part i / item 1 Competitive Conditions Seasonal Nature of Business Government Contracts Financing Research and Development Our Customers Raw Materials Our lines of business are conducted under highly competitive con- ditions in each of the geographic and product areas they serve. Because of the diversity of the classes of products manufactured and sold, they do not compete with the same companies in all geo- graphic or product areas. Accordingly, it is not possible to estimate the precise number of competitors or to identify our competitive position, although we believe that we are a principal competitor in many of our markets. Our principal method of competition is pro- duction of quality products at competitive prices delivered in a timely and efficient manner. Our business does not experience significant seasonality. We have agreements relating to the sale of products to government entities, primarily involving products in our Aerospace & Elec- tronics segment and our Fluid Handling segment. As a result, we are subject to various statutes and regulations that apply to compa- nies doing business with the government. The laws and regulations governing government contracts differ from those governing pri- vate contracts. For example, some government contracts require disclosure of cost and pricing data and impose certain sourcing conditions that are not applicable to private contracts. Our failure to comply with these laws could result in suspension of these con- tracts, criminal or civil sanctions, administrative penalties and fines or suspension or debarment from government contracting or subcontracting for a period of time. For a further discussion of risks related to compliance with government contracting require- ments; please refer to “Item 1A. Risk Factors.” Our products have primary application in the aerospace, defense electronics, non-residential construction, RV, transportation, automated merchandising, chemical, pharmaceutical, oil, gas, power, nuclear, building services and utilities. As such, our rev- enues are dependent upon numerous unpredictable factors, including changes in market demand, general economic conditions and capital spending. Because these products are also sold in a wide variety of markets and applications, we do not believe we can reli- ably quantify or predict the possible effects upon our business resulting from such changes. Our engineering and product development activities are directed primarily toward improvement of existing products and adaptation of existing products to particular customer requirements as well as the development of new products. We own numerous patents, trademarks, copyrights, trade secrets and licenses to intellectual property, no one of which is of such importance that termination would materially affect our business. From time to time, however, we do engage in litigation to protect our intellectual property. In December 2012, we obtained $600 million of bank loan commitments in support of our pending acquisition of MEI. The commitments support a $200 million expansion of our current multi-year credit facility, which expires in May 2017, and an addi- tional $400 million 364-day credit facility. In May 2012, we entered into a five-year, $300 million Amended and Restated Credit Agreement (as subsequently amended, the “facility”), which is due to expire in May 2017. The facility allows us to borrow, repay, or to the extent permitted by the agreement, pre- pay and re-borrow funds at any time prior to the stated maturity date, and the loan proceeds may be used for general corporate purposes including financing for acquisitions. Interest is based on, at our option, (1) a LIBOR-based formula that is dependent in part on the Company’s credit rating (LIBOR plus 105 basis points as of the date of this Report; up to a maximum of LIBOR plus 147.5 basis points), or (2) the greatest of (i) the JPMorgan Chase Bank, N.A.‘s prime rate, (ii) the Federal Funds rate plus 50 basis points, or (iii) an adjusted LIBOR rate plus 100 basis points. Neither facility was used in 2012 and 2011, and our prior facility was only used for letter of credit purposes in 2010. The facility contains customary affirmative and negative covenants for credit facilities of this type, including the absence of a material adverse effect and limitations on us and our subsidiaries with respect to indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of all or substantially all assets, transactions with affiliates and hedging arrangements. The facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, the fact that any representa- tion or warranty made by us is false in any material respect, default under certain other indebtedness, certain insolvency or receiver- ship events affecting us and our subsidiaries, certain ERISA events, material judgments and a change in control. The facility contains a leverage ratio covenant requiring a ratio of total debt to total capitalization of less than or equal to 65%. At December 31, 2012, our ratio was 30%. Research and development costs are expensed when incurred. These costs were $66.9 million, $64.2 million and $65.9 million in 2012, 2011 and 2010, respectively, and were incurred primarily by the Aerospace & Electronics segment. No customer accounted for more than 10% of our consolidated revenues in 2012, 2011 and 2010. Our manufacturing operations employ a wide variety of raw materi- als, including steel, copper, cast iron, electronic components, aluminum, plastics and various petroleum-based products. We purchase raw materials from a large number of independent sour- ces around the world. Although market forces have generally caused increases in the costs of steel, copper and petroleum-based prod- ucts, there have been no raw materials shortages that have had a material adverse impact on our business, and we believe that we will generally be able to obtain adequate supplies of major raw material requirements or reasonable substitutes at reasonable costs. 5