UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
 
(Mark One)
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to             
   
Commission File Number 1-14097
SAUER-DANFOSS INC.
(Exact name of registrant as specified in its charter)

Delaware
 
36-3482074
(State or other jurisdiction of
 
(IRS Employer
incorporation or organization)
 
Identification No.)
2800 East 13 th  Street, Ames, Iowa
 
50010
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(515) 239-6000
(Registrant's telephone number, including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x   No   £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x   No   £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer £
 
Accelerated filer  x
 
 
 
Non-accelerated filer £
 
Smaller reporting company £
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £  No x

As of August 1, 2012, 48,457,461 sh ares of Sauer-Danfoss Inc. common stock, $.01 par value, were outstanding.


Table of Contents

PART I
 
FINANCIAL INFORMATION
 
 
 
Item 1.
 
Financial Statements (Unaudited):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CERTIFICATIONS
 
 



2



Sauer-Danfoss Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Net sales
$
518,787

 
$
563,317

 
$
1,092,780

 
$
1,128,059

Cost of sales
346,766

 
372,734

 
730,529

 
748,217

Gross profit
172,021

 
190,583

 
362,251

 
379,842

Selling, general and administrative
58,960

 
57,663

 
119,005

 
111,919

Research and development
16,367

 
15,555

 
32,663

 
29,650

Other
(29
)
 
49

 
(17
)
 
(261
)
Total operating expenses
75,298

 
73,267

 
151,651

 
141,308

Income from operations
96,723

 
117,316

 
210,600

 
238,534

Nonoperating income (expense):
 
 
 
 
 
 
 
Interest expense, net
(4,047
)
 
(5,774
)
 
(8,418
)
 
(11,875
)
Loss on early retirement of debt
—

 
(899
)
 
—

 
(899
)
Other, net
776

 
362

 
1,208

 
(4,137
)
Nonoperating expenses, net
(3,271
)
 
(6,311
)
 
(7,210
)
 
(16,911
)
Income before income taxes
93,452

 
111,005

 
203,390

 
221,623

Income tax expense
(27,765
)
 
(25,052
)
 
(59,704
)
 
(51,135
)
Net income
65,687

 
85,953

 
143,686

 
170,488

Net income attributable to noncontrolling interest, net of tax
(9,279
)
 
(11,078
)
 
(22,484
)
 
(25,059
)
Net income attributable to Sauer-Danfoss Inc.
$
56,408

 
$
74,875

 
$
121,202

 
$
145,429

Net income per common share, basic
$
1.17

 
$
1.55

 
$
2.50

 
$
3.00

Net income per common share, diluted
$
1.16

 
$
1.54

 
$
2.50

 
$
3.00

Weighted average basic shares outstanding
48,410,917

 
48,399,816

 
48,409,305

 
48,398,196

Weighted average diluted shares outstanding
48,480,667

 
48,480,360

 
48,480,702

 
48,479,310


See accompanying notes to consolidated financial statements.


3


Sauer-Danfoss Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
65,687

 
$
85,953

 
$
143,686

 
$
170,488

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(35,734
)
 
8,375

 
(21,574
)
 
30,498

Pension and postretirement plan adjustments
1,362

 
994

 
1,839

 
943

Unrealized gains (losses) on hedging activities
(1,443
)
 
1,039

 
288

 
2,492

Other comprehensive income (loss)
(35,815
)
 
10,408

 
(19,447
)
 
33,933

Comprehensive income
29,872

 
96,361

 
124,239

 
204,421

Comprehensive income attributable to noncontrolling interest
(11,120
)
 
(12,168
)
 
(21,850
)
 
(26,366
)
Comprehensive income attributable to Sauer-Danfoss Inc.
$
18,752

 
$
84,193

 
$
102,389

 
$
178,055


See accompanying notes to consolidated financial statements.



4

Sauer-Danfoss Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
(Unaudited)
 
June 30,
 
December 31,
 
2012
 
2011
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
77,773

 
$
72,560

Cash deposited with related persons
286,014

 
178,727

Accounts receivable (net of allowances of $4,331 and $4,361 in 2012 and 2011, respectively)
276,529

 
215,978

Inventories
183,283

 
217,710

Other current assets
86,637

 
75,868

Total current assets
910,236

 
760,843

 
 
 
 
Property, Plant and Equipment  (net of accumulated depreciation of $792,960 and $779,449 in 2012 and 2011, respectively)
333,031

 
367,844

 
 
 
 
Other Assets:
 
 
 
Goodwill
33,817

 
34,474

Other intangible assets, net
16,090

 
16,883

Deferred income taxes
88,235

 
90,512

Other
7,797

 
7,700

Total other assets
145,939

 
149,569

Total Assets
$
1,389,206

 
$
1,278,256

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current Liabilities:
 
 
 
Long-term debt due within one year
$
889

 
$
955

Accounts payable
183,383

 
177,996

Accrued salaries and wages
68,874

 
67,140

Accrued warranty
26,390

 
29,863

Other accrued liabilities
94,378

 
52,237

Total current liabilities
373,914

 
328,191

 
 
 
 
Long-Term Debt
196,858

 
199,502

 
 
 
 
Other Liabilities:
 
 
 
Long-term pension liability
73,900

 
79,717

Postretirement benefits other than pensions
31,350

 
31,488

Deferred income taxes
34,816

 
35,184

Other
23,157

 
26,348

Total other liabilities
163,223

 
172,737

 
 
 
 
Total liabilities
733,995

 
700,430

 
 
 
 
Stockholders' Equity:
 
 
 
Preferred stock, par value $.01 per share, authorized 4,500,000 shares, no shares issued or outstanding
—

 
—

Common stock, par value $.01 per share, authorized shares 75,000,000 in 2012 and 2011; issued and outstanding 48,451,417 in 2012 and 48,432,860 in 2011
485

 
484

Additional paid-in capital
335,357

 
335,337

Retained earnings
231,715

 
144,424

Accumulated other comprehensive income (loss)
(11,640
)
 
7,173

Total Sauer-Danfoss Inc. stockholders' equity
555,917

 
487,418

Noncontrolling interest
99,294

 
90,408

Total stockholders' equity
655,211

 
577,826

 
 
 
 
Total Liabilities and Stockholders' Equity
$
1,389,206

 
$
1,278,256

See accompanying notes to consolidated financial statements.

5

Sauer-Danfoss Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(Dollars in thousands, except per share data)
(Unaudited)

 
Number of
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
December 31, 2011
48,432,860

 
$
484

 
$
335,337

 
$
144,424

 
$
7,173

 
$
90,408

 
$
577,826

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
121,202

 
—

 
22,484

 
143,686

Other comprehensive loss
—

 
—

 
—

 
—

 
(18,813
)
 
(634
)
 
(19,447
)
Performance units vested
5,057

 
—

 
—

 
—

 
—

 
—

 
—

Restricted stock grant
13,500

 
1

 
(1
)
 
—

 
—

 
—

 
—

Minimum tax withholding settlement
—

 
—

 
(114
)
 
—

 
—

 
—

 
(114
)
Restricted stock compensation
—

 
—

 
135

 
—

 
—

 
—

 
135

Noncontrolling interest distribution
—

 
—

 
—

 
—

 
—

 
(12,964
)
 
(12,964
)
Cash dividends declared ($.70 per share)
—

 
—

 
—

 
(33,911
)
 
—

 
—

 
(33,911
)
June 30, 2012
48,451,417

 
$
485

 
$
335,357

 
$
231,715

 
$
(11,640
)
 
$
99,294

 
$
655,211


See accompanying notes to consolidated financial statements.

6

Sauer-Danfoss Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

 
Six Months Ended June 30,
 
2012
 
2011
Cash Flows from Operating Activities:
 
 
 
Net income
$
143,686

 
$
170,488

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
41,212

 
45,312

Loss on early retirement of debt
—

 
899

Change in deferred income taxes
4,541

 
14,832

Other
118

 
(261
)
Changes in operating assets and liabilities
 
 
 
Accounts receivable, net
(66,007
)
 
(50,483
)
Inventories
29,231

 
(14,963
)
Other current assets
(13,488
)
 
(9,531
)
Accounts payable
9,618

 
5,810

Accrued liabilities
18,363

 
5,969

Other
(332
)
 
1,085

Net cash provided by operating activities
166,942

 
169,157

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Purchases of property, plant and equipment
(12,707
)
 
(14,052
)
Proceeds from sale of property, plant and equipment
209

 
1,159

Advances to related persons
(114,921
)
 
(4,242
)
Net cash used in investing activities
(127,419
)
 
(17,135
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Net repayments on notes payable and bank overdrafts
—

 
(27,988
)
Net repayments on revolving credit facility
—

 
(51,026
)
Repayments of long-term debt
(600
)
 
(605
)
Cash dividends
(16,953
)
 
—

Distributions to noncontrolling interest partners
(12,964
)
 
(10,135
)
Net cash used in financing activities
(30,517
)
 
(89,754
)
 
 
 
 
Effect of Exchange Rate Changes on Cash
(3,793
)
 
4,490

 
 
 
 
Cash and Cash Equivalents:
 
 
 
Net increase during the period
5,213

 
66,758

Beginning balance
72,560

 
44,039

Ending balance
$
77,773

 
$
110,797

 
 
 
 
Supplemental Cash Flow Disclosures:
 
 
 
Interest paid
$
8,959

 
$
11,089

Income taxes paid
$
39,613

 
$
34,497

See accompanying notes to consolidated financial statements.

7

Sauer-Danfoss Inc. and Subsidiaries
Notes To Consolidated Financial Statements
(Dollars in thousands, except per share data)
(Unaudited)


1)      Summary of Significant Accounting Policies —

Basis of Presentation and Principles of Consolidation —

The consolidated financial statements of Sauer-Danfoss Inc. and subsidiaries (the Company) included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and represent the consolidation of all companies in which the Company has a controlling financial ownership interest or a majority of the interest in earnings or losses. Certain information and disclosures normally included in comprehensive financial statements, prepared in accordance with U.S. generally accepted accounting principles (GAAP), have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the financial statements reflect all adjustments necessary to present fairly the Company's consolidated financial position, results of operations and cash flows for the periods presented. It is suggested that these interim financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest annual report on Form 10-K as filed with the Securities and Exchange Commission on March 1, 2012.

Use of Estimates —

In preparing the consolidated financial statements in conformity with U.S. GAAP, management must make decisions that impact the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures, including disclosures of contingent assets and liabilities. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Estimates are used in determining, among other items, inventory valuation, warranty reserves, allowance for doubtful accounts, valuation allowances on deferred tax assets, pension and postretirement accruals, employee incentive accruals, useful lives for intangible assets, and future cash flows associated with impairment testing for goodwill and other long-lived assets. These estimates and assumptions are based on management's best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances, including the current economic environment, adjusting such estimates and assumptions when facts and circumstances dictate. A number of these factors include, among others, the economic conditions, restricted credit markets, foreign currency, and higher commodity costs, all of which impact such estimates and assumptions. As future events and their effects cannot be determined with precision, actual amounts could differ significantly from those estimated at the time the consolidated financial statements are prepared. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Recently Adopted Accounting Principles —

In May 2011 the Financial Accounting Standards Board (FASB) issued new accounting guidance that amends some fair value measurement principles and disclosure requirements. The new guidance states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The Company adopted this guidance as of January 1, 2012 with no impact on the consolidated financial statements.

In June 2011 the FASB amended requirements for the presentation of other comprehensive income (OCI), requiring all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this guidance in the first quarter of 2012. Upon adoption, certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications have no impact on previously reported financial position, results of operations or cash flows.


8

In September 2011 the FASB issued amendments to the guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. Annual impairment tests are performed by the Company in the fourth quarter of each year. The adoption of this updated authoritative guidance is not expected to have an impact on the consolidated financial statements.

2)      Basic and Diluted Per Share Data —

Basic net income per common share is based on the weighted average number of shares of common stock outstanding for the period less restricted stock shares issued in connection with the Company's long-term incentive plans and subject to risk of forfeiture. Diluted net income per common share assumes that outstanding common shares were increased by shares issuable upon (i) vesting of restricted stock shares, and (ii) granting of shares deferred under the long-term incentive plan. Restricted stock and shares under the long-term incentive plans have an exercise price of zero .

The reconciliation of basic net income per common share to diluted net income per common share is shown in the following table for the three and six-month periods ended June 30, 2012 and 2011 :

 
 
June 30, 2012
 
June 30, 2011
 
 
Net Income
 
Shares
 
EPS
 
Net Income
 
Shares
 
EPS
 
Three Months
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income
$
56,408

 
48,410,917

 
$
1.17

 
$
74,875

 
48,399,816

 
$
1.55

 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
 
Restricted stock
—

 
16,349

 
—

 
—

 
11,283

 
—

 
Performance units
—

 
53,401

 
(0.01
)
 
—

 
69,261

 
(0.01
)
 
Diluted net income
$
56,408

 
48,480,667

 
$
1.16

 
$
74,875

 
48,480,360

 
$
1.54

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income
$
121,202

 
48,409,305

 
$
2.50

 
$
145,429

 
48,398,196

 
$
3.00

 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
 
Restricted stock
—

 
16,384

 
—

 
—

 
10,233

 
—

 
Performance units
—

 
55,013

 
—

 
—

 
70,881

 
—

 
Diluted net income
$
121,202

 
48,480,702

 
$
2.50

 
$
145,429

 
48,479,310

 
$
3.00


3)      Restructuring —

In 2011 the Company announced its plans to restructure its European sales organization to establish a distributor organization to serve smaller customers. Costs related to the reorganization are included in the Global Services segment and totaled $507 and $746 in the three and six months ended June 30, 2012 , which are included in selling, general and administrative expenses.

9


The following table summarizes the restructuring charges incurred and the activity in the accrued liability during the six months ended June 30, 2012 .

 
Employee
Termination
Costs
 
Professional Fees
 
Accelerated Depreciation
 
Total
Balance as of December 31, 2011
$
4,180

 
$
483

 
$
—

 
$
4,663

Charges to Expense
—

 
239

 
—

 
239

Payments made / Other
—

 
(722
)
 
—

 
(722
)
Balance as of March 31, 2012
$
4,180

 
$
—

 
$
—

 
$
4,180

Charges to Expense
—

 
460

 
47

 
507

Payments made / Other
—

 
(460
)
 
(47
)
 
(507
)
Balance as of June 30, 2012 (1)
$
4,180

 
$
—

 
$
—

 
$
4,180

 
 
 
 
 
 
 
 
Cumulative charges incurred
$
4,180

 
$
1,182

 
$
47

 
$
5,409

(1) The $4,180 of accrued employee termination costs are expected to be paid through 2013.

4)      Inventories —

The composition of inventories is as follows:

 
 
June 30, 2012
 
December 31, 2011
 
Raw materials
$
90,180

 
$
101,069

 
Work in progress
43,511

 
50,455

 
Finished goods and parts
72,068

 
87,846

 
LIFO allowance
(22,476
)
 
(21,660
)
 
Total
$
183,283

 
$
217,710


5)      Fair Value and Derivative Financial Instruments —
The Company holds certain assets and liabilities that are required to be measured at fair value on a recurring basis. These include the Company's derivative instruments related to foreign currency forward contracts, as well as foreign exchange swaps. The Company uses derivative financial instruments to manage risk and not for trading or other speculative purposes.
Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is the Company's policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. The fair values of the Company's derivatives are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these contracts as Level 2 in the fair value hierarchy.

10

The following table presents the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis:
 
Balance Sheet
Classification
 
June 30,
2012
 
December 31,
2011
Assets:
 
 
 
 
 
Foreign exchange swaps (not designated as hedging instruments)
Other current assets
 
$
244

 
$
494

Liabilities:
 
 
 
 
 
Forward contracts (designated as hedging instruments)
Other accrued liabilities
 
$
3,177

 
$
3,809

Forward contracts (designated as hedging instruments)
Other liabilities
 
452

 
129

Total liabilities
 
 
$
3,629

 
$
3,938

 
 
 


 



The Company enters into forward contracts to hedge the value of the U.S. dollar or euro cash flow at locations that do not have the U.S. dollar or euro as their functional currency but conduct certain transactions in U.S. dollars or euros. The objective of all outstanding forward contracts is to hedge forecasted transactions in U.S. dollars or euros through the cash settlement date. The Company enters into forward contracts with maturity dates of up to eighteen months after the contract date. All forward contracts are designated as and qualify for hedge accounting treatment.

The Company had foreign currency forward contracts outstanding in notional amounts as follows:

 
June 30,
2012
 
December 31,
2011
U.S. dollar
58,320

 
50,550

Euro
15,600

 
8,250


Changes in the fair value of forward contracts designated as hedging instruments are recognized as a component of net income or accumulated other comprehensive income depending on whether the transaction related to the hedged risk has occurred and whether the contract qualifies as highly effective. Changes in fair values of derivatives that are accounted for as cash flow hedges are recorded in accumulated other comprehensive income. The amount of loss, net of tax, recorded as a component of accumulated other comprehensive income related to forward contracts was $2,433 and $2,721 at June 30, 2012 and December 31, 2011 , respectively. At June 30, 2012 the Company expects to reclassify $2,070 of loss, net of tax, on forward contracts from accumulated other comprehensive income to net income during the next twelve months due to the actual fulfillment of forecasted transactions.

The following table summarizes the amount of gain (loss) reclassified from accumulated other comprehensive income into net income for the three and six months ended June 30, 2012 and 2011 :

Statement of Operations Classification
June 30,
2012
 
June 30,
2011
Three months ended
 
 
 
Net Sales
$
(631
)
 
$
133

Other, net
(10
)
 
22

 
$
(641
)
 
$
155

Six months ended
 
 
 
Net Sales
$
(1,138
)
 
$
(25
)
Other, net
157

 
233

 
$
(981
)
 
$
208


Any portion of the hedge that is deemed ineffective due to the absolute value of the cumulative change in the derivative being greater than the cumulative change in the hedged item is recorded immediately in other, net on the consolidated statements of operations. There was no significant hedge ineffectiveness in the three and six months

11

ended June 30, 2012 and 2011 .

The Company uses foreign exchange swaps to hedge intercompany financing activities between group companies with different functional currencies. The Company does not designate these foreign exchange swaps as hedging instruments. Accordingly, the gain or loss associated with changes in the fair value of these contracts is immediately recorded in other, net on the consolidated statements of operations.

The following table summarizes the amount of gain (loss) related to foreign exchange swaps recognized in the statements of operations for the three and six months ended June 30, 2012 and 2011 :

Statement of Operations Classification
June 30,
2012
 
June 30,
2011
Three months ended
 
 
 
Other, net
$
339

 
$
481

Six months ended
 
 
 
Other, net
$
(242
)
 
$
168


6)      Related Person Transactions —

At June 30, 2012 the Company can borrow up to $300,000 under a term loan and revolving credit facility with Danfoss A/S, the Company's majority stockholder. Two term loans of approximately $200,000 ( $140,000 and 45,000 euro) were outstanding at June 30, 2012 and December 31, 2011 . There were no principal amounts outstanding under the revolving credit facility at June 30, 2012 or December 31, 2011. The Company incurred interest expense of $4,498 and $9,106 for the three and six months ended June 30, 2012 , respectively, and $5,768 and $11,554 for the three and six months ended June 30, 2011 , respectively, related to the debt with Danfoss A/S.
In June 2011 upon the request of the Company, the borrowing capacity of the revolving credit facility was reduced to approximately $150,000 ( $125,000 and 20,000 euro). As a result of the reductions in borrowing capacity the Company recognized $899 of loss on early retirement of debt in the three and six months ended June 30, 2011 due to the write-off of unamortized deferred financing costs. In September 2011 the borrowing capacity was further reduced to approximately $100,000 ( $75,000 and 20,000 euro)
In August 2011 the Company entered into an Agreement with Danfoss A/S, the Company's majority stockholder, to loan excess cash to Danfoss A/S at the EURIBOR or LIBOR rate plus 0.25% . The cash deposited with Danfoss A/S was $271,003 and $168,450 , at June 30, 2012 and December 31, 2011, respectively. The Company had four deposits of cash with Danfoss A/S at June 30, 2012 with a weighted average interest rate of 0.60% and terms ranging from 6 to 28 days. The Company recorded interest income of $371 and $722 during the three and six months ended June 30, 2012 , respectively, related to this agreement.
In October 2010 the Company entered into an Agreement with Daikin Industries Ltd., a noncontrolling interest owner in an entity consolidated by the Company, to loan excess cash or borrow funds on a daily basis as needed. The cash deposited with Daikin was $15,011 and $10,277 at June 30, 2012 and December 31, 2011, respectively. Interest is earned based on short term financing rates and was $16 and $27 during the three and six months ended June 30, 2012 , respectively, and $8 and $10 during the three and six months ended June 30, 2011 , respectively, related to this agreement.
7)      Accrued Warranty Costs —

The Company warrants its various products over differing periods depending upon the type of product and application. Consequently, the Company records warranty liabilities for the estimated costs that may be incurred under its basic warranty based on past trends of actual warranty claims compared to the actual sales levels to which those claims apply. These liabilities are accrued at the time the sales of the products are recorded.

In addition to its normal warranty liability, the Company, from time to time in the normal course of business, incurs costs to repair or replace defective products with a specific customer or group of customers. The Company refers to these as field recalls and in these instances, the Company records a specific provision for the expected costs it will incur to repair or replace these products utilizing information from customers and internal information regarding the

12

specific cost of materials and labor. Due to the sporadic and infrequent nature of field recalls, and the potential for a range of costs associated with field recalls, the Company cannot accurately estimate these costs at the time the products are sold. Therefore, these costs are recorded at the time information becomes known to the Company. As the field recalls are carried out, the Company relieves the specific liability related to that field recall. These specific field recall liabilities are reviewed on a quarterly basis.

The following table presents the changes in the Company's accrued warranty liability:

 
 
Six Months Ended June 30,
 
 
2012
 
2011
 
Balance, beginning of period
$
29,863

 
$
28,183

 
Payments
(8,179
)
 
(6,455
)
 
Accruals for warranties
5,309

 
5,796

 
Currency impact
(603
)
 
1,306

 
Balance, end of period
$
26,390

 
$
28,830


8)      Pension and Postretirement Benefits Other than Pensions —

Pension Benefits

The Company has defined benefit plans covering a significant number of its employees. The benefits under these plans are based primarily on years of service and compensation levels. Pension expense for the three and six months ended June 30, 2012 and 2011 for the defined benefit plans consists of the following components:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
2011
 
2012
2011
Service cost
$
883

$
947

 
$
2,081

$
1,957

Interest cost
1,939

3,301

 
6,269

6,556

Expected return on plan assets
(1,680
)
(3,293
)
 
(6,036
)
(6,457
)
Amortization of prior service cost
(62
)
(71
)
 
(136
)
(138
)
Amortization of net loss
1,217

912

 
2,742

1,967

Net periodic pension expense
$
2,297

$
1,796

 
$
4,920

$
3,885


Postretirement Benefits

The Company provides health benefits for certain retired employees and certain dependents when the employee becomes eligible for these benefits by satisfying plan provisions that include certain age and service requirements. The components of the postretirement benefit expense of the Company-sponsored plans for the three and six months ended June 30, 2012 and 2011 are as follows:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
2011
 
2012
2011
Service cost
$
44

$
46

 
$
94

$
96

Interest cost
284

679

 
634

1,329

Amortization of prior service cost
(390
)
(32
)
 
(765
)
(64
)
Amortization of net loss
378

445

 
903

927

Postretirement benefit expense
$
316

$
1,138

 
$
866

$
2,288


During the third quarter of 2011, the Company amended its U.S. retiree health care plans to change the method by which postretirement health care is provided for certain eligible Medicare age retirees and / or spouses. Beginning January 1, 2012, the Company provides its eligible Medicare age retirees and / or spouses postretirement health care in the form of a defined contribution benefit, together with access to a third party health care exchange designed specifically for Medicare age participants. Postretirement health care was previously provided to this group through the Company's standard group health plan. The plan amendment reduced the accumulated postretirement benefit

13

obligation by approximately $19,500 which is being recognized as part of net periodic postretirement benefit cost over the average life expectancy of retired eligible employees.

9)      Other Comprehensive Income —

The following table shows the tax and exchange rate effects of amounts allocated to each component of other comprehensive income (loss) for the three and six months ended June 30, 2012 and 2011 .
 
Change in Period
 
Tax (Expense) Benefit
 
Effect of Exchange Rates
 
Net Change
Three Months Ended June 30, 2012
 
 
 
 
 
 
 
Foreign currency translation
$
(35,734
)
 
$
—

 
$
—

 
$
(35,734
)
Pension and postretirement plan adjustment
1,149

 
(430
)
 
643

 
1,362

Unrealized gains on hedging activities
(2,021
)
 
430

 
148

 
(1,443
)
Other comprehensive income (loss)
$
(36,606
)
 
—

 
$
791

 
$
(35,815
)
Three Months Ended June 30, 2011
 
 
 
 
 
 
 
Foreign currency translation
$
8,375

 
$
—

 
$
—

 
$
8,375

Pension and postretirement plan adjustment
1,685

 
(630
)
 
(61
)
 
994

Unrealized gains on hedging activities
1,194

 
(136
)
 
(19
)
 
1,039

Other comprehensive income (loss)
$
11,254

 
$
(766
)
 
$
(80
)
 
$
10,408

Six Months Ended June 30, 2012
 
 
 
 
 
 
 
Foreign currency translation
$
(21,574
)
 
$
—

 
$
—

 
$
(21,574
)
Pension and postretirement plan adjustment
2,757

 
(1,032
)
 
114

 
1,839

Unrealized gains on hedging activities
210

 
28

 
50

 
288

Other comprehensive income (loss)
$
(18,607
)
 
$
(1,004
)
 
$
164

 
$
(19,447
)
Six Months Ended June 30, 2011
 
 
 
 
 
 
 
Foreign currency translation
$
30,498

 
$
—

 
$
—

 
$
30,498

Pension and postretirement plan adjustment
2,687

 
(1,007
)
 
(737
)
 
943

Unrealized gains on hedging activities
2,824

 
(310
)
 
(22
)
 
2,492

Other comprehensive income (loss)
$
36,009

 
$
(1,317
)
 
$
(759
)
 
$
33,933


The changes in accumulated other comprehensive income (loss), excluding non-controlling interest, for the six months ended June 30, 2012 is as follows:
 
Foreign Currency
Translation
 
Pension/
Postretirement
Plan
Adjustment
 
Hedging
Activities
 
Accumulated
Other
Comprehensive
Income (Loss)
Balance as of January 1, 2012
$
82,955

 
$
(73,061
)
 
$
(2,721
)
 
$
7,173

Current period other comprehensive income (loss)
(20,940
)
 
1,839

 
288

 
(18,813
)
Balance as of June 30, 2012
$
62,015

 
$
(71,222
)
 
$
(2,433
)
 
$
(11,640
)


14

10) Segment and Geographic Information —

The Company's reportable segments are organized around its various product lines of Propel, Work Function, Controls and Stand-Alone Businesses. Propel products include hydrostatic transmissions and related products that transmit the power from the engine to the wheel to propel a vehicle. Work Function products include steering motors and motors that transmit power for the work functions of the vehicle. Controls products include electrohydraulic controls, microprocessors, and valves that control and direct the power of a vehicle. Stand-Alone Businesses, an aggregation of two operating segments, includes open circuit gear pumps and motors, cartridge valves and hydraulic integrated circuits, directional control valves, inverters, and light duty hydrostatic transmissions that transmit, control and direct the power of a vehicle and are marketed under their own names and operate as stand-alone businesses. Costs in Global Services relate to internal global service departments and include costs such as consulting for special projects, tax and accounting fees paid to outside third parties, certain insurance premiums, and amortization of intangible assets from certain business combinations.
The following table presents the significant items by reportable segment for the results of operations for the three and six-month periods ended June 30, 2012 and 2011 :

Three months ended

 
 
Propel
 
Work
Function
 
Controls
 
Stand-Alone
 
Global
Services
 
Total
 
June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
233,373

 
$
83,075

 
$
84,899

 
$
117,440

 
$
—

 
$
518,787

 
Segment income (loss)
49,522

 
13,773

 
22,285

 
22,551

 
(10,632
)
 
97,499

 
Interest expense, net
 
 
 
 
 
 
 
 
 
 
(4,047
)
 
Income before income taxes
 
 
 
 
 
 
 
 
 
 
93,452

 
Depreciation and amortization
7,931

 
5,108

 
3,248

 
3,879

 
369

 
20,535

 
Capital expenditures
2,163

 
1,518

 
1,018

 
2,065

 
609

 
7,373

 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
249,960

 
$
105,776

 
$
88,663

 
$
118,918

 
$
—

 
$
563,317

 
Segment income (loss)
61,531

 
19,409

 
25,576

 
20,495

 
(9,333
)
 
117,678

 
Interest expense, net
 
 
 
 
 
 
 
 
 
 
(5,774
)
 
Loss on early retirement of debt
 
 
 
 
 
 
 
 
 
 
(899
)
 
Income before income taxes
 
 
 
 
 
 
 
 
 
 
111,005

 
Depreciation and amortization
8,543

 
5,688

 
3,547

 
4,503

 
559

 
22,840

 
Capital expenditures
4,245

 
371

 
1,239

 
1,958

 
721

 
8,534

    

15

Six months ended
 
 
Propel
 
Work
Function
 
Controls
 
Stand-Alone
 
Global
Services
 
Total
 
June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
489,699

 
$
175,308

 
$
169,467

 
$
258,306

 
$
—

 
$
1,092,780

 
Segment income (loss)
104,798

 
31,650

 
45,593

 
50,646

 
(20,879
)
 
211,808

 
Interest expense, net
 
 
 
 
 
 
 
 
 
 
(8,418
)
 
Income before income taxes
 
 
 
 
 
 
 
 
 
 
203,390

 
Depreciation and amortization
15,793

 
10,175

 
6,391

 
7,867

 
986

 
41,212

 
Capital expenditures
3,508

 
2,472

 
1,844

 
3,812

 
1,071

 
12,707

 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
500,190

 
$
205,482

 
$
168,002

 
$
254,385

 
$
—

 
$
1,128,059

 
Segment income (loss)
126,651

 
36,739

 
48,326

 
46,413

 
(23,732
)
 
234,397

 
Interest expense, net
 
 
 
 
 
 
 
 
 
 
(11,875
)
 
Loss on early retirement of debt
 
 
 
 
 
 
 
 
 
 
(899
)
 
Income before income taxes
 
 
 
 
 
 
 
 
 
 
221,623

 
Depreciation and amortization
16,980

 
11,130

 
7,039

 
9,035

 
1,128

 
45,312

 
Capital expenditures
7,520

 
915

 
1,712

 
2,952

 
953

 
14,052


A summary of the Company's net sales and long-lived assets by geographic area is presented below:

 
 
Net Sales (1)
 
Long-Lived Assets (2)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
United States
$
236,925

 
$
209,154

 
$
490,703

 
$
429,434

 
$
98,375

 
$
103,179

 
China
31,876

 
60,413

 
70,161

 
133,510

 
17,784

 
14,187

 
Germany
43,532

 
54,094

 
92,699

 
105,567

 
47,054

 
56,632

 
Denmark (3)
5,108

 
5,559

 
10,850

 
12,078

 
85,715

 
106,798

 
Other countries
201,346

 
234,097

 
428,367

 
447,470

 
141,807

 
185,113

 
Total
$
518,787

 
$
563,317

 
$
1,092,780

 
$
1,128,059

 
$
390,735

 
$
465,909

________________________________________
(1)
Net sales are attributed to countries based on location of customer.

(2)
Long-lived assets include property, plant and equipment net of accumulated depreciation, goodwill, intangible assets net of accumulated amortization, and certain other long-lived assets.

(3)
Majority of this country's sales are shipped outside of the home country where the product is produced.

One customer accounted for ten percent of total consolidated net sales for the three and six-month periods ended June 30, 2012 . No customer accounted for ten percent of total consolidated net sales for the three and six month periods ended June 30, 2011

11)      Subsequent Event —

In July 2012, upon the request of the Company, the borrowing capacity of the revolving credit facility with Danfoss A/S, was reduced to $0 . As a result of the reductions in the borrowing capacity the Company will recognize $325 o f loss on early retirement of debt due to the write-off of unamortized deferred financing costs in the three months ended September 30, 2012. The was no change to the amount of the term loan outstanding with Danfoss A/S.


16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Sauer-Danfoss Inc. and Subsidiaries (the Company)

This Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other portions of this quarterly report, contain certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. All statements regarding future performance, growth, sales and earnings projections, conditions or developments are forward-looking statements. Words such as “anticipates,” “in the opinion,” “believes,” “intends,” “expects,” “may,” “will,” “should,” “could,” “plans,” “forecasts,” “estimates,” “predicts,” “projects,” “potential,” “continue,” and similar expressions may be intended to identify forward-looking statements.
Actual future results may differ materially from those described in the forward-looking statements due to a variety of factors. Readers should bear in mind that past experience is never a perfect guide to anticipating actual future results. Risk factors affecting the Company's forward-looking statements include, but are not limited to, the following: general, worldwide economic conditions, the level of interest rates, crude oil prices, commercial and consumer confidence, and currency exchange rates; specific economic conditions in the agriculture, construction, road building, turf care, material handling and specialty vehicle markets and the impact of such conditions on the Company's customers in such markets; the cyclical nature of some of the Company's businesses; the ability of the Company to win new programs and maintain existing programs with its original equipment manufacturer (OEM) customers; the highly competitive nature of the markets for the Company's products as well as pricing pressures that may result from such competitive conditions; the continued operation and viability of the Company's significant customers; the Company's execution of internal performance plans; difficulties or delays in manufacturing; the effectiveness of the Company's cost-management and productivity improvement efforts; the Company's ability to manage its business effectively in a period of slowing growth in sales and its capacity to make necessary adjustments to changes in demand for its products; competing technologies and difficulties entering new and expanding markets, both domestic and foreign; changes in the Company's product mix; future levels of indebtedness and capital spending; the availability of sufficient levels of cash flow from operations and credit on favorable terms, whether from Danfoss A/S, the Company's majority stockholder, or from the capital markets or traditional credit sources to enable the Company to meet its capital needs; claims, including, without limitation, warranty claims, field recall claims, product liability claims, charges or dispute resolutions; the ability of suppliers to provide materials as needed and the Company's ability to recover any price increases for materials in product pricing; the Company's ability to attract and retain key technical and other personnel; labor relations; the failure of customers to make timely payment, especially in light of the persistence of tight credit markets; any inadequacy of the Company's intellectual property protection or the potential for third-party claims of infringement; credit market disruptions and significant changes in capital market liquidity and funding costs affecting the Company and its customers and suppliers; sovereign debt crises, in Europe or elsewhere, and the reaction of other nations to such crises; energy prices; the impact of new or changed tax and other legislation and regulations in jurisdictions in which the Company and its affiliates operate, including regulations affecting retirement and health care benefits provided to Company employees; actions by the U.S. Federal Reserve Board and the central banks of other nations, including heightened capital requirements imposed on Chinese banks; actions by other regulatory agencies, including those taken in response to the global credit crisis; actions by credit rating agencies; changes in accounting standards; worldwide political stability, including developments in the Middle East; the effects of terrorist activities and resulting political or economic instability; natural catastrophes; U.S. and NATO military action overseas; and the effect of acquisitions, divestitures, restructurings, product withdrawals, and other unusual events.
The Company cautions the reader that this list of cautionary statements and risk factors is not exhaustive. The Company expressly disclaims any obligation or undertaking to release publicly any updates or changes to these forward-looking statements to reflect future events or circumstances. The foregoing risks and uncertainties are further described in Item 1A (Risk Factors) in the Company's latest annual report on Form 10-K filed with the SEC, which should be reviewed in considering the forward-looking statements contained in this quarterly report.
About the Company
Sauer-Danfoss Inc. and subsidiaries (the Company) is a worldwide leader in the design, manufacture, and sale of engineered hydraulic and electronic systems and components that generate, transmit and control power in mobile equipment. The Company's products are used by original equipment manufacturers (OEMs) of mobile equipment, including construction, road building, agricultural, turf care, material handling, and specialty equipment. The Company designs, manufactures, and markets its products in the Americas, Europe, and the Asia-Pacific region, and markets its products throughout the rest of the world either directly or through distributors.


17



Executive Summary — Three Months Ended June 30, 2012

The nature of the Company's operations as a global producer and supplier in the fluid power industry means the Company is impacted by changes in local economies, including currency exchange rate fluctuations. In order to gain a better understanding of the Company's base results, a financial statement user needs to understand the impact of those currency exchange rate fluctuations. The following table summarizes the Company's second quarter 2012 and 2011 results from operations, separately identifying the impact of currency fluctuations. This analysis is more consistent with how the Company internally evaluates its results.

(in millions)
 
Three Months Ended June 30, 2011
 
Currency
Fluctuation
 
Underlying
Change
 
Three Months Ended June 30, 2012
Net sales
 
$
563.3

 
$
(25.3
)
 
$
(19.2
)
 
$
518.8

Gross profit
 
190.6

 
(9.6
)
 
(9.0
)
 
172.0

% of Sales
 
33.8
%
 
 
 
 
 
33.2
%
 
 
 
 
 
 
 
 
 
Selling, general and administrative and Other
 
57.7

 
(3.7
)
 
5.0

 
59.0

Research & development
 
15.6

 
(1.1
)
 
1.8

 
16.3

Total operating costs
 
73.3

 
(4.8
)
 
6.8

 
75.3

Income from operations
 
$
117.3

 
$
(4.8
)
 
$
(15.8
)
 
$
96.7

% of Sales
 
20.8
%
 
 
 
 
 
18.6
%

Net sales for the second quarter 2012 decreased 3 percent compared to the second quarter 2011 , excluding the effects of currency. Excluding the impacts of currency, sales increased 12 percent in the Americas, while sales decreased 26 percent in Asia-Pacific and 10 percent in Europe. Sales in the Controls and Stand-Alone Businesses segments increased 2 percent, while sales in the Work Function and Propel segments decreased by 14 percent and 4 percent, respectively.

Income from operations decreased 13 percent, excluding the impacts of currency. The reduction was driven by a 5 percent decrease in gross profit, mainly due to lower sales volume. Also contributing to the reduction was a 9 percent increase in operating costs.

Following is a discussion of the Company's operating results by market, region, and business segment.

Operating Results - Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Sales Growth by Market

The following table summarizes the Company's sales growth by market. The table and following discussion is on a comparable basis, which excludes the effects of currency fluctuations.

 
Americas
 
Asia-Pacific
 
Europe
 
Total
 
$ Change
% Change
 
$ Change
% Change
 
$ Change
% Change
 
$ Change
% Change
Agriculture/Turf Care
$
17.9

16
 %
 
$
0.7

19
 %
 
$
(7.9
)
(11
)%
 
$
10.7

6
 %
Construction/Road Building
8.7

24

 
(14.5
)
(31
)
 
(5.4
)
(12
)
 
(11.2
)
(9
)
Specialty
2.8

11

 
(2.0
)
(21
)
 
(5.2
)
(7
)
 
(4.4
)
(4
)
Distribution
(0.6
)
(1
)
 
(10.3
)
(26
)
 
(3.4
)
(10
)
 
(14.3
)
(10
)

Agriculture/Turf Care

The agriculture/turf care markets experienced a 6 percent increase in sales in the second quarter of 2012 compared to the same period in 2011 . Agricultural sales in the Americas remained strong and continue to benefit from high commodity prices, while sales in Brazil continue to be driven by a strong sugar-cane market. Sales in the turf care market showed moderate improvement due to growing consumer confidence. Agriculture and turf care sales in Europe were down due to the overall

18

weakening of the European economy. The Asia-Pacific region contributes less than 5 percent of the sales in the agriculture/turf care market, therefore any change in the Asia-Pacific region does not significantly impact the total market.

Construction/Road Building

Sales in the construction/road building markets declined significantly in the Europe and Asia-Pacific regions in the second quarter of 2012 compared to the same period in 2011 , which more than offset the strong sales increase in the Americas. The sales decline in the Asia-Pacific region was largely due to reduced demand for rollers and transit mixers in China. Sales in Europe were down due to reduced demand as a result of the weakening European economy. Sales in the Americas benefited from increased demand as a result of renewed investments in aging rental fleets despite depressed residential construction markets and limited spending by state and local governments due to budget constraints.

Specialty

Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management, railway and waste recycling. Overall sales into the specialty vehicle market decreased 4 percent in the second quarter of 2012 compared to the same period in 2011 . Sales in Europe declined due to weakening forestry and mining markets despite continued strong demand for telehandlers and aerial lifts. Sales in the Asia-Pacific region declined largely due to a saturated railway carrier market and suspended infrastructure programs in China. Sales in the Americas benefited from increased demand for aerial lifts and renewed investments in aging rental fleets.

Distribution

Products related to all of the above markets are also sold to distributors, who then serve smaller OEMs.

Business Segment Results

The following discussion of operating results by reportable segment relates to information as presented in Note 10 in the Notes to Consolidated Financial Statements. Segment income is defined as the respective segment's portion of the total Company's net income, excluding net interest expense, income taxes, and noncontrolling interest. Propel products include hydrostatic transmissions and related products that transmit power from the engine to the wheel to propel a vehicle. Work Function products include steering motors and motors that transmit power for the work functions of the vehicle. Controls products include electrohydraulic controls, microprocessors, and valves that control and direct the power of a vehicle. Stand-Alone Businesses include open circuit gear pumps and motors, cartridge valves and hydraulic integrated circuits, directional control valves, inverters and light duty hydrostatic transmissions that transmit, control and direct the power of the vehicle, but are marketed under their own names and operate as stand-alone businesses.


19

The following table provides a summary of each segment's sales and segment income, separately identifying the impact of currency fluctuations.
(in millions)
 
Three Months Ended June 30, 2011
 
Currency
Fluctuation
 
Underlying
Change
 
Three Months Ended June 30, 2012
Net sales
 
 
 
 
 
 
 
 
Propel
 
$
249.9

 
$
(7.7
)
 
$
(8.8
)
 
$
233.4

Work Function
 
105.8

 
(8.1
)
 
(14.6
)
 
83.1

Controls
 
88.7

 
(5.6
)
 
1.8

 
84.9

     Stand-Alone Businesses
 
118.9

 
(3.9
)
 
2.4

 
117.4

 
 
 
 
 
 
 
 
 
Segment income (loss)
 
 
 
 
 
 
 
 
Propel
 
$
61.5

 
$
(2.0
)
 
$
(10.1
)
 
$
49.4

Work Function
 
19.4

 
(2.1
)
 
(3.5
)
 
13.8

Controls
 
25.6

 
(1.6
)
 
(1.7
)
 
22.3

Stand-Alone Businesses
 
20.5

 
(0.4
)
 
2.5

 
22.6

Global Services and other expenses, net
 
(9.3
)
 
0.8

 
(2.1
)
 
(10.6
)

Propel Segment

The Propel segment experienced a 4 percent decrease in sales, excluding the effects of currency fluctuations, during the second quarter 2012 compared to 2011 largely due to weakened economic conditions in China. Segment income decreased by $10.1 million during the quarter when compared to the same period in 2011 , excluding the effects of currency, due to reduced sales volume, higher material costs and a change in customer mix. Also contributing to the reduction in segment income was a $4.6 million increase in operating costs, partially due to the Company's continued investments in China as part of its long-term growth strategy.

Work Function Segment

The Work Function segment experienced a 14 percent decrease in sales during the second quarter of 2012 when compared with the same period in 2011 , excluding the effects of currency fluctuations. The decrease in sales was largely due to the weakened European economy. Segment income decreased $3.5 million primarily due to reduced sales volume. Partially offsetting the negative impact of reduced sales was a 3 percentage point increase in contribution margin, which was driven by higher margins on export sales from Europe to the United States due to the strengthening of the U.S. dollar.

Controls Segment

Net sales in the Controls segment increased 2 percent during the second quarter of 2012 compared with the same period in 2011 , excluding the effects of currency fluctuations. Segment income decreased $1.7 million due to a 2 percentage point reduction in contribution margin largely due to a change in product and customer mix, as well as a $1.5 million increase in operating costs.

Stand-Alone Businesses Segment

The Stand-Alone Businesses segment experienced a 2 percent increase in sales during the second quarter of 2012 compared with the same period in 2011 , excluding the effects of currency fluctuations. Segment income increased $2.5 million primarily due to increased sales volume, as well as fixed production cost reductions of $0.9 million.

Global Services and other expenses, net

Costs in Global Services and other expenses, net, relate to internal global service departments. Global services include such costs as consulting for special projects, tax and accounting fees paid to outside third parties, internal audit, certain insurance premiums, and the amortization of intangible assets from certain business combinations. Global services and other expenses increased $2.1 million , excluding the impacts of currency. The Company incurred restructuring costs of $0.5 million related to the reorganization of the European sales organization during the second quarter of 2012 , as well as increased incentive plan costs of $0.8 million during the quarter when compared to the same period in 2011 . Partially offsetting the negative impact of

20

increased costs was the fact that the Company recognized a gain on foreign currency transactions of $0.3 million during the second quarter of 2012 compared to a loss of $0.2 million during the same period in 2011 , which is reported as other, net in nonoperating income (expense) on the consolidated statements of operations.

Income Taxes

The Company's effective tax rate was 29.7 percent for the second quarter of 2012 compared to 22.6 percent for the same period in 2011. The increase in the tax rate is partly attributable to the fact that the valuation allowances in Denmark were reversed during 2011 and, therefore, 2012 Danish earnings are no longer benefited by the reversal of valuation allowances. As most of the valuation allowances have now been reversed, the Company's tax rate is returning to a more normal rate. The Company's tax rate can also vary significantly from quarter to quarter due to the mix of earnings between countries.

Executive Summary — Six Months Ended June 30, 2012

The following table summarizes the Company's results from operations, separately identifying the impact of currency fluctuations for the six months ended June 30, 2012 and 2011 . This analysis is more consistent with how the Company internally evaluates its results.

(in millions)
 
Six Months Ended June 30, 2011
 
Currency
Fluctuation
 
Underlying
Change
 
Six Months Ended June 30, 2012
Net sales
 
$
1,128.1

 
$
(32.9
)
 
$
(2.4
)
 
$
1,092.8

Gross profit
 
379.8

 
(13.5
)
 
(4.0
)
 
362.3

% of Sales
 
33.7
%
 
 
 
 
 
33.2
%
 
 
 
 
 
 
 
 
 
Selling, general and administrative and Other
 
111.9

 
(4.9
)
 
12.0

 
119.0

Research & development
 
29.7

 
(1.4
)
 
4.4

 
32.7

Other
 
(0.3
)
 
0.1

 
0.2

 
—

Total operating costs
 
141.3

 
(6.2
)
 
16.6

 
151.7

Income from operations
 
$
238.5

 
$
(7.3
)
 
$
(20.6
)
 
$
210.6

% of Sales
 
21.1
%
 
 
 
 
 
19.3
%

Net sales for the six months ended June 30, 2012 remained level when compared to the same period in 2011 , excluding the effects of currency. Excluding the impacts of currency, sales increased 14 percent in the Americas, while sales decreased 28 percent in Asia-Pacific and 3 percent in Europe. Sales in the Controls and Stand-Alone Businesses segments were up 5 percent and 4 percent, respectively. These increases were offset by a 9 percent decrease in the Work Function segment, while sales in the Propel segment remained level compared to the same period in 2011 .

The reduction in income from operations was driven by a 12 percent increase in operating costs, excluding the impacts of currency. Total selling, general and administrative costs increased by 11 percent, while research and development costs increased by 15 percent.

Following is a discussion of the Company's operating results by market, region, and business segment.


21

Operating Results - Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Sales Growth by Market

The following table summarizes the Company's sales growth by market. The table and following discussion is on a comparable basis, which excludes the effects of currency fluctuations.

 
Americas
 
Asia-Pacific
 
Europe
 
Total
 
$ Change
% Change
 
$ Change
% Change
 
$ Change
% Change
 
$ Change
% Change
Agriculture/Turf Care
$
29.3

12
%
 
$
1.6

19
 %
 
$
(4.7
)
(3
)%
 
$
26.2

7
 %
Construction/Road Building
15.4

21

 
(38.5
)
(38
)
 
(2.6
)
(3
)
 
(25.7
)
(10
)
Specialty
7.6

17

 
(4.3
)
(24
)
 
(2.4
)
(2
)
 
0.9

—

Distribution
16.4

14

 
(18.2
)
(23
)
 
(2.0
)
(3
)
 
(3.8
)
(1
)

Agriculture/Turf Care

Sales into the agriculture/turf care market remained strong in the six months ended June 30, 2012 resulting in a 7 percent increase compared to the same period in 2011 . Agricultural sales in the Americas continue to benefit from high commodity prices, while sales in Brazil continue to be driven by a strong sugar-cane market. Sales in the turf care market showed moderate improvement due to growing consumer confidence. Agricultural sales in Europe also benefited from high commodity prices early in the year, while sales declined in recent months due to a weakening European economy. The Asia-Pacific region contributes less than 5 percent of the sales in the agriculture/turf care market, therefore any change in the Asia-Pacific region does not significantly impact the total market.

Construction/Road Building

Sales in the construction/road building markets declined significantly in the Asia-Pacific region during the six months ended June 30, 2012 compared to the same period in 2011 , which more than offset the strong increase in the Americas. Sales in Europe experienced a moderate decline. The sales decline in the Asia-Pacific region was largely due to reduced demand for rollers and transit mixers in China, as well as credit restrictions imposed by the Chinese government. Sales in the Americas benefited from increased demand as a result of renewed investments in aging rental fleets despite depressed residential construction markets and limited spending by state and local governments due to budget constraints. Sales in Europe were down due to a weakening European economy.

Specialty

Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management, railway and waste recycling. Overall sales into the specialty vehicle market remained level during the six months ended June 30, 2012 compared to the same period in 2011 . Sales in the Americas showed a strong increase due to increased demand for aerial lifts driven by renewed investments in aging rental fleets. Sales in the Asia-Pacific region declined largely due to a saturated railway carrier market and suspended infrastructure programs in China, as well as credit restrictions imposed by the Chinese government. Sales in Europe declined slightly due to weakening forestry and mining markets despite continued strong demand for telehandlers and aerial lifts.

Distribution

Products related to all of the above markets are also sold to distributors, who then serve smaller OEMs.

Business Segment Results

The following discussion of operating results by segment relates to information as presented in Note 10 in the Notes to the Consolidated Financial Statements. Segment income is defined as the respective segment's portion of the total Company's net income, excluding net interest expense, loss on early retirement of debt, income taxes, and noncontrolling interest.


22

The following table provides a summary of each segment's sales and segment income, separately identifying the impact of currency fluctuations.

(in millions)
 
Six Months Ended June 30, 2011
 
Currency
Fluctuation
 
Underlying
Change
 
Six Months Ended June 30, 2012
Net sales
 
 
 
 
 
 
 
 
Propel
 
$
500.2

 
$
(8.9
)
 
$
(1.6
)
 
$
489.7

Work Function
 
205.5

 
(11.2
)
 
(19.0
)
 
175.3

Controls
 
168.0

 
(7.5
)
 
9.0

 
169.5

     Stand-Alone Businesses
 
254.4

 
(5.3
)
 
9.2

 
258.3

 
 
 
 
 
 
 
 
 
Segment income (loss)
 
 
 
 
 
 
 
 
Propel
 
$
126.7

 
$
(2.8
)
 
$
(19.2
)
 
$
104.7

Work Function
 
36.7

 
(3.3
)
 
(1.7
)
 
31.7

Controls
 
48.3

 
(2.3
)
 
(0.4
)
 
45.6

Stand-Alone Businesses
 
46.4

 
(0.5
)
 
4.8

 
50.7

Global Services and other expenses, net
 
(23.7
)
 
1.0

 
1.8

 
(20.9
)

Propel Segment

Sales in the Propel segment remained level during the six months ended June 30, 2012 compared to the same period in 2011 , excluding the effects of currency fluctuations. Segment income decreased by $19.2 million, excluding the effects of currency, partially due to a 2 percentage point decrease in contribution margin largely due to a change in customer mix and higher material costs. Also contributing to the reduction in segment income was a $9.9 million increase in operating costs, partially due to the Company's continued investments in China as part of its long-term growth strategy. Sales & marketing costs were the largest increase at $4.2 million, followed by an increase of $2.7 million in research & development costs. Operating costs were favorably impacted by a $1.2 million reduction in incentive plan costs.

Work Function Segment

The Work Function segment experienced a 9 percent decrease in sales during the six months ended June 30, 2012 compared to the same period in 2011 , excluding the effects of currency fluctuations, largely due to weakened economic conditions in Europe. Segment income decreased $1.7 million primarily due to reduced sales volume. Partially offsetting the negative impact of reduced sales was a 4 percentage point increase in contribution margin largely due to improved production efficiency, as well as higher margins on export sales from Europe to the United States due to the strengthening of the U.S. dollar.

Controls Segment

Net sales in the Controls segment increased 5 percent during the six months ended June 30, 2012 compared to the same period in 2011 , excluding the effects of currency fluctuations. Increased gross profit was offset by a $3.3 million increase in operating costs, due to research & development costs increasing by $1.1 million and sales & marketing costs increasing by $1.0 million.

Stand-Alone Businesses Segment

The Stand-Alone Businesses segment experienced a 4 percent increase in sales during the six months ended June 30, 2012 compared with the same period in 2011 , excluding the effects of currency fluctuations. Segment income increased $4.8 million primarily due to increased sales volume, as well as a reduction in fixed production cost reductions of $1.6 million. Partially offsetting the positive impact of increased sales and reduced fixed production costs was a $2.5 million increase in operating costs, with sales & marketing costs experiencing the largest increase at $1.4 million.

Global Services and other expenses, net

Global services and other expenses decreased $1.8 million, excluding the impacts of currency. The Company recognized a gain on foreign currency transactions of $0.5 million during the six months ended June 30, 2012 compared to a loss of $5.2 million during the same period in 2011 , which is reported as other, net in nonoperating income (expense) on the consolidated

23

statements of operations. The positive impact of foreign currency transactions was partially offset by a $1.5 million increase in incentive plan costs, as well as restructuring costs of $0.7 million related to the reorganization of the European sales organization.

Income Taxes

The Company's effective tax rate was 29.4 percent for the first six months of 2012 compared to 23.1 percent for the same period in 2011. The increase in the tax rate is partly attributable to the fact that the valuation allowances in Denmark were reversed during 2011 and, therefore, 2012 Danish earnings are no longer benefited by the reversal of valuation allowances. As most of the valuation allowances have now been reversed, the Company's tax rate is returning to a more normal rate. The Company's tax rate can also vary significantly from quarter to quarter due to the mix of earnings between countries.

Order Backlog

The following table shows the Company's order backlog at June 30, 2012 and 2011 and orders written in the six-month periods ended June 30, 2012 and 2011 , separately identifying the impact of currency fluctuations.

(in millions)
 
2011
 
Currency
Fluctuation
 
Underlying
Change
 
2012
Backlog at June 30
 
$
895.1

 
$
(45.8
)
 
$
37.9

 
$
887.2

Orders written
 
1,182.8

 
(30.5
)
 
(99.2
)
 
1,053.1


Total order backlog at June 30, 2012 was $887.2 million compared to $895.1 million at June 30, 2011 . On a comparable basis, excluding the impact of currency fluctuation, order backlog increased 4 percent. Decreases in order backlog in the European and Asia-Pacific regions were more than offset by an increase in the Americas. Backlog levels can vary as customers alter their sales order patterns.

New sales orders written during the six-month period ended June 30, 2012 were $1,053.1 million , a decrease of 8 percent compared to 2011 , excluding the impact of currency fluctuations.

Market Risk

The Company is exposed to various market risks, including changes in foreign currency exchange rates, interest rates, and material purchase prices.

Foreign currency changes

The Company has operations and sells its products in many different countries of the world and therefore, conducts its business in various currencies. The Company's financial statements, which are presented in U.S. dollars, can be impacted by foreign exchange fluctuations through both translation exposure and transaction risk. Translation exposure is when the financial statements of the Company, for a particular period or as of a certain date, may be affected by changes in the exchange rates that are used to translate the financial statements of the Company's operations from foreign currencies into U.S. dollars. Transaction risk is the potential expense or income due to the Company receiving its sale proceeds or holding its assets in a currency different from that in which it pays its expenses and holds its liabilities. Foreign currency income of $0.5 million was recognized during the six months ended June 30, 2012 , compared to expense of $5.2 million for the same period in 2011 .

Fluctuations of currencies against the U.S. dollar can be substantial and therefore significantly impact comparisons with prior periods. The U.S. dollar strengthened compared to other currencies between December 31, 2011 and June 30, 2012 . The Company enters into forward contracts to minimize the impact of currency fluctuations on cash flows related to forecasted sales denominated in currencies other than the functional currency of the selling location. The forecasted sales represent sales to both external and internal parties. Any effects of the forward contracts related to sales to internal parties are eliminated in the consolidation process until the related inventory has been sold to an external party. The forward contracts qualify for hedge accounting and therefore are subject to effectiveness testing at the inception of the contract and throughout the life of the contract. The fair value of forward contracts outstanding at June 30, 2012 was a net liability of $3.6 million.



24

Liquidity and Capital Resources

The Company's principal sources of liquidity have been cash flow from operations and from its credit facilities. The Company historically has accessed diverse funding sources, including short-term and long-term unsecured bank lines of credit in the United States, Europe, and Asia.

The Company has a Credit Agreement (Danfoss Agreement) with Danfoss A/S that is unsecured and permitted the Company to borrow up to approximately $300 million at June 30, 2012. The Danfoss Agreement includes a term loan of approximately $200 million ($140 million and 45 million euro) that will mature in September 2015. The Credit Agreement also had a revolving credit facility that permitted borrowings of approximately $100 million ($75 million and 20 million euro) at June 30, 2012. At the Company's request the revolving credit facility was canceled in July 2012. The Company did not expect to borrow against the revolving facility due to its strong cash position and therefore canceled the facility to reduce interest expense related to commitment fees. . The Danfoss Agreement contains no financial covenants but it does contain a number of affirmative and negative covenants that, among other things, require the Company to obtain the consent of Danfoss A/S prior to engaging in certain types of transactions.

As a result of strong cash flow and a strong balance sheet, the Company announced in March that its Board of Directors had reinstated a quarterly cash dividend. A cash dividend of $0.35 per share was declared in both the first and second quarters of 2012. The Company suspended the payment of dividends in March 2009 in response to the recession. The Company expects to continue to generate strong cash flow and therefore plans to pay this level of dividend on a quarterly basis going forward.

As the Company has significant international operations, a portion of the cash on the balance sheet is held in foreign subsidiaries. The repatriation of cash balances from certain foreign subsidiaries could have adverse tax consequences or be subject to capital controls, however, those balances are generally available without legal restrictions to fund local ordinary business operations. With few exceptions, the Company intends to reinvest these earnings permanently and, therefore, U.S. income taxes have not been provided for undistributed earnings of foreign subsidiaries. At June 30, 2012 approximately $237.4 million, or 65 percent, of the cash, cash equivalents and cash deposited with related persons is on the balance sheet of subsidiaries for which U.S. income taxes have not been provided for the undistributed earnings.

The Company expects to have sufficient sources of liquidity to meet its funding needs for the foreseeable future.

Cash Flow from Operations

Cash provided by operations was $166.9 million during the six months ended June 30, 2012 compared to $169.2 million for the six months ended June 30, 2011 . Cash flow was negatively impacted by a $26.8 million reduction in net income, as well as a $10.3 million reduction in the change in net deferred income tax assets and a $4.1 million reduction in depreciation and amortization. In addition, changes in other current assets used an additional $4.0 million of cash during the six months ended June 30, 2012 compared to the same period in 2011 . The reduced cash flow related to these items was mostly offset by changes in accrued liabilities, which provided an additional $12.4 million of cash during the six months ended June 30, 2012 compared to the same period in 2011 . Changes in net working capital, consisting of accounts receivable, inventories, and accounts payable, used $27.2 million of cash during the six months ended June 30, 2012 compared to $59.6 million during the same period in 2011 . The positive trend in net working capital was driven by inventory reduction efforts during the six months ended June 30, 2012 .

Cash Used in Investing Activities

Cash used in investing activities totaled $127.4 million for the six months ended June 30, 2012 compared to $17.1 million for the six months ended June 30, 2011 . The Company invested $114.9 million of excess cash with related persons during the period compared to $4.2 million during the same period in 2011 . The portion of the cash deposited with Danfoss A/S, classified on the consolidated balance sheets as cash deposited with related persons, may be offset against the term loan outstanding under the Danfoss Agreement if Danfoss A/S were not able to repay the cash. Cash deposited with Danfoss A/S exceeds the funds borrowed from Danfoss A/S by $75.1 million. Capital expenditures during the period were $12.7 million compared to $14.1 million during the same period in 2011 .

Cash Used in Financing Activities

The Company paid dividends of $17.0 million during the six months ended June 30, 2012 . This was the first dividend payment since the Company suspended the payment of dividends in March 2009 in response to the recession. The Company expects to continue to generate strong cash flow and therefore plans to pay this level of dividend on a quarterly basis going forward. Net

25

repayment of borrowings used $0.6 million of cash during the six months ended June 30, 2012 compared to $79.6 million during the six months ended June 30, 2011 . The Company makes varying distributions to its noncontrolling interest partners from its joint venture activities depending on the amount of undistributed earnings of the business and the needs of the partners. Distributions totaled $13.0 million during the six months ended June 30, 2012 compared to $10.1 million during the same period in 2011 .

Other Matters

Critical Accounting Estimates

In preparing its most recent annual report on Form 10-K, the Company disclosed information about critical accounting estimates the Company makes in applying its accounting policies. The Company has made no changes to the methods of application or the assumptions used in applying these policies from what was disclosed in its most recent annual report on Form 10-K.

Recently Adopted Accounting Principles —

In May 2011 the Financial Accounting Standards Board (FASB) issued new accounting guidance that amends some fair value measurement principles and disclosure requirements. The new guidance states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The Company adopted this guidance as of January 1, 2012 with no impact on the consolidated financial statements.

In June 2011 the FASB amended requirements for the presentation of other comprehensive income (OCI), requiring all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted this guidance in the first quarter of 2012. Upon adoption, certain prior period amounts have been reclassified to conform to the current period financial statement presentation. These reclassifications have no impact on previously reported financial position, results of operations or cash flows.

In September 2011 the FASB issued amendments to the guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. Annual impairment tests are performed by the Company in the fourth quarter of each year. The adoption of this updated authoritative guidance is not expected to have an impact on the consolidated financial statements.

Outlook

Due to slowing sales growth in the Americas and market declines in Europe and the Asia-Pacific regions, Company management expects a moderate sales decrease of 5 to 10 percent in 2012 compared to 2011 .


26

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information disclosing market risk is set forth in the Company's most recent annual report filed on Form 10-K (Item 7A), and is incorporated herein by reference. There has been no material change in this information.

Item 4. Controls and Procedures

As required by Rule 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934 (Exchange Act) the Company's management carried out an evaluation, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of June 30, 2012 . Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2012 , the Company's disclosure controls and procedures were effective to ensure that (a) information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (b) such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There was no change in the Company's internal control over financial reporting during the three months ended June 30, 2012 that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.


27

PART II. OTHER INFORMATION

Item 6. Exhibits.

Exhibit
No.
 
Description of Document
 
 
 
31.1

 
Certification by the Chief Executive Officer Pursuant to Rule 13a-14(a).
31.2

 
Certification by the Chief Financial Officer Pursuant to Rule 13a-14(a).
32.1

 
Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2

 
Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
101.INS

 
XBRL Instance Document.*
101.SCH

 
XBRL Taxonomy Extension Schema Document.*
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document.*
________________________________________

* Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011 , (ii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011 , (iii) Consolidated Balance Sheets at June 30, 2012 and December 31, 2011 , (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 and (v) Notes to Consolidated Financial Statements for the six months ended June 30, 2012 .

In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act, shall be deemed not filed for purposes of Section 18 of the Exchange Act or Section 34(b) of the Investment Company Act, and otherwise is not subject to liability under these Sections.


28

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
Sauer-Danfoss Inc.
 
 
 
 
 
By
/s/ Kenneth D. McCuskey
 
 
Kenneth D. McCuskey
 
 
Vice President and Chief Accounting Officer, Secretary
 
 
 
Date:
August 2, 2012
 



29
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