PART I
Item 1. Business.
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(a)
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General Development of Business
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Sauer-Danfoss Inc. (the Company), a U.S. Delaware corporation, and its predecessor organizations have been active in the mobile hydraulics industry since the 1960s. Sauer-Danfoss is a global leader in the development, manufacture, and marketing of advanced systems for the distribution and control of power in mobile equipment. The Company designs, manufactures, and markets hydraulic, electronic, and mechanical components, as well as software and integrated systems that generate, transmit, and control power in mobile equipment. Principal products are hydrostatic transmissions, open circuit piston pumps, open circuit gear pumps and motors, low speed high torque motors, steering units, microprocessor controls, electrohydraulics, and control valves. The Company sells its products to original equipment manufacturers (OEMs) of highly engineered, off-road vehicles who use Sauer-Danfoss products to provide the hydraulic and electronic power for the propel, work, and control functions of their vehicles. The Company's products are sold primarily to the agriculture, construction, road building, turf care, material handling, and specialty vehicle markets. The Company conducts its business globally under the Sauer-Danfoss name.
During 2012 the Company commenced construction of a new manufacturing facility in Haiyan, China, to produce Sauer-Danfoss products for the Chinese
market, including hydrostatic pumps and motors, work function motors and steering, proportional valves group (PVG) valves, and hydraulic integrated circuits (HICs). The facility is expected to be completed and operational in the third quarter of 2013.
The wind-down period for the joint venture TSD Integrated Controls, LLC (TSD) ended in 2012. Final collection of accounts receivable and distribution of the equity of TSD will be made to the Company and Topcon Positioning Systems, Inc., the noncontrolling interest partner, in 2013.
In October 2012 the Company and Daikin Industries Ltd. (Daikin), the noncontrolling interest partner in the joint venture Sauer-Danfoss-Daikin, Ltd. (SDD) agreed that the stock owned by Daikin in the joint venture entity would be redeemed effective January 1, 2013. At that same time, the operations of SDD would be transferred to Daikin-Sauer-Danfoss Manufacturing, Ltd., a separate joint venture that is owned by the Company and Daikin. Effective January 1, 2013 SDD will become a holding company, holding the investment in the sales companies in the Asia-Pacific region, which is fully owned by the Company.
As previously disclosed, on November 28, 2012, Danfoss A/S, the Company's parent company, informed the Company's Board of Directors and publicly announced that Danfoss proposed to acquire all the shares of the Company's common stock that it does not already own for a price of $49 per share in cash, and on the following day the Company announced that its Board of Directors had established a special committee of independent directors to consider Danfoss' proposal. From late December 2012 through late January 2013, the Special Committee and its advisors undertook efforts to enable the Special Committee to respond to Danfoss' proposal, and since late January 2013 the Special Committee, through its advisors, has been in discussions with Danfoss' advisors regarding the proposal. These discussions are continuing. There is no assurance that the Special Committee and Danfoss will reach any agreement or, if an agreement is reached, as to the terms and conditions of that agreement or whether it will be successfully completed.
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(b)
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Financial Information About Segments
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The Company reports its operating segments based on its product lines of Hydrostatics (formerly Propel), Work Function, Controls and Stand-Alone Businesses. Hydrostatics products include hydrostatic transmissions and related products that transmit the power from the engine to the wheel to propel a vehicle. Work Function products include hydrostatic steering units, geroller and gerotor motors used for both propel and work functions. Products in the Controls segment include electrohydraulic controls, microprocessors, and proportional valves that control and direct the power of a vehicle. Products in the Stand-Alone Businesses segment include cartridge valves and hydraulic integrated circuits (HICs), open circuit gear pumps and motors, directional control valves, inverters, light power hydrostatic transmissions, gear reduction drives, piston pumps and wheel motors. Information about the Company's reportable segments defined by product lines is set forth in Note 17 in the Notes to Consolidated Financial Statements on pages
F-30
through
F-32
of this report and is incorporated herein by reference.
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(c)
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Description of Business
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Information regarding the Company's principal products, by segment, and the business in general is presented below. Information regarding sales by the Company's segments and geographic regions is set forth in Note 17 in the Notes to Consolidated Financial Statements on pages
F-30
through
F-32,
and is incorporated herein by reference. In 2012 and 2011 one customer accounted for slightly more than 10 percent of the Company's total net sales, and no individual customer accounted for 10 percent or more of the Company's total net sales in 2010.
Hydrostatics Segment
Hydrostatic Transmissions
Sauer-Danfoss designs, manufactures, and markets a range of closed circuit axial and bent axis piston hydrostatic transmissions for the propulsion of mobile equipment in the Americas, Europe, and the Asia-Pacific region. High-power (typically over 50 HP) and medium-power (typically 25 to 50 HP) applications for hydrostatic transmissions manufactured by the Company include construction, road building, specialty, and agricultural mobile equipment. Light-power (typically 15 to 25 HP) and bantam-power (typically under 15 HP) applications for hydrostatic transmissions manufactured by the Company include light agricultural and turf care mobile equipment. The Company manufactures these hydrostatic transmissions at its facilities in Ames, Iowa; Freeport, Illinois; Shanghai, China; Neumünster, Germany; Osaka, Japan; Dubnica nad Váhom, Slovakia; and Povazská Bystrica, Slovakia.
Open Circuit Piston Pumps
Sauer-Danfoss designs, manufactures, and markets open circuit piston pumps used to transform mechanical power from the engine to hydraulic power for the various functions of the vehicle. The advantages of open circuit piston pumps compared to other types of pumps, such as vane or gear pumps, are the high degree of control within the work function hydraulic system and the more efficient use of engine power. These products are designed and manufactured at facilities in Ames, Iowa and Dubnica nad Váhom, Slovakia.
Work Function Segment
Low Speed High Torque Motors
Sauer-Danfoss designs, manufactures, and markets a complete line of geroller and gerotor motors used for both propel and work functions in all served markets. These motors are manufactured at the Company's Ames, Iowa; Shanghai, China; Nordborg, Denmark; and Bielany Wroclawskie, Poland facilities.
Steering Units
Sauer-Danfoss designs, manufactures, and markets hydrostatic steering units to customers throughout the world. These steering units convert steering wheel motion into hydraulic flow and pressure to provide steering motion for agricultural tractors, combines, turf care, marine, and earthmoving equipment. The Company manufactures steering units in Nordborg, Denmark; Pune, India; and Wroclaw, Poland.
Controls Segment
Electronic Components
Sauer-Danfoss designs, manufactures and markets a portfolio of electronic controls, including microprocessor-based controllers, intelligent displays, joysticks and electronic sensors through its electronic and mechatronic operations in Minneapolis, Minnesota; Shanghai, China; Nordborg, Denmark; Neumünster, Germany; and Älmhult, Sweden. The software to integrate all these components into systems is also developed by Sauer-Danfoss and licensed to customers to let them develop their own solutions in an easy-to-use, graphical environment. Electronic controls and software are used by OEMs to network hydrostatic transmissions and work function hydraulics of mobile equipment into comfortable, safe and efficient systems.
Proportional Valves Group (PVG)
Sauer-Danfoss designs, manufactures and markets a variety of proportional valves to meet its customers' needs, ranging from very sophisticated electrohydraulic valves for highly sophisticated forestry and agricultural harvesting equipment, to simpler mechanically actuated valves for construction equipment. These products are produced in facilities located in Easley, South Carolina; Shanghai, China; Nordborg, Denmark; and Povazská Bystrica, Slovakia.
Stand-Alone Businesses Segment
Open Circuit Gear Pumps and Motors
Sauer-Danfoss designs, manufactures, and markets a broad range of high-performance standard gear pumps and motors under the brand “TurollaOCG.” Gear pumps and motors are the most widely used type of mobile hydraulic pumps and motors in the industry. The Company manufactures gear pumps and motors at its Ames, Iowa; Bologna, Italy; and Povazská Bystrica, Slovakia facilities.
Cartridge Valves and Hydraulic Integrated Circuits (HICs)
Sauer Danfoss designs, manufactures and markets a broad portfolio of cartridge valves to meet its customers' needs for power control under the brand “Comatrol.” The business works directly with its customers in designing and manufacturing custom hydraulic integrated circuits (HICs) that combine multiple cartridge valves into a complete hydraulic control solution to regulate speed, control direction and modulate force. The cartridge valves range from very simple, low-cost mechanical cartridges used on compact utility tractors and fairway mowers, to precise electro-proportional control valves for complex applications such as aerial lifts, paving equipment and agricultural harvesters. The Company manufactures cartridge valves and HICs in facilities located in Easley, South Carolina; Shanghai, China; and Reggio Emilia, Italy.
Directional Control Valves
Sauer-Danfoss designs, manufactures and markets directional control valves for compact utility tractors, construction equipment, material handling and mobile equipment in general under the brand "Valmova." These products are manufactured in facilities located in Caxias do Sul, Brazil; and Pune, India.
Inverters
Sauer-Danfoss develops and markets a broad range of high-performance inverters for mobile applications under the brand "Schwarzmüller Inverter." Inverters are used to drive alternating current (AC) motors and transform electrical power from a battery to mechanical power. Typical applications are traction, steering and hydraulic pump systems in material handling vehicles and other battery powered/electrical hybrid applications. The advantage of inverter driven AC-systems compared to hydraulic solutions is the high degree of control and efficiency. These products are designed at the Company's facility in Kaiserslautern, Germany and manufactured by contractors in Slovakia and Germany.
Light Duty Hydrostatic Transmissions
The Company designs, manufactures and markets high-performance light duty hydrostatic transmissions, gear reduction drives, piston pumps, and wheel motors for both the consumer and commercial markets in the turf maintenance equipment and light industrial industries under the brand "Hydro-Gear." These products are manufactured at its facilities in Sullivan, Illinois and Princeton, Kentucky.
Major Markets and Applications
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Construction and Road Building
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Agriculture and Turf Care
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Material Handling and
Specialty Vehicles
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Chip spreaders
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Combines
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Industrial lift trucks
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Concrete pumps
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Commercial wide-area,
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Logging equipment
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Concrete saws
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walk-behind mowers
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Marine equipment
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Crawler dozers
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Commercial zero-turn mowers
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Mining equipment
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Crawler loaders
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Cotton pickers
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Oil field equipment
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Ditchers/trenchers
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Detasselers
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Railway maintenance vehicles
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Excavators
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General turf maintenance
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Rough terrain fork lifts
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Grinders
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equipment
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Self-propelled boom aerial lifts
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Landfill compactors
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Harvesters
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Self-propelled scissor aerial lifts
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Pavers
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Lawn and garden tractors
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Snow groomers
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Planers
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Seeders
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Sweepers
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Rollers
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Sprayers
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Tree shakers
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Skid steer loaders
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Tractors
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Truck and bus fan drives
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Transit mixers
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Windrowers
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Warehouse trucks
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Utility tractors
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Wheel loaders
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General Characteristics
Sauer-Danfoss sells both standard and customized products, with most products being built to order. With respect to some of the most technologically demanding vehicles, such as those used in agriculture, forestry, construction, and road building, Sauer-Danfoss' engineers work closely with customers from design through manufacture of the final product. The research and design
phase, which is funded by the Company, can range from a few weeks to as long as four to six years for a major application. Once the design has been accepted and the customer has placed an order, the manufacturing process typically takes only a few days.
Sauer-Danfoss operates 19 manufacturing facilities in the Americas, Europe, and the Asia-Pacific region. The Company's decentralized manufacturing capabilities allow it to adapt its products to local market needs and to provide flexibility to meet customer delivery requirements. The Company sells and distributes its products directly to large OEMs and serves smaller OEMs through Company-owned sales companies or independent distributors.
In accordance with standard industry practice for the mobile equipment industry, the Company warrants its products to be free from defects in material and workmanship. The warranty period varies from one to three years, from the date of first use or from the date of original shipment of the product from Sauer-Danfoss. The Company's warranty expense has been 1 percent or less of net sales in each of the past three years.
Because many of its products are designed and developed in conjunction with its customers' design teams to fit their specific needs and to minimize inventory levels, the Company primarily manufactures products to order. The Company typically machines components with long lead times according to a sales forecast and machines certain unique components for specific customers according to firm orders. Inventories at the Company's manufacturing sites consist primarily of raw materials and machined iron housings and components. Limited amounts of assembled finished units are maintained in inventory at the manufacturing sites. Some of the Company's sales locations maintain inventory that consists primarily of finished units manufactured specifically for distribution to customers in those locations.
The Company does not accept orders subject to late delivery penalties. On occasion, the Company sells its products to government agencies, including products used for military applications, but it does not design its products to meet specific government standards and usually only enters into contracts for the supply of commercial products. There are no government contracts of material value to the Company.
Raw Materials
The Company purchases iron housings and components from various U.S., European, and Asian foundries and metal suppliers. The principal materials used by the Company are iron, steel, brass, and aluminum. All materials used by the Company are generally available from a number of sources in quantities sufficient to meet current requirements. The Company has a global supplier quality program that it uses to ensure all suppliers meet the Company's quality expectations.
Patents, Trademarks, and Licenses
The Company owns or licenses rights to 547 patents and trademarks relating to its business. While the Company considers its patents and trademarks important in the operation of its business and in protecting its technology from being used by competitors, its business is not dependent on any single patent or trademark or group of related patents or trademarks.
To ensure worldwide availability of the Company's design of products, the Company has, in the past, licensed its technology to unaffiliated companies in certain countries. The Company does not currently have any such license agreements in place. The Company currently has license agreements in place as part of joint ventures in which the Company participates to manufacture or distribute the Company's technology.
Seasonality
Seasonal patterns in retail demand for agricultural, construction, road building, and turf care equipment sold by the Company's customers result in variations in the volume and mix of products sold by the Company during various times of the year. Historically, the Company has higher sales levels in the first half of the year, although this was not the case in 2010. Seasonal demand must be estimated in advance, and products must be manufactured in anticipation of such demand in order to achieve efficient utilization of labor and production resources.
Working Capital
The Company has historically funded its working capital requirements through cash flow from operations and its various credit facilities. The Company has built up a significant cash balance and is in a position to fund its working capital requirements through cash flow from operations and the available cash on hand.
Backlog
At
December 31, 2012
the Company's backlog (consisting of accepted but unfilled customer orders primarily scheduled for delivery during
2013
) was $837 million, a decrease of 11 percent from
December 31, 2011
, excluding the impact of currency fluctuation. Historically, backlog comparisons have been a good indicator of the Company's future business level, but the value of those comparisons depends on the degree to which customer ordering behavior remains constant from year to year. Customers
can increase, cancel, or reschedule orders, so some customers place orders in excess of their actual needs in order to ensure that adequate quantities will be available. In such a case, the customer may ultimately cancel a portion of its order.
Competition
The mobile hydraulics industry is very competitive. Sauer-Danfoss competes based on technological product innovation, quality, and customer service. The Company believes that to be successful over the long term, suppliers to mobile equipment manufacturers must have the ability to capitalize on the changing needs of the industry by providing technological innovation, shorter product development times, and reduced manufacturing lead times at globally competitive price levels.
Hydrostatics Segment
The closed circuit hydrostatic transmission market is highly concentrated and intensely competitive. There are a small number of manufacturers of hydrostatic transmissions with which the Company competes worldwide that are not captive suppliers of OEMs. These include Bosch Rexroth AG, Eaton Corporation, and Linde AG. In addition, the Company competes with alternative products, such as mechanical transmissions, of other manufacturers.
The Company competes with a number of smaller companies that typically offer a single, specialized product on a more limited geographic basis as a component of a closed circuit hydrostatic transmission system.
In terms of global supply of closed circuit hydrostatic transmissions, the Company believes it is the world leader in terms of product range, market share, and geographic coverage. Only Bosch Rexroth AG offers similar geographic coverage.
Work Function Segment
Low speed high torque motors (LSHT) and hydrostatic steering units are provided to the market from more than ten competitors, the major ones being Eaton Corporation, Zhenjiang Hydraulic Components Manufacturing Co., Ltd., White Drive Products, Parker-Hannifin Corporation, Ognibene S.p.A., Bosch Rexroth AG and M+S Hydraulic. Sauer-Danfoss believes it occupies the number two position in the global market for LSHT. The Company believes it has the largest European market share for steering units. As steering systems' technical demands grow, Sauer-Danfoss is providing electronic control of steering and complete electrical steering solutions to meet the growing demands of the steering market.
Controls Segment
In the electronic components market, which covers both propel and work function, there are only a few global competitors providing both the hydraulic and electronic elements of the system. The main competition comes from major OEMs, who produce electronic controls for their own use, or niche competitors who focus on a specific market segment, region, or technology. The Company believes it is well positioned to establish itself as a technology leader, as there is no clearly established technology in this sector that is deemed to be an industry standard. It also believes it will experience higher than average market growth levels as a result of the industry applying more electronics to meet the needs of new safety and emissions regulations.
The proportional valves group marketplace is fragmented among a number of suppliers, most of which are focused on limited valve types or flow ranges. Sauer-Danfoss provides a comprehensive line of proportional valves to meet the specific needs of its customers. Competitors who provide partial lines include HAWE Hydraulics, Bucher Hydraulics, HUSCO International, and Walvoil S.p.A., plus many others. Full-line global proportional valves competitors are limited to Parker-Hannifin Corporation, Bosch Rexroth AG, and Eaton Corporation. Sauer-Danfoss believes growth in this market will be higher than average market levels related to its new product introductions and the implementation of new emissions regulations.
Stand-Alone Businesses Segment
The open circuit gear pumps and motors market is fragmented among a large number of suppliers of all types of products and with intensive competition on pricing at the component level. There are approximately ten major companies that compete on a global basis, including Bosch Rexroth AG, Parker-Hannifin Corporation, Casappa S.p.A., Concentric (previously branded Haldex), and in Japan, Shimadzu Corporation. The supply of standard gear pumps and motors is particularly fragmented among more than 50 companies worldwide. Most of these competitors have a limited product range and operate in a limited geographic market.
The control valves marketplace is fragmented among a large number of suppliers, most of which are focused on limited valve types or flow ranges. Sauer-Danfoss provides a comprehensive line of HICs, cartridge and directional control valves to meet the specific needs of its customers. Competitors who provide partial lines include HydraForce, HUSCO International, Sun Hydraulics Corporation, and Walvoil S.p.A., plus many others. Complete global control valve line competitors are limited to Parker-Hannifin Corporation, Bosch Rexroth AG, and Eaton Corporation.
The inverters market is dominated by Zapi and Curtis. Other relevant competitors are Danaher, Sevcon and SME, while the biggest vehicle manufacturers in the material handling market such as Kion and Jungheinrich design and produce their own inverters. Sauer-Danfoss' unique selling point is the full graphical programmability of its inverters which gives distributors and customers a high flexibility to design their own applications and opens new distribution channels and markets.
The hydrostatic drive systems market for the turf maintenance equipment and light industrial industries is highly concentrated and intensely competitive. In addition, the Company competes with alternative products, such as mechanical transmissions of other manufacturers. With respect to global supply of small-sized hydrostatic transmissions, the Company believes it is the world leader in terms of product range and value.
Research and Development
The Company's research and development expenditures during
2012
,
2011
, and
2010
were $64.1 million, $64.0 million, and $51.6 million, respectively.
Environmental Matters
In all countries in which it operates, the Company is subject to environmental laws and regulations concerning emissions to air, discharge to waterways, and the generation, handling, storage, transportation, treatment, and disposal of waste materials. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they will have on the Company in the future. The regulations are subject to varying and conflicting interpretations and implementation. In some cases, compliance can only be achieved by additional capital expenditures. The Company cannot accurately predict what capital expenditures, if any, may be required to comply with applicable environmental laws and regulations in the future; however, the Company does not currently estimate that any future capital expenditures for environmental control facilities will be material. The Company is not currently subject to any governmental remediation order, nor is the Company aware of any environmental issues that would have a materially adverse effect on the Company.
Employees
As of
December 31, 2012
,
2011
, and
2010
the Company had approximately 6,400, 6,500, and 6,000 employees, respectively. Of its full-time employees at
December 31, 2012
, approximately 2,200 were located in the Americas with the remainder located in Europe and the Asia-Pacific region. From time to time, the Company also retains consultants, independent contractors, and temporary and part-time workers.
Financial Information about Geographic Areas
Information regarding the Company's net sales and long-lived assets by geographic area is set forth in Note 17 in the Notes to Consolidated Financial Statements on pages
F-30 through F-32
of this report, and is incorporated herein by reference.
Available Information
The Company maintains an internet website and the address of that site is
http://www.sauer-danfoss.com
. The Company provides access to its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 through its internet website as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (SEC). The SEC maintains an internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC site is
http://www.sec.gov
.
Item 1A. Risk Factors.
The Company's business, financial condition, results of operations and cash flows can be affected by a number of factors, including but not limited to those set forth below and elsewhere in this annual report on Form 10-K, any one of which could cause actual results to vary materially from recent results or from anticipated future results.
Worldwide Economic Conditions
The Company manufactures and sells its products throughout the world, so worldwide economic conditions can have a material and adverse effect on the Company's business, financial condition, results of operations, and cash flows. The Company's performance over the last five years is illustrative of the impact the overall economic climate can have. The Company's performance in 2008 and 2009 was significantly disrupted by the recession and market turmoil that occurred in those years. The global economy, with numerous localized exceptions, saw modest improvements during 2010, 2011, and 2012, which helped the Company to achieve better financial and operational results in those years. If the worldwide economy were to return to a recessionary state, the Company's performance would likely suffer.
Economic indicators are, at best, mixed on both global and regional levels. For example, the U.S. economy saw low levels of growth during 2012 and continues to suffer from high unemployment. The domestic housing and construction markets have been slow to recover from the severe downturn in 2008 and 2009. In addition, continuing debt crises across the Euro-zone, decelerating growth in China, and austerity measures being implemented or contemplated by various countries around the world could have negative, worldwide consequences. If one of those consequences is a renewed tightening of credit markets, the Company and its suppliers and customers could suffer from a reduced ability to finance their operations, which could lead to a decrease in orders for the Company's products or an increase in its costs of production.
Another feature of the recent worldwide recession that had a material impact on the Company's business was the response of central banking authorities and national governments to the economic crisis. Whether or not the global economy continues to show signs of improvement, changes in U.S., European, and other nations' fiscal and monetary policies and laws affecting banking, liquidity, exchange rates, taxes, and governmental spending levels may have a material and adverse effect on the Company's business, financial condition, and results of operations.
Avoidance of Credit Default; Dependence on Affiliate Borrowing
The Company has a Credit Agreement with Danfoss A/S, the Company's majority stockholder. Initially the Credit Agreement consisted of a revolving credit facility that matures in September 2013 and two term loans that require repayment in September 2015. This amount was originally $500 million, however due to the strong cash generation in 2011 and 2012 the Company voluntarily reduced the available credit and ultimately decided to terminate the revolving credit facility in 2012. In September 2012 the Company also prepaid 10 percent of the term loan and reduced the loan amount to $178 million. Historically, the Company was dependent on Danfoss A/S for the Company's working capital and other funding needs. However, the Company has built up a significant cash balance and is now in a position to fund its dividend payments, working capital requirements and other funding needs through cash flow from operations and the available cash on hand. If the Company's strong cash flow since 2010 were to slow significantly for an extended period of time, the Company might need to seek new financing from Danfoss A/S or other external sources.
Goodwill and Long-Lived Assets Impairment
If the price of the Company's stock was to decline to the point that its market capitalization was lower than its carrying value, the Company may be required to perform interim impairment tests on goodwill or other long-lived assets. There may be other triggering events that indicate that the carrying amount of goodwill or long-lived assets may not be recoverable from future cash flows. If the Company determines that any goodwill or other long-lived asset amounts need to be written down to fair values at that time, this could result in a charge that may be material to the Company's operating results and financial condition.
International Operations
The Company depends on the strength of the economies in various parts of the world, particularly in the U.S., Europe, and the Asia-Pacific region. As a result of this worldwide exposure, net revenue and profitability may be harmed as a result of economic conditions in the major markets in which the Company operates, including, but not limited to, recessions, inflation and deflation, general weakness in the markets it serves, changes in governmental laws and policies, government embargoes or foreign trade restrictions, duties and tariffs, import and export controls, and changes in consumer purchasing power.
Technology Change
The hydraulic industry and markets for component parts of mobile hydraulics are subject to technological change, evolving industry standards, changing customer requirements and improvements in and expansion of product offerings. Although the Company believes that it has the technological capabilities to remain competitive, technological advances or developments by competitors or others could result in the Company needing to make significant capital expenditures in order to remain competitive and to avoid material adverse effects on its business, financial condition and results of operations.
Common Business System
The Company has implemented a common business system at substantially all of its locations. Any significant problems incurred related to operation of the system may delay or stop manufacturing and hinder the Company's ability to ship product in a timely manner or affect the Company's ability to access financial information. These problems could result in the loss of customers, a decrease in revenue, or significant costs to correct the problem.
Raw Material Availability
The Company purchases raw materials and component parts from suppliers to be used in the manufacture of products. During the worldwide economic recession, many of the Company's raw material suppliers reduced their output. As the worldwide market has improved over the last few years, suppliers have increased production. In the event of a short-term substantial increase in demand, the Company may experience price increases and difficulties in purchasing raw materials.
Pricing and Competitive Pressures from OEM Customers
A majority of the Company's sales are directly to OEM customers. OEM customers continue to use their positions as volume purchasers in the mobile hydraulics market to obtain preferential pricing and to obtain substantial quality assurance protection from the Company and other suppliers.
Currency Exchange Rates
The Company has a number of manufacturing sites throughout the world and sells products in several countries other than those where the product is manufactured. As a result, the Company has exposure to changing exchange rates between the various currencies in its customers' countries and the currencies in which the Company's manufacturing facilities are located. The Company's most significant foreign currency exposures are the euro, Japanese yen, Brazilian real, Polish zloty, British pound, Chinese yuan and Danish kroner. Exchange rate fluctuations between these currencies and against the U.S. dollar or euro could adversely affect the Company's results of operations. The Company enters into forward contracts to reduce the impact of currency fluctuations on cash flows related to forecasted sales denominated in currencies other than the functional currency of the selling location.
Cyclicality: Risks Associated with General Economic Conditions
The capital goods industry in general, and the mobile hydraulics industry in particular, are subject to economic cycles. Cyclical downturns had a material adverse effect on the demand for the Company's products in recent years. Future cyclical downturns may negatively impact the Company's business, financial condition, and results of operations. Demand for the Company's products is dependent upon the general condition of the off-highway mobile equipment industry which may be affected by numerous factors, including levels of construction activity, weather conditions, interest rates and access to financing. The Company's results of operations are also subject to price competition and the cost of supplies and labor, both of which are affected by general economic conditions. The Company derives substantial sales from cyclical industries, including the turf care, material handling, construction and agricultural equipment industries.
Income Tax Estimates
The Company is subject to income taxes in the U.S. and numerous non-U.S. jurisdictions. Significant judgment is required in determining the Company's worldwide provision for income taxes. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is periodically under audit by tax authorities. Although management believes its tax estimates are reasonable, the final outcome of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals. If the outcome of a given tax audit or related litigation is materially different from the Company's estimates, the determination could result in material differences between the Company's originally reported income tax provision or net income and the final reported financial results.
Catastrophic Events
Unforeseen events, including war, terrorism and other international conflicts, public health issues, and natural disasters such as earthquakes, hurricanes or other adverse weather and climate conditions, whether occurring in the U.S. or abroad, could disrupt the Company's operations, disrupt the operations of suppliers or customers, or result in political or economic instability. These events could reduce demand for hydraulic and electronic products and make it difficult or impossible for the Company to manufacture products, deliver products to customers, or to receive products from suppliers.
The foregoing list is not exhaustive. There can be no assurance that the Company has correctly identified and appropriately assessed all factors affecting the Company or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties not presently known to the Company or that are currently believed to be immaterial also may adversely impact the Company's business. Should any risks or uncertainties develop into actual events, these developments could have a material adverse effect on the Company's business, financial condition, and results of operations.
Item 2. Properties.
Sauer-Danfoss Inc. conducts its manufacturing operations at 19 locations; six in the United States, two each in Slovakia, Poland and Italy, and one each in Brazil, China, Denmark, Germany, India, Japan, and Sweden. The following table sets forth certain information relating to the Company's principal manufacturing facilities:
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Location
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Segment that Uses the Facility
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Approx.
Area in
Sq. Ft.
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Owned/Leased
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United States
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Ames, Iowa
|
|
Hydrostatics, Work Function and Stand-Alone Businesses
|
|
359,100
|
|
|
Owned
|
|
Sullivan, Illinois
|
|
Stand-Alone Businesses
|
|
220,000
|
|
|
Owned
|
|
Freeport, Illinois
|
|
Hydrostatics
|
|
192,000
|
|
|
Owned
|
|
Easley, South Carolina
|
|
Controls and Stand-Alone Businesses
|
|
184,000
|
|
|
Owned
|
|
Minneapolis, Minnesota
|
|
Controls
|
|
75,000
|
|
|
Leased
|
|
Princeton, Kentucky
|
|
Stand-Alone Businesses
|
|
68,000
|
|
|
Owned
|
|
South America
|
|
|
|
|
|
|
|
Caxias do Sul, Brazil
|
|
Stand-Alone Businesses
|
|
90,000
|
|
|
Leased
|
|
Europe
|
|
|
|
|
|
|
|
Nordborg, Denmark
|
|
Work Function and Controls
|
|
751,300
|
|
|
Leased
|
|
Neumünster, Germany
|
|
Hydrostatics and Controls
|
|
421,500
|
|
|
Owned
|
|
Povazská Bystrica, Slovakia
|
|
Hydrostatics, Controls and Stand-Alone Businesses
|
|
386,900
|
|
|
Owned
|
|
Dubnica nad Váhom, Slovakia
|
|
Hydrostatics
|
|
249,700
|
|
|
Owned
|
|
Bielany Wroclawskie, Poland
|
|
Work Function
|
|
223,000
|
|
|
Leased
|
|
Wroclaw, Poland
|
|
Work Function
|
|
126,000
|
|
|
Owned
|
|
Bologna, Italy
|
|
Stand-Alone Businesses
|
|
85,000
|
|
|
Owned
|
|
Reggio Emilia, Italy
|
|
Stand-Alone Businesses
|
|
76,500
|
|
|
Leased
|
|
Älmhult, Sweden
|
|
Controls
|
|
50,000
|
|
|
Leased
|
|
India
|
|
|
|
|
|
|
|
Pune, India
|
|
Work Function and Stand-Alone Businesses
|
|
63,600
|
|
|
Owned
|
|
Asia
|
|
|
|
|
|
|
|
Shanghai, China
|
|
Hydrostatics, Work Function, Controls and Stand-Alone Businesses
|
|
105,000
|
|
|
Leased
|
|
Osaka, Japan
|
|
Hydrostatics
|
|
120,000
|
|
|
Leased
|
|
Total
|
|
|
|
3,846,600
|
|
|
|
Item 3. Legal Proceedings.
From time to time, the Company is involved in various legal matters in the ordinary course of its business. The Company intends to defend itself vigorously against all such claims. It is the Company's policy to accrue for amounts related to lawsuits brought against it if it is probable that a liability has been incurred and an amount can be reasonably estimated. Although the outcome of such matters cannot be predicted with certainty and no assurances can be given with respect to such matters, the Company believes that the outcome of those ordinary-course matters in which it is currently involved will not have a materially adverse effect on its results of operations, liquidity, or financial position.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding the executive officers of the Company:
|
|
|
|
|
|
|
|
|
|
|
Name
|
Age
|
|
Position
|
|
Year
Appointed
|
|
Eric Alstrom(1)
|
46
|
|
|
President and Chief Executive Officer
|
|
2012
|
|
Jesper V. Christensen(2)
|
43
|
|
|
Executive Vice President and Chief Financial Officer, Treasurer
|
|
2009
|
|
C. Kells Hall(3)
|
64
|
|
|
Executive Vice President and Chief Technology Officer
|
|
2013
|
|
Helge Jørgensen(3)
|
50
|
|
|
Executive Vice President and President Work Function Division
|
|
2011
|
|
Thomas Kaiser(3)
|
51
|
|
|
Executive Vice President and President Hydrostatics Division
|
|
2013
|
|
Marc A. Weston(4)
|
43
|
|
|
Executive Vice President and Chief Marketing Officer
|
|
2010
|
|
Anne Wilkinson(3)
|
47
|
|
|
Executive Vice President - Human Resources
|
|
2010
|
|
Kenneth D. McCuskey(3)
|
58
|
|
|
Vice President and Chief Accounting Officer, Secretary
|
|
2000
|
|
|
|
|
(1)
|
Prior to joining the Company, Mr. Alstrom was employed by Benteler Automotive as Managing Director.
|
|
|
|
|
(2)
|
Prior to joining the Company, Mr. Christensen was employed as Vice President, Finance, IT & HR in the Motion Controls Division of Danfoss A/S, the majority stockholder of the Company.
|
|
|
|
|
(3)
|
These executive officers have served in various capacities with the Company or its subsidiaries for more than the past five years.
|
|
|
|
|
(4)
|
Prior to joining the Company, Mr. Weston was employed by The Timken Company as Vice President Strategic Planning.
|
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for the Company's Common Stock, Related Stockholder Matters and Company Purchases of Common Stock.
Market and Dividend Information
The Company's Common Stock is traded on the New York Stock Exchange. As of February
19,
2013 there were 115 stockholders of record.
The Company historically paid a quarterly dividend. Quarterly dividends are subject to Board of Directors approval. On March 13, 2009 the Board of Directors voted to suspend the Company's quarterly dividend indefinitely. On March 20, 2012, the Board of Directors voted to reinstate the quarterly cash dividend.
The following table sets forth the high and low prices on the New York Stock Exchange for the Company's Common Stock since January 1, 2011, and the quarterly cash dividends declared in
2012
and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
|
|
2nd
|
|
3rd
|
|
4th
|
|
Full Year
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
High
|
$
|
56.10
|
|
|
$
|
48.36
|
|
|
$
|
43.28
|
|
|
$
|
53.45
|
|
|
$
|
56.10
|
|
|
Low
|
$
|
34.58
|
|
|
$
|
33.16
|
|
|
$
|
33.24
|
|
|
$
|
37.57
|
|
|
$
|
33.16
|
|
|
Dividends
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
$
|
1.40
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
High
|
$
|
51.59
|
|
|
$
|
65.04
|
|
|
$
|
56.30
|
|
|
$
|
41.60
|
|
|
$
|
65.04
|
|
|
Low
|
$
|
27.29
|
|
|
$
|
41.53
|
|
|
$
|
28.86
|
|
|
$
|
25.60
|
|
|
$
|
25.60
|
|
|
Dividends
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity Compensation Plan Information
The following table summarizes, as of
December 31, 2012
, information about compensation plans under which equity securities of the Company are authorized for issuance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Category
|
Number of Securities to
be Issued upon Exercise
of Outstanding Options,
Warrants and Rights
(a)
|
|
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
|
|
Number of Securities Remaining
Available for Future Issuance
under Equity Compensation
Plans (Excluding Securities
Reflected in Column(a))
(c)
|
|
Equity compensation plans approved by security holders
|
44,766
|
|
|
$
|
—
|
|
|
3,353,516
|
|
The Company does not have any equity compensation plans that were not approved by security holders. Refer to Note 13 in the Notes to the Consolidated Financial Statements on page
F-28
of this report for a description of the equity compensation plans.
Column (a) includes only performance units that have vested but the payout of which has been deferred. Column (c) includes
3,353,516
shares available for issuance under the Company's 2006 Omnibus Incentive Plan. The plan permits the Company to issue common stock at times other than upon the exercise of options, warrants, or rights; for example, issuance in the form of restricted stock grants.
Performance Graph
The following graph shows a comparison of the cumulative total returns from December 31, 2007 to
December 31, 2012
, for the Company, the Russell 2000 Index, and the Morningstar Diversified Industrials Index ("Morningstar Group Index").
The graph assumes that $100 was invested on December 31, 2007 in the Company's common stock, the Russell 2000 Index, and the Morningstar Group Index, a peer group index, and that all dividends were reinvested.
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
|
(in millions except per share data)
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,916.1
|
|
|
$
|
2,057.5
|
|
|
$
|
1,640.6
|
|
|
$
|
1,159.0
|
|
|
$
|
2,090.5
|
|
|
Gross profit
|
616.9
|
|
|
657.2
|
|
|
498.1
|
|
|
128.0
|
|
|
435.6
|
|
|
Selling, general and administrative
|
235.1
|
|
|
228.0
|
|
|
195.5
|
|
|
209.7
|
|
|
258.5
|
|
|
Research and development
|
64.1
|
|
|
64.0
|
|
|
51.6
|
|
|
61.4
|
|
|
82.9
|
|
|
Impairment charges
|
—
|
|
|
—
|
|
|
—
|
|
|
50.8
|
|
|
58.2
|
|
|
Loss (gain) on sale of businesses and asset disposals
|
(0.1
|
)
|
|
0.6
|
|
|
7.6
|
|
|
16.4
|
|
|
9.6
|
|
|
Total operating expenses
|
299.1
|
|
|
292.6
|
|
|
254.7
|
|
—
|
|
338.3
|
|
—
|
|
409.2
|
|
|
Total interest expense, net
|
15.0
|
|
|
21.1
|
|
|
49.4
|
|
|
48.4
|
|
|
24.6
|
|
|
Loss on early retirement of debt
|
1.3
|
|
|
1.2
|
|
|
2.4
|
|
|
15.8
|
|
|
—
|
|
|
Net income (loss) attributable to Sauer-Danfoss Inc.
|
181.8
|
|
|
229.9
|
|
|
213.4
|
|
|
(345.8
|
)
|
|
(29.1
|
)
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share, basic
|
$
|
3.75
|
|
|
$
|
4.75
|
|
|
$
|
4.41
|
|
|
$
|
(7.15
|
)
|
|
$
|
(0.60
|
)
|
|
Income (loss) per common share, diluted
|
$
|
3.75
|
|
|
$
|
4.74
|
|
|
$
|
4.40
|
|
|
$
|
(7.15
|
)
|
|
$
|
(0.60
|
)
|
|
Cash dividends declared per share
|
$
|
1.40
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.72
|
|
|
Weighted average basic shares outstanding
|
48.4
|
|
|
48.4
|
|
|
48.4
|
|
|
48.3
|
|
|
48.2
|
|
|
Weighted average diluted shares outstanding
|
48.5
|
|
|
48.5
|
|
|
48.5
|
|
|
48.3
|
|
|
48.2
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
$
|
178.2
|
|
|
$
|
217.7
|
|
|
$
|
201.0
|
|
|
$
|
177.6
|
|
|
$
|
325.5
|
|
|
Property, plant and equipment, net
|
342.2
|
|
|
367.8
|
|
|
408.1
|
|
|
513.5
|
|
|
598.4
|
|
|
Total assets
|
1,399.0
|
|
|
1,278.3
|
|
|
1,128.2
|
|
|
1,068.3
|
|
|
1,467.7
|
|
|
Total debt (1)
|
178.9
|
|
|
200.5
|
|
|
281.5
|
|
|
533.2
|
|
|
491.4
|
|
|
Stockholders' equity
|
696.9
|
|
|
577.8
|
|
|
369.1
|
|
|
154.6
|
|
|
477.9
|
|
|
Debt to total capital
|
20.4
|
%
|
|
25.8
|
%
|
|
43.3
|
%
|
|
77.5
|
%
|
|
50.7
|
%
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
Backlog (at year-end)
|
$
|
837.0
|
|
|
$
|
939.8
|
|
|
$
|
814.2
|
|
|
$
|
509.5
|
|
|
$
|
743.7
|
|
|
Depreciation and amortization
|
80.5
|
|
|
88.1
|
|
|
97.3
|
|
80.5
|
|
117.1
|
|
88,094.0
|
|
113.0
|
|
|
Capital expenditures
|
48.6
|
|
|
51.8
|
|
|
26.2
|
|
|
43.0
|
|
|
198.6
|
|
|
EBITDA (2)
|
401.1
|
|
|
449.6
|
|
|
344.2
|
|
|
(89.9
|
)
|
|
175.6
|
|
|
Cash flows from (used in):
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
335.3
|
|
|
374.2
|
|
|
269.3
|
|
|
86.8
|
|
|
183.5
|
|
|
Investing activities
|
(228.7
|
)
|
|
(228.0
|
)
|
|
(18.0
|
)
|
|
(42.2
|
)
|
|
(187.5
|
)
|
|
Financing activities
|
(98.0
|
)
|
|
(112.6
|
)
|
|
(249.2
|
)
|
|
(24.7
|
)
|
|
4.7
|
|
|
|
|
|
(1)
|
Total debt includes notes payable and bank overdrafts, long-term debt due within one year, and long-term debt.
|
|
|
|
|
(2)
|
EBITDA represents net income plus net interest expense, income tax expense, depreciation and amortization, long-lived asset impairment charge, loss on early retirement of debt and noncontrolling interest. The impairment charge is included as it will reduce depreciation in future years. EBITDA may not be comparable to similarly titled measures reported by other companies. While EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with accounting principles generally
|
accepted in the United States, it is included herein to provide additional information as management of the Company believes it provides an indication with respect to the ability of Sauer-Danfoss to meet its future debt service, capital expenditures, and working capital requirements. The following table further demonstrates how EBITDA is derived from cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
Cash flows from operating activities
|
$
|
335.3
|
|
|
$
|
374.2
|
|
|
$
|
269.3
|
|
|
$
|
86.8
|
|
|
$
|
183.5
|
|
|
Increase (decrease) in working capital, excluding the effects of acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
2.3
|
|
|
1.0
|
|
|
63.8
|
|
|
(91.4
|
)
|
|
(71.7
|
)
|
|
Inventories
|
(39.9
|
)
|
|
19.0
|
|
|
28.5
|
|
|
(153.4
|
)
|
|
16.8
|
|
|
Other current assets
|
0.3
|
|
|
(10.2
|
)
|
|
8.1
|
|
|
5.0
|
|
|
7.9
|
|
|
Accounts payable
|
10.1
|
|
|
(0.5
|
)
|
|
(77.6
|
)
|
|
54.2
|
|
|
14.5
|
|
|
Accrued liabilities
|
(2.4
|
)
|
|
(12.2
|
)
|
|
(16.6
|
)
|
|
20.7
|
|
|
(23.6
|
)
|
|
Deferred income taxes, pension and postretirement benefits and other
|
(13.2
|
)
|
|
(23.4
|
)
|
|
68.1
|
|
|
(137.0
|
)
|
|
9.5
|
|
|
Interest expense, net and loss on early retirement of debt
|
16.3
|
|
|
22.3
|
|
|
51.8
|
|
|
64.2
|
|
|
24.6
|
|
|
Income tax
|
92.3
|
|
|
79.4
|
|
|
(51.2
|
)
|
|
61.0
|
|
|
14.1
|
|
|
EBITDA
|
$
|
401.1
|
|
|
$
|
449.6
|
|
|
$
|
344.2
|
|
|
$
|
(89.9
|
)
|
|
$
|
175.6
|
|
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Safe Harbor Statement
This Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other portions of this annual report, contain certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. All statements regarding future performance, growth, sales and earnings projections, conditions or developments are forward-looking statements. Words such as “anticipates,” “in the opinion,” “believes,” “intends,” “expects,” “may,” “will,” “should,” “could,” “plans,” “forecasts,” “estimates,” “predicts,” “projects,” “potential,” “continue,” and similar expressions may be intended to identify forward-looking statements.
Actual future results may differ materially from those described in the forward-looking statements due to a variety of factors. Readers should bear in mind that past experience is never a perfect guide to anticipating actual future results. Risk factors affecting the Company's forward-looking statements include, but are not limited to, the following: general, worldwide economic conditions, the level of interest rates, crude oil prices, commercial and consumer confidence, and currency exchange rates; specific economic conditions in the agriculture, construction, road building, turf care, material handling and specialty vehicle markets and the impact of such conditions on the Company's customers in such markets; the cyclical nature of some of the Company's businesses; the ability of the Company to win new programs and maintain existing programs with its original equipment manufacturer (OEM) customers; the highly competitive nature of the markets for the Company's products as well as pricing pressures that may result from such competitive conditions; the continued operation and viability of the Company's significant customers; the Company's execution of internal performance plans; difficulties or delays in manufacturing; the effectiveness of the Company's cost-management and productivity improvement efforts; the Company's ability to manage its business effectively in a period of slowing growth in sales and its capacity to make necessary adjustments to changes in demand for its products; competing technologies and difficulties entering new and expanding markets, both domestic and foreign; changes in the Company's product mix; future levels of indebtedness and capital spending; the availability of sufficient levels of cash flow from operations and credit on favorable terms, whether from Danfoss A/S, the Company's majority stockholder, or from the capital markets or traditional credit sources to enable the Company to meet its capital needs; claims, including, without limitation, warranty claims, field recall claims, product liability claims, charges or dispute resolutions; the ability of suppliers to provide materials as needed and the Company's ability to recover any price increases for materials in product pricing; the Company's ability to attract and retain key technical and other personnel; labor relations; the failure of customers to make timely payment, especially in light of the persistence of tight credit markets; any inadequacy of the Company's intellectual property protection or the potential for third-party claims of infringement; credit market disruptions and significant changes in capital market liquidity and funding costs affecting the Company and its customers and suppliers; sovereign debt crises, in Europe or elsewhere, and the reaction of other nations to such crises; energy prices; the impact of new or changed tax and other legislation and regulations in jurisdictions in which the Company and its affiliates operate, including regulations affecting retirement and health care benefits provided to Company employees; actions by the U.S. Federal Reserve Board and the central banks of other nations, including heightened capital requirements imposed on Chinese banks; actions by other regulatory agencies, including those taken in response to the global credit crisis; actions by credit rating agencies; changes in accounting standards; worldwide political stability, including developments in the Middle East; the effects of terrorist activities and resulting political or economic instability; natural catastrophes; U.S. and NATO military action overseas; and the effect of acquisitions, divestitures, restructurings, product withdrawals, and other unusual events.
The Company cautions the reader that this list of cautionary statements and risk factors is not exhaustive. The Company's outlook is based upon assumptions and projections arising in connection with the foregoing factors, the evaluation of which is often based on estimates and data prepared by government and other third-party sources. Those estimates and data are frequently revised. The Company expressly disclaims any obligation or undertaking to release publicly any updates or changes to these forward-looking statements to reflect future events or circumstances. The foregoing risks and uncertainties are discussed in Item 1A (Risk Factors) in this annual report on Form 10-K.
About the Company
Sauer-Danfoss Inc. and subsidiaries (the Company) is a worldwide leader in the design, manufacture, and sale of engineered hydraulic and electronic systems and components that generate, transmit and control power in mobile equipment. The Company's products are used by original equipment manufacturers (OEMs) of mobile equipment, including construction, road building, agricultural, turf care, material handling, and specialty equipment. The Company designs, manufactures, and markets its products in the Americas, Europe, and the Asia-Pacific region, and markets its products throughout the rest of the world either directly or through distributors.
Executive Summary of
2012
Compared to
2011
The nature of the Company's operations as a global producer and supplier in the fluid power industry means the Company is impacted by changes in local economies, including currency exchange rate fluctuations. In order to gain a better understanding of the Company's base results, a financial statement user needs to understand the impact of those currency exchange rate fluctuations. The following table summarizes the change in the Company's results from operations by separately identifying changes due to currency fluctuations and the underlying change in operations from
2011
to
2012
. This analysis is more consistent with how the Company's management internally evaluates results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2011
|
|
Currency fluctuations
|
|
Underlying change
|
|
2012
|
|
Net Sales
|
$
|
2,057.5
|
|
|
$
|
(62.0
|
)
|
|
$
|
(79.4
|
)
|
|
$
|
1,916.1
|
|
|
Gross Profit
|
657.2
|
|
|
(24.4
|
)
|
|
(15.9
|
)
|
|
616.9
|
|
|
% of Net Sales
|
31.9
|
%
|
|
|
|
|
|
32.2
|
%
|
|
Selling, general and administrative
|
228.0
|
|
|
(10.3
|
)
|
|
17.3
|
|
|
235.0
|
|
|
Research and development
|
64.0
|
|
|
(2.7
|
)
|
|
2.8
|
|
|
64.1
|
|
|
Loss (gain) on sale of businesses and asset disposals
|
0.6
|
|
|
—
|
|
|
(0.7
|
)
|
|
(0.1
|
)
|
|
Total operating costs
|
292.6
|
|
|
(13.0
|
)
|
|
19.4
|
|
|
299.0
|
|
|
Operating income
|
364.6
|
|
|
(11.4
|
)
|
|
(35.3
|
)
|
|
317.9
|
|
|
% of Net Sales
|
17.7
|
%
|
|
|
|
|
|
|
|
16.6
|
%
|
|
Interest expense, net
|
(21.1
|
)
|
|
—
|
|
|
6.1
|
|
|
(15.0
|
)
|
|
Loss on early retirement of debt
|
(1.2
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
(1.3
|
)
|
|
Other, net
|
(3.1
|
)
|
|
(0.1
|
)
|
|
6.0
|
|
|
2.8
|
|
|
Income before income taxes
|
339.2
|
|
|
(11.5
|
)
|
|
(23.3
|
)
|
|
304.4
|
|
|
% of Net Sales
|
16.5
|
%
|
|
|
|
|
|
|
|
15.9
|
%
|
|
Income tax
|
(79.4
|
)
|
|
2.8
|
|
|
(15.7
|
)
|
|
(92.3
|
)
|
|
Net income
|
259.8
|
|
|
(8.7
|
)
|
|
(39.0
|
)
|
|
212.1
|
|
|
Net income attributable to noncontrolling interest, net of tax
|
(29.9
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
(30.3
|
)
|
|
Net income attributable to Sauer-Danfoss Inc.
|
$
|
229.9
|
|
|
$
|
(8.7
|
)
|
|
$
|
(39.4
|
)
|
|
$
|
181.8
|
|
Net sales for the year ended
December 31, 2012
decreased 4 percent compared to the year ended
December 31, 2011
, excluding the effects of currency. Excluding the impacts of currency, sales increased 7 percent in the Americas, while sales decreased 19 percent in Asia-Pacific and 10 percent in Europe. Sales in the Work Function segment were down 12 percent, followed by decreases of 5 percent in the Hydrostatics segment and 2 percent in the Controls segment. Sales in the Stand-Alone Businesses segment increased 4 percent.
Gross profit decreased
$15.9 million
during the year ended
December 31, 2012
, excluding the impact of currency, mainly due to reduced sales volume in relation to fixed production costs. Partially offsetting the negative impact of reduced sales in 2012 was a $9.5 million reduction in warranty and field recall costs.
Total operating costs increased by
$19.4 million
during
2012
when compared to the same period in
2011
, excluding the impact of currency. Selling, general and administrative costs increased 8 percent, while research and development costs experienced a 4 percent increase. Higher costs in 2012 were partially due to wage and salary increases, as well as the Company's continued investments in China as part of its long-term growth strategy. In 2012 the Company incurred restructuring costs of $1.1 million related to the reorganization of the European sales organization, as well as executive separation costs of $2.7 million. Partially offsetting the negative impact of these items in 2012 was a $1.6 million reduction in incentive plan costs. In 2011 the Company incurred restructuring costs of $4.1 million related to restructuring of the European sales organization.
In 2011 the Company incurred costs of $1.2 million related to the write-down of a building in Odense, Denmark. This was partially offset by a $0.6 million gain on the sale of a building in Lawrence, Kansas.
Net interest expense decreased in 2012 due to a reduction in the principal balance of debt outstanding during the year. A reduction in borrowing capacity at the request of the Company resulted in a $1.3 million loss on early retirement of debt in 2012, which consisted of prepayment penalties of $0.8 million and $0.5 million related to the write-off of unamortized deferred financing
costs. Reduction of availability of a revolving credit facility in 2011 resulted in a $1.2 million loss on early retirement of debt due to the write-off of unamortized deferred financing costs.
Operating Results—
2012
Compared to
2011
Sales Growth by Market
The following table summarizes the Company's sales growth by market. The table and following discussion is on a comparable basis, which excludes the effects of currency fluctuations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
Asia-Pacific
|
|
Europe
|
|
Total
|
|
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture/Turf Care
|
$
|
56.6
|
|
14
|
%
|
|
$
|
4.4
|
|
29
|
%
|
|
$
|
(33.1
|
)
|
(13
|
)%
|
|
$
|
27.9
|
|
4
|
%
|
|
Construction/Road Building
|
4.3
|
|
3
|
|
|
(42.0
|
)
|
(25
|
)
|
|
(14.5
|
)
|
(9
|
)
|
|
(52.2
|
)
|
(11
|
)
|
|
Specialty
|
7.5
|
|
8
|
|
|
(8.1
|
)
|
(22
|
)
|
|
(22.9
|
)
|
(9
|
)
|
|
(23.5
|
)
|
(6
|
)
|
|
Distribution
|
(2.0
|
)
|
(1
|
)
|
|
(23.7
|
)
|
(17
|
)
|
|
(5.9
|
)
|
(5
|
)
|
|
(31.6
|
)
|
(6
|
)
|
Agriculture/Turf Care
Sales into the agriculture/turf care market showed a modest increase of 4 percent during the year ended
December 31, 2012
compared to the same period in
2011
. Agricultural sales in the Americas continue to benefit from high commodity prices as well as strong demand for sprayers and harvesting equipment in Brazil, although South American sales have been negatively impacted in recent months by restrictive trade laws in Argentina. Sales in the turf care market continue to show improvement due to growing consumer confidence. Agricultural sales in Europe have declined due to a weakened European economy as well as high interest rates and political uncertainty in India. The Asia-Pacific region contributes less than 5 percent of the sales in the agriculture/turf care market, therefore any change in the Asia-Pacific region does not significantly impact the total market.
Construction/Road Building
Sales in the construction/road building markets declined in Europe and the Asia-Pacific region during the year ended
December 31, 2012
compared to the same period in
2011
, which more than offset a modest sales increase in the Americas. Sales in Europe were down due to a weakened European economy. The sales decline in the Asia-Pacific region was largely due to reduced demand for rollers and transit mixers in China, as well as credit restrictions imposed by the Chinese government. Sales in the Americas benefited from increased demand as a result of renewed investments in aging rental fleets despite depressed residential construction markets and a weak road building market due to limited spending by state and local governments due to budget constraints.
Specialty
Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management and waste recycling. Overall sales into the specialty vehicle market decreased 6 percent compared to
2011
. Sales in the Americas increased due to increased demand for aerial lifts driven by renewed investments in aging rental fleets. Sales in the Asia-Pacific region declined largely due to a saturated railway carrier market and suspended infrastructure programs in China, as well as credit restrictions imposed by the Chinese government. Sales in Europe declined due to weakening forestry and mining markets despite continued strong demand for telehandlers and aerial lifts during the first half of the year.
Distribution
Products related to all of the above markets are sold to distributors, who then serve smaller OEMs.
Order Backlog
The following table shows the Company's order backlog and orders written activity for
2011
and
2012
, separately identifying the impact of currency fluctuations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2011
|
|
Currency
fluctuation
|
|
Underlying
change
|
|
2012
|
|
Backlog at December 31
|
$
|
939.8
|
|
|
$
|
2.2
|
|
|
$
|
(105.0
|
)
|
|
$
|
837.0
|
|
|
Orders written
|
2,190.8
|
|
|
(61.4
|
)
|
|
(311.3
|
)
|
|
1,818.1
|
|
Total order backlog at the end of
2012
was
$837.0 million
, compared to
$939.8 million
at the end of
2011
. On a comparable basis, excluding the impact of currency fluctuation, order backlog decreased 11 percent compared to
2011
. Backlog levels can vary as customers alter their sales order patterns.
New sales orders written for
2012
were
$1,818.1 million
, a decrease of 14 percent compared to
2011
, excluding the impact of currency fluctuations.
Business Segment Results
The following discussion of operating results by reportable segment relates to information as presented in Note 17 in the Notes to Consolidated Financial Statements. Segment income is defined as the respective segment's portion of the total Company's net income, excluding net interest expense, income taxes, and noncontrolling interest. Hydrostatics (formerly Propel) products include hydrostatic transmissions and related products that transmit the power from the engine to the wheel to propel a vehicle. Work Function products include steering motors and motors that transmit power for the work functions of the vehicle. Controls products include electrohydraulic controls, microprocessors, and valves that control and direct the power of a vehicle. Stand-Alone Businesses include open circuit gear pumps and motors, cartridge valves and HICs, directional control valves, inverters and light duty hydrostatic transmissions that transmit, control and direct the power of a vehicle, but are marketed under their own names and are managed as stand-alone businesses.
The following table provides a summary of each segment's net sales and segment income, separately identifying the impact of currency fluctuations during the year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2011
|
|
Currency
fluctuation
|
|
Underlying
change
|
|
2012
|
|
Net sales
|
|
|
|
|
|
|
|
|
Hydrostatics
|
$
|
948.2
|
|
|
$
|
(19.0
|
)
|
|
$
|
(45.5
|
)
|
|
$
|
883.7
|
|
|
Work Function
|
377.5
|
|
|
(19.7
|
)
|
|
(46.2
|
)
|
|
311.6
|
|
|
Controls
|
322.5
|
|
|
(12.8
|
)
|
|
(6.1
|
)
|
|
303.6
|
|
|
Stand-Alone Businesses
|
409.3
|
|
|
(10.5
|
)
|
|
18.4
|
|
|
417.2
|
|
|
Segment income (loss)
|
|
|
|
|
|
|
|
|
Hydrostatics
|
$
|
210.5
|
|
|
$
|
(5.5
|
)
|
|
$
|
(31.4
|
)
|
|
$
|
173.6
|
|
|
Work Function
|
59.2
|
|
|
(4.4
|
)
|
|
(6.5
|
)
|
|
48.3
|
|
|
Controls
|
78.5
|
|
|
(3.7
|
)
|
|
(0.6
|
)
|
|
74.2
|
|
|
Stand-Alone Businesses
|
58.6
|
|
|
(1.1
|
)
|
|
10.9
|
|
|
68.4
|
|
|
Global Services and other expenses, net
|
(45.3
|
)
|
|
2.0
|
|
|
(0.5
|
)
|
|
(43.8
|
)
|
Hydrostatics Segment
Sales in the Hydrostatics segment decreased 5 percent during
2012
compared to
2011
, excluding the effects of currency fluctuations. Segment income decreased
$31.4 million
excluding the effects of currency fluctuations, primarily due to reduced sales volumes and increased operating costs. Total operating costs increased $12.3 million, partially due to the Company's continued investments in China as part of its long-term growth strategy. Segment income was favorably impacted by a $2.6 million reduction in warranty and field recall costs, as well as a $1.9 million reduction in incentive plan costs.
Work Function Segment
The Work Function segment experienced a 12 percent decrease in sales during
2012
compared to
2011
, excluding the effects of currency fluctuations, largely due to weakened economic conditions in Europe. Segment income decreased
$6.5 million
primarily due to reduced sales volume. Partially offsetting the negative impact of reduced sales was a 3 percentage point increase in contribution margin largely due to improved production efficiency and higher margins on export sales from Europe to the United States due to the strengthening of the U.S. dollar during the first half of the year.
Controls Segment
Net sales in the Controls segment decreased 2 percent in
2012
compared to
2011
, excluding the effects of currency fluctuations. Segment income remained level compared to
2011
largely due to a 2 percentage point increase in contribution margin driven by an $8.3 million reduction in warranty and field recall costs. In addition, segment income was favorably impacted by a $1.2 million reduction in incentive plan costs in
2012
compared to
2011
.
Stand-Alone Businesses Segment
The Stand-Alone Businesses segment experienced a 4 percent increase in sales in
2012
compared to
2011
, excluding the effects of currency fluctuations. Segment income increased
$10.9 million
due to increased sales volume, as well as a $2.8 million reduction in fixed production cots. Partially offsetting the positive impact of increased sales and reduced fixed production costs was a $2.0 million increase in operating costs.
Global Services and other expenses, net
Segment costs in Global Services and other expenses, net, relate to internal global service departments. Global services include such costs as consulting for special projects, tax and accounting fees paid to outside third parties, internal audit, certain insurance premiums, and the amortization of intangible assets from certain business combinations. Global services and other expenses remained level in
2012
compared to
2011
, excluding the impacts of currency. In
2012
the Company incurred executive severance costs of $2.6 million, as well as restructuring costs of $1.1 million related to the restructuring of the European sales organization. Global incentive plan costs increased $2.4 million in
2012
compared to
2011
. The negative impact of these items was offset by the fact that the Company experienced a $4.8 million reduction in loss on foreign currency transactions in
2012
compared to
2011
. In
2011
the Company recognized restructuring costs of $4.7 million related to the restructuring of the European sales organization.
Income Taxes
The Company recognized tax expense of $92.3 million on pretax income of $304.4 million in 2012 resulting in an effective tax rate of 30.3 percent. The Company has returned to a more normal effective tax rate which is impacted by the Company's worldwide earnings mix.
Executive Summary of 2011 Compared to 2010
The nature of the Company's operations as a global producer and supplier in the fluid power industry means the Company is impacted by changes in local economies, including currency exchange rate fluctuations. In order to gain a better understanding of the Company's base results, a financial statement user needs to understand the impact of those currency exchange rate fluctuations. The following table summarizes the change in the Company's results from operations by separately identifying changes due to currency fluctuations and the underlying change in operations from 2010 to 2011. This analysis is more consistent with how the Company's management internally evaluates results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2010
|
|
Currency fluctuations
|
|
Underlying change
|
|
2011
|
|
Net Sales
|
$
|
1,640.6
|
|
|
$
|
65.2
|
|
|
$
|
351.7
|
|
|
$
|
2,057.5
|
|
|
Gross Profit
|
498.1
|
|
|
22.1
|
|
|
137.0
|
|
|
657.2
|
|
|
% of Net Sales
|
30.4
|
%
|
|
|
|
|
|
31.9
|
%
|
|
Selling, general and administrative
|
195.5
|
|
|
7.5
|
|
|
25.0
|
|
|
228.0
|
|
|
Research and development
|
51.6
|
|
|
2.2
|
|
|
10.2
|
|
|
64.0
|
|
|
Loss on sale of businesses and asset disposals
|
7.6
|
|
|
—
|
|
|
(7.0
|
)
|
|
0.6
|
|
|
Total operating costs
|
254.7
|
|
|
9.7
|
|
|
28.2
|
|
|
292.6
|
|
|
Operating income
|
243.4
|
|
|
12.4
|
|
|
108.8
|
|
|
364.6
|
|
|
% of Net Sales
|
14.8
|
%
|
|
|
|
|
|
|
|
17.7
|
%
|
|
Interest expense, net
|
(49.4
|
)
|
|
—
|
|
|
28.3
|
|
|
(21.1
|
)
|
|
Loss on early retirement of debt
|
(2.4
|
)
|
|
—
|
|
|
1.2
|
|
|
(1.2
|
)
|
|
Other, net
|
3.5
|
|
|
(0.7
|
)
|
|
(5.9
|
)
|
|
(3.1
|
)
|
|
Income before income taxes
|
195.1
|
|
|
11.7
|
|
|
132.4
|
|
|
339.2
|
|
|
% of Net Sales
|
11.9
|
%
|
|
|
|
|
|
|
|
16.5
|
%
|
|
Income tax
|
51.2
|
|
|
(1.8
|
)
|
|
(128.8
|
)
|
|
(79.4
|
)
|
|
Net income
|
246.3
|
|
|
9.9
|
|
|
3.6
|
|
|
259.8
|
|
|
Net income attributable to noncontrolling interest, net of tax
|
(32.9
|
)
|
|
(0.9
|
)
|
|
3.9
|
|
|
(29.9
|
)
|
|
Net income attributable to Sauer-Danfoss Inc.
|
$
|
213.4
|
|
|
$
|
9.0
|
|
|
$
|
7.5
|
|
|
$
|
229.9
|
|
Net sales for the year ended December 31, 2011 increased 21 percent compared to the year ended December 31, 2010, excluding the effects of currency. Net sales increased in all regions and segments. Excluding the impacts of currency, sales increased 25 percent in the Americas, 22 percent in Europe and 12 percent in Asia-Pacific. Sales in the Hydrostatics segment were up 28 percent, followed by increases of 27 percent in the Controls segment, 13 percent in the Work Function segment, and 12 percent in the Stand-Alone Businesses segment.
Gross profit increased significantly during the year ended December 31, 2011, excluding the impact of currency, due to increased sales volumes in relation to fixed production costs, partially due to reduced depreciation. In 2010 gross profit was negatively impacted by restructuring costs of $3.1 million related to the closure of the Lawrence, Kansas facility. Partially offsetting the positive impact of increased sales in 2011 were increased warranty and field recall costs of $7.4 million.
Selling, general and administrative costs increased 13 percent during 2011 when compared to the same period in 2010, excluding the effects of currency. In 2011 the Company incurred restructuring costs of $4.1 million related to restructuring of the European sales organization, as well as increased incentive plan costs of $5.8 million. In 2010 the Company incurred restructuring costs of $0.5 million related to the closure of the Lawrence facility, costs of $3.5 million related to a stock tender offer initiated by Danfoss Acquisition, Inc., and costs of $1.5 million related to a pension settlement with a former executive. Research and development costs increased 20 percent excluding the effects of currency. The increase was largely due to cost reduction efforts in 2010 in light of the economic downturn.
In 2011 the Company incurred costs of $1.2 million related to the write-down of a building in Odense, Denmark. This was partially offset by a $0.6 million gain on the sale of a building in Lawrence, Kansas. In 2010 the Company incurred costs of $4.4 million related to the exit from the AC motor product line and $1.1 million related to the sale of the steering column business in Kolding, Denmark. In addition, the Company recognized costs of $2.3 million related to a loss on sale of fixed assets and write-down of the building in Lawrence, Kansas. Partially offsetting these costs in 2010 was a gain on sale of equipment of $1.1 million.
Net interest expense decreased in 2011 due to a reduction in the principal balance of debt outstanding during the year. Refinancing activities in 2010 resulted in a $2.4 million loss on early retirement of debt, which consisted of prepayment penalties of $1.7 million and $0.7 million related to the write-off of unamortized deferred financing costs. Reduction of availability of a revolving credit facility in 2011 resulted in a $1.2 million loss on early retirement of debt due to the write-off of unamortized deferred financing costs.
Operating Results—2011 Compared to 2010
Sales Growth by Market
The following table summarizes the Company's sales growth by market. The table and following discussion is on a comparable basis, which excludes the effects of currency fluctuations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
Asia-Pacific
|
|
Europe
|
|
Total
|
|
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
$ Change
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture/Turf Care
|
$
|
54.1
|
|
15
|
%
|
|
$
|
2.2
|
|
18
|
%
|
|
$
|
56.9
|
|
32
|
%
|
|
$
|
113.2
|
|
20
|
%
|
|
Construction/Road Building
|
22.2
|
|
18
|
|
|
10.0
|
|
7
|
|
|
22.0
|
|
17
|
|
|
54.2
|
|
14
|
|
|
Specialty
|
31.9
|
|
53
|
|
|
9.5
|
|
39
|
|
|
46.3
|
|
22
|
|
|
87.7
|
|
30
|
|
|
Distribution
|
70.3
|
|
42
|
|
|
14.9
|
|
12
|
|
|
11.4
|
|
11
|
|
|
96.6
|
|
25
|
|
Agriculture/Turf Care
Sales into the agriculture/turf care market showed a strong increase in all regions during the year ended December 31, 2011 compared to 2010. The agricultural market in the Americas benefited from historically high commodity prices and a strong sugar-cane market in Brazil. Agricultural sales growth in Europe was also driven by high commodity prices. Sales in the turf care market improved due to growing consumer confidence. The Asia-Pacific region contributes less than 5 percent of the sales in the agriculture / turf care market, therefore any change in the Asia-Pacific region does not significantly impact the total market.
Construction/Road Building
Sales into the construction/road building markets increased in all regions during the year ended December 31, 2011 compared to 2010. Sales in the Americas and Europe showed the strongest improvement over relatively low sales levels in 2010 despite depressed residential construction markets and limited spending by state and local governments due to budget constraints. The sales growth in the Asia-Pacific region was driven by increased demand in Japan, where customers have increased production due to higher export sales to the Americas, and to rebuild damage caused by the earthquake earlier in the year. Sales in China were strong during the first half of the year due to increased demand for rollers and transit mixers, while sales declined in the second half of the year due to reduced demand and credit restrictions imposed by the Chinese government.
Specialty
Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management and waste recycling. Overall sales into the specialty vehicle market increased 30 percent compared to 2010. Sales in the Americas benefited from increased demand for aerial lifts due to renewed investments in aging rental fleets, as well as a strong overall market in Brazil. Sales in Europe improved due to strengthening forestry and mining markets, as well as increased demand for telehandlers, truck-mounted cranes, and aerial lifts. Sales in the Asia-Pacific region improved as some new and existing customers in China and Australia increased production.
Distribution
Products related to all of the above markets are sold to distributors, who then serve smaller OEMs.
Order Backlog
The following table shows the Company's order backlog and orders written activity for 2010 and 2011, separately identifying the impact of currency fluctuations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2010
|
|
Currency
fluctuation
|
|
Underlying
change
|
|
2011
|
|
Backlog at December 31
|
$
|
814.2
|
|
|
$
|
(4.4
|
)
|
|
$
|
130.0
|
|
|
$
|
939.8
|
|
|
Orders written
|
1,955.8
|
|
|
66.9
|
|
|
168.1
|
|
|
2,190.8
|
|
Total order backlog at the end of 2011 was $939.8 million, compared to $814.2 million at the end of 2010. On a comparable basis, excluding the impact of currency fluctuation, order backlog increased 16 percent compared to 2010. New sales orders written for 2011 were $2,190.8 million, an increase of 9 percent compared to 2010, excluding the impact of currency fluctuations.
Business Segment Results
The following discussion of operating results by reportable segment relates to information as presented in Note 17 in the Notes to Consolidated Financial Statements. Segment income is defined as the respective segment's portion of the total Company's net income, excluding net interest expense, income taxes, and noncontrolling interest. Hydrostatics products include hydrostatic transmissions and related products that transmit the power from the engine to the wheel to propel a vehicle. Work Function products include steering motors and motors that transmit power for the work functions of the vehicle. Controls products include electrohydraulic controls, microprocessors, and valves that control and direct the power of a vehicle. Stand-Alone Businesses include open circuit gear pumps and motors, cartridge valves and HICs, directional control valves, inverters and light duty hydrostatic transmissions that transmit, control and direct the power of a vehicle, but are marketed under their own names and are managed as stand-alone businesses.
The following table provides a summary of each segment's net sales and segment income, separately identifying the impact of currency fluctuations during the year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2010
|
|
Currency
fluctuation
|
|
Underlying
change
|
|
2011
|
|
Net sales
|
|
|
|
|
|
|
|
|
Hydrostatics
|
$
|
717.2
|
|
|
$
|
30.6
|
|
|
$
|
200.4
|
|
|
$
|
948.2
|
|
|
Work Function
|
320.7
|
|
|
15.2
|
|
|
41.6
|
|
|
377.5
|
|
|
Controls
|
243.2
|
|
|
13.2
|
|
|
66.1
|
|
|
322.5
|
|
|
Stand-Alone Businesses
|
359.5
|
|
|
6.2
|
|
|
43.6
|
|
|
409.3
|
|
|
Segment income (loss)
|
|
|
|
|
|
|
|
|
Hydrostatics
|
$
|
165.0
|
|
|
$
|
6.4
|
|
|
$
|
39.1
|
|
|
$
|
210.5
|
|
|
Work Function
|
28.7
|
|
|
2.6
|
|
|
27.9
|
|
|
59.2
|
|
|
Controls
|
49.1
|
|
|
3.4
|
|
|
26.0
|
|
|
78.5
|
|
|
Stand-Alone Businesses
|
35.8
|
|
|
0.7
|
|
|
22.1
|
|
|
58.6
|
|
|
Global Services and other expenses, net
|
(31.7
|
)
|
|
(1.4
|
)
|
|
(12.2
|
)
|
|
(45.3
|
)
|
Hydrostatics Segment
Sales in the Hydrostatics segment increased 28 percent during 2011 compared to 2010, excluding the effects of currency fluctuations. Segment income increased $39.1 million, excluding the effects of currency fluctuations, primarily due to higher sales volumes. Partially offsetting the positive impact of increased sales in 2011 were increases in premium freight costs of $2.3 million and warranty and field recall costs of $2.3 million. Total operating costs increased $25.7 million, with the largest increase in research and development costs. In 2010 the Hydrostatics segment recognized a $0.8 million gain on sale of equipment.
Work Function Segment
The Work Function segment experienced a $27.9 million increase in segment income in 2011 compared to 2010, excluding the effects of currency fluctuations, primarily due to a 13 percent increase in sales. Gross profit margin increased 4 percentage points due to increased sales volume in relation to fixed production costs, which decreased by $3.5 million. Also contributing to the increase in segment income was a reduction in warranty and field recall costs of $0.8 million, as well as a $0.6 million gain on the sale of a building in Lawrence, Kansas. In 2010 the Work Function segment recognized restructuring costs of $4.0 million related to the closure of the Lawrence facility and costs of $1.1 million related to future lease payments on the Kolding, Denmark facility.
Controls Segment
Net sales in the Controls segment increased 27 percent in 2011 compared to 2010, excluding the effects of currency fluctuations. Segment income increased $26.0 million in 2011 largely due to higher sales volume and a change in product mix. Also contributing to the increase in segment income was the fact that in 2010 the Controls segment recognized a loss on sale of business of $3.5 million, net of royalty income, related to the exit from the electric drives business. Partially offsetting the increased sales and reduced costs related to these items in 2011 were increased warranty and field recall costs of $3.1 million. Total operating costs increased $7.0 million, with the largest increase in research and development costs.
Stand-Alone Businesses Segment
Net sales in the Stand-Alone Businesses segment increased 12 percent in 2011 compared to 2010, excluding the effects of currency fluctuations. Segment income increased $22.1 million primarily due to higher sales volume, as well as reductions in fixed production costs of $1.9 million and operating costs of $2.7 million. Also contributing to the increase in segment income was the fact that in 2010 the Stand-Alone Businesses segment recognized restructuring costs of $1.8 million related to the closure of the Lawrence, Kansas facility. Partially offsetting the increased sales and reduced costs related to these items in 2011 were increased warranty and field recall costs of $2.8 million.
Global Services and other expenses, net
Segment costs in Global Services and other expenses, net, relate to internal global service departments. Global services include such costs as consulting for special projects, tax and accounting fees paid to outside third parties, internal audit, certain insurance premiums, and the amortization of intangible assets from certain business combinations. Global services and other expenses increased $12.2 million, or 38 percent excluding the impacts of currency. Contributing to the increase in 2011 were European restructuring costs of $4.7 million, as well as a $3.9 million increase in long-term incentive plan costs compared to 2010. In addition, the Company recognized a $5.0 million loss on foreign currency transactions in 2011 compared to a gain of $1.3 million in 2010. The negative impact of these items was partially offset by the fact that in 2010 the Company recognized costs of $1.5 million related to a pension settlement with a former executive and costs of $3.5 million related to a stock tender offer initiated by Danfoss Acquisition, Inc., which expired without the minimum tender conditions being satisfied.
Income Taxes
The Company recognized tax expense of $79.4 million on pre-tax income of $339.2 million resulting in an effective tax rate of 23.4 percent.
In 2011 the Company reversed $22.9 million of valuation allowance related to net deferred tax assets in Denmark. Future taxable income projections support the realization of the Denmark net deferred tax assets. The Company's worldwide earnings mix also impacted 2011 income tax expense.
Market Risk
The Company is naturally exposed to various market risks, including changes in foreign currency exchange rates and interest rates.
Foreign Currency Changes
The Company has operations and sells its products in many different countries of the world and therefore, conducts its business in various currencies. The Company's financial statements, which are presented in U.S. dollars, can be impacted by foreign exchange fluctuations through both translation risk and transaction risk.
Translation risk is the risk that the financial statements of the Company, for a particular period or as of a certain date, may be affected by changes in the exchange rates that are used to translate the financial statements of the Company's operations from foreign currencies into U.S. dollars. Transaction risk is the risk from the Company receiving its sale proceeds or holding its assets in a currency different from that in which it pays its expenses and holds its liabilities.
In previous years, the Company had been well balanced between its U.S. and European operations because the Company generated its sales in the same region in which it incurred its expenses, or shipped products between geographic regions on a balanced basis. However, in recent years the balance has shifted and the amount of sales made in U.S. dollars has increased, whereas the production costs are in a currency other than the U.S. dollar, increasing the Company's exposure to transaction risk.
In
2012
the Company sold a total of $190.2 million of product into the U.S. that had been produced in European-based currencies compared to sales into Europe of $51.9 million of product produced in U.S. dollars. In
2012
the results were unfavorable, as the dollar weakened slightly in comparison to other currencies. The Company produces and sells its product in several regions of the world, however the U.S. and European transactions comprise the majority of the imbalance between regions.
The Company enters into forward contracts to minimize the impact of currency fluctuations on cash flows related to forecasted sales denominated in currencies other than the functional currency of the selling location. The forecasted sales represent sales to both external and internal parties. Any effects of the forward contracts related to sales to internal parties are eliminated in the consolidation process until the related inventory has been sold to an external party. The forward contracts qualify for hedge accounting and therefore are subject to effectiveness testing at the inception of the contract and throughout the life of the contract.
In
2012
, as a result of hedge accounting for the forward contracts, the Company recognized a decrease to net sales of $3.4 million and a decrease to other expense of $0.2 million. The fair value of forward contracts included on the balance sheet at
December 31, 2012
was a net asset of $1.4 million.
The Company is also impacted by translation risk in terms of comparing results from period to period. Fluctuations of currencies against the U.S. dollar can be substantial and therefore, significantly impact comparisons with prior periods. Translation affects the comparability of both the income statement and the balance sheet. As shown in the table below, the translation impact on net sales was significant in
2012
as the euro weakened against the U.S. dollar for much of the first half of the year while it strengthened during the second half of the year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Sales Growth Over Prior Year
|
|
|
2012
|
|
2011
|
|
2010
|
|
As Reported
|
(6.9
|
)%
|
|
25.4
|
%
|
|
41.6
|
%
|
|
Without Currency Translation Impact
|
(3.9
|
)
|
|
21.4
|
|
|
41.9
|
|
The change in the exchange rate affects the comparability of the balance sheet between
2012
and
2011
as the balance sheet accounts are translated at the exchange rate as of December 31. The U.S. dollar weakened 2.2 percent against the euro and 1.8 percent against the Danish kroner from
December 31, 2011
to
December 31, 2012
. The weakening of the dollar has resulted in approximately 32 percent of the Company's total balance sheet being stated approximately 2.0 percent higher than the prior year.
Interest Rate Changes
The following table summarizes the maturity of the Company's fixed-rate debt obligations (amounts in millions):
|
|
|
|
|
|
|
|
|
Fixed Rate Debt
|
|
2013
|
$
|
0.5
|
|
|
2014
|
0.1
|
|
|
2015
|
178.3
|
|
|
2016
|
—
|
|
|
2017
|
—
|
|
|
2018 and thereafter
|
—
|
|
|
Total
|
$
|
178.9
|
|
Liquidity and Capital Resources
The Company's principal sources of liquidity have been cash flow from operations and from its credit facilities. The Company historically has accessed diverse funding sources, including short-term and long-term unsecured bank lines of credit in the Americas, Europe, and Asia.
The Company has a Credit Agreement (Danfoss Agreement) with Danfoss A/S that is unsecured and includes a term loan of approximately $178 million ($140 million and 29 million euro) that will mature in September 2015. In September 2012, upon the request of the Company, the term loan amount was reduced by approximately $20 million (16 million euro). A prepayment penalty of $0.8 million was incurred as a result of the term loan reduction. The Credit Agreement also had a revolving credit facility that permitted borrowings of approximately $100 million ($75 million and 20 million euro) at December 31, 2011. At the Company's request the revolving credit facility was canceled in July 2012. The Company did not expect to borrow against the revolving facility due to its strong cash position and therefore canceled the facility to reduce expense related to commitment fees. The Danfoss Agreement contains no financial covenants but it does contain a number of affirmative and negative covenants that, among other things, require the Company to obtain the consent of Danfoss A/S prior to engaging in certain types of transactions.
As a result of strong cash flow and a strong balance sheet, the Company announced in March that its Board of Directors had reinstated a quarterly cash dividend. A cash dividend of $0.35 per share was declared in each quarter during 2012. The Company had suspended the payment of dividends in March 2009 in response to the recession. The Company expects to continue to generate strong cash flow and therefore plans to continue paying dividends on a quarterly basis going forward.
As the Company has significant international operations, a portion of the cash on the balance sheet is held in foreign subsidiaries. The repatriation of cash balances from certain foreign subsidiaries could have adverse tax consequences or be subject to capital controls, however, those balances are generally available without legal restrictions to fund local ordinary business operations. With few exceptions, the Company intends to reinvest these earnings permanently and, therefore, U.S. income taxes have not been provided for undistributed earnings of foreign subsidiaries. At
December 31, 2012
$163.6 million, or 37 percent, of the cash, cash equivalents and cash deposited with related persons is on the balance sheet of subsidiaries for which U.S. income taxes have not been provided for the undistributed earnings.
The Company expects to have sufficient sources of liquidity to meet its future funding needs for the foreseeable future.
Cash Flows from Operations
Cash provided by operating activities was
$335.3 million
in
2012
compared to
$374.2 million
in
2011
. Contributing to the decrease was a $47.7 million reduction in net income in
2012
compared to
2011
, as well as $14.6 million reduction in cash provided by the change in net deferred income tax assets. Also contributing to the decrease was a $9.9 million reduction in cash provided by changes in accrued liabilities, while changes in other current assets used $0.3 million in cash in
2012
while providing cash of $10.2 million in
2011
. The reduced cash flow related to these items was partially offset by changes in net pension and postretirement benefits, which provided cash of $8.3 million in
2012
while using $6.3 million in cash in
2011
. In addition, changes in net working capital, consisting of accounts receivable, inventories, and accounts payable, provided cash of $27.5 million in
2012
while using $19.4 million in
2011
. The positive trend in net working capital was driven by inventory reduction efforts in
2012
.
Total cash of the Company, excluding cash deposited with related parties, increased
$9.7 million
from
December 31, 2011
to
December 31, 2012
. At
December 31, 2012
cash balances in China totaled $39.1 million, an increase of $11.9 million from
December 31, 2011
. The Company's Chinese entities did not have cash deposited with related parties at
December 31, 2012
or
December 31, 2011
. Due to the nature of the governmental and other regulatory controls, it is difficult to transfer cash out of China for reasons other than payment for goods shipped into the country. As the Company continues to consider expanding its manufacturing capabilities in low-cost regions, it will make every effort to utilize the cash balances in those regions to fund future expansions. Total cash of the Company, including cash deposited with related parties, increased $190 million from
December 31, 2011
to
December 31, 2012
due to strong cash flows during the year.
Cash Used in Investing Activities
Cash used in investing activities totaled
$228.7 million
in
2012
compared to
$228.0 million
in
2011
. The Company invested an additional
$180.6 million
of excess cash with related persons during the year. The majority of cash deposited with related persons relates to excess cash loaned to Danfoss A/S, which may be offset against the term loan outstanding under the Danfoss Agreement if Danfoss A/S were not able to repay the cash. The Company had five deposits of cash with Danfoss A/S, totaling
$336.1 million
and
$168.5 million
at
December 31, 2012
and
2011
, respectively. Capital expenditures during the period were
$48.6 million
compared to
$51.8 million
in
2011
.
Cash Used in Financing Activities
In March
2012
the Company announced that its Board of Directors had reinstated a quarterly cash dividend, which had been suspended since March 2009. The Company paid cash dividends of
$50.9 million
in
2012
. Net repayment of borrowings used $21.9 million of cash during
2012
compared to $82.6 million in
2011
. The Company also paid $0.8 million in debt extinguishment costs during
2012
.
The Company makes varying distributions to its noncontrolling interest partners from its various joint venture activities depending on the amount of undistributed earnings of the business and the needs of the partners. Distributions totaled
$24.4 million
in
2012
compared to
$17.1 million
in
2011
. In 2010 the Company received $13.2 million net cash from Danfoss A/S in connection with the tax sharing agreement in Denmark which was repaid to Danfoss in 2011.
Contractual Cash Obligations
The majority of the Company's contractual obligations to make cash payments to third parties are for financing obligations. These include future lease payments under both operating and capital leases. The following table discloses the Company's future commitments under contractual obligations as of
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Cash Obligations(1)
|
Total
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018 and thereafter
|
|
Long-term debt
|
$
|
178.9
|
|
|
$
|
0.5
|
|
|
$
|
0.1
|
|
|
$
|
178.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest on long-term debt
|
35.4
|
|
|
13.2
|
|
|
13.2
|
|
|
9.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Capital leases
|
0.7
|
|
|
0.6
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Operating leases
|
89.2
|
|
|
17.9
|
|
|
15.3
|
|
|
12.4
|
|
|
7.5
|
|
|
6.8
|
|
|
29.3
|
|
|
Rental and service agreements with related person Danfoss A/S
|
42.8
|
|
|
8.7
|
|
|
8.5
|
|
|
8.5
|
|
|
8.4
|
|
|
8.4
|
|
|
0.3
|
|
|
Service Agreements
|
$
|
13.2
|
|
|
$
|
6.2
|
|
|
$
|
3.8
|
|
|
$
|
2.7
|
|
|
$
|
0.3
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
Total contractual cash obligations
|
$
|
360.2
|
|
|
$
|
47.1
|
|
|
$
|
41.0
|
|
|
$
|
210.9
|
|
|
$
|
16.2
|
|
|
$
|
15.4
|
|
|
$
|
29.6
|
|
The following assumptions are used in the calculation of the contractual cash obligations:
|
|
|
|
(1)
|
Commitments denominated in a currency other than the U.S. dollar are translated at the
December 31, 2012
exchange rate.
|
In addition to the above contractual obligations, the Company has certain other funding needs that are non-contractual by nature, including funding of certain pension plans and payment of dividends. In
2013
the Company anticipates contributing
$14.9
million to its pension and health benefit plans. In 2012 the Company declared a dividend of $17.0 million to be paid in 2013.
Other Matters
Critical Accounting Estimates
The SEC's guidance surrounding the disclosure of critical accounting estimates requires disclosures about estimates a company makes in applying its accounting policies. However, such discussion is limited to "critical accounting estimates," or those that management believes meet two criteria: 1) the accounting estimate must require a company to make assumptions about matters that are highly uncertain at the time the accounting estimate is made, and 2) different estimates that the company reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the presentation of the company's financial condition, changes in financial condition or results of operations.
Besides the estimates that meet the two criteria for a "critical estimate" above, the Company makes many other accounting estimates in preparing its financial statements and related disclosures. All estimates, whether or not deemed critical, can affect the reported amounts of assets, liabilities, revenues, and expenses as well as disclosures of contingent assets and liabilities. Estimates are based on experience and information available prior to the issuance of the financial statements. Materially different results can occur as circumstances change and additional information becomes known, including estimates not deemed "critical" under the SEC's guidance.
The discussion below should be read in conjunction with disclosures elsewhere in this discussion and in the Notes to the Consolidated Financial Statements related to estimates, uncertainties, contingencies, and new accounting standards. Significant
accounting policies are discussed in Note 1 to the Consolidated Financial Statements beginning on page
F-6. T
he development and selection of accounting estimates, including those deemed "critical," and the associated disclosures in this discussion, have been discussed by management with the audit committee of the Board of Directors.
Inventory Valuation
As a manufacturer in the capital goods industry, inventory is a substantial portion of the assets of the Company, amounting to over 12 percent of total assets at
December 31, 2012
. The Company must periodically evaluate the carrying value of its inventory to assess the proper valuation. This includes recording period adjustments as needed to 1) record expenses due to excess capacity, 2) provide for excess and obsolete inventory, and 3) ensure that inventory is valued at the lower of cost or market. On a quarterly basis, management within each segment performs an analysis of the underlying inventory to identify the need for appropriate write-downs to cover each of these items. In doing so, management applies consistent practices based upon historical data such as actual loss experience, past and projected usage, actual margins generated from trade sales of its products, and finally its best judgment to estimate the appropriate carrying value of the inventory.
Warranty Provisions
The Company warrants its various products over differing periods depending upon the type of product and application. Consequently, the Company records liabilities for the estimated warranty costs that may be incurred under its basic warranty based on past trends of actual warranty claims compared to the actual sales levels to which those claims apply. These liabilities are accrued at the time the sales of the products are recorded. Factors that affect the Company's warranty liability include the number of units in the field currently under warranty, historical and anticipated rates of warranty claims on those units and the cost per claim to satisfy the Company's warranty obligation. The anticipated rate of warranty claims is the primary factor impacting the Company's estimated warranty obligation. Each quarter, the Company reevaluates its estimates to assess the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
In addition to its normal warranty liability, the Company, from time to time in the normal course of business, incurs costs to repair or replace defective products with a specific customer or group of customers. The Company refers to these as "field recalls" and in these instances, the Company will record a specific provision for the expected costs it will incur to repair or replace these products utilizing information from customers and internal information regarding the specific cost of materials and labor. Typically, field recalls are infrequent in occurrence, however, when they occur, field recalls can be for a large number of units and quite costly to rectify. Because of the sporadic and infrequent nature of field recalls, and due to the range of costs associated with field recalls, the Company cannot accurately estimate these costs at the time the products are sold. Therefore, these costs are recorded at the time information becomes known to the Company. As the field recalls are settled, the Company relieves the specific liability related to that field recall. These specific field recall liabilities are reviewed on a quarterly basis.
Goodwill and Long-Lived Asset Recovery
A significant portion of the Company's total assets consist of property, plant and equipment (PP&E) and definite life intangibles, as well as goodwill. Changes in technology or in the Company's intended use of these assets, as well as changes in the broad global economy in which the Company operates, may cause the estimated period of use or the carrying value of these assets to change.
This requires the Company to periodically assess the estimated useful lives of its assets in order to match, through depreciation and amortization, the cost of those assets with the benefits derived over the period of usefulness. The useful lives of these assets can be shortened through greater use due to volume increases, a change in strategy regarding production of a certain product, rapidly changing technology such as the use of electronics and computer-operated controls, and through inadequate maintenance. Despite management's best efforts to determine the appropriate useful lives of its equipment, certain situations may arise that lead to an asset or group of assets becoming impaired, meaning their economic value becomes less than the value at which the Company is carrying the asset on its books. Examples of these situations are product rationalization efforts or restructuring of manufacturing facilities. When these situations arise, the Company tests the assets for impairment and will write down the asset in the period when the impairment becomes known. Goodwill is tested for impairment at least annually. Goodwill is also tested if an event occurs or conditions change that would more likely than not reduce the fair value of a reporting unit below its carrying value (triggering event).
The Company completes its annual goodwill impairment valuation on
December 31
each year. The Company identified six reporting units that are either operating segments or one level below operating segments. In performing the impairment valuation, the Company considers declines in market values, and reconciles the sum of the estimated fair values of its reporting units to the Company's market value (based on its stock price), plus a reasonable control premium, which is estimated as that amount which would be received to sell the Company as a whole in an orderly transaction between market participants.
When testing for goodwill impairment, the Company performs a first step of the goodwill impairment test to identify a potential impairment. In doing so, the Company compares the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, goodwill may be impaired and a second step is performed to measure the amount of any impairment loss. The Company determined that the fair value of goodwill for all reporting units was greater than their carrying values at
December 31, 2012
.
Estimates about fair value used in the first step of the goodwill impairment tests are calculated using an income approach based on the present value of future cash flows of each reporting unit. The income approach is supported by other valuation approaches, such as similar transaction and guideline analyses. Under the income approach, the Company determines fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions among others. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairments in future periods. At
December 31, 2012
the Company had $35.3 million of goodwill related to its hydrostatics and electronic components reporting units, which was tested for impairment and determined to not be impaired.
The Company tests its long-lived assets for recoverability at any time that an event or change in circumstances occurs that indicates the carrying amount of the long-lived assets may not be recoverable. Events or circumstances that may trigger a recoverability test include a significant change in the market price of similar long-lived assets; a change in the use of the long-lived asset due to product rationalization efforts or restructuring of manufacturing facilities; a significant adverse change in legal factors, business climate, industry or economic conditions ; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; historical and projected operating losses associated with the use of a long-lived asset; or an expectation that more likely than not, a long-lived asset will be disposed of significantly before the end of its previously estimated useful life. The Company reviews these factors quarterly to determine whether a triggering event has occurred. No triggering events were noted in
2012
.
Valuation of Trade Receivables
The Company records trade receivables due from its customers at the time a sale is recorded in accordance with its revenue recognition policy. The future collectability of these amounts can be impacted by the Company's collection efforts, the financial stability of its customers, and the general economic climate in which it operates. The Company applies a consistent practice of establishing an allowance for accounts that it believes may become uncollectible through reviewing the historical aging of its receivables, looking at the historical losses incurred as a percentage of net sales, and by monitoring the financial strength of its customers regarding specific outstanding accounts receivable balances. In addition, local customary practices have to be taken into account due to varying payment terms being applied in various parts of the world where the Company conducts its business. If the Company becomes aware of a customer's inability to meet its financial obligations (e.g., where it has filed for bankruptcy), the Company establishes a specific allowance for the potential bad debt to reduce the net recognized receivable to the amount it reasonably believes will be collected. The valuation of trade receivables is reviewed quarterly.
Workers Compensation
The Company has an insurance policy to cover workers compensation claims in the U.S., in which the Company pays the first $0.25 million per claim, per incident. The Company establishes its workers compensation reserve based on historic growth factors of claims and an estimate of incurred, but not reported claims. This analysis is performed on a quarterly basis.
U.S. Health Care Costs
The Company self insures its U.S. health care costs for eligible employees and their qualified dependents. The Company purchases individual stop loss coverage to limit the exposure stemming from high value claims from any single member in a given year. The Company's individual stop loss coverage limit, which excludes vision, dental, and prescription drug costs, is $0.3 million. The Company establishes reserves for its health care cost based on historic claims data and an estimate of incurred, but not reported claims. This analysis is performed on a quarterly basis.
Pensions
The Company has defined benefit pension plans for a portion of its employees. These plans are funded with plan assets. The measurement of the Company's pension obligations and costs is dependent on a variety of assumptions determined by management and used by the Company's actuaries. These assumptions include estimates of the present value of projected future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and other experience. These assumptions may have an effect on the amount and timing of future contributions. The plan trustees conduct independent valuations of the fair value of pension plan assets.
The assumptions used in developing the required estimates include the following key factors: discount rates, inflation, salary growth, expected return on plan assets, retirements rates, and mortality rates.
The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. The Company sets its rate to reflect the yield of a portfolio of high-quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits.
The inflation assumption is based on an evaluation of external market indicators. The salary growth assumptions reflect the Company's past actual experience, the near-term outlook and assumed inflation. The expected return on plan assets reflects asset allocations, long-term investment strategy, and the views of investment managers and other large pension plan sponsors. Retirement and mortality rates are based primarily on actual plan experience and standard industry actuarial tables, respectively. The effects of actual results differing from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense in such future periods.
The Company's funding policy for the U.S. plans is to contribute amounts sufficient to meet the minimum funding requirement of the Employee Retirement Income Security Act of 1974, plus any additional amounts the Company may deem to be appropriate. In
2013
the Company anticipates contributing $8.9 million to its U.S. plans, $1.9 million to its German plans, and $0.9 million to its U.K. plans.
Postretirement Benefits Other Than Pensions
The Company provides postretirement health care benefits for certain employee groups in the U.S. This plan is contributory and contains certain other cost-sharing features such as deductibles and coinsurance. The Company does not pre-fund this plan and has the right to modify or terminate this plan in the future.
The postretirement liability, which is determined on an actuarial basis, is recognized in the Company's Consolidated Balance Sheets and the postretirement expense is recognized in the Consolidated Statements of Operations. The Company must determine the actuarial assumption for the discount rate used to reflect the time value of money in the calculation of the accumulated postretirement benefit obligation for the end of the current year and to determine the postretirement cost for the subsequent year. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. The Company sets its rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits.
In addition, the Company must determine the actuarial assumption for the health care cost trend rate used in the calculation of the accumulated postretirement benefit obligation for the end of the current year and to determine the net periodic postretirement benefit cost for the subsequent year. As of
December 31, 2012
a 1 percentage point change in the assumed health care cost trend rate would impact the expense recognized in
2012
by less than $0.1 million and would affect the postretirement benefit obligation by $1.0 million. In
2013
the Company anticipates contributing $3.2 million to this plan.
Deferred Income Taxes and Valuation Allowances
Tax regulations may require items to be included in the tax return at different times than the items are reflected in the financial statements. Some of the differences are permanent, such as expenses that are not deductible on a tax return, and some of the differences are temporary such as the rate of depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally are attributable to items that can be used as a tax deduction or credit in a tax return in future years but the amount has already been included as an expense in the financial statements. Deferred tax liabilities generally represent deductions that have been taken on the tax return but have not been recognized as expense in the financial statements. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Management believes it is more likely than not that the Company will realize the benefits of the net deferred tax assets reported on the Consolidated Balance Sheets.
Recently Adopted Accounting Principles —
In May 2011 the Financial Accounting Standards Board (FASB) issued new accounting guidance that amends some fair value measurement principles and disclosure requirements. The new guidance states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The Company adopted this guidance as of January 1, 2012 with no impact on the consolidated financial statements.
In June 2011 the FASB amended requirements for the presentation of other comprehensive income (OCI), requiring all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this guidance in the first quarter of 2012. Upon adoption, certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications have no impact on previously reported financial position, results of operations or cash flows.
In September 2011 the FASB issued guidance to amend and simplify the rules related to testing goodwill for impairment. The revised guidance allows an entity to make an initial qualitative evaluation, based on the entity's events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is more likely than not greater than its carrying amount, the two-
step goodwill impairment test is not required. Annual impairment tests are performed by the Company in the fourth quarter of each year. The adoption of this updated authoritative guidance did not have an impact on the consolidated financial statements.
Outlook
Due to uncertainty in the global economy, Company management expects a moderate change in sales during
2013
when compared to
2012
, with sales increasing as much as 7 percent or decreasing as much as 3 percent. Capital expenditures during
2013
are expected to be $65.0 to $75.0 million.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Certain market risks are discussed on pages
23 through 24
of this report, and the other disclosure requirements are considered either not applicable or not material.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements, Report of Independent Registered Public Accounting Firm, and Report of Management are presented on pages
F-1
through
F-34
of this report.
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934 (Exchange Act), the Company's management carried out an evaluation, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of
December 31, 2012
. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of
December 31, 2012
, the Company's disclosure controls and procedures were effective to ensure that (a) information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (b) such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
The Company's management, under the supervision of the Company's Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining a system of internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). This system is augmented by written policies and procedures, careful selection and training of financial management personnel, a continuing management commitment to the integrity of the system, and examinations by an internal audit function that coordinates its activities with the Company's Independent Registered Public Accounting Firm. Because of its inherent limitations, however, even the best internal control over financial reporting may not prevent or detect misstatements. It is also important to note that controls that are effective at a particular point in time may become ineffective at a later time due to changed conditions that may require new or modified controls or due to a deterioration in compliance with the controls. There were no changes in the Company's internal control over financial reporting during the fourth quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
As required by Rules 13a-15(c) and 15d-15(c) of the Exchange Act, the Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company's internal control over financial reporting, as of
December 31, 2012
, based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, the Company's management concluded that the Company's internal control over financial reporting was effective as of
December 31, 2012
.
KPMG LLP, an independent registered public accounting firm has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and, as a part of the audit, has issued its attestation report, included in Item 8, on the effectiveness of the Company's internal control over financial reporting.
Notes to Consolidated Financial Statements
December 31, 2012
,
2011
, and
2010
(Dollars in thousands, except per share data)
(1) Summary of Significant Accounting Policies:
Basis of Presentation and Principles of Consolidation—
Sauer-Danfoss Inc., a U.S. Delaware corporation, and subsidiaries (the Company) is a worldwide leader in the design, manufacture, and sale of engineered hydraulic and electronic systems and components that generate, transmit and control power in mobile equipment. The Company's products are used by original equipment manufacturers of mobile equipment, including construction, road building, agricultural, turf care, material handling, and specialty vehicle equipment. The Company's products are sold throughout the world either directly or through distributors.
The consolidated financial statements represent the consolidation of all companies in which the Company has a controlling interest and are stated in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP). All significant intercompany balances, transactions, and profits have been eliminated in the consolidated financial statements.
Reclassification—
Certain amounts in the prior year financial statements have been reclassified to conform to current year presentation.
Use of Estimates—
In preparing the consolidated financial statements in conformity with U.S. GAAP, management must make decisions that impact the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures, including disclosures of contingent assets and liabilities. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Estimates are used in determining, among other items, inventory valuation, warranty reserves, allowance for doubtful accounts, pension and postretirement accruals, employee incentive accruals, valuation allowances on deferred tax assets, useful lives for intangible assets, and future cash flows associated with impairment testing for goodwill and other long-lived assets. These estimates and assumptions are based on management's best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances, including the current economic environment, adjusting such estimates and assumptions when facts and circumstances dictate. A number of these factors include, among others, the economic conditions, restricted credit markets, foreign currency, and higher commodity costs, all of which impact such estimates and assumptions. As future events and their effects cannot be determined with precision, actual amounts could differ significantly from those estimated at the time the consolidated financial statements are prepared. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
Revenue Recognition—
Net sales are recorded when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably assured. Estimates for future warranty expense are recorded when the related revenue is recognized. Timing of revenue recognition is consistent with when the risks and rewards of ownership and title to the product have transferred to the customer.
Cash and Cash Equivalents—
Cash equivalents are considered by the Company to be all highly liquid instruments purchased with original maturities of three months or less. At
December 31, 2012
cash and cash equivalents balances in China totaled approximately
$39,100
. Due to the nature of the governmental and other regulatory controls it is difficult to transfer cash out of this country for reasons other than payment for goods shipped into the country.
Trade Receivables—
The Company records trade receivables due from its customers at the time sales are recorded in accordance with its revenue recognition policy. The future collectibility of these amounts can be impacted by the Company's collection efforts, the financial stability of its customers, and the general economic climate in which the Company and its customers operate. The Company applies a consistent practice of establishing an allowance for accounts that it believes may become uncollectible through reviewing the historical write-offs of accounts, aging of its receivables, and by monitoring the economic environment and financial strength of its customers. If the Company becomes aware of a customer's inability to meet its financial obligations (e.g., where it has filed for
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
bankruptcy), the Company establishes a specific allowance for the potential bad debt to reduce the net recognized receivable to the amount it reasonably believes will be collected. The analysis of the valuation of trade receivables is performed quarterly.
Inventories—
Inventories are valued at the lower of cost or market, using various cost methods, and include the cost of material, labor, and factory overhead. The last-in, first-out (LIFO) method was adopted in 1987 and is used to value inventories at the U.S. locations which existed at that time. Inventories at all of the non-U.S. locations and the U.S. locations obtained through acquisition after 1987, which produce products different than those produced at U.S. locations existing at 1987, are valued under the first-in, first-out (FIFO) inventory valuation method. The percentage of year-end inventory valued under the LIFO and FIFO cost methods was
14%
and
86%
, respectively, for
2012
, and
15%
and
85%
, respectively, for
2011
.
Property, Plant and Equipment and Depreciation—
Property, plant and equipment are stated at historical cost, net of accumulated depreciation. Depreciation is generally computed using the straight-line method for building equipment and buildings over 10 to 37 years and for machinery and equipment over 3 to 8 years. Additions and improvements that substantially extend the useful life of a particular asset are capitalized. Repair and maintenance costs (
$32,011
,
$39,163
, and
$26,839
in
2012
,
2011
, and
2010
, respectively) are charged to expense. When property, plant and equipment are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in the consolidated statements of operations.
Goodwill and Other Intangible Assets—
Goodwill represents the excess of the purchase price over the estimated fair values of net assets acquired in the purchase of businesses. Goodwill is not amortized, but tested for impairment at least annually or when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The Company did not recognize any impairment charges for goodwill during the periods presented in the consolidated statements of operations.
Intangible assets consist primarily of trade names, technology, and customer relationships and are recorded at fair value at the time of acquisition. Intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from three to thirty-five years.
Impairment of Long-Lived Assets and Assets to be Disposed Of—
The Company periodically assesses whether events or circumstances have occurred that may indicate the carrying value of its long-lived tangible and intangible assets may not be recoverable. The carrying value of long-lived tangible and intangible assets to be held and used is evaluated for recoverability based on the expected future undiscounted operating cash flows. When the evaluation indicates the carrying value of an asset or group of assets is impaired, the Company determines the fair value of assets, using discounted cash flows or determining the liquidation value of the long-lived assets, and recognizes an impairment loss to the extent that the carrying value of the assets exceeds the fair value of the assets. The Company did not recognize any impairment charges for long-lived assets during the periods presented in the consolidated statements of operations.
Product Warranty—
The Company warrants its various products over differing periods, generally up to two years or 2000 hours, depending upon the type of product and application. Consequently, the Company records warranty liabilities for the estimated costs that may be incurred under its basic warranty based on past trends of actual warranty claims compared to the actual sales levels to which those claims apply. These liabilities are accrued at the time the sales of the products are recorded. Factors that affect the Company's warranty liability include the number of units in the field currently under warranty, historical and anticipated rates of warranty claims on those units and the cost per claim to satisfy the Company's warranty obligation. The anticipated rate of warranty claims is the primary factor impacting the Company's estimated warranty obligation.
In addition to its normal warranty liability, the Company, from time to time in the normal course of business, incurs costs to repair or replace defective products with a specific customer or group of customers. The Company refers to these actions as field recalls and in these instances, the Company records a specific provision for the expected costs it will incur to repair or replace these products utilizing information from customers and internal information regarding the specific cost of materials and labor. Due to the sporadic and infrequent nature of field recalls, and the potential for a range of costs associated with field recalls, the Company cannot accurately estimate these costs at the time the products are sold. Therefore, these costs are recorded at the time
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
information becomes known to the Company. As the field recalls are carried out, the Company relieves the specific liability related to that field recall. These specific field recall liabilities are reviewed on a quarterly basis.
The following table represents the change in the Company's accrued warranty and field recall liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2012
|
|
2011
|
|
2010
|
|
Balance, beginning of period
|
$
|
29,863
|
|
|
$
|
28,183
|
|
|
$
|
28,820
|
|
|
Payments
|
(14,102
|
)
|
|
(17,884
|
)
|
|
(11,877
|
)
|
|
Provisions for warranties and field recalls
|
10,249
|
|
|
19,786
|
|
|
12,435
|
|
|
Currency impact
|
41
|
|
|
(222
|
)
|
|
(1,195
|
)
|
|
Balance, end of period
|
$
|
26,051
|
|
|
$
|
29,863
|
|
|
$
|
28,183
|
|
Income Taxes—
The provision for income taxes has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of the Company's assets and liabilities, net operating loss carryforwards, and tax credit carryforwards and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when the Company is unable to conclude that realization of the deferred tax assets is more likely than not.
Fair Value of Financial Instruments—
The carrying values of cash and cash equivalents, cash deposited with related persons, accounts and other receivables, and accounts payable approximate fair value because of the short-term nature of these instruments.
The fair value of long-term debt is calculated by discounting scheduled cash flows through maturity using estimated market discount rates. The discount rate is estimated using the rates currently offered for long-term debt of similar remaining maturities and credit characteristics. At
December 31, 2012
and
2011
the Company estimated the fair value of its long-term debt, including amounts due within one year, to be the same as its carrying values of $
178,857
and $
200,457
, respectively. These estimates are subjective in nature and involve uncertainties and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
The fair value of derivative instruments is discussed in Note 7.
Derivatives and Hedging—
It is the Company's policy that derivative transactions are executed only to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. All derivatives are recorded at fair value on the balance sheets as current or long-term other assets or other liabilities depending on whether the maturity date of the derivative contract is within one year from the balance sheet date.
The Company utilizes forward contracts to minimize the impact of currency fluctuations on cash flows related to forecasted sales denominated in currencies other than the functional currency of the selling location. The forward contracts qualify for hedge accounting and therefore are subject to effectiveness testing at the inception of the contract and throughout the life of the contract.
When, and if, a forward contract is determined not to be highly effective as a hedge, or the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, the hedge accounting is discontinued and any past or future changes in the derivative's fair value that will not be effective as an offset to the income effects of the item being hedged are recognized currently in the statements of operations. Any changes in fair values of derivatives not qualifying as hedges would be reported immediately in other income (expense) on the consolidated statements of operations; however, the Company did not have any forward contracts that did not qualify as hedges in
2012
,
2011
, or
2010
.
The Company uses foreign exchange swaps to hedge intercompany financing activities between group companies with different functional currencies. The Company does not designate these foreign exchange swaps as hedging instruments. Accordingly, the
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
gain or loss associated with changes in the fair value of these contracts is immediately recorded in other, net on the consolidated statements of operations.
Employee Stock-Based Compensation—
The fair value method is used to account for employee-stock compensation.
Income Per Share—
Basic net income per common share is based on the weighted average number of common shares outstanding, less unvested restricted stock shares, in each year. Diluted net income per common share assumes that outstanding common shares were increased by shares issuable upon (i) vesting of restricted stock shares, and (ii) granting of shares deferred under the long-term incentive plan. Restricted stock and shares under the long term incentive plan both have an exercise price of
zero
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Sauer-Danfoss Inc.
|
|
Shares
|
|
Net Income Per Share
|
|
Year Ended December 31, 2012:
|
|
|
|
|
|
|
Basic net income
|
$
|
181,759
|
|
|
48,413,138
|
|
|
$
|
3.75
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Restricted stock
|
—
|
|
|
18,946
|
|
|
—
|
|
|
Performance units
|
—
|
|
|
49,861
|
|
|
—
|
|
|
Diluted net income
|
$
|
181,759
|
|
|
48,481,945
|
|
|
$
|
3.75
|
|
|
Year Ended December 31, 2011:
|
|
|
|
|
|
|
Basic net income
|
$
|
229,870
|
|
|
48,402,059
|
|
|
$
|
4.75
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Restricted stock
|
—
|
|
|
10,856
|
|
|
—
|
|
|
Performance units
|
—
|
|
|
65,712
|
|
|
(0.01
|
)
|
|
Diluted net income
|
$
|
229,870
|
|
|
48,478,627
|
|
|
$
|
4.74
|
|
|
Year Ended December 31, 2010:
|
|
|
|
|
|
|
Basic net income
|
$
|
213,399
|
|
|
48,382,860
|
|
|
$
|
4.41
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Restricted stock
|
—
|
|
|
5,892
|
|
|
—
|
|
|
Performance units
|
—
|
|
|
80,767
|
|
|
(0.01
|
)
|
|
Diluted net income
|
$
|
213,399
|
|
|
48,469,519
|
|
|
$
|
4.40
|
|
Translation of Non-U.S. Currencies—
Assets and liabilities of consolidated non-U.S. subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars at exchange rates in effect at the end of each period, while revenues and expenses are translated at average exchange rates prevailing during the period. The resulting translation adjustments are included in accumulated other comprehensive income. Gains or losses on transactions denominated in non-functional currencies and the related tax effects are reflected in the consolidated statements of operations.
Recently Adopted Accounting Principles —
In May 2011 the Financial Accounting Standards Board (FASB) issued new accounting guidance that amends some fair value measurement principles and disclosure requirements. The new guidance states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The Company adopted this guidance as of January 1, 2012 with no impact on the consolidated financial statements.
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
In June 2011 the FASB amended requirements for the presentation of other comprehensive income (OCI), requiring all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this guidance in the first quarter of 2012. Upon adoption, certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications have no impact on previously reported financial position, results of operations or cash flows.
In September 2011 the FASB issued guidance to amend and simplify the rules related to testing goodwill for impairment. The revised guidance allows an entity to make an initial qualitative evaluation, based on the entity's events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is more likely than not greater than its carrying amount, the two-step goodwill impairment test is not required. Annual impairment tests are performed by the Company in the fourth quarter of each year. The adoption of this updated authoritative guidance did not have an impact on the consolidated financial statements.
(2) Sale of Businesses and Termination of Joint Ventures:
In 2009 the Company sold the assets of its steering column business which was located in Kolding, Denmark. In 2010 the Company recognized expense in the Work Function segment of approximately
$1,100
related to future building lease costs because the buyer moved production operations to a different location and the Company was not able to sublease the building. The lease was terminated in 2012.
In December 2008 the Company signed a sales agreement to sell its alternating current (AC) motor business related to the material handling market. The closing of the transaction occurred in 2009 when the transfer of the machinery and inventory covered by the purchase agreement was completed. Losses of approximately
$1,500
and
$4,400
in 2011 and 2010, respectively, are reported in the Controls segment. Cumulative expense related to the sale is approximately
$20,600
. In 2008 and 2009 expense was recognized for employee retention costs and to write down the value of machinery, inventory, and an intangible asset. In 2011 and 2010 the Company recognized additional expense related to a write-down of the carrying value of a building. An additional write-down of inventory was recognized in 2010 as the inventory was held on consignment and the purchaser revised their estimates of future inventory purchases from the Company. As part of the sales agreement, the Company will receive a commission payment in 2010 through 2012 based on the level of AC motor sales made by the purchaser. The Company recognized commission income of approximately
$1,200
,
$1,600
, and
$900
in
2012
,
2011
, and
2010
, respectively, which is included in Other, net on the consolidated statements of operations.
In October 2012 the Company and Daikin Industries Ltd. (Daikin), the noncontrolling interest partner in the joint venture Sauer-Danfoss-Daikin, Ltd. (SDD) agreed that the stock owned by Daikin in the joint venture entity would be redeemed effective January 1, 2013. At that same time, the operations of SDD would be transferred to Daikin-Sauer-Danfoss Manufacturing, Ltd., a separate joint venture that is owned by the Company and Daikin. Effective January 1, 2013 SDD will become a holding company, holding the investment in the sales companies in the Asia-Pacific region, which is fully owned by the Company.
In July 2009 the Company and Topcon Positioning Systems, Inc. (Topcon), the noncontrolling interest partner, agreed to terminate the joint venture they have operated since April 2001 through TSD Integrated Controls, LLC (TSD). The termination was effective September 1, 2009 but is subject to a three-year wind down period as contemplated in the 2001 joint venture agreement. During the wind-down period, the Company and Topcon will each receive distributions of certain assets of TSD and royalties on sales of TSD products. The final collection of accounts receivable and distributions to the joint venture partners will be made in 2013. The effects of this wind-down will not have a material impact on the Company's operations.
(3) Restructuring Charges:
In 2011 the Company announced its plans to restructure the European sales structure to establish a distributor organization to serve smaller customers. Costs related to the reorganization are included in the Global Services segment.
In September 2009 the Company announced its plans to close the Lawrence, Kansas plant, and transfer the majority of the production lines to the Ames, Iowa and Freeport, Illinois locations to reduce costs and increase efficiencies. Costs related to the Lawrence plant closing are included in the Work Function and Stand-Alone Businesses segments. This project was completed in 2010.
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
In June 2009 the Company sold its AC electric motor business related to the material handling market. The losses related to the sale of the business, as discussed in Note 2, of approximately
$1,500
and
$4,400
in
2011
and
2010
, respectively, are not included in the restructuring charges below.
The following table summarizes the restructuring charges incurred, as well as the cumulative charges incurred on these projects.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Work
Function
|
|
Stand-Alone Businesses
|
|
Global Services
|
|
Total
|
|
Charges incurred in 2012
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,132
|
|
|
$
|
1,132
|
|
|
Charges incurred in 2011
|
—
|
|
|
—
|
|
|
4,663
|
|
|
4,663
|
|
|
Charges incurred in 2010
|
4,012
|
|
|
1,805
|
|
|
—
|
|
|
5,817
|
|
|
Cumulative charges incurred
|
5,811
|
|
|
3,705
|
|
|
5,795
|
|
|
15,311
|
|
The restructuring costs incurred are reported in the consolidated statements of operations as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
Selling, General and
Administrative
Expenses
|
|
Loss on
Asset Disposals
|
|
Total
|
|
Charges incurred in 2012
|
$
|
42
|
|
|
$
|
1,090
|
|
|
$
|
—
|
|
|
$
|
1,132
|
|
|
Charges incurred in 2011
|
540
|
|
|
4,123
|
|
|
—
|
|
|
4,663
|
|
|
Charges incurred in 2010
|
3,075
|
|
|
472
|
|
|
2,270
|
|
|
5,817
|
|
|
Cumulative charges incurred
|
7,356
|
|
|
5,685
|
|
|
2,270
|
|
|
15,311
|
|
The following table summarizes the restructuring charges incurred and the activity in accrued liabilities during
2012
,
2011
and
2010
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Termination
Costs
|
|
Building and
Lease
Cancellation
Costs
|
|
Accelerated
Depreciation and
Loss on Asset
Disposals
|
|
Equipment
Moving Costs
|
|
Other
|
|
Total
|
|
Balance as of January 1, 2010
|
$
|
851
|
|
|
$
|
555
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,406
|
|
|
Charges to expense
|
—
|
|
|
—
|
|
|
2,767
|
|
|
812
|
|
|
2,238
|
|
|
5,817
|
|
|
Payments made / other
|
(851
|
)
|
|
(555
|
)
|
|
(2,767
|
)
|
|
(812
|
)
|
|
(2,238
|
)
|
|
(7,223
|
)
|
|
Balance as of December 31, 2010
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Charges to expense
|
4,180
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
483
|
|
|
4,663
|
|
|
Payments made / other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Balance as of December 31, 2011
|
4,180
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
483
|
|
|
4,663
|
|
|
Charges to expense
|
670
|
|
|
—
|
|
|
280
|
|
|
—
|
|
|
182
|
|
|
1,132
|
|
|
Payments made / other
|
$
|
(943
|
)
|
|
$
|
—
|
|
|
$
|
(280
|
)
|
|
$
|
—
|
|
|
$
|
(535
|
)
|
|
$
|
(1,758
|
)
|
|
Balance as of December 31, 2012 (1)
|
$
|
3,907
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
130
|
|
|
$
|
4,037
|
|
(1) The
$3,907
of accrued employee termination costs will be paid through 2014. The
$130
of other accrued costs relating to professional fees will be paid in 2013.
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
(4) Inventories:
The composition of inventories is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
Raw materials
|
$
|
79,169
|
|
|
$
|
101,069
|
|
|
Work in progress
|
43,275
|
|
|
50,455
|
|
|
Finished goods and parts
|
78,905
|
|
|
87,846
|
|
|
LIFO allowance
|
(23,123
|
)
|
|
(21,660
|
)
|
|
Total
|
$
|
178,226
|
|
|
$
|
217,710
|
|
(5) Property, Plant and Equipment and Property Held for Sale:
The cost and related accumulated depreciation of property, plant and equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
Cost—
|
|
|
|
|
|
|
Land and improvements
|
$
|
16,427
|
|
|
$
|
14,417
|
|
|
Buildings and improvements
|
146,699
|
|
|
138,188
|
|
|
Machinery and equipment
|
970,343
|
|
|
953,744
|
|
|
Construction in progress
|
39,453
|
|
|
37,194
|
|
|
Plant and equipment under capital leases
|
1,061
|
|
|
3,750
|
|
|
Total costs
|
1,173,983
|
|
|
1,147,293
|
|
|
Less—accumulated depreciation
|
(831,737
|
)
|
|
(779,449
|
)
|
|
Net property, plant and equipment
|
$
|
342,246
|
|
|
$
|
367,844
|
|
Depreciation expense for
2012
,
2011
, and
2010
was
$78,881
,
$86,386
, and
$95,504
, respectively.
In 2010 the Company decided the land and building at the Ganloese, Denmark location would be sold. This location was exited in the fourth quarter of 2010. The Company intends to sell the building, which has a carrying value of approximately
$800
. The building is classified in other current assets in the Global Services segment.
In 2009 the Company decided that the land and building at the Lawrence, Kansas location would be sold. This location was exited in the second quarter of 2010 as discussed in Note 3. The building, which was written down by approximately
$2,000
in 2010, was sold in 2011 for a gain of approximately
$600
.
The Company exercised the buy-out option in the capital lease for the building in Odense, Denmark in 2009. This location was previously used for the design and manufacture of electric drives until the business was exited in the second quarter of 2009 as discussed in Note 2. The Company intends to sell the building, which was written down by approximately
$2,000
in 2010, and further written down by approximately
$1,200
in 2011 to a carrying value of approximately
$5,700
. The building is classified in other current assets in the Controls segment.
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
(6) Goodwill and Intangible Assets:
Goodwill is required to be tested for impairment annually and if an event or conditions change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company completes its annual impairment test as of December 31 of each year.
The Company has identified
six
reporting units that are either operating segments or one level below operating segments. As an overall reasonableness test in its step one analysis the Company reconciled the sum of the estimated fair values of its reporting units to the Company's market value (based on its stock price at the measurement date), plus a reasonable control premium, which is estimated as that amount which would be received to sell a majority share of the Company in an orderly transaction between market participants versus the market value of the minority shares as evidenced by the stock price.
When testing for goodwill impairment, the Company performs a first step of the goodwill impairment test to identify a potential impairment. In doing so, the Company compares the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, goodwill may be impaired and a second step of the goodwill impairment test is performed to measure the amount of any impairment loss. Estimates about fair value used in the first step of the goodwill impairment tests have been calculated using an average of the income approach based on the present value of future cash flows of each reporting unit and the guideline public company model. Under the income approach, the Company determined fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates and operating margins, discount rates and future market conditions among others. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairments in future periods.
In the second step of the goodwill impairment test, the Company compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner that the amount of goodwill recognized in a business combination is determined. The Company allocates the fair value of a reporting unit to all of the assets and liabilities of that unit, including intangible assets, as if the reporting unit had been acquired in a business combination. Any excess of the value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.
At
December 31, 2012
the Company has
$35,255
of goodwill related to its hydrostatics and electronic components reporting units which was tested for impairment, as required annually. The fair value of the hydrostatics and electronic components reporting units substantially exceeded the carrying value, resulting in no impairment.
The changes in the carrying amounts of goodwill for the years ended
December 31, 2011
and
2012
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydrostatics
Segment
|
|
Controls
Segment
|
|
Total
|
|
Balance as of January 1, 2011
|
$
|
26,466
|
|
|
$
|
8,589
|
|
|
$
|
35,055
|
|
|
Translation Adjustment
|
(432
|
)
|
|
(149
|
)
|
|
(581
|
)
|
|
Balance as of December 31, 2011
|
26,034
|
|
|
8,440
|
|
|
34,474
|
|
|
Translation Adjustment
|
576
|
|
|
205
|
|
|
781
|
|
|
Balance as of December 31, 2012
|
$
|
26,610
|
|
|
$
|
8,645
|
|
|
$
|
35,255
|
|
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
The following table summarizes the components of the other intangible asset balances at
December 31, 2012
and
2011
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Name
|
|
Technology
|
|
Customer
Relationships
|
|
Other
|
|
Total
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Cost
|
$
|
19,000
|
|
|
$
|
10,700
|
|
|
$
|
1,311
|
|
|
$
|
2,363
|
|
|
$
|
33,374
|
|
|
Accumulated amortization
|
(6,515
|
)
|
|
(8,559
|
)
|
|
(850
|
)
|
|
(1,788
|
)
|
|
(17,712
|
)
|
|
Other intangible assets, net
|
$
|
12,485
|
|
|
$
|
2,141
|
|
|
$
|
461
|
|
|
$
|
575
|
|
|
$
|
15,662
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Cost
|
$
|
19,000
|
|
|
$
|
10,700
|
|
|
$
|
1,267
|
|
|
$
|
2,008
|
|
|
$
|
32,975
|
|
|
Accumulated amortization
|
(5,972
|
)
|
|
(7,846
|
)
|
|
(644
|
)
|
|
(1,630
|
)
|
|
(16,092
|
)
|
|
Other intangible assets, net
|
$
|
13,028
|
|
|
$
|
2,854
|
|
|
$
|
623
|
|
|
$
|
378
|
|
|
$
|
16,883
|
|
The weighted average useful lives for the intangible assets are
35
,
15
,
15
, and
4
years for trade name, technology, customer relationships, and other, respectively. Amortization of intangible assets was
$1,622
,
$1,708
, and
$1,832
in
2012
,
2011
, and
2010
, respectively. Amortization expense is expected to be approximately
$1,700
in
2013
,
$1,500
in
2014
,
$1,400
in
2015
,
$600
in
2016
, and
$600
in
2017
.
(7) Fair Value and Derivative Financial Instruments:
The Company holds certain assets and liabilities that are required to be measured at fair value on a recurring basis. These include the Company's derivative instruments related to foreign currency forward contracts, as well as foreign exchange swaps. The Company uses derivative financial instruments to manage risk and not for trading or other speculative purposes.
Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is the Company's policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. The fair values of the Company's derivatives are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these contracts as Level 2 in the fair value hierarchy.
The following table shows the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
Classification
|
December 31,
|
|
|
2012
|
|
2011
|
|
Assets:
|
|
|
|
|
|
|
|
Forward contracts (designated as hedging instruments)
|
Other current assets
|
$
|
1,210
|
|
|
$
|
—
|
|
|
Foreign exchange swaps (not designated as hedging instruments)
|
Other current assets
|
—
|
|
|
494
|
|
|
Forward contracts (designated as hedging instruments)
|
Other assets
|
418
|
|
|
—
|
|
|
Total assets
|
|
$
|
1,628
|
|
|
$
|
494
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Forward contracts (designated as hedging instruments)
|
Other accrued liabilities
|
$
|
196
|
|
|
$
|
3,809
|
|
|
Foreign exchange swaps (not designated as hedging instruments)
|
Other accrued liabilities
|
297
|
|
|
—
|
|
|
Forward contracts (designated as hedging instruments)
|
Other liabilities
|
—
|
|
|
129
|
|
|
Total liabilities
|
|
$
|
493
|
|
|
$
|
3,938
|
|
The Company enters into forward contracts to hedge the value of the U.S. dollar or euro cash flow at locations that do not have the U.S. dollar or euro as their functional currency but conduct certain transactions in U.S. dollars or euros. The objective of all outstanding forward contracts is to hedge forecasted transactions in U.S. dollars or euros through the cash settlement date. The Company enters into forward contracts with maturity dates of up to eighteen months after the contract date. All forward contracts are designated as and qualify for hedge accounting treatment.
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
The Company had foreign currency forward contracts outstanding in notional amounts as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
U.S. dollar
|
52,020
|
|
|
50,550
|
|
|
Euro
|
19,500
|
|
|
8,250
|
|
Changes in the fair value of forward contracts designated as hedging instruments are recognized as a component of net income or accumulated other comprehensive income depending on whether the transaction related to the hedged risk has occurred and whether the contract qualifies as highly effective. Changes in fair values of derivatives that are accounted for as cash flow hedges are recorded in accumulated other comprehensive income. The amount of gain, net of tax, recorded as a component of accumulated other comprehensive income related to forward contracts was $
978
at
December 31, 2012
compared to a loss of $
2,721
at
December 31, 2011
. At
December 31, 2012
the Company expects to reclassify $
633
of gain, net of tax, on forward contracts from accumulated other comprehensive income to net income during the next twelve months due to the actual fulfillment of forecasted transactions.
The following table summarizes the amount of gain (loss) reclassified from accumulated other comprehensive income into the consolidated statements of operations for
2012
,
2011
, and
2010
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Statements of Operations Classification
|
2012
|
|
2011
|
|
2010
|
|
Net Sales
|
$
|
(3,394
|
)
|
|
$
|
538
|
|
|
$
|
(824
|
)
|
|
Other, net
|
157
|
|
|
(536
|
)
|
|
(269
|
)
|
|
|
$
|
(3,237
|
)
|
|
$
|
2
|
|
|
$
|
(1,093
|
)
|
The Company formally assesses at a hedge's inception, and on an ongoing basis, whether the derivatives that are used in the hedging transaction have been highly effective in offsetting changes in the cash flows of the hedged items and whether those derivatives are expected to remain highly effective. When it is determined that a derivative has ceased to be highly effective as a hedge the Company discontinues hedge accounting prospectively. When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur by the end of the originally expected period, but it is probable that the transaction will occur within the two months following the forecasted period, the gain or loss on the derivative remains in accumulated other comprehensive income and is reclassified to net earnings when the forecasted transaction affects net earnings.
However, if it is probable that a forecasted transaction will not occur within two months after the forecasted period, the gains and losses that were accumulated in other comprehensive income will be recognized immediately in net earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company carries the derivative at its fair value on the consolidated balance sheets, recognizing future changes in the fair value in other income or expense, net. All forward contracts qualified for hedge accounting in
2012
,
2011
, and
2010
.
In addition, any portion of the hedge that is deemed ineffective due to the absolute value of the cumulative change in the derivative being greater than the cumulative change in the hedged item is recorded immediately in other income (expense) on the consolidated statements of operations. There was no significant hedge ineffectiveness in
2012
,
2011
or
2010
.
The Company uses foreign exchange swaps to hedge intercompany financing activities between group companies with different functional currencies. The Company does not designate these foreign exchange swaps as hedging instruments. Accordingly, the gain or loss associated with changes in the fair value of these contracts is immediately recorded in other, net on the consolidated statements of operations.
The following table summarizes the amount of gain (loss) related to foreign exchange swaps recognized in the statements of operations for
2012
,
2011
, and
2010
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Statement of Operations Classification
|
2012
|
|
2011
|
|
2010
|
|
Other, net
|
$
|
(782
|
)
|
|
$
|
517
|
|
|
$
|
14
|
|
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
(8) Long-Term Debt:
Long-term debt outstanding at
December 31, 2012
and
2011
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
|
Long-term Debt Due
Within One Year
|
|
Long-term
Debt
|
|
Long-term Debt Due
Within One Year
|
|
Long-term
Debt
|
|
Danfoss A/S Multicurrency Term Loan
|
$
|
—
|
|
|
$
|
178,325
|
|
|
$
|
—
|
|
|
$
|
198,028
|
|
|
Other Borrowings
|
479
|
|
|
53
|
|
|
955
|
|
|
1,474
|
|
|
Total
|
$
|
479
|
|
|
$
|
178,378
|
|
|
$
|
955
|
|
|
$
|
199,502
|
|
Related Person Loans
In September 2010 the Company entered into an amended and restated credit agreement with Danfoss A/S (the Danfoss Agreement), the Company's majority stockholder, which replaced the 2009 Credit Agreement discussed below. The Danfoss Agreement originally included two, five-year term loans of approximately
$200,000
(
$140,000
and
45,000
euro) and a three-year revolving credit facility. The term loan bears interest at a fixed rate of
8.00%
and
8.25%
for the U.S. dollar and euro loans, respectively. The revolving credit facility bore interest at a rate equal to the U.S. prime rate or LIBOR, as in effect at times specified in the Danfoss Agreement, plus
3.9%
. The Company paid closing fees of approximately
$4,200
(
$2,750
and
1,125
euro) to Danfoss A/S, which were capitalized and amortized to interest expense over the term of the Danfoss Agreement.
In 2012 the Company paid down the term loan by approximately
$20,000
(
16,000
euro). The term loan outstanding at
December 31, 2012
was approximately
$178,000
(
$140,000
and
$29,000
euro).
In 2012, upon request of the Company, the revolving credit facility was permanently reduced to
$0
. In 2011, upon the request of the Company, the borrowing capacity of the revolving credit facility was reduced to approximately
$100,000
(
$75,000
and
20,000
euro). The Company paid a quarterly commitment fee equal to
1.17%
of the average daily unused portion of the revolving credit facility.
In November 2009 the Company entered into an unsecured term loan and revolving credit facility agreement with Danfoss A/S (the 2009 Credit Agreement). This agreement was scheduled to mature on April 29, 2011 but was replaced by the Danfoss Agreement discussed above in September 2010. Under the original terms of the 2009 Credit Agreement the Company was able to borrow up to
$690,000
. In 2010, upon the request of the Company, the borrowing capacity of the 2009 Credit Agreement was reduced to
$500,000
. The principal amount outstanding under the 2009 Credit Agreement bore interest at a rate equal to the U.S. prime rate or LIBOR, as in effect at times specified in the 2009 Credit Agreement, plus
10%
. The 2009 Credit Agreement also included term loans of
92,000
euro and
$200,000
, with interest at an annual rate of
11.8%
and
11.4%
, respectively. The Company was required to pay a quarterly commitment fee equal to
4%
of the average daily unused portion of the 2009 Credit Agreement.
In November 2009 the Company entered into an agreement with Danfoss A/S whereby Danfoss A/S, from time to time, provides letters of intent to banks, financial institutions and other relevant third parties to provide comfort for credit facilities made available to the Company. In exchange for this service, Danfoss A/S charged the Company a facility fee based on a percentage,
0.3%
through November 2012, of all issued and outstanding letters of intent. This facility fee is waived for all issued and outstanding letters of intent after November 2012.
The Company incurred interest expense of
$15,908
,
$17,979
and
$42,620
and commitment fee expense of
$897
,
$2,303
and
$6,060
related to the debt with Danfoss A/S during
2012
,
2011
, and
2010
, respectively. In addition, the Company incurred facility fee expense of
$192
,
$618
and
$2,152
in
2012
,
2011
, and
2010
, respectively.
The Danfoss Agreement contains no financial covenants but does contain a number of affirmative and negative covenants that, among other things, requires the Company to obtain the consent of Danfoss A/S prior to engaging in certain types of transactions. The Danfoss Agreement contains customary representations and warranties regarding the Company and its business and operations. The Agreement also sets forth a number of events of default for, among other things, failure to pay principal or
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
interest, breaches of representations, warranties and covenants and various events relating to the bankruptcy or insolvency of the Company or its subsidiaries.
Other Borrowings
The Company borrows locally when favorable terms are available. In May 2007, the Company borrowed
$150
from the Ames, Iowa Economic Development Commission. The loan bears interest at an annual rate of
4.13%
, and the outstanding balance on the loan at
December 31, 2012
was
$50
. In February 2007, the Company borrowed
150,000
Indian rupee from Deutsche Bank AG. The loan bore interest at an annual rate of
11.75%
, and was fully repaid during 2012. In December 2006, the Company borrowed
$750
from the Iowa Department of Economic Development. The loan does not bear interest, and the outstanding balance at
December 31, 2012
was
$482
. In April, 2005 the Company borrowed
150,000
Indian rupee from The Hong Kong and Shanghai Banking Corporation. The loan bore interest at a variable rate ranging from
8.20%
to
9.36%
, and was fully repaid during 2012.
A Danish subsidiary maintains a line of credit for purposes of centralizing cash management for the European locations.
Loss on Early Retirement of Debt
The Company recognized a loss on early retirement of debt of
$1,254
,
$1,176
, and
$2,421
during
2012
,
2011
, and
2010
, respectively. The loss in
2012
was due to prepayment penalties of
$803
and the write-off of unamortized deferred financing costs of
$451
which was the result of the reductions in borrowing capacities for the revolving loan agreement. The loss in
2011
was due to the write-off of unamortized deferred financing costs of
$1,176
. In
2010
, the loss consisted of
$1,674
of prepayment penalties and
$747
to write-off unamortized deferred financing costs.
Repayment of Borrowings
Payments required to be made on long-term debt outstanding as of
December 31, 2012
during the years ending
2013
, 2014 , and 2015 are
$479
,
$53
, and
$178,325
, respectively. No payments are required after 2015.
(9) Pension and Postretirement Benefits other than Pensions:
The Company has defined benefit pension plans covering a significant number of its employees. The benefits under these plans are based primarily on years of service and compensation levels. The Company also provides health benefits for certain retired employees and certain dependents when the employee becomes eligible for these benefits by satisfying plan provisions that include certain age and service requirements. The measurements for the pension and health benefit plans were performed at
December 31
.
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
Pension Benefits
Pension expense for
2012
,
2011
, and
2010
for these defined benefit plans consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2012
|
|
2011
|
|
2010
|
|
Service cost
|
$
|
4,179
|
|
|
$
|
3,909
|
|
|
$
|
3,807
|
|
|
Interest cost
|
12,547
|
|
|
13,081
|
|
|
13,291
|
|
|
Expected return on plan assets
|
(12,077
|
)
|
|
(12,886
|
)
|
|
(11,643
|
)
|
|
Amortization of prior service cost
|
(264
|
)
|
|
(287
|
)
|
|
(354
|
)
|
|
Amortization of net loss
|
5,486
|
|
|
3,943
|
|
|
3,878
|
|
|
Settlement
|
—
|
|
|
—
|
|
|
1,541
|
|
|
Correction of error
|
—
|
|
|
—
|
|
|
(2,909
|
)
|
|
Net periodic pension expense
|
9,871
|
|
|
7,760
|
|
|
7,611
|
|
|
|
|
|
|
|
|
|
Adjustments included in other comprehensive (income) loss:
|
|
|
|
|
|
|
Net actuarial losses
|
16,382
|
|
|
24,713
|
|
|
4,865
|
|
|
Amortization of actuarial losses
|
(5,486
|
)
|
|
(3,943
|
)
|
|
(3,878
|
)
|
|
Amortization of prior service cost
|
264
|
|
|
287
|
|
|
354
|
|
|
Settlement / curtailment
|
—
|
|
|
—
|
|
|
(1,541
|
)
|
|
Correction of error
|
—
|
|
|
—
|
|
|
2,909
|
|
|
Total loss recognized in other comprehensive (income) loss
|
11,160
|
|
|
21,057
|
|
|
2,709
|
|
|
Total recognized in comprehensive (income) loss
|
$
|
21,031
|
|
|
$
|
28,817
|
|
|
$
|
10,320
|
|
In 2010 a former executive of the Company received a lump sum distribution which resulted in settlement expense of
$1,541
.
In 2010 the Company changed its method of recognizing pension expense for its U.S. defined benefit pension plans. Previously a market-related value of plan assets which reflected the changes in fair value of plan assets over a five-year period was used to calculate the expected return on plan assets, a component of net periodic pension expense. In 2010 a change was made to use the fair value of plan assets to calculate the expected return on plan assets, which is consistent with how the non-U.S. plans recognize pension expense.
$2,909
of income was recognized in 2010 as a result of this change. The Company made the correction for this item in 2010 as the error was determined to be immaterial to the overall financial statements in 2010 and in all previous years.
The Company expects to incur income of
$299
related to the amortization of prior service costs and expense of
$5,236
for amortization of net loss in
2013
.
The weighted average assumptions used to determine net periodic pension expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2012
|
|
2011
|
|
2010
|
|
Discount rate
|
4.6
|
%
|
|
5.3
|
%
|
|
5.8
|
%
|
|
Rate of compensation increase
|
3.5
|
%
|
|
3.6
|
%
|
|
3.5
|
%
|
|
Expected long-term rate of return on plan assets
|
6.0
|
%
|
|
7.0
|
%
|
|
7.2
|
%
|
The discount rate reflects the current rate at which the associated liabilities could be effectively settled. The Company sets its rate to reflect the yield of a portfolio of high-quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits. The rate of compensation increase assumption reflects the Company's past actual experience, the near-term outlook and assumed inflation. The expected long-term rate of return on plan assets reflects asset allocations, investment strategy, and the views of investment managers and other large pension plan sponsors.
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
The following table sets forth the plans' funded status as of the respective balance sheet dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
Reconciliation of benefit obligation:
|
|
|
|
|
Benefit obligation at January 1
|
$
|
(274,802
|
)
|
|
$
|
(247,380
|
)
|
|
Service cost
|
(4,179
|
)
|
|
(3,909
|
)
|
|
Interest cost
|
(12,547
|
)
|
|
(13,081
|
)
|
|
Plan participant contributions
|
(1,441
|
)
|
|
(1,141
|
)
|
|
Actuarial loss
|
(29,725
|
)
|
|
(22,147
|
)
|
|
Benefit payments
|
11,527
|
|
|
11,489
|
|
|
Effect of exchange rate changes
|
(4,446
|
)
|
|
1,367
|
|
|
Benefit obligation at December 31
|
(315,613
|
)
|
|
(274,802
|
)
|
|
Reconciliation of fair value of plan assets:
|
|
|
|
|
Fair value of plan assets at January 1
|
197,878
|
|
|
182,781
|
|
|
Actual return on plan assets
|
25,420
|
|
|
10,320
|
|
|
Employer contributions
|
11,535
|
|
|
13,829
|
|
|
Plan participant contributions
|
1,441
|
|
|
1,141
|
|
|
Benefit payments
|
(9,626
|
)
|
|
(9,496
|
)
|
|
Effect of exchange rate changes
|
3,817
|
|
|
(697
|
)
|
|
Fair value of plan assets at December 31
|
230,465
|
|
|
197,878
|
|
|
Funded status at December 31
|
(85,148
|
)
|
|
(76,924
|
)
|
|
Net amount recognized
|
$
|
(85,148
|
)
|
|
$
|
(76,924
|
)
|
The weighted average assumptions used to determine the benefit obligation are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
Discount rate
|
3.8
|
%
|
|
4.6
|
%
|
|
Rate of compensation increase
|
3.5
|
%
|
|
3.5
|
%
|
Amounts recognized in the consolidated balance sheets as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
Long-term pension asset
|
$
|
3,737
|
|
|
$
|
2,847
|
|
|
Current pension liability
|
(106
|
)
|
|
(54
|
)
|
|
Long-term pension liability
|
(88,779
|
)
|
|
(79,717
|
)
|
|
Net amount recognized
|
$
|
(85,148
|
)
|
|
$
|
(76,924
|
)
|
The total accumulated benefit obligation for all pension plans at
December 31, 2012
and
2011
was
$302,587
and
$260,130
, respectively.
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
The aggregate projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with projected and accumulated benefit obligations in excess of plan assets as of
December 31, 2012
and
2011
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected and Accumulated Benefit Obligation
Exceeds the Fair Value of Plan Assets
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
|
December 31,
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Projected benefit obligation
|
$
|
191,912
|
|
|
$
|
168,644
|
|
|
$
|
66,464
|
|
|
$
|
53,597
|
|
|
Accumulated benefit obligation
|
181,245
|
|
|
158,955
|
|
|
62,760
|
|
|
51,720
|
|
|
Fair value of plan assets
|
137,192
|
|
|
117,003
|
|
|
32,220
|
|
|
25,468
|
|
Amounts recorded in accumulated other comprehensive income as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
Actuarial loss
|
$
|
98,492
|
|
|
$
|
86,587
|
|
|
Prior service cost
|
(2,217
|
)
|
|
(2,432
|
)
|
|
|
$
|
96,275
|
|
|
$
|
84,155
|
|
These amounts have not yet been recognized as components of net periodic pension expense.
Plan Assets
The target asset allocation for the U.S. pension assets, on average, is
60 percent
in equity securities and
40 percent
in fixed income securities. This allocation is expected to earn an average annual rate of return of approximately
7 percent
measured over a planning horizon of
twenty
years with reasonable and acceptable levels of risk. This expected level will be obtained, with an allowance for expenses, and cash investments, if equity securities realize an average annual return of
10 percent
and fixed income securities produce an average annual yield of
5 percent
.
The target asset allocation for the U.K. pension assets, on average, is
32 percent
in equity securities,
67 percent
in fixed income securities, and
1 percent
in cash. This allocation is expected to earn an average annual rate of return of approximately
4.9 percent
.
The target asset allocation for the German pension assets is
15 percent
in equity securities and
85 percent
in fixed income securities. This allocation is expected to earn an average annual rate of return of approximately
3.5 percent
measured over a long-term planning horizon. This expected level will be obtained, with an allowance for expenses, and cash investments, if equity securities realize an average annual return of
7
to
8 percent
and fixed income securities produce an average annual yield of
2.5
to
3 percent
.
The weighted average asset allocations by asset category for the pension plans at
December 31
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
U.K. Plans
|
|
German Plans
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Equity securities
|
62
|
%
|
|
62
|
%
|
|
32
|
%
|
|
42
|
%
|
|
14
|
%
|
|
9
|
%
|
|
Fixed income securities
|
37
|
|
|
37
|
|
|
67
|
|
|
57
|
|
|
80
|
|
|
85
|
|
|
Other
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
6
|
|
|
6
|
|
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
The following tables present the Company's plan assets using the fair value hierarchy as of
December 31, 2012
and
December 31, 2011
. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
23,166
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,166
|
|
|
International index-linked government securities
|
42,040
|
|
|
—
|
|
|
—
|
|
|
42,040
|
|
|
Fixed income funds
|
—
|
|
|
50,264
|
|
|
—
|
|
|
50,264
|
|
|
Cash equivalents and short-term investments
|
3,049
|
|
|
—
|
|
|
—
|
|
|
3,049
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and preferred stock
|
4,152
|
|
|
—
|
|
|
—
|
|
|
4,152
|
|
|
Common/collective/pooled funds
|
—
|
|
|
51,295
|
|
|
—
|
|
|
51,295
|
|
|
Derivatives
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
|
International equity
|
55,936
|
|
|
—
|
|
|
—
|
|
|
55,936
|
|
|
Total
|
$
|
128,328
|
|
|
$
|
101,559
|
|
|
$
|
—
|
|
|
$
|
229,887
|
|
|
Receivables
|
|
|
|
|
|
|
|
|
|
599
|
|
|
Payables
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
Total plan assets
|
|
|
|
|
|
|
|
|
|
$
|
230,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
Corporate bonds
|
$
|
17,104
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,104
|
|
|
International index-linked government securities
|
35,038
|
|
|
—
|
|
|
—
|
|
|
35,038
|
|
|
Fixed income funds
|
—
|
|
|
43,275
|
|
|
—
|
|
|
43,275
|
|
|
Cash equivalents and short-term investments
|
2,381
|
|
|
—
|
|
|
—
|
|
|
2,381
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and preferred stock
|
2,530
|
|
|
—
|
|
|
—
|
|
|
2,530
|
|
|
Common/collective/pooled funds
|
—
|
|
|
49,187
|
|
|
—
|
|
|
49,187
|
|
|
Derivatives
|
(155
|
)
|
|
—
|
|
|
—
|
|
|
(155
|
)
|
|
International equity
|
48,021
|
|
|
—
|
|
|
—
|
|
|
48,021
|
|
|
Total
|
$
|
104,919
|
|
|
$
|
92,462
|
|
|
$
|
—
|
|
|
$
|
197,381
|
|
|
Receivables
|
|
|
|
|
|
|
|
|
|
517
|
|
|
Payables
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
Total plan assets
|
|
|
|
|
|
|
|
|
|
$
|
197,878
|
|
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades.
Cash equivalents and short-term investments are primarily held in registered money market funds which are valued using a market approach based on the quoted market prices of identical instruments.
Common and preferred stock equity securities and international equity securities are valued using a market approach based on quoted market prices. Common/collective/pooled funds are common or collective trusts valued at their net asset values that are calculated by the investment manager or fund sponsor based on the quoted market prices of the underlying investments.
Postretirement Benefits
The Company has contributory health benefit plans covering certain groups of U.S. employees. U.S. employees retiring after March 1, 1993, and hired prior to January 1, 1993, will receive the standard health benefits up to age 65 and then will be eligible to receive a health care reimbursement account based on years of service. U.S. employees hired after January 1, 1993, and retiring after age 65 with ten years of service, will be eligible at age 65 to receive a health care reimbursement account based on years of service.
These plans contain other cost-sharing features such as deductibles and coinsurance. The Company does not pre-fund these plans and has the right to modify or terminate any of these plans in the future. Health benefits for retirees of non-U.S. operations, where applicable, are provided through government-sponsored plans to which the Company contributes funds during the individuals' employment periods.
The components of the postretirement benefit expense of the Company-sponsored health benefit plans for
2012
,
2011
, and
2010
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2012
|
|
2011
|
|
2010
|
|
Service cost
|
$
|
188
|
|
|
$
|
192
|
|
|
$
|
172
|
|
|
Interest cost
|
1,267
|
|
|
2,658
|
|
|
2,865
|
|
|
Amortization of prior service cost
|
(1,530
|
)
|
|
(128
|
)
|
|
(128
|
)
|
|
Amortization of net loss
|
1,806
|
|
|
1,855
|
|
|
1,676
|
|
|
Postretirement benefit expense
|
1,731
|
|
|
4,577
|
|
|
4,585
|
|
|
|
|
|
|
|
|
|
Adjustments included in other comprehensive (income) loss:
|
|
|
|
|
|
|
Net actuarial losses
|
2,397
|
|
|
1,797
|
|
|
9,582
|
|
|
Amortization of actuarial losses
|
(1,806
|
)
|
|
(1,855
|
)
|
|
(1,676
|
)
|
|
Amortization of prior service credit
|
1,530
|
|
|
128
|
|
|
128
|
|
|
Plan amendment
|
—
|
|
|
(19,543
|
)
|
|
—
|
|
|
Total (gain) loss recognized in other comprehensive (income) loss
|
2,121
|
|
|
(19,473
|
)
|
|
8,034
|
|
|
Total recognized in comprehensive (income) loss
|
$
|
3,852
|
|
|
$
|
(14,896
|
)
|
|
$
|
12,619
|
|
In 2011, the Company amended its postretirement health care plan for certain Medicare eligible retirees to a defined contribution approach, with the amendment to be effective on January 1, 2012. Prior to the amendment, the Company provided postretirement health care to these same Medicare eligible retirees by allowing them to continue participation in the Company's existing group health care plan, on a secondary basis to Medicare.
The Company expects to incur income of
$1,531
for amortization of prior service costs and expense of
$2,081
for amortization of net loss in
2013
.
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
The funded status of the Company-sponsored health benefit plans as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
Reconciliation of benefit obligation:
|
|
|
|
|
Benefit obligation at January 1
|
$
|
(34,839
|
)
|
|
$
|
(52,959
|
)
|
|
Service cost
|
(188
|
)
|
|
(192
|
)
|
|
Interest cost
|
(1,267
|
)
|
|
(2,658
|
)
|
|
Plan participant contributions
|
(248
|
)
|
|
(471
|
)
|
|
Plan amendment
|
—
|
|
|
19,543
|
|
|
Actuarial loss
|
(2,397
|
)
|
|
(1,797
|
)
|
|
Benefit payments
|
3,209
|
|
|
3,805
|
|
|
Health care subsidy receipts
|
(142
|
)
|
|
(110
|
)
|
|
Benefit obligation at December 31
|
(35,872
|
)
|
|
(34,839
|
)
|
|
Reconciliation of fair value of plan assets:
|
|
|
|
|
Fair value of plan assets at January 1
|
—
|
|
|
—
|
|
|
Employer contributions
|
2,819
|
|
|
3,224
|
|
|
Plan participant contributions
|
248
|
|
|
471
|
|
|
Health care subsidy receipts
|
142
|
|
|
110
|
|
|
Benefit payments
|
(3,209
|
)
|
|
(3,805
|
)
|
|
Fair value of plan assets at December 31
|
—
|
|
|
—
|
|
|
Benefit obligation
|
(35,872
|
)
|
|
(34,839
|
)
|
|
Less current portion
|
3,190
|
|
|
3,351
|
|
|
Postretirement benefit obligation, long-term
|
$
|
(32,682
|
)
|
|
$
|
(31,488
|
)
|
Amounts recognized in accumulated other comprehensive income as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
Actuarial loss
|
$
|
32,870
|
|
|
$
|
32,279
|
|
|
Prior service credit
|
(19,838
|
)
|
|
(21,368
|
)
|
|
|
$
|
13,032
|
|
|
$
|
10,911
|
|
The assumed weighted average rate of increase in the per capita cost of covered health benefits used to determine the accumulated postretirement benefit obligation at
December 31, 2012
was
7.4%
, gradually decreasing to
4.5%
through
2027
and for all future years.
A
1 percent
increase in the assumed health care trend rates would have increased the accumulated postretirement benefit obligation at
December 31, 2012
by
$977
, and increased postretirement benefit expense for
2012
by
$38
. A
1 percent
decrease in the assumed health care trend rates would have decreased the accumulated postretirement benefit obligation at
December 31, 2012
by
$908
, and decreased postretirement benefit expense for
2012
by
$35
.
The weighted average discount rate used to estimate the accumulated postretirement benefit obligation was
3.2%
,
4.2%
, and
5.3%
for
2012
,
2011
, and
2010
, respectively.
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
The benefits expected to be paid from the benefit plans, which reflect expected future years of service are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
Health Care
|
|
2013
|
$
|
11,701
|
|
|
$
|
3,190
|
|
|
2014
|
12,219
|
|
|
3,232
|
|
|
2015
|
13,172
|
|
|
3,235
|
|
|
2016
|
13,817
|
|
|
3,220
|
|
|
2017
|
14,316
|
|
|
3,072
|
|
|
2018-2022
|
81,064
|
|
|
12,157
|
|
The Company plans to contribute
$14,890
to the Company pension and health benefit plans in
2013
.
The Company also maintains defined contribution plans for eligible employees. Company contributions include both base and matching amounts. The Company contributed approximately
$3,900
,
$3,300
, and
$3,000
to this plan in
2012
,
2011
and
2010
, respectively.
(10) Income Taxes:
The Company's income before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2012
|
|
2011
|
|
2010
|
|
United States
|
$
|
140,994
|
|
|
$
|
95,675
|
|
|
$
|
50,472
|
|
|
European and other
|
163,358
|
|
|
243,508
|
|
|
144,613
|
|
|
Total
|
$
|
304,352
|
|
|
$
|
339,183
|
|
|
$
|
195,085
|
|
The Company's primary German operation is treated as a flow-through entity for U.S. tax purposes. The above analysis of pretax income and the following analysis of the income tax provision by taxing jurisdiction are therefore not directly related.
The benefit (expense) for income taxes by taxing jurisdiction is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2012
|
|
2011
|
|
2010
|
|
Current
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
Federal
|
$
|
(30,350
|
)
|
|
$
|
(2,469
|
)
|
|
$
|
225
|
|
|
State
|
(4,578
|
)
|
|
(3,876
|
)
|
|
(332
|
)
|
|
European and other
|
(46,404
|
)
|
|
(51,946
|
)
|
|
(24,608
|
)
|
|
Total current
|
(81,332
|
)
|
|
(58,291
|
)
|
|
(24,715
|
)
|
|
Deferred
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
Federal
|
(7,333
|
)
|
|
(27,932
|
)
|
|
73,628
|
|
|
State
|
49
|
|
|
(777
|
)
|
|
6,020
|
|
|
European and other
|
(3,658
|
)
|
|
7,620
|
|
|
(3,750
|
)
|
|
Total deferred
|
(10,942
|
)
|
|
(21,089
|
)
|
|
75,898
|
|
|
Total income tax benefit (expense)
|
$
|
(92,274
|
)
|
|
$
|
(79,380
|
)
|
|
$
|
51,183
|
|
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
A reconciliation of tax benefit (expense) calculated using the U.S. statutory tax rate of
35%
and recorded income tax expense based on the Company's income before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2012
|
|
2011
|
|
2010
|
|
Tax benefit (expense) based on U.S. statutory tax rate
|
$
|
(106,523
|
)
|
|
$
|
(118,714
|
)
|
|
$
|
(68,280
|
)
|
|
Foreign taxes (rate and other differences)—net
|
4,327
|
|
|
11,749
|
|
|
15,017
|
|
|
State income taxes–net of federal benefit
|
(2,944
|
)
|
|
(3,024
|
)
|
|
3,697
|
|
|
Tax effect of noncontrolling interest
|
7,403
|
|
|
5,766
|
|
|
5,968
|
|
|
Changes in tax reserves and allowances—net
|
—
|
|
|
22,880
|
|
|
99,166
|
|
|
Non-deductible expenses/Non-taxable income—net
|
(239
|
)
|
|
(249
|
)
|
|
(1,805
|
)
|
|
U.S. manufacturing deduction
|
3,920
|
|
|
1,575
|
|
|
—
|
|
|
Other
|
1,782
|
|
|
637
|
|
|
(2,580
|
)
|
|
Total income tax benefit (expense)
|
$
|
(92,274
|
)
|
|
$
|
(79,380
|
)
|
|
$
|
51,183
|
|
The components of the Company's net deferred tax assets and liabilities, determined on a jurisdictional and entity basis, are attributable to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
Net operating loss (NOL) and tax credit carryforwards
|
$
|
11,342
|
|
|
$
|
—
|
|
|
$
|
17,896
|
|
|
$
|
—
|
|
|
Deferred compensation, postretirement medical and accrued pension benefits
|
65,262
|
|
|
(9,798
|
)
|
|
57,831
|
|
|
(11,450
|
)
|
|
Fixed asset basis differences
|
12,800
|
|
|
(13,273
|
)
|
|
13,442
|
|
|
(12,324
|
)
|
|
Inventory and warranty accruals
|
8,601
|
|
|
(924
|
)
|
|
10,113
|
|
|
(860
|
)
|
|
Intangible asset fair market value step-up
|
1,539
|
|
|
(8,650
|
)
|
|
3,016
|
|
|
(8,889
|
)
|
|
Other items
|
13,528
|
|
|
(12,428
|
)
|
|
17,938
|
|
|
(11,142
|
)
|
|
Gross deferred tax assets/liabilities
|
113,072
|
|
|
(45,073
|
)
|
|
120,236
|
|
|
(44,665
|
)
|
|
Valuation allowance
|
(5,037
|
)
|
|
—
|
|
|
(5,350
|
)
|
|
—
|
|
|
Net deferred tax assets/liabilities
|
108,035
|
|
|
(45,073
|
)
|
|
114,886
|
|
|
(44,665
|
)
|
|
Less current portion
|
(21,732
|
)
|
|
11,537
|
|
|
(24,374
|
)
|
|
9,481
|
|
|
Net deferred tax assets/liabilities, long-term
|
$
|
86,303
|
|
|
$
|
(33,536
|
)
|
|
$
|
90,512
|
|
|
$
|
(35,184
|
)
|
The ultimate realization of net deferred tax assets is dependent upon the generation of future taxable income during (i) the years in which temporary differences reverse and (ii) the years prior to the expiration of NOL and tax credit carryforwards. Management considers projected future taxable income and tax planning strategies in making this assessment.
As of
December 31, 2012
and
2011
, the Company had not provided U.S. federal income taxes on
$241,507
and
$171,965
, respectively, of undistributed earnings recorded by certain subsidiaries outside the U.S. since these earnings were deemed permanently invested. Although it is not practicable to determine the deferred tax liability on the unremitted earnings, foreign tax credits would be available to reduce the U.S. tax liability if these foreign earnings were remitted.
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2008. During 2012 the Internal Revenue Service concluded an audit of the 2009 and 2010 U.S. federal income tax returns with no significant changes.
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
A reconciliation of the beginning and ending gross unrecognized tax benefits (UTB) is as follows:
|
|
|
|
|
|
|
|
|
Amount
|
|
Gross UTB balance at January 1, 2012
|
$
|
2,128
|
|
|
Additions based on tax positions related to the current year
|
65
|
|
|
Additions for tax positions of prior years
|
—
|
|
|
Reductions for tax positions of prior years
|
—
|
|
|
Settlements
|
(814
|
)
|
|
Foreign currency adjustments
|
35
|
|
|
Reductions due to lapse of applicable statute of limitations
|
(258
|
)
|
|
Gross UTB balance at December 31, 2012
|
$
|
1,156
|
|
The total amount of unrecognized tax expense that, if recognized, would affect the effective tax rate as of
December 31, 2012
and
2011
were
$243
and
$345
, respectively. The total amount of UTB is not expected to significantly increase or decrease within the next twelve months. The net UTBs are included as components of deferred income tax assets and other liabilities in the consolidated balance sheets.
The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense and other expense, respectively. Interest and penalties of
$148
and
$201
have been accrued as of
December 31, 2012
and
2011
, respectively. Interest and penalty benefit of
$56
and
$134
were recognized for the years ending
December 31, 2012
and
2011
, respectively.
The Company had the following tax return loss carryforwards available to offset future years' taxable income at
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Expiration Dates
|
|
German NOL—Trade
|
$
|
3,628
|
|
|
None
|
|
U.S. NOL
|
7,010
|
|
|
2018-2019
|
|
U.K. NOL
|
9,216
|
|
|
None
|
|
Brazil NOL
|
5,742
|
|
|
None
|
|
China NOL
|
8,543
|
|
|
2013-2017
|
|
Italy NOL
|
2,099
|
|
|
None
|
|
Spain NOL
|
1,159
|
|
|
2024-2027
|
|
Sweden NOL
|
1,024
|
|
|
None
|
|
State NOL
|
11,819
|
|
|
2012-2029
|
|
State tax credits
|
198
|
|
|
2017-2022
|
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
(11) Accumulated Other Comprehensive Income:
The changes in accumulated other comprehensive income for
2012
,
2011
, and
2010
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Period
|
|
Tax (Expense) Benefit
|
|
Effect of Exchange Rates
|
|
Net Change
|
|
Year Ended December 31, 2012:
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
$
|
4,395
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,395
|
|
|
Pension and postretirement plan adjustment
|
(13,281
|
)
|
|
5,213
|
|
|
(911
|
)
|
|
(8,979
|
)
|
|
Unrealized gains on hedging activities
|
4,904
|
|
|
(1,214
|
)
|
|
9
|
|
|
3,699
|
|
|
Other comprehensive income (loss)
|
$
|
(3,982
|
)
|
|
$
|
3,999
|
|
|
$
|
(902
|
)
|
|
$
|
(885
|
)
|
|
Year Ended December 31, 2011:
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
$
|
(17,830
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(17,830
|
)
|
|
Pension and postretirement plan adjustment
|
(1,584
|
)
|
|
76
|
|
|
321
|
|
|
(1,187
|
)
|
|
Unrealized gains on hedging activities
|
(2,835
|
)
|
|
612
|
|
|
154
|
|
|
(2,069
|
)
|
|
Other comprehensive income (loss)
|
$
|
(22,249
|
)
|
|
$
|
688
|
|
|
$
|
475
|
|
|
$
|
(21,086
|
)
|
|
Year Ended December 31, 2010:
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
$
|
(3,879
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3,879
|
)
|
|
Pension and postretirement plan adjustment
|
(10,743
|
)
|
|
(6,968
|
)
|
|
985
|
|
|
(16,726
|
)
|
|
Unrealized gains on hedging activities
|
(1,140
|
)
|
|
210
|
|
|
70
|
|
|
(860
|
)
|
|
Other comprehensive income (loss)
|
$
|
(15,762
|
)
|
|
$
|
(6,758
|
)
|
|
$
|
1,055
|
|
|
$
|
(21,465
|
)
|
The changes in accumulated other comprehensive income (loss), excluding non-controlling interest, for
2010
,
2011
, and
2012
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
Translation
|
|
Pension/
Postretirement
Plan
Adjustment
|
|
Hedging
Activities
|
|
Accumulated
Other
Comprehensive
Income
|
|
Balance January 1, 2010
|
$
|
110,362
|
|
|
$
|
(55,148
|
)
|
|
$
|
208
|
|
|
$
|
55,422
|
|
|
Other comprehensive income in 2010
|
(7,036
|
)
|
|
(16,726
|
)
|
|
(860
|
)
|
|
(24,622
|
)
|
|
Balance December 31, 2010
|
$
|
103,326
|
|
|
$
|
(71,874
|
)
|
|
$
|
(652
|
)
|
|
$
|
30,800
|
|
|
Other comprehensive income in 2011
|
(20,371
|
)
|
|
(1,187
|
)
|
|
(2,069
|
)
|
|
(23,627
|
)
|
|
Balance December 31, 2011
|
$
|
82,955
|
|
|
$
|
(73,061
|
)
|
|
$
|
(2,721
|
)
|
|
$
|
7,173
|
|
|
Other comprehensive income in 2012
|
6,438
|
|
|
(8,979
|
)
|
|
3,699
|
|
|
1,158
|
|
|
Balance December 31, 2012
|
$
|
89,393
|
|
|
$
|
(82,040
|
)
|
|
$
|
978
|
|
|
$
|
8,331
|
|
(12) Noncontrolling Interests:
Noncontrolling interests in net assets and income reflected in the accompanying consolidated financial statements for 2012, 2011, and 2010 consist of:
|
|
|
|
a)
|
A
40%
noncontrolling interest held by Agri-Fab, Inc. in Hydro-Gear Limited Partnership, a U.S. limited partnership.
|
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
|
|
|
|
b)
|
A
40%
noncontrolling interest held by Shanghai Hydraulics and Pneumatics in Sauer Shanghai Hydraulic Transmission Co., Ltd., a Chinese equity business venture.
|
|
|
|
|
c)
|
A
35%
noncontrolling interest held by Daikin Industries Ltd. in Sauer-Danfoss-Daikin, Ltd., a Japanese corporation.
|
|
|
|
|
d)
|
A
49.9%
noncontrolling interest held by Topcon Positioning Systems in TSD Integrated Controls LLC, a U.S. limited partnership.
|
|
|
|
|
e)
|
A
55%
noncontrolling interest held by Daikin Industries Ltd. in Daikin-Sauer-Danfoss Manufacturing, Ltd., a Japanese corporation.
|
The following table sets forth the components of noncontrolling interest in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
Hydro-Gear Limited Partnership
|
$
|
25,640
|
|
|
$
|
23,720
|
|
|
Sauer Shanghai Hydraulic Transmission Co., Ltd.
|
27,710
|
|
|
31,097
|
|
|
Sauer-Danfoss-Daikin, Ltd. (1)
|
22,031
|
|
|
19,937
|
|
|
TSD Integrated Controls LLC (2)
|
459
|
|
|
(456
|
)
|
|
Daikin-Sauer-Danfoss Manufacturing, Ltd.
|
18,435
|
|
|
16,110
|
|
|
Total
|
$
|
94,275
|
|
|
$
|
90,408
|
|
|
|
|
|
(1)
|
On January 1, 2013 the shares of the noncontrolling interest partner were redeemed in connection with the joint venture restructuring discussed in Note 2. The operating activities of Sauer-Danfoss-Daikin, Ltd. were transferred to Daikin-Sauer-Danfoss Manufacturing, Ltd. on that same day.
|
|
|
|
|
(2)
|
In connection with the wind-down of the TSD joint venture discussed in Note 2 the noncontrolling interest partner had received distribution of assets in excess of their interest in the joint venture. There will be a settlement between the joint venture partners in 2013.
|
The Hydro-Gear Limited Partnership agreement indicates a termination date of December 31, 2035. This entity is consolidated in the Company's financial statements. The agreement indicates that if the partnership were to terminate the partnership would be liquidated and the resulting proceeds would be distributed in accordance with each partner's ownership percentage.
(13) Equity-Based Compensation:
The Company's 2006 Omnibus Incentive Plan (2006 Incentive Plan) provides for the grant of stock options, stock appreciation rights, restricted stock, performance units, performance shares, and other incentive awards to officers and key employees and qualifies certain awards for the performance-based exception to obtain favorable tax treatment. The total number of shares of common stock that may be subject to awards or be issued under the 2006 Incentive Plan shall not exceed
3,500,000
shares. The settlement of performance units is in shares of Company stock or cash as determined by the Compensation Committee of the Board of Directors. The performance units entitle the participants to receive an amount equal to the Company's dividends during the vesting period.
All grants to employees in 2012, 2011 and 2010 under the 2006 Incentive Plan were cash-based awards.
The 2006 Incentive Plan also allows for grants of equity-based shares to directors of the Company. The Company awarded
13,500
shares of restricted stock in each of the years
2012
,
2011
and
2010
to non-employee directors. The restricted stock awards entitle the participants to full dividend and voting rights. Unvested shares are restricted as to disposition and subject to forfeiture under certain circumstances. The value of each award was established based on the market value of the stock as of the grant date. Expense is computed based on the market value of the restricted shares at the grant date, which is amortized ratably over the three-year vesting period of the grants. In 2010, related to the cash tender offer initiated by Danfoss Acquisition to acquire the outstanding shares of stock, the board of directors removed the transfer restrictions on the restricted stock granted in 2007, 2008, and 2009.
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
Expense recognized in conjunction with the restricted stock outstanding to non-employee directors in
2012
,
2011
, and
2010
amounted to $
344
, $
170
, and $
326
, respectively.
(14) Related Person Transactions:
In connection with the acquisition of Danfoss Fluid Power on May 3, 2000, the Company entered into several agreements with Danfoss A/S to purchase ongoing operational services from Danfoss A/S. These services include rental of shared facilities, administrative support and information technology support. These fees are paid on a monthly basis. Total expense recognized for goods and services purchased from Danfoss A/S for
2012
,
2011
, and
2010
was approximately
$37,100
,
$41,200
, and
$36,000
, respectively. At
December 31, 2012
and
2011
approximately
$9,000
and
$8,500
owed to Danfoss A/S is included in accounts payable on the consolidated balance sheet. Payments required under these agreements as of
December 31, 2012
, during the years ending
2013
through
2017
and
2018 and thereafter
, are
$8,689
,
$8,524
,
$8,541
,
$8,352
,
$8,357
, and
$270
, respectively. The Company also sold products to Danfoss A/S totaling approximately
$7,700
,
$9,000
, and
$6,500
during
2012
,
2011
, and
2010
, respectively. At
December 31, 2012
and
2011
approximately
$400
and
$900
due from Danfoss A/S is included in accounts receivable on the consolidated balance sheet.
The subsidiaries in Denmark file a joint tax return with Danfoss A/S as required under the laws of Denmark. The Company has elected to provide for taxes on a separate entity basis for U.S. GAAP. The difference in the amount of cash paid or received under these two methods is reported as a capital contribution or a dividend distribution in the consolidated statements of stockholders' equity. In 2010 the Company received approximately
$14,900
from Danfoss A/S related to the usage of the Company's net operating loss (NOL) carryforwards generated in Denmark on the joint tax return for 2009. The Company paid approximately
$12,900
and
$1,800
to Danfoss A/S in 2011 and 2010, respectively as the Company generated taxable income in Denmark in these years.
The Company has an outstanding term loan balance of approximately
$178,000
with Danfoss A/S as of
December 31, 2012
. Refer to Note 8 for additional discussion of the Danfoss Agreement which was entered into in September 2010.
In August 2011 the Company entered into an Agreement with Danfoss A/S, the Company's majority stockholder, to loan excess cash to Danfoss A/S at the EURIBOR or LIBOR rate plus
0.25%
. These deposits may be offset against the outstanding term loan discussed in Note 8 if Danfoss A/S were not able to repay the deposits. The Company had five deposits of cash with Danfoss A/S, totaling
$336,113
and
$168,450
at
December 31, 2012
and
2011
, respectively. The deposits have a weighted average interest rate of
0.44%
and terms ranging from
7
to
90
days. The Company recorded interest income of
$1,325
and
$794
in
2012
and
2011
, respectively.
The Company purchases inventory components from Shanghai Hydraulics and Pneumatics, a noncontrolling interest owner in an entity included in the Company's consolidated financial statements. Purchases were approximately
$7,900
,
$6,900
, and
$6,300
in
2012
,
2011
, and
2010
, respectively.
The Company purchases inventory components from Agri-Fab, Inc., a noncontrolling interest owner in an entity included in the Company's consolidated financial statements. Purchases were approximately
$1,000
in each year for
2012
,
2011
, and
2010
.
The Company sold product totaling approximately
$6,800
,
$6,400
, and
$4,300
in
2012
,
2011
, and
2010
, respectively, to Daikin Industries Ltd. (Daikin), a noncontrolling interest owner in an entity consolidated by the Company. The Company also purchases inventory components and ongoing operational services from Daikin. These services include shared facilities and administrative support. Total expense recognized for goods and services purchased from Daikin in
2012
,
2011
, and
2010
were approximately
$6,900
,
$6,800
, and
$6,200
, respectively. In October 2010, the Company entered into an Agreement with Daikin to loan excess cash or borrow funds on a daily basis as needed. The cash deposited with Daikin was
$22,877
and
$10,277
at
December 31, 2012
and
2011
, respectively. Interest is earned based on short-term financing rates and was
$74
,
$30
, and
$1
in
2012
,
2011
, and
2010
, respectively.
The Company purchases product from Topcon Positioning Systems, Inc., a noncontrolling interest owner in an entity included in the Company's consolidated financial statements. Purchases were approximately
$1,100
,
$1,700
, and
$1,900
in
2012
,
2011
, and
2010
, respectively.
The Company had sales to FAUN Umwelttechnik GmbH & Co., a company owned by a director of the Company, of approximately
$1,100
,
$1,700
, and
$1,700
in
2012
,
2011
and
2010
, respectively.
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
(15) Commitments, Contingencies, and Guarantees:
The Company leases certain facilities and equipment under operating leases, many of which contain renewal options. Total rental expense on all operating leases during
2012
,
2011
, and
2010
was
$21,405
,
$20,374
, and
$19,441
, respectively. Rent expense with related parties is disclosed separately in Note 14. Rent is expensed on a straight-line basis over the term of the leases.
Minimum future rental commitments under all noncancelable operating leases as of
December 31, 2012
, during the years ending
2013
through
2017
and for
2018 and thereafter
, are
$17,938
,
$15,285
,
$12,392
,
$7,496
,
$6,794
, and
$29,332
, respectively. Future rental commitments with related parties are disclosed separately in Note 14.
The Company also leases certain facilities and equipment under capital leases. The liability related to these capital leases is included in current other accrued liabilities and other long-term liabilities on the consolidated balance sheets. Minimum future lease payments under all noncancelable capital leases as of
December 31, 2012
, during the years
2013
and
2014
are
$622
and
$149
, respectively. No payments are required after
2014
.
The Company, from time to time, is involved in various legal matters in the normal course of its business. The Company intends to vigorously defend against all such claims. It is the Company's policy to accrue for amounts related to these matters if it is probable that a liability has been incurred and an amount can be reasonably estimated. Although the outcome of such matters cannot be predicted with certainty and no assurances can be given with respect to such matters, the Company believes that the outcome of these matters in which it is currently involved will not have a materially adverse effect on its results of operations, liquidity or financial position.
(16) Quarterly Financial Data (Unaudited):
Summarized quarterly data is set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
573,993
|
|
|
$
|
518,787
|
|
|
$
|
410,307
|
|
|
$
|
413,007
|
|
|
$
|
1,916,094
|
|
|
Gross profit
|
190,230
|
|
|
172,021
|
|
|
132,713
|
|
|
121,923
|
|
|
616,887
|
|
|
Net income attributable to Sauer-Danfoss Inc.
|
64,794
|
|
|
56,408
|
|
|
40,633
|
|
|
19,924
|
|
|
181,759
|
|
|
Basic net income per common share (1)
|
$
|
1.34
|
|
|
$
|
1.17
|
|
|
$
|
0.84
|
|
|
$
|
0.41
|
|
|
$
|
3.75
|
|
|
Diluted net income per common share
|
$
|
1.34
|
|
|
$
|
1.16
|
|
|
$
|
0.84
|
|
|
$
|
0.41
|
|
|
$
|
3.75
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
564,742
|
|
|
$
|
563,317
|
|
|
$
|
483,297
|
|
|
$
|
446,131
|
|
|
$
|
2,057,487
|
|
|
Gross profit
|
189,259
|
|
|
190,583
|
|
|
154,815
|
|
|
122,500
|
|
|
657,157
|
|
|
Net income attributable to Sauer-Danfoss Inc.
|
70,554
|
|
|
74,875
|
|
|
56,997
|
|
|
27,444
|
|
|
229,870
|
|
|
Basic net income per common share (1)
|
$
|
1.46
|
|
|
$
|
1.55
|
|
|
$
|
1.18
|
|
|
$
|
0.57
|
|
|
$
|
4.75
|
|
|
Diluted net income per common share (1)
|
$
|
1.46
|
|
|
$
|
1.54
|
|
|
$
|
1.18
|
|
|
$
|
0.57
|
|
|
$
|
4.74
|
|
(1) Basic and diluted net income per common share is computed independently for each of the periods presented. Accordingly, the sum of the quarterly basic and diluted net income per common share may not agree to the annual total.
(17) Segment and Geographic Information:
The Company's reportable segments are organized around its various product lines of Hydrostatics (formerly Propel), Work Function, Controls and Stand-Alone Businesses. Hydrostatics products include hydrostatic transmissions and related products that transmit the power from the engine to the wheel to propel a vehicle. Work Function products include steering motors and motors
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
that transmit power for the work functions of the vehicle. Controls products include electrohydraulic controls, microprocessors, and valves that control and direct the power of a vehicle. Stand-Alone Businesses, an aggregation of
two
operating segments, includes open circuit gear pumps and motors, cartridge valves and hydraulic integrated circuits, directional control valves, inverters, and light duty hydrostatic transmissions that transmit, control and direct the power of a vehicle and are marketed under their own names and are managed as stand-alone businesses. Segment costs in Global Services relate to internal global service departments and include costs such as consulting for special projects, tax and accounting fees paid to outside third parties, certain insurance premiums, and amortization of intangible assets from certain business combinations.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates individual segment performance based on segment income or loss defined as the respective segment's portion of the total Company's net income, excluding net interest expense, income taxes, and noncontrolling interest. The following table presents the significant items by reportable segment as of and for the years ended
December 31, 2012
,
2011
, and 2010 respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hydrostatics
|
|
Work
Function
|
|
Controls
|
|
Stand-Alone Businesses
|
|
Global
Services
|
|
Total
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
883,683
|
|
|
$
|
311,588
|
|
|
$
|
303,612
|
|
|
$
|
417,211
|
|
|
$
|
—
|
|
|
$
|
1,916,094
|
|
|
Segment income (loss)
|
173,549
|
|
|
48,288
|
|
|
74,224
|
|
|
68,361
|
|
|
(43,781
|
)
|
|
320,641
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(17,648
|
)
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
2,613
|
|
|
Loss on early retirement of debt
|
|
|
|
|
|
|
|
|
|
|
(1,254
|
)
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
304,352
|
|
|
Total assets
|
346,291
|
|
|
132,501
|
|
|
107,174
|
|
|
158,896
|
|
|
654,097
|
|
|
1,398,959
|
|
|
Depreciation and amortization
|
30,915
|
|
|
19,883
|
|
|
12,646
|
|
|
14,753
|
|
|
2,306
|
|
|
80,503
|
|
|
Capital expenditures
|
20,978
|
|
|
4,937
|
|
|
6,147
|
|
|
9,599
|
|
|
6,971
|
|
|
48,632
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
948,153
|
|
|
$
|
377,519
|
|
|
$
|
322,489
|
|
|
$
|
409,326
|
|
|
$
|
—
|
|
|
$
|
2,057,487
|
|
|
Segment income (loss)
|
210,532
|
|
|
59,235
|
|
|
78,459
|
|
|
58,624
|
|
|
(45,341
|
)
|
|
361,509
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(22,829
|
)
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
1,679
|
|
|
Loss on early retirement of debt
|
|
|
|
|
|
|
|
|
|
|
(1,176
|
)
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
339,183
|
|
|
Total assets
|
385,313
|
|
|
159,120
|
|
|
112,118
|
|
|
153,284
|
|
|
468,421
|
|
|
1,278,256
|
|
|
Depreciation and amortization
|
32,559
|
|
|
21,724
|
|
|
13,561
|
|
|
17,757
|
|
|
2,493
|
|
|
88,094
|
|
|
Capital expenditures
|
22,402
|
|
|
5,619
|
|
|
7,907
|
|
|
8,985
|
|
|
6,852
|
|
|
51,765
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
717,193
|
|
|
$
|
320,716
|
|
|
$
|
243,163
|
|
|
$
|
359,511
|
|
|
$
|
—
|
|
|
$
|
1,640,583
|
|
|
Segment income (loss)
|
165,047
|
|
|
28,674
|
|
|
49,113
|
|
|
35,796
|
|
|
(31,678
|
)
|
|
246,952
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(50,901
|
)
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
1,455
|
|
|
Loss on early retirement of debt
|
|
|
|
|
|
|
|
|
|
|
(2,421
|
)
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
195,085
|
|
|
Total assets
|
380,574
|
|
|
198,560
|
|
|
119,415
|
|
|
169,230
|
|
|
260,425
|
|
|
1,128,204
|
|
|
Depreciation and amortization
|
35,957
|
|
|
22,640
|
|
|
14,794
|
|
|
21,814
|
|
|
2,131
|
|
|
97,336
|
|
|
Capital expenditures
|
10,408
|
|
|
4,355
|
|
|
4,279
|
|
|
5,771
|
|
|
1,405
|
|
|
26,218
|
|
Sauer-Danfoss Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011, and 2010
(Dollars in thousands, except per share data)
A summary of the Company's net sales and long-lived assets by geographic area is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales(1)
|
|
Long-Lived Assets(2)
|
|
|
2012
|
|
2011
|
|
2010
|
|
2012
|
|
2011
|
|
United States
|
$
|
841,636
|
|
|
$
|
780,734
|
|
|
$
|
612,787
|
|
|
$
|
102,759
|
|
|
$
|
104,481
|
|
|
China
|
131,115
|
|
|
203,389
|
|
|
192,483
|
|
|
21,876
|
|
|
19,001
|
|
|
Germany
|
152,576
|
|
|
190,464
|
|
|
144,657
|
|
|
50,338
|
|
|
51,924
|
|
|
Japan
|
112,553
|
|
|
99,799
|
|
|
70,725
|
|
|
7,513
|
|
|
9,892
|
|
|
Denmark(3)
|
20,212
|
|
|
24,037
|
|
|
20,693
|
|
|
86,402
|
|
|
95,064
|
|
|
Other countries
|
658,002
|
|
|
759,064
|
|
|
599,238
|
|
|
133,465
|
|
|
146,539
|
|
|
Total
|
$
|
1,916,094
|
|
|
$
|
2,057,487
|
|
|
$
|
1,640,583
|
|
|
$
|
402,353
|
|
|
$
|
426,901
|
|
(1)
Net sales are attributed to countries based on location of customer.
(2)
Long-lived assets include property, plant and equipment net of accumulated depreciation, goodwill, intangible assets net of accumulated amortization, and certain other long-lived assets.
(3)
Majority of this country's sales are shipped outside of the home country where the product is produced.
One
customer accounted for 10 percent of total consolidated net sales for the years ended December 31, 2012 and 2011. No single customer accounted for 10 percent or more of total consolidated net sales for the year ended December 31, 2010.