10-K 1 shs201210k.htm 10-K SHS 2012.10K


SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012
COMMISSION FILE NUMBER: 1-14097
 
SAUER-DANFOSS INC.
(Exact name of registrant as specified in its charter)
Delaware
 
36-3482074
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2800 E. 13th Street, Ames, Iowa
 
50010
(Address of principal executive offices)
 
(Zip Code)
(515) 239-6000
(Registrant's telephone number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
 
New York Stock Exchange
(Title of each class)
 
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes o    No x
         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act"). Yes o    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 Act during the preceding 12 months (or for such shorter periods 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 o
         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 o
         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 o
 
Accelerated filer x
 
Non-accelerated filer o
 (Do not check if a smaller
reporting company)
 
Smaller reporting company o
         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes o    No x
         The aggregate market value of the voting common stock of the registrant held by nonaffiliates based on the last sale price on June 30, 2012 was $408,128,268. (The registrant does not have any other authorized common equity.)
         As of February 19, 2013 there were 48,462,518 shares of common stock, $0.01 par value, of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
         Portions of the Proxy Statement for the annual meeting of stockholders to be held June 13, 2013 are incorporated by reference into Part III.




PART I

Item 1.    Business.
(a)
General Development of Business
Sauer-Danfoss Inc. (the Company), a U.S. Delaware corporation, and its predecessor organizations have been active in the mobile hydraulics industry since the 1960s. Sauer-Danfoss is a global leader in the development, manufacture, and marketing of advanced systems for the distribution and control of power in mobile equipment. The Company designs, manufactures, and markets hydraulic, electronic, and mechanical components, as well as software and integrated systems that generate, transmit, and control power in mobile equipment. Principal products are hydrostatic transmissions, open circuit piston pumps, open circuit gear pumps and motors, low speed high torque motors, steering units, microprocessor controls, electrohydraulics, and control valves. The Company sells its products to original equipment manufacturers (OEMs) of highly engineered, off-road vehicles who use Sauer-Danfoss products to provide the hydraulic and electronic power for the propel, work, and control functions of their vehicles. The Company's products are sold primarily to the agriculture, construction, road building, turf care, material handling, and specialty vehicle markets. The Company conducts its business globally under the Sauer-Danfoss name.
During 2012 the Company commenced construction of a new manufacturing facility in Haiyan, China, to produce Sauer-Danfoss products for the Chinese market, including hydrostatic pumps and motors, work function motors and steering, proportional valves group (PVG) valves, and hydraulic integrated circuits (HICs). The facility is expected to be completed and operational in the third quarter of 2013.
The wind-down period for the joint venture TSD Integrated Controls, LLC (TSD) ended in 2012. Final collection of accounts receivable and distribution of the equity of TSD will be made to the Company and Topcon Positioning Systems, Inc., the noncontrolling interest partner, in 2013.
In October 2012 the Company and Daikin Industries Ltd. (Daikin), the noncontrolling interest partner in the joint venture Sauer-Danfoss-Daikin, Ltd. (SDD) agreed that the stock owned by Daikin in the joint venture entity would be redeemed effective January 1, 2013. At that same time, the operations of SDD would be transferred to Daikin-Sauer-Danfoss Manufacturing, Ltd., a separate joint venture that is owned by the Company and Daikin. Effective January 1, 2013 SDD will become a holding company, holding the investment in the sales companies in the Asia-Pacific region, which is fully owned by the Company.
As previously disclosed, on November 28, 2012, Danfoss A/S, the Company's parent company, informed the Company's Board of Directors and publicly announced that Danfoss proposed to acquire all the shares of the Company's common stock that it does not already own for a price of $49 per share in cash, and on the following day the Company announced that its Board of Directors had established a special committee of independent directors to consider Danfoss' proposal. From late December 2012 through late January 2013, the Special Committee and its advisors undertook efforts to enable the Special Committee to respond to Danfoss' proposal, and since late January 2013 the Special Committee, through its advisors, has been in discussions with Danfoss' advisors regarding the proposal. These discussions are continuing. There is no assurance that the Special Committee and Danfoss will reach any agreement or, if an agreement is reached, as to the terms and conditions of that agreement or whether it will be successfully completed.
(b)
Financial Information About Segments
The Company reports its operating segments based on its product lines of Hydrostatics (formerly Propel), Work Function, Controls and Stand-Alone Businesses. Hydrostatics products include hydrostatic transmissions and related products that transmit the power from the engine to the wheel to propel a vehicle. Work Function products include hydrostatic steering units, geroller and gerotor motors used for both propel and work functions. Products in the Controls segment include electrohydraulic controls, microprocessors, and proportional valves that control and direct the power of a vehicle. Products in the Stand-Alone Businesses segment include cartridge valves and hydraulic integrated circuits (HICs), open circuit gear pumps and motors, directional control valves, inverters, light power hydrostatic transmissions, gear reduction drives, piston pumps and wheel motors. Information about the Company's reportable segments defined by product lines is set forth in Note 17 in the Notes to Consolidated Financial Statements on pages F-30 through F-32 of this report and is incorporated herein by reference.
(c)
Description of Business
Information regarding the Company's principal products, by segment, and the business in general is presented below. Information regarding sales by the Company's segments and geographic regions is set forth in Note 17 in the Notes to Consolidated Financial Statements on pages F-30 through F-32, and is incorporated herein by reference. In 2012 and 2011 one customer accounted for slightly more than 10 percent of the Company's total net sales, and no individual customer accounted for 10 percent or more of the Company's total net sales in 2010.

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Hydrostatics Segment
Hydrostatic Transmissions
Sauer-Danfoss designs, manufactures, and markets a range of closed circuit axial and bent axis piston hydrostatic transmissions for the propulsion of mobile equipment in the Americas, Europe, and the Asia-Pacific region. High-power (typically over 50 HP) and medium-power (typically 25 to 50 HP) applications for hydrostatic transmissions manufactured by the Company include construction, road building, specialty, and agricultural mobile equipment. Light-power (typically 15 to 25 HP) and bantam-power (typically under 15 HP) applications for hydrostatic transmissions manufactured by the Company include light agricultural and turf care mobile equipment. The Company manufactures these hydrostatic transmissions at its facilities in Ames, Iowa; Freeport, Illinois; Shanghai, China; Neumünster, Germany; Osaka, Japan; Dubnica nad Váhom, Slovakia; and Povazská Bystrica, Slovakia.
Open Circuit Piston Pumps
Sauer-Danfoss designs, manufactures, and markets open circuit piston pumps used to transform mechanical power from the engine to hydraulic power for the various functions of the vehicle. The advantages of open circuit piston pumps compared to other types of pumps, such as vane or gear pumps, are the high degree of control within the work function hydraulic system and the more efficient use of engine power. These products are designed and manufactured at facilities in Ames, Iowa and Dubnica nad Váhom, Slovakia.
Work Function Segment
Low Speed High Torque Motors
Sauer-Danfoss designs, manufactures, and markets a complete line of geroller and gerotor motors used for both propel and work functions in all served markets. These motors are manufactured at the Company's Ames, Iowa; Shanghai, China; Nordborg, Denmark; and Bielany Wroclawskie, Poland facilities.
Steering Units
Sauer-Danfoss designs, manufactures, and markets hydrostatic steering units to customers throughout the world. These steering units convert steering wheel motion into hydraulic flow and pressure to provide steering motion for agricultural tractors, combines, turf care, marine, and earthmoving equipment. The Company manufactures steering units in Nordborg, Denmark; Pune, India; and Wroclaw, Poland.
Controls Segment
Electronic Components
Sauer-Danfoss designs, manufactures and markets a portfolio of electronic controls, including microprocessor-based controllers, intelligent displays, joysticks and electronic sensors through its electronic and mechatronic operations in Minneapolis, Minnesota; Shanghai, China; Nordborg, Denmark; Neumünster, Germany; and Älmhult, Sweden. The software to integrate all these components into systems is also developed by Sauer-Danfoss and licensed to customers to let them develop their own solutions in an easy-to-use, graphical environment. Electronic controls and software are used by OEMs to network hydrostatic transmissions and work function hydraulics of mobile equipment into comfortable, safe and efficient systems.
Proportional Valves Group (PVG)
Sauer-Danfoss designs, manufactures and markets a variety of proportional valves to meet its customers' needs, ranging from very sophisticated electrohydraulic valves for highly sophisticated forestry and agricultural harvesting equipment, to simpler mechanically actuated valves for construction equipment. These products are produced in facilities located in Easley, South Carolina; Shanghai, China; Nordborg, Denmark; and Povazská Bystrica, Slovakia.
Stand-Alone Businesses Segment
Open Circuit Gear Pumps and Motors
Sauer-Danfoss designs, manufactures, and markets a broad range of high-performance standard gear pumps and motors under the brand “TurollaOCG.” Gear pumps and motors are the most widely used type of mobile hydraulic pumps and motors in the industry. The Company manufactures gear pumps and motors at its Ames, Iowa; Bologna, Italy; and Povazská Bystrica, Slovakia facilities.

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Cartridge Valves and Hydraulic Integrated Circuits (HICs)
Sauer Danfoss designs, manufactures and markets a broad portfolio of cartridge valves to meet its customers' needs for power control under the brand “Comatrol.” The business works directly with its customers in designing and manufacturing custom hydraulic integrated circuits (HICs) that combine multiple cartridge valves into a complete hydraulic control solution to regulate speed, control direction and modulate force. The cartridge valves range from very simple, low-cost mechanical cartridges used on compact utility tractors and fairway mowers, to precise electro-proportional control valves for complex applications such as aerial lifts, paving equipment and agricultural harvesters. The Company manufactures cartridge valves and HICs in facilities located in Easley, South Carolina; Shanghai, China; and Reggio Emilia, Italy.
Directional Control Valves
Sauer-Danfoss designs, manufactures and markets directional control valves for compact utility tractors, construction equipment, material handling and mobile equipment in general under the brand "Valmova." These products are manufactured in facilities located in Caxias do Sul, Brazil; and Pune, India.
Inverters
Sauer-Danfoss develops and markets a broad range of high-performance inverters for mobile applications under the brand "Schwarzmüller Inverter." Inverters are used to drive alternating current (AC) motors and transform electrical power from a battery to mechanical power. Typical applications are traction, steering and hydraulic pump systems in material handling vehicles and other battery powered/electrical hybrid applications. The advantage of inverter driven AC-systems compared to hydraulic solutions is the high degree of control and efficiency. These products are designed at the Company's facility in Kaiserslautern, Germany and manufactured by contractors in Slovakia and Germany.
Light Duty Hydrostatic Transmissions
The Company designs, manufactures and markets high-performance light duty hydrostatic transmissions, gear reduction drives, piston pumps, and wheel motors for both the consumer and commercial markets in the turf maintenance equipment and light industrial industries under the brand "Hydro-Gear." These products are manufactured at its facilities in Sullivan, Illinois and Princeton, Kentucky.
Major Markets and Applications
Construction and Road Building
 
Agriculture and Turf Care
 
Material Handling and
Specialty Vehicles
Chip spreaders
 
Combines
 
Industrial lift trucks
Concrete pumps
 
Commercial wide-area,
 
Logging equipment
Concrete saws
 
walk-behind mowers
 
Marine equipment
Crawler dozers
 
Commercial zero-turn mowers
 
Mining equipment
Crawler loaders
 
Cotton pickers
 
Oil field equipment
Ditchers/trenchers
 
Detasselers
 
Railway maintenance vehicles
Excavators
 
General turf maintenance
 
Rough terrain fork lifts
Grinders
 
equipment
 
Self-propelled boom aerial lifts
Landfill compactors
 
Harvesters
 
Self-propelled scissor aerial lifts
Pavers
 
Lawn and garden tractors
 
Snow groomers
Planers
 
Seeders
 
Sweepers
Rollers
 
Sprayers
 
Tree shakers
Skid steer loaders
 
Tractors
 
Truck and bus fan drives
Transit mixers
 
Windrowers
 
Warehouse trucks
Utility tractors
 
 
 
 
Wheel loaders
 
 
 
 
General Characteristics
Sauer-Danfoss sells both standard and customized products, with most products being built to order. With respect to some of the most technologically demanding vehicles, such as those used in agriculture, forestry, construction, and road building, Sauer-Danfoss' engineers work closely with customers from design through manufacture of the final product. The research and design

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phase, which is funded by the Company, can range from a few weeks to as long as four to six years for a major application. Once the design has been accepted and the customer has placed an order, the manufacturing process typically takes only a few days.
Sauer-Danfoss operates 19 manufacturing facilities in the Americas, Europe, and the Asia-Pacific region. The Company's decentralized manufacturing capabilities allow it to adapt its products to local market needs and to provide flexibility to meet customer delivery requirements. The Company sells and distributes its products directly to large OEMs and serves smaller OEMs through Company-owned sales companies or independent distributors.
In accordance with standard industry practice for the mobile equipment industry, the Company warrants its products to be free from defects in material and workmanship. The warranty period varies from one to three years, from the date of first use or from the date of original shipment of the product from Sauer-Danfoss. The Company's warranty expense has been 1 percent or less of net sales in each of the past three years.
Because many of its products are designed and developed in conjunction with its customers' design teams to fit their specific needs and to minimize inventory levels, the Company primarily manufactures products to order. The Company typically machines components with long lead times according to a sales forecast and machines certain unique components for specific customers according to firm orders. Inventories at the Company's manufacturing sites consist primarily of raw materials and machined iron housings and components. Limited amounts of assembled finished units are maintained in inventory at the manufacturing sites. Some of the Company's sales locations maintain inventory that consists primarily of finished units manufactured specifically for distribution to customers in those locations.
The Company does not accept orders subject to late delivery penalties. On occasion, the Company sells its products to government agencies, including products used for military applications, but it does not design its products to meet specific government standards and usually only enters into contracts for the supply of commercial products. There are no government contracts of material value to the Company.
Raw Materials
The Company purchases iron housings and components from various U.S., European, and Asian foundries and metal suppliers. The principal materials used by the Company are iron, steel, brass, and aluminum. All materials used by the Company are generally available from a number of sources in quantities sufficient to meet current requirements. The Company has a global supplier quality program that it uses to ensure all suppliers meet the Company's quality expectations.
Patents, Trademarks, and Licenses
The Company owns or licenses rights to 547 patents and trademarks relating to its business. While the Company considers its patents and trademarks important in the operation of its business and in protecting its technology from being used by competitors, its business is not dependent on any single patent or trademark or group of related patents or trademarks.
To ensure worldwide availability of the Company's design of products, the Company has, in the past, licensed its technology to unaffiliated companies in certain countries. The Company does not currently have any such license agreements in place. The Company currently has license agreements in place as part of joint ventures in which the Company participates to manufacture or distribute the Company's technology.
Seasonality
Seasonal patterns in retail demand for agricultural, construction, road building, and turf care equipment sold by the Company's customers result in variations in the volume and mix of products sold by the Company during various times of the year. Historically, the Company has higher sales levels in the first half of the year, although this was not the case in 2010. Seasonal demand must be estimated in advance, and products must be manufactured in anticipation of such demand in order to achieve efficient utilization of labor and production resources.
Working Capital
The Company has historically funded its working capital requirements through cash flow from operations and its various credit facilities. The Company has built up a significant cash balance and is in a position to fund its working capital requirements through cash flow from operations and the available cash on hand.
Backlog
At December 31, 2012 the Company's backlog (consisting of accepted but unfilled customer orders primarily scheduled for delivery during 2013) was $837 million, a decrease of 11 percent from December 31, 2011, excluding the impact of currency fluctuation. Historically, backlog comparisons have been a good indicator of the Company's future business level, but the value of those comparisons depends on the degree to which customer ordering behavior remains constant from year to year. Customers

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can increase, cancel, or reschedule orders, so some customers place orders in excess of their actual needs in order to ensure that adequate quantities will be available. In such a case, the customer may ultimately cancel a portion of its order.
Competition
The mobile hydraulics industry is very competitive. Sauer-Danfoss competes based on technological product innovation, quality, and customer service. The Company believes that to be successful over the long term, suppliers to mobile equipment manufacturers must have the ability to capitalize on the changing needs of the industry by providing technological innovation, shorter product development times, and reduced manufacturing lead times at globally competitive price levels.
Hydrostatics Segment
The closed circuit hydrostatic transmission market is highly concentrated and intensely competitive. There are a small number of manufacturers of hydrostatic transmissions with which the Company competes worldwide that are not captive suppliers of OEMs. These include Bosch Rexroth AG, Eaton Corporation, and Linde AG. In addition, the Company competes with alternative products, such as mechanical transmissions, of other manufacturers.
The Company competes with a number of smaller companies that typically offer a single, specialized product on a more limited geographic basis as a component of a closed circuit hydrostatic transmission system.
In terms of global supply of closed circuit hydrostatic transmissions, the Company believes it is the world leader in terms of product range, market share, and geographic coverage. Only Bosch Rexroth AG offers similar geographic coverage.
Work Function Segment
Low speed high torque motors (LSHT) and hydrostatic steering units are provided to the market from more than ten competitors, the major ones being Eaton Corporation, Zhenjiang Hydraulic Components Manufacturing Co., Ltd., White Drive Products, Parker-Hannifin Corporation, Ognibene S.p.A., Bosch Rexroth AG and M+S Hydraulic. Sauer-Danfoss believes it occupies the number two position in the global market for LSHT. The Company believes it has the largest European market share for steering units. As steering systems' technical demands grow, Sauer-Danfoss is providing electronic control of steering and complete electrical steering solutions to meet the growing demands of the steering market.
Controls Segment
In the electronic components market, which covers both propel and work function, there are only a few global competitors providing both the hydraulic and electronic elements of the system. The main competition comes from major OEMs, who produce electronic controls for their own use, or niche competitors who focus on a specific market segment, region, or technology. The Company believes it is well positioned to establish itself as a technology leader, as there is no clearly established technology in this sector that is deemed to be an industry standard. It also believes it will experience higher than average market growth levels as a result of the industry applying more electronics to meet the needs of new safety and emissions regulations.
The proportional valves group marketplace is fragmented among a number of suppliers, most of which are focused on limited valve types or flow ranges. Sauer-Danfoss provides a comprehensive line of proportional valves to meet the specific needs of its customers. Competitors who provide partial lines include HAWE Hydraulics, Bucher Hydraulics, HUSCO International, and Walvoil S.p.A., plus many others. Full-line global proportional valves competitors are limited to Parker-Hannifin Corporation, Bosch Rexroth AG, and Eaton Corporation. Sauer-Danfoss believes growth in this market will be higher than average market levels related to its new product introductions and the implementation of new emissions regulations.
Stand-Alone Businesses Segment
The open circuit gear pumps and motors market is fragmented among a large number of suppliers of all types of products and with intensive competition on pricing at the component level. There are approximately ten major companies that compete on a global basis, including Bosch Rexroth AG, Parker-Hannifin Corporation, Casappa S.p.A., Concentric (previously branded Haldex), and in Japan, Shimadzu Corporation. The supply of standard gear pumps and motors is particularly fragmented among more than 50 companies worldwide. Most of these competitors have a limited product range and operate in a limited geographic market.
The control valves marketplace is fragmented among a large number of suppliers, most of which are focused on limited valve types or flow ranges. Sauer-Danfoss provides a comprehensive line of HICs, cartridge and directional control valves to meet the specific needs of its customers. Competitors who provide partial lines include HydraForce, HUSCO International, Sun Hydraulics Corporation, and Walvoil S.p.A., plus many others. Complete global control valve line competitors are limited to Parker-Hannifin Corporation, Bosch Rexroth AG, and Eaton Corporation.

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The inverters market is dominated by Zapi and Curtis. Other relevant competitors are Danaher, Sevcon and SME, while the biggest vehicle manufacturers in the material handling market such as Kion and Jungheinrich design and produce their own inverters. Sauer-Danfoss' unique selling point is the full graphical programmability of its inverters which gives distributors and customers a high flexibility to design their own applications and opens new distribution channels and markets.
The hydrostatic drive systems market for the turf maintenance equipment and light industrial industries is highly concentrated and intensely competitive. In addition, the Company competes with alternative products, such as mechanical transmissions of other manufacturers. With respect to global supply of small-sized hydrostatic transmissions, the Company believes it is the world leader in terms of product range and value.
Research and Development
The Company's research and development expenditures during 2012, 2011, and 2010 were $64.1 million, $64.0 million, and $51.6 million, respectively.
Environmental Matters
In all countries in which it operates, the Company is subject to environmental laws and regulations concerning emissions to air, discharge to waterways, and the generation, handling, storage, transportation, treatment, and disposal of waste materials. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they will have on the Company in the future. The regulations are subject to varying and conflicting interpretations and implementation. In some cases, compliance can only be achieved by additional capital expenditures. The Company cannot accurately predict what capital expenditures, if any, may be required to comply with applicable environmental laws and regulations in the future; however, the Company does not currently estimate that any future capital expenditures for environmental control facilities will be material. The Company is not currently subject to any governmental remediation order, nor is the Company aware of any environmental issues that would have a materially adverse effect on the Company.
Employees
As of December 31, 2012, 2011, and 2010 the Company had approximately 6,400, 6,500, and 6,000 employees, respectively. Of its full-time employees at December 31, 2012, approximately 2,200 were located in the Americas with the remainder located in Europe and the Asia-Pacific region. From time to time, the Company also retains consultants, independent contractors, and temporary and part-time workers.
Financial Information about Geographic Areas
Information regarding the Company's net sales and long-lived assets by geographic area is set forth in Note 17 in the Notes to Consolidated Financial Statements on pages F-30 through F-32 of this report, and is incorporated herein by reference.
Available Information
The Company maintains an internet website and the address of that site is http://www.sauer-danfoss.com. The Company provides access to its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 through its internet website as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (SEC). The SEC maintains an internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC site is http://www.sec.gov.
Item 1A.    Risk Factors.
The Company's business, financial condition, results of operations and cash flows can be affected by a number of factors, including but not limited to those set forth below and elsewhere in this annual report on Form 10-K, any one of which could cause actual results to vary materially from recent results or from anticipated future results.
Worldwide Economic Conditions
The Company manufactures and sells its products throughout the world, so worldwide economic conditions can have a material and adverse effect on the Company's business, financial condition, results of operations, and cash flows. The Company's performance over the last five years is illustrative of the impact the overall economic climate can have. The Company's performance in 2008 and 2009 was significantly disrupted by the recession and market turmoil that occurred in those years. The global economy, with numerous localized exceptions, saw modest improvements during 2010, 2011, and 2012, which helped the Company to achieve better financial and operational results in those years. If the worldwide economy were to return to a recessionary state, the Company's performance would likely suffer.

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Economic indicators are, at best, mixed on both global and regional levels. For example, the U.S. economy saw low levels of growth during 2012 and continues to suffer from high unemployment. The domestic housing and construction markets have been slow to recover from the severe downturn in 2008 and 2009. In addition, continuing debt crises across the Euro-zone, decelerating growth in China, and austerity measures being implemented or contemplated by various countries around the world could have negative, worldwide consequences. If one of those consequences is a renewed tightening of credit markets, the Company and its suppliers and customers could suffer from a reduced ability to finance their operations, which could lead to a decrease in orders for the Company's products or an increase in its costs of production.
Another feature of the recent worldwide recession that had a material impact on the Company's business was the response of central banking authorities and national governments to the economic crisis. Whether or not the global economy continues to show signs of improvement, changes in U.S., European, and other nations' fiscal and monetary policies and laws affecting banking, liquidity, exchange rates, taxes, and governmental spending levels may have a material and adverse effect on the Company's business, financial condition, and results of operations.
Avoidance of Credit Default; Dependence on Affiliate Borrowing
The Company has a Credit Agreement with Danfoss A/S, the Company's majority stockholder. Initially the Credit Agreement consisted of a revolving credit facility that matures in September 2013 and two term loans that require repayment in September 2015. This amount was originally $500 million, however due to the strong cash generation in 2011 and 2012 the Company voluntarily reduced the available credit and ultimately decided to terminate the revolving credit facility in 2012. In September 2012 the Company also prepaid 10 percent of the term loan and reduced the loan amount to $178 million. Historically, the Company was dependent on Danfoss A/S for the Company's working capital and other funding needs. However, the Company has built up a significant cash balance and is now in a position to fund its dividend payments, working capital requirements and other funding needs through cash flow from operations and the available cash on hand. If the Company's strong cash flow since 2010 were to slow significantly for an extended period of time, the Company might need to seek new financing from Danfoss A/S or other external sources.
Goodwill and Long-Lived Assets Impairment
If the price of the Company's stock was to decline to the point that its market capitalization was lower than its carrying value, the Company may be required to perform interim impairment tests on goodwill or other long-lived assets. There may be other triggering events that indicate that the carrying amount of goodwill or long-lived assets may not be recoverable from future cash flows. If the Company determines that any goodwill or other long-lived asset amounts need to be written down to fair values at that time, this could result in a charge that may be material to the Company's operating results and financial condition.
International Operations
The Company depends on the strength of the economies in various parts of the world, particularly in the U.S., Europe, and the Asia-Pacific region. As a result of this worldwide exposure, net revenue and profitability may be harmed as a result of economic conditions in the major markets in which the Company operates, including, but not limited to, recessions, inflation and deflation, general weakness in the markets it serves, changes in governmental laws and policies, government embargoes or foreign trade restrictions, duties and tariffs, import and export controls, and changes in consumer purchasing power.
Technology Change
The hydraulic industry and markets for component parts of mobile hydraulics are subject to technological change, evolving industry standards, changing customer requirements and improvements in and expansion of product offerings. Although the Company believes that it has the technological capabilities to remain competitive, technological advances or developments by competitors or others could result in the Company needing to make significant capital expenditures in order to remain competitive and to avoid material adverse effects on its business, financial condition and results of operations.
Common Business System
The Company has implemented a common business system at substantially all of its locations. Any significant problems incurred related to operation of the system may delay or stop manufacturing and hinder the Company's ability to ship product in a timely manner or affect the Company's ability to access financial information. These problems could result in the loss of customers, a decrease in revenue, or significant costs to correct the problem.

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Raw Material Availability
The Company purchases raw materials and component parts from suppliers to be used in the manufacture of products. During the worldwide economic recession, many of the Company's raw material suppliers reduced their output. As the worldwide market has improved over the last few years, suppliers have increased production. In the event of a short-term substantial increase in demand, the Company may experience price increases and difficulties in purchasing raw materials.
Pricing and Competitive Pressures from OEM Customers
A majority of the Company's sales are directly to OEM customers. OEM customers continue to use their positions as volume purchasers in the mobile hydraulics market to obtain preferential pricing and to obtain substantial quality assurance protection from the Company and other suppliers.
Currency Exchange Rates
The Company has a number of manufacturing sites throughout the world and sells products in several countries other than those where the product is manufactured. As a result, the Company has exposure to changing exchange rates between the various currencies in its customers' countries and the currencies in which the Company's manufacturing facilities are located. The Company's most significant foreign currency exposures are the euro, Japanese yen, Brazilian real, Polish zloty, British pound, Chinese yuan and Danish kroner. Exchange rate fluctuations between these currencies and against the U.S. dollar or euro could adversely affect the Company's results of operations. The Company enters into forward contracts to reduce the impact of currency fluctuations on cash flows related to forecasted sales denominated in currencies other than the functional currency of the selling location.
Cyclicality: Risks Associated with General Economic Conditions
The capital goods industry in general, and the mobile hydraulics industry in particular, are subject to economic cycles. Cyclical downturns had a material adverse effect on the demand for the Company's products in recent years. Future cyclical downturns may negatively impact the Company's business, financial condition, and results of operations. Demand for the Company's products is dependent upon the general condition of the off-highway mobile equipment industry which may be affected by numerous factors, including levels of construction activity, weather conditions, interest rates and access to financing. The Company's results of operations are also subject to price competition and the cost of supplies and labor, both of which are affected by general economic conditions. The Company derives substantial sales from cyclical industries, including the turf care, material handling, construction and agricultural equipment industries.
Income Tax Estimates
The Company is subject to income taxes in the U.S. and numerous non-U.S. jurisdictions. Significant judgment is required in determining the Company's worldwide provision for income taxes. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is periodically under audit by tax authorities. Although management believes its tax estimates are reasonable, the final outcome of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals. If the outcome of a given tax audit or related litigation is materially different from the Company's estimates, the determination could result in material differences between the Company's originally reported income tax provision or net income and the final reported financial results.
Catastrophic Events
Unforeseen events, including war, terrorism and other international conflicts, public health issues, and natural disasters such as earthquakes, hurricanes or other adverse weather and climate conditions, whether occurring in the U.S. or abroad, could disrupt the Company's operations, disrupt the operations of suppliers or customers, or result in political or economic instability. These events could reduce demand for hydraulic and electronic products and make it difficult or impossible for the Company to manufacture products, deliver products to customers, or to receive products from suppliers.
The foregoing list is not exhaustive. There can be no assurance that the Company has correctly identified and appropriately assessed all factors affecting the Company or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not presently known to the Company or that are currently believed to be immaterial also may adversely impact the Company's business. Should any risks or uncertainties develop into actual events, these developments could have a material adverse effect on the Company's business, financial condition, and results of operations.

8



Item 2.    Properties.
Sauer-Danfoss Inc. conducts its manufacturing operations at 19 locations; six in the United States, two each in Slovakia, Poland and Italy, and one each in Brazil, China, Denmark, Germany, India, Japan, and Sweden. The following table sets forth certain information relating to the Company's principal manufacturing facilities:
Location
 
Segment that Uses the Facility
 
Approx.
Area in
Sq. Ft.
 
Owned/Leased
United States
 
 
 
 
 
 
Ames, Iowa
 
Hydrostatics, Work Function and Stand-Alone Businesses
 
359,100

 
Owned
Sullivan, Illinois
 
Stand-Alone Businesses
 
220,000

 
Owned
Freeport, Illinois
 
Hydrostatics
 
192,000

 
Owned
Easley, South Carolina
 
Controls and Stand-Alone Businesses
 
184,000

 
Owned
Minneapolis, Minnesota
 
Controls
 
75,000

 
Leased
Princeton, Kentucky
 
Stand-Alone Businesses
 
68,000

 
Owned
South America
 
 
 
 
 
 
Caxias do Sul, Brazil
 
Stand-Alone Businesses
 
90,000

 
Leased
Europe
 
 
 
 
 
 
Nordborg, Denmark
 
Work Function and Controls
 
751,300

 
Leased
Neumünster, Germany
 
Hydrostatics and Controls
 
421,500

 
Owned
Povazská Bystrica, Slovakia
 
Hydrostatics, Controls and Stand-Alone Businesses
 
386,900

 
Owned
Dubnica nad Váhom, Slovakia
 
Hydrostatics
 
249,700

 
Owned
Bielany Wroclawskie, Poland
 
Work Function
 
223,000

 
Leased
Wroclaw, Poland
 
Work Function
 
126,000

 
Owned
Bologna, Italy
 
Stand-Alone Businesses
 
85,000

 
Owned
Reggio Emilia, Italy
 
Stand-Alone Businesses
 
76,500

 
Leased
Älmhult, Sweden
 
Controls
 
50,000

 
Leased
India
 
 
 
 
 
 
Pune, India
 
Work Function and Stand-Alone Businesses
 
63,600

 
Owned
Asia
 
 
 
 
 
 
Shanghai, China
 
Hydrostatics, Work Function, Controls and Stand-Alone Businesses
 
105,000

 
Leased
Osaka, Japan
 
Hydrostatics
 
120,000

 
Leased
Total
 
 
 
3,846,600

 
 

Item 3.    Legal Proceedings.
From time to time, the Company is involved in various legal matters in the ordinary course of its business. The Company intends to defend itself vigorously against all such claims. It is the Company's policy to accrue for amounts related to lawsuits brought against it if it is probable that a liability has been incurred and an amount can be reasonably estimated. Although the outcome of such matters cannot be predicted with certainty and no assurances can be given with respect to such matters, the Company believes that the outcome of those ordinary-course matters in which it is currently involved will not have a materially adverse effect on its results of operations, liquidity, or financial position.


9



EXECUTIVE OFFICERS OF THE COMPANY

        The following table sets forth certain information regarding the executive officers of the Company:
Name
Age
 
Position
 
Year
Appointed
Eric Alstrom(1)
46

 
President and Chief Executive Officer
 
2012
Jesper V. Christensen(2)
43

 
Executive Vice President and Chief Financial Officer, Treasurer
 
2009
C. Kells Hall(3)
64

 
Executive Vice President and Chief Technology Officer
 
2013
Helge Jørgensen(3)
50

 
Executive Vice President and President Work Function Division
 
2011
Thomas Kaiser(3)
51

 
Executive Vice President and President Hydrostatics Division
 
2013
Marc A. Weston(4)
43

 
Executive Vice President and Chief Marketing Officer
 
2010
Anne Wilkinson(3)
47

 
Executive Vice President - Human Resources
 
2010
Kenneth D. McCuskey(3)
58

 
Vice President and Chief Accounting Officer, Secretary
 
2000

(1)
Prior to joining the Company, Mr. Alstrom was employed by Benteler Automotive as Managing Director.

(2)
Prior to joining the Company, Mr. Christensen was employed as Vice President, Finance, IT & HR in the Motion Controls Division of Danfoss A/S, the majority stockholder of the Company.

(3)
These executive officers have served in various capacities with the Company or its subsidiaries for more than the past five years.

(4)
Prior to joining the Company, Mr. Weston was employed by The Timken Company as Vice President Strategic Planning.

Item 4.    Mine Safety Disclosures.
Not applicable.

10




PART II

Item 5.    Market for the Company's Common Stock, Related Stockholder Matters and Company Purchases of Common Stock.
Market and Dividend Information
The Company's Common Stock is traded on the New York Stock Exchange. As of February 19, 2013 there were 115 stockholders of record.
The Company historically paid a quarterly dividend. Quarterly dividends are subject to Board of Directors approval. On March 13, 2009 the Board of Directors voted to suspend the Company's quarterly dividend indefinitely. On March 20, 2012, the Board of Directors voted to reinstate the quarterly cash dividend.
The following table sets forth the high and low prices on the New York Stock Exchange for the Company's Common Stock since January 1, 2011, and the quarterly cash dividends declared in 2012 and 2011:
 
1st
 
2nd
 
3rd
 
4th
 
Full Year
2012
 
 
 
 
 
 
 
 
 
High
$
56.10

 
$
48.36

 
$
43.28

 
$
53.45

 
$
56.10

Low
$
34.58

 
$
33.16

 
$
33.24

 
$
37.57

 
$
33.16

Dividends
$
0.35

 
$
0.35

 
$
0.35

 
$
0.35

 
$
1.40

2011
 
 
 
 
 
 
 
 
 
High
$
51.59

 
$
65.04

 
$
56.30

 
$
41.60

 
$
65.04

Low
$
27.29

 
$
41.53

 
$
28.86

 
$
25.60

 
$
25.60

Dividends
$

 
$

 
$

 
$

 
$


Equity Compensation Plan Information
The following table summarizes, as of December 31, 2012, information about compensation plans under which equity securities of the Company are authorized for issuance:
Plan Category
Number of Securities to
be Issued upon Exercise
of Outstanding Options,
Warrants and Rights
(a)
 
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
 
Number of Securities Remaining
Available for Future Issuance
under Equity Compensation
Plans (Excluding Securities
Reflected in Column(a))
(c)
Equity compensation plans approved by security holders
44,766

 
$

 
3,353,516

The Company does not have any equity compensation plans that were not approved by security holders. Refer to Note 13 in the Notes to the Consolidated Financial Statements on page F-28 of this report for a description of the equity compensation plans.
Column (a) includes only performance units that have vested but the payout of which has been deferred. Column (c) includes 3,353,516 shares available for issuance under the Company's 2006 Omnibus Incentive Plan. The plan permits the Company to issue common stock at times other than upon the exercise of options, warrants, or rights; for example, issuance in the form of restricted stock grants.



11



Performance Graph
The following graph shows a comparison of the cumulative total returns from December 31, 2007 to December 31, 2012, for the Company, the Russell 2000 Index, and the Morningstar Diversified Industrials Index ("Morningstar Group Index").
The graph assumes that $100 was invested on December 31, 2007 in the Company's common stock, the Russell 2000 Index, and the Morningstar Group Index, a peer group index, and that all dividends were reinvested.





12



Item 6.    Selected Financial Data.
SELECTED FINANCIAL DATA
 
2012
 
2011
 
2010
 
2009
 
2008
 
(in millions except per share data)
Operating Data:
 
 
 
 
 
 
 
 
 
Net sales
$
1,916.1

 
$
2,057.5

 
$
1,640.6

 
$
1,159.0

 
$
2,090.5

Gross profit
616.9

 
657.2

 
498.1

 
128.0

 
435.6

Selling, general and administrative
235.1

 
228.0

 
195.5

 
209.7

 
258.5

Research and development
64.1

 
64.0

 
51.6

 
61.4

 
82.9

Impairment charges

 

 

 
50.8

 
58.2

Loss (gain) on sale of businesses and asset disposals
(0.1
)
 
0.6

 
7.6

 
16.4

 
9.6

Total operating expenses
299.1

 
292.6

 
254.7


338.3


409.2

Total interest expense, net
15.0

 
21.1

 
49.4

 
48.4

 
24.6

Loss on early retirement of debt
1.3

 
1.2

 
2.4

 
15.8

 

Net income (loss) attributable to Sauer-Danfoss Inc.
181.8

 
229.9

 
213.4

 
(345.8
)
 
(29.1
)
Per Share Data:
 
 
 
 
 
 
 
 
 
Income (loss) per common share, basic
$
3.75

 
$
4.75

 
$
4.41

 
$
(7.15
)
 
$
(0.60
)
Income (loss) per common share, diluted
$
3.75

 
$
4.74

 
$
4.40

 
$
(7.15
)
 
$
(0.60
)
Cash dividends declared per share
$
1.40

 
$

 
$

 
$

 
$
0.72

Weighted average basic shares outstanding
48.4

 
48.4

 
48.4

 
48.3

 
48.2

Weighted average diluted shares outstanding
48.5

 
48.5

 
48.5

 
48.3

 
48.2

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Inventories
$
178.2

 
$
217.7

 
$
201.0

 
$
177.6

 
$
325.5

Property, plant and equipment, net
342.2

 
367.8

 
408.1

 
513.5

 
598.4

Total assets
1,399.0

 
1,278.3

 
1,128.2

 
1,068.3

 
1,467.7

Total debt (1)
178.9

 
200.5

 
281.5

 
533.2

 
491.4

Stockholders' equity
696.9

 
577.8

 
369.1

 
154.6

 
477.9

Debt to total capital
20.4
%
 
25.8
%
 
43.3
%
 
77.5
%
 
50.7
%
Other Data:
 
 
 
 
 
 
 
 
 
Backlog (at year-end)
$
837.0

 
$
939.8

 
$
814.2

 
$
509.5

 
$
743.7

Depreciation and amortization
80.5

 
88.1

 
97.3

80.5

117.1

88,094.0

113.0

Capital expenditures
48.6

 
51.8

 
26.2

 
43.0

 
198.6

EBITDA (2)
401.1

 
449.6

 
344.2

 
(89.9
)
 
175.6

Cash flows from (used in):
 
 
 
 
 
 
 
 
 
Operating activities
335.3

 
374.2

 
269.3

 
86.8

 
183.5

Investing activities
(228.7
)
 
(228.0
)
 
(18.0
)
 
(42.2
)
 
(187.5
)
Financing activities
(98.0
)
 
(112.6
)
 
(249.2
)
 
(24.7
)
 
4.7



(1)
Total debt includes notes payable and bank overdrafts, long-term debt due within one year, and long-term debt.
(2)
EBITDA represents net income plus net interest expense, income tax expense, depreciation and amortization, long-lived asset impairment charge, loss on early retirement of debt and noncontrolling interest. The impairment charge is included as it will reduce depreciation in future years. EBITDA may not be comparable to similarly titled measures reported by other companies. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with accounting principles generally

13



accepted in the United States, it is included herein to provide additional information as management of the Company believes it provides an indication with respect to the ability of Sauer-Danfoss to meet its future debt service, capital expenditures, and working capital requirements. The following table further demonstrates how EBITDA is derived from cash flows from operating activities:
 
2012
 
2011
 
2010
 
2009
 
2008
Cash flows from operating activities
$
335.3

 
$
374.2

 
$
269.3

 
$
86.8

 
$
183.5

Increase (decrease) in working capital, excluding the effects of acquisitions


 


 


 


 


Accounts receivable, net
2.3

 
1.0

 
63.8

 
(91.4
)
 
(71.7
)
Inventories
(39.9
)
 
19.0

 
28.5

 
(153.4
)
 
16.8

Other current assets
0.3

 
(10.2
)
 
8.1

 
5.0

 
7.9

Accounts payable
10.1

 
(0.5
)
 
(77.6
)
 
54.2

 
14.5

Accrued liabilities
(2.4
)
 
(12.2
)
 
(16.6
)
 
20.7

 
(23.6
)
Deferred income taxes, pension and postretirement benefits and other
(13.2
)
 
(23.4
)
 
68.1

 
(137.0
)
 
9.5

Interest expense, net and loss on early retirement of debt
16.3

 
22.3

 
51.8

 
64.2

 
24.6

Income tax
92.3

 
79.4

 
(51.2
)
 
61.0

 
14.1

EBITDA
$
401.1

 
$
449.6

 
$
344.2

 
$
(89.9
)
 
$
175.6



  

14



Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

Safe Harbor Statement
This Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other portions of this annual report, contain certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. All statements regarding future performance, growth, sales and earnings projections, conditions or developments are forward-looking statements. Words such as “anticipates,” “in the opinion,” “believes,” “intends,” “expects,” “may,” “will,” “should,” “could,” “plans,” “forecasts,” “estimates,” “predicts,” “projects,” “potential,” “continue,” and similar expressions may be intended to identify forward-looking statements.
Actual future results may differ materially from those described in the forward-looking statements due to a variety of factors. Readers should bear in mind that past experience is never a perfect guide to anticipating actual future results. Risk factors affecting the Company's forward-looking statements include, but are not limited to, the following: general, worldwide economic conditions, the level of interest rates, crude oil prices, commercial and consumer confidence, and currency exchange rates; specific economic conditions in the agriculture, construction, road building, turf care, material handling and specialty vehicle markets and the impact of such conditions on the Company's customers in such markets; the cyclical nature of some of the Company's businesses; the ability of the Company to win new programs and maintain existing programs with its original equipment manufacturer (OEM) customers; the highly competitive nature of the markets for the Company's products as well as pricing pressures that may result from such competitive conditions; the continued operation and viability of the Company's significant customers; the Company's execution of internal performance plans; difficulties or delays in manufacturing; the effectiveness of the Company's cost-management and productivity improvement efforts; the Company's ability to manage its business effectively in a period of slowing growth in sales and its capacity to make necessary adjustments to changes in demand for its products; competing technologies and difficulties entering new and expanding markets, both domestic and foreign; changes in the Company's product mix; future levels of indebtedness and capital spending; the availability of sufficient levels of cash flow from operations and credit on favorable terms, whether from Danfoss A/S, the Company's majority stockholder, or from the capital markets or traditional credit sources to enable the Company to meet its capital needs; claims, including, without limitation, warranty claims, field recall claims, product liability claims, charges or dispute resolutions; the ability of suppliers to provide materials as needed and the Company's ability to recover any price increases for materials in product pricing; the Company's ability to attract and retain key technical and other personnel; labor relations; the failure of customers to make timely payment, especially in light of the persistence of tight credit markets; any inadequacy of the Company's intellectual property protection or the potential for third-party claims of infringement; credit market disruptions and significant changes in capital market liquidity and funding costs affecting the Company and its customers and suppliers; sovereign debt crises, in Europe or elsewhere, and the reaction of other nations to such crises; energy prices; the impact of new or changed tax and other legislation and regulations in jurisdictions in which the Company and its affiliates operate, including regulations affecting retirement and health care benefits provided to Company employees; actions by the U.S. Federal Reserve Board and the central banks of other nations, including heightened capital requirements imposed on Chinese banks; actions by other regulatory agencies, including those taken in response to the global credit crisis; actions by credit rating agencies; changes in accounting standards; worldwide political stability, including developments in the Middle East; the effects of terrorist activities and resulting political or economic instability; natural catastrophes; U.S. and NATO military action overseas; and the effect of acquisitions, divestitures, restructurings, product withdrawals, and other unusual events.
The Company cautions the reader that this list of cautionary statements and risk factors is not exhaustive. The Company's outlook is based upon assumptions and projections arising in connection with the foregoing factors, the evaluation of which is often based on estimates and data prepared by government and other third-party sources. Those estimates and data are frequently revised. The Company expressly disclaims any obligation or undertaking to release publicly any updates or changes to these forward-looking statements to reflect future events or circumstances. The foregoing risks and uncertainties are discussed in Item 1A (Risk Factors) in this annual report on Form 10-K.
About the Company
Sauer-Danfoss Inc. and subsidiaries (the Company) is a worldwide leader in the design, manufacture, and sale of engineered hydraulic and electronic systems and components that generate, transmit and control power in mobile equipment. The Company's products are used by original equipment manufacturers (OEMs) of mobile equipment, including construction, road building, agricultural, turf care, material handling, and specialty equipment. The Company designs, manufactures, and markets its products in the Americas, Europe, and the Asia-Pacific region, and markets its products throughout the rest of the world either directly or through distributors.

15



Executive Summary of 2012 Compared to 2011
The nature of the Company's operations as a global producer and supplier in the fluid power industry means the Company is impacted by changes in local economies, including currency exchange rate fluctuations. In order to gain a better understanding of the Company's base results, a financial statement user needs to understand the impact of those currency exchange rate fluctuations. The following table summarizes the change in the Company's results from operations by separately identifying changes due to currency fluctuations and the underlying change in operations from 2011 to 2012. This analysis is more consistent with how the Company's management internally evaluates results.
(in millions)
2011
 
Currency fluctuations
 
Underlying change
 
2012
Net Sales
$
2,057.5

 
$
(62.0
)
 
$
(79.4
)
 
$
1,916.1

     Gross Profit
657.2

 
(24.4
)
 
(15.9
)
 
616.9

     % of Net Sales
31.9
%
 
 
 
 
 
32.2
%
Selling, general and administrative
228.0

 
(10.3
)
 
17.3

 
235.0

Research and development
64.0

 
(2.7
)
 
2.8

 
64.1

Loss (gain) on sale of businesses and asset disposals
0.6

 

 
(0.7
)
 
(0.1
)
     Total operating costs
292.6

 
(13.0
)
 
19.4

 
299.0

     Operating income
364.6

 
(11.4
)
 
(35.3
)
 
317.9

     % of Net Sales
17.7
%
 
 

 
 

 
16.6
%
Interest expense, net
(21.1
)
 

 
6.1

 
(15.0
)
Loss on early retirement of debt
(1.2
)
 

 
(0.1
)
 
(1.3
)
Other, net
(3.1
)
 
(0.1
)
 
6.0

 
2.8

Income before income taxes
339.2

 
(11.5
)
 
(23.3
)
 
304.4

     % of Net Sales
16.5
%
 
 

 
 

 
15.9
%
Income tax
(79.4
)
 
2.8

 
(15.7
)
 
(92.3
)
Net income
259.8

 
(8.7
)
 
(39.0
)
 
212.1

Net income attributable to noncontrolling interest, net of tax
(29.9
)
 

 
(0.4
)
 
(30.3
)
Net income attributable to Sauer-Danfoss Inc. 
$
229.9

 
$
(8.7
)
 
$
(39.4
)
 
$
181.8

Net sales for the year ended December 31, 2012 decreased 4 percent compared to the year ended December 31, 2011, excluding the effects of currency. Excluding the impacts of currency, sales increased 7 percent in the Americas, while sales decreased 19 percent in Asia-Pacific and 10 percent in Europe. Sales in the Work Function segment were down 12 percent, followed by decreases of 5 percent in the Hydrostatics segment and 2 percent in the Controls segment. Sales in the Stand-Alone Businesses segment increased 4 percent.
Gross profit decreased $15.9 million during the year ended December 31, 2012, excluding the impact of currency, mainly due to reduced sales volume in relation to fixed production costs. Partially offsetting the negative impact of reduced sales in 2012 was a $9.5 million reduction in warranty and field recall costs.
Total operating costs increased by $19.4 million during 2012 when compared to the same period in 2011, excluding the impact of currency. Selling, general and administrative costs increased 8 percent, while research and development costs experienced a 4 percent increase. Higher costs in 2012 were partially due to wage and salary increases, as well as the Company's continued investments in China as part of its long-term growth strategy. In 2012 the Company incurred restructuring costs of $1.1 million related to the reorganization of the European sales organization, as well as executive separation costs of $2.7 million. Partially offsetting the negative impact of these items in 2012 was a $1.6 million reduction in incentive plan costs. In 2011 the Company incurred restructuring costs of $4.1 million related to restructuring of the European sales organization.
In 2011 the Company incurred costs of $1.2 million related to the write-down of a building in Odense, Denmark. This was partially offset by a $0.6 million gain on the sale of a building in Lawrence, Kansas.
Net interest expense decreased in 2012 due to a reduction in the principal balance of debt outstanding during the year. A reduction in borrowing capacity at the request of the Company resulted in a $1.3 million loss on early retirement of debt in 2012, which consisted of prepayment penalties of $0.8 million and $0.5 million related to the write-off of unamortized deferred financing

16



costs. Reduction of availability of a revolving credit facility in 2011 resulted in a $1.2 million loss on early retirement of debt due to the write-off of unamortized deferred financing costs.
Operating Results—2012 Compared to 2011
Sales Growth by Market
The following table summarizes the Company's sales growth by market. The table and following discussion is on a comparable basis, which excludes the effects of currency fluctuations.
 
Americas
 
Asia-Pacific
 
Europe
 
Total
 
$ Change
% Change
 
$ Change
% Change
 
$ Change
% Change
 
$ Change
% Change
 
 
 
 
 
 
 
 
 
 
 
 
Agriculture/Turf Care
$
56.6

14
 %
 
$
4.4

29
 %
 
$
(33.1
)
(13
)%
 
$
27.9

4
 %
Construction/Road Building
4.3

3

 
(42.0
)
(25
)
 
(14.5
)
(9
)
 
(52.2
)
(11
)
Specialty
7.5

8

 
(8.1
)
(22
)
 
(22.9
)
(9
)
 
(23.5
)
(6
)
Distribution
(2.0
)
(1
)
 
(23.7
)
(17
)
 
(5.9
)
(5
)
 
(31.6
)
(6
)
Agriculture/Turf Care
Sales into the agriculture/turf care market showed a modest increase of 4 percent during the year ended December 31, 2012 compared to the same period in 2011. Agricultural sales in the Americas continue to benefit from high commodity prices as well as strong demand for sprayers and harvesting equipment in Brazil, although South American sales have been negatively impacted in recent months by restrictive trade laws in Argentina. Sales in the turf care market continue to show improvement due to growing consumer confidence. Agricultural sales in Europe have declined due to a weakened European economy as well as high interest rates and political uncertainty in India. The Asia-Pacific region contributes less than 5 percent of the sales in the agriculture/turf care market, therefore any change in the Asia-Pacific region does not significantly impact the total market.
Construction/Road Building
Sales in the construction/road building markets declined in Europe and the Asia-Pacific region during the year ended December 31, 2012 compared to the same period in 2011, which more than offset a modest sales increase in the Americas. Sales in Europe were down due to a weakened European economy. The sales decline in the Asia-Pacific region was largely due to reduced demand for rollers and transit mixers in China, as well as credit restrictions imposed by the Chinese government. Sales in the Americas benefited from increased demand as a result of renewed investments in aging rental fleets despite depressed residential construction markets and a weak road building market due to limited spending by state and local governments due to budget constraints.
Specialty
Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management and waste recycling. Overall sales into the specialty vehicle market decreased 6 percent compared to 2011. Sales in the Americas increased due to increased demand for aerial lifts driven by renewed investments in aging rental fleets. Sales in the Asia-Pacific region declined largely due to a saturated railway carrier market and suspended infrastructure programs in China, as well as credit restrictions imposed by the Chinese government. Sales in Europe declined due to weakening forestry and mining markets despite continued strong demand for telehandlers and aerial lifts during the first half of the year.
Distribution
Products related to all of the above markets are sold to distributors, who then serve smaller OEMs.

17



Order Backlog
The following table shows the Company's order backlog and orders written activity for 2011 and 2012, separately identifying the impact of currency fluctuations.
(in millions)
2011
 
Currency
fluctuation
 
Underlying
change
 
2012
Backlog at December 31
$
939.8

 
$
2.2

 
$
(105.0
)
 
$
837.0

Orders written
2,190.8

 
(61.4
)
 
(311.3
)
 
1,818.1

Total order backlog at the end of 2012 was $837.0 million, compared to $939.8 million at the end of 2011. On a comparable basis, excluding the impact of currency fluctuation, order backlog decreased 11 percent compared to 2011. Backlog levels can vary as customers alter their sales order patterns.
New sales orders written for 2012 were $1,818.1 million, a decrease of 14 percent compared to 2011, excluding the impact of currency fluctuations.
Business Segment Results
The following discussion of operating results by reportable segment relates to information as presented in Note 17 in the Notes to Consolidated Financial Statements. Segment income is defined as the respective segment's portion of the total Company's net income, excluding net interest expense, income taxes, and noncontrolling interest. Hydrostatics (formerly Propel) products include hydrostatic transmissions and related products that transmit the power from the engine to the wheel to propel a vehicle. Work Function products include steering motors and motors that transmit power for the work functions of the vehicle. Controls products include electrohydraulic controls, microprocessors, and valves that control and direct the power of a vehicle. Stand-Alone Businesses include open circuit gear pumps and motors, cartridge valves and HICs, directional control valves, inverters and light duty hydrostatic transmissions that transmit, control and direct the power of a vehicle, but are marketed under their own names and are managed as stand-alone businesses.
The following table provides a summary of each segment's net sales and segment income, separately identifying the impact of currency fluctuations during the year.
(in millions)
2011
 
Currency
fluctuation
 
Underlying
change
 
2012
Net sales
 
 
 
 
 
 
 
Hydrostatics
$
948.2

 
$
(19.0
)
 
$
(45.5
)
 
$
883.7

Work Function
377.5

 
(19.7
)
 
(46.2
)
 
311.6

Controls
322.5

 
(12.8
)
 
(6.1
)
 
303.6

Stand-Alone Businesses
409.3

 
(10.5
)
 
18.4

 
417.2

Segment income (loss)
 
 
 
 
 
 
 
Hydrostatics
$
210.5

 
$
(5.5
)
 
$
(31.4
)
 
$
173.6

Work Function
59.2

 
(4.4
)
 
(6.5
)
 
48.3

Controls
78.5

 
(3.7
)
 
(0.6
)
 
74.2

Stand-Alone Businesses
58.6

 
(1.1
)
 
10.9

 
68.4

Global Services and other expenses, net
(45.3
)
 
2.0

 
(0.5
)
 
(43.8
)
Hydrostatics Segment
Sales in the Hydrostatics segment decreased 5 percent during 2012 compared to 2011, excluding the effects of currency fluctuations. Segment income decreased $31.4 million excluding the effects of currency fluctuations, primarily due to reduced sales volumes and increased operating costs. Total operating costs increased $12.3 million, partially due to the Company's continued investments in China as part of its long-term growth strategy. Segment income was favorably impacted by a $2.6 million reduction in warranty and field recall costs, as well as a $1.9 million reduction in incentive plan costs.

18



Work Function Segment
The Work Function segment experienced a 12 percent decrease in sales during 2012 compared to 2011, excluding the effects of currency fluctuations, largely due to weakened economic conditions in Europe. Segment income decreased $6.5 million primarily due to reduced sales volume. Partially offsetting the negative impact of reduced sales was a 3 percentage point increase in contribution margin largely due to improved production efficiency and higher margins on export sales from Europe to the United States due to the strengthening of the U.S. dollar during the first half of the year.
Controls Segment
Net sales in the Controls segment decreased 2 percent in 2012 compared to 2011, excluding the effects of currency fluctuations. Segment income remained level compared to 2011 largely due to a 2 percentage point increase in contribution margin driven by an $8.3 million reduction in warranty and field recall costs. In addition, segment income was favorably impacted by a $1.2 million reduction in incentive plan costs in 2012 compared to 2011.
Stand-Alone Businesses Segment
The Stand-Alone Businesses segment experienced a 4 percent increase in sales in 2012 compared to 2011, excluding the effects of currency fluctuations. Segment income increased $10.9 million due to increased sales volume, as well as a $2.8 million reduction in fixed production cots. Partially offsetting the positive impact of increased sales and reduced fixed production costs was a $2.0 million increase in operating costs.
Global Services and other expenses, net
Segment costs in Global Services and other expenses, net, relate to internal global service departments. Global services include such costs as consulting for special projects, tax and accounting fees paid to outside third parties, internal audit, certain insurance premiums, and the amortization of intangible assets from certain business combinations. Global services and other expenses remained level in 2012 compared to 2011, excluding the impacts of currency. In 2012 the Company incurred executive severance costs of $2.6 million, as well as restructuring costs of $1.1 million related to the restructuring of the European sales organization. Global incentive plan costs increased $2.4 million in 2012 compared to 2011. The negative impact of these items was offset by the fact that the Company experienced a $4.8 million reduction in loss on foreign currency transactions in 2012 compared to 2011. In 2011 the Company recognized restructuring costs of $4.7 million related to the restructuring of the European sales organization.
Income Taxes
The Company recognized tax expense of $92.3 million on pretax income of $304.4 million in 2012 resulting in an effective tax rate of 30.3 percent. The Company has returned to a more normal effective tax rate which is impacted by the Company's worldwide earnings mix.



19



Executive Summary of 2011 Compared to 2010
The nature of the Company's operations as a global producer and supplier in the fluid power industry means the Company is impacted by changes in local economies, including currency exchange rate fluctuations. In order to gain a better understanding of the Company's base results, a financial statement user needs to understand the impact of those currency exchange rate fluctuations. The following table summarizes the change in the Company's results from operations by separately identifying changes due to currency fluctuations and the underlying change in operations from 2010 to 2011. This analysis is more consistent with how the Company's management internally evaluates results.
(in millions)
2010
 
Currency fluctuations
 
Underlying change
 
2011
Net Sales
$
1,640.6

 
$
65.2

 
$
351.7

 
$
2,057.5

     Gross Profit
498.1

 
22.1

 
137.0

 
657.2

     % of Net Sales
30.4
%
 
 
 
 
 
31.9
%
Selling, general and administrative
195.5

 
7.5

 
25.0

 
228.0

Research and development
51.6

 
2.2

 
10.2

 
64.0

Loss on sale of businesses and asset disposals
7.6

 

 
(7.0
)
 
0.6

     Total operating costs
254.7

 
9.7

 
28.2

 
292.6

     Operating income
243.4

 
12.4

 
108.8

 
364.6

     % of Net Sales
14.8
%
 
 

 
 

 
17.7
%
Interest expense, net
(49.4
)
 

 
28.3

 
(21.1
)
Loss on early retirement of debt
(2.4
)
 

 
1.2

 
(1.2
)
Other, net
3.5

 
(0.7
)
 
(5.9
)
 
(3.1
)
Income before income taxes
195.1

 
11.7

 
132.4

 
339.2

     % of Net Sales
11.9
%
 
 

 
 

 
16.5
%
Income tax
51.2

 
(1.8
)
 
(128.8
)
 
(79.4
)
Net income
246.3

 
9.9

 
3.6

 
259.8

Net income attributable to noncontrolling interest, net of tax
(32.9
)
 
(0.9
)
 
3.9

 
(29.9
)
Net income attributable to Sauer-Danfoss Inc. 
$
213.4

 
$
9.0

 
$
7.5

 
$
229.9

Net sales for the year ended December 31, 2011 increased 21 percent compared to the year ended December 31, 2010, excluding the effects of currency. Net sales increased in all regions and segments. Excluding the impacts of currency, sales increased 25 percent in the Americas, 22 percent in Europe and 12 percent in Asia-Pacific. Sales in the Hydrostatics segment were up 28 percent, followed by increases of 27 percent in the Controls segment, 13 percent in the Work Function segment, and 12 percent in the Stand-Alone Businesses segment.
Gross profit increased significantly during the year ended December 31, 2011, excluding the impact of currency, due to increased sales volumes in relation to fixed production costs, partially due to reduced depreciation. In 2010 gross profit was negatively impacted by restructuring costs of $3.1 million related to the closure of the Lawrence, Kansas facility. Partially offsetting the positive impact of increased sales in 2011 were increased warranty and field recall costs of $7.4 million.
Selling, general and administrative costs increased 13 percent during 2011 when compared to the same period in 2010, excluding the effects of currency. In 2011 the Company incurred restructuring costs of $4.1 million related to restructuring of the European sales organization, as well as increased incentive plan costs of $5.8 million. In 2010 the Company incurred restructuring costs of $0.5 million related to the closure of the Lawrence facility, costs of $3.5 million related to a stock tender offer initiated by Danfoss Acquisition, Inc., and costs of $1.5 million related to a pension settlement with a former executive. Research and development costs increased 20 percent excluding the effects of currency. The increase was largely due to cost reduction efforts in 2010 in light of the economic downturn.
In 2011 the Company incurred costs of $1.2 million related to the write-down of a building in Odense, Denmark. This was partially offset by a $0.6 million gain on the sale of a building in Lawrence, Kansas. In 2010 the Company incurred costs of $4.4 million related to the exit from the AC motor product line and $1.1 million related to the sale of the steering column business in Kolding, Denmark. In addition, the Company recognized costs of $2.3 million related to a loss on sale of fixed assets and write-down of the building in Lawrence, Kansas. Partially offsetting these costs in 2010 was a gain on sale of equipment of $1.1 million.

20



Net interest expense decreased in 2011 due to a reduction in the principal balance of debt outstanding during the year. Refinancing activities in 2010 resulted in a $2.4 million loss on early retirement of debt, which consisted of prepayment penalties of $1.7 million and $0.7 million related to the write-off of unamortized deferred financing costs. Reduction of availability of a revolving credit facility in 2011 resulted in a $1.2 million loss on early retirement of debt due to the write-off of unamortized deferred financing costs.
Operating Results—2011 Compared to 2010
Sales Growth by Market
The following table summarizes the Company's sales growth by market. The table and following discussion is on a comparable basis, which excludes the effects of currency fluctuations.
 
Americas
 
Asia-Pacific
 
Europe
 
Total
 
$ Change
% Change
 
$ Change
% Change
 
$ Change
% Change
 
$ Change
% Change
 
 
 
 
 
 
 
 
 
 
 
 
Agriculture/Turf Care
$
54.1

15
%
 
$
2.2

18
%
 
$
56.9

32
%
 
$
113.2

20
%
Construction/Road Building
22.2

18

 
10.0

7

 
22.0

17

 
54.2

14

Specialty
31.9

53

 
9.5

39

 
46.3

22

 
87.7

30

Distribution
70.3

42

 
14.9

12

 
11.4

11

 
96.6

25

Agriculture/Turf Care
Sales into the agriculture/turf care market showed a strong increase in all regions during the year ended December 31, 2011 compared to 2010. The agricultural market in the Americas benefited from historically high commodity prices and a strong sugar-cane market in Brazil. Agricultural sales growth in Europe was also driven by high commodity prices. Sales in the turf care market improved due to growing consumer confidence. The Asia-Pacific region contributes less than 5 percent of the sales in the agriculture / turf care market, therefore any change in the Asia-Pacific region does not significantly impact the total market.
Construction/Road Building
Sales into the construction/road building markets increased in all regions during the year ended December 31, 2011 compared to 2010. Sales in the Americas and Europe showed the strongest improvement over relatively low sales levels in 2010 despite depressed residential construction markets and limited spending by state and local governments due to budget constraints. The sales growth in the Asia-Pacific region was driven by increased demand in Japan, where customers have increased production due to higher export sales to the Americas, and to rebuild damage caused by the earthquake earlier in the year. Sales in China were strong during the first half of the year due to increased demand for rollers and transit mixers, while sales declined in the second half of the year due to reduced demand and credit restrictions imposed by the Chinese government.
Specialty
Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management and waste recycling. Overall sales into the specialty vehicle market increased 30 percent compared to 2010. Sales in the Americas benefited from increased demand for aerial lifts due to renewed investments in aging rental fleets, as well as a strong overall market in Brazil. Sales in Europe improved due to strengthening forestry and mining markets, as well as increased demand for telehandlers, truck-mounted cranes, and aerial lifts. Sales in the Asia-Pacific region improved as some new and existing customers in China and Australia increased production.
Distribution
Products related to all of the above markets are sold to distributors, who then serve smaller OEMs.

21



Order Backlog
The following table shows the Company's order backlog and orders written activity for 2010 and 2011, separately identifying the impact of currency fluctuations.
(in millions)
2010
 
Currency
fluctuation
 
Underlying
change
 
2011
Backlog at December 31
$
814.2

 
$
(4.4
)
 
$
130.0

 
$
939.8

Orders written
1,955.8

 
66.9

 
168.1

 
2,190.8

Total order backlog at the end of 2011 was $939.8 million, compared to $814.2 million at the end of 2010. On a comparable basis, excluding the impact of currency fluctuation, order backlog increased 16 percent compared to 2010. New sales orders written for 2011 were $2,190.8 million, an increase of 9 percent compared to 2010, excluding the impact of currency fluctuations.
Business Segment Results
The following discussion of operating results by reportable segment relates to information as presented in Note 17 in the Notes to Consolidated Financial Statements. Segment income is defined as the respective segment's portion of the total Company's net income, excluding net interest expense, income taxes, and noncontrolling interest. Hydrostatics products include hydrostatic transmissions and related products that transmit the power from the engine to the wheel to propel a vehicle. Work Function products include steering motors and motors that transmit power for the work functions of the vehicle. Controls products include electrohydraulic controls, microprocessors, and valves that control and direct the power of a vehicle. Stand-Alone Businesses include open circuit gear pumps and motors, cartridge valves and HICs, directional control valves, inverters and light duty hydrostatic transmissions that transmit, control and direct the power of a vehicle, but are marketed under their own names and are managed as stand-alone businesses.
The following table provides a summary of each segment's net sales and segment income, separately identifying the impact of currency fluctuations during the year.
(in millions)
2010
 
Currency
fluctuation
 
Underlying
change
 
2011
Net sales
 
 
 
 
 
 
 
Hydrostatics
$
717.2

 
$
30.6

 
$
200.4

 
$
948.2

Work Function
320.7

 
15.2

 
41.6

 
377.5

Controls
243.2

 
13.2

 
66.1

 
322.5

Stand-Alone Businesses
359.5

 
6.2

 
43.6

 
409.3

Segment income (loss)
 
 
 
 
 
 
 
Hydrostatics
$
165.0

 
$
6.4

 
$
39.1

 
$
210.5

Work Function
28.7

 
2.6

 
27.9

 
59.2

Controls
49.1

 
3.4

 
26.0

 
78.5

Stand-Alone Businesses
35.8

 
0.7

 
22.1

 
58.6

Global Services and other expenses, net
(31.7
)
 
(1.4
)
 
(12.2
)
 
(45.3
)
Hydrostatics Segment
Sales in the Hydrostatics segment increased 28 percent during 2011 compared to 2010, excluding the effects of currency fluctuations. Segment income increased $39.1 million, excluding the effects of currency fluctuations, primarily due to higher sales volumes. Partially offsetting the positive impact of increased sales in 2011 were increases in premium freight costs of $2.3 million and warranty and field recall costs of $2.3 million. Total operating costs increased $25.7 million, with the largest increase in research and development costs. In 2010 the Hydrostatics segment recognized a $0.8 million gain on sale of equipment.

22



Work Function Segment
The Work Function segment experienced a $27.9 million increase in segment income in 2011 compared to 2010, excluding the effects of currency fluctuations, primarily due to a 13 percent increase in sales. Gross profit margin increased 4 percentage points due to increased sales volume in relation to fixed production costs, which decreased by $3.5 million. Also contributing to the increase in segment income was a reduction in warranty and field recall costs of $0.8 million, as well as a $0.6 million gain on the sale of a building in Lawrence, Kansas. In 2010 the Work Function segment recognized restructuring costs of $4.0 million related to the closure of the Lawrence facility and costs of $1.1 million related to future lease payments on the Kolding, Denmark facility.
Controls Segment
Net sales in the Controls segment increased 27 percent in 2011 compared to 2010, excluding the effects of currency fluctuations. Segment income increased $26.0 million in 2011 largely due to higher sales volume and a change in product mix. Also contributing to the increase in segment income was the fact that in 2010 the Controls segment recognized a loss on sale of business of $3.5 million, net of royalty income, related to the exit from the electric drives business. Partially offsetting the increased sales and reduced costs related to these items in 2011 were increased warranty and field recall costs of $3.1 million. Total operating costs increased $7.0 million, with the largest increase in research and development costs.
Stand-Alone Businesses Segment
Net sales in the Stand-Alone Businesses segment increased 12 percent in 2011 compared to 2010, excluding the effects of currency fluctuations. Segment income increased $22.1 million primarily due to higher sales volume, as well as reductions in fixed production costs of $1.9 million and operating costs of $2.7 million. Also contributing to the increase in segment income was the fact that in 2010 the Stand-Alone Businesses segment recognized restructuring costs of $1.8 million related to the closure of the Lawrence, Kansas facility. Partially offsetting the increased sales and reduced costs related to these items in 2011 were increased warranty and field recall costs of $2.8 million.
Global Services and other expenses, net
Segment costs in Global Services and other expenses, net, relate to internal global service departments. Global services include such costs as consulting for special projects, tax and accounting fees paid to outside third parties, internal audit, certain insurance premiums, and the amortization of intangible assets from certain business combinations. Global services and other expenses increased $12.2 million, or 38 percent excluding the impacts of currency. Contributing to the increase in 2011 were European restructuring costs of $4.7 million, as well as a $3.9 million increase in long-term incentive plan costs compared to 2010. In addition, the Company recognized a $5.0 million loss on foreign currency transactions in 2011 compared to a gain of $1.3 million in 2010. The negative impact of these items was partially offset by the fact that in 2010 the Company recognized costs of $1.5 million related to a pension settlement with a former executive and costs of $3.5 million related to a stock tender offer initiated by Danfoss Acquisition, Inc., which expired without the minimum tender conditions being satisfied.
Income Taxes
The Company recognized tax expense of $79.4 million on pre-tax income of $339.2 million resulting in an effective tax rate of 23.4 percent.
In 2011 the Company reversed $22.9 million of valuation allowance related to net deferred tax assets in Denmark. Future taxable income projections support the realization of the Denmark net deferred tax assets. The Company's worldwide earnings mix also impacted 2011 income tax expense.
Market Risk
The Company is naturally exposed to various market risks, including changes in foreign currency exchange rates and interest rates.
Foreign Currency Changes
The Company has operations and sells its products in many different countries of the world and therefore, conducts its business in various currencies. The Company's financial statements, which are presented in U.S. dollars, can be impacted by foreign exchange fluctuations through both translation risk and transaction risk.
Translation risk is the risk that the financial statements of the Company, for a particular period or as of a certain date, may be affected by changes in the exchange rates that are used to translate the financial statements of the Company's operations from foreign currencies into U.S. dollars. Transaction risk is the risk from the Company receiving its sale proceeds or holding its assets in a currency different from that in which it pays its expenses and holds its liabilities.

23



In previous years, the Company had been well balanced between its U.S. and European operations because the Company generated its sales in the same region in which it incurred its expenses, or shipped products between geographic regions on a balanced basis. However, in recent years the balance has shifted and the amount of sales made in U.S. dollars has increased, whereas the production costs are in a currency other than the U.S. dollar, increasing the Company's exposure to transaction risk. In 2012 the Company sold a total of $190.2 million of product into the U.S. that had been produced in European-based currencies compared to sales into Europe of $51.9 million of product produced in U.S. dollars. In 2012 the results were unfavorable, as the dollar weakened slightly in comparison to other currencies. The Company produces and sells its product in several regions of the world, however the U.S. and European transactions comprise the majority of the imbalance between regions.
The Company enters into forward contracts to minimize the impact of currency fluctuations on cash flows related to forecasted sales denominated in currencies other than the functional currency of the selling location. The forecasted sales represent sales to both external and internal parties. Any effects of the forward contracts related to sales to internal parties are eliminated in the consolidation process until the related inventory has been sold to an external party. The forward contracts qualify for hedge accounting and therefore are subject to effectiveness testing at the inception of the contract and throughout the life of the contract. In 2012, as a result of hedge accounting for the forward contracts, the Company recognized a decrease to net sales of $3.4 million and a decrease to other expense of $0.2 million. The fair value of forward contracts included on the balance sheet at December 31, 2012 was a net asset of $1.4 million.
The Company is also impacted by translation risk in terms of comparing results from period to period. Fluctuations of currencies against the U.S. dollar can be substantial and therefore, significantly impact comparisons with prior periods. Translation affects the comparability of both the income statement and the balance sheet. As shown in the table below, the translation impact on net sales was significant in 2012 as the euro weakened against the U.S. dollar for much of the first half of the year while it strengthened during the second half of the year.
 
Percentage Sales Growth Over Prior Year
 
2012
 
2011
 
2010
As Reported
(6.9
)%
 
25.4
%
 
41.6
%
Without Currency Translation Impact
(3.9
)
 
21.4

 
41.9

The change in the exchange rate affects the comparability of the balance sheet between 2012 and 2011 as the balance sheet accounts are translated at the exchange rate as of December 31. The U.S. dollar weakened 2.2 percent against the euro and 1.8 percent against the Danish kroner from December 31, 2011 to December 31, 2012. The weakening of the dollar has resulted in approximately 32 percent of the Company's total balance sheet being stated approximately 2.0 percent higher than the prior year.
Interest Rate Changes
The following table summarizes the maturity of the Company's fixed-rate debt obligations (amounts in millions):
 
Fixed Rate Debt
2013
$
0.5

2014
0.1

2015
178.3

2016

2017

2018 and thereafter

Total
$
178.9


24



Liquidity and Capital Resources
The Company's principal sources of liquidity have been cash flow from operations and from its credit facilities. The Company historically has accessed diverse funding sources, including short-term and long-term unsecured bank lines of credit in the Americas, Europe, and Asia.

The Company has a Credit Agreement (Danfoss Agreement) with Danfoss A/S that is unsecured and includes a term loan of approximately $178 million ($140 million and 29 million euro) that will mature in September 2015. In September 2012, upon the request of the Company, the term loan amount was reduced by approximately $20 million (16 million euro). A prepayment penalty of $0.8 million was incurred as a result of the term loan reduction. The Credit Agreement also had a revolving credit facility that permitted borrowings of approximately $100 million ($75 million and 20 million euro) at December 31, 2011. At the Company's request the revolving credit facility was canceled in July 2012. The Company did not expect to borrow against the revolving facility due to its strong cash position and therefore canceled the facility to reduce expense related to commitment fees. The Danfoss Agreement contains no financial covenants but it does contain a number of affirmative and negative covenants that, among other things, require the Company to obtain the consent of Danfoss A/S prior to engaging in certain types of transactions.

As a result of strong cash flow and a strong balance sheet, the Company announced in March that its Board of Directors had reinstated a quarterly cash dividend. A cash dividend of $0.35 per share was declared in each quarter during 2012. The Company had suspended the payment of dividends in March 2009 in response to the recession. The Company expects to continue to generate strong cash flow and therefore plans to continue paying dividends on a quarterly basis going forward.
    
As the Company has significant international operations, a portion of the cash on the balance sheet is held in foreign subsidiaries. The repatriation of cash balances from certain foreign subsidiaries could have adverse tax consequences or be subject to capital controls, however, those balances are generally available without legal restrictions to fund local ordinary business operations. With few exceptions, the Company intends to reinvest these earnings permanently and, therefore, U.S. income taxes have not been provided for undistributed earnings of foreign subsidiaries. At December 31, 2012 $163.6 million, or 37 percent, of the cash, cash equivalents and cash deposited with related persons is on the balance sheet of subsidiaries for which U.S. income taxes have not been provided for the undistributed earnings.

The Company expects to have sufficient sources of liquidity to meet its future funding needs for the foreseeable future.
Cash Flows from Operations
Cash provided by operating activities was $335.3 million in 2012 compared to $374.2 million in 2011. Contributing to the decrease was a $47.7 million reduction in net income in 2012 compared to 2011, as well as $14.6 million reduction in cash provided by the change in net deferred income tax assets. Also contributing to the decrease was a $9.9 million reduction in cash provided by changes in accrued liabilities, while changes in other current assets used $0.3 million in cash in 2012 while providing cash of $10.2 million in 2011. The reduced cash flow related to these items was partially offset by changes in net pension and postretirement benefits, which provided cash of $8.3 million in 2012 while using $6.3 million in cash in 2011. In addition, changes in net working capital, consisting of accounts receivable, inventories, and accounts payable, provided cash of $27.5 million in 2012 while using $19.4 million in 2011. The positive trend in net working capital was driven by inventory reduction efforts in 2012.
Total cash of the Company, excluding cash deposited with related parties, increased $9.7 million from December 31, 2011 to December 31, 2012. At December 31, 2012 cash balances in China totaled $39.1 million, an increase of $11.9 million from December 31, 2011. The Company's Chinese entities did not have cash deposited with related parties at December 31, 2012 or December 31, 2011. Due to the nature of the governmental and other regulatory controls, it is difficult to transfer cash out of China for reasons other than payment for goods shipped into the country. As the Company continues to consider expanding its manufacturing capabilities in low-cost regions, it will make every effort to utilize the cash balances in those regions to fund future expansions. Total cash of the Company, including cash deposited with related parties, increased $190 million from December 31, 2011 to December 31, 2012 due to strong cash flows during the year.
Cash Used in Investing Activities
Cash used in investing activities totaled $228.7 million in 2012 compared to $228.0 million in 2011. The Company invested an additional $180.6 million of excess cash with related persons during the year. The majority of cash deposited with related persons relates to excess cash loaned to Danfoss A/S, which may be offset against the term loan outstanding under the Danfoss Agreement if Danfoss A/S were not able to repay the cash. The Company had five deposits of cash with Danfoss A/S, totaling $336.1 million and $168.5 million at December 31, 2012 and 2011, respectively. Capital expenditures during the period were $48.6 million compared to $51.8 million in 2011.

25



Cash Used in Financing Activities
In March 2012 the Company announced that its Board of Directors had reinstated a quarterly cash dividend, which had been suspended since March 2009. The Company paid cash dividends of $50.9 million in 2012. Net repayment of borrowings used $21.9 million of cash during 2012 compared to $82.6 million in 2011. The Company also paid $0.8 million in debt extinguishment costs during 2012.
The Company makes varying distributions to its noncontrolling interest partners from its various joint venture activities depending on the amount of undistributed earnings of the business and the needs of the partners. Distributions totaled $24.4 million in 2012 compared to $17.1 million in 2011. In 2010 the Company received $13.2 million net cash from Danfoss A/S in connection with the tax sharing agreement in Denmark which was repaid to Danfoss in 2011.
Contractual Cash Obligations
The majority of the Company's contractual obligations to make cash payments to third parties are for financing obligations. These include future lease payments under both operating and capital leases. The following table discloses the Company's future commitments under contractual obligations as of December 31, 2012:
Contractual Cash Obligations(1)
Total
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018 and thereafter
Long-term debt
$
178.9

 
$
0.5

 
$
0.1

 
$
178.3

 
$

 
$

 
$

Interest on long-term debt
35.4

 
13.2

 
13.2

 
9.0

 

 

 

Capital leases
0.7

 
0.6

 
0.1

 

 

 

 

Operating leases
89.2

 
17.9

 
15.3

 
12.4

 
7.5

 
6.8

 
29.3

Rental and service agreements with related person Danfoss A/S
42.8

 
8.7

 
8.5

 
8.5

 
8.4

 
8.4

 
0.3

Service Agreements
$
13.2

 
$
6.2

 
$
3.8

 
$
2.7

 
$
0.3

 
$
0.2

 
$

Total contractual cash obligations
$
360.2

 
$
47.1

 
$
41.0

 
$
210.9

 
$
16.2

 
$
15.4

 
$
29.6


The following assumptions are used in the calculation of the contractual cash obligations:
(1)
Commitments denominated in a currency other than the U.S. dollar are translated at the December 31, 2012 exchange rate.
In addition to the above contractual obligations, the Company has certain other funding needs that are non-contractual by nature, including funding of certain pension plans and payment of dividends. In 2013 the Company anticipates contributing $14.9 million to its pension and health benefit plans. In 2012 the Company declared a dividend of $17.0 million to be paid in 2013.
Other Matters
Critical Accounting Estimates
The SEC's guidance surrounding the disclosure of critical accounting estimates requires disclosures about estimates a company makes in applying its accounting policies. However, such discussion is limited to "critical accounting estimates," or those that management believes meet two criteria: 1) the accounting estimate must require a company to make assumptions about matters that are highly uncertain at the time the accounting estimate is made, and 2) different estimates that the company reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the presentation of the company's financial condition, changes in financial condition or results of operations.
Besides the estimates that meet the two criteria for a "critical estimate" above, the Company makes many other accounting estimates in preparing its financial statements and related disclosures. All estimates, whether or not deemed critical, can affect the reported amounts of assets, liabilities, revenues, and expenses as well as disclosures of contingent assets and liabilities. Estimates are based on experience and information available prior to the issuance of the financial statements. Materially different results can occur as circumstances change and additional information becomes known, including estimates not deemed "critical" under the SEC's guidance.
The discussion below should be read in conjunction with disclosures elsewhere in this discussion and in the Notes to the Consolidated Financial Statements related to estimates, uncertainties, contingencies, and new accounting standards. Significant

26



accounting policies are discussed in Note 1 to the Consolidated Financial Statements beginning on page F-6. The development and selection of accounting estimates, including those deemed "critical," and the associated disclosures in this discussion, have been discussed by management with the audit committee of the Board of Directors.
Inventory Valuation    As a manufacturer in the capital goods industry, inventory is a substantial portion of the assets of the Company, amounting to over 12 percent of total assets at December 31, 2012. The Company must periodically evaluate the carrying value of its inventory to assess the proper valuation. This includes recording period adjustments as needed to 1) record expenses due to excess capacity, 2) provide for excess and obsolete inventory, and 3) ensure that inventory is valued at the lower of cost or market. On a quarterly basis, management within each segment performs an analysis of the underlying inventory to identify the need for appropriate write-downs to cover each of these items. In doing so, management applies consistent practices based upon historical data such as actual loss experience, past and projected usage, actual margins generated from trade sales of its products, and finally its best judgment to estimate the appropriate carrying value of the inventory.
Warranty Provisions    The Company warrants its various products over differing periods depending upon the type of product and application. Consequently, the Company records liabilities for the estimated warranty costs that may be incurred under its basic warranty based on past trends of actual warranty claims compared to the actual sales levels to which those claims apply. These liabilities are accrued at the time the sales of the products are recorded. Factors that affect the Company's warranty liability include the number of units in the field currently under warranty, historical and anticipated rates of warranty claims on those units and the cost per claim to satisfy the Company's warranty obligation. The anticipated rate of warranty claims is the primary factor impacting the Company's estimated warranty obligation. Each quarter, the Company reevaluates its estimates to assess the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
In addition to its normal warranty liability, the Company, from time to time in the normal course of business, incurs costs to repair or replace defective products with a specific customer or group of customers. The Company refers to these as "field recalls" and in these instances, the Company will record a specific provision for the expected costs it will incur to repair or replace these products utilizing information from customers and internal information regarding the specific cost of materials and labor. Typically, field recalls are infrequent in occurrence, however, when they occur, field recalls can be for a large number of units and quite costly to rectify. Because of the sporadic and infrequent nature of field recalls, and due to the range of costs associated with field recalls, the Company cannot accurately estimate these costs at the time the products are sold. Therefore, these costs are recorded at the time information becomes known to the Company. As the field recalls are settled, the Company relieves the specific liability related to that field recall. These specific field recall liabilities are reviewed on a quarterly basis.
Goodwill and Long-Lived Asset Recovery    A significant portion of the Company's total assets consist of property, plant and equipment (PP&E) and definite life intangibles, as well as goodwill. Changes in technology or in the Company's intended use of these assets, as well as changes in the broad global economy in which the Company operates, may cause the estimated period of use or the carrying value of these assets to change.
This requires the Company to periodically assess the estimated useful lives of its assets in order to match, through depreciation and amortization, the cost of those assets with the benefits derived over the period of usefulness. The useful lives of these assets can be shortened through greater use due to volume increases, a change in strategy regarding production of a certain product, rapidly changing technology such as the use of electronics and computer-operated controls, and through inadequate maintenance. Despite management's best efforts to determine the appropriate useful lives of its equipment, certain situations may arise that lead to an asset or group of assets becoming impaired, meaning their economic value becomes less than the value at which the Company is carrying the asset on its books. Examples of these situations are product rationalization efforts or restructuring of manufacturing facilities. When these situations arise, the Company tests the assets for impairment and will write down the asset in the period when the impairment becomes known. Goodwill is tested for impairment at least annually. Goodwill is also tested if an event occurs or conditions change that would more likely than not reduce the fair value of a reporting unit below its carrying value (triggering event).
The Company completes its annual goodwill impairment valuation on December 31 each year. The Company identified six reporting units that are either operating segments or one level below operating segments. In performing the impairment valuation, the Company considers declines in market values, and reconciles the sum of the estimated fair values of its reporting units to the Company's market value (based on its stock price), plus a reasonable control premium, which is estimated as that amount which would be received to sell the Company as a whole in an orderly transaction between market participants.
When testing for goodwill impairment, the Company performs a first step of the goodwill impairment test to identify a potential impairment. In doing so, the Company compares the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, goodwill may be impaired and a second step is performed to measure the amount of any impairment loss. The Company determined that the fair value of goodwill for all reporting units was greater than their carrying values at December 31, 2012.

27



Estimates about fair value used in the first step of the goodwill impairment tests are calculated using an income approach based on the present value of future cash flows of each reporting unit. The income approach is supported by other valuation approaches, such as similar transaction and guideline analyses. Under the income approach, the Company determines fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions among others. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairments in future periods. At December 31, 2012 the Company had $35.3 million of goodwill related to its hydrostatics and electronic components reporting units, which was tested for impairment and determined to not be impaired.
The Company tests its long-lived assets for recoverability at any time that an event or change in circumstances occurs that indicates the carrying amount of the long-lived assets may not be recoverable. Events or circumstances that may trigger a recoverability test include a significant change in the market price of similar long-lived assets; a change in the use of the long-lived asset due to product rationalization efforts or restructuring of manufacturing facilities; a significant adverse change in legal factors, business climate, industry or economic conditions ; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; historical and projected operating losses associated with the use of a long-lived asset; or an expectation that more likely than not, a long-lived asset will be disposed of significantly before the end of its previously estimated useful life. The Company reviews these factors quarterly to determine whether a triggering event has occurred. No triggering events were noted in 2012.
Valuation of Trade Receivables    The Company records trade receivables due from its customers at the time a sale is recorded in accordance with its revenue recognition policy. The future collectability of these amounts can be impacted by the Company's collection efforts, the financial stability of its customers, and the general economic climate in which it operates. The Company applies a consistent practice of establishing an allowance for accounts that it believes may become uncollectible through reviewing the historical aging of its receivables, looking at the historical losses incurred as a percentage of net sales, and by monitoring the financial strength of its customers regarding specific outstanding accounts receivable balances. In addition, local customary practices have to be taken into account due to varying payment terms being applied in various parts of the world where the Company conducts its business. If the Company becomes aware of a customer's inability to meet its financial obligations (e.g., where it has filed for bankruptcy), the Company establishes a specific allowance for the potential bad debt to reduce the net recognized receivable to the amount it reasonably believes will be collected. The valuation of trade receivables is reviewed quarterly.
Workers Compensation    The Company has an insurance policy to cover workers compensation claims in the U.S., in which the Company pays the first $0.25 million per claim, per incident. The Company establishes its workers compensation reserve based on historic growth factors of claims and an estimate of incurred, but not reported claims. This analysis is performed on a quarterly basis.
U.S. Health Care Costs    The Company self insures its U.S. health care costs for eligible employees and their qualified dependents. The Company purchases individual stop loss coverage to limit the exposure stemming from high value claims from any single member in a given year. The Company's individual stop loss coverage limit, which excludes vision, dental, and prescription drug costs, is $0.3 million. The Company establishes reserves for its health care cost based on historic claims data and an estimate of incurred, but not reported claims. This analysis is performed on a quarterly basis.
Pensions    The Company has defined benefit pension plans for a portion of its employees. These plans are funded with plan assets. The measurement of the Company's pension obligations and costs is dependent on a variety of assumptions determined by management and used by the Company's actuaries. These assumptions include estimates of the present value of projected future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and other experience. These assumptions may have an effect on the amount and timing of future contributions. The plan trustees conduct independent valuations of the fair value of pension plan assets.
The assumptions used in developing the required estimates include the following key factors: discount rates, inflation, salary growth, expected return on plan assets, retirements rates, and mortality rates.
The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. The Company sets its rate to reflect the yield of a portfolio of high-quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits.

28



The inflation assumption is based on an evaluation of external market indicators. The salary growth assumptions reflect the Company's past actual experience, the near-term outlook and assumed inflation. The expected return on plan assets reflects asset allocations, long-term investment strategy, and the views of investment managers and other large pension plan sponsors. Retirement and mortality rates are based primarily on actual plan experience and standard industry actuarial tables, respectively. The effects of actual results differing from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense in such future periods.
The Company's funding policy for the U.S. plans is to contribute amounts sufficient to meet the minimum funding requirement of the Employee Retirement Income Security Act of 1974, plus any additional amounts the Company may deem to be appropriate. In 2013 the Company anticipates contributing $8.9 million to its U.S. plans, $1.9 million to its German plans, and $0.9 million to its U.K. plans.
Postretirement Benefits Other Than Pensions    The Company provides postretirement health care benefits for certain employee groups in the U.S. This plan is contributory and contains certain other cost-sharing features such as deductibles and coinsurance. The Company does not pre-fund this plan and has the right to modify or terminate this plan in the future.
The postretirement liability, which is determined on an actuarial basis, is recognized in the Company's Consolidated Balance Sheets and the postretirement expense is recognized in the Consolidated Statements of Operations. The Company must determine the actuarial assumption for the discount rate used to reflect the time value of money in the calculation of the accumulated postretirement benefit obligation for the end of the current year and to determine the postretirement cost for the subsequent year. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. The Company sets its rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits.
In addition, the Company must determine the actuarial assumption for the health care cost trend rate used in the calculation of the accumulated postretirement benefit obligation for the end of the current year and to determine the net periodic postretirement benefit cost for the subsequent year. As of December 31, 2012 a 1 percentage point change in the assumed health care cost trend rate would impact the expense recognized in 2012 by less than $0.1 million and would affect the postretirement benefit obligation by $1.0 million. In 2013 the Company anticipates contributing $3.2 million to this plan.
Deferred Income Taxes and Valuation Allowances    Tax regulations may require items to be included in the tax return at different times than the items are reflected in the financial statements. Some of the differences are permanent, such as expenses that are not deductible on a tax return, and some of the differences are temporary such as the rate of depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally are attributable to items that can be used as a tax deduction or credit in a tax return in future years but the amount has already been included as an expense in the financial statements. Deferred tax liabilities generally represent deductions that have been taken on the tax return but have not been recognized as expense in the financial statements. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Management believes it is more likely than not that the Company will realize the benefits of the net deferred tax assets reported on the Consolidated Balance Sheets.
Recently Adopted Accounting Principles —

In May 2011 the Financial Accounting Standards Board (FASB) issued new accounting guidance that amends some fair value measurement principles and disclosure requirements. The new guidance states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The Company adopted this guidance as of January 1, 2012 with no impact on the consolidated financial statements.

In June 2011 the FASB amended requirements for the presentation of other comprehensive income (OCI), requiring all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this guidance in the first quarter of 2012. Upon adoption, certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications have no impact on previously reported financial position, results of operations or cash flows.

In September 2011 the FASB issued guidance to amend and simplify the rules related to testing goodwill for impairment. The revised guidance allows an entity to make an initial qualitative evaluation, based on the entity's events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is more likely than not greater than its carrying amount, the two-

29



step goodwill impairment test is not required. Annual impairment tests are performed by the Company in the fourth quarter of each year. The adoption of this updated authoritative guidance did not have an impact on the consolidated financial statements.

Outlook
Due to uncertainty in the global economy, Company management expects a moderate change in sales during 2013 when compared to 2012, with sales increasing as much as 7 percent or decreasing as much as 3 percent. Capital expenditures during 2013 are expected to be $65.0 to $75.0 million.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk.
Certain market risks are discussed on pages 23 through 24 of this report, and the other disclosure requirements are considered either not applicable or not material.

Item 8.    Financial Statements and Supplementary Data.
The Consolidated Financial Statements, Report of Independent Registered Public Accounting Firm, and Report of Management are presented on pages F-1 through F-34 of this report.
Item 9A.    Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934 (Exchange Act), the Company's management carried out an evaluation, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2012. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2012, the Company's disclosure controls and procedures were effective to ensure that (a) information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (b) such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
The Company's management, under the supervision of the Company's Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining a system of internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). This system is augmented by written policies and procedures, careful selection and training of financial management personnel, a continuing management commitment to the integrity of the system, and examinations by an internal audit function that coordinates its activities with the Company's Independent Registered Public Accounting Firm. Because of its inherent limitations, however, even the best internal control over financial reporting may not prevent or detect misstatements. It is also important to note that controls that are effective at a particular point in time may become ineffective at a later time due to changed conditions that may require new or modified controls or due to a deterioration in compliance with the controls. There were no changes in the Company's internal control over financial reporting during the fourth quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
As required by Rules 13a-15(c) and 15d-15(c) of the Exchange Act, the Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company's internal control over financial reporting, as of December 31, 2012, based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, the Company's management concluded that the Company's internal control over financial reporting was effective as of December 31, 2012.
KPMG LLP, an independent registered public accounting firm has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and, as a part of the audit, has issued its attestation report, included in Item 8, on the effectiveness of the Company's internal control over financial reporting.


30



PART III

Item 10.    Directors, Executive Officers and Corporate Governance
Information regarding directors of the Company is set forth under the section entitled "ELECTION OF DIRECTORS" of the Company's Proxy Statement for the annual meeting of stockholders to be held June 13, 2013 (the "Proxy Statement"), and is incorporated herein by reference. Information regarding executive officers of the Company is set forth in Part I of this report under the caption "Executive Officers of the Company." Information regarding the Company's code of conduct and code of ethics is set forth under the section entitled "GOVERNANCE OF THE COMPANY—Code of Conduct and Code of Ethics" of the Proxy Statement, and is incorporated herein by reference. Information regarding the Company's audit committee is set forth under the section entitled "GOVERNANCE OF THE COMPANY—Audit Committee" of the Proxy Statement and is incorporated herein by reference. Copies of the Worldwide Code of Legal and Ethical Business Conduct and the Code of Ethics for Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer or Controller and other Senior Finance Staff are posted on the Company's website at http://ir.sauer-danfoss.com, and printed copies of such codes may be obtained, without charge, by written request addressed to Kenneth D. McCuskey, Corporate Secretary, 2800 E. 13th Street, Ames, Iowa 50010.
The Company's Audit Committee Charter, Compensation Committee Charter, and Corporate Governance Guidelines are posted on the Company's website set forth in the preceding paragraph. Also, printed copies of such charters and guidelines may be obtained, without charge, by sending a written request to the Corporate Secretary at the address set forth in the preceding paragraph.

Item 11.    Executive Compensation
Information as to Executive Compensation is set forth under the section entitled "EXECUTIVE COMPENSATION" of the Proxy Statement, and is incorporated herein by reference. Information regarding compensation committee interlocks is set forth under the section entitled "Compensation Committee Interlocks and Insider Participation" of the Proxy Statement, and is incorporated herein by reference. The Company's compensation committee's report is set forth under the section entitled "Compensation Committee Report" of the Proxy Statement, and is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding securities authorized for issuance under equity compensation plans is set forth in Part II on page 11 of this report. Information regarding security ownership is set forth under the section entitled "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" of the Proxy Statement, and is incorporated herein by reference.

Item 13.    Certain Relationships and Related Transactions, and Director Independence
In connection with the acquisition of Danfoss Fluid Power in May 2000 and the acquisition of additional assets and business operations of the fluid power business of Danfoss A/S in January 2001, the Company has entered into several agreements with Danfoss A/S to purchase ongoing operational services from Danfoss A/S. Information regarding these relationships and agreements, in addition to other related person transactions, is set forth in Note 14 in the Notes to Consolidated Financial Statements on page F-29 of this report, and is incorporated herein by reference.
The Company has a Credit Agreement (Danfoss Agreement) with Danfoss A/S, the Company's majority stockholder, that is unsecured and includes term loans of $178 million ($140 million and 29 million euro) that will mature in September 2015. Information regarding this relationship and loan transaction is set forth in Notes 8 and 14 in the Notes to Consolidated Financial Statements on pages F-16 through F-17 and F-29 of this report, respectively, and is incorporated herein by reference.
Additional information regarding related person transactions is set forth under the section entitled "GOVERNANCE OF THE COMPANY—Transactions with Related Persons" of the Proxy Statement, and is incorporated herein by reference. Information about the independence of the Company's directors is set forth in the Proxy Statement under the section entitled "GOVERNANCE OF THE COMPANY" under the subheadings "Board of Directors" and "Basis for Board Determination of Independence of Directors" and is incorporated herein by reference.

  

31



Item 14.    Principal Accountant Fees and Services
Information regarding accounting services and fees is set forth under the section entitled "RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM" of the Proxy Statement, and is incorporated herein by reference.


32



PART IV

Item 15.    Exhibits and Financial Statement Schedules.
(a)
The following documents are filed as a part of this report.

(1)
The following consolidated financial statements and related information, included in Item 8, are filed as a separate section of this report:
Consolidated Statements of Operations for the years ended December 31, 2012, 2011, and 2010, on page F-1.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011, and 2010, on page F-2.
Consolidated Balance Sheets as of December 31, 2012 and 2011, on page F-3.
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2012, 2011, and 2010, on page F-4.
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011, and 2010, on page F-5.
Notes to Consolidated Financial Statements on pages F-6 through F-32.
Report of Independent Registered Public Accounting Firm, KPMG LLP, and Report of Management on pages F-33 through F-34.
(2)
The following schedule:
Schedule II, Valuation and Qualifying Accounts, on page F-35.
All other schedules for which provision is made in Regulation S-X of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(3)
Exhibits
 
Exhibit No.
 
Description of Document
3.1
 
The Amended and Restated Certificate of Incorporation of the Company dated July 10, 2008, is attached as Exhibit 3.1 to the Company's Form 8-K filed on July 11, 2008, and is incorporated herein by reference.
3.2
 
The Amended and Restated Bylaws of the Company dated July 10, 2008, are attached as Exhibit 3.2 to the Company's Form 8-K filed on July 11, 2008, and are incorporated herein by reference.
4
 
The form of Certificate of the Company's Common Stock, $.01 Par Value, is attached as Exhibit 4 to the Company's Form 10-Q filed on August 16, 2000 and is incorporated herein by reference.
10.1(a)
 
The form of Indemnification Agreement entered into between the Company and certain of its directors and officers is attached as Exhibit 10.1(c) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(b)
 
The Lease Agreement for the Company's Osaka, Japan, facility is attached hereto.
10.1(c)
 
The Lease Agreement for the Company's Minneapolis, Minnesota, facility is attached as Exhibit 10.1(h) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(d)
 
Amendment No. 1 to the Lease Agreement for the Company's Minneapolis, Minnesota facility, effective March 1, 2003, is attached as Exhibit 10.1(e) to the Company's Form 10-K filed on March 24, 2009, and is incorporated herein by reference.
10.1(e)
 
Amendment No. 2 to the Lease Agreement for the Company's Minneapolis, Minnesota facility, effective March 28, 2007, is attached as Exhibit 10.1(f) to the Company's Form 10-K filed on March 24, 2009, and is incorporated herein by reference.

33




Exhibit No.
 
Description of Document
10.1(f)
 
The Lease Agreement for the Company's Shanghai/Pudong, China, facility is attached as Exhibit 10.1(j) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(g)
 
The Indenture of Lease Agreement for the Company's Nordborg, Denmark, facility effective May 3, 2000, is attached as Exhibit 10.1(ah) to the Company's Form 10-K filed on March 30, 2001, and is incorporated herein by reference.
10.1(h)
 
The Lease Agreement for the Company's leased facility in Caxias do Sul, Brazil, effective July 1, 2007, is attached as Exhibit 10.1(l) to the Company's Form 10-K filed on March 11, 2008, and is incorporated herein by reference.
10.1(i)
 
The Lease Agreement for the Company's leased facility in Reggio Emilia, Italy, effective October 1, 2003, is attached as Exhibit 10.1(m) to the Company's Form 10-K filed on March 11, 2008, and is incorporated herein by reference.
10.1(j)
 
The Lease Agreement for the Company's leased facility in Bielany Wroclawskie, Poland, including Annex 1 effective May 16, 2008, and Annex 2 effective October 28, 2009, is attached as Exhibit 10.1(k) to the Company's Form 10-K filed on March 4, 2010, and is incorporated herein by reference.
10.1(k)
 
The Lease Agreement for the Company's leased facility in Älmhult, Sweden, effective May 2007, is attached as Exhibit 10.1(1) to the Company's Form10-K filed on March 4, 2010, and is incorporated herein by reference.
10.1(l)
 
The Employment Contract effective as of January 1, 2009 by and between Sauer-Danfoss GmbH & Co. OHG and Sven Ruder is attached as Exhibit 10.2 to the Company's Form 8-K filed on January 21, 2009, and is incorporated herein by reference.
10.1(m)
 
The Separation Agreement and General Release dated as of August 29, 2012 by and between Sauer-Danfoss GmbH & Co. OHG, Sauer-Danfoss Inc. and Sven Ruder is attached as Exhibit 10.2 to the Company's Form 10-Q filed on October 25, 2012, and is incorporated herein by reference.
10.1(n)
 
The Executive Employment Agreement with Kenneth D. McCuskey dated December 15, 2008 and effective December 31, 2008, is attached as Exhibit 10.1(u) to the Company's Form 10-K filed on March 24, 2009, and is incorporated herein by reference.
10.1(o)
 
The Executive Employment Agreement with Wolfgang Schramm dated December 15, 2008 and effective December 31, 2008, is attached as Exhibit 10.1(w) to the Company's Form 10-K filed on March 24, 2009, and is incorporated herein by reference.
10.1(p)
 
The Employment Contract dated April 6, 2009 and effective as of May 1, 2009 by and between Sauer-Danfoss GmbH & Co. OHG and Jesper V. Christensen is attached as Exhibit 10.1 to the Company's Form 10-Q filed on May 6, 2009, and is incorporated herein by reference.
10.1(q)
 
The Change in Control Agreement between Sauer-Danfoss (US) Company Inc. and Charles K. Hall dated March 8, 2004, is attached as Exhibit 10.1(x) of the Company's Form 10-K filed on March 4, 2010, and is incorporated herein by reference.
10.1(r)
 
The First Amendment to the Change in Control Agreement between Sauer-Danfoss (US) Company and Charles K. Hall dated December 20, 2008, is attached as Exhibit 10.1(y) of the Company's Form 10-K filed on March 4, 2010, and is incorporated herein by reference.
10.1(s)
 
The Employment Contact effective as of May 1, 2011 by and between Sauer-Danfoss ApS and Helge Joergensen is attached as Exhibit 10.1 to the Company's Form 10-Q filed on August 4, 2011, and is incorporated herein by reference.
10.1(t)
 
The Employment Contract dated as of August 30, 2012 by and between Sauer-Danfoss GmbH and Co. OHG and Eric Alstrom is attached as Exhibit 10.2 to the Company's Form 10-Q filed on October 25, 2012, and is incorporated herein by reference.
10.1(u)
 
The Sauer-Danfoss Inc. 1998 Long-Term Incentive Plan is attached as Exhibit 10.1(p) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
10.1(v)
 
The Amendment, effective May 3, 2000, to the Sauer-Danfoss Inc. 1998 Long-Term Incentive Plan referred to in 10.1(u) above is attached as Exhibit 10.1(v) to the Company's Form 10-Q filed on August 16, 2000, and is incorporated herein by reference.
10.1(w)
 
The Amendment to the Sauer-Danfoss Inc. 1998 Long-Term Incentive Plan effective December 4, 2002, is attached as Exhibit 10.1(bd) to the Company's Form 10-K filed on March 12, 2003, and is incorporated herein by reference.


34



Exhibit No.
 
Description of Document
10.1(x)
 
The Second Amendment to Sauer-Danfoss Inc. 1998 Long-Term Incentive Plan is attached as Exhibit 10 to the Company's Form 8-K filed on August 24, 2006, and is incorporated herein by reference.
10.1(y)
 
The Trademark and Trade Name Agreement dated May 3, 2000, between the Company and Danfoss A/S is attached as Exhibit 10.1(ac) to the Company's Form 10-Q filed on August 16, 2000, and is incorporated herein by reference.
10.1(z)
 
The Sauer-Danfoss Inc. Deferred Compensation Plan for Selected Employees dated December 9, 2003, is attached as exhibit 10.1(bk) to the Company's Form 10-K filed on March 15, 2004, and is incorporated herein by reference.
10.1(aa)
 
The First Amendment to the Sauer-Danfoss Inc. Deferred Compensation Plan for Selected Employees, effective December 31, 2005, is attached as exhibit 9.1 to the Company's Form 8-K filed on December 7, 2005, and is incorporated herein by reference.
10.1(ab)
 
The Sauer-Danfoss Inc. Supplemental Executive Savings & Retirement Plan (as Amended and Restated Effective as of January 1, 2008), is attached as Exhibit 10.1(ao) to the Company's Form 10-K filed on March 24, 2009, and is incorporated herein by reference.
10.1(ac)
 
The First Amendment to the Sauer-Danfoss Inc. Supplemental Executive Savings & Retirement Plan (as Amended and Restated Effective January 1, 2008), is attached hereto.*
10.1(ad)
 
The Sauer-Danfoss Inc. 409A Deferred Compensation Plan for Selected Employees and US Nonemployee Directors (As Amended and Restated Effective as of January 1, 2008), is attached as Exhibit 10.1(ar) to the Company's Form 10-K filed on March 24, 2009, and is incorporated herein by reference.
10.1(ae)
 
The First Amendment to the Sauer-Danfoss Inc. 409A Deferred Compensation Plan for Selected Employees and U.S. Nonemployee Directors (as Amended and Restated Effective January 1, 2008), is attached hereto.*
10.1(af)
 
The Second Amendment to the Sauer-Danfoss Inc. 409A Deferred Compensation Plan for Selected Employees and U.S. Nonemployee Directors (as Amended and Restated Effective January 1, 2008), is attached hereto.*
10.1(ag)
 
The Sauer-Danfoss Inc. 2006 Omnibus Incentive Plan is filed as Appendix A to the Company's Definitive Proxy Statement filed on April 24, 2006, and is incorporated herein by reference.
10.1(ah)
 
The form of Performance Unit Award Agreement under the Sauer-Danfoss Inc. 2006 Omnibus Incentive Plan is attached as Exhibit 10.1 to the Company's Form 8-K filed on April 5, 2007, and is incorporated herein by reference.
10.1(ai)
 
The form of Sauer-Danfoss Inc. 2006 Omnibus Incentive Plan Restricted Stock Award Agreement is attached as Exhibit 10.1(aq) to the Company's Form 10-K filed on March 4, 2010, and is incorporated herein by reference.
10.1(aj)
 
The Sauer-Danfoss Inc. Final Average Pay Supplemental Retirement Benefit Plan (as Amended and Restated Generally Effective January 1, 2008) is attached as Exhibit 10 to the Company's Form 8-K filed on September 17, 2007, and is incorporated herein by reference.
10.1(ak)
 
The First Amendment to the Sauer-Danfoss Inc. Final Average Pay Supplemental Retirement Benefit Plan (as Amended and Restated Effective January 1, 2008), is attached hereto.*
10.1(al)
 
The Amended and Restated Credit Agreement dated as of September 7, 2010 by and between Danfoss A/S and the Company is attached as Exhibit 10.1 to the Company's Form 8-K filed on September 9, 2010, and is incorporated herein by reference.
10.1(am)
 
The Loan Agreement dated as of August 18, 2011 by and between Danfoss A/S and the Company is attached as Exhibit 10.1 to the Company's Form 10-Q filed on November 3, 2011, and is incorporated herein by reference.
10.1(an)
 
The Second Amended and Restated Manufacturing Joint Venture Agreement dated as of October 30, 2012, by and between Sauer-Danfoss Inc., and Daikin Industries, Ltd., is attached hereto.*
21
 
Subsidiaries of the Registrant.*
23.1
 
Consent of Independent Registered Public Accounting Firm.*
31.1
 
Certification by the Chief Executive Officer Pursuant to Rule 13a-14(a).*
31.2
 
Certification by the Chief Financial Officer Pursuant to Rule 13a-14(a).*
32.1
 
Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.*

35



Exhibit No.
 
Description of Document
32.2
 
Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.*
101.INS
 
XBRL Instance Document.*
101.SCH
 
XBRL Taxonomy Extension Schema Document.*
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.*


(b)The exhibits that are listed under Item 15(a)(3) above are filed or incorporated by reference hereunder.

* Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations for the years ended December 31, 2012, 2011, and 2010, (ii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011, and 2010, (iii) Consolidated Balance Sheets at December 31, 2012 and 2011, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011, and 2010, and (v) Notes to Consolidated Financial Statements.

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed to be "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

36



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
SAUER-DANFOSS INC.
 
By:
 
/s/ KENNETH D. MCCUSKEY
 
 
 
Kenneth D. McCuskey
Vice President and Chief Accounting
Officer, Secretary
Date: February 21, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each person signing below also hereby appoints Eric Alstrom and Kenneth D. McCuskey, and each of them singly, his or her lawful attorney-in-fact with full power to execute and file any and all amendments to this report together with exhibits thereto and generally to do all such things as such attorney-in-fact may deem appropriate to enable Sauer-Danfoss Inc. to comply with the provisions of the Securities Exchange Act of 1934 and all requirements of the Securities and Exchange Commission.
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ ERIC ALSTROM
 
Director and President and Chief Executive Officer
 
February 21, 2013
Eric Alstrom
 
 
 
 

/s/ JESPER V. CHRISTENSEN
 
Executive Vice President and Chief Financial Officer, Treasurer
 
February 21, 2013
Jesper V. Christensen
 
 
 
 

/s/ KENNETH D. MCCUSKEY
 
Vice President and Chief Accounting Officer, Secretary
 
February 21, 2013
Kenneth D. McCuskey
 
 
 
 

/s/ NIELS B. CHRISTIANSEN
 
Director
 
February 21, 2013
Niels B. Christiansen
 
 
 
 

/s/ JØRGEN M. CLAUSEN
 
Director
 
February 21, 2013
Jørgen M. Clausen
 
 
 
 

/s/ KIM FAUSING
 
Director
 
February 21, 2013
Kim Fausing
 
 
 
 


37



/s/ RICHARD J. FREELAND
 
Director
 
February 21, 2013
Richard J. Freeland
 
 
 
 

/s/ PER HAVE
 
Director
 
February 21, 2013
Per Have
 
 
 
 

/s/ WILLIAM E. HOOVER, JR.
 
Director
 
February 21, 2013
William E. Hoover, Jr.
 
 
 
 

/s/ JOHANNES F. KIRCHHOFF
 
Director
 
February 21, 2013
Johannes F. Kirchhoff
 
 
 
 

/s/ ANDERS STAHLSCHMIDT
 
Director
 
February 21, 2013
Anders Stahlschmidt
 
 
 
 

/s/ STEVEN H. WOOD
 
Director
 
February 21, 2013
Steven H. Wood
 
 
 
 

38

Sauer-Danfoss Inc. and Subsidiaries

Consolidated Statements of Operations
(Dollars in thousands, except per share data)
 
For the Years Ended December 31,
 
2012
 
2011
 
2010
Net sales
$
1,916,094

 
$
2,057,487

 
$
1,640,583

Cost of sales
1,299,207

 
1,400,330

 
1,142,455

     Gross profit
616,887

 
657,157

 
498,128

Selling, general and administrative
235,069

 
227,968

 
195,494

Research and development
64,072

 
63,996

 
51,575

Loss (gain) on sale of businesses and asset disposals
(70
)
 
590

 
7,632

       Total operating expenses
299,071

 
292,554

 
254,701

       Operating income
317,816

 
364,603

 
243,427

Nonoperating income (expenses):
 
 
 
 
 
     Interest expense
(17,648
)
 
(22,829
)
 
(50,901
)
     Interest income
2,613

 
1,679

 
1,455

     Loss on early retirement of debt
(1,254
)
 
(1,176
)
 
(2,421
)
     Other, net
2,825

 
(3,094
)
 
3,525

        Nonoperating expenses, net
(13,464
)
 
(25,420
)
 
(48,342
)
Income before income taxes
304,352

 
339,183

 
195,085

Income tax
(92,274
)
 
(79,380
)
 
51,183

Net income
212,078

 
259,803

 
246,268

Net income attributable to noncontrolling interest, net of tax
(30,319
)
 
(29,933
)
 
(32,869
)
        Net income attributable to Sauer-Danfoss Inc
$
181,759

 
$
229,870

 
$
213,399

Net income per common share, basic
$
3.75

 
$
4.75

 
$
4.41

Net income per common share, diluted
$
3.75

 
$
4.74

 
$
4.40

Weighted average basic shares outstanding
48,413,138

 
48,402,059

 
48,382,860

Weighted average diluted shares outstanding
48,481,945

 
48,478,627

 
48,469,519

See accompanying notes to consolidated financial statements.


F- 1

Sauer-Danfoss Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income
(Dollars in thousands)
 
For the Years Ended December 31,
 
2012
 
2011
 
2010
Net income
$
212,078

 
$
259,803

 
$
246,268

Other comprehensive income (loss), net of tax:

 

 

Foreign currency translation adjustments
4,395

 
(17,830
)
 
(3,879
)
Pension and postretirement plan adjustments
(8,979
)
 
(1,187
)
 
(16,726
)
Unrealized gains (losses) on hedging activities
3,699

 
(2,069
)
 
(860
)
Other comprehensive loss, net of tax
(885
)
 
(21,086
)
 
(21,465
)
Comprehensive income
211,193

 
238,717

 
224,803

Comprehensive income attributable to noncontrolling interest, net of tax
(28,275
)
 
(32,474
)
 
(36,026
)
Comprehensive income attributable to Sauer-Danfoss Inc.
$
182,918

 
$
206,243

 
$
188,777


See accompanying notes to consolidated financial statements.


F- 2

Sauer-Danfoss Inc. and Subsidiaries

Consolidated Balance Sheets
(Dollars in thousands, except per share data)
 
December 31,
 
2012
 
2011
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
82,252

 
$
72,560

Cash deposited with related persons
358,990

 
178,727

Accounts receivable (net of allowances of $4,350 and $4,361 in 2012 and 2011, respectively)
217,611

 
215,978

Inventories
178,226

 
217,710

Other current assets
73,224

 
75,868

Total current assets
910,303

 
760,843

Property, Plant and Equipment
342,246

 
367,844

Other Assets:
 
 
 
Goodwill
35,255

 
34,474

Other intangible assets, net
15,662

 
16,883

Deferred income taxes
86,303

 
90,512

Other
9,190

 
7,700

Total other assets
146,410

 
149,569

Total Assets
$
1,398,959

 
$
1,278,256

Liabilities and Stockholders' Equity
 
 
 
Current Liabilities:
 
 
 
Long-term debt due within one year
$
479

 
$
955

Accounts payable
168,486

 
177,996

Accrued salaries and wages
78,878

 
67,140

Accrued warranty
26,051

 
29,863

Other accrued liabilities
66,431

 
52,237

Total current liabilities
340,325

 
328,191

Long-Term Debt
178,378

 
199,502

Other Liabilities:
 
 
 
Long-term pension liability
88,779

 
79,717

Postretirement benefits other than pensions
32,682

 
31,488

Deferred income taxes
33,536

 
35,184

Other
28,341

 
26,348

Total other liabilities
183,338

 
172,737

Total liabilities
702,041

 
700,430

Stockholders' Equity:
 
 
 
Preferred stock, par value $.01 per share, authorized 4,500,000 shares, no shares issued or outstanding

 

Common stock, par value $.01 per share, authorized shares 75,000,000 in 2012 and 2011; issued and outstanding 48,457,461 in 2012 and 48,432,860 in 2011
485