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RBN > SEC Filings for RBN > Form 10-K on 23-Oct-2012All Recent SEC Filings

Show all filings for ROBBINS & MYERS, INC.

Form 10-K for ROBBINS & MYERS, INC.


23-Oct-2012

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a leading designer, manufacturer and marketer of highly engineered, application-critical equipment and systems for the energy, industrial, chemical and pharmaceutical markets worldwide. With our acquisition of T-3 Energy Services, Inc. ("T-3") on January 10, 2011 ("the acquisition date"), we are expanding and complementing our energy business in our Energy Services segment, and creating a stronger strategic platform with better scale to support future growth. We attribute our success to our close and continuing interaction with customers, our manufacturing, sourcing and application engineering expertise and our ability to serve customers globally. We have initiated programs to reduce our manufacturing footprint for specific product lines to improve asset utilization, and we have standardized more of the reactor system product offerings to leverage our supply chain, global manufacturing assets and functional resources. We are continuing to find ways to leverage strengths across the Company and identify new synergy opportunities. In fiscal 2013, we expect to continue our streamlining and profit margin expansion efforts in certain businesses and pursue our organic and strategic growth initiatives to improve our competitiveness, financial results, long-term profitability and shareholder value.

As more fully described in Note 3 of Notes to Consolidated Financial Statements, on August 8, 2012, we entered into a definitive merger agreement with National Oilwell Varco, Inc. ("NOV," "National Oilwell Varco"), in an all-cash transaction. Under the terms of the transaction, which has been approved by the Boards of Directors of both Robbins & Myers and NOV, upon the closing of the merger, our shareholders will receive $60.00 in cash for each common share of Robbins & Myers they own. Consummation of the transaction is subject to customary closing conditions, including obtaining certain regulatory approvals, as well as approval of our shareholders. On October 9, 2012, we received a request for additional information and documents from the U.S. Justice Department (often referred to as a second request) in connection with the proposed merger. Unless expressly noted to the contrary, all forward-looking statements in the discussion and analysis of financial condition and results of operations that follows relate to the Company on a stand-alone basis and are not reflective of the impact of the proposed merger with NOV.

We continued to experience positive results during fiscal 2012 in major geographic areas and end markets, with most products achieving revenue growth and improved margins driven by strong backlog at the beginning of fiscal 2012 and higher orders in fiscal 2012, along with benefits from our past restructuring and continuing cost containment initiatives. We are seeing our energy markets moderating, but remain at relatively high levels and continued growth in certain chemical and industrial markets. We are cautiously optimistic that with our order trends and record backlog in both our segments at the end of fiscal 2012, we will continue to see improved operating results in fiscal 2013.

With approximately 43% of our sales outside the United States, we can be affected by changes in currency exchange rates between the U.S. dollar and the foreign currencies in non-U.S. countries in which we operate. The impact on net income, sales and orders due to foreign exchange changes was not material for fiscal 2012 compared with fiscal 2011. Additionally, the assets and liabilities of our foreign operations are translated at the exchange rates in effect at the balance sheet date, with related gains or losses reported as a separate component of our shareholders' equity, except for Venezuela, which is reported following highly inflationary accounting rules under U.S. GAAP. The marginal weakening of most foreign currencies against the U.S. dollar in fiscal 2012 did not materially impact our financial condition at the end of fiscal 2012 as compared with the end of fiscal 2011.

Beginning with the first quarter of fiscal 2012, we changed the composition of our reportable segments to reflect organizational, management and operational changes implemented in the first quarter of fiscal 2012. The Company now reports results in two business segments consisting of Energy Services and Process & Flow Control. The Company previously reported its operations under the Fluid Management segment and the Process Solutions segment. The businesses in our Energy Services segment provide mission-critical products to customers in the upstream oil and gas markets for use in drilling and exploration, production and completion, and pipeline transmission infrastructure. Major products include power sections for drilling motors, blowout preventers, down-hole progressing cavity pumps, drive systems and automation, wellhead equipment, frac manifolds and trees, high pressure engineered gate valves and a broad line of ancillary equipment for the energy sector, such as rod guides, rod and tubing rotators, pipeline closure products and valves. Our Energy Services segment includes products and services sold under the Robbins & Myers Energy Systems® and T-3 ® brands. Our Process & Flow Control segment targets industrial customers in the industrial chemical, pharmaceutical, wastewater treatment, food and beverage, and other end markets. Products include glass-lined reactors and thermal heat exchangers, progressing cavity pumps for industrial applications and surface transfer of viscous fluids, mixing equipment and engineered systems used to filter and process various liquids and materials. Primary brands in our Process &


Flow Control segment include Pfaudler®, Moyno ®, Chemineer® and Edlon®. We believe that this strategic realignment, which is reflected in our financial reporting for all periods presented, will enable us to have greater focus on our primary end markets while creating additional opportunities to more efficiently serve common customers and to leverage strengths across product groups.

As mentioned above, on January 10, 2011, we acquired 100% of the outstanding common stock and voting interest of T-3. The operating results of T-3 are included in our consolidated financial statements since the acquisition date in our Energy Services segment.

During the third quarter of fiscal 2011, we divested our Romaco businesses (Romaco segment). This divestiture was part of the Company's portfolio management process and operating strategy to simplify the business and improve its profit profile, and to focus on growing the Company around core competencies. The results of operations for our Romaco segment are reported as discontinued operations for all periods presented.

With the sale of the Romaco segment and our realignment as discussed above, our business consists of two market-focused segments: Energy Services and Process & Flow Control.

Energy Services. Order levels from customers served by our Energy Services segment moderated in the second half of fiscal 2012, but continued to show year-over-year improvements in fiscal 2012 compared with fiscal 2011. Our primary objectives for this segment are to grow sales by increasing our capacity to meet current demand, expanding our geographic reach, improving our selling and product management capabilities, commercializing new products in our niche market sectors, developing new customer relationships, and expanding our aftermarket business. Our Energy Services business segment designs, manufactures, markets, repairs and services equipment and systems including power sections for drilling motors, blow-out preventers, down-hole progressing cavity pumps, drive systems and controllers, wellhead equipment, frac manifolds and trees, high pressure engineered gate valves, and a broad line of ancillary equipment for the energy sector, such as rod guides, rod and tubing rotators, pipeline closure products and valves. These products are primarily used in upstream oil and gas exploration and recovery applications.

Process & Flow Control. Our Process & Flow Control segment orders improved in fiscal 2012 over fiscal 2011, achieving the highest levels since fiscal 2008. Pricing began to show improvement in fiscal 2012, but has not fully recovered, especially in the European chemical markets. Our primary objectives for this segment are to reduce operating costs in developed regions, increase manufacturing capabilities in low cost areas, standardize our products to increase operating flexibility, integrate our global operations and increase our focus on aftermarket opportunities. Our Process & Flow Control business segment designs, manufactures and services glass-lined reactors and storage vessels, customized equipment and systems and customized fluoropolymer-lined fittings, industrial progressing cavity pumps and complementary products such as grinders and customized fluid-agitation equipment and systems primarily for the pharmaceutical, industrial and specialty chemical markets.


Results of Operations

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

            Consolidated                  2012            2011         2010
            Sales                            100.0 %       100.0 %      100.0 %
            Cost of sales                     61.1          62.8         66.8

            Gross profit                      38.9          37.2         33.2
            SG&A expenses                     17.5          19.1         22.8
            Other expense                      0.3           2.1          0.6

            EBIT                              21.1 %        16.0 %        9.8 %


            By Segment                    2012            2011         2010
            Energy Services:              (In millions, except percents)
            Sales                     $      665.5       $ 477.2      $ 201.6
            EBIT                             198.0         131.0         61.7
            EBIT %                            29.8 %        27.4 %       30.6 %
            Process & Flow Control:
            Sales                     $      369.3       $ 343.4      $ 276.6
            EBIT                              41.4          26.8          4.9
            EBIT %                            11.2 %         7.8 %        1.8 %
            Consolidated:
            Sales                     $    1,034.8       $ 820.6      $ 478.2
            EBIT                             218.6         131.3         46.9
            EBIT %                            21.1 %        16.0 %        9.8 %

The comparability of the operating results has been impacted by NOV merger-related costs in fiscal 2012 and T-3 merger-related costs in fiscal 2011, as well as restructuring costs in fiscal 2011 and 2010. See Note 7-Statement of Income Information in Item 8 of this Report for further discussion. In addition, the comparability of the segment data is impacted by changes in foreign currency exchange rates, due to the translation of non-U.S. dollar denominated subsidiary results into U.S. dollars, acquisition of T-3 (included in our Energy Services segment) on January 10, 2011, as well as general economic conditions in the end markets we serve.

The Company's operating performance is evaluated using several measures. One of those measures, EBIT, is income before interest and income taxes and is reconciled to net income on our Consolidated Statement of Income. We evaluate performance of our business segments and allocate resources based on EBIT. EBIT is not, however, a measure of performance calculated in accordance with U.S. generally accepted accounting principles and should not be considered as an alternative to net income as a measure of our operating results. EBIT is not a measure of cash available for use by management.

Fiscal Year Ended August 31, 2012 Compared with Fiscal Year Ended August 31, 2011

Net Sales

Consolidated net sales from continuing operations for fiscal 2012 were $1,034.8 million, or $214.1 million higher than fiscal 2011 net sales, an increase of 26%. Excluding the impact of currency translation and the T-3 acquisition, net sales increased by $100.8 million, or 16%, due to higher sales in both of our segments in fiscal 2012.

The Energy Services segment, which includes T-3 results since January 10, 2011, had sales of $665.5 million in fiscal 2012 compared with $477.2 million in fiscal 2011. The T-3 acquisition contributed $127.0 million in additional sales over the prior year, with $78.4 million due to T-3 being owned for only a partial period of the prior year and the remaining due to strong demand in fiscal 2012, as discussed below. Excluding the impacts of foreign currency translation and T-3 acquisition, sales in fiscal 2012 increased $64.1 million, or 21%. This volume increase was primarily due to higher customer demand resulting from higher oil prices worldwide in fiscal 2012 and increased expenditure for drilling activity as exploration and production companies invested to capture oil and


gas from shale formations in North America. Orders for this segment were impacted by the same factors and were $714.4 million in fiscal 2012 compared with $517.8 million in fiscal 2011. Excluding currency and acquisition impacts, orders in fiscal 2012 grew $61.9 million, or 21%, due to strong market conditions. Ending backlog at August 31, 2012 was $169.7 million compared with $121.3 million at August 31, 2011.

The Process & Flow Control segment had sales of $369.3 million in fiscal 2012 compared with $343.4 million in fiscal 2011, an increase of $25.9 million, or 8%. Excluding currency impact, sales in fiscal 2012 increased $36.7 million, or 11%, from the prior year, reflecting improved market conditions in certain served end markets. Segment orders in fiscal 2012 continued to improve from fiscal 2011 and were $386.6 million, compared with $358.5 million in fiscal 2011. Excluding currency impact, orders increased $38.4 million, or 11%, in fiscal 2012 compared with fiscal 2011, reflecting improved demand in certain end markets outside Europe. Ending backlog at August 31, 2012 was $138.1 million compared with $129.8 million at August 31, 2011.

Income Before Interest and Income Taxes (EBIT)

Consolidated EBIT from continuing operations for fiscal 2012 was $218.6 million compared with $131.3 million in fiscal 2011, an increase of $87.3 million. The T-3 business acquired in the second quarter of fiscal 2011 contributed $42.3 million of the consolidated EBIT increase, including $5.9 million of T-3 merger-related costs incurred at Corporate and $19.7 million of higher amortization related to customer backlog, severance costs and inventory write-up values expense in the Energy Services segment which did not recur in fiscal 2012. The current year EBIT includes $3.0 million of expense related to the NOV merger. The remaining $48.0 million increase in consolidated EBIT was mainly attributable to the higher sales volume described above in all our business platforms and a favorable sales mix in our Energy Services segment. The exchange rate impact on EBIT was minimal.

The Energy Services segment had EBIT of $198.0 million in fiscal 2012, compared with $131.0 million in the prior year, an increase of $67.0 million. The T-3 business acquired in the second quarter of fiscal 2011 contributed $36.4 million of the increase. The prior year EBIT included merger-related expenses of $19.7 million for higher amortization related to customer backlog, severance and expense due to inventory write-up values. The remaining increase in EBIT of $30.6 million was mainly due to the higher sales volume described above and an improved product sales mix. The exchange rate impact on EBIT was minimal.

The Process & Flow Control segment had EBIT of $41.4 million in fiscal 2012 compared with $26.8 million in fiscal 2011, an increase of $14.6 million. The increase in EBIT was due principally to the higher sales volume in fiscal 2012 described above. Fiscal 2011 had $1.2 million of pension curtailment costs related to one of our U.S. operations and restructuring costs of $1.0 million related to our German operations, that did not recur in fiscal 2012. The exchange rate impact on EBIT was minimal.

Corporate costs were $5.6 million lower in fiscal 2012 compared with fiscal 2011. Merger-related costs, NOV in fiscal 2012 and T-3 in fiscal 2011, were $2.9 million lower. The remaining decrease is from lower compensation costs related to the departure of an executive officer in the second quarter of fiscal 2012, lower pension costs and foreign currency gains.

Income Taxes

Our effective tax rate for continuing operations was 30.9% for fiscal 2012 compared with 38.2% in fiscal 2011. The current year effective tax rate is lower than the U.S. statutory tax rate and the effective tax rate in fiscal 2011, primarily due to audit settlements in fiscal 2012 and the related release of unrecognized tax benefit balances, as well as increased income in our foreign locations which have lower effective tax rates. Additionally, fiscal 2011 included the recording of an additional valuation allowance of $7.0 million for certain deferred tax assets in our Process & Flow Control segment.

Net Income

Our net income in fiscal 2012 was $150.0 million compared with $134.0 million in fiscal 2011, which includes income from discontinued operations, net of tax, of $53.6 million (see Note 5-Discontinued Operations in Item 8 of this Report). Net income from continuing operations in fiscal 2012 was $150.0 million, compared with $80.4 million in fiscal 2011. The increase in fiscal 2012 net income from continuing operations was primarily driven by the contribution of the prior year T-3 acquisition for the full year, higher sales volume, favorable product mix, lower merger-related charges and a lower effective tax rate.


Fiscal Year Ended August 31, 2011 Compared with Fiscal Year Ended August 31, 2010

Net Sales

Consolidated net sales from continuing operations for fiscal 2011 were $820.6 million, or $342.4 million higher than fiscal 2010 net sales, an increase of 72%. Excluding the impact of currency translation and the T-3 acquisition, net sales increased by $152.4 million, or 32%, due to higher sales in both of our segments in fiscal 2011.

The Energy Services segment, which included T-3 results since January 10, 2011, had sales of $477.2 million in fiscal 2011 compared with $201.6 million in fiscal 2010. Excluding the impacts of foreign currency translation and T-3 acquisition, sales in fiscal 2011 increased $91.7 million, or 45%. The increase was primarily due to strong growth in horizontal rigs, as exploration and production companies invested to capture oil and gas from shale formations in North America. Orders for this segment were $517.8 million in fiscal 2011 compared with $218.4 million in fiscal 2010. Excluding currency and acquisition impacts, orders in fiscal 2011 grew $78.4 million, or 36%, due to strong market conditions. Ending backlog at August 31, 2011, including T-3 backlog of $91.3 million, was $121.3 million compared with $27.1 million at August 31, 2010.

The Process & Flow Control segment had sales of $343.4 million in fiscal 2011 compared with $276.6 million in fiscal 2010, an increase of $66.8 million, or 24%. Excluding currency impact, sales in fiscal 2011 increased $60.7 million, or 22%, from the prior year, due to improving demand for capital goods in global chemical markets. Segment orders in fiscal 2011 continued to improve from fiscal 2010 and were $358.5 million, compared with $303.5 million in fiscal 2010. Excluding currency impact, orders increased $49.9 million, or 16%, in fiscal 2011 compared with fiscal 2010, reflecting improved demand in certain end markets outside Europe. Ending backlog at August 31, 2011 was $129.8 million compared with $109.7 million at August 31, 2010.

Income Before Interest and Income Taxes (EBIT)

Consolidated EBIT from continuing operations for fiscal 2011 was $131.3 million compared with $46.9 million in fiscal 2010, an increase of $84.4 million. Excluding the impacts of currency translation and operating results of T-3, consolidated EBIT in fiscal 2011 increased by $67.2 million. This increase in consolidated EBIT was mainly attributable to the higher sales volume described above in all our business platforms and a favorable sales mix in our Energy Services segment. We also experienced $1.8 million of lower restructuring charges in our Process & Flow Control segment in fiscal 2011 compared with fiscal 2010.

The Energy Services segment had EBIT of $131.0 million in fiscal 2011 compared with $61.7 million in fiscal 2010. Excluding currency and acquisition impacts, EBIT for fiscal 2011 increased by $51.8 million, or 84%, due principally to the sales increase and a favorable product mix.

The Process & Flow Control segment had EBIT of $26.8 million in fiscal 2011 compared with $4.9 million in fiscal 2010. This increase in EBIT resulted from higher sales volume in fiscal 2011, as well as lower restructuring charges of $1.8 million.

Corporate costs were $6.8 million higher in fiscal 2011 compared with fiscal 2010, primarily due to $5.9 million of costs associated with professional fees and accelerated stock compensation expense related to the T-3 merger transaction.

Income Taxes

Our effective tax rate for continuing operations was 38.2% for fiscal 2011 compared with 35.2% in fiscal 2010. The fiscal 2011 effective tax rate was higher than the U.S. statutory tax rate and the effective tax rate in fiscal 2010, primarily due to the recording of an additional valuation allowance of $7.0 million for certain deferred tax assets in our Process & Flow Control segment. Excluding this impact, the effective tax rate for fiscal 2011 was lower than the U.S. federal statutory tax rate primarily due to certain U.S. permanent deductions and tax credits.

The effective tax rate for fiscal 2010 from continuing operations approximated the U.S. federal statutory tax rate.


Net Income

Our net income in fiscal 2011, which included income from discontinued operations, net of tax, of $53.6 million (see Note 5-Discontinued Operations in Item 8 of this Report), was $134.0 million compared with $33.2 million in fiscal 2010, which included net income from discontinued operations of $3.9 million. Net income from continuing operations in fiscal 2011 was $80.4 million, compared with $29.3 million in fiscal 2010. The increase in fiscal 2011 net income was primarily driven by higher sales volume and a favorable product mix, somewhat reduced by charges relating to the acquisition of T-3 and a higher effective tax rate.

Liquidity and Capital Resources

Operating Activities

In fiscal 2012, our cash inflow from operating activities was $160.4 million, compared with $101.0 million in fiscal 2011, an increase of $59.4 million. This increase in fiscal 2012 was primarily caused by higher net income from continuing operations of $69.6 million, reduced by increased funding for our pension plans of $6.8 million. The increase in working capital was a reduction in operating cash flow, although lower than the prior year impact.

In fiscal 2011, our cash inflow from operating activities was $101.0 million, compared with $88.5 million in fiscal 2010, an increase of $12.5 million. This increase was caused by higher net income, somewhat reduced by higher working capital needs in fiscal 2011 to support our sales and profit growth, payments for restructuring costs accrued at the end of fiscal 2010, increased funding for U.S. pension plans, and payments related to accruals in the opening balance sheet of T-3.

Cash flows from operating activities can fluctuate significantly from period-to-period due to working capital needs and the timing of payments for items such as income taxes, restructuring activities, pension funding and other items.

We expect our available cash, fiscal 2013 operating cash flow and availability under our credit agreement to be adequate to fund fiscal year 2013 operating needs, shareholder dividends, capital expenditures, and additional share repurchases, if any.

Investing Activities

In fiscal 2012, the Company continued to generate substantial cash from operating activities, which resulted in a strong year end financial position, with resources available for reinvestment in existing businesses. Capital expenditures in fiscal 2012 were $29.5 million in fiscal 2012 and were primarily related to our cost reduction and sales growth initiatives.

In fiscal 2011, our net cash outflows relating to investing activities of $29.5 million included $90.4 million of cash used for the T-3 acquisition, net of cash acquired; cash proceeds from the sale of our Romaco businesses of $89.2 million and $28.3 million of capital expenditures.

In fiscal 2010, our net cash outflows from investing activities of $8.1 million consisted of capital expenditures of approximately $10.6 million and asset sale proceeds of $2.5 million related to the sale of certain of our assets at two of our business units.

The Company expects fiscal 2013 capital spending to be about 30% higher than fiscal 2012.

Financing Activities

Our cash outflows from financing activities for fiscal 2012 were $188.6 million which included $187.2 million in share repurchases, as more fully described in Note 14 of the financial statements at Item 8 of this Report. The decrease in net proceeds from stock activities in fiscal 2012 of $12.9 million primarily resulted from fewer stock option exercises in the current year. The large amount of option exercises in fiscal 2011 was attributable to the T-3 acquisition. Dividends paid during fiscal 2012 were $8.6 million, or $1.0 million higher than fiscal 2011, primarily due to additional shares issued in January 2011 related to our T-3 merger. The quarterly dividend rate per common share was increased in January 2012 from $0.045 to $0.050.


From available cash balances, we repaid the remaining $30.0 million of Senior Notes on the May 3, 2010 maturity date.

On October 6, 2011, the Company announced that its Board of Directors had authorized to repurchase up to 3.0 million of the Company's outstanding common shares, in addition to the approximately 1.0 million remaining available for repurchase under the October 2008 authorization by the Board of Directors. In fiscal 2012, the Company repurchased all the remaining 4.0 million shares for $187.2 million. Repurchases were funded from the Company's available cash balances. There were no such share repurchases in fiscal 2011 and 2010.

On June 25, 2012, the Company's Board of Directors authorized the repurchase of up to 2.0 million of the Company's currently outstanding common shares (the "June 2012 Program"). Repurchases under the June 2012 Program will generally be made in the open market or in privately negotiated transactions not exceeding prevailing market prices, subject to regulatory considerations and market conditions, and will be funded from the Company's cash and credit facilities. There were no repurchases under the June 2012 Program in fiscal 2012. Under the terms of the definitive merger agreement with NOV, we have agreed not to repurchase our common shares under the June 2012 Program pending consummation of the merger. The June 2012 Program will expire when we have repurchased all the authorized shares, unless terminated earlier by a Board resolution or consummation of the merger.

Credit Agreement

Our Bank Credit Agreement (the "Agreement") provides that we may borrow, for the five-year term of the Agreement, on a revolving credit basis up to a maximum of . . .

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