UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1169
THE HOURLY PENSION INVESTMENT PLAN
(Full title of the Plan)
THE TIMKEN COMPANY, 1835 Dueber Avenue, S.W., Canton, Ohio 44706
(Name of issuer of the securities held pursuant to the Plan
and the address of its principal executive office)
The Hourly Pension Investment Plan
Audited Financial Statements and Supplemental Schedule
December 31, 2009 and 2008, and
Year Ended December 31, 2009
Contents
| 1 | ||
| Audited Financial Statements |
||
| 2 | ||
| 3 | ||
| 4 | ||
| Supplemental Schedule |
||
| Schedule H, Line 4i – Schedule of Assets (Held at End of Year) |
15 | |
| Exhibit 23 – Consent of Independent Registered Public Accounting Firm |
||
Report of Independent Registered Public Accounting Firm
The Timken Company, Administrator of
The Hourly Pension Investment Plan
We have audited the accompanying statements of net assets available for benefits of The Hourly Pension Investment Plan as of December 31, 2009 and 2008, and the related statement of changes in net assets available for benefits for the year ended December 31, 2009. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Plan’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Plan’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan at December 31, 2009 and 2008, and the changes in its net assets available for benefits for the year ended December 31, 2009, in conformity with US generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the financial statements taken as a whole. The accompanying supplemental schedule of assets (held at end of year) as of December 31, 2009 is presented for purposes of additional analysis and is not a required part of the financial statements but is supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This supplemental schedule is the responsibility of the Plan’s management. The supplemental schedule has been subjected to the auditing procedures applied in our audits of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole.
/s/ Ernst & Young LLP
Cleveland, Ohio
June 25, 2010
1
The Hourly Pension Investment Plan
Statements of Net Assets Available for Benefits
| December 31, | ||||||
| 2009 | 2008 | |||||
| Assets |
||||||
| Investments, at fair value: |
||||||
| Interest in The Master Trust Agreement for The Timken Company Defined Contribution Plans |
$ | 101,403,185 | $ | 84,871,267 | ||
| Participant notes receivable |
8,071,373 | 8,434,795 | ||||
| Total investments, at fair value |
109,474,558 | 93,306,062 | ||||
| Receivables: |
||||||
| Contribution receivable from participants |
103,111 | 146,144 | ||||
| Contribution receivable from The Timken Company |
327,358 | 335,972 | ||||
| Total receivables |
430,469 | 482,116 | ||||
| Net assets available for benefits, at fair value |
109,905,027 | 93,788,178 | ||||
| Adjustment from fair value to contract value for interest in The Master Trust Agreement for The Timken Company Defined Contribution Plans relating to fully benefit-responsive investment contracts |
789,298 | 1,602,026 | ||||
| Net assets available for benefits |
$ | 110,694,325 | $ | 95,390,204 | ||
See accompanying notes.
2
The Hourly Pension Investment Plan
Statement of Changes in Net Assets Available for Benefits
Year Ended December 31, 2009
| Additions |
|||
| Investment income: |
|||
| Net investment gain from The Master Trust Agreement for The Timken Company Defined Contribution Plans |
$ | 18,247,203 | |
| Interest |
564,575 | ||
| 18,811,778 | |||
| Participant rollovers |
— | ||
| Contributions: |
|||
| Participants |
3,122,312 | ||
| The Timken Company |
2,085,496 | ||
| 5,207,808 | |||
| Total additions |
24,019,586 | ||
| Deductions |
|||
| Benefits paid directly to participants |
8,627,003 | ||
| Administrative expenses |
88,462 | ||
| Total deductions |
8,715,465 | ||
| Net increase |
15,304,121 | ||
| Net assets available for benefits: |
|||
| Beginning of year |
95,390,204 | ||
| End of year |
$ | 110,694,325 | |
See accompanying notes.
3
The Hourly Pension Investment Plan
Notes to Financial Statements
December 31, 2009 and 2008, and
Year Ended December 31, 2009
1. Description of the Plan
The following description of The Hourly Pension Investment Plan (the Plan) provides only general information. Participants should refer to their Total Rewards handbook (Summary Plan Description) for a more complete description of the Plan’s provisions. Copies of the handbook are available from The Timken Company (Timken, the Company, and Plan Administrator).
General
The Plan is a defined contribution plan covering nonbargaining hourly employees of the Company’s manufacturing facilities located in Canton, Ohio; Bucyrus, Ohio; Lincolnton, North Carolina; and Gaffney, South Carolina. Employees of the Company become eligible to participate in the Plan the first of the month following or coincident with the completion of one full calendar month of full-time service. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA).
Contributions
Under the provisions of the Plan, participants may elect to contribute up to 20% of their gross earnings directly to the Plan subject to Internal Revenue Service (IRS) limitations. Participants may also roll over amounts representing distributions from other qualified defined benefit or defined contribution plans. The Company matches employee contributions, “Matching Contributions,” at an amount equal to 100% of the first 3% of participant’s gross earnings and 50% of the excess of 3% up to the next 3% of the participant’s gross earnings.
The Plan provides for a quarterly “Core Contribution” by the Company for employees who did not have five years of Credited Service or 50 points (in Credited Service and age) as of December 31, 2003. This contribution is based on the participant’s full years of service and age as of December 31 of the previous calendar year. Core Contribution amounts range from 1.0% to 4.5%.
4
The Hourly Pension Investment Plan
Notes to Financial Statements (continued)
1. Description of the Plan (continued)
Upon enrollment, a participant must direct the percentage of his or her contribution to be invested in each fund in increments of 1%. If a participant fails to make a deferral election, he/she will be automatically enrolled in the Plan at a 3% deferral rate. If the participant makes no further changes to his/her deferral rate, then each year following the year in which the participant was automatically enrolled in the Plan the participant’s deferral rate will be increased by 1% until a deferral rate of 6% has been attained. All Matching Contributions are made in Timken common shares. Participants are not allowed to direct the investment of the Matching Contributions made in Timken common shares until (i) attaining age 55, (ii) the third anniversary of the date on which such participant is hired, (iii) the date such participant obtains 3 years of Continuous Service, or (iv) following retirement. Core Contributions are invested based on the participant’s investment election. If a participant fails to make investment elections, his/her deferrals will default to an appropriate Vanguard Target Retirement Fund, based on the participant’s age. Participants have access to their account information and the ability to make account transfers and contribution changes daily through an automated telecommunications system and through the Internet.
Participants may elect to have their dividends in The Timken Company Common Stock Fund distributed to them in cash rather than automatically reinvested in Timken common shares.
Due to the effect of the global recession in 2009, the Company suspended Matching Contributions for all associates effective with pay dates occurring on and after September 1, 2009 through December 31, 2009. Matching Contributions were reinstated commencing with pay dates on and after January 1, 2010. Associates were able to make employee contributions during the period in which Matching Contribution were suspended.
The suspension of the Company matching contributions meant that the Plan was no longer considered to be a Safe Harbor plan for 2009. Consequently, Timken was required by law to conduct non-discrimination testing, and the Plan was required to return some of the highly compensated associates’ pre-tax contributions and limit some of their matching contributions.
Participant Accounts
Each participant’s account is credited with the participant’s contributions and allocations of (a) the Company’s contributions and (b) plan earnings, and is charged administrative expenses, as appropriate. Allocations are based on participant earnings or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.
5
The Hourly Pension Investment Plan
Notes to Financial Statements (continued)
1. Description of the Plan (continued)
Vesting
Participants are immediately vested in their contributions and Matching Contributions plus actual earnings thereon. Participants vest in the Core Contributions after the completion of three years of service.
Participant Notes Receivable
Participants may borrow from their accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of their account balance. Loan terms generally cannot exceed five years for general purpose loans and 30 years for residential loans. The loans are secured by the balance in the participant’s account and bear interest at an interest rate of 1% in excess of the prime rate, as published the first business day of each month in the Wall Street Journal. Principal and interest are paid ratably through payroll deductions. For the years ended December 31, 2009 and 2008, participant notes receivables represent 5% or more of the Plan’s net assets available for benefits.
Payment of Benefits
On termination of service, a participant may receive a lump-sum amount equal to the vested balance of their account, or elect to receive installment payments over a period of time not to exceed their life expectancy. If a participant’s vested balance is greater than $1,000, they may leave their assets in the Plan until age 70 1/2.
Transfers Between Plans
Certain participants who change job positions within the Company and, as a result, are covered under a different defined contribution plan offered by the Company may be eligible to transfer their account balance between plans.
Plan Termination
Although it has not expressed any interest to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, the trustee shall distribute to each participant the balance in their separate account.
6
The Hourly Pension Investment Plan
Notes to Financial Statements (continued)
2. Accounting Policies
Basis of Accounting
The financial statements have been prepared on the accrual basis of accounting.
Investment Valuation and Income Recognition
The Plan’s investments are stated at fair value and are invested in The Master Trust Agreement for the Company defined contribution plans (Master Trust), which was established for the investment of assets of the Plan and the seven other defined contribution plans sponsored by the Company. The fair value of the Plan’s interest in the Master Trust is based on the value of the Plan’s interest in the fund plus actual contributions and allocated investment income (loss) less actual distributions.
The Plan’s trustee, JP Morgan (Trustee) maintains a collective investment trust of Timken common shares in which the Company’s defined contribution plans participate on a unit basis. Timken common shares are traded on a national securities exchange and participation units in The Timken Company Common Stock Fund are valued at the last reported sales price on the last business day of the plan year. The valuation per unit of The Timken Company Common Stock Fund was $12.99 and $10.85 at December 31, 2009 and 2008, respectively.
Investments in registered investment companies, common collective funds and investment contracts are valued at the redemption value of units held at year-end. Participant loans are valued at cost, which approximates fair value.
Purchases and sales of securities are recorded on a trade-date basis. Dividends are recorded on the ex-dividend date.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
7
The Hourly Pension Investment Plan
Notes to Financial Statements (continued)
3. Investments
The Trustee holds all the Plan’s investment assets and executes investment transactions. All investment assets of the Plan, except for participant loans, are pooled for investment purposes in the Master Trust.
The following table presents a summary of the investments of the Master Trust as of December 31:
| 2009 | 2008 | |||||
| Investments, at fair value: |
||||||
| The Timken Company Common Stock Fund |
$ | 241,078,465 | $ | 225,514,383 | ||
| Registered investment companies |
297,278,461 | 221,647,760 | ||||
| Common collective funds |
235,129,337 | 182,763,527 | ||||
| 773,486,263 | 629,925,670 | |||||
| Investment contracts, at fair value |
154,903,737 | 156,437,336 | ||||
| Adjustments from fair value to contract value |
9,702,374 | 20,458,669 | ||||
| Investment contracts, at contract value |
164,606,111 | 176,896,005 | ||||
| $ | 938,092,374 | $ | 806,821,675 | |||
At December 31, 2009, The Timken Company Common Stock Fund consisted of 18,565,348 units of The Timken Company’s common stock. The Plan’s interest in the Master Trust as of December 31, 2009 and 2008 was 10.89% and 10.72% respectively.
8
The Hourly Pension Investment Plan
Notes to Financial Statements (continued)
3. Investments (continued)
Investment income (loss) relating to the Master Trust is allocated to the individual plans based upon the average balance invested by each plan in each of the individual funds of the Master Trust. Investment income (loss) for the Master Trust is as follows:
| Year Ended December 31, | |||||||
| 2009 | 2008 | ||||||
| Net appreciation (depreciation) in fair value of investments determined by quoted market price: |
|||||||
| The Timken Company Common Stock Fund |
$ | 51,426,725 | $ | (120,044,417 | ) | ||
| Registered investment companies |
62,675,842 | (128,819,219 | ) | ||||
| Common collective funds |
39,342,564 | (73,116,499 | ) | ||||
| 153,445,131 | (321,980,135 | ) | |||||
| Net appreciation in investment contracts |
3,265,586 | 3,154,296 | |||||
| Interest and dividends |
10,441,107 | 15,478,607 | |||||
| Total Master Trust |
$ | 167,151,824 | $ | (303,347,232 | ) | ||
4. Fair Value
The following table presents the fair value hierarchy for those investments of the Master Trust measured at fair value on a recurring basis as of December 31, 2009:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB provides accounting rules that classify the inputs used to measure fair value into the following hierarchy:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3 – Unobservable inputs for the asset or liability.
9
The Hourly Pension Investment Plan
Notes to Financial Statements (continued)
4. Fair Value (continued)
| Total | Level 1 | Level 2 | Level 3 | |||||||||
| Assets: |
||||||||||||
| The Timken Company Common Stock Fund |
$ | 241,078,465 | $ | — | $ | 241,078,465 | $ | — | ||||
| Registered investment companies |
297,278,461 | 297,278,461 | — | — | ||||||||
| S&P 500 Index |
139,647,844 | — | 139,647,844 | — | ||||||||
| Core Bond |
66,002,400 | — | 66,002,400 | — | ||||||||
| Russell 2000-A Index |
29,479,093 | — | 29,479,093 | — | ||||||||
| Investment Contracts |
164,606,111 | — | 164,606,111 | — | ||||||||
| Total assets |
$ | 938,092,374 | $ | 297,278,461 | $ | 640,813,913 | $ | — | ||||
The Timken Company Stock Fund participates in units and is valued based on the closing price of Timken Common Shares traded on a national securities exchange. Registered investment companies are valued based on quoted market prices reported on the active market on which the individual securities are traded.
The S&P 500 Index fund includes investments that provide exposure to a broad equity market and is designed to mirror the aggregate price and dividend performance of the S&P 500 Index. The fair values of the investments in this category have been determined using the net asset value per share.
The Core Bond fund includes investments that seek to maximize total return by investing primarily in a diversified portfolio of intermediate- and long-term debt securities. The fair value of the investments in this category has been determined using the net asset value per share.
The Russell 2000-A Index fund includes investments seeking an investment return that approximates as closely as practicable, before expenses, the performance of the Russell 2000 Index over the long term. The Fund includes exposure to stocks of small U.S. companies. The fair value of the investments in this category has been determined using the net asset value per share.
Investment Contracts include a common collective trust fund that is designed to deliver safety and stability by preserving principal and accumulating earnings. This fund is primarily invested in guaranteed investment contracts and synthetic investment contracts. See Note 6 - Investment Contracts for further discussion on investment contracts.
10
The Hourly Pension Investment Plan
Notes to Financial Statements (continued)
4. Fair Value (continued)
The following table presents the fair value hierarchy for those investments of the Plan measured at fair value on a recurring basis as of December 31, 2009:
| Total | Level 1 | Level 2 | Level 3 | |||||||||
| Assets: |
||||||||||||
| Participant notes receivable |
$ | 8,071,373 | $ | — | $ | — | $ | 8,071,373 | ||||
| Total assets |
$ | 8,071,373 | $ | — | $ | — | $ | 8,071,373 | ||||
Participant notes receivable are valued at amortized cost, which approximates fair value.
The table below sets forth a summary of changes in the fair value of the Plan’s level 3 assets for the year ended December 31, 2009:
| Participant notes receivable: |
||||
| Balance, beginning of year |
$ | 8,434,795 | ||
| Issuances and settlements, net |
(363,422 | ) | ||
| Balance, end of year |
$ | 8,071,373 | ||
5. Non-Participant-Directed Investments
Information about the net assets and the significant components of changes in net assets related to non-participant-directed investments is as follows:
| December 31, | ||||||
| 2009 | 2008 | |||||
| Investments, at fair value: |
||||||
| Interest in Master Trust related to The Timken Company Common Stock Fund |
$ | 39,516,903 | $ | 36,136,951 | ||
| Receivables: |
||||||
| Contributions receivable |
129,723 | 137,498 | ||||
| $ | 39,646,626 | $ | 36,274,449 | |||
11
The Hourly Pension Investment Plan
Notes to Financial Statements (continued)
5. Non-Participant-Direct Investments (continued)
| Year Ended December 31, 2009 |
||||
| Change in net assets: |
||||
| Net appreciation in fair value of investments |
$ | 7,786,036 | ||
| Dividends |
822,348 | |||
| Contributions |
2,055,631 | |||
| Benefits paid directly to participants |
(2,284,567 | ) | ||
| Expenses |
(38,420 | ) | ||
| Transfers to participant-directed accounts |
(4,968,851 | ) | ||
| $ | 3,372,177 | |||
6. Investment Contracts
The Master Trust invests in synthetic guaranteed investment contracts (GICs), or a Stable Value Fund, that credit a stated interest rate for a specified period of time. The Stable Value Fund provides principal preservation plus accrued interest through fully benefit-responsive wrap contracts issued by a third party which back the underlying assets owned by the Master Trust. The account is credited with earnings on the underlying investments and charged for participant withdrawals and administrative expenses. The investment contract issuer is contractually obligated to repay the principal at a specified interest rate that is guaranteed to the Plan.
Investment contracts held by a defined contribution plan are required to be reported at fair value. However, contract value is the relevant measurement attribute for that portion of the net assets available for benefits attributable to the fully benefit-responsive investment contracts. Contract value represents contributions made under the contracts, plus earnings, less participant withdrawals and administrative expenses. Participants may ordinarily direct the withdrawal or transfer of all or a portion of their investment at contract value.
12
The Hourly Pension Investment Plan
Notes to Financial Statements (continued)
6. Investment Contracts (continued)
There are no reserves against contract value for credit risk of the contract issuer or otherwise. The crediting interest rates for the wrap contracts are calculated on a quarterly basis (or more frequently if necessary) using contract value, market value of the underlying fixed income portfolio, the yield of the portfolio, and the duration of the index, but cannot be less than zero.
| December 31, | ||||||
| Average Yields for Synthetic GICS |
2009 | 2008 | ||||
| Based on actual earnings |
4.2 | % | 6.5 | % | ||
| Based on interest rate credited to participants |
2.2 | % | 3.2 | % | ||
The following is a reconciliation of net assets available for benefits per the financial statements to the Form 5500:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| Net assets available for benefits per the financial statements |
$ | 110,694,325 | $ | 95,390,204 | ||||
| Adjustment from contract value to fair value for fully benefit-responsive investment contracts |
(789,298 | ) | (1,602,026 | ) | ||||
| Net assets available for benefits per the Form 5500 |
$ | 109,905,027 | $ | 93,788,178 | ||||
The fully benefit-responsive investment contracts have been adjusted from fair value to contract value for purposes of the financial statements. For purposes of the Form 5500, the investment contracts will be stated at fair value.
7. Risks and Uncertainties
The Master Trust invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statement of net assets available for benefits.
13
The Hourly Pension Investment Plan
Notes to Financial Statements (continued)
8. Income Tax Status
The Plan has received a determination letter from the IRS dated April 3, 2003, stating that the Plan is qualified under Section 401(a) of the Internal Revenue Code (the Code), and therefore, the related trust is exempt from taxation. Subsequent to this determination by the Internal Revenue Service, the Plan was amended. Once qualified, the Plan is required to operate in conformity with the Code to maintain its qualification. The Plan Administrator believes that the Plan, as amended, is qualified and the related trust is tax-exempt. The Plan Administrator will take steps to ensure that the Plan’s operations remain in compliance with the Code, including taking appropriate action, when necessary, to bring the Plan’s operations into compliance.
9. Related-Party Transactions
Related-party transactions included the investments in the common stock of the Company and the investment funds of the Trustee. Such transactions are exempt from being prohibited transactions.
The following is a summary of transactions in Timken common shares with the Master Trust for the year ended December 31, 2009:
| Shares | Dollars | ||||
| Purchased |
2,951,208 | $ | 26,519,232 | ||
| Issued to participants for payment of benefits |
260,128 | 463,880 | |||
Benefits paid to participants include payments made in Timken common shares valued at quoted market prices at the date of distribution.
Certain legal and accounting fees and certain administrative expenses relating to the maintenance of participant records are paid by the Company. Fees paid during the year for services rendered by parties in interest were based on customary and reasonable rates for such services.
14
Supplemental Schedule
The Hourly Pension Investment Plan
EIN #34-0577130 Plan #016
Schedule H, Line 4i – Schedule of Assets
(Held at End of Year)
Year Ended December 31, 2009
| Identity of Issuer, Borrower, Lessor, or Similar Party |
Description of Investment, Including Maturity Date, Rate of Interest, Collateral, Par, or Maturity Value |
Current Value | |||
| Participant notes receivable* | Interest rates ranging from 4.25% to 11.0% with various maturity dates |
$ | 8,071,373 | ||
| * | Indicates party in interest to the Plan. |
15
SIGNATURES
The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other person who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized.
| THE HOURLY PENSION INVESTMENT PLAN | ||||||
| Date: June 25, 2010 | By: | /s/ Scott A. Scherff | ||||
| Scott A. Scherff | ||||||
| Assistant Secretary | ||||||