10-K 1 d392740d10k.htm 10-K 10-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended August 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to         

Commission File Number 001-13651

 

 

ROBBINS & MYERS, INC.

(Exact name of registrant as specified in its charter)

 

                Ohio                 

 

    31-0424220    

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

10586 Highway 75 North, Willis, TX

 

    77378    

(Address of principal executive offices)   (Zip Code)

(936) 890-1064

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on

which registered

Common Shares, without par value

  New York

 

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

 

Aggregate market value of Common Shares, without par value, held by non-affiliates of the Company at February 29, 2012 (the last business day of the Company’s second fiscal quarter), based on the closing sales price on the New York Stock Exchange

   $ 1,868,781,588   

Number of Common Shares, without par value, outstanding at September 30, 2012

     42,180,217   

 

 

 


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—Risk Factors”). Except to the limited extent required by applicable law, the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

OVERVIEW

Robbins & Myers, Inc. is an Ohio corporation. As used in this report, the terms “Company,” “Robbins & Myers,” “R&M,” “we,” “our,” or “us” mean Robbins & Myers, Inc. and its subsidiaries unless the context indicates another meaning. We are a leading supplier of engineered equipment and systems for critical applications in global energy, industrial, chemical and pharmaceutical markets. 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. Our fiscal 2012 sales were approximately $1,035 million.

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 proposed 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 the shareholders of Robbins & Myers, Inc. 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.

Beginning with the first quarter of fiscal year 2012 (“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.

On January 10, 2011 (“the acquisition date”), we completed our acquisition of T-3 Energy Services, Inc. (“T-3”), by means of a merger, such that T-3 became a wholly-owned subsidiary of Robbins & Myers, Inc. 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. The operating results of T-3 are included in our consolidated financial statements since the acquisition date within our Energy Services segment.

On April 29, 2011, we divested our Romaco businesses. The results of our Romaco segment are reported as discontinued operations for all periods presented.

Information concerning our sales, income before interest and income taxes (“EBIT”), identifiable assets by segment and sales and tangible assets by geographic area for the years ended August 31, 2012, 2011 and 2010 is set forth in Note 16 to the Consolidated Financial Statements included at Item 8 and is incorporated herein by reference.

Energy Services Segment

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, production and completion, pipeline transmission infrastructure and a variety of other industrial applications. Our Energy Services segment includes products and services sold under the Robbins & Myers Energy Systems® and T-3® brands. Our products and systems include power sections for drilling motors, blow-out preventers (“BOPs”), down-hole progressing cavity pumps, drive systems and automation, wellhead equipment,

 

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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.

Sales, Marketing and Distribution. We sell our hydraulic drilling power sections, BOPs, pressure control systems, wellhead equipment, manifolds and gate valves through a direct sales force. We sell our tubing wear prevention products, down-hole pump systems, closure products and industrial pumps through major oilfield and industrial distributors as well as our direct sales force and service centers in key oilfield locations. Backlog at August 31, 2012 was $169.7 million, compared with $121.3 million at August 31, 2011.

Aftermarket Sales. Aftermarket sales consist principally of selling replacement components for our pumps, as well as the relining of power section stators, repair and field services for BOPs, manifolds and valves for the energy market. Aftermarket sales represented approximately 30% of the sales in this segment in fiscal 2012, compared with 34% in fiscal 2011. However, replacement items, such as power section rotors and stators and down-hole pumps are components of larger systems that wear out after regular usage. These are often sold as components in larger systems and are not identifiable by us as aftermarket sales.

Markets and Competition. We believe we are one of the leading independent manufacturers of power sections, BOPs, pressure control systems, wellhead equipment and frac manifolds and trees, in the markets we serve. We are also a leading manufacturer of rod guides, pipeline closure products and down-hole progressing cavity pumps worldwide. While the markets we serve are generally highly fragmented and also involve various competing technologies, we believe that with our leading brands and products, we are effectively positioned to serve customers with an attractive range of products and services.

Process & Flow Control Segment

Our Process & Flow Control business segment designs, manufactures and services glass-lined reactors and storage vessels, industrial progressing cavity pumps, mixing equipment, and related products such as grinders for applications involving the flow of viscous, abrasive and solid-laden slurries and sludge, standard and customized fluid-agitation equipment and systems. We also provide alloy steel vessels, heat exchangers, other fluid systems, wiped film evaporators and packaged process systems. In addition, we provide customized fluoropolymer-lined fittings, vessels and accessories. The primary markets served by this segment are the industrial, chemical, pharmaceutical, wastewater treatment, food and beverage, specialty chemical and other end markets. Primary brands are Pfaudler®, Moyno®, Chemineer® and Edlon®.

Sales, Marketing and Distribution. We primarily manufacture, market, sell and service glass-lined reactors, storage vessels, industrial pumps, thermal and other fluid processing systems through our direct sales and service force, as well as manufacturers’ representatives in certain geographic markets. Industrial mixers and agitation equipment products are primarily sold through manufacturers’ representatives. Backlog at August 31, 2012 was $138.1 million compared with $129.8 million at August 31, 2011.

Aftermarket Sales. Aftermarket products and services, which include field service, replacement parts, accessories and reconditioning of glass-lined vessels, are an important part of our glass-lined reactor product line. Our aftermarket capabilities and presence allow us to service our large installed base of Pfaudler® glass-lined vessels and to meet the needs of our customers who outsource various maintenance and service functions. In addition, we refurbish and sell used, glass-lined vessels. Our aftermarket business for the Chemineer® and Moyno® lines primarily consists of selling replacement parts. Aftermarket sales represented approximately 37% of this segment’s sales in fiscal 2012, compared with 38% in fiscal 2011.

Markets and Competition. We believe we have the number one worldwide market position in sales value for quality glass-lined reactors and storage vessels, competing principally with smaller European companies. Competition in Europe has increased resulting in increasing pricing pressure. There are also Asian suppliers who compete in local markets based on a lower quality specification. We are also one of the leading suppliers of progressing cavity pumps for industrial applications, and also for mixing equipment for certain markets. There are several worldwide competitors in these markets and there are also various alternative technologies related to the markets we serve. Our Edlon® brand primarily competes by offering highly engineered products and products made for special needs, and tends to compete with other niche suppliers.

 

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Other Consolidated Information

BACKLOG

Our total order backlog was $307.8 million at August 31, 2012 compared with $251.1 million at August 31, 2011. We expect to ship substantially all of our backlog during the next 12 months.

CUSTOMERS

No customer represented more than 10% of consolidated sales in fiscal 2012, 2011 or 2010. See Note 16 – Business Segments and Geographic Information, included in Item 8 of this Report for financial information by geographic region.

RAW MATERIALS

Raw materials are purchased from a broad supplier base that is often located in the same regions as our facilities. Over the last three years the prices of raw materials, especially steel, have been volatile. Our supply of steel and other raw materials and components has been adequate and available without significant delivery delays. No events are known or anticipated that would change the availability of raw materials. No one vendor provides more than 10% of our supplied materials.

GENERAL

We own a number of patents relating to the design and manufacture of our products. While we consider these patents important, we believe that the successful manufacture and sale of our products depends more upon application expertise and manufacturing skills. We are committed to maintaining high quality manufacturing standards and have completed ISO certification at many of our facilities.

During fiscal 2012, we spent approximately $7.0 million on research and development activities compared with $5.9 million in fiscal 2011 and $4.8 million in fiscal 2010. These amounts do not include engineering development costs incurred in conjunction with fulfilling custom customer orders and executing customer projects.

Compliance with federal, state and local laws regulating the discharge of materials into the environment is not anticipated to have any material effect upon the Company’s capital expenditures, earnings or competitive position.

At August 31, 2012, we had 3,473 employees, which included approximately 380 employees at majority-owned joint ventures. Approximately 270 of our U.S. employees were covered by collective bargaining agreements at various locations. In addition, approximately 510 of our non-U.S. employees were covered by government-mandated agreements in their respective countries. The agreement covering our Dayton, Ohio, manufacturing facility expires in fiscal 2013. The Company considers labor relations at each of its locations to be generally good.

CERTIFICATIONS

Peter C. Wallace, our President and Chief Executive Officer, certified to the New York Stock Exchange (“NYSE”) on February 6, 2012 that, as of that date, he was not aware of any violation by the Company of the NYSE’s Corporate Governance Listing Standards. We have filed with the Securities and Exchange Commission (“SEC”) the certifications of Mr. Wallace and Kevin J. Brown, our Interim Chief Financial Officer, that are required by Section 302 of the Sarbanes-Oxley Act of 2002 relating to the financial statements and disclosures contained in our Annual Report on Form 10-K for the year ended August 31, 2012.

AVAILABLE INFORMATION

We make available free of charge on or through our web site, at www.robn.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC.

We also post on our web site the following corporate governance documents: Corporate Governance Guidelines, Code of Business Conduct and the Charters of our Audit, Compensation, and Nominating and Governance Committees. Written copies of the foregoing documents may also be requested from our Corporate Secretary, Robbins & Myers, Inc., 10586 Highway 75 North, Willis, TX 77378.

 

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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

 

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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.

 

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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.

 

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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.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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.

 

     Manufacturing      Sales/ Service      Square Footage
(In thousands)
 
           Owned      Leased  

Function and size by segment:

           

Energy Services

     14         35         980         473   

Process & Flow Control

     13         3         2,144         179   
     North America      South America      Europe      Asia/Australia  

Geographical locations by segment:

           

Energy Services

     43         3         1         2   

Process & Flow Control

     7         1         6         2   

 

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. MINE SAFETY DISCLOSURES

Not applicable.

 

8


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.

 

9


PART II

 

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.

 

Fiscal 2012

   High      Low      Dividends
Declared and
Paid per  Share
 

1st Quarter ended Nov. 30, 2011

   $ 53.20       $ 32.04       $ 0.0450   

2nd Quarter ended Feb. 29, 2012

     51.97         45.41         0.0500   

3rd Quarter ended May 31, 2012

     53.29         43.66         0.0500   

4th Quarter ended Aug. 31, 2012

     60.11         39.34         0.0500   

Fiscal 2011

                    

1st Quarter ended Nov. 30, 2010

   $ 31.01       $ 24.43       $ 0.0425   

2nd Quarter ended Feb. 28, 2011

     43.08         31.87         0.0450   

3rd Quarter ended May 31, 2011

     45.99         38.94         0.0450   

4th Quarter ended Aug. 31, 2011

     54.79         38.93         0.0450   

(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

 

Period

   Total Number
of Shares
Purchased (a)
     Average Price
Paid per
Share
     Total Number of
Shares Purchased
as Part of Publicly

Announced Plans
or Programs (b)
     Maximum Number
of Shares that May

Yet Be Purchased
Under the Plans or
Programs (b)
 

June 1-30, 2012

     531,550       $ 45.22         530,000         2,000,000   

July 1-31, 2012

     —           —           —           2,000,000   

August 1-31, 2012

     8,903         59.82         —           2,000,000   
  

 

 

       

 

 

    

Total

     540,453            530,000      
  

 

 

       

 

 

    

(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

 

10


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. 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements included in Item 8 “Financial Statements and Supplementary Data”.

     2012      2011      2010      2009      2008  

Operating Results

              

Orders (2)

   $ 1,100,984       $ 876,250       $ 521,948       $ 451,310       $ 667,621   

Ending backlog (2)

     307,790         251,064         136,798         94,838         186,697   

Sales (2)

     1,034,783         820,640         478,193         527,345         636,472   

EBIT (2,3,4)

     218,616         131,343         46,918         72,076         110,061   

Net income from continuing operations - Robbins & Myers, Inc. (3)

     150,000         80,375         29,338         53,476         69,516   

Net income per share from continuing operations (3):

              

Basic

   $ 3.41       $ 1.96       $ 0.89       $ 1.61       $ 2.01   

Diluted

     3.39         1.94         0.89         1.61         2.00   

Financial Condition

              

Total assets

   $ 1,523,263       $ 1,582,966       $ 817,021       $ 796,854       $ 864,717   

Total cash

     166,925         230,606         149,213         108,169         123,405   

Total long-term debt (excluding portion due within one year)

     —           24         93         265         30,435   

Total equity

     1,091,279         1,166,419         491,024         483,111         515,456   

Other Data

              

Cash flow from operating activities

   $ 160,432       $ 101,048       $ 88,483       $ 51,860       $ 89,560   

Capital expenditures, net

     29,464         28,307         10,611         17,694         22,114   

Amortization

     11,023         15,684         601         1,107         1,279   

Depreciation

     20,896         18,277         15,029         15,119         14,970   

Dividends declared per share

   $ 0.1950       $ 0.1775       $ 0.1675       $ 0.1575       $ 0.1450   

Number of employees

     3,473         3,387         2,965         3,027         3,357   

 

11


Notes to Selected Financial Data

(1) We acquired all of the outstanding common stock and voting interests of T-3 Energy Services, Inc. (“T-3”) on January 10, 2011. We purchased the remaining 24 percent noncontrolling interest in our Process & Flow Control Group Chinese subsidiary on June 9, 2009. Our 51-percent-owned subsidiary, GMM, acquired Mavag on January 10, 2008. These transactions impact the comparability of the Selected Financial Data.

(2) On April 29, 2011, we disposed of our Romaco segment which was accounted for as a discontinued operation. Orders, ending backlog, sales and EBIT reflect only continuing operations. Other information includes our Romaco segment for periods owned.

(3) A summary of the Company’s special items, including inventory write-up values charged to cost of sales, and their impact on diluted earnings per share is as follows:

 

         2012             2011             2010             2009              2008      
     (In thousands, except per share data)  

Pre-tax impact of special items expense (income):

           

NOV merger-related costs

   $ 2,959      $ —        $ —        $ —         $ —     

Cost of sales-T-3 merger-related inventory write-up values

     —          9,499        —          —           —     

Other T-3 merger-related costs:

           

Employee termination costs

     —          3,022        —          —           —     

Backlog amortization

     —          7,234        —          —           —     

Professional fees and accelerated equity compensation

     —          5,884        —          —           —     

Restructuring costs including severance

     —          1,012        2,764        —           —     

Net facility sale gains

     —          —          —          —           (835
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total special items

   $ 2,959      $ 26,651      $ 2,764      $ —         $ (835
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

(Decrease) increase in net income due to special items

   $ (1,923   $ (18,058   $ (2,764   $ —         $ 543   

(Decrease) increase in diluted earnings per share due to special items

   $ (0.04   $ (0.44   $ (0.08   $ —         $ 0.02   

(4) 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.

 

12


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 &

 

13


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.

 

14


Results of Operations

The following tables present components of our Consolidated Statement of Income and segment information for our continuing operations.

 

Consolidated    2012     2011     2010  

Sales

     100.0     100.0     100.0

Cost of sales

     61.1        62.8        66.8   
  

 

 

   

 

 

   

 

 

 

Gross profit

     38.9        37.2        33.2   

SG&A expenses

     17.5        19.1        22.8   

Other expense

     0.3        2.1        0.6   
  

 

 

   

 

 

   

 

 

 

EBIT

     21.1     16.0     9.8
  

 

 

   

 

 

   

 

 

 
By Segment    2012     2011     2010  
Energy Services:    (In millions, except percents)  

Sales

   $ 665.5      $ 477.2      $ 201.6   

EBIT

     198.0        131.0        61.7   

EBIT %

     29.8     27.4     30.6

Process & Flow Control:

      

Sales

   $ 369.3      $ 343.4      $ 276.6   

EBIT

     41.4        26.8        4.9   

EBIT %

     11.2     7.8     1.8

Consolidated:

      

Sales

   $ 1,034.8      $ 820.6      $ 478.2   

EBIT

     218.6        131.3        46.9   

EBIT %

     21.1     16.0     9.8

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

 

15


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.

 

16


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.

 

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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.

 

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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.

 

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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

 

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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

 

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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

 

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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.

 

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Contractual Obligations

Following is information regarding our long-term contractual obligations and other commitments outstanding as of August 31, 2012:

 

     Payments Due by Period  

Long-term contractual obligations

   Total      One
year
or less
     Two
to
three
years
     Four
to five
years
     After
five
years
 
     (In thousands)  

Debt obligations

   $ 153       $ 153       $ —         $ —         $ —     

Operating leases (1)

     17,224         5,785         7,584         2,413         1,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 17,377       $ 5,938       $ 7,584       $ 2,413       $ 1,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

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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.

 

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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, 2012

 

26


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

 

27


CONSOLIDATED BALANCE SHEET

Robbins & Myers, Inc. and Subsidiaries

(In thousands, except share data)

 

     August 31,  
     2012     2011  

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 166,925      $ 230,606   

Accounts receivable

     180,047        166,511   

Inventories

     162,713        151,463   

Other current assets

     11,206        11,247   

Deferred taxes

     21,169        18,674   
  

 

 

   

 

 

 

Total Current Assets

     542,060        578,501   

Goodwill

     577,874        592,051   

Other Intangible Assets

     195,730        206,668   

Deferred Taxes

     25,200        26,344   

Other Assets

     12,663        13,776   

Property, Plant and Equipment

     169,736        165,626   
  

 

 

   

 

 

 
   $ 1,523,263      $ 1,582,966   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current Liabilities:

    

Accounts payable

   $ 95,698      $ 84,761   

Accrued expenses

     98,299        90,159   

Deferred taxes

     1,020        1,094   

Current portion of long-term debt

     153        421   
  

 

 

   

 

 

 

Total Current Liabilities

     195,170        176,435   

Long-Term Debt, Less Current Portion

     —          24   

Deferred Taxes

     134,758        131,697   

Other Long-Term Liabilities

     102,056        108,391   

Robbins & Myers, Inc. Shareholders' Equity:

    

Common stock-without par value:

    

Authorized shares-80,000,000

    

Issued shares-48,236,027 in 2012 (47,933,190 in 2011)

     743,007        730,765   

Treasury shares-6,055,810 in 2012 (2,047,194 in 2011)

     (228,434     (39,545

Retained earnings

     640,072        498,653   

Accumulated other comprehensive loss:

    

Foreign currency translation

     (30,549     (6,623

Pension liability

     (47,728     (33,312
  

 

 

   

 

 

 

Total

     (78,277     (39,935
  

 

 

   

 

 

 

Total Robbins & Myers, Inc. Shareholders' Equity

     1,076,368        1,149,938   

Noncontrolling Interest

     14,911        16,481   
  

 

 

   

 

 

 

Total Equity

     1,091,279        1,166,419   
  

 

 

   

 

 

 
   $ 1,523,263      $ 1,582,966   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

28


CONSOLIDATED EQUITY STATEMENT

Robbins & Myers Inc. and Subsidiaries

(In thousands, except share and per share data)

 

 

     Robbins & Myers, Inc. Shareholders' Equity              
     Common
Shares
    Treasury
Shares
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Noncontrolling
Interest
    Total  

Balance at August 31, 2009

   $ 190,097      $ (39,753   $ 344,530      $ (25,923   $ 14,160      $ 483,111   

Net income

         33,197          950        34,147   

Change in foreign currency translation

           (14,190     538        (13,652

Change in pension liability, net of tax

           (9,206       (9,206
          

 

 

   

 

 

 

Comprehensive income

             1,488        11,289   

Dividends and other-net

             (688     (688

Restricted stock grants-net, 110,890 shares (37,961 from Treasury)

            

Restricted stock expense

     760                760   

Cash dividend declared, $0.1675 per share

         (5,529         (5,529

Treasury stock purchases-other, 37,670 shares

       (886           (886

Issuance of restricted stock from Treasury stock, 37,961 shares

     (1,075     1,075              —     

Stock option expense

     1,051                1,051   

Performance stock award expense

     1,224                1,224   

Proceeds from employee benefit plan share sales, 43,191 shares

     1,036                1,036   

Stock options exercised, 4,334 shares

     50                50   

Tax impact of vested restricted stock and stock options exercised

     (394             (394
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at August 31, 2010

     192,749        (39,564     372,198        (49,319     14,960        491,024   

Net income

         134,012          904        134,916   

Change in foreign currency translation, net of divested businesses

           (2,571     1,116        (1,455

Change in pension liability, net of tax and divested businesses

           11,955          11,955   
          

 

 

   

 

 

 

Comprehensive income

             2,020        145,416   

Dividends and other-net

             (499     (499

Restricted stock grants-net, 58,003 shares (10,728 from Treasury)

            

Restricted stock expense

     1,331                1,331   

Cash dividend declared, $0.1775 per share

         (7,557         (7,557

Treasury stock purchases-other, 12,174 shares

       (442           (442

Issuance of restricted stock from Treasury stock, 10,728 shares

     (461     461              —     

Stock option expense

     1,755                1,755   

Performance stock award expense

     1,178                1,178   

Proceeds from employee benefit plan share sales, 23,274 shares

     758                758   

Stock options exercised, 901,861 shares

     21,029                21,029   

Tax impact of vested restricted stock and stock options exercised

     378                378   

Merger-related T-3 options and warrants

     19,693                19,693   

Shares issued for T-3 merger, 11,950,870 shares

     492,137                492,137   

Exercise of T-3 warrants, 5,298 shares

     218                218   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at August 31, 2011

     730,765        (39,545     498,653        (39,935     16,481        1,166,419   

Net income

         150,000          991        150,991   

Change in foreign currency translation

           (23,926     (2,099     (26,025

Change in pension liability, net of tax

           (14,416       (14,416
          

 

 

   

 

 

 

Comprehensive income

             (1,108     110,550   

Dividends and other-net

             (462     (462

Restricted stock grants-net, 57,936 shares (7,194 from Treasury)

            

Restricted stock expense

     1,668                1,668   

Cash dividend declared, $0.1950 per share

         (8,581         (8,581

Treasury stock purchases-share buyback program, 3,978,279 shares

       (187,249           (187,249

Treasury stock purchases-other, 37,531 shares

       (2,003           (2,003

Issuance of restricted stock from Treasury stock, 7,194 shares

     (363     363              —     

Stock option expense

     708                708   

Performance stock award expense

     706                706   

Proceeds from employee benefit plan share sales, 415 shares

     19                19   

Stock options exercised, 251,680 shares

     8,156                8,156   

Tax impact of vested restricted stock and stock options exercised

     1,348                1,348   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at August 31, 2012

   $ 743,007      $ (228,434   $ 640,072      $ (78,277   $ 14,911      $ 1,091,279   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

29


CONSOLIDATED STATEMENT OF INCOME

Robbins & Myers, Inc. and Subsidiaries

(In thousands, except per share data)

 

     Years ended August 31,  
     2012      2011     2010  

Sales

   $ 1,034,783       $ 820,640      $ 478,193   

Cost of sales

     632,058         515,574        319,490   
  

 

 

    

 

 

   

 

 

 

Gross profit

     402,725         305,066        158,703   

Selling, general and administrative expenses

     181,150         156,571        109,021   

Other expense

     2,959         17,152        2,764   
  

 

 

    

 

 

   

 

 

 

Income before interest and income taxes (EBIT)

     218,616         131,343        46,918   

Interest expense (income), net

     102         (196     195   
  

 

 

    

 

 

   

 

 

 

Income from continuing operations before income taxes

     218,514         131,539        46,723   

Income tax expense

     67,523         50,260        16,435   
  

 

 

    

 

 

   

 

 

 

Net income from continuing operations including noncontrolling interest

     150,991         81,279        30,288   

Income from discontinued operations, net of tax

     —           53,637        3,859   
  

 

 

    

 

 

   

 

 

 

Net income including noncontrolling interest

     150,991         134,916        34,147   

Less: Net income attributable to noncontrolling interest

     991         904        950   
  

 

 

    

 

 

   

 

 

 

Net income attributable to Robbins & Myers, Inc.

   $ 150,000       $ 134,012      $ 33,197   
  

 

 

    

 

 

   

 

 

 

Net income per share from continuing operations:

       

Basic

   $ 3.41       $ 1.96      $ 0.89   
  

 

 

    

 

 

   

 

 

 

Diluted

   $ 3.39       $ 1.94      $ 0.89   
  

 

 

    

 

 

   

 

 

 

Net income per share:

       

Basic

   $ 3.41       $ 3.26      $ 1.01   
  

 

 

    

 

 

   

 

 

 

Diluted

   $ 3.39       $ 3.24      $ 1.01   
  

 

 

    

 

 

   

 

 

 

Weighted average common shares outstanding:

       

Basic

     44,015         41,063        32,924   
  

 

 

    

 

 

   

 

 

 

Diluted

     44,197         41,420        33,004   
  

 

 

    

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

30


CONSOLIDATED CASH FLOW STATEMENT

Robbins & Myers, Inc. and Subsidiaries

(In thousands)

 

     Years Ended August 31,  
     2012     2011     2010  

OPERATING ACTIVITIES

      

Net income including noncontrolling interest

   $ 150,991      $ 134,916      $ 34,147   

Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:

      

Depreciation

     20,896        18,277        15,029   

Amortization

     11,023        15,684        601   

Deferred taxes

     4,024        12,394        (5,003

Stock compensation

     3,082        4,264        3,035   

Gain on sale of businesses

     —          (53,357     —     

Gain on sale of assets

     —          —          (1,022

Changes in operating assets and liabilities:

      

Accounts receivable

     (18,080     (32,960     (5,176

Inventories

     (18,350     (14,409     3,893   

Other assets

     827        2,992        3,484   

Accounts payable

     12,836        21        13,144   

Accrued expenses and other liabilities

     (6,817     13,226        26,351   
  

 

 

   

 

 

   

 

 

 

Net cash and cash equivalents provided by operating activities

     160,432        101,048        88,483   

INVESTING ACTIVITIES

      

Business acquisition, net of cash acquired

     —          (90,410     —     

Proceeds from sale of businesses

     —          89,247        —     

Proceeds from sale of assets

     —          —          2,464   

Capital expenditures, net of nominal disposals

     (29,464     (28,307     (10,611
  

 

 

   

 

 

   

 

 

 

Net cash and cash equivalents used by investing activities

     (29,464     (29,470     (8,147

FINANCING ACTIVITIES

      

Proceeds from debt borrowings

     8,616        8,409        8,022   

Payments of long-term debt

     (8,908     (12,256     (38,196

Share buyback program

     (187,249     —          —     

Net proceeds from issuance of common stock, including stock option tax impact

     9,523        22,383        692   

Treasury stock purchases

     (2,003     (442     (886

Dividends paid

     (8,581     (7,557     (5,529
  

 

 

   

 

 

   

 

 

 

Net cash and cash equivalents (used) provided by financing activities

     (188,602     10,537        (35,897

Effect of exchange rate changes on cash

     (6,047     (722     (3,395
  

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (63,681     81,393        41,044   

Cash and cash equivalents at beginning of year

     230,606        149,213        108,169   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 166,925      $ 230,606      $ 149,213   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

31


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

 

32


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.

 

33


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:

 

     2012     2011  
     (In thousands)  

Balance at beginning of the fiscal year

   $ 6,853      $ 5,729   

Warranty expense

     3,089        3,063   

Warranty accrual related to T-3 acquisition

     —          370  

Deductions/payments

     (3,528     (2,389

Impact of exchange rate changes

     (94     80   
  

 

 

   

 

 

 

Balance at end of the fiscal year

   $ 6,320      $ 6,853   
  

 

 

   

 

 

 

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.

 

34


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.

 

     2012     2011     2010  

Expected volatility of common stock

     45.41     49.39     45.60

Risk free interest rate

     2.53        2.62        3.25   

Dividend yield

     0.49        0.41        0.70   

Expected life of option

     5.26  Yrs.      3.7  Yrs.      7.0  Yrs. 

Fair value at grant date

   $ 15.95      $ 22.19      $ 10.66   

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.

 

35


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.

 

36


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.

 

37


NOTE 2—BALANCE SHEET INFORMATION

 

     2012     2011  
     (In thousands)  

Accounts receivable

    

Allowances for doubtful accounts

   $ 5,847      $ 4,435   
  

 

 

   

 

 

 

Inventories

    

FIFO:

    

Finished products

   $ 87,134      $ 74,994   

Work in process

     54,604        53,941   

Raw materials

     38,464        37,993   
  

 

 

   

 

 

 
     180,202        166,928   

LIFO reserve, U.S. inventories

     (17,489     (15,465
  

 

 

   

 

 

 
   $ 162,713      $ 151,463   
  

 

 

   

 

 

 

Inventories at FIFO

   $ 128,293      $ 121,625   
  

 

 

   

 

 

 

Property, plant and equipment

    

Land

   $ 10,670      $ 11,593   

Buildings

     87,237        83,075   

Machinery and equipment

     317,739        307,828   
  

 

 

   

 

 

 
     415,646        402,496   

Less accumulated depreciation

     (245,910     (236,870
  

 

 

   

 

 

 
   $ 169,736      $ 165,626   
  

 

 

   

 

 

 

Accrued expenses

    

Employee compensation and payroll taxes

   $ 23,232      $ 24,708   

Customer advances

     25,797        23,684   

Pension benefits

     2,777        3,045   

U.S. other postretirement benefits

     1,468        1,595   

Warranty costs

     6,320        6,853   

Accrued restructuring

     —          1,074   

Income taxes

     9,250        4,923   

Commissions

     4,459        3,967   

Other

     24,996        20,310   
  

 

 

   

 

 

 
   $ 98,299      $ 90,159   
  

 

 

   

 

 

 

Other long-term liabilities

    

German pension liability

   $ 48,955      $ 45,486   

U.S. pension liability

     13,104        25,361   

U.S. other postretirement benefits

     25,275        23,458   

U.K. pension liability

     5,631        2,833   

Other

     9,091        11,253   
  

 

 

   

 

 

 
   $ 102,056      $ 108,391   
  

 

 

   

 

 

 

 

38


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.

 

39


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):

 

Cash

   $ 15,863   

Accounts receivable

     41,618   

Inventories

     60,740   

Other current assets

     13,257   

Property, plant and equipment, net

     54,392   

Other long-term assets

     12,296   

Intangible assets

     214,120   
  

 

 

 

Total identifiable assets acquired excluding goodwill

     412,286   

Current liabilities

     45,287   

Long-term liabilities

     78,980   
  

 

 

 

Total liabilities assumed

     124,267   
  

 

 

 

Net identifiable assets acquired excluding goodwill

     288,019   

Goodwill

     330,377   
  

 

 

 

Net assets acquired

   $ 618,396   
  

 

 

 

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:

 

     2011  
     (In thousands, except
per share data)
 

Net sales from continuing operations:

  

As reported

   $ 820,640   

Pro forma

     899,088   

Net income attributable to Robbins & Myers, Inc. from continuing operations:

  

As reported

   $ 80,375   

Pro forma

     85,381   

Basic net income per share from continuing operations:

  

As reported

   $ 1.96   

Pro forma

     1.88   

Diluted net income per share from continuing operations:

  

As reported

   $ 1.94   

Pro forma

     1.86   

 

40


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:

 

     2011     2010  
     (In thousands, except per
share data)
 

Net sales

   $ 71,966      $ 106,501   
  

 

 

   

 

 

 

Net income per share from discontinued operations:

    

Basic

   $ 1.30      $ 0.12   
  

 

 

   

 

 

 

Diluted

   $ 1.30      $ 0.12   
  

 

 

   

 

 

 

Income from operations of divested businesses

   $ 537      $ 3,960   

Gain on disposal of businesses

     53,357        —     

Income tax (expense)

     (257     (101
  

 

 

   

 

 

 

Income from discontinued operations, net of income taxes

   $ 53,637      $ 3,859   
  

 

 

   

 

 

 

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.

 

41


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):

 

     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

August 31, 2012:

        

Cash and cash equivalents (1)

   $ 166,925         —           —     
  

 

 

    

 

 

    

 

 

 

August 31, 2011:

        

Cash and cash equivalents (1)

   $ 230,606         —           —     
  

 

 

    

 

 

    

 

 

 

 

(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.

 

42


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.

 

     2012      2011     2010  
     (In thousands)  

Corporate NOV merger-related costs

   $ 2,959       $ —        $ —     

Energy Services segment T-3 merger-related costs:

       

Employee termination costs

     —           3,022        —     

Backlog amortization

     —           7,234        —     

Inventory write-up values expensed in cost of sales

     —           9,499        —     

Process & Flow Control segment restructuring costs

     —           1,012        2,764   

Corporate T-3 merger-related costs:

       

Professional fees and accelerated equity compensation

     —           5,884        —     
  

 

 

    

 

 

   

 

 

 

Total merger-related and restructuring costs

     2,959         26,651        2,764   

Less inventory write-up values expensed in cost of sales

     —           (9,499     —     
  

 

 

    

 

 

   

 

 

 

Total costs

   $ 2,959       $ 17,152      $ 2,764   
  

 

 

    

 

 

   

 

 

 

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:

 

     (In thousands)  

2013

   $ 5,785   

2014

     4,663   

2015

     2,921   

2016

     1,670   

2017

     743   

Thereafter

     1,442   
  

 

 

 
   $ 17,224   
  

 

 

 

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.

 

43


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:

 

     2012      2011      2010  
     (In thousands)  

Interest paid

   $ 826       $ 541       $ 2,089   

Income taxes paid, net of refunds

     62,385         37,873         10,577   

 

44


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:

 

     Energy
Services
Segment
    Process &
Flow Control
Segment
    Total  
     (In thousands)  

Balance as of August 31, 2010

   $ 89,948      $ 159,793      $ 249,741   

Goodwill related to T-3 acquisition

     330,377        —          330,377   

Translation adjustments

     2,192        9,741        11,933   
  

 

 

   

 

 

   

 

 

 

Balance as of August 31, 2011

     422,517        169,534        592,051   

Translation adjustments

     (772     (13,405     (14,177
  

 

 

   

 

 

   

 

 

 

Balance as of August 31, 2012

   $ 421,745      $ 156,129      $ 577,874   
  

 

 

   

 

 

   

 

 

 

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:

 

     2012      2011  
     Carrying
Amount
     Accumulated
Amortization
     Net      Carrying
Amount
     Accumulated
Amortization
     Net  
     (In thousands)  

Customer relationships

   $ 156,414       $ 13,306       $ 143,108       $ 156,500       $ 4,774       $ 151,726   

Technology

     32,582         3,580         29,002         32,600         1,347         31,253   

Patents, trademarks and tradenames

     31,076         9,737         21,339         30,646         9,644         21,002   

Non-compete agreements

     8,801         7,764         1,037         8,822         7,544         1,278   

Financing costs

     9,630         9,340         290         9,652         9,172         480   

Other

     13,640         12,686         954         13,552         12,623         929   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 252,143       $ 56,413       $ 195,730       $ 251,772       $ 45,104       $ 206,668   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

45


NOTE 10—LONG-TERM DEBT

 

     2012     2011  
     (In thousands)  

Revolving credit loan

   $ —        $ —     

Other

     153        445   
  

 

 

   

 

 

 

Total debt

     153        445   

Less current portion

     (153     (421
  

 

 

   

 

 

 

Long-term debt

   $ —        $ 24   
  

 

 

   

 

 

 

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:

 

     (In thousands)  

2013

   $ 153   

2014

     —     

2015

     —     

2016

     —     

2017 and thereafter

     —     
  

 

 

 

Total

   $ 153   
  

 

 

 

 

46


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:

 

     Pension Benefits  
     2012     2011     2010  
     (In thousands)  

Service cost

   $ 1,282      $ 1,365      $ 1,902   

Interest cost

     8,058        7,966        8,535   

Expected return on plan assets

     (7,525     (6,325     (5,814

Settlement/curtailment cost

     —          1,203        988   

Amortization of prior service cost

     175        235        723   

Recognized net actuarial losses

     3,040        4,101        3,210   
  

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 5,030      $ 8,545      $ 9,544   
  

 

 

   

 

 

   

 

 

 

Defined contribution cost

   $ 4,435      $ 3,675      $ 2,570   
  

 

 

   

 

 

   

 

 

 
     Other Benefits  
     2012     2011     2010  
     (In thousands)  

Service cost

   $ 495      $ 487      $ 431   

Interest cost

     1,136        1,158        1,328   

Net amortization

     654        1,046        814   
  

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 2,285      $ 2,691      $ 2,573   
  

 

 

   

 

 

   

 

 

 

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.

 

47


The benefit obligation, funded status and amounts recorded in the Consolidated Balance Sheet at August 31, are as follows:

 

     Pension Benefits     Other Benefits  
     2012     2011     2012     2011  
     (In thousands)  

Change in benefit obligation:

        

Beginning of year

   $ 174,716      $ 170,043      $ 25,053      $ 27,193   

Service cost

     1,268        1,719        495        487   

Interest cost

     7,999        8,082        1,136        1,158   

Participant contributions

     200        49        —          —     

Currency exchange rate impact

     (7,049     8,026        —          —     

Actuarial losses (gains)

     22,273        (2,782     1,564        (2,430

Benefit payments

     (9,988     (10,421     (1,505     (1,355
  

 

 

   

 

 

   

 

 

   

 

 

 

End of year

   $ 189,419      $ 174,716      $ 26,743      $ 25,053   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in plan assets:

        

Beginning of year

   $ 97,991      $ 81,627      $ —        $ —     

Currency exchange rate impact

     (820     1,603        —          —     

Actual return

     10,955        11,326        —          —     

Company contributions

     20,614        13,807        1,505        1,355   

Participant contributions

     200        49        —          —     

Benefit payments

     (9,988     (10,421     (1,505     (1,355
  

 

 

   

 

 

   

 

 

   

 

 

 

End of year

   $ 118,952      $ 97,991      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Funded status

   $ (70,467   $ (76,725   $ (26,743   $ (25,053
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued benefit cost

   $ (70,467   $ (76,725   $ (26,743   $ (25,053
  

 

 

   

 

 

   

 

 

   

 

 

 

Recorded as follows:

        

Accrued expenses

   $ (2,777   $ (3,045   $ (1,468   $ (1,595

Other long-term liabilities

     (67,690     (73,680     (25,275     (23,458
  

 

 

   

 

 

   

 

 

   

 

 

 
     (70,467     (76,725     (26,743     (25,053

Accumulated other comprehensive loss

     59,123        43,312        8,264        7,354   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (11,344   $ (33,413   $ (18,479   $ (17,699
  

 

 

   

 

 

   

 

 

   

 

 

 

Deferred taxes on accumulated other comprehensive loss

   $ (16,519   $ (14,559   $ (3,140   $ (2,795
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive loss at August 31:

        

Net actuarial losses

   $ 59,322      $ 43,322      $ 7,859      $ 6,744   

Prior service (credit) cost

     (199     (10     405        610   

Deferred taxes

     (16,519     (14,559     (3,140     (2,795
  

 

 

   

 

 

   

 

 

   

 

 

 

Net accumulated other comprehensive loss at August 31

   $ 42,604      $ 28,753      $ 5,124      $ 4,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

48


Pension plans with accumulated (“ABO”) and projected (“PBO”) benefit obligations in excess of plan assets:

 

     2012      2011  
     (In thousands)  

Accumulated benefit obligation

   $ 179,858       $ 166,600   

Projected benefit obligation

     183,714         169,552   

Plan assets

     113,153         92,489   

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.

 

     2012     2011  

Equity securities

     65     64

Debt securities

     31        34   

Cash and cash equivalents

     4        2   
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

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:

 

     Pension Benefits      Other
Benefits
 
     (In thousands)  

2013

   $ 11,400       $ 1,500   

2014

     11,100         1,600   

2015

     11,000         1,700   

2016

     10,900         1,800   

2017

     10,600         1,900   

2018-2022

     51,400         10,000   

 

49


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:

 

     Pension Benefits     Other Benefits  
     2012     2011     2012     2011  

Weighted average assumptions:

        

Discount rate

     3.80     5.00     3.90     4.80

Expected return on plan assets

     7.30        7.20        N/A        N/A   

Rate of compensation increase

     2.40        2.80        N/A        N/A   

Health care cost increase

     N/A        N/A        8.0 –5.0     8.5 – 5.0

Health care cost grading period

     N/A        N/A        6 years        7 years   

The actuarial weighted average assumptions used to determine plan costs are as follows (measurement date September 1):

 

     Pension Benefits     Other Benefits  
     2012     2011     2012     2011  

Discount rate

     5.00     4.70     4.80     4.50

Expected return on plan assets

     7.20        7.40        N/A        N/A   

Rate of compensation increase

     2.80        2.90        N/A        N/A   

Health care cost increase

     N/A        N/A        8.5 – 5.0     8.0 – 5.0

Health care cost grading period

     N/A        N/A        7 years        6 years   

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:

 

     Increase      Decrease  
     (In thousands)  

Service and interest cost

   $ 197       $ (186

Postretirement benefit obligation

     1,080         (959

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.

 

50


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:

 

     August 31,
2012
     Quoted Prices In
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable

Inputs
(Level 3)
 
     (In thousands)  

Cash

   $ 4,963       $ 4,963       $ —         $ —     

U.S. Government and U.S. Agency Obligations (1)

     11,155         11,155         —           —     

Common Stocks (1)

     8,445         8,445         —           —     

Foreign Stocks (1)

     7,867         7,867         —           —     

Common Trust Funds and Mutual Funds (1)

     70,025         70,025         —           —     

Corporate Obligations (2)

     14,342         —           14,342         —     

Foreign Obligations (2)

     2,155         —           2,155         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 118,952       $ 102,455       $ 16,497       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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:

 

     August 31,
2011
     Quoted Prices In
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable

Inputs
(Level 3)
 
     (In thousands)  

Cash

   $ 3,034       $ 3,034       $ —         $ —     

U.S. Government and U.S. Agency Obligations (1)

     10,481         10,481         —           —     

Common Stocks (1)

     6,401         6,401         —           —     

Foreign Stocks (1)

     6,753         6,753         —           —     

Common Trust Funds and Mutual Funds (1)

     58,539         58,539         —           —     

Corporate Obligations (2)

     11,620         —           11,620         —     

Foreign Obligations (2)

     1,163         —           1,163         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 97,991       $ 85,208       $ 12,783       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

51


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.

 

     2012     2011  
     (In thousands)  

Deferred tax assets and liabilities

    

Assets:

    

Postretirement obligations

   $ 18,803      $ 21,057   

Net operating loss carryforwards

     19,962        20,633   

Tax credit carryforward

     7,841        9,279   

Other accruals

     8,480        5,737   

Inventory allowances

     10,485        10,961   

Warranty reserve

     1,990        2,252   

Research and development costs

     572        900   

Goodwill and purchased assets basis differences

     —          906   

Other items

     6,232        6,259   
  

 

 

   

 

 

 
     74,365        77,984   

Less valuation allowances

     (19,190     (20,759
  

 

 

   

 

 

 
     55,175        57,225   

Liabilities:

    

Other accruals

     1,020        1,094   

Fixed asset basis differences

     27,308        21,896   

Goodwill and purchased assets basis differences

     116,100        120,086   

Other items

     156        1,922   
  

 

 

   

 

 

 
     144,584        144,998   
  

 

 

   

 

 

 

Net deferred tax liability

   $ (89,409   $ (87,773
  

 

 

   

 

 

 

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.

 

52


Expense

 

     2012     2011     2010  
     (In thousands)  

Current tax expense:

      

U.S. federal

   $ 51,865      $ 25,951      $ 16,413   

Non-U.S.

     9,662        8,817        4,326   

U.S. state

     2,103        1,081        1,365   
  

 

 

   

 

 

   

 

 

 
     63,630        35,849        22,104   

Deferred tax expense (benefit):

      

U.S. federal

     4,129        9,657        (3,487

Non-U.S.

     (348     4,925        (1,920

U.S. state

     112        (171     (262
  

 

 

   

 

 

   

 

 

 
     3,893        14,411        (5,669
  

 

 

   

 

 

   

 

 

 
   $ 67,523      $ 50,260      $ 16,435   
  

 

 

   

 

 

   

 

 

 

Tax expense included in noncontrolling interest

   $ 510      $ 397      $ 554   
  

 

 

   

 

 

   

 

 

 

Non-U.S. pretax income (loss)

   $ 39,080      $ 24,000      $ (5,530
  

 

 

   

 

 

   

 

 

 

The following is a reconciliation of the effective income tax rate with the U.S. federal statutory income tax rate:

 

     2012     2011     2010  

Federal statutory income tax rate

         35.0         35.0         35.0

Impact of state taxes

     1.1        1.1        2.1   

Impact of change in valuation allowances on non-U.S. losses

     0.6        6.7        6.2   

Impact on U.S. taxes from repatriation of foreign earnings

     (0.5     0.2        (9.4

Extraterritorial income deduction/Section 199

     (2.3     (2.1     (2.4

Impact from permanent items

     —          —          2.9   

Non-U.S. tax lower than U.S. tax rates

     (1.6     (1.8     —     

Tax contingencies

     (1.2     0.3        (0.8

Other items - net

     (0.2     (1.2     1.6   
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

     30.9     38.2     35.2
  

 

 

   

 

 

   

 

 

 

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.

 

53


A reconciliation of the change in unrecognized tax benefits, excluding interest and penalties, is as follows:

 

     2012     2011  
     (In thousands)  

Balance at beginning of the year

   $ 4,638      $ 3,571   

Increase related to T-3 acquisition

     —          725   

(Decreases)/increases for current year tax positions

     (204     377   

Decreases related to settlements

     (1,890     —     

Decreases related to statute lapses

     (70     (105

(Decreases)/increases related to exchange rate changes

     (216     70   
  

 

 

   

 

 

 

Balance at end of the year

   $ 2,258      $ 4,638   
  

 

 

   

 

 

 

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.

 

54


Summaries of amounts issued under the stock option plans are presented in the following tables.

Stock option activity

 

                         
     Stock
Options
    Weighted-
Average Option
Price Per Share
 

Outstanding at August 31, 2009

     552,342      $ 17.77   

Granted

     150,140        22.33   

Exercised

     (4,334     11.48   

Canceled

     (33,356     23.75   
  

 

 

   

 

 

 

Outstanding at August 31, 2010

     664,792        18.54   

Granted

     1,075,525        29.35   

Exercised

     (901,861     23.32   

Canceled

     (33,415     36.12   
  

 

 

   

 

 

 

Outstanding at August 31, 2011

     805,041        26.90   

Granted

     80,784        39.55   

Exercised

     (251,680     32.41   

Canceled

     (18,599     33.92   
  

 

 

   

 

 

 

Outstanding at August 31, 2012

     615,546      $ 26.10   
  

 

 

   

 

 

 

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.

 

                         

Exercisable stock options at year-end

     

2010

        387,157   

2011

        701,605   

2012

        475,614   

Shares available for grant at year-end

     

2010

        1,287,369   

2011

        1,107,398   

2012

        970,271   

Components of outstanding stock options at August 31, 2012

 

Range of
Exercise
Price
   Number
Outstanding
     Weighted-
Average
Contract Life
in Years
     Weighted-
Average
Exercise Price
     Intrinsic
Value
(In thousands)
 
$  7.69 – 22.33      298,720         4.94       $ 17.43       $ 12,661   
  26.19 – 50.07      316,826         7.07         34.26         8,098   

 

  

 

 

    

 

 

    

 

 

    

 

 

 
$  7.69 – 50.07      615,546         6.04       $ 26.10       $ 20,759   

 

  

 

 

    

 

 

    

 

 

    

 

 

 

Components of exercisable stock options at August 31, 2012

 

Range of
Exercise
Price
   Number
Exercisable
     Weighted-
Average
Contract Life
in Years
     Weighted-
Average
Exercise Price
     Intrinsic
Value
(In thousands)
 
$  7.69 – 22.33      298,720         4.94       $ 17.43       $ 12,661   
  26.19 – 43.57      176,894         5.66         32.77         4,785   

 

  

 

 

    

 

 

    

 

 

    

 

 

 
$  7.69 – 43.57      475,614         5.21       $ 23.14       $ 17,446   

 

  

 

 

    

 

 

    

 

 

    

 

 

 

The total intrinsic value of options exercised during fiscal 2012, 2011, and 2010 was $6,899,000, $22,306,000 and $52,800, respectively.

 

55


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.

 

56


NOTE 15—NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per share from continuing operations:

 

     2012      2011      2010  
     (In thousands, except per share data)  

Numerator:

  

Net income from continuing operations attributable to Robbins & Myers, Inc.

   $ 150,000       $ 80,375       $ 29,338   
  

 

 

    

 

 

    

 

 

 

Denominator:

        

Basic weighted average shares

     44,015         41,063         32,924   

Effect of dilutive options and restricted shares/units

     182         357         80   
  

 

 

    

 

 

    

 

 

 

Diluted weighted average shares

     44,197         41,420         33,004   
  

 

 

    

 

 

    

 

 

 

Net income per share from continuing operations:

        

Basic

   $ 3.41       $ 1.96       $ 0.89   
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 3.39       $ 1.94       $ 0.89   
  

 

 

    

 

 

    

 

 

 

Anti-dilutive options (excluded from diluted net income per share from continuing operations computations)

     28         28         227   

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.

 

57


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.

 

     2012     2011     2010  
     (In thousands)  

Unaffiliated Customer Sales:

      

Energy Services

   $ 665,487      $ 477,198      $ 201,592   

Process & Flow Control

     369,296        343,442        276,601   
  

 

 

   

 

 

   

 

 

 

Total

   $ 1,034,783      $ 820,640      $ 478,193   
  

 

 

   

 

 

   

 

 

 

Depreciation and Amortization:

      

Energy Services

   $ 23,401      $ 23,560      $ 4,546   

Process & Flow Control

     8,176        8,392        8,491   

Corporate and Eliminations

     342        336        304   
  

 

 

   

 

 

   

 

 

 

Total

   $ 31,919      $ 32,288      $ 13,341   
  

 

 

   

 

 

   

 

 

 

Income Before Interest and Income Taxes (EBIT):

      

Energy Services

   $ 198,025      $ 130,968  (2)    $ 61,702   

Process & Flow Control

     41,429