ITEM 1. BUSINESS
Important Information Regarding Forward-Looking Statements
Portions of this Form 10-K include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. This includes, in particular, “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K as well as other portions of this Form 10-K. The words “believe,” “expect,” “anticipate,” “project,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date such statements were made. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. The most significant of these risks, uncertainties and other factors are described in this Form 10-K (included in “Item 1A
ITEM 1A. RISK FACTORS
If any of the events contemplated by the following risks actually occurs, then our business, financial condition or results of operations could be materially and adversely affected. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We can neither predict these new risk factors, nor can we assess the impact, if any, of these new risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements.
Our announcement that we had entered into a definitive merger agreement with National Oilwell Varco in an all-cash transaction could adversely affect our business.
On August 8, 2012, we entered into a definitive merger agreement with National Oilwell Varco in an all cash transaction. Upon the closing of the merger, each of our shareholders will receive $60.00 in cash for each common share they own. Consummation of the transaction is subject to customary closing conditions, including obtaining certain regulatory approvals, as well as approval from our Company’s shareholders. Expected synergies associated with the transaction may require the merger of certain of our operations into those of NOV, which could result in the termination of a number of our employees and restructuring of certain of our operations. The announcement and pending nature of the transaction could potentially cause disruptions in our business (including certain merger-related operational contractual restrictions and additional legal and regulatory proceedings), and have an adverse effect on our relationship with our customers, vendors, and employees. In addition, it could result in diversion of management’s attention from ongoing business concerns, employee retention issues, added merger-related costs, and the possibility that alternative takeover proposals will or will not be made, which could, in turn, have an adverse effect on our business, financial results, and operations.
The consummation of the proposed merger transaction with National Oilwell Varco is not certain, and its delay or failure could adversely affect our business.
There is no assurance that the proposed merger transaction with National Oilwell Varco will occur. In addition, we cannot predict the exact timing of the consummation of the transaction. Consummation of the transaction is subject to the satisfaction of various conditions, including obtaining certain regulatory approvals and the approval of our Company’s shareholders. A number of the conditions are not within our control. We cannot assure that all closing conditions will be satisfied, that we will receive the required governmental approvals, or that the transaction will be successfully consummated. If the transaction is not completed, the price of our common shares may change to the extent that the current market price of our common shares reflects the assumption that the transaction will be completed. In addition, a failed transaction may result in negative publicity and a negative impression of us in the investment community. Under certain circumstances, upon termination of the merger agreement, we could be required to pay a termination fee of $75 million to National Oilwell Varco, or its costs and expenses.
Some of our end-markets are cyclical, which may cause fluctuations in our sales and operating results.
We have experienced, and expect to continue to experience, fluctuations in operating results due to business cycles. We sell our products principally to energy, chemical, industrial and pharmaceutical markets. While we serve a variety of markets, the purchase of T-3 Energy Services, Inc. and the sale of our Romaco businesses in fiscal 2011 have resulted in a significant portion of our business being focused in the energy market. A significant downturn in any of these markets, especially energy, could cause a material adverse impact on our sales and operating results. In addition, there is a risk that if our future operating results significantly decline, it could impair our ability to realize our deferred tax assets.
Our businesses are adversely affected by economic downturns and volatility in the equity markets or interest rates could adversely impact the funded status of our pension plans.
While economic conditions improved in fiscal 2012, business conditions could worsen in the future. Furthermore, our backlog may not be converted to revenue due to customer order cancellations.
We cannot predict the timing or duration of any economic slowdown or the timing or strength of a subsequent recovery, worldwide, or in the specific end markets we serve. In particular, the European debt crisis and the instability and uncertainty relating to the Euro could constrain government budgets, limit the financing available to our suppliers and customers and adversely affect the economies and capital markets in Europe and other
geographies, which could, in turn, adversely affect demand for our products, the availability of supplies and the value of our Euro-denominated assets and obligations. If our markets significantly deteriorate due to these economic effects, our business, financial condition and results of operations will likely be materially and adversely affected. Furthermore, our share price could decrease if investors have concerns that our business, financial condition and results of operations will be negatively impacted by a worldwide economic downturn.
In addition, our defined benefit pension plans invest in fixed income and equity securities to fund related benefit obligations under those plans. The performance of the financial markets and interest rates impact our funding obligations under our defined benefit pension plans. Significant changes in market interest rates, decreases in the fair value of our plan assets and investment losses on plan assets may increase our future funding obligations and adversely impact our results of operations and cash flows over the long-term.
Our restructuring activities could affect our business and financial results.
To improve operational efficiency, we occasionally initiate programs to streamline operations and reduce expenses, including measures such as reductions in workforce and discretionary spending. We generally expect these initiatives to generate significant savings that we can invest in our growth initiatives and long-term value enhancing strategy. Our failure to generate significant cost savings and margin improvement from these initiatives could adversely affect our profitability and weaken our competitive position. Because we cannot always immediately adapt our production capacity and related cost structures to changing market conditions, our manufacturing capacity may at times exceed or fall short of our production requirements, which could result in the loss of customers, loss of market share and otherwise adversely affect our business and financial results.
Approximately 43% of our sales are to customers outside the United States, and we are subject to economic and political and currency fluctuation risks or devaluation associated with international operations.
Approximately 43% of our fiscal 2012 sales were to customers outside the U.S., and we maintain primary operations in 15 countries. Conducting business outside the U.S. is subject to risks, including currency exchange rate fluctuations and the possibility of hyper-inflationary conditions; changes in regional, political or economic conditions including trade protection measures, such as tariffs or import/export restrictions; subsidies or increased access to capital for firms who are currently, or may emerge, as competitors in countries in which we have operations; partial or total expropriation; unexpected changes in regulatory requirements; and international sentiment towards the U.S. One or more of these factors could have a material adverse effect on our international operations. Furthermore, unexpected and dramatic devaluations of currencies in developing or emerging markets could negatively affect the value of our earnings from, and of the assets located in, those markets.
Regulatory and legal developments including changes to United States taxation rules, health care reform, offshore drilling and hydraulic fracturing process legislation, governmental greenhouse gases emission restrictions and climate change initiatives could negatively affect our financial performance.
Our operations and the markets we compete in are subject to numerous federal, state, local and foreign governmental laws and regulations. Existing laws and regulations may be revised or reinterpreted and new laws and regulations, including taxation rules, health care reform, offshore drilling and hydraulic fracturing process legislation, governmental greenhouse gases emission restrictions and climate change initiatives, may be adopted or become applicable to us or our customers. New regulations like the Dodd-Frank Wall Street Reform and Consumer Protection Act may also increase our expenses and our customers’ requirements from us. These regulations are complex, change frequently and have tended to become more stringent over time and may increase our costs and reduce profitability. We cannot predict the form any such new laws or regulations will take or the impact these laws and regulations will have on our business or operations. However, significant changes in governmental laws and regulations could adversely affect our future results of operations.
Adverse weather conditions in certain regions could adversely affect our operations.
From time to time, hurricanes, typhoons and severe weather impact our operations. These storms and associated threats reduce the number of days on which we and our customers operate which results in lower revenues than we otherwise would have achieved. Our Canadian operations, particularly in the third quarter of each fiscal year, may vary greatly depending on the timing of “break-up”, or the spring thaw, which annually results in a period in which conditions are not conducive to operations and could reduce our operations and revenues during the relevant period.
We must comply with a variety of import and export laws and regulations, and the cost of compliance as well as the consequences of failure to properly comply with such laws could adversely affect our business.
We are subject to a variety of laws regarding our international operations, including regulations issued by the U.S. Department of Commerce Bureau of Industry and Security and various foreign governmental agencies. We cannot predict the nature, scope or effect of future regulatory requirements to which our international manufacturing operations and trading practices might be subject or the manner in which existing laws might be administered or interpreted. Future regulations could limit the countries in which certain of our products may be manufactured or sold or could restrict our access to, and increase the cost of, obtaining products from foreign sources. In addition, actual or alleged violations of import-export laws could result in enforcement actions and substantial financial penalties.
Our reputation, ability to do business and financial statements may be impaired by improper conduct by any of our employees, business partners or agents.
We cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by our employees, business partners or agents that would violate U.S. and/or non-U.S. laws, including the laws governing payments to government officials, bribery, fraud, anti-kickback and false claims rules, competition, export and import compliance, money laundering and data privacy. In particular, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business, and we operate in many parts of the world that have experienced governmental corruption to some degree. Any such improper actions could subject us to civil or criminal investigations in the U.S. and in other jurisdictions, could lead to substantial civil and criminal, monetary and non-monetary penalties and related shareholder lawsuits, could cause us to incur significant legal fees and could damage our reputation.
Competition in our markets could cause our sales to decrease.
We face significant competition from a variety of competitors in our markets. In some markets, our competitors have greater resources than we do and in some cases we sell to our competitors. In addition, new competitors could enter our markets. Competitive pressures, including product quality, performance, price and service capabilities, and new technologies could adversely affect our competitive position, involving a loss of market share or decrease in prices, either of which could have a material adverse effect on our sales and operating results.
The nature of our products creates the possibility of product liability lawsuits, which could harm our business.
As a global manufacturer of a broad range of equipment and systems for use in various markets, we face an inherent risk of exposure to product liability claims. Although we maintain strict quality controls and procedures, we cannot be certain that our products will be completely free from defect. In addition, in certain cases, we rely on third-party manufacturers for components of our products. Although we have liability insurance coverage, we cannot be certain that this insurance coverage will continue to be available to us at a reasonable cost or will be adequate to cover any such liabilities. We generally seek to obtain contractual indemnification from our third-party suppliers, which is typically limited by its terms. In the event we do not have adequate insurance or contractual indemnification, product liabilities could have a material adverse effect on our business, financial condition or results of operations. Even if a product liability claim is without merit, it could harm our business.
Our results of operations could vary based on the availability and cost of our raw materials.
The prices of our raw materials may increase. The costs of raw materials used by us are affected by fluctuations in the price of metals such as steel.
Our ability to obtain parts and raw materials from our suppliers is uncertain. We are engaged in a continuous, company-wide effort to concentrate our purchases of parts and raw materials on fewer suppliers, and to obtain parts from low-cost countries where possible. As this effort progresses, we are exposed to an increased risk of disruptions to our supply chain, which could have a significant effect on our operating results.
Our results of operations could vary as a result of the methods, estimates and judgments we use in applying our accounting policies or due to changes in accounting standards.
The methods, estimates and judgments we use in applying our accounting policies could have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates” in Part II, Item 7 of this Report). Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time, that lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations. Additionally, changes in accounting standards, including new interpretations and application of accounting standards, may change our reported financial condition, results of operations or cash flow.
Any impairment in the value of our intangible assets, including goodwill, would negatively affect our operating results and total capitalization.
Our total assets reflect substantial intangible assets, primarily goodwill. The goodwill results from our acquisitions, representing the excess of cost over the fair value of the net assets we have acquired. We assess at least annually whether there has been any impairment in the value of our intangible assets. If future operating performance at one or more of our business units were to fall significantly below current levels, if competing or alternative technologies emerge, if we are unable to effectively integrate acquired businesses, or if market conditions for acquired businesses decline, if significant and prolonged negative industry or economic trends continue, if our stock price and market capitalization declines, or if future cash flow estimates decline, we could incur, under current applicable accounting rules, a non-cash charge to operating earnings for goodwill impairment. Any determination requiring the write-off of a significant portion of unamortized intangible assets would negatively affect our results of operations and total capitalization, the effect of which could be material.
Work stoppages, union and works council campaigns, labor disputes and other matters associated with our labor force could adversely impact our results of operations and cause us to incur incremental costs.
We have a number of U.S. collective bargaining units and various non-U.S. collective labor arrangements. We are subject to potential work stoppages, union and works council campaigns and potential labor disputes, any of which could adversely impact our productivity and results of operations.
Our growth and results of operations may be adversely affected if we are unsuccessful in our capital allocation and acquisition program. Additionally, an increase in the number of our outstanding common shares could adversely affect our common share price or dilute our earnings per share.
We expect to continue our strategy of seeking to acquire add-on businesses that broaden our existing businesses and our global reach, as well as, in the right circumstances, strategically pursuing larger, stand-alone businesses that have the potential to either complement our existing businesses or allow us to pursue a new platform. However, there can be no assurance that we will find suitable businesses to purchase or that the associated price would be acceptable. If we are unsuccessful in the acquisition efforts, then our ability to grow could be adversely affected. In addition, a completed acquisition, may under-perform relative to expectations, be unable to achieve synergies originally anticipated, or require the payment of additional expenses for assumed liabilities. Further, failure to allocate capital appropriately could also result in significant exposure to certain markets and geographies. Additionally, issuance of a significant number of common shares in connection with acquisitions may adversely affect our common share price or have a dilutive effect on our earnings per share. These factors could potentially have an adverse impact on our operating profits and cash flows.
Divestitures could negatively impact our business, and contingent liabilities from businesses that we have sold could adversely affect our results of operations and financial condition.
We continually assess the strategic fit of our existing businesses and have in the past, and may in the future, divest businesses that are deemed not to fit with our strategic plan or are not achieving the desired return on investment. Divestitures pose risks and challenges that could negatively affect our business, including the potentially dilutive effect on our earnings per share and other financial impacts, potential disputes with buyers and distraction of management’s attention from core businesses. In addition, we have retained responsibility for, and in certain cases have agreed to, indemnify buyers against contingent liabilities related to the businesses we have sold, such as lawsuits, tax liabilities and product liabilities claims.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Set forth below is certain information relating to our principal operating facilities. We consider our properties, as well as the related machinery and equipment, to be suitable for their intended purposes.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are claims, suits and complaints arising in the ordinary course of business filed or pending against us. Although we cannot predict the outcome of such claims, suits and complaints with certainty, we do not believe that the disposition of these matters will have a material adverse effect on our financial position, results of operations or cash flows.
The Company is subject to an ongoing investigation by the U.S. Department of Justice (“DOJ”) and the Department of Commerce Bureau of Industry and Security (“BIS”) regarding potential export controls violations arising from certain shipments by our Belgian subsidiary to one customer in Iran, Sudan and Syria in 2005 and 2006. We have cooperated with the investigation and in August 2012, we received a proposed joint settlement offer from DOJ and BIS. We have requested additional information from DOJ and BIS regarding the proposed settlement terms. We have accrued $1.8 million in connection with this matter and the potential settlement and cannot predict whether or when this matter will be settled or the specific terms of any settlement.
In connection with the proposed merger with an affiliate of National Oilwell Varco, Inc., on August 13, 2012, August 17, 2012, and October 5, 2012, respectively, shareholder derivative and class action complaints were filed in the District Court of Montgomery County, Texas, the United States District Court for the Southern District of Ohio, and the United States District Court for the Southern District of Texas against the Company, our directors, and National Oilwell Varco, Inc. and its affiliate. The complaints allege, among other things, that our directors breached their fiduciary duties to the Company and our shareholders and that National Oilwell Varco aided and abetted our directors’ alleged breaches of their fiduciary duties. The complaints seek, among other things, injunctive relief, rescission of the merger agreement and the plaintiffs’ costs and disbursements in pursuing the actions, including reasonable attorneys’ and experts’ fees. On October 22, 2012, the plaintiff dismissed the action pending in Texas State Court with prejudice. The Company, our directors and each of the other named defendants are defending and will continue to defend the remaining lawsuits. We do not expect that these lawsuits will have a material adverse effect on the Company’s financial condition or results of operations or completion of the merger.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Executive Officers of the Registrant
Peter C. Wallace, age 58, has been President and Chief Executive Officer of the Company since July 12, 2004. From October 2001 to July 2004, Mr. Wallace was President and Chief Executive Officer of IMI Norgren Group (sophisticated motion and fluid control systems for original equipment manufacturers). He was employed by Rexnord Corporation (power transmission and conveying components) for 25 years serving as President and Group Chief Executive from 1998 until October 2001 and holding a variety of senior sales, marketing, and international positions prior thereto.
Kevin J. Brown, age 54, was named our Interim Chief Financial Officer and Corporate Controller in December 2011. Prior to that, he was our Corporate Controller and Chief Accounting Officer since October 2006. He was our Vice President of Corporate Services, Investor Relations & Compliance from August 2006 to October 2006 and he was our Vice President and Chief Financial Officer from January 2000 to August 2006. Previously, he was our Controller and Chief Accounting Officer since December 1995. Prior to joining us, he was employed by the accounting firm of Ernst & Young LLP for 15 years.
Saeid Rahimian, age 54, was named Senior Vice President and President of our newly created Energy Services Group in October 2011. Prior to that, he was our Corporate Vice President and President, Fluid Management, since September 2005. He was Group Vice President and President of our R&M Energy Systems and Reactor Systems businesses from May 2004 to September 2005. He was President of our R&M Energy Systems business from 1998 to May 2004. Prior to 1998, he held various positions within Robbins & Myers, Inc.
Aaron H. Ravenscroft, age 34, was appointed as Vice President and President of our newly created Process & Flow Control Group in September 2011. Prior to joining us, he was employed by Gardner Denver (manufacturer of highly engineered compressors and blowers for industrial applications) from December 2008 to September 2011, where he held various management positions, the most recent being Vice President of Industrial Products-Europe. Prior to joining Gardner Denver, he was employed by Wabtec from 2003, where he held a series of management positions with increasing responsibility. Prior to 2003, he was employed by Janney Montgomery Scott.
Jeffrey L. Halsey, age 60, has been our Vice President, Human Resources since July 2007. He held various Human Resources positions with ABB Ltd. from 1989 through 2006, most recently as Group Senior Vice President, Human Resources for ABB Inc. Prior to 1989, he was Vice President, Employee Relations for Pullman, Inc.
Michael J. McAdams, age 63, has been our Treasurer since October 2005, and was Assistant Treasurer from September 2004 to September 2005. From 1999 to 2003, he was Treasurer of Evenflo Company, Inc. He was Treasurer of Advanced Silicon Materials, Inc. from 1996 to 1999. He was also employed by Armco, Inc. for 15 years, holding various finance positions, including the position of Assistant Treasurer.
Linn S. Harson, age 47, has been our Secretary and General Counsel since January 2009. She has been with the law firm of Thompson Hine LLP since 1996, and a partner in the same firm since January 2005.
The term of office of our executive officers is until our 2013 Annual Meeting of Directors (the date of which has not yet been finally determined) or until their respective successors are elected.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(A) Our common shares trade on the New York Stock Exchange under the symbol RBN. The prices presented in the following table are the high and low closing prices for the common shares for the periods presented.
(B) As of September 30, 2012, we had 365 shareholders of record.
(C) Dividends paid on common shares are presented in the table in Item 5(A). Our credit agreement includes certain covenants which restrict our payment of dividends, such that if immediately prior to, and after giving effect to, payment of such dividends, the consolidated leverage ratio is greater than 2.75 to 1.00, the aggregate of certain restricted purchases, redemptions and payments in the fiscal year does not exceed $25,000,000. In addition, the Merger Agreement with National Oilwell Varco limits our ability to pay dividends.
(D) In fiscal 2012, there were no sales of unregistered securities.
(E) A summary of the Company’s repurchases of its common shares during the quarter ended August 31, 2012 is as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
(a) During the fourth quarter of fiscal 2012, the Company purchased 10,453 of its common shares in connection with its employee benefit plans, including purchases associated with the vesting of restricted share awards. These purchases were not made pursuant to a publicly announced repurchase plan or program. The remaining 530,000 shares repurchased during the fourth quarter of fiscal 2012 were under our share repurchase programs. (See (b) below).
(b) On October 6, 2011, the Company announced that its Board of Directors had authorized the repurchase of up to 3.0 million of the Company’s currently outstanding common shares. This is in addition to the approximately 1.0 million shares that were available to be repurchased under the October 27, 2008 authorization by the Board of Directors which had authorized 3.0 million shares to be repurchased (the “Programs”). Repurchases under both
Programs have generally been made in the open market or in privately negotiated transactions not exceeding prevailing market prices, subject to regulatory considerations and market conditions, and have been funded from the Company’s available cash balances. As of June 19, 2012, the Company had substantially completed all of the repurchases under the Programs.
On completion of the repurchases eligible under the Programs, on June 25, 2012, the Company’s Board of Directors authorized the repurchase of up to 2.0 million of the Company’s currently outstanding common shares (the “June 2012 Program”). Repurchases under the June 2012 Program will generally be made in the open market or in privately negotiated transactions not exceeding prevailing market prices, subject to regulatory considerations and market conditions, and will be funded from the Company’s available cash and credit facilities. The June 2012 Program will expire when we have repurchased all the authorized shares, unless terminated earlier by a Board resolution. No repurchases were made in fiscal 2012 under the June 2012 Program.
Under the terms of the definitive merger agreement with NOV, we have agreed not to repurchase our common shares under the June 2012 Program pending consummation of the merger.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data (1)
Robbins & Myers, Inc. and Subsidiaries
(In thousands, except per share and employee data)
The following selected financial data should be read in conjunction with Item 7
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading designer, manufacturer and marketer of highly engineered, application-critical equipment and systems for the energy, industrial, chemical and pharmaceutical markets worldwide. With our acquisition of T-3 Energy Services, Inc. (“T-3”) on January 10, 2011 (“the acquisition date”), we are expanding and complementing our energy business in our Energy Services segment, and creating a stronger strategic platform with better scale to support future growth. We attribute our success to our close and continuing interaction with customers, our manufacturing, sourcing and application engineering expertise and our ability to serve customers globally. We have initiated programs to reduce our manufacturing footprint for specific product lines to improve asset utilization, and we have standardized more of the reactor system product offerings to leverage our supply chain, global manufacturing assets and functional resources. We are continuing to find ways to leverage strengths across the Company and identify new synergy opportunities. In fiscal 2013, we expect to continue our streamlining and profit margin expansion efforts in certain businesses and pursue our organic and strategic growth initiatives to improve our competitiveness, financial results, long-term profitability and shareholder value.
As more fully described in Note 3 of Notes to Consolidated Financial Statements, on August 8, 2012, we entered into a definitive merger agreement with National Oilwell Varco, Inc. (“NOV,” “National Oilwell Varco”), in an all-cash transaction. Under the terms of the transaction, which has been approved by the Boards of Directors of both Robbins & Myers and NOV, upon the closing of the merger, our shareholders will receive $60.00 in cash for each common share of Robbins & Myers they own. Consummation of the transaction is subject to customary closing conditions, including obtaining certain regulatory approvals, as well as approval of our shareholders. On October 9, 2012, we received a request for additional information and documents from the U.S. Justice Department (often referred to as a second request) in connection with the proposed merger. Unless expressly noted to the contrary, all forward-looking statements in the discussion and analysis of financial condition and results of operations that follows relate to the Company on a stand-alone basis and are not reflective of the impact of the proposed merger with NOV.
We continued to experience positive results during fiscal 2012 in major geographic areas and end markets, with most products achieving revenue growth and improved margins driven by strong backlog at the beginning of fiscal 2012 and higher orders in fiscal 2012, along with benefits from our past restructuring and continuing cost containment initiatives. We are seeing our energy markets moderating, but remain at relatively high levels and continued growth in certain chemical and industrial markets. We are cautiously optimistic that with our order trends and record backlog in both our segments at the end of fiscal 2012, we will continue to see improved operating results in fiscal 2013.
With approximately 43% of our sales outside the United States, we can be affected by changes in currency exchange rates between the U.S. dollar and the foreign currencies in non-U.S. countries in which we operate. The impact on net income, sales and orders due to foreign exchange changes was not material for fiscal 2012 compared with fiscal 2011. Additionally, the assets and liabilities of our foreign operations are translated at the exchange rates in effect at the balance sheet date, with related gains or losses reported as a separate component of our shareholders’ equity, except for Venezuela, which is reported following highly inflationary accounting rules under U.S. GAAP. The marginal weakening of most foreign currencies against the U.S. dollar in fiscal 2012 did not materially impact our financial condition at the end of fiscal 2012 as compared with the end of fiscal 2011.
Beginning with the first quarter of fiscal 2012, we changed the composition of our reportable segments to reflect organizational, management and operational changes implemented in the first quarter of fiscal 2012. The Company now reports results in two business segments consisting of Energy Services and Process & Flow Control. The Company previously reported its operations under the Fluid Management segment and the Process Solutions segment. The businesses in our Energy Services segment provide mission-critical products to customers in the upstream oil and gas markets for use in drilling and exploration, production and completion, and pipeline transmission infrastructure. Major products include power sections for drilling motors, blowout preventers, down-hole progressing cavity pumps, drive systems and automation, wellhead equipment, frac manifolds and trees, high pressure engineered gate valves and a broad line of ancillary equipment for the energy sector, such as rod guides, rod and tubing rotators, pipeline closure products and valves. Our Energy Services segment includes products and services sold under the Robbins & Myers Energy Systems® and T-3® brands. Our Process & Flow Control segment targets industrial customers in the industrial chemical, pharmaceutical, wastewater treatment, food and beverage, and other end markets. Products include glass-lined reactors and thermal heat exchangers, progressing cavity pumps for industrial applications and surface transfer of viscous fluids, mixing equipment and engineered systems used to filter and process various liquids and materials. Primary brands in our Process &
Flow Control segment include Pfaudler®, Moyno®, Chemineer® and Edlon®. We believe that this strategic realignment, which is reflected in our financial reporting for all periods presented, will enable us to have greater focus on our primary end markets while creating additional opportunities to more efficiently serve common customers and to leverage strengths across product groups.
As mentioned above, on January 10, 2011, we acquired 100% of the outstanding common stock and voting interest of T-3. The operating results of T-3 are included in our consolidated financial statements since the acquisition date in our Energy Services segment.
During the third quarter of fiscal 2011, we divested our Romaco businesses (Romaco segment). This divestiture was part of the Company’s portfolio management process and operating strategy to simplify the business and improve its profit profile, and to focus on growing the Company around core competencies. The results of operations for our Romaco segment are reported as discontinued operations for all periods presented.
With the sale of the Romaco segment and our realignment as discussed above, our business consists of two market-focused segments: Energy Services and Process & Flow Control.
Energy Services. Order levels from customers served by our Energy Services segment moderated in the second half of fiscal 2012, but continued to show year-over-year improvements in fiscal 2012 compared with fiscal 2011. Our primary objectives for this segment are to grow sales by increasing our capacity to meet current demand, expanding our geographic reach, improving our selling and product management capabilities, commercializing new products in our niche market sectors, developing new customer relationships, and expanding our aftermarket business. Our Energy Services business segment designs, manufactures, markets, repairs and services equipment and systems including power sections for drilling motors, blow-out preventers, down-hole progressing cavity pumps, drive systems and controllers, wellhead equipment, frac manifolds and trees, high pressure engineered gate valves, and a broad line of ancillary equipment for the energy sector, such as rod guides, rod and tubing rotators, pipeline closure products and valves. These products are primarily used in upstream oil and gas exploration and recovery applications.
Process & Flow Control. Our Process & Flow Control segment orders improved in fiscal 2012 over fiscal 2011, achieving the highest levels since fiscal 2008. Pricing began to show improvement in fiscal 2012, but has not fully recovered, especially in the European chemical markets. Our primary objectives for this segment are to reduce operating costs in developed regions, increase manufacturing capabilities in low cost areas, standardize our products to increase operating flexibility, integrate our global operations and increase our focus on aftermarket opportunities. Our Process & Flow Control business segment designs, manufactures and services glass-lined reactors and storage vessels, customized equipment and systems and customized fluoropolymer-lined fittings, industrial progressing cavity pumps and complementary products such as grinders and customized fluid-agitation equipment and systems primarily for the pharmaceutical, industrial and specialty chemical markets.
Results of Operations
The following tables present components of our Consolidated Statement of Income and segment information for our continuing operations.
The comparability of the operating results has been impacted by NOV merger-related costs in fiscal 2012 and T-3 merger-related costs in fiscal 2011, as well as restructuring costs in fiscal 2011 and 2010. See Note 7-Statement of Income Information in Item 8 of this Report for further discussion. In addition, the comparability of the segment data is impacted by changes in foreign currency exchange rates, due to the translation of non-U.S. dollar denominated subsidiary results into U.S. dollars, acquisition of T-3 (included in our Energy Services segment) on January 10, 2011, as well as general economic conditions in the end markets we serve.
The Company’s operating performance is evaluated using several measures. One of those measures, EBIT, is income before interest and income taxes and is reconciled to net income on our Consolidated Statement of Income. We evaluate performance of our business segments and allocate resources based on EBIT. EBIT is not, however, a measure of performance calculated in accordance with U.S. generally accepted accounting principles and should not be considered as an alternative to net income as a measure of our operating results. EBIT is not a measure of cash available for use by management.
Fiscal Year Ended August 31, 2012 Compared with Fiscal Year Ended August 31, 2011
Net Sales
Consolidated net sales from continuing operations for fiscal 2012 were $1,034.8 million, or $214.1 million higher than fiscal 2011 net sales, an increase of 26%. Excluding the impact of currency translation and the T-3 acquisition, net sales increased by $100.8 million, or 16%, due to higher sales in both of our segments in fiscal 2012.
The Energy Services segment, which includes T-3 results since January 10, 2011, had sales of $665.5 million in fiscal 2012 compared with $477.2 million in fiscal 2011. The T-3 acquisition contributed $127.0 million in additional sales over the prior year, with $78.4 million due to T-3 being owned for only a partial period of the prior year and the remaining due to strong demand in fiscal 2012, as discussed below. Excluding the impacts of foreign currency translation and T-3 acquisition, sales in fiscal 2012 increased $64.1 million, or 21%. This volume increase was primarily due to higher customer demand resulting from higher oil prices worldwide in fiscal 2012 and increased expenditure for drilling activity as exploration and production companies invested to capture oil and
gas from shale formations in North America. Orders for this segment were impacted by the same factors and were $714.4 million in fiscal 2012 compared with $517.8 million in fiscal 2011. Excluding currency and acquisition impacts, orders in fiscal 2012 grew $61.9 million, or 21%, due to strong market conditions. Ending backlog at August 31, 2012 was $169.7 million compared with $121.3 million at August 31, 2011.
The Process & Flow Control segment had sales of $369.3 million in fiscal 2012 compared with $343.4 million in fiscal 2011, an increase of $25.9 million, or 8%. Excluding currency impact, sales in fiscal 2012 increased $36.7 million, or 11%, from the prior year, reflecting improved market conditions in certain served end markets. Segment orders in fiscal 2012 continued to improve from fiscal 2011 and were $386.6 million, compared with $358.5 million in fiscal 2011. Excluding currency impact, orders increased $38.4 million, or 11%, in fiscal 2012 compared with fiscal 2011, reflecting improved demand in certain end markets outside Europe. Ending backlog at August 31, 2012 was $138.1 million compared with $129.8 million at August 31, 2011.
Income Before Interest and Income Taxes (EBIT)
Consolidated EBIT from continuing operations for fiscal 2012 was $218.6 million compared with $131.3 million in fiscal 2011, an increase of $87.3 million. The T-3 business acquired in the second quarter of fiscal 2011 contributed $42.3 million of the consolidated EBIT increase, including $5.9 million of T-3 merger-related costs incurred at Corporate and $19.7 million of higher amortization related to customer backlog, severance costs and inventory write-up values expense in the Energy Services segment which did not recur in fiscal 2012. The current year EBIT includes $3.0 million of expense related to the NOV merger. The remaining $48.0 million increase in consolidated EBIT was mainly attributable to the higher sales volume described above in all our business platforms and a favorable sales mix in our Energy Services segment. The exchange rate impact on EBIT was minimal.
The Energy Services segment had EBIT of $198.0 million in fiscal 2012, compared with $131.0 million in the prior year, an increase of $67.0 million. The T-3 business acquired in the second quarter of fiscal 2011 contributed $36.4 million of the increase. The prior year EBIT included merger-related expenses of $19.7 million for higher amortization related to customer backlog, severance and expense due to inventory write-up values. The remaining increase in EBIT of $30.6 million was mainly due to the higher sales volume described above and an improved product sales mix. The exchange rate impact on EBIT was minimal.
The Process & Flow Control segment had EBIT of $41.4 million in fiscal 2012 compared with $26.8 million in fiscal 2011, an increase of $14.6 million. The increase in EBIT was due principally to the higher sales volume in fiscal 2012 described above. Fiscal 2011 had $1.2 million of pension curtailment costs related to one of our U.S. operations and restructuring costs of $1.0 million related to our German operations, that did not recur in fiscal 2012. The exchange rate impact on EBIT was minimal.
Corporate costs were $5.6 million lower in fiscal 2012 compared with fiscal 2011. Merger-related costs, NOV in fiscal 2012 and T-3 in fiscal 2011, were $2.9 million lower. The remaining decrease is from lower compensation costs related to the departure of an executive officer in the second quarter of fiscal 2012, lower pension costs and foreign currency gains.
Income Taxes
Our effective tax rate for continuing operations was 30.9% for fiscal 2012 compared with 38.2% in fiscal 2011. The current year effective tax rate is lower than the U.S. statutory tax rate and the effective tax rate in fiscal 2011, primarily due to audit settlements in fiscal 2012 and the related release of unrecognized tax benefit balances, as well as increased income in our foreign locations which have lower effective tax rates. Additionally, fiscal 2011 included the recording of an additional valuation allowance of $7.0 million for certain deferred tax assets in our Process & Flow Control segment.
Net Income
Our net income in fiscal 2012 was $150.0 million compared with $134.0 million in fiscal 2011, which includes income from discontinued operations, net of tax, of $53.6 million (see Note 5-Discontinued Operations in Item 8 of this Report). Net income from continuing operations in fiscal 2012 was $150.0 million, compared with $80.4 million in fiscal 2011. The increase in fiscal 2012 net income from continuing operations was primarily driven by the contribution of the prior year T-3 acquisition for the full year, higher sales volume, favorable product mix, lower merger-related charges and a lower effective tax rate.
Fiscal Year Ended August 31, 2011 Compared with Fiscal Year Ended August 31, 2010
Net Sales
Consolidated net sales from continuing operations for fiscal 2011 were $820.6 million, or $342.4 million higher than fiscal 2010 net sales, an increase of 72%. Excluding the impact of currency translation and the T-3 acquisition, net sales increased by $152.4 million, or 32%, due to higher sales in both of our segments in fiscal 2011.
The Energy Services segment, which included T-3 results since January 10, 2011, had sales of $477.2 million in fiscal 2011 compared with $201.6 million in fiscal 2010. Excluding the impacts of foreign currency translation and T-3 acquisition, sales in fiscal 2011 increased $91.7 million, or 45%. The increase was primarily due to strong growth in horizontal rigs, as exploration and production companies invested to capture oil and gas from shale formations in North America. Orders for this segment were $517.8 million in fiscal 2011 compared with $218.4 million in fiscal 2010. Excluding currency and acquisition impacts, orders in fiscal 2011 grew $78.4 million, or 36%, due to strong market conditions. Ending backlog at August 31, 2011, including T-3 backlog of $91.3 million, was $121.3 million compared with $27.1 million at August 31, 2010.
The Process & Flow Control segment had sales of $343.4 million in fiscal 2011 compared with $276.6 million in fiscal 2010, an increase of $66.8 million, or 24%. Excluding currency impact, sales in fiscal 2011 increased $60.7 million, or 22%, from the prior year, due to improving demand for capital goods in global chemical markets. Segment orders in fiscal 2011 continued to improve from fiscal 2010 and were $358.5 million, compared with $303.5 million in fiscal 2010. Excluding currency impact, orders increased $49.9 million, or 16%, in fiscal 2011 compared with fiscal 2010, reflecting improved demand in certain end markets outside Europe. Ending backlog at August 31, 2011 was $129.8 million compared with $109.7 million at August 31, 2010.
Income Before Interest and Income Taxes (EBIT)
Consolidated EBIT from continuing operations for fiscal 2011 was $131.3 million compared with $46.9 million in fiscal 2010, an increase of $84.4 million. Excluding the impacts of currency translation and operating results of T-3, consolidated EBIT in fiscal 2011 increased by $67.2 million. This increase in consolidated EBIT was mainly attributable to the higher sales volume described above in all our business platforms and a favorable sales mix in our Energy Services segment. We also experienced $1.8 million of lower restructuring charges in our Process & Flow Control segment in fiscal 2011 compared with fiscal 2010.
The Energy Services segment had EBIT of $131.0 million in fiscal 2011 compared with $61.7 million in fiscal 2010. Excluding currency and acquisition impacts, EBIT for fiscal 2011 increased by $51.8 million, or 84%, due principally to the sales increase and a favorable product mix.
The Process & Flow Control segment had EBIT of $26.8 million in fiscal 2011 compared with $4.9 million in fiscal 2010. This increase in EBIT resulted from higher sales volume in fiscal 2011, as well as lower restructuring charges of $1.8 million.
Corporate costs were $6.8 million higher in fiscal 2011 compared with fiscal 2010, primarily due to $5.9 million of costs associated with professional fees and accelerated stock compensation expense related to the T-3 merger transaction.
Income Taxes
Our effective tax rate for continuing operations was 38.2% for fiscal 2011 compared with 35.2% in fiscal 2010. The fiscal 2011 effective tax rate was higher than the U.S. statutory tax rate and the effective tax rate in fiscal 2010, primarily due to the recording of an additional valuation allowance of $7.0 million for certain deferred tax assets in our Process & Flow Control segment. Excluding this impact, the effective tax rate for fiscal 2011 was lower than the U.S. federal statutory tax rate primarily due to certain U.S. permanent deductions and tax credits.
The effective tax rate for fiscal 2010 from continuing operations approximated the U.S. federal statutory tax rate.
Net Income
Our net income in fiscal 2011, which included income from discontinued operations, net of tax, of $53.6 million (see Note 5-Discontinued Operations in Item 8 of this Report), was $134.0 million compared with $33.2 million in fiscal 2010, which included net income from discontinued operations of $3.9 million. Net income from continuing operations in fiscal 2011 was $80.4 million, compared with $29.3 million in fiscal 2010. The increase in fiscal 2011 net income was primarily driven by higher sales volume and a favorable product mix, somewhat reduced by charges relating to the acquisition of T-3 and a higher effective tax rate.
Liquidity and Capital Resources
Operating Activities
In fiscal 2012, our cash inflow from operating activities was $160.4 million, compared with $101.0 million in fiscal 2011, an increase of $59.4 million. This increase in fiscal 2012 was primarily caused by higher net income from continuing operations of $69.6 million, reduced by increased funding for our pension plans of $6.8 million. The increase in working capital was a reduction in operating cash flow, although lower than the prior year impact.
In fiscal 2011, our cash inflow from operating activities was $101.0 million, compared with $88.5 million in fiscal 2010, an increase of $12.5 million. This increase was caused by higher net income, somewhat reduced by higher working capital needs in fiscal 2011 to support our sales and profit growth, payments for restructuring costs accrued at the end of fiscal 2010, increased funding for U.S. pension plans, and payments related to accruals in the opening balance sheet of T-3.
Cash flows from operating activities can fluctuate significantly from period-to-period due to working capital needs and the timing of payments for items such as income taxes, restructuring activities, pension funding and other items.
We expect our available cash, fiscal 2013 operating cash flow and availability under our credit agreement to be adequate to fund fiscal year 2013 operating needs, shareholder dividends, capital expenditures, and additional share repurchases, if any.
Investing Activities
In fiscal 2012, the Company continued to generate substantial cash from operating activities, which resulted in a strong year end financial position, with resources available for reinvestment in existing businesses. Capital expenditures in fiscal 2012 were $29.5 million in fiscal 2012 and were primarily related to our cost reduction and sales growth initiatives.
In fiscal 2011, our net cash outflows relating to investing activities of $29.5 million included $90.4 million of cash used for the T-3 acquisition, net of cash acquired; cash proceeds from the sale of our Romaco businesses of $89.2 million and $28.3 million of capital expenditures.
In fiscal 2010, our net cash outflows from investing activities of $8.1 million consisted of capital expenditures of approximately $10.6 million and asset sale proceeds of $2.5 million related to the sale of certain of our assets at two of our business units.
The Company expects fiscal 2013 capital spending to be about 30% higher than fiscal 2012.
Financing Activities
Our cash outflows from financing activities for fiscal 2012 were $188.6 million which included $187.2 million in share repurchases, as more fully described in Note 14 of the financial statements at Item 8 of this Report. The decrease in net proceeds from stock activities in fiscal 2012 of $12.9 million primarily resulted from fewer stock option exercises in the current year. The large amount of option exercises in fiscal 2011 was attributable to the T-3 acquisition. Dividends paid during fiscal 2012 were $8.6 million, or $1.0 million higher than fiscal 2011, primarily due to additional shares issued in January 2011 related to our T-3 merger. The quarterly dividend rate per common share was increased in January 2012 from $0.045 to $0.050.
From available cash balances, we repaid the remaining $30.0 million of Senior Notes on the May 3, 2010 maturity date.
On October 6, 2011, the Company announced that its Board of Directors had authorized to repurchase up to 3.0 million of the Company’s outstanding common shares, in addition to the approximately 1.0 million remaining available for repurchase under the October 2008 authorization by the Board of Directors. In fiscal 2012, the Company repurchased all the remaining 4.0 million shares for $187.2 million. Repurchases were funded from the Company’s available cash balances. There were no such share repurchases in fiscal 2011 and 2010.
On June 25, 2012, the Company’s Board of Directors authorized the repurchase of up to 2.0 million of the Company’s currently outstanding common shares (the “June 2012 Program”). Repurchases under the June 2012 Program will generally be made in the open market or in privately negotiated transactions not exceeding prevailing market prices, subject to regulatory considerations and market conditions, and will be funded from the Company’s cash and credit facilities. There were no repurchases under the June 2012 Program in fiscal 2012. Under the terms of the definitive merger agreement with NOV, we have agreed not to repurchase our common shares under the June 2012 Program pending consummation of the merger. The June 2012 Program will expire when we have repurchased all the authorized shares, unless terminated earlier by a Board resolution or consummation of the merger.
Credit Agreement
Our Bank Credit Agreement (the “Agreement”) provides that we may borrow, for the five-year term of the Agreement, on a revolving credit basis up to a maximum of $150.0 million at any one time. In addition, under the terms of the Agreement, we are entitled, on up to six occasions prior to the maturity of the loan, subject to the satisfaction of certain conditions, to increase the aggregate commitments under the Agreement in the aggregate principal amount of up to $150.0 million. All outstanding amounts under the Agreement are due and payable on March 16, 2016. Interest is variable based upon formulas tied to a Eurocurrency rate or an alternative base rate defined in the Agreement, at our option. Borrowings, which may also be used for general corporate purposes, are unsecured, but are guaranteed by certain of our subsidiaries. While no amounts are outstanding under the Agreement at August 31, 2012, we have $23.7 million of standby letters of credit outstanding at August 31, 2012. These standby letters of credit are used as security for advance payments received from customers and for future payments to our vendors. Accordingly, under the Agreement, we have $126.3 million of unused borrowing capacity.
The Agreement contains customary representations and warranties, default provisions and affirmative and negative covenants, including limitations on indebtedness, liens, asset sales, mergers and other fundamental changes involving the Company, permitted investments, sales and lease backs, cash dividends and share repurchases, and financial covenants relating to interest coverage and leverage. As of August 31, 2012, we are in compliance with these covenants.
We obtained a waiver from the lenders under the Agreement in connection with our pending merger with National Oilwell Varco, because the execution of the Merger Agreement and the merger would cause us to be in default under the Agreement.
Critical Accounting Policies and Estimates
This “Management’s Discussion and Analysis” is based on our Consolidated Financial Statements and the related notes. The more critical accounting policies used in the preparation of our Consolidated Financial Statements are discussed below.
Revenue Recognition
We recognize revenue at the time of title passage to our customer which is generally upon shipment of the product. We recognize revenue for certain longer-term contracts based on the percentage of completion method. The percentage of completion method requires estimates of total expected contract revenue and costs. We follow this method because we can make reasonably dependable estimates of the revenue and cost applicable to various stages of a contract. Revisions in profit estimates are reflected in the period in which the facts that gave rise to the revision become known.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. Significant estimates made by us include the allowance for doubtful accounts, inventory valuation, deferred tax asset valuation allowance, warranty, litigation, product liability, tax contingencies, stock option valuation, goodwill and intangible valuation and retirement benefit obligations.
Our estimate for uncollectible accounts receivable is based upon an analysis of our prior collection experience, specific customer creditworthiness, current economic trends within the industries we serve, specific customers’ ability to pay us and the length of time that the receivables are past due.
Inventory valuation reserves are determined based on our assessment of the demand for our products and the on-hand quantities of inventory in relation to historical usage. The inventory to which this reserve relates is still on-hand and will be sold or disposed of in the future. The expected selling price of this inventory approximates its net book value; therefore, there is no significant impact on gross margin when it is sold.
We have recorded valuation allowances to reflect the estimated amount of deferred tax assets that may not be realized based upon our analysis of the realization of tax benefits associated with the deferred tax assets. Future taxable income, reversals of temporary differences, available carryback periods, the results of tax strategies and changes in tax laws could impact these estimates.
Warranty obligations are contingent upon product failure rates, material required for the repairs and service and delivery costs. We estimate the warranty accrual based on specific product failures that are known to us plus an additional amount based on the historical relationship of warranty claims to sales. We record litigation and product liability reserves based upon a case-by-case analysis of the facts, circumstances and estimated costs.
Estimates form the basis for making judgments about the carrying value of our assets and liabilities and are based on the best available information at the time we prepare our consolidated financial statements. These estimates are subject to change as conditions within and beyond our control change, including but not limited to economic conditions, the availability of additional information and actual experience rates different from those used in our estimates. Accordingly, actual results may differ from these estimates.
Acquisition and Disposition
On August 8, 2012, we entered into a definitive merger agreement with National Oilwell Varco in an all-cash transaction. Under the terms of the transaction, which has been approved by the Boards of Directors of both Robbins & Myers, Inc. and NOV, upon the closing of the merger, our shareholders will receive $60.00 in cash for each common share of Robbins & Myers they own. Consummation of the transaction is subject to customary closing conditions, including obtaining certain regulatory approvals, as well as approval from our shareholders.
On January 10, 2011 (“the acquisition date”), we completed our acquisition of T-3 Energy Services, Inc. (“T-3”), such that T-3 became a wholly-owned subsidiary of Robbins & Myers, Inc. The operating results of T-3 are included in our consolidated financial statements since the acquisition date within our Energy Services segment. See Note 4 - Acquisition in Item 8 of this Report. The merger was accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations”. Accordingly, we made an allocation of the purchase price at the acquisition date based upon our estimates of the fair value of the acquired assets and assumed liabilities obtained during our due diligence process and through other sources, including through tangible and intangible asset appraisals. Additionally, as required by ASC 805, all integration-related costs, including professional fees and severance, were expensed as incurred.
In fiscal 2011, we completed the sale of all the shares and equity interest in our Romaco businesses (Romaco segment). The results of our Romaco segment are reported as discontinued operations for all periods presented. See Note 5 - Discontinued Operations in Item 8 of this Report.
Goodwill and Other Intangible Assets
Goodwill is assessed on an annual basis, or more frequently as impairment indicators arise. Due to the reconfiguration of our segments in fiscal 2012, impairment tests, which involve the use of estimates related to the fair market values of the business operations with which goodwill is associated at our reporting unit level, were performed at year-end for fiscal 2012 (our annual impairment test date) using both a market approach, as well as a discounted cash flow methodology (“income approach”). The market approach determines the value of a reporting unit by deriving market multiples for reporting units based on assumptions potential market participants would use in establishing a bid price for the unit. This approach therefore assumes strategic initiatives will result in improvements in operational performance in the event of purchase, and includes the application of a discount rate based on market participant assumptions with respect to capital structure and access to capital markets. The income approach uses a reporting unit’s projection of estimated operating results and cash flows that are discounted using a weighted-average cost of capital that reflects current and future market conditions. The projection uses management’s best estimates of economic and market conditions over the projected period, including growth rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements. Our final estimate of fair value of reporting units is developed by a combination of the fair values determined through both the market and income approaches. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. Although our market participant assumptions and cash flow
forecasts are based on assumptions that are consistent with the market environment and plans and estimates we are using to manage the underlying businesses, there is significant judgment in applying these assumptions to our valuations. The impairment testing performed by the Company at August 31, 2012 indicated that the estimated fair value of each reporting unit exceeded its corresponding carrying amount, and, as such, no impairment existed.
Our definite-lived intangible assets are generally amortized on a straight line basis, with estimated useful lives ranging from under one year to 20 years. These assets are evaluated periodically and when events or circumstances indicate a possible inability to recover their carrying amount. When events and circumstances indicate that the carrying values of these definite-lived intangible assets may not be recoverable, management assesses the recoverability of the carrying value by preparing estimates of sales volume and the resulting gross profit and cash flows. If the sum of the expected undiscounted future cash flows is less than the carrying amount, we recognize an impairment loss for the amount by which the carrying amount exceeds the fair value. We use a variety of methodologies to determine the fair values of these assets including discounted cash flow models, which are consistent with the assumptions we believe hypothetical marketplace participants would use.
Losses, if any, resulting from impairment tests for goodwill and definite-lived intangible assets would be reflected in income before interest and income taxes in our Consolidated Statement of Income.
Foreign Currency Accounting
Gains and losses resulting from the settlement of a transaction in a currency different from that used to record the transaction are charged or credited to net income when incurred. Adjustments resulting from the translation of non-U.S. dollar functional currency denominated financial statements into U.S. dollars are recognized in accumulated other comprehensive income or loss in the Consolidated Balance Sheet (except Venezuela, which was reported under highly inflationary accounting rules since our second quarter of fiscal 2010-see below).
Our Company has a Venezuelan subsidiary with net sales, operating income and total assets representing approximately one percent of our consolidated financial statement amounts for fiscal 2010, 2011 and 2012. In early January 2010, the Venezuelan government devalued its currency. Our subsidiary operated under a rate of 4.30 bolivars to the U.S. dollar, as compared with the previous rate of 2.15, and our fiscal 2010, fiscal 2011 and fiscal 2012 year-end financial statements reflected this new rate. In addition, the financial statements of our Venezuelan subsidiary were consolidated and reported under highly inflationary accounting rules under U.S. generally accepted accounting principles beginning in the second quarter of fiscal 2010, with all gains or losses from remeasurement reflected in our Consolidated Statement of Income since the second quarter of fiscal 2010.
We use permanently invested intercompany loans as a source of capital to reduce the exposure to foreign currency fluctuations in our foreign subsidiaries. These loans are treated as analogous to equity for accounting purposes. Therefore, we record foreign exchange gains or losses on these intercompany loans in accumulated other comprehensive income or loss.
Pensions
We maintain defined benefit and defined contribution pension plans that provide retirement benefits to substantially all U.S. employees and certain non-U.S. employees. Pension expense for fiscal 2012 and beyond is dependent on a number of factors including returns on plan assets and changes in plan discount rates and therefore cannot be predicted with certainty.
A significant factor in determining the amount of expense recorded for a funded pension plan is the expected long-term rate of return on plan assets. We develop the long-term rate of return assumption based on the current mix of equity and debt securities included in plan assets and on the historical returns on those types of investments, judgmentally adjusted to reflect current expectations of future returns. At August 31, 2012, the weighted average expected rate of return on plan assets was 7.3%.
In addition to the expected rate of return on plan assets, recorded pension expense includes the effects of service cost - the actuarial cost of benefits earned during a period - and interest on the plan’s liabilities to participants. These amounts are determined actuarially based on current discount rates and assumptions regarding matters such as future salary increases and mortality. Differences in actual experience in relation to these assumptions are generally not recognized immediately but rather are deferred together with asset-related gains or losses. When cumulative asset-related and liability-related gains or losses exceed the greater of 10% of total liabilities or the calculated value of plan assets, the excess is amortized and included in pension income or expense. At
August 31, 2012, the weighted average discount rate used to value plan liabilities was 3.8%. We determine our discount rate based on an actuarial yield curve applied to the payments we expect to make out of our defined benefit plans.
The Company reviews its actuarial assumptions on an annual basis and makes modifications based on current rates and trends when appropriate. Additional changes in the key assumptions discussed above would affect the amount of pension expense currently expected to be recorded for years subsequent to fiscal 2012. Specifically, a one-half percent decrease in the rate of return on assets assumption would have the effect of increasing pension expense by approximately $0.5 million. A comparable increase in this assumption would have the opposite effect. In addition, a one-half percent increase in the discount rate would decrease pension expense by $0.4 million, and a comparable decrease in the discount rate would increase expense by approximately $0.6 million.
New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements,” that amends existing disclosure requirements under ASC 820, by adding required disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchase, sales, issuances, and settlements relative to level 3 measurements; and clarifying, among other things, the existing fair value disclosures about the level of disaggregation. This ASU was effective for us in the fourth quarter of fiscal 2010, except for the requirement to provide level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which was effective beginning in our fiscal 2012. The remaining adoption of this standard in fiscal 2012 for level 3 activity disclosure did not have a material impact on our consolidated financial statements.
In December 2010, the FASB issued ASU No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations,” that addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in this standard specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior reporting period only. This standard also expands the supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this ASU are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. This standard was effective for us beginning in our fiscal 2012 and its applicability will depend on future acquisitions. The adoption of this standard did not have a material impact on our consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” that amends the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and disclosing information about fair value measurements. The amendments in this ASU achieve the objectives of developing common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs and improving their understandability. Some of the requirements clarify the FASB’s intent about the application of existing fair value measurement requirements while other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU are effective prospectively for interim and annual periods beginning after December 15, 2011, with no early adoption permitted. This standard was effective for us beginning in our third quarter of fiscal 2012. The adoption of this standard did not have a material impact on our consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income,” that improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this standard require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, adjustments must be displayed for items that are reclassified from other comprehensive income (“OCI”) to net income, in both net income and OCI. The standard does not change the current option for presenting components of OCI gross or net of the effect of income taxes, provided that such tax effects are presented in the statement in which OCI is
presented or disclosed in the notes to the financial statements. Additionally, the standard does not affect the calculation or reporting of earnings per share. In December 2011, the FASB issued ASU No. 2011-12, “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,” which defers only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments. All other requirements in ASU No. 2011-05 are not affected by this standard, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. For public entities, the amendments in ASU No. 2011-05, as superseded by ASU No. 2011-12, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and are to be applied retrospectively, with early adoption permitted. These standards will be effective for us beginning in our fiscal 2013. We do not expect the adoption of these standards to have a material impact on our consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment,” that gives both public and nonpublic entities the option to qualitatively determine whether they can bypass the existing two-step goodwill impairment test under ASC 350-20. Under the new standard, if an entity chooses to perform a qualitative assessment and determines that it is more likely than not (a more than 50 percent likelihood) that the fair value of a reporting unit is less than its carrying amount, it would then perform Step 1 of the annual goodwill impairment test in ASC 350-20 and, if necessary, proceed to Step 2. Otherwise, no further evaluation would be necessary. The decision to perform a qualitative assessment is made at the reporting unit level, and an entity with multiple units may utilize a mix of qualitative assessments and quantitative tests among its reporting units. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this standard did not have a material impact on our consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment,” that gives both public and nonpublic entities the option to use a qualitative approach to test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, the quantitative impairment test is not required. This standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. This standard will be effective for us beginning in our fiscal 2014. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
Contractual Obligations
Following is information regarding our long-term contractual obligations and other commitments outstanding as of August 31, 2012:
(1) Operating leases consist primarily of building and equipment leases.
Unrecognized tax benefits in the amount of $2,674,000, including interest and penalties, have been excluded from the table because we are unable to make a reasonably reliable estimate of the timing of future payments. The only other commercial commitments outstanding were standby letters of credit of $23,704,000. Of this outstanding amount, $16,306,000 is due within a year, $7,153,000 is due within two to three years and $245,000 is due within four to five years.
Other Off-Balance Sheet Arrangements
In fiscal 2011, the Company divested its Romaco businesses. In connection with this divestiture, the Company has provided certain representations, warranties and/or indemnities to cover various risks and liabilities, such as claims for damages arising out of the use of products or relating to intellectual property matters, commercial disputes, environmental matters or tax matters. The Company has not included any such items in the table above because they relate to unknown conditions and the Company cannot estimate the likelihood or the amount of potential liabilities from such matters. The Company does not believe that any such liability will have a material adverse effect on the Company’s financial position, results of operations or liquidity.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We maintain operations in the U.S. and foreign countries. We have market risk exposure to foreign exchange rates in the normal course of our business operations. Our significant non-U.S. operations have their local currencies as their functional currency and primarily buy and sell using that same currency. The Company also operates in Venezuela, whose currency in 2010 became highly inflationary, as defined by U.S. generally accepted accounting principles, causing us to utilize the U.S. dollar as the functional currency. Sales, operating income and total assets in Venezuela represent approximately one percent of our consolidated financial statement amounts. We manage our exposure to net assets and cash flows in currencies other than U.S. dollars by minimizing our non-U.S. dollar net asset positions. Under certain conditions, we may enter into hedging transactions, primarily currency swaps, under established policies and guidelines that enable us to mitigate the potential adverse impact of foreign exchange rate risk. We do not engage in trading or other speculative activities with these transactions as established policies require that these hedging transactions relate to specific currency exposures. We currently do not have any such hedging transactions in place.
Our main foreign exchange rate exposures relate to assets, liabilities and cash flows denominated in British pounds, euros, Indian rupees, Chinese renminbi and Canadian dollars and the general economic exposure that fluctuations in these currencies could have on the U.S. dollar value of future non-U.S. cash flows. To illustrate the potential impact of changes in foreign currency exchange rates on us for fiscal 2012, the net unhedged exposures in each currency were remeasured assuming a ten percent decrease in foreign exchange rates compared with the U.S. dollar. Using this method, our EBIT for fiscal 2012 would have decreased by $4.2 million and our cash flow from operations for fiscal 2012 would have decreased by $2.4 million. This calculation assumed that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, these changes may also affect the volume of sales or the foreign currency sales prices as competitors’ products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not include any effects of potential changes in sales levels or local currency prices.
At August 31, 2012, we had a nominal total debt of $0.2 million with a minimal interest rate. The estimated fair value of our debt at August 31, 2012 approximates its carrying value due to the short period until maturity.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Robbins & Myers, Inc. and Subsidiaries
We have audited Robbins & Myers, Inc. and Subsidiaries’ internal control over financial reporting as of August 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Robbins & Myers, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Robbins & Myers, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of August 31, 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Robbins & Myers, Inc. and Subsidiaries as of August 31, 2012 and 2011, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended August 31, 2012 and our report dated October 22, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Columbus, Ohio
October 22,
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Robbins & Myers, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Robbins & Myers, Inc. and Subsidiaries as of August 31, 2012 and 2011, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended August 31, 2012. Our audits also included the financial statement schedule listed in Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as 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 consolidated financial position of Robbins & Myers, Inc. and Subsidiaries at August 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Robbins & Myers, Inc. and Subsidiaries’ internal control over financial reporting as of August 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 22, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Columbus, Ohio
October 22, 2012
CONSOLIDATED BALANCE SHEET
Robbins & Myers, Inc. and Subsidiaries
(In thousands, except share data)
See Notes to Consolidated Financial Statements
CONSOLIDATED EQUITY STATEMENT
Robbins & Myers Inc. and Subsidiaries
(In thousands, except share and per share data)
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF INCOME
Robbins & Myers, Inc. and Subsidiaries
(In thousands, except per share data)
See Notes to Consolidated Financial Statements
CONSOLIDATED CASH FLOW STATEMENT
Robbins & Myers, Inc. and Subsidiaries
(In thousands)
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Robbins & Myers, Inc. and Subsidiaries
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Robbins & Myers, Inc. (“Company,” “Robbins & Myers,” “R&M,” “we,” “our,” or “us”) and all of its subsidiaries in which a controlling interest is maintained. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participation rights. For those consolidated subsidiaries where our ownership is less than 100%, the other shareholders’ interests are shown as Noncontrolling Interest. All significant intercompany accounts and transactions have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable relate primarily to customers located in North America, Western Europe and Asia, and are concentrated in the pharmaceutical, chemical, industrial and energy markets. To reduce credit risk, we perform credit investigations prior to accepting an order and, when necessary, require letters of credit to ensure payment.
Our estimate for uncollectible accounts receivable is based upon an analysis of our prior collection experience, specific customer creditworthiness, current economic trends within the industries we serve, specific customers’ ability to pay us and the length of time that the receivables are past due.
Inventories
Inventories are stated at the lower of cost or market determined by the last-in, first-out (“LIFO”) method in certain of our U.S. units and the first-in, first-out (“FIFO”) method for other U.S. and non-U.S. units. Inventory valuation reserves are determined based on our assessment of the market demand for our products and the on-hand quantities of inventory in relation to historical usage.
Inventory valuation reserves are determined based on our assessment of the demand for our products and the on-hand quantities of inventory in relation to historical usage. The inventory to which this reserve relates is still on-hand and will be sold or disposed of in the future. The expected selling price of this inventory approximates its net book value; therefore, there is no significant impact on gross margin when it is sold.
Goodwill and Other Intangible Assets
Goodwill is the excess of the purchase price paid over the value of net assets of businesses acquired. Goodwill is not amortized, but has been assessed for impairment on an annual basis, or more frequently as impairment indicators arise, using a fair market value approach, at the reporting unit level. We recognize an impairment charge for any amount by which the carrying amount of goodwill exceeds its fair value. Impairment tests are performed each year based on August 31 financial information. Other definite-lived intangible assets are evaluated periodically and when events or circumstances indicate a possible inability to recover their carrying amount. No indicators of impairment were identified in the year ended August 31, 2012 and 2011, respectively. Losses, if any, resulting from impairment tests are reflected in income before interest and income taxes in our Consolidated Statement of Income.
Amortization of other definite-lived intangible assets is generally calculated on the straight-line basis using the following lives:
Technology
15 years
Patents, trademarks and tradenames
14 to 20 years
Customer relationships
10 to 20 years
Non-compete agreements
3 to 5 years
Financing costs
3 to 5 years
Backlog
up to 1 year
Other
up to 20 years
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation expense is recorded over the estimated useful life of the asset on the straight-line method using the following lives:
Buildings
45 years
Machinery and equipment
2 to 15 years
Our normal policy is to expense repairs and improvements made to capital assets as incurred. In limited circumstances, betterments are capitalized and amortized over the estimated life of the new asset and any remaining value of the old asset is written off. Repairs to machinery and equipment must result in an addition to the useful life of the asset before the costs are capitalized.
Foreign Currency Accounting
Gains and losses resulting from the settlement of a transaction in a currency different from that used to record the transaction are charged or credited to net income when incurred. Adjustments resulting from the translation of non-U.S. dollar functional currency denominated financial statements into U.S. dollars are recognized in accumulated other comprehensive income or loss in the Consolidated Balance Sheet (except Venezuela, which was reported under highly inflationary accounting rules since our second quarter of fiscal 2010-see below).
Our Company has a Venezuelan subsidiary with net sales, operating income and total assets representing approximately one percent of our consolidated financial statement amounts for fiscal 2010, 2011 and 2012. In early January 2010, the Venezuelan government devalued its currency. Our subsidiary operated under a rate of 4.30 bolivars to the U.S. dollar, as compared with the previous rate of 2.15, and our fiscal 2011 and fiscal 2012 year-end financial statements reflected this new rate. In addition, the financial statements of our Venezuelan subsidiary were consolidated and reported under highly inflationary accounting rules under U.S. GAAP beginning in the second quarter of fiscal 2010, with all gains or losses from remeasurement reflected in our Consolidated Statement of Income since the second quarter of fiscal 2010.
Acquisition and Disposition
On January 10, 2011 (“the acquisition date”), we completed our acquisition of T-3 Energy Services, Inc. (“T-3”), such that T-3 became a wholly-owned subsidiary of Robbins & Myers, Inc. The operating results of T-3 are included in our consolidated financial statements since the acquisition date within our Energy Services segment. See Note 4 - Acquisition. The merger was accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations” (“ASC 805”). Accordingly, we made an allocation of the purchase price at the acquisition date based upon our estimates of the fair value of the acquired assets and assumed liabilities obtained during our due diligence process and through other sources, including through tangible and intangible asset appraisals. Additionally, as required by ASC 805, all integration-related costs, including professional fees and severance, were expensed as incurred. See Note 4 - Acquisition.
In fiscal 2011, we completed the sale of all the shares and equity interest in our Romaco businesses (Romaco segment). The results of our Romaco segment are reported as discontinued operations for all periods presented. See Note 5 - Discontinued Operations.
Product Warranties
Warranty obligations are contingent upon product failure rates, material required for the repairs and service and delivery costs. We estimate the warranty accrual based on specific product failures that are known to us plus an additional amount based on the historical relationship of warranty claims to sales.
Changes in our product warranty liability related to our continuing operations during the year are as follows:
Consolidated Statement of Income
Research and development costs are expensed as incurred and recorded in selling, general and administrative expenses. Research and development costs in fiscal 2012, 2011 and 2010 were $6,993,000, $5,932,000 and $4,844,000, respectively. These amounts do not include engineering development costs incurred in conjunction with fulfilling custom customer orders and executing customer projects. Shipping and handling costs are included in cost of sales. Advertising costs are expensed as incurred.
Revenue Recognition
We recognize revenue at the time of title passage to our customer which is generally upon shipment of the product. We recognize revenue for certain longer-term contracts based on the percentage of completion method. The percentage of completion method requires estimates of total expected contract revenue and costs. We follow this method since we can make reasonably dependable estimates of the revenue and cost applicable to various stages of the contract. Revisions in profit estimates are reflected in the period in which the facts that gave rise to the revision become known.
Income Taxes
Income taxes are provided for all items included in the Consolidated Statement of Income regardless of the period when such items are reported for income tax purposes. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We record valuation allowances to reflect the estimated amount of deferred tax assets that may not be realized based upon our analysis of the realization of tax benefits associated with the deferred tax assets. Future taxable income, reversals of temporary differences, available carryback periods, the results of tax strategies and changes in tax laws could impact these estimates.
Generally, our policy is to provide U.S. income taxes on non-U.S. income when remitted to the U.S. We have not provided deferred taxes on the undistributed earnings of international subsidiaries because the earnings are deemed permanently reinvested. Accordingly, the Accounting Principles Board Opinion No. 23, “Accounting for Income Taxes”, (now known as ASC 740-30) exception will apply to the international subsidiaries accumulated earnings and profits, which aggregated $78,287,000 and $67,287,000 at August 31, 2012 and 2011, respectively.
Significant judgment is required in determining the provision for income taxes, unrecognized tax benefits, and the related accruals and deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, our tax returns are subject to audit by various tax authorities in numerous jurisdictions. Although we believe that our estimates are reasonable, actual results could differ from these estimates resulting in a final tax outcome that may be materially different from that which is reflected in our consolidated financial statements.
Consolidated Cash Flow Statement
Cash and cash equivalents consist of cash balances and temporary investments having an original maturity of 90 days or less.
Fair Value of Financial Instruments
The following methods and assumptions were used by us in estimating the fair value of financial instruments:
Cash and cash equivalents - The amounts reported approximate fair value.
Long-term debt - The fair value of our debt (classified as Level 2) was $153,000 and $445,000 at August 31, 2012 and 2011, respectively. These amounts are based on the terms, interest rates and maturities currently available to us for similar debt instruments.
Accounts receivable, accounts payable, and accrued expenses - The amounts reported approximate fair value due to their short-term commercial nature.
Common Stock Plans
We sponsor a long-term incentive stock plan to provide for the granting of stock-based compensation to certain officers and other key employees. Under the plan, stock option prices per share may not be less than the fair market value per share as of the date of grant. Outstanding grants generally become exercisable over a three to four year period. Replacement grants issued related to the T-3 merger were deemed vested on the acquisition date per the terms of the merger agreement.
The fair value of each stock option grant in fiscal years 2012, 2011 and 2010 was estimated on the date of grant using a Black-Scholes-Merton option pricing model with the following weighted average assumptions. The table below for fiscal 2011 includes replacement options issued in connection with the T-3 merger.
Assumptions utilized in the model are evaluated when awards are granted. The expected volatility of our common shares is estimated based upon the historical volatility of our common share price. The risk-free interest rate is based on the U.S. Treasury security yields at the time of the grant for a security with a maturity term equal to or approximating the expected term of the underlying award. The dividend yield is determined by using a blend of historical dividend yield information and expected future trends. The expected life of the option grants represents the period of time options are expected to be outstanding and is based on the contractual term of the grant, vesting schedule and past exercise behavior. We recognize compensation cost on a straight-line basis over the requisite service period for the entire award.
New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements,” that amends existing disclosure requirements under ASC 820, by adding required disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchase, sales, issuances, and settlements relative to level 3 measurements; and clarifying, among other things, the existing fair value disclosures about the level of disaggregation. This ASU was effective for us in the fourth quarter of fiscal 2010, except for the requirement to provide level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which was effective beginning in our fiscal 2012. The remaining adoption of this standard in fiscal 2012 for level 3 activity disclosure did not have a material impact on our consolidated financial statements.
In December 2010, the FASB issued ASU No. 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations,” that addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in this standard specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior reporting period only. This standard also expands the supplemental pro forma disclosures under ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this ASU are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. This standard was effective for us beginning in our fiscal 2012 and its applicability will depend on future acquisitions. The adoption of this standard did not have a material impact on our consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” that amends the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and disclosing information about fair value measurements. The amendments in this ASU achieve the objectives of developing common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs and improving their understandability. Some of the requirements clarify the FASB’s intent about the application of existing fair value measurement requirements while other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this ASU are effective prospectively for interim and annual periods beginning after December 15, 2011, with no early adoption permitted. This standard was effective for us beginning in our third quarter of fiscal 2012. The adoption of this standard did not have a material impact on our consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income,” that improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this standard require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, adjustments must be displayed for items that are reclassified from other comprehensive income (“OCI”) to net income, in both net income and OCI. The standard does not change the current option for presenting components of OCI gross or net of the effect of income taxes, provided that such tax effects are presented in the statement in which OCI is presented or disclosed in the notes to the financial statements. Additionally, the standard does not affect the calculation or reporting of earnings per share. In December 2011, the FASB issued ASU No. 2011-12, “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,” which defers only those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments. All other requirements in ASU No. 2011-05 are not affected by this standard, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. For public entities, the amendments in ASU No. 2011-05, as superseded by ASU No. 2011-12, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and are to be applied retrospectively, with early adoption permitted. These standards will be effective for us beginning in our fiscal 2013. We do not expect the adoption of these standards to have a material impact on our consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment,” that gives both public and nonpublic entities the option to qualitatively determine whether they can bypass the existing two-step goodwill impairment test under ASC 350-20. Under the new standard, if an entity chooses to perform a qualitative assessment and determines that it is more likely than not (a more than 50 percent likelihood) that the fair value of a reporting unit is less than its carrying amount, it would then perform Step 1 of the annual goodwill impairment test in ASC 350-20 and, if necessary, proceed to Step 2. Otherwise, no further evaluation would be necessary. The decision to perform a qualitative assessment is made at the reporting unit level, and an entity with multiple units may utilize a mix of qualitative assessments and quantitative tests among its reporting units. This standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this standard did not have a material impact on our consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment,” that gives both public and nonpublic entities the option to use a qualitative approach to test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, the quantitative impairment test is not required. This standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. This standard will be effective for us beginning in our fiscal 2014. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications did not have a material impact on our consolidated financial statements. See Note 9 for additional information.
NOTE 2-BALANCE SHEET INFORMATION
NOTE 3-AGREEMENT AND PLAN OF MERGER
On August 8, 2012, Robbins & Myers, Inc. (“Robbins & Myers”), and National Oilwell Varco, Inc., a Delaware corporation (“NOV”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Robbins & Myers will merge with an affiliate of NOV, with Robbins & Myers surviving as a wholly-owned subsidiary of NOV (the “Merger”). The Merger Agreement has been unanimously approved by the Boards of Directors of both Robbins & Myers and NOV.
NOV, headquartered in Houston, Texas, is a worldwide leader in the design, manufacture and sale of equipment and components used in oil and gas drilling and production operations, the provision of oilfield services, and supply chain integration services to the upstream oil and gas industry.
Under the Merger Agreement, upon closing of the transaction, our shareholders will receive $60.00 in cash for each common share of Robbins & Myers they own. The per share closing price of our common shares on August 8, 2012 was $46.80.
Each outstanding option to purchase Robbins & Myers common shares and each outstanding restricted common share, restricted share unit, and performance share of Robbins & Myers, whether vested or unvested, will be deemed to be fully vested at the effective time of the Merger and will be automatically converted into the right to receive $60.00 in cash (less the exercise price in the case of options).
The Merger Agreement contains certain termination rights for both NOV and Robbins & Myers. Upon termination of the Merger Agreement under specified circumstances, we may be required to pay NOV a termination fee of $75 million.
The consummation of the proposed Merger is conditioned upon customary closing conditions, including, among others: (1) approval of the holders of at least two-thirds of our outstanding common shares; (2) the absence of any injunction, law or order prohibiting the Merger; (3) regulatory approvals, including expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976; (4) in the case of NOV, the absence of any material adverse effect on Robbins & Myers; and (5) in the case of NOV, that the holders of not more than 5% of our outstanding common shares exercise dissenters’ rights under Ohio law.
For additional information about the Merger, please see our Current Report on Form 8-K, filed with the SEC on August 9, 2012, and the Merger Agreement, which is attached as Exhibit 1.1 thereto.
NOTE 4-ACQUISITION
On January 10, 2011, we acquired 100% of the outstanding common stock and voting interests of T-3. T-3 designs, manufactures, repairs and services products used in the drilling, completion and production of new oil and gas wells, the workover of existing wells, and the production and transportation of oil and gas.
The purchase price for acquiring all of the outstanding common stock of T-3 was approximately $618.4 million, which consisted of approximately $106.3 million in cash, $492.1 million as the fair value of our common shares and $20.0 million as the fair value of options and warrants issued to replace T-3 grants for pre-merger services and warrants. We funded the cash portion of the purchase price from our available cash on hand. We issued approximately 12.0 million shares as part of the purchase price to T-3 stockholders.
We have finalized our valuations of acquired assets, liabilities and contingencies with all measurement period adjustments related to the acquisition being made in the year ended August 31, 2011.
The following table summarizes the fair values of the assets acquired and liabilities assumed as part of the acquisition, at the acquisition date (in thousands):
The purchase price allocation resulted in the recognition of $330.4 million in goodwill (approximately $25.0 million of which is deductible for tax purposes) and $214.1 million of definite-lived intangible assets with no residual value, including $156.5 million of customer relationships, $17.8 million of trademarks and trade names, $32.6 million of technology and $7.2 million of backlog. The amounts assigned to customer relationships, trademarks and trade names, technology and backlog are amortized over the estimated useful life of 10-20 years, 20 years, 15 years and up to 1 year, respectively. The weighted average life over which these acquired intangibles will be amortized is approximately 18 years. Goodwill recognized from the acquisition primarily relates to the expected contributions of the entity to the overall corporate strategy in addition to synergies and acquired workforce, which are not separable from goodwill.
The unaudited pro forma information for the period set forth below gives effect to the acquisition as if it had occurred at the beginning of fiscal 2011. These amounts have been calculated after applying our accounting policies and adjusting the results of T-3 to reflect the additional cost of sales, depreciation and amortization that would have been charged assuming the fair value adjustments to inventory, property, plant and equipment and intangible assets had been applied as at the beginning of each respective year, together with the consequential tax effects, as applicable. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time or that may result in the future:
Fiscal 2011 pro forma period reflects the expense due to the inventory write-up values and amortization of backlog of $16.7 million ($10.8 million after tax and $0.24 per share based on the Company’s marginal tax rate) which had lives of three months or less. Therefore, these assets were fully amortized in the first three months of fiscal 2011.
NOTE 5-DISCONTINUED OPERATIONS
During the third quarter of fiscal 2011, we entered into an agreement to divest our Romaco businesses (Romaco segment) which design, manufacture and market packaging and secondary processing equipment for the pharmaceutical, healthcare, nutraceutical, food and cosmetic industries. This divestiture was part of the Company’s portfolio management process and operating strategy to simplify the business and improve profit profile, and to focus on growing the Company around core competencies. On April 29, 2011, we completed the sale of all the shares and equity interest in our Romaco businesses for a consideration of approximately 64 million (approximately $95 million at the time of closing), which included 61 million in cash and 3 million of liabilities assumed. In fiscal 2011, income from discontinued operations, net of income taxes, was approximately $53.6 million. The gain on disposal included the realization of amounts in accumulated other comprehensive income or loss of $13.8 million, which includes $16.2 million related to realized foreign currency gain and $2.4 million realized loss related to pension liability, net of tax. For tax purposes, the gain on disposal of the Romaco segment was minimal. The results of operations for our Romaco segment are reported as discontinued operations for fiscal 2011 and fiscal 2010 and are summarized as follows:
There were no assets or liabilities attributable to discontinued operations at the end of fiscal 2012 and 2011.
In connection with this divestiture, the Company has provided certain representations, warranties and/or indemnities to cover various risks and liabilities, such as claims for damages arising out of the use of products or relating to intellectual property matters, commercial disputes, environmental matters or tax matters. The Company has not included any such items in the table above because they relate to unknown conditions and the Company cannot estimate the likelihood or the amount of potential liabilities from such matters. The Company does not believe that any such liability will have a material adverse effect on the Company’s financial position, results of operations or liquidity.
NOTE 6-FAIR VALUE MEASUREMENTS
Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value where the Company’s assets and liabilities are required to be carried at fair values and provide for certain disclosures related to the valuation methods used within a valuation hierarchy as established within the accounting standards. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation. Level 3 inputs are unobservable inputs based on management’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. There were no transfers among fair value hierarchies for any assets or liabilities during the current fiscal year.
A summary of the financial assets that are carried at fair value measured on a recurring basis as of August 31, 2012 and 2011 is as follows (in thousands):
(1) Our cash and cash equivalents primarily consist of cash in banks, commercial paper and overnight investments in highly rated financial institutions.
Non-Financial Assets and Liabilities at Fair value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). At August 31, 2012, no fair value adjustments or fair value measurements were required for non-financial assets or liabilities.
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and debt. The fair values of short-term debt (classified as Level 2) as well as cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their carrying values because of the short-term nature of these instruments.
NOTE 7-STATEMENT OF INCOME INFORMATION
Unless otherwise noted, the costs mentioned below in this note were included on the “Other expense” line of our Consolidated Statement of Income in the period indicated.
In fiscal 2012, Corporate incurred merger-related costs of $2,959,000 in connection with its proposed merger with NOV, for legal, advisory and professional fees associated with the transaction.
In fiscal 2011, we incurred T-3 merger-related costs in our Energy Services segment of $19,755,000 related to employee termination, backlog amortization and inventory write-up values expense. In addition, Corporate incurred merger-related costs of $5,884,000 related to professional fees and accelerated equity compensation.
In fiscal 2011 and fiscal 2010, we incurred restructuring costs of $1,012,000 and $2,764,000, respectively, related to employee termination benefits at our German facility in our Process & Flow Control segment. These costs were accrued in the last quarter of each respective year, with payments made in the following year.
Minimum lease payments
Future minimum payments, by year and in the aggregate, under non-cancellable operating leases with initial or remaining terms of one year or more consisted of the following at August 31, 2012:
Rental expense for all operating leases in 2012, 2011 and 2010 was approximately $7,745,000, $6,958,000 and $4,889,000, respectively. Operating leases consist primarily of building and equipment leases.
NOTE 8-CASH FLOW STATEMENT INFORMATION
In fiscal 2012, we recorded the following non-cash investing and financing transactions: $2,388,000 increase in deferred tax assets, $16,804,000 increase in other long-term retirement liabilities, and $14,416,000 increase in accumulated other comprehensive income or loss related to the retirement liabilities.
In fiscal 2011, we recorded the following non-cash investing and financing transactions: $7,065,000 decrease in deferred tax assets, $16,605,000 decrease in other long-term retirement liabilities, and $9,540,000 decrease in accumulated other comprehensive income or loss related to the retirement liabilities. In addition, we issued $512,100,000 in our common shares and other equity instruments in the T-3 acquisition, see Note 4.
In fiscal 2010, we recorded the following non-cash investing and financing transactions: $4,246,000 increase in deferred tax assets, $13,452,000 increase in other long-term retirement liabilities, and $9,206,000 increase in accumulated other comprehensive income or loss related to the retirement liabilities.
Supplemental cash flow information consisted of the following:
NOTE 9-GOODWILL AND OTHER INTANGIBLE ASSETS
Beginning with the first quarter of fiscal year 2012, we changed the composition of our reportable segments to reflect organizational, management and operational changes implemented in the first quarter of fiscal 2012. The Company now reports results in two business segments consisting of Energy Services and Process & Flow Control. The Company previously reported its operations under the Fluid Management segment and the Process Solutions segment. The information below for goodwill reflects this new segmentation change. Changes in the carrying amount of goodwill by reportable segment are as follows:
Goodwill arises from the excess of the purchase price for acquired businesses over the fair value of net identifiable assets acquired.
Information regarding our other intangible assets is as follows:
The weighted average life over which our intangible assets will be amortized is approximately 17 years. The amortization expense for fiscal 2012 and fiscal 2011 was $11.0 million and $15.7 million, respectively. We estimate that the amortization expense will be approximately $11.0 million for each of the next five years beginning fiscal 2013. The expected amortization expense is an estimate. Actual amounts of amortization expense may differ from the estimated amounts due to changes in foreign currency exchange rates, impairment of intangible assets, intangible asset additions, accelerated amortization of intangible assets, acquisition and divestiture activities and other factors.
NOTE 10-LONG-TERM DEBT
Our Bank Credit Agreement (the “Agreement”) provides that we may borrow, for the five-year term of the Agreement, on a revolving credit basis up to a maximum of $150.0 million at any one time. In addition, under the terms of the Agreement, we are entitled, on up to six occasions prior to the maturity of the loan, subject to the satisfaction of certain conditions, to increase the aggregate commitments under the Agreement in the aggregate principal amount of up to $150.0 million. All outstanding amounts under the Agreement are due and payable on March 16, 2016. Interest is variable based upon formulas tied to a Eurocurrency rate or an alternative base rate defined in the Agreement, at our option. Borrowings, which may also be used for general corporate purposes, are unsecured, but are guaranteed by certain of our subsidiaries. While no amounts are outstanding under the Agreement at August 31, 2012, we have $23.7 million of standby letters of credit outstanding at August 31, 2012. These standby letters of credit are used as security for advance payments received from customers and for future payments to our vendors. Accordingly, under the Agreement, we have $126.3 million of unused borrowing capacity.
The Agreement contains customary representations and warranties, default provisions and affirmative and negative covenants, including limitations on indebtedness, liens, asset sales, mergers and other fundamental changes involving the Company, permitted investments, sales and lease backs, cash dividends and share repurchases, and financial covenants relating to interest coverage and leverage. As of August 31, 2012, we are in compliance with these covenants.
We obtained a waiver from the lenders under the Agreement in connection with our pending merger with National Oilwell Varco, because the execution of the Merger Agreement and the merger would cause us to be in default under the Agreement.
Our other debt consisted primarily of unsecured non-U.S. loans with a minimal interest rate.
Aggregate principal payments of long-term debt, for the five years subsequent to August 31, 2012, are as follows:
NOTE 11-RETIREMENT BENEFITS
We sponsor two defined contribution plans covering most U.S. salaried employees and certain U.S. hourly employees. Contributions are made to the plans based on a percentage of eligible amounts contributed by participating employees. We also sponsor several defined benefit plans covering certain employees. Benefits are based on years of service and employees’ compensation or stated amounts for each year of service. Our funding policy is consistent with the funding requirements of applicable regulations.
We entered into a new labor agreement at one of our U.S. facilities in fiscal 2011. As a result, we incurred curtailment expense of approximately $1.2 million in fiscal 2011. Curtailment of the pension plan is expected to reduce pension costs in future years.
In addition to pension benefits, we provide health care and life insurance benefits for certain of our retired U.S. employees. Our policy is to fund the cost of these benefits as claims are paid.
Pension and other post-retirement plan costs are as follows:
Fiscal 2012 and fiscal 2011 defined contribution cost includes approximately $749,000 and $420,000, respectively, related to T-3.
The estimated net actuarial loss and prior service cost for our defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic pension cost during fiscal 2013 are $4,027,000 and $71,000, respectively.
The estimated net actuarial loss and prior service cost for our other post-retirement benefit plans that will be amortized from accumulated other comprehensive loss into net periodic pension cost during fiscal 2013 are $613,000 and $202,000, respectively.
The benefit obligation, funded status and amounts recorded in the Consolidated Balance Sheet at August 31, are as follows:
Pension plans with accumulated (“ABO”) and projected (“PBO”) benefit obligations in excess of plan assets:
In 2012 and 2011, $47,609,000 and $45,367,000, respectively, of the unfunded ABO and $51,465,000 and $48,318,000, respectively, of the unfunded PBO related to our pension plan for a German operation. Pre-funding of pension obligations is not required in Germany.
The weighted allocations of pension plan assets at August 31, 2012 and 2011 are shown in the following table.
At August 31, 2012, our target allocation percentages for plan assets were approximately 65% equity securities and 35% debt securities. The targets may be adjusted periodically to reflect current market conditions and trends as well as inflation levels, interest rates and the trend thereof, and economic and monetary policy. The objectives underlying this allocation are to achieve a long-term rate of return of 5.75% above inflation and to manage the plan assets so that they are sufficient to meet the plans’ future obligations while maintaining adequate liquidity to meet current benefit payments and operating expenses. The actual amount for which these obligations will be settled depends on future events, including life expectancy of plan participants and salary inflation. Equity securities can include, but are not limited to, broadly diversified international and domestic equities. At August 31, 2012 and 2011, pension assets included 100,000 of our common shares. Debt securities include, but are not limited to, international and domestic direct bond investments. The assets are managed by professional investment firms and performance is evaluated against specific benchmarks.
We will use a weighted average long-term rate of return on pension plan assets of approximately 7.3% in fiscal 2013. Expected rates of return are developed based on the target allocation of debt and equity securities and on the historical returns on these types of investments judgmentally adjusted to reflect current expectations based on historical experience of the plan’s investment managers. In evaluating future returns on equity securities, the existing portfolio is stratified to separately consider large and small capitalization investments as well as international and other types of securities.
We expect to make future benefit payments from our benefit plans as follows:
The Company intends to make such contributions as are required to maintain the plan assets on a sound actuarial basis, in such amounts and at such times as determined by the Company in accordance with the funding policy established by management and consistent with plans’ objectives. The Company anticipates contributing $3,200,000 to its pension benefit plans in fiscal 2013.
The actuarial weighted average assumptions used to determine plan liabilities at August 31, are as follows:
The actuarial weighted average assumptions used to determine plan costs are as follows (measurement date September 1):
The assumed health care trend rate has a significant effect on the amounts reported for health care benefits. A one-percentage point change in assumed health care rate would have the following effects:
Pursuant to ASC 820, the Company is required to categorize pension plan assets based on the following fair value hierarchy:
•
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets in active markets.
•
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset through corroboration with observable market data.
•
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
The following table summarizes the bases used to measure financial assets of the pension plans at their fair market value on a recurring basis as of August 31, 2012:
The following table summarizes the bases used to measure financial assets of the pension plans at their fair market value on a recurring basis as of August 31, 2011:
(1) U.S. Government and U.S. Agency Obligations, Common and Foreign Stocks and Common Trust and Mutual Funds are valued at the closing price reported on the active market on which the individual securities are traded.
(2) Corporate and Foreign Obligations are estimated using recent transactions, broker quotations and/or bond spread information.
There have been no changes in the methodologies used during fiscal 2012 and 2011.
NOTE 12-INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The tax credit carryforwards, which primarily relate to foreign tax credits, begin to expire in fiscal 2019. The primary components of the net operating loss carryforwards exist in the U.S. ($8,484,000), Germany ($26,918,000 for income tax and $30,527,000 for trade tax), Italy ($4,382,000), Venezuela ($3,692,000), Argentina ($3,681,000) and the Netherlands ($6,921,000). There are no expiration dates on the net operating loss carryforwards in Germany. The net operating loss carryforwards in the U.S. begin to expire in fiscal 2021 and in Italy, the Netherlands, Venezuela and Argentina begin to expire in fiscal 2013. These expiration dates, as well as our ability to generate future taxable income to utilize these carryforwards, have been considered in determining our valuation allowances.
Expense
The following is a reconciliation of the effective income tax rate with the U.S. federal statutory income tax rate:
The impact of change in valuation allowances on non-U.S. losses primarily relate to certain of our entities in Germany, Italy, Venezuela, Argentina and the Netherlands.
A reconciliation of the change in unrecognized tax benefits, excluding interest and penalties, is as follows:
All of the balance of unrecognized tax benefits at August 31, 2012 of $2,674,000 including interest and penalties, would, if recognized, affect the effective tax rate. The balance of unrecognized tax benefits at August 31, 2011 was $5,596,000, including interest and penalties. During fiscal 2012, the Company received notification from various taxing authorities, that the previously accrued unrecognized tax positions have been settled, thus triggering current period derecognition of tax positions.
To the extent penalties and interest would be assessed on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense in the financial statements. Accrued interest and penalties are included in the related tax liability in the Consolidated Balance Sheet. The Company made an immaterial payment of interest and penalties in fiscal 2012 related to the settlement of a tax audit in Italy, and as of August 31, 2012, has recognized a liability for interest and penalties of $416,000. The Company had recognized a liability for interest and penalties of $958,000 at August 31, 2011.
The Company does not anticipate a significant change in the balance of unrecognized tax benefits within the next 12 months.
The Company is subject to income tax in numerous jurisdictions where it operates, including in the United States, Canada, Germany, India, People’s Republic of China, Italy, Switzerland, the United Kingdom and the Netherlands. The Company is open to examination in the United States from the tax year ended 2009 to present. During fiscal 2012, the Company settled all open T-3 federal tax years from 2008 to 2011. The Company’s non-U.S. locations are open to examination as far back as tax years ended 2004 to present.
NOTE 13-COMMON STOCK
We sponsor a long-term incentive stock plan to provide for the granting of stock-based compensation to certain officers and other key employees. Under the plan, stock option prices per share may not be less than the fair market value per share as of the date of grant. Outstanding grants generally become exercisable over a 3 to 4 year period and have a 10 year contractual term. Proceeds from the sale of stock issued under option arrangements are credited to common stock. In addition, we sponsor a stock compensation plan for non-employee directors.
As part of the T-3 merger consideration, in fiscal 2011, we issued approximately 1.0 million fully vested stock options to replace T-3 grants for pre-merger services. These options retained their respective original pre-merger options’ contractual term.
Summaries of amounts issued under the stock option plans are presented in the following tables.
Stock option activity
As part of the T-3 merger consideration, in fiscal 2011, we issued approximately 1.0 million stock options to replace T-3 grants for pre-merger services.
Components of outstanding stock options at August 31, 2012
Components of exercisable stock options at August 31, 2012
The total intrinsic value of options exercised during fiscal 2012, 2011, and 2010 was $6,899,000, $22,306,000 and $52,800, respectively.
Under our fiscal 2010, 2011 and 2012 long-term incentive stock plans, each a subplan under our 2004 Stock Incentive Plan As Amended, selected participants were granted target performance share awards. The ultimate performance shares earned under the plans range from 0% to 200% of the target award based on earnings per share and return on net assets. Under the fiscal 2010 and 2011 subplans, performance shares are earned at the end of one year but are only issued as common shares to the participant if the participant continues in our employment for two more years. Under the fiscal 2012 subplan, performance shares are earned based on three one-year performance cycles, but are issued as common shares to the participant if the participant continues in our employment through the end of our fiscal 2014.
For the performance period ended August 31, 2012, a value of $759,000 performance shares were earned ($1,698,000 and $927,000 in fiscal 2011 and fiscal 2010, respectively).
As of August 31, 2012 we had $4,381,000 of compensation expense not yet recognized related to nonvested stock awards. The weighted-average period that this compensation cost will be recognized is 1.9 years.
Total after tax compensation expense included in net income for all stock based awards was $1,911,000, $2,644,000 and $1,882,000 for fiscal years 2012, 2011 and 2010, respectively. The fiscal 2011 stock compensation expense includes $2,030,000 of pre-tax expense which resulted from accelerated vesting of certain stock awards upon the acquisition of T-3 in the second quarter of fiscal 2011, pursuant to the terms of those awards.
NOTE 14-SHARE REPURCHASE PROGRAM
On October 6, 2011, the Company announced that its Board of Directors had authorized the repurchase of up to 3.0 million of the Company’s currently outstanding common shares in addition to the approximately 1.0 million shares that were available to be repurchased under the October 2008 authorization by the Board of Directors (the “Programs”). By June 2012, the Company had substantially completed all the repurchases under the Programs resulting in the repurchase of $187.2 million of its common shares in fiscal 2012, at the average price of $47.07 per share, which were accounted as treasury shares and were funded from the Company’s available cash balances. On June 25, 2012, the Company’s Board of Directors authorized the repurchase of up to 2.0 million of the Company’s currently outstanding common shares (the “ June 2012 Program”). Repurchases under the June 2012 Program will generally be made in the open market or in privately negotiated transactions not exceeding prevailing market prices, subject to regulatory considerations and market conditions, and will be funded from the Company’s available cash and credit facilities.
There were no repurchases under the June 2012 Program in fiscal 2012. Under the terms of the definitive merger agreement with NOV, we have agreed not to repurchase our common shares under the June 2012 Program pending consummation of the merger. The June 2012 Program will expire when we have repurchased all the authorized shares, unless terminated earlier by a Board resolution, or consummation of the merger.
There were no share repurchases in fiscal 2010 or fiscal 2011.
NOTE 15-NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share from continuing operations:
In connection with the acquisition of T-3 on January 10, 2011, we issued approximately 12.0 million shares to T-3 stockholders as part of the purchase price consideration, which have been included in our computation of basic and diluted net income per share from continuing operations for fiscal 2012 and 2011. In addition, as part of the merger consideration, we issued approximately 1.0 million options to replace T-3 grants for pre-merger services which have also been included in the computation above.
NOTE 16-BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
Energy Services. Our Energy Services business segment, which includes T-3, designs, manufactures, markets, repairs and services equipment and systems used in upstream oil and gas exploration and recovery applications. Our Energy Services segment includes products and services sold under the Robbins & Myers Energy Systems® and T-3® brands and include power sections for drilling motors, blow-out preventers (“BOPs”), down-hole progressing cavity pumps, drive systems and automation, wellhead equipment, frac manifolds and trees, high pressure engineered gate valves, and a broad line of ancillary equipment for the energy sector, such as rod guides, rod and tubing rotators, pipeline closure products and valves.
Process & Flow Control. Our Process & Flow Control business segment designs, manufactures and services glass-lined reactors and storage vessels, customized equipment and systems and customized fluoropolymer-lined fittings, progressing cavity pumps for industrial applications and surface transfer of viscous fluids, mixing equipment and engineered systems used to filter and process various liquids and materials as well as complementary products such as grinders and customized fluid-agitation equipment and systems, vessels and accessories. We also provide alloy steel vessels, heat exchangers, other fluid systems, wiped film evaporators and packaged process systems. The primary markets served by this segment are the industrial, chemical, pharmaceutical, wastewater treatment, food and beverage, and specialty chemical markets. Primary brands in our Process & Flow Control segment are Pfaudler®, Moyno®, Chemineer® and Edlon®.
We evaluate performance and allocate resources using several measures, one of which is income before interest and income taxes (“EBIT”) and is reconciled to net income on our Consolidated Statement of Income. EBIT is not, however, a measure of performance calculated in accordance with U.S. generally accepted accounting principles and should not be considered as an alternative to net income as a measure of our operating results. EBIT is not a measure of cash available for use by management. Identifiable assets by business segment include all assets directly identified with those operations. Corporate assets consist mostly of cash and deferred tax assets. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
The following tables present information about our reportable business segments. Beginning with the first quarter of fiscal 2012, we changed the composition of our reportable segments to reflect organizational, management and operational changes implemented in the first quarter of fiscal 2012. The Company now reports results in two business segments consisting of Energy Services and Process & Flow Control. The financial information presented herein reflects the impact of this change for all periods presented. Inter-segment sales were not material and were eliminated at the consolidated level.
(1) Includes NOV merger-related costs of $2,959,000 for legal, advisory and professional fees.
(2) Includes T-3 merger-related costs of $10,256,000 associated with employee termination benefits and backlog amortization and $9,499,000 of expense due to inventory write-up values recorded in cost of sales.
(3) Includes costs of $1,012,000 related to restructuring activities.
(4) Includes costs of $5,884,000 due to T-3 merger-related professional fees and accelerated equity compensation expense.
(5) Includes costs of $2,764,000 related to restructuring activities.
Information about our operations in different geographical regions is presented below. Our primary operations are in North America, Europe and Asia. Sales are attributed to countries based on the location of the customer.
NOTE 17-CONTINGENCIES
There are claims, suits and complaints arising in the ordinary course of business filed or pending against us. Although we cannot predict the outcome of such claims, suits and complaints with certainty, we do not believe that the disposition of these matters will have a material adverse effect on our financial position, results of operations or cash flows.
The Company is subject to an ongoing investigation by the U.S. Department of Justice (“DOJ”) and the Department of Commerce Bureau of Industry and Security (“BIS”) regarding potential export controls violations arising from certain shipments by our Belgian subsidiary to one customer in Iran, Sudan and Syria in 2005 and 2006. We have cooperated with the investigation and in August 2012, we received a proposed joint settlement offer from DOJ and BIS. We have requested additional information from DOJ and BIS regarding the proposed settlement terms. We have accrued $1,800,000 in connection with this matter and the potential settlement and cannot predict whether or when this matter will be settled or the specific terms of any settlement.
NOTE 18-QUARTERLY DATA (UNAUDITED)
Earnings per share for each quarter and the year are calculated individually and may not add up to the total for the year. Information regarding sales, gross profit, EBIT and income from continuing operations before income taxes and noncontrolling interest reflects only continuing operations and any variations from our previously reported amounts relate to our divested Romaco segment.
(1) Includes NOV merger-related costs of $2,959,000 for legal, advisory and professional fees ($1,923,000 after tax, $0.05 per share for the 4th quarter and $0.04 per share for fiscal 2012)
(2) Includes net income from discontinued operations of $67,000 ($0.00 per share)
(3) Includes T-3 merger-related costs of $4,406,000 due to T-3 backlog amortization costs, $3,022,000 related to employee termination benefits, $5,884,000 related to professional fees and equity compensation expense, and $4,103,000 due to inventory write-up values expensed in cost of sales (total $11,783,000 after tax, and $0.30 per share).
(4) Includes net income from discontinued operations of $1,535,000 ($0.04 per share)
(5) Includes T-3 merger-related costs of $2,828,000 due to T-3 backlog amortization costs and $5,396,000 due to inventory write-up values expensed in cost of sales (total $5,263,000 after tax, and $0.12 per share).
(6) Includes net income from discontinued operations of $52,035,000 ($1.15 per basic share and $1.13 per diluted share).
(7) Includes restructuring charges of $1,012,000 ($1,012,000 after tax, and $0.02 per share) related to severance costs at our German facility in our Process & Flow Control segment.
(8) Includes T-3 merger-related costs of $25,639,000 as mentioned in (3) and (5) above, restructuring costs of $1,012,000 as mentioned in (7) above (total $18,058,000 after tax, and $0.44 per share), and net income of discontinued operations of $53,637,000 ($1.30 per share).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (Disclosure Controls) as of August 31, 2012. Based upon this evaluation, our CEO and CFO have concluded that the design and operation of our disclosure controls and procedures were effective as of August 31, 2012.
Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s (SEC) rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of Disclosure Controls includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis for purposes of providing the management report which is set forth below.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Management assessed our internal control over financial reporting as of August 31, 2012, the end of our fiscal year. Management based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of August 31, 2012. Our independent registered public accounting firm, Ernst & Young LLP, independently assessed the effectiveness of the Company’s internal control over financial reporting. Ernst & Young LLP has issued an attestation report, which is included at Part II, Item 8 of this Form 10-K.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal quarter ended August 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our Board of Directors is currently comprised of seven directors, divided into one class of four directors, and one class of three directors, with one class of directors elected at each annual meeting of shareholders for a term of two years. Set forth below is information concerning our directors.
Directors Continuing in Office until 2013 Annual Shareholder Meeting
Andrew G. Lampereur
Director Since March 2007
Mr. Lampereur, age 49, has been Executive Vice President and Chief Financial Officer of Actuant Corporation (manufacturer of industrial products and systems) since August 2000. Mr. Lampereur joined Actuant in 1993 as Corporate Controller, a position he held until 1996 when he was appointed Vice President of Finance of its Gardner Bender unit. He served as Vice President, General Manager for Gardner Bender, from 1998 until assuming his present position. Mr. Lampereur brings to the Board extensive executive and financial experience with a public company.
Thomas P. Loftis
Director Since 1987
Mr. Loftis, age 68, has been Chairman of the Board of the Company since June 2004 and served as Vice Chairman from March 2004 to June 2004. Mr. Loftis has been engaged in commercial real estate development, asset management and consulting with Midland Properties, Inc. since 1981. Loftis Investments LLC, a company wholly owned by Mr. Loftis, is a general partner of M.H.M. & Co., Ltd. (investments). Mr. Loftis is also a director of Security National Bank, a subsidiary of Park National Corporation. Mr. Loftis brings to the Board his long-term experience with the Company and knowledge of the Company’s operations, his experience as an entrepreneur, and relationship with M.H.M., our largest shareholder.
Dale L. Medford
Director Since 2003
Mr. Medford, age 62, retired in June 2005 from The Reynolds and Reynolds Company (software and services to automotive retailers) where he had served as Chief Administrative Officer from July 2004 to June 2005, as Executive Vice President and Chief Financial Officer from January 2001 to June 2005, and as Vice President of Corporate Finance and Chief Financial Officer from February 1986 to January 2001. Mr. Medford brings to the Board his extensive past financial and administrative experience with a public company.
Albert J. Neupaver
Director Since January 2009
Mr. Neupaver, age 62, has been President, Chief Executive Officer and a director of Wabtec Corporation (manufacturer of braking equipment and other parts for locomotives, freight cars and passenger rail cars) since February 2006. From 1998 to February 2006, Mr. Neupaver was President of the Electromechanical Group of AMETEK, Inc. (manufacturer of electronic instruments and electromechanical devices). Mr. Neupaver also serves as a director of Koppers Holdings Inc., a publicly-held company. Mr. Neupaver brings to the Board his experience as a chief executive officer of a global publicly-held manufacturing company, his operations experience, and his experience as a director of other public companies.
Directors Continuing in Office until 2014 Annual Shareholder Meeting
Richard J. Giromini
Director Since October 2008
Mr. Giromini, age 59, has been President and Chief Executive Officer of Wabash National Corporation (manufacturer and distributor of semi-trailers to trucking industry) from January 2007 and a director since December 2005. He was President and Chief Operating Officer of Wabash National Corporation from December 2005 through December 2006. From February 2005 until December 2005, Mr. Giromini served as Executive Vice President and Chief Operating Officer, and from July 2002 to February 2005, he was Senior Vice President and Chief Operating Officer, of Wabash National Corporation. Mr. Giromini brings to the Board his extensive executive, operational and sales experience with a public company, with particular insight and experience in lean manufacturing, turnarounds, logistics and distribution.
Stephen F. Kirk
Director Since June 2006
Mr. Kirk, age 63, has been the Executive in Residence at Cleveland State University since retiring in December 2011 from The Lubrizol Corporation (manufacturer of specialty chemicals). While at Lubrizol, he served as Senior Vice President and Chief Operating Officer from September 2008 to December 2011, President of Lubrizol Additives from June 2004 to September 2008, and Vice President of Sales and Marketing of The Lubrizol Corporation from June 1999 to June 2004. Mr. Kirk brings to the Board global operational and executive experience with a public company. His knowledge of the chemical markets is particularly suited to our Process Solutions business.
Peter C. Wallace
Director Since July 2004
Mr. Wallace, age 58, has been President and Chief Executive Officer of the Company since July 12, 2004. From October 2001 to July 2004, Mr. Wallace was President and Chief Executive Officer of IMI Norgren Group (sophisticated motion and fluid control systems for original equipment manufacturers). He was employed by Rexnord Corporation (power transmission and conveying components) for 25 years serving as President and Group Chief Executive from 1998 until October 2001 and holding a variety of senior sales, marketing, and international positions prior thereto. Mr. Wallace is also a director of Applied Industrial Technologies, Inc. and Rogers Corporation, publicly-held companies. Mr. Wallace provides an important executive and leadership perspective to the Board given his extensive knowledge of the Company and the industries and markets in which it operates, as well as his executive experience and experience in sales and marketing, and as a director of other public companies.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires directors and executive officers of the Company and owners of more than 10% of the Company’s common shares to file an initial ownership report with the Securities and Exchange Commission and follow up reports listing any subsequent change in their ownership of common shares. The Company believes, based on information provided to the Company by the persons required to file such reports, that all filing requirements applicable to such persons during the period from September 1, 2011 through August 31, 2012 were met.
Code of Ethics
The Company has a Code of Business Conduct (the “Code”) that applies to all employees, executive officers and directors of the Company. A copy of the Code is posted on the Company’s website. The Code also serves as a code of ethics for the Company’s chief executive officer, principal financial officer, principal accounting officer, controller, or any person performing similar functions (the “Senior Officers”). Any waiver of any provision of the Code granted to a Senior Officer may only be granted by the full Board of Directors or its Audit Committee. If a waiver is granted, information concerning the waiver will be posted on the Company’s website www.robn.com for a period of 12 months.
Audit Committee
The Company’s Board of Directors has a standing Audit Committee, comprised of Dale L. Medford (Chair), Richard J. Giromini, Andrew G. Lampereur, and Albert J. Neupaver. All Audit Committee members are independent directors. The Board has determined that all members of the Audit Committee are financially literate, that all members meet the enhanced standards for independence at Rule 10A-3 issued under the Securities Exchange Act of 1934, and that two members of the Committee - Dale L. Medford and Andrew G. Lampereur - are audit committee financial experts within the meaning of applicable regulations of the Securities and Exchange Commission.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview
This Compensation Discussion and Analysis (“CD&A”) describes our compensation philosophy and objectives, how our compensation process works, why the Compensation Committee arrived at specific compensation decisions, and the role of the Committee, its compensation consultant, and Mr. Wallace, our Chief Executive Officer, in setting the compensation of our named executive officers (“Named Executive Officers”). Our Named Executive Officers for fiscal 2012 were:
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Peter C. Wallace, President and Chief Executive Officer
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Kevin J. Brown, Interim Chief Financial Officer and Corporate Controller
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Saeid Rahimian, Sr. Vice President and President - Energy Services Group
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Aaron H. Ravenscroft, Vice President and President - Process & Flow Control Group
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Jeffrey L. Halsey, Vice President - Human Resources
Christopher M. Hix, our former Vice President and Chief Financial Officer, resigned effective December 2, 2011. He is included as a Named Executive Officer for purposes of this CD&A and the tables that follow.
Effective in the first quarter of fiscal 2012, we reorganized our management structure, which resulted in a realignment of our operating segments. As a result, our operating segments are Energy Services, which includes the R&M Energy and T-3 product lines, and Process & Flow Control, which principally includes the Moyno Industrial, Chemineer and Pfaudler product lines. Mr. Rahimian, who was the Company’s Vice President and President - Fluid Management Group, became our Senior Vice President and President - Energy Services Group. Aaron H. Ravenscroft joined the Company as Vice President and President - Process & Flow Control Group. In December 2011, Mr. Hix resigned from the Company, and Mr. Brown became the Company’s Interim Chief Financial Officer.
Performance in fiscal 2012 remained strong especially in our Energy Services Group. The performance of our Process & Flow Control Group also improved.
We have adopted several programs that are intended to enhance our pay-for-performance culture and better align the interests of our Named Executive Officers with those of our shareholders. For example:
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Stock Ownership Guidelines. We maintain robust stock ownership guidelines for our Named Executive Officers and directors.
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Clawback Policy. We maintain a “clawback policy,” which allows us to recover certain incentive compensation that is based on financial results that are subsequently restated.
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Employment Agreements. We do not maintain employment agreements with our Named Executive Officers - other than an agreement with our Chief Executive Officer. We do maintain change of control agreements with our other Named Executive Officers that only provide benefits on a “double trigger,” meaning that the benefits are due only if our executives incur a qualifying termination in connection with a change of control.
On August 8, 2012, we entered into a definitive merger agreement with National Oilwell Varco (“NOV”) in an all-cash transaction. Under the terms of the proposed transaction, our shareholders will receive $60.00 in cash for cash common share of Robbins & Myers they own. Consummation of the transaction is subject to customary closing conditions, including obtaining certain regulatory approvals as well as approval from our shareholders. The Merger Agreement restricts our ability to increase compensation and benefits, grant additional equity awards and adopt new benefit plans. The merger with NOV will constitute a change of control for purposes of our outstanding equity awards, our annual cash incentive program, the employment agreement with our Chief Executive Officer, and our change-of-control agreements with our other Named Executive Officers.
Oversight of the Company’s Executive Compensation Programs
Compensation Committee
The Compensation Committee develops and administers our compensation programs, policies and processes and sets the compensation of our Chief Executive Officer and the other Named Executive Officers. The Committee is comprised of three independent directors. Our Human Resources Department and General Counsel support the Committee in its work. The Committee has the authority in its discretion to engage outside advisors to assist it.
When determining the compensation of our Chief Executive Officer, the Committee considers:
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His performance against the annual and long-term objectives it has established for him;
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Evaluations of our Chief Executive Officer submitted by each director and the personal evaluation that Mr. Wallace submits to the Committee;
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Benchmark data from compensation surveys and our self-developed peer group; and
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His past compensation and accumulated equity interest in the Company and his total proposed compensation taking into account all forms of compensation.
In the process of determining his compensation, the Nominating and Governance Committee administers an annual performance evaluation. The Chairman of the Nominating and Governance Committee and the Chairman of the Board meet with Mr. Wallace to discuss the results of the evaluation, and with input from the Compensation Committee, the rationale for the various elements of his compensation, the sizing of the elements, and the benchmarking of his total compensation.
The Compensation Committee also considers the economic and general business conditions at the time in which compensation decisions are made. While the Committee may adjust and refine the compensation packages as operating conditions change, it believes that consistency in its compensation philosophy and approach is important.
Role of Management
Management plays an important role in the process of setting compensation for executives other than our Chief Executive Officer. The Chief Executive Officer, in consultation with our Vice President - Human Resources, and the Compensation Committee’s compensation consultant, develops compensation recommendations for the Compensation Committee to consider. The Chief Executive Officer considers various factors when making individual compensation recommendations including the relative importance of the executive’s position within the organization, the individual tenure and experience of the executive, and the executive’s individual performance and contributions to the Company’s results.
Mr. Wallace assists the Committee when it determines the compensation of the other Named Executive Officers by providing the Committee:
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His evaluation of each executive’s performance against targeted objectives;
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His recommended allocation of the executive’s compensation among the various elements of compensation; and
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His recommendation as to the size or amount of each element of compensation.
On behalf of the Committee, Mr. Wallace also meets individually with each other Named Executive Officer to explain the Committee’s rationale for various elements of the executive’s compensation and the sizing or amount of each element of compensation.
Role of Compensation Consultant
The Compensation Committee has retained Meridian Compensation Partners LLC and its predecessor, Hewitt Associates, as its compensation consultant since 2007. The Committee determines the services provided to the Committee by Meridian and the fees paid. Meridian reports directly to the Committee independent of management and meets regularly with the Committee without management present. Meridian provided no actuarial services to the Company in fiscal 2012.
For fiscal 2012, Meridian provided the following services to the Committee:
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Participated in the design and implementation of our executive compensation program for our Named Executive Officers;
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Provided competitive market practice data and benchmarking;
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Provided a review of our stock ownership guidelines applicable to Named Executive Officers and directors;
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Provided a review of our compensation peer group;
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Evaluated each of our Named Executive Officer’s position against competitive market practice data;
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Evaluated the features of each of our compensation plans against market practice;
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Analyzed our equity awards (e.g. options, restricted stock, restricted share units, and performance shares) to arrive at their respective economic value; and
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Participated in meetings of the Committee at which fiscal 2012 compensation decisions were made.
Objectives of the Company’s Compensation Program
The Compensation Committee believes that our targeted growth strategies require an executive compensation program that reinforces the importance of performance and accountability - both at the individual and at the corporate level. Our program is designed to provide executives with meaningful rewards, while maintaining alignment with shareholder interests, corporate values, and important management initiatives. In making compensation decisions, the Committee is guided by the following objectives:
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To attract, motivate, and retain highly experienced executives who are vital to our short- and long-term success, profitability, and growth;
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To create alignment among executives and shareholders by actively promoting compensation programs and arrangements intended to result in executives having a meaningful investment in the Company through share ownership;
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To provide focus on key financial performance goals and objectives that are integral to achieving the Company’s annual and long-term strategic plans; and
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To provide targeted compensation levels that are generally consistent with the 50th percentile of competitive market practice for base salary, annual incentives at target level performance, and annualized economic grant value for equity awards, with adjustments above or below the 50th percentile but generally not in excess of the 75th percentile based on various factors, such as level of responsibility, prior experience, length of service, achievement of personal objectives, future potential and internal pay equity issues.
Types of Compensation
Our compensation program includes the following types of compensation:
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Annual fixed compensation - salaries;
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Annual cash incentive compensation - cash bonus earned only if certain pre-established financial performance targets are achieved for the fiscal year;
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Equity awards that provide opportunities for our executives to accumulate wealth that is directly related to the creation of shareholder value and serve to strengthen the long-term commitment of executives to the Company, including the following:
* Stock options that become exercisable in equal installments on an annual basis over a three-year service period;
* Restricted share units that vest in equal installments on an annual basis over a three-year service period; and
* Performance shares that are earned based on three one-year performance cycles. The performance shares are only paid out if the executive continues in our employment through the end of the last performance cycle;
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Executive perquisites provided on a limited basis that serve certain corporate purposes;
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Retirement contributions designed to provide wealth accumulation and post-employment security; and
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Special equity awards that are made from time to time when superior performance merits exceptional pay.
In October 2011, the Committee made special discretionary grants of restricted share units to certain of our Named Executive Officers in order to recognize exceptional performance in fiscal 2011, including the acquisition of T-3 and the sale of the Romaco business group. These special grants vest after three years if the Named Executive Officer remains employed by the Company until that date. The number of restricted share units granted to the Named Executive Officers were Mr. Wallace - 2,740, Mr. Hix - 1,370, and Mr. Rahimian - 1,370. Mr. Hix forfeited his award upon his resignation effective December 2, 2011.
Upon joining the Company in September 2011, Aaron Ravenscroft received 9,666 restricted shares. This special grant vests after three years if Mr. Ravenscroft remains employed by the Company until that date.
In January, 2012, the Committee made a special discretionary grant of restricted share units and stock options to Mr. Brown in recognition of his role of Interim Chief Financial Officer. The grant consisted of 4,724 stock options and 1,998 restricted share units, all of which vest after three years if Mr. Brown remains employed by the Company until that date.
Factors Considered in Determining Executive Compensation
Competitive Benchmarking
During fiscal 2011, the Compensation Committee asked Meridian to provide updated executive pay data to be used for decisions related to fiscal 2012 compensation both as to size of the total compensation package offered and the type and design of the various elements included in each Named Executive Officer’s compensation package. As part of this process, Meridian assisted the Compensation Committee in reviewing the custom peer group. The peer group companies have a heavy emphasis on manufacturing, are publicly traded, and are viewed by the Committee as potential competitors for executive talent.
For fiscal 2012, the 18-company custom peer group was comprised of the following companies:
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Ameron International Corporation
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Circor International
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Enpro Industries, Inc.
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Gardner Denver, Inc.
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IDEX Corp.
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Kaman Corp.
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Mueller Water Products, Inc.
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Regal Beloit Corp.
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Trimas Corp.
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Woodward Governor Company
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Colfax Corp.
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Franklin Electric Co., Inc.
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Graco Inc.
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John Bean Technologies Corp.
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Kaydon Corp.
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Nordson Corp.
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Standex International Corp.
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Watts Water Technologies
Tally Sheets
In setting each Named Executive Officer’s compensation, the Compensation Committee reviewed the total annual fixed, incentive, and equity compensation to be received by each of them, including base salary, annual and long-term incentives, equity grants, executive perquisites, total equity holdings in the Company, and post-employment obligations. The Committee uses Tally Sheets to facilitate this review.
How Target Levels of Compensation Are Determined
The Compensation Committee strives to create an overall compensation package for each Named Executive Officer that satisfies the objectives of our compensation program. With its consultant, the Committee reviews the market data, discussed above, and focuses on the 50th percentile level as a starting point for each component of pay, as well as target total compensation. When determining the percentile range, the Committee does not adjust based on the size of the company (regression). The market data is regarded as a general reference for the Committee in determining the type and design of the various elements of compensation. The Committee generally does not exceed the 75th percentile, but makes adjustments to the market data in order to respond to market conditions, promotions, individual performance, levels of responsibility, prior experience, length of service, future potential, and internal pay equity issues. The Committee rewards exceptional performance in a particular fiscal year by providing for incentive compensation that will pay out above the targeted compensation level if certain stretch goals are achieved.
The Committee uses incentive compensation to promote the achievement of annual and longer-term financial measures. Annual incentive compensation is used to motivate executives to achieve specific performance goals of the Company’s annual plan. Performance share awards are tied to financial objectives that, while measured annually, are focused on consistent longer-term goals of continuing earnings growth and steadily improving asset utilization. Option grants and restricted share unit awards with time-based vesting promote the retention of key executives, help drive long-term performance and align management’s interests with those of shareholders.
The Committee believes that as an executive’s responsibility increases so does his ability to influence our performance and, accordingly, the proportion of his compensation that consists of salary and cash incentive should decrease while the proportion of equity incentives to total compensation should increase. The Committee uses our above-listed types of compensation in various proportions in order to motivate desired performance. Based upon the philosophy noted above and the program design, the various elements of compensation comprised the following percentages of the total compensation package for each Named Executive Officer for fiscal 2012:
(1) Assuming a payout of annual incentive compensation and performance shares at target amounts. Does not include perquisites.
When determining the level of long-term incentive awards, a targeted value is first established for each recipient using the 50th percentile of the peer group data (described above) as a reference point. Generally, the Committee allocates the targeted value of the long-term incentive awards equally among restricted share units, stock options and performance shares. The number of restricted share units and target number of performance shares to be awarded is determined by dividing the allocation made for the respective vehicles by the average closing common share price for August of the year of grant. The number of options granted is determined by dividing the targeted value allocated to stock options for the year by the product of (i) the average closing price of the Company’s common shares for August of the year of grant and (ii) the calculated Black-Scholes value. Equity awards as a percentage of total compensation are valued based on their grant date fair value.
In setting each Named Executive Officer’s compensation, the Committee reviewed the potential total annual fixed, incentive, and equity compensation to be received by each of them, including base salary, cash incentives, annual and long-term incentives, equity grants, executive perquisites and post-employment obligations.
Salaries
For fiscal 2012, base salary comprised the following percentage of total compensation for each Named Executive Officer:
(1) Assuming a payout of annual incentive compensation and performance shares at target amounts. Does not include perquisites.
Annual Cash Incentive Opportunities
Annual cash incentive compensation provides Named Executive Officers with an opportunity to receive additional cash compensation through the achievement of specified annual financial targets. Targets are financial measures based on the Company’s annual plan and were fixed at the outset of fiscal 2012. Annual cash incentive compensation for fiscal 2012 at target is set at 35% to 100% of base salary depending on the Named Executive Officer. Annual cash incentive compensation could be earned at the threshold (50% of target payout), target (100% of target payout), or maximum (200% of target payout) level based on the extent to which the financial measures were achieved. The amounts that could have been earned at threshold, target and maximum are shown in the “Grants of Plan-Based Awards” table at page 78 and the amounts earned for fiscal 2012 are in the “Summary Compensation Table” at page 76.
For fiscal 2012, the “Corporate” level performance measures (for Messrs. Wallace, Brown, and Halsey), the weighting assigned to each measure, and the extent to which each measure was achieved were:
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Measure: Consolidated sales, weighted 20%, and our consolidated sales for fiscal 2012 were above target by 3%.
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Measure: Adjusted diluted earnings per share, weighted 40%, and our adjusted diluted earnings per share for fiscal 2012 were above target by 10%.
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Measure: Adjusted free cash flow, weighted 40%, and our adjusted free cash flow for fiscal 2012 was above target by 18%.
When setting performance measures for fiscal 2012 (October 2011), the Compensation Committee determined that diluted earnings per share and free cash flow would be adjusted for the after-tax impact of restructuring charges and goodwill impairment, if any, and the stock repurchase program. The Compensation Committee also determined that currency fluctuations would not impact the calculation of the sales results. The Committee further determined that the impact of the discretionary $10 million contribution to our pension plan trust and the after-tax impact of expenses associated with the merger with NOV would not be included in determining the incentive awards for fiscal 2012.
For Mr. Rahimian, President of the Energy Services Group, and Mr. Ravenscroft, President of the Process & Flow Control Group, 25% of their respective annual cash incentive is calculated on the above “Corporate” level performance measures while 75% is calculated on the basis of their respective group’s operating performance. The performance measures, the weighting assigned to each measure, and the extent to which is each measure was achieved for the Energy Services Group and the Process & Flow Control Group were:
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Measure: Sales, weighted 20%. Sales for fiscal 2012 were above target by 5% for the Energy Services Group and above target by 3% for the Process & Flow Control Group.
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Measure: Adjusted operating profit, weighted 40%. Adjusted operating profit for fiscal 2012 was above target by 1% for the Energy Services Group and above target by 11% for the Process & Flow Control Group.
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Measure: Adjusted operating cash flow, weighted 40%. Adjusted operating cash flow for fiscal 2012 was below target by 6% for the Energy Services Group and below target by 29% for the Process & Flow Control Group.
When setting the Energy Services Group and Process & Flow Control Group performance measures for fiscal 2012 (October 2011), the Compensation Committee determined that operating profit would be adjusted for the impact of restructuring charges and goodwill impairment, if any, and that currency fluctuations would not impact the sales and operating income results. For the Process & Flow Control Group, it was determined that the results of GMM Pfaudler Ltd., our Indian affiliate, and a portion of the expense associated with an extended strike at one of the Process & Flow Control Group facilities would not be included in the calculation of the incentive awards for fiscal 2012.
Equity Grant Practices
To further align management and shareholder interests, the Compensation Committee in October of each year grants options and awards restricted share units and performance shares to Named Executive Officers. Awards are made pursuant to our 2004 Stock Incentive Plan As Amended that was initially approved by shareholders in December 2004. Except for new hires and special circumstances, the Committee generally grants equity awards at its October meeting, which is normally scheduled one year in advance. The Committee believes these annual equity awards as structured provide substantial incentives to Named Executive Officers to achieve significant growth in shareholder value and to continue in our employment.
Stock Options and Restricted Share Units
At the beginning of fiscal 2012 (October 2011), the Compensation Committee granted stock options and awarded restricted share units under our 2004 Stock Incentive Plan As Amended. The exercise price for options is the closing price of our common shares on the date of grant, options become exercisable over three years in equal annual installments and have a term of 10 years. With the exception of special restricted share unit awards made to the Named Executive Officers described in “Types of Compensation” above, fiscal 2012 restricted share unit awards also vest equally over a three-year period. The special awards vest after three years if the Named Executive Officer remains employed by the Company at that time. The sizing of the awards is based on the guidelines set forth above at “Factors Considered in Determining Executive Compensation” above and the actual grants and awards for fiscal 2012 are set forth in the “Grants of Plan-Based Awards” table on page 78.
Fiscal 2012 Performance Share Awards
At the beginning of fiscal 2012 (October 2011), the Compensation Committee awarded performance shares under our Long Term Incentive Plan (LTIP), which is a sub-plan under our 2004 Stock Incentive Plan As Amended. Under the LTIP, the Committee awards to each Named Executive Officer a target number of performance shares. For fiscal 2012, the Committee set performance threshold, target and maximum payout levels, as follows:
For fiscal 2012 (in October 2011), the Committee awarded performance shares that are earned based on three one-year performance cycles rather than one year of performance. One third of the target number of performance shares awarded are allocated to each of the three one-year performance periods. The performance shares are only paid out if the executive continues in our employment through August 31, 2014.
When setting the targets for performance shares for fiscal 2012 (October 2011), the Compensation Committee determined that diluted earnings per share would be adjusted based on restructuring charges and goodwill impairment, if any, and return on net assets would be adjusted for restructuring charges, if any. The Compensation Committee also determined that share repurchases, expenses associated with the merger with NOV, and the discretionary $10 million contribution to our pension plan trust would not be included in determining adjusted diluted earning per share or return on net assets.
At the end of fiscal 2012, the Committee determined the actual number of performance shares earned based on the extent to which the targets were achieved for fiscal 2012. The number of performance shares earned, if any, will be forfeited by the executive if he is not employed by us on August 31, 2014. If the executive continues in our employment through August 31, 2014, for each performance share earned for fiscal 2012, he is then issued one common share. In addition, the dollar amount of dividends that would have been paid on such common shares if they had been issued to the executive on the performance share award date of October 5, 2011 is calculated and such amount is divided by the average closing price of our common shares in August 2014 to arrive at a number of dividend equivalent common shares that will be issued to the executive on or about September 1, 2014.
The fiscal 2012 LTIP performance share awards at threshold (50% of target payout), target (100% of target payout) and maximum (200% of target payout) are set forth in the “Grants of Plan-Based Awards” table at page 78. For fiscal 2012, Adjusted Diluted Earnings Per Share was $3.29 and Return on Net Assets was 23.9%, resulting in a 137% payout, and the following performance share awards were earned by the Named Executive Officers:
(1) Represents the portion of the 2012 LTIP award attributable to fiscal 2012 performance.
Perquisites
The Company has historically provided its Named Executive Officers with certain perquisites that the Committee believes are reasonable, competitive and consistent with the Company’s overall compensation philosophy. The perquisites provided to each Named Executive Officer in fiscal 2012 are described in the table at page 77. In all cases, the aggregate value of personal benefits made available to an executive was less than 5% of his total compensation.
Retirement and Other Benefits
On December 31, 2005, we “froze” all Named Executive Officer defined benefit plans. In their place, we adopted our 2006 Executive Supplemental Retirement Plan. This plan is an unfunded defined contribution plan under which we annually credit an amount equal to 10% of the Named Executive Officer’s salary and annual cash incentive to his deferred compensation account. The amount credited, however, is reduced by amounts we credit to his account for the same fiscal year under our qualified 401(k) savings plan. We also credit interest at a rate of seven percent per annum on each Named Executive Officer’s deferred compensation account balance. The amounts credited in fiscal 2012 for each Named Executive Officer are described in the table at page 84.
Change-in-Control Agreements
We have an employment agreement with our Chief Executive Officer that provides certain payments in the event he is terminated or resigns with good reason within 24 months following a change-in-control of the Company or resigns during the 13th month following a change-in-control. We do not have employment agreements with any other executive officers, but we do have change-in-control agreements with each of our other Named Executive Officers that provide certain benefits in the event of termination of employment or resignation for good reason within 24 months after a change-in-control.
The purpose of these agreements is to aid in retention and recruitment, encourage continued attention and dedication to assigned duties during periods involving a possible change-in-control of the Company and to protect the earned benefits of each Named Executive Officer against adverse changes resulting from a change-in-control. When the Compensation Committee approved these agreements in prior years, it carefully reviewed the level of payments that would be paid in the event payments under the agreement were triggered and satisfied itself that the payments were reasonable in amount and designed to further the Committee’s objectives. Except for our Chief Executive Officer’s agreement, the agreements do not contain “tax gross up” provisions. The agreements are described in detail at “Potential Payments Upon Termination of Employment or a Change-in-Control” at page 85.
On October 5, 2010, the Board of Directors, upon recommendation of the Compensation Committee, approved changes to the definition of “change of control” for all awards made on or after October 5, 2010 under our 2004 Stock Incentive Plan As Amended. The Plan provides that unvested stock options granted under the Plan will vest upon a change of control of the Company, as defined in the Plan, and the Compensation Committee can take certain actions upon a change of control with respect to other equity awards outstanding under the Plan. The amendment changes the circumstances under which a change of control will be deemed to occur for purposes of the Plan. Prior to the amendment, a change of control would have occurred under the Plan upon the approval by the shareholders of the Company of a merger or consolidation of the Company unless the voting shares of the Company outstanding prior to the merger or consolidation continued to represent at least 80% of the voting power of the Company or surviving entity following the merger or consolidation. As amended, a change of control will occur upon the consummation of a merger or consolidation of the Company unless the voting shares of the Company outstanding prior to the merger or consolidation continue to represent at least 50% of the voting power of the Company or surviving entity following the merger or consolidation.
All outstanding equity awards that have not previously vested will vest upon the consummation of the merger with NOV. The merger with NOV will constitute a change of control under our 2004 Stock Incentive Plan As Amended, the employment agreement with our Chief Executive Officer, and the change-of-control agreements with our other Named Executive Officers. See “Potential Payments Upon Termination of Employment or a Change-in-Control” below.
Stock Ownership Guidelines
We recognize the importance of equity ownership in the alignment of shareholder and management interests. We require our Chief Executive Officer to own common shares having a value equal to five (5) times his salary, our Senior Vice President and President - Energy Services Group (Mr. Rahimian), and Vice President and President - Process & Flow Control Group (Mr. Ravenscroft) to own common shares having a value equal to three (3) times their salary, and other Named Executive Officers to own common shares having a value equal to one and one-half (1.5) times their respective salaries. All vested and unvested restricted stock and restricted share units and all earned performance shares are included in determining an executive’s ownership; however, shares subject to outstanding options are excluded. Until an executive officer meets the stock ownership requirement, the officer must hold at least 60% of all stock compensation we pay him.
Our non-employee directors are required to own our common shares having a value equal to at least five (5) times the annual cash retainer we pay directors. Until a director meets the stock ownership requirement, the director must retain at least 60% of all stock compensation paid by us.
Risk Assessment
The Compensation Committee appointed a Risk Assessment Committee to consider whether our compensation practices or policies encourage excessive or inappropriate risk-taking by our employees, including our Named Executive Officers. The Risk Assessment Committee is comprised of our Vice President - Human Resources, our Corporate Controller, and our General Counsel. The Risk Assessment Committee reported its findings to the Compensation Committee and, after review and discussion, the Compensation Committee agreed with those findings. Specifically, the Risk Assessment Committee and the Compensation Committee concluded that although a portion of our executive compensation program is performance-based, it does not encourage excessive or inappropriate risk-taking. In addition, we have certain risk mitigators in place including a clawback policy, robust stock ownership guidelines, and 200% cap on incentive compensation payouts.
Compensation Recovery “Clawback” Policy
The Company adopted a Compensation Clawback Policy effective for plan years beginning on or after October 5, 2010, for Named Executive Officers. This policy further strengthens the risk mitigation program by defining the economic consequences that misconduct has on the executive officer’s incentive-based compensation. In the event of a financial restatement due to fraudulent activity or misconduct as determined by the Board of Directors, the culpable executive officer will reimburse the Company for annual incentive, equity-based awards or other performance-based compensation paid to him, including options, restricted share, restricted stock units, performance shares and annual cash incentive compensation based on the financial results that were subsequently the subject of the restatement. In addition, the Board of Directors has discretion to determine whether or not such Named Executive Officer was involved in the fraudulent activity or misconduct.
Consideration of Results of Shareholder Advisory Votes on Executive Compensation
When setting compensation for fiscal 2012 (October 2011) and in determining compensation policies, the Committee took into account the results of the shareholder advisory votes on executive compensation that took place in March 2011. In those votes, which were advisory and not binding, our shareholders approved the compensation of our Named Executive Officers as disclosed in the proxy statement for the 2011 Annual Meeting of Shareholders and approved our Board’s recommendation to hold advisory votes on an annual basis. The Committee believes that the results of these advisory votes, especially the strong support (approximately 92% of the votes cast) for approval of last year’s compensation disclosures, is evidence that the Company’s pay-for-performance policies are working.
Tax Deductibility of Compensation
Section 162(m) of the U.S. Internal Revenue Code limits the deduction for executive compensation paid to the chief executive officer and the three other most highly compensated officers other than the chief financial officer of a public company to $1.0 million per year, but contains an exception for certain performance-based compensation. While base salary and time-based restricted share units, by their nature, do not qualify as performance-based compensation under Section 162(m), we have structured the annual cash incentive awards under our Amended and Restated Senior Executive Annual Cash Incentive Plan and grants of stock options and performance shares under our 2004 Stock Incentive Plan As Amended with the intention that those awards would qualify as performance-based compensation. Although the Compensation Committee attempts to establish and maintain compensation programs that optimize the tax deductibility of compensation, the Committee retains discretion to authorize compensation that may not be fully tax deductible.
Conclusion
Each year the Compensation Committee reviews the total compensation package available to each of the Named Executive Officers to satisfy itself that the complete package is consistent with the Committee’s goals and objectives. The Committee also reviews the accumulated wealth that each Named Executive Officer has achieved as a result of equity awards and retirement benefits provided by the Company, and the particular incentives, vesting requirements and agreements that encourage our Named Executive Officers to continue in our employment. The Committee believes our compensation processes, policies and programs for Named Executive Officers, including the processes it follows when determining the compensation of our Chief Executive Officer, further our compensation goals and objectives, are consistent with good corporate governance practices, effectively tie executive compensation to our performance against key metrics and shareholder value, and induce our key executives to continue to render outstanding service on behalf of the Company.
Summary Compensation Table
The following table shows for the fiscal year ended August 31, 2012, the compensation provided by the Company to our Named Executive Officers.
(1) Amounts reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 of restricted shares, restricted share units, and performance shares granted under the Company’s 2004 Stock Incentive Plan As Amended (which we refer to as the 2004 Plan) during fiscal 2012 and prior years. The amounts were calculated by multiplying the close price on the date of grant by the number of restricted shares and restricted share units received and the number of performance shares awarded assuming a payout at target. The maximum payout amount (number of shares) that
could have been received for performance share awards made in fiscal 2012 (for performance in fiscal 2012, 2013 and 2014), fiscal 2011 (for performance in fiscal 2011), and fiscal 2010 (for performance in fiscal 2010) were: Mr. Wallace - 20,880, 32,322, and 29,240; Mr. Brown - 1,520, 2,388, and 2,240; Mr. Rahimian - 6,160, 9,836, and 9,000; Mr. Ravenscroft 3,800, 0, and 0; Mr. Halsey - 2,900, 4,496, and 4,220; and Mr. Hix - 5,860, 8,994, and 8,020. The actual value of performance share awards received by the Named Executive Officers for fiscal 2012, 2011, and 2010 (based on the closing price on the date of grant) were: Mr. Wallace - $174,065, $862,351, and $492,957; Mr. Brown - $12,671, $63,712, and $37,360; Mr. Rahimian - $51,353, $262,424, and $151,732; Mr. Ravenscroft-$31,679, $0, and $0; Mr. Halsey - $24,176, $119,953, and $71,143; and Mr. Hix - $0, $239,960, and $135,208. The actual value of fiscal 2012 performance awards represents the portion of the fiscal 2012 award attributable to fiscal 2012 performance. For further information on these awards, see the Grants of Plan-Based Awards table on page 78.
(2) Amounts reflect the aggregate grant date fair value for fiscal 2012 and prior years computed in accordance with FASB ASC Topic 718 for stock option grants under the 2004 Plan. The amounts do not reflect whether a Named Executive Officer has actually received a financial benefit from the award. The amount was calculated using the Black-Scholes option pricing model calculated as of the close of the preceding fiscal year. See Notes 1 and 13 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for a discussion of the relevant assumptions used in calculating the compensation cost. For further information on these awards, see the Grants of Plan-Based Awards table on page 78.
(3) Amounts shown in this column include cash incentives paid for fiscal 2012, 2011 and 2010 performance under our Amended and Restated Senior Executive Annual Cash Incentive Plan. The methodology applied in determining these cash incentive amounts is discussed under “Compensation Discussion and Analysis” at “Annual Cash Incentive Opportunities” on page 71.
(4) Amounts shown in this column include (i) the aggregate of the increase in actuarial values of each of the Named Executive Officer’s benefits under our Pension Plan and Supplemental Pension Plan and (ii) the portion of interest earned on Non-Qualified Deferred Compensation assets that exceeds the SEC benchmark “market” rate (120% of the applicable federal long-term rate). For fiscal 2012, the aggregate increase in actuarial values and above market earnings, respectively, for each of the Named Executive Officers was as follows: Mr. Wallace - $11,328 and $30,405; Mr. Brown - $89,936 and $5,908; Mr. Rahimian - $64,632 and $10,387; Mr. Ravenscroft -$0 and $0; Mr. Halsey - $0 and $4,379; and Mr. Hix - $0 and $9,306.
(5) Amounts shown in this column for fiscal 2012 include for each Named Executive Officer the items listed in the following table. For those items which are perquisites, we include the incremental costs to the Company of providing the perquisites, and we value perquisites based on the amount we actually paid to the third party to obtain the perquisite for the executive.
The following table identifies the perquisites or personal benefits that were made available and utilized by each Named Executive Officer in fiscal 2012. Such benefits differ among Named Executive Officers depending on employment classification, location, and, with respect to certain benefits, whether the Named Executive Officer chose to utilize them in fiscal 2012.
In fiscal 2012, the Company relocated Mr. Ravenscroft to Dayton, Ohio. The Company maintains a relocation policy applicable to all management-level employees, including Named Executive Officers. Pursuant to the relocation policy, the Company reimbursed Mr. Ravenscroft for $32,815 in certain out-of-pocket costs resulting from his relocation. None of the reimbursed amount was used to cover a loss in Mr. Ravenscroft’s home value. Also in accordance with the Company’s relocation policy, the Company reimbursed Mr. Ravenscroft for $4,226 of taxes with respect to the relocation costs. In fiscal 2011, the Company relocated Mr. Wallace to Houston, Texas. In fiscal 2012, Mr. Wallace was reimbursed for additional expenses associated with his fiscal 2011 relocation in the amount of $3,254 which resulted in reimbursement of taxes with respect to the additional relocation expense in the amount of $2,021.
(6) Mr. Hix resigned from the Company effective December 2, 2011. Effective December 2, 2011, Mr. Brown became the Interim Chief Financial Officer of the Company.
Grants of Plan-Based Awards in Fiscal 2012
(1) Represents the threshold, target and maximum cash incentive awards set for fiscal 2012 under our annual executive officer cash incentive compensation program. The methodology applied in determining these awards and how they are earned is discussed under “Compensation Discussion and Analysis” at “Annual Cash Incentive Opportunities” on page 71. The actual annual cash incentives paid to the Named Executive Officers for fiscal 2012, 2011, and 2010 are set forth in the Summary Compensation Table.
(2) Represents the fiscal 2012 performance share award under the LTIP plan (a subplan under the 2004 Plan) assuming a payout at threshold, target, and maximum. The methodology applied in determining these awards and how they are earned is discussed under “Compensation Discussion and Analysis” at “Fiscal 2012 Performance Share Awards” on page 73. The actual value of performance share awards received by the Named Executive Officers for fiscal 2012, 2011, and 2010, calculated using the closing prices on the date of grant of $36.51 for 2012, $26.68 for 2011 and $22.33 for 2010, were: Mr. Wallace - $174,065, $862,351, and $492,957; Mr. Brown - $12,671, $63,712, and $37,760; Mr. Rahimian - $51,353, $262,424, and $151,732; Mr. Ravenscroft - $31,679, $0, and $0; Mr. Halsey - $24,176, $119,953, and $71,143; and Mr. Hix - $0, $239,960, and $135,208. The actual value of fiscal 2012 performance awards represents the portion of the fiscal 2012 award attributable to fiscal 2012 performance.
(3) Represents the following awards made under the 2004 Plan:
- Restricted share unit awards made on October 5, 2011, to Mr. Wallace (10,440), Mr. Brown (760), Mr. Rahimian (3,080), Mr. Ravenscroft (1,900), Mr. Halsey (1,450), and Mr. Hix (2,930). These shares vest in equal installments over a three-year period.
- Restricted share unit awards made on October 5, 2011, to Mr. Wallace (2,740),Mr. Rahimian (1,370); and Mr. Hix (1,370) on October 5, 2011, under the 2004 Plan. These awards vest after three years on October 5, 2014, if the Named Executive Officer remains employed by the Company at that time.
- A restricted share award made to Mr. Ravenscroft (9,666) on September 29, 2011, upon his employment with Robbins & Myers. This award vests after three years on September 29, 2014, if Mr. Ravenscroft remains employed by the Company at that time.
- A restricted share unit award made to Mr. Brown (1,998) on January 11, 2012. This award vests after three years on January 11, 2015 if Mr. Brown remains employed by the Company at that time.
(4) Represents an option award an October 5, 2011, under the 2004 Plan. These options have a ten-year term, become exercisable ratably over a three-year period, and have an option exercise price equal to the closing price of a common share on the date of grant. Also includes an option award on January 11, 2012, to Mr. Brown (4,724) under the 2004 Plan which vests three years from the date of grant if Mr. Brown remains employed by the Company at that time. These options have a ten-year term, become exercisable after three years, and have an option exercise price equal to the closing price of a common share on the date of grant.
(5) Represents the grant date fair value computed in accordance with FASB ASC Topic 718 for stock options, restricted shares, restricted share units, and performance shares, assuming, for performance shares, a payout at target.
(6) Mr. Hix resigned on December 2, 2011 and forfeited all grants of Plan-based awards made to him in fiscal 2012.
Outstanding Equity Awards At August 31, 2012
(1) Each option listed in the table has a ten-year term and was granted on the same day and in the same month as its expiration date, but 10 years earlier. All options become exercisable with respect to one-third of the shares on the first annual anniversary date of their grant, two-thirds of the shares on the second anniversary, and 100% of the shares on the third anniversary except that the option award to Mr. Brown on January 5, 2012, becomes 100% exercisable on the third anniversary.
(2) All restricted share units granted in October 2009 vested upon the approval by our shareholders of the acquisition of T-3 Energy Services, Inc. on January 7, 2011; however, in accordance with the terms of such awards, the restricted share units were not paid out until October 5, 2012, as follows: Mr. Wallace - 12,120; Mr. Brown - 930; Mr. Rahimian - 3,730; and Mr. Halsey - 1,750. The 3,320 restricted share units granted in October 2009 to Mr. Hix vested on January 7, 2011, and were paid out six months after his termination on June 4, 2012. In addition, 22,076 performance shares granted to Mr. Wallace in October 2009 vested upon the approval by our shareholders of the T-3 acquisition, and in accordance with the terms of such award, the performance shares were paid out on August 31, 2012.
(3) These restricted share units and restricted shares vest as follow:
Mr. Wallace - restricted share units: 5,387 and 3,480 (10/5/2012), 5,387 and 3,480 (10/5/2013), and 2,740 and 3,480 (10/5/2014).
Mr. Brown - restricted share units: 398 and 254 (10/5/2012), 398 and 253 (10/5/2013), 253 (10/5/2014) and 1,998 (1/5/2015).
Mr. Rahimian - restricted share units: 1,639 and 1,027 (10/5/2012), 1,639 and 1,027 (10/5/2013), and 1,026 and 1,370 (10/5/2014).
Mr. Ravenscroft - restricted share units: 634 (10/5/2012), 633 (10/5/2013), and 633 (10/5/2014); restricted shares - 9,666 (9/29/2014).
Mr. Halsey - restricted share units: 749 and 484 (10/5/2012), 749 and 483 (10/5/2013), and 483 (10/5/2014).
(4) Market value of shares is the number of shares that have not vested multiplied by our closing price per share of $59.82 on August 31, 2012.
(5) Mr. Hix resigned from the Company effective December 2, 2011. All unvested options and unvested stock awards were forfeited as a result of his resignation.
Option Exercises and Stock Vested in Fiscal 2012
(1) Represents the excess of the market price of a common share on the date of exercise of the option over the exercise price times the number of shares acquired upon exercise of the option.
(2) Represents the vesting in fiscal 2012 of restricted shares and restricted share units awarded under our 2004 Plan in prior years.
(3) Calculated based on the closing price of $36.51 on October 5, 2011, the date on which the stock awards vested.
Post-Employment (Retirement) Compensation
The Company has two active retirement plans for Named Executive Officers:
•
A qualified 401(k) Employee Savings Plan, which we refer to as the 401(k) Plan.
•
A nonqualified, defined contribution plan, which we refer to as the Executive Supplemental Retirement Plan.
The Company has two inactive retirement plans from which benefits are still payable, but under which no additional benefits are being earned (other than earnings credits as described below):
•
A qualified defined benefit pension plan, which we refer to as the Prior Pension Plan.
•
A nonqualified supplemental plan, which we refer to as the Prior Supplemental Pension Plan.
Pension Benefits
The Company has no active defined benefit pension plans. Messrs. Wallace, Brown, and Rahimian are the only Named Executive Officers that participated in the inactive defined benefit pension plans. The following table provides information concerning these inactive defined benefit pension plans.
(1) The Prior Pension Plan was for officers and other salaried employees and was “frozen” on December 31, 2005. Retirement benefits for Messrs. Wallace and Rahimian under the Prior Pension Plan are calculated on a “cash balance” benefit formula basis. Under the cash balance benefit formula, each year a percentage of the employee’s compensation (5% if less than 15 years of service; 6.5% if 15 or more years of service) was credited to the employee’s cash balance account. For certain individuals including Mr. Rahimian, the pay credits were doubled to 10% and 13%, respectively, until December 31, 2005. Effective December 31, 2005, the Prior Pension Plan was “frozen” in that no future pay credits are credited to any participant’s account. Each account is also credited annually with interest. The interest credits continue to apply even though there are no more pay credits. Interest is credited quarterly and is the greater of (1) the average of the U.S. Government One-Year Treasury Constant Maturities for the last business day of the 12 months ending August preceding the plan year, rounded to the next highest quarter percent and (2) 3.5%. Upon retirement, the employee may receive benefits in the form of a lump sum payment equal to the employee’s cash balance account or a monthly annuity equal to the actuarial equivalent of the cash balance account. Mr. Brown’s retirement benefits under the plan are calculated on a “final average earnings” formula basis. For him, the Company calculates retirement benefits under the Prior Pension Plan on the basis of his average annual compensation for the five highest years during his last ten years of employment with reductions for credited years of service less than 35. Compensation for the purpose of calculating retirement benefits includes salary and cash incentive compensation (exclusive of deferred incentive compensation). The
maximum annual retirement benefit that the Company can pay under the Pension Plan to any participant as a result of limitations imposed under the Internal Revenue Code is presently $200,000. The Prior Supplemental Pension Plan provides supplemental retirement benefits for Messrs. Wallace, Brown, and Rahimian. The supplemental retirement benefit is equal to the excess of (i) the benefit that would have been payable to the employee under the Prior Pension Plan without regard to certain annual retirement income and pay limitations imposed by federal law over (ii) the benefit payable to the employee under the Prior Pension Plan. The Prior Supplemental Pension Plan also provides in the case of Messrs. Wallace and Rahimian that the employee’s cash balance account at retirement would be multiplied by 150% and 130%, respectively. The estimated annual benefits payable at normal retirement (age 65) in the form of an annuity to Messrs. Wallace and Rahimian are $10,100 and $50,400, respectively. In making these estimates, the assumptions applied to the “frozen” August 31, 2012 account balances were (i) that the interest rate for all years is 3.5%, which was the rate used for the 2012 plan year and (ii) that the projected cash balance account at normal retirement age (after applying the multiplier in effect for participants in the Prior Supplemental Pension Plan) was converted to an annuity using the interest rate and mortality assumptions under section 417(e)(3)(c) and 417 (e)(3)(B) respectively. The estimated annual benefit payable at normal retirement age in the form of an annuity to Mr. Brown is $40,700.
(2) No Named Executive Officer is eligible for early retirement under any retirement plan of the Company.
(3) Other assumptions not explicitly mentioned are the same as those assumptions used for financial reporting. Please refer to Note 11 to our Consolidated Financial Statements for the year ended August 31, 2012, for more information on those assumptions.
Nonqualified Deferred Compensation
Other than the 401(k) Plan, the only active retirement plan that the Company maintains for the Named Executive Officers is the Executive Supplemental Retirement Plan, which was established in fiscal 2006. The following table provides information concerning the Executive Supplemental Retirement Plan.
Nonqualified Deferred Compensation (1)
(1) As described in footnote (1) to the Pension Benefits table, above, the Company “froze,” as of December 31, 2005, all of the plans that provided retirement benefits to the Named Executive Officers and adopted the Executive Supplemental Retirement Plan. This plan is an unfunded defined contribution plan under which the Company annually credits an amount equal to 10% of the participant’s salary and annual cash incentive compensation to the participant’s deferred compensation account. The amount credited under the plan, however, is reduced by certain amounts the Company credits to the participant’s account for the same fiscal year under the 401(k) Plan. The Company also credits interest at a rate of 7% per annum on the amounts credited to the participant’s deferred compensation account. The Company will distribute the aggregate balance in the participant’s deferred compensation account to him on the first day of 14th month after the later of the participant’s retirement from the Company or attaining age 60. A participant may elect up to 12 months before such lump sum payment date to be paid in equal annual installments over 15 years or less, but the first installment payment may not be made until five years after such lump sum payment date. Upon termination of employment, a participant forfeits his benefits under the plan if he has less than five years of service with the Company unless the reason for termination was disability or death.
(2) Amounts in this column are included in the “All Other Compensation” column of the Summary Compensation Table.
(3) For each Named Executive Officer, only 3.5% of the amounts listed in this column were included in the Summary Compensation Table. This amount represents the portion of interest earned on Non-Qualified Deferred Compensation assets that exceeds the SEC benchmark “market” rate (120% of the applicable federal long-term rate). See Summary Compensation Table at footnote (4) for additional information.
Potential Payments Upon Termination of Employment or a Change-in-Control
Payments and benefits received by Named Executive Officers upon termination or a change-in-control are governed by the arrangements described below and quantified in the tables at the end of this section. The amounts shown in the tables assume the termination of employment and change of control occurred on August 31, 2012, the last day of fiscal 2012 (based on the executive’s compensation and service levels at such date and the closing stock price of our common shares on August 31, 2012, of $59.82 per share). The actual amounts to be paid out can only be determined at the time of the Named Executive Officer’s departure from the Company.
The approval by our shareholders of the merger of T-3 Energy Services, Inc. (“T-3”) with one of our subsidiaries constituted a change of control under our 2004 Stock Incentive Plan As Amended for all grants and awards made under the 2004 Plan prior to October 5, 2010. All outstanding, unvested stock options, restricted shares, restricted share units, and performance shares granted or awarded prior to October 5, 2010, vested on January 7, 2011, when our shareholders approved the merger with T-3. Effective October 5, 2010, we revised the definition of change of control in the 2004 Plan and consequently, the merger with T-3 did not constitute a change of control for grants or awards made on or after October 5, 2010. See “Change-in-Control Agreements” on page 74 for additional information.
The consummation of the pending merger with NOV will constitute a change of control under all of the arrangements described below.
Prior Pension Plan and Prior Supplemental Pension Plan
Named Executive Officers who are terminated for any reason receive their vested benefits under the Prior Pension Plan and the Prior Supplemental Pension Plan as discussed in the “Pension Benefits” section, above.
Executive Supplemental Retirement Plan and 401(k) Plan
Named Executive Officers who are terminated for any reason other than cause receive their vested aggregate account balance as discussed in the “Nonqualified Deferred Compensation” section. In addition, upon a change of control, unvested amounts under the supplemental retirement plan vest.
Life Insurance and Disability
We have life insurance and disability insurance programs that would provide Named Executive Officers or their beneficiaries certain payments in the event the executive’s employment were terminated due to death or disability.
Stock Compensation Plans
Under the Company’s stock plans (meaning our 1999 Plan and 2004 Plan), unvested equity awards (or in the case of options, unexercisable options) are treated as follows:
Nature of Termination
Restricted Shares and
Restricted Share Unit
Awards
Stock Options
Voluntary (other than Retirement)
Forfeit
Forfeit unexercisable;
vested exercisable for 30 days
Involuntary for Cause
Forfeit
Forfeit
Involuntary without Cause
Forfeit
Forfeit unexercisable;
vested exercisable for 30 days
Early Retirement and Normal Retirement
Fully vest
All become exercisable - for one year
(early retirement) and three years (
normal retirement)
Death and Disability
Fully vest
All become exercisable for three years
Change of Control
Fully vest
Fully vest
Employment Agreement with Mr. Wallace and Change-in-Control Agreements With Other Named Executive Officers
We have entered into an employment agreement with Mr. Wallace and change-in-control agreements with each of the other Named Executive Officers.
The change-in-control agreements with Messrs. Brown, Rahimian, and Halsey expire on June 30, 2013. Mr. Ravenscroft’s agreement expires on October 5, 2013. The agreements, however, automatically renew each year for an additional year unless at least 60 days prior to the scheduled renewal date, we advise the executive that the agreement will not be extended for an additional year in which case the agreement would continue for the one year period remaining in the current term.
The change-in-control agreements provide that if the executive is terminated by us other than for cause or disability or if the executive elects to terminate employment for good reason within two years following a change-in-control, the executive will be entitled to certain payments and benefits listed in the table below.
For purposes of the change-in-control agreements and Mr. Wallace’s employment agreement, “change-in-control” means:
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a person, other than M.H.M. & Co., Ltd. and its affiliates, becomes the owner of more than 25% of our voting shares;
•
change in a majority of the incumbent directors (including directors approved by a majority of the incumbent Directors) within a two-year period;
•
certain reorganizations, mergers, combinations and other transactions that result in our existing shareholders not owning at least 60% of the Company resulting from the transaction; or
•
the complete liquidation of the Company or the sale of substantially all of our assets.
For purposes of the change-in-control agreements and Mr. Wallace’s employment agreement, “good reason” means:
•
material diminishment in executive’s duties or responsibilities that reflect a material diminution of the scope and importance of executive’s position;
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decrease in base salary or target annual cash incentive;
•
material reduction in benefits available under employee and officer benefit plans and programs; or
•
failure to bind our successors to honor the change-in-control agreement.
The following table sets forth the payments and benefits that would have been due to a Named Executive Officer (other than Mr. Wallace) if a change-in-control of the Company had occurred on August 31, 2012. Other than the change-in-control agreements, we do not have any severance plans or agreements covering the Named Executive Officers included in the table. Mr. Hix resigned December 2, 2011, and therefore is not party to a change-in-control agreement.
(1) Table assumes a change-in-control at the end of fiscal 2012 at which time the cash incentive compensation for fiscal 2012 would have been fully earned. At any other time, there would be a prorated annual cash incentive paid under our Amended and Restated Senior Executive Annual Cash Incentive Plan. In the event employment continues or there is a termination due to death, disability, or retirement, the executive will receive a prorated projected annual cash incentive payable after the close of the fiscal year. In the event there is a termination without cause by the company or termination by the executive for good reason, the executive will receive a prorated target annual cash incentive payable at the time of termination.
(2) Represents the excess of the closing price of our shares of $59.82 on August 31, 2012, over the option exercise price of options that became exercisable due to the occurrence of a change-in-control.
(3) Represents the value of restricted shares and restricted share units that vested on account of a change-in-control, using the $59.82 per share closing price on August 31, 2012. In the event of retirement, restricted shares and restricted share units vest only with the consent of the Compensation Committee.
(4) Performance share awards made in October 2010 and 2011 vest to the extent they have been earned are paid out in common shares. Performance shares awarded in 2011 are paid at target except that in the event of death, disability, or retirement, when performance shares are paid at actual earned amounts for completed fiscal years up to the date of termination and at target for any remaining fiscal years. The amount listed includes the dollar value of the following dividend equivalent shares: Mr. Brown - 18 shares, Mr. Rahimian - 76 shares, Mr. Ravenscroft - 7 shares, and Mr. Halsey - 35 shares.
(5) Retirement benefits under the Executive Supplemental Retirement Plan normally vest after five years of service.
(6) Restricted share units granted in October 2009, which vested upon the approval by our shareholders of the acquisition of T-3 Energy Services, Inc. on January 7, 2011, and one third of restricted share units granted on October 5, 2010, which vested on October 5, 2011.
(7) The amount listed would be in addition to the amounts listed in the section entitled “Employment Continues.”
(8) None of our named executive officers other than Mr. Wallace is entitled to receive any gross-up payment for excise taxes that may be imposed under Sections 280G and 4999 of the Internal Revenue Code in connection with a change-in-control. Instead, if the occurrence of a change-in-control and/or the termination of such a named executive officer’s employment in connection with a change-in-control would result in the imposition of any excise tax under Sections 280G and 4999 of the Internal Revenue Code, the named executive officer would either (a) receive all compensation to which he is otherwise entitled, subject to the excise tax, or (b) have his compensation reduced to the “safe harbor” level at which no excise tax would be imposed, if such a reduction would result in the named executive officer receiving a greater net after-tax benefit. Based on the assumptions stated below, it is estimated that the cash severance payments to Mr. Ravenscroft pursuant to his change-in-control agreement would be reduced by approximately $159,780, in order to avoid the imposition of excise tax under Sections 280G and 4999 of the Internal Revenue Code. The amount of cash severance disclosed in the table above reflects the full cash severance payable to Mr. Ravenscroft, before any such reduction. Based on the assumptions stated below, none of our other named executive officers would be subject to any excise tax under Sections 280G and 4999 of the Internal Revenue Code. For this purpose, it is assumed that a change-in-control occurred on August 31, 2012, each named executive officer’s employment was terminated involuntarily without cause or by the named executive officer for good reason on that date, and present values of benefits are determined using discount rates of 0.30% and 1.06%, as applicable.
(9) For Messrs. Brown, Rahimian and Halsey, the amount listed is 1.5 times the average annual cash incentive earned for fiscal years 2009, 2010 and 2011. For Mr. Ravenscroft, who had less than three years of employment as of August 31, 2012, the amount listed is 1.5 times the annual cash incentive earned for fiscal 2012.
We entered into an employment agreement with Mr. Wallace on June 28, 2006, which expires on June 30, 2013. The agreement, however, automatically renews each year for an additional year unless at least 60 days prior to the scheduled renewal date, we or Mr. Wallace elect not to extend the agreement for an additional year in which case the agreement would continue for the one-year period remaining in the current term. The following table sets forth the payments and benefits that would have been due to Mr. Wallace under the agreement if a change-in-control of the Company had occurred on August 31, 2012, or upon termination of his employment both before and after a change-in-control of the Company.
(1) Chart assumes termination at end of fiscal 2012 at which time the annual cash incentive for fiscal 2012 would have been fully earned. At any other time, there would be a prorated annual cash incentive paid.
(2) Represents the excess of the closing price of our shares of $59.82 on August 31, 2012, over the option exercise price of options that became exercisable due to the occurrence of a change-in-control.
(3) Represents the value of restricted share units that vested on account of a change-in-control, using the $59.82 per share closing price on August 31, 2012. In the event of retirement, restricted share units vest only with the consent of the Compensation Committee.
(4) Performance share awards made in October 2010 and 2011 to the extent they have been earned are paid out as common shares. Performance shares awarded in 2011 are paid at target except that in the event of death, disability, or retirement when performance shares are paid at actual earned amounts for completed fiscal years up to the date of termination and at target for any remaining fiscal years. The amount listed includes the dollar value of 250 dividend equivalent shares.
(5) Restricted share units granted in October 2009, which vested upon the approval by our shareholders of the acquisition of T-3 Energy Services, Inc. on January 7, 2011, and one third of restricted share units granted on October 5, 2010, which vested on October 5, 2011.
(6) Mr. Wallace’s employment agreement provides that if any excise tax is imposed on Mr. Wallace’s compensation under Sections 280G and 4999 of the Internal Revenue Code in connection with the occurrence of a change-in-control and/or termination of Mr. Wallace’s employment in connection with a change-in-control, Mr. Wallace would be entitled to receive an additional gross-up payment such that, after paying all taxes on the gross-up payment, Mr. Wallace would retain an amount of the gross-up payment equal to the amount of the excise tax. However, based on the assumptions stated below, Mr. Wallace would not be subject to any excise tax under Sections 280G and 4999 of the Internal Revenue Code. For this purpose, it is assumed that a change-in-control occurred on August 31, 2012, Mr. Wallace’s employment was terminated involuntarily without cause or by Mr. Wallace for good reason on that date, and present values of benefits are determined using a discount rate of 0.30%.
(7) The amount listed would be in addition to amount listed in the row entitled “Change-in-Control-Employment Continues,” except that the annual cash incentive would be prorated target.
The change-in-control agreements and Mr. Wallace’s employment agreement each provide that the executive will maintain the confidentiality of the Company’s confidential information indefinitely and for one year after termination of employment for any reason will not compete with the Company or solicit employees to leave the Company and join another organization.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive the compensation listed in the following table for services as a director. The information set forth in the table describes director compensation as in effect during fiscal 2012.
(1) Awards are made under the 2004 Stock Incentive Plan As Amended on the date of each annual meeting of shareholders.
(2) If meeting is telephonic, fees are 50% of amount stated.
Our non-employee directors are required to own our common shares having a value equal to at least five times the annual cash retainer we pay directors. Until a director meets the stock ownership requirement, the director must retain at least 60% of all stock compensation paid by us.
The following table provides additional information on fiscal 2012 compensation for non-employee directors who served during fiscal 2012.
(1) Consists of the cash amounts described in the preceding table.
(2) The grant date fair value of the restricted share awards granted to each of the directors in 2012 under FASB ASC Topic 718 was $60,000.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding our equity compensation plans as of August 31, 2012:
(1) Includes outstanding options under (i) our 1995 Stock Option Plan for Non-Employee Directors, and 1999 Long-Term Incentive Plan, all of which have terminated as to future awards, and (ii) our 2004 Stock Incentive Plan As Amended.
(2) All shares listed in Column (c) are available for future awards under our 2004 Stock Incentive Plan As Amended. Awards may be comprised of options, restricted shares, restricted units, performance shares, share awards or share unit awards upon such terms as the Compensation Committee of the Board determines at the time of grant that are consistent with the express terms of the plan.
SECURITY OWNERSHIP
Directors and Executive Officers
Set forth below is information as of October 15, 2012 concerning common shares of the Company beneficially owned by each director, each of our Named Executive Officers, and directors and executive officers as a group. In addition to the shares shown in the following table, executive officers hold restricted share units, as listed in footnote 3 to the table.
(1) Christopher M. Hix, our former Vice President and Chief Financial Officer, resigned on December 2, 2011.
(2) Unless otherwise indicated, total voting power and total investment power are exercised by each individual and/or a member of his household. Shares which a person may acquire within 60 days of October 15, 2012 are treated as “beneficially owned” and the number of such shares included in the table for each person is:
(3) In addition to the shares listed in the table, as of October 15, 2012, executive officers held the following number of vested and unvested restricted share units. No director holds any restricted share units.
(4) This table does not include: (i) performance shares granted in October 2011 earned based on performance for the fiscal year ended August 31, 2011, subject to a two-year vesting period, or (ii) performance shares granted in October 2012 which will be earned based on performance for the fiscal years ending August 31, 2012, 2013 and 2014.
(5) Less than 1%.
Principal Shareholders
The only persons known by the Board of Directors of the Company to be beneficial owners of more than 5% of the outstanding common shares of the Company as of October 15, 2012 are listed in the following table:
(1) Calculated based on 42,180,217 common shares outstanding as of August 31, 2012.
(2) Pursuant to Amendment No. 2 to Schedule 13G filed by Blackrock with the SEC on February 10, 2012, Blackrock has sole voting and dispositive power with respect to the listed shares.
(3) Pursuant to Schedule 13D filed with the SEC on September 5, 2012, by Mario J. Gabellio and various entities which he directly or indirectly controls or for which he acts as chief investment officer, Mr. Gabellio and each such entity has sole voting and dispositive power over the listed shares it holds as follows: Gabelli Funds LLC - 822,964 shares; GAMCO Asset Management Inc. - 954,551 shares; Gabelli Securities, Inc. - 291,535 shares; Gabelli Foundation, Inc. - 8,000 shares; MJG Associates, Inc. - 2,000 shares; GGCP, Inc. - 20,000 shares; GAMCO Investors, Inc. - 17,600 shares; and Mario J. Gabelli - 54,500 shares.
(4) M.H.M. & Co., Ltd. is an Ohio limited partnership (the “Partnership”). Maynard H. Murch Co., Inc. is the managing general partner, and Loftis Investments LLC, a company wholly-owned by Thomas P. Loftis, is the other general partner of the Partnership. Partnership decisions with respect to the voting and disposition of Company shares are determined by Maynard H. Murch Co., Inc., whose board of directors is comprised of Creighton B. Murch and Robert B. Murch, who are first cousins, and Maynard H. Murch V, who is Mr. Robert B. Murch’s nephew.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Related Party Transactions
Our Board of Directors has adopted a written policy regarding the review, approval or ratification of related party transactions. Under the policy, all related party transactions must be pre-approved by the Audit Committee or ratified by the Audit Committee if pre-approval is not feasible. Under the policy, certain transactions are excluded from the definition of related party transaction, including (i) director and executive officer compensation required to be disclosed in the Company’s SEC filings; (ii) certain transactions with other companies where the related party’s only relationship is as beneficial owner of less than 10% of that company’s shares, if the aggregate amount involved during any twelve-month year does not exceed the greater of $1,000,000 or 2% of that company’s total annual revenues; (iii) transactions where the related party’s interest arises solely from the ownership of the Company’s common shares and all holders of the Company’s common shares receive the same benefit on a pro rata basis; (iv) transactions in which the rates or charges are determined by competitive bids or involve the rendering of services as a common or contract carrier or public utility, at rates or charges fixed in conformity with law or governmental authority; and (v) transactions involving services as a bank depository of funds, transfer agent, registrar, trustee or similar services. In determining whether to approve or ratify a related party transaction, the Audit Committee will consider, among other factors, whether the terms of the transaction are fair to the Company, whether there are compelling business reasons to enter into the transaction, and whether the transaction would, in the case of an outside director, impair the independence of that outside director. Any Audit Committee member who has an interest in a transaction under discussion must abstain from voting on the proposed transaction.
Linn S. Harson, our Secretary and General Counsel, is a partner in the law firm of Thompson Hine LLP. Thompson Hine has served as our principal legal counsel since 1979 and this relationship is annually disclosed in writing to our Audit Committee for review. During fiscal 2012, we paid Thompson Hine $1,876,754 for legal services.
Other than as described in the preceding paragraph, during fiscal 2012 we were not a party to any transaction in which an executive officer, director, or 5% shareholder (or their immediate family members) had a material direct or indirect interest and no such person was indebted to us.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees for services provided by Ernst & Young LLP related to fiscal years 2012 and 2011 and for other services billed in the most recent two fiscal years:
(1) For services rendered for the audits of the consolidated financial statements of the Company, audit of internal control over financial reporting, as well as statutory audits, review of financial statements included in Form 10-Q reports, issuance of consents, and assistance with review of documents filed with the Securities and Exchange Commission.
(2) For services related to employee benefit plan audits and due diligence related to strategic alternatives.
(3) For services related to tax compliance, tax return preparation, and tax assistance.
(4) For due diligence services.
In appointing Ernst & Young LLP to serve as the Company’s independent auditors for fiscal 2012, the Audit Committee reviewed past services performed during fiscal 2011 and services proposed to be performed during fiscal 2012. In appointing Ernst & Young LLP, the Audit Committee carefully considered the impact of such services on Ernst & Young LLP’s independence. The Audit Committee has determined that the performance of such services did not affect the independence of Ernst & Young LLP. Ernst & Young LLP has advised the Company that Ernst & Young LLP is in compliance with all rules, standards and policies of the Independence Standards Board and the Securities and Exchange Commission governing auditor independence.
The Audit Committee has adopted policies and procedures that require the pre-approval of all audit, audit-related, tax and other services rendered by the Company’s independent auditors. Under the policy, an auditor services schedule is prepared at the beginning of each year that describes each type of service to be provided by the independent auditors and the projected fees for each such service. The Audit Committee reviews and approves in advance, as appropriate, each service listed on the auditor services schedule and the projected fees for each such service. On a periodic basis, the independent auditors report to the Audit Committee the actual spending for specified services compared with the approved amounts. Projected fee amounts listed on the auditor services schedule may be updated, as appropriate in the Audit Committee’s discretion, at each regularly scheduled meeting of the Audit Committee. The Audit Committee may also pre-approve particular services on a case-by-case basis. The policy allows the Audit Committee to delegate pre-approval authority to one or more members of the Audit Committee. Any decisions made by the designated pre-approval member are reported, for informational purposes only, to the full Audit Committee at its next meeting.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) FINANCIAL STATEMENTS
The following consolidated financial statements of Robbins & Myers, Inc. and its subsidiaries are at Item 8 hereof.
Consolidated Balance Sheet-August 31, 2012 and 2011.
Consolidated Statement of Income -
Years ended August 31, 2012, 2011 and 2010.
Consolidated Equity Statement -
Years ended August 31, 2012, 2011 and 2010.
Consolidated Cash Flow Statement -
Years ended August 31, 2012, 2011 and 2010.
Notes to Consolidated Financial Statements.
(a) (2) FINANCIAL STATEMENT SCHEDULE
Schedule II-Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.
(a) (3) EXHIBITS.
See INDEX to EXHIBITS.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Robbins & Myers, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 22nd day of October, 2012.
ROBBINS & MYERS, INC.
BY
/s/ Peter C. Wallace
Peter C. Wallace
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Robbins & Myers, Inc. and in the capacities and on the date indicated:
* The undersigned, by signing his name hereto, executes this Report on Form 10-K for the year ended August 31, 2012 pursuant to powers of attorney executed by the above-named persons and filed with the Securities and Exchange Commission.
/s/ Peter C. Wallace
Peter C. Wallace
Their Attorney-in-fact
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(1) Includes impact from acquisition of T-3 in fiscal 2011 of $840,000 for uncollectible and reserves deducted from assets, $26,754,000 for inventory obsolescence reserve and $370,000 for warranty claims.
(2) Represents accounts receivable written off against the reserve.
(3) Inventory items scrapped and written off against the reserve.
(4) Impact of valuation allowance release including expiration of related net operating losses and changes in tax rates.
(5) Warranty cost incurred applied against the reserve.
(6) Spending against casualty reserve.
(7) Spending against restructuring reserve.
(8) Includes impact of exchange rates, and for fiscal 2011, allowances and reserve accounts of our acquired business on acquisition date and certain other additions that were not charged to expense.
INDEX TO EXHIBITS
“F” Indicates Exhibit is being filed with this Report.
“*” The Agreement and Plan of Merger filed as Exhibit 2.1 to our Current Report on 8-K filed on October 6, 2010 omits the disclosure letters to the Merger Agreement. Robbins & Myers agrees to furnish supplementally a copy of these documents to the Securities and Exchange Commission upon request.
“**” Indicates that Exhibit is incorporated by reference in this Report from a previous filing with the Commission.
“***” The Agreement filed as Exhibit 2.1 to our Current Report on Form 8-K filed on May 5, 2011 omits all Schedules and Sub-Schedules to the Agreement other than Schedules 1.1(d) (Sellers’ Statements) and 13.1.5 (Conduct of Business Prior to Closing). Robbins & Myers agrees to furnish supplementally a copy of these documents to the Securities and Exchange Commission upon request.
“****” The Agreement and Plan of Merger filed as Exhibit 1.1 to our Current Report on Form 8-K filed on August 9, 2012 omits all Disclosure Schedules to the Agreement. Robbins & Myers agrees to furnish supplementally a copy of these documents to the Securities and Exchange Commission upon request.
“*****” Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filings.
“M” Indicates management contract or compensatory arrangement.