Commitments and Contingencies

Lease Commitments

Total rental expense for the years ended December 31, 2012, 2011 and 2010 amounted to $2.5 million, $0.8 million and $1.4 million, respectively. In March 2012, the Company began leasing its new headquarters. The operating lease for the headquarters expires in March 2023 and at December 31, 2012, includes total future minimum lease payments of $11.4 million. In June 2012, the Company began leasing its 10 year build-to-suit lease for the new McCook Facility which expires in June 2022 and includes future minimum lease payments, related to the building, of $12.1 million.

The Company’s future minimum lease commitments, principally for facilities and equipment, as of December 31, 2012, were as follows:



Year ended December 31,	Operating Leases		Financing Lease ⁽¹⁾			Capital Leases
2013	$	1,709	$	1,047		$	121
2014	1,292		1,085			96
2015	1,229		1,124			8
2016	1,261		1,165			4
2017	1,305		1,255			—
Thereafter	7,394		6,440			—
Total	$	14,190	$	12,116		$	229
Less: Interest portion			(524		)	(18		)
Liability			$	11,592		$	211

(1) Relates to the McCook, Illinois distribution center lease.

The financing lease obligation will be amortized over the 10 year lease term.

At December 31, 2012 the cost and accumulated depreciation of the asset related to the financing obligation were $13.0 million and $0.7 million, respectively, and the cost and accumulated amortization of the assets related to capital leases were $1.7 million and $1.5 million, respectively.

Litigation, regulatory and tax matters

The Company is involved in legal actions that arise in the ordinary course of business. It is the opinion of management that the resolution of any currently pending litigation will not have a material adverse effect on the Company’s financial position or results of operations.

One of the Company’s subsidiaries, Drummond American LLC (“Drummond”), is under an employment tax examination for the years 2007 and 2008 of the long-standing treatment of its sales representatives as independent contractors. In January 2012 the Company received a Notice of Proposed Adjustment in the amount of $9.5 million, including penalties, from the IRS challenging Drummond’s position that the sales representatives were independent contractors. The Company disagreed with the IRS position and filed an administrative appeal with the IRS Appeals Office.

Although the Company intends to vigorously defend its position for the treatment of its sales representatives as independent contractors, the Company established a liability of $1.2 million during 2011 as its best estimate of the cost to resolve the matter with the IRS. The notice of Proposed Adjustment was determined by applying the full statutory rates and penalties, rather than applying the reduced tax rates provided by section 3509 of the Internal Revenue Code (“IRC”). The Company believes the use of reduced tax rates is mandatory for all IRS worker classification assessments, except when the employer intentionally disregarded its employment tax obligations. Because the Company believes it fully complied with its employment tax obligations, the Company based its estimated loss at the reduced tax rates. The Company applied these reduced tax rates against only one year because any settlement resolution would likely be limited to one year as this is consistent with the IRS’s settlement practices. The Company has assessed its potential exposure for other subsidiaries and time periods and has concluded that an additional liability is not probable. No adjustment has been proposed by the IRS for any other time periods or subsidiaries of the Company.

The case has been assigned to the Chicago Appeals Office. The Company is unable to establish an estimated time frame in which the case will be resolved through the appeals process. An unfavorable outcome of this matter could have a material adverse effect on the Company's business, financial condition and results of operations.

In 2012, the Company identified that a site owned by its Automatic Screw Machine Products (“ASMP”) subsidiary in Alabama contained hazardous substances in the soil and groundwater as a result of historical operations prior to the Company's ownership. The Company has retained an environmental consulting firm to further investigate the contamination including the measurement and monitoring of the site. At this time insufficient data regarding the situation has been collected to reasonably estimate the cost, if any, of remedying this situation. Accordingly, the Company has not established a reserve for any remediation costs.

In 2012, the Company contracted with a third party for the installation of material handling equipment in the Company's new McCook, Illinois distribution center. The third party, in turn, hired subcontractors to complete the project. Certain of the subcontractors have not yet been paid in full which could result in the the subcontractors to file mechanic's liens against the property. While such liens would be the responsibility of the third party, the Company could, under certain circumstances, be required to satisfy any unpaid obligations. The Company has estimated its possible net exposure in the range of zero to $1.0 million. The Company believes an unfavorable outcome related to this situation is not probable, accordingly, no amount has been accrued in the accompanying financial statements.

In 2009, the Company identified certain services and benefits that were not properly reported on information returns with respect to its independent sales representatives. The Company notified the Internal Revenue Service Employment Tax Division and established procedures to improve proper information reporting practices. As of December 31, 2012, the Company believes that this matter has been substantively resolved.