NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Lufkin Industries, Inc. and its consolidated subsidiaries (the “Company”) and have been prepared pursuant to the rules and regulations for interim financial statements of the Securities and Exchange Commission. Certain information in the notes to the consolidated financial statements normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America has been condensed or omitted pursuant to these rules and regulations for interim financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals unless specified, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods included in this report have been included. For further information, including a summary of major accounting policies, refer to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the three months ended March 31, 2013, are not necessarily indicative of the results that may be expected for the full fiscal year.
Certain amounts in the Other Accrued Current Liabilities footnote (Note 10) for the prior period have been reclassified to conform to the current presentation.
The Company’s financial instruments include cash, accounts receivable, accounts payable, and debt obligations. The book value of cash, accounts receivable, short-term debt and accounts payable are considered to be representative of their fair market value because of the short maturity of these instruments. The Company’s accounts receivable do not have an unusual credit risk or concentration risk.
2. Agreement and Plan of Merger
On April 5, 2013, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with General Electric Company, a New York corporation (“GE”), and Red Acquisition, Inc., a Texas corporation and a wholly owned subsidiary of GE (“Merger Sub”). Upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with the Company (the “Merger”), with the Company continuing its existence under Texas law as the surviving entity in the Merger. Upon the completion of the Merger, the Company will be a wholly owned subsidiary of GE. The boards of directors of the Company, GE and Merger Sub have approved the Merger Agreement, and the board of directors of the Company has agreed to submit the Merger Agreement to a vote of the Company’s shareholders and to recommend that the Company’s shareholders approve the Merger Agreement.
At the effective time of the Merger (the “Effective Time”), each share of common stock of the Company (“Common Stock”) issued and outstanding as of immediately prior to the Effective Time (excluding any shares of Common Stock held by GE or Merger Sub, any shares of Common Stock held by the Company in treasury or by any direct or indirect wholly owned subsidiary of the Company and any shares of Common Stock belonging to a shareholder exercising his or her rights of dissent and appraisal) will be converted into the right to receive $88.50 per share in cash, without interest (the “Merger Consideration”).
Each share of restricted Common Stock that is outstanding immediately prior to the Effective Time will, as of the Effective Time, vest in full, the restrictions with respect thereto will lapse and each share of restricted Common Stock will be deemed issued and outstanding immediately prior to the Effective Time and will be converted into the right to receive the Merger Consideration.
At the Effective Time, each option to purchase shares of Common Stock (each, a “Company Option”) that is outstanding immediately prior to the Effective Time (whether or not then vested or exercisable) will be cancelled and terminated and converted at the Effective Time into the right to receive a cash amount equal to the Option Consideration for each share of Common Stock then subject to the Company Option. “Option Consideration” means, with respect to any share of Common Stock issuable under each Company Option, an amount equal to the excess, if any, of (i) the Merger Consideration over (ii) the exercise price payable in respect of such share of Company Common Stock issuable under the Company Option.
The Company has agreed, subject to certain exceptions with respect to unsolicited proposals, not to directly or indirectly solicit competing acquisition proposals, or provide confidential information in connection therewith. The board of directors of the Company may, subject to certain conditions, change its recommendation in favor of the approval of the Merger Agreement if, (i) in connection with the receipt of an unsolicited alternative proposal, it determines in good faith, after consultation with its financial advisors and outside counsel, that the failure to effect such a change in recommendation would be reasonably likely to be inconsistent with its fiduciary duties or (ii) in connection with a material event or circumstance that arises or occurs after the date of the Merger Agreement, or a material consequence relating to an event or circumstance existing on or before the date of the Merger Agreement, that was in either case not, prior to the date of the Merger Agreement, known by the board of directors of the Company, it determines in good faith, after consultation with its financial advisors and outside counsel, that the failure to effect such a change in recommendation would be reasonably likely to be inconsistent with its fiduciary duties, in each case, after providing notice thereof to GE and allowing GE the opportunity to modify the Merger Agreement in a manner such that the board of directors of the Company no longer concludes that the failure to effect such a change in recommendation would be reasonably likely to be inconsistent with its fiduciary duties.
The completion of the Merger is subject to satisfaction or waiver of customary closing conditions, including, among others: (i) approval of the Merger Agreement by holders of two-thirds of the Company’s outstanding shares of common stock; (ii) expiration or termination of any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended and the making and receipt of applicable filings and approvals under foreign antitrust laws that are required to be made or obtained; (iii) there being no law or injunction prohibiting the consummation of the Merger and there being no action or litigation instituted or threatened in writing by any governmental authority that would or would be reasonably likely to prevent the consummation of the Merge or make the Merger illegal; (iv) subject to specified materiality standards, the accuracy of the representations and warranties of the Company and GE contained in the Merger Agreement; (v) compliance by the Company, GE and Merger Sub in all material respects with their respective obligations contained in the Merger Agreement; (vi) the absence of any changes or events that have had or would reasonably be expected to have a material adverse effect on the Company, and (vii) there being no investigation or litigation that shall be pending or threatened in writing by a governmental authority which would be reasonably likely to impose limitations on the ability of GE to effectively exercise full rights of ownership of the Company or result in a material governmental damages or a governmental investigation reasonably expected to result in significant criminal or civil sanctions.
The Merger Agreement contains customary representations and warranties of the Company and GE. The Merger Agreement also contains customary covenants and agreements, including covenants and agreements relating to (i) the conduct of the Company’s business between the date of the signing of the Merger Agreement and the closing date of the Merger and (ii) the efforts of the parties to cause the Merger to be completed. The Merger Agreement contains certain termination rights for both the Company and GE. The Merger Agreement further provides that, upon termination of the Merger Agreement, under certain circumstances, the Company will be required to pay GE a termination fee equal to $95,000,000 (or $47,000,000 in the event that the Merger Agreement had been terminated in specified circumstances on or prior to May 5, 2013).
For additional information about the Merger, please see our Current Report on Form 8-K, filed with the SEC on April 8, 2013, and the Merger Agreement, which is attached as Exhibit 2.1 thereto and other filings with the SEC related to the Merger.
3. Correction of Accounting Error
During the first quarter of 2013, the Company identified an error in the intra-company elimination and purchase price allocation of Quinn’s Oilfield Supply Ltd. for the year ended December 31, 2012 in which goodwill was overstated by $9.2 million and accounts receivable and accounts payable were understated by $16.6 million and $7.4 million, respectively. In accordance with Accounting Standards Codification (ASC) Topic 250,
Accounting for Changes and Error Corrections
, the Company evaluated the materiality of the error from a qualitative and quantitative perspective and concluded that the error was not material to the respective balances at December 31, 2012. Further, the error had no impact on the results of operations or total cash flows from operating activities for the year ended December 31, 2012. Accordingly, the Company corrected the goodwill, accounts receivable, and accounts payable balances in the first quarter of 2013.
4. Recently Issued Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-02,
Other Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income –
(“ASU 2013-02”),
which requires the Company to provide additional information about reclassifications out of accumulated other comprehensive income. The topic requires the Company to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, the Company is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012, with early application permitted. The Company adopted ASU 2013-02 on January 1, 2013. The adoption of ASU 2013-02 did not have a material impact on accumulated other comprehensive income.
Management believes the impact of other recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.
5. Acquisitions
Datac/RealFlex
On January 19, 2012, the Company completed the acquisition of Datac Instrumentation Limited (“Datac”) and RealFlex Technologies Limited (“Realflex”). Datac, based in Dublin, Ireland, is a solutions company serving the oil and gas, power, water and waste water, and transportation and marine industries that provides systems integration for supervisory control and data acquisition (“SCADA”). RealFlex, also based in Dublin, provides real-time software packages for SCADA and process control applications.
In connection with the Datac acquisition, the Company identified uncertain tax liabilities of the target company related to previous tax years. As a result, the Company entered into an agreement whereby the former owners funded an escrow account for $5.5 million dollars. In accordance with ASC 805,
Business Combinations,
the Company has identified an indemnification asset resulting from this agreement.
The Datac and Realflex preliminary purchase price allocation has been finalized in the first quarter of 2013. The final valuation for Datac and Realflex did not result in material changes to the preliminary allocations.
Zenith
On February 29, 2012, the Company completed the acquisition of Zenith Oilfield Technology Ltd (“Zenith”). Zenith, based in Aberdeen, Scotland, is an international provider of innovative technology and products for the monitoring and analysis of down-hole data and related completion products for the oilfield artificial lift market.
The Zenith preliminary purchase price allocation was finalized in the first quarter of 2013. The final valuation for Zenith did not result in material changes to the preliminary allocations.
Other
During 2012, the Company also acquired the assets of two businesses for aggregate consideration of $3.3 million. The two acquisitions were included in the Company’s consolidated financial statements for the periods subsequent to the acquisitions. There have been no adjustments to the preliminary purchase allocations.
Supplemental Pro Forma Data
Proforma information for the Datac, Realflex, Zenith and other acquisitions are not material.
6. Receivables
The following is a summary of the Company’s receivable balances (in thousands of dollars):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
249,545
|
|
|
$
|
252,413
|
|
Notes receivable
|
|
|
63
|
|
|
|
-
|
|
Other receivables
|
|
|
3,053
|
|
|
|
1,623
|
|
Gross receivables
|
|
|
252,661
|
|
|
|
254,036
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts receivable
|
|
|
(1,752
|
)
|
|
|
(767
|
)
|
Net receivables
|
|
$
|
250,909
|
|
|
$
|
253,269
|
|
Bad debt expense related to receivables for the three months ended March 31, 2013 and 2012 was $1.1 million and negligible, respectively.
7. Inventories
Inventories used in determining cost of sales were as follows (in thousands of dollars):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Gross inventories at FIFO:
|
|
|
|
|
|
|
Finished goods
|
|
$
|
34,523
|
|
|
$
|
26,751
|
|
Work in progress
|
|
|
33,615
|
|
|
|
31,136
|
|
Raw materials & component parts
|
|
|
197,644
|
|
|
|
185,739
|
|
Maintenance, tooling & supplies
|
|
|
16,028
|
|
|
|
14,864
|
|
Total gross inventories at FIFO
|
|
|
281,810
|
|
|
|
258,490
|
|
Less reserves:
|
|
|
|
|
|
|
|
|
LIFO
|
|
|
35,854
|
|
|
|
34,954
|
|
Valuation
|
|
|
5,049
|
|
|
|
5,061
|
|
Total inventories as reported
|
|
$
|
240,907
|
|
|
$
|
218,475
|
|
Gross inventories on a first in, first out (“FIFO”) basis before adjustments for reserves shown above that were accounted for on a last in, first out (“LIFO”) basis were $128.7 million and $120.7 million at March 31, 2013 and December 31, 2012, respectively.
8. Property, Plant & Equipment
The following is a summary of the Company's property, plant and equipment balances (in thousands of dollars):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
27,274
|
|
|
$
|
29,026
|
|
Land improvements
|
|
|
13,151
|
|
|
|
13,142
|
|
Buildings
|
|
|
193,606
|
|
|
|
158,984
|
|
Machinery and equipment
|
|
|
332,421
|
|
|
|
310,944
|
|
Furniture and fixtures
|
|
|
10,003
|
|
|
|
9,647
|
|
Computer equipment and software
|
|
|
37,729
|
|
|
|
37,708
|
|
Construction in progress
|
|
|
77,436
|
|
|
|
125,545
|
|
Total property, plant and equipment
|
|
|
691,620
|
|
|
|
684,996
|
|
Less accumulated depreciation
|
|
|
(286,321
|
)
|
|
|
(283,323
|
)
|
Total property, plant and equipment, net
|
|
$
|
405,299
|
|
|
$
|
401,673
|
|
Depreciation expense related to property, plant and equipment was $7.8 million and $7.2 million for the three months ended March 31, 2013 and 2012, respectively.
For the three months ended March 31, 2013 $7.8 million in capital expenditures were included in accounts payables on the Condensed Consolidated Statements of Cash Flows.
The Romanian Government granted an economic incentive to the Company for the construction of its Romanian facility, which was ongoing at March 31, 2013. This incentive is subject to employment requirements the Company must maintain for five years. For the three months ended March 31, 2013 and 2012 capital expenditures were reduced by $2.9 million and $0.0 million in the additions to property, plant, and equipment on the Condensed Consolidated Statements of Cash Flows as a result of incentives received from the government.
9. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill during the three months ended March 31, 2013, are as follows (in thousands of dollars):
|
|
|
|
|
Power
|
|
|
|
|
|
|
Oil Field
|
|
|
Transmission
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
$
|
347,199
|
|
|
$
|
7,120
|
|
|
$
|
354,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Correction of error
|
|
|
(9,162
|
)
|
|
|
-
|
|
|
|
(9,162
|
)
|
Adjustments for prior year acquisitions
|
|
|
26
|
|
|
|
-
|
|
|
|
26
|
|
Foreign currency translation
|
|
|
(10,849
|
)
|
|
|
(66
|
)
|
|
|
(10,915
|
)
|
Balance as of March 31, 2013
|
|
$
|
327,214
|
|
|
$
|
7,054
|
|
|
$
|
334,268
|
|
Intangible Assets
The Company amortizes identifiable intangible assets on a straight-line basis over the periods expected to be benefited. All of the below intangible assets relate to acquisitions since 2009. The components of these intangible assets are as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
March 31, 2013
|
|
|
Average
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Period
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
(years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements and trademarks
|
|
$
|
10,281
|
|
|
$
|
2,665
|
|
|
$
|
7,616
|
|
|
|
5.7
|
|
Customer relationships and contracts
|
|
|
112,050
|
|
|
|
22,486
|
|
|
|
89,564
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
122,331
|
|
|
$
|
25,151
|
|
|
$
|
97,180
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
December 31, 2012
|
|
|
Average
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
(years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements and trademarks
|
|
$
|
10,281
|
|
|
$
|
2,082
|
|
|
$
|
8,199
|
|
|
|
5.7
|
|
Customer relationships and contracts
|
|
|
112,050
|
|
|
|
15,788
|
|
|
|
96,262
|
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
122,331
|
|
|
$
|
17,870
|
|
|
$
|
104,461
|
|
|
|
7.6
|
|
Amortization expense of intangible assets was approximately $3.8 million and $3.1 million for the three months ended March 31, 2013 and 2012, respectively. Expected amortization for the remainder of the fiscal year ending December 31, 2013 is $11.2 million. Expected amortization expense by year is (in thousands of dollars):
For the year ended December 31, 2014
|
|
$
|
14,329
|
|
For the year ended December 31, 2015
|
|
|
14,262
|
|
For the year ended December 31, 2016
|
|
|
14,167
|
|
For the year ended December 31, 2017
|
|
|
13,807
|
|
For the year ended December 31, 2018
|
|
|
13,798
|
|
Thereafter
|
|
|
15,587
|
|
10. Other Current Accrued Liabilities
The following is a summary of the Company's other current accrued liabilities balances (in thousands of dollars):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Customer prepayments
|
|
$
|
12,075
|
|
|
$
|
15,681
|
|
Deferred compensation & benefit plans
|
|
|
7,296
|
|
|
|
6,918
|
|
Acquisition hold back and royalty consideration
|
|
|
719
|
|
|
|
2,330
|
|
Accrued interest
|
|
|
1,851
|
|
|
|
1,634
|
|
Accrued freight
|
|
|
4,795
|
|
|
|
5,098
|
|
Other accrued liabilities
|
|
|
4,571
|
|
|
|
2,322
|
|
Total other current accrued liabilities
|
|
$
|
31,307
|
|
|
$
|
33,983
|
|
11. Debt
The following is a summary of the Company's outstanding debt balances (in thousands of dollars):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Long-term notes payable
|
|
$
|
320,139
|
|
|
$
|
326,704
|
|
|
|
|
|
|
|
|
|
|
Less current portion of long-term debt
|
|
|
(32,813
|
)
|
|
|
(26,250
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
287,326
|
|
|
$
|
300,454
|
|
Scheduled maturities of long-term debt in future years as of March 31, 2013 are as follows (in thousands of dollars):
2013
|
|
$
|
19,688
|
|
2014
|
|
|
52,500
|
|
2015
|
|
|
87,500
|
|
2016
|
|
|
160,451
|
|
|
|
|
|
|
Total
|
|
$
|
320,139
|
|
The Company executed a five year secured credit facility in November 2011 with a group of lenders (the “Bank Facility”) consisting of a revolving line of credit that provides for up to $175.0 million of aggregate borrowing and an amortizing $350.0 million term loan. Under the Bank Facility the Company has granted a first priority lien on, security interest in and collateral assignment of substantially all of its assets. The Bank Facility matures on November 30, 2016. Borrowings under the Bank Facility bear interest, at the Company’s option, at either (A) the highest of (i) the Prime Rate, (ii) the Federal Funds Effective Rate plus 0.5%, and (iii) the Adjusted LIBO Rate for an Interest Period of one month plus 1.0%, in each case plus an Applicable Margin based on the Company’s Leverage Ratio or (B) the interest rate equal to (i) the rate for US dollar deposits in the London interbank market for the applicable Interest Period multiplied by (ii) the Statutory Reserve Rate, plus (iii) the Applicable Margin.
Throughout the term of the Bank Facility, the Company pays an
Unused Commitment Fee
which ranges from 0.25 percent to 0.50 percent based on the Company’s Leverage Ratio.
As of March 31, 2013, $295.1 million of the term loan and $25.0 million of the revolving line of credit were outstanding. Additionally, there were $11.2 million in letters of credit outstanding against the revolving credit facility. As of March 31, 2013 the interest rate was 2.75% on the Bank Facility and the Company paid $2.1 million of interest expense in the quarter ended March 31, 2013.
The carrying value of debt is not materially different from its fair value. The Company was in compliance with all financial covenants under the Bank Facility as of March 31, 2013 and had borrowing capacity of $138.8 million under the revolving line of credit.
Although the consummation of the Merger would result in an event of default under the Company’s Bank Facility, giving the lenders thereunder the right to accelerate all indebtedness outstanding thereunder, the Company and GE intend to repay amounts outstanding thereunder and terminate the Bank Facility contemporaneously with the closing of the Merger.
12. Retirement Benefits
The Company has a qualified noncontributory pension plan covering substantially all U.S. employees. The benefits provided by this plan are measured by length of service, compensation and other factors, and are currently funded by a trust established under the plan. Funding of retirement costs for the plan complies with the minimum funding requirements specified by the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as amended. As of December 31, 2011, the qualified noncontributory pension plan was closed to new participants. In addition, the Company has two unfunded non-qualified deferred compensation pension plans for certain U.S. employees. The Retirement Plan Restoration Plan for Salaried Employees of Lufkin Industries, Inc. (the “Pension Restoration Plan”) provides supplemental retirement benefits. The benefit is based on the same benefit formula as the qualified pension plan except that it does not limit the amount of a participant's compensation or maximum benefit. The Lufkin Industries, Inc. Supplemental Executive Retirement Plan (the “SERP”) credits an individual with 0.5 years of service for each year of service credited under the qualified plan. The benefits calculated under the Pension Restoration Plan and the SERP are offset by the participant's benefit payable under the qualified pension plan. The liabilities for the non-qualified deferred compensation pensions plans are included in “Other current accrued liabilities” and “Other liabilities” in the Consolidated Balance Sheet.
The Company is also required by the French government to provide a lump sum benefit payable upon retirement to its French employees. A dedicated insurance policy is in place that can reimburse the Company for these retirement payments.
The Company sponsors two postretirement welfare plans that cover both salaried and hourly employees. One plan provides medical benefits, and the other plan provides life insurance benefits. Both plans are contributory, with retiree contributions adjusted periodically. The Company accrues the estimated costs of the plans over the employee’s service periods. The Company's postretirement health care plan is unfunded. For measurement purposes, the submitted claims medical trend was assumed to be 9.25% in 1997. Thereafter, the Company’s obligation is fixed at the amount of the Company’s contribution for 1997.
The Company also has qualified defined contribution retirement plans covering substantially all of its U.S. employees and certain Canadian employees. For U.S. salaried employees, the Company makes contributions of 75% of employee contributions up to a maximum employee contribution of 6% of employee earnings. For U.S. hourly employees, the
Company made contributions of 75% of employee contributions from January 1, 2011 through September 30, 2011 and then 100% of employee contributions thereafter up to a maximum employee contribution of 6% of employee earnings. The plan was amended to include the change for U.S. hourly employees on October 1, 2011. Employees may contribute up to an additional 18% (in 1% increments), which is not subject to matching by the Company. For Canadian employees, the Company makes contributions of 3%-8% of an employee’s salary with no individual employee matching required. All obligations of the Company are funded through March 31, 2013. In addition, the Company provides an unfunded non-qualified deferred compensation defined contribution plan (the Thrift Plan Restoration Plan for Salaried Employees of Lufkin Industries, Inc., or the “Thrift Restoration Plan”) for certain U.S. employees. The Company’s and individual’s contributions are based on the same formula as the qualified contribution plan except that it does not limit the amount of a participant’s compensation or maximum benefit. The contribution calculated under the Thrift Restoration Plan is offset by the Company’s and participant’s contributions under the qualified defined contribution plan. The Company’s expense for these plans totaled $3.2 million and $3.3 million in the three months ended March 31, 2013 and 2012, respectively. The liability for the Thrift Restoration Plan is included in “Other current accrued liabilities” in the Consolidated Balance Sheet.
Components of Net Periodic Benefit Cost (in thousands of dollars)
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
Three Months Ended March 31,
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2,834
|
|
|
$
|
2,151
|
|
|
$
|
11
|
|
|
$
|
57
|
|
Interest cost
|
|
|
3,023
|
|
|
|
2,905
|
|
|
|
45
|
|
|
|
74
|
|
Expected return on plan assets
|
|
|
(3,547
|
)
|
|
|
(3,230
|
)
|
|
|
-
|
|
|
|
-
|
|
Amortization of prior service cost
|
|
|
221
|
|
|
|
232
|
|
|
|
(63
|
)
|
|
|
13
|
|
Amortization of unrecognized net loss (gain)
|
|
|
2,453
|
|
|
|
2,203
|
|
|
|
(25
|
)
|
|
|
(45
|
)
|
Net periodic benefit cost
|
|
$
|
4,984
|
|
|
$
|
4,261
|
|
|
$
|
(32
|
)
|
|
$
|
99
|
|
Employer Contributions
The Company previously disclosed in the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, that it expected to make contributions of $0.4 million to the pension plans in 2013. The Company also disclosed that it expected to make contributions of $0.2 million to its postretirement plan in 2013. As of March 31, 2013, the Company had made contributions of $0.0 million to its pension plans and $0.1 million to its postretirement plan. The Company presently anticipates making additional contributions of $0.4 million to its pension plans and $0.1 million to its postretirement plan during the remainder of 2013.
13. Legal Proceedings
Other Matters
There are various other claims and legal proceedings arising in the ordinary course of business pending against or involving the Company wherein monetary damages are sought. For certain of these claims, the Company maintains insurance coverage while retaining a portion of the losses that occur through the use of deductibles and retention limits. Amounts in excess of the self-insured retention levels are fully insured to limits believed appropriate for the Company’s operations. Self-insurance accruals are based on claims filed and an estimate for claims incurred but not reported. While the Company does maintain insurance above its self-insured levels, a decline in the financial condition of its insurer, while not currently anticipated, could result in increased risk. It is management’s opinion that the Company’s exposure under such circumstances or involving any other non-insured claims or legal proceedings would not materially affect its consolidated financial position, results of operations, or cash flow.
14. Accumulated Comprehensive Income
Accumulated other comprehensive income (loss) in the consolidated balance sheet consists of the following (in thousands of dollars):
|
|
|
|
|
Defined
|
|
|
Defined
|
|
|
Accumulated
|
|
|
|
Foreign
|
|
|
Benefit
|
|
|
Benefit
|
|
|
Other
|
|
|
|
Currency
|
|
|
Pension
|
|
|
Postretirement
|
|
|
Comprehensive
|
|
|
|
Translation
|
|
|
Plans
|
|
|
Plans
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
$
|
14,415
|
|
|
$
|
(91,514
|
)
|
|
$
|
3,080
|
|
|
$
|
(74,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current-period change
|
|
|
(20,156
|
)
|
|
|
1,688
|
|
|
|
(55
|
)
|
|
|
(18,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2013
|
|
$
|
(5,741
|
)
|
|
$
|
(89,826
|
)
|
|
$
|
3,025
|
|
|
$
|
(92,542
|
)
|
15. Net Earnings Per Share
A reconciliation of the number of weighted shares used to compute basic and diluted net earnings per share for the three months ended March 31, 2013 and 2012 are illustrated below:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Weighted average common shares outstanding for basic EPS
|
|
|
33,584,928
|
|
|
|
31,399,249
|
|
Effect of dilutive securities: employee stock options and other awards
|
|
|
378,059
|
|
|
|
412,883
|
|
Adjusted weighted average common shares outstanding for diluted EPS
|
|
|
33,962,987
|
|
|
|
31,812,132
|
|
Weighted options to purchase a total of 518,122 and 400,529 shares of the Company’s common stock for the three months ended March 31, 2013 and 2012, respectively, were excluded from the calculations of fully diluted earnings per share, in each case because the effect on fully diluted earnings per share for the period was antidilutive.
16. Stock Compensation Plans
The Company currently has two stock compensation plans. The 1996 Nonemployee Director Stock Option Plan and the 2000 Incentive Stock Compensation Plan provide for the granting of stock options to officers, employees and non-employee directors at an exercise price equal to the fair market value of the stock at the date of grant. Unrestricted options granted to employees vest over two to four years and are exercisable up to ten years from the grant date. Upon retirement, any unvested options become exercisable immediately. Options granted to directors vest at the grant date and are exercisable up to ten years from the grant date. The 2000 Incentive Stock Compensation Plan also provides for other forms of stock-based compensation such as restricted stock.
The following table is a summary of the stock-based compensation expense recognized by type of grant for the three months ended March 31, 2013 and 2012 (in thousands of dollars):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
1,212
|
|
|
$
|
1,331
|
|
Performance shares
|
|
|
490
|
|
|
|
-
|
|
Restricted stock awards and units
|
|
|
871
|
|
|
|
288
|
|
Total stock-based compensation expense
|
|
|
2,573
|
|
|
|
1,619
|
|
Tax benefit
|
|
|
(952
|
)
|
|
|
(599
|
)
|
Stock-based compensation expense, net of tax
|
|
$
|
1,621
|
|
|
$
|
1,020
|
|
Stock Options
The fair value of each option grant during the first three months of 2013 was estimated on the date of grant using the Black-Scholes option-pricing model, based on the following assumptions. There were no option grants during the first three months of 2012.
|
|
2013
|
|
|
|
|
|
Expected dividend yield
|
|
|
1.02
|
%
|
Expected stock price volatility
|
|
|
46.4% - 53.0
|
%
|
Risk free interest rate
|
|
|
0.27% - 0.60
|
%
|
Expected life options
|
|
2 - 4 years
|
|
Weighted-average fair value per option at grant date
|
|
$
|
18.24
|
|
The expected life of options was determined based on the exercise history of employees and directors since the inception of the plans. The expected stock price volatility is based upon the historical weekly and daily stock price for the prior number of years equivalent to the expected life of the stock option. The expected dividend yield was based on the dividend yield of the Company’s common stock at the date of the grant. The risk free interest rate was based upon the yield of U.S. Treasuries, the terms of which were equivalent to the expected life of the stock option.
A summary of stock option activity under the plans during the three months ended March 31, 2013, is presented below:
Options
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2013
|
|
|
1,625,327
|
|
|
$
|
43.96
|
|
|
|
|
|
|
|
Granted
|
|
|
10,500
|
|
|
|
62.26
|
|
|
|
|
|
|
|
Exercised
|
|
|
(30,182
|
)
|
|
|
36.63
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(15,791
|
)
|
|
|
57.64
|
|
|
|
|
|
|
|
Outstanding at March 31, 2013
|
|
|
1,589,854
|
|
|
$
|
44.08
|
|
|
$
|
7.1
|
|
|
$
|
36,657
|
|
Exercisable at March 31, 2013
|
|
|
954,735
|
|
|
$
|
38.54
|
|
|
|
6.2
|
|
|
$
|
27,340
|
|
As of March 31, 2013, there was $4.6 million of total unrecognized compensation expense related to non-vested stock options. That cost is expected to be recognized over a weighted-average period of 1.83 years. The intrinsic value of stock options exercised in the first three months of 2013 was $0.9 million.
The Company has granted performance share awards (“PSAs”) to members of senior management, at no cost to the recipient, as a means of rewarding them for the Company’s shareholder return performance relative to a specific group of companies over a three-year performance cycle. Compensation expense, which is recorded ratably over the vesting period, is based on the fair value at grant date and the anticipated number of shares of the Company’s common stock to be issued, which is determined on a Monte Carlo probability model. Grant recipients do not have any shareholder rights until the granted shares have been issued.
The following table summarizes information about the performance shares that remain outstanding as of March 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Target Shares
|
|
|
Target Shares
|
|
|
|
|
|
Average
|
|
|
|
Target Shares
|
|
|
Granted
|
|
|
Granted
|
|
|
Target Shares
|
|
|
Grant Date
|
|
Period
|
|
Outstanding at
|
|
|
During
|
|
|
During
|
|
|
Outstanding
|
|
|
Fair Value
|
|
Granted
|
|
December 31, 2012
|
|
|
Current Year
|
|
|
Current Year
|
|
|
at March 31, 2013
|
|
|
per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
67,155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67,155
|
|
|
$
|
58.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
67,155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67,155
|
|
|
|
|
|
As of March 31, 2013, there was $2.9 million of total unrecognized compensation expense related to unvested PSAs. The cost is expected to be recognized over a weighted average period of 1.28 years.
Restricted Stock Awards and Units
The 2000 Incentive Stock Compensation Plan also provides for other forms of stock-based compensation such as restricted stock awards (“RSA”) and restricted stock units (“RSU”). These awards vest over a three year period.
A summary of the combined changes of RSAs and RSUs for the three months ended March 31, 2013, is presented below:
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
Awards
|
|
Awards
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Unvested at January 1, 2013
|
|
|
109,907
|
|
|
$
|
60.13
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Unvested at March 31, 2013
|
|
|
109,907
|
|
|
$
|
60.13
|
|
As of March 31, 2013 there was $4.3 million of total unrecognized compensation cost related to unvested RSAs and RSUs. The cost is expected to be recognized over a weighted average period of 1.67 years.
17. Uncertain Tax Positions
As of December 31, 2012, the Company had approximately $5.6 million of total gross unrecognized tax benefits, of which $3.0 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the net effective income tax rate in any future period. As of March 31, 2013, the Company had approximately $6.3 million of total gross unrecognized tax benefits. Of this total, $3.6 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the net effective income tax rate in any future period. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands of dollars):
Balance at January 1, 2013
|
|
$
|
5,635
|
|
|
|
|
|
|
Gross increases- current year tax positions
|
|
|
636
|
|
|
|
|
|
|
Balance at March 31, 2013
|
|
$
|
6,271
|
|
The Company has unrecognized tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months. The unrecognized tax benefits relate to tax credits and other various deductions. The Company estimates the change to be approximately $1.9 million.
The Company’s practice is to recognize interest and penalties related to income tax matters in administrative costs. The Company had $0.1 million accrued for interest and penalties at December 31, 2012. Negligible interest and penalties were recognized during the three months ended March 31, 2013.
For the three months ended March 31, 2013 the Company paid taxes of $1.5 million.
In addition, with the Datac acquisition the Company identified uncertain tax liabilities of the target company related to previous tax years. As a result, the Company entered into an agreement whereby the former owners funded an escrow account for $5.5 million. In accordance with ASC 805,
Business Combinations,
the Company has identified an indemnification asset resulting from this agreement.
18. Segment Data
The Company operates within two business segments - Oilfield and Power Transmission. The two operating segments are supported by a common corporate group. Corporate expenses and certain assets are allocated to the operating segments based primarily upon third-party revenues. Inter-segment sales and transfers are accounted for as if the sales and transfers were to third parties, that is, at current market prices, as available. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The following is a summary of key segment information (in thousands of dollars):
Three Months Ended March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power
|
|
|
Corporate
|
|
|
|
|
|
|
Oilfield
|
|
|
Transmission
|
|
|
& Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales
|
|
$
|
276,643
|
|
|
$
|
44,139
|
|
|
$
|
-
|
|
|
$
|
320,782
|
|
Inter-segment sales
|
|
|
(2,046
|
)
|
|
|
(757
|
)
|
|
|
-
|
|
|
|
(2,803
|
)
|
Net sales
|
|
$
|
274,597
|
|
|
$
|
43,382
|
|
|
$
|
-
|
|
|
$
|
317,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
28,105
|
|
|
$
|
1,801
|
|
|
$
|
-
|
|
|
$
|
29,906
|
|
Other (expense) income, net
|
|
|
(1,084
|
)
|
|
|
15
|
|
|
|
130
|
|
|
|
(939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income tax provision
|
|
$
|
27,021
|
|
|
$
|
1,816
|
|
|
$
|
130
|
|
|
$
|
28,967
|
|
Three Months Ended March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power
|
|
|
Corporate
|
|
|
|
|
|
|
Oilfield
|
|
|
Transmission
|
|
|
& Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales
|
|
$
|
240,290
|
|
|
$
|
47,936
|
|
|
$
|
-
|
|
|
$
|
288,226
|
|
Inter-segment sales
|
|
|
(4,283
|
)
|
|
|
(4,407
|
)
|
|
|
-
|
|
|
|
(8,690
|
)
|
Net sales
|
|
$
|
236,007
|
|
|
$
|
43,529
|
|
|
$
|
-
|
|
|
$
|
279,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
22,473
|
|
|
$
|
1,521
|
|
|
$
|
-
|
|
|
$
|
23,994
|
|
Other expense, net
|
|
|
(3,178
|
)
|
|
|
(14
|
)
|
|
|
(576
|
)
|
|
|
(3,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income tax provision
|
|
$
|
19,295
|
|
|
$
|
1,507
|
|
|
$
|
(576
|
)
|
|
$
|
20,226
|
|