(Dollars in millions, except per share data) Net sales Cost of products sold Gross Profit Selling, general and administrative expenses Impairment and restructuring charges Operating Income Interest expense Interest income Other expense, net Income Before Income Taxes Provision for income taxes Net Income Less: Net income attributable to noncontrolling interest Net Income Attributable to The Timken Company Net Income per Common Share Attributable to The Timken Company Common Shareholders Basic earnings per share Diluted earnings per share Dividends per share (Dollars in millions) Net Income Other comprehensive income, net of tax: Foreign currency translation adjustments Unrealized gain on marketable securities Pension and postretirement liability adjustment Change in fair value of derivative financial instruments Other comprehensive income Comprehensive Income Less: comprehensive income attributable to noncontrolling interest Comprehensive Income Attributable to The Timken Company (Dollars in millions) ASSETS Current Assets Cash and cash equivalents Restricted cash Accounts receivable, less allowances: 2012 – $13.8 million; 2011 – $19.0 million Inventories, net Deferred income taxes Deferred charges and prepaid expenses Other current assets Total Current Assets Property, Plant and Equipment-Net Other Assets Goodwill Other intangible assets Deferred income taxes Other non-current assets Total Other Assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term debt Accounts payable, trade Salaries, wages and benefits Income taxes payable Deferred income taxes Other current liabilities Current portion of long-term debt Total Current Liabilities Non-Current Liabilities Long-term debt Accrued pension cost Accrued postretirement benefits cost Deferred income taxes Other non-current liabilities Total Non-Current Liabilities 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) (2012 – 98,375,135 shares; 2011 – 98,375,135 shares) Stated capital Other paid-in capital Earnings invested in the business Accumulated other comprehensive loss Treasury shares at cost (2012 – 760,243 shares; 2011 – 708,327 shares) Total Shareholders’ Equity Noncontrolling Interest Total Equity Total Liabilities and Shareholders’ Equity (Dollars in millions) CASH PROVIDED (USED) Operating Activities Net income attributable to The Timken Company Net income attributable to noncontrolling interest Adjustments to reconcile income before income taxes to net cash provided by operating activities: Depreciation and amortization Impairment charges Loss on sale of assets Deferred income tax provision Stock-based compensation expense Pension and other postretirement expense Pension contributions and other postretirement benefit payments Changes in operating assets and liabilities: Accounts receivable Inventories Accounts payable, trade Other accrued expenses Income taxes Other – net Net Cash Used by Operating Activities Investing Activities Capital expenditures Acquisitions Proceeds from disposals of property, plant and equipment Investments in short-term marketable securities, net Other Net Cash Used by Investing Activities Financing Activities Cash dividends paid to shareholders Net proceeds from common share activity Purchase of treasury shares Proceeds from issuance of long-term debt Payments on long-term debt Short-term debt activity – net Increase in restricted cash Other Net Cash Used by Financing Activities Effect of exchange rate changes on cash Decrease In Cash and Cash Equivalents Cash and cash equivalents at beginning of year Cash and Cash Equivalents at End of Period Inventories, net: Manufacturing supplies Raw materials Work in process Finished products Subtotal Allowance for surplus and obsolete inventory Total Inventories, net Property, Plant and Equipment: Land and buildings Machinery and equipment Subtotal Less allowances for depreciation Property, Plant and Equipment – net Beginning Balance Acquisitions Purchase Price Allocation Other Ending Balance Intangible assets subject to amortization: Customer relationships Know-how Industrial license agreements Land-use rights Patents Technology use Trademarks PMA licenses Non-compete agreements Unpatented technology Intangible assets not subject to amortization: Tradename FAA air agency certificates Total intangible assets 2011 Variable-rate lines of credit for certain of the Company’s foreign subsidiaries with various banks with interest rates ranging from 2.24% to 6.89% and 2.24% to 11.0% at March 31, 2012 and December 31, 2011, respectively Short-term debt Fixed-rate Medium-Term Notes, Series A, mature at various dates through May 2028, with interest rates ranging from 6.74% to 7.76% Fixed-rate Senior Unsecured Notes, maturing on September 15, 2014, with an interest rate of 6.0% Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.11% at March 31, 2012) Variable-rate State of Ohio Air Quality Development Revenue Refunding Bonds, maturing on November 1, 2025 (0.32% at March 31, 2012) Variable-rate State of Ohio Pollution Control Revenue Refunding Bonds, maturing on June 1, 2033 (0.32% at March 31, 2012) Variable-rate credit facility with US Bank for Advanced Green Components, LLC, maturing on May 23, 2012 (1.392% at March 31, 2012) Other Less current maturities Long-term debt 2033 Beginning balance, January 1 Expense Payments Ending balance 2011 Balance at December 31, 2011 Net income Foreign currency translation adjustment Pension and postretirement liability adjustment (net of the income tax benefit of $8.4 million) Unrealized gain on marketable securities Change in fair value of derivative financial instruments, net of reclassifications Dividends – $0.23 per share Excess tax benefit from stock compensation Stock-based compensation expense Stock purchased at fair market value Stock option exercise activity Restricted shares (issued) surrendered Shares surrendered for taxes Balance at March 31, 2012 Numerator: Net Income Attributable to The Timken Company Less: undistributed earnings allocated to nonvested stock Net income available to common shareholders for basic earnings per share and diluted earnings per share Denominator: Weighted average number of shares outstanding – basic Effect of dilutive securities: Stock options and awards - based on the treasury stock method Weighted average number of shares outstanding, assuming dilution of stock options and awards Basic earnings per share Diluted earnings per share 2011: Net sales to external customers: Mobile Industries Process Industries Aerospace and Defense Steel Intersegment sales: Mobile Industries Process Industries Steel Segment EBIT: Mobile Industries Process Industries Aerospace and Defense Steel Total EBIT for reportable segments Unallocated corporate expenses Interest expense Interest income Intersegment adjustments Income before income taxes Three Months Ended March 31, Severance and related benefit costs Exit costs Total 190 employees. The Company expects to incur pretax costs of approximately $55 million to $65 million in connection with this closure, of which approximately $20 million to $25 million is expected to be pretax cash costs. The Company has incurred pretax expenses of approximately $17.7 million as of June 30, 2012 including rationalization costs recorded in cost of products sold. During the second quarter of 2012, the Company recorded $16.5 million of severance and related benefits, including a curtailment of pension benefits of $10.7 million. The majority of the $16.5 million charge related to the Mobile Industries segment. Beginning balance, January 1 Expense Payments Ending balance 2011 Components of net periodic benefit cost Service cost Interest cost Expected return on plan assets Amortization of prior service cost (credit) Amortization of net actuarial loss Net periodic benefit cost 2012 Provision for income taxes Effective tax rate matters, including U.S. state and local taxes and taxes related to the Company's international operations, and lapses in statute of limitation on various tax matters. Consolidated Balance Sheets. Assets: Accounts receivable, net Inventories, net Deferred charges and prepaid expenses Other current assets Property, plant and equipment – net Goodwill Other intangible assets Other non-current assets Total assets acquired Liabilities: Accounts payable, trade Salaries, wages and benefits Other current liabilities Total liabilities assumed Net assets acquired allocation during the first six months of 2012: Trade name (Not subject to amortization) Developed Technology Trade name Know how All customer relationships Non-compete agreements Total intangible assets allocated June 30, 2012: Assets: Cash and cash equivalents Short-term investments Foreign currency hedges Total Assets Liabilities: Foreign currency hedges Total Liabilities The Company’s financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, net, accounts payable, trade, short-term borrowings and long-term debt. Due to their short-term nature, the carrying value of cash and cash equivalents, short-term investments, accounts receivable, net, accounts payable, trade and short-term borrowings are a reasonable estimate of their fair value. The fair value of the Company’s long-term fixed-rate debt, based on quoted market prices, was The measured using Level 2 inputs. OPERATIONS The Net sales Net income attributable to The Timken Company Diluted earnings per share Average number of shares – diluted Mobile Industries Process Industries Aerospace and Defense Steel Total Company sectors. Gross profit Gross profit % to net sales Selling, general and administrative expenses Selling, general and administrative expenses % to net sales the Sao Paulo, Brazil environmental remediation costs. Interest expense Interest income Income Tax Expense: Effective tax rate U.S. manufacturing deduction. manufacturing deduction. Segments Net sales, including intersegment sales EBIT EBIT margin Net sales, including intersegment sales Acquisitions Currency Net sales, excluding the impact of acquisitions and currency Acquisitions also had a favorable impact on EBIT for the first six months of 2012. Net sales, including intersegment sales EBIT EBIT margin Net sales, including intersegment sales Acquisitions Currency Net sales, excluding the impact of acquisitions and currency Net sales, including intersegment sales EBIT EBIT margin Net sales, including intersegment sales Currency Net sales, excluding the impact of currency approximately $3 million related to management's decision to exit certain non-strategic aftermarket products. Net sales, including intersegment sales EBIT EBIT margin Net sales, including intersegment sales Currency Net sales, excluding the impact of currency The average scrap index for the second quarter of 2012 was $460 per ton, compared to $488 per ton for the second quarter of 2011. Steel shipments for the second quarter of 2012 were approximately 301,000 tons, compared to approximately 333,000 tons for the second quarter of 2011, a decrease of 9.8%. The Steel Corporate expenses Corporate expenses % to net sales professional fees. 2011 Cash and cash equivalents Restricted cash Accounts receivable, net Inventories, net Deferred income taxes Deferred charges and prepaid expenses Other current assets Total current assets Property, plant and equipment Less: allowances for depreciation Property, plant and equipment – net Goodwill Other intangible assets Deferred income taxes Other non-current assets Total other assets 2012. Current Liabilities: Short-term debt Accounts payable Salaries, wages and benefits Income taxes payable Deferred income taxes Other current liabilities Current portion of long-term debt Total current liabilities 2012. Long-term debt Accrued pension cost Accrued postretirement benefits cost Deferred income taxes Other non-current liabilities Total non-current liabilities Common stock Earnings invested in the business Accumulated other comprehensive loss Treasury shares Noncontrolling interest Total shareholders’ equity Cash Net cash used by operating activities Net cash used by investing activities Net cash used by financing activities Effect of exchange rate changes on cash Decrease in cash and cash equivalents Cash Provided (Used): Accounts receivable Inventories Trade accounts payable Other accrued expenses Resources: Short-term debt Current portion of long-term debt Long-term debt Total debt Less: Cash and cash equivalents Restricted cash Net debt Net debt Shareholders’ equity Net debt + shareholders’ equity (capital) Ratio of net debt to capital debt. Commitments: Refer to Other Matters - Benefit Plans for additional discussion.xý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 March 31,June 30, 2012¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OHIO 34-0577130 44706-2798 (Address of principal executive offices) (Zip Code) xý No ¨xý No ¨Large accelerated filer xý Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ xýClass Outstanding at March 31,June 30, 2012Common Shares, without par value 97,614,89297,329,738 sharesITEM 1.FINANCIAL STATEMENTS Three Months Ended
March 31, 2012 2011 $ 1,421.0 $ 1,254.1 1,009.4 920.8 411.6 333.3 164.7 150.3 0.2 1.1 246.7 181.9 (8.6 ) (9.8 ) 0.7 1.5 (1.3 ) (2.4 ) 237.5 171.2 81.5 57.4 156.0 113.8 0.3 1.1 $ 155.7 $ 112.7 $ 1.59 $ 1.15 $ 1.58 $ 1.13 $ 0.23 $ 0.18 Three Months Ended
June 30, Six Months Ended
June 30, 2012 2011 2012 2011 (Dollars in millions, except per share data) Net sales $ 1,343.2 $ 1,329.6 $ 2,764.2 $ 2,583.7 Cost of products sold 965.9 979.1 1,975.3 1,899.9 Gross Profit 377.3 350.5 788.9 683.8 Selling, general and administrative expenses 163.0 153.7 327.7 304.0 Impairment and restructuring charges 16.7 6.2 16.9 7.3 Operating Income 197.6 190.6 444.3 372.5 Interest expense (8.1 ) (9.3 ) (16.7 ) (19.1 ) Interest income 0.7 1.4 1.4 2.9 109.5 — 109.5 — Other (expense) income, net (3.8 ) 1.1 (5.1 ) (1.3 ) Income Before Income Taxes 295.9 183.8 533.4 355.0 Provision for income taxes 112.5 61.5 194.0 118.9 Net Income 183.4 122.3 339.4 236.1 Less: Net income (loss) attributable to noncontrolling interest (0.2 ) 0.8 0.1 1.9 Net Income attributable to The Timken Company $ 183.6 $ 121.5 $ 339.3 $ 234.2 Basic earnings per share $ 1.88 $ 1.24 $ 3.47 $ 2.39 Diluted earnings per share $ 1.86 $ 1.22 $ 3.44 $ 2.36 Dividends per share $ 0.23 $ 0.20 $ 0.46 $ 0.38 Three Months Ended
March 31, 2012 2011 $ 156.0 $ 113.8 23.4 33.0 (0.5 ) 0.1 12.3 6.7 1.0 (0.2 ) 36.2 39.6 192.2 153.4 0.2 1.1 $ 192.0 $ 152.3 Three Months Ended
June 30, Six Months Ended
June 30, 2012 2011 2012 2011 (Dollars in millions) Net Income $ 183.4 $ 122.3 $ 339.4 $ 236.1 Other comprehensive income, net of tax: Foreign currency translation adjustments (39.4 ) 13.5 (16.0 ) 46.5 Unrealized gain on marketable securities — 0.2 (0.5 ) 0.3 Pension and postretirement liability adjustment 9.7 11.8 22.0 18.5 Change in fair value of derivative financial instruments 0.4 0.3 1.4 0.1 Other comprehensive (loss) income (29.3 ) 25.8 6.9 65.4 Comprehensive Income 154.1 148.1 346.3 301.5 (0.2 ) 0.9 — 2.0 Comprehensive Income attributable to The Timken Company $ 154.3 $ 147.2 $ 346.3 $ 299.5 (Unaudited)
March 31, December 31, 2012 2011 $ 355.3 $ 464.8 3.6 3.6 762.0 645.5 993.1 964.4 113.4 113.7 15.4 12.8 73.7 87.5 2,316.5 2,292.3 1,313.3 1,308.9 311.1 307.2 253.4 261.6 133.8 141.9 45.4 40.2 743.7 750.9 $ 4,373.5 $ 4,352.1 $ 13.0 $ 22.0 310.6 287.3 186.8 259.3 121.5 70.2 3.7 3.1 168.1 188.4 12.8 14.3 816.5 844.6 478.8 478.8 388.3 491.0 392.7 395.9 6.9 7.5 92.1 91.8 1,358.8 1,465.0 — — 53.1 53.1 884.0 889.2 2,137.9 2,004.7 (853.2 ) (889.5 ) (38.0 ) (29.2 ) 2,183.8 2,028.3 14.4 14.2 2,198.2 2,042.5 $ 4,373.5 $ 4,352.1 December 31, 2012 2011 (Dollars in millions) ASSETS Current Assets Cash and cash equivalents $ 509.9 $ 464.8 Restricted cash — 3.6 Accounts receivable, less allowances: 2012 – $13.0 million; 2011 – $19.0 million 715.7 645.5 Inventories, net 943.3 964.4 Deferred income taxes 112.8 113.7 Deferred charges and prepaid expenses 12.9 12.8 Other current assets 70.9 88.1 Total Current Assets 2,365.5 2,292.9 Property, Plant and Equipment-Net 1,320.0 1,308.9 Other Assets Goodwill 332.1 332.7 Other intangible assets 226.3 235.7 Deferred income taxes 121.0 141.9 Other non-current assets 39.9 40.0 Total Other Assets 719.3 750.3 Total Assets $ 4,404.8 $ 4,352.1 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Short-term debt $ 8.1 $ 22.0 Accounts payable, trade 283.7 287.3 Salaries, wages and benefits 202.7 259.3 Income taxes payable 140.8 70.2 Deferred income taxes 3.6 3.1 Other current liabilities 176.6 188.4 Current portion of long-term debt 12.2 14.3 Total Current Liabilities 827.7 844.6 Non-Current Liabilities Long-term debt 473.9 478.8 Accrued pension cost 278.0 491.0 Accrued postretirement benefits cost 389.2 395.9 Deferred income taxes 6.6 7.5 Other non-current liabilities 114.2 91.8 Total Non-Current Liabilities 1,261.9 1,465.0 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) (2012 – 98,375,135 shares; 2011 – 98,375,135 shares) Stated capital 53.1 53.1 Other paid-in capital 884.2 889.2 Earnings invested in the business 2,299.1 2,004.7 Accumulated other comprehensive loss (882.5 ) (889.5 ) Treasury shares at cost (2012 – 1,045,397 shares; 2011 – 708,327 shares) (52.9 ) (29.2 ) Total Shareholders’ Equity 2,301.0 2,028.3 Noncontrolling Interest 14.2 14.2 Total Equity 2,315.2 2,042.5 Total Liabilities and Shareholders’ Equity $ 4,404.8 $ 4,352.1 Three Months Ended
March 31, 2012 2011 $ 155.7 $ 112.7 0.3 1.1 49.8 47.4 — 1.8 1.6 0.1 (0.4 ) 0.3 4.4 3.4 21.0 22.3 (104.7 ) (166.0 ) (112.0 ) (149.6 ) (21.4 ) (80.4 ) 22.1 54.8 (103.4 ) (81.3 ) 58.2 41.0 (9.9 ) (5.2 ) (38.7 ) (197.6 ) (46.0 ) (20.1 ) (0.2 ) — 0.9 0.4 17.5 (13.3 ) (1.4 ) 0.8 (29.2 ) (32.2 ) (22.5 ) (17.6 ) 12.6 15.2 (26.2 ) (25.3 ) — 1.5 (1.5 ) (1.8 ) (9.9 ) 8.6 — (4.8 ) — 0.3 (47.5 ) (23.9 ) 5.9 14.2 (109.5 ) (239.5 ) 464.8 877.1 $ 355.3 $ 637.6 Six Months Ended
June 30, 2012 2011 (Dollars in millions) CASH PROVIDED (USED) Operating Activities Net income attributable to The Timken Company $ 339.3 $ 234.2 Net income attributable to noncontrolling interest 0.1 1.9 Adjustments to reconcile income before income taxes to net cash provided by operating activities: Depreciation and amortization 99.8 93.8 Impairment charges — 3.2 Loss (gain) on sale of assets 2.9 (1.1 ) Deferred income tax provision 4.2 42.2 Stock-based compensation expense 9.3 9.2 Pension and other postretirement expense 50.4 37.2 Pension contributions and other postretirement benefit payments (225.9 ) (331.8 ) Changes in operating assets and liabilities: Accounts receivable (74.5 ) (191.7 ) Inventories 15.1 (86.6 ) Accounts payable, trade (2.1 ) 46.9 Other accrued expenses (77.2 ) (38.8 ) Income taxes 102.9 19.8 Other – net (7.9 ) (1.3 ) Net Cash Provided (Used) by Operating Activities 236.4 (162.9 ) Investing Activities Capital expenditures (115.3 ) (59.6 ) Acquisitions (0.2 ) — Proceeds from disposals of property, plant and equipment 1.4 5.2 Divestitures — 4.8 Investments in short-term marketable securities, net 18.2 (13.3 ) Other 2.6 1.9 Net Cash Used by Investing Activities (93.3 ) (61.0 ) Financing Activities Cash dividends paid to shareholders (44.9 ) (37.1 ) Net proceeds from common share activity 19.8 23.2 Purchase of treasury shares (51.7 ) (25.3 ) Proceeds from issuance of long-term debt — 9.2 Payments on long-term debt (6.9 ) (3.1 ) Short-term debt activity – net (13.7 ) 0.1 Decrease (increase) in restricted cash 3.6 (4.8 ) Other — (4.1 ) Net Cash Used by Financing Activities (93.8 ) (41.9 ) Effect of exchange rate changes on cash (4.2 ) 21.5 Decrease In Cash and Cash Equivalents 45.1 (244.3 ) Cash and cash equivalents at beginning of year 464.8 877.1 Cash and Cash Equivalents at End of Period $ 509.9 $ 632.8 Note 1 – Basis of PresentationNote 1 - Basis of Presentation 2011.2011.Note 2 – Recent Accounting PronouncementsNote 2 - Recent Accounting Pronouncements “ComprehensiveComprehensive Income (Topic 220): Presentation"Presentation of 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 a financial statement presenting the components of other comprehensive income and a total for comprehensive income. The Consolidated Financial Statements include the Consolidated Statements of Comprehensive Income as a result of adopting this new guidance. – Deferral: "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05." The amendments are being made to allow the Financial Accounting Standards Board (FASB) time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. As the FASB is considering the presentation requirements, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05.“FairFair Value Measurement (Topic 820): Amendments"Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”IFRSs" effective January 1, 2012. The new accounting requirements 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 requirements also expand the disclosures about fair value measurement.Note 3 – InventoriesNote 3 - Inventories March 31, December 31, 2012 2011 $ 66.4 $ 65.6 142.4 129.8 341.1 327.4 478.6 472.4 1,028.5 995.2 (35.4 ) (30.8 ) $ 993.1 $ 964.4 June 30, 2012 December 31, 2011 Inventories, net: Manufacturing supplies $ 69.3 $ 65.6 Raw materials 131.6 129.8 Work in process 324.1 327.4 Finished products 455.1 472.4 Subtotal 980.1 995.2 Allowance for obsolete and surplus inventory (36.8 ) (30.8 ) Total Inventories, net $ 943.3 $ 964.4 last-in, first-out (LIFO)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.Note 3 – Inventories (continued)March 31,June 30, 2012 and December 31, 2011 was $296.5$296.9 million and $287.7$287.7 million, respectively. The Company recognized an increase in its LIFO reserve of $8.8$0.1 million and $9.2 million during the second quarter and first quartersix months of 2012, respectively, compared to an increase in its LIFO reserve of $6.0$9.7 million and $15.7 million during the second quarter and first quartersix months of 2011.2011, respectively.$28.6$17.6 million in LIFO expense for the year ended December 31, 2012.2012. The expected increase in the LIFO reserve for 2012 reflects anticipated higher costs;costs, especially scrap steel costs, as well as higher quantities. A 1.0% increase in costs would increase the current LIFO expense estimate for 2012 by $7.2 million.$8.7 million. A 1.0% increase in inventory quantities would have no effect on the current LIFO expense estimate for 2012.2012.Note 4 – Property, Plant and EquipmentNote 4 - Property, Plant and Equipment March 31,
2012 December 31,
2011 $ 647.5 $ 637.3 2,994.5 2,952.1 3,642.0 3,589.4 (2,328.7 ) (2,280.5 ) $ 1,313.3 $ 1,308.9 Total depreciation June 30, 2012 December 31, 2011 Property, Plant and Equipment: Land and buildings $ 644.2 $ 637.3 Machinery and equipment 3,014.5 2,952.1 Subtotal 3,658.7 3,589.4 Less allowances for depreciation (2,338.7 ) (2,280.5 ) Property, Plant and Equipment – net $ 1,320.0 $ 1,308.9 threesix months ended March 31,June 30, 2012 and 2011 was $44.6$90.3 million and $45.0$89.2 million, respectively. At March 31,June 30, 2012 and December 31, 2011 machinery and equipment included approximately $87.2$86.7 million and $90.5$90.5 million, respectively, of capitalized software. Depreciation expense on capitalized software for the threesix months ended March 31,June 30, 2012 and 2011 was approximately $6.7$11.6 million and $6.9$10.5 million, respectively.Note 5 – Goodwill and Other Intangible AssetsNote 5 - Goodwill and Other Intangible Assets threesix months ended March 31,June 30, 2012 were as follows: Mobile
Industries Process
Industries Aerospace
and Defense Steel Total $ — $ 132.5 $ 162.1 $ 12.6 $ 307.2 — 0.2 — — 0.2 16.9 (13.6 ) — — 3.3 — 0.3 0.1 — 0.4 $ 16.9 $ 119.4 $ 162.2 $ 12.6 $ 311.1 Steel Total Beginning Balance $ 16.9 $ 141.1 $ 162.1 $ 12.6 $ 332.7 Acquisitions — 0.2 — — 0.2 Other — (0.7 ) (0.1 ) — (0.8 ) Ending Balance $ 16.9 $ 140.6 $ 162.0 $ 12.6 $ 332.1 quartersix months of 2012, the Company allocated goodwill acquired as part of the acquisition of Drives, LLC (Drives) between the Mobile Industries and Process Industries segments based on the relative fair value of each reporting unit. The Company also obtained additional information on the fair value of intangible assets acquired in 2011 and, therefore, adjusted the value of goodwill and other intangible assets during the first quartersix months of 2012 (See Note 14 – Acquisitions for additional information on the purchase price allocation). The purchase price allocation adjustments were made retroactive to December 31, 2011. Other primarily includes foreign currency translation adjustments.Note 5 – Goodwill and Other Intangible Assets (continued)March 31,June 30, 2012 and December 31, 2011: As of March 31, 2012 As of December 31, 2011 Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount $ 187.5 $ 29.6 $ 157.9 $ 189.9 $ 26.3 $ 163.6 17.0 1.7 15.3 17.0 1.5 15.5 0.1 0.1 — 0.2 0.1 0.1 8.6 3.9 4.7 8.6 3.8 4.8 2.5 1.7 0.8 2.5 1.7 0.8 47.0 9.3 37.7 44.3 8.7 35.6 14.8 2.7 12.1 14.5 2.3 12.2 8.8 3.2 5.6 8.8 3.1 5.7 5.2 2.8 2.4 4.7 2.5 2.2 7.2 6.5 0.7 7.2 6.4 0.8 298.7 61.5 237.2 297.7 56.4 241.3 2.0 — 2.0 6.1 — 6.1 14.2 — 14.2 14.2 — 14.2 16.2 — 16.2 20.3 — 20.3 �� $ 314.9 $ 61.5 $ 253.4 $ 318.0 $ 56.4 $ 261.6 As of June 30, 2012 As of December 31, 2011 Intangible assets subject to amortization: Customer relationships $ 157.1 $ 32.5 $ 124.6 $ 157.1 $ 26.3 $ 130.8 Know-how 22.6 2.2 20.4 22.6 1.5 21.1 Industrial license agreements 0.1 0.1 — 0.1 0.1 — Land-use rights 8.5 3.9 4.6 8.6 3.8 4.8 Patents 2.5 1.8 0.7 2.5 1.7 0.8 Technology use 46.9 10.0 36.9 46.9 8.7 38.2 Trademarks 2.9 2.3 0.6 2.8 2.3 0.5 PMA licenses 8.8 3.3 5.5 8.8 3.1 5.7 Non-compete agreements 3.9 2.9 1.0 3.9 2.5 1.4 Unpatented technology 7.2 6.7 0.5 7.2 6.3 0.9 $ 260.5 $ 65.7 $ 194.8 $ 260.5 $ 56.3 $ 204.2 Intangible assets not subject to amortization: Tradename $ 17.3 $ — $ 17.3 $ 17.3 $ — $ 17.3 FAA air agency certificates 14.2 — 14.2 14.2 — 14.2 $ 31.5 $ — $ 31.5 $ 31.5 $ — $ 31.5 Total intangible assets $ 292.0 $ 65.7 $ 226.3 $ 292.0 $ 56.3 $ 235.7 $5.2$9.5 million and $2.4$4.6 million for the threesix months ended March 31,June 30, 2012 and March 31,June 30, 2011, respectively. Amortization expense for intangible assets is estimated to be approximately $21.1$18.7 million for 2012; $19.82012; $17.4 million in 2013; $19.42013; $16.9 million in 2014; $19.42014; $16.8 million in 2015;2015; and $19.0$16.5 million in 2016.2016.Note 6 – Financing ArrangementsNote 6 - Financing Arrangements March 31,June 30, 2012 and December 31, 2011 was as follows: March 31,
2012 December 31,
2011 $ 13.0 $ 22.0 $ 13.0 $ 22.0 June 30, 2012 $ 8.1 $ 22.0 Short-term debt $ 8.1 $ 22.0 $250.2 million.$239.0 million. At March 31,June 30, 2012, the Company’s foreign subsidiaries had borrowings outstanding of $13.0$8.1 million and guarantees of $11.7$3.4 million, which reduced the availability under these facilities to $225.5 million.$227.5 million.Note 6 – Financing Arrangements (continued)$150$150 million Accounts Receivable Securitization Financing Agreement (Asset Securitization Agreement), which matures November 10, 2012.2012. 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 by 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 March 31,June 30, 2012, 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 Statements of Income.March 31,June 30, 2012 and December 31, 2011 was as follows: March 31,
2012 December 31,
2011 $ 175.0 $ 175.0 249.8 249.8 12.2 12.2 9.5 9.5 17.0 17.0 3.7 5.1 24.4 24.5 491.6 493.1 12.8 14.3 $ 478.8 $ 478.8 $ 175.0 $ 175.0 249.8 249.8 12.2 12.2 9.5 9.5 17.0 17.0 1.7 5.1 Other 20.9 24.5 486.1 493.1 Less current maturities 12.2 14.3 Long-term debt $ 473.9 $ 478.8 $500$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, 2012.2012. The Senior Credit Facility now matures on May 11, 2016.2016. At March 31,June 30, 2012, the Company had no outstanding borrowings under the Senior Credit Facility but had letters of credit outstanding totaling $17.2$17.2 million, which reduced the availability under the Senior Credit Facility to $482.8 million.$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 March 31,June 30, 2012, the Company was in full compliance with the covenants under the Senior Credit Facility.$17$17 million balance during the secondthird quarter of 2012.2012. The remaining balance matures on June 1, 2033.Advanced Green Components, LLC (AGC) is a joint venture of the Company. As of March 31, 2012, the Company had restricted cash of $3.6 million in a collateral account to secure up to $3.6 million of the indebtedness between AGC and US Bank in the event AGC defaults on its credit facility with US Bank. The $3.6 million collateral account is classified as restricted cash on the Consolidated Balance Sheet as of March 31, 2012.$23.8 million.$18.9 million. At March 31,June 30, 2012, the Company had borrowings outstanding of $23.8$18.9 million, leaving no availability under these long-term facilities.–- Product Warrantythreesix months ended March 31,June 30, 2012 and the twelve months ended December 31, 2011: March 31,
2012 December 31,
2011 $ 11.7 $ 8.0 (1.1 ) 9.0 (0.9 ) (5.3 ) $ 9.7 $ 11.7 June 30, 2012 December 31, 2011 Beginning balance, January 1 $ 11.7 $ 8.0 Expense (1.1 ) 9.0 Payments (4.0 ) (5.3 ) Ending balance $ 6.6 $ 11.7 March 31,June 30, 2012 and December 31, 2011 was included in other current liabilities on the Consolidated Balance Sheets.Note 8 – Equity The Timken Company Shareholders Total Stated
Capital Other
Paid-In
Capital Earnings
Invested
in the
Business Accumulated
Other
Comprehensive
(Loss) Treasury
Stock Non-
controlling
Interest $ 2,042.5 $ 53.1 $ 889.2 $ 2,004.7 $ (889.5 ) $ (29.2 ) $ 14.2 156.0 155.7 0.3 23.4 23.4 12.3 12.3 (0.5 ) (0.4 ) (0.1 ) 1.0 1.0 (22.5 ) (22.5 ) 7.6 7.6 4.4 4.4 (26.2 ) (26.2 ) 6.8 (14.6 ) 21.4 — (2.6 ) 2.6 (6.6 ) — (6.6 ) $ 2,198.2 $ 53.1 $ 884.0 $ 2,137.9 $ (853.2 ) $ (38.0 ) $ 14.4 Note 8 - Equity The Timken Company Shareholders Total Balance at December 31, 2011 $ 2,042.5 $ 53.1 $ 889.2 $ 2,004.7 $ (889.5 ) $ (29.2 ) $ 14.2 Net income 339.4 339.3 0.1 Foreign currency translation adjustment (16.0 ) (16.0 ) Pension and postretirement liability adjustment (net of the income tax benefit of $16.4 million) 22.0 22.0 Unrealized gain on marketable securities (0.5 ) (0.4 ) (0.1 ) Change in fair value of derivative financial instruments, net of reclassifications 1.4 1.4 Dividends – $0.46 per share (44.9 ) (44.9 ) Excess tax benefit from stock compensation 9.5 9.5 Stock-based compensation expense 9.3 9.3 Stock purchased at fair market value (51.7 ) (51.7 ) Stock option exercise activity 12.2 (20.2 ) 32.4 Restricted shares (issued) surrendered — (3.6 ) 3.6 Shares surrendered for taxes (8.0 ) (8.0 ) Balance at June 30, 2012 $ 2,315.2 $ 53.1 $ 884.2 $ 2,299.1 $ (882.5 ) $ (52.9 ) $ 14.2 –- Earnings Per Sharethreesix months ended March 31,June 30, 2012 and 2011, respectively: Three Months Ended March 31, 2012 2011 $ 155.7 $ 112.7 0.4 0.5 $ 155.3 $ 112.2 97,451,935 97,444,389 1,135,687 1,451,437 98,587,622 98,895,826 $ 1.59 $ 1.15 $ 1.58 $ 1.13 2012 2011 2012 2011 Numerator: Net Income attributable to The Timken Company $ 183.6 $ 121.5 $ 339.3 $ 234.2 Less: undistributed earnings allocated to nonvested stock 0.6 0.4 1.2 0.9 $ 183.0 $ 121.1 $ 338.1 $ 233.3 Denominator: Weighted average number of shares outstanding – basic 97,265,627 97,644,773 97,355,740 97,552,528 Effect of dilutive securities: 938,578 1,255,219 1,017,617 1,353,328 98,204,205 98,899,992 98,373,357 98,905,856 Basic earnings per share $ 1.88 $ 1.24 $ 3.47 $ 2.39 Diluted earnings per share $ 1.86 $ 1.22 $ 3.44 $ 2.36 306,970 and 353,000612,300 during the firstsecond quarter of 2012 and there were no anti-dilutive stock options outstanding during the second quarter of 2011. The antidilutive stock options outstanding were 459,635 and 176,500 during the six months ended June 30, 2012 and 2011, respectively.–- Segment Information Three Months Ended
March 31, 2012 2011 $ 469.1 $ 442.9 354.1 284.1 91.3 79.1 506.5 448.0 $ 1,421.0 $ 1,254.1 $ — $ 0.1 1.5 0.9 29.0 33.5 $ 30.5 $ 34.5 $ 86.7 $ 72.1 82.3 65.3 10.7 1.6 88.0 59.3 $ 267.7 $ 198.3 (20.7 ) (19.3 ) (8.6 ) (9.8 ) 0.7 1.5 (1.6 ) 0.5 $ 237.5 $ 171.2 2012 2011 2012 2011 Net sales to external customers: Mobile Industries $ 448.2 $ 465.1 $ 917.3 $ 908.0 Process Industries 336.6 307.5 690.7 591.6 Aerospace and Defense 87.2 83.5 178.5 162.6 Steel 471.2 473.5 977.7 921.5 $ 1,343.2 $ 1,329.6 $ 2,764.2 $ 2,583.7 Intersegment sales: Mobile Industries $ 0.2 $ 0.1 $ 0.2 $ 0.2 Process Industries 1.1 0.8 2.6 1.7 Steel 28.6 31.6 57.6 65.1 $ 29.9 $ 32.5 $ 60.4 $ 67.0 Segment EBIT: Mobile Industries $ 48.8 $ 71.4 $ 135.5 $ 143.5 Process Industries 71.3 68.7 153.6 134.0 Aerospace and Defense 7.9 2.5 18.6 4.1 Steel 88.9 71.3 176.9 130.6 Total EBIT for reportable segments $ 216.9 $ 213.9 $ 484.6 $ 412.2 Unallocated corporate expenses (23.0 ) (21.8 ) (43.7 ) (41.1 ) CDSOA receipt, net of expense 109.5 — 109.5 — Interest expense (8.1 ) (9.3 ) (16.7 ) (19.1 ) Interest income 0.7 1.4 1.4 2.9 Intersegment adjustments (0.1 ) (0.4 ) (1.7 ) 0.1 Income before income taxes $ 295.9 $ 183.8 $ 533.4 $ 355.0 –- Impairment and Restructuring Chargesfor the Mobile Industriesby segment are comprised of the following: 2012 2011 $ 0.1 $ — 0.1 1.1 $ 0.2 $ 1.1 Mobile Industries Process Industries Aerospace & Defense Total Severance and related benefit costs $ 16.2 $ 0.3 $ — $ 16.5 Exit costs 0.2 — — 0.2 Total $ 16.4 $ 0.3 $ — $ 16.7 Mobile Industries Process Industries Aerospace & Defense Total Impairment charges $ 0.1 $ 0.2 $ 0.1 $ 0.4 Severance 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 Mobile Industries Process Industries Aerospace & Defense Total Severance and related benefit costs $ 16.3 $ 0.3 $ — $ 16.6 Exit costs 0.3 — — 0.3 Total $ 16.6 $ 0.3 $ — $ 16.9 Mobile Industries Process Industries Aerospace & Defense 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 $60$60 million, which includes restructuring costs and rationalization costs recorded in cost of products sold and selling, general and administrative expenses. Mobile Industries has incurred cumulative pretax expenses of approximately $51.4$52.3 million as of March 31,June 30, 2012 related to this closure. During the first quartersix months of 2012 and 2011,, the Company recorded $2.8$2.9 million and $1.1 million, respectively, of exit costs associated with the closure of this facility.facility primarily related to environmental remediation costs. 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 this closure. The exit costs recorded in the second quarter and first quartersix months of 20122011 were primarily related to environmental remediation costs. The exit costs recorded in the first quarter of 2011 primarily related to workers’and workers' compensation claims for former employees. The Company accrues environmental remediation costs and workers’workers' compensation claims when they are probable and estimable.$2.8$2.7 million during the first six months of 2012 for environmental exit costs at the site of its former plant in Columbus, Ohio. The favorable adjustment was a result of the sale of the real estate at the site of this former plant during the first quarter of 2012.2012. The buyer assumed responsibility for the environmental remediation as a result of the sale. However, theThe buyer was able to obtain funding from the State of Ohio to remediate the site.threesix months ended March 31,June 30, 2012 and the twelve months ended December 31, 2011: March 31,
2012 December 31,
2011 $ 21.8 $ 22.1 0.2 13.9 (3.1 ) (14.2 ) $ 18.9 $ 21.8 Beginning balance, January 1 $ 21.8 $ 22.1 Expense 6.2 13.9 Payments (10.3 ) (14.2 ) Ending balance $ 17.7 $ 21.8 March 31,June 30, 2012 and December 31, 2011 was included in other current liabilities on the Consolidated Balance Sheets. The restructuring accrual at March 31,June 30, 2012 excluded costs related to the curtailment of pension benefit plans of $10.7 million. The restructuring accrual at June 30, 2012included $12.4$6.7 million of environmental remediation costs, of which $11.0$5.6 million relates to Sao Paulo, Brazil. 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’sCompany's liability in proportion to other responsible parties. The Company’sCompany's estimated total liability for this site ranges from a minimum of $11.0$5.6 million to a maximum of $17.2 million.$11.2 million. It is possible that the estimateestimates may change in the near term.13–- Retirement and Postretirement Benefit PlansMarch 31,June 30, 2012 are based on updated actuarial calculations prepared during the fourthsecond quarter of 2011. Consistent with prior years, these calculations will be updated later in the year. These updated calculations may result in different net periodic benefit cost for 2012. The net periodic benefit cost recorded for the three months and six months ended March 31,June 30, 2012 is the Company’s best estimate of theeach period’s proportionate share of the amounts to be recorded for the year ending December 31, 2012. Pension Postretirement Three Months Ended
March 31, Three Months Ended
March 31, 2012 2011 2012 2011 $ 8.8 $ 8.3 $ 0.7 $ 0.5 37.8 39.8 7.2 8.7 (55.2 ) (50.1 ) (2.8 ) �� (0.7 ) 2.3 2.4 (0.1 ) (0.4 ) 21.2 12.8 1.1 1.0 $ 14.9 $ 13.2 $ 6.1 $ 9.1 Note 13 – Income Taxes Pension Postretirement Three Months Ended
June 30, Three Months Ended
June 30, 2012 2011 2012 2011 Components of net periodic benefit cost Service cost $ 8.4 $ 7.9 $ 0.5 $ 0.7 Interest cost 37.8 39.6 6.7 7.5 Expected return on plan assets (55.3 ) (57.5 ) (2.5 ) (1.5 ) Amortization of prior service cost (credit) 2.4 2.3 — 0.2 Amortization of net actuarial loss 20.5 15.2 0.2 0.5 Curtailment loss 10.7 — — — Net periodic benefit cost $ 24.5 $ 7.5 $ 4.9 $ 7.4 Pension Postretirement Six Months Ended
June 30, Six Months Ended
June 30, 2012 2011 2012 2011 Components of net periodic benefit cost Service cost $ 17.2 $ 16.2 $ 1.2 $ 1.2 Interest cost 75.6 79.4 13.9 16.2 Expected return on plan assets (110.5 ) (107.6 ) (5.3 ) (2.2 ) Amortization of prior service cost (credit) 4.7 4.7 (0.1 ) (0.2 ) Amortization of net actuarial loss 41.7 28.0 1.3 1.5 Curtailment loss 10.7 — — — Net periodic benefit cost $ 39.4 $ 20.7 $ 11.0 $ 16.5 Note 13 - Income Taxes Three Months Ended
March 31, 2012 2011 $ 81.5 $ 57.4 34.3 % 33.5 % 2012 2011 2012 2011 Provision for income taxes $ 112.5 $ 61.5 $ 194.0 $ 118.9 Effective tax rate 38.0 % 33.5 % 36.4 % 33.5 % firstsecond quarter of 2012 was higher than the U.S. federal statutory rate of 35% primarily due to losses at certain foreign subsidiaries where no tax benefit could be recorded, including restructuring charges related to the closure of the manufacturing facility in St. Thomas, U.S. state and local taxes, and U.S. taxation of foreign income. These factors were partially offset by the U.S. manufacturing deduction and other U.S. tax benefits.U.S. taxationand the net impact of foreign income,other items.and other net discrete income tax expense itemsincluding restructuring charges related to prior tax periods.The effective tax ratethe closure of the manufacturing facility in the first quarter of 2011 wasSt. Thomas, lower than the U.S. federal statutory tax rate primarily due to the earnings in certain foreign jurisdictions where the effective tax rate was lesslower than the U.S. manufacturing deduction, the U.S. research tax credit, and other discrete net income tax benefits related to prior tax periods, partially offset byhigher U.S. state and local taxes, losses at certain foreign subsidiaries where nopartially offset by higher tax benefits could be recorded,from the U.S. taxationmanufacturing deduction.foreignJune 30, 2012, the Company had approximately $110.3 million of total gross unrecognized tax benefits. Included in this amount was approximately $45.3 million, that represents the amount of unrecognized tax benefits that would favorably impact the Company's effective income tax rate in any future periods if such benefits were recognized. As of June 30, 2012, the Company anticipates a decrease in its unrecognized tax positions of approximately $43.0 million to $44.0 million during the next 12 months. The anticipated decrease is primarily due to settlements with tax authorities. As of June 30, 2012, the Company has accrued approximately $10.2 million of interest and penalties related to uncertain tax positions. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense. June 30, 2012 December 31, 2011 Beginning balance, January 1 $ 87.2 $ 77.8 Tax positions related to the current year: Additions 21.0 1.3 Tax positions related to prior years: Additions 3.3 13.7 Reductions (0.7 ) (5.6 ) Lapses in statutes of limitation (0.5 ) — Ending balance $ 110.3 $ 87.2 items.14Note 14 – AcquisitionsNote 14 - Acquisitions $93$93 million in cash. On July 1, 2011, the Company completed the acquisition of substantially all of the assets of Philadelphia Gear Corp. (Philadelphia Gear) for approximately $199$199 million in cash. The Company makes an initial allocation of the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. In the months after closing, the Company obtains additional information and is able to refine the estimates of fair value and more accurately allocate the purchase price. TheDuring the first six months of 2012, the Company will make appropriate adjustments tofinalized the purchase price allocation for boththe Philadelphia Gear acquisition and the Drives acquisition and all appropriate adjustments were made. The purchase price allocation was made retroactive to December 31, 2011 on the Philadelphia Gear acquisition prior to completion of the measurement period, as required.allocation: Initial
Purchase Price
Allocation Adjustments Adjusted
Purchase Price
Allocation $ 25.6 $ — $ 25.6 23.6 — 23.6 0.9 — 0.9 0.1 — 0.1 32.1 — 32.1 83.3 3.5 86.8 146.9 (3.1 ) 143.8 0.6 (0.2 ) 0.4 $ 313.1 $ 0.2 $ 313.3 $ 10.7 $ — $ 10.7 5.1 — 5.1 5.2 — 5.2 $ 21.0 $ — $ 21.0 $ 292.1 $ 0.2 $ 292.3 Adjustments Assets: Accounts receivable, net $ 25.6 $ — $ 25.6 Inventories, net 23.6 — 23.6 Deferred charges and prepaid expenses 0.9 — 0.9 Other current assets 0.1 0.5 0.6 Property, plant and equipment – net 32.1 — 32.1 Goodwill 83.3 25.7 109.0 Other intangible assets 146.9 (25.9 ) 121.0 Other non-current assets 0.6 (0.1 ) 0.5 Total assets acquired $ 313.1 $ 0.2 $ 313.3 Liabilities: Accounts payable, trade $ 10.7 $ — $ 10.7 Salaries, wages and benefits 5.1 — 5.1 Other current liabilities 5.2 — 5.2 Total liabilities assumed $ 21.0 $ — $ 21.0 Net assets acquired $ 292.1 $ 0.2 $ 292.3 for identifiable assets acquired in 2011: Initial Purchase
Price Allocation Adjusted Purchase
Price Allocation Weighted -
Average Life Weighted -
Average Life $ 4.1 Indefinite $ — Indefinite 5.4 7 years 8.0 15 years 12.0 15 years 12.3 15 years 15.0 20 years 15.0 20 years 108.4 17 years 106.1 16 years 2.0 5 years 2.4 5 years $ 146.9 $ 143.8 The adjustments to other intangible assets during the first quarteras of 2012 relate to the Drives acquisition.15 Trade name (not subject to amortization) $ 4.1 Indefinite $ 15.3 Indefinite Developed Technology 5.4 7 years 8.0 15 years Trade name 12.0 15 years 0.3 2 years Know-how 15.0 20 years 20.6 20 years All customer relationships 108.4 17 years 75.7 10 years Non-compete agreements 2.0 5 years 1.1 3 years Total intangible assets allocated $ 146.9 $ 121.0 –- Fair ValueFinancial Accounting Standards Board (FASB)FASB provides accounting rules that classify the inputs used to measure fair value into the following hierarchy:March 31, 2012: Fair Value at March 31, 2012 Total Level 1 Level 2 Level 3 $ 355.3 $ 355.3 $ — $ — 29.1 29.1 — — 1.7 — 1.7 — $ 386.1 $ 384.4 $ 1.7 $ — $ 6.9 $ — $ 6.9 $ — $ 6.9 $ — $ 6.9 $ — Fair Value at June 30, 2012 Total Level 1 Level 2 Level 3 Assets: Cash and cash equivalents $ 509.9 $ 509.9 $ — $ — Short-term investments 28.2 28.2 — — Foreign currency hedges 2.7 — 2.7 — Total Assets $ 540.8 $ 538.1 $ 2.7 $ — Liabilities: Foreign currency hedges $ 4.0 $ — $ 4.0 $ — Total Liabilities $ 4.0 $ — $ 4.0 $ — Financial Instruments$478.7$492.5 million and $480.7$480.7 million at March 31,June 30, 2012 and December 31, 2011, respectively. The carrying value of this debt was $425.7$427.2 million and $428.9$428.9 million at March 31,June 30, 2012 and December 31, 2011, respectively.16Note 16 – Subsequent EventU.S. Continued Dumping and Subsidy Offset Act (CDSOA) provides for distributionfair value of monies collected by U.S. Customs from antidumping cases to qualifying domestic producers where the domestic producers have continued to invest in their technology, equipment and people.In September 2002, the World Trade Organization (WTO) ruled that CDSOA payments are not consistent with international trade rules. In February 2006, U.S. legislationlong-term fixed debt was enacted that ended CDSOA distributions for dumped imports covered by antidumping duty orders entering the United States after September 30, 2007. Instead, any such antidumping duties collected would remain with the U.S. Treasury. Several countries have objected that this U.S. legislation is not consistent with WTO rulings, and were granted retaliation rights by the WTO, typically in the form of increased tariffs on some imported goods from the United States. The European Union and Japan have been retaliating in this fashion against the operation of U.S. law.In 2006, the U.S. Court of International Trade (CIT) ruled, in two separate decisions, that the procedure for determining recipients eligible to receive CDSOA distributions was unconstitutional. In addition, several other court cases challenging various provisions of CDSOA were ongoing. As a result, from 2006 through 2010 U.S. Customs and Border Protection (U.S. Customs) withheld a portion of the amounts that would otherwise have been distributed under CDSOA.In February 2009, the U.S. Court of Appeals for the Federal Circuit reversed both of the 2006 decisions of the CIT. Later in December 2009, a plaintiff petitioned the U.S. Supreme Court to hear a further appeal, but the Supreme Court declined the petition, allowing the appellate court reversals to stand. At that time, several court cases challenging various provisions of the CDSOA were still unresolved, so U.S. Customs accepted the CIT’s recommendation to continue to withhold CDSOA receipts related to 2006 through 2010 until January 2012.U.S. Customs began distributing the withheld funds to affected domestic producers in early April 2012 and is expected to continue this process until distributions originally withheld from 2006 through 2010 have been completed. In April 2012, the Company received CDSOA distributions of $112.8 million in the aggregate for 2006 through 2010.While some of the challenges to CDSOA have been resolved, others are still in litigation. Since there continue to be legal challenges to CDSOA, U.S. Customs has advised all affected domestic producers that it is possible that CDSOA distributions could be subject to clawback.17ItemManagement’s DiscussionMANAGEMENT'S DISCSSION and AnalysisANALYSIS of Financial ConditionFINANCIAL CONDITION and ResultsRESULTS of OperationsCompany’sCompany's segments:•Steel produces more than 450 grades of carbon and alloy steel, which are sold in ingots, bars, and tubes in a variety of chemistries, lengths and finishes. The segment’s metallurgical expertise and operational capabilities result in customized 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.Company’ssegment's metallurgical expertise and operational capabilities result in customized 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.Company’sCompany's existing portfolio of business, thereby generating strong profits and cash flows. The Company pursues its growth strategy through differentiation and expansion:• createintroduce new products that create value for its customers. The Company recently broadened its product offering by expanding ato include Timken® ADAPT™ bearing and Quick-Flex® elastomeric couplings, which increase ease of maintenance in metal caster operations. In addition, the Company has expanded its line of spherical, cylindrical and housed bearings, developing new products and services – including the new Ecoturn®bearings. seal for the railroad industry – and introducing numerous new custom-developed grades of specialty alloy steel.Company’sCompany's products and create significant aftermarket demand, thereby providing a lifetime of opportunity in both product sales and services. The Company also seeks to expand its portfolio in new geographic spaces with an emphasis in Asia and other emerging markets. The Company’sCompany's acquisition strategy is directed at complementing its existing portfolio and expanding the Company’sCompany's market position globally.18Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)The following items highlight certain of the Company’s more recent significant strategic accomplishments:•In February 2012, the Company and the United Steelworkers (USW) Local 1123 announced the ratification of a new five-year labor agreement to replace the existing labor agreement, which was due to expire September 2013. After securing the agreement, the Company is moving forward with a $225 million investment at its Faircrest steel plant in Canton, Ohio. With this investment, the Company’s Steel segment expects to improve productivity, expand its product range and increase capacity to serve growing demand for Timken® specialty alloy steel bars.FebruaryMay 2012, the Company announced that it will invest $42 millionclose its plant in St. Thomas in approximately one year and consolidate bearing production with its existing U.S. operations to build a new 160,000 square foot two-story office complex connectedbetter align the Company's manufacturing footprint and customer base. The Company will also move customer service for the Canadian market to its existing facilityoffices in North Canton, Ohio. The new building will bring together personnel from its Bearings and Power Transmission headquarters, currently located in leased facilities in Canton, with their colleagues at the Company's global technology center. The move is expected to increase collaboration, the speed of innovation and overall service levels. The new buildingToronto. Production is expected to be completedtransferred to its operations in the fourth quarter of 2013.Ohio, North Carolina and South Carolina by mid-2013. Three Months Ended
March 31, 2012 2011 $ Change % Change $ 1,421.0 $ 1,254.1 $ 166.9 13.3 % 155.7 112.7 43.0 38.2 % $ 1.58 $ 1.13 $ 0.45 39.8 % 98,587,622 98,895,826 — (0.3 )% Three Months Ended
June 30, 2012 2011 $ Change % Change Net sales $ 1,343.2 $ 1,329.6 $ 13.6 1.0 % Net income attributable to The Timken Company 183.6 121.5 62.1 51.1 % Diluted earnings per share $ 1.86 $ 1.22 $ 0.64 52.5 % Average number of shares – diluted 98,204,205 98,899,992 — (0.7 )% Six Months Ended
June 30, 2012 2011 $ Change % Change Net sales $ 2,764.2 $ 2,583.7 $ 180.5 7.0 % Net income attributable to The Timken Company 339.3 234.2 105.1 44.9 % Diluted earnings per share $ 3.44 $ 2.36 $ 1.08 45.8 % Average number of shares – diluted 98,373,357 98,905,856 — (0.5 )% firstsecond quarter of 2012, of $1.4 billion, compared to $1.3$1.33 billion in the firstsecond quarter of 2011, an increase of 13.3%1.0%. Higher sales were driven by favorable pricing and sales mix and the impact of prior-year acquisitions, as well as stronghigher pricing and favorable sales mix, partially offset by lower demand across most of the Company’sCompany's end market sectors.sectors, primarily outside of North America, the impact of currency-rate changes and lower material surcharges. For the firstsecond quarter of 2012, net income per diluted share was $1.58,$1.86, compared to $1.13$1.22 per diluted share for the second quarter of 2011. The Company's net income for the second quarter of 2012 reflects U.S. Continued Dumping and Subsidy Offset Act (CDSOA) receipts of $109.5 million ($69.0 million after-tax or $0.70 per diluted share), net of expense (refer to Other Matters - Continued Dumping and Subsidy Offset Act (CDSOA) for additional discussion). The second quarter results also reflect the impact of pricing, sales mix and acquisitions and lower material costs, partially offset by lower material surcharges, the impact of lower volume, restructuring charges related to the St. Thomas plant closure and higher manufacturing costs.quartersix months of 2011. The Company’sCompany's net income for the first quartersix months of 2012 reflects continued improvement in most of the Company’s end markets. In addition, the first quarter results reflect the impact of higherCDSOA receipts, net of expense, pricing, sales mix and acquisitions, partially offset by the impact of lower volume, lower restructuring charges, higher raw materialmanufacturing costs and higher selling, general and administrative expenses.Outlookhigher2012 sales of approximately 7% to 10% in 2012be up slightly compared to 2011, primarily driven by higher volumesvolume across the Process Industries and Aerospace and Defense segments,segment, Mobile Industries’Industries' rail and off-highway and rail market sectors and Steel’s oil and gas market sector,the industrial distribution channel within Process Industries, as well as favorable pricing and the full-year impact of the acquisitions completed in 2011. The Company expects to leverage sales growth to drive improved operating performance. However, the strengtheningThe Company expects margins willto be strong primarily driven by pricing and sales mix, partially offset by higher raw material costs and slightly higher selling, general and administrative expenses to support the higher sales.From a liquidity standpoint, the$565$545 million in 2012, which is a 167%157% increase over 2011, primarily driven by lower working capital increases andrequirements, lower pension and postretirement contributions.contributions and CDSOA receipts. Pension and postretirement contributions are expected to be approximately $375 million in 2012, compared to $416 million in 2011. The Company expects to increase capital expenditures to approximately $335$315 million in 2012, compared to $205 million in 2011. The Company received U.S. Continued Dumping and Subsidy Offset Act (CDSOA) receipts of approximately $110 million in April 2012 (refer to Other Matters for further discussion of CDSOA).19Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Three Months Ended
March 31, 2012 2011 $ Change % Change $ 469.1 $ 442.9 $ 26.2 5.9 % 354.1 284.1 70.0 24.6 % 91.3 79.1 12.2 15.4 % 506.5 448.0 58.5 13.1 % $ 1,421.0 $ 1,254.1 $ 166.9 13.3 % Three Months Ended
June 30, 2012 2011 $ Change % Change Mobile Industries $ 448.2 $ 465.1 $ (16.9 ) (3.6 )% Process Industries 336.6 307.5 29.1 9.5 % Aerospace and Defense 87.2 83.5 3.7 4.4 % Steel 471.2 473.5 (2.3 ) (0.5 )% Total Company $ 1,343.2 $ 1,329.6 $ 13.6 1.0 % Six Months Ended
June 30, 2012 2011 $ Change % Change Mobile Industries $ 917.3 $ 908.0 $ 9.3 1.0 % Process Industries 690.7 591.6 99.1 16.8 % Aerospace and Defense 178.5 162.6 15.9 9.8 % Steel 977.7 921.5 56.2 6.1 % Total Company $ 2,764.2 $ 2,583.7 $ 180.5 7.0 % quartersix months of 2012 increased $166.9$180.5 million, or 13.3%7.0%, compared to the first quartersix months of 2011, primarily due to higher pricing and favorable sales mix of approximately $75$140 million and the impact of acquisitions of approximately $60$130 million, partially offset by the impact of foreign currency changes of approximately $45 million, lower volume of $35 million and higher volumelower surcharges of approximately $30$15 million. The favorable impact of acquisitions in the first quarter of 2012 was due to the Philadelphia Gear Corp. (Philadelphia Gear) acquisition in July 2011 and the Drives LLC (Drives) acquisition in October 2011. The increasedecrease in volume was primarily driven by the Mobile Industries’ off-highwayIndustries' light-vehicle and railheavy truck market sectors the Process Industries’ distribution channel, the Aerospace and Defense segmentSteel's industrial and Steel’s oil and gasmobile market sector. Three Months Ended
March 31, 2012 2011 $ Change % Change $ 411.6 $ 333.3 $ 78.3 23.5 % 29.0 % 26.6 % — 240 bps Three Months Ended
June 30, 2012 2011 $ Change Change Gross profit $ 377.3 $ 350.5 $ 26.8 7.6 % Gross profit % to net sales 28.1 % 26.4 % — 170 bps Six Months Ended
June 30, 2012 2011 $ Change Change Gross profit $ 788.9 $ 683.8 $ 105.1 15.4 % Gross profit % to net sales 28.5 % 26.5 % — 200 bps margin increased in the firstsecond quarter of 2012 compared to the firstsecond quarter of 2011 primarily due to the impact of higher pricing and favorable sales mix of approximately $65$55 million, the impact of acquisitions of approximately $20 million, lower raw material costs of approximately $15 million and the impact of higher sales volumea decrease in the last-in, first-out (LIFO) reserve of approximately $10 million These factors were partially offset by the impact of lower volume of approximately $30 million, lower surcharges of approximately $25 million and higher raw materialmanufacturing costs of approximately $15 million. Three Months Ended
March 31, 2012 2011 $ Change % Change $ 164.7 $ 150.3 $ 14.4 9.6 % 11.6 % 12.0 % — (40 ) bps Three Months Ended
June 30, 2012 2011 $ Change Change Selling, general and administrative expenses $ 163.0 $ 153.7 $ 9.3 6.1 % Selling, general and administrative expenses % to net sales 12.1 % 11.6 % — 50 bps Six Months Ended
June 30, 2012 2011 $ Change Change Selling, general and administrative expenses $ 327.7 $ 304.0 $ 23.7 7.8 % Selling, general and administrative expenses % to net sales 11.9 % 11.8 % — 10 bps of $14 million in the second quarter of 2012 and first quartersix months of 2012, compared to the first quarter of 2011respective periods in the prior year, was primarily due to the acquisitions of Philadelphia Gear and Drives, which added approximately $7$8 million and $15 million, respectively, of selling, general and administrative expenses in the first quarter offor 2012. In addition, selling, general and administrative expenses increased as a result of higher salaries and related expensesprofessional fees of approximately $7 million. Selling, general and administrative expenses, as a percentage of sales, decreased$5 million in the first half of 2012. Three Months Ended
June 30, 2012 2011 $ Change Impairment Charges $ — $ 0.4 $ (0.4 ) Severance and related benefit costs 16.5 0.2 16.3 Exit Costs 0.2 5.6 (5.4 ) Total $ 16.7 $ 6.2 $ 10.5 Six Months Ended
June 30, 2012 2011 $ Change Impairment Charges $ — $ 0.4 $ (0.4 ) Severance and related benefit costs 16.6 0.1 16.5 Exit Costs 0.3 6.8 (6.5 ) Total $ 16.9 $ 7.3 $ 9.6 comparedrespectively, were primarily due to the recognition of $16.5 million of severance and related benefits, including $10.7 million of pension curtailment, related to the announced closure of the manufacturing facility in St. Thomas. Impairment and restructuring charges of $6.2 million and $7.3 million in the second quarter and first quartersix months of 2011, as a resultrespectively, were primarily related to environmental remediation costs and workers compensation claims by former associates at the former manufacturing facility in Sao Paulo, Brazil. Refer to Note 11 - Impairment and Restructuring Charges in the Notes to the Consolidated Financial Statements for further detail on the announced closure of the Company’s ability to effectively leverage these costs against higher sales.20Management’s Discussionmanufacturing plant in St. Thomas and Analysis of Financial Condition and Results of Operations (continued) Three Months Ended
March 31, 2012 2011 $ Change % Change $ 8.6 $ 9.8 $ (1.2 ) (12.2 )% $ (0.7 ) $ (1.5 ) $ 0.8 53.3 % Three Months Ended
June 30, 2012 2011 $ Change % Change Interest expense $ 8.1 $ 9.3 $ (1.2 ) (12.9 )% Interest income $ 0.7 $ 1.4 $ (0.7 ) (50.0 )% Six Months Ended
June 30, 2012 2011 $ Change % Change Interest expense $ 16.7 $ 19.1 $ (2.4 ) (12.6 )% Interest income $ 1.4 $ 2.9 $ (1.5 ) (51.7 )% quartersix months of 2012 decreased compared to the first quarter ofrespective periods in 2011 primarily due to lower financing costs as a result of the refinancing of the Company’sCompany's $500 million Amended and Restated Credit Agreement (Senior Credit Facility), which occurred in May 2011. Interest income for the second quarter and the first quartersix months of 2012 decreased compared to the same periodperiods in the prior year primarily due to lower invested cash balances. Three Months Ended
June 30, 2012 2011 $ Change % Change CDSOA receipts, net of expense $ 109.5 $ — $ 109.5 NM Other (expense) income, net $ (3.8 ) $ 1.1 $ (4.9 ) (445.5 )% Six Months Ended
June 30, 2012 2011 $ Change % Change CDSOA receipts, net of expense $ 109.5 $ — $ 109.5 NM Other (expense), net $ (5.1 ) $ (1.3 ) $ (3.8 ) 292.3 % Three Months Ended
March 31, 2012 2011 $ Change % Change $ 81.5 $ 57.4 $ 24.1 42.0 % 34.3 % 33.5 % — 80 bps Three Months Ended
June 30, 2012 2011 $ Change Change Income tax expense $ 112.5 $ 61.5 $ 51.0 82.9 % Effective tax rate 38.0 % 33.5 % — 450 bps Six Months Ended
June 30, 2012 2011 $ Change Change Income tax expense $ 194.0 $ 118.9 $ 75.1 63.2 % Effective tax rate 36.4 % 33.5 % — 290 bps firstsecond quarter of 2012 compared to the firstsecond quarter of 2011 was primarily due to higher discretelosses at certain foreign subsidiaries where no tax expensesbenefit could be recorded, including restructuring charges related to priorthe closure of the manufacturing facility in St. Thomas, lower earnings in certain foreign jurisdictions where the effective tax years recorded inrate was lower than 35%, and higher U.S. state and local taxes. These factors were partially offset by higher tax benefits from the first quarter of 2012.infor the first quartersix months of 2012 was lowerhigher than the U.S. federal statutory tax rate of 35% primarily due to U.S. state and local taxes, U.S. taxation of foreign income, and losses at certain foreign subsidiaries where no tax benefit could be recorded, including restructuring charges related to the closure of the manufacturing facility in St. Thomas. These factors were partially offset by earnings in certain foreign jurisdictions where the effective tax rate was less than 35%, the U.S. manufacturing deduction and other U.S. tax benefits, partially offset by U.S. state and local taxes, U.S. taxationbenefits.foreign income,2012 compared to the first six months of 2011 was primarily due to higher losses at certain foreign subsidiaries where no tax benefit could be recorded, and other net discrete income tax expense itemsincluding restructuring charges related to prior tax periods.The effective tax ratethe closure of the manufacturing facility in the first quarter of 2011 wasSt. Thomas, lower than the U.S. federal statutory tax rate primarily due to the earnings in certain foreign jurisdictions where the effective tax rate was lesslower than 35%, the U.S. manufacturing deduction, the U.S. research tax credit and other discrete net income tax benefits related to prior tax periods, partially offset byhigher U.S. state and local taxes, losses at certain foreign subsidiaries where nopartially offset by higher tax benefits could be recorded,from the U.S. taxation of foreign income and other U.S. tax items.21Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)Segments:–- Segment Information in the Notes to the Consolidated Financial Statements for the reconciliation of EBIT by segment to consolidated income before income taxes.includeincludes a reconciliation of the changes in net sales for each segment reported in accordance with U.S. GAAP to net sales adjusted to remove the effects of acquisitions made in 2011 and currency exchange rates. The effects of acquisitions and currency exchange rates on net sales are removed to allow investors and the Company to meaningfully evaluate the percentage change in net sales on a comparable basis from period to period. During the third quarter of 2011, the Company completed the acquisition of substantially all of the assets of Philadelphia Gear.Philadelphia Gear is part of the Process Industries segment.During the fourth quarter of 2011, the Company completed the acquisition of Drives. Results for Drives are reported in the Mobile and Process Industries segments based on customer application. Three Months Ended
March 31, 2012 2011 $ Change % Change $ 469.1 $ 443.0 $ 26.1 5.9 % $ 86.7 $ 72.1 $ 14.6 20.2 % 18.5 % 16.3 % — 220 bps Three Months Ended
March 31, 2012 2011 $ Change % Change $ 469.1 $ 443.0 $ 26.1 5.9 % 19.7 — 19.7 NM (8.1 ) — (8.1 ) NM $ 457.5 $ 443.0 $ 14.5 3.3 % 2012 2011 $ Change Change Net sales, including intersegment sales $ 448.4 $ 465.2 $ (16.8 ) (3.6 )% EBIT $ 48.8 $ 71.4 $ (22.6 ) (31.7 )% EBIT margin 10.9 % 15.3 % — (440 ) bps 2012 2011 $ Change % Change Net sales, including intersegment sales $ 448.4 $ 465.2 $ (16.8 ) (3.6 )% Acquisitions 23.8 — 23.8 NM Currency (23.8 ) — (23.8 ) NM Net sales, excluding the impact of acquisitions and currency $ 448.4 $ 465.2 $ (16.8 ) (3.6 )% 2012 2011 $ Change Change Net sales, including intersegment sales $ 917.5 $ 908.2 $ 9.3 1.0 % EBIT $ 135.5 $ 143.5 $ (8.0 ) (5.6 )% EBIT margin 14.8 % 15.8 % — (100 ) bps 2012 2011 $ Change % Change Net sales, including intersegment sales $ 917.5 $ 908.2 $ 9.3 1.0 % Acquisitions 43.5 — 43.5 NM Currency (31.9 ) — (31.9 ) NM Net sales, excluding the impact of acquisitions and currency $ 905.9 $ 908.2 $ (2.3 ) (0.3 )% segment’ssegment's net sales, excluding the effects of acquisitions and currency-rate changes, increased 3.3% fordecreased 3.6% in the firstsecond quarter of 2012 compared to the firstsecond quarter of 2011 primarily due to higherlower volume of approximately $10 million and surcharges of approximately $5$20 million. The higherlower volume was led by a 30% increase in rail and a 24% increase in off-highway, partially offset by an approximately 20%16% decrease in light vehicle volume, driven by exited business.business, and a 23% decrease in heavy truck volume, partially offset by a 37% increase in rail volume. EBIT was lower primarily due to higher restructuring charges of approximately $10 million, driven by expenses related to the announced closure of the St. Thomas manufacturing plant, higher raw material costs of approximately $5 million and higher manufacturing costs of approximately $5 million, as a result of lower plant utilization. Acquisitions also had a favorable impact on EBIT for the second quarter of 2012.quartersix months of 2012 compared to the first quartersix months of 2011, as lower volume of approximately $10 million was offset by higher surcharges of approximately $10 million. The lower volume was led by a 17% decrease in light vehicle volume, driven by exited business, and a 15% decrease in heavy truck volume, partially offset by a 32% increase in rail volume and a 10% increase in off-highway volume. EBIT was lower in the first six months of 2012 compared to the first six months of 2011 primarily due to higher restructuring charges of approximately $10 million, the impact of higherlower volume of approximately $5 million, higher manufacturing costs of approximately $5 million, as a result of lower plant utilization, and higher raw material costs of approximately $5 million, partially offset by lower logistics costs of approximately $5$10 million and higher surcharges of approximately $5$10 million.up 5 percentdown 5% in 2012 compared to 2011 as a result of higher volume and the full-year impact of 2011 acquisitions, as well as higher pricing and surcharges. Thesurcharges, partially offset by currency-rate changes. Volume for 2012, compared to 2011, is expected increase in volume is primarily due to be down slightly as a 27%25% increase in rail demand and an 11% increase in off-highway demand, partiallyis more than offset by a 16%17% decrease in light-vehicle volume, driven by exited business. In addition, the higher volume was due to a 21% increase to automotive aftermarket distributors.business, and an 18% decrease in heavy truck volume. Sales for the Mobile Industries segment, excluding the effecteffects of acquisitions and currency-rate changes, are expected to be flat to down 5% in 2012 compared to 2011.2011 as increases due to acquisitions are offset by decreases due to currency-rate changes. EBIT for the Mobile Industries segment is expected to be up slightlylower in 2012 compared to 2011 as a result of higher volume and pricing, partially offset byrestructuring charges, higher raw material and manufacturing costs and higher selling, general and administrative expenses.22Management’s Discussionexpenses, partially offset by higher pricing and Analysis of Financial Conditionsurcharges and Results of Operations (continued)lower logistics costs. Three Months Ended
March 31, 2012 2011 $ Change % Change $ 355.6 $ 285.0 $ 70.6 24.8 % $ 82.3 $ 65.3 $ 17.0 26.0 % 23.1 % 22.9 % — 20 bps Three Months Ended
March 31, 2012 2011 $ Change % Change $ 355.6 $ 285.0 $ 70.6 24.8 % 42.1 — 42.1 NM (1.6 ) — (1.6 ) NM $ 315.1 $ 285.0 $ 30.1 10.6 % 2012 2011 $ Change Change Net sales, including intersegment sales $ 337.7 $ 308.3 $ 29.4 9.5 % EBIT $ 71.3 $ 68.7 $ 2.6 3.8 % EBIT margin 21.1 % 22.3 % — (120 ) bps 2012 2011 $ Change % Change Net sales, including intersegment sales $ 337.7 $ 308.3 $ 29.4 9.5 % Acquisitions 43.8 — 43.8 NM Currency (11.0 ) — (11.0 ) NM Net sales, excluding the impact of acquisitions and currency $ 304.9 $ 308.3 $ (3.4 ) (1.1 )% 2012 2011 $ Change Change Net sales, including intersegment sales $ 693.3 $ 593.3 $ 100.0 16.9 % EBIT $ 153.6 $ 134.0 $ 19.6 14.6 % EBIT margin 22.2 % 22.6 % — (40 ) bps 2012 2011 $ Change % Change Net sales, including intersegment sales $ 693.3 $ 593.3 $ 100.0 16.9 % Acquisitions 85.9 — 85.9 NM Currency (12.6 ) — (12.6 ) NM Net sales, excluding the impact of acquisitions and currency $ 620.0 $ 593.3 $ 26.7 4.5 % 10.6%4.5% in the first quartersix months of 2012 compared to the same period in the prior year primarily due to higher volumepricing and favorable sales mix of approximately $20 million as well asand higher pricing and favorable sales mixvolume of approximately $10 million. The higher sales were primarily due to an approximately 12%8% increase to industrial distributors. EBIT was higher in the first quartersix months of 2012 compared to the first quartersix months of 2011 primarily due to the impact of higher pricing and favorable sales mix of approximately $10$20 million, the favorable impact from acquisitions of approximately $15 million and the impact of higher volume of approximately $10$5 million, and the favorable impact from acquisitions, partially offset by higher selling, general and administrative expenses of approximately $5 million, higher manufacturing costs of approximately $5 million and higher raw material costs of approximately $5 million.The Company expectssegment’s salessegment are expected to increase by 10%approximately 7% to 15%12% in 2012 compared to 2011. The increase in sales is expected to reflect continued strengthening2011 as a result of global industrial distribution and sales from new product lines, as well as the full-year impact of 2011 acquisitions, as well as higher volume and pricing.pricing, partially offset by currency-rate changes. The increase in volume in 2012, compared to 2011, is primarily due to a 3% increase in global industrial distribution. Sales for the Process Industries segment, excluding the effecteffects of acquisitions and currency-rate changes, are expected to increase by approximately 5%2% to 10%7% in 2012 compared to 2011. EBIT for the Process Industries segment is expected to be up for 2012 compared to 2011 as a result of higher volume and pricing, partially offset by higher raw materialmanufacturing costs, as a result of lower plant utilization, and higher selling, general and administrative expenses. Three Months Ended
March 31, 2012 2011 $ Change % Change $ 91.3 $ 79.1 $ 12.2 15.4 % $ 10.7 $ 1.6 $ 9.1 NM 11.7 % 2.0 % — 970 bps Three Months Ended
March 31, 2012 2011 $ Change % Change $ 91.3 $ 79.1 $ 12.2 15.4 % (0.2 ) — (0.2 ) NM $ 91.5 $ 79.1 $ 12.4 15.7 % 2012 2011 $ Change Change Net sales, including intersegment sales $ 87.2 $ 83.5 $ 3.7 4.4 % EBIT $ 7.9 $ 2.5 $ 5.4 216.0 % EBIT margin 9.1 % 3.0 % — 610 bps 2012 2011 $ Change % Change Net sales, including intersegment sales $ 87.2 $ 83.5 $ 3.7 4.4 % Currency (0.5 ) — (0.5 ) NM Net sales, excluding the impact of currency $ 87.7 $ 83.5 $ 4.2 5.0 % 2012 2011 $ Change Change Net sales, including intersegment sales $ 178.5 $ 162.6 $ 15.9 9.8 % EBIT $ 18.6 $ 4.1 $ 14.5 NM EBIT margin 10.4 % 2.5 % — 790 bps 2012 2011 $ Change % Change Net sales, including intersegment sales $ 178.5 $ 162.6 $ 15.9 9.8 % Currency (0.7 ) — (0.7 ) NM Net sales, excluding the impact of currency $ 179.2 $ 162.6 $ 16.6 10.2 % 15.7%5.0% in the firstsecond quarter of 2012 compared to the firstsecond quarter of 2011 primarily due to higher volume of approximately $12$5 million across most market sectors. EBIT wasfor the second quarter of 2012 increased compared to the second quarter of 2011 primarily due to lower manufacturing costs and the impact of higher volume. In 2011, the Aerospace and Defense segment recognized an inventory write-down of approximately $3 million related to management's decision to exit certain non-strategic aftermarket products.quartersix months of 2012 compared to the first quartersix months of 2011 primarily due to higher volume of approximately $15 million across most market sectors, higher pricing and favorable sales mix. EBIT was higher in the first six months of 2012 compared to the first six months of 2011 primarily due to better manufacturing efficiency of approximately $5 million and the impact of higher volume of approximately $5 million, as well as higher pricing and favorable sales mixmix. In 2011, the Aerospace and pricing and lower selling, general and administrative expenses.23Management’s Discussion and AnalysisDefense segment recognized an inventory write-down of Financial Condition and Results of Operations (continued) Three Months Ended
March 31, 2012 2011 $ Change % Change $ 535.5 $ 481.5 $ 54.0 11.2 % $ 88.0 $ 59.3 $ 28.7 48.4 % 16.4 % 12.3 % — 410 bps Three Months Ended
March 31, 2012 2011 $ Change % Change $ 535.5 $ 481.5 $ 54.0 11.2 % (0.3 ) — (0.3 ) NM $ 535.8 $ 481.5 $ 54.3 11.3 % 2012 2011 $ Change Change Net sales, including intersegment sales $ 499.8 $ 505.1 $ (5.3 ) (1.0 )% EBIT $ 88.9 $ 71.3 $ 17.6 24.7 % EBIT margin 17.8 % 14.1 % — 370 bps 2012 2011 $ Change % Change Net sales, including intersegment sales $ 499.8 $ 505.1 $ (5.3 ) (1.0 )% Currency (0.7 ) — (0.7 ) NM Net sales, excluding the impact of currency $ 500.5 $ 505.1 $ (4.6 ) (0.9 )% 2012 2011 $ Change Change Net sales, including intersegment sales $ 1,035.3 $ 986.6 $ 48.7 4.9 % EBIT $ 176.9 $ 130.6 $ 46.3 35.5 % EBIT margin 17.1 % 13.2 % — 390 bps 2012 2011 $ Change % Change Net sales, including intersegment sales $ 1,035.3 $ 986.6 $ 48.7 4.9 % Currency (1.0 ) — (1.0 ) NM Net sales, excluding the impact of currency $ 1,036.3 $ 986.6 $ 49.7 5.0 % segment’ssegment's net sales for the firstsecond quarter of 2012, excluding the effecteffects of currency-rate changes, increased 11.3%decreased 0.9% compared to the firstsecond quarter of 2011 primarily due to lower volume of approximately $35 million and lower surcharges of approximately $30 million, mostly offset by higher pricing and favorable sales mix of approximately $60 million, partially offset by lower volume of approximately $10 million. The lower volume was primarily driven by an approximately 20%18% decrease in mobileindustrial demand and an approximately 10%4% decrease in industrial demand, partially offset by an approximately 40% increase in oil and gasmobile demand. The decreaseSurcharges decreased to $124.6 million in the mobile and industrial demand was primarily due to customers adjusting inventory levels. Steel shipments for the firstsecond quarter of 2012 were approximately 319,000 tons, compared to 330,000 tons for the first quarter of 2011, a decrease of approximately 3%. The Steel segment’s average selling price was $1,678 per ton for the first quarter of 2012, compared to an average selling price of $1,459 per ton in the first quarter of 2011. The increase in the average selling prices was primarily the result of higher pricing and favorable sales mix. Surcharges were $142.4from $151.9 million in the first quarter of 2012, compared to $138.1 million in the firstsecond quarter of 2011. Surcharges are a pricing mechanism that the Company uses to recover scrap steel, energy and certain alloy costs, which are derived from published monthly indices.segment’ssegment's average selling price, including surcharges, was $1,662 per ton for the second quarter of 2012, compared to an average selling price of $1,516 per ton in the second quarter of 2011. The increase in the average selling prices was primarily the result of higher pricing and favorable sales mix. The lower surcharges were a result of lower market prices for certain input raw materials, especially scrap steel, nickel and molybdenum and lower volume.firstsecond quarter of 2012 compared to the second quarter of 2011 primarily due to the impact of higher pricing and favorable mix of approximately $45 million and lower raw material costs of approximately $20 million, partially offset by lower surcharges of approximately $30 million and the impact of lower volume of approximately $20 million. The lower raw material costs were driven by lower volume, partially offset by higher material costs per ton. Raw material costs consumed in the manufacturing process, including scrap steel, alloys and energy, for the second quarter of 2012 were comparable with the second quarter of 2011, with an average cost of $563 per ton.quartersix months of 2012, excluding the effects of currency-rate changes, increased 5.0% compared to the first six months of 2011 primarily due to higher pricing and favorable sales mix of approximately $120 million, partially offset by lower volume of approximately $45 million and lower surcharges of approximately $25 million. The lower volume was primarily driven by an approximately 13% decrease in industrial demand and an approximately 12% decrease in mobile demand, partially offset by an approximately 20% increase in oil and gas demand. Surcharges decreased to $267.1 million in the first six months of 2012 from $290.0 million in the first six months of 2011. The average scrap index for the first six months of 2012 was $462 per ton, compared to $493 per ton for the first six months of 2011. Steel shipments for the first six months of 2012 were approximately 620,000 tons, compared to approximately 663,000 tons in the first six months 2011, a decrease of 6.6%. The Steel segment's average selling price, including surcharges, was $1,673 per ton for the first six months of 2012, compared to an average selling price of $1,487 per ton in the first six months of 2011. The increase in the average selling prices was primarily the result of higher pricing and favorable sales mix. The lower surcharges were a result of lower market prices for certain input raw materials, especially scrap steel, nickel and molybdenum and lower volume.$55$100 million and lower raw material costs of approximately $10 million, partially offset by the impact of lower volume of approximately $10$30 million, lower surcharges of approximately $25 million and higher raw materialsmanufacturing costs of approximately $10 million and expense of approximately $5 million related to the ratification of the new labor agreement.$15 million. The lower raw material costs were driven by lower volume, partially offset by higher material costs per ton. Raw material costs consumed in the manufacturing process, including scrap steel, alloys and energy, increased 28%4.6% in the first quartersix months of 2012 over the comparable period in the prior year to an average cost of $553$568 per ton.The Company expectssee abe flat to down 5% to 10% increase in sales for 2012 compared to 2011 due to higher average selling prices,driven by lower overall demand, partially offset by slightly lower volume. The higher average selling prices are expected to be driven by higher pricing as scrap steel and alloy prices are expected to increase in 2012.favorable sales mix. The Company expects lower demand driven by a 10%an 18% decrease in industrial demand partially offset byand a 14% increase5% decrease in oil and gasmobile demand. The Company expects the Steel segment’ssegment's EBIT to increasebe flat in 2012 compared to 2011 primarily due toas higher average selling prices, partiallypricing and lower raw material costs are offset by the impact of lower volume and higher raw material costs.lower surcharges. Scrap, alloy and energy costs are expected to increase in the near term from current levels as global industrial production improves and then levelslevel off. Three Months Ended
March 31, 2012 2011 $ Change % Change $ 20.7 $ 19.3 $ 1.4 7.3 % 1.5 % 1.5 % — 0 bps 2012 2011 $ Change Change Corporate expenses $ 23.0 $ 21.8 $ 1.2 5.5 % Corporate expenses % to net sales 1.7 % 1.6 % — 10 bps 2012 2011 $ Change Change Corporate expenses $ 43.7 $ 41.1 $ 2.6 6.3 % Corporate expenses % to net sales 1.6 % 1.6 % — — bps slightly for the second quarter and first quartersix months of 2012 compared to the same period insecond quarter and first six months of 2011, respectively, primarily due to higher salaries and related expenses.24Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)March 31,June 30, 2012 and December 31, 2011. March 31,
2012 December 31,
2011 $ Change % Change $ 355.3 $ 464.8 $ (109.5 ) (23.6 )% 3.6 3.6 — 0.0 % 762.0 645.5 116.5 18.0 % 993.1 964.4 28.7 3.0 % 113.4 113.7 (0.3 ) (0.3 )% 15.4 12.8 2.6 20.3 % 73.7 87.5 (13.8 ) (15.8 )% $ 2,316.5 $ 2,292.3 $ 24.2 1.1 % $ Change % Change Cash and cash equivalents $ 509.9 $ 464.8 $ 45.1 9.7 % Restricted cash — 3.6 (3.6 ) (100.0 )% Accounts receivable, net 715.7 645.5 70.2 10.9 % Inventories, net 943.3 964.4 (21.1 ) (2.2 )% Deferred income taxes 112.8 113.7 (0.9 ) (0.8 )% Deferred charges and prepaid expenses 12.9 12.8 0.1 0.8 % Other current assets 70.9 88.1 (17.2 ) (19.5 )% Total current assets $ 2,365.5 $ 2,292.9 $ 72.6 3.2 % decreaseincrease in cash and cash equivalents. Accounts receivable net increased as a result of higher sales in the firstsecond quarter of 2012 compared to the fourth quarter of 2011. Inventories increaseddecreased primarily due to support higher sales and expected future demand.a concerted effort to reduce steel inventories, as well as an increase in the Company's LIFO inventory reserve. Other current assets decreased as a result of a $17an $18 million decrease in short-term marketable securities. These short-term marketable securities matured during the first quarter of 2012 and were converted to cash and cash equivalents. March 31,
2012 December 31,
2011 $ Change % Change $ 3,642.0 $ 3,589.4 $ 52.6 1.5 % (2,328.7 ) (2,280.5 ) (48.2 ) (2.1 )% $ 1,313.3 $ 1,308.9 $ 4.4 0.3 % $ Change % Change Property, plant and equipment $ 3,658.7 $ 3,589.4 $ 69.3 1.9 % Less: allowances for depreciation (2,338.7 ) (2,280.5 ) (58.2 ) (2.6 )% Property, plant and equipment – net $ 1,320.0 $ 1,308.9 $ 11.1 0.8 % – net in the first quartersix months of 2012 was primarily due to current-year capital expenditures exceeding depreciation expense, partially offset by the impact of foreign currency translation. During the first quarter of 2012, capital expenditures were offset by current-year depreciation.$33.7$30 million, including interest, subject to fluctuations in foreign currency exchange rates, over an 18-month period. March 31,
2012 December 31,
2011 $ Change % Change $ 311.1 $ 307.2 $ 3.9 1.3 % 253.4 261.6 (8.2 ) (3.1 )% 133.8 141.9 (8.1 ) (5.7 )% 45.4 40.2 5.2 12.9 % $ 743.7 $ 750.9 $ (7.2 ) (1.0 )% $ Change % Change Goodwill $ 332.1 $ 332.7 $ (0.6 ) (0.2 )% Other intangible assets 226.3 235.7 (9.4 ) (4.0 )% Deferred income taxes 121.0 141.9 (20.9 ) (14.7 )% Other non-current assets 39.9 40.0 (0.1 ) (0.3 )% Total other assets $ 719.3 $ 750.3 $ (31.0 ) (4.1 )% amortization, as well as an adjustment to the value of the intangible assets acquired as part of the Drives acquisition.amortization. The decrease in deferred income taxes was primarily due to the tax impactreceipt of amortizationCDSOA disbursements during the second quarter of actuarial losses and prior-year service costs for defined benefit pension and postretirement plans.25Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) March 31,
2012 December 31,
2011 $ Change % Change $ 13.0 $ 22.0 $ (9.0 ) (40.9 )% 310.6 287.3 23.3 8.1 % 186.8 259.3 (72.5 ) (28.0 )% 121.5 70.2 51.3 73.1 % 3.7 3.1 0.6 19.4 % 168.1 188.4 (20.3 ) (10.8 )% 12.8 14.3 (1.5 ) (10.5 )% $ 816.5 $ 844.6 $ (28.1 ) (3.3 )% $ Change % Change Short-term debt $ 8.1 $ 22.0 $ (13.9 ) (63.2 )% Accounts payable 283.7 287.3 (3.6 ) (1.3 )% Salaries, wages and benefits 202.7 259.3 (56.6 ) (21.8 )% Income taxes payable 140.8 70.2 70.6 100.6 % Deferred income taxes 3.6 3.1 0.5 16.1 % Other current liabilities 176.6 188.4 (11.8 ) (6.3 )% Current portion of long-term debt 12.2 14.3 (2.1 ) (14.7 )% Total current liabilities $ 827.7 $ 844.6 $ (16.9 ) (2.0 )% Company’sCompany's foreign lines of credit in Asia. The increase in accounts payable was primarily due to higher volume. The decrease in accrued salaries, wages and benefits was the result of the payout of the 2011 performance-based compensation, partially offset by current-year accruals for 2012 performance-based compensation. The increase in income taxes payable was primarily due to the current-year provision for income taxes in the first six months of 2012, partially offset by income tax payments in 2012. The decrease in other current liabilities was primarily due to the payoutfirst six months of customer rebates and the payment of interest on the Company’s $250 million fixed-rate senior unsecured notes. March 31,
2012 December 31,
2011 $ Change % Change $ 478.8 $ 478.8 $ — 0.0 % 388.3 491.0 (102.7 ) (20.9 )% 392.7 395.9 (3.2 ) (0.8 )% 6.9 7.5 (0.6 ) (8.0 )% 92.1 91.8 0.3 0.3 % $ 1,358.8 $ 1,465.0 $ (106.2 ) (7.2 )% $ Change % Change Long-term debt $ 473.9 $ 478.8 $ (4.9 ) (1.0 )% Accrued pension cost 278.0 491.0 (213.0 ) (43.4 )% Accrued postretirement benefits cost 389.2 395.9 (6.7 ) (1.7 )% Deferred income taxes 6.6 7.5 (0.9 ) (12.0 )% Other non-current liabilities 114.2 91.8 22.4 24.4 % Total non-current liabilities $ 1,261.9 $ 1,465.0 $ (203.1 ) (13.9 )% Company’sCompany's contributions of approximately $96$210 million to its global defined benefit pension plansplans. The increase in other non-current liabilities was primarily due to a $21 million increase in the Company's accrual for uncertain tax positions related to the receipt of CDSOA disbursements received during the firstsecond quarter of 2012. March 31,
2012 December 31,
2011 $ Change % Change $ 937.1 $ 942.3 $ (5.2 ) (0.6 )% 2,137.9 2,004.7 133.2 6.6 % (853.2 ) (889.5 ) 36.3 4.1 % (38.0 ) (29.2 ) (8.8 ) (30.1 )% 14.4 14.2 0.2 1.4 % $ 2,198.2 $ 2,042.5 $ 155.7 7.6 % $ Change % Change Common stock $ 937.3 $ 942.3 $ (5.0 ) (0.5 )% Earnings invested in the business 2,299.1 2,004.7 294.4 14.7 % Accumulated other comprehensive loss (882.5 ) (889.5 ) 7.0 (0.8 )% Treasury shares (52.9 ) (29.2 ) (23.7 ) 81.2 % Noncontrolling interest 14.2 14.2 — — % Total shareholders’ equity $ 2,315.2 $ 2,042.5 $ 272.7 13.4 % quartersix months of 2012 by net income of $155.7$339.3 million, partially offset by dividends declared of $22.5$44.9 million. The decrease in accumulated other comprehensive loss was primarily due to a $23.4 million increase in foreign currency translation and a $12.3$22.0 million after-tax pension and postretirement adjustment as a result of the amortization of actuarial losses and prior-year service costs for defined benefit pension and postretirement plans. TheThis decrease was partially offset by the effect of foreign currency translation adjustments wereof $16.0 million due to the weakeningstrengthening of the U.S. dollar relative to other currencies, such as the Euro, the British pound,Romanian lei, the Canadian dollarIndian Rupee and the Polish zloty. See “Foreign Currency”Brazilian Real. Refer to Other Matters - Foreign Currency for further discussion regarding the impact of foreign currency translation. The increase in treasury shares was primarily due to the Company’sCompany's purchase of 500,000one million of its common shares for an aggregate of $26.2$51.7 million, partially offset by shares issued for stock compensation plans.26Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)Flows:Flows For the Three Months Ended
March 31, 2012 2011 $ Change $ (38.7 ) $ (197.6 ) $ 158.9 (29.2 ) (32.2 ) 3.0 (47.5 ) (23.9 ) (23.6 ) 5.9 14.2 (8.3 ) $ (109.5 ) $ (239.5 ) $ 130.0 2012 2011 $ Change Net cash used by operating activities $ 236.4 $ (162.9 ) $ 399.3 Net cash used by investing activities (93.3 ) (61.0 ) (32.3 ) Net cash used by financing activities (93.8 ) (41.9 ) (51.9 ) Effect of exchange rate changes on cash (4.2 ) 21.5 (25.7 ) Decrease in cash and cash equivalents $ 45.1 $ (244.3 ) $ 289.4 usedprovided cash of $38.7$236.4 million in the first quartersix months of 2012, after using cash of $197.6$162.9 million in the first quartersix months of 2011. The change in cash from operating activities was primarily due to lower pension contributions and other postretirement benefit payments, lowerless cash used for working capital items, particularly accounts receivable and inventories, lower pension contributions and other postretirement benefit payments, and higher net income.income, including pretax CDSOA receipts of approximately $110 million. Pension contributions and other postretirement benefit payments were $104.7$225.9 million in the first quartersix months of 2012, compared to $166.0$331.8 million in the first quartersix months of 2011. Net income attributable to The Timken Company increased $43.0$105.1 million in the first quartersix months of 2012 compared to the first quartersix months of 2011.quarterssix months of 2012 and 2011, respectively: For the Three Months Ended
March 31, 2012 2011 $ (112.0 ) $ (149.6 ) (21.4 ) (80.4 ) 22.1 54.8 (103.4 ) (81.3 ) The net 2012 2011 Cash Provided (Used): Accounts receivable $ (74.5 ) $ (191.7 ) Inventories 15.1 (86.6 ) Trade accounts payable (2.1 ) 46.9 Other accrued expenses (77.2 ) (38.8 ) $29.2$93.3 million in the first quartersix months of 2012 decreased slightlyincreased from the same period in 2011 primarily due to a $30.8$55.7 million increase in capital expenditures, partially offset by a $31.5 million decrease in investments in short-term marketable securities, partially offset by a $25.9 million increase in capital expenditures.securities. Short-term marketable securities provided cash of $17.5$18.2 million in the first quartersix months of 2012 after using cash of $13.3 million in the first quartersix months of 2011. The Company expects to increase capital expenditures by approximately $130$110 million in 2012 compared to the 2011 level.flows fromused by financing activities used cash of $47.5was $93.8 million in the first quartersix months of 2012, after using cash of $23.9$41.9 million in the first quartersix months of 2011. The increase in cash used by financing activities was primarily due to a $26.4 million increase in the Company's repurchases of its common shares, a reduction in net borrowings, net of restricted cash, of $18.4 million and a $7.8 million increase in cash dividends paid to shareholders in 2012 compared to 2011. The Company purchased one million of its common shares for an aggregate of $51.7 million in the first six months of 2012 after purchasing 500,000 of its common shares for an aggregate of $25.3 million in the first six months of 2011. The Company reduced its net borrowings by $11.4$17.0 million during the first quartersix months of 2012 after increasing its net borrowings net of restricted cash, by $3.5$1.4 million during the first quartersix months of 2011. In addition, the Company increased dividends paid to shareholders by $4.9 million in the first quarter of 2012 compared to the first quarter of 2011.27Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)Resources$504.6$494.2 million and $515.1 million at March 31,June 30, 2012 and December 31, 2011, respectively. At March 31,June 30, 2012, total debt of $504.6 million exceeded cash and cash equivalents and restricted cash of $358.9$509.9 million exceeded total debt of $494.2 million by $145.7$15.7 million. At December 31, 2011, total debt of $515.1million exceeded cash and cash equivalents and restricted cash of $468.4million by $46.7 million. TheCash in excess of debt as a percentage of total capital was 0.7% at June 30, 2012, and net debt to capital ratio was 6.2% and 2.2%, respectively, at March 31, 2012 and December 31, 2011. March 31, December 31, 2012 2011 $ 13.0 $ 22.0 12.8 14.3 478.8 478.8 504.6 515.1 (355.3 ) (464.8 ) (3.6 ) (3.6 ) $ 145.7 $ 46.7 Short-term debt $ 8.1 $ 22.0 Current portion of long-term debt 12.2 14.3 Long-term debt 473.9 478.8 Total debt 494.2 515.1 Less: Cash and cash equivalents (509.9 ) (464.8 ) Restricted cash — (3.6 ) Net debt $ (15.7 ) $ 46.7 March 31, December 31, 2012 2011 $ 145.7 $ 46.7 2,198.2 2,042.5 $ 2,343.9 $ 2,089.2 6.2 % 2.2 % Net debt $ (15.7 ) $ 46.7 Shareholders’ equity 2,315.2 2,042.5 Net debt + shareholders’ equity (capital) $ 2,299.5 $ 2,089.2 Ratio of net debt to capital (0.7 )% 2.2 % Company’sCompany's financial position than total debt due to the amount of cash and cash equivalents.March 31,June 30, 2012, the Company had no outstanding borrowings under its two-year AccountsAsset Receivable Securitization Financing Agreement (Asset Securitization Agreement), which provides for borrowings up to $150 million, subject to certain borrowing base limitations, and is secured by certain domestic trade receivables of the Company. The Company had full availability under the Asset Securitization Agreement as of March 31,at June 30, 2012.March 31,June 30, 2012, the Company had no outstanding borrowings under its Senior Credit Facility, but had letters of credit outstanding totaling $17.2 million, which reduced the availability under the Senior Credit Facility to $482.8million. The Senior Credit Facility matures on May 11, 2016. Under the Senior Credit Facility, the Company has two financial covenants: a consolidated leverage ratio and a consolidated interest coverage ratio. At March 31,June 30, 2012, the Company was in full compliance with the covenants under the Senior Credit Facility and its other debt agreements. The maximum consolidated leverage ratio permitted under the Senior Credit Facility is 3.25 to 1.0. As of March 31,June 30, 2012, the Company’sCompany's consolidated leverage ratio was 0.490.48 to 1.0. The minimum consolidated interest coverage ratio permitted under the Senior Credit Facility is 4.0 to 1.0. As of March 31,June 30, 2012, the Company’sCompany's consolidated interest coverage ratio was 31.2331.38 to 1.0.Company’sCompany's consolidated leverage ratio. In addition, the Company pays a facility fee based on the consolidated leverage ratio multiplied by the aggregate commitments of all of the lenders under this agreement.Company’sCompany's foreign subsidiaries, which provide for borrowings up to $274.0$257.9 million. The majority of these lines are uncommitted. At March 31,June 30, 2012, the Company had borrowings outstanding of $36.8$27.0 million and guarantees of $11.7$3.4 million, which reduced the availability under these facilities to $225.5$227.5 million.28Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)March 31,June 30, 2012, approximately $240.0$228.1 million, or 67.6%44.7%, of the Company’sCompany's cash and cash equivalents resided in jurisdictions outside the United States. Repatriation of these funds to the United States could be subject to government restrictions and domestic and foreign taxes. Part of the Company’sCompany's strategy is to grow in attractive market sectors, many of which are outside the United States. This may include making investments in facilities and equipment and potential new acquisitions. The Company plans to fund these investments, as well as meet working capital requirements, with cash and cash equivalents and unused lines of credit within the geographic location of these investments when possible.March 31,June 30, 2012, the Company could have borrowed the full amounts available under the Senior Credit Facility and Asset Securitization Agreement, and would have still been in compliance with its debt covenants.167%157% over 2011 as the Company anticipates higher net income, including CDSOA receipts, as well as lower working capital increasesrequirements and a decrease in pension and postretirement contributions. The Company expects to make approximately $375 million in pension and postretirement contributions in 2012, compared to $416 million in 2011. The Company also expects to increase capital expenditures to $335$315 million in 2012 compared to $205 million in 2011, primarily due to the Company’sCompany's investment at its Faircrest steel plant in Canton, Ohio.Commitmentsthreesix months of 2012, the Company made contributions of approximately $96$210 million to its global defined benefit pension plans, of which $93.8$203.8 million was discretionary. The Company currently expects to make contributions to its global defined benefit pension plans in 2012 totaling approximately $275 million, of which $255 million is discretionary. The Company also currently expects to make contributions to a Voluntary Employee Beneficiary Association (VEBA) trust to fund retiree healthcare costs totaling $100 million. The Company may consider making additional discretionary contributions to either its defined benefit pension plans or its postretirement benefit plans during 2012. Returns for the Company’sCompany's global defined benefit pension plan assets in 2011 were below the expected rate-of-return assumption of 8.5 percent due to broad decreases in global equity markets. These lower returns negatively impacted the funded status of the plans at the end of 2011 and are expected to result in higher pension expense and required pension contributions in future years. The impact of these unfavorable returns in 2011, as well as the impact of the lower discount rate for expense in 2012 compared to 2011 will increase pension expense to approximately $60 million, compared to $41 million in 2011. Returns for the Company’sCompany's U.S. defined benefit plan pension assets for the first threesix months of 2012 were approximately 7%6.5%.quartersix months of 2012, the Company purchased 500,000one million of its common shares for approximately $26.2 $51.7million in the aggregate under the Company’sCompany's 2012 common share purchase plan. This plan authorizes the Company to buy, in the open market or in privately negotiated transactions, up to ten million common shares, which are to be held as treasury shares and used for specified purposes. The authorization expires on December 31, 2015.Company’sCompany's financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The Company reviews its critical accounting policies throughout the year. The Company has concluded that there have been no changes to its critical accounting policies or estimates, as described in its Annual Report on Form 10-K for the year ended December 31, 2011, during the threesix months ended March 31,June 30, 2012.29Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Matters Currency: Brazilian Real. Act: second quarter of 2012. the Company. While the Company believes that current assumptions are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect the Company's pension and other postretirement employee benefit obligations and its future expense and cash flow. Shares Period 1/1/12 – 1/31/12 2/1/12 – 2/29/12 3/1/12 – 3/31/12 Total By: /s/ James W. Griffith By: /s/ Glenn A. Eisenberg and Administration (Principal Financial Officer)Matters:CurrencyStatementsStatement of Income.Company’sCompany's operating results for the three months ended March 31,second quarter of 2012 were $1.1$5.0 million, compared to a loss of $2.2$0.6 million during the threesecond quarter of 2011. Foreign currency exchange losses included in the Company's operating results for the six months ended March 31,June 30, 2012 were $6.1 million, compared to a loss of $2.7 million during the six months ended June 30, 2011. For the threesix months ended March 31,June 30, 2012, the Company recorded a positivenegative non-cash foreign currency translation adjustment of $23.4$16.0 million that increased shareholders’decreased shareholders' equity, compared to a positive non-cash foreign currency translation adjustment of $33.0$46.5 million that increased shareholders’shareholders' equity for the threesix months ended March 31,June 30, 2011. The foreign currency translation adjustmentadjustments for the threesix months ended March 31,June 30, 2012 was positivelywere negatively impacted by the weakeningstrengthening of the U.S. dollar relative to other currencies, such as the Euro, the British pound,Romanian lei, the Canadian dollarIndian Rupee and the Polish zloty.New Labor AgreementOn February 21, 2012, the Company reached a new labor agreement with the United Steelworkers (USW) Local 1123. The agreement covers four facilities in Canton, Ohio through September 2017 and replaces an agreement that would have expired in September 2013. In the first quarter of 2012, the Company recognized approximately $5.6 million of expense as a result of ratification of this agreement.Actand Border Protection (U.S. Customs) withheld a portion of the amounts that would otherwise have been distributed under CDSOA.CIT’sCIT's recommendation to continue to withhold CDSOA receipts related to 2006 through 2010 until January 2012.2012 and is expected to continue this process until distributions originally withheld from 2006 through 2010 have been completed. In April 2012, the2012. The Company received CDSOA distributions of $112.8$109.5 million, innet of expenses, during the aggregate for 2006 through 2010.30Management’s DiscussionAnalysisunfunded postretirement plans that provide health care and life insurance benefits for eligible retirees and their dependents. These plans are accounted for in accordance with accounting rules for defined benefit pension plans and postretirement plans.Financial Conditionliabilities related to these plans is based on management's assumptions related to future events, including discount rates, rates of return on pension plan assets, rates of compensation increases and Resultshealth care cost trend rates. Management regularly evaluates these assumptions and adjusts them as required and appropriate. Other plan assumptions are also reviewed on a regular basis to reflect recent experience and the Company's future expectations. Actual experience that differs from these assumptions may affect future liquidity, expense and the overall financial position of Operations (continued)Net actuarial losses at December 31, 2007 $ 500.1 Plus/minus actuarial gains and losses recognized: Net actuarial losses recognized in 2008 743.5 Net actuarial gains recognized in 2009 (90.7 ) Net actuarial gains recognized in 2010 (51.1 ) Net actuarial losses recognized in 2011 404.6 1,006.3 Minus amortization of net acturial losses: Amortization of net actuarial losses in 2008 (29.6 ) Amortization of net actuarial losses in 2009 (35.8 ) Amortization of net actuarial losses in 2010 (51.9 ) Amortization of net actuarial losses in 2011 (56.0 ) (173.3 ) Foreign Currency Impact (20.3 ) Net actuarial losses at December 31, 2011 $ 1,312.8 + / - Change at December 31, 2012 Change PBO Equity 2012 Expense Assumption: Discount rate +/- 0.25% $ 78.1 $ 78.1 $ 5.0 Actual return on plan assets +/- 0.25% N/A 5.8 0.2 Expected return on assets +/- 0.25% N/A N/A 6.0 + / - Change at December 31, 2012 Change ABO Equity 2012 Expense Assumption: Discount rate +/- 0.25% $ 12.5 $ 12.5 $ 0.5 Actual return on plan assets +/- 0.25% N/A 0.5 — Expected return on assets +/- 0.25% N/A N/A 0.5 Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2011 (including the Company’sCompany's forecasts, beliefs and expectations) that are not historical in nature are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, Management’sManagement's Discussion and Analysis contains numerous forward-looking statements. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Form 10-Q. The Company cautions readers that actual results may differ materially from those expressed or implied in forward-looking statements made by or on behalf of the Company due to a variety of factors, such as:Company’sCompany's products are sold or distributed;Company’sCompany's manufacturing processes; changes in costs associated with varying levels of operations and manufacturing capacity; availability of raw materials and energy; the Company’sCompany's ability to mitigate the impact of fluctuations in raw materials and energy costs and the operation of the Company’sCompany's surcharge mechanism; changes in the expected costs associated with product warranty claims; changes resulting from inventory management and cost reduction initiatives and different levels of customer demands; the effects of unplanned work stoppages; and changes in the cost of labor and benefits;Company’sCompany's operating plans;plans, announced programs, initiatives and capital investments; the ability to integrate acquired companies; the ability of acquired companies to achieve satisfactory operating results, including results being accretive to earnings; and the Company’sCompany's ability to maintain appropriate relations with unions that represent Company associates in certain locations in order to avoid disruptions of business;Company’sCompany's cost of funds and/or ability to raise capital; the Company’sCompany's pension obligations and investment performance; and/or customer demand and the ability of customers to obtain financing to purchase the Company’sCompany's products or equipment that contain the Company’sCompany's products;Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2011.Company’sCompany's business, the industries in which the Company operates or the Company’sCompany's common shares may be described from time to time in the Company’sCompany's filings with the Securities and Exchange Commission. All of these risk factors are difficult to predict, are subject to material uncertainties that may affect actual results and may be beyond the Company’sCompany's control.31Item 3.Quantitative and Qualitative Disclosures about Market Risk2011.2011. There have been no material changes in reported market risk since the inclusion of this discussion in the Company’s Annual Report on Form 10-K referenced above.Item 4.Controls and Procedures(a) Disclosure Controls and Procedures (b) Changes in Internal Control Over Financial Reporting 32Item 1.Legal ProceedingsItem 1A. Risk Factors 2011.2011.Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.Stockstockshares during the quarter ended March 31, 2012. Total number Maximum of shares number of purchased as shares that part of publicly may yet Total number Average announced be purchased of shares price paid plans or under the plans purchased(1) per share (2) programs or programs(3) 97,262 $ 48.84 — 2,000,000 197,417 52.23 — 10,000,000 501,840 52.39 500,000 9,500,000 796,519 $ 51.91 500,000 9,500,000 Period 4/1/12 – 4/30/12 12,831 $ 55.97 — 9,500,000 5/1/12 – 5/31/12 511,128 51.22 500,000 9,000,000 6/1/12 – 6/30/12 516 45.37 — 9,000,000 Total 524,475 $ 51.33 500,000 9,000,000 (1)The(1) 12,831 shares purchased in January, February and 1,840April, 11,128 of the shares purchased in MarchMay, and 516 shares purchased in June represent common shares of the Company's common stockCompany that are owned and tendered by employees to exercise stock options, and to satisfy withholding obligations in connection with the exercise of stock options and vesting of restricted shares.(2)(2) For shares tendered in connection with the vesting of restricted shares, the average price paid per share is an average calculated using the daily high and low of the Company's common stockshares as quoted on the New York Stock Exchange at the time of vesting. For shares tendered in connection with the exercise of stock options, the price paid is the real-time trading stock price at the time the options are exercised.(3)Pursuant to the Company’s 2006 common stock purchase plan, the Company was authorized to purchase up to four million shares of common stock at an amount not to exceed $180 million in the aggregate until December 31, 2012. (3) On February 10, 2012, the Board of Directors of the Company approved a new stockshare purchase plan pursuant to which the Company may purchase up to ten million shares of its common stockshares in the aggregate. This new stockshare purchase plan replacesreplaced the Company's 2006 common stockshare purchase plan and expires on December 31, 2015. The Company may purchase shares from time to time in open market purchases or privately negotiated transactions. The Company may make all or part of the purchases pursuant to accelerated share repurchases or Rule 10b5-1 plans.3310.1The Timken Company 2012 Performance-Based Restricted Stock Unit Agreement for key employees.10.2The Timken Company 2012 Time-Based Restricted Stock Unit Agreement for key employees.12 Computation of Ratio of Earnings to Fixed Charges. 31.1 Certification of James W. Griffith, President and Chief Executive Officer (principal executive officer) of The Timken Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Glenn A. Eisenberg, Executive Vice President – Finance and Administration (principal financial officer) of The Timken Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certifications of James W. Griffith, President and Chief Executive Officer (principal executive officer) and Glenn A. Eisenberg, Executive Vice President – Finance and Administration (principal financial officer) of The Timken Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101 Financial statements from the quarterly report on Form 10-Q of The Timken Company for the quarter ended March 31,June 30, 2012, filed on May 2,July 31, 2012, formatted in XBRL: (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.34 Date: May 2,July 31, 2012 and Director Date: May 2,July 31, 2012