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NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation—FMC Technologies, Inc. and consolidated subsidiaries ("FMC Technologies" or "we") designs, manufactures and services technologically sophisticated systems and products for our customers through our business segments: Subsea Technologies, Surface Technologies and Energy Infrastructure. Our consolidated financial statements have been prepared in U.S. dollars and in accordance with U.S. generally accepted accounting principles ("GAAP").
On February 25, 2011, our Board of Directors approved a two-for-one stock split of our outstanding shares of common stock. The stock split was completed in the form of a stock dividend that was issued on March 31, 2011 to stockholders of record at the close of business on March 14, 2011. All common share and per share information in our consolidated financial statements have been revised retroactively to reflect the stock split.
Use of estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. We base our estimates on historical experience and on other assumptions that we believe to be relevant under the circumstances. In particular, judgment is used in areas such as revenue recognition using the percentage of completion method of accounting, valuation of inventory, accounting for income taxes, impairment of long-lived and intangible assets, accounting for goodwill and other intangible assets, and accounting for retirement benefits and contingencies, including liquidated damages.
Principles of consolidation—The consolidated financial statements include the accounts of FMC Technologies and its majority-owned subsidiaries and affiliates. Intercompany accounts and transactions are eliminated in consolidation.
Investments in the common stock of unconsolidated affiliates—The investments in, and the operating results of, unconsolidated affiliates are included in the consolidated financial statements on the basis of the equity method of accounting or the cost method of accounting, depending on specific facts and circumstances. We have a 45% interest in Schilling Robotics, LLC ("Schilling") that we account for using the equity method. The carrying value of the investment at December 31, 2011 and 2010 was $126.7 million and $115.7 million, respectively, and is reported in the Subsea Technologies segment.
Investments in unconsolidated affiliates are assessed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the investments may not be fully recoverable. Evidence of a loss in value that is other than temporary include, but are not limited to, the absence of an ability to recover the carrying amount of the investment, the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment, or, where applicable, estimated sales proceeds that are insufficient to recover the carrying amount of the investment. Management's assessment as to whether any decline in value is other than temporary is based on our ability and intent to hold the investment and whether evidence indicating the carrying value of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. Management generally considers our investments in equity method investees to be strategic long-term investments. Therefore, management completes its assessments with a long-term viewpoint. If the fair value of the investment is determined to be less than the carrying value and the decline in value is considered to be other than temporary, an appropriate write-down is recorded based on the excess of the carrying value over the best estimate of fair value of the investment.
Reclassifications—Certain prior-year amounts have been reclassified to conform to the current year's presentation.
Revenue recognition—Revenue from equipment sales is recognized either upon transfer of title to the customer (which is upon shipment or when customer-specific acceptance requirements are met) or under the percentage of completion method. Service revenue is recognized as the service is provided. We record our sales net of any value added, sales or use tax.
The percentage of completion method of accounting is used for construction-type manufacturing and assembly projects that involve significant design and engineering efforts in order to satisfy detailed customer-supplied specifications. Under the percentage of completion method, revenue is recognized as work progresses on each contract. We primarily apply the ratio of costs incurred to date to total estimated contract costs at completion to measure this ratio. If it is not possible to form a reliable estimate of progress toward completion, no revenue or costs are recognized until the project is complete or substantially complete. Any expected losses on construction-type contracts in progress are charged to earnings, in total, in the period the losses are identified.
Modifications to construction-type contracts, referred to as "change orders," effectively change the provisions of the original contract, and may, for example, alter the specifications or design, method or manner of performance, equipment, materials, sites and/or period for completion of the work. If a change order represents a firm price commitment from a customer, we account for the revised estimate as if it had been included in the original estimate, effectively recognizing the pro rata impact of the new estimate on our calculation of progress toward completion in the period in which the firm commitment is received. If a change order is unpriced: (1) we include the costs of contract performance in our calculation of progress toward completion in the period in which the costs are incurred or become probable; and (2) when it is determined that the revenue is probable of recovery, we include the change order revenue, limited to the costs incurred to date related to the change order, in our calculation of progress toward completion. Unpriced change orders included in revenue were immaterial to our consolidated revenue for all periods presented. Margin is not recorded on unpriced change orders unless realization is assured beyond a reasonable doubt. The assessment of realization may be based upon our previous experience with the customer or based upon our receipt of a firm price commitment from the customer.
Progress billings generally are issued contingent on completion of certain phases of the work as stipulated in the contract. Revenue in excess of progress billings on contracts accounted for under the percentage of completion method amounted to $411.8 million and $285.5 million at December 31, 2011 and 2010, respectively. These unbilled receivables are reported in trade receivables on the consolidated balance sheets. Progress billings and cash collections in excess of revenue recognized on a contract are classified as advance payments and progress billings within current liabilities on the consolidated balance sheets.
Shipping and handling costs—Shipping and handling costs are recorded as cost of product revenue in our consolidated statements of income.
Cash equivalents—Cash equivalents are highly-liquid, short-term instruments with original maturities of three months or less from their date of purchase.
Trade receivables—An allowance for doubtful accounts is provided on trade receivables equal to the estimated uncollectible amounts. This estimate is based on historical collection experience and a specific review of each customer's trade receivable balance.
Inventories—Inventories are stated at the lower of cost or net realizable value. Inventory costs include those costs directly attributable to products, including all manufacturing overhead, but excluding costs to distribute. Cost is determined on the last-in, first-out ("LIFO") basis for all significant domestic inventories, except certain inventories relating to construction-type contracts, which are stated at the actual production cost incurred to date, reduced by the portion of these costs identified with revenue recognized. The first-in, first-out ("FIFO") method is used to determine the cost for all other inventories.
Investments—The appropriate classification of investments in marketable equity securities is determined at the time of purchase and re-evaluated as of each subsequent reporting date. Securities classified as available-for-sale are carried at fair value with unrealized holding gains and losses on these securities recognized in accumulated other comprehensive income (loss), net of related income tax. We had no available-for-sale securities at December 31, 2011 or 2010.
Securities classified as trading securities are carried at fair value with gains and losses on these securities recognized through other income (expense), net. Trading securities are comprised primarily of marketable equity mutual funds that approximate a portion of our liability under our Non-Qualified Savings and Investment Plan ("Non-Qualified Plan"). Trading securities totaled approximately $32.8 million and $32.5 million at December 31, 2011 and 2010, respectively.
Property, plant, and equipment—Property, plant, and equipment is recorded at cost. Depreciation for financial reporting purposes is provided principally on the straight-line basis over the estimated useful lives of the assets (land improvements—20 to 35 years; buildings—20 to 50 years; and machinery and equipment—3 to 20 years). Gains and losses are reflected in income upon the sale or retirement of assets. Expenditures that extend the useful lives of property, plant and equipment are capitalized and depreciated over the estimated new remaining life of the asset.
Impairment of property, plant, and equipment—Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value.
Long-lived assets held for sale are reported at the lower of carrying value or fair value less cost to sell.
Capitalized software costs—Other assets include the capitalized cost of internal use software (including Internet websites). The assets are stated at cost less accumulated amortization and totaled $33.8 million and $25.7 million at December 31, 2011 and 2010, respectively. These software costs include significant purchases of software and internal and external costs incurred during the application development stage of software projects. These costs are amortized on a straight-line basis over the estimated useful lives of the assets. For internal use software, the useful lives range from three to ten years. For Internet website costs, the estimated useful lives do not exceed three years.
Goodwill and other intangible assets—Goodwill is not subject to amortization but is tested for impairment on an annual basis (or more frequently if impairment indicators arise). We have established October 31 as the date of our annual test for impairment of goodwill. Reporting units with goodwill are tested for impairment by first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, or based on management's judgment, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a two-step impairment test is performed. The first step compares the fair value of the reporting unit (measured as the present value of expected future cash flows) to its carrying amount. If the fair value of the reporting unit is less than its carrying amount, a second step is performed. In this step, the fair value of the reporting unit is allocated to its assets and liabilities to determine the implied fair value of goodwill, which is used to measure the impairment loss. We have not recognized any impairment for the years ended December 31, 2011 or 2010, as the fair values of our reporting units with goodwill balances exceeded our carrying amounts. In addition, there were no negative conditions, or triggering events, that occurred in 2011 or 2010 requiring us to perform additional impairment reviews.
Our acquired intangible assets are being amortized on a straight-line basis over their estimated useful lives, which generally range from 7 to 40 years. None of our acquired intangible assets have indefinite lives. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable. The carrying amount of an intangible asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the intangible asset exceeds its fair value.
Fair Value—We record our financial assets and financial liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
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Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities. |
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Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets. |
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Level 3: Unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability. |
Income taxes—Current income taxes are provided on income reported for financial statement purposes, adjusted for transactions that do not enter into the computation of income taxes payable in the same year. Deferred tax assets and liabilities are measured using enacted tax rates for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is established whenever management believes that it is more likely than not that deferred tax assets may not be realizable.
U.S. income taxes are not provided on our equity in undistributed earnings of foreign subsidiaries or affiliates to the extent we have determined that the earnings are indefinitely reinvested. U.S. income taxes are provided on such earnings in the period in which we can no longer support that such earnings are indefinitely reinvested.
It is our policy to classify interest expense and penalties recognized on underpayments of income taxes as income tax expense.
Stock-based employee compensation—We measure compensation cost on restricted stock awards based on the market price at the grant date and the number of shares awarded. The compensation cost for each award is recognized ratably over the applicable service period, after taking into account estimated forfeitures.
Common stock held in employee benefit trust—Shares of our common stock are purchased by the plan administrator of the Non-Qualified Plan and placed in a trust owned by us. Purchased shares are recorded at cost and classified as a reduction of stockholders' equity on the consolidated balance sheets.
Earnings per common share ("EPS")—Basic EPS is computed using the weighted-average number of common shares outstanding during the year. Diluted EPS gives effect to the potential dilution of earnings that could have occurred if additional shares were issued for stock option exercises and restricted stock under the treasury stock method. The treasury stock method assumes that proceeds that would be obtained upon exercise of common stock options and issuance of restricted stock are used to buy back outstanding common stock at the average market price during the period.
Warranty obligations—We provide warranties of various lengths and terms to certain of our customers based on standard terms and conditions and negotiated agreements. We provide for the estimated cost of warranties at the time revenue is recognized for products where reliable, historical experience of warranty claims and costs exists. We also provide warranty liability when additional specific obligations are identified. The obligation reflected in other current liabilities on the consolidated balance sheets is based on historical experience by product and considers failure rates and the related costs in correcting a product failure. Should actual product failure rates or repair costs differ from our current estimates, revisions to the estimated warranty liability would be required.
Foreign currency—Financial statements of operations for which the U.S. dollar is not the functional currency, and are located in non-highly inflationary countries, are translated into U.S. dollars prior to consolidation. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date, while income statement accounts are translated at the average exchange rate for each period. For these operations, translation gains and losses are recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity until the foreign entity is sold or liquidated. For operations in highly inflationary countries and where the local currency is not the functional currency, inventories, property, plant and equipment, and other non-current assets are converted to U.S. dollars at historical exchange rates, and all gains or losses from conversion are included in net income. Foreign currency effects on cash, cash equivalents and debt in hyperinflationary economies are included in interest income or expense.
Derivative instruments—Derivatives are recognized on the consolidated balance sheets at fair value, with classification as current or non-current based upon the maturity of the derivative instrument. Changes in the fair value of derivative instruments are recorded in current earnings or deferred in accumulated other comprehensive income (loss), depending on the type of hedging transaction and whether a derivative is designated as, and is effective as, a hedge. Each instrument is accounted for individually and assets and liabilities are not offset.
Hedge accounting is only applied when the derivative is deemed to be highly effective at offsetting changes in anticipated cash flows of the hedged item or transaction. Changes in fair value of derivatives that are designated as cash flow hedges are deferred in accumulated other comprehensive income (loss) until the underlying transactions are recognized in earnings. At such time, related deferred hedging gains or losses are also recorded in operating earnings on the same line as the hedged item. Effectiveness is assessed at the inception of the hedge and on a quarterly basis. Effectiveness of forward contract cash flow hedges are assessed based solely on changes in fair value attributable to the change in the spot rate. The change in the fair value of the contract related to the change in forward rates is excluded from the assessment of hedge effectiveness. Changes in this excluded component of the derivative instrument, along with any ineffectiveness identified, are recorded in operating earnings as incurred. We document our risk management strategy and hedge effectiveness at the inception of, and during the term of, each hedge.
We also use forward contracts to hedge foreign currency assets and liabilities, for which we do not apply hedge accounting. The changes in fair value of these contracts are recognized in other income (expense), net, as they occur and offset gains or losses on the remeasurement of the related asset or liability.
Cash flows from derivative contracts are reported in the consolidated statements of cash flows in the same categories as the cash flows from the underlying transactions.
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NOTE 2. RECENTLY ADOPTED ACCOUNTING STANDARDS
Effective January 1, 2011, we adopted an update issued by the Financial Accounting Standards Board ("FASB") to existing guidance on revenue recognition for arrangements with multiple deliverables. This update allows companies to allocate consideration received for qualified separate deliverables based on estimated selling price for both delivered and undelivered items when vendor-specific or third-party evidence is unavailable. Additionally, disclosure of the nature of multiple element arrangements, the types of deliverables under the arrangements, the general timing of their delivery and significant factors and estimates used to determine estimated selling prices are required. The adoption of the update did not have a material impact on our consolidated financial statements.
Effective January 1, 2011, we adopted changes issued by the FASB to disclosure requirements for fair value measurements. Specifically, the changes require a reporting entity to disclose, in the reconciliation of fair value measurements using significant unobservable inputs (Level 3), separate information about purchases, sales, issuances and settlements (that is, on a gross basis rather than as one net number). There was no impact on the presentation of our consolidated financial statements from the adoption of this update.
Effective November 1, 2011, we adopted an update issued by the FASB to existing guidance on goodwill impairment testing. This update provides an entity the option, prior to performing the first step of the two-step goodwill impairment test under existing guidance, to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The adoption of the amended guidance did not have an impact on our consolidated financial position or results of operations.
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NOTE 4. BUSINESS COMBINATIONS
During 2009, we acquired all of the equity interests of two businesses for a total cash purchase price of $153.5 million, earn-out contingent consideration of $56.1 million and debt assumed of $4.1 million. These businesses were acquired to enhance and expand our segment product offerings. Total goodwill recorded from these acquisitions was $128.4 million.
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NOTE 5. INVENTORIES
Inventories consisted of the following:
| (In millions) | December 31, | |||||||
| 2011 | 2010 | |||||||
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Raw materials |
$ | 138.7 | $ | 108.8 | ||||
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Work in process |
126.7 | 95.8 | ||||||
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Finished goods |
594.4 | 508.4 | ||||||
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Gross inventories before LIFO reserves and valuation adjustments |
859.8 | 713.0 | ||||||
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LIFO reserves and valuation adjustments |
(147.6 | ) | (146.5 | ) | ||||
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Inventory, net |
$ | 712.2 | $ | 566.5 | ||||
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Net inventories accounted for under the LIFO method totaled $244.7 million and $157.9 million at December 31, 2011 and 2010, respectively. The current replacement costs of LIFO inventories exceeded their recorded values by $83.9 million and $81.7 million at December 31, 2011 and 2010, respectively. There were no reductions to the base LIFO inventory in 2011 or 2010. In 2009, we reduced certain LIFO inventories that were carried at costs lower than current replacement costs. The result was a decrease in cost of sales by approximately $0.2 million in 2009.
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NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
| (In millions) | December 31, | |||||||
| 2011 | 2010 | |||||||
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Land and land improvements |
$ | 36.9 | $ | 23.3 | ||||
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Buildings |
221.2 | 185.7 | ||||||
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Machinery and equipment |
900.7 | 802.4 | ||||||
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Construction in process |
137.1 | 75.2 | ||||||
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| 1,295.9 | 1,086.6 | |||||||
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Accumulated depreciation |
(528.0 | ) | (477.6 | ) | ||||
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Property, plant and equipment, net |
$ | 767.9 | $ | 609.0 | ||||
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Depreciation expense was $86.1 million, $80.7 million and $78.3 million in 2011, 2010 and 2009, respectively.
The amount of interest cost capitalized was $0.5 million, $0.2 million and $0.6 million in 2011, 2010 and 2009, respectively.
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NOTE 7. GOODWILL AND INTANGIBLE ASSETS
Goodwill —The carrying amount of goodwill by business segment was as follows:
| (In millions) | Subsea Technologies |
Surface Technologies |
Energy Infrastructure |
Total | ||||||||||||
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December 31, 2010 |
$ | 135.1 | $ | 12.1 | $ | 127.6 | $ | 274.8 | ||||||||
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Translation |
(9.0 | ) | — | — | (9.0 | ) | ||||||||||
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December 31, 2011 |
$ | 126.1 | $ | 12.1 | $ | 127.6 | $ | 265.8 | ||||||||
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Intangible assets—The components of intangible assets were as follows:
| (In millions) | December 31, | |||||||||||||||
| 2011 | 2010 | |||||||||||||||
| Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
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Customer lists |
$ | 36.9 | $ | 14.3 | $ | 36.9 | $ | 11.9 | ||||||||
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Patents and acquired technology |
130.5 | 29.6 | 132.3 | 22.2 | ||||||||||||
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Trademarks |
8.0 | 4.0 | 8.2 | 3.4 | ||||||||||||
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Other |
5.4 | 4.9 | 5.4 | 4.8 | ||||||||||||
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Total intangible assets |
$ | 180.8 | $ | 52.8 | $ | 182.8 | $ | 42.3 | ||||||||
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All of our acquired identifiable intangible assets are subject to amortization and, where applicable, foreign currency translation adjustments. We recorded $11.3 million, $11.5 million and $7.8 million in amortization expense related to acquired intangible assets during the years ended December 31, 2011, 2010 and 2009, respectively. During the years 2012 through 2016, annual amortization expense is expected to be as follows: $10.8 million in 2012, $10.5 million in 2013, $10.3 million in 2014, $10.3 million in 2015, $10.2 million in 2016 and $75.9 million thereafter.
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NOTE 8. SALE LEASEBACK TRANSACTION
In March 2007, we sold and leased back property in Houston, Texas, consisting of land, corporate offices and production facilities primarily related to the Subsea Technologies and Surface Technologies segments. We received net proceeds of $58.1 million in connection with the sale. The carrying value of the property sold was $20.3 million. We accounted for the transaction as a sale leaseback resulting in (i) first quarter 2007 recognition of $1.3 million of the $37.4 million gain on the transaction and (ii) the deferral of the remaining $36.1 million of the gain, which will be amortized to rent expense over a noncancellable ten-year lease term. The deferred gain is presented in other liabilities in the consolidated balance sheet. The lease expires in 2022 and provides for two 5-year optional extensions as well as the option to terminate the lease in 2017, subject to a $3.3 million fee. Annual rent of $4.2 million escalates 2% per year. The lease has been recorded as an operating lease.
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NOTE 9. DEBT
Revolving credit facilities—Our $600 million five-year revolving credit agreement that matures in December 2012 with JPMorgan Chase Bank, N.A., as Administrative Agent, accrues interest at a rate equal to, at our option; either (a) a base rate determined by reference to the higher of (1) the agent's prime rate and (2) the federal funds rate plus 1/2 of 1% or (b) an interest rate of 45 basis points above the London Interbank Offered Rate ("LIBOR"). The margin over LIBOR is variable and is determined based on our debt rating. Available capacity under the credit facility is reduced by outstanding letters of credit associated with the facility, which totaled $13.8 million as of December 31, 2011, and any outstanding commercial paper.
Our $350 million three-year revolving credit agreement maturing on January 14, 2013, with Bank of America, N.A., as Administrative Agent, accrues interest at a rate equal to, at our option, either (a) a base rate determined by reference to the higher of (1) the agent's prime rate, (2) the federal funds rate plus 1/2 of 1% or (3) LIBOR plus 1.00% or (b) LIBOR plus 2.75%. The margin over LIBOR is variable and is determined based on our debt rating.
Unused capacity under the credit facilities at December 31, 2011, totaled $356.1 million.
Among other restrictions, the terms of the credit agreements include negative covenants related to liens and a financial covenant related to the debt-to-earnings ratio. We were in compliance with all restrictive covenants as of December 31, 2011.
Commercial paper—Under our commercial paper program, we have the ability to access $750.0 million of short-term financing through our commercial paper dealers subject to the limit of unused capacity of our revolving credit agreements. Commercial paper borrowings are issued at market interest rates. Commercial paper borrowings as of December 31, 2011, had a weighted average interest rate of 0.52%.
Term loan—In May 2010, we entered into a R$54.7 million term loan agreement in Brazil maturing on June 15, 2013, with Itaú BBA., as Administrative Agent. Under the loan agreement, interest accrues at an annual rate of 4.50%. Principal and interest are due at maturity.
Property financing—In September 2004, we entered into agreements for the sale and leaseback of an office building having a net book value of $8.5 million. Under the terms of the agreement, the building was sold for $9.7 million in net proceeds and leased back under a 10-year lease. We have subleased this property to a third party under a lease agreement that is being accounted for as an operating lease. We have accounted for the transaction as a financing transaction and are amortizing the related obligation using an effective annual interest rate of 5.37%.
Uncommitted credit—We have uncommitted credit lines at many of our international subsidiaries for immaterial amounts. We utilize these facilities to provide a more efficient daily source of liquidity. The effective interest rates depend upon the local national market.
Short-term debt and current portion of long-term debt—Short-term debt and current portion of long-term debt consisted of the following:
| (In millions) | December 31, | |||||||
| 2011 | 2010 | |||||||
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Revolving credit facilities |
$ | 100.0 | $ | — | ||||
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Commercial paper |
480.1 | — | ||||||
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Property financing |
0.5 | 0.4 | ||||||
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Foreign uncommitted credit facilities |
7.0 | 6.6 | ||||||
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Other |
— | 5.2 | ||||||
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Total short-term debt and current portion of long-term debt |
$ | 587.6 | $ | 12.2 | ||||
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Long-term debt—Long-term debt consisted of the following:
| (In millions) | December 31, | |||||||
| 2011 | 2010 | |||||||
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Revolving credit facilities |
$ | 100.0 | $ | 100.0 | ||||
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Commercial paper |
480.1 | 211.0 | ||||||
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Term loan |
29.2 | 32.8 | ||||||
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Property financing |
7.3 | 7.7 | ||||||
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Other |
— | 5.2 | ||||||
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Total long-term debt |
616.6 | 356.7 | ||||||
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Less: current portion |
(580.6 | ) | (5.6 | ) | ||||
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Long-term debt, less current portion |
$ | 36.0 | $ | 351.1 | ||||
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Maturities of total long-term debt as of December 31, 2011, are payable as follows: $580.6 million in 2012 and $36.0 million in 2013.
Interest rate swaps—In March 2009, we entered into interest rate swaps related to interest payments on $100.0 million of our variable rate borrowings on our $600 million revolving credit facility. The effect of these interest rate swaps was to fix the effective annual interest rate of these variable rate borrowings at 2.08%. The interest rate swaps were accounted for as cash flow hedges. See Note 14 to these consolidated financial statements for additional disclosure of our interest rate swaps.
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NOTE 10. INCOME TAXES
Domestic and foreign components of income before income taxes are shown below:
| Year Ended December 31, | ||||||||||||
| (In millions) | 2011 | 2010 | 2009 | |||||||||
|
Domestic |
$ | 132.7 | $ | 64.6 | $ | 70.4 | ||||||
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Foreign |
416.4 | 470.9 | 446.0 | |||||||||
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Income before income taxes |
$ | 549.1 | $ | 535.5 | $ | 516.4 | ||||||
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The provision for income taxes consisted of:
| Year Ended December 31, | ||||||||||||
| (In millions) | 2011 | 2010 | 2009 | |||||||||
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Current: |
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Federal |
$ | 26.7 | $ | 16.7 | $ | 53.2 | ||||||
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State |
3.3 | 1.0 | 1.9 | |||||||||
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Foreign |
134.4 | 55.3 | 96.1 | |||||||||
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Total current |
164.4 | 73.0 | 151.2 | |||||||||
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Deferred: |
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Increase in the valuation allowance for deferred tax assets |
0.2 | 0.1 | 1.4 | |||||||||
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Other deferred tax (benefit) expense |
(15.3 | ) | 86.5 | 2.5 | ||||||||
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Total deferred |
(15.1 | ) | 86.6 | 3.9 | ||||||||
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Provision for income taxes |
$ | 149.3 | $ | 159.6 | $ | 155.1 | ||||||
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Significant components of our deferred tax assets and liabilities were as follows:
| December 31, | ||||||||
| (In millions) | 2011 | 2010 | ||||||
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Deferred tax assets attributable to: |
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Accrued expenses |
$ | 56.1 | $ | 49.9 | ||||
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Foreign tax credit carryforwards |
1.4 | 7.6 | ||||||
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Accrued pension and other post-retirement benefits |
109.3 | 63.3 | ||||||
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Stock-based compensation |
20.0 | 22.0 | ||||||
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Net operating loss carryforwards |
23.7 | 29.4 | ||||||
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Inventories |
18.6 | 20.8 | ||||||
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Foreign exchange |
5.2 | 4.3 | ||||||
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Other |
— | 1.3 | ||||||
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Deferred tax assets |
234.3 | 198.6 | ||||||
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Valuation allowance |
(3.7 | ) | (3.5 | ) | ||||
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Deferred tax assets, net of valuation allowance |
230.6 | 195.1 | ||||||
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Deferred tax liabilities attributable to: |
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Revenue in excess of billings on contracts accounted for under the percentage of completion method |
138.0 | 140.2 | ||||||
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U.S. tax on foreign subsidiaries' undistributed earnings not indefinitely reinvested |
22.5 | 36.1 | ||||||
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Property, plant and equipment, goodwill and other assets |
42.2 | 88.5 | ||||||
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Deferred tax liabilities |
202.7 | 264.8 | ||||||
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Net deferred tax assets (liabilities) |
$ | 27.9 | $ | (69.7 | ) | |||
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At December 31, 2011 and 2010, the carrying amount of net deferred tax assets and the related valuation allowance included the impact of foreign currency translation adjustments. Included in our deferred tax assets at December 31, 2011 were U.S. foreign tax credit carryforwards of $1.4 million, which, if not utilized, will begin to expire after 2015. Realization of these deferred tax assets is dependent on the generation of sufficient U.S. taxable income prior to the above date. Based on long-term forecasts of operating results, management believes that it is more likely than not that domestic earnings over the forecast period will result in sufficient U.S. taxable income to fully realize these deferred tax assets. In its analysis, management has considered the effect of foreign deemed dividends and other expected adjustments to domestic earnings that are required in determining U.S. taxable income. Foreign earnings taxable to us as dividends, including deemed dividends for U.S. tax purposes, were $169.3 million, $341.2 million and $275.5 million, in 2011, 2010 and 2009, respectively. Also included in deferred tax assets are tax benefits related to net operating loss carryforwards attributable to foreign entities. If not utilized, these net operating loss carryforwards will begin to expire in 2012. Management believes it is more likely than not that we will not be able to utilize certain of these operating loss carryforwards before expiration; therefore, we have established a valuation allowance against the related deferred tax assets.
By country, current and non-current deferred income taxes included in our consolidated balance sheet at December 31, 2011, were as follows:
| December 31, 2011 | ||||||||||||||||||||
| (In millions) | Current Asset |
Non-Current Asset |
Current (Liability) |
Non-Current (Liability) |
Total | |||||||||||||||
|
United States |
$ | 51.8 | $ | 56.7 | $ | — | $ | — | $ | 108.5 | ||||||||||
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Brazil |
12.7 | — | — | (16.9 | ) | (4.2 | ) | |||||||||||||
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Norway |
10.1 | — | — | (83.5 | ) | (73.4 | ) | |||||||||||||
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Other foreign |
3.2 | 10.4 | (5.1 | ) | (11.5 | ) | (3.0 | ) | ||||||||||||
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Net deferred tax assets (liabilities) |
$ | 77.8 | $ | 67.1 | $ | (5.1 | ) | $ | (111.9 | ) | $ | 27.9 | ||||||||
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The following table presents a rollforward of our unrecognized tax benefits and associated interest and penalties:
| (In millions) | Federal, State and Foreign Tax |
Accrued Interest and Penalties |
Total Gross Unrecognized Income Tax Benefits |
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Balance at December 31, 2008 |
$ | 28.0 | $ | 6.3 | $ | 34.3 | ||||||
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Additions for tax positions related to the current year |
13.8 | — | 13.8 | |||||||||
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Additions for tax positions related to prior years |
1.0 | 1.6 | 2.6 | |||||||||
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Reductions for tax positions due to settlements |
(3.1 | ) | (1.9 | ) | (5.0 | ) | ||||||
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Reductions due to a lapse of the statute of limitations |
(0.3 | ) | — | (0.3 | ) | |||||||
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Other reductions for tax positions related to prior years |
(1.7 | ) | — | (1.7 | ) | |||||||
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Balance at December 31, 2009 |
37.7 | 6.0 | 43.7 | |||||||||
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Additions for tax positions related to the current year |
17.2 | — | 17.2 | |||||||||
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Additions for tax positions related to prior years |
12.4 | 3.9 | 16.3 | |||||||||
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Reductions for tax positions due to settlements |
(15.3 | ) | (4.7 | ) | (20.0 | ) | ||||||
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Reductions due to a lapse of the statute of limitations |
(2.7 | ) | (0.4 | ) | (3.1 | ) | ||||||
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Other reductions for tax positions related to prior years |
(8.7 | ) | (0.4 | ) | (9.1 | ) | ||||||
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Balance at December 31, 2010 |
40.6 | 4.4 | 45.0 | |||||||||
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Additions for tax positions related to prior years |
4.6 | 2.9 | 7.5 | |||||||||
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Reductions for tax positions due to settlements |
(5.0 | ) | (1.1 | ) | (6.1 | ) | ||||||
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Reductions due to a lapse of the statute of limitations |
(0.3 | ) | — | (0.3 | ) | |||||||
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Balance at December 31, 2011 |
$ | 39.9 | $ | 6.2 | $ | 46.1 | ||||||
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At December 31, 2011, 2010 and 2009, there were $42.2 million, $41.3 million and $43.3 million, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate.
It is reasonably possible that within twelve months unrecognized tax benefits related to certain tax reporting positions taken in prior periods could decrease by up to $25.8 million, due to either the expiration of the statute of limitations in certain jurisdictions or the resolution of current income tax examinations, or both.
In April 2009, we filed a protest with the Internal Revenue Service Appeals Office with respect to proposed adjustments to our federal income tax returns for our 2004 and 2005 tax years related to our treatment of intercompany transfer pricing. In November 2010, we resolved this matter with the IRS Appeals Office. As a result of the resolution, we recorded a benefit in the fourth quarter of 2010 of approximately $27.6 million, representing the resolution of the 2004 and 2005 matter, as well as the associated impact of remeasuring reserves related to intercompany transfer pricing for all other open tax years.
Tax years that remain subject to examination are years after 2001 for Norway, after 2003 for Brazil and after 2006 for the United States.
The effective income tax rate was different from the statutory U.S. federal income tax rate due to the following:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Statutory U.S. federal income tax rate |
35 | % | 35 | % | 35 | % | ||||||
|
Net difference resulting from: |
||||||||||||
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Foreign earnings subject to different tax rates |
(9 | ) | (14 | ) | (12 | ) | ||||||
|
Foreign earnings subject to U.S. tax |
1 | 8 | 4 | |||||||||
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Net change in unrecognized tax benefits |
1 | 1 | 3 | |||||||||
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Other |
(1 | ) | — | — | ||||||||
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Total difference |
(8 | ) | (5 | ) | (5 | ) | ||||||
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Effective income tax rate |
27 | % | 30 | % | 30 | % | ||||||
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We have provided U.S. income taxes on $834.2 million of cumulative undistributed earnings of certain foreign subsidiaries where we have determined that the foreign subsidiaries' earnings are not indefinitely reinvested. No provision for U.S. income taxes has been recorded on earnings of foreign subsidiaries that are indefinitely reinvested. The cumulative balance of foreign earnings with respect to which no provision for U.S. income taxes has been recorded was $1,103.5 million at December 31, 2011. The amount of applicable U.S. income taxes that would be incurred if these earnings were repatriated is approximately $287.7 million.
We benefit from income tax holidays in India, Singapore and Malaysia, which expired in the first quarter of 2011 for India, and will expire after 2018 for Singapore and 2015 for Malaysia. For the year ended December 31, 2011, these tax holidays reduced our provision for income taxes by $17.8 million, or $0.07 per share on a diluted basis. In January 2011, we received final approval from the Singapore Economic Development Board for an extension to 2013 of our existing tax holiday in Singapore, along with a reduction in the incentive tax rate from 10% to 5%, retroactive to January 1, 2009. In addition, we received final approval for an additional tax holiday in Singapore conditioned on additional local investment and applicable to income related to certain products manufactured in Singapore. This additional tax holiday is retroactive to January 1, 2009 and expires after 2018. Included in the amount above, we recognized the retroactive benefit of approximately $7.3 million, or $0.03 per share on a diluted basis, related to these tax holidays in the first quarter of 2011.
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NOTE 11. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
We have funded and unfunded defined benefit pension plans which provide defined benefits based on years of service and final average salary. In October 2009, the Board of Directors amended the U.S. Qualified and Non-Qualified Defined Benefit Pension Plans ("U.S. Pension Plans") to freeze participation in the U.S. Pension Plans for all new nonunion employees hired on or after January 1, 2010, and current nonunion employees with less than five years of vesting service as of December 31, 2009. For current nonunion employees with less than five years of vesting service as of December 31, 2009, benefits accrued under the U.S. Pension Plans and earned as of that date were frozen based on credited service and pay as of December 31, 2009.
Foreign-based employees are eligible to participate in FMC Technologies-sponsored or government-sponsored benefit plans to which we contribute. Several of the foreign defined benefit pension plans sponsored by us provide for employee contributions; the remaining plans are noncontributory.
We have other post-retirement benefit plans covering substantially all of our U.S. employees who were hired prior to January 1, 2003. The post-retirement health care plans are contributory; the post-retirement life insurance plans are noncontributory.
We are required to recognize the funded status of defined benefit post-retirement plans as an asset or liability in the consolidated balance sheet and recognize changes in that funded status in comprehensive income in the year in which the changes occur. Further, we are required to measure the plan's assets and its obligations that determine its funded status as of the date of the consolidated balance sheet. We have applied this guidance to our domestic pension and other post-retirement benefit plans as well as for many of our non-U.S. plans, including those in the United Kingdom, Norway, Germany, France and Canada. Pension expense measured in compliance with GAAP for the other non-U.S. pension plans is not materially different from the locally reported pension expense.
The funded status of our U.S. Pension Plans, certain foreign pension plans and U.S. post-retirement health care and life insurance benefit plans, together with the associated balances recognized in our consolidated financial statements as of December 31, 2011 and 2010, were as follows:
| Pensions | Other Post-retirement Benefits |
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| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||
| (In millions) | U.S. | Int'l | U.S. | Int'l |
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Accumulated benefit obligation |
$ | 536.6 | $ | 326.1 | $ | 436.2 | $ | 287.3 | ||||||||||||||||
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Projected benefit obligation at January 1 |
$ | 486.9 | $ | 388.5 | $ | 419.0 | $ | 334.9 | $ | 8.6 | $ | 7.9 | ||||||||||||
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Service cost |
12.0 | 29.5 | 11.1 | 24.9 | 0.1 | 0.1 | ||||||||||||||||||
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Interest cost |
26.1 | 20.3 | 25.2 | 17.9 | 0.4 | 0.5 | ||||||||||||||||||
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Actuarial loss |
88.6 | 32.0 | 48.7 | 22.5 | 0.4 | 0.9 | ||||||||||||||||||
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Amendments |
0.9 | — | — | 1.0 | — | — | ||||||||||||||||||
|
Foreign currency exchange rate changes |
— | (8.4 | ) | — | (7.0 | ) | — | — | ||||||||||||||||
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Plan participants' contributions |
— | 1.6 | — | 1.6 | — | — | ||||||||||||||||||
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Benefits paid |
(16.7 | ) | (9.0 | ) | (17.1 | ) | (7.3 | ) | (0.7 | ) | (0.8 | ) | ||||||||||||
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Projected benefit obligation at December 31 |
597.8 | 454.5 | 486.9 | 388.5 | 8.8 | 8.6 | ||||||||||||||||||
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Fair value of plan assets at January 1 |
380.5 | 321.9 | 311.1 | 308.7 | — | — | ||||||||||||||||||
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Actual return on plan assets |
(10.6 | ) | (6.0 | ) | 44.5 | 17.0 | — | — | ||||||||||||||||
|
Company contributions |
52.8 | 61.3 | 42.0 | 8.9 | 0.7 | 0.8 | ||||||||||||||||||
|
Foreign currency exchange rate changes |
— | (7.7 | ) | — | (7.0 | ) | — | — | ||||||||||||||||
|
Plan participants' contributions |
— | 1.6 | — | 1.6 | — | — | ||||||||||||||||||
|
Benefits paid |
(16.7 | ) | (9.0 | ) | (17.1 | ) | (7.3 | ) | (0.7 | ) | (0.8 | ) | ||||||||||||
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Fair value of plan assets at December 31 |
406.0 | 362.1 | 380.5 | 321.9 | — | — | ||||||||||||||||||
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Funded status of the plans (liability) at December 31 |
$ | (191.8 | ) | $ | (92.4 | ) | $ | (106.4 | ) | $ | (66.6 | ) | $ | (8.8 | ) | $ | (8.6 | ) | ||||||
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Current portion of accrued pension and other post-retirement benefits |
(18.8 | ) | (1.0 | ) | (1.6 | ) | (1.4 | ) | (0.8 | ) | (0.9 | ) | ||||||||||||
|
Accrued pension and other post-retirement benefits, net of current portion |
(173.0 | ) | (91.4 | ) | (104.8 | ) | (65.2 | ) | (8.0 | ) | (7.7 | ) | ||||||||||||
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Funded status recognized in the consolidated balance sheets at December 31 |
$ | (191.8 | ) | $ | (92.4 | ) | $ | (106.4 | ) | $ | (66.6 | ) | $ | (8.8 | ) | $ | (8.6 | ) | ||||||
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Amounts recognized in accumulated other comprehensive (income) loss: |
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Unrecognized actuarial (gain) loss |
$ | 315.6 | $ | 173.8 | $ | 200.1 | $ | 116.9 | $ | (1.9 | ) | $ | (2.6 | ) | ||||||||||
|
Unrecognized prior service (credit) cost |
— | 1.0 | (1.0 | ) | 1.1 | (1.6 | ) | (2.9 | ) | |||||||||||||||
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Unrecognized transition asset |
— | (0.8 | ) | — | (1.3 | ) | — | — | ||||||||||||||||
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Accumulated other comprehensive (income) loss at December 31 |
$ | 315.6 | $ | 174.0 | $ | 199.1 | $ | 116.7 | $ | (3.5 | ) | $ | (5.5 | ) | ||||||||||
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Plans with underfunded or non-funded projected benefit obligation: |
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Aggregate projected benefit obligation |
$ | 597.8 | $ | 454.5 | $ | 486.9 | $ | 388.5 | $ | 8.8 | $ | 8.6 | ||||||||||||
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Aggregate fair value of plan assets |
406.0 | 362.2 | 380.5 | 321.9 | — | — |
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Plans with underfunded or non-funded accumulated benefit obligation: |
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Aggregate accumulated benefit obligation |
$ | 536.6 | $ | 21.9 | $ | 436.2 | $ | 21.7 | ||||||||||||||||
|
Aggregate fair value of plan assets |
406.0 | 6.5 | 380.5 | 6.0 |
The following table summarizes the components of net periodic benefit cost for the years ended December 31, 2011, 2010 and 2009:
| Pensions | Other Post-retirement Benefits |
|||||||||||||||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||||||||||||||
| (In millions) | U.S. | Int'l | U.S. | Int'l | U.S. | Int'l | ||||||||||||||||||||||||||||||
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Components of net annual benefit cost: |
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|
Service cost |
$ | 12.0 | $ | 29.5 | $ | 11.1 | $ | 24.9 | $ | 13.8 | $ | 22.8 | $ | 0.1 | $ | 0.1 | $ | 0.1 | ||||||||||||||||||
|
Interest cost |
26.1 | 20.3 | 25.2 | 17.9 | 23.6 | 16.1 | 0.4 | 0.5 | 0.6 | |||||||||||||||||||||||||||
|
Expected return on plan assets |
(38.2 | ) | (24.5 | ) | (32.7 | ) | (21.9 | ) | (27.2 | ) | (18.6 | ) | — | — | — | |||||||||||||||||||||
|
Curtailment |
— | — | — | — | (0.5 | ) | — | — | — | — | ||||||||||||||||||||||||||
|
Settlement cost |
8.9 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Amortization of transition asset |
— | (0.5 | ) | — | (0.5 | ) | — | (0.5 | ) | — | — | — | ||||||||||||||||||||||||
|
Amortization of prior service cost (credit) |
(0.1 | ) | 0.1 | (0.1 | ) | — | (0.3 | ) | 0.1 | (1.3 | ) | (1.2 | ) | (1.3 | ) | |||||||||||||||||||||
|
Amortization of net actuarial loss (gain) |
12.9 | 5.0 | 8.7 | 3.1 | 11.5 | 4.6 | (0.2 | ) | (0.3 | ) | (0.1 | ) | ||||||||||||||||||||||||
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Net periodic benefit cost (income) |
$ | 21.6 | $ | 29.9 | $ | 12.2 | $ | 23.5 | $ | 20.9 | $ | 24.5 | $ | (1.0 | ) | $ | (0.9 | ) | $ | (0.7 | ) | |||||||||||||||
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Other changes in plan assets and benefit obligations recognized in other comprehensive income: |
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Net actuarial loss (gain) arising during period |
$ | 137.3 | $ | 61.9 | $ | 36.9 | $ | 27.5 | $ | (18.2 | ) | $ | (12.2 | ) | $ | 0.5 | $ | 0.9 | $ | (3.2 | ) | |||||||||||||||
|
Amortization of net actuarial loss (gain) |
(21.8 | ) | (5.0 | ) | (8.7 | ) | (3.1 | ) | (11.5 | ) | (4.6 | ) | 0.2 | 0.3 | 0.1 | |||||||||||||||||||||
|
Prior service cost arising during period |
0.9 | — | — | 0.9 | — | — | — | — | — | |||||||||||||||||||||||||||
|
Amortization of prior service (cost) credit |
0.1 | (0.1 | ) | 0.1 | — | 0.3 | (0.1 | ) | 1.3 | 1.2 | 1.3 | |||||||||||||||||||||||||
|
Amortization of transition asset |
— | 0.5 | — | 0.5 | — | 0.5 | — | — | — | |||||||||||||||||||||||||||
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Total recognized in other comprehensive loss (income) |
$ | 116.5 | $ | 57.3 | $ | 28.3 | $ | 25.8 | $ | (29.4 | ) | $ | (16.4 | ) | $ | 2.0 | $ | 2.4 | $ | (1.8 | ) | |||||||||||||||
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Included in accumulated other comprehensive income at December 31, 2011, are noncash, pretax charges which have not yet been recognized in net periodic benefit cost (income). The estimated amounts that will be amortized from the portion of each component of accumulated other comprehensive income as a component of net period benefit cost (income), during the next fiscal year are as follows:
| Pensions | Other Post-retirement Benefits |
|||||||||||
| (In millions) | U.S. | Int'l | ||||||||||
|
Net actuarial losses (gains) |
$ | 21.7 | $ | 7.9 | $ | (0.1 | ) | |||||
|
Prior service cost (credit) |
$ | — | $ | 0.1 | $ | (1.1 | ) | |||||
|
Transition asset |
$ | — | $ | (0.2 | ) | $ | — | |||||
Key assumptions—The following weighted-average assumptions were used to determine the benefit obligations:
| Pensions | Other Post-retirement Benefits |
|||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||
| U.S. | Int'l | U.S. | Int'l | |||||||||||||||||||||||
|
Discount rate |
4.60% | 4.54 | % | 5.40% | 5.00% | 4.60% | 5.40% | |||||||||||||||||||
|
Rate of compensation increase |
4.00% | 4.05 | % | 4.00% | 4.20% | — | — | |||||||||||||||||||
The following weighted-average assumptions were used to determine net periodic benefit cost:
| Pensions | Other Post-retirement Benefits |
|||||||||||||||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | |||||||||||||||||||||||||||||||
| U.S. | Int'l | U.S. | Int'l | U.S. | Int'l | |||||||||||||||||||||||||||||||
|
Discount rate |
5.39% | 5.00% | 5.90% | 5.57% | 6.10% | 5.63% | 5.40% | 5.90% | 6.10% | |||||||||||||||||||||||||||
|
Rate of compensation increase |
4.00% | 4.20% | 4.00% | 4.18% | 4.00% | 4.15% | — | — | — | |||||||||||||||||||||||||||
|
Expected rate of return on plan assets |
9.00% | 6.98% | 9.00% | 7.48% | 9.00% | 7.69% | — | — | — | |||||||||||||||||||||||||||
Our estimate of expected rate of return on plan assets is primarily based on the historical performance of plan assets, current market conditions, our asset allocation and long-term growth expectations.
Plan assets—Our pension investment strategy emphasizes maximizing returns consistent with minimizing risk. Excluding our international plans with insurance-based investments, 78% of our total pension assets represent the U.S. qualified plan, the U.K. plan and Canadian plan. These plans are primarily invested in equities to maximize the long-term returns of the plans. The investment managers of these assets, including the hedge funds and limited partnerships, use Graham and Dodd fundamental investment analysis to select securities that have a margin of safety between the price of the security and the estimated value of the security. This value-oriented approach tends to mitigate the risk of a large equity allocation.
The following is a description of the valuation methodologies used for the pension plan assets. There have been no changes in the methodologies used at December 31, 2011 and 2010.
| • |
Cash is valued at cost, which approximates fair value. |
| • |
Equity securities are comprised of common stock, preferred stock and registered investment companies. The fair values of equity securities are valued at the closing price reported on the active market on which the securities are traded. The fair values of registered investment companies are valued based on quoted market prices, which represent the net asset value ("NAV") of shares held. |
| • |
The fair values of hedge funds are valued using the NAV as determined by the administrator or custodian of the fund. |
| • |
The fair values of limited partnerships are valued using the NAV as determined by the administrator or custodian of the fund. |
| • |
Insurance contracts are valued at book value, which approximates fair value, and is calculated using the prior-year balance plus or minus investment returns and changes in cash flows. |
| • |
Emerging market bonds are valued at the closing price reported on the active market on which the bonds are traded. |
Our pension plan assets measured at fair value are as follows at December 31, 2011 and 2010. Please refer to "Fair Value" in Note 1 to these consolidated financial statements for a description of the levels.
| U.S. | International | |||||||||||||||||||||||||||||||
|
December 31, 2011 (In millions) |
Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||
|
Cash |
$ | 36.1 | $ | 36.1 | $ | — | $ | — | $ | 0.9 | $ | 0.9 | $ | — | $ | — | ||||||||||||||||
|
Equity securities: |
||||||||||||||||||||||||||||||||
|
U.S. companies: |
||||||||||||||||||||||||||||||||
|
Large cap |
109.6 | 109.6 | — | — | 43.6 | 43.6 | — | — | ||||||||||||||||||||||||
|
Mid cap |
8.8 | 8.8 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Small cap |
62.8 | 62.8 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
International companies |
99.0 | 99.0 | — | — | 148.0 | 148.0 | — | — | ||||||||||||||||||||||||
|
Hedge funds |
53.3 | — | — | 53.3 | — | — | — | — | ||||||||||||||||||||||||
|
Limited partnerships |
32.8 | — | — | 32.8 | — | — | — | — | ||||||||||||||||||||||||
|
Insurance contracts |
— | — | — | — | 169.6 | — | 169.6 | — | ||||||||||||||||||||||||
|
Emerging market bonds |
3.6 | 3.6 | — | — | — | — | — | — | ||||||||||||||||||||||||
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|
|||||||||||||||||
|
Total assets |
$ | 406.0 | $ | 319.9 | $ | — | $ | 86.1 | $ | 362.1 | $ | 192.5 | $ | 169.6 | $ | — | ||||||||||||||||
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December 31, 2010 (In millions) |
||||||||||||||||||||||||||||||||
|
Cash |
$ | 37.0 | $ | 37.0 | $ | — | $ | — | $ | 0.3 | $ | 0.3 | $ | — | $ | — | ||||||||||||||||
|
Equity securities: |
||||||||||||||||||||||||||||||||
|
U.S. companies: |
||||||||||||||||||||||||||||||||
|
Large cap |
88.2 | 88.2 | — | — | 38.3 | 38.3 | — | — | ||||||||||||||||||||||||
|
Small cap |
63.2 | 63.2 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
International companies |
114.3 | 114.3 | — | — | 155.2 | 155.2 | — | — | ||||||||||||||||||||||||
|
Hedge funds |
32.1 | — | — | 32.1 | — | — | — | — | ||||||||||||||||||||||||
|
Limited partnerships |
42.3 | — | — | 42.3 | — | — | — | — | ||||||||||||||||||||||||
|
Insurance contracts |
— | — | — | — | 128.1 | — | 128.1 | — | ||||||||||||||||||||||||
|
Emerging market bonds |
3.4 | 3.4 | — | — | — | — | — | — | ||||||||||||||||||||||||
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|
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|
|||||||||||||||||
|
Total assets |
$ | 380.5 | $ | 306.1 | $ | — | $ | 74.4 | $ | 321.9 | $ | 193.8 | $ | 128.1 | $ | — | ||||||||||||||||
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|||||||||||||||||
The summary of changes in the fair value of the pension plan Level 3 assets for the years ended December 31, 2011 and 2010 is as follows:
| (In millions) | Hedge Funds | Limited Partnerships |
||||||
|
Balance at December 31, 2009 |
$ | 23.9 | $ | 35.6 | ||||
|
Unrealized gains relating to instruments still held at the reporting date |
3.2 | 6.7 | ||||||
|
Purchases |
5.0 | — | ||||||
|
|
|
|
|
|||||
|
Balance at December 31, 2010 |
$ | 32.1 | $ | 42.3 | ||||
|
Unrealized losses relating to instruments still held at the reporting date |
(3.8 | ) | (2.5 | ) | ||||
|
Purchases |
25.0 | — | ||||||
|
Distributions |
— | (7.0 | ) | |||||
|
|
|
|
|
|||||
|
Balance at December 31, 2011 |
$ | 53.3 | $ | 32.8 | ||||
|
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|
|
|
|||||
Contributions—We expect to contribute approximately $45.9 million to our international pension plans, representing primarily the U.K. and Norway qualified pension plans, and our Non-Qualified Defined Benefit Pension Plan in 2012. Additionally, we may make a discretionary contribution of approximately $15.0 million to our domestic qualified pension plan in 2012. All of the contributions are expected to be in the form of cash. In 2011 and 2010, we contributed $114.1 million and $50.9 million to the pension plans, respectively, which included $51.0 million and $39.0 million, respectively, to the U.S. Qualified Defined Benefit Pension Plan.
Estimated future benefit payments—The following table summarizes expected benefit payments from our various pension and post-retirement benefit plans through 2021. Actual benefit payments may differ from expected benefit payments.
| Pensions | Other Post-retirement Benefits |
|||||||||||
| (In millions) | U.S. | International | ||||||||||
|
2012 |
$ | 37.0 | $ | 8.2 | $ | 0.8 | ||||||
|
2013 |
35.6 | 8.8 | 0.8 | |||||||||
|
2014 |
23.3 | 9.4 | 0.8 | |||||||||
|
2015 |
25.4 | 9.5 | 0.8 | |||||||||
|
2016 |
27.2 | 9.8 | 0.8 | |||||||||
|
2017-2021 |
169.5 | 63.4 | 3.6 | |||||||||
Savings Plans—The FMC Technologies, Inc. Savings and Investment Plan ("Qualified Plan"), a qualified salary reduction plan under Section 401(k) of the Internal Revenue Code, is a defined contribution plan. Additionally, we have a non-qualified deferred compensation plan, the Non-Qualified Plan, which allows certain highly compensated employees the option to defer the receipt of a portion of their salary. We match a portion of the participants' deferrals to both plans. In October 2009, the Board of Directors approved amendments to the U.S. Qualified Plan and U.S. Non-Qualified Plan ("Amended Plans"). Under the Amended Plans, we are required to make a nonelective contribution every pay period to all new nonunion employees hired on or after January 1, 2010, and current nonunion employees with less than five years of vesting service as of December 31, 2009. The vesting schedule for the nonelective contribution under the Amended Plans is three years of vesting service with FMC Technologies.
Participants in the Non-Qualified Plan earn a return based on hypothetical investments in the same options as our 401(k) plan, including FMC Technologies stock. Changes in the market value of these participant investments are reflected as an adjustment to the deferred compensation liability with an offset to other income (expense), net. As of December 31, 2011 and 2010, our liability for the Non-Qualified Plan was $35.1 million and $32.3 million, respectively, and was recorded in other non-current liabilities. We hedge the financial impact of changes in the participants' hypothetical investments by purchasing the investments that the participants have chosen. With the exception of FMC Technologies stock, which is maintained at its cost basis, changes in the fair value of these investments are recognized as an offset to other income (expense), net. As of December 31, 2011 and 2010, we had investments for the Non-Qualified Plan totaling $26.2 million and $26.4 million, respectively, at fair market value and FMC Technologies stock held in trust of $5.8 million and $3.4 million, respectively, at its cost basis.
We recognized expense of $14.6 million, $11.1 million and $10.6 million, for matching contributions to these plans in 2011, 2010 and 2009, respectively. Additionally, we recognized expense of $8.4 million and $6.2 million for nonelective contributions in 2011 and 2010, respectively.
|
|||
NOTE 12. STOCK-BASED COMPENSATION
We sponsor a stock-based compensation plan, which is described below, and have granted awards primarily in the form of nonvested stock awards (also known as restricted stock in the plan document) and stock options. The compensation expense for awards under the plan for each of the years in the three-year period ended December 31, 2011 is as follows:
| (In millions) | 2011 | 2010 | 2009 | |||||||||
|
Stock-based compensation expense |
$ | 26.3 | $ | 27.5 | $ | 29.2 | ||||||
|
Income tax benefits related to stock-based compensation expense |
$ | 8.9 | $ | 9.4 | $ | 10.8 | ||||||
Stock-based compensation expense is recognized over the lesser of the stated vesting period (three or four years) or the period until the employee reaches age 62 (the retirement eligible age under the plan). As of December 31, 2011, a portion of the stock-based compensation expense related to outstanding awards remains to be recognized in future periods. The compensation expense related to nonvested awards yet to be recognized totaled $26.3 million for restricted stock. These costs are expected to be recognized over a weighted average period of 1.2 years.
Incentive compensation and stock plan—The Amended and Restated FMC Technologies, Inc. Incentive Compensation and Stock Plan (the "Plan") provides certain incentives and awards to officers, employees, directors and consultants of FMC Technologies or its affiliates. The Plan allows our Board of Directors to make various types of awards to non-employee directors and the Compensation Committee (the "Committee") of the Board of Directors to make various types of awards to other eligible individuals. Awards include management incentive awards, common stock, stock options, stock appreciation rights, restricted stock and stock units. All awards are subject to the Plan's provisions.
Under the Plan, 48.0 million shares of our common stock were authorized for awards. These shares are in addition to shares previously granted by FMC Corporation and converted into approximately 18.0 million shares of our common stock. As of December 31, 2011, 5.0 million shares were reserved to satisfy existing awards and 21.6 million shares were available for future awards.
Management incentive awards may be awards of cash, common stock options, restricted stock or a combination thereof. Grants of common stock options may be incentive and/or nonqualified stock options. Under the plan, the exercise price for options cannot be less than the market value of our common stock at the date of grant. Options vest in accordance with the terms of the award as determined by the Committee, which is generally after three years of service, and expire not later than 10 years after the grant date. Restricted stock grants specify any applicable performance goals, the time and rate of vesting and such other provisions as determined by the Committee. Restricted stock grants generally vest after three to four years of service. Additionally, most awards vest immediately upon a change of control as defined in the Plan agreement.
Stock-based compensation awards to non-employee directors consist of restricted stock units. Awards to non-employee directors generally vest on the date of our annual stockholder meeting following the date of grant. Stock units are not settled until a director ceases services to the Board of Directors. At December 31, 2011, outstanding awards to active and retired non-employee directors included 819 thousand stock units.
Restricted stock—A summary of the nonvested restricted stock awards as of December 31, 2011, and changes during the year is presented below:
| (Number of restricted stock shares in thousands) | Shares | Weighted-Average Grant Date Fair Value |
||||||
|
Nonvested at December 31, 2010 |
4,223 | $ | 20.30 | |||||
|
Granted |
706 | $ | 40.84 | |||||
|
Vested |
(1,070 | ) | $ | 24.78 | ||||
|
Cancelled |
(12 | ) | $ | 20.86 | ||||
|
|
|
|||||||
|
Nonvested at December 31, 2011 |
3,847 | $ | 22.82 | |||||
|
|
|
|||||||
For current year performance-based awards, the payout was dependent upon our performance relative to a peer group of companies with respect to EBITDA growth and return on investment for the year ended December 31, 2011. Based on results for the performance period, the payout will be 185 thousand shares at the vesting date in January 2014. Compensation cost has been measured for 2011 based on the actual outcome of the performance conditions.
For current year market-based awards, the payout was contingent upon our performance relative to the same peer group of companies with respect to total stockholder return for the year ended December 31, 2011. Based on results for the performance period, the payout will be 123 thousand shares at the vesting date in January 2014. Compensation cost for these awards has been calculated using the grant date fair market value, as estimated using a Monte Carlo simulation.
The following summarizes values for restricted stock activity in each of the years in the three-year period ended December 31, 2011:
| 2011 | 2010 | 2009 | ||||||||||
|
Weighted average grant date fair value of restricted stock awards granted |
$ | 40.84 | $ | 26.94 | $ | 14.29 | ||||||
|
Vest date fair value of restricted stock vested (in millions) |
$ | 47.3 | $ | 54.3 | $ | 26.6 | ||||||
On January 3, 2012, restricted stock awards vested and approximately 1.9 million shares were issued to employees.
Stock options—There were no options granted, forfeited or expired during the year ended December 31, 2011.
The following shows stock option activity for the year ended December 31, 2011:
| (Number of stock options in thousands, intrinsic value in millions) | Shares Under Option |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term |
Aggregate Intrinsic Value |
||||||||||||
|
Outstanding at December 31, 2010 |
560 | $ | 5.06 | |||||||||||||
|
Exercised |
(254 | ) | $ | 5.05 | ||||||||||||
|
|
|
|||||||||||||||
|
Outstanding and exercisable at December 31, 2011 |
306 | $ | 5.06 | 1.4 | $ | 14.4 | ||||||||||
|
|
|
|||||||||||||||
The aggregate intrinsic value reflects the value to the option holders, or the difference between the market price as of December 31, 2011, and the exercise price of the option, which would have been received by the option holders had all options been exercised as of that date. While the intrinsic value is representative of the value to be gained by the option holders, this value is not indicative of compensation expense recorded by us. Compensation expense on stock options was calculated on the date of grant using the fair value of the options, as determined by a Black-Scholes option pricing model and the number of options granted, reduced by estimated forfeitures.
The intrinsic value of options exercised for each year in the three-year period ended December 31, 2011, was $11.8 million, $14.9 million and $16.8 million, respectively.
|
|||
NOTE 13. STOCKHOLDERS' EQUITY
Capital stock —The following is a summary of our capital stock activity during each of the years in the three-year period ended December 31, 2011:
| (Number of shares in thousands) | Common Stock Issued |
Common Stock Held in Employee Benefit Trust |
Common Stock Held in Treasury |
|||||||||
|
December 31, 2008 |
286,318 | 244 | 36,238 | |||||||||
|
Stock awards |
— | — | (2,367 | ) | ||||||||
|
Treasury stock purchases |
— | — | 8,540 | |||||||||
|
Net stock purchased for employee benefit trust |
— | 4 | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
December 31, 2009 |
286,318 | 248 | 42,411 | |||||||||
|
Stock awards |
— | — | (1,670 | ) | ||||||||
|
Treasury stock purchases |
— | — | 5,804 | |||||||||
|
Net stock sold from employee benefit trust |
— | (116 | ) | — | ||||||||
|
|
|
|
|
|
|
|||||||
|
December 31, 2010 |
286,318 | 132 | 46,545 | |||||||||
|
Stock awards |
— | — | (975 | ) | ||||||||
|
Treasury stock purchases |
— | — | 2,746 | |||||||||
|
Net stock purchased for employee benefit trust |
— | 37 | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
December 31, 2011 |
286,318 | 169 | 48,316 | |||||||||
|
|
|
|
|
|
|
|||||||
The plan administrator of the Non-Qualified Plan purchases shares of our common stock on the open market. Such shares are placed in a trust owned by FMC Technologies.
In 2005, we announced a repurchase plan approved by our Board of Directors authorizing the repurchase of up to two million shares of our issued and outstanding common stock through open market purchases. The Board of Directors authorized extensions of this program, adding five million shares in February 2006 and eight million shares in February 2007 for a total of 15 million shares of common stock authorized for repurchase. As a result of the two-for-one stock splits (i) on August 31, 2007, the authorization was increased to 30 million shares; and (ii) on March 31, 2011, the authorization was increased to 60 million shares. In December 2011, the Board of Directors authorized an extension of our repurchase program, adding 15 million shares, for a total of 75 million shares. In addition to the 75 million shares, in July 2008, the Board of Directors authorized the repurchase of $95.0 million of our outstanding common stock, and as of September 2008, there was no remaining amount available for purchase under the $95.0 million authorization.
We repurchased $114.0 million, $164.4 million and $155.7 million of common stock during 2011, 2010 and 2009, respectively, under the authorized repurchase program. As of December 31, 2011, approximately 17.3 million shares remained available for purchase under the current program which may be executed from time to time in the open market. We intend to hold repurchased shares in treasury for general corporate purposes, including issuances under our employee stock plans. Treasury shares are accounted for using the cost method.
On May 12, 2011, we amended our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 300 million to 600 million shares.
No cash dividends were paid on our common stock in 2011, 2010 or 2009.
Accumulated other comprehensive loss—Accumulated other comprehensive loss consisted of the following:
| December 31, | ||||||||
| (In millions) | 2011 | 2010 | ||||||
|
Cumulative foreign currency translation adjustments |
$ | (102.8 | ) | $ | (51.7 | ) | ||
|
Cumulative deferral of hedging (losses) gains, net of tax of $9.1 million and $(3.8) million, respectively |
(16.7 | ) | 6.1 | |||||
|
Cumulative deferral of pension and other post-retirement benefit losses, net of tax of $161.8 million and $103.8 million, respectively |
(324.3 | ) | (206.5 | ) | ||||
|
|
|
|
|
|||||
|
Accumulated other comprehensive loss |
$ | (443.8 | ) | $ | (252.1 | ) | ||
|
|
|
|
|
|||||
|
|||
NOTE 14. DERIVATIVE FINANCIAL INSTRUMENTS
We hold derivative financial instruments for the purpose of hedging the risks of certain identifiable and anticipated transactions. The types of risks hedged are those relating to the variability of future earnings and cash flows caused by movements in foreign currency exchange rates and interest rates. We hold the following types of derivative instruments:
Interest rate swap instruments – The purpose of these instruments is to hedge the uncertainty of anticipated interest expense from variable-rate debt obligations and achieve a fixed net interest rate. At December 31, 2011, we held three instruments which in aggregate hedged the interest expense on $100.0 million of variable-rate debt.
Foreign exchange rate forward contracts – The purpose of these instruments is to hedge the risk of changes in future cash flows of anticipated purchase or sale commitments denominated in foreign currencies. At December 31, 2011, we held the following material positions:
| Notional Amount Bought (Sold) |
||||||||
| (In millions) | USD Equivalent | |||||||
|
Brazilian real |
131.6 | 70.2 | ||||||
|
British pound |
31.8 | 49.4 | ||||||
|
Euro |
(31.2 | ) | (40.4 | ) | ||||
|
Malaysian ringgit |
100.5 | 31.7 | ||||||
|
Norwegian krone |
2,454.3 | 410.7 | ||||||
|
Singapore dollar |
174.8 | 134.8 | ||||||
|
U.S. dollar |
(670.6 | ) | (670.6 | ) | ||||
Foreign exchange rate instruments embedded in purchase and sale contracts – The purpose of these instruments is to match offsetting currency payments and receipts for particular projects, or comply with government restrictions on the currency used to purchase goods in certain countries. At December 31, 2011, our portfolio of these instruments included the following material positions:
| Notional Amount Bought (Sold) |
||||||||
| (In millions) | USD Equivalent | |||||||
|
Australian dollar |
(35.7 | ) | (36.5 | ) | ||||
|
British pound |
29.8 | 46.3 | ||||||
|
Euro |
22.1 | 28.7 | ||||||
|
Norwegian krone |
(492.7 | ) | (82.5 | ) | ||||
|
U.S. dollar |
37.6 | 37.6 | ||||||
The purpose of our foreign currency hedging activities is to manage the volatility associated with anticipated foreign currency purchases and sales created in the normal course of business. We primarily utilize forward exchange contracts with maturities of less than three years.
Our policy is to hold derivatives only for the purpose of hedging risks and not for trading purposes where the objective is solely to generate profit. Generally, we enter into hedging relationships such that changes in the fair values or cash flows of the transactions being hedged are expected to be offset by corresponding changes in the fair value of the derivatives. For derivative instruments that qualify as a cash flow hedge, the effective portion of the gain or loss of the derivative, which does not include the time value component of a forward currency rate, is reported as a component of other comprehensive income ("OCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
The following tables of all outstanding derivative instruments are based on estimated fair value amounts that have been determined using available market information and commonly accepted valuation methodologies. Refer to Note 15 to these consolidated financial statements for further disclosures related to the fair value measurement process. Accordingly, the estimates presented may not be indicative of the amounts that we would realize in a current market exchange and may not be indicative of the gains or losses we may ultimately incur when these contracts settle or mature.
| December 31, 2011 | December 31, 2010 | |||||||||||||||
| (In millions) | Assets | Liabilities | Assets | Liabilities | ||||||||||||
|
Derivatives designated as hedging instruments: |
||||||||||||||||
|
Foreign exchange contracts: |
||||||||||||||||
|
Current – Derivative financial instruments |
$ | 60.8 | $ | 58.3 | $ | 40.7 | $ | 39.7 | ||||||||
|
Long-term – Derivative financial instruments |
26.4 | 28.7 | 45.5 | 31.8 | ||||||||||||
|
Interest rate contracts: |
||||||||||||||||
|
Current – Derivative financial instruments |
— | 1.6 | — | — | ||||||||||||
|
Long-term – Derivative financial instruments |
— | &nb | ||||||||||||||