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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended August 31, 2010
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to ___________
Commission File Number 001-13651
ROBBINS & MYERS, INC.
| Ohio | 31-0424220 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation) | Identification No.) | |
| 51 Plum St., Suite 260, Dayton, OH | 45440 | |
| (Address of principal executive offices) | (Zip Code) |
(937) 458-6600
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Name of each exchange on | ||
| Title of each class | which registered | |
| Common Shares, without par value | New York |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 þ | 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 þ
| Aggregate market value of Common Shares, without par value, held by non-affiliates of the Company at February 28, 2010 (the last business day of the Company’s second fiscal quarter), based on the closing sales price on the New York Stock Exchange on February 26, 2010 | $ | 651,071,375 | ||
| Number of Common Shares, without par value, outstanding at September 30, 2010 | 32,962,195 |
EXPLANATORY NOTE
Robbins & Myers, Inc. (the “Company”) is filing this Amendment No.1 on Form 10-K/A to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2010, which was filed with the Securities and Exchange Commission on October 26, 2010, to include sections of Part III of the Report, as permitted by General Instruction G of Form 10-K.
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ITEM 1.BUSINESS
Important Information Regarding Forward-Looking Statements
Portions of this Form 10-K include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. This includes, in particular, “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K as well as other portions of this Form 10-K. The words “believe,” “expect,” “anticipate,” “project,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. The most significant of these risks, uncertainties and other factors are described in this Form 10-K (included in “Item 1A-Risk Factors”). Except to the limited extent required by applicable law, the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
OVERVIEW
Robbins & Myers, Inc. is an Ohio corporation. As used in this report, the terms “Company,” “we,” “our,” or “us” mean Robbins & Myers, Inc. and its subsidiaries unless the context indicates another meaning. We are a leading supplier of engineered equipment and systems for critical applications in global energy, industrial, chemical and pharmaceutical markets. Our success is based on close and continuing interaction with our customers, application expertise, innovation, customer support and a competitive cost structure. Our fiscal 2010 sales were approximately $585 million.
Beginning with the first quarter of fiscal 2010, we realigned our business segment reporting structure as a result of organizational, management and operational changes implemented in the first quarter of fiscal 2010. Our Chemineer brand is now included in our Fluid Management segment, instead of the Process Solutions segment where it was previously reported. Previously reported results have been reclassified to reflect this reporting structure.
On October 6, 2010, the Company, Triple Merger I, Inc., a Delaware corporation and wholly-owned subsidiary of the Company, Triple Merger II, Inc., a Delaware corporation and wholly owned subsidiary of the Company, and T-3 Energy Services, Inc., a Delaware corporation (“T-3”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Under the terms of the transaction, which has been unanimously approved by the Boards of Directors of both the Company and T-3, T-3 stockholders will receive 0.894 common shares of the Company, without par value, plus $7.95 in cash, without interest, for each share of common stock of T-3, par value $0.001 per share, they own. Consummation of the transaction is subject to customary closing conditions, including among others, obtaining certain regulatory approvals and approval of the Company’s shareholders and the stockholders of T-3.
Information concerning our sales, income before interest and income taxes (“EBIT”), identifiable assets by segment and sales and tangible assets by geographic area for the years ended August 31, 2010, 2009 and 2008 is set forth in Note 13 to the Consolidated Financial Statements included at Item 8 and is incorporated herein by reference.
Fluid Management Segment
Our Fluid Management business segment designs, manufactures and markets equipment and systems used in oil and gas exploration, recovery and transportation, specialty chemical, wastewater treatment and a variety of other industrial applications. Primary brands include Moyno®, Yale®, New Era®, Chemineer®, TARBY® and Hercules®. Our products and systems include hydraulic drilling power sections; down-hole and industrial progressing cavity pumps and related products such as grinders for applications involving the flow of viscous, abrasive and solid-laden slurries and sludge; standard and customized fluid-agitation equipment and systems; and a broad line of ancillary equipment for the energy sector, such as rod guides, rod and tubing rotators, wellhead systems, pipeline closure products and valves.
Sales, Marketing and Distribution.We sell our rotors and stators for hydraulic drilling power sections through a direct sales force. We sell our tubing wear prevention products, down-hole pump systems, wellhead equipment, closure products and industrial pumps through major distributors as well as our direct sales force and service centers in key oilfield locations worldwide. Industrial mixers and agitation equipment products are primarily sold through manufacturers’ representatives. Backlog at August 31, 2010 was $58.1 million, compared with $35.1 million at August 31, 2009.
Aftermarket Sales. Aftermarket sales consist principally of selling replacement components for our pumps, as well as the relining of stators and the refurbishment of rotors for the energy market. Our aftermarket business for the Chemineer® line primarily consists of selling replacement parts. Aftermarket sales represented approximately 28% of the sales in this segment in fiscal 2010. However, replacement items, such as power section rotors and stators, down-hole pump rotors and rod guides are components of larger systems that wear out after regular usage. These are often sold as complete products and are not identifiable by us as aftermarket sales.
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Markets and Competition.We believe we are the leading independent manufacturer of rotors and stators for hydraulic drilling power sections in the markets we serve. We are also a leading manufacturer of rod guides, wellhead components, pipeline closure products and down-hole progressing cavity pumps worldwide. While the oil and gas exploration and recovery equipment marketplace is highly fragmented, we believe that with our leading brands and products we are effectively positioned to serve customers with an attractive range of products and services. The mixing equipment industry in which our Chemineer® brand participates is highly competitive and fragmented. We believe we are one of the market leaders in North America. We also have a large installed base and a significant market share in progressing cavity pumps in the U.S. and Canada, but a smaller presence in Europe and Asia. In addition, there are several other types of positive displacement pumps, including gear, lobe and diaphragm pumps that compete with progressing cavity pumps in certain applications.
Process Solutions Segment
Our Process Solutions business segment designs, manufactures and services glass-lined reactors and storage vessels. We also provide alloy steel vessels, heat exchangers, other fluid systems, wiped film evaporators and packaged process systems. In addition, we also provide customized fluoropolymer-lined fittings, vessels and accessories. The primary markets served by this segment are the pharmaceutical and specialty chemical markets. Primary brands are Pfaudler®, Tycon-Technoglass®, and Edlon®.
Sales, Marketing and Distribution.We primarily manufacture, market, sell and service glass-lined reactors, storage vessels and thermal and other fluid processing systems through our direct sales and service force, as well as manufacturers’ representatives in certain geographic markets. Backlog at August 31, 2010 was $78.7 million compared with $59.7 million at August 31, 2009.
Aftermarket Sales.Aftermarket products and services, which include field service, replacement parts, accessories and reconditioning of glass-lined vessels, are an important part of our glass-lined reactor product line. Our aftermarket capabilities and presence allow us to service our large installed base of Pfaudler® glass-lined vessels and to meet the needs of our customers who outsource various maintenance and service functions. We also service competitors’ equipment in the U.S. and in Europe. In addition, we refurbish and sell used, glass-lined vessels. Aftermarket sales represented approximately 37% of this segment’s sales in fiscal 2010.
Markets and Competition.We believe we have the number one worldwide market position in sales value for quality glass-lined reactors and storage vessels, competing principally with smaller European companies. Competition in Europe has increased over the past two years due to a significant decline in customer orders resulting in increasing pricing pressure. There are also Asian suppliers who compete in local markets based on a lower quality specification. Our Edlon® brand primarily competes by offering highly engineered products and products made for special needs, and tend to compete with other niche suppliers.
Romaco Segment
Our Romaco business segment designs, manufactures and markets packaging and secondary processing equipment for the pharmaceutical, healthcare, nutraceutical, food and cosmetic industries. Packaging applications include blister and strip packaging for various products including tablets, effervescent tablets and capsules; filling of both liquid and powder into vials and bottles, capsule and tube filling; tablet counting and packaging for bottles; customized packaging for drug delivery devices; as well as secondary processing for liquids and semi solids. Primary brands are Noack®, Siebler®, FrymaKoruma®, Macofar® and Promatic®.
Sales, Marketing and Distribution.We sell Romaco products worldwide through an extensive network of manufacturers’ representatives and third party distributors which we supplement with our direct sales and service centers in certain strategic markets. Backlog at August 31, 2010 was $38.3 million compared with $40.1 million at August 31, 2009. The 2009 backlog included a $9 million order from fiscal 2006 that was cancelled in the second quarter of fiscal 2010.
Aftermarket Sales. Aftermarket sales of our Romaco business were approximately 36% of this segment’s fiscal 2010 sales, consisting largely of replacement parts for the installed base of equipment.
Markets and Competition.We believe Romaco operates in an industry with many competitors, none of which is dominant. Given the fragmented nature of the industry, we believe there are opportunities to expand our market share through technical innovation, increased product applications and additional sales channel development.
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Other Consolidated Information
BACKLOG
Our total order backlog was $175.1 million at August 31, 2010 compared with $135.0 million at August 31, 2009. We expect to ship substantially all of our backlog during the next 12 months.
CUSTOMERS
No customer represented more than 5% of consolidated sales in fiscal 2010, 2009 or 2008.
RAW MATERIALS
Raw materials are purchased from a broad supplier base that is often located in the same regions as our facilities. Over the last three years the prices of raw materials, especially steel, have been volatile. Our supply of steel and other raw materials and components has been adequate and available without significant delivery delays. No events are known or anticipated that would change the availability of raw materials. No one vendor provides more than 5% of our supplied materials.
GENERAL
We own a number of patents relating to the design and manufacture of our products. While we consider these patents important to our operations, we believe that the successful manufacture and sale of our products depend more upon application expertise and manufacturing skills. We are committed to maintaining high quality manufacturing standards and have completed ISO certification at many of our facilities.
During fiscal 2010, we spent approximately $7.0 million on research and development activities compared with $6.7 million in fiscal 2009 and $6.5 million in fiscal 2008. These amounts do not include significant engineering development costs incurred in conjunction with fulfilling custom customer orders and executing customer projects.
Compliance with federal, state and local laws regulating the discharge of materials into the environment is not anticipated to have any material effect upon the Company’s capital expenditures, earnings or competitive position.
At August 31, 2010, we had 2,965 employees, which included approximately 400 employees at majority-owned joint ventures. Approximately 255 of our U.S. employees were covered by collective bargaining agreements at various locations. In addition, approximately 810 of our non-U.S. employees were covered by government-mandated agreements in their respective countries. The Company considers labor relations at each of its locations to be generally good.
CERTIFICATIONS
Peter C. Wallace, our President and Chief Executive Officer, certified to the New York Stock Exchange (“NYSE”) on February 16, 2010 that, as of that date, he was not aware of any violation by the Company of the NYSE’s Corporate Governance Listing Standards. We have filed with the Securities and Exchange Commission (“SEC”) the certifications of Mr. Wallace and Christopher M. Hix, our Chief Financial Officer, that are required by Section 302 of the Sarbanes-Oxley Act of 2002 relating to the financial statements and disclosures contained in our Annual Report on Form 10-K for the year ended August 31, 2010.
AVAILABLE INFORMATION
We make available free of charge on or through our web site, at www.robn.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC. Additionally, the public may read and copy any materials we file with or furnish to the SEC at the SEC’s Public Reference Room at 100 F. Street, NE., Washington, D.C., 20549. Information regarding operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. Information that we file with the SEC is also available at the SEC’s web site at www.sec.gov.
We also post on our web site the following corporate governance documents: Corporate Governance Guidelines, Code of Business Conduct and the Charters of our Audit, Compensation, and Nominating and Governance Committees. Written copies of the foregoing documents may also be requested from our Corporate Secretary, Robbins & Myers, Inc., 51 Plum Street, Suite 260, Dayton, Ohio 45440.
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ITEM 1A.RISK FACTORS
If any of the events contemplated by the following risks actually occurs, then our business, financial condition or results of operations could be materially adversely affected. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We can neither predict these new risk factors, nor can we assess the impact, if any, of these new risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements.
Some of our end-markets are cyclical, which may cause fluctuations in our sales and operating results.
We have experienced, and expect to continue to experience, fluctuations in operating results due to business cycles. We sell our products principally to energy, chemical, industrial and pharmaceutical markets. While we serve a variety of markets to minimize our dependency on any one, a significant downturn in any of these markets could cause a material adverse impact on our sales and operating results. In addition, there is a risk that if our future operating results significantly decline, it could impair our ability to realize our deferred tax assets.
Our businesses are adversely affected by economic downturns.
In 2008, general worldwide economic conditions significantly deteriorated. While these conditions improved in fiscal 2010, the improvement has not been uniform and these business conditions could prolong or worsen. Furthermore, our backlog may not be converted to revenue due to customer order cancellations.
We cannot predict the timing or duration of any economic slowdown or the timing or strength of a subsequent recovery, worldwide, or in the specific end markets we serve. If our markets significantly deteriorate due to these economic effects, our business, financial condition and results of operations will likely be materially and adversely affected. Additionally, our stock price could decrease if investors have concerns that our business, financial condition and results of operations will be negatively impacted by the worldwide economic downturn.
In addition, our defined benefit employee plans invest in fixed income and equity securities to fund employee obligations under those plans. The performance of the financial markets and interest rates impact our funding obligations under our defined benefit pension plans. Significant changes in market interest rates, decreases in the fair value of our plan assets and investment losses on plan assets may increase our future funding obligations and adversely impact our results of operations and cash flows over the long-term.
Our restructuring activities could affect our business and financial results.
In response to the 2008 worldwide economic downturn, and to improve operational efficiency, we initiated programs to streamline operations and reduce expenses, including measures such as reductions in workforce, discretionary spending and capital expenditures. We expect these comprehensive initiatives to generate significant savings that we can invest in our growth initiatives and long-term value enhancing strategy. Our failure to generate significant cost savings and margin improvement from these initiatives could adversely affect our profitability and weaken our competitive position. Because we cannot always immediately adapt our production capacity and related cost structures to changing market conditions, our manufacturing capacity may at times exceed or fall short of our production requirements, which could result in the loss of customers, loss of market share and otherwise adversely affect our business and financial results.
Approximately 59% of our sales are to customers outside the United States, and we are subject to economic and political and currency fluctuation risks or devaluation associated with international operations.
Approximately 59% of our fiscal 2010 sales were to customers outside the U.S., and we maintain primary operations in 15 countries. Conducting business outside the U.S. is subject to risks, including currency exchange rate fluctuations and the possibility of hyper-inflationary conditions; changes in regional, political or economic conditions including trade protection measures, such as tariffs or import/export restrictions; subsidies or increased access to capital for firms who are currently, or may emerge, as competitors in countries in which we have operations; partial or total expropriation; unexpected changes in regulatory requirements; and international
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sentiment towards the U.S. One or more of these factors could have a material adverse effect on our international operations. Furthermore, unexpected and dramatic devaluations of currencies in developing or emerging markets, such as the recent devaluation of the Venezuelan bolivar, could negatively affect the value of our earnings from, and of the assets located in, those markets.
Regulatory and legal developments including changes to United States taxation rules, health care reform and recent governmental climate change initiatives could negatively affect our financial performance.
Our operations and the markets we compete in are subject to numerous federal, state, local and foreign governmental laws and regulations. Existing laws and regulations may be revised or reinterpreted and new laws and regulations, including taxation rules, health care reform and recent governmental climate change initiatives, may be adopted or become applicable to us or our customers. These regulations are complex, change frequently and have tended to become more stringent over time and may increase our costs and reduce profitability. We cannot predict the form any such new laws or regulations will take or the impact these laws and regulations will have on our business or operations. However, significant changes in governmental laws and regulations could adversely affect our future results of operations.
We must comply with a variety of import and export laws and regulations, and the cost of compliance as well as the consequences of failure to properly comply with such laws could adversely affect our business.
We are subject to a variety of laws regarding our international operations, including regulations issued by the U.S. Department of Commerce Bureau of Industry and Security and various foreign governmental agencies. We cannot predict the nature, scope or effect of future regulatory requirements to which our international manufacturing operations and trading practices might be subject or the manner in which existing laws might be administered or interpreted. Future regulations could limit the countries in which certain of our products may be manufactured or sold or could restrict our access to, and increase the cost of obtaining, products from foreign sources. In addition, actual or alleged violations of import-export laws could result in enforcement actions and substantial financial penalties.
Competition in our markets could cause our sales to decrease.
We face significant competition from a variety of competitors in our markets. In some markets, our competitors have greater resources than we do. In addition, new competitors could enter our markets. Competitive pressures, including product quality, performance, price and service capabilities, and new technologies could adversely affect our competitive position, involving a loss of market share or decrease in prices, either of which could have a material adverse effect on our sales and operating results.
The nature of our products creates the possibility of product liability lawsuits, which could harm our business.
As a manufacturer of equipment and systems for use in various markets, we face an inherent risk of exposure to product liability claims. Although we maintain strict quality controls and procedures, we cannot be certain that our products will be completely free from defect. In addition, in certain cases, we rely on third-party manufacturers for components of our products. Although we have liability insurance coverage, we cannot be certain that this insurance coverage will continue to be available to us at a reasonable cost or will be adequate to cover any such liabilities. We generally seek to obtain contractual indemnification from our third-party suppliers, which is typically limited by its terms. In the event we do not have adequate insurance or contractual indemnification, product liabilities could have a material adverse effect on our business, financial condition or results of operations. Even if a product liability claim is without merit, it could harm our business.
Our results of operations could vary based on the availability and cost of our raw materials.
The prices of our raw materials may increase. The costs of raw materials used by us are affected by fluctuations in the price of metals such as steel.
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Our ability to obtain parts and raw materials from our suppliers is uncertain. We are engaged in a continuous, company-wide effort to concentrate our purchases of parts and raw materials on fewer suppliers, and to obtain parts from low-cost countries where possible. As this effort progresses, we are exposed to an increased risk of disruptions to our supply chain, which could have a significant effect on our operating results.
Our results of operations could vary as a result of the methods, estimates and judgments we use in applying our accounting policies or due to changes in accounting standards.
The methods, estimates and judgments we use in applying our accounting policies could have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates” in Part II, Item 7 of this Form 10-K). Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments could significantly affect our results of operations. Additionally, changes in accounting standards, including new interpretations and application of accounting standards, may change our reported financial condition, results of operations or cash flow.
Any impairment in the value of our intangible assets, including goodwill, would negatively affect our operating results and total capitalization.
Our total assets reflect substantial intangible assets, primarily goodwill. The goodwill results from our acquisitions, representing the excess of cost over the fair value of the net assets we have acquired. We assess at least annually whether there has been any impairment in the value of our intangible assets. If future operating performance at one or more of our business units were to fall significantly below current levels, if competing or alternative technologies emerge, if market conditions for businesses acquired decline, if significant and prolonged negative industry or economic trends continue, if our stock price and market capitalization declines, or if future cash flow estimates decline, we could incur, under current applicable accounting rules, a non-cash charge to operating earnings for goodwill impairment. Any determination requiring the write-off of a significant portion of unamortized intangible assets would negatively affect our results of operations and total capitalization, the effect of which could be material.
Work stoppages, union and works council campaigns, labor disputes and other matters associated with our labor force could adversely impact our results of operations and cause us to incur incremental costs.
We have a number of U.S. collective bargaining units and various non-U.S. collective labor arrangements. We are subject to potential work stoppages, union and works council campaigns and potential labor disputes, any of which could adversely impact our productivity and results of operations.
The Company’s growth and results of operations may be adversely affected if the Company is unsuccessful in its capital allocation and acquisition program or unable to successfully divest non-core assets and businesses.
The Company expects to continue its strategy of seeking to acquire value creating add-on businesses that broaden its existing companies and their global reach as well as, in the right circumstances, strategically pursuing larger, stand-alone businesses that have the potential to either complement its existing companies or allow the Company to pursue a new platform. However, there can be no assurance that the Company will find suitable businesses to purchase or that the associated price would be acceptable. If the Company is unsuccessful in its acquisition efforts, then its ability to grow could be adversely affected. In addition, a completed acquisition, such as the potential acquisition of T-3 Energy Services, Inc., may underperform relative to expectations, be unable to achieve synergies originally anticipated, or require the payment of additional expenses for assumed liabilities. Further, failure to allocate capital appropriately could also result in over exposure in certain markets and geographies. These factors could potentially have an adverse impact on the Company’s operating profits and cash flows. The inability to dispose of non-core assets and businesses on satisfactory terms and conditions and within the expected time frame could also have an adverse affect on our results of operations.
ITEM 1B.UNRESOLVED STAFF COMMENTS
None.
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ITEM 2.PROPERTIES
Our executive offices are leased in Beavercreek Township, near Dayton, Ohio. Set forth below is certain information relating to our principal operating facilities. We consider our properties, as well as the related machinery and equipment, to be suitable for their intended purposes.
| Square Footage | ||||||||||||||||
| Sales/ | (in thousands) | |||||||||||||||
| Manufacturing | Service | Owned | Leased | |||||||||||||
Function and size by segment: | ||||||||||||||||
| Fluid Management | 13 | 16 | 1,008 | 153 | ||||||||||||
| Process Solutions | 12 | — | 1,667 | 149 | ||||||||||||
| Romaco | 5 | 1 | 221 | 80 | ||||||||||||
| North America | South America | Europe | Asia/Australia | |||||||||||||
Geographical locations by segment: | ||||||||||||||||
| Fluid Management | 23 | 3 | 1 | 2 | ||||||||||||
| Process Solutions | 3 | 1 | 5 | 3 | ||||||||||||
| Romaco | 1 | — | 5 | — | ||||||||||||
ITEM 3.LEGAL PROCEEDINGS
There are claims, suits and complaints arising in the ordinary course of business filed or pending against us. Although we cannot predict the outcome of such claims, suits and complaints with certainty, we do not believe that the disposition of these matters will have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 4.[REMOVED AND RESERVED]
Executive Officers of the Registrant
Peter C. Wallace, age 56, has been President and Chief Executive Officer of the Company since July 12, 2004. From October 2001 to July 2004, Mr. Wallace was President and CEO of IMI Norgren Group (sophisticated motion and fluid control systems for original equipment manufacturers). He was employed by Rexnord Corporation (power transmission and conveying components) for 25 years serving as President and Group Chief Executive from 1998 until October 2001 and holding a variety of senior sales, marketing, and international positions prior thereto.
Christopher M. Hix, age 48, has been our Vice President and Chief Financial Officer since August 2006. He held various corporate finance and business development positions with Roper Industries (diversified industrial products) from 2001 to July 2006, the most recent being Vice President, Business Development and Assistant Secretary. He was Chief Financial Officer and Vice President of Customer Support for Somero Enterprises, Inc. from 1999 to 2001. From 1991 to 1999 he was with Roper Industries serving in various senior business unit financial and operational leadership positions.
Saeid Rahimian, age 52, has been a Corporate Vice President and President, Fluid Management, since September 2005. He was Group Vice President and President of our R&M Energy Systems and Reactor Systems businesses from May 2004 to September 2005. He has also been President of our R&M Energy Systems business from 1998 to May 2004. Prior to 1998 he held various positions within Robbins & Myers, Inc.
Jeffrey L. Halsey, age 58, has been our Vice President, Human Resources since July 2007. He held various Human Resources positions with ABB Ltd. from 1989 through 2006, most recently as Group Senior Vice President, Human Resources for ABB Inc. Prior to 1989 he was Vice President, Employee Relations for Pullman, Inc.
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Kevin J. Brown, age 52, has been our Corporate Controller and Chief Accounting Officer since October 2006. He was our Vice President of Corporate Services, Investor Relations & Compliance from August 2006 to October 2006 and he was our Vice President and Chief Financial Officer from January 2000 to August 2006. Previously, he was our Controller and Chief Accounting Officer since December 1995. Prior to joining us, he was employed by the accounting firm of Ernst & Young LLP for 15 years.
Michael J. McAdams, age 61, has been our Treasurer since October 2005, and was Assistant Treasurer from September 2004 to September 2005. From 1999 to 2003, he was Treasurer of Evenflo Company, Inc. He was Treasurer of Advanced Silicon Materials, Inc. from 1996 to 1999. He was also employed by Armco, Inc. for 15 years, holding various finance positions, including the position of Assistant Treasurer.
Linn S. Harson, age 45, has been our Secretary and General Counsel since January 2009. She has been with the law firm of Thompson Hine LLP since 1996, and a partner in the same firm since January 2005.
The term of office of our executive officers is until our 2011 Annual Meeting of Directors (the date of which has not yet been finally determined) or until their respective successors are elected.
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PART II
ITEM 5.MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(A) Our common shares trade on the New York Stock Exchange under the symbol RBN. The prices presented in the following table are the high and low closing prices for the common shares for the periods presented.
| Dividends | ||||||||||||
| Declared and | ||||||||||||
| Fiscal 2010 | High | Low | Paid per Share | |||||||||
| 1st Quarter ended Nov. 30, 2009 | $ | 25.76 | $ | 22.33 | $ | 0.0400 | ||||||
| 2nd Quarter ended Feb. 28, 2010 | 26.45 | 22.22 | 0.0425 | |||||||||
| 3rd Quarter ended May 31, 2010 | 27.60 | 20.95 | 0.0425 | |||||||||
| 4th Quarter ended Aug. 31, 2010 | 25.00 | 20.56 | 0.0425 | |||||||||
| Fiscal 2009 | ||||||||||||
| 1st Quarter ended Nov. 30, 2008 | $ | 43.19 | $ | 16.53 | $ | 0.0375 | ||||||
| 2nd Quarter ended Feb. 28, 2009 | 20.02 | 15.71 | 0.0400 | |||||||||
| 3rd Quarter ended May 31, 2009 | 22.19 | 13.45 | 0.0400 | |||||||||
| 4th Quarter ended Aug. 31, 2009 | 23.76 | 17.49 | 0.0400 | |||||||||
(B) As of September 30, 2010, we had 333 shareholders of record.
(C) Dividends paid on common shares are presented in the table in Item 5(A). Our credit agreement includes certain covenants which restrict our payment of dividends above $10,000,000 plus a carry over amount from the prior year, which is 50% of the amount that such dividends were under $10,000,000.
(D) In fiscal 2010 there were no sales of unregistered securities.
(E) A summary of the Company’s repurchases of its common shares during the quarter ended August 31, 2010 is as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
| Total Number of | Maximum | |||||||||||||||
| Shares | Number of | |||||||||||||||
| Purchased as | Shares that May | |||||||||||||||
| Average | Part of Publicly | Yet Be | ||||||||||||||
| Total Number | Price | Announced | Purchased Under | |||||||||||||
| of Shares | Paid per | Plans or | the Plans or | |||||||||||||
| Period | Purchased(1) | Share | Programs | Programs(2) | ||||||||||||
| June 1-30, 2010 | 0 | $ | — | 0 | 992,463 | |||||||||||
| July 1-31, 2010 | 0 | — | 0 | 992,463 | ||||||||||||
| August 1-31, 2010 | 31,531 | 23.66 | 0 | 992,463 | ||||||||||||
| Total | 31,531 | 0 | ||||||||||||||
| (1) | During the fourth quarter of 2010, the Company purchased 31,531 of its common shares in connection with its employee benefit plans, including purchases associated with the vesting of restricted stock awards. These purchases were not made pursuant to a publicly announced repurchase plan or program. | |
| (2) | On October 27, 2008, our Board of Directors approved the repurchase of up to 3.0 million of our outstanding common shares (the “Program”). In the first quarter of fiscal 2009, we repurchased an aggregate of 2,007,537 of our outstanding common shares pursuant to the Program. In connection with the Program, the Company entered into a Rule 10b5-1 securities repurchase plan which was effective November 17, 2008 through January 7, 2009. The Program will expire when we have repurchased all the authorized shares under the Program, unless terminated earlier by a Board resolution. No shares were repurchased under the program in fiscal 2010. |
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ITEM 6.SELECTED FINANCIAL DATA
Selected Financial Data (1)
Robbins & Myers, Inc. and Subsidiaries
(In thousands, except per share and employee data)
Robbins & Myers, Inc. and Subsidiaries
(In thousands, except per share and employee data)
The following selected financial data should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements included In Item 8 “Financial Statements and Supplementary Data”. Per share information for fiscal 2006 and 2007 has been adjusted to reflect our 2008 stock split.
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| Operating Results | ||||||||||||||||||||
| Orders | $ | 641,320 | $ | 554,349 | $ | 812,998 | $ | 719,848 | $ | 688,822 | ||||||||||
| Ending backlog | 175,074 | 134,977 | 237,980 | 193,821 | 174,447 | |||||||||||||||
| Sales | 584,694 | 640,358 | 787,168 | 695,393 | 625,389 | |||||||||||||||
| EBIT (2,3) | 50,878 | 74,368 | 130,664 | 94,282 | 7,508 | |||||||||||||||
| Net income (loss) -Robbins & Myers, Inc. (2,3) | 33,197 | 55,364 | 87,402 | 50,705 | (19,587 | ) | ||||||||||||||
| Net income (loss) per share, diluted (2,3) | $ | 1.01 | $ | 1.66 | $ | 2.52 | $ | 1.48 | $ | (0.66 | ) | |||||||||
| Financial Condition | ||||||||||||||||||||
| Total assets | $ | 817,021 | $ | 796,854 | $ | 864,717 | $ | 816,143 | $ | 712,047 | ||||||||||
| Total cash | 149,213 | 108,169 | 123,405 | 116,110 | 48,365 | |||||||||||||||
| Total long-term debt (excluding portion due within one year) | 93 | 265 | 30,435 | 30,553 | 104,787 | |||||||||||||||
| Total equity (4) | 491,024 | 483,111 | 515,456 | 424,947 | 351,115 | |||||||||||||||
| Other Data | ||||||||||||||||||||
| Cash flow from operating activities | $ | 88,483 | $ | 51,860 | $ | 89,560 | $ | 65,113 | $ | 40,581 | ||||||||||
| Capital expenditures, net | 10,611 | 17,694 | 22,114 | 16,536 | 13,660 | |||||||||||||||
| Amortization | 601 | 1,107 | 1,279 | 1,631 | 2,343 | |||||||||||||||
| Depreciation | 15,029 | 15,119 | 14,970 | 14,993 | 16,235 | |||||||||||||||
| Dividends declared per share | $ | 0.1675 | $ | 0.1575 | $ | 0.1450 | $ | 0.1250 | $ | 0.1100 | ||||||||||
| Number of employees | 2,965 | 3,027 | 3,357 | 3,233 | 3,271 | |||||||||||||||
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Notes to Selected Financial Data
(1) We purchased the remaining 24 percent noncontrolling interest in our Process Solutions Group Chinese subsidiary on June 9, 2009. We acquired Mavag on January 10, 2008 (by our 51 percent owned consolidated joint venture in India). We sold our Zanchetta product line on March 31, 2007 and our Hapa and Laetus product lines on March 31, 2006, all of which impact the comparability of the Selected Financial Data.
(2) A summary of the Company’s special items including inventory write-downs charged to cost of sales, and their impact on the diluted earnings per share is as follows:
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
| Pre-tax impact of special items expense (income): | ||||||||||||||||||||
| Cost of sales-restructuring inventory writedowns- Process Solutions and Romaco segments | $ | — | $ | — | $ | — | $ | — | $ | 1,127 | ||||||||||
| Other restructuring costs including severance | 2,764 | — | — | 1,818 | 8,472 | |||||||||||||||
| Net product line/facility sale gains | — | — | (7,631 | ) | (5,279 | ) | (10,258 | ) | ||||||||||||
| Goodwill impairment-Romaco segment | — | — | — | — | 39,174 | |||||||||||||||
| Total special items | $ | 2,764 | $ | — | $ | (7,631 | ) | $ | (3,461 | ) | $ | 38,515 | ||||||||
| (Decrease) increase on net income due to special items | $ | (2,764 | ) | $ | — | $ | 6,265 | $ | 3,461 | $ | (36,941 | ) | ||||||||
| (Decrease) increase on diluted earnings per share due to special items | $ | (0.08 | ) | $ | — | $ | 0.18 | $ | 0.06 | $ | (1.29 | ) | ||||||||
(3) The Company’s operating performance is evaluated using several measures. One of those measures, EBIT, is income before interest and income taxes and is reconciled to net income on our Consolidated Statement of Income. We evaluate performance of our business segments and allocate resources based on EBIT. EBIT is not, however, a measure of performance calculated in accordance with U.S. generally accepted accounting principles and should not be considered as an alternative to net income as a measure of our operating results. EBIT is not a measure of cash available for use by management.
(4) In the first quarter of fiscal 2010, the Company adopted and retrospectively applied a new accounting standard related to a noncontrolling interest in a subsidiary. The standard requires a noncontrolling interest in a subsidiary to be classified as a separate component of total equity.
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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS
Overview
We are a leading designer, manufacturer and marketer of highly engineered, application-critical equipment and systems for the energy, industrial, chemical and pharmaceutical markets worldwide. We attribute our success to our close and continuing interaction with customers, our manufacturing, sourcing and application engineering expertise and our ability to serve customers globally. We attempt to continually develop initiatives to improve our performance in these key areas. In late calendar year 2008 through mid calendar year 2009, demand for most of our products slowed due to lower oil and natural gas prices as well as the worldwide economic downturn, which affected our operating results. We responded to these challenging business conditions by cutting costs, initiating restructuring programs to reduce manufacturing capacity while increasing utilization, standardizing product offerings to allow greater utilization of our lower cost manufacturing facilities, leveraging functional resources, and further integrating our business activities. We expect to continue our restructuring efforts into fiscal 2011 to improve our competitiveness and long-term profitability.
In addition, we are continuing our focus on emerging markets where economic growth remains well above the global average, and we are committed to increasing margins through productivity initiatives, improved sales, product management and aftermarket capabilities, commercializing new products, increased utilization of global work force, reductions in discretionary spending and close management of fixed costs. We operate in a highly competitive business environment in most markets, and our long-term growth will depend in particular on our ability to expand our business (including through geographical and product line expansion), identify, consummate and integrate appropriate acquisitions to create shareholder value, develop innovative new products with attractive gross profit margins and continue to improve operating efficiency and organizational effectiveness. We are cautiously optimistic that worldwide economic recovery and recent market trends will continue to gain strength in fiscal 2011, following four quarters of sequential growth in consolidated orders and an increase in consolidated backlog throughout fiscal 2010.
Our Company has a Venezuelan subsidiary with net sales, operating income and total assets representing approximately one percent of our consolidated financial statement amounts in fiscal 2010 and 2009. In early January 2010, the Venezuelan government devalued its currency. We expect our subsidiary to operate under a rate of 4.30 bolivars to the U.S. dollar, as compared with the previous rate of 2.15, and our fiscal 2010 year-end financial statements reflect this new rate. In addition, the financial statements of our Venezuelan subsidiary were consolidated and reported under highly inflationary accounting rules beginning in the second quarter of fiscal 2010 resulting in an income statement exchange loss of $2.2 million during the year.
With approximately 59% of our sales outside the United States, we were also impacted by foreign currency translation in fiscal 2010 due to the U.S. dollar strengthening relative to our other principal operating currencies. The impact on net income was immaterial for fiscal 2010. Additionally, the assets and liabilities of our foreign operations are translated at the exchange rates in effect at the balance sheet date, with related gains or losses reported as a separate component of our shareholders’ equity, except for Venezuela as discussed above. The devaluation of most foreign currencies against the U.S. dollar impacted our financial condition at the end of fiscal 2010 as compared with fiscal 2009.
On October 6, 2010, we announced an agreement to acquire T-3 Energy Services, Inc. (“T-3”), a provider of oilfield and pipeline products and services, in a transaction valued at approximately $422 million as of the date of the announcement, net of cash assumed. Under the terms of the agreement, for each share of T-3 common stock, T-3 stockholders will receive 0.894 of our common shares plus $7.95 in cash without interest. Accordingly, T-3 stockholders are estimated to receive an aggregate of approximately 12 million of our common shares and $106 million in cash, which we expect to pay from our available cash balances. Upon closing of the transaction, we expect T-3 stockholders to own approximately 27% of our outstanding common shares. The proposed agreement (See Note 14 — Subsequent Events) is expected to be completed in late calendar year 2010 or early calendar year 2011 subject to customary closing conditions, shareholder approvals and regulatory reviews and will operate under our Fluid Management segment.
Our business consists of three market-focused segments: Fluid Management, Process Solutions and Romaco. Beginning with the first quarter of fiscal 2010, we realigned our business segment reporting structure as a result of organizational, management and operational changes implemented in the first quarter of fiscal 2010. Our Chemineer brand is now included in our Fluid Management segment, instead of the Process Solutions segment where it was previously reported. Certain amounts presented in the prior period financial statements have been reclassified to conform to our current year presentation and to reflect this segment realignment.
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Fluid Management. Order levels from customers served by our Fluid Management segment have recovered from fiscal 2009 and are showing a strong upward trend. Demand for our energy products remains robust and industrial demand is improving. Our primary objectives for this segment are to expand our geographic reach, improve our selling and product management capabilities, commercialize new products in our niche market sectors, develop new customer relationships and capture synergies within the segment. Our Fluid Management business segment designs, manufactures and markets equipment and systems, including hydraulic drilling power sections; standard and customized fluid-agitation equipment and systems; down-hole and industrial progressing cavity pumps, wellhead systems, grinders, rod guides, tubing rotators, pipeline closure products and valves. These products are used in oil and gas exploration and recovery, specialty chemical, wastewater treatment and a variety of other industrial applications.
Process Solutions. Order levels in our Process Solutions segment have improved sequentially each quarter of fiscal 2010. However, pricing has not fully recovered, especially in European chemical markets. Our primary objectives are to increase the capabilities of our low cost locations, standardize our products, integrate our global operations and increase our focus on aftermarket opportunities. Our Process Solutions business segment designs, manufactures and services glass-lined reactors and storage vessels, customized equipment and systems and customized fluoropolymer-lined fittings, vessels and accessories, primarily for the pharmaceutical and specialty chemical markets.
Romaco. Order levels in our Romaco segment have also trended higher in fiscal 2010 compared with fiscal 2009. The primary target markets for Romaco include pharmaceutical, healthcare, food and cosmetics. Our primary objectives are to maintain our simplified business model, increase our market presence for certain applications, further develop our global distribution capabilities and increase our focus on aftermarket opportunities. Our Romaco business segment designs, manufactures and markets packaging and secondary processing equipment for the pharmaceutical, healthcare, nutraceutical, food and cosmetic industries. Packaging applications include blister and strip packaging for various products including tablets, effervescent tablets and capsules; filling of both liquid and powder into vials and bottles, capsule and tube filling; tablet counting and packaging for bottles; customized packaging for drug delivery devices; as well as secondary processing for liquids and semi solids.
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Results of Operations
The following tables present components of our Consolidated Statement of Income and segment information.
| Consolidated | 2010 | 2009 | 2008 | |||||||||
| Sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
| Cost of sales | 66.3 | 64.9 | 63.1 | |||||||||
| Gross profit | 33.7 | 35.1 | 36.9 | |||||||||
| SG&A expenses | 24.5 | 23.5 | 21.2 | |||||||||
| Other expense (income) | 0.5 | — | (0.9 | ) | ||||||||
| EBIT | 8.7 | % | 11.6 | % | 16.6 | % | ||||||
| By Segment | 2010 | 2009 | 2008 | |||||||||
| (In millions, except percents) | ||||||||||||
| Fluid Management: | ||||||||||||
| Sales | $ | 308.5 | $ | 327.9 | $ | 389.5 | ||||||
| EBIT | 75.3 | 80.0 | 97.3 | |||||||||
| EBIT % | 24.4 | % | 24.4 | % | 25.0 | % | ||||||
| Process Solutions: | ||||||||||||
| Sales | $ | 169.7 | $ | 199.4 | $ | 246.9 | ||||||
| EBIT | (8.7 | ) | 8.6 | 31.6 | ||||||||
| EBIT % | (5.1 | )% | 4.3 | % | 12.8 | % | ||||||
| �� | ||||||||||||
| Romaco: | ||||||||||||
| Sales | $ | 106.5 | $ | 113.0 | $ | 150.7 | ||||||
| EBIT | 4.0 | 2.3 | 20.6 | |||||||||
| EBIT % | 3.7 | % | 2.0 | % | 13.7 | % | ||||||
| Consolidated: | ||||||||||||
| Sales | $ | 584.7 | $ | 640.4 | $ | 787.2 | ||||||
| EBIT | 50.9 | 74.4 | 130.7 | |||||||||
| EBIT % | 8.7 | % | 11.6 | % | 16.6 | % | ||||||
The comparability of the operating results has been impacted by restructuring costs in fiscal 2010, as well as product line/facility sale gains in fiscal 2008. See Note 4, “Statement of Income Information”, in Notes to Consolidated Financial Statements for further discussion. In addition, the comparability of the segment data is impacted by changes in foreign currency exchange rates, due to the translation of non-U.S. dollar denominated subsidiary results into U.S. dollars.
The Company’s operating performance is evaluated using several measures. One of those measures, EBIT, is income before interest and income taxes and is reconciled to net income on our Consolidated Statement of Income. We evaluate performance of our business segments and allocate resources based on EBIT. EBIT is not, however, a measure of performance calculated in accordance with U.S. generally accepted accounting principles and should not be considered as an alternative to net income as a measure of our operating results. EBIT is not a measure of cash available for use by management.
Fiscal Year Ended August 31, 2010 Compared with Fiscal Year Ended August 31, 2009
Net Sales
Consolidated sales for fiscal 2010 were $584.7 million compared with $640.4 million in fiscal 2009, a decrease of $55.7 million, or 9%. Excluding the impact of currency translation, sales decreased by $66.4 million, or 10% due to lower sales in all three of our segments in the first six months of fiscal 2010. Sales in the second half of fiscal 2010 were higher than the comparable period of the prior year.
The Fluid Management segment had sales of $308.5 million in fiscal 2010 compared with $327.9 million in fiscal 2009, a decrease of $19.4 million, or 6%. Excluding the impact of foreign currency translation, sales declined by $24.0 million, or 7%. The year over year sales decrease was primarily due to lower customer demand early in fiscal
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2010 resulting from reduced levels of oil and gas exploration and recovery activity in that period. There was higher activity in the second half of fiscal 2010 over the same period in the prior year which was driven by higher oil prices worldwide, a higher level of demand for horizontal drilling rigs used in North American shale formations and higher general industrial activity. Orders for this segment were impacted by the same factors and were $332.6 million in fiscal 2010 compared with $274.7 million in fiscal 2009. Excluding the impact of foreign currency, orders grew $52.6 million in fiscal 2010 over fiscal 2009. Ending backlog of $58.1 million was 66% higher than at the end of the prior year.
The Process Solutions segment had sales of $169.7 million in fiscal 2010 compared with $199.4 million in fiscal 2009, a decrease of $29.7 million, or 15%. Excluding the impact of currency translation, sales decreased by $34.4 million, or 17% from 2009 results which benefited from significant backlog at the beginning of the fiscal year. Orders in fiscal 2010, however, continued to improve from the latter half of fiscal 2009 to $189.3 million reflecting improved market conditions. Excluding foreign currency impact, orders increased by $8.9 million, or 5% over prior year. Demand in our Western chemical markets remained weak, while demand in our Asian market was favorable. Ending backlog of $78.7 million was 32% higher than at the end of prior year.
The Romaco segment, which is a European-based business, had sales of $106.5 million in fiscal 2010 compared with $113.0 million in fiscal 2009, a decrease of $6.5 million, or 6%. After adjusting for currency translation, sales decreased $8.1 million, or 7% from the prior year. Orders were $119.4 million in fiscal 2010 compared with $103.0 million in fiscal 2009. Excluding currency impact, orders increased $11.0 million, or 11%, from the prior year. We believe this order increase is an outcome of the global economic recovery combined with our increased focus on market opportunities and product innovation. Ending backlog of $38.3 million was 5% lower than prior year levels.
Earnings Before Interest and Income Taxes (EBIT)
Consolidated EBIT for fiscal 2010 was $50.9 million compared with $74.4 million in fiscal 2009, a decrease of $23.5 million. Results for fiscal 2010 included other expense of $2.8 million related to restructuring costs in our Process Solutions segment. Excluding the impacts of other expense and currency, consolidated EBIT decreased $22.2 million mainly due to lower sales volume described above in all of our segments, a $2.2 million highly inflationary currency loss related to our Venezuelan operations, European pricing pressures in our Process Solutions segment and higher corporate costs related to strategic and legal matters. Consistent with the sales variances described above, the unfavorable variances related primarily to the first six months of the fiscal year.
The Fluid Management segment EBIT for fiscal 2010 was $75.3 million, compared with $80.0 million in fiscal 2009. Excluding the currency rate impact, EBIT decreased $5.4 million or 7% due primarily to the sales decrease described above and the Venezuelan highly inflationary currency loss, offset by an insurance recovery of $0.8 million, an asset sale gain of $0.6 million and favorable product mix.
The Process Solutions segment had an EBIT loss of $8.7 million in fiscal 2010, compared with EBIT of $8.6 million in fiscal 2009, a decrease of $17.3 million. Excluding the impact of currency translation, EBIT declined $18.0 million. This decrease is due principally to lower sales, restructuring costs of $2.8 million and European pricing pressures in fiscal 2010.
The Romaco segment EBIT was $4.0 million for fiscal 2010, an increase of $1.7 million compared with fiscal 2009. Currency translation did not materially impact EBIT in this segment. The increase in EBIT, despite lower sales in fiscal 2010 compared with fiscal 2009, resulted from operational streamlining, personnel reductions and other cost-cutting measures.
Corporate costs were $3.2 million higher in fiscal 2010 over the prior year mainly due to costs associated with strategic and legal matters.
Interest Expense
Net interest expense was $0.2 million in fiscal 2010 and $0.4 million in fiscal 2009. The reduction in net interest expense resulted primarily from lower debt levels in fiscal 2010 due to the $30.0 million repayment of all remaining Senior Notes on May 3, 2010.
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Income Taxes
Our effective tax rate was 32.6% in fiscal 2010 and 23.5% in fiscal 2009. The current year tax rate is slightly lower than the U.S federal statutory rate mainly due to a one-time tax planning gain and the closure of tax audits, somewhat offset by non-U.S. valuation allowances. The lower fiscal 2009 tax rate resulted from a non-recurring tax planning gain and finalizing earlier tax estimates that year.
Net Income
Our net income in fiscal 2010 was $33.2 million compared with $55.4 million in fiscal 2009. The decrease in net income is a result of lower sales, pricing pressures in certain product lines, higher costs related to restructuring, legal and strategic matters and a higher tax rate, partly offset by cost reduction initiatives.
Fiscal Year Ended August 31, 2009 Compared with Fiscal Year Ended August 31, 2008
Net Sales
Consolidated sales for fiscal 2009 were $640.4 million compared with $787.2 million in fiscal 2008, a decrease of $146.8 million or 19%. Excluding the impact of currency translation and an acquisition early in the second quarter of fiscal 2008, sales decreased by $97.5 million or 13%, primarily in the second half of fiscal 2009.
The Fluid Management segment had sales of $327.9 million in fiscal 2009 compared with $389.5 million in fiscal 2008, a decrease of $61.6 million, or 16%. Currency translation accounted for $12.7 million of the decrease, and the remaining $48.9 million decrease, or 13%, resulted from lower demand for energy equipment products and lower demand in general industrial markets. Orders for this segment were impacted by the same factors and were $274.7 million in fiscal 2009 compared with $419.2 million in fiscal 2008. Ending backlog of $35.1 million was 62% lower than at the end of the prior year.
The Process Solutions segment had sales of $199.4 million in fiscal 2009 compared with $246.9 million in fiscal 2008, a decrease $47.5 million, or 19%. Excluding the impact of currency translation, sales declined by $21.9 million. We believe this decrease was largely attributable to the worldwide economic downturn. Orders were $176.6 million in fiscal 2009 compared with $248.5 million in fiscal 2008. The drop in orders in fiscal 2009 over prior year was primarily driven by lower demand in our chemical markets. Ending backlog of $59.7 million was 37% lower than prior year levels.
The Romaco segment had sales of $113.0 million in fiscal 2009 compared with $150.7 million in fiscal 2008, a decrease of $37.7 million, or 25%. After adjusting for currency translation, sales decreased $27.9 million, or 19% from the prior year. Orders decreased $30.9 million, or 21%, from the prior year after adjusting for currency exchange rates. We believe the decrease in demand was primarily due to the worldwide economic slowdown. Ending backlog of $40.1 million was 22% lower than prior year levels.
Earnings Before Interest and Income Taxes (EBIT)
Consolidated EBIT for fiscal 2009 was $74.4 million compared with $130.7 million in fiscal 2008, a decrease of $56.3 million. Results for fiscal 2008 included other income of $7.6 million from gains on product line/facility sales. Excluding the impact of other income, and a currency impact of $2.9 million, consolidated EBIT decreased $45.8 million mainly due to decreased sales volume described above, pricing pressures in certain product lines, and higher general operating expenses related to severance, employee benefit plans and legal costs, partly offset by cost reduction initiatives completed during the year.
The Fluid Management segment EBIT for fiscal 2009 was $80.0 million, compared with $97.3 million in fiscal 2008. The decrease of $17.3 million, or $15.2 million excluding currency translation, resulted primarily from the sales decrease in the second half of fiscal 2009 as described above and pricing pressures in certain product lines.
The Process Solutions segment EBIT was $8.6 million for fiscal 2009, compared with $31.6 million for fiscal 2008, a decrease of $23.0 million. Process Solutions had a gain on the sale of a facility in fiscal 2008 of $0.8 million. Excluding the impact of the facility sale gain, and a currency effect of $1.6 million, fiscal 2009 EBIT decreased by $20.6 million principally due to the lower sales volume described above, coupled with pricing pressures in certain product lines and severance costs.
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The Romaco segment EBIT was $2.3 million for fiscal 2009, a decrease of $18.3 million compared with fiscal 2008. In fiscal 2008, other income included a $5.7 million gain from Romaco product lines divestiture in fiscal 2006 and a $1.1 million gain on a facility sale related to a previously disposed product line. The remaining $11.5 million in lower earnings was due to decreased sales volume described above.
Interest Expense
Net interest expense was $0.4 million in fiscal 2009 and $2.0 million in fiscal 2008. The reduction in net interest expense resulted from lower debt levels in fiscal 2009 due to the repayment of $70.0 million of Senior Notes on May 1, 2008.
Income Taxes
Our effective tax rate was 23.5% in fiscal 2009 and 30.4% in fiscal 2008. The lower tax rate resulted from the implementation of certain tax strategies and finalizing earlier tax estimates. The effective tax rate in fiscal 2008 was lower than the statutory tax rate primarily due to profitable operations in Italy and Germany, which resulted in the release of deferred tax asset valuation allowances of $4.9 million as well as increased taxable income in countries outside the United States, where statutory rates are lower.
Net Income
Our net income in fiscal 2009 was $55.4 million compared with $87.4 million in fiscal 2008. The decrease in net income was a result of lower sales, pricing pressures in certain product lines, severance costs related to our restructuring efforts across all our business platforms, benefit from product line/ asset sales in fiscal 2008, higher medical and legal costs, partly offset by cost reduction initiatives, lower interest expense and a lower normalized effective tax rate in fiscal 2009, as discussed above.
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Liquidity and Capital Resources
Operating Activities
In fiscal 2010, our cash flow from operating activities was $88.5 million compared with $51.9 million in fiscal 2009, an increase of $36.6 million. This increase from prior year, despite lower net income, resulted from a net reduction in working capital, which contributed $41.7 million to fiscal 2010 cash flow.
We expect our available cash, fiscal 2011 operating cash flow and availability under our credit agreement to be adequate to fund fiscal year 2011 operating needs, shareholder dividends, capital expenditures, and additional share repurchases, if any.
Investing Activities
In 2010, the Company continued to generate substantial cash from operating activities, which resulted in a strong year end financial position, with resources available for reinvestment in existing businesses and acquisitions. Our capital expenditures were $10.6 million in fiscal 2010, a decrease from $17.7 million in fiscal 2009. Our 2010 capital expenditures were primarily for cost reduction, sales growth initiatives and replacement items. Capital expenditures in fiscal 2011 are expected to be $15 million or higher.
In fiscal 2010, we received $2.5 million related to the sale of certain of our assets at two of our business units. In the fourth quarter of fiscal 2009, we purchased the remaining 24 percent noncontrolling interest in our Process Solutions Group Chinese subsidiary for $2.3 million, which we funded from available cash balances. We made an acquisition in our Process Solutions segment in 2008 for a total consideration of $5.1 million. In fiscal 2008 we received proceeds of $8.5 million related to the sale of two of our Romaco product lines sold in fiscal 2006 and the sale of two facilities.
Financing Activities
From available cash balances, we repaid the remaining $30.0 million of Senior Notes on the May 3, 2010 maturity date.
Proceeds from the sale of common stock were $1.1 million in fiscal 2010 and $2.4 million in fiscal 2009 and were primarily related to the exercise of stock options and employee benefit plan sales. Dividends paid during fiscal 2010 were $5.5 million, compared with $5.2 million in fiscal 2009. The quarterly dividend rate per common share was increased in January 2010 from $0.0400 to $0.0425.
On October 27, 2008, we announced that our Board of Directors authorized the repurchase of up to 3.0 million of our currently outstanding common shares. We acquired approximately 2.0 million of our outstanding common shares for $39.1 million under the repurchase program in the first quarter of fiscal 2009. There were no such share repurchases in fiscal 2010.
Credit Agreement
Our Bank Credit Agreement (“Agreement”) provides that we may borrow on a revolving credit basis up to a maximum of $150.0 million and includes a $100.0 million expansion feature. All outstanding amounts under the Agreement are due and payable on December 19, 2011. Interest is variable based upon formulas tied to LIBOR or an alternative base rate defined in the Agreement, at our option, and is payable quarterly. Indebtedness under the Agreement is unsecured except for the pledge of the stock of our U.S. subsidiaries and approximately two-thirds of the stock of certain non-U.S. subsidiaries. At August 31, 2010 we had no borrowings under the Agreement. We had $28.2 million of standby letters of credit outstanding at August 31, 2010. These standby letters of credit are primarily used as security for advance payments received from customers and for our performance under customer contracts. Under the Agreement, we have $121.8 million of unused borrowing capacity.
Six banks participate in our revolving credit agreement. We are not dependent on any single bank for our financing needs.
From available cash balances, we repaid the remaining $30.0 million of Senior Notes on the May 3, 2010 maturity date.
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Critical Accounting Policies and Estimates
This “Management’s Discussion and Analysis” is based on our Consolidated Financial Statements and the related notes. The more critical accounting policies used in the preparation of our Consolidated Financial Statements are discussed below.
Revenue Recognition
We recognize revenue at the time of title passage to our customer which is generally upon shipment of the product. We recognize revenue for certain longer-term contracts based on the percentage of completion method. The percentage of completion method requires estimates of total expected contract revenue and costs. We follow this method because we can make reasonably dependable estimates of the revenue and cost applicable to various stages of the contract. Revisions in profit estimates are reflected in the period in which the facts that gave rise to the revision become known.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. Significant estimates made by us include the allowance for doubtful accounts, inventory valuation, deferred tax asset valuation allowance, warranty, litigation, product liability, tax contingencies, stock option valuation, goodwill valuation and retirement benefit obligations.
Our estimate for uncollectible accounts receivable is based upon an analysis of our prior collection experience, specific customer creditworthiness, current economic trends within the industries we serve, specific customers’ ability to pay us and the length of time that the receivables are past due.
Inventory valuation reserves are determined based on our assessment of the demand for our products and the on-hand quantities of inventory in relation to historical usage. The inventory to which this reserve relates is still on-hand and will be sold or disposed of in the future. The expected selling price of this inventory approximates its net book value; therefore, there is no significant impact on gross margin when it is sold.
We have recorded valuation allowances to reflect the estimated amount of deferred tax assets that may not be realized based upon our analysis of the realization of tax benefits associated with the deferred tax assets. Future taxable income, reversals of temporary differences, available carryback periods, the results of tax strategies and changes in tax laws could impact these estimates.
Warranty obligations are contingent upon product failure rates, material required for the repairs and service and delivery costs. We estimate the warranty accrual based on specific product failures that are known to us plus an additional amount based on the historical relationship of warranty claims to sales. We record litigation and product liability reserves based upon a case-by-case analysis of the facts, circumstances and estimated costs.
These estimates form the basis for making judgments about the carrying value of our assets and liabilities and are based on the best available information at the time we prepare our consolidated financial statements. These estimates are subject to change as conditions within and beyond our control change, including but not limited to economic conditions, the availability of additional information and actual experience rates different from those used in our estimates. Accordingly, actual results may differ from these estimates.
Goodwill and Other Intangible Assets
Goodwill is tested on an annual basis, or more frequently as impairment indicators arise. Impairment tests, which involve the use of estimates related to the fair market values of the business operations with which goodwill is associated at our reporting unit level, were performed at year-end for fiscal 2010 (our annual impairment test date) using both a market participant approach, as well as a discounted cash flow methodology (“income approach”). The market participant approach determines the value of a reporting unit by deriving market multiples for reporting units based on assumptions potential market participants would use in establishing a bid price for the unit. This approach therefore assumes strategic initiatives will result in improvements in operational performance in the event of purchase, and includes the application of a discount rate based on market participant assumptions with respect to capital structure and access to capital markets. The income approach uses a reporting unit’s projection of estimated operating results and cash flows that is discounted using a weighted-average cost of
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capital that reflects current and future market conditions. The projection uses management’s best estimates of economic and market conditions over the projected period, including growth rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements. Our final estimate of fair value of reporting units is developed by a combination of the fair values determined through both the market participant and income approaches. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. Although our market participant assumptions and cash flow forecasts are based on assumptions that are consistent with the market environment and plans and estimates we are using to manage the underlying businesses, there is significant judgment in applying these assumptions to our valuations. The impairment testing performed by the Company at August 31, 2010 indicated that the estimated fair value of each reporting unit exceeded its corresponding carrying amount, and, as such, no impairment existed.
Our definite-lived intangible assets are amortized on a straight line basis, with estimated useful lives ranging from 3 to 17 years. These assets are evaluated periodically and when events or circumstances indicate a possible inability to recover their carrying amount. When events and circumstances indicate that the carrying values of these definite-lived intangible assets may not be recoverable, management assesses the recoverability of the carrying value by preparing estimates of sales volume and the resulting gross profit and cash flows. If the sum of the expected undiscounted future cash flows is less than the carrying amount, we recognize an impairment loss for the amount by which the carrying amount exceeds the fair value. We use a variety of methodologies to determine the fair values of these assets including discounted cash flow models, which are consistent with the assumptions we believe hypothetical marketplace participants would use.
Losses, if any, resulting from impairment tests for goodwill and definite-lived intangible assets would be reflected in income before interest and income taxes in our Consolidated Statement of Income.
Foreign Currency Accounting
Gains and losses resulting from the settlement of a transaction in a currency different from that used to record the transaction are charged or credited to net income when incurred. Adjustments resulting from the translation of non-U.S. dollar functional currency denominated financial statements into U.S. dollars are recognized in accumulated other comprehensive income or loss in the Consolidated Balance Sheet (except Venezuela, which was reported under highly inflationary accounting rules since our second quarter of fiscal 2010, with all gains and losses from remeasurement reflected in our Consolidated Statement of Income).
We use permanently invested intercompany loans as a source of capital to reduce the exposure to foreign currency fluctuations in our foreign subsidiaries. These loans are treated as analogous to equity for accounting purposes. Therefore, we record foreign exchange gains or losses on these intercompany loans in accumulated other comprehensive income or loss.
Pensions
We maintain defined benefit and defined contribution pension plans that provide retirement benefits to substantially all U.S. employees and certain non-U.S. employees. Pension expense for fiscal 2010 and beyond is dependent on a number of factors including returns on plan assets and changes in plan discount rates and therefore cannot be predicted with certainty. The following paragraphs discuss the significant factors that affect the amount of recorded pension expense.
A significant factor in determining the amount of expense recorded for a funded pension plan is the expected long-term rate of return on plan assets. We develop the long-term rate of return assumption based on the current mix of equity and debt securities included in plan assets and on the historical returns on those types of investments, judgmentally adjusted to reflect current expectations of future returns. At August 31, 2010, the weighted average expected rate of return on plan assets was 6.4%.
In addition to the expected rate of return on plan assets, recorded pension expense includes the effects of service cost — the actuarial cost of benefits earned during a period — and interest on the plan’s liabilities to participants. These amounts are determined actuarially based on current discount rates and assumptions regarding matters such as future salary increases and mortality. Differences in actual experience in relation to these assumptions are generally not recognized immediately but rather are deferred together with asset-related gains or losses. When cumulative asset-related and liability-related gains or losses exceed the greater of 10% of total liabilities or the calculated value of plan assets, the excess is amortized and included in pension income or expense. At
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August 31, 2010, the weighted average discount rate used to value plan liabilities was 4.4%. We determine our discount rate based on an actuarial yield curve applied to the payments we expect to make out of our retirement plans.
The Company reviews its actuarial assumptions on an annual basis and makes modifications based on current rates and trends when appropriate. Additional changes in the key assumptions discussed above would affect the amount of pension expense currently expected to be recorded for years subsequent to fiscal 2010. Specifically, a one-half percent decrease in the rate of return on assets assumption would have the effect of increasing pension expense by approximately $0.5 million. A comparable increase in this assumption would have the opposite effect. In addition, a one-half percent increase in the discount rate would decrease pension expense by $0.4 million, and a comparable decrease in the discount rate would have the opposite effect.
New Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (“FASB”) issued and, in April 2009, amended a new business combination standard codified within Accounting Standards Codification™ (“ASC”) 805, which changed the accounting for business acquisitions. Accounting for business combinations under this standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. This standard was effective for us on September 1, 2009. The standard had no immediate impact on our consolidated financial statements but could affect our financial position and results of operations depending on future acquisitions.
In December 2007, the FASB issued a new standard which established the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. This standard requires all entities to report NCIs (previously reported as minority interests) in subsidiaries within equity in the consolidated financial statements, but separate from the parent shareholders’ equity. This standard also requires any acquisitions or dispositions of NCIs that do not result in a change of control to be accounted for as equity transactions. Further, it requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. The standard was effective for us on September 1, 2009. Provisions of this standard were applied to all NCIs prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented. As a result, upon adoption, we retroactively reclassified the “Minority Interest” balance reported in the liabilities section of the Consolidated Balance Sheet to a new component of equity with respect to NCIs in consolidated subsidiaries. The adoption of this standard also impacted certain captions identifying net income including NCI and net income attributable to Robbins & Myers, Inc. Additional disclosures required by this standard are also included in the Consolidated Equity Statement. The adoption of this standard did not have a material impact on our consolidated financial statements.
In April 2008, the FASB issued an accounting standard which amended the list of factors that should be considered in developing renewal or extension assumptions used to determine the useful life of recognized intangible assets under ASC 350, “Intangibles-Goodwill and Other”. The new standard applies to intangible assets that are acquired individually or with a group of other assets as well as intangible assets acquired in business combinations and asset acquisitions. Under this standard, entities estimating the useful life of a recognized intangible asset must consider the historical experience in renewing or extending similar arrangements, or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension. This standard was effective for the Company on September 1, 2009 and required certain additional disclosures (included in Note 6 to our Consolidated Financial Statements) and application to useful life estimates prospectively for intangible assets acquired after August 31, 2009. The adoption of this standard did not have a material impact on our consolidated financial statements.
In December 2008, the FASB issued an accounting standard which provides additional guidance on employers’ disclosures about the plan assets of defined benefit pension or other postretirement plans. The disclosures required by the standard include a description of how investment allocation decisions are made, major categories of plan assets, and concentrations of risk within plan assets. Additionally, this standard requires disclosures similar to those required for fair value measurements and disclosures under ASC 820 with respect to fair value of plan assets, such as the inputs and valuation techniques used to measure fair value and information with respect to classification of plan assets in hierarchy of the source of information used to determine their value (see Note 8 to our Consolidated Financial Statements). The disclosures under this standard are required for annual periods ending after December 15, 2009. The adoption of this standard did not have a material impact on our consolidated financial statements.
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In January 2010, the FASB issued Accounting Standard Update (“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements”, that amends existing disclosure requirements under ASC 820, by adding required disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchase, sales, issuances, and settlements relative to level 3 measurements; and clarifying, among other things, the existing fair value disclosures about the level of disaggregation. This ASU was effective for us in the fourth quarter of fiscal 2010, except for the requirement to provide level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which is effective beginning our fiscal 2012. The adoption of this standard that was applicable for fiscal 2010 did not have a material impact on our consolidated financial statements. We do not expect the remaining adoption of this standard in fiscal 2012 for level 3 activity disclosure to have a material impact on our consolidated financial statements.
In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements”, which amends ASC 855, “Subsequent Events”. This ASU, which was effective immediately, removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated. We adopted this standard in the second quarter of fiscal 2010. The adoption of this standard did not have a material impact on our consolidated financial statements.
In May 2010, the FASB issued ASU No. 2010-19, “Foreign Currency Issues: Multiple Foreign Currency Exchange Rates”. The ASU was an announcement made by the staff of the U.S. Securities and Exchange Commission and provided the staff’s view on certain foreign currency issues related to investments in Venezuela. The ASU was effective as of the announcement date of March 18, 2010. The adoption of this standard did not have a material impact on our consolidated financial statements.
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Contractual Obligations
Following is information regarding our long-term contractual obligations and other commitments outstanding as of August 31, 2010:
| Payments Due by Period | ||||||||||||||||||||
| Two to | ||||||||||||||||||||
| Long-term contractual | One year | three | Four to | After five | ||||||||||||||||
| obligations | Total | or less | years | five years | years | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Debt obligations | $ | 285 | $ | 192 | $ | 93 | $ | — | $ | — | ||||||||||
| Operating leases (1) | 15,505 | 4,614 | 5,983 | 3,415 | 1,493 | |||||||||||||||
| Total contractual cash obligations | $ | 15,790 | $ | 4,806 | $ | 6,076 | $ | 3,415 | $ | 1,493 | ||||||||||
| (1) | Operating leases consist primarily of building and equipment leases. |
Unrecognized tax benefits in the amount of $4,241,000, including interest and penalties, have been excluded from the table because we are unable to make a reasonably reliable estimate of the timing of future payments. The only other commercial commitments outstanding were standby letters of credit of $28,176,000. Of this outstanding amount $23,999,000 is due within a year and $4,177,000 is due within two to three years.
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ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We maintain operations in the U.S. and foreign countries. We have market risk exposure to foreign exchange rates in the normal course of our business operations. Our significant non-U.S. operations have their local currencies as their functional currency and primarily buy and sell using that same currency. The Company also operates in Venezuela, whose currency in 2010 became highly inflationary, as defined by U.S. generally accepted accounting principles, causing us to utilize the U.S. dollar as the functional currency. Sales, operating income and total assets in Venezuela represent less than 1% of our consolidated financial statement amounts. We continue to monitor these situations and take appropriate actions when needed. We manage our exposure to net assets and cash flows in currencies other than U.S. dollars by minimizing our non-U.S. dollar net asset positions. Under certain conditions, we may enter into hedging transactions, primarily currency swaps, under established policies and guidelines that enable us to mitigate the potential adverse impact of foreign exchange rate risk. We do not engage in trading or other speculative activities with these transactions as established policies require that these hedging transactions relate to specific currency exposures. We currently do not have any such hedging transactions in place.
Our main foreign exchange rate exposures relate to assets, liabilities and cash flows denominated in British pounds, euros, Swiss francs and Canadian dollars and the general economic exposure that fluctuations in these currencies could have on the U.S. dollar value of future non-U.S. cash flows. To illustrate the potential impact of changes in foreign currency exchange rates on us for fiscal 2010, the net unhedged exposures in each currency were remeasured assuming a 10% decrease in foreign exchange rates compared with the U.S. dollar. Using this method, our EBIT for fiscal 2010 would have decreased by $0.4 million and our cash flow from operations for fiscal 2010 would have decreased by $3.2 million. This calculation assumed that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, these changes may also affect the volume of sales or the foreign currency sales prices as competitors’ products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not include any effects of potential changes in sales levels or local currency prices.
At August 31, 2010, our total debt of $0.3 million had a weighted average variable interest rate of 7.4%. The estimated fair value of our debt at August 31, 2010 approximates its carrying value due to the short period until maturity or the variable rate nature of the instruments. The following table presents the aggregate maturities and related weighted average interest rates of our debt obligations at August 31, 2010 by maturity dates:
| Non-U.S. Dollar | ||||||||
| Variable Rate | ||||||||
| Maturity Date | Amount | Rate | ||||||
| (In thousands, except percents) | ||||||||
| 2011 | $ | 192 | 10.00 | % | ||||
| 2012 | 93 | 2.00 | ||||||
| 2013 | — | — | ||||||
| 2014 | — | — | ||||||
| 2015 | — | — | ||||||
| Thereafter | — | — | ||||||
| Total | $ | 285 | 7.39 | % | ||||
| Fair value | $ | 285 | ||||||
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ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Robbins & Myers, Inc. and Subsidiaries
Robbins & Myers, Inc. and Subsidiaries
We have audited Robbins & Myers, Inc. and Subsidiaries’ internal control over financial reporting as of August 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Robbins & Myers, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Robbins & Myers, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of August 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Robbins & Myers, Inc. and Subsidiaries as of August 31, 2010 and 2009, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended August 31, 2010 and our report dated October 26, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dayton, Ohio
October 26, 2010
Dayton, Ohio
October 26, 2010
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Robbins & Myers, Inc. and Subsidiaries
Robbins & Myers, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Robbins & Myers, Inc. and Subsidiaries as of August 31, 2010 and 2009, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended August 31, 2010. Our audits also included the financial statement schedule listed in Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Robbins & Myers, Inc. and Subsidiaries at August 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as whole, presents fairly in all material respects the information set forth therein.
As described in Note 9 to the Consolidated Financial Statements, in 2008 the Company adopted new Financial Accounting Standards Board (FASB) authoritative guidance on accounting for uncertainty in income taxes. Also, as described in Note 1 to the Consolidated Financial Statements, in 2010, the Company adopted new FASB authoritative guidance on accounting for and reporting of noncontrolling interests.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Robbins & Myers, Inc. and Subsidiaries’ internal control over financial reporting as of August 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 26, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dayton, Ohio
October 26, 2010
Dayton, Ohio
October 26, 2010
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CONSOLIDATED BALANCE SHEET
Robbins & Myers, Inc. and Subsidiaries
(In thousands, except share data)
Robbins & Myers, Inc. and Subsidiaries
(In thousands, except share data)
| August 31, | ||||||||
| 2010 | 2009 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 149,213 | $ | 108,169 | ||||
| Accounts receivable | 115,387 | 114,191 | ||||||
| Inventories | 97,939 | 105,772 | ||||||
| Other current assets | 7,589 | 11,573 | ||||||
| Deferred taxes | 14,164 | 12,519 | ||||||
| Total Current Assets | 384,292 | 352,224 | ||||||
| Goodwill | 260,332 | 267,687 | ||||||
| Other Intangible Assets | 3,774 | 5,789 | ||||||
| Deferred Taxes | 33,932 | 26,477 | ||||||
| Other Assets | 10,091 | 9,490 | ||||||
| Property, Plant and Equipment | 124,600 | 135,187 | ||||||
| $ | 817,021 | $ | 796,854 | |||||
| LIABILITIES AND EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 66,562 | $ | 55,918 | ||||
| Accrued expenses | 86,872 | 66,141 | ||||||
| Deferred taxes | 3,473 | 1,918 | ||||||
| Current portion of long-term debt | 192 | 30,194 | ||||||
| Total Current Liabilities | 157,099 | 154,171 | ||||||
| Long-Term Debt, Less Current Portion | 93 | 265 | ||||||
| Deferred Taxes | 42,568 | 44,194 | ||||||
| Other Long-Term Liabilities | 126,237 | 115,113 | ||||||
| Robbins & Myers, Inc. Shareholders’ Equity: | ||||||||
| Common stock-without par value: | ||||||||
| Authorized shares-80,000,000 | ||||||||
| Issued shares-35,004,612 in 2010 (34,884,158 in 2009) | 192,749 | 190,097 | ||||||
| Treasury shares-2,045,748 in 2010 (2,046,039 in 2009) | (39,564 | ) | (39,753 | ) | ||||
| Retained earnings | 372,198 | 344,530 | ||||||
| Accumulated other comprehensive (loss) income: | ||||||||
| Foreign currency translation | (4,052 | ) | 10,138 | |||||
| Pension liability | (45,267 | ) | (36,061 | ) | ||||
| Total | (49,319 | ) | (25,923 | ) | ||||
| Total Robbins & Myers, Inc. Shareholders’ Equity | 476,064 | 468,951 | ||||||
| Noncontrolling Interest | 14,960 | 14,160 | ||||||
| Total Equity | 491,024 | 483,111 | ||||||
| $ | 817,021 | $ | 796,854 | |||||
See Notes to Consolidated Financial Statements
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CONSOLIDATED EQUITY STATEMENT
Robbins & Myers Inc. and Subsidiaries
(In thousands, except share and per share data)
Robbins & Myers Inc. and Subsidiaries
(In thousands, except share and per share data)
| Robbins & Myers, Inc. Shareholders’ Equity | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Comprehensive | ||||||||||||||||||||||||
| Common | Treasury | Retained | Income | Noncontrolling | ||||||||||||||||||||
| Shares | Shares | Earnings | (Loss) | Interest | Total | |||||||||||||||||||
| Balance at September 1, 2007 | $ | 172,319 | $ | (683 | ) | $ | 217,548 | $ | 23,334 | $ | 12,429 | $ | 424,947 | |||||||||||
| Net income | 87,402 | 2,132 | 89,534 | |||||||||||||||||||||
| Change in foreign currency translation | (3,079 | ) | (242 | ) | (3,321 | ) | ||||||||||||||||||
| Change in minimum pension liability, net of tax | 1,748 | 1,748 | ||||||||||||||||||||||
| Comprehensive income | 1,890 | 87,961 | ||||||||||||||||||||||
| GAAP adoption-tax contingencies | (5,538 | ) | (5,538 | ) | ||||||||||||||||||||
| Dividends and other-net | 1,120 | 1,120 | ||||||||||||||||||||||
| Restricted stock grants-net, 64,546 shares (0 from Treasury) | ||||||||||||||||||||||||
| Restricted stock expense | 666 | 666 | ||||||||||||||||||||||
| Cash dividend declared, $0.1450 per share | (5,003 | ) | (5,003 | ) | ||||||||||||||||||||
| Treasury stock purchases, 29,236 shares | (1,264 | ) | (1,264 | ) | ||||||||||||||||||||
| Stock option expense | 745 | 745 | ||||||||||||||||||||||
| Performance stock award expense | 1,979 | 1,979 | ||||||||||||||||||||||
| Proceeds from employee benefit plan share sales, 34,700 shares | 1,278 | 1,278 | ||||||||||||||||||||||
| Stock options exercised, 388,198 shares | 4,249 | 4,249 | ||||||||||||||||||||||
| Tax impact of vested restricted stock and stock options exercised | 4,316 | 4,316 | ||||||||||||||||||||||
| Balance at August 31, 2008 | 185,552 | (1,947 | ) | 294,409 | 22,003 | 15,439 | 515,456 | |||||||||||||||||
| Net income | 55,364 | 1,210 | 56,574 | |||||||||||||||||||||
| Change in foreign currency translation | (26,807 | ) | (859 | ) | (27,666 | ) | ||||||||||||||||||
| Change in minimum pension liability, net of tax | (21,119 | ) | (21,119 | ) | ||||||||||||||||||||
| Comprehensive income | 351 | 7,789 | ||||||||||||||||||||||
| Dividends and other-net | (1,630 | ) | (1,630 | ) | ||||||||||||||||||||
| Restricted stock grants-net, 38,816 shares (15,022 from Treasury) | ||||||||||||||||||||||||
| Restricted stock expense | 734 | 734 | ||||||||||||||||||||||
| Cash dividend declared, $0.1575 per share | (5,243 | ) | (5,243 | ) | ||||||||||||||||||||
| Treasury stock purchases-share buyback program, 2,007,537 shares | (39,114 | ) | (39,114 | ) | ||||||||||||||||||||
| Treasury stock purchases-other, 34,920 shares | (546 | ) | (546 | ) | ||||||||||||||||||||
| Vesting of restricted stock issued from Treasury stock, 55,266 shares | (1,854 | ) | 1,854 | — | ||||||||||||||||||||
| Stock option expense | 1,008 | 1,008 | ||||||||||||||||||||||
| Performance stock award expense | 1,719 | 1,719 | ||||||||||||||||||||||
| Proceeds from employee benefit plan share sales, 62,948 shares | 1,234 | 1,234 | ||||||||||||||||||||||
| Stock options exercised, 34,462 shares | 373 | 373 | ||||||||||||||||||||||
| Tax impact of vested restricted stock and stock options exercised | 1,331 | 1,331 | ||||||||||||||||||||||
| Balance at August 31, 2009 | 190,097 | (39,753 | ) | 344,530 | (25,923 | ) | 14,160 | 483,111 | ||||||||||||||||
| Net income | 33,197 | 950 | 34,147 | |||||||||||||||||||||
| Change in foreign currency translation | (14,190 | ) | 538 | (13,652 | ) | |||||||||||||||||||
| Change in minimum pension liability, net of tax | (9,206 | ) | (9,206 | ) | ||||||||||||||||||||
| Comprehensive income | 1,488 | 11,289 | ||||||||||||||||||||||
| Dividends and other-net | (688 | ) | (688 | ) | ||||||||||||||||||||
| Restricted stock grants-net, 110,890 shares (37,961 from Treasury) | ||||||||||||||||||||||||
| Restricted stock expense | 760 | 760 | ||||||||||||||||||||||
| Cash dividend declared, $0.1675 per share | (5,529 | ) | (5,529 | ) | ||||||||||||||||||||
| Treasury stock purchases-other, 37,670 shares | (886 | ) | (886 | ) | ||||||||||||||||||||
| Vesting of restricted stock issued from Treasury stock, 37,961 shares | (1,075 | ) | 1,075 | — | ||||||||||||||||||||
| Stock option expense | 1,051 | 1,051 | ||||||||||||||||||||||
| Performance stock award expense | 1,224 | 1,224 | ||||||||||||||||||||||
| Proceeds from employee benefit plan share sales, 43,191 shares | 1,036 | 1,036 | ||||||||||||||||||||||
| Stock options exercised, 4,334 shares | 50 | 50 | ||||||||||||||||||||||
| Tax impact of vested restricted stock and stock options exercised | (394 | ) | (394 | ) | ||||||||||||||||||||
| Balance at August 31, 2010 | $ | 192,749 | $ | (39,564 | ) | $ | 372,198 | $ | (49,319 | ) | $ | 14,960 | $ | 491,024 | ||||||||||
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENT OF INCOME
Robbins & Myers, Inc. and Subsidiaries
(In thousands, except per share data)
Robbins & Myers, Inc. and Subsidiaries
(In thousands, except per share data)
| Years ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| Sales | $ | 584,694 | $ | 640,358 | $ | 787,168 | ||||||
| Cost of sales | 387,746 | 415,861 | 496,906 | |||||||||
| Gross profit | 196,948 | 224,497 | 290,262 | |||||||||
| Selling, general and administrative expenses | 143,306 | 150,129 | 167,229 | |||||||||
| Other expense (income) | 2,764 | — | (7,631 | ) | ||||||||
| Income before interest and income taxes | 50,878 | 74,368 | 130,664 | |||||||||
| Interest expense, net | 195 | 382 | 2,031 | |||||||||
| Income before income taxes | 50,683 | 73,986 | 128,633 | |||||||||
| Income tax expense | 16,536 | 17,412 | 39,099 | |||||||||
| Net income including noncontrolling interest | 34,147 | 56,574 | 89,534 | |||||||||
| Less: Net income attributable to noncontrolling interest | 950 | 1,210 | 2,132 | |||||||||
| Net income attributable to Robbins & Myers, Inc. | $ | 33,197 | $ | 55,364 | $ | 87,402 | ||||||
| Net income per share: | ||||||||||||
| Basic | $ | 1.01 | $ | 1.67 | $ | 2.53 | ||||||
| Diluted | $ | 1.01 | $ | 1.66 | $ | 2.52 | ||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 32,924 | 33,227 | 34,524 | |||||||||
| Diluted | 33,004 | 33,261 | 34,718 | |||||||||
See Notes to Consolidated Financial Statements
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CONSOLIDATED CASH FLOW STATEMENT
Robbins & Myers, Inc. and Subsidiaries
(In thousands)
Robbins & Myers, Inc. and Subsidiaries
(In thousands)
| Years Ended August 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| OPERATING ACTIVITIES | ||||||||||||
| Net income including noncontrolling interest | $ | 34,147 | $ | 56,574 | $ | 89,534 | ||||||
| Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: | ||||||||||||
| Depreciation | 15,029 | 15,119 | 14,970 | |||||||||
| Amortization | 601 | 1,107 | 1,279 | |||||||||
| Deferred taxes | (5,003 | ) | 4,417 | 6,201 | ||||||||
| Stock compensation | 3,035 | 3,461 | 3,390 | |||||||||
| Net gain on sale of business/facilities/assets | (1,022 | ) | — | (7,631 | ) | |||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | (5,176 | ) | 34,457 | (1,067 | ) | |||||||
| Inventories | 3,893 | (3,651 | ) | (7,261 | ) | |||||||
| Other assets | 3,484 | (4,056 | ) | (560 | ) | |||||||
| Accounts payable | 13,144 | (28,394 | ) | 3,682 | ||||||||
| Accrued expenses and other liabilities | 26,351 | (27,174 | ) | (12,977 | ) | |||||||
| Net cash and cash equivalents provided by operating activities | 88,483 | 51,860 | 89,560 | |||||||||
| INVESTING ACTIVITIES | ||||||||||||
| Capital expenditures, net of nominal disposals | (10,611 | ) | (17,694 | ) | (22,114 | ) | ||||||
| Proceeds from sale of business/facilities/assets | 2,464 | — | 8,484 | |||||||||
| Acquisitions | — | (2,325 | ) | (5,061 | ) | |||||||
| Net cash and cash equivalents used by investing activities | (8,147 | ) | (20,019 | ) | (18,691 | ) | ||||||
| FINANCING ACTIVITIES | ||||||||||||
| Proceeds from debt borrowings | 8,022 | 6,653 | 12,003 | |||||||||
| Payments of long-term debt | (38,196 | ) | (9,821 | ) | (81,451 | ) | ||||||
| Share buyback program | — | (39,114 | ) | — | ||||||||
| Net proceeds from issuance of common stock, including stock option tax impact | 692 | 2,938 | 9,843 | |||||||||
| Treasury stock purchases | (886 | ) | (546 | ) | (1,264 | ) | ||||||
| Dividends paid | (5,529 | ) | (5,243 | ) | (5,003 | ) | ||||||
| Net cash and cash equivalents used by financing activities | (35,897 | ) | (45,133 | ) | (65,872 | ) | ||||||
| Effect of exchange rate changes on cash | (3,395 | ) | (1,944 | ) | 2,298 | |||||||
| Increase (decrease) in cash and cash equivalents | 41,044 | (15,236 | ) | 7,295 | ||||||||
| Cash and cash equivalents at beginning of year | 108,169 | 123,405 | 116,110 | |||||||||
| Cash and cash equivalents at end of year | $ | 149,213 | $ | 108,169 | $ | 123,405 | ||||||
See Notes to Consolidated Financial Statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Robbins & Myers, Inc. and Subsidiaries
Robbins & Myers, Inc. and Subsidiaries
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Robbins & Myers, Inc. (“Company,” “we,” “our,” or “us”) and all of its subsidiaries in which a controlling interest is maintained. Controlling interest is determined by majority ownership interest and the absence of substantive third-party participation rights. For those consolidated subsidiaries where our ownership is less than 100%, the other shareholders’ interests are shown as Noncontrolling Interest. All significant intercompany accounts and transactions have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable relate primarily to customers located in North America, Western Europe and Asia, and are concentrated in the pharmaceutical, chemical, industrial and energy markets. To reduce credit risk, we perform credit investigations prior to accepting an order and, when necessary, require letters of credit to ensure payment.
Our estimate for uncollectible accounts receivable is based upon an analysis of our prior collection experience, specific customer creditworthiness, current economic trends within the industries we serve, specific customers’ ability to pay us and the length of time that the receivables are past due.
Inventories
Inventories are stated at the lower of cost or market determined by the last-in, first-out (“LIFO”) method in the U.S. and the first-in, first-out (“FIFO”) method outside the U.S. Inventory valuation reserves are determined based on our assessment of the market demand for our products and the on-hand quantities of inventory in relation to historical usage.
Goodwill and Other Intangible Assets
Goodwill is the excess of the purchase price paid over the value of net assets of businesses acquired. Goodwill is not amortized, but is tested for impairment on an annual basis, or more frequently as impairment indicators arise, using a fair market value approach, at the reporting unit level. We recognize an impairment charge for any amount by which the carrying amount of goodwill exceeds its fair value. Impairment tests are performed each year based on August 31 financial information. Other definite-lived intangible assets are evaluated periodically and when events or circumstances indicate a possible inability to recover their carrying amount. Losses, if any, resulting from impairment tests are reflected in income before interest and income taxes in our Consolidated Statement of Income.
Amortization of other definite-lived intangible assets is calculated on the straight-line basis using the following lives:
| Patents and trademarks | 14 to 17 years | |
| Non-compete agreements | 3 to 5 years | |
| Financing costs | 3 to 5 years |
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation expense is recorded over the estimated useful life of the asset on the straight-line method using the following lives:
| Buildings | 45 years | |
| Machinery and equipment | 3 to 15 years |
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Our normal policy is to expense repairs and improvements made to capital assets as incurred. In limited circumstances, betterments are capitalized and amortized over the estimated life of the new asset and any remaining value of the old asset is written off. Repairs to machinery and equipment must result in an addition to the useful life of the asset before the costs are capitalized.
Foreign Currency Accounting
Gains and losses resulting from the settlement of a transaction in a currency different from that used to record the transaction are charged or credited to net income when incurred. Adjustments resulting from the translation of non-U.S. dollar functional currency denominated financial statements into U.S. dollars are recognized in accumulated other comprehensive income or loss in the Consolidated Balance Sheet (except Venezuela, which was reported under highly inflationary accounting rules since our second quarter of fiscal 2010, with all gains and losses from remeasurement reflected in our Consolidated Statement of Income).
Product Warranties
Warranty obligations are contingent upon product failure rates, material required for the repairs and service delivery costs. We estimate the warranty accrual based on specific product failures that are known to us plus an additional amount based on the historical relationship of warranty claims to sales.
Changes in our product warranty liability during the year are as follows:
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
| Balance at beginning of the fiscal year | $ | 7,221 | $ | 7,853 | ||||
| Warranty expense | 2,468 | 2,750 | ||||||
| Deductions | (3,354 | ) | (3,287 | ) | ||||
| Impact of exchange rate changes | (43 | ) | (95 | ) | ||||
| Balance at end of the fiscal year | $ | 6,292 | $ | 7,221 | ||||
Consolidated Statement of Income
Research and development costs are expensed as incurred and recorded in selling, general and administrative expenses. Research and development costs in fiscal 2010, 2009 and 2008 were $6,958,000, $6,743,000 and $6,469,000, respectively. These amounts do not include significant engineering development costs incurred in conjunction with fulfilling custom customer orders and executing customer projects. Shipping and handling costs are included in cost of sales. Advertising costs are expensed as incurred.
Revenue Recognition
We recognize revenue at the time of title passage to our customer which is generally upon shipment of the product. We recognize revenue for certain longer-term contracts based on the percentage of completion method. The percentage of completion method requires estimates of total expected contract revenue and costs. We follow this method since we can make reasonably dependable estimates of the revenue and cost applicable to various stages of the contract. Revisions in profit estimates are reflected in the period in which the facts that gave rise to the revision become known.
Income Taxes
Income taxes are provided for all items included in the Consolidated Statement of Income regardless of the period when such items are reported for income tax purposes. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We record valuation allowances to reflect the estimated amount of deferred tax assets that may not be realized based upon our analysis of the realization of tax benefits associated with the deferred tax assets. Future taxable income, reversals of temporary differences, available carryback periods, the results of tax strategies and changes in tax laws could impact these estimates.
Generally, our policy is to provide U.S. income taxes on non-U.S. income when remitted to the U.S. We have not provided deferred taxes on the undistributed earnings of international subsidiaries because the earnings are deemed permanently reinvested. Accordingly, the Accounting Principles Board Opinion No. 23, “Accounting for Income Taxes”, (now known as ASC 740-30) exception will apply to the international subsidiaries accumulated earnings and profits, which aggregated $51,984,000 and $67,044,000 at August 31, 2010 and 2009, respectively.
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Significant judgment is required in determining the provision for income taxes, unrecognized tax benefits, and the related accruals and deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, our tax returns are subject to audit by various tax authorities in numerous jurisdictions. Although we believe that our estimates are reasonable, actual results could differ from these estimates resulting in a final tax outcome that may be materially different from that which is reflected in our consolidated financial statements.
Consolidated Cash Flow Statement
Cash and cash equivalents consist of cash balances and temporary investments having an original maturity of 90 days or less.
Fair Value of Financial Instruments
The following methods and assumptions were used by us in estimating the fair value of financial instruments:
Cash and cash equivalents — The amounts reported approximate fair value.
Long-term debt — The fair value of our debt was $285,000 and $30,839,000 at August 31, 2010 and 2009, respectively. These amounts are based on the terms, interest rates and maturities currently available to us for similar debt instruments.
Accounts receivable, accounts payable, and accrued expenses — The amounts reported approximate fair value.
Common Stock Plans
We sponsor a long-term incentive stock plan to provide for the granting of stock-based compensation to certain officers and other key employees. Under the plan, the stock option price per share may not be less than the fair market value per share as of the date of grant. Outstanding grants generally become exercisable over a three-year period.
The fair value of each stock option grant in fiscal years 2010, 2009 and 2008 was estimated on the date of grant using a Black-Scholes-Merton option pricing model with the following weighted average assumptions.
| 2010 | 2009 | 2008 | ||||||||||
| Expected volatility of common stock | 45.60 | % | 38.90 | % | 35.86 | % | ||||||
| Risk free interest rate | 3.25 | 2.00 | 4.00 | |||||||||
| Dividend yield | 0.70 | 0.90 | 0.50 | |||||||||
| Expected life of option | 7.0 | Yrs. | 7.0 | Yrs. | 7.0 | Yrs. | ||||||
| Fair value at grant date | $ | 10.66 | $ | 8.43 | $ | 12.70 | ||||||
Assumptions utilized in the model are evaluated when awards are granted. The expected volatility of our common shares is estimated based upon the historical volatility of our common share price. The risk-free interest rate is based on the U.S. Treasury security yields at the time of the grant for a security with a maturity term equal to or approximating the expected term of the underlying award. The dividend yield is determined by using a blend of historical dividend yield information and expected future trends. The expected life of the option grants represents the period of time options are expected to be outstanding and is based on the contractual term of the grant, vesting schedule and past exercise behavior. We have elected to recognize compensation cost on a straight-line basis over the requisite service period for the entire award.
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New Accounting Pronouncements
In December 2007, the FASB issued and, in April 2009, amended a new business combination standard codified within Accounting Standards Codification™ (“ASC”) 805, which changed the accounting for business acquisitions. Accounting for business combinations under this standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. This standard was effective for us on September 1, 2009. The standard had no immediate impact on our consolidated financial statements but could affect our financial position and results of operations depending on future acquisitions.
In December 2007, the FASB issued a new standard which established the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. This standard requires all entities to report NCIs (previously reported as minority interests) in subsidiaries within equity in the consolidated financial statements, but separate from the parent shareholders’ equity. This standard also requires any acquisitions or dispositions of NCIs that do not result in a change of control to be accounted for as equity transactions. Further, it requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. The standard was effective for us on September 1, 2009. Provisions of this standard were applied to all NCIs prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented. As a result, upon adoption, we retroactively reclassified the “Minority Interest” balance reported in the liabilities section of the Consolidated Balance Sheet to a new component of equity with respect to NCIs in consolidated subsidiaries. The adoption of this standard also impacted certain captions identifying net income including NCI and net income attributable to Robbins & Myers, Inc. Additional disclosures required by this standard are also included in the Consolidated Equity Statement. The adoption of this standard did not have a material impact on our consolidated financial statements.
In April 2008, the FASB issued an accounting standard which amended the list of factors that should be considered in developing renewal or extension assumptions used to determine the useful life of recognized intangible assets under ASC 350, “Intangibles-Goodwill and Other”. The new standard applies to intangible assets that are acquired individually or with a group of other assets as well as intangible assets acquired in business combinations and asset acquisitions. Under this standard, entities estimating the useful life of a recognized intangible asset must consider the historical experience in renewing or extending similar arrangements, or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension. This standard was effective for the Company on September 1, 2009 and required certain additional disclosures (included in Note 6 to our Consolidated Financial Statements) and application to useful life estimates prospectively for intangible assets acquired after August 31, 2009. The adoption of this standard did not have a material impact on our consolidated financial statements.
In December 2008, the FASB issued an accounting standard which provides additional guidance on employers’ disclosures about the plan assets of defined benefit pension or other postretirement plans. The disclosures required by the standard include a description of how investment allocation decisions are made, major categories of plan assets, and concentrations of risk within plan assets. Additionally, this standard requires disclosures similar to those required for fair value measurements and disclosures under ASC 820 with respect to fair value of plan assets, such as the inputs and valuation techniques used to measure fair value and information with respect to classification of plan assets in hierarchy of the source of information used to determine their value (see Note 8 to our Consolidated Financial Statements). The disclosures under this standard are required for annual periods ending after December 15, 2009. The adoption of this standard did not have a material impact on our consolidated financial statements.
In January 2010, the FASB issued Accounting Standard Update (“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements”, that amends existing disclosure requirements under ASC 820, by adding required disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchase, sales, issuances, and settlements relative to level 3 measurements; and clarifying, among other things, the existing fair value disclosures about the level of disaggregation. This ASU was effective for us in the fourth quarter of fiscal 2010, except for the requirement to provide level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which is effective beginning our fiscal 2012. The adoption of this standard that was applicable for fiscal 2010 did not have a material impact on our consolidated financial statements. We do not expect the remaining adoption of this standard in fiscal 2012 for level 3 activity disclosure to have a material impact on our consolidated financial statements.
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In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements”, which amends ASC 855, “Subsequent Events”. This ASU which, was effective immediately, removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated. We adopted this standard in the second quarter of fiscal 2010. The adoption of this standard did not have a material impact on our consolidated financial statements.
In May 2010, the FASB issued ASU No. 2010-19, “Foreign Currency Issues: Multiple Foreign Currency Exchange Rates”. The ASU was an announcement made by the staff of the U.S. Securities and Exchange Commission and provided the staff’s view on certain foreign currency issues related to investments in Venezuela. The ASU was effective as of the announcement date of March 18, 2010. The adoption of this standard did not have a material impact on our consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications did not have a material impact on our consolidated net income or financial position.
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NOTE 2 — BALANCE SHEET INFORMATION
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
Accounts receivable | ||||||||
| Allowances for doubtful accounts | $ | 5,549 | $ | 7,470 | ||||
Inventories | ||||||||
| FIFO: | ||||||||
| Finished products | $ | 36,844 | $ | 36,644 | ||||
| Work in process | 41,011 | 42,134 | ||||||
| Raw materials | 33,214 | 38,551 | ||||||
| 111,069 | 117,329 | |||||||
| LIFO reserve, U.S. inventories | (13,130 | ) | (11,557 | ) | ||||
| $ | 97,939 | $ | 105,772 | |||||
| Non-U.S. inventories at FIFO | $ | 71,455 | $ | 78,403 | ||||
Property, plant and equipment | ||||||||
| Land | $ | 15,308 | $ | 16,916 | ||||
| Buildings | 99,451 | 103,728 | ||||||
| Machinery and equipment | 188,182 | 182,804 | ||||||
| 302,941 | 303,448 | |||||||
| Less accumulated depreciation | (178,341 | ) | (168,261 | ) | ||||
| $ | 124,600 | $ | 135,187 | |||||
Accrued expenses | ||||||||
| Salaries, wages and payroll taxes | $ | 21,522 | $ | 13,344 | ||||
| Customer advances | 21,026 | 16,825 | ||||||
| Pension benefits | 2,774 | 3,068 | ||||||
| U.S. other postretirement benefits | 1,645 | 1,555 | ||||||
| Warranty costs | 6,292 | 7,221 | ||||||
| Accrued restructuring | 2,721 | — | ||||||
| Income taxes | 12,250 | 3,375 | ||||||
| Commissions | 3,820 | 3,609 | ||||||
| Other | 14,822 | 17,144 | ||||||
| $ | 86,872 | $ | 66,141 | |||||
Other long-term liabilities | ||||||||
| German pension liability | $ | 41,500 | $ | 43,755 | ||||
| U.S. pension liability | 39,645 | 31,215 | ||||||
| U.S. other postretirement benefits | 25,548 | 22,153 | ||||||
| U.K. pension liability | 4,497 | 3,912 | ||||||
| Switzerland pension liability | 3,082 | — | ||||||
| Other | 11,965 | 14,078 | ||||||
| $ | 126,237 | $ | 115,113 | |||||
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NOTE 3 — FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued an accounting standard, codified in ASC 820, “Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. We adopted this standard on September 1, 2008 for all financial assets and liabilities recognized or disclosed at fair value in our consolidated financial statements on a recurring basis (at least annually).
In February 2008, the FASB deferred the effective date for certain non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The Company adopted the remaining provisions of this fair value measurement standard related to non-financial assets and liabilities, including goodwill and intangibles, prospectively on September 1, 2009.
The following table summarizes the bases used to measure certain financial assets at fair value on a recurring basis as of August 31, 2010 (in thousands):
| Quoted Prices | Significant | |||||||||||||||
| in Active | Other | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||
| August 31, | Identical Assets | Inputs | Inputs | |||||||||||||
| 2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Cash and cash equivalents(1) | $ | 149,213 | $ | 149,213 | $ | — | $ | — | ||||||||
| Total assets at fair value | $ | 149,213 | $ | 149,213 | $ | — | $ | — | ||||||||
| (1) | Our cash and cash equivalents primarily consist of cash in banks, commercial paper and overnight investments in highly rated financial institutions. |
Non-Financial Assets and Liabilities at Fair value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (e.g., when there is evidence of impairment). At August 31, 2010, no fair value adjustments or fair value measurements were required for non-financial assets or liabilities.
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and debt. The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their carrying values because of the short-term nature of these instruments. The fair value of debt instruments equal their carrying value due to the short period until maturity or the variable rate nature of the instruments.
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NOTE 4 — STATEMENT OF INCOME INFORMATION
Unless otherwise noted, the costs and gains mentioned below in this note were included on the “Other expense (income)” line of our Consolidated Statement of Income in the period indicated.
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Process Solutions segment restructuring costs | $ | 2,764 | $ | — | $ | — | ||||||
| Gain on disposition of product lines/facilities | — | — | (7,631 | ) | ||||||||
| Other expense (income) | $ | 2,764 | $ | — | $ | (7,631 | ) | |||||
In fiscal 2010, we incurred $2,764,000 in restructuring costs related to employee termination benefits at our German facility in our Process Solutions segment. These costs were accrued at the end of fiscal 2010, with payments to be made in our fiscal 2011.
In fiscal 2008, we sold a facility in each of our Process Solutions and Romaco segments. Cash proceeds from these asset sales totaled $2,787,000. The net gain recognized in fiscal 2008 as a result of these facility sales was $1,934,000, which included $835,000 in our Process Solutions segment and $1,099,000 in our Romaco segment.
In addition, in fiscal 2008, we received cash and recorded a pre-tax gain of $5,697,000 related to the sale of two of our Romaco product lines-Hapa and Laetus-sold in fiscal 2006. As part of that transaction, funds were placed in escrow as collateral for potential claims by the purchaser. The financial guarantees associated with these escrowed funds lapsed on March 31, 2008, resulting in the release of the escrowed funds and the gain.
Minimum lease payments
Future minimum payments, by year and in the aggregate, under non-cancellable operating leases with initial or remaining terms of one year or more consisted of the following at August 31, 2010:
| (In thousands) | ||||
| 2011 | $ | 4,614 | ||
| 2012 | 3,362 | |||
| 2013 | 2,621 | |||
| 2014 | 1,959 | |||
| 2015 | 1,456 | |||
| Thereafter | 1,493 | |||
| $ | 15,505 | |||
Rental expense for all operating leases in 2010, 2009 and 2008 was approximately $6,172,000, $6,610,000 and $7,398,000, respectively. Operating leases consist primarily of building and equipment leases.
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NOTE 5 — CASH FLOW STATEMENT INFORMATION
In fiscal 2010, we recorded the following non-cash investing and financing transactions: $4,246,000 increase in deferred tax assets, $13,452,000 increase in other long-term liabilities, and $9,206,000 increase related to the minimum liability of our employee benefit plans.
In fiscal 2009, we recorded the following non-cash investing and financing transactions: $11,453,000 increase in deferred tax assets, $32,572,000 increase in other long-term liabilities, and $21,119,000 increase related to the minimum liability of our employee benefit plans.
In fiscal 2008, we recorded the following non-cash investing and financing transactions: $158,000 decrease in deferred tax assets, $1,550,000 increase in property, plant and equipment, $5,182,000 decrease in other long-term liabilities, $5,538,000 decrease in retained earnings for the adoption of a FASB authoritative guidance on accounting for uncertainty in income taxes and $1,748,000 decrease related to the minimum liability of our employee benefit plans.
Supplemental cash flow information consisted of the following:
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
| Interest paid | $ | 2,089 | $ | 2,133 | $ | 8,141 | ||||||
| Income taxes paid, net of refunds | 10,577 | 27,082 | 30,838 | |||||||||
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NOTE 6—GOODWILL AND OTHER INTANGIBLE ASSETS
The Company made certain changes to its business segments effective in the first quarter of fiscal 2010. This resulted in a $45.0 million reclassification of goodwill from the Process Solutions segment to the Fluid Management segment. Changes in the carrying amount of goodwill by operating segment are as follows:
| Process | Fluid | |||||||||||||||
| Solutions | Management | Romaco | ||||||||||||||
| Segment | Segment | Segment | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| Balance as of September 1, 2008 | $ | 157,870 | $ | 108,703 | $ | 12,333 | $ | 278,906 | ||||||||
| Goodwill addition due to business acquisition | 333 | — | — | 333 | ||||||||||||
| Translation adjustments | (8,625 | ) | (2,514 | ) | (413 | ) | (11,552 | ) | ||||||||
| Balance as of August 31, 2009 | 149,578 | 106,189 | 11,920 | 267,687 | ||||||||||||
| Goodwill reclassification | (45,000 | ) | 45,000 | — | — | |||||||||||
| Translation adjustments | (4,300 | ) | (1,726 | ) | (1,329 | ) | (7,355 | ) | ||||||||
| Balance as of August 31, 2010 | $ | 100,278 | $ | 149,463 | $ | 10,591 | $ | 260,332 | ||||||||
Information regarding our other intangible assets is as follows:
| 2010 | 2009 | |||||||||||||||||||||||
| Carrying | Accumulated | Carrying | Accumulated | |||||||||||||||||||||
| Amount | Amortization | Net | Amount | Amortization | Net | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Patents and trademarks | $ | 9,434 | $ | 7,465 | $ | 1,969 | $ | 11,661 | $ | 8,138 | $ | 3,523 | ||||||||||||
| Non-compete agreements | 8,680 | 7,359 | 1,321 | 8,998 | 7,622 | 1,376 | ||||||||||||||||||
| Financing costs | 9,536 | 9,052 | 484 | 9,631 | 9,145 | 486 | ||||||||||||||||||
| Other | 5,120 | 5,120 | — | 5,601 | 5,197 | 404 | ||||||||||||||||||
| $ | 32,770 | $ | 28,996 | $ | 3,774 | $ | 35,891 | $ | 30,102 | $ | 5,789 | |||||||||||||
The amortization expense for fiscal 2010 and fiscal 2009 was $601,000 and $1,107,000 respectively. We estimate that the amortization expense will be approximately $600,000 for each of the next five years beginning fiscal 2011. The expected amortization expense is an estimate. Actual amounts of amortization expense may differ from the estimated amounts due to changes in foreign currency exchange rates, impairment of intangible assets, intangible asset acquisitions, accelerated amortization of intangible assets and other events.
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NOTE 7 — LONG-TERM DEBT
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
| Senior debt: | ||||||||
| Senior notes | $ | — | $ | 30,000 | ||||
| Other | 285 | 459 | ||||||
| Total debt | 285 | 30,459 | ||||||
| Less current portion | (192 | ) | (30,194 | ) | ||||
| Long-term debt | $ | 93 | $ | 265 | ||||
Our Bank Credit Agreement (“Agreement”) provides that we may borrow on a revolving credit basis up to a maximum of $150,000,000 and includes a $100,000,000 expansion feature. All outstanding amounts under the Agreement are due and payable on December 19, 2011. Interest is variable based upon formulas tied to LIBOR or an alternative base rate defined in the Agreement, at our option, and is payable quarterly. Indebtedness under the Agreement is unsecured except for the pledge of the stock of our U.S. subsidiaries and approximately two-thirds of the stock of certain non-U.S. subsidiaries. While no amounts are outstanding under the Agreement at August 31, 2010, we have $28,176,000 of standby letters of credit outstanding at August 31, 2010. These standby letters of credit are used as security for advance payments received from customers and future payments to our vendors. Accordingly, under the Agreement we have $121,824,000 of unused borrowing capacity.
The Agreement contains certain restrictive covenants including limitations on indebtedness, asset sales, sales and lease backs, and cash dividends as well as financial covenants relating to interest coverage, leverage and net worth. As of August 31, 2010, we are in compliance with these covenants.
From available cash balances, we repaid the remaining $30,000,000 of Senior Notes on the May 3, 2010 maturity date.
Our other debt consisted primarily of unsecured non-U.S. bank lines of credit with interest rates approximating 7.39%.
Aggregate principal payments of long-term debt, for the five years subsequent to August 31, 2010, are as follows:
| (In thousands) | ||||
| 2011 | $ | 192 | ||
| 2012 | 93 | |||
| 2013 | — | |||
| 2014 | — | |||
| 2015 | — | |||
| 2016 and thereafter | — | |||
| Total | $ | 285 | ||
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NOTE 8 — RETIREMENT BENEFITS
We sponsor two defined contribution plans covering most U.S. salaried employees and certain U.S. hourly employees. Contributions are made to the plans based on a percentage of eligible amounts contributed by participating employees. We also sponsor several defined benefit plans covering certain employees. Benefits are based on years of service and employees’ compensation or stated amounts for each year of service. Our funding policy is consistent with the funding requirements of applicable regulations.
In addition to pension benefits, we provide health care and life insurance benefits for certain of our retired U.S. employees. Our policy is to fund the cost of these benefits as claims are paid.
Pension and other post-retirement plan costs are as follows:
| Pension Benefits | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Service cost | $ | 2,570 | $ | 2,251 | $ | 2,082 | ||||||
| Interest cost | 9,368 | 10,062 | 9,714 | |||||||||
| Expected return on plan assets | (6,523 | ) | (8,044 | ) | (8,352 | ) | ||||||
| Settlement/curtailment cost | 988 | 600 | 461 | |||||||||
| Amortization of prior service cost | 723 | 754 | 759 | |||||||||
| Amortization of transition asset | (33 | ) | (31 | ) | (21 | ) | ||||||
| Recognized net actuarial losses | 3,210 | 743 | 214 | |||||||||
| Net periodic benefit cost | $ | 10,303 | $ | 6,335 | $ | 4,857 | ||||||
| Defined contribution cost | $ | 2,620 | $ | 3,040 | $ | 3,056 | ||||||
| Other Benefits | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Service cost | $ | 431 | $ | 405 | $ | 392 | ||||||
| Interest cost | 1,328 | 1,379 | 1,389 | |||||||||
| Net amortization | 814 | 501 | 716 | |||||||||
| Net periodic benefit cost | $ | 2,573 | $ | 2,285 | $ | 2,497 | ||||||
The estimated net actuarial loss and prior service cost for our defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic pension cost during fiscal 2011 are $4,058,000 and $600,000, respectively.
The estimated net actuarial loss and prior service cost for our other post-retirement benefit plans that will be amortized from accumulated other comprehensive loss into net periodic pension cost during fiscal 2011 are $845,000 and $213,000, respectively.
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The benefit obligation, funded status and amounts recorded in the Consolidated Balance Sheet at August 31, are as follows:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (In thousands) | ||||||||||||||||
| Change in benefit obligation: | ||||||||||||||||
| Beginning of year | $ | 185,697 | $ | 175,720 | $ | 23,708 | $ | 21,780 | ||||||||
| Service cost | 2,693 | 2,483 | 431 | 405 | ||||||||||||
| Interest cost | 9,332 | 10,389 | 1,328 | 1,379 | ||||||||||||
| Participant contributions | 758 | 776 | — | — | ||||||||||||
| Currency exchange rate impact | (5,751 | ) | (4,173 | ) | — | — | ||||||||||
| Actuarial losses | 18,246 | 14,171 | 3,220 | 2,138 | ||||||||||||
| Benefit payments | (11,393 | ) | (13,669 | ) | (1,494 | ) | (1,994 | ) | ||||||||
| End of year | $ | 199,582 | $ | 185,697 | $ | 27,193 | $ | 23,708 | ||||||||
| Change in plan assets: | ||||||||||||||||
| Beginning of year | �� | $ | 103,747 | $ | 125,416 | $ | — | $ | — | |||||||
| Currency exchange rate impact | (359 | ) | (3,059 | ) | — | — | ||||||||||
| Actual return | 9,124 | (9,898 | ) | — | — | |||||||||||
| Company contributions | 6,207 | 4,181 | 1,494 | 1,994 | ||||||||||||
| Participant contributions | 758 | 776 | — | — | ||||||||||||
| Benefit payments | (11,393 | ) | (13,669 | ) | (1,494 | ) | (1,994 | ) | ||||||||
| End of year | $ | 108,084 | $ | 103,747 | $ | — | $ | — | ||||||||
| Funded status | $ | (91,498 | ) | $ | (81,950 | ) | $ | (27,193 | ) | $ | (23,708 | ) | ||||
| Accrued benefit cost | $ | (91,498 | ) | $ | (81,950 | ) | $ | (27,193 | ) | $ | (23,708 | ) | ||||
| Recorded as follows: | ||||||||||||||||
| Accrued expenses | $ | (2,774 | ) | $ | (3,068 | ) | $ | (1,645 | ) | $ | (1,555 | ) | ||||
| Other long-term liabilities | (88,724 | ) | (78,882 | ) | (25,548 | ) | (22,153 | ) | ||||||||
| (91,498 | ) | (81,950 | ) | (27,193 | ) | (23,708 | ) | |||||||||
| Accumulated other comprehensive loss | 59,456 | 48,416 | 10,830 | 8,424 | ||||||||||||
| $ | (32,042 | ) | $ | (33,534 | ) | $ | (16,363 | ) | $ | (15,284 | ) | |||||
| Deferred taxes on accumulated other comprehensive loss | $ | (20,904 | ) | $ | (17,578 | ) | $ | (4,115 | ) | $ | (3,201 | ) | ||||
| Accumulated other comprehensive loss at August 31: | ||||||||||||||||
| Net actuarial losses | $ | 58,028 | $ | 45,796 | $ | 10,007 | $ | 7,388 | ||||||||
| Prior service cost | 1,428 | 2,620 | 823 | 1,036 | ||||||||||||
| Deferred taxes | (20,904 | ) | (17,578 | ) | (4,115 | ) | (3,201 | ) | ||||||||
| Net accumulated other comprehensive loss at August 31 | $ | 38,552 | $ | 30,838 | $ | 6,715 | $ | 5,223 | ||||||||
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Pension plans with accumulated (“ABO”) and projected (“PBO”) benefit obligations in excess of plan assets:
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
| Accumulated benefit obligation | $ | 196,618 | $ | 182,948 | ||||
| Projected benefit obligation | 199,582 | 185,697 | ||||||
| Plan assets | 108,084 | 103,747 | ||||||
In 2010 and 2009, $41,071,000 and $43,829,000, respectively, of the unfunded ABO and $44,036,000 and $46,579,000, respectively, of the unfunded PBO related to our pension plan for a German operation. Funding of pension obligations is not required in Germany.
The weighted allocations of pension plan assets at August 31, 2010 and 2009 are shown in the following table.
| 2010 | 2009 | |||||||
| Equity securities | 63 | % | 65 | % | ||||
| Debt securities | 35 | 34 | ||||||
| Cash and cash equivalents | 2 | 1 | ||||||
| 100 | % | 100 | % | |||||
At August 31, 2010, our target allocation percentages for plan assets were approximately 65% equity securities and 35% debt securities. The targets may be adjusted periodically to reflect current market conditions and trends as well as inflation levels, interest rates and the trend thereof, and economic and monetary policy. The objective underlying this allocation is to achieve a long-term rate of return of 5.75% above inflation and to manage the plan assets so that they are sufficient to meet the plans’ future obligations while maintaining adequate liquidity to meet current benefit payments and operating expenses. The actual amount for which these obligations will be settled depends on future events, including life expectancy of plan participants and salary inflation. Equity securities can include, but are not limited to, broadly diversified international and domestic equities. At August 31, 2010 and 2009, pension assets included 160,000 shares of our common shares. Debt securities include, but are not limited to, international and domestic direct bond investments. The assets are managed by professional investment firms and performance is evaluated against specific benchmarks.
We will use a weighted average long-term rate of return of approximately 6.40% in fiscal 2011. Expected rates of return are developed based on the target allocation of debt and equity securities and on the historical returns on these types of investments judgmentally adjusted to reflect current expectations based on historical experience of the plan’s investment managers. In evaluating future returns on equity securities, the existing portfolio is stratified to separately consider large and small capitalization investments as well as international and other types of securities.
We expect to make future benefits payments from our benefit plans as follows:
| Other | ||||||||
| Pension Benefits | Benefits | |||||||
| (In thousands) | ||||||||
| 2011 | $ | 12,000 | $ | 1,600 | ||||
| 2012 | 12,000 | 1,700 | ||||||
| 2013 | 12,000 | 1,800 | ||||||
| 2014 | 11,900 | 1,900 | ||||||
| 2015 | 11,700 | 1,900 | ||||||
| 2016-2020 | 57,700 | 10,300 | ||||||
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The Company intends to make such contributions as are required to maintain the plan assets on a sound actuarial basis, in such amounts and at such times as determined by the Company in accordance with the funding policy established by management and consistent with plans’ objectives. The Company anticipates contributing $13,800,000 to its pension benefit plans in fiscal 2011.
The actuarial weighted average assumptions used to determine plan liabilities at August 31, are as follows:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Weighted average assumptions: | ||||||||||||||||
| Discount rate | 4.40 | % | 5.40 | % | 4.50 | % | 5.75 | % | ||||||||
| Expected return on plan assets | 6.40 | 6.60 | N/A | N/A | ||||||||||||
| Rate of compensation increase | 2.50 | 2.60 | N/A | N/A | ||||||||||||
| Health care cost increase | N/A | N/A | 8.0 — 5.0 | % | 8.5 — 5.0 | % | ||||||||||
| Health care cost grading period | N/A | N/A | 6 years | 7 years | ||||||||||||
The actuarial weighted average assumptions used to determine plan costs are as follows (measurement date September 1):
| Pension Benefits | Other Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| Discount rate | 5.40 | % | 6.30 | % | 5.75 | % | 6.90 | % | ||||||||
| Expected return on plan assets | 6.60 | 7.70 | N/A | N/A | ||||||||||||
| Rate of compensation increase | 2.60 | 3.00 | N/A | N/A | ||||||||||||
| Health care cost increase | N/A | N/A | 8.5 — 5.0 | % | 9.0 — 5.0 | % | ||||||||||
| Health care cost grading period | N/A | N/A | 7 years | 8 years | ||||||||||||
The assumed health care trend rate has a significant effect on the amounts reported for health care benefits. A one-percentage point change in assumed health care rate would have the following effects:
| Increase | Decrease | |||||||
| (In thousands) | ||||||||
| Service and interest cost | $ | 180 | $ | (166 | ) | |||
| Postretirement benefit obligation | 1,139 | (995 | ) | |||||
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Pursuant to the adoption of a new FASB accounting standard in fiscal 2010, the Company is required to categorize pension plan assets based on the following fair value hierarchy:
| • | Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets in active markets. | ||
| • | Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset through corroboration with observable market data. | ||
| • | Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions. |
The following table summarizes the bases used to measure financial assets of the pension plans at their fair market value on a recurring basis as of August 31, 2010:
| Quoted Prices In | Significant | |||||||||||||||
| Active Markets | Other | Significant | ||||||||||||||
| for Identical | Observable | Unobservable | ||||||||||||||
| August 31, | Assets | Inputs | Inputs | |||||||||||||
| 2010 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| (in thousands) | ||||||||||||||||
| Cash | $ | 2,168 | $ | 2,168 | $ | — | $ | — | ||||||||
U.S. Government and U.S. Agency Obligations(1) | 7,132 | 7,132 | — | — | ||||||||||||
Common Stocks(1) | 5,222 | 5,222 | — | — | ||||||||||||
Foreign Stocks(1) | 6,540 | 6,540 | — | — | ||||||||||||
Common Trust Funds and Mutual Funds(1) | 48,350 | 48,350 | — | — | ||||||||||||
Corporate Obligations(2) | 11,616 | — | 11,616 | — | ||||||||||||
Receivables against Banks and Insurance Companies(1) | 26,456 | 26,456 | — | — | ||||||||||||
Foreign Obligations(2) | 549 | — | 549 | — | ||||||||||||
Other(2) | 51 | — | 51 | — | ||||||||||||
| Total | $ | 108,084 | $ | 95,868 | $ | 12,216 | $ | — | ||||||||
| (1) | U.S. Government and U.S. Agency Obligations, Common and Foreign Stocks, Receivables against Banks and Insurance Companies and Common Trust and Mutual Funds are valued at the closing price reported on the active market on which the individual securities are traded. | |
| (2) | Corporate and Foreign Obligations and Other assets are estimated using recent transactions, broker quotations and/or bond spread information. |
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NOTE 9 — INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
Deferred tax assets and liabilities | ||||||||
| Assets: | ||||||||
| Postretirement obligations | $ | 29,707 | $ | 23,255 | ||||
| Net operating loss carryforwards | 19,508 | 17,720 | ||||||
| Tax credit carryforward | 10,023 | 8,489 | ||||||
| Other accruals | 7,397 | 5,774 | ||||||
| Inventory allowances | 4,852 | 3,963 | ||||||
| Warranty reserve | 1,991 | 2,024 | ||||||
| Customer advance payments and prepaid expenses | — | 858 | ||||||
| Research and development costs | 1,282 | 1,624 | ||||||
| Goodwill and purchase assets basis differences | 261 | 1,028 | ||||||
| Other items | 6,590 | 4,115 | ||||||
| 81,611 | 68,850 | |||||||
| Less valuation allowances | 14,869 | 15,302 | ||||||
| 66,742 | 53,548 | |||||||
| Liabilities: | ||||||||
| Other accruals | 3,473 | 1,918 | ||||||
| Fixed asset basis differences | 10,173 | 9,704 | ||||||
| Goodwill and purchased asset basis differences | 49,159 | 47,595 | ||||||
| Other items | 1,882 | 1,447 | ||||||
| 64,687 | 60,664 | |||||||
| Net deferred tax asset (liability) | $ | 2,055 | $ | (7,116 | ) | |||
The tax credit carryforwards, which primarily relate to foreign tax credits, begin to expire in fiscal 2016. The primary components of the net operating loss carryforwards exist in Germany ($27,981,000 for income tax and $22,080,000 for trade tax), Italy ($5,986,000) and the Netherlands ($12,911,000). There are no expiration dates on the net operating loss carryforwards in Germany. The net operating loss carryforwards in Italy and the Netherlands begin to expire in fiscal 2011. These expiration dates, as well as our ability to generate future taxable income to utilize these carryforwards, have been considered in determining our valuation allowances.
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Expense
| 2010 | 2009 | 2008 | ||||||||||
| (in thousands) | ||||||||||||
| Current: | ||||||||||||
| U.S. federal | $ | 16,671 | $ | 8,634 | $ | 16,243 | ||||||
| Non-U.S. | 4,893 | 6,634 | 14,803 | |||||||||
| U.S. state | 1,364 | 325 | 1,110 | |||||||||
| 22,928 | 15,593 | 32,156 | ||||||||||
| Deferred: | ||||||||||||
| U.S. federal | (3,487 | ) | 4,531 | 15,282 | ||||||||
| Non-U.S. | (2,643 | ) | (3,100 | ) | (9,649 | ) | ||||||
| U.S. state | (262 | ) | 388 | 1,310 | ||||||||
| (6,392 | ) | 1,819 | 6,943 | |||||||||
| $ | 16,536 | $ | 17,412 | $ | 39,099 | |||||||
| Tax expense included in noncontrolling interest | $ | 554 | $ | 641 | $ | 916 | ||||||
| Non-U.S. pretax (loss) income | $ | (1,605 | ) | $ | 16,420 | $ | 64,735 | |||||
The following is a reconciliation of the effective income tax rate with the U.S. federal statutory income tax rate:
| 2010 | 2009 | 2008 | ||||||||||
| Federal statutory income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| Impact of state taxes | 1.9 | 0.4 | 0.6 | |||||||||
| Impact of change in valuation allowances on non-U.S. losses | 6.0 | 1.1 | (3.8 | ) | ||||||||
| Impact on U.S. taxes from repatriation of foreign earnings | (8.6 | ) | (7.1 | ) | 0.6 | |||||||
| Extraterritorial income deduction/Section 199 | (2.2 | ) | (1.5 | ) | (0.6 | ) | ||||||
| Impact from permanent items | 1.0 | (0.4 | ) | 0.6 | ||||||||
| Non-U.S. tax lower than U.S. tax rates | — | (0.8 | ) | (1.8 | ) | |||||||
| Tax contingencies | (1.5 | ) | (0.2 | ) | 0.3 | |||||||
| Revaluation of deferred tax accounts | — | — | 0.2 | |||||||||
| Other items — net | 1.0 | (3.0 | ) | (0.7 | ) | |||||||
| Effective income tax rate | 32.6 | % | 23.5 | % | 30.4 | % | ||||||
The impact of change in valuation allowances on non-U.S. losses primarily relate to certain of our entities in Germany, Italy and Venezuela.
The Company adopted the provisions of a FASB authoritative guidance on accounting for uncertainty in income taxes on September 1, 2007. This resulted in the Company recognizing a $5,538,000 increase in the liability for unrecognized tax benefits, including interest and penalties, which was accounted for as a decrease to retained earnings (cumulative effect) as of September 1, 2007.
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A reconciliation of the change in unrecognized tax benefits, excluding interest and penalties, is as follows:
| 2010 | 2009 | |||||||
| (in thousands) | ||||||||
| Balance at beginning of the year | $ | 5,277 | $ | 5,381 | ||||
| Increases for prior year tax positions | — | 73 | ||||||
| Increases for current year tax positions | 344 | 792 | ||||||
| Decreases related to settlements | (1,636 | ) | — | |||||
| Decreases related to statute lapses | (507 | ) | (530 | ) | ||||
| Increases/(decreases) related to exchange rate changes | 93 | (439 | ) | |||||
| Balance at end of the year | $ | 3,571 | $ | 5,277 | ||||
All of the balance of unrecognized tax benefits at August 31, 2010 of $4,241,000, including interest and penalties, would, if recognized, affect the effective tax rate. The balance of unrecognized tax benefits at August 31, 2009 was $6,156,000, including interest and penalties.
To the extent penalties and interest would be assessed on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense in the financial statements. Accrued interest and penalties are included in the related tax liability in the Consolidated Balance Sheet. The Company made no payments of interest and penalties in fiscal 2010, and as of August 31, 2010, has recognized a liability for interest and penalties of $0.7 million. The Company had recognized a liability for interest and penalties of $0.9 million at August 31, 2009.
The Company does not anticipate a significant change in the balance of unrecognized tax benefits within the next 12 months.
The Company is subject to income tax in numerous jurisdictions where it operates including in the United States, Canada, Germany, Italy, Switzerland, the United Kingdom and the Netherlands. The Company is open to examination in the United States from the tax year ended 2009 to present. The Company’s non-U.S. locations are open to examination as far back as tax year ended 2004 to present.
NOTE 10 — COMMON STOCK
We sponsor a long-term incentive stock plan to provide for the granting of stock-based compensation to certain officers and other key employees. Under the plan, the stock option price per share cannot be less than the fair market value per share as of the date of grant. Outstanding grants become exercisable over a three-year period. Option awards generally have 10-year contractual terms. Proceeds from the sale of stock issued under option arrangements are credited to common stock. In addition, we sponsor a stock compensation plan for non-employee directors.
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Summaries of amounts issued under the stock option plans are presented in the following tables. All data reflects our 2-for-1 stock split which was effective February 28, 2008. The 2-for-1 stock split was in the form of share distribution.
Stock option activity
| Weighted- | ||||||||
| Stock | Average Option | |||||||
| Options | Price Per Share | |||||||
| Outstanding at September 1, 2007 | 737,800 | $ | 11.84 | |||||
| Granted | 111,822 | 12.70 | ||||||
| Exercised | (388,198 | ) | 11.26 | |||||
| Outstanding at August 31, 2008 | 461,424 | 16.52 | ||||||
| Granted | 153,187 | 21.35 | ||||||
| Exercised | (34,462 | ) | 11.67 | |||||
| Canceled | (27,807 | ) | 24.27 | |||||
| Outstanding at August 31, 2009 | 552,342 | 17.77 | ||||||
| Granted | 150,140 | 22.33 | ||||||
| Exercised | (4,334 | ) | 11.48 | |||||
| Canceled | (33,356 | ) | 23.75 | |||||
| Outstanding at August 31, 2010 | 664,792 | $ | 18.54 | |||||
Exercisable stock options at year-end | ||||
| 2008 | 252,805 | |||
| 2009 | 318,157 | |||
| 2010 | 387,157 | |||
Shares available for grant at year-end | ||||
| 2008 | 1,740,362 | |||
| 2009 | 1,543,323 | |||
| 2010 | 1,287,369 |
Components of outstanding stock options at August 31, 2010
| Weighted- | ||||||||||||||||
| Average | Weighted- | Intrinsic | ||||||||||||||
| Number | Contract Life in | Average | Value | |||||||||||||
| Range of Exercise Price | Outstanding | Years | Exercise Price | (In thousands) | ||||||||||||
| $ 7.69 — 10.89 | 155,000 | 4.39 | $ | 10.61 | $ | 2,023 | ||||||||||
| 11.50 — 31.02 | 509,792 | 6.87 | 20.95 | 1,382 | ||||||||||||
| $ 7.69 — 31.02 | 664,792 | 6.29 | $ | 18.54 | $ | 3,405 | ||||||||||
Components of exercisable stock options at August 31, 2010
| Weighted- | ||||||||||||||||
| Average | Weighted- | Intrinsic | ||||||||||||||
| Number | Contract Life in | Average | Value | |||||||||||||
| Range of Exercise Price | Exercisable | Years | Exercise Price | (In thousands) | ||||||||||||
| $ 7.69 — 10.89 | 155,000 | 4.39 | $ | 10.61 | $ | 2,023 | ||||||||||
| 11.50 — 29.73 | 232,157 | 4.94 | 18.46 | 1,207 | ||||||||||||
| $ 7.69 — 29.73 | 387,157 | 4.72 | $ | 15.32 | $ | 3,230 | ||||||||||
The total intrinsic value of options exercised during fiscal 2010, 2009, and 2008 was $52,800, $398,000 and $12,649,000, respectively.
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Under our 2008, 2009 and 2010 long-term incentive stock plans, each a subplan under our 2004 Stock Incentive Plan As Amended, selected participants were granted target performance share awards. The ultimate performance shares earned under the plans range from 0% to 200% of the target award based on earnings per share and return on net assets. No performance share awards were earned under our 2009 long-term incentive plan. The performance shares are earned at the end of one year, but are only issued as common shares to the participant if the participant continues in our employment for two more years. Under our previous long-term incentive stock plan, selected participants received awards which converted into a variable number of restricted shares based on absolute measures based on earnings per share and return on net assets. The restricted shares earned ranged from 50% to 200% of the target award. Restricted shares earned were issued to the participants at the end of the three-year measurement period and were subject to forfeiture if the participant left our employment within the following one to two years.
For the performance period ended August 31, 2010, a value of $927,000 performance shares were earned ($1,501,000 and $1,745,000 in fiscal 2009 and fiscal 2008, respectively).
As of August 31, 2010 we had $2,709,000 of compensation expense not yet recognized related to nonvested stock awards. The weighted-average period that this compensation cost will be recognized is 1.8 years.
Total after tax compensation expense included in net income for all stock based awards was $1,882,000, $2,146,000 and $2,100,000 for fiscal years 2010, 2009 and 2008, respectively.
NOTE 11 — SHARE REPURCHASE PROGRAM
On October 27, 2008, we announced that our Board of Directors authorized the repurchase of up to 3.0 million of our currently outstanding common shares (the “Program”). Repurchases under the Program have and will generally be made in the open market or in privately negotiated transactions not exceeding prevailing market prices, subject to regulatory considerations and market conditions, and have and will be funded from the Company’s available cash and credit facilities. In the first quarter of fiscal 2009, we acquired approximately 2.0 million of our outstanding common shares for $39.1 million under the Program, which were accounted for as treasury shares.
NOTE 12 — NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share:
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands, except per share data) | ||||||||||||
| Numerator: | ||||||||||||
| Net income attributable to Robbins & Myers, Inc. | $ | 33,197 | $ | 55,364 | $ | 87,402 | ||||||
| Denominator: | ||||||||||||
| Basic weighted average shares | 32,924 | 33,227 | 34,524 | |||||||||
| Effect of dilutive options and restricted shares/units | 80 | 34 | 194 | |||||||||
| Diluted shares | 33,004 | 33,261 | 34,718 | |||||||||
| Net income per share: | ||||||||||||
| Basic | $ | 1.01 | $ | 1.67 | $ | 2.53 | ||||||
| Diluted | $ | 1.01 | $ | 1.66 | $ | 2.52 | ||||||
At August 31, 2010 and 2009, 227,000 and 245,500, respectively, of stock options outstanding were anti-dilutive and excluded from the computation of dilutive earnings per share. There were no anti-dilutive stock options at August 31, 2008.
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NOTE 13 — BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION
Fluid Management. Our Fluid Management business segment designs, manufactures and markets equipment and systems used in oil and gas exploration, recovery and transportation, specialty chemical, wastewater treatment and a variety of other industrial applications. Primary brands include Moyno®, Yale®, New Era®, Chemineer®, TARBY® and Hercules®. Our products and systems include hydraulic drilling power sections; down-hole and industrial progressing cavity pumps and related products such as grinders for applications involving the flow of viscous, abrasive and solid-laden slurries and sludge; standard and customized fluid-agitation equipment and systems; and a broad line of ancillary equipment for the energy sector, such as rod guides, rod and tubing rotators, wellhead systems, pipeline closure products and valves.
Process Solutions. Our Process Solutions business segment designs, manufactures and services glass-lined reactors and storage vessels. We also provide alloy steel vessels, heat exchangers, other fluid systems, wiped film evaporators and packaged process systems. In addition, we also provide customized fluoropolymer-lined fittings, vessels and accessories. The primary markets served by this segment are the pharmaceutical and specialty chemical markets. Primary brands are Pfaudler®, Tycon-Technoglass®, and Edlon®.
Romaco. Our Romaco business segment designs, manufactures and markets packaging and secondary processing equipment for the pharmaceutical, healthcare, nutraceutical, food and cosmetic industries. Packaging applications include blister and strip packaging for various products including tablets, effervescent tablets and capsules; filling of both liquid and powder into vials and bottles, capsule and tube filling; tablet counting and packaging for bottles; customized packaging for drug delivery devices; as well as secondary processing for liquids and semi solids. Primary brands are Noack®, Siebler®, FrymaKoruma®, Macofar® and Promatic®.
We evaluate performance and allocate resources based on income before interest and income taxes (“EBIT”). Identifiable assets by business segment include all assets directly identified with those operations. Corporate assets consist mostly of cash and intangible assets. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies except that we account for U.S. inventory on a FIFO basis at the segment level compared with a LIFO basis at the consolidated level.
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The following tables present information about our reportable business segments. Effective in the first quarter of fiscal 2010, the Company realigned its business segment reporting structure as a result of organizational, management and operational changes. Our Chemineer brand is now included in our Fluid Management segment, instead of the Process Solutions segment where it was previously reported. The financial information presented herein reflects the impact of this change for all periods presented. Inter-segment sales were not material and were eliminated at the consolidated level.
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Unaffiliated Customer Sales: | ||||||||||||
| Fluid Management | $ | 308,452 | $ | 327,935 | $ | 389,525 | ||||||
| Process Solutions | 169,741 | 199,410 | 246,947 | |||||||||
| Romaco | 106,501 | 113,013 | 150,696 | |||||||||
| Total | $ | 584,694 | $ | 640,358 | $ | 787,168 | ||||||
| Depreciation and Amortization: | ||||||||||||
| Fluid Management | $ | 7,988 | $ | 8,275 | $ | 8,005 | ||||||
| Process Solutions | 5,049 | 5,481 | 5,741 | |||||||||
| Romaco | 2,289 | 2,013 | 1,869 | |||||||||
| Corporate and Eliminations | 304 | 457 | 634 | |||||||||
| Total | $ | 15,630 | $ | 16,226 | $ | 16,249 | ||||||
| Income Before Interest and Income Taxes (EBIT): | ||||||||||||
| Fluid Management | $ | 75,329 | $ | 79,988 | $ | 97,254 | ||||||
| Process Solutions | (8,737 | )(1) | 8,569 | 31,635 | (2) | |||||||
| Romaco | 3,960 | 2,292 | 20,603 | (3) | ||||||||
| Corporate and Eliminations | (19,674 | ) | (16,481 | ) | (18,828 | ) | ||||||
| Total | $ | 50,878 | $ | 74,368 | $ | 130,664 | ||||||
| Identifiable Assets: | ||||||||||||
| Fluid Management | $ | 323,053 | $ | 327,491 | $ | 353,407 | ||||||
| Process Solutions | 242,942 | 269,146 | 290,469 | |||||||||
| Romaco | 81,631 | 98,335 | 111,610 | |||||||||
| Corporate and Eliminations | 169,395 | 101,882 | 109,231 | |||||||||
| Total | $ | 817,021 | $ | 796,854 | $ | 864,717 | ||||||
| Capital Expenditures: | ||||||||||||
| Fluid Management | $ | 5,741 | $ | 12,225 | $ | 15,179 | ||||||
| Process Solutions | 2,713 | 3,104 | 7,705 | |||||||||
| Romaco | 2,094 | 2,790 | 1,505 | |||||||||
| Corporate and Eliminations | 63 | (425 | ) | (2,275 | ) | |||||||
| Total | $ | 10,611 | $ | 17,694 | $ | 22,114 | ||||||
| (1) | Includes costs of $2,764,000 related to restructuring activities. | |
| (2) | Includes gain of $835,000 related to the disposition of facilities. | |
| (3) | Includes gain of $6,796,000 on product line and facility dispositions. |
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Information about our operations in different geographical regions is presented below. Our primary operations are in North America, Europe and Asia. Sales are attributed to countries based on the location of the customer.
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
| Sales: | ||||||||||||
| United States | $ | 240,240 | $ | 241,354 | $ | 304,100 | ||||||
| Europe | 135,076 | 171,457 | 215,133 | |||||||||
| Other North America | 62,827 | 59,715 | 81,738 | |||||||||
| Asia | 93,856 | 107,836 | 111,108 | |||||||||
| South America | 28,440 | 28,402 | 36,207 | |||||||||
| Other | 24,255 | 31,594 | 38,882 | |||||||||
| $ | 584,694 | $ | 640,358 | $ | 787,168 | |||||||
| Tangible Assets: | ||||||||||||
| United States | $ | 121,829 | $ | 128,091 | $ | 145,789 | ||||||
| Europe | 148,782 | 171,905 | 186,100 | |||||||||
| Other North America | 30,070 | 25,179 | 27,915 | |||||||||
| South America | 21,682 | 20,429 | 21,461 | |||||||||
| Asia and Australia | 56,533 | 63,053 | 75,907 | |||||||||
| Corporate | 174,019 | 114,721 | 121,786 | |||||||||
| $ | 552,915 | $ | 523,378 | $ | 578,958 | |||||||
NOTE 14 — SUBSEQUENT EVENTS
On October 6, 2010, Robbins & Myers, Inc. (“R&M”), Triple Merger I, Inc., a Delaware corporation and a wholly-owned subsidiary of R&M (“Merger Sub I”), Triple Merger II, Inc., a Delaware corporation and a wholly-owned subsidiary of R&M (“Merger Sub II”), and T-3 Energy Services, Inc., a Delaware corporation (“T-3”), (NASDAQ: TTES), entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub I will merge with and into T-3, with T-3 surviving as a wholly-owned subsidiary of R&M (the “Merger”). The Merger Agreement and the Merger have been unanimously approved by the Boards of Directors of both R&M and T-3.
T-3, located in Houston, Texas, provides oilfield and pipeline products and services and will operate under our Fluid Management segment.
Under the Merger Agreement, T-3 stockholders will receive 0.894 common shares of R&M, without par value, plus $7.95 in cash, without interest, for each share of common stock of T-3, par value $0.001 per share, in a transaction valued at approximately $422 million as of the date of the announcement. Accordingly, T-3 stockholders are estimated to receive an aggregate of approximately 12 million of our common shares and $106 million in cash. Upon completion of the Merger Agreement, we expect T-3 stockholders to own approximately 27% of our outstanding common shares.
The exchange ratio is fixed and will not be adjusted in the event of any change in the price of R&M common shares or T-3 common stock between the date of the Merger Agreement and the closing. Because the exchange ratio is fixed, the value of the consideration paid for each share of T-3 common stock will vary based upon any changes in the market value of common shares of R&M. Changes in the market value of shares of T-3 common stock will have no effect upon the value of the consideration paid for each share of T-3 common stock.
Completion of the Merger is conditioned upon: (1) approval by R&M shareholders and T-3 stockholders; (2) the absence of any law or order prohibiting the closing; (3) regulatory approvals, including expiration or early termination of the applicable waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976; (4) subject to certain exceptions, the accuracy of representations and warranties and the performance of covenants; (5) the effectiveness of a registration statement on Form S-4 that will be filed by R&M for the issuance of its common shares in the Merger and the authorization of the listing of those shares on the NYSE; (6) the delivery of customary opinions from counsel to Robbins & Myers and T-3 that the Merger will qualify as a tax-free reorganization for U.S. federal income tax purposes; and (7) other closing conditions set forth in the Merger Agreement.
Annual revenues of T-3 for the years ended December 31, 2009 and 2008 were approximately $218 million and $285 million, respectively. Total assets of T-3 for the years ended December 31, 2009 and 2008 were approximately $280 million and $287 million, respectively.
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NOTE 15 — QUARTERLY DATA (UNAUDITED)
Earnings per share for each quarter and the year are calculated individually and may not add up to the total for the year.
| 2010 Quarters | ||||||||||||||||||||
| 1st | 2nd | 3rd | 4th | Total | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
| Sales | $ | 129,413 | $ | 129,919 | $ | 146,965 | $ | 178,397 | $ | 584,694 | ||||||||||
| Gross profit | 43,034 | 41,930 | 51,378 | 60,606 | 196,948 | |||||||||||||||
| EBIT | 9,736 | 6,546 | 13,078 | 21,518 | (1) | 50,878 | (1) | |||||||||||||
| Income before income taxes and noncontrolling interest | 9,593 | 6,385 | 12,976 | 21,729 | (1) | 50,683 | (1) | |||||||||||||
| Net income attributable to Robbins & Myers, Inc. | 6,030 | 4,193 | 8,162 | 14,812 | (1) | 33,197 | (1) | |||||||||||||
| Net income per share: | ||||||||||||||||||||
| Basic | $ | 0.18 | $ | 0.13 | $ | 0.25 | $ | 0.45 | (1) | $ | 1.01 | (1) | ||||||||
| Diluted | 0.18 | 0.13 | 0.25 | 0.45 | (1) | 1.01 | (1) | |||||||||||||
| Weighted average common shares: | ||||||||||||||||||||
| Basic | 32,872 | 32,927 | 32,941 | 32,953 | 32,924 | |||||||||||||||
| Diluted | 32,911 | 32,966 | 33,016 | 33,045 | 33,004 | |||||||||||||||
| 2009 Quarters | ||||||||||||||||||||
| 1st | 2nd | 3rd | 4th | Total | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
| Sales | $ | 177,971 | $ | 163,825 | $ | 143,375 | $ | 155,187 | $ | 640,358 | ||||||||||
| Gross profit | 67,976 | 56,776 | 49,793 | 49,952 | 224,497 | |||||||||||||||
| EBIT | 26,394 | 20,835 | 12,395 | 14,744 | 74,368 | |||||||||||||||
| Income before income taxes and noncontrolling interest | 26,341 | 20,745 | 12,296 | 14,604 | 73,986 | |||||||||||||||
| Net income attributable to Robbins & Myers, Inc. | 17,208 | 15,063 | 10,286 | 12,807 | 55,364 | |||||||||||||||
| Net income per share: | ||||||||||||||||||||
| Basic | $ | 0.50 | $ | 0.46 | $ | 0.31 | $ | 0.39 | $ | 1.67 | ||||||||||
| Diluted | 0.50 | 0.46 | 0.31 | 0.39 | 1.66 | |||||||||||||||
| Weighted average common shares: | ||||||||||||||||||||
| Basic | 34,429 | 32,802 | 32,829 | 32,853 | 33,227 | |||||||||||||||
| Diluted | 34,465 | 32,804 | 32,845 | 32,941 | 33,261 | |||||||||||||||
| (1) | Includes restructuring charges of $2,764,000 ($2,764,000 after tax, and $0.08 per share) related to severance costs at our German facility in our Process Solutions segment. |
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ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (Disclosure Controls) as of August 31, 2010. Based upon this evaluation, our CEO and CFO have concluded that the design and operation of our disclosure controls and procedures were effective as of August 31, 2010.
Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s (SEC) rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of Disclosure Controls includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis for purposes of providing the management report which is set forth below.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
| • | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; | ||
| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and | ||
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Management assessed our internal control over financial reporting as of August 31, 2010, the end of our fiscal year. Management based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of August 31, 2010. Our independent registered public accounting firm, Ernst & Young LLP, independently assessed the effectiveness of the Company’s internal control over financial reporting. Ernst & Young LLP has issued an attestation report, which is included at Part II, Item 8 of this Form 10-K.
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Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal quarter ended August 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.OTHER INFORMATION
None.
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PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information Concerning Directors and Executive Officers
Certain information concerning executive officers of the Company appears under “Executive Officers of the Registrant” at Part I of this Report.
Our Board of Directors is currently comprised of seven directors, divided into one class of four directors, and one class of three directors, with one class of directors elected at each annual meeting of shareholders for a term of two years. Set forth below is information concerning our directors.
Directors Continuing in Office until 2011 Annual Shareholder Meeting
| Andrew G. Lampereur | Director Since March 2007 |
Mr. Lampereur, age 47, has been Executive Vice President and Chief Financial Officer of Actuant Corporation (manufacturer of industrial products and systems) since August 2000. Mr. Lampereur joined Actuant in 1993 as Corporate Controller, a position he held until 1996 when he was appointed Vice President of Finance of its Gardner Bender unit. He served as Vice President, General Manager for Gardner Bender, from 1998 until assuming his present position. Mr. Lampereur brings to the Board extensive executive and financial experience with a public company.
| Thomas P. Loftis | Director Since 1987 |
Mr. Loftis, age 66, has been Chairman of the Board of the Company since June 2004 and served as Vice Chairman from March 2004 to June 2004. Mr. Loftis has been engaged in commercial real estate development, asset management and consulting with Midland Properties, Inc. since 1981. Loftis Investments LLC, a company wholly owned by Mr. Loftis, is a general partner of M.H.M. & Co., Ltd. (investments). Mr. Loftis is also a director of Security National Bank, a subsidiary of Park National Corporation. Mr. Loftis brings to the Board his long-term experience with the Company and knowledge of the Company’s operations, his experience as an entrepreneur, and relationship with M.H.M., our largest shareholder.
| Dale L. Medford | Director Since 2003 |
Mr. Medford, age 60, retired in June 2005 from The Reynolds and Reynolds Company (software and services to automotive retailers) where he had served as Chief Administrative Officer from July 2004 to June 2005, as Executive Vice President and Chief Financial Officer from January 2001 to June 2005, and as Vice President of Corporate Finance and Chief Financial Officer from February 1986 to January 2001. Mr. Medford brings to the Board his extensive past financial and administrative experience with a public company.
| Albert J. Neupaver | Director Since January 2009 |
Mr. Neupaver, age 60, has been President, Chief Executive Officer and a director of Wabtec Corporation (manufacturer of braking equipment and other parts for locomotives, freight cars and passenger rail cars) since February 2006. From 1998 to February 2006, Mr. Neupaver was President of the Electromechanical Group of AMETEK, Inc. (manufacturer of electronic instruments and electromechanical devices). Mr. Neupaver also serves as a director of Koppers Holdings Inc., a publicly-held company. Mr. Neupaver brings to the Board his experience as a chief executive officer of a global publicly-held manufacturing company, his operations experience, and his experience as a director of other public companies.
Directors Continuing in Office until 2012 Annual Shareholder Meeting
| Richard J. Giromini | Director Since October 2008 |
Mr. Giromini, age 57, has been President and Chief Executive Officer of Wabash National Corporation (manufacturer and distributor of semi-trailers to trucking industry) from January 2007 and a director since December 2005. He was President and Chief Operating Officer of Wabash National Corporation from December 2005 through December 2006. From February 2005 until December 2005, Mr. Giromini served as Executive Vice President and Chief Operating Officer, and from July 2002 to February 2005, he was Senior Vice President and Chief Operating Officer, of Wabash National Corporation. Mr. Giromini brings to the Board his extensive executive, operational and sales experience with a public company, with particular insight into logistics and distribution.
| Stephen F. Kirk | Director Since June 2006 |
Mr. Kirk, age 61, has been Senior Vice President and Chief Operating Officer of The Lubrizol Corporation (manufacturer of specialty chemicals) since September 2008. From June 2004 to September 2008, he was President of Lubrizol Additives. He served as Vice President of Sales and Marketing of The Lubrizol Corporation from June 1999 to June 2004. Mr. Kirk brings to the Board global operational and executive experience with a public company. His knowledge of the chemical markets is particularly suited to our Process Solutions Group business.
| Peter C. Wallace | Director Since July 2004 |
Mr. Wallace, age 56, has been President and Chief Executive Officer of the Company since July 12, 2004. From October 2001 to July 2004, Mr. Wallace was President and Chief Executive Officer of IMI Norgren Group (sophisticated motion and fluid control systems for original equipment manufacturers). He was employed by Rexnord Corporation (power transmission and conveying components) for 25 years serving as President and Group Chief Executive from 1998 until October 2001 and holding a variety of senior sales, marketing, and international positions prior thereto. Mr. Wallace is also a director of Applied Industrial Technologies, Inc. and Rogers Corporation, publicly-held companies. Mr. Wallace provides an important executive and leadership perspective to the Board given his extensive knowledge of the Company and the industries and markets in which it operates, as well as his executive experience and experience in sales and marketing, and director of other public companies.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires directors and executive officers of the Company and owners of more than 10% of the Company’s common shares to file an initial ownership report with the Securities and Exchange Commission and follow up reports listing any subsequent change in their ownership of common shares. The Company believes, based on information provided to the Company by the persons required to file such reports, that all filing requirements applicable to such persons during the period from September 1, 2009 through August 31, 2010 were met.
Code of Ethics
The Company has a Code of Business Conduct (the “Code”) that applies to all employees, executive officers and directors of the Company. A copy of the Code is posted on the Company’s website. The Code also serves as a code of ethics for the Company’s chief executive officer, principal financial officer, principal accounting officer, controller, or any person performing similar functions (the “Senior Officers”). Any waiver of any provision of the Code granted to a Senior Officer may only be granted by the full Board of Directors or its Audit Committee. If a waiver is granted, information concerning the waiver will be posted on the Company’s websitewww.robn.com for a period of 12 months.
Audit Committee.
The Company’s Board of Directors has a standing Audit Committee, comprised of Andrew G. Lampereur (Chair), Richard J. Giromini, Dale L. Medford, and Albert J. Neupaver. All Audit Committee members are independent directors. The Board has determined that all members of the Audit Committee are financially literate, that all members meet the enhanced standards for independence at Rule 10A-3 issued under the Securities Exchange Act of 1934, and that two members of the Committee — Dale L. Medford and Andrew G. Lampereur — are audit committee financial experts within the meaning of applicable regulations of the Securities and Exchange Commission.
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ITEM 11.EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Compensation Committee Report
The Compensation Committee of our Board reviewed and discussed the following Compensation Discussion and Analysis with management and based on such review and discussions, the Compensation Committee recommended to our Board that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for the year ended August 31, 2010.
THE COMPENSATION COMMITTEE
Andrew G. Lampereur, Chair
Stephen F. Kirk
Albert J. Neupaver
Andrew G. Lampereur, Chair
Stephen F. Kirk
Albert J. Neupaver
Compensation Discussion and Analysis
Overview
This Compensation Discussion and Analysis (“CD&A”) describes our compensation philosophy and objectives, how our compensation process works, why the Compensation Committee arrived at specific compensation decisions, and the role of the Committee, its compensation consultant, and Mr. Wallace, our Chief Executive Officer, in setting the compensation of our Named Executive Officers. Our Named Executive Officers for fiscal 2010 include the following:
| • | Peter C. Wallace, President and Chief Executive Officer | ||
| • | Christopher M. Hix, Vice President and Chief Financial Officer | ||
| • | Saeid Rahimian, Vice President and President, Fluid Management Group | ||
| • | Kevin J. Brown, Corporate Controller | ||
| • | Jeffrey L. Halsey, Vice President — Human Resources |
The Company paid no annual cash incentives or performance shares to Named Executive Officers based on the Company’s fiscal 2009 financial performance and, as a result of the continued global economic uncertainty, the Committee took the following actions in the beginning of fiscal 2010 (October 2009) with respect to our compensation programs:
| • | froze the base salaries and annual incentive opportunity levels of our Named Executive Officers; | ||
| • | changed the performance metrics for annual incentive opportunities applicable to operating segments to minimize the impact of restructuring efforts; and | ||
| • | increased the maximum payout for performance shares to create additional incentive to achieve “stretch” goals. |
The Company maintains a robust stock ownership policy for its directors and Named Executive Officers and has implemented a Compensation Clawback Policy to ensure the integrity of its financial statements.
Oversight of the Company’s Executive Compensation Programs
Compensation Committee
The Compensation Committee develops and administers our compensation programs, policies and processes and sets the compensation of our Chief Executive Officer and the other Named Executive Officers. The Committee was comprised of four independent directors until January 6, 2010 and was then decreased to three independent directors. Our Human
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Resources Department and General Counsel support the Committee in its work. The Committee has the authority in its discretion to engage outside advisors to assist it.
When determining the compensation of our Chief Executive Officer, the Committee considers:
| • | His performance against the annual and long-term objectives it has established for him; | ||
| • | Evaluations of our Chief Executive Officer submitted by each director and the personal evaluation that Mr. Wallace submits to the Committee; | ||
| • | Benchmark data from compensation surveys and our self-developed peer group; and | ||
| • | His past compensation and accumulated equity interest in the Company and his total proposed compensation taking into account all forms of compensation. |
In the process of determining his compensation, the Chairman of the Committee and the Chairman of the Board meet with Mr. Wallace to discuss the Committee’s evaluation of his performance, the rationale for the various elements of his compensation, the sizing of the elements, and the benchmarking of his total compensation. For fiscal 2011, the Nominating & Governance Committee began administering the annual evaluation of our Chief Executive Officer’s performance. Therefore, for fiscal 2011, the Chairman of the Nominating & Governance Committee and the Chairman of the Board met with Mr. Wallace to discuss the evaluation results. The Chairman of the Nominating & Governance Committee then communicated the results of the evaluation to the Compensation Committee.
The Committee also considers the economic and general business conditions at the time in which compensation decisions are made. While the Committee may adjust and refine the compensation packages as operating conditions change, it believes that consistency in its compensation philosophy and approach is important.
Role of Management
Management plays an important role in the process of setting compensation for executives other than our Chief Executive Officer. The Chief Executive Officer in consultation with our Vice President — Human Resources, and the Compensation Committee’s compensation consultant, develops compensation recommendations for the Compensation Committee to consider. The Chief Executive Officer considers various factors when making individual compensation recommendations including the relative importance of the executive’s position within the organization, the individual tenure and experience of the executive, and the executive’s individual performance and contributions to the Company’s results.
Mr. Wallace assists the Committee when it determines the compensation of the other Named Executive Officers by providing the Committee:
| • | His evaluation of each executive’s performance against targeted objectives; | ||
| • | His recommended allocation of the executive’s compensation among the various elements of compensation; and | ||
| • | His recommendation as to the size or amount of each element of compensation. |
On behalf of the Committee, Mr. Wallace also meets individually with each Named Executive Officer to explain the Committee’s rationale for various elements of the executive’s compensation and the sizing or amount of each element of compensation.
Role of Compensation Consultant
The Compensation Committee has retained Hewitt Associates as its compensation consultant since May 2007. During fiscal 2010, Hewitt spun off its executive compensation consulting services to Meridian Compensation Partners LLC, and
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following the spin-off, the Committee engaged Meridian as its compensation consultant. However, at the time of setting compensation for fiscal 2010 (October 2009), the spin-off had not yet occurred and Hewitt was serving as the compensation consultant to the Committee. The Committee determines the services provided to the Committee by the compensation consultant and the fees paid. The compensation consultant reports directly to the Committee independent of management and meets regularly with the Committee without management present. In addition to services to the Committee, Hewitt provided actuarial services to the Company in fiscal 2010.
For fiscal 2010, Hewitt provided the following services to the Committee:
| • | Participated in the design and implementation of our executive compensation program for our Named Executive Officers; | ||
| • | Provided competitive market practice data and benchmarking; | ||
| • | Provided a review of our stock ownership guidelines applicable to Named Executive Officers and directors; | ||
| • | Evaluated each of our Named Executive Officer’s position against competitive market practice data; | ||
| • | Evaluated the features of each of our compensation plans against market practice; | ||
| • | Analyzed our equity awards (e.g. options, restricted stock, restricted share units, and performance shares) to arrive at their respective economic value; and | ||
| • | Participated in meetings of the Committee at which fiscal 2010 compensation decisions were made. |
Objectives of the Company’s Compensation Program
The Compensation Committee believes that our targeted growth strategies require an executive compensation program that reinforces the importance of performance and accountability — both at the individual and at the corporate level. Our program is designed to provide executives with meaningful rewards, while maintaining alignment with shareholder interests, corporate values, and important management initiatives. In making compensation decisions, the Committee is guided by the following objectives:
| • | To attract, motivate, and retain highly experienced executives who are vital to our short- and long-term success, profitability, and growth; | ||
| • | To create alignment among executives and shareholders by actively promoting compensation programs and arrangements intended to result in executives having a meaningful investment in the Company through share ownership; | ||
| • | To provide focus on key financial performance goals and objectives that are integral to achieving the Company’s annual and long-term strategic plans; and | ||
| • | To provide targeted compensation levels that are generally consistent with a range of the 50th percentile of competitive market practice for base salary, annual incentives at target level performance, and annualized economic grant value for equity awards, with adjustments above or below the 50th percentile based on various factors, such as level of responsibility, prior experience, length of service, achievement of personal objectives, future potential and internal pay equity issues. |
Types of Compensation
Our compensation program includes the following types of compensation:
| • | Annual fixed compensation — salaries; |
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| • | Annual cash incentive compensation — cash bonus earned only if certain pre-established financial performance targets are achieved for the fiscal year; | ||
| • | Equity awards that provide opportunities for our executives to accumulate wealth that is directly related to the creation of shareholder value and serve to strengthen the long-term commitment of executives to the Company, including the following: |
| * | Stock options that become exercisable in equal installments on an annual basis over a three-year service period; | ||
| * | Restricted share units that vest in equal installments on an annual basis over a three-year service period; and | ||
| * | Performance shares that are earned based on annual financial measures but are only paid out if the executive continues in our employment for three years. |
| • | Executive perquisites provided on a limited basis that serve certain corporate purposes; | ||
| • | Retirement contributions designed to provide wealth accumulation and post-employment security; and | ||
| • | Special equity awards that are made from time to time when superior performance merits exceptional pay. |
Factors Considered in Determining Executive Compensation
Competitive Benchmarking
For our fiscal 2010 compensation program, Hewitt assisted the Compensation Committee in developing measures for benchmarking compensation, both as to the size of the total compensation package offered and the types and design of the various elements of compensation included in each Named Executive Officer’s compensation package. With Hewitt’s assistance, two comparative measures were developed:
| • | One drew upon Hewitt’s proprietary Total Compensation Measurement Database for the purpose of assessing market percentile ranges; and | ||
| • | The other was an updated version of a customized 12-company peer group that the Compensation Committee had previously developed for testing the competitiveness of our compensation against a more immediate peer group. |
For fiscal 2010, the Compensation Committee’s self-developed 12-company peer group was comprised of the following companies:
• Ameron International Corporation | • Circor International | |
• Crane Co. | • Flowserve Corporation | |
• Franklin Electric Co., Inc. | • Gardner Denver, Inc. | |
• Graco Inc. | • IDEX Corp. | |
• Milacron, Inc.(1) | • Sauer-Danfoss, Inc. | |
• Watts Water Technologies | • Woodward Governor Company |
| (1) | Milicron filed for Chapter 11 bankruptcy protection in March 2009 and therefore, fiscal year end results were not publicly available. |
For fiscal 2011 (October 2010), the Compensation Committee in consultation with Meridian, its compensation consultant, reviewed and expanded the Company’s self-developed peer group for use in setting compensation beginning in fiscal 2011 (October 2010).
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Tally Sheets
In setting each Named Executive Officer’s compensation, the Compensation Committee reviewed the total annual fixed, incentive, and equity compensation to be received by each of them, including base salary, annual and long-term incentives, equity grants, executive perquisites, total equity holdings in the Company, and post-employment obligations. The Committee uses Tally Sheets to facilitate this review.
How Target Levels of Compensation Are Determined
The Compensation Committee strives to create an overall compensation package for each Named Executive Officer that satisfies the objectives of our compensation program. With its consultant, the Committee reviews the market data, discussed above, to determine for each Named Executive Officer a total compensation at the 50th percentile level. The market data is regarded as a general reference point for the Committee and the Committee makes adjustments to the market data in order to respond to market conditions, promotions, individual performance, levels of responsibility, prior experience, length of service, future potential, and internal pay equity issues, with the intent that each Named Executive Officer’s total compensation package and each of the three major components are generally consistent with the desired 50th percentile level. The Committee rewards exceptional performance in a particular fiscal year by providing for incentive compensation that will payout above the targeted compensation level if certain stretch goals are achieved.
The Committee uses incentive compensation to promote the achievement of annual and longer-term financial measures. Annual incentive compensation is used to motivate executives to achieve specific performance goals of the Company’s annual plan. Performance share awards are tied to financial objectives that, while measured annually, are focused on consistent longer-term goals of continuing earnings growth and steadily improving asset utilization. Option grants and restricted share unit awards, while not performance based, promote the retention of key executives, help drive long-term performance and align management’s interests with those of shareholders.
The Committee believes that as an executive’s responsibility increases so does his ability to influence our performance and accordingly, the proportion of his compensation that consists of salary and cash incentive should decrease while the proportion of equity incentives to total compensation should increase. The Committee uses our above-listed types of compensation in various proportions in order to motivate desired performance. The Committee developed the following general guidelines as to the sizing of the various elements of compensation that comprised the executive’s total compensation package:
| Other Named | ||||||||
| Executive Officers | ||||||||
| Chief Executive Officer | (% of Total | |||||||
| Element of Compensation | (% of Total Compensation) | Compensation) | ||||||
| Salary | 25% to 35% | 40% to 60% | ||||||
| Annual Cash Incentive at Target | 20% to 25% | 20% to 25% | ||||||
| Performance Shares at Target | 10% to 15% | 5% to 10% | ||||||
| Restricted Share Unit Awards | 10% to 15% | 5% to 10% | ||||||
| Stock Option Awards | 25% to 30% | 10% to 25% | ||||||
| Annual Retirement Contributions (includes 3% attributable to Company contribution to 401(k) savings plan) | 10% of Cash Compensation | 10% of Cash Compensation | ||||||
Equity awards as a percentage of total compensation were valued based their “economic value.” In the case of options, economic value was determined using a Hewitt Associates’ model that is based on the American Call version of the Black-Scholes option pricing approach. For restricted share unit and performance share awards, the starting point for a determination of the economic value of an award is the closing market price of our shares on a recent date, with various adjustments related to restrictions on the share awards and the vesting period.
In setting each Named Executive Officer’s compensation, the Committee reviewed the total annual fixed, incentive, and equity compensation to be received by each of them, including base salary, cash incentives, annual and long-term incentives, equity grants, executive perquisites and post-employment obligations.
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Salaries
As a result of the global economic downturn, the Compensation Committee froze the fiscal 2010 base salaries for the Named Executive Officers at the fiscal 2009 rates. Base salary for fiscal 2010 comprised the following percentage of total compensation for each Named Executive Officer:
| Percent of Total | ||||||||
| Fiscal 2010 | ||||||||
| Named Executive Officer | Base Salary | Compensation(1) | ||||||
| Mr. Wallace | $ | 700,000 | 29 | % | ||||
| Mr. Hix | $ | 310,000 | 40 | % | ||||
| Mr. Rahimian | $ | 315,000 | 39 | % | ||||
| Mr. Brown | $ | 200,000 | 57 | % | ||||
| Mr. Halsey | $ | 219,000 | 47 | % | ||||
| (1) | Assuming a payout of annual incentive compensation and performance shares at target amounts. |
Annual Cash Incentive Opportunities
Annual cash incentive compensation provides Named Executive Officers with an opportunity to receive additional cash compensation through the achievement of specified annual financial targets. Targets are financial measures based on the Company’s annual plan and were fixed at the outset of fiscal 2010. Annual cash incentive compensation for fiscal 2010 at target comprised 35% to 80% of base salary depending on the Named Executive Officer. Annual cash incentive compensation could be earned at the threshold (50% payout), target (100% payout), or maximum (200% payout) level based on the extent to which the financial measures were achieved. The amounts that could have been earned at threshold, target and maximum are shown in the “Grants of Plan-Based Awards” table at page 70 of this Report and the amounts earned for fiscal 2010 are in the Summary Compensation Table at page 68 of this Report.
For fiscal 2010, the performance measures, the weighting assigned to each measure, and the extent to which each measure was achieved were:
| • | Measure: Consolidated sales, weighted 20%, and our consolidated sales for fiscal 2010 were 2% below target. | ||
| • | Measure: Adjusted diluted earnings per share, weighted 40%, and our adjusted diluted earnings per share for fiscal 2010 were 15% above target. | ||
| • | Measure: Adjusted free cash flow, weighted 40%, and our adjusted free cash flow for fiscal 2010 was 62% above target. |
When setting the performance measures for fiscal 2010 (October 2009), the Compensation Committee determined that diluted earnings per share and free cash flow would be adjusted for the after-tax impact of restructuring charges and goodwill impairment, if any.
The above measures apply to all of our Named Executive Officers. However, for Mr. Rahimian, President of the Fluid Management Group, 25% of his annual cash incentive is calculated on the above consolidated level basis while 75% is calculated on the basis of his particular group’s operating performance. The performance measures, the weighting assigned to each measure, and the extent to which is each measure was achieved for the Fluid Management Group were:
| • | Measure: Sales, weighted 20%, and sales for the Fluid Management Group for fiscal 2010 were 5% above target. | ||
| • | Measure: Adjusted operating profit, weighted 40%, and our adjusted operating income for the Fluid Management Group for fiscal 2010 was 20% above target. | ||
| • | Measure: Adjusted operating cash flow, weighted 40%, and our adjusted operating cash flow for the Fluid Management Group for fiscal 2010 was 32% above target. |
When setting the performance measures for fiscal 2010 (October 2009), the Committee determined that operating profit would be adjusted for restructuring costs and goodwill impairment, if any, and operating cash flow would be adjusted for the after-tax impact of restructuring charges, if any.
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Equity Grant Practices
To further align management and shareholder interests, the Compensation Committee in October of each year grants options and awards restricted share units to Named Executive Officers. Awards are made pursuant to our 2004 Stock Incentive Plan As Amended that was approved by shareholders in December 2004. Except for new hires and special circumstances, the Committee only grants equity awards at its October meeting, which is normally scheduled one year in advance. The Committee believes these annual equity awards as structured provide substantial incentives to Named Executive Officers to achieve significant growth in shareholder value and to continue in our employment.
Stock Options and Restricted Share Units
At the beginning of fiscal 2010 (October 2009), the Compensation Committee granted stock options and awarded restricted share units under our 2004 Stock Incentive Plan As Amended. The exercise price for options is the closing price of our common shares on the date of grant, options become exercisable over three years in equal annual installments and have a term of 10 years. Fiscal 2010 restricted share unit awards also vest equally over a three-year period. The sizing of the awards is based on the guidelines set forth above at “Factors Considered in Determining Executive Compensation” above and the actual grants and awards for fiscal 2010 are set forth in the “Grants of Plan-Based Awards” table at page 70 of this Report.
Fiscal 2010 Performance Share Awards
At the beginning of fiscal 2010 (October 2009), the Compensation Committee made performance share awards under our Long Term Incentive Plan (LTIP), which is a sub-plan under our 2004 Stock Incentive Plan As Amended. Under the LTIP, the Committee awards to each Named Executive Officer a target number of performance shares. For fiscal 2010, the Committee set performance threshold, target and maximum payout levels, as follows:
| Measure | Weight | Threshold | Target | Maximum | ||||||||||||
| Adjusted Diluted Earnings Per Share | 75 | % | $ | 0.76 | $ | 0.95 | $ | 1.19 | ||||||||
| Return on Net Assets | 25 | % | 10.72 | % | 13.40 | % | 16.75 | % | ||||||||
Diluted earnings per share are adjusted based on restructuring charges and goodwill impairment, if any. Return on net assets is adjusted for restructuring charges, if any.
For fiscal 2010, the Committee increased the maximum payout for performance shares from 150% to 200% to create additional incentive to achieve the maximum levels. At the end of fiscal 2010, the Committee determined the actual number of performance shares earned based on the extent to which the targets were achieved for fiscal 2010. The performance shares are forfeited by the executive if he is not employed by us on August 31, 2012. If the executive continues in our employment through August 31, 2012, for each performance share earned for fiscal 2010, he is then issued one common share. In addition, the dollar amount of dividends that would have been paid on such common shares if they had been issued to the executive on the performance share award date of October 6, 2009 is calculated and such amount is divided by the average closing price of our common shares in August 2012 to arrive at a number of dividend equivalent common shares that are issued to the executive on or about September 1, 2012.
The fiscal 2010 LTIP performance share awards at threshold (50% payout), target (100% payout) and maximum (200% payout) are set forth in the “Grants of Plan-Based Awards” table at page 70 of this Report. For fiscal 2010, Adjusted Diluted Earnings Per Share was $1.09 and Return on Net Assets was 14.38%, resulting in a 151% payout, and the following performance share awards for the Named Executive Officers:
| Number of Performance Shares | ||||
| Named Executive Officer | Earned for Fiscal 2010 | |||
| Mr. Wallace | 22,076 | |||
| Mr. Hix | 6,055 | |||
| Mr. Rahimian | 6,795 | |||
| Mr. Brown | 1,691 | |||
| Mr. Halsey | 3,186 | |||
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Perquisites
The Company has historically provided its Named Executive Officers with certain perquisites that the Committee believes are reasonable, competitive and consistent with the Company’s overall compensation philosophy. The perquisites provided to each Named Executive Officer in fiscal 2010 are described in the table at page 69 of this Report. In all cases, the aggregate value of personal benefits made available to an executive was less than 5% of his total compensation.
Retirement and Other Benefits
On December 31, 2005, we “froze” all Named Executive Officer defined benefit plans. In their place, we adopted our 2006 Executive Supplemental Retirement Plan. This plan is an unfunded defined contribution plan under which we annually credit an amount equal to 10% of the Named Executive Officer’s salary and annual cash incentive to his deferred compensation account. The amount credited, however, is reduced by amounts we credit to his account for the same fiscal year under the our qualified 401(k) savings plan. We also credit interest at a rate of seven percent per annum on each Named Executive Officer’s deferred compensation account balance. The amounts credited in fiscal 2010 for each Named Executive Officer are described in the table at page 69 of this Report.
Change-in-Control Agreements
We have an employment agreement with our Chief Executive Officer that provides certain payments in the event he is terminated or resigns with good reason within 24 months following a change-in-control of the Company or resigns during the 13th month following a change-in-control. We do not have employment agreements with any other executive officers, but we do have change-in-control agreements with each of our other Named Executive Officers that provide certain benefits in the event of termination of employment or resignation for good reason within 24 months after a change-in-control.
The purpose of these agreements is to aid in retention and recruitment, encourage continued attention and dedication to assigned duties during periods involving a possible change-in-control of the Company and to protect the earned benefits of each Named Executive Officer against adverse changes resulting from a change-in-control. When the Compensation Committee approved these agreements in prior years, it carefully reviewed the level of payments that would be paid in the event payments under the agreement were triggered and satisfied itself that the payments were reasonable in amount and designed to further the Committee’s objectives. Except for our Chief Executive Officer’s agreement, the agreements do not contain “tax gross up” provisions. The agreements are described in detail at “Potential Payments Upon Termination of Employment or a Change-in-Control” at page 74 of this Report.
On October 5, 2010, the Board of Directors, upon recommendation of the Compensation Committee, approved changes to the definition of “change of control” for all awards made on or after October 5, 2010 under our 2004 Stock Incentive Plan As Amended. The Plan provides that unvested stock options granted under the Plan will vest upon a change of control of the Company, as defined in the Plan, and the Compensation Committee can take certain actions upon a change of control with respect to other equity awards outstanding under the Plan. The amendment changes the circumstances under which a change of control will be deemed to occur for purposes of the Plan. Prior to the amendment, a change of control would have occurred under the Plan upon the approval by the shareholders of the Company of a merger or consolidation of the Company unless the voting shares of the Company outstanding prior to the merger or consolidation continued to represent at least 80% of the voting power of the Company or surviving entity following the merger or consolidation. As amended, a change of control will occur upon the consummation of a merger or consolidation of the Company unless the voting shares of the Company outstanding prior to the merger or consolidation continue to represent at least 50% of the voting power of the Company or surviving entity following the merger or consolidation.
Stock Ownership Guidelines.
We recognize the importance of equity ownership in the alignment of shareholder and management interests. Until June 23, 2010, we required that our Chief Executive Officer own common shares having a value equal to at least three times his salary and other Named Executive Officers in an amount equal to one times their respective salaries. Unvested restricted stock, unvested restricted share units and shares subject to outstanding options were not considered as owned in determining an executive’s ownership of our common shares. Effective June 23, 2010, we approved changes to the stock ownership guidelines, which now require that the Chief Executive Officer own common shares having a value equal to five times his
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salary, the Chief Financial Officer (Mr. Hix) and President of the Fluid Management Group (Mr. Rahimian) own common shares having a value equal to three times his salary, and other Named Executive Officers own common shares having a value equal to 1.5 times their respective salaries. Also effective June 23, 2010, all vested and unvested restricted stock and restricted share units and all earned performance shares are included in determining an executive’s ownership. However, shares subject to outstanding options are excluded. Until an executive officer meets the stock ownership requirement, the officer must hold at least 60% of all stock compensation we pay him.
Also effective June 23, 2010, we revised the stock ownership guidelines applicable to our non-employee directors. Our non-employee directors are required to own our stock having a value equal to at least five times the annual cash retainer we pay directors. Until a director meets the stock ownership requirement, the director must retain at least 60% of all stock compensation paid by us.
Risk Assessment
The Compensation Committee appointed a Risk Assessment Committee to consider whether our compensation practices or policies encourage excessive or inappropriate risk taking by our employees, including our Named Executive Officers. The Risk Assessment Committee is comprised of our Vice President — Human Resources, our Corporate Controller, and our General Counsel. The Risk Assessment Committee reported its findings to the Compensation Committee and, after review and discussion, the Compensation Committee agreed with those findings. Specifically, the Risk Assessment Committee and the Compensation Committee concluded that although a portion of our executive compensation program is performance-based, it does not encourage excessive or inappropriate risk-taking.
Compensation Recovery “Clawback” Policy
The Company has adopted a Compensation Clawback Policy effective for plan years beginning on or after October 5, 2010 for Named Executive Officers. This policy further strengthens the risk mitigation program by defining the economic consequences that misconduct has on the executive officer’s incentive-based compensation. In the event of a financial restatement due to fraudulent activity or misconduct as determined by the Board of Directors, the culpable executive officer will reimburse the Company for incentive-based compensation paid to him. In addition, the Board of Directors has discretion to determine whether or not such Named Executive Officer was involved in the fraudulent activity or misconduct.
Tax Deductibility of Compensation.
Section 162(m) of the U.S. Internal Revenue Code limits the deduction we may take for executive compensation paid to an Named Executive Officer to $1.0 million per year, but contains an exception for certain performance-based compensation. We have structured annual cash incentive compensation under our Senior Executive Annual Cash Bonus Plan and grants of options, awards of restricted shares, restricted share units, and LTIP awards under our 2004 Stock Incentive Plan As Amended to qualify as performance-based compensation. The Compensation Committee intends to continue to structure executive compensation so that payments will be fully deductible. Occasionally, however, we may make cash payments and equity awards that are not fully deductible if, in the Committee’s judgment, those payments or awards are needed to achieve our overall compensation objectives.
Conclusion
Each year the Compensation Committee reviews the total compensation package available to each of the Named Executive Officers to satisfy itself that the complete package is consistent with the Committee’s goals and objectives. The Committee also reviews the accumulated wealth that each Named Executive Officer has achieved as a result of equity awards and retirement benefits provided by the Company, and the particular incentives, vesting requirements and agreements that encourage our Named Executive Officers to continue in our employment. The Committee believes our compensation processes, policies and programs for Named Executive Officers, including the processes it follows when determining the compensation of our Chief Executive Officer, further our compensation goals and objectives, are consistent with good corporate governance practices, effectively tie executive compensation to our performance and shareholder value, and induce our key executives to continue to render outstanding service on behalf of the Company.
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Summary Compensation Table
The following table shows for the fiscal year ended August 31, 2010 the compensation provided by the Company to our Named Executive Officers.
| Change in | ||||||||||||||||||||||||||||||||
| Pension Value | ||||||||||||||||||||||||||||||||
| and Non- | ||||||||||||||||||||||||||||||||
| Qualified | ||||||||||||||||||||||||||||||||
| Non-Equity | Deferred | |||||||||||||||||||||||||||||||
| Stock | Option | Incentive Plan | Compensation | All Other | ||||||||||||||||||||||||||||
| Salary | Awards | Awards | Compensation | Earnings | Compensation | Total | ||||||||||||||||||||||||||
| Name andPrincipal Position | Year | ($)(1) | ($)(2) | ($)(3) | ($)(4) | ($)(5) | ($)(6) | ($) | ||||||||||||||||||||||||
| Peter C. Wallace, | 2010 | $ | 700,000 | $ | 597,105 | $ | 432,375 | $ | 940,800 | $ | 8,499 | $ | 228,204 | $ | 2,906,983 | |||||||||||||||||
| President and Chief | 2009 | 694,584 | 546,977 | 548,196 | 0 | 5,310 | 128,995 | 1,924,062 | ||||||||||||||||||||||||
| Executive Officer | 2008 | 628,750 | 589,784 | 238,693 | 838,676 | 5,987 | 207,331 | 2,509,221 | ||||||||||||||||||||||||
| Christopher M. Hix, | 2010 | $ | 310,000 | $ | 163,679 | $ | 118,442 | $ | 260,400 | $ | 726 | $ | 94,791 | $ | 948,038 | |||||||||||||||||
| Vice President and | 2009 | 307,084 | 149,908 | 150,228 | 0 | 546 | 69,446 | 677,212 | ||||||||||||||||||||||||
| Chief Financial | 2008 | 273,750 | 147,461 | 59,670 | 242,138 | 258 | 107,414 | 830,691 | ||||||||||||||||||||||||
| Officer | ||||||||||||||||||||||||||||||||
| Saeid Rahimian, | 2010 | $ | 315,000 | $ | 183,776 | $ | 133,025 | $ | 289,800 | $ | 30,407 | $ | 105,453 | $ | 1,057,461 | |||||||||||||||||
| Vice President and | 2009 | 313,750 | 168,304 | 168,681 | 0 | 14,448 | 80,144 | 745,327 | ||||||||||||||||||||||||
| President Fluid | 2008 | 298,750 | 147,461 | 59,670 | 195,863 | 21,582 | 100,024 | 823,350 | ||||||||||||||||||||||||
| Management Group | ||||||||||||||||||||||||||||||||
| Kevin J Brown, | 2010 | $ | 200,000 | $ | 45,777 | $ | 28,915 | $ | 117,600 | $ | 82,987 | $ | 55,924 | $ | 531,203 | |||||||||||||||||
| Controller | 2009 | 200,000 | 21,054 | 21,082 | 0 | 71,564 | 48,794 | 362,494 | ||||||||||||||||||||||||
| 2008 | 200,000 | 22,119 | 8,955 | 123,270 | 204 | 58,902 | 413,450 | |||||||||||||||||||||||||
| Jeffrey L. Halsey, | 2010 | $ | 219,000 | $ | 86,194 | $ | 54,205 | $ | 165,570 | $ | 280 | $ | 59,793 | $ | 585,042 | |||||||||||||||||
| Vice President, | 2009 | 217,417 | 78,899 | 79,070 | 0 | 180 | 44,554 | 420,120 | ||||||||||||||||||||||||
| Human Resources | ||||||||||||||||||||||||||||||||
| (1) | For fiscal 2010, salaries were frozen at the 2009 rates. The differences between salaries for fiscal 2009 and fiscal 2010 reflect that fiscal year salaries include 11 months at the current fiscal year rate and one month at the prior fiscal year rate. | |
| (2) | Amounts reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 of restricted shares, restricted share units, and performance shares granted under the Company’s 2004 Stock Incentive Plan As Amended (which we refer to as the 2004 Plan) during fiscal 2010 and prior years. The amounts were calculated by multiplying the close price on the date of grant by the number of restricted shares and restricted share units received and the number of performance share awards assuming a payout at target. The maximum payout amount that could have been received for performance share awards for fiscal 2010, 2009, and 2008 were: Wallace — 15,936, 20,924, and 29,240; Hix — 3,987, 5,735, and 8,020; Rahimian — 3,987, 6,438, and 9,000; Brown — 597, 806, and 2,240; and Halsey — 2,988, 3,018, and 4,220. The actual value of performance share awards received by the Named Executive Officers for fiscal 2010, 2009, and 2008 were: Wallace — $492,957, $0, and $473,777; Hix — $135,208, $0, and $118,534; Rahimian — $151,732, $0, and $118,534; Brown — $37,360, $0, $17,749; and Halsey — $71,143, $0, and $88,833. For further information on these awards, see the Grants of Plan-Based Awards table on page 70 of this Report. | |
| (3) | Amounts reflect the aggregate grant date fair value for fiscal 2010 and prior years computed in accordance with FASB ASC Topic 718 of stock option grants under the 2004 Plan. The amounts do not reflect whether a Named Executive Officer has actually received a financial benefit from the award. The amount was calculated using the Black-Scholes option pricing model calculated as of the close of the preceding fiscal year. See Notes 1 and 10 to the Consolidated Financial Statements included in this Report on Form 10-K/A for a discussion of the relevant assumptions used in calculating the compensation cost. For further information on these awards, see the Grants of Plan-Based Awards table on page 70 of this Report. | |
| (4) | Amounts shown in this column include cash incentives paid for fiscal 2010, 2009 and 2008 performance under our annual cash incentive program. The methodology applied in determining these cash incentive amounts is discussed under |
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| “Compensation Discussion and Analysis” at “Annual Cash Incentive Opportunities” on page 64 of this Report. | ||
| (5) | Amounts shown in this column include (i) the aggregate of the increase in actuarial values of each of the Named Executive Officer’s benefits under our Pension Plan and Supplemental Pension Plan and (ii) the portion of interest earned on Non-Qualified Deferred Compensation assets that exceeds the SEC benchmark “market” rate (120% of the applicable federal long-term rate). For fiscal 2010, the aggregate increase in actuarial values and above market earnings, respectively, for each of the Named Executive Officers was as follows: Mr. Wallace — $6,003 and $2,496; Mr. Hix — $0 and $726; Mr. Rahimian — $29,504 and $903; Mr. Brown — $82,400 and $587, and Mr. Halsey — $0 and $280. | |
| (6) | Amounts shown in this column for fiscal 2010 include for each Named Executive Officer the items listed in the following table. For those items which are perquisites, we include the incremental costs to the Company of providing the perquisites, and we value perquisites based on the amount we actually paid to the third party to obtain the perquisite for the executive. |
| Items Included in “All Other Compensation” for Fiscal 2010 | Mr. Wallace | Mr. Hix | Mr. Rahimian | Mr. Brown | Mr. Halsey | |||||||||||||||
| Company contribution to Executive Supplemental Retirement Plan | $ | 156,170 | $ | 49,535 | $ | 50,453 | $ | 24,340 | $ | 31,008 | ||||||||||
| Company contribution to 401(k) Employee Savings Plan | 14,700 | 14,700 | 14,700 | 12,250 | 13,414 | |||||||||||||||
| Perquisites or Personal Benefits | 56,774 | 30,401 | 40,143 | 19,334 | 15,273 | |||||||||||||||
The following table identifies the perquisites or personal benefits that were made available and utilized by each Named Executive Officer in fiscal 2010. Such benefits differ among Named Executive Officers depending on employment classification, location, and, with respect to certain benefits, whether the Named Executive Officer chose to utilize them in fiscal 2010.
| Items Included in Perquisites or Personal Benefits | Mr. Wallace | Mr. Hix | Mr. Rahimian | Mr. Brown | Mr. Halsey | |||||||||||||||
| Financial planning program | X | X | X | X | ||||||||||||||||
| Car allowance | X | X | X | X | X | |||||||||||||||
| Reimbursement for club membership | X | X | ||||||||||||||||||
| Supplemental disability insurance premiums | X | X | X | X | X | |||||||||||||||
| Life insurance premiums | X | X | X | X | X | |||||||||||||||
| Long-term care insurance premiums | X | X | X | X | ||||||||||||||||
| Physical examinations to the extent not covered by insurance | X | |||||||||||||||||||
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Grants of Plan-Based Awards in Fiscal 2010
| All Other | Grant Date | |||||||||||||||||||||||||||||||||||||||||||
| Option | Fair Value | |||||||||||||||||||||||||||||||||||||||||||
| All Other Stock | Awards: | of Stock and | ||||||||||||||||||||||||||||||||||||||||||
| Awards: | Number of | Option | ||||||||||||||||||||||||||||||||||||||||||
| Number of | Securities | Exercise or Base | Awards (5) | |||||||||||||||||||||||||||||||||||||||||
| Estimated Future Payouts Under | Estimated Future Payouts Under | Shares of Stock | Underlying | Price of Option | ||||||||||||||||||||||||||||||||||||||||
| Non-Equity Incentive Plan Awards | Equity Incentive Plan Awards | or Units | Options | Awards | ||||||||||||||||||||||||||||||||||||||||
| Threshold | Target | Maximum | Threshold | Target | Maximum | |||||||||||||||||||||||||||||||||||||||
| Name | Grant Date | ($) | ($) | ($) | (#) | (#) | (#) | (#) | (#) | ($/Sh) | ($)(5) | |||||||||||||||||||||||||||||||||
| Mr. Wallace | FY 2010 cash incentive plan(1) | $ | 280,000 | $ | 560,000 | $ | 1,120,000 | |||||||||||||||||||||||||||||||||||||
| 10/8/09 LTIP(2) | 7,310 | 14,620 | 29,240 | $ | 326,465 | |||||||||||||||||||||||||||||||||||||||
| Restricted Share Units (3) | 12,120 | 270,640 | ||||||||||||||||||||||||||||||||||||||||||
| Stock Options (4) | 51,290 | $ | 22.33 | 432,375 | ||||||||||||||||||||||||||||||||||||||||
| Mr. Hix | FY 2010 cash incentive plan(1) | $ | 77,500 | $ | 155,000 | $ | 310,000 | |||||||||||||||||||||||||||||||||||||
| 10/8/09 LTIP(2) | 2,005 | 4,010 | 8,020 | $ | 89,543 | |||||||||||||||||||||||||||||||||||||||
| Restricted Share Units (3) | 3,320 | 74,130 | ||||||||||||||||||||||||||||||||||||||||||
| Stock Options (4) | 14,050 | $ | 22.33 | 118,442 | ||||||||||||||||||||||||||||||||||||||||
| Mr. Rahimian | FY 2010 cash incentive plan(1) | $ | 78,750 | $ | 157,500 | $ | 315,000 | |||||||||||||||||||||||||||||||||||||
| 10/8/09 LTIP(2) | 2,250 | 4,500 | 9,000 | $ | 100,485 | |||||||||||||||||||||||||||||||||||||||
| Restricted Share Units(3) | 3,730 | 83,291 | ||||||||||||||||||||||||||||||||||||||||||
| Stock Options (4) | 15,780 | $ | 22.33 | 133,025 | ||||||||||||||||||||||||||||||||||||||||
| Mr. Brown | FY 2010 cash incentive plan(1) | $ | 35,000 | $ | 70,000 | $ | 140,000 | |||||||||||||||||||||||||||||||||||||
| 10/8/09 LTIP(2) | 560 | 1,120 | 2,240 | $ | 25,010 | |||||||||||||||||||||||||||||||||||||||
| Restricted Share Units(3) | 930 | 20,767 | ||||||||||||||||||||||||||||||||||||||||||
| Stock Options (4) | 3,430 | $ | 22.33 | 28,915 | ||||||||||||||||||||||||||||||||||||||||
| Mr. Halsey | FY 2010 cash incentive plan(1) | $ | 49,275 | $ | 98,550 | $ | 197,100 | |||||||||||||||||||||||||||||||||||||
| 10/8/09 LTIP(2) | 1,055 | 2,110 | 4,220 | $ | 47,116 | |||||||||||||||||||||||||||||||||||||||
| Restricted Share Units (3) | 1,750 | 39,078 | ||||||||||||||||||||||||||||||||||||||||||
| Stock Options (4) | 6,430 | $ | 22.33 | 54,205 | ||||||||||||||||||||||||||||||||||||||||
| (1) | Represents the threshold, target and maximum cash incentive awards set for fiscal 2010 under our annual executive officer cash incentive compensation program. The methodology applied in determining these awards and how they are earned in discussed under “Compensation Discussion and Analysis” at “Annual Cash Incentive Opportunities” on page 64 of this Report. The actual annual cash incentives paid to the Named Executive Officers for fiscal 2010, 2009, and 2008 are set forth in the Summary Compensation Table. | |
| (2) | Represents the fiscal 2010 performance share award under the LTIP plan (a subplan under the 2004 Plan) assuming a payout at threshold, target and maximum. The methodology applied in determining these awards and how they are earned is discussed under “Compensation Discussion and Analysis” at “Fiscal 2010 Performance Share Awards” on page 65 of this Report. The actual value of performance share awards received the Named Executive Officers for fiscal 2010, 2009, and 2008, calculated using the closing prices on the date of grant of $29.73 for 2008 and $22.33 for 2010, were: Wallace — $492,957, $0, and $473,777; Hix — $135,208, $0, and $118,534; Rahimian — $151,732, $0, and $118,534; Brown — $37,360, $0, $17,749; and Halsey — $71,143, $0, and $88,833. | |
| (3) | Represents a restricted share unit award on October 6, 2009 under the 2004 Plan. The shares vest in equal installments over a three-year period. | |
| (4) | Represents an option award on October 6, 2009 under the 2004 Plan. Options have a ten-year term, become exercisable ratably over a three-year period, and have an option exercise price equal to the closing price of a common share on the date of grant. | |
| (5) | Represents the grant date fair value computed in accordance with FASB ASC Topic 718 for stock options, restricted share units, and performance shares, assuming, for performance shares, a payout at target. |
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Outstanding Equity Awards At August 31, 2010
| Option Awards(1) | |||||||||||||||||||||||||
| Number of | Number of | ||||||||||||||||||||||||
| Securities | Securities | Stock Awards | |||||||||||||||||||||||
| Underlying | Underlying | Option | Number of Shares or | Market Value of | |||||||||||||||||||||
| Unexercised | Unexercised | Exercise | Option | Units of Stock That | Shares or Units of | ||||||||||||||||||||
| Options (#) | Options (#) | Price | Expiration | Have not Vested | Stock That have | ||||||||||||||||||||
| Name | Exercisable | Unexercisable | $ | Date | (#)(2) | Not Vested ($)(3) | |||||||||||||||||||
| Mr. Wallace | 40,000 | 0 | $ | 10.79 | 10/6/2015 | 22,899 | $ | 541,790 | |||||||||||||||||
| 34,000 | 0 | $ | 15.25 | 10/4/2016 | |||||||||||||||||||||
| 27,437 | 13,717 | $ | 29.73 | 10/5/2017 | |||||||||||||||||||||
| 14,389 | 28,776 | $ | 21.44 | 10/9/2018 | |||||||||||||||||||||
| 0 | 51,290 | $ | 22.33 | 10/6/2019 | |||||||||||||||||||||
| Mr. Hix | 16,668 | 0 | $ | 13.20 | 8/1/2016 | 6,199 | $ | 146,668 | |||||||||||||||||
| 6,268 | 0 | $ | 15.25 | 10/4/2016 | |||||||||||||||||||||
| 6,858 | 3,430 | $ | 29.73 | 10/5/2017 | |||||||||||||||||||||
| 3,942 | 7,887 | $ | 21.44 | 10/9/2018 | |||||||||||||||||||||
| 0 | 14,050 | $ | 22.33 | 10/6/2019 | |||||||||||||||||||||
| Mr. Rahimian | 25,000 | 0 | $ | 10.79 | 10/6/2015 | 6,869 | $ | 162,521 | |||||||||||||||||
| 9,400 | 0 | $ | 15.25 | 10/4/2016 | |||||||||||||||||||||
| 6,858 | 3,430 | $ | 29.73 | 10/5/2017 | |||||||||||||||||||||
| 4,427 | 8,855 | $ | 21.44 | 10/9/2018 | |||||||||||||||||||||
| 0 | 15,780 | $ | 22.33 | 106/2019 | |||||||||||||||||||||
| Mr. Brown | 30,000 | 0 | $ | 13.88 | 6/27/2011 | 1,341 | $ | 31,728 | |||||||||||||||||
| 35,000 | 0 | $ | 12.59 | 6/26/2012 | |||||||||||||||||||||
| 50,000 | 0 | $ | 10.89 | 6/25/2014 | |||||||||||||||||||||
| 20,000 | 0 | $ | 10.79 | 10/6/2015 | |||||||||||||||||||||
| 1,029 | 515 | $ | 29.73 | 10/5/2017 | |||||||||||||||||||||
| 553 | 1,107 | $ | 21.44 | 10/9/2018 | |||||||||||||||||||||
| 0 | 3,430 | $ | 22.33 | 10/6/2019 | |||||||||||||||||||||
| Mr. Halsey | 5,144 | 2,572 | $ | 29.73 | 10/5/2017 | 3,438 | $ | 81,343 | |||||||||||||||||
| 2,075 | 4,151 | $ | 21.44 | 10/9/2018 | |||||||||||||||||||||
| 0 | 6,430 | $ | 22.33 | 10/6/2019 | |||||||||||||||||||||
| (1) | Each option listed in the table has a ten-year term and was granted on the same day and in the same month as its expiration date, but 10 years earlier. All options become exercisable with respect to one-third of the shares on the first annual anniversary date of their grant, two-thirds of the shares on the second anniversary, and 100% of the shares on the third anniversary. | |
| (2) | The restricted shares and restricted share units listed in this column vest as follows: | |
| Mr. Wallace — restricted shares: 3,071 (10/5/2010), 3,854 (10/9/2010), 3,854 (10/9/2011); restricted share units: 4,040 (10/6/2010), 4,040 (10/6/2011), and 4,040 (10/6/2012). | ||
| Mr. Hix — restricted shares: 767 (10/5/2010), 1,056 (10/9/2010), and 1,056 (10/9/2011); restricted share units: 1,107 (10/6/2010), 1,107 (10/6/2011), and 1,106 (10/6/2012). | ||
| Mr. Rahimian — restricted shares: 767 (10/5/2010), 1,186 (10/9/2010), and 1,186 (10/9/2011); restricted share units: 1,244 (10/6/2010), 1,243 (10/6/2011) and 1,243 (10/6/2012). | ||
| Mr. Brown — restricted shares: 115 (10/5/2010), 148 (10/9/2010), and 148 (10/9/2011); restricted share units: 310 (10/6/2010), 310 (10/6/2011), and 310 (10/6/2012). | ||
| Mr. Halsey — restricted shares: 576 (10/5/2010), 556 (10/9/2010), and 556 (10/9/2011); restricted share units: 584 (10/5/2010), 583 (10/6/2011), and 583 (10/6/2012). |
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| (3) | Market value of shares is the number of shares that have not vested multiplied by our closing price per share of $23.66 on August 31, 2010. |
Option Exercises and Stock Vested in Fiscal 2010
| Option Awards | ||||||||||||||||
| Number of Shares | Stock Awards | |||||||||||||||
| Acquired on | Value Realized | Number of Shares | ||||||||||||||
| Exercise | on Exercise | Acquired on Vesting | Value Realized | |||||||||||||
| Name | (#) | ($) | (#)(1) | on Vesting ($) | ||||||||||||
| Mr. Wallace | 0 | 0 | 56,438 | $ | 1,325,257 | |||||||||||
| Mr. Hix | 0 | 0 | 15,875 | 372,921 | ||||||||||||
| Mr. Rahimian | 0 | 0 | 16,004 | 375,866 | ||||||||||||
| Mr. Brown | 0 | 0 | 3,245 | 76,594 | ||||||||||||
| Mr. Halsey | 0 | 0 | 1,132 | 26,028 | ||||||||||||
| (1) | Represents the vesting in fiscal 2010 of restricted shares and restricted share units awarded under our 2004 Plan in prior years. |
Post-Employment (Retirement) Compensation
The Company has two active retirement plans for Named Executive Officers:
| • | A qualified 401(k) Employee Savings Plan, which we refer to as the 401(k) Plan. | ||
| • | A nonqualified, defined contribution plan, which we refer to as the Executive Supplemental Retirement Plan. |
The Company has two inactive retirement plans from which benefits are still payable, but under which no additional benefits are being earned (other than earnings credits as described below):
| • | A qualified defined benefit pension plan, which we refer to as the Prior Pension Plan. | ||
| • | A nonqualified supplemental plan, which we refer to as the Prior Supplemental Pension Plan. |
Pension Benefits
The Company has no active defined benefit pension plans. Messrs. Brown, Rahimian, and Wallace are the only Named Executive Officers that participated in the inactive defined benefit pension plans. The following table provides information concerning these inactive defined benefit pension plans.
| Pension Benefits | ||||||||||||||||
| Number of Years | Present Value of | Payments During | ||||||||||||||
| Credited Service | Accumulated | Last Fiscal Year | ||||||||||||||
| Name | Plan Name | (#) | Benefit($) | ($) | ||||||||||||
| Mr. Wallace | Prior Pension Plan | 2.3 | $ | 30,460 | 0 | |||||||||||
| Prior Supplemental Pension Plan | 2.9 | 64,804 | 0 | |||||||||||||
| Mr. Rahimian | Prior Pension Plan | 20.1 | 268,226 | 0 | ||||||||||||
| Prior Supplemental Pension Plan | 20.1 | 140,810 | 0 | |||||||||||||
| Mr. Brown | Prior Pension Plan | 10.3 | 210,361 | 0 | ||||||||||||
| Prior Supplemental Pension Plan | 10.3 | 147,848 | 0 | |||||||||||||
| (1) | The Prior Pension Plan was for officers and other salaried employees and was “frozen” on December 31, 2005. Retirement benefits for Messrs. Rahimian and Wallace under the Prior Pension Plan are calculated on a “cash balance” benefit formula basis. Under the cash balance benefit formula, each year a percentage of the employee’s compensation |
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| (5% if less than 15 years of service; 6.5% if 15 or more years of service) was credited to the employee’s cash balance account. For certain individuals including Mr. Rahimian, the pay credits were doubled to 10% and 13%, respectively, until December 31, 2005. Effective December 31, 2005, the Prior Pension Plan was “frozen” in that no future pay credits are credited to any participant’s account. Each account is also credited annually with interest. The interest credits continue to apply even though there are no more pay credits. Interest is credited quarterly and is the greater of (1) the average of the U.S. Government One-Year Treasury Constant Maturities for the last business day of the 12 months ending August preceding the plan year, rounded to the next highest quarter percent and (2) 3.5%. Upon retirement, the employee may receive benefits in the form of a lump sum payment equal to the employee’s cash balance account or a monthly annuity equal to the actuarial equivalent of the cash balance account. Mr. Brown’s retirement benefits under the plan are calculated on a “final average earnings” formula basis. For him, the Company calculates retirement benefits under the Prior Pension Plan on the basis of his average annual compensation for the five highest years during his last ten years of employment with reductions for credited years of service less than 35. Compensation for the purpose of calculating retirement benefits includes salary and cash incentive compensation (exclusive of deferred incentive compensation). The maximum annual retirement benefit that the Company can pay under the Pension Plan to any participant as a result of limitations imposed under the Internal Revenue Code is presently $195,000. The Prior Supplemental Pension Plan provides supplemental retirement benefits for Messrs. Wallace, Brown, and Rahimian. The supplemental retirement benefit is equal to the excess of (i) the benefit that would have been payable to the employee under the Prior Pension Plan without regard to certain annual retirement income and pay limitations imposed by federal law over (ii) the benefit payable to the employee under the Prior Pension Plan. The Prior Supplemental Pension Plan also provides in the case of Messrs. Wallace and Rahimian that the employee’s cash balance account at retirement would be multiplied by 150% and 130%, respectively. The estimated annual benefits payable at normal retirement (age 65) in the form of an annuity to Messrs. Wallace and Rahimian are $9,400 and $63,400, respectively. In making these estimates, the assumptions applied to the “frozen” 12/31/2005 account balance were (i) that the interest rate for all years is 4.0%, which was the rate used for the 2005 plan year and (ii) that the projected cash balance account at normal retirement age (after applying the multiplier in effect for participants in the Prior Supplemental Pension Plan) was converted to an annuity using an interest rate of 5.50% and the 1995 Group Annuity Reserve Table for Males and Females as published in Revenue Ruling 2001-62. The estimated annual benefit payable at normal retirement age in the form of an annuity to Mr. Brown is $29,800. | ||
| (2) | No Named Executive Officer is eligible for early retirement under any retirement plan of the Company. | |
| (3) | Other assumptions not explicitly mentioned are the same as those assumptions used for financial reporting. Please refer to Note 8 to our Consolidated Financial Statements for the year ended August 31, 2010 for more information on those assumptions. |
Nonqualified Deferred Compensation
Other than the 401(k) Plan, the only active retirement plan that the Company maintains for the Named Executive Officers is the Executive Supplemental Retirement Plan, which was established in fiscal 2006. The following table provides information concerning the Executive Supplemental Retirement Plan.
| Name | Nonqualified Deferred Compensation(1) | |||||||||||||||||||
| Executive | Registrant | Aggregate | Aggregate | Aggregate | ||||||||||||||||
| Contributions | Contributions | Earnings | Withdrawals/ | Balance | ||||||||||||||||
| in Last FY | in Last FY | in Last FY | Distributions | at Last FYE | ||||||||||||||||
| ($) | ($)(2) | ($)(3) | ($) | ($) | ||||||||||||||||
| Mr. Wallace | 0 | $ | 156,170 | $ | 29,118 | 0 | $ | 601,225 | ||||||||||||
| Mr. Hix | 0 | 49,535 | 8,474 | 0 | 179,065 | |||||||||||||||
| Mr. Rahimian | 0 | 50,453 | 10,538 | 0 | 211,532 | |||||||||||||||
| Mr. Brown | 0 | 24,340 | 6,847 | 0 | 129,005 | |||||||||||||||
| Mr. Halsey | 0 | 31,008 | 3,262 | 0 | 80,877 | |||||||||||||||
| (1) | As described in footnote (1) to the Pension Benefits table, above, the Company “froze,” as of December 31, 2005, all of the plans that provided retirement benefits to the Named Executive Officers and adopted the Executive Supplemental Retirement Plan. This plan is an unfunded defined contribution plan under which the Company annually |
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| credits an amount equal to 10% of the participant’s salary and annual cash incentive compensation to the participant’s deferred compensation account. The amount credited under the plan, however, is reduced by certain amounts the Company credits to the participant’s account for the same fiscal year under the 401(k) Plan. The Company also credits interest at a rate of seven percent per annum on the amounts credited to the participant’s deferred compensation account. The Company will distribute the aggregate balance in the participant’s deferred compensation account to him on the first day of 14th month after the later of the participant’s retirement from the Company or attaining age 60. A participant may elect up to 12 months before such lump sum payment date to be paid in equal annual installments over 15 years or less, but the first installment payment may not be made until five years after such lump sum payment date. Upon termination of employment, a participant forfeits his benefits under the plan if he has less than five years of service with the Company unless the reason for termination was disability or death. | ||
| (2) | Amounts in this column are included in the “All Other Compensation” column of the Summary Compensation Table. | |
| (3) | For each Named Executive Officer, only 0.6% of the amounts listed in this column were included in the Summary Compensation Table. This amount represents the portion of interest earned on Non-Qualified Deferred Compensation assets that exceeds the SEC benchmark “market” rate (120% of the applicable federal long-term rate). See Summary Compensation Table at footnote (5) for additional information. |
Potential Payments Upon Termination of Employment or a Change-in-Control
Payments and benefits received by Named Executive Officers upon termination or a change-in-control are governed by the arrangements described below and quantified in the tables at the end of this section. The amounts shown in the tables assume the termination of employment and change of control occurred on August 31, 2010, the last day of fiscal 2010 (based on the executive’s compensation and service levels at such date and the closing stock price of our common shares on August 31, 2010 of $23.66 per share). The actual amounts to be paid out can only be determined at the time of the Named Executive Officer’s departure from the Company.
The approval by our shareholders of the merger of T-3 Energy Services, Inc. (“T-3”) with one of our subsidiaries will constitute a change of control under our 2004 Stock Incentive Plan As Amended for all grants and awards made under the 2004 Plan prior to October 5, 2010. All outstanding, unvested stock options, restricted shares, restricted share units, and performance shares granted or awarded prior to October 5, 2010 will vest upon the approval by our shareholders of the merger with T-3. Effective October 5, 2010, we revised the definition of change of control in the 2004 Plan and consequently, the merger with T-3 does not constitute a change of control for grants or awards made on or after October 5, 2010. See “Change-in-Control Agreements” on page 66 of this Report for additional information.
Prior Pension Plan and Prior Supplemental Pension Plan
Named Executive Officers who are terminated for any reason receive their vested benefits under the Prior Pension Plan and the Prior Supplemental Pension Plan as discussed in the “Pension Benefits” section, above.
Executive Supplemental Retirement Plan and 401(k) Plan
Named Executive Officers who are terminated for any reason other than cause receive their vested aggregate account balance as discussed in the “Nonqualified Deferred Compensation” section. Upon termination without cause following a change of control, the Named Executive Officers who have not yet vested in the executive supplemental retirement plan would become fully vested and would receive their aggregate account balance. Named Executive Officers would also receive their aggregate account balance under the 401(k) Plan.
Life Insurance and Disability
We have life insurance and disability insurance programs that would provide Named Executive Officers or their beneficiaries certain payments in the event the executive’s employment were terminated due to death or disability.
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Stock Compensation Plans
Under the Company’s stock plans (meaning our 1994 Plan, 1999 Plan and 2004 Plan), unvested equity awards (or in the case of options, unexercisable options) are treated as follows:
| Restricted Shares and | ||||
| Nature of Termination | Restricted Share Unit Awards | Stock Options | ||
| Voluntary (other than Retirement) | Forfeit | Forfeit unexercisable; vested exercisable for 30 days | ||
| Involuntary for Cause | Forfeit | Forfeit | ||
| Involuntary without Cause | Forfeit | Forfeit unexercisable; vested exercisable for 30 days | ||
| Early Retirement and Normal Retirement | Fully vest | All become exercisable — for one year (early retirement) and three years (normal retirement) | ||
| Death and Disability | Fully vest | All become exercisable for three years | ||
| Change of Control | Fully vest | Fully vest |
Employment Agreement with Mr. Wallace and Change-in-Control Agreements With Other Named Executive Officers
We have entered into an employment agreement with Mr. Wallace and change-in-control agreements with each of the other Named Executive Officers.
The change-in-control agreements with Messrs. Hix, Rahimian, Brown, and Halsey expire on June 30, 2011. The agreements, however, automatically renew each year for an additional year unless at least 60 days prior to the scheduled renewal date, we advise the executive that the agreement will not be extended for an additional year in which case the agreement would continue for the one year period remaining in the current term.
The change-in-control agreements provide that if the executive is terminated by us other than for cause or disability or if the executive elects to terminate employment for good reason within two years following a change-in-control, the executive will be entitled to certain payments and benefits listed in the “Change-in-Control Agreement” table, below.
For purposes of the change-in-control agreements and Mr. Wallace’s employment agreement, “change-in-control” means:
| • | a person, other than M.H.M. & Co., Ltd. and its affiliates, becomes the owner of more than 25% of our voting shares; | ||
| • | change in a majority of the incumbent directors (including directors approved by a majority of the incumbent Directors) within a two-year period; | ||
| • | certain reorganizations, mergers, combinations and other transactions that result in our existing shareholders not owning at least 60% of the company resulting from the transaction; or | ||
| • | the complete liquidation of the Company or the sale of substantially all of our assets. |
For purposes of the change-in-control agreements and Mr. Wallace’s employment agreement, “good reason” means:
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| • | material diminishment in executive’s duties or responsibilities that reflect a material diminution of the scope and importance of executive’s position; | ||
| • | decrease in base salary or target annual cash incentive; | ||
| • | material reduction in benefits available under employee and officer benefit plans and programs; or | ||
| • | failure to bind our successors to honor the change-in-control agreement. |
The following table sets forth the payments and benefits that could be due to a Named Executive Officer (other than Mr. Wallace) upon the occurrence of a change-in-control of the Company on August 31, 2010. Other than the change-in-control agreements, we do not have any severance plans or agreements covering the Named Executive Officers included in the table.
| Change-in-Control Occurs | |||||||||||||||||||||
| and then the | |||||||||||||||||||||
| Following Occurs | Compensation Component | Mr. Hix | Mr. Rahimian | Mr. Brown | Mr. Halsey | ||||||||||||||||
| Employment Continues | Unexercisable options become | ||||||||||||||||||||
| exercisable(1) | $ | 36,196 | $ | 40,646 | $ | 7,019 | $ | 17,767 | |||||||||||||
| Immediate vesting of | |||||||||||||||||||||
| restricted stock and | |||||||||||||||||||||
| restricted share units(2) | 146,668 | 162,521 | 31,728 | 81,343 | |||||||||||||||||
| Performance shares vest(3) | 143,261 | 160,770 | 40,009 | 75,381 | |||||||||||||||||
| Immediate vesting of | 179,065 | 0 | 0 | 80,877 | |||||||||||||||||
| retirement benefits(4) | |||||||||||||||||||||
| Total | $ | 505,190 | $ | 363,937 | $ | 78,756 | $ | 255,368 | |||||||||||||
| Termination Due to | Prorated target annual cash | ||||||||||||||||||||
| Disability or Death (6) | incentive(5) | 0 | 0 | 0 | 0 | ||||||||||||||||
| Termination Due to Retirement | Unexercisable options become exercisable(1) | 36,196 | 40,646 | 7,019 | 17,676 | ||||||||||||||||
| Immediate vesting of restricted stock and restricted stock units(2) | 146,668 | 162,521 | 31,728 | 81,343 | |||||||||||||||||
| Immediate vesting of performance shares(3) | 143,261 | 160,770 | 40,009 | 75,381 | |||||||||||||||||
| Total | $ | 326,125 | $ | 363,937 | $ | 78,756 | $ | 174,400 | |||||||||||||
| Termination without Cause by | Prorated target annual cash | 0 | 0 | 0 | |||||||||||||||||
| the Company or Termination | incentive(5) | ||||||||||||||||||||
| by Executive for Good Reason (6) | 1.5 times base salary | 465,000 | 472,500 | 300,000 | 328,500 | ||||||||||||||||
| 1.5 times average annual cash | |||||||||||||||||||||
| incentive for last 3 years | 230,465 | 196,043 | 127,085 | 105,660 | |||||||||||||||||
| 18 months of health and | |||||||||||||||||||||
| welfare benefits | 25,875 | 25,969 | 1,500 | 14,328 | |||||||||||||||||
| Total | $ | 721,340 | $ | 694,512 | $ | 428,585 | $ | 448,488 | |||||||||||||
| Termination for Cause by the Company or Termination by Executive without Good Reason (6) | No special payments or benefits | 0 | 0 | 0 | 0 | ||||||||||||||||
| (1) | Represents the excess of the closing price of our shares of $23.66 on August 31, 2010 over the option exercise price of options that became exercisable due to the occurrence of a change-in-control. | |
| (2) | Represents the value of restricted shares and restricted share units that vested on account of a change-in-control, using the $23.66 per share closing price on August 31, 2010. | |
| (3) | Performance share awards made in October 2009 vest to the extent they have been earned and are paid out in common shares. | |
| (4) | Retirement benefits under the Executive Supplemental Retirement Plan normally vest after five years of service. At August 31, 2010, Messrs. Hix and Halsey each had less than five years of service. |
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| (5) | Chart assumes termination at end of fiscal 2010 at which time the cash incentive compensation for fiscal 2010 would have been fully earned. At any other time, there would be a prorated annual cash incentive paid at target as set under the Senior Executive Annual Cash Bonus Plan. | |
| (6) | The amount listed would be in addition to the amounts listed in the row entitled “Employment Continues.” |
We entered into an employment agreement with Mr. Wallace on June 28, 2006 which expires on June 30, 2011. The agreement, however, automatically renews each year for an additional year unless at least 60 days prior to the scheduled renewal date, we or Mr. Wallace elect not extend the agreement for an additional year in which case the agreement would continue for the one-year period remaining in the current term. The following table sets forth the payments and benefits that would be due to Mr. Wallace under the agreement in the event of a change-in-control of the Company on August 31, 2010 or his termination of employment both before and after a change-in-control of the Company.
| Triggering Event | Compensation Component | Payout | ||||
| Termination Due to Death or Disability | Prorated target cash incentive(1) | $ | 0 | |||
| Termination Due to Retirement | Prorated target cash incentive(1) | $ | 0 | |||
| Unexercisable options become exercisable(2) | 132,098 | |||||
| Immediate vesting of restricted stock and | 541,970 | |||||
| restricted stock units(3) | ||||||
| Immediate vesting of performance shares (4) | 522,318 | |||||
| Total | $ | 1,196,206 | ||||
| Termination without Cause by the | Severance payments for 22 months | $ | 1,283,333 | |||
| Company or Termination by Executive for Good Reason | Prorated target annual cash incentive (1) | 0 | ||||
| Unexercisable options become exercisable(2) | 132,098 | |||||
| Immediate vesting of restricted stock and | 541,790 | |||||
| restricted stock units(3) | ||||||
| Immediate vesting of performance shares (4) | 522,318 | |||||
| 24 months of health and welfare benefits | 19,104 | |||||
| Total | $ | 2,498,643 | ||||
| Change-in-Control — | Unexercisable options become exercisable(2) | 132,098 | ||||
| Employment Continues | Immediate vesting of restricted stock and | 541,790 | ||||
| restricted stock units(3) | ||||||
| Immediate vesting of performance shares | 522,318 | |||||
| Total | $ | 1,196,206 | ||||
| Change-in-Control — | Prorated target annual cash incentive(1) | 0 | ||||
| Termination without Cause by the Company or Termination by Executive for Good Reason(5) | 3.0 times base salary 3.0 times average annual cash incentive | 2,100,000 | ||||
| for last 3 years | 1,466,997 | |||||
| 24 months of health and welfare benefits | 19,104 | |||||
| Gross up payment for any excise tax | 0 | |||||
| Total | $ | 3,586,101 | ||||
| Change-in-Control — | Prorated target annual cash incentive(1) | 0 | ||||
| Termination by Executive in the 13th month following a Change-in-Control(5) | 2.0 times base salary | 1,400,000 | ||||
| 2.0 times average annual cash incentive | 997,998 | |||||
| for last 3 years | ||||||
| 24 months of health and welfare benefits | 19,104 | |||||
| Gross up payment for any excise tax | 0 | |||||
| Total | $ | 2,417,102 | ||||
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| Triggering Event | Compensation Component | Payout | ||||
| Change-in-Control-Termination for Cause | No special payments or benefits | |||||
| by the Company or Termination by Executive without Good Reason other than in the 13th month following a Change-in-Control(5) | ||||||
| (1) | Chart assumes termination at end of fiscal 2010 at which time the annual cash incentive for fiscal 2010 would have been fully earned. At any other time, there would be a prorated annual cash incentive paid. | |
| (2) | Represents the excess of the closing price of our shares of $23.66 on August 31, 2010 over the option exercise price of options that became exercisable due to the occurrence of a change-in-control. | |
| (3) | Represents the value of restricted shares that vested on account of a change-in-control, using the $23.66 per share closing price on August 31, 2010. | |
| (4) | Performance share awards made in October 2009 to the extent they have been earned and are paid out as common shares. | |
| (5) | The amount listed would be in addition to amount listed in the row entitled “Change-in-Control-Employment Continues.” |
The change-in-control agreements and Mr. Wallace’s employment agreement each provide that the executive will maintain the confidentiality of the Company’s confidential information indefinitely and for one year after termination of employment for any reason will not compete with the Company or solicit employees to leave the Company and join another organization.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive the compensation listed in the following table for services as a director. The information set forth in the table describes director compensation as in effect during fiscal 2010.
| Non-Employee Director Compensation | Amount | |
| Annual Cash Retainer | $32,000 | |
Annual Restricted Stock Award(1) | $40,000 in Shares Vest After One Year of Service | |
Meeting Attendance Fees(2) | Board — $1,500; Committee — $1,000 | |
| Chair of Audit Committee | Additional $10,000 Retainer | |
| Chair of Compensation Committee | Additional $7,500 Retainer | |
| Chair of Nominating and Governance Committee | Additional $7,500 Retainer | |
| Board Chair | $100,000 in lieu of Retainers and Meeting Fees |
| (1) | Awards are made under the 2004 Stock Incentive Plan As Amended on the date of each annual meeting of shareholders. | |
| (2) | If meeting is telephonic, fees are 50% of amount stated. |
Our non-employee directors are required to own our stock having a value equal to at least five times the annual cash retainer we pay directors. Until a director meets the stock ownership requirement, the director must retain at least 60% of all stock compensation paid by us.
The following table provides additional information on fiscal 2010 compensation for non-employee Directors who served during fiscal 2010.
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| Director Compensation Table | ||||||||||||
| Fees Earned | ||||||||||||
| or Paid in | Stock | |||||||||||
| Cash | Awards | Total | ||||||||||
| Name | ($)(1) | ($)(2) | ($)(3) | |||||||||
| Richard J. Giromini | $ | 48,750 | $ | 40,000 | $ | 88,750 | ||||||
| Stephen F. Kirk | 54,750 | 40,000 | 94,750 | |||||||||
| Andrew G. Lampereur | 52,500 | 40,000 | 92,500 | |||||||||
| Thomas P. Loftis | 100,000 | 40,000 | 140,000 | |||||||||
| Dale L. Medford | 58,750 | 40,000 | 98,750 | |||||||||
| Albert J. Neupaver | 48,750 | 40,000 | 88,750 | |||||||||
| (1) | Consists of the cash amounts described in the preceding table. | |
| (2) | The grant date fair value of the restricted stock awards granted to each of the directors in 2010 under FASB ASC Topic 718 was $40,000. |
Compensation Committee Interlocks and Insider Participation.
Our Board’s Compensation Committee is currently comprised of Andrew G. Lampereur (Chair), Stephen F. Kirk, and Albert J. Neupaver. None of the members is a present or past employee or officer of the Company or any of its subsidiaries. None of our executive officers has served on the board of directors or compensation committee of any other entity, one of whose executive officers served on our Board or Compensation Committee.
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ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding our equity compensation plans as of August 31, 2010:
| (c) | ||||||||||||
| Number of | ||||||||||||
| Common Shares | ||||||||||||
| Remaining | ||||||||||||
| (b) | Available for | |||||||||||
| (a) | Weighted- | Future Issuance | ||||||||||
| Number of Common | Average | Under Equity | ||||||||||
| Shares to | Exercise Price of | Compensation | ||||||||||
| be issued Upon | Outstanding | Plans (excluding | ||||||||||
| Exercise of | Options, | securities | ||||||||||
| Outstanding Options, | Warrants, and | reflected in | ||||||||||
| Plan Category | Warrants, and Rights | Rights | column (a)) | |||||||||
Equity compensation plans approved by shareholders(1,2) | 664,792 | $ | 18.54 | 1,287,369 | ||||||||
| Equity compensation plans not approved by shareholders | — | — | — | |||||||||
| Total | 664,792 | $ | 18.54 | 1,287,369 | ||||||||
| (1) | Includes outstanding options under (i) our 1994 Long-Term Incentive Stock Plan, 1995 Stock Option Plan for Non-Employee Directors, and 1999 Long-Term Incentive Plan, all of which have terminated as to future awards, and (ii) our 2004 Stock Incentive Plan As Amended. | |
| (2) | All shares listed in Column (c) are available for future awards under our 2004 Stock Incentive Plan As Amended. Awards may be comprised of options, restricted shares, restricted units, performance shares, share awards or share unit awards upon such terms as the Compensation Committee of the Board determines at the time of grant that are consistent with the express terms of the plan. |
SECURITY OWNERSHIP
Directors and Executive Officers
Set forth below is information as of November 30, 2010 concerning common shares of the Company beneficially owned by each director and each executive officer named in the Summary Compensation Table, and directors and executive officers as a group. In addition to the shares shown in the following table, executive officers hold restricted share units, as listed in footnote 4 to the table.
| Number of | ||||||||
| Common | ||||||||
| Shares Beneficially | ||||||||
| Owned as of | ||||||||
| Individual or Group | 11/30/10(1) | Percent of Class | ||||||
| Richard J. Giromini | 4,199 | (3 | ) | |||||
| Stephen F. Kirk | 10,763 | (3 | ) | |||||
| Andrew G. Lampereur | 7,913 | (3 | ) | |||||
| Thomas P. Loftis (2) | 81,703 | (3 | ) | |||||
| Dale L. Medford | 18,679 | (3 | ) | |||||
| Albert J. Neupaver | 5,799 | (3 | ) | |||||
| Peter C. Wallace | 376,621 | 1.1 | % | |||||
| Christopher M. Hix | 88,088 | (3 | ) | |||||
| Saeid Rahimian | 122,489 | (3 | ) | |||||
| Jeffrey L. Halsey | 22,699 | (3 | ) | |||||
| Kevin J. Brown | 194,241 | (3 | ) | |||||
| Directors and Executive Officers as a Group (13 persons) | 920,474 | 2.8 | % | |||||
| (1) | Unless otherwise indicated, total voting power and total investment power are exercised by each individual and/or a member of his household. Shares which a person may acquire within 60 days of November 30, 2010 are treated as “beneficially owned” and the number of such shares included in the table for each person is: |
| Mr. Giromini — 0 | Mr. Kirk — 0 | Mr. Lampereur — 0 | ||||
| Mr. Loftis — 4,000 | Mr. Medford — 4,000 | Mr. Neupaver — 0 | ||||
| Mr. Wallace — 161,028 | Mr. Hix — 45,794 | Mr. Rahimian — 58,803 | ||||
| Mr. Halsey — 14,011 | Mr. Brown — 138,795 | |||||
| Directors and executive officers as a group — 428,431 | ||||||
| (2) | Includes 16,408 shares with respect to which Mr. Loftis has sole voting and shared investment power. | |
| (3) | Less than 1%. | |
| (4) | In addition to the shares listed in the table, as of November 30, 3020, executive officers held the following number of vested and unvested restricted share units: |
| Named Executive Officer | Unvested | Vested | ||||||
| Mr. Wallace | 24,241 | 4,040 | ||||||
| Mr. Hix | 6,710 | 1,107 | ||||||
| Mr. Rahimian | 7,404 | 1,244 | ||||||
| Mr. Halsey | 3,414 | 584 | ||||||
| Mr. Brown | 1,814 | 310 | ||||||
| Executive officers as a group: | 43,586 | 7,285 | ||||||
Principal Shareholders
The only persons known by the Board of Directors of the Company to be beneficial owners of more than 5% of the outstanding common shares of the Company as of November 30, 2010 are listed in the following table:
| Number of | ||||||||
| Common Shares | ||||||||
| Beneficially | ||||||||
| Owned as of | % of | |||||||
| Name and Address | 11/30/10 | Class | ||||||
| Blackrock, Inc. | 2,798,305 | 8.5 | % | |||||
| 40 East 52nd Street New York, NY 10022 | ||||||||
| Keeley Asset Management Corp. | 1,725,000 | 5.2 | % | |||||
| 401 South LaSalle Street Chicago, IL 60605(2) | ||||||||
| M.H.M. & Co., Ltd.(3) | 5,546,106 | 16.8 | % | |||||
| 830 Hanna Building Cleveland, OH 44115 | ||||||||
| (1) | Formerly, Barclays Global Investors, NA. Blackrock has sole voting and dispositive power with respect to the listed shares. | |
| (2) | Keeley Asset Management Corp. is an investment advisor with sole voting and dispositive power with respect to the listed shares. | |
| (3) | M.H.M. & Co., Ltd. is an Ohio limited partnership (the “Partnership”). Maynard H. Murch Co., Inc. is the managing general partner, and Loftis Investments LLC, a company wholly-owned by Thomas P. Loftis, is the other general partner of the Partnership. Partnership decisions with respect to the voting and disposition of Company shares are determined by Maynard H. Murch Co., Inc., whose board of directors is comprised of Creighton B. Murch and Robert B. Murch, who are first cousins, and Maynard H. Murch V, who is Mr. Robert B. Murch’s nephew. |
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Related Party Transactions
The Board of Directors has adopted a written policy regarding the review, approval or ratification of related party transactions. Under the policy, all related party transactions must be pre-approved by the Audit Committee or ratified by the Audit Committee if pre-approval is not feasible. Under the policy, certain transactions are excluded from the definition of related party transaction, including (i) director and executive officer compensation required to be disclosed in the Company’s SEC filings; (ii) certain transactions with other companies where the related party’s only relationship is as beneficial owner of less than 10% of that company’s shares, if the aggregate amount involved during any twelve-month year does not exceed the greater of $1,000,000 or 2% of that company’s total annual revenues; (iii) transactions where the related party’s interest arises solely from the ownership of the Company’s common shares and all holders of the Company’s common shares receive the same benefit on a pro rata basis; (iv) transactions in which the rates or charges are determined by competitive bids or involve the rendering of services as a common or contract carrier or public utility, at rates or charges fixed in conformity with law or governmental authority; and (v) transactions involving services as a bank depository of funds, transfer agent, registrar, trustee or similar services. In determining whether to approve or ratify a related party transaction, the Audit Committee will consider, among other factors, whether the terms of the transaction are fair to the Company, whether the are compelling business reasons to enter into the transaction, and whether the transaction would impair the independence of an outside director. Any Audit Committee member who has an interest in a transaction under discussion must abstain from voting on the proposed transaction.
Linn S. Harson, our Secretary and General Counsel, is a partner in the law firm of Thompson Hine LLP. Thompson Hine has served as our principal legal counsel since 1979 and this relationship is annually disclosed in writing to our Audit Committee for review. During fiscal 2010, we paid Thompson Hine $2,860,060 for legal services.
Other than as described in the preceding paragraph, during fiscal 2010 we were not a party to any transaction in which an executive officer, director, or 5% shareholder (or their immediate family members) had a material direct or indirect interest and no such person was indebted to us.
Director Independence
The Board of Directors has adopted the Robbins & Myers, Inc. Corporate Governance Guidelines (“Guidelines”). The Guidelines provide that a majority of the members of the Board must be “independent” under the criteria set forth in the New York Stock Exchange (“NYSE”) listing standards. The Board has adopted “Standards of Assessing Director Independence” to assist it in determining those directors that are independent. The Standards and Guidelines are posted in the Corporate Governance section of our website atwww.robn.com. Applying the Standards, the Board affirmatively determined in October 2010 that all of our directors are independent of the Company and its management, with the exception of Peter C. Wallace who is not independent because of his employment by the Company as President and Chief Executive Officer.
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees for services provided by Ernst & Young LLP related to fiscal years 2010 and 2009 and for other services billed in the most recent two fiscal years:
| Fees | Fiscal 2010 | Fiscal 2009 | ||||||
| Audit(1) | $ | 1,710,037 | $ | 1,895,463 | ||||
| Audit-Related(2) | 20,000 | 24,600 | ||||||
| Tax(3) | 57,497 | 57,200 | ||||||
| All Other(4) | --0- | -0- | ||||||
| Total | $ | 1,787,534 | $ | 1,977,263 | ||||
| (1) | For services rendered for the audits of the consolidated financial statements of the Company, audit of internal control over financial reporting, as well as statutory audits, review of financial statements included in Form 10-Q reports, issuance of consents, and assistance with review of documents filed with the Securities and Exchange Commission. | |
| (2) | For services related to employee benefit plan audits and due diligence related to strategic alternatives. | |
| (3) | For services related to tax compliance, tax return preparation, and tax assistance. | |
| (4) | There were no other fees incurred for fiscal 2010 and 2009. |
In appointing Ernst & Young LLP to serve as the Company’s independent auditors for fiscal 2010, the Audit Committee reviewed past services performed during fiscal 2009 and services proposed to be performed during fiscal 2010. In appointing Ernst & Young LLP, the Audit Committee carefully considered the impact of such services on Ernst & Young LLP’s independence. The Audit Committee has determined that the performance of such services did not affect the independence of Ernst & Young LLP. Ernst & Young LLP has advised the Company that Ernst & Young LLP is in compliance with all rules, standards and policies of the Independence Standards Board and the Securities and Exchange Commission governing auditor independence.
The Audit Committee has adopted policies and procedures that require the pre-approval of all audit, audit-related, tax and other services rendered by the Company’s independent auditors. Under the policy, an auditor services schedule is prepared at the beginning of each year that describes each type of service to be provided by the independent auditors and the projected fees for each such service. The Audit Committee reviews and approves in advance, as appropriate, each service listed on the auditor services schedule and the projected fees for each such service. On a periodic basis, the independent auditors report to the Audit Committee the actual spending for specified services compared with the approved amounts. Projected fee amounts listed on the auditor services schedule may be updated, as appropriate in the Audit Committee’s discretion, at each regularly scheduled meeting of the Audit Committee. The Audit Committee may also pre-approve particular services on a case-by-case basis. The policy allows the Audit Committee to delegate pre-approval authority to one or more members of the Audit Committee. Any decisions made by the designated pre-approval member are reported, for informational purposes only, to the full Audit Committee at its next meeting.
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PART IV
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) (1) | FINANCIAL STATEMENTS | ||
| The following consolidated financial statements of Robbins & Myers, Inc. and its subsidiaries are at Item 8 hereof. |
| 27 | ||||
| 28 | ||||
| 29 | ||||
| 30 | ||||
| 31 |
| (a) (2) | FINANCIAL STATEMENT SCHEDULE |
| Schedule II — Valuation and Qualifying Accounts | 62 |
All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto.
| (a) (3) | EXHIBITS. | ||
| See INDEX to EXHIBITS. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Robbins & Myers, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 23rd day of December, 2010.
| ROBBINS & MYERS, INC. | ||||
| BY | /s/ Peter C. Wallace | |||
| Peter C. Wallace | ||||
| President and Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Robbins & Myers, Inc. and in the capacities and on the date indicated:
| NAME | TITLE | DATE | ||
/s/ Peter C. Wallace | Director, President and Chief Executive Officer | December 23, 2010 | ||
/s/ Christopher M. Hix | Vice President and Chief Financial Officer (Principal Financial Officer) | December 23, 2010 | ||
/s/ Kevin J. Brown | Corporate Controller (Principal Accounting Officer) | December 23, 2010 | ||
| *Thomas P. Loftis | Chairman Of Board | December 23, 2010 | ||
| *Richard J. Giromini | Director | December 23, 2010 | ||
| *Stephen F. Kirk | Director | December 23, 2010 | ||
| *Andrew G. Lampereur | Director | December 23, 2010 | ||
| *Dale L. Medford | Director | December 23, 2010 | ||
| *Albert J. Neupaver | Director | December 23, 2010 |
| * | The undersigned, by signing his name hereto, executes this Report on Form 10-K for the year ended August 31, 2010 pursuant to powers of attorney executed by the above-named persons and filed with the Securities and Exchange Commission. |
| /s/ Peter C. Wallace | ||||
| Peter C. Wallace | ||||
| Their Attorney-in-fact | ||||
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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
| Additions | ||||||||||||||||||||
| Balance at | Charged to Costs | Other - | Deductions- | Balance at | ||||||||||||||||
| Description | Beginning of Period | and Expenses | Describe (8) | Describe | End of Period | |||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Year Ended August 31, 2010 | ||||||||||||||||||||
| Allowances and reserves deducted from assets: | ||||||||||||||||||||
| Uncollectible and reserves deducted from assets | $ | 7,470 | $ | 659 | $ | (414 | ) | $ | 2,166 | (2) | $ | 5,549 | ||||||||
| Inventory obsolescence | 18,325 | 1,894 | (549 | ) | 1,017 | (3) | 18,653 | |||||||||||||
| Deferred tax asset valuation allowance | 15,302 | 3,185 | (443 | ) | 3,175 | (4) | 14,869 | |||||||||||||
| Other reserves: | ||||||||||||||||||||
| Warranty claims | 7,221 | 2,468 | (43 | ) | 3,354 | (5) | 6,292 | |||||||||||||
| Current & L-T insurance reserves | 1,520 | 901 | — | 993 | (6) | 1,428 | ||||||||||||||
| Restructuring reserves | — | 2,721 | — | — | 2,721 | |||||||||||||||
| Year Ended August 31, 2009 | ||||||||||||||||||||
| Allowances and reserves deducted from assets: | ||||||||||||||||||||
| Uncollectible and reserves deducted from assets | $ | 7,695 | $ | 1,196 | $ | (299 | ) | $ | 1,122 | (2) | $ | 7,470 | ||||||||
| Inventory obsolescence | 15,309 | 6,312 | (534 | ) | 2,762 | (3) | 18,325 | |||||||||||||
| Deferred tax asset valuation allowance | 14,720 | 1,477 | (233 | ) | 662 | (4) | 15,302 | |||||||||||||
| Other reserves: | ||||||||||||||||||||
| Warranty claims | 7,853 | 2,750 | (95 | ) | 3,287 | (5) | 7,221 | |||||||||||||
| Current & L-T insurance reserves | 1,311 | 1,254 | — | 1,045 | (6) | 1,520 | ||||||||||||||
| Year Ended August 31, 2008 | ||||||||||||||||||||
| Allowances and reserves deducted from assets: | ||||||||||||||||||||
| Uncollectible and reserves deducted from assets | $ | 6,189 | $ | 1,790 | $ | 333 | (1) | $ | 617 | (2) | $ | 7,695 | ||||||||
| Inventory obsolescence | 14,137 | 1,791 | 430 | 1,049 | (3) | 15,309 | ||||||||||||||
| Deferred tax asset valuation allowance | 19,140 | 969 | 469 | 5,858 | (4) | 14,720 | ||||||||||||||
| Other reserves: | ||||||||||||||||||||
| Warranty claims | 7,922 | 1,851 | 53 | 1,973 | (5) | 7,853 | ||||||||||||||
| Current & L-T insurance reserves | 1,663 | 801 | — | 1,153 | (6) | 1,311 | ||||||||||||||
| Restructuring reserves | 258 | — | — | 258 | (7) | — | ||||||||||||||
| (1) | Includes impact from acquisition of Mavag (by our 51 percent owned consolidated joint venture in India) in fiscal 2008 of $250,000. | |
| (2) | Represents accounts receivable written off against the reserve. | |
| (3) | Inventory items scrapped and written off against the reserve. | |
| (4) | Impact of valuation allowance release including expiration of related net operating losses and changes in tax rates. | |
| (5) | Warranty cost incurred applied against the reserve. | |
| (6) | Spending against casualty reserve. | |
| (7) | Spending against restructuring reserve. | |
| (8) | Includes impact of exchange rates, and for fiscal 2008, allowance for doubtful accounts of acquired business. |
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INDEX TO EXHIBITS
| (2) | PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION |
| 2.1 | Agreement and Plan of Merger, dated as of October 6, 2010, by and among Robbins & Myers, Inc., Triple Merger I, Inc., Triple Merger II, Inc., and T-3 Energy Services, Inc., filed as Exhibit 2.1 to our Current Report on Form 8-K filed on October 6, 2010 | */** | ||
| (3) | ARTICLES OF INCORPORATION AND BY-LAWS: |
| 3.1 | Amended Articles of Incorporation of Robbins & Myers, Inc was filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the Quarter ended February 29, 2008 | ** | ||
| 3.2 | Code of Regulations of Robbins & Myers, Inc. was filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q for the Quarter ended February 28, 2007 | ** |
| (4) | INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES: |
| 4.1 | Fifth Amended and Restated Credit Agreement dated December 19, 2006 among Robbins & Myers, Inc., Robbins & Myers Finance Europe B.V., the Lenders named in the amended agreement and JP Morgan Chase Bank, N.A. as Administrative Agent and Issuing Bank was filed as Exhibit 4.1 to our Current Report on Form 8-K filed on December 22, 2006 | ** | ||
| 4.2 | Amended and Restated Pledge and Security Agreement between Robbins & Myers, Inc. and Bank One, Dayton, N.A., dated May 15, 1998, was filed as Exhibit 4.2 to our Report on Form 10-K for the year ended August 31, 2003 | ** | ||
| 4.3 | Registration Agreement, dated August 7, 2008, between Robbins & Myers, Inc. and M.H.M & Co., Ltd. was filed as Exhibit 4.3 to our Registration Statement on Form S-3ASR (File No. 333-152874), as amended by Post-Effective Amendment No. 1 filed on October 30, 2009 | ** |
| (10) | MATERIAL CONTRACTS: |
| 10.1 | Robbins & Myers, Inc. Cash Balance Pension Plan (As Amended and Restated Effective as of October 1, 2010) | ***/M | ||
| 10.2 | Robbins & Myers, Inc. Retirement Savings Plan (January 1, 2010 Restatement) | ***/M | ||
| 10.3 | First Amendment to Robbins & Myers, Inc. Retirement Savings Plan (January 1, 2010 Restatement) | ***/M | ||
| 10.4 | Robbins & Myers, Inc. Executive Supplemental Retirement Plan as amended through October 5, 2007 was filed as Exhibit 10.4 to our Annual Report on Form 10-K for the year ended August 31, 2007 | **/M | ||
| 10.5 | Robbins & Myers, Inc. Executive Supplemental Pension Plan as amended through October 5, 2007 was filed as Exhibit 10.5 to our Annual Report on Form 10-K for the year ended August 31, 2007 | **/M | ||
| 10.6 | Form of Indemnification Agreement between Robbins & Myers, Inc., and each director was filed as Exhibit 10.5 to our Annual Report on Form 10-K for the year ended August 31, 2001 | **/M | ||
| 10.7 | Robbins & Myers, Inc. 1994 Directors Stock Compensation Plan was filed as Exhibit 10.6 to our Annual Report on Form 10-K for the year ended August 31, 2001 | **/M |
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| 10.8 | Robbins & Myers, Inc. 1994 Long-Term Incentive Stock Plan as amended was filed as Exhibit 10.10 to our Report on Form 10-K for the year ended August 31, 1996 | **/M | ||
| 10.9 | Robbins & Myers, Inc. 1995 Stock Option Plan for Non-Employee Directors was filed as Exhibit 4.3 to our Registration Statement on Form S-8 (File No. 333-00293) | **/M | ||
| 10.10 | Robbins & Myers, Inc. Senior Executive Annual Cash Bonus Plan as amended through January 9, 2008 was filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the Quarter ended February 29, 2008 | **/M | ||
| 10.11 | Robbins & Myers, Inc. 1999 Long-Term Incentive Stock Plan was filed as Exhibit 4.3 to our Registration Statement on Form S-8 (File No. 333-35856) | **/M |
| 10.12 | Robbins & Myers, Inc. 2004 Stock Incentive Plan As Amended (as amended through October 5, 2010), filed as Exhibit 10.1 to our Current Report on Form 8-K filed on October 12, 2010 | **/M | ||
| 10.13 | Letter Agreement between Robbins & Myers, Inc. and Christopher M. Hix, dated July 17, 2006 was filed as Exhibit 10.1 to our Current Report on Form 8-K filed on July 21, 2006 | **/M | ||
| 10.14 | Employment Agreement between Robbins & Myers, Inc. and Peter C. Wallace as amended through October 6, 2009, filed as Exhibit 10.14 to our Annual Report on Form 10-K for the year ended August 31, 2009 | **/M | ||
| 10.15 | Form of Executive Officer Change of Control Agreement as amended through October 5, 2007 entered into with each of Kevin J. Brown, Jeffrey L. Halsey, Christopher M. Hix, and Saeid Rahimian was filed as Exhibit 10.15 to our Annual Report on Form 10-K for the year ended August 31, 2007 | **/M | ||
| 10.16 | 2006 Executive Supplemental Retirement Plan, effective August 31, 2006, and as amended through October 5, 2007 was filed as Exhibit 10.16 to our Annual Report on Form 10-K for the year ended August 31, 2007 | **/M | ||
| 10.17 | Asset and Share Purchase Agreement, dated February 28, 2006, among Robbins & Myers, Inc., Romaco International B.V., and Romaco Pharmatechnik GmbH and Coesia, S.p.A. was filed as Exhibit 10.1 to our Current Report on Form 8-K filed on March 3, 2006 | ** | ||
| 10.18 | Severance Agreement and Release of Claims, dated April 6, 2009, between Robbins & Myers, Inc. and Gary L. Brewer, was filed as Exhibit 10.1 to our Current Report on Form 8-K filed on April 9, 2009 | **/M | ||
| 10.19 | Form of Restricted Share Unit Award Agreement under Robbins & Myers, Inc. 2004 Stock Incentive Plan As Amended, approved by the Compensation Committee of the Board of Directors of Robbins & Myers, Inc. on October 5, 2010, filed as Exhibit 10.2 to our Current Report on Form 8-K filed on October 12, 2010 | **/M | ||
| 10.20 | Form of Option Award Agreement under the Robbins & Myers, Inc. 2004 Stock Incentive Plan As Amended, approved by the Compensation Committee of the Board of Directors of Robbins & Myers, Inc. on October 5, 2010, filed as Exhibit 10.3 to our Current Report on Form 8-K filed on October 12, 2010 | **/M |
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| 10.21 | Form of Performance Share Unit Award Agreement for Peter C. Wallace under the Robbins & Myers, Inc. 2004 Stock Incentive Plan As Amended, approved by the Compensation Committee of the Board of Directors of Robbins & Myers, Inc. on October 5, 2010, filed as Exhibit 10.4 to our Current Report on Form 8-K filed on October 12, 2010 | **/M | ||
| 10.22 | Form of Performance Share Award Agreement under the Robbins & Myers, Inc. 2004 Stock Incentive Plan As Amended, approved by the Compensation Committee of the Board of Directors of Robbins & Myers, Inc. on October 5, 2010, filed as Exhibit 10.5 to our Current Report on Form 8-K filed on October 12, 2010 | **/M | ||
| 10.23 | Form of Compensation Clawback Policy Acknowledgement and Agreement, approved by the Board of Directors of Robbins & Myers, Inc. on October 5, 2010, filed as Exhibit 10.6 to our Current Report on Form 8-K filed on October 12, 2010 | **/M | ||
| 10.24 | Voting Agreement, dated October 6, 2010, by and among M.H.M. & Co., Ltd., Robbins & Myers, Inc., and T-3 Energy Services, Inc., filed as Exhibit 10.1 to our Current Report on Form 8-K filed on October 6, 2010 | ** | ||
| 10.25 | Waiver, dated as of October 6, 2010, by and among Robbins & Myers, Inc., Robbins & Myers Finance Europe B.V., the Lenders party thereto, and JPMorgan Chase Bank, N.A., as administrative agent, filed as Exhibit 10.2 to our Current Report on Form 8-K filed on October 6, 2010 | ** |
| (21) | SUBSIDIARIES OF THE REGISTRANT |
| 21.1 | Subsidiaries of Robbins & Myers, Inc. | *** |
| (23) | CONSENTS OF EXPERTS AND COUNSEL |
| 23.1 | Consent of Ernst & Young LLP | F |
| (24) | POWER OF ATTORNEY |
| 24.1 | Powers of Attorney of any person who signed this Report on Form 10-K/A on behalf of another pursuant to a Power of Attorney | *** |
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| (31) | RULE 13A—14(A) CERTIFICATIONS |
| 31.1 | Rule 13a-14(a) CEO Certification | F | ||
| 31.2 | Rule 13a-14(a) CFO Certification | F |
| (32) | SECTION 1350 CERTIFICATIONS |
| 32.1 | Section 1350 CEO Certification | F | ||
| 32.2 | Section 1350 CFO Certification | F |
| “F” | Indicates Exhibit is being filed with this Report. | |
| “*” | The Agreement and Plan of Merger filed as Exhibit 2.1 to our Current Report on 8-K filed on October 6, 2010 omits the disclosure letters to the Merger Agreement. Robbins & Myers agrees to furnish supplementally a copy of these documents to the Securities and Exchange Commission upon request. | |
| “**” | Indicates that Exhibit is incorporated by reference in this Report from a previous filing with the Commission. Unless otherwise indicated, all incorporated items are incorporated from SEC File No. 000-288 and 001-13651. | |
| “***” | Indicates that Exhibit is incorporated by reference in this Report from our Annual Report on Form 10-K for the year ended August 31, 2010, filed with the SEC on October 26, 2010. | |
| “M” | Indicates management contract or compensatory arrangement. |
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