You should read the following discussion in conjunction with "Selected Financial Data" and our Consolidated Financial Statements and related notes included in this Annual Report. Overview We are a diversified growth company that designs, manufactures and distributes medical and scientific imaging products and software, radio frequency ("RF") products, services and application software, industrial technology products and energy systems and controls products and solutions. We market these products and services to a broad range of markets including RF applications, medical, water, energy, research, education, software-as-a-service ("SaaS")-based information networks, security and other niche markets.
We pursue consistent and sustainable growth in earnings and cash flow by emphasizing continuous improvement in the operating performance of our existing businesses and by acquiring other carefully selected businesses. Our acquisitions have represented both bolt-ons and new strategic platforms.
May 1, 2013, we purchased the shares of Managed Health Care Associates, Inc.("MHA"), a leading provider of services and technologies to support the diverse and complex needs of alternate site health care providers who deliver services outside of an acute care hospital setting. The acquisition of MHA complements and expands our medical software and services platform. On October 4, 2013, we acquired the shares of Advanced Sensors, Ltd.("Advanced Sensors"), which manufactures oil-in-water analyzers for the oil and gas industries.
Application of Critical Accounting Policies
Our Consolidated Financial Statements are prepared in conformity with generally accepted accounting principles in
the United States("GAAP"). A discussion of our significant accounting policies can also be found in the notes to our Consolidated Financial Statements for the year ended December 31, 2013included in this Annual Report. GAAP offers acceptable alternative methods for accounting for certain issues affecting our financial results, such as determining inventory cost, depreciating long-lived assets and recognizing revenue. We have not changed the application of acceptable accounting methods or the significant estimates affecting the application of these principles in the last three years in a manner that had a material effect on our financial statements. The preparation of financial statements in accordance with GAAP requires the use of estimates, assumptions, judgments and interpretations that can affect the reported amounts of assets, liabilities, revenues and expenses, the disclosure of contingent assets and liabilities and other supplemental disclosures. The development of accounting estimates is the responsibility of our management. Our management discusses those areas that require significant judgments with the audit committee of our Board of Directors. The audit committee has reviewed all financial disclosures in our annual filings with the SEC. Although we believe the positions we have taken with regard to uncertainties are reasonable, others might reach different conclusions and our positions can change over time as more information becomes available. If an accounting estimate changes, its effects are accounted for prospectively or through a cumulative catch up adjustment. Our most significant accounting uncertainties are encountered in the areas of accounts receivable collectibility, inventory valuation, future warranty obligations, revenue recognition (percentage-of-completion), income taxes and goodwill and indefinite-lived asset analyses. These issues affect each of our business segments and are evaluated using a combination of historical experience, current conditions and relatively short-term forecasting. Accounts receivable collectibility is based on the economic circumstances of customers and credits given to customers after shipment of products, including in certain cases credits for returned products. Accounts receivable are regularly reviewed to determine customers who have not paid within agreed upon terms, whether these amounts are consistent with past experiences, what historical experience has been with amounts deemed uncollectible and the impact that economic conditions might have on collection efforts in general and with specific customers. The returns and other sales credit allowance is an estimate of customer returns, exchanges, discounts or other forms of anticipated concessions and is treated as a reduction in revenue. The returns and other sales credits histories are analyzed to determine likely future rates for such credits. At December 31, 2013, our allowance for doubtful accounts receivable was $11.4 millionand our allowance for sales returns and sales credits was $3.6 million, for a total of $15.0 million, or 2.8% of total gross accounts receivable. This percentage is influenced by the risk profile of the underlying receivables, and the timing of write-offs of accounts deemed uncollectible. The total allowance at December 31, 2013was $1.0 millionlower than at December 31, 2012. The allowance will continue to fluctuate as a percentage of sales based on specific identification of allowances needed due to changes in our business, the write-off of uncollectible receivables, and the addition of reserve balances at acquired businesses. We regularly compare inventory quantities on hand against anticipated future usage, which we determine as a function of historical usage or forecasts related to specific items in order to evaluate obsolescence and excessive quantities. When we use historical usage, this information is also qualitatively compared to business trends to evaluate the reasonableness of using historical information as an estimate of future usage. At December 31, 2013, inventory reserves for excess and obsolete inventory were $43.5 million, or 17.5% of gross inventory cost, as compared to $42.0 million, or 18.0% of gross inventory cost, at December 31, 2012. The inventory reserve as a percent of gross inventory cost will continue to fluctuate based upon specific identification of reserves needed based upon changes in our business as well as the physical disposal of obsolete inventory. Most of our sales are covered by warranty provisions that generally provide for the repair or replacement of qualifying defective items for a specified period after the time of sale, typically 12 months. Future warranty obligations are evaluated using, among other factors, historical cost experience, product evolution and customer feedback. Our expense for warranty obligations was less than 1% of net sales for each of the years ended December 31, 2013, 2012, and 2011. Revenues related to the use of the percentage-of-completion method of accounting are dependent on total costs incurred compared with total estimated costs for a project. During the year ended December 31, 2013, we recognized revenue of $205.0 millionusing this method, primarily for major turn-key, longer term toll and traffic and energy projects and installations of large software application products. We recognized $145.5 millionand $151.5 millionof revenue using this method during the years ended December 31, 2012and December 31, 2011, respectively. At December 31, 2013, $222.1 millionof revenue related to unfinished percentage-of-completion contracts had yet to be recognized. Contracts accounted for under this method are generally not significantly different in profitability from revenues accounted for under other methods. Income taxes can be affected by estimates of whether and within which jurisdictions future earnings will occur and if, how and when cash is repatriated to the U.S., combined with other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. During 2013, our effective income tax rate was 28.6%, which was slightly lower than the 2012 rate of 29.6% due in part to the enactment of the American Taxpayer Relief Act of 2012 ("ATRA") on January 2, 2013which retroactively reinstated and extended certain tax provisions to January 1, 2012. As a result, our income tax provision for the first quarter of 2013 included discrete tax benefits totaling $6 million. We expect the effective tax rate to increase in 2014 due to a continued increase in revenues and resulting pretax income in higher tax jurisdictions as well as the non-recurrence of the $6 milliontax benefit taken in 2013. We account for goodwill in a purchase business combination as the excess of the cost over the estimated fair value of net assets acquired. Goodwill, which is not amortized, is tested for impairment on an annual basis (or an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value) using a two-step process. The first step utilizes both an income approach (discounted cash flows) and a market approach consisting of a comparable company earnings multiples methodology to estimate the fair value of a reporting unit. To determine the reasonableness of the estimated fair values, we review the assumptions to ensure that neither the income approach nor the market approach provides significantly different valuations. If the estimated fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying value exceeds the estimated fair value, the goodwill of the reporting unit is potentially impaired and then the second step would be completed to measure the impairment loss by calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets (including unrecognized intangible assets) of the reporting unit from the fair value of the reporting unit. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss would be recognized. Key assumptions used in the income and market approaches are updated when the analysis is performed for each reporting unit. Various assumptions are utilized including forecasted operating results, strategic plans, economic projections, anticipated future cash flows, the weighted-average cost of capital, comparable transactions, market data and earnings multiples. While we use reasonable and timely information to prepare our cash flow and discount rate assumptions, actual future cash flows or market conditions could differ significantly and could result in future non-cash impairment charges related to recorded goodwill balances. We have 28 reporting units with individual goodwill amounts ranging from zero to $988 million. We concluded that the fair value of each of our reporting units was in excess of its carrying value, with no impairment indicated as of December 31, 2013. However, the fair value of one of our reporting units in the RF Technology segment was less than 5% above its carrying value at December 31, 2013using the discounted cash flow methodology. The decrease from the prior year's results was due to lower growth assumptions in the current year's testing. The weighted average cost of capital utilized in 2013 was consistent with the prior year's testing. We believe the market value of this unit to be significantly in excess of its carrying value based upon observed market data.
Negative industry or economic trends, disruptions to our business, actual results significantly below projections, unexpected significant changes or planned changes in the use of the assets, divestitures and market capitalization declines may have a negative effect on the fair value of our reporting units.
Business combinations can also result in other intangible assets being recognized. Amortization of intangible assets, if applicable, occurs over their estimated useful lives. Trade names that are determined to have an indefinite useful economic life are not amortized, but separately tested for impairment during the fourth quarter of the fiscal year or on an interim basis if an event occurs that indicates the fair value is more likely than not below the carrying value. We conduct these reviews for all of our reporting units using the relief-from-royalty method, which we believe to be an acceptable methodology due to its common use by valuations specialists in determining the fair value of intangible assets. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these assets. The fair value of each trade name is determined by applying a royalty rate to a projection of net sales discounted using a risk adjusted rate of capital. Each royalty rate is determined based on the profitability of the reporting unit to which it relates and observed market royalty rates. Sales growth rates are determined after considering current and future economic conditions, recent sales trends, discussions with customers, planned timing of new product launches or other variables. Reporting units resulting from recent acquisitions generally represent the highest risk of impairment, which typically decreases as the businesses are integrated into our enterprise and positioned for improved future sales growth. The assessment of fair value for impairment purposes requires significant judgments to be made by management. Although our forecasts are based on assumptions that are considered reasonable by management and consistent with the plans and estimates management is using to operate the underlying businesses, there is significant judgment in determining the expected results attributable to the reporting units. Changes in estimates or the application of alternative assumptions could produce significantly different results. No impairment resulted from the annual reviews performed in 2013; however, the fair value of the trade names of one of our reporting units in the RF Technology segment could have fallen below the carrying value at
December 31, 2013, had the assumed sales growth been less than that used in the assessment. We do not believe that impairment is probable; however, it is possible that the trade name could become impaired in the future, at which point we would be required to record a non-cash impairment charge to reduce the carrying level of the trade name at the reporting unit. We evaluate whether there has been an impairment of identifiable intangible assets with definite useful economic lives, or of the remaining life of such assets, when certain indicators of impairment are present. In the event that facts and circumstances indicate that the cost or remaining period of amortization of any asset may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future gross, undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to fair value or a revision in the remaining amortization period is required.
Results of Operations
The following table sets forth selected information for the years indicated.
Dollar amounts are in thousands and percentages are of net sales. Amounts may not foot due to rounding. Years ended December 31, 2013 2012 2011 Net sales Industrial Technology
$ 779,564 $ 795,240 $ 737,356Energy Systems and Controls(1) 651,920 646,116
Medical and Scientific Imaging(2) 902,281 703,835 610,617 RF Technology 904,363 848,298 851,314 Total
$ 3,238,128 $ 2,993,489 $ 2,797,089Gross profit: Industrial Technology 51.1 % 51.6 % 49.8 % Energy Systems and Controls 57.4 56.3 55.5 Medical and Scientific Imaging 69.3 64.4 63.3 RF Technology 53.7 52.4 50.6 Total 58.1 55.8 54.2 Operating profit: Industrial Technology 28.6 % 30.8 % 28.2 % Energy Systems and Controls 28.2 27.8 26.4 Medical and Scientific Imaging 29.7 26.6 24.3 RF Technology 28.0 26.3 23.8 Total 28.7 27.9 25.6 Corporate administrative expenses (2.7 )% (2.6 )% (2.0 )% Income from continuing operations 26.0 25.3 23.6 Interest expense, net (2.7 ) (2.3 ) (2.3 ) Other income/(expense) - (0.1 ) 0.3 Income from continuing operations before taxes 23.3 22.9 21.6 Income taxes (6.7 ) (6.8 ) (6.4 ) Net earnings 16.6 % 16.1 % 15.3 %
(1) Includes results from the acquisition of
(2) Includes results from the acquisitions of
May 1, 2013.
Net sales for the year ended
December 31, 2013were $3.24 billionas compared to sales of $2.99 billionfor the year ended December 31, 2012, an increase of 8%. The increase was the result of contributions from acquisitions of 7% and organic sales growth of 1%.
Our Medical and Scientific Imaging segment reported a
Gross margin increased to 69.3% in the year ended
December 31, 2013from 64.4% in the year ended December 31, 2012, due primarily to additional sales from medical products which have a higher gross margin. Selling, general and administrative ("SG&A") expenses as a percentage of net sales increased to 39.5% in the year ended December 31, 2013as compared to 37.8% in the year ended December 31, 2012due to higher SG&A expense structures at our medical businesses as well as SG&A expenses at MHA in which the corresponding revenues were not recognizable under GAAP (See Note 2 of the notes to Consolidated Financial Statements included in this Annual Report). Operating margin was 29.7% in the year ended December 31, 2013as compared to 26.6% in the year ended December 31, 2012. In our RF Technology segment, net sales for the year ended December 31, 2013increased by $56 millionor 7% over the year ended December 31, 2012. The increase was due primarily to growth in our toll and traffic, university card systems and security solutions businesses. Gross margin was 53.7% in 2013 as compared to 52.4% in the prior year due to operating leverage on higher sales volume. SG&A expenses as a percentage of sales in the year ended December 31, 2013were 25.6%, a decrease from 26.1% in the prior year due to operating leverage on higher sales volume. Operating profit margin was 28.0% in 2013 as compared to 26.3% in 2012. Net sales for our Industrial Technology segment decreased by $16 millionor 2% for the year ended December 31, 2013over the year ended December 31, 2012. The decrease was due primarily to the loss of a customer at our water metering business and lower sales at our materials testing business. Gross margin was 51.1% for the year ended December 31, 2013as compared to 51.6% in the year ended December 31, 2012due to negative operating leverage on lower sales volume as well as the inclusion in 2012 of a one-time $5.5 millionreduction to cost of goods sold at one of our businesses. SG&A expenses as a percentage of net sales were 22.5%, as compared to 20.8% in the prior year, due primarily to a $9.1 millionpretax charge for warranty expense at one of our subsidiaries, Hansen Technologies, to provide its customers with replacements for refrigeration valves that included a vendor-supplied component that did not meet Roper quality standards. The resulting operating profit margin was 28.6% in the year ended December 31, 2013as compared to 30.8% in the year ended December 31, 2012. In our Energy Systems and Controls segment, net sales for the year ended December 31, 2013increased by $6 millionor 1% over the year ended December 31, 2012, due primarily to acquisitions. Organic sales were impacted by lower sales of non-destructive testing systems for nuclear plants and pressure sensors for industrial applications, offset by increased demand for control systems for oil and gas applications. Gross margin was 57.4% in the year ended December 31, 2013, compared to 56.3% in the year ended December 31, 2012, due to product mix. SG&A expenses as a percentage of net sales were 29.2% as compared to 28.4% in the prior year due to product mix. Operating profit margin was 28.2% in the year ended December 31, 2013as compared to 27.8% in the year ended December 31, 2012. Corporate expenses increased by $8.6 millionto $86.1 million, or 2.7% of sales, in 2013 as compared to $77.5 million, or 2.6% of sales, in 2012. The increase was due to higher equity compensation (primarily as a result of higher stock prices), offset in part by a decrease in acquisition-related expenses.
Interest expense increased
Other expense of
$0.2 millionfor the year ended December 31, 2013was composed of foreign exchange losses at our non-U.S. based companies, offset in part by proceeds from a legal settlement. Other expense for the year ended December 31, 2012was $2.3 million, primarily due to foreign exchange losses at our non-U.S. based companies. During 2013, our effective income tax rate was 28.6% versus 29.6% in 2012. The reduction was due to $6 millionin discrete tax benefits related to the enactment of the American Taxpayer Relief Act of 2012 ("ATRA"), as well as a $6 millionbenefit from the correction of an out of period adjustment of tax balances which were immaterial to any covered period, offset in part by increased revenues and resulting pretax income in higher tax jurisdictions, primarily the United States. We expect the effective tax rate to increase in 2014 due to a continued increase in revenues and resulting pretax income in higher tax jurisdictions as well as the non-recurrence of the $6 milliontax benefit taken in 2013. At December 31, 2013, the functional currencies of most of our European subsidiaries were stronger and our Canadian and United Kingdomsubsidiaries were weaker against the U.S. dollar compared to currency exchange rates at December 31, 2012. The net result of these changes led to a pre-tax decrease in the foreign exchange component of comprehensive earnings of $17.9 millionin the year ended December 31, 2013. Approximately $9.5 millionof this amount related to goodwill and is not expected to directly affect our projected future cash flows. For the entire year of 2013, operating profit decreased by less than 1% due to fluctuations in non-U.S. currencies.
The following table summarizes our net order information for the years ended
2013 2012 change Industrial Technology
$ 772,337 $ 783,362(1.4 )% Energy Systems and Controls 673,569 634,051 6.2 Medical and Scientific Imaging 958,830 703,034 36.4 RF Technology 943,757 871,225 8.3 Total $ 3,348,493 $ 2,991,67211.9 % The increase in orders was due to internal growth of 4%, as well as orders from acquisitions which added 8%. Our Energy Systems and Controls and RF Technology segments experienced strong internal growth throughout 2013. Our Medical and Scientific Imaging segment experienced internal growth of 3%, as well as orders from recent acquisitions. The following table summarizes order backlog information at December 31, 2013and 2012 (dollar amounts in thousands). We include in backlog only orders that are expected to be recognized as revenue within twelve months. 2013 2012 change Industrial Technology $ 121,943 $ 131,621(7.4 )% Energy Systems and Controls 131,799 109,885 19.9 Medical and Scientific Imaging 290,435 234,526 23.8 RF Technology 510,553 471,185 8.4 Total $ 1,054,730 $ 947,21711.4 %
Net sales for the year ended
December 31, 2012were $2.99 billionas compared to sales of $2.80 billionfor the year ended December 31, 2011, an increase of 7%. The increase was the result of organic sales growth of 4%, contributions from acquisitions of 4% and an unfavorable effect from foreign exchange of 1%. Our Medical and Scientific Imaging segment reported a $93 millionor 15% increase in net sales for the year ended December 31, 2012over the year ended December 31, 2011. Acquisitions added $94 millionin sales, while organic sales increased 1% due to increased sales in our medical and electron microscopy businesses, offset by declines in sales of scientific imaging products. The impact from foreign exchange was a negative 1%. Gross margin increased to 64.4% in the year ended December 31, 2012from 63.3% in the year ended December 31, 2011, due primarily to additional sales from medical products which have a higher gross margin. Selling, general and administrative expenses ("SG&A") as a percentage of net sales decreased to 37.8% in the year ended December 31, 2012as compared to 39.0% in the year ended December 31, 2011due to investments in new products in the medical businesses in 2011 that did not recur in 2012. Operating margin was 26.6% in the year ended December 31, 2012as compared to 24.3% in the year ended December 31, 2011. In our Energy Systems and Controls segment, net sales for the year ended December 31, 2012increased by $48 millionor 8% over the year ended December 31, 2011. Organic sales increased 7% while acquisitions added $19 million, or 3%. The increase in organic sales was primarily due to increased demand in industrial process and nuclear plant inspection end markets. The impact from foreign exchange was a negative 2%. Gross margin was 56.3% in the year ended December 31, 2012, compared to 55.5% in the year ended December 31, 2011, due to operating leverage from higher sales volume. SG&A expenses as a percentage of net sales were 28.4% as compared to 29.1% in the prior year due to operating leverage from higher sales volume. Operating margin was 27.8% in the year ended December 31, 2012as compared to 26.4% in the year ended December 31, 2011. Net sales for our Industrial Technology segment increased by $58 millionor 8% for the year ended December 31, 2012over the year ended December 31, 2011. The increase was due to broad-based growth in nearly all businesses in the segment, with particular strength in our materials testing business and fluid handling businesses, offset in part by a negative 2% impact from foreign exchange. Gross margin was 51.6% for the year ended December 31, 2012as compared to 49.8% in the year ended December 31, 2011due to operating leverage on higher sales volume as well as a $5.5 millionone-time reduction to cost of goods sold at one of our businesses. This reduction is due to the cumulative effect of an accounting system error which caused the cost of goods sold to be overstated for several years by quarterly and annually immaterial amounts. SG&A expenses as a percentage of net sales were 20.8%, as compared to 21.5% in the prior year, due primarily to operating leverage on higher sales volume. The resulting operating profit margin was 30.8% in the year ended December 31, 2012as compared to 28.2% in the year ended December 31, 2011. In our RF Technology segment, net sales for the year ended December 31, 2012decreased by $3 millionover the year ended December 31, 2011. Organic sales were flat as growth in toll and traffic systems was offset by a large installation project in gas network monitoring during 2011 that has since been completed. Gross margin was 52.4% in 2012 as compared to 50.6% in the prior year due to product mix. SG&A expenses as a percentage of sales in the year ended December 31, 2012were 26.1%, a decrease from 26.8% in the prior year due to lower spending, particularly in selling expense related to toll projects.
Operating profit margin was 26.3% in 2012 as compared to 23.8% in 2011.
Corporate expenses increased by
$20.6 millionto $77.5 million, or 2.6% of sales, in 2012 as compared to $56.9 million, or 2.0% of sales, in 2011. The increase was due to $6.5 millionof acquisition expense related to the Sunquest acquisition, higher equity compensation (as a result of higher stock prices) and other compensation related costs.
Interest expense increased
Other expense for the year ended
December 31, 2012was $2.3 million, primarily due to foreign exchange losses at our non-U.S. based companies. Other income for the year ended December 31, 2011was $8.1 million, which was primarily due to a currency remeasurement gain on an intercompany note.
During 2012, our effective income tax rate was 29.6% versus 29.4% in 2011. This increase was due to a decrease in R&D credits.
December 31, 2012, the functional currencies of our Canadian and most of our European subsidiaries were stronger against the U.S. dollar compared to currency exchange rates at December 31, 2011. The net result of these changes led to a pre-tax increase in the foreign exchange component of comprehensive earnings of $24.5 millionin the year ended December 31, 2012. Approximately $12.7 millionof this amount related to goodwill and is not expected to directly affect our projected future cash flows. For the entire year of 2012, operating profit decreased by 1.3% due to fluctuations in non-U.S. currencies.
The following table summarizes our net order information for the years ended
2012 2011 change Industrial Technology
$ 783,362 $ 767,0202.1 % Energy Systems and Controls 634,051 608,538 4.2 Medical and Scientific Imaging 703,034 612,787 14.7 RF Technology 871,225 834,903 4.4 Total $ 2,991,672 $ 2,823,2486.0 % The increase in orders was due to internal growth of 2%, as well as orders from acquisitions which added $124 million. Our Industrial Technology, Energy Systems and Controls and RF Technology segments experienced strong internal growth throughout 2012. Our Medical and Scientific Imaging segment experienced negative internal growth, offset by bookings from recent acquisitions. The following table summarizes order backlog information at December 31, 2012and 2011 (dollar amounts in thousands). We include in backlog only orders that are expected to be recognized as revenue within twelve months. 2012 2011 change Industrial Technology $ 131,621 $ 141,836(7.2 )% Energy Systems and Controls 109,885 120,497 (8.8 ) Medical and Scientific Imaging 234,526 118,609 97.7 RF Technology 471,185 447,355 5.3 Total $ 947,217 $ 828,29714.4 %
Financial Condition, Liquidity and Capital Resources
Selected cash flows for the years ended
December 31, 2013, 2012, and 2011 are as follows (in millions): 2013 2012 2011 Cash provided by/(used in): Operating activities $ 802.6 $ 677.9$
Investing activities (1,115.9 ) (1,505.6 )
Financing activities 403.6 853.9
Operating activities - The increase in cash provided by operating activities in 2013 was primarily due to increased earnings net of intangible amortization related to acquisitions and improved receivables collection.
Investing activities - Cash used in investing activities during 2013, 2012, and 2011 was primarily for business acquisitions.
Financing activities - Cash used in financing activities in all periods presented was primarily debt repayments as well as dividends paid to stockholders. Cash provided by financing activities during all periods presented was primarily debt borrowings for acquisitions partially offset by debt payments made using cash from operations.
Net working capital (current assets, excluding cash, less total current liabilities, excluding debt) was
Total debt was
$2.5 billionat December 31, 2013(36.9% of total capital) compared to $2.0 billionat December 31, 2012(35.4% of total capital). Our increased debt at December 31, 2013compared to December 31, 2012was due to debt borrowings for acquisitions, partially offset by debt payments made using cash from operations. At December 31, 2013, we had $250 millionof outstanding borrowings under our $1.5 billionrevolving credit facility, $400 millionof senior notes due 2017, $800 millionof senior notes due 2018, $500 millionof senior notes due 2019, $500 millionof senior notes due 2022 and $8 millionof senior subordinated convertible notes due 2034. In addition, we had $6.5 millionof other debt in the form of capital leases and several smaller facilities that allow for borrowings or the issuance of letters of credit in foreign locations to support our non-U.S. businesses. We had $41.0 millionof outstanding letters of credit at December 31, 2013, of which $36.0 millionwas covered by our lending group, thereby reducing our remaining revolving credit capacity commensurately.
Cash and short-term investments at our foreign subsidiaries at
December 31, 2013totaled $386 million. Repatriation of these funds under current regulatory and tax law for use in domestic operations would expose us to additional taxes.
consider this cash to be permanently reinvested. We expect existing cash and cash equivalents, cash generated by our U.S. operations, our unsecured credit facility, as well as our expected ability to access the capital markets, will be sufficient to fund operating requirements in the U.S. for the foreseeable future.
We were in compliance with all debt covenants related to our credit facilities throughout the year ended
Capital expenditures of
$42.5 million, $38.4 millionand $40.7 millionwere incurred during 2013, 2012, and 2011, respectively. In the future, we expect capital expenditures as a percentage of sales to be between 1.0% and 1.5% of annual net sales.
Description of Certain Indebtedness
Senior Unsecured Credit Facility - On
July 27, 2012, we entered into a new unsecured credit facility (the "2012 Facility"), composed of a five-year $1.5 billionrevolving credit facility, with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders. We may also, subject to compliance with specified conditions, request term loans or additional revolving credit commitments in an aggregate amount not to exceed $350 million. The 2012 Facility replaced our previous unsecured credit facility dated as of July 7, 2008(the "2008 Facility"). Due to the early termination of the 2008 Facility, we recorded a $1.0 millionnon-cash debt extinguishment charge, reported as other expense, in the third quarter of 2012 reflecting the unamortized fees associated with the 2008 Facility. At December 31, 2013, there were $250 millionof outstanding borrowings under the 2012 Facility. The 2012 Facility contains various affirmative and negative covenants which, among other things, limit our ability to incur new debt, prepay subordinated debt, make certain investments and acquisitions, sell assets and grant liens, make restricted payments (including the payment of dividends on our common stock) and capital expenditures, or change our line of business. We also are subject to financial covenants which require us to limit our consolidated total leverage ratio and to maintain a consolidated interest coverage ratio. The most restrictive covenant is the consolidated total leverage ratio which is limited to 3.5. Senior Notes - Our senior notes are unsecured senior obligations of the Company and rank senior in right of payment with all of our existing and future subordinated indebtedness and rank equally in right of payment with all of our existing and future unsecured senior indebtedness. The notes are effectively subordinated to any of our existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness. The notes are not guaranteed by any of our subsidiaries and are effectively subordinated to all existing and future indebtedness and other liabilities of our subsidiaries. Senior Notes due 2018 - On June 6, 2013, we completed a public offering of $800 millionaggregate principal amount of 2.050% senior unsecured notes due October 1, 2018. The notes were issued at 99.791% of their principal amount. Net proceeds of $793.5 millionwere used to pay off a portion of the outstanding revolver balance under the 2012 Facility.
The notes bear interest at a fixed rate of 2.050% per year, payable semi-annually in arrears on
We may redeem some of all of these notes at any time or from time to time, at 100% of their principal amount, plus a make-whole premium based on a spread to U.S. Treasury securities. Senior Notes due 2017 - In
November 2012, we completed a public offering of $400 millionaggregate principal amount of 1.850% senior unsecured notes due November 2017. Net proceeds of $397.2 millionwere used to pay off a portion of the outstanding revolver balance under the 2012 Facility.
The notes bear interest at a fixed rate of 1.850% per year, payable semi-annually in arrears on
We may redeem some of all of these notes at any time or from time to time, at 100% of their principal amount, plus a make-whole premium based on a spread to U.S. Treasury securities. Senior Notes due 2022 - In
November 2012, we completed a public offering of $500 millionaggregate principal amount of 3.125% senior unsecured notes due November 2022. Net proceeds of $496.4 millionwere used to pay off a portion of the outstanding revolver balance under the 2012 Facility.
The notes bear interest at a fixed rate of 3.125% per year, payable semi-annually in arrears on
We may redeem some of all of these notes at any time or from time to time, at 100% of their principal amount, plus a make-whole premium based on a spread to U.S. Treasury securities. Senior Notes due 2019 - In
September 2009, we completed a public offering of $500 millionaggregate principal amount of 6.25% senior unsecured notes due September 2019. Net proceeds of $496 millionwere used to pay off our $350 millionterm loan originally due July 2010and the outstanding revolver balance under the 2008 Facility.
The notes bear interest at a fixed rate of 6.25% per year, payable semi-annually in arrears on
We may redeem some of all of these notes at any time or from time to time, at 100% of their principal amount, plus a make-whole premium based on a spread to U.S. Treasury securities.
Senior Notes due 2013 - On
August 15, 2013an aggregate notional amount of $500 millionin interest rate swaps we had entered into during 2009 expired. The swaps had been designated as fair value hedges which had effectively changed our $500 millionsenior notes due 2013 to a variable-rate obligation at a weighted average spread of 4.377% plus the 3 month London Interbank Offered Rate ("LIBOR"). Senior Subordinated Convertible Notes - In December 2003, we issued $230 millionof senior subordinated convertible notes at an original issue discount of 60.498%, resulting in an effective yield of 3.75% per year to maturity. Interest on the notes was payable semi-annually, beginning July 15, 2004, until January 15, 2009, after which cash interest is not paid on the notes prior to maturity unless contingent cash interest becomes payable. As of January 15, 2009, interest is recognized at the effective rate of 3.75% and represents accrual of original issue discount, excluding any contingent cash interest that may become payable. We will pay contingent cash interest to the holders of the notes during any six month period commencing after January 15, 2009if the average trading price of a note for a five trading day measurement period preceding the applicable six month period equals 120% or more of the sum of the issue price, accrued original issue discount and accrued cash interest, if any, for such note. The contingent cash interest payable per note in respect of any six month period will equal the annual rate of 0.25%. In accordance with this criterion, contingent interest has been paid for each six month period since January 15, 2009.
The notes are unsecured senior subordinated obligations, rank junior to our existing and future senior secured indebtedness and rank equally with our existing and future senior subordinated indebtedness.
As originally issued, each
$1,000principal amount of the notes will be convertible at the option of the holder into 12.422 shares of our common stock (giving effect to the 2-for-1 stock split effective August 26, 2005and subject to further adjustment), if (i) the sale price of our common stock reaches, or the trading price of the notes falls below, specified thresholds, (ii) if the notes are called for redemption or (iii) if specified corporate transactions have occurred. Upon conversion, we would have the right to deliver, in lieu of common stock, cash or a combination of cash and common stock. On November 19, 2004, we began a consent solicitation to amend the notes such that we would pay the same conversion value upon conversion of the notes, but would change how the conversion value is paid. In lieu of receiving exclusively shares of common stock or cash upon conversion, noteholders would receive cash up to the value of the accreted principal amount of the notes converted and, at our option, any remainder of the conversion value would be paid in cash or shares of common stock. The consent solicitation was successfully completed on December 6, 2004and the amended conversion provisions were adopted. As of September 30, 2005, the senior subordinated convertible notes were reclassified from long-term to short-term debt as the notes became convertible on October 1, 2005based upon our common stock trading above the trigger price for at least 20 trading days during the 30 consecutive trading-day period ending on September 30, 2005. Holders may require us to purchase all or a portion of their notes on January 15, 2014, January 15, 2019, January 15, 2024, and January 15, 2029, at stated prices plus accrued cash interest, if any, including contingent cash interest, if any. We may only pay the purchase price of such notes in cash and not in common stock. We may redeem for cash all or a portion of the notes at any time at redemption prices equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, including contingent cash interest, if any, on such notes to the applicable redemption date. We include in our diluted weighted-average common share calculation an increase in shares based upon the difference between our average closing stock price for the period and the conversion price of $31.80, plus accretion. This is calculated using the treasury stock method.
Contractual Cash Obligations and Other Commercial Commitments and Contingencies
The following tables quantify our contractual cash obligations and commercial commitments at
Contractual Payments Due in Fiscal Year Cash Obligations1 Total 2014 2015 2016 2017 2018 Thereafter Long-term debt
$ 2,458,321 $ 8,321$ - $ - $ 650,000 $ 800,000 $ 1,000,000Senior note interest 417,547 70,675 70,675 70,675 69,750 54,392 81,380 Capital leases 6,531 2,695 2,262 1,234 335 5 - Operating leases 124,910 38,978 32,092 25,008 16,452 7,520 4,860 Total $ 3,007,309 $ 120,669 $ 105,029 $ 96,917 $ 736,537 $ 861,917 $ 1,086,240Total Amounts Expiring in Fiscal Year Other Commercial Amount Commitments Committed 2014 2015 2016 2017 2018 Thereafter Standby letters of credit and bank guarantees $ 40,980 $ 30,279 $ 5,813 $ 932 $ 419 $ 114 $ 3,4231. We have excluded $26.9 millionrelated to the liability for uncertain tax positions from the tables as the current portion is not material, and we are not able to reasonably estimate the timing of the long-term portion of the liability. See Note 7 of the notes to Consolidated Financial Statements.
December 31, 2013and 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We believe that internally generated cash flows and the remaining availability under our credit facilities will be adequate to finance normal operating requirements and future acquisition activities. Although we maintain an active acquisition program, any future acquisitions will be dependent on numerous factors and it is not feasible to reasonably estimate if or when any such acquisitions will occur and what the impact will be on our activities, financial condition and results of operations. We may also explore alternatives to attract additional capital resources. We anticipate that our businesses will generate positive cash flows from operating activities, and that these cash flows will permit the reduction of currently outstanding debt in accordance with the repayment schedule. However, the rate at which we can reduce our debt during 2014 (and reduce the associated interest expense) will be affected by, among other things, the financing and operating requirements of any new acquisitions and the financial performance of our existing companies. None of these factors can be predicted with certainty.
Recently Issued Accounting Standards
See Note 1 of our notes to Consolidated Financial Statements for information regarding the effect of new accounting pronouncements on our financial statements.