton, Ohio bearing facilities. In the first quarter of 2008, the rationalization expenses included in selling, administrative and general expenses primarily related to the rationalization of the Process Industries’ Canton, Ohio bearing facilities and costs associated with vacating the Torrington, Connecticut office complex.

		1Q 2009				1Q 2008				$ Change
(Dollars in millions)
Impairment charges		$	3.9			$	0.4			$	3.5
Severance and related benefit costs			10.2				2.1				8.1
Exit costs			0.6				0.4				0.2
Total		$	14.7			$	2.9			$	11.8

In the first quarter of 2009, impairment and restructuring charges were $8.5 million for the Mobile Industries segment, $4.5 million for the Process Industries segment, $0.5 million for the Steel segment and $1.2 million for Corporate. Corporate represents corporate administrative expenses that are not allocated to any of the reportable segments. In the first quarter of 2008, impairment and restructuring charges were $2.4 million for the Mobile Industries segment, $0.2 million for the Process Industries segment and $0.3 million for the Steel segment. The following discussion explains the major impairment and restructuring charges recorded for the periods presented; however, it is not intended to reflect a comprehensive discussion of all amounts in the table above.

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

Selling and Administrative Reductions

In March 2009, the Company announced the realignment of its organization to improve efficiency and reduce costs. The Company had targeted pretax savings of approximately $30 million to $40 million in annual selling and administrative costs. In light of the Company’s revised forecast indicating significantly reduced sales and earnings for the year, the Company is now expanding the target to approximately $80 million. The implementation of these savings began in the first quarter of 2009 and is expected to be significantly completed by the end of the fourth quarter of 2009, with full-year savings expected to be achieved in 2010. As the Company streamlines its operating structure, it expects to cut its salaried workforce by up to 400 positions in 2009, incurring severance costs of approximately $10 million to $20 million. During the first quarter of 2009, the Company recorded $2.2 million of severance and related benefit costs related to this initiative to eliminate approximately 26 associates. Of the $2.2 million charge, $1.2 million related to Corporate, $0.4 million related to the Mobile Industries segment, $0.4 million related to the Steel segment and $0.2 million related to the Process Industries segment.

Manufacturing Workforce Reductions

During the first quarter of 2009, the Company recorded $7.4 million in severance and related benefit costs, including a curtailment of pension benefits of $1.8 million, to eliminate approximately 900 associates to properly align its business as a result of the current downturn in the economy and expected market demand. Of the $7.4 million charge, $6.6 million related to the Mobile Industries segment and $0.8 million related to the Process Industries segment.

Bearings and Power Transmission Reorganization

In August 2007, the Company announced the realignment of its management structure. During the first quarter of 2008, the Company began to operate under two major business groups: the Steel Group and the Bearings and Power Transmission Group. The Bearings and Power Transmission Group includes three reportable segments: Mobile Industries, Process Industries and Aerospace and Defense. The Company realized pretax savings of approximately $18 million in 2008 as a result of these changes. During the first quarter of 2008, the Company recorded $1.1 million of severance and related benefit costs related to this initiative.

Mobile Industries

In March 2007, the Company announced the planned closure of its manufacturing facility in Sao Paulo, Brazil. The closure of this manufacturing facility was subsequently delayed to serve higher customer demand. However, with the current downturn in the economy, the Company believes it will close this facility before the end of 2010. This closure is targeted to deliver annual pretax savings of approximately $5 million, with expected pretax costs of approximately $25 million to $30 million, which includes restructuring costs and rationalization costs recorded in cost of products sold and selling, administrative and general expenses. Due to the delay in the closure of this manufacturing facility, the Company expects to realize the $5 million of annual pretax savings before the end of 2010, once this facility closes. Mobile Industries has incurred cumulative pretax costs of approximately $18.5 million as of March 31, 2009 related to this closure. During the first quarter of 2009 and 2008, the Company recorded $0.6 million and $1.0 million, respectively, of severance and related benefit costs associated with the planned closure of the Company’s Sao Paulo, Brazil manufacturing facility.

In addition to the above charges, the Company recorded an impairment charges of $0.9 million during the first quarter of 2009 related to an impairment of fixed assets at two of its facilities in France as a result of the carrying value of these assets exceeding expected future cash flows. During the first quarter of 2008, the Company recorded an impairment charge of $0.3 million related to an impairment of fixed assets at its facility in Spain as a result of the carrying value of these assets exceeding expected future cash flows due to the then-anticipated sale of this facility.

Process Industries

In May 2004, the Company announced plans to rationalize the Company’s three bearing plants in Canton, Ohio within the Process Industries segment. This rationalization initiative is expected to deliver annual pretax savings of approximately $20 million through streamlining operations and workforce reductions, with pretax costs of approximately $45 million to $50 million, by the end of 2009.

The Company recorded impairment charges of $3.0 million and exit costs of $0.6 million during the first quarter of 2009 related to Process Industries’ rationalization plans. During the first quarter of 2008, the Company recorded impairment charges of $0.1 million and exit costs of $0.1 million as a result of Process Industries’ rationalization plans. Including rationalization costs recorded in cost of products sold and selling, administrative and general expenses, the Process Industries segment has incurred cumulative pretax costs of approximately $41.2 million as of March 31, 2009 for these rationalization plans. As of March 31, 2009, the Process Industries segment has realized approximately $15 million in annual pretax savings.

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

Steel

In April 2007, the Company completed the closure of its seamless steel tube manufacturing facility located in Desford, England. The Company recorded $0.3 million of exit costs during the first quarter of 2008 related to this action.

Rollforward of Restructuring Accruals:

		March 31,				Dec. 31,
		2009				2008
(Dollars in millions)
Beginning balance, January 1		$	18.9			$	24.5
Expense			9.0				12.6
Payments			(6.7	)			(18.2	)
Ending balance		$	21.2			$	18.9

The restructuring accrual at March 31, 2009 and December 31, 2008 is included in Accounts payable and other liabilities on the Consolidated Balance Sheet. The restructuring accrual at March 31, 2009 excludes costs related to the curtailment of pension benefit plans of $1.8 million. The accrual at March 31, 2009 includes $14.4 million of severance and related benefits, with the remainder of the balance primarily representing environmental exit costs. Approximately half of the $14.4 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 once the closure of the manufacturing facility in Sao Paulo, Brazil is completed.

Interest Expense and Income:

		1Q 2009				1Q 2008				$ Change				% Change
(Dollars in millions)
Interest expense		$	8.5			$	11.0			$	(2.5	)			(22.7	)%
Interest income		$	0.4			$	1.4			$	(1.0	)			(71.4	)%

Interest expense for the first quarter of 2009 decreased compared to the first quarter of 2008, primarily due to lower average debt outstanding. Interest income for the first quarter of 2009 decreased compared to the same period in the prior year, due to lower interest rates on invested cash balances.

Other Income and Expense:

		1Q 2009				1Q 2008				$ Change				% Change
(Dollars in millions)
Gain on divestitures of non-strategic assets		$	1.2			$	20.4			$	(19.2	)			(94.1	)%
Other income (expense)			6.2				(4.9	)			11.1			NM
Other income (expense), net		$	7.4			$	15.5			$	(8.1	)			(52.3	)%

The gain on divestitures of non-strategic assets for the first quarter of 2009 primarily related to the sale of one of the buildings at the Company’s former office complex located in Torrington, Connecticut. The gain on divestitures of non-strategic assets for the first quarter of 2008 primarily related to the sale of the Company’s former seamless steel tube manufacturing facility located in Desford, England. In February 2008, the Company completed the sale of this facility, resulting in a pretax gain of approximately $20.2 million.

For the first quarter of 2009, other income (expense) primarily consisted of $6.9 million of foreign currency exchange gains, $0.7 million of export incentives and $0.5 million of royalty income, partially offset by $1.3 million of losses on the disposal of fixed assets and $0.6 million of losses from equity investments. For the first quarter of 2008, other income (expense) primarily consisted of $2.9 million of losses on the disposal of fixed assets and $1.7 million of foreign currency exchange losses.

		1Q 2009				1Q 2008				$ Change				Change
(Dollars in millions)
Income tax expense		$	2.8			$	51.2			$	(48.4	)			(94.5	)%
Effective tax rate			(127.7	)%			37.5	%			—			(16,520		) bps