PROcEss INDusTRIEs sEGMENT: aEROsPacE aND DEFENsE sEGMENT: MANAgEMENT’s dIsCussION ANd ANAlYsIs OF FINANCIAl CONdITION ANd rEsulTs OF OPErATIONs  23 THE TIMKEN COMPANY The Process Industries segment’s net sales, excluding the effect of acquisitions and currency-rate changes, increased 23.8% for 2011  compared to 2010, primarily due to higher volume of approximately $190 million and pricing and sales mix of approximately $25 million.  The higher sales primarily resulted from a 25% increase to industrial distributors. In addition, the higher sales resulted from a 15%  increase to original equipment manufacturers, primarily driven by an approximately 30% increase in gear drives and an approximately  25% increase in global energy. EBIT was higher in 2011 compared to 2010 due to the impact of increased volume of approximately $100  million and higher pricing and favorable sales mix of $40 million, partially offset by higher raw material costs of $15 million. EBIT for the  Process Industries segments also benefited from acquisitions in 2011. Sales for the Process Industries segment are expected to increase by 8% to 13% in 2012 compared to 2011. The increase in sales  reflects continued strengthening in global industrial distribution, growth in Asia and sales from new product lines, as well as the full-year  impact of 2011 acquisitions and pricing. Sales for the Process Industries segment, excluding the effect of acquisitions and currency-rate  changes, are expected to increase by approximately 5% to 10% in 2012 compared to 2011. EBIT for the Process Industries segment  is expected to be flat in 2012 compared to 2011 as a result of pricing and higher volumes, partially offset by higher raw material costs. The Aerospace and Defense segment’s net sales, excluding the effect of currency-rate changes, decreased 4.8% for 2011 compared  to 2010. The decline was due to a decrease in volume of approximately $20 million, partially offset by favorable pricing. The decrease  in volume was driven by reduced volume of defense-related products, partially offset by increased volume from commercial aerospace  customers. EBIT decreased 54.5% in 2011 compared to 2010, primarily due to the impact of lower volume of approximately $8 million,  a product warranty charge of approximately $5 million and an inventory write-down of approximately $3 million, partially offset by  favorable pricing and reduced selling, general and administrative costs totaling approximately $7 million. Sales for the Aerospace and Defense segment are expected to increase by approximately 10% to 15% in 2012 compared to 2011, as a  result of anticipated strengthening in the defense and commercial aerospace sectors. EBIT for the Aerospace and Defense segment is  expected to be up significantly in 2012 compared to 2011 as a result of higher volumes and better manufacturing efficiency. 2011 2010 $ Change  Change  Net sales, including intersegment sales  $ 1,244.6  $ 903.4 $ 341.2 37.8%  EBIT $ 281.6 $ 133.6 $ 148.0 110.8%  EBIT margin  22.6% 14.8% – 780 bps 2011 2010 $ Change  % Change  Net sales, including intersegment sales  $ 1,244.6 $ 903.4 $ 341.2 37.8%  Acquisitions  103.8  –  103.8  NM Currency  22.2   –  22.2  NM Net sales, excluding the impact of acquisitions  and currency  $ 1,118.6 $ 903.4 $ 215.2 23.8%  2011 2010 $ Change  Change  Net sales, including intersegment sales  $ 324.1 $ 338.3 $ (14.2) (4.2)% EBIT $ 7.6 $ 16.7 $ (9.1) (54.5)% EBIT margin  2.3% 4.9%  –  (260) bps 2011 2010 $ Change  % Change  Net sales, including intersegment sales  $ 324.1 $ 338.3 $ (14.2) (4.2)% Currency  2.2  –  2.2  NM Net sales, excluding the impact of currency  $ 321.9 $ 338.3 $ (16.4) (4.8)%