NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Corporate Organization and Summary of Significant Accounting Policies
Lufkin Industries, Inc. and its consolidated subsidiaries (collectively, the “Company”) manufacture and sell oilfield pumping units and power transmission products throughout the world. The impact of subsequent events on these financial statements has been evaluated through the date of issuance.
Basis of presentation
: Certain amounts in the Balance Sheet and the Property, Plant and Equipment footnote for the prior period have been reclassified to conform to the current presentation. All pension and property classifications for the prior period have been reclassified to reflect these changes.
Principles of consolidation:
The consolidated financial statements include the accounts of Lufkin Industries, Inc. and its wholly-owned subsidiaries after elimination of all inter-company accounts and transactions.
Use of estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Foreign currencies:
Assets and liabilities of foreign operations where the applicable foreign currency is the functional currency are translated into U.S. dollars at the exchange rate in effect at the end of each accounting period, with any resulting translation adjustment reflected in accumulated other comprehensive income (loss) within shareholders’ equity section. Income statement accounts are translated at the average exchange rates prevailing during the period. Gains and losses resulting from balance sheet remeasurement of foreign operations where the U.S. dollar is the functional currency are included in the consolidated statement of earnings as incurred.
Any gains or losses on transactions denominated in a foreign currency are included in the consolidated statements of earnings as incurred.
Cash equivalents:
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
Revenue recognition:
Revenue is not recognized until it is realized or realizable and earned. The criteria to meet this guideline are: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable and collectability is reasonably assured. The Company will process a bill-and-hold invoice and recognize revenue at the time of the storage request if all of the following criteria are met:
|
|
●
|
the customer has accepted title and risk of loss;
|
|
|
●
|
the customer has provided a written purchase order for the product;
|
|
|
●
|
the customer, not the Company, requested the product to be stored and to be invoiced under a bill-and-hold arrangement.
|
|
|
●
|
the customer provides the business purpose for the storage request;
|
|
|
●
|
the customer must provide a storage period and future shipping date;
|
|
|
●
|
the Company must not have retained any future performance obligations on the product;
|
|
|
●
|
the Company must segregate the stored product and not make it available to use on other orders; and
|
|
|
●
|
the product must be completed and ready for shipment.
|
The Company had 1.73%, 3.23%, and 3.14% of revenues in bill-and-hold transactions outstanding as of December 31, 2012, 2011, and 2010, respectively.
Amounts billed for shipping are classified as sales and costs incurred for shipping are classified as cost of sales in the consolidated statements of earnings.
Accounts and Notes Receivable and Allowance for Doubtful Accounts:
Accounts and notes receivable are stated at cost net of write-offs and allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on historical experience and any specific customer issues that the Company has identified. Uncollected receivables are generally reserved before being past due over one year or when the Company has determined that the balance will not be collected.
Inventories:
The Company reports its inventories by using the last-in, first-out (LIFO) and the first-in, first-out (FIFO) methods less reserves necessary to report inventories at the lower of cost or estimated market. Inventory costs include material, labor and factory overhead. On a routine basis, the Company uses estimates in determining the level of reserves required to state inventory at the lower of cost or market. Management’s estimates are primarily influenced by market activity levels, production requirements, the physical condition of products and technological innovation. Changes in any of these factors may result in adjustments to the carrying value of inventory.
Property, plant and equipment (P. P. & E.):
The Company records investments in these assets at cost. Improvements are capitalized, while repair and maintenance costs are charged to operations as incurred. Gains or losses realized on the sale or retirement of these assets are reflected in income. The Company reviews its P. P. & E. for possible impairment whenever events or changes in circumstance might indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Depreciation for financial reporting purposes is provided on a straight-line method based upon the estimated useful lives of the assets. The following is a summary of the Company’s P. P. & E. useful lives:
|
|
Useful Life
|
|
|
(in years)
|
|
|
|
|
|
|
Land
|
|
-
|
|
|
Land improvements
|
10.0
|
-
|
25.0
|
|
Buildings
|
12.5
|
-
|
40.0
|
|
Machinery and equipment
|
3.0
|
-
|
15.0
|
|
Furniture and fixtures
|
5.0
|
-
|
12.5
|
|
Computer equipment and software
|
3.0
|
-
|
7.0
|
Goodwill and other intangible assets:
Goodwill and intangible assets with indefinite lives are not amortized and are tested for impairment at least annually. During the fourth quarter of 2012, the Company completed its annual impairment evaluation by comparing the fair value of each reporting unit to its carrying amount. No impairment was necessary.
The Company amortizes intangible assets with finite lives over the years expected to be benefited.
Income taxes
: The Company computes taxes on income in accordance with the tax rules and regulations of the many taxing jurisdictions where the income is earned. The income tax rates imposed by these taxing authorities vary substantially. Taxable income may differ from pretax income for financial accounting purposes. To the extent that differences are due to revenue or expense items reported in one period for tax purposes and in another period for financial accounting purposes, an appropriate provision for deferred income taxes is made. Any effect of changes in income tax rates or tax laws is included in the provision for income taxes in the period of enactment. When it is more likely than not that all or a portion of a deferred tax asset will not be realized in the future, the Company provides a corresponding valuation allowance against deferred tax assets.
Appropriate U.S. and foreign income taxes have been provided for earnings of foreign subsidiary companies that are expected to be remitted in the near future. The cumulative amount of undistributed earnings of foreign subsidiaries that the Company intends to permanently reinvest and upon which no deferred U.S. income taxes have been provided is $115.5 million at December 31, 2012, the majority of which has been generated in Argentina, Canada and France. Upon distribution of these earnings in the form of dividends or otherwise, the Company may be subject to U.S. income taxes (subject to adjustment for foreign tax credits) and foreign withholding taxes, which amounts could be significant. It is not practical, however, to estimate the amount of taxes that may be payable on the eventual remittance of these earnings after consideration of available foreign tax credits.
The Company is required to determine if an income tax position meets the criteria of more-likely-than-not to be realized based on the merits of the position under tax laws, in order to recognize an income tax benefit. This requires the Company to make many assumptions and judgments regarding merits of income tax positions and the application of income tax law. Additionally, if a tax position meets the recognition criteria of more-likely-than-not the Company is required to make judgments and assumptions to measure the amount of the tax benefits to recognize based on the probability of the amount of tax benefits that would be realized if the tax position was challenged by the taxing authorities. Interpretations and guidance surrounding income tax laws and regulations change over time. As a consequence, changes in assumptions and judgments can materially affect amounts recognized in the consolidated financial statements.
Financial instruments:
The Company’s financial instruments include cash and cash equivalents, accounts receivable, debt obligations, and accounts payable. The book value of accounts receivable, short-term debt and accounts payable are considered to be representative of their fair value because of the short maturity of these instruments. As of December 31, 2012 and 2011, the Company had no derivative financial instruments.
Stock-based compensation:
Employee services received in exchange for stock are expensed. The fair value of the employee services received in exchange for stock-based awards is measured based on the grant-date fair value. The fair value is estimated using the Black-Scholes option-pricing model. Awards granted are expensed pro-ratably over the service period of the award. As stock based compensation expense is recognized based on awards ultimately expected to vest, compensation expense is reduced for estimated forfeitures based on historical forfeiture rates. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures.
The Company has also granted performance shares to members of senior management, at no cost to the recipient. Performance is based on shareholder return relative to a specific group of companies over a three-year performance cycle. Compensation expense is based on the fair value at grant date and the anticipated number of shares of the Company’s common stock, which is determined on a Monte Carlo probability model.
In addition to stock options and performance shares, officers, directors and key employees may be granted restricted stock awards (“RSA”), which is an award of common stock with no exercise price, or restricted stock units (“RSU”), where each unit represents the right to receive, at the end of a stipulated period, one unrestricted share of stock with no exercise price. RSAs and RSUs vest over a three year period and the fair value is based on the market price on the date of issuance.
Product warranties:
The Company sells certain of its products to customers with a product warranty that provides repairs at no cost to the customer or the issuance of credit to the customer. The length of the warranty term depends on the product being sold, but ranges from one year to five years. The Company accrues its estimated liability for warranty claims based upon historical warranty claim costs as a percentage of sales multiplied by prior sales still under warranty at the end of any period. Management reviews these estimates on a regular basis and adjusts the warranty provisions as actual experience differs from historical estimates or other information becomes available.
Recently issued accounting pronouncements:
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05,
Comprehensive Income (Topic 220): Presentation of Comprehensive Income –
(“ASU 2011-05”),
which changes the presentation of comprehensive income. The topic requires the Company to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted ASU 2011-05 on January 1, 2012 and has presented consolidated net earnings and consolidated comprehensive income in two separate, but consecutive, statements.
In December 2011, the FASB issued ASU 2011-12,
Comprehensive Income (Topic 220): 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 –
(“ASU 2011-12”),
which defers only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. The Company adopted ASU 2011-12 on January 1, 2012. The adoption of ASU 2011-12 did not have a material impact on the statement of other comprehensive income.
In September 2011, the FASB issued ASU 2011-08,
Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment –
(“ASU 2011-08”), which simplifies how entities test for goodwill impairment. The topic allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under ASU 2011-08, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. ASU 2011-08 includes a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The Company adopted this ASU for the 2012 goodwill impairment testing. The Company elected to continue to calculate the value of each reporting unit within its annual goodwill impairment testing. Therefore, the adoption of ASU 2011-08 did not have any impact on the Company’s consolidated financial statements.
Management believes the impact of other recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.
(2) Acquisitions
Pentagon
On September 1, 2011, the Company completed the acquisition of Pentagon Optimization Services, Inc. (“Pentagon”), an Alberta corporation based in Red Deer, Alberta, Canada. Pentagon, a diversified well optimization company serving the oil and gas industry, provides a wide range of products and services, including plunger lift systems and well engineering and testing. The addition of the proprietary “Angel” pump, which can pump both liquid and gas simultaneously without gas locking, will upgrade the Company’s product portfolio and provide a cost effective method to produce pressure-depleted gas wells.
The following table represents the final purchase price consideration and purchase price allocation (in thousands of dollars):
|
Cash paid at closing, net
|
|
$
|
18,982
|
|
|
Royalty consideration
|
|
|
2,381
|
|
|
|
|
|
|
|
|
Total consideration paid
|
|
$
|
21,363
|
|
|
|
|
|
|
|
|
Purchase price
|
|
$
|
21,363
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
1,763
|
|
|
Inventories
|
|
|
1,183
|
|
|
Other current assets
|
|
|
470
|
|
|
Property, plant and equipment
|
|
|
680
|
|
|
Intangible assets
|
|
|
4,195
|
|
|
Accounts payable
|
|
|
(258
|
)
|
|
Other accrued liabilities
|
|
|
(981
|
)
|
|
Goodwill recorded
|
|
$
|
14,311
|
|
The Pentagon purchase price allocation was finalized in the third quarter of 2012. The final valuation for Pentagon did not result in material changes to the preliminary allocations.
Quinn’s
On December 1, 2011, the Company completed the acquisition of Quinn’s Oilfield Supply Ltd., including certain affiliates (“Quinn’s”), an Alberta corporation based in Red Deer, Alberta, Canada. Quinn’s is one of the largest reciprocating rod pump manufacturers in North America and also manufactures and distributes progressive cavity pumps (“PCPs”) and related equipment.
The following table represents the final purchase price consideration and purchase price allocation (in thousands of dollars):
|
Cash paid at closing, net
|
|
$
|
311,003
|
|
|
Cash paid as a working capital true-up
|
|
|
250
|
|
|
|
|
|
|
|
|
Total consideration paid
|
|
$
|
311,253
|
|
|
|
|
|
|
|
|
Purchase price
|
|
$
|
311,253
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
27,680
|
|
|
Inventories
|
|
|
23,006
|
|
|
Other current assets
|
|
|
715
|
|
|
Property, plant and equipment
|
|
|
62,734
|
|
|
Intangible assets
|
|
|
57,400
|
|
|
Accounts payable
|
|
|
(24,924
|
)
|
|
Other accrued liabilities
|
|
|
(9,046
|
)
|
|
Deferred tax liabilities
|
|
|
(41
|
)
|
|
Goodwill recorded
|
|
$
|
173,729
|
|
The Quinn’s purchase price allocation was finalized in the fourth quarter of 2012. The final valuation resulted in an additional payout of $250,000 dollars.
Datac/RealFlex
On January 19, 2012, the Company completed the acquisition of Datac Instrumentation Limited (“Datac”) and RealFlex Technologies Limited (“Realflex”). Datac, based in Dublin, Ireland, is a solutions company serving the oil and gas, power, water and waste water, and transportation and marine industries that provides systems integration for supervisory control and data acquisition (“SCADA”). RealFlex, also based in Dublin, provides real-time software packages for SCADA and process control applications.
The Datac and Realflex acquisition was recorded using the acquisition method of accounting, and accordingly, the acquired operations have been included in the results of operations since the date of acquisition. The preliminary purchase price consideration consisted of the following (in thousands of dollars):
|
Cash paid at closing, net
|
|
$
|
18,586
|
|
|
Common stock paid at closing
|
|
|
8,414
|
|
|
|
|
|
|
|
|
Total consideration paid
|
|
$
|
27,000
|
|
In connection with the Datac and Realflex acquisition, the Company issued 116,716 restricted shares at a value of $72.09 per share. The restrictions on the shares lapsed on July 19, 2012.
The following table indicates (in thousands of dollars) the preliminary purchase price allocation to net assets acquired, which was based on estimated fair values as of the acquisition date. The excess of the purchase price over the net assets acquired, which totaled $20.7 million, was recorded as goodwill in the Company’s consolidated balance sheet in the Oilfield segment. Based on the structure of the transaction, the majority of the goodwill related to the transaction is not expected to be deductible for tax purposes.
|
Purchase price
|
|
$
|
27,000
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
323
|
|
|
Inventories
|
|
|
449
|
|
|
Other current assets
|
|
|
57
|
|
|
Property, plant and equipment
|
|
|
51
|
|
|
Non-compete agreements and trademarks
|
|
|
350
|
|
|
Customer relationships and contracts
|
|
|
5,983
|
|
|
Indemnification asset
|
|
|
5,500
|
|
|
Accounts payable
|
|
|
(178
|
)
|
|
Other accrued liabiltiies
|
|
|
(484
|
)
|
|
Deferred tax liabilities
|
|
|
(229
|
)
|
|
Uncertain tax liability
|
|
|
(5,500
|
)
|
|
|
|
|
|
|
|
Goodwill recorded
|
|
$
|
20,678
|
|
In connection with the Datac acquisition the Company identified uncertain tax liabilities of the target company related to previous tax years. As a result, the Company entered into an agreement whereby the former owners funded an escrow account for $5.5 million dollars. In accordance with ASC 805,
Business Combinations,
the Company has identified an indemnification asset resulting from this agreement.
The Datac and Realflex preliminary purchase price allocations, which are based on relevant facts and circumstances, are subject to change upon completion of the final valuation analysis by the Company’s management. The final valuations for Datac and Realflex, which were required to be completed by January 2013, did not result in material changes to the preliminary allocations.
Zenith
On February 29, 2012, the Company completed the acquisition of Zenith Oilfield Technology Ltd (“Zenith”). Zenith, based in Aberdeen, Scotland, is an international provider of innovative technology and products for the monitoring and analysis of down-hole data and related completion products for the oilfield artificial lift market.
The Zenith acquisition was recorded using the acquisition method of accounting, and accordingly, the acquired operations have been included in the Company’s results of operations since the date of acquisition. The preliminary purchase price consideration consisted of the following (in thousands of dollars):
|
Cash paid at closing, net
|
|
$
|
133,972
|
|
|
|
|
|
|
|
|
Total consideration paid
|
|
$
|
133,972
|
|
The following table indicates (in thousands of dollars) the preliminary purchase price allocation to net assets acquired, which was based on estimated fair values as of the acquisition date. The excess of the purchase price over the net assets acquired, which totaled $86.6 million, was recorded as goodwill in the Company’s consolidated balance sheet in the Oilfield segment. Based on the structure of the transaction, the majority of the goodwill related to the transaction is not expected to be deductible for tax purposes.
|
Purchase price
|
|
$
|
133,972
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
13,236
|
|
|
Inventories
|
|
|
4,226
|
|
|
Other current assets
|
|
|
7,711
|
|
|
Property, plant and equipment
|
|
|
518
|
|
|
Non-compete agreements and trademarks
|
|
|
3,614
|
|
|
Customer relationships and contracts
|
|
|
32,665
|
|
|
Other long term assets
|
|
|
355
|
|
|
Accounts payable
|
|
|
(3,698
|
)
|
|
Other accrued liabilities
|
|
|
(2,144
|
)
|
|
Deferred tax liabilities
|
|
|
(9,380
|
)
|
|
|
|
|
|
|
|
Goodwill recorded
|
|
$
|
86,869
|
|
The Zenith preliminary purchase price allocations, which are based on relevant facts and circumstances, are subject to change upon completion of the final valuation analysis by the Company’s management. The final valuations for Zenith, which were required to be completed by February 2013, did not result in material changes to the preliminary allocations.
Other
During 2012, the Company also acquired the assets of two businesses for a total price consideration of $3.3 million. The two acquisitions were included in the Company’s consolidated financial statements for the periods subsequent to the acquisitions.
Supplemental Pro Forma Data
Revenues and earnings to date for the Pentagon, Datac, Realflex, and Zenith acquisitions are not material and pro forma information is not provided. Results of operations for all acquisitions have been included in the Company’s financial statements for periods subsequent to the effective date of the acquisition. The following unaudited supplemental pro forma data (“pro forma data”) presents consolidated information as if the Quinn’s acquisition had been completed on January 1, 2010:
|
Years ended December 31, 2011 and 2010
|
|
|
|
|
|
|
|
(Thousands of dollars, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,070,623
|
|
|
$
|
761,327
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
75,601
|
|
|
$
|
39,467
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations
|
|
$
|
2.45
|
|
|
$
|
1.36
|
|
The pro forma data was prepared based on the historical financial information of Quinn’s and Lufkin and has been adjusted to give effect to pro forma adjustments that are (i) directly attributable to the transaction, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results. The pro forma data is not necessarily indicative of what Quinn’s results of operations actually would have been had the transactions been completed on January 1, 2010. Additionally, the pro forma data does not project the future results of operations of the combined company nor do they reflect the expected realization of synergies associated with the transactions. The pro forma data reflects the application of the following adjustments:
|
|
·
|
Additional depreciation and amortization expense associated with fair value adjustments to acquired identifiable intangible assets and property, plant and equipment.
|
|
|
·
|
Increase in interest expense resulting from the issuance of debt to finance the purchase price, as well as the amortization of related deferred financing costs.
|
|
|
·
|
Elimination of transaction costs incurred in 2010 that are directly related to the transactions, and do not have a continuing impact on the combined company’s operating results.
|
(3) Receivables
The following is a summary of the Company's receivable balances at December 31:
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
252,413
|
|
|
$
|
214,608
|
|
|
Notes receivable
|
|
|
-
|
|
|
|
16
|
|
|
Other receivables
|
|
|
1,623
|
|
|
|
2,108
|
|
|
Gross receivables
|
|
|
254,036
|
|
|
|
216,732
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts receivable
|
|
|
(767
|
)
|
|
|
(125
|
)
|
|
Net receivables
|
|
$
|
253,269
|
|
|
$
|
216,607
|
|
Bad debt expense related to the year ended December 31, 2012 was $0.1 million. Collections on previous bad debts related to receivables resulted in a recovery of $0.1 million at December 31, 2011 and 2010.
(4) Inventories
Inventories used in determining cost of sales were as follows at December 31:
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Gross inventories at FIFO:
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
26,751
|
|
|
$
|
11,914
|
|
|
Work in progress
|
|
|
31,136
|
|
|
|
27,749
|
|
|
Raw materials and component parts
|
|
|
185,739
|
|
|
|
144,731
|
|
|
Maintenance, tooling and supplies
|
|
|
14,864
|
|
|
|
17,001
|
|
|
Total gross inventories at FIFO
|
|
|
258,490
|
|
|
|
201,395
|
|
|
Less reserves:
|
|
|
|
|
|
|
|
|
|
LIFO
|
|
|
34,954
|
|
|
|
32,103
|
|
|
Valuation
|
|
|
5,061
|
|
|
|
3,144
|
|
|
Total inventories as reported
|
|
$
|
218,475
|
|
|
$
|
166,148
|
|
Gross inventories on a FIFO basis shown above that were accounted for on a LIFO basis were $120.7 million and $97.9 million at December 31, 2012 and 2011, respectively.
(5) Property, Plant & Equipment
The following is a summary of the Company’s P. P. & E. balances at December 31:
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
29,026
|
|
|
$
|
27,883
|
|
|
Land improvements
|
|
|
13,142
|
|
|
|
10,379
|
|
|
Buildings
|
|
|
158,984
|
|
|
|
137,923
|
|
|
Machinery and equipment
|
|
|
310,944
|
|
|
|
306,151
|
|
|
Furniture and fixtures
|
|
|
9,647
|
|
|
|
8,779
|
|
|
Computer equipment and software
|
|
|
37,708
|
|
|
|
16,359
|
|
|
Construction in progress
|
|
|
125,545
|
|
|
|
106,789
|
|
|
Total property, plant and equipment
|
|
|
684,996
|
|
|
|
614,263
|
|
|
Less accumulated depreciation
|
|
|
(283,323
|
)
|
|
|
(267,833
|
)
|
|
Total property, plant and equipment, net
|
|
$
|
401,673
|
|
|
$
|
346,430
|
|
Depreciation expense related to property, plant and equipment was $28.5 million, $21.6 million and $19.4 million in 2012, 2011 and 2010, respectively.
As of December 31, 2012 there was $6.6 million of additions to property, plant and equipment in accounts payable.
The Romanian Government granted an economic incentive to the Company for the construction of its Romanian facility, which was ongoing at December 31, 2012. This incentive is subject to employment requirements the Company must maintain for five years. For the years ended December 31, 2012 and 2011 capital expenditures were reduced by $18.1 million and $5.9 million in the additions to property, plant, and equipment on the Consolidated Statements of Cash Flows as a result of incentives received from the government.
(6) Goodwill & Acquired Intangible Assets
Goodwill
The changes in the carrying amount of goodwill during the years ended December 31, 2012 and 2011 are as follows:
|
|
|
|
|
|
Power
|
|
|
|
|
|
(Thousands of dollars)
|
|
Oilfield
|
|
|
Transmission
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2011
|
|
$
|
45,862
|
|
|
$
|
7,149
|
|
|
$
|
53,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the period
|
|
|
179,910
|
|
|
|
-
|
|
|
|
179,910
|
|
|
Foreign currency translation
|
|
|
(2
|
)
|
|
|
13
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
|
225,770
|
|
|
|
7,162
|
|
|
|
232,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the period
|
|
|
109,385
|
|
|
|
-
|
|
|
|
109,385
|
|
|
Adjustments for prior year acquisitions
|
|
|
5,302
|
|
|
|
-
|
|
|
|
5,302
|
|
|
Foreign currency translation
|
|
|
6,742
|
|
|
|
(42
|
)
|
|
|
6,700
|
|
|
Balance as of December 31, 2012
|
|
$
|
347,199
|
|
|
$
|
7,120
|
|
|
$
|
354,319
|
|
The purchase price allocations relating to the businesses acquired are initially based on estimates. The Company adjusts these estimates based upon final analysis including input from third party appraisals, when deemed appropriate. The determination of fair value is finalized no later than twelve months from acquisition. Goodwill adjustments represent subsequent adjustments to the purchase price allocation for acquisitions as determined by the respective accounting guidance requirements based on the date of acquisition.
Intangible Assets
The Company amortizes identifiable intangible assets on a straight-line basis over the periods expected to be benefitted. All of the below intangible assets relate to acquisitions since 2009. The components of these intangible assets are as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
December 31, 2012
|
|
|
Average
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Period
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
(years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements and trademarks
|
|
$
|
10,281
|
|
|
$
|
2,082
|
|
|
$
|
8,199
|
|
|
|
5.7
|
|
|
Customer relationships and contracts
|
|
|
112,050
|
|
|
|
15,788
|
|
|
|
96,262
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
122,331
|
|
|
$
|
17,870
|
|
|
$
|
104,461
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
December 31, 2011
|
|
|
Average
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
(years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements and trademarks
|
|
$
|
6,258
|
|
|
$
|
1,091
|
|
|
$
|
5,167
|
|
|
|
5.1
|
|
|
Customer relationships and contracts
|
|
|
72,818
|
|
|
|
4,572
|
|
|
|
68,246
|
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,076
|
|
|
$
|
5,663
|
|
|
$
|
73,413
|
|
|
|
7.4
|
|
Amortization expense of intangible assets was approximately $14.8 million, $2.7 million and $1.7 million at December 31, 2012, 2011, and 2010 respectively. Expected amortization expense by year is (in thousands of dollars):
|
For the year ended December 31, 2013
|
|
$
|
15,473
|
|
|
For the year ended December 31, 2014
|
|
|
14,808
|
|
|
For the year ended December 31, 2015
|
|
|
14,742
|
|
|
For the year ended December 31, 2016
|
|
|
14,645
|
|
|
For the year ended December 31, 2017
|
|
|
14,276
|
|
|
Thereafter
|
|
|
30,517
|
|
(7) Other Current Accrued Liabilities
The following is a summary of the Company's other current accrued liabilities balances at December 31:
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Customer prepayments
|
|
$
|
15,681
|
|
|
$
|
10,659
|
|
|
Litigation reserves
|
|
|
-
|
|
|
|
2,743
|
|
|
Deferred compensation and benefit plans
|
|
|
6,918
|
|
|
|
6,884
|
|
|
Acquisition hold back and royalty consideration
|
|
|
2,330
|
|
|
|
2,219
|
|
|
Other accrued liabilities
|
|
|
9,054
|
|
|
|
3,689
|
|
|
Total other current accrued liabilities
|
|
$
|
33,983
|
|
|
$
|
26,194
|
|
(8) Debt Obligations
The following is a summary of the Company's outstanding debt balances at December 31:
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Long-term notes payable
|
|
$
|
326,704
|
|
|
$
|
350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion of long-term debt
|
|
|
(26,250
|
)
|
|
|
(17,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
300,454
|
|
|
$
|
332,500
|
|
Scheduled maturities of long-term debt in future years as of December 31, 2012 are as follows (in thousands of dollars):
|
2013
|
|
$
|
26,250
|
|
|
2014
|
|
|
52,500
|
|
|
2015
|
|
|
87,500
|
|
|
2016
|
|
|
160,454
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
326,704
|
|
The Company has a five year secured credit facility with a group of lenders (the “Bank Facility”) consisting of a revolving line of credit that provides up to $175.0 million of aggregate borrowing and a $350.0 million term loan. Under the Bank Facility the Company has granted a first priority lien, security interest and collateral assignment of substantially all of its current assets. The Bank Facility matures on November 30, 2016. Borrowings under the Bank Facility bear interest, at the Company’s option, at either (A) the highest of (i) the Prime Rate, (ii) the Federal Funds Effective Rate plus 0.5%, and (iii) the Adjusted LIBO Rate for an Interest Period of one month plus 1.0%, in each case plus an Applicable Margin based on the Company’s Leverage Ratio or (B) the interest rate equal to (i) the rate for US dollar deposits in the London interbank market for such Interest Period multiplied by (ii) the Statutory Reserve Rate, plus (iii) the Applicable Margin.
Throughout the term of the Bank Facility, the Company pays an
Unused Commitment Fee
which ranges from 0.25 percent to 0.50 percent based on the Company’s Leverage Ratio.
As of December 31, 2012, $301.7 million of borrowings under the term loan and $25.0 million of borrowings under the revolving line of credit were outstanding. Additionally, there was $10.4 million in letters of credit outstanding against the revolving credit facility. As of December 31, 2012, the interest rate was 2.75% on the credit facility and the Company paid $10.2 million of interest expense in the year ended December 31, 2012. The carrying value of debt is not materially different from its fair value. The Company was in compliance with all financial covenants under the Bank Facility as of December 31, 2012 and had borrowing capacity of $139.6 million.
In addition, the Company’s credit facility restricts the ability to declare and pay dividends on common stock when the payment of any such dividend would cause the Company to exceed specified leverage and fixed charge ratios.
(9) Retirement Benefits
The Company has a qualified noncontributory pension plan covering substantially all U.S. employees. The benefits provided by this plan are measured by length of service, compensation and other factors, and are currently funded by trusts established under the plan. Funding of retirement costs for the plan complies with the minimum funding requirements specified by the Employee Retirement Income Security Act, as amended. As of December 31, 2011, the qualified noncontributory pension plan was closed to new participants. In addition, the Company has two unfunded non-qualified deferred compensation pension plans for certain U.S. employees. The Pension Restoration Plan provides supplemental retirement benefits. The benefit is based on the same benefit formula as the qualified pension plan except that it does not limit the amount of a participant's compensation or maximum benefit. The Supplemental Executive Retirement Plan credits an individual with 0.5 years of service for each year of service credited under the qualified plan. The benefits calculated under the non-qualified pension plans are offset by the participant's benefit payable under the qualified plan. The liabilities for the non-qualified deferred compensation pensions plans are included in “Other current accrued liabilities” and “Other liabilities” in the Consolidated Balance Sheet.
The Company is also required by the French government to provide a lump sum benefit payable upon retirement to its French employees. A dedicated insurance policy is in place that can reimburse the Company for these retirement payments.
The Company sponsors two defined benefit postretirement plans that cover both salaried and hourly employees. One plan provides medical benefits, and the other plan provides life insurance benefits. Both plans are contributory, with retiree contributions adjusted periodically. The Company accrues the estimated costs of the plans over the employee’s service periods. The Company's postretirement health care plan is unfunded. For measurement purposes, the submitted claims medical trend was assumed to be 9.25% in 1997. Thereafter, the Company’s obligation is fixed at the amount of the Company’s contribution for 1997.
Effective January 1, 2013, the Company’s postretirement health plan was amended to discontinue medical benefits for all future retirees under the age of 65 and all future and current employees over the age of 65. Premiums for current retirees under the age of 65 were increased and the company subsidy was eliminated. The plan amendment resulted in a $3.4 million reduction in the Accumulated Postretirement Benefit Obligation at December 31, 2012.
The Company also has qualified defined contribution retirement plans covering substantially all of its U.S. employees and certain Canadian employees. For U.S. salaried employees, the Company makes contributions of 75% of employee contributions up to a maximum employee contribution of 6% of employee earnings. For U.S. hourly employees, the
Company made contributions of 75% of employee contributions from January 1, 2011 through September 30, 2011 and then 100% of employee contributions thereafter up to a maximum employee contribution of 6% of employee earnings. The plan was amended to include the change for U.S. hourly employees on October 1, 2011. Employees may contribute up to an additional 18% (in 1% increments), which is not subject to matching by the Company. For Canadian employees, the Company makes contributions of 3%-8% of an employee’s salary with no individual employee matching required. All obligations of the Company are funded through December 31, 2012. In addition, the Company provides an unfunded non-qualified deferred compensation defined contribution plan for certain U.S. employees. The Company’s and individual’s contributions are based on the same formula as the qualified contribution plan except that it does not limit the amount of a participant’s compensation or maximum benefit. The contribution calculated under the non-qualified defined contribution plan is offset by the Company’s and participant’s contributions under the qualified plan. The Company’s expense for these plans totaled $11.3 million, $4.6 million and $3.8 million in the years ended December 31, 2012, 2011 and 2010, respectively. The liability for the non-qualified deferred defined contribution plan is included in “Other current accrued liabilities” in the Consolidated Balance Sheet.
Obligations and Funded Status
At December 31
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
283,866
|
|
|
$
|
227,259
|
|
|
$
|
7,894
|
|
|
$
|
6,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
|
10,209
|
|
|
|
6,881
|
|
|
|
176
|
|
|
|
129
|
|
|
Interest cost
|
|
|
12,147
|
|
|
|
11,842
|
|
|
|
311
|
|
|
|
347
|
|
|
Plan participants' contributions
|
|
|
-
|
|
|
|
-
|
|
|
|
516
|
|
|
|
646
|
|
|
Actuarial loss
|
|
|
32,547
|
|
|
|
48,250
|
|
|
|
182
|
|
|
|
673
|
|
|
Benefits paid
|
|
|
(11,220
|
)
|
|
|
(10,333
|
)
|
|
|
(860
|
)
|
|
|
(862
|
)
|
|
Plan change
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,434
|
)
|
|
|
-
|
|
|
Other
|
|
|
29
|
|
|
|
(33
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
327,578
|
|
|
|
283,866
|
|
|
|
4,785
|
|
|
|
7,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
190,547
|
|
|
|
205,054
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual return (loss) on plan assets
|
|
|
19,511
|
|
|
|
(4,595
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Employer contributions
|
|
|
16,131
|
|
|
|
441
|
|
|
|
343
|
|
|
|
216
|
|
|
Plan participants' contributions
|
|
|
-
|
|
|
|
-
|
|
|
|
516
|
|
|
|
646
|
|
|
Benefits paid
|
|
|
(11,220
|
)
|
|
|
(10,333
|
)
|
|
|
(859
|
)
|
|
|
(862
|
)
|
|
Other
|
|
|
12
|
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
214,981
|
|
|
|
190,547
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded status at end of year
|
|
$
|
(112,597
|
)
|
|
$
|
(93,319
|
)
|
|
$
|
(4,785
|
)
|
|
$
|
(7,894
|
)
|
Amounts recognized in the balance sheet consist of:
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current accrued liabilities
|
|
$
|
(476
|
)
|
|
$
|
(383
|
)
|
|
$
|
(279
|
)
|
|
$
|
(379
|
)
|
|
Postretirement benefits
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,506
|
)
|
|
|
(7,515
|
)
|
|
Pension benefits
|
|
|
(112,121
|
)
|
|
|
(92,936
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
(112,597
|
)
|
|
$
|
(93,319
|
)
|
|
$
|
(4,785
|
)
|
|
$
|
(7,894
|
)
|
Amounts recognized in accumulated other comprehensive income consist of:
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
2,661
|
|
|
$
|
3,247
|
|
|
$
|
(1,950
|
)
|
|
$
|
245
|
|
|
Net loss (gain)
|
|
|
88,137
|
|
|
|
78,238
|
|
|
|
(1,089
|
)
|
|
|
(1,320
|
)
|
|
|
|
$
|
90,798
|
|
|
$
|
81,485
|
|
|
$
|
(3,039
|
)
|
|
$
|
(1,075
|
)
|
The accumulated benefit obligation for all defined benefit pension plans was $301.1 million and $268.3 million at December 31, 2012, and 2011, respectively.
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
10,209
|
|
|
$
|
6,881
|
|
|
$
|
5,654
|
|
|
$
|
176
|
|
|
$
|
129
|
|
|
$
|
92
|
|
|
Interest cost
|
|
|
12,147
|
|
|
|
11,842
|
|
|
|
11,585
|
|
|
|
311
|
|
|
|
346
|
|
|
|
350
|
|
|
Expected return on plan assets
|
|
|
(12,932
|
)
|
|
|
(13,564
|
)
|
|
|
(12,752
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Amortization of prior service cost
|
|
|
930
|
|
|
|
946
|
|
|
|
785
|
|
|
|
51
|
|
|
|
51
|
|
|
|
51
|
|
|
Amortization of net loss (gain)
|
|
|
9,769
|
|
|
|
3,917
|
|
|
|
3,712
|
|
|
|
(186
|
)
|
|
|
(223
|
)
|
|
|
(291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
20,123
|
|
|
$
|
10,022
|
|
|
$
|
8,984
|
|
|
$
|
352
|
|
|
$
|
303
|
|
|
$
|
202
|
|
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $9.8 million and $0.9 million, respectively. The estimated net gain and prior service cost for the defined benefit postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0.1 million and $0.3 million, respectively.
Additional Information
Assumptions
Weighted-average assumptions used to determine benefit obligations at December 31
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.58% - 3.77
|
%
|
|
|
4.09% - 4.19
|
%
|
|
|
3.75
|
%
|
|
|
4.05
|
%
|
|
Rate of compensation increase
|
|
|
4.80
|
%
|
|
|
4.90
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.09% - 4.19
|
%
|
|
|
5.19% - 5.26
|
%
|
|
|
5.26% - 5.80
|
%
|
|
|
4.05
|
%
|
|
|
4.97
|
%
|
|
|
5.58
|
%
|
|
Expected long-term return on plan assets
|
|
|
6.80
|
%
|
|
|
6.80
|
%
|
|
|
6.80
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Rate of compensation increase
|
|
|
4.80
|
%
|
|
|
4.90
|
%
|
|
|
5.12
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Discount rates are estimated based upon a cash flow matching exercise against the Citigroup Pension Discount Curve. Guidance for determining this rate is taken from the yield on high-quality, long-term, corporate bonds.
For 2012, the Company assumed a long-term asset rate of return of 6.8%. In developing the 6.8% expected long-term rate of return assumption, the Company evaluated input from its third-party pension plan asset manager, including their review of asset class return expectations and long-term inflation assumptions. The Company also considered its historical 10-year and 15-year compounded return (period ended December 31, 2012), which were in-line to higher than the Company’s long-term rate of return assumption, and analyzed expected long-term rate of return projections by asset class.
Plan Assets
The Company’s qualified pension plan assets at December 31, 2012 are as follows:
Fair Value Measurements at December 31, 2012 (in thousands)
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
|
Active markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Asset Category
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Cash
|
|
$
|
7,678
|
|
|
$
|
7,678
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
53,559
|
|
|
|
53,559
|
|
|
|
|
|
|
|
|
International stock - commingled funds (a)
|
|
|
32,683
|
|
|
|
|
|
|
$
|
32,683
|
|
|
|
|
|
International stock - mutual fund
|
|
|
18,787
|
|
|
|
18,787
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries
|
|
|
12,160
|
|
|
|
12,160
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
6,853
|
|
|
|
|
|
|
|
6,853
|
|
|
|
|
|
Collateralized mortgage obligations
|
|
|
596
|
|
|
|
|
|
|
|
|
|
|
$
|
596
|
|
|
Corporate bonds (b)
|
|
|
22,981
|
|
|
|
|
|
|
|
22,981
|
|
|
|
|
|
|
Other types of investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity long/short hedge funds (c)
|
|
|
37,010
|
|
|
|
|
|
|
|
|
|
|
|
37,010
|
|
|
Insurance policy (d)
|
|
|
675
|
|
|
|
|
|
|
|
|
|
|
|
675
|
|
|
Real Estate (e)
|
|
|
21,999
|
|
|
|
|
|
|
|
|
|
|
|
21,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
214,981
|
|
|
$
|
92,184
|
|
|
$
|
62,517
|
|
|
$
|
60,280
|
|
|
(a)
|
This category represents International Equity Commingled Funds which invests in international stocks. The
benchmark is the MSCI EAFE Index.
|
|
(b)
|
This category represents investment grade bonds of U.S. issuers from diverse industries.
|
|
(c)
|
This category includes hedge funds that invest both long and short in primarily U.S. common stocks.
Management of the hedge funds has the ability to shift investments from value to growth strategies,
from small to large capitalization stocks, and from a net long position to a net short position; however it is
expected that the equity long/short hedge funds will have a net long position.
|
|
(d)
|
This category includes a private insurance policy used for French retirement benefits.
|
|
(e)
|
This category includes a RREEF America II Fund and Black Rock Granite Properties which consists of commingled
private real estate.
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
Equity Long/Short
|
|
|
|
|
|
Insurance
|
|
|
Collateralized
|
|
|
|
|
|
|
|
Hedge Funds
|
|
|
Real Estate
|
|
|
Contracts
|
|
|
Mortgage Obligations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at December 31, 2011
|
|
$
|
35,288
|
|
|
$
|
21,001
|
|
|
$
|
645
|
|
|
$
|
2,156
|
|
|
$
|
59,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relating to assets still held at the reporting date
|
|
|
1,722
|
|
|
|
998
|
|
|
|
|
|
|
|
|
|
|
|
2,720
|
|
|
Relating to assets sold during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Purchases, sales, and settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,560
|
)
|
|
|
(1,560
|
)
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
30
|
|
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance at December 31, 2012
|
|
$
|
37,010
|
|
|
$
|
21,999
|
|
|
$
|
675
|
|
|
$
|
596
|
|
|
$
|
60,280
|
|
The Company invests in a diversified portfolio consisting of an array of assets classes that attempts to maximize returns while minimizing volatility. These asset classes include U.S. domestic equities, developed market equities, international equities, fixed income, real estate and hedged investments. Fixed income securities include medium-term government notes, corporate bonds and highly-rated mortgage-backed securities and collateralized mortgage obligations. Real estate primarily includes REIT investments focused on U.S. commercial warehouses. Hedge fund investments are primarily concentrated in funds focused on long/short investment strategies.
Equity Long/Short Hedge Funds
Hedge fund-of-funds are based on daily closing or institutional evaluation prices of underlying securities consistent with industry practices.
Real Estate
Real estate securities are valued based on recent market appraisals of underlying property as well as valuation methodologies to determine the most probable cash price in a competitive market.
Insurance Contracts
Insurance contracts are valued based upon underlying securities consistent with industry practices.
No equity or debt securities of the Company were held by the plan at December 31, 2012 or 2011.
The unqualified pension plans and the postretirement benefit plan of the Company are unfunded and thus had no plan assets as of December 31, 2012 and 2011.
Contributions
The Company expects to make contributions of $0.4 million to the pension plans and $0.2 million to the postretirement plan, in 2013. Due to pension funding legislation passed in 2012, the Company may not be required to make contributions to its U.S. qualified pension plan but may elect to make contributions of $10 to15 million.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the fiscal years ending:
|
|
|
Pension
|
|
|
Other
|
|
|
(Thousands of dollars)
|
|
Benefits
|
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
12,687
|
|
|
$
|
249
|
|
|
2014
|
|
|
13,459
|
|
|
|
250
|
|
|
2015
|
|
|
14,323
|
|
|
|
251
|
|
|
2016
|
|
|
15,158
|
|
|
|
251
|
|
|
2017
|
|
|
16,129
|
|
|
|
253
|
|
|
2018 - 2022
|
|
|
92,957
|
|
|
|
1,267
|
|
The following table illustrates the balances of accumulated other comprehensive income:
|
|
|
|
|
|
Defined
|
|
|
Defined
|
|
|
Accumulated
|
|
|
|
|
Foreign
|
|
|
Benefit
|
|
|
Benefit
|
|
|
Other
|
|
|
|
|
Currency
|
|
|
Pension
|
|
|
Postretirement
|
|
|
Comprehensive
|
|
|
(Thousands of dollars)
|
|
Translation
|
|
|
Plans
|
|
|
Plans
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Dec. 31, 2010
|
|
$
|
5,077
|
|
|
$
|
(43,372
|
)
|
|
$
|
1,649
|
|
|
$
|
(36,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current-period change
|
|
|
(3,316
|
)
|
|
|
(38,441
|
)
|
|
|
(533
|
)
|
|
|
(42,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Dec. 31, 2011
|
|
|
1,761
|
|
|
|
(81,813
|
)
|
|
|
1,116
|
|
|
|
(78,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current-period change
|
|
|
12,654
|
|
|
|
(9,701
|
)
|
|
|
1,964
|
|
|
|
4,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Dec. 31, 2012
|
|
$
|
14,415
|
|
|
$
|
(91,514
|
)
|
|
$
|
3,080
|
|
|
$
|
(74,019
|
)
|
(10) Earnings per Share
A reconciliation of the number of weighted shares used to compute basic and diluted net earnings per share for 2012, 2011 and 2010, are illustrated below:
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Weighted average common shares outstanding for basic EPS
|
|
|
33,015,323
|
|
|
|
30,445,772
|
|
|
|
29,978,034
|
|
|
Effect of dilutive securities: employee stock options
|
|
|
346,395
|
|
|
|
396,741
|
|
|
|
328,328
|
|
|
Adjusted weighted average common shares outstanding for diluted EPS
|
|
|
33,361,718
|
|
|
|
30,842,513
|
|
|
|
30,306,362
|
|
Options to purchase a total of 440,786, 154,449 and 125,543 shares of the Company’s common stock were excluded from the calculation of fully diluted earnings per share for 2012, 2011 and 2010, respectively, because their effect on fully diluted earnings per share for the period were antidilutive.
(11) Stock Option Plans
The Company currently has two stock compensation plans. The 1996 Nonemployee Director Stock Option Plan and the 2000 Incentive Stock Compensation Plan provide for the granting of stock options to officers, employees and non-employee directors at an exercise price equal to the fair market value of the stock at the date of grant. Unrestricted options granted to employees vest over two to four years and are exercisable up to ten years from the grant date. Upon retirement, any unvested options become exercisable immediately. Options granted to directors vest at the grant date and are exercisable up to ten years from the grant date.
The following table is a summary of the stock-based compensation expense recognized for the years ended December 31, 2012, 2011 and 2010:
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
5,162
|
|
|
$
|
4,881
|
|
|
$
|
4,627
|
|
|
Performance shares
|
|
|
288
|
|
|
|
-
|
|
|
|
-
|
|
|
Restricted stock awards and units
|
|
|
2,216
|
|
|
|
429
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
|
7,666
|
|
|
|
5,310
|
|
|
|
4,627
|
|
|
Tax benefit
|
|
|
(2,836
|
)
|
|
|
(1,964
|
)
|
|
|
(1,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation expense, net of tax
|
|
$
|
4,830
|
|
|
$
|
3,346
|
|
|
$
|
2,915
|
|
Stock Options
The fair value of each option grant during the years ended December 31, 2012, 2011 and 2010 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.64% -1.02
|
%
|
|
|
0.60% -0.80
|
%
|
|
|
0.94% - 1.60
|
%
|
|
Expected stock price volatility
|
|
|
45.00% - 56.40
|
%
|
|
|
48.10% - 57.90
|
%
|
|
|
51.20% - 57.80
|
%
|
|
Risk free interest rate
|
|
|
0.27% - 0.82
|
%
|
|
|
0.28% - 2.39
|
%
|
|
|
0.53% - 2.96
|
%
|
|
Expected life of options
|
|
2 - 4 years
|
|
|
3 - 4 years
|
|
|
2 - 6 years
|
|
|
Weighted-average fair value per share at grant date
|
|
$
|
63.84
|
|
|
$
|
26.29
|
|
|
$
|
17.05
|
|
The expected life of options was determined based on the exercise history of employees and directors since the inception of the plans. The expected volatility is based upon the historical weekly and daily stock price for the prior number of year’s equivalent to the expected life of the stock option. The expected dividend yield was based on the dividend yield of the Company’s common stock at the date of the grant. The risk free interest rate was based upon the yield of U.S. Treasuries which terms were equivalent to the expected life of the stock option.
A summary of stock option activity under the plans during the year ended December 31, 2012, is presented below:
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
|
Options
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
($000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2012
|
|
|
1,504,311
|
|
|
$
|
42.26
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
236,800
|
|
|
|
50.58
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(71,026
|
)
|
|
|
27.46
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(44,758
|
)
|
|
|
48.04
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
1,625,327
|
|
|
|
43.96
|
|
|
|
7.3
|
|
|
|
25,474
|
|
|
Exercisable at December 31, 2012
|
|
|
921,461
|
|
|
|
38.37
|
|
|
|
6.4
|
|
|
|
19,430
|
|
As of December 31, 2012, there was $4.8 million of total unrecognized compensation expense related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 1.96 years. The intrinsic value of stock options exercised in 2012, 2011 and 2010 was $3.4 million, $9.2 million and $11.4 million, respectively.
Performance Shares
The Company has granted performance shares to members of senior management, at no cost to the recipient, as a means of rewarding them for the Company’s shareholder return performance relative to a specific group of companies over a three-year performance cycle. Compensation expense, which is recorded ratably over the vesting period, is based on the fair value at grant date and the anticipated number of shares of the Company’s common stock to be issued, which is determined on a Monte Carlo probability model. Grant recipients do not have any shareholder rights until the granted shares have been issued.
The following table summarizes information about the performance shares that remain outstanding as of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Target Shares
|
|
|
|
|
|
|
|
|
Target Shares
|
|
|
Average
|
|
|
|
|
Outstanding at
|
|
|
Target
|
|
|
Target
|
|
|
Outstanding
|
|
|
Grant Date
|
|
|
Period
|
|
Beginning
|
|
|
Shares
|
|
|
Shares
|
|
|
at End
|
|
|
Fair Value
|
|
|
Granted
|
|
of Year
|
|
|
Granted
|
|
|
Forfeited
|
|
|
of Year
|
|
|
per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
-
|
|
|
|
70,151
|
|
|
|
(2,996
|
)
|
|
|
67,155
|
|
|
$
|
59.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
-
|
|
|
|
70,151
|
|
|
|
(2,996
|
)
|
|
|
67,155
|
|
|
|
|
|
As of December 31, 2012, there was $3.9 million of total unrecognized compensation expense related to unvested PSAs. The cost is expected to be recognized over a weighted average period of 1.5 years.
Restricted Stock Awards and Units
The 2000 Incentive Stock Compensation Plan also provides for other forms of stock-based compensation such as restricted stock awards (“RSA”) and restricted stock units (“RSU”). The Company granted 74,705 shares and 57,300 shares of restricted stock to employees and non-employee directors for the years ended December 31, 2012 and 2011, respectively. These awards vest over a three year period and had a fair value of $62.36 and $57.40 on date of issuance for the years ended December 31, 2012 and 2011, respectively.
A summary of the combined changes of RSAs and RSUs for the year ended December 31, 2012, is presented below:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Awards
|
|
Awards
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
Unvested at January 1, 2012
|
|
|
57,300
|
|
|
$
|
57.40
|
|
|
Granted
|
|
|
74,705
|
|
|
|
62.36
|
|
|
Vested
|
|
|
(19,102
|
)
|
|
|
57.40
|
|
|
Forfeited
|
|
|
(2,996
|
)
|
|
|
79.64
|
|
|
Unvested at December 31, 2012
|
|
|
109,907
|
|
|
$
|
60.13
|
|
As of December 31, 2012 and 2011, there was $7.7 million and $2.9 million of total unrecognized compensation cost related to unvested RSAs and RSUs. The cost is expected to be recognized over a weighted average period of 2.3 years.
(12) Capital Stock
The Company is authorized to issue 2,000,000 shares of preferred stock, the terms and conditions to be determined by the Board of Directors in creating any particular series. As of December 31, 2012 and 2011, no shares of preferred stock had been issued.
During the quarter ended March 31, 2012, the Company completed an equity offering, which resulted in the issuance of 2,875,000 shares of common stock and net proceeds of $217.6 million.
(13) Income Taxes
Earnings from continuing operations before income taxes
for 2012, 2011 and 2010 consisted of the following:
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
88,301
|
|
|
$
|
76,025
|
|
|
$
|
50,278
|
|
|
Foreign
|
|
|
37,654
|
|
|
|
29,444
|
|
|
|
17,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings before income taxes
|
|
$
|
125,955
|
|
|
$
|
105,469
|
|
|
$
|
67,445
|
|
The income tax provision for 2012, 2011 and 2010 consisted of the following:
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal and state income taxes
|
|
$
|
35,054
|
|
|
$
|
21,466
|
|
|
$
|
15,815
|
|
|
Foreign
|
|
|
12,324
|
|
|
|
8,465
|
|
|
|
6,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
47,378
|
|
|
|
29,931
|
|
|
|
22,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal and state income taxes
|
|
|
1,885
|
|
|
|
9,820
|
|
|
|
2,819
|
|
|
Foreign
|
|
|
(5,165
|
)
|
|
|
(253
|
)
|
|
|
(1,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(3,280
|
)
|
|
|
9,567
|
|
|
|
1,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44,098
|
|
|
$
|
39,498
|
|
|
$
|
23,914
|
|
Cash payments for income taxes totaled $44.1 million, $30.5 million and $18.8 million for 2012, 2011 and 2010, respectively.
A reconciliation of the income tax provision as computed at the statutory U.S. income tax rate and the income tax provision presented in the consolidated financial statements is as follows:
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision computed at statutory rate
|
|
$
|
44,084
|
|
|
$
|
36,914
|
|
|
$
|
23,606
|
|
|
Tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses for which no benefit was realized
|
|
|
492
|
|
|
|
702
|
|
|
|
202
|
|
|
Change in effective state tax rate
|
|
|
23
|
|
|
|
(6
|
)
|
|
|
13
|
|
|
Tax credit
|
|
|
(239
|
)
|
|
|
(733
|
)
|
|
|
(930
|
)
|
|
State taxes net of federal benefit
|
|
|
2
,512
|
|
|
|
1,779
|
|
|
|
1,813
|
|
|
Benefit of manufacturing deduction
|
|
|
(3,093
|
)
|
|
|
(1,492
|
)
|
|
|
(1,127
|
)
|
|
Acquisition costs
|
|
|
2,437
|
|
|
|
1,919
|
|
|
|
-
|
|
|
Foreign operations
|
|
|
(1,217
|
)
|
|
|
520
|
|
|
|
530
|
|
|
Other, net
|
|
|
(901
|
)
|
|
|
(105
|
)
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for taxes
|
|
$
|
44,098
|
|
|
$
|
39,498
|
|
|
$
|
23,914
|
|
The American Taxpayer Relief Act of 2012, signed into law on January 2, 2013, extends retroactively the US R&D tax credit for the period January 1, 2012 through December 31, 2013. Although reinstated retroactively, since the enactment of this tax law occurred after December 31, 2012, the tax benefit of the US R&D tax credit for the year 2012 will be recognized in our financial results for the first quarter of 2013. This tax benefit is estimated to be $678,000.
Appropriate U.S. and foreign income taxes have been provided for earnings of foreign subsidiary companies that are expected to be remitted in the near future. The cumulative amount of undistributed earnings of foreign subsidiaries that the Company intends to permanently reinvest and upon which no deferred U.S. income taxes have been provided was
$115.5 million at December 31, 2012, the majority of which has been generated in Argentina, Canada, and France. Upon distribution of these earnings in the form of dividends or otherwise, the Company may be subject to U.S. income taxes (subject to adjustment for foreign tax credits) and foreign withholding taxes. It is not practical, however, to estimate the amount of taxes that may be payable on the eventual remittance of these earnings after consideration of available foreign tax credits.
The primary components of the deferred tax assets and liabilities and the related valuation allowances are as follows:
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension costs
|
|
$
|
43,788
|
|
|
$
|
36,430
|
|
|
Payroll and benefits
|
|
|
1,129
|
|
|
|
1,365
|
|
|
Accrued warranty expenses
|
|
|
1,906
|
|
|
|
1,425
|
|
|
Postretirement benefits
|
|
|
9,137
|
|
|
|
8,143
|
|
|
Accrued liabilities
|
|
|
261
|
|
|
|
591
|
|
|
Other, net
|
|
|
8,573
|
|
|
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
64,794
|
|
|
|
49,634
|
|
|
Less valuation allowance
|
|
|
(4,779
|
)
|
|
|
(1,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
60,015
|
|
|
|
48,517
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(792
|
)
|
|
|
(993
|
)
|
|
Depreciation
|
|
|
(33,781
|
)
|
|
|
(34,143
|
)
|
|
Inventories
|
|
|
(974
|
)
|
|
|
(1,758
|
)
|
|
Intangible assets
|
|
|
(17,527
|
)
|
|
|
(8,784
|
)
|
|
Liability for unremitted earnings
|
|
|
(12,005
|
)
|
|
|
|
|
|
Other, net
|
|
|
(210
|
)
|
|
|
(5,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent deferred income tax liabilities, net
|
|
|
(65,289
|
)
|
|
|
(51,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax liability
|
|
$
|
(5,274
|
)
|
|
$
|
(2,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax asset
|
|
$
|
574
|
|
|
$
|
1,140
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liability
|
|
|
(5,848
|
)
|
|
|
(3,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax liability
|
|
$
|
(5,274
|
)
|
|
$
|
(2,746
|
)
|
At December 31, 2012, 2011 and 2010 there are $5.6 million, $2.1 million and $1.8 million, respectively, of unrecognized tax benefits. Of these amounts, $3.0 million, $2.1 million, and $1.8 million, respectively, represent the amounts of unrecognized tax benefits that, if recognized, would favorably affect the net effective income tax rate in any future period. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1,
|
|
$
|
2,060
|
|
|
$
|
1,838
|
|
|
$
|
1,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross increases- current year tax positions
|
|
|
4,255
|
|
|
|
791
|
|
|
|
372
|
|
|
Gross increases- tax positions from prior periods
|
|
|
3
|
|
|
|
115
|
|
|
|
233
|
|
|
Gross decreases- tax positions from prior periods
|
|
|
(683
|
)
|
|
|
(657
|
)
|
|
|
(262
|
)
|
|
Settlements
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
5,635
|
|
|
$
|
2,060
|
|
|
$
|
1,838
|
|
In connection with the Datac acquisition the Company identified uncertain tax liabilities of the target company related to previous tax years. As a result, the Company entered into an agreement whereby the former owners funded an escrow account for $5.5 million dollars. In accordance with ASC 805, Business Combinations, the Company has identified an indemnification asset resulting from this agreement.
The Company conducts business globally and, as a result, Lufkin Industries, Inc. and its subsidiaries file income tax returns in the U.S. federal and state jurisdictions, and various foreign jurisdictions. For U.S. federal purposes, tax years prior to 2009 are closed to assessment. Statutes for years prior to 2009 remain subject to review in certain U.S. state jurisdictions; however, the outcome of any future audit is not expected to have a material effect on the Company’s results of operations. The Company also remains subject to income tax examinations in the following material international jurisdictions: Canada (2009-2011), France (2010-2011), Argentina (2006– 2011) and United Kingdom (2011).
The Company has unrecognized tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months. The unrecognized tax benefits relate to tax credits and other various deductions. The Company estimates the change to be approximately $1,900,000.
The Company’s continuing policy is to recognize interest and penalties related to income tax matters in administrative costs. The Company had $100,000 accrued for interest and penalties at December 31, 2012. Net penalty and interest income of $10,000 and $45,000 were recognized in December 31, 2012 and 2011 respectively. Net penalty and interest expense of $30,000 was expensed in December 31, 2010.
(14) Commitments and Contingencies
Legal proceedings:
Intellectual Property Matter
In 2009, the Company brought suit in a Texas state court against the former owners of a business it had previously acquired in order to protect certain of the Company’s intellectual property rights. The former owners responded by counter suit against the Company as well as its outside counsel for the acquisition, Andrews Kurth LLP (“AK”), claiming that the Company had improperly acquired title to their inventions. The case was removed from the Texas state court to a U.S. District Court in Midland, Texas in order to address intellectual property and patent issues as well as other claims made by the parties. After reviewing the facts and positions of the parties, in February 2011, the U.S. District Court granted summary judgment for the Company disposing of all federal claims and remanded the remainder of the case back to the Texas state court.
The parties appealed various decisions of the U.S. District Court to the U.S. Court of Appeals for the Federal Circuit, which ultimately dismissed the appeals for lack of jurisdiction and transferred the appeals to the Fifth Circuit in February 2012. In addition to the federal appeals, the plaintiffs asked the Texas state court to proceed with a trial on the remanded case, which set the remanded case for trial over defendants’ objections. AK then sought and obtained an injunction from the U.S. District Court prohibiting the plaintiffs from pursuing the Texas state court case until resolution of the federal appeals, which the plaintiffs appealed. In September 2012, the Fifth Circuit ruled in favor of the plaintiffs by vacating the injunction prohibiting the plaintiffs from litigating in state court. Trail in state court was set to begin in March of 2013, while a number of substantive appeals remained before the Fifth Circuit.
On December 10, 2012, the parties entered into a confidential settlement agreement following a successful mediation of all claims between plaintiffs and defendants. Pursuant to the terms of the settlement agreement, Lufkin agreed, among other things, to release all current and future claims arising out of or related to the intellectual property disputes made the basis of the lawsuit in exchange for a corresponding release of claims by plaintiffs.
Upon agreed motions by the parties, the appeals pending before the Fifth Circuit and the state court action were dismissed on January 3, 2013 and January 11, 2013, respectively.
Other Matters
There are various other claims and legal proceedings arising in the ordinary course of business pending against or involving the Company wherein monetary damages are sought. For certain of these claims, the Company maintains insurance coverage while retaining a portion of the losses that occur through the use of deductibles and retention limits. Amounts in excess of the self-insured retention levels are fully insured to limits believed appropriate for the Company’s operations. Self-insurance accruals are based on claims filed and an estimate for claims incurred but not reported. While the Company does maintain insurance above its self-insured levels, a decline in the financial condition of its insurer, while not currently anticipated, could result in increased risk. It is management’s opinion that the Company’s liability under such circumstances or involving any other non-insured claims or legal proceedings would not materially affect its consolidated financial position, results of operations, or cash flow.
Product warranties:
The change in the aggregate product warranty liability for the years ended December 31, 2012 and 2011, is as follows:
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
4,847
|
|
|
$
|
3,620
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims paid or accrued
|
|
|
(4,714
|
)
|
|
|
(3,032
|
)
|
|
Additional warranties issued
|
|
|
5,404
|
|
|
|
4,225
|
|
|
Revisions in estimates
|
|
|
624
|
|
|
|
67
|
|
|
Foreign currency translation
|
|
|
21
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
6,182
|
|
|
$
|
4,847
|
|
Operating leases:
Future minimum rental payments for operating leases having initial or remaining noncancelable lease terms in excess of one year as of December 31, 2012 are:
|
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
8,694
|
|
|
2014
|
|
|
7,368
|
|
|
2015
|
|
|
5,006
|
|
|
2016
|
|
|
3,642
|
|
|
2017
|
|
|
2,191
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
3,353
|
|
Expenses for rentals and leases, including short-term rental contracts, were $14.2 million, $9.9 million and $7.8 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Capital expenditures: As of December 31, 2012, the Company had contractual commitments for capital expenditures of $30.8 million that are expected to be paid in 2013.
(15)
Business Segment Information
The Company operates with two business segments: Oilfield and Power Transmission. The two operating segments are supported by a common corporate group. The accounting policies of the segments are the same as those described in the summary of major accounting policies. Corporate expenses and certain assets are allocated to the operating segments primarily based upon third party revenues. Sales by geographic region are determined by the shipping destination of a product or the site of service work. Inter-segment sales and transfers are accounted for as if the sales and transfers were to third parties, that is, at current market prices, as available. The following is a summary of key business segment and product group information:
|
(Thousands of dollars)
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Sales by segment:
|
|
|
|
|
|
|
|
|
|
|
Oilfield
|
|
$
|
1,075,612
|
|
|
$
|
736,488
|
|
|
$
|
477,867
|
|
|
Power Transmission
|
|
|
205,588
|
|
|
|
195,647
|
|
|
|
167,776
|
|
|
Total sales
|
|
$
|
1,281,200
|
|
|
$
|
932,135
|
|
|
$
|
645,643
|
|
|
Sales by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
823,432
|
|
|
$
|
582,947
|
|
|
$
|
390,129
|
|
|
Europe
|
|
|
77,785
|
|
|
|
64,926
|
|
|
|
46,799
|
|
|
Canada
|
|
|
157,292
|
|
|
|
88,317
|
|
|
|
33,668
|
|
|
Latin America
|
|
|
115,148
|
|
|
|
100,287
|
|
|
|
103,390
|
|
|
Middle East/North Africa
|
|
|
86,472
|
|
|
|
69,703
|
|
|
|
43,913
|
|
|
Other
|
|
|
21,071
|
|
|
|
25,955
|
|
|
|
27,744
|
|
|
Total sales
|
|
$
|
1,281,200
|
|
|
$
|
932,135
|
|
|
$
|
645,643
|
|
|
Earnings (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield
|
|
$
|
121,666
|
|
|
$
|
91,278
|
|
|
$
|
57,690
|
|
|
Power Transmission
|
|
|
4,359
|
|
|
|
16,402
|
|
|
|
10,937
|
|
|
Corporate & Other
|
|
|
(70
|
)
|
|
|
(2,211
|
)
|
|
|
(1,182
|
)
|
|
Total earnings (loss) before income taxes
|
|
$
|
125,955
|
|
|
$
|
105,469
|
|
|
$
|
67,445
|
|
|
Assets by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield
|
|
$
|
1,162,071
|
|
|
$
|
869,519
|
|
|
|
|
|
|
Power Transmission
|
|
|
165,136
|
|
|
|
153,429
|
|
|
|
|
|
|
Corporate & Other
|
|
|
108,012
|
|
|
|
73,757
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,435,219
|
|
|
$
|
1,096,705
|
|
|
|
|
|
|
Property, plant & equipment, net, by geographic region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
191,583
|
|
|
$
|
175,921
|
|
|
|
|
|
|
Europe
|
|
|
127,883
|
|
|
|
86,213
|
|
|
|
|
|
|
Canada
|
|
|
68,679
|
|
|
|
69,047
|
|
|
|
|
|
|
Latin America
|
|
|
13,237
|
|
|
|
14,884
|
|
|
|
|
|
|
Other
|
|
|
291
|
|
|
|
365
|
|
|
|
|
|
|
Total P, P & E, net
|
|
$
|
401,673
|
|
|
$
|
346,430
|
|
|
|
|
|
|
Capital expenditures by segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield
|
|
$
|
71,579
|
|
|
$
|
83,871
|
|
|
$
|
43,938
|
|
|
Power Transmission
|
|
|
10,062
|
|
|
|
5,995
|
|
|
|
8,445
|
|
|
Corporate & Other
|
|
|
3,078
|
|
|
|
13,693
|
|
|
|
7,980
|
|
|
Total capital expenditures
|
|
$
|
84,719
|
|
|
$
|
103,559
|
|
|
$
|
60,363
|
|
|
Depreciation/amortization by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield
|
|
$
|
33,361
|
|
|
$
|
16,548
|
|
|
$
|
13,484
|
|
|
Power Transmission
|
|
|
6,436
|
|
|
|
6,893
|
|
|
|
6,752
|
|
|
Corporate & Other
|
|
|
3,486
|
|
|
|
825
|
|
|
|
922
|
|
|
Total depreciation/amortization
|
|
$
|
43,283
|
|
|
$
|
24,266
|
|
|
$
|
21,158
|
|
Additional key segment information is presented below:
Year Ended December 31, 2012
|
|
|
|
|
|
Power
|
|
|
Corporate
|
|
|
|
|
|
(Thousands of dollars)
|
|
Oilfield
|
|
|
Transmission
|
|
|
& Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales
|
|
$
|
1,083,152
|
|
|
$
|
212,724
|
|
|
$
|
-
|
|
|
$
|
1,295,876
|
|
|
Inter-segment sales
|
|
|
(7,540
|
)
|
|
|
(7,136
|
)
|
|
|
-
|
|
|
|
(14,676
|
)
|
|
Net sales
|
|
$
|
1,075,612
|
|
|
$
|
205,588
|
|
|
$
|
-
|
|
|
$
|
1,281,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
135,745
|
|
|
$
|
4,315
|
|
|
$
|
(8
|
)
|
|
$
|
140,052
|
|
|
Other (expense) income, net
|
|
|
(14,080
|
)
|
|
|
45
|
|
|
|
(62
|
)
|
|
|
(14,097
|
)
|
|
Earnings (loss) before income tax provision
|
|
$
|
121,665
|
|
|
$
|
4,360
|
|
|
$
|
(70
|
)
|
|
$
|
125,955
|
|
Year Ended December 31, 2011
|
|
|
|
|
|
Power
|
|
|
Corporate
|
|
|
|
|
|
(Thousands of dollars)
|
|
Oilfield
|
|
|
Transmission
|
|
|
& Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales
|
|
$
|
743,545
|
|
|
$
|
206,978
|
|
|
$
|
-
|
|
|
$
|
950,523
|
|
|
Inter-segment sales
|
|
|
(7,057
|
)
|
|
|
(11,331
|
)
|
|
|
-
|
|
|
|
(18,388
|
)
|
|
Net sales
|
|
$
|
736,488
|
|
|
$
|
195,647
|
|
|
$
|
-
|
|
|
$
|
932,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
93,058
|
|
|
$
|
16,298
|
|
|
$
|
(1,878
|
)
|
|
$
|
107,478
|
|
|
Other (expense) income, net
|
|
|
(1,780
|
)
|
|
|
104
|
|
|
|
(333
|
)
|
|
|
(2,009
|
)
|
|
Earnings (loss) before income tax provision
|
|
$
|
91,278
|
|
|
$
|
16,402
|
|
|
$
|
(2,211
|
)
|
|
$
|
105,469
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
Power
|
|
|
Corporate
|
|
|
|
|
|
(Thousands of dollars)
|
|
Oilfield
|
|
|
Transmission
|
|
|
& Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales
|
|
$
|
479,732
|
|
|
$
|
171,155
|
|
|
$
|
-
|
|
|
$
|
650,887
|
|
|
Inter-segment sales
|
|
|
(1,865
|
)
|
|
|
(3,379
|
)
|
|
|
-
|
|
|
|
(5,244
|
)
|
|
Net sales
|
|
$
|
477,867
|
|
|
$
|
167,776
|
|
|
$
|
-
|
|
|
$
|
645,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
57,749
|
|
|
$
|
10,911
|
|
|
$
|
(1,001
|
)
|
|
$
|
67,659
|
|
|
Other (expense) income, net
|
|
|
(59
|
)
|
|
|
26
|
|
|
|
(181
|
)
|
|
|
(214
|
)
|
|
Earnings (loss) before income tax provision
|
|
$
|
57,690
|
|
|
$
|
10,937
|
|
|
$
|
(1,182
|
)
|
|
$
|
67,445
|
|
(16) Concentrations of Credit Risk
The Company’s concentration with respect to trade accounts receivable is limited. The large number of customers and diversified customer base across the two segments significantly reduces the Company’s credit risk. The Company also has strict policies regarding the granting of credit to customers and does not offer credit terms to those customers that do not meet certain financial criteria and other guidelines. The Company is monitoring the payment practices of customers and is reviewing credit limits more frequently and conservatively than in prior periods. No customer represented over 10% of consolidated company sales or accounts receivable as of December 31, 2012, 2011 and 2010.
(17)
Quarterly Financial Data (Unaudited)
The following table sets forth unaudited quarterly financial data for 2012 and 2011:
|
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
(Millions of dollars, except per share data)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
279.5
|
|
|
$
|
305.6
|
|
|
$
|
340.3
|
|
|
$
|
355.8
|
|
|
Gross profit
|
|
|
67.5
|
|
|
|
76.5
|
|
|
|
79.3
|
|
|
|
86.4
|
|
|
Net earnings
|
|
|
10.9
|
|
|
|
19.3
|
|
|
|
26.3
|
|
|
|
25.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
0.35
|
|
|
|
0.57
|
|
|
|
0.78
|
|
|
|
0.78
|
|
|
Diluted earnings per share
|
|
|
0.34
|
|
|
|
0.57
|
|
|
|
0.78
|
|
|
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
194.4
|
|
|
$
|
226.8
|
|
|
$
|
231.7
|
|
|
$
|
279.3
|
|
|
Gross profit
|
|
|
46.2
|
|
|
|
57.4
|
|
|
|
53.9
|
|
|
|
69.0
|
|
|
Net earnings
|
|
|
12.4
|
|
|
|
18.5
|
|
|
|
14.4
|
|
|
|
20.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
0.41
|
|
|
|
0.61
|
|
|
|
0.47
|
|
|
|
0.68
|
|
|
Diluted earnings per share
|
|
|
0.40
|
|
|
|
0.60
|
|
|
|
0.47
|
|
|
|
0.67
|
|