UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________________
FORM 10-K
(Mark
One)
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
|
For
the fiscal year ended December 31, 2006
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 0-21803
_______________________
AFTERMARKET
TECHNOLOGY CORP.
(Exact
name of registrant as specified in its charter)
|
DELAWARE
|
95-4486486
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
1400
Opus Place, Suite 600, Downers Grove, IL
|
60515
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's telephone number, including area code: (630) 271-8100
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of Each Class
|
Name
of Each Exchange on Which Listed
|
|
Common
Stock, $.01 par value
|
Nasdaq
Global Select Market
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o Nox
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
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
filer x Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
The
aggregate market value of the voting stock held by non-affiliates of the
registrant (based on the closing price of such stock, as reported by the Nasdaq
National Market, on June 30, 2006) was $542 million.
The
number of shares outstanding of the Registrant's Common Stock, as of February
15, 2007, was 21,842,908 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
ANNUAL
REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2006
|
Page
|
||
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report contains forward-looking statements (as such term is defined
in
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) and information relating to us that are based
on the current beliefs of our management as well as assumptions made by and
information currently available to management, including statements related
to
the markets for our products, general trends in our operations or financial
results, plans, expectations, estimates and beliefs. In addition, when used
in
this Annual Report, the words "may," "could," "should," "anticipate," "believe,"
"estimate," "expect," "intend," "plan," "predict" and similar expressions and
their variants, as they relate to us or our management, may identify
forward-looking statements. These statements reflect our judgment as of the
date
of this Annual Report with respect to future events, the outcome of which is
subject to risks, which may have a significant impact on our business, operating
results or financial condition. Readers are cautioned that these forward-looking
statements are inherently uncertain. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results or outcomes may vary materially from those described herein.
We
undertake no obligation to update forward-looking statements. The risks
identified in Item 1A. “Risk Factors,” among others, may impact forward-looking
statements contained in this Annual Report.
PART
I
ITEM
1. BUSINESS
Overview
Aftermarket
Technology Corp. and its subsidiaries provide outsourced engineering solutions
and supply chain logistics services to the light and medium/heavy-duty vehicle
aftermarket and consumer electronics industries. Through our Drivetrain
Business, we provide customized remanufacturing services focused on complex
light and medium/heavy-duty vehicle drivetrain products, such as automatic
transmissions and engines, that are primarily sold through the service,
repair and parts organizations of our customers. Through our Logistics Business,
we offer value-added supply-chain services to the consumer electronics and
light
vehicle aftermarket industries, including fulfillment, returns management,
reverse logistics, test, repair and other related services. We generally provide
services under contractual relationships with customers that distribute
high-value, complex products.
We
believe our service offerings are differentiated from those of our competitors
by the degree of customization we provide coupled with our focus on quality
and
the consistency of our performance. We
have
developed business processes, technical capabilities and information technology
systems that allow us to design flexible and scaleable solutions
that
help our
customers reduce their costs, improve their supply chain efficiency and enhance
their profitability.
We
manage,
monitor and communicate detailed information about our processes and our
customers’ shipments, returns, products and inventory on a real-time basis. This
information is readily accessible to our customers, easy-to-use, and customized
to fit their needs. We also use this information to analyze and improve the
performance of our businesses and to help us achieve our exacting quality and
service benchmarks.
Our
Drivetrain Business
Our
Drivetrain Business remanufactures drivetrain products, which we distribute
primarily to Original Equipment Service (“OES”)
organizations and their outlets. As our OES customers are the service and repair
organizations of automotive Original Equipment Manufacturers (“OEMs”), we are
not subject to the same market trends, such as the cyclical nature of new light
vehicle sales, as “Tier 1” suppliers to the automotive industry. We believe we
are the largest independent light vehicle automatic transmission remanufacturer
in the world. Our drivetrain products consist principally of remanufactured
automatic transmissions and also include remanufactured torque converters,
valve
bodies and engines. Our principal drivetrain customers are the North American
service, repair and parts organizations of Honda, Ford, DaimlerChrysler, Allison
and the European division of Ford. Drivetrain
Business net sales accounted for 47.1%, 63.5%, 72.2%, 74.7%, and 69.8% of our
2006, 2005, 2004, 2003 and 2002 net sales, respectively.
Remanufactured
products are used in the repair of vehicles by dealers and other service outlets
during both the warranty and post-warranty periods following the sale of a
vehicle. Remanufacturing is a process through which used components known as
“cores” are returned to a central facility where they are disassembled and the
parts are inspected, cleaned, refurbished and tested. We then combine the
reusable parts with new parts, primarily in a high-volume cellular assembly
process, to create remanufactured components that are of comparable quality
to
new components.
We
remanufacture some of the most complex components of a vehicle, such as the
transmission and engine. Generally, our customers and their designated suppliers
provide parts and cores to us and the customer retains title to the core.
However, our medium/heavy-duty remanufacturing program with Allison requires
us
to purchase the cores from Allison. In cases where we do not take ownership
of
the cores, our working capital requirements are reduced. Furthermore, because
we
use salvaged parts from cores or new parts sourced from our customers and their
designated suppliers, we are not directly subject to material pricing
fluctuations. We believe remanufactured products are generally lower in cost
than new replacement components and frequently facilitate a faster, more
reliable repair when compared to components that are rebuilt at service outlets.
In addition, remanufactured components efficiently reuse existing parts and
are
less damaging to the environment.
We
remanufacture OEM-approved transmissions for warranty and/or post-warranty
replacement of transmissions for Honda, Ford, DaimlerChrysler, Allison and
certain foreign OEMs, primarily for use in the United States service and repair
organizations of their dealer networks. Additionally, our European
facility remanufactures OEM-approved gas and diesel engines for several European
OEMs, including Jaguar and the European divisions of Ford and GM. These
engines are used for warranty and post-warranty replacement, and we also provide
certain machining services for some of our customers.
We
generally sell our products to each customer pursuant to a supply arrangement
for individual transmission or engine models, which supply arrangement typically
may be terminated by the customer on 90 days notice or less. Our contracts
for transmission remanufacturing with Ford and DaimlerChrysler were both renewed
during 2006 and run through 2008.
We
work
to develop and maintain strong relationships at many levels, in both the
corporate and factory organizations of our drivetrain customers. We began
remanufacturing transmissions for DaimlerChrysler’s Chrysler division and Ford
in 1989, and Honda in 2002. Over the past few years, we have strengthened
our relationships with many of our Drivetrain Business customers, as evidenced
by the award of new business with Honda, Ford, General Motors, DaimlerChrysler,
Jaguar, Land Rover and Isuzu. We believe that we are the largest provider of
remanufactured transmissions to DaimlerChrysler, Ford and Honda for light
vehicles in North America.
Our
facilities that remanufacture transmissions for OEMs have QS-9000 or ISO-9000
certification, a complete quality management system developed for manufacturers
who subscribe to the ISO 9002 quality standards. The system is designed to
help suppliers, such as us, develop a quality system that emphasizes defect
prevention and continuous improvement in manufacturing processes.
Our
Logistics Business
Our
Logistics Business provides a number of value-added services that generate
operational efficiencies for our customers through the outsourcing of certain
supply chain functions. Specifically, our Logistics Business provides
value-added warehousing and distribution, reverse logistics, turnkey order
fulfillment, electronic equipment testing, and refurbishment and repair
services. Except for component parts to support our repair services, we
generally do not take ownership of inventory. As a result, we face less risk
of
inventory obsolescence and require relatively less working capital than
logistics service providers who take ownership of inventory. Our principal
customers are currently in the wireless, consumer electronics and automotive
industries and include AT&T Mobility (formerly Cingular Wireless), Nokia,
GM, LG, Magellan, T-Mobile, Delphi, Visteon, TiVo and TomTom. Logistics
Business segment sales accounted for 52.9%, 36.5%, 27.8%, 25.3% and 30.2% of
our
2006, 2005, 2004, 2003 and 2002 net sales, respectively.
We
determine our logistics process in close consultation with our customers. Our
information technology systems allow rapid integration with our customers’
systems and, in conjunction with our customized processes, help us to meet
demanding logistics and repair requirements. By improving our customers’
inventory turns and speed of repair and refurbishments, as well as enabling
our
customers to realize value from returned products, we believe we help our
customers increase their profitability, reduce their capital investments and
enhance their opportunities for growth.
We
customize our products and services to meet the specific individual needs of
customers instead of offering one standard suite of products and
services.
Our
logistics customers market and distribute complex and serialized consumer
electronics such as cellular phones, wireless devices, navigation devices,
and
light vehicle audio systems and instrument clusters. As
part
of our service offering, we provide bulk and direct fulfillment of cellular
telephones to AT&T and its partners. We deliver products both to
AT&T retail locations and directly to individuals who order a cellular
phone, and provide inventory tracking and management, process all
warranty-service exchanges and perform handset testing and repair. Growth
in
our Logistics Business has largely been with AT&T. Additionally, we (i)
process returns and perform handset testing and repair for Nokia, (ii)
remanufacture,
repair and distribute light vehicle audio systems and instrument and display
clusters primarily for Delphi, Visteon, and GM, and various mobile electronics
products, such as navigation systems, primarily for Delphi, GM, Magellan and
TomTom, and (iii) offer returned material reclamation and core management and
disposition services.
Revenue
for services to AT&T grew significantly in 2006 and we expect them to grow
further in 2007. We also signed agreements and launched new business with other
logistics customers in 2006 that we expect to generate additional sales in
2007.
Industry
Background
Automotive
Aftermarket
Demand
for replacement or repair of drivetrain products is a function of numerous
factors, such as the number of vehicles in operation, the average age of
vehicles and the average number of miles driven per vehicle. Within this overall
market, factors that influence demand for our remanufactured products, when
compared to repair services, include product complexity, OEM warranty policies
governing repair-versus-replace decisions made by their dealers, and the length
of warranty periods. In addition, we believe increasing demand for our
remanufacturing services, when compared to repair services, is also driven
by
the relatively limited number of qualified repair technicians and repair test
equipment, and the increase in customer service demands. The demand for our
products is generally not tied to the cyclical nature of new light vehicle
sales. We supply our products to the automotive aftermarket, which consists
of
parts and services for light vehicles after their original purchase. According
to the Frost & Sullivan report dated February 2005, the North American
replacement and repair component of this market for transmissions was
approximately $2.7 billion in 2004 and expected to grow at a compound annual
rate of 4.4% from 2004 to 2011 due to the increasing number of vehicles in
operation, the average age of vehicles and the average number of miles driven
per vehicle.
Remanufacturing
Process
When
an
assembly such as a transmission or engine fails, there are generally three
alternatives available to return the vehicle to operating condition. The
dealer or independent repair shop may:
|
•
|
remove
the assembly, disassemble it into its component pieces, replace worn
or
broken parts with remanufactured or new components, and reinstall
the
assembly in the vehicle;
|
|
•
|
replace
the assembly with an assembly from a remanufacturer such as us;
or
|
|
•
|
replace
the assembly with a new assembly manufactured by the
OEM.
|
In
our
remanufacturing process, we generally obtain used transmission and engine
cores
from our
customers or their designated suppliers. We then sort the cores by vehicle
make and model and either place them into immediate production or store them
until needed. In the remanufacturing process, we evaluate the cores,
disassemble them into their component parts and inspect, clean, refurbish and
test the components that can be incorporated into the remanufactured
product. We replace components that we determine to be not reusable or
repairable with other remanufactured or new components. We conduct
inspection and testing at various stages of the remanufacturing process, and
we
test each finished assembly on equipment designed to simulate performance under
operating conditions. After testing, we generally package completed
products for immediate delivery.
There
are
four primary benefits of using remanufactured components in the repair of
vehicles:
|
•
|
First,
costs to the customers associated with remanufactured assemblies
generally
are substantially less than costs associated with either new assemblies
or
assemblies that have been rebuilt by the dealer following a severe
failure. This is due primarily to our lower labor costs and our use
of high volume salvage and manufacturing techniques that enable us
to
refurbish and reuse a high percentage of original components. The
cost savings produced by remanufactured assemblies help our customers
manage their warranty expenses.
|
|
•
|
Second,
remanufactured assemblies are generally of consistent high quality
due to
the precision manufacturing techniques, technical upgrades and rigorous
inspection and testing procedures we employ in remanufacturing. By
contrast, the quality of rebuilt assemblies generally is less consistent
because it is heavily dependent on the skill level of the particular
mechanic as well as the availability of adequate tooling and testing
equipment. For warranty repairs, consistent quality is
important to the customer providing the applicable warranty, because
once
installed, the remanufactured product is usually covered by the customer’s
warranty for the balance of the original warranty
period.
|
|
•
|
Third,
replacement of a component with a remanufactured component generally
takes
considerably less time than the time needed to rebuild the component,
thereby significantly reducing the time the vehicle is at the dealer
or
repair shop and allowing the dealer or repair shop to increase its
volume
of business.
|
|
•
|
Fourth,
the environmental benefits of remanufacturing may be significant. We
annually re-process thousands of tons of materials that would otherwise
have been discarded. Remanufacturing in our facilities, when compared
to
rebuilding at various dealers, generally results in a more efficient
reuse
of parts and a more controlled recycling of scrap materials and excess
fluids. This in turn leads to associated cost savings and benefits
to customers that are increasingly focused on environmental compliance
issues.
|
Logistics
Industry
Logistics
can generally be defined as the management and transportation of materials
and
inventory throughout the supply chain as well as the provision of value-added
services such as assembly, packaging, programming, testing and repair. The
logistics industry has expanded rapidly over the last 15 years due to
dramatic improvements in technology, increased demand in customer service
requirements, and the significant value proposition provided to companies by
third
party logistics (3PL) providers. As
more
companies focus on core competencies, many companies have decided to outsource
the management of all or part of their supply chain as a means to reduce costs,
increase asset and labor flexibility and improve customer service. As a
result, 3PL providers have become extensively involved in the full range of
customer supply chain functions. The operational efficiencies of a 3PL
provider enable companies to reduce investments in facilities, information
technology, inventory and personnel. Third-party services include turnkey
supply chain services, such as order fulfillment, product labeling and
packaging, inventory and warehouse management, product return, refurbishment
and
repair, electronics equipment testing, reverse logistics and the physical
movement of goods.
We
compete in the value-added warehousing market, a subset of the 3PL market,
which
we believe is fragmented, with no dominant industry player, and growing rapidly.
According to the Armstrong & Associates, Inc. 2006 North American 3PL Market
Overview report, this market size was estimated to be $22.3 billion of gross
revenues in 2005.
Our
Competitive Strengths
We
believe we offer products and solutions that improve our customers’ profits and
operations as a result of our competitive strengths, which include the
following:
Customized
Service Offering
We
are
recognized by our customers for our high level of service and our flexibility
in
providing product and service solutions. This approach
involves our team of specialists who work with the client to understand the
specific deliverables required by that client, understand communication points
within the supply chain, design solutions, establish operational and business
metrics, eliminate waste and improve efficiencies. We offer a broad array of
products and services to our logistics customers, which allows us to work with
the customer to customize our
products and services to meet the specific individual needs of the customer
instead of offering one standard suite of products and services. We believe
our
“One-Size-Fits-One” approach helps us attract and retain customers. For
instance, for AT&T, our supply chain management services include product
warranty and returns, order entry processing, testing and repair, warehousing,
picking, kitting, customized packaging, shipping and delivery of wireless
handsets, including wireless data devices. Our integrated logistics
services also include inventory management and private labeling. Our customized
approach has allowed us to add Nokia, Allison, T-Mobile, LG, Magellan, TomTom
and TiVo as new customers over the past two years.
High
Quality Through Engineering and Technical Know-How
Our
remanufactured products are of consistent high quality due to the precision
manufacturing techniques, technical upgrades and rigorous inspection and testing
procedures employed in our remanufacturing processes. We partner with our
customers to design processes that help ensure that our remanufacturing of
complex products such as automatic transmissions, valve bodies, torque
converters, engines and automotive electronics replicates OEM quality and test
procedures. Our remanufacturing process is completed by testing products
using state-of-the-art equipment such as sophisticated test stands that enable
us to replicate OEM test procedures. We are committed to upholding the quality
of our customers’ products and hold QS-9000 Certification, ISO-9000
Certification and Ford’s Q1 Certification. We monitor our procedures and
processes, which allows us to identify and to quickly correct situations that
could impact our product quality. We have a team of engineers dedicated to
enhancing and adding new products, sharing innovative solutions and reducing
our
customers’ expenses. Our engineering capabilities include developing new
products.
Information
Technology Capabilities
We
use
information technology to help meet customers’ needs in product security and
confidentiality, product qualification and identification, inventory management,
and interactive electronic communication. We also provide customers with
solutions for their supply chain management, reverse logistics, product tracking
and product history needs, while maintaining service and quality levels.
Our
use
of information technology allows us to provide flexible, accurate, customized
logistics solutions to help meet customer requirements while providing full
visibility across the supply chain. Our solutions can reduce customer-required
investment in information technology, and can improve the efficiency of our
customers’ inventory and supply chains by providing enhanced traceability and
visibility of inventory, resulting in market-leading performance metrics and
improved customer profitability. In addition, our information technology systems
allow for rapid integration with our customers’ systems, enhancing the quality
of our services.
Strong,
Experienced Management Team
Our
executive and operations management team has extensive experience. Our Chief
Executive Officer, Donald T. Johnson, Jr., has 33 years of experience in the
logistics and automotive industries, including five years as Global
Director of Parts, Supply and Logistics for Ford and 26 years within
Caterpillar’s Parts and Service and Logistics organizations where he became Vice
President, Caterpillar Logistics. Our
Vice
President and Chief Financial Officer, Todd R. Peters, has 22 years of
financial, acquisition and integration, and automotive operations experience.
The President of our ATC Logistics Business, William L. Conley, Jr., has 28
years of logistics experience, and the Vice President of our North American
Remanufacturing
Operations,
Brett
O. Dickson, has 17 years of operational and supply chain management
experience.
Our
Growth Strategies
Our
strategy is to be a valued partner that provides remanufacturing, logistics,
return and repair services for customers that distribute high-value, complex
products in various markets. We will grow by leveraging our strong customer
relationships while we develop new customers and products.
Growth
Within Our Drivetrain Business
Expand
Our Product Offering and Product Application.
Our
business and product development teams are working to identify new products
and
processes that enable us to compete for additional business with our OES dealer
customers by helping them to increase their penetration of the drivetrain repair
market and/or reduce their total warranty costs. For example, we are working
with certain of our OES customers to (i) develop and implement products and
strategies designed to enable them to penetrate, or increase their penetration
of, the post-warranty replacement market for automotive transmissions that
we
remanufacture on their behalf and (ii) re-introduce remanufactured transmissions
as a transmission repair alternative in warranty applications.
Enter
Additional Markets for our Services.
We are
seeking drivetrain remanufacturing opportunities in markets outside our primary
light vehicle aftermarket, including the commercial vehicle market. For example,
in 2005 we were awarded a remanufacturing program by Allison for
medium/heavy-duty automatic transmissions, which generates over $30 million
of annualized revenue. We
believe that our expertise in drivetrain remanufacturing will be directly
transferable to these other markets over time.
Expand
Our International Presence. In
2006,
we generated approximately 95% of our total net sales in North America. We
believe that our expertise in drivetrain remanufacturing will be directly
transferable to foreign markets, which generally have a less developed
drivetrain remanufacturing market than North America. As such we are actively
pursuing additional opportunities with both new and existing customers to
provide remanufacturing services in both Europe and Asia. We
believe that these areas represent an opportunity for growth. We are currently
working to develop programs with OEMs in the growing Chinese automotive market
(where we do not currently have a presence). We continue to explore
opportunities in the global automotive industry for our products and services
in
order to capture new business opportunities and improve
profitability.
Emerging
Technology.
We
continue to invest in the NuVinci™
Continuously Variable Planetary (CVP) Drive technology to further diversify
our
products, markets, customers and revenues. Initially we are focusing on the
bicycle, light electric vehicle, recreation/garden vehicle and commercial
vehicle markets. We intend to utilize the strengths, capabilities and capacity
in our Drivetrain Business to develop and commercialize the CVP
product.
Growth
Within Our Logistics Business
Target
New Customers and Broaden Services Provided to Customers.
We
believe we are well positioned to capitalize on growth in the 3PL services
market, particularly with existing and new customers in the consumer electronics
and vehicle industries, by offering customized, reliable and cost effective
solutions for customers with complex logistics requirements involving high-value
products. In
2006,
we were awarded new logistics business that we expect to generate $21 million
of
annualized revenue.
We
intend
to increase penetration of our existing Logistics Business customer base by
broadening our offering of Logistics products and services and by marketing
our
core competencies as solutions to meet our customers’ needs. Under our
“One-Size-Fits-One”
philosophy, we will continue to leverage our broad range of services to target
new customers that provide serialized products across a variety of industries
and provide them with customized products and services to meet their specific
needs instead of offering one standard suite of products and services. We also
intend to leverage our core competencies in logistics and electronics
refurbishment by working with our existing and new customers to identify
products and services where we can add value in satisfaction of our customers’
specific needs. We intend to further expand our penetration of the market for
logistics services and electronics repair through the addition of other wireless
carriers to our customer base and through penetration into other vertical
markets, including broadband/cable, electronics and computers, and medical
equipment. We have also identified and targeted several new market segments,
including additional classes of consumer electronics.
Additional
Corporate Initiatives
Leverage
Operating Efficiency and Productivity Gains.
We
regularly evaluate our operating efficiency and productivity in order to
increase our profitability and cash flows. Over the last several years, we
have
completed numerous lean manufacturing, six sigma and continuous improvement
projects that have resulted in significant cost savings and increased capacity
utilization. Our “Lean and Continuous Improvement” program has helped us achieve
margin improvements and further enhancement of quality. We believe there are
additional opportunities to further improve our cost base and increase earnings.
Selectively
Pursue Acquisitions.
From
time to time we evaluate potential acquisitions of complementary businesses
that
we believe will broaden our product offerings, diversify our customer base
or
provide us access to new markets. We have established criteria by which we
evaluate potential acquisitions, which we use to identify and pursue only those
that we believe will enhance long-term shareholder value. We have made various
acquisitions in the past and, to the extent suitable acquisition candidates,
acquisition terms and financing are available, we intend to pursue acquisitions
in the future.
Competition
In
our
Drivetrain Business, we primarily compete in the market for remanufactured
transmissions sold to the automotive aftermarket through the OEM dealer
networks. This market, narrowly defined, is one in which the majority of
industry supply comes from a limited number of participants. Competition
is based primarily on product quality, service, delivery, technical support
and
price and tends to be split along customer lines.
In
our
Logistics Business, we primarily compete in a fragmented market as a niche
participant offering a specialized value-added service requiring stringent
service level requirements. Based on our performance levels, we believe we
are well positioned to compete in this market. However, some of our
competitors in this segment such as Caterpillar Logistics and UPS Logistics
are
larger and have greater financial and other resources.
Employees
As
of
December
31, 2006,
we had
approximately 4,000 full-time and temporary employees. We believe our
employee and labor relations are good. We have not experienced any work
stoppage to date and currently none of our employees is represented by a labor
union.
Environmental
We
are
subject to various evolving federal, state, local and foreign environmental
laws
and regulations governing, among other things, emissions to air, discharge
to
waters and the generation, handling, storage, transportation, treatment and
disposal of a variety of hazardous and non-hazardous substances and wastes.
These laws and regulations provide for substantial fines and criminal sanctions
for violations and impose liability for the costs of cleaning up, and damages
resulting from, past spills, disposals or other releases of hazardous
substances.
In
connection with the acquisition of our subsidiaries, some of which have been
subsequently divested or relocated, we conducted certain investigations of
these
companies’ facilities and their compliance with applicable environmental laws.
The investigations, which included Phase I assessments by independent
consultants of all manufacturing and various distribution facilities, found
that
a number of these facilities have had or may have had releases of hazardous
materials that may require remediation and also may be subject to potential
liabilities for contamination from off-site disposal of substances or
wastes. These assessments also found that reporting and other regulatory
requirements, including waste management procedures, were not or may not have
been satisfied. Although there can be no assurance, we believe that, based
in
part on the investigations conducted, in part on certain remediation completed
prior to or since the acquisitions, and in part on the indemnification
provisions of the agreements entered into in connection with our acquisitions,
we will not incur any material liabilities relating to these
matters.
In
connection with the October 2000 sale of our Distribution Group, we agreed
to indemnify the buyer against environmental liability at former Distribution
Group facilities that had been closed prior to the Distribution Group sale,
including former facilities in Azusa, California, Mexicali, Mexico and Dayton,
Ohio. We also agreed to indemnify the buyer against any other environmental
liability of the Distribution Group relating to periods prior to the closing
of
the Distribution Group sale. Our indemnification obligations to the buyer are
subject to a $750,000 deductible and a $12.0 million cap, except with
respect to the closed facilities. We also have an additional $100,000 deductible
applicable to all Distribution Group claims for indemnification.
Segment
Reporting
We
have
two reportable segments: the Drivetrain segment and the Logistics segment.
See
Item 8. “Consolidated Financial Statements and Supplementary Data” and Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Available
Information
Our
internet website is www.goATC.com.
We make
available free of charge on our website our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any other
filings we make with the Securities and Exchange Commission as soon as
reasonably practicable. This information may also be obtained by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains an internet website that contains reports
and
other information regarding issuers like us that file electronically with the
Securities and Exchange Commission at www.sec.gov.
We will
provide a copy of any of the foregoing documents to shareholders upon request.
The contents of our website are not part of this Annual Report.
ITEM
1A. RISK
FACTORS
We
believe that the following are the material risks currently facing our business.
Additional risks we are not presently aware of or that we currently believe
are
immaterial, may also impair our business operations. Any of these risks could
have a material adverse effect on our financial condition, results of operations
or stock price. Readers should also refer to the other information included
in
this Annual Report, including our consolidated financial statements and related
notes thereto.
We
rely on a few major customers for a significant majority of our business and
the
loss of any of those customers, significant changes in prices or other terms
with any of our major customers, or changes to our customers’ warranty policies,
could reduce our net income and operating results.
A
few
customers account for a significant majority of our net sales each year. In
2006, we had three customers that individually accounted for more than 10%
of
our net sales. AT&T Mobility (formerly Cingular Wireless) accounted for
41.8%, 29.8% and 23.5% of our net sales during 2006, 2005 and 2004,
respectively, Ford accounted for 15.4%, 24.4% and 31.2% of our net sales for
2006, 2005 and 2004, respectively, and Honda accounted for 15.6%, 19.3% and
20.4% of our net sales during 2006, 2005 and 2004, respectively. In addition,
DaimlerChrysler accounted for 7.3%, 15.4% and 15.5% of our net sales in 2006,
2005 and 2004, respectively. If we lose any of these customers, or if any of
them reduces or cancels a significant order, our net sales and operating results
could decrease significantly.
Our
significant OEM customers generally require that their dealers using
remanufactured products for warranty application use only products from approved
suppliers. Although we are a factory approved supplier of our customers, they
generally are not obligated to continue to purchase our products and may switch
some or all of their business to other suppliers in the future and we may not
be
able to maintain or increase our sales to them.
Most
of
our contracts or arrangements with our customers (including the contracts with
AT&T and Ford) have a term of three years or less and are terminable by the
customer subject to a notice period that ranges from 90 days or less to 180
days. In addition, we periodically renegotiate the prices and other terms of
our
products with our customers, and have historically experienced price reductions
in connection with contract renewals. Because of the periodic expiration of
our
customer contracts, the short termination periods of those contracts and
periodic price negotiations, we cannot give any assurances of the stability
of
the demand or prices for our products and, therefore, our revenue streams.
Significant demand or price fluctuations could materially affect our
business.
Loss
of a
significant customer could also result in us incurring asset impairment charges
and exit costs associated with the closure of the plant that serviced that
customer. In connection with the loss of General Motors transmission business
in
2004, we recorded goodwill and other asset impairment charges totaling $26.4
million and incurred $3.4 million of exit costs to close the Gastonia,
North Carolina facility where we had produced units for General Motors.
Within
the last few years the standard new vehicle warranty provided by our customers
has varied and shorter warranty periods could be implemented in the future.
Any
shortening of warranty periods could reduce the amount of warranty work
performed by dealers and reduce the demand for our products. Additionally,
our
customers may vary their policies that determine when their dealers may use
remanufactured products for warranty applications, which could reduce the demand
for our products. Our results, most recently in 2005, have been adversely
affected by certain customers changing the policies that govern their dealer
warranty repair-versus-replace decisions, which have resulted in dealers
repairing more transmissions and consequently replacing fewer transmissions
with
remanufactured units.
Our
Logistics Business is dependent on the strength of
AT&T.
AT&T,
which accounted for 79.0% of our Logistics segment net sales for 2006, operates
in a highly competitive technology market. The number of cell phones sold by
AT&T, whether to new subscribers or as replacement phones to existing
subscribers, is dependent on its ability to keep pace with technological
advancements and to provide service programs and prices that are attractive
to
current and potential customers. Our Logistics net sales to AT&T are
substantially related to the number of phones sold by AT&T. Consequently,
any material decrease in phones sold by AT&T will materially and adversely
affect our Logistics net sales.
Interruptions
or delays in obtaining transmission cores and component parts could impair
our
business.
In
our
remanufacturing operations, we obtain used transmissions, engines and related
components, commonly known as cores, which are sorted and either placed into
immediate production or stored until needed. The majority of the cores we
remanufacture are obtained from OEMs. Our ability to obtain cores of the types
and in the quantities we require is critical to our ability to meet demand
and
expand production. With the increasing acceptance in the aftermarket of
remanufactured assemblies, the demand for cores has increased. We have
periodically experienced situations in which the inability to obtain sufficient
cores has limited our ability to accept orders. We may experience core shortages
in the future. In addition, from time to time, we experience shortages of
components manufactured by our OEM customers that we require for our
transmission remanufacturing process. If we experience such shortages for an
extended period of time, it could have a material adverse effect on our business
and negatively impact our competitive position.
Our
financial results are affected by transmission failure rates, which are outside
our control.
Our
quarterly and annual operating results are affected by transmission failure
rates, and a drop in these rates could adversely affect sales or profitability
or lead to variability of our operating results. Generally, if transmissions
last longer, there will be less demand for our remanufactured transmissions.
Transmission failure rates could drop due to a number of factors outside our
control, including:
|
•
|
consumers
retaining automobiles for shorter periods, which could occur in periods
of
economic growth or stability;
|
|
•
|
transmission
designs that result in greater reliability;
|
|
•
|
consumers
driving fewer miles per year due to high gasoline prices; and
|
|
•
|
mild
weather.
|
Our
financial results are affected by our customers' policies, which are outside
our
control.
Our
financial results are also affected by the policies of our OEM customers.
Changes to our key OEM customers’ policies that could materially affect our
business include:
|
•
|
guidelines
that affect dealer decisions to rebuild units at the dealer rather
than
install remanufactured transmissions;
|
|
•
|
a
decision not to use remanufactured units for warranty
replacements;
|
|
•
|
shortened
warranty periods that could reduce the demand for our products;
|
|
•
|
reductions
in the amount of inventory our OEM customers elect to retain;
|
|
•
|
longer
time periods before remanufactured transmissions are introduced for
use
with a particular automobile; and
|
|
•
|
pricing
strategies.
|
We
may incur material liabilities under various federal, state, local and foreign
environmental laws.
We
are
subject to various evolving federal, state, local and foreign environmental
laws
and regulations governing, among other things, emissions to air, discharge
to
waters and the generation, handling, storage, transportation, treatment and
disposal of a variety of hazardous and non-hazardous substances and wastes.
These laws and regulations provide for substantial fines and criminal sanctions
for violations and impose liability for the costs of cleaning up, and the
damages resulting from, past spills, disposals or other releases of hazardous
substances. In connection with our acquisition activity, we have conducted
certain investigations of facilities we have acquired and their compliance
with
applicable environmental laws. Similarly, in the course of lease terminations,
we have generally conducted investigations into potential environmental impacts
resulting from our operations. These investigations revealed various
environmental matters and conditions that could expose us to liability or which
have required us to undertake compliance-related improvements or remedial
activities. Any liability we may have under environmental laws could materially
affect our business.
Substantial
competition could reduce our market share and significantly harm our financial
performance.
Our
industry segments are highly competitive. We may not be successful in competing
against other companies, some of which are larger than us and have greater
financial and other resources available to them than we do. Increased
competition could require us to reduce prices or take other actions that may
have an adverse effect on our operating results.
Our
stock price is volatile, and investors may not be able to recover their
investment if our stock price declines.
The
trading price of our common stock has been volatile and can be expected to
be
affected by factors such as:
|
•
|
quarterly
variations in our results of operations, which may be impacted by,
among
other things, price renegotiations with, or loss of, our customers;
|
|
•
|
quarterly
variations in the results of operations or stock prices of comparable
companies;
|
|
•
|
announcements
of new products or services offered by us or our competitors;
|
|
•
|
changes
in earnings estimates or buy/sell recommendations by financial analysts;
|
|
•
|
the
stock price performance of our customers; and
|
|
•
|
general
market conditions or market conditions specific to particular industries.
|
Our
future operating results may fluctuate significantly.
We
may
experience significant variations in our future quarterly results of operations.
These fluctuations may result from many factors, including the condition of
our
industry in general and shifts in demand and pricing for our products. Our
operating results are also highly dependent on our level of gross profit as
a
percentage of net sales. Our gross profit percentage fluctuates due to numerous
factors, some of which may be outside of our control. These factors include:
|
•
|
pricing
strategies;
|
|
•
|
changes
to our customers’ warranty policies;
|
|
•
|
changes
in product costs from vendors;
|
|
•
|
the
risk of some of the items in our inventory becoming obsolete;
|
|
•
|
the
availability and quality of cores;
|
|
•
|
the
relative mix of products and services sold during the period; and
|
|
•
|
general
market and competitive conditions.
|
Results
of operations in any period, therefore, should not be considered indicative
of
the results to be expected for any future period.
Our
success depends on our ability to retain our senior management and to attract
and retain key personnel.
Our
success depends to a significant extent on the efforts and abilities of our
senior management team. We have various programs in place to motivate, reward
and retain our management team, including bonus and stock incentive plans.
However, the loss of one or more of these persons could have an adverse effect
on our business. Our success and plans for future growth will also depend on
our
ability to hire, train and retain skilled workers in all areas of our business.
We currently do not have key executive insurance relating to our senior
management team.
We
cannot predict the impact of unionization efforts or labor shortages on our
business.
From
time
to time, labor unions have indicated their interest in organizing a portion
of
our workforce. Given that our OEM customers are in the highly unionized
automotive industry, our business is likely to continue to attract the attention
of union organizers. While these efforts have not been successful to date except
in the case of our former Mahwah, New Jersey facility (which we closed in
December 2003), we cannot give any assurance that we will not experience
additional union activity in the future. Any union organization activity, if
successful, could result in increased labor costs and, even if unsuccessful,
could result in a temporary disruption of our production capabilities and a
distraction to our management.
Additionally,
we need qualified managers and a number of skilled employees with technical
experience in order to operate our business successfully. From time to time,
there may be a shortage of skilled labor, which may make it more difficult
and
expensive for us to attract and retain qualified employees. If we are unable
to
attract and retain qualified individuals or our costs to do so increase
significantly, our operations would be materially adversely affected.
We
are subject to risks associated with future acquisitions.
An
element of our growth strategy is the acquisition and integration of
complementary businesses in order to broaden product offerings, capture market
share and improve profitability. We will not be able to acquire other businesses
if we cannot identify suitable acquisition opportunities, obtain financing
on
acceptable terms or reach mutually agreeable terms with acquisition candidates.
The negotiation of potential acquisitions as well as the integration of an
acquired business could require us to incur significant costs and cause
diversion of our management's time and resources. Future acquisitions by us
could result in:
|
•
|
dilutive
issuances of equity securities;
|
|
•
|
reductions
in our operating results;
|
|
•
|
incurrence
of debt and contingent liabilities;
|
|
•
|
future
impairment of goodwill and other intangibles; and
|
|
•
|
other
acquisition-related expenses.
|
Some
or
all of these items could have a material adverse effect on our business. The
businesses we may acquire in the future might not achieve sales and
profitability that justify our investment. In addition, to the extent that
consolidation becomes more prevalent in our industry, the prices for suitable
acquisition candidates may increase to unacceptable levels and limit our growth.
We
may
encounter difficulties in integrating any businesses we acquire with our
operations. The success of these transactions depends on our ability to:
|
•
|
retain
key management members and technical personnel of acquired companies;
|
|
•
|
successfully
merge corporate cultures and operational and financial systems; and
|
|
•
|
realize
sale and cost reduction synergies.
|
Furthermore,
we may not realize the benefits we anticipated when we entered into these
transactions. In addition, after we have completed an acquisition, our
management must be able to assume significantly greater responsibilities, and
this in turn may cause them to divert their attention from our existing
operations. Any of the foregoing could have a material adverse effect on our
business and results of operations.
Our
level of indebtedness and the terms of our indebtedness could adversely affect
our business and liquidity position.
As
of
December 31, 2006, our net debt (outstanding indebtedness minus cash and
cash equivalents on hand) was $10.0 million. However, we expect that our
indebtedness may increase substantially from time to time in the future for
various reasons, including fluctuations in operating results, capital
expenditures and possible acquisitions. Our consolidated indebtedness level
could materially affect our business because:
|
•
|
a
portion of our cash flow from operations must be dedicated to interest
payments on our indebtedness and is not available for other purposes,
which amount would increase if prevailing interest rates rise;
|
|
•
|
it
may materially limit or impair our ability to obtain financing in
the
future;
|
|
•
|
it
may reduce our flexibility to respond to changing business and economic
conditions or take advantage of business opportunities that may arise;
and
|
|
•
|
our
ability to pay dividends is limited.
|
In
addition, our credit facility requires us to meet specified financial ratios
and
limits our ability to enter into various transactions. If we default on any
of
our indebtedness, or if we are unable to obtain necessary liquidity, our
business could be adversely affected.
Our
certificate of incorporation contains provisions that may hinder or prevent
a
change in control of our company.
Provisions
of our certificate of incorporation could make it more difficult for a third
party to obtain control of us, even if such a change in control would benefit
our stockholders. Our Board of Directors can issue preferred stock without
stockholder approval. The rights of common stockholders could be adversely
affected by the rights of holders of preferred stock that we issue in the
future. These provisions could discourage a third party from trying to obtain
control of us. Such provisions may also impede a transaction in which our
stockholders could receive a premium over then-current market prices and our
stockholders' ability to approve transactions that they consider in their best
interests.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM
2. PROPERTIES
We
conduct our business from the following facilities:
|
Location
|
Approx.
Sq.
Feet
|
Lease
Expiration
Date
|
Products
Produced/Services Provided
|
|||
|
Springfield,
MO
|
280,800
|
2008
|
transmissions,
transfer cases and assorted components (1)
|
|||
|
Oklahoma
City, OK
|
100,000
|
2019
|
transmissions,
transfer cases and assorted components, NuVinci
products (1)
|
|||
|
Oklahoma
City, OK
|
200,000
|
owned
(2)
|
transmissions
and assorted components (1)
|
|||
|
Oklahoma
City, OK
|
94,000
|
2008
|
returned
material reclamation and disposition, core management
(3)
|
|||
|
Carrollton
(Dallas), TX
|
39,000
|
2008
|
radios,
telematics and instrument and display clusters (3)
|
|||
|
Ft.
Worth, TX
|
221,000
|
2008
|
cellular
phone and accessory distribution and related
services (3)
|
|||
|
Ft.
Worth, TX
|
375,000
|
2010
|
cellular
phone test and repair, returns processing, accessory packaging
(3)
|
|||
|
Ft.
Worth, TX
|
180,000
|
2009
|
wireless
device and accessory distribution and related
services (3)
|
|||
|
Grantham,
England
|
120,000
|
owned
|
engines
and related components (1)
|
________________
|
(1)
|
This
facility is used by the Drivetrain segment.
|
|
(2)
|
This
property is subject to a mortgage securing our bank credit
facility.
|
|
(3)
|
This
facility is used by the Logistics
segment.
|
We
also
lease assorted warehouses and space for our corporate offices and computer
services centers. We believe that our current facilities are adequate for the
current level of our activities. In the event we were to require additional
facilities, we believe that we could procure acceptable facilities.
ITEM
3. LEGAL
PROCEEDINGS
From
time
to time, we have been, and currently are, involved in various legal proceedings.
Management believes that all of our litigation is routine in nature and
incidental to the conduct of our business, and that none of our litigation,
if
determined adversely
to us,
would have a material adverse effect, individually or in the aggregate, on
us.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No
matters were submitted to a vote of the stockholders of the Company during
the
quarter ended December 31, 2006.
PART
II
ITEM
5. MARKET FOR REGISTRANT'S
COMMON
EQUITY,
RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market
Information and Holders
Our
common stock is traded on the Nasdaq Global Select Market under the symbol
"ATAC". As of February 15, 2007, there were 126 record holders of our common
stock. The
following table sets forth for the periods indicated the range of high and
low
sale prices of the common stock as reported by Nasdaq:
|
High
|
Low
|
||||
|
2006
|
|||||
|
First
quarter
|
$
|
22.68
|
$
|
19.19
|
|
|
Second
quarter
|
26.83
|
21.77
|
|||
|
Third
quarter
|
25.64
|
16.81
|
|||
|
Fourth
quarter
|
22.31
|
17.49
|
|||
|
2005
|
|||||
|
First
quarter
|
$
|
16.70
|
$
|
13.53
|
|
|
Second
quarter
|
17.68
|
13.80
|
|||
|
Third
quarter
|
18.84
|
15.96
|
|||
|
Fourth
quarter
|
21.71
|
16.15
|
|||
On
February
15, 2007, the
last
sale price of our common stock, as reported by Nasdaq, was $24.00
per share.
Stock
Repurchases
During
November
2006, certain employees of the Company delivered to us a total of 1,473 shares
of our outstanding common stock in payment of $25,940 of withholding tax
obligations arising from the vesting of restricted stock previously awarded
under our stock incentive plans. Per the stock incentive plans, the shares
delivered to us were valued at $17.61 per share, the closing price of our common
stock on the vesting date of the restricted stock.
Following
is a summary of treasury stock acquisitions during the three month period ended
December 31, 2006:
|
Period
|
Total
number
of
Shares Purchased
|
Price
Paid per Share
|
Total
Number of Shares Purchased
as
Part of a
Publicly
Announced
Plan
|
Maximum
Number
of Shares that May Yet Be Purchased Under
the
Plan
|
|||||
|
October
1-31, 2006
|
−
|
$
|
−
|
−
|
−
|
||||
|
November
1-30, 2006
|
1,473
|
$
|
17.61
|
1,473(1)
|
−
|
||||
|
December
1-31, 2006
|
−
|
$
|
−
|
−
|
−
|
________________
|
(1)
|
Repurchases
were made pursuant to our stock incentive
plans.
|
For
2007,
we
intend
to repurchase shares of our outstanding common stock to offset the dilutive
impact of stock option exercises and restricted stock grants made during the
year under our stock incentive plans. We estimate the number of shares to be
repurchased under this plan to be approximately 2% of the total shares
outstanding.
Dividends
We
have
never paid cash dividends on our common stock. Because we currently intend
to
retain any earnings to provide funds for the operation and expansion of our
business and for the servicing and repayment of indebtedness, we do not intend
to pay cash dividends on the common stock in the foreseeable future.
Furthermore, as a holding company with no independent operations, the ability
of
Aftermarket Technology Corp. to pay cash dividends is dependent upon the receipt
of dividends or other payments from our subsidiaries. The agreement for our
bank
credit facility contains certain covenants that, among other things, restrict
our ability to pay dividends. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." Any determination to pay cash dividends on the common stock
in the future will be at the sole discretion of our Board of
Directors.
Performance
Graph
The
following graph shows the total return to our stockholders compared to a peer
group and the Nasdaq Market Index over the period from December 31, 2001 to
December 31, 2006. Each line on the graph assumes that $100 was invested in
our common stock and the respective indices at the closing price on
December 31, 2001. The graph then presents the value of these investments,
assuming reinvestment of dividends, through the close of trading on
December 31, 2006.
|
12/31/01
|
12/31/02
|
12/31/03
|
12/31/04
|
12/30/05
|
12/29/06
|
|
|
Aftermarket
Technology Corp.
|
100.00
|
89.51
|
84.69
|
99.38
|
120.00
|
131.36
|
|
Peer
Group Index
|
100.00
|
85.18
|
98.45
|
133.68
|
141.54
|
156.27
|
|
NASDAQ
Market Index
|
100.00
|
69.75
|
104.88
|
113.70
|
116.19
|
128.12
|
The
peer
group consists of Federal-Mogul Corp., Genuine Parts Co., Standard Motor
Products (publicly-traded companies engaged primarily in businesses in the
automotive aftermarket) and Brightpoint, Inc. (a publicly-traded company engaged
in third party logistics business), which, in management’s opinion, most closely
represent the peer group for our two business segments.
The
cumulative total return shown on the stock performance graph indicates
historical results only and is not necessarily indicative of future results.
ITEM
6. SELECTED
FINANCIAL DATA
The
selected financial data presented below with respect to the statements of income
data for the years ended December 31, 2006, 2005 and 2004 and the balance
sheet data as of December 31, 2006 and 2005 are derived from the
Consolidated Financial Statements of the Company that have been audited by
Ernst & Young LLP, independent registered public accounting firm, and
are included elsewhere herein, and are qualified by reference to such financial
statements and notes related thereto. The selected financial data with respect
to the statements of income data for the years ended December 31, 2003 and
2002
and the balance sheet data as of December 31, 2004, 2003 and 2002, are
derived from the Consolidated Financial Statements of the Company that have
been
audited by Ernst & Young LLP, independent registered public accounting
firm, but are not included herein. The data provided should be read in
conjunction with the Consolidated Financial Statements and related notes,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and other financial information included in this Annual Report.
During
the first quarter of 2006, we discontinued our Independent Aftermarket
businesses, which
were
reported as “Other” in segment information previously disclosed. These
businesses are classified as discontinued operations and are excluded from
the
selected financial data presented below.
|
Year
Ended December 31,
|
|||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
(In
thousands, except per share data)
|
|||||||||||||||
|
Statements
of Income Data:
|
|||||||||||||||
|
Net
sales
|
$
|
497,974
|
$
|
419,618
|
$
|
375,600
|
$
|
322,657
|
$
|
378,764
|
|||||
|
Cost
of sales
|
393,269
|
315,507
|
275,453
|
227,239
|
242,781
|
||||||||||
|
Exit,
disposal, certain severance and other charges (1)
|
−
|
−
|
−
|
200
|
−
|
||||||||||
|
Gross
profit
|
104,705
|
104,111
|
100,147
|
95,218
|
135,983
|
||||||||||
|
Selling,
general and administrative expense
|
54,538
|
48,993
|
45,034
|
45,332
|
52,612
|
||||||||||
|
Amortization
of intangible assets
|
269
|
125
|
125
|
299
|
333
|
||||||||||
|
Impairment
of goodwill
|
14,592
|
−
|
−
|
−
|
−
|
||||||||||
|
Exit,
disposal, certain severance and other charges (credits)
(1)
|
1,938
|
523
|
3,766
|
8,273
|
(277
|
)
|
|||||||||
|
Operating
income
|
33,368
|
54,470
|
51,222
|
41,314
|
83,315
|
||||||||||
|
Interest
income
|
605
|
2,026
|
2,658
|
2,863
|
2,769
|
||||||||||
|
Interest
expense
|
(4,297
|
)
|
(7,696
|
)
|
(7,271
|
)
|
(8,169
|
)
|
(12,280
|
)
|
|||||
|
Other
income, net
|
262
|
542
|
19
|
70
|
43
|
|
|||||||||
|
Equity
in income (losses) of investee
|
−
|
−
|
146
|
277 | (575 | ) | |||||||||
|
Redemption
of senior notes
|
−
|
−
|
−
|
−
|
(3,022
|
)
|
|||||||||
|
Write-off
of debt issuance costs
|
(1,691
|
)
|
−
|
−
|
−
|
(1,480
|
)
|
||||||||
|
Income
tax expense
|
(10,506
|
)
|
(16,344
|
)
|
(16,698
|
)
|
(13,477
|
)
|
(23,650
|
)
|
|||||
|
Income
from continuing operations (2)
|
$
|
17,741
|
$
|
32,998
|
$
|
30,076
|
$
|
22,878
|
$
|
45,120
|
|||||
|
Income
from continuing operations per diluted share (3)
|
$
|
0.81
|
$
|
1.53
|
$
|
1.40
|
$
|
0.93
|
$
|
1.87
|
|||||
|
Shares
used in computation of income from continuing operations per diluted
share
(3)
|
21,927
|
21,579
|
21,411
|
24,486
|
24,119
|
||||||||||
|
Other
Data:
|
|||||||||||||||
|
Capital
expenditures
|
$
|
11,910
|
$
|
17,292
|
$
|
10,820
|
$
|
12,927
|
$
|
12,476
|
|||||
|
As
of December 31,
|
||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||
|
(In
thousands)
|
||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||
|
Cash
and cash equivalents
|
$
|
7,835
|
$
|
45,472
|
$
|
18,085
|
$
|
59,628
|
$
|
65,504
|
||||
|
Working
capital, continuing operations
|
89,262
|
109,226
|
88,221
|
103,855
|
122,627
|
|||||||||
|
Property,
plant and equipment, net
|
53,008
|
54,153
|
51,416
|
53,435
|
51,648
|
|||||||||
|
Total
assets
|
345,677
|
407,780
|
390,277
|
451,862
|
454,030
|
|||||||||
|
Current
and long-term debt outstanding
|
17,800
|
90,779
|
112,406
|
127,342
|
164,613
|
|||||||||
|
Long-term
liabilities, less current portion
|
46,194
|
107,077
|
122,225
|
134,545
|
159,561
|
|||||||||
|
Total
stockholders' equity
|
232,330
|
221,230
|
186,373
|
229,251
|
206,435
|
|||||||||
________________
| (1) |
See
Item 8. “Consolidated Financial Statements and Supplementary Data - Note
18” for a description of exit, disposal, certain severance and other
charges.
|
| (2) |
Income
from continuing operations for the years ended December 31, 2006,
2005, 2004, 2003 and 2002 excludes gain (loss) from discontinued
operations, net of
income taxes, of $(9,718), $(1,990), $(24,300), $(2,367) and $1,307, respectively. |
| (3) |
See
Item 8. “Consolidated Financial Statements and Supplementary Data - Note
13” for a description of the computation of earnings per
share.
|
ITEM
7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto included elsewhere in this Annual Report.
See Item 8. “Consolidated Financial Statements and Supplementary
Data.”
Readers
are cautioned that the following discussion contains certain forward-looking
statements and should be read in conjunction with the “Special Note Regarding
Forward-Looking Statements” appearing at the beginning of this Annual
Report.
Discontinued
Operations
During
the first quarter of 2006, we discontinued our Independent Aftermarket
businesses which remanufactured engines and distributed non-OEM branded
remanufactured engines and transmissions directly to independent transmission
and general repair shops and certain aftermarket parts retailers. These
businesses were not reportable segments and were reported as “Other” in segment
information previously disclosed. The operations of these businesses have been
reflected in the accompanying consolidated financial statements and management’s
discussion and analysis as discontinued operations.
Overview
Operations.
We
provide outsourced engineering solutions and supply chain logistics services
to
the light vehicle and medium/heavy-duty aftermarket and consumer electronics
industries. Through our Drivetrain Business, we provide customized
remanufacturing services focused on complex light and medium/heavy duty vehicle
drivetrain products, such as automatic transmissions and engines, that are
primarily sold through the service, repair and parts organizations of our
customers. Through our Logistics Business, we offer value-added supply-chain
services to the consumer electronics and light vehicle aftermarket industries,
including fulfillment, returns management, reverse logistics, repair and other
related services. We generally provide our services under contractual
relationships with customers that distribute high-value, complex products.
Demand
for replacement or repair of drivetrain products is a function of numerous
factors, such as the number of vehicles in operation, the average age of
vehicles and the average number of miles driven per vehicle. Within this overall
market, factors that influence demand for our remanufactured products, when
compared to repair services, include product complexity, OEM warranty policies
governing replace-versus-repair decisions made by their dealers, and the length
of warranty periods. In addition, we believe demand for our remanufacturing
services, when compared to repair services, is also increased by the relatively
limited number of qualified repair technicians and repair test equipment, and
the increase in customer service demands. The demand for our products is not
tied to the cyclical nature of new light vehicle sales. However, our OEM
customers periodically revise their policies governing warranty
repair-versus-replace decisions that can impact, either positively or
negatively, the demand for our remanufactured products as dealers utilize a
greater or lesser number of remanufactured transmissions. Policy revisions
that
have negatively impacted demand for our products occurred in late 2002 and
early
2003 and again in late 2004. For 2006, our Drivetrain Business reported net
sales of $234.6 million, or 47.1% of our total net sales. Additionally, during
2006 we were awarded three new transmission remanufacturing programs with Ford
and General Motors that are expected to launch during 2007.
Our
Logistics Business provides a number of value-added services that generate
operational efficiencies for our customers through the outsourcing of certain
supply chain functions. Specifically, our Logistics Business provides
value-added warehousing and distribution, reverse logistics, turnkey order
fulfillment, electronic equipment testing, and refurbishment and repair
services. Except for component parts to support our repair services, we
generally do not take ownership of inventory. As a result, we face less risk
of
inventory obsolescence and less working capital needs than other logistics
services providers who do take ownership of inventory. However, during 2006,
our
volume of repair services and associated component inventory increased
significantly. Additionally, our business model does not require substantial
capital investments in transportation equipment or facilities.
For
the
year ended December 31, 2006, net sales from our Logistics Business
increased $110.2 million, or 71.9%, to $263.4 million, which represented 52.9%
of our total net sales. AT&T Mobility (formerly Cingular Wireless) accounted
for 79.0% of our Logistics Business sales in 2006. Sales and growth in our
Logistics segment have largely: (i) been related to services we provide for
AT&T; (ii) been dependent on demand for cellular phones and services and
AT&T’s share of cellular service volume; and (iii) benefited from upgrades
in cellular telephone technology through increased replacement demand for more
advanced handsets, from any increases in the number of AT&T’s subscribers,
and from any expansion of our service offerings. Over the past three years,
we
have launched additional business with AT&T and have expanded on certain
lines of service previously provided. In addition to new business from AT&T,
we have signed agreements with a number of new logistics customers over the
past
three years that generated additional sales in 2006 and will generate
incremental sales in 2007. We believe our Logistics Business represents a key
growth opportunity and we continue to actively pursue customer diversification.
Financing.
During
2006, we replaced our old credit facility with a new $150 million revolving
credit facility with terms we consider more favorable than those of the old
facility. During 2006 we reduced total debt outstanding by $72.9 million and
repurchased $11.1 million of treasury stock, primarily from $45.5 million of
cash on hand at December 31, 2005, $47.5 million of cash from 2006 operating
activities-continuing operations, and $8.8 million of cash generated primarily
from the exercise of stock options during 2006. As of December 31, 2006, we
had
$17.8 million of total debt outstanding, $7.8 million of cash and cash
equivalents on hand and $130.6 million of borrowing capacity under our new
credit facility.
Components
of Income and Expense
Net
Sales.
In our
Drivetrain segment, we recognize sales primarily from the sale of remanufactured
transmissions at the time of shipment to the customer and, to a lesser extent,
upon the completion or performance of a service. In our Logistics segment,
sales
are primarily related to providing:
|
•
|
value-added
warehouse and distribution services;
|
|
•
|
turnkey
order fulfillment and information
services;
|
|
•
|
test
and repair services;
|
|
•
|
automotive
electronic components remanufacturing and distribution services;
and
|
|
•
|
returned
material reclamation, disposition and core management services,
|
and
are
recognized upon completion or performance of those services.
Cost
of Sales.
Cost of
sales represents the actual cost of purchased components and other materials,
direct labor, indirect labor and warehousing cost and manufacturing overhead
costs, including depreciation, utilized directly in the production of products
or performance of services for which sales have been recognized.
Selling,
General & Administrative Expense.
Selling,
general and administrative (“SG&A”) expenses generally are those costs not
directly related to the production process or the performance of a service
generating sales and include all selling, marketing, product development and
customer service expenses as well as expenses related to general management,
finance and accounting, information services, human resources, legal, and
corporate overhead expense.
Amortization
of Intangible Assets.
Expense
for amortization of intangibles primarily relates to the amortization of
definite lived intangible assets.
Exit,
Disposal, Certain Severance and Other Charges.
As part
of our lean and continuous improvement philosophy, we
have
periodically identified opportunities to right-size, rationalize and consolidate
operations or manufacturing capacity, alter our processes in an effort to
improve customer service, and fix or discontinue lower-margin product lines,
the
purpose of which is to improve profitability, reduce costs, streamline
operations and improve efficiency. As a result of this process, we may incur
certain costs, primarily associated with restructuring and other initiatives
that include consolidation of operations or facilities, management
reorganization and delayering, rationalization of certain products, product
lines and services and asset impairments. In management’s opinion these costs
are generally incremental to our ongoing operation and are separated on our
statements of income in order to improve the clarity of our reported operations.
Examples
of these costs include severance benefits for terminated employees, lease
termination and other facility exit costs, moving and relocation costs, losses
on the disposal of fixed assets and write down of inventories. The components
of
these charges are computed based on actual cash payouts, our estimate of the
realizable value of the affected tangible and intangible assets and estimated
exit costs including severance and other employee benefits.
These
charges can vary significantly from period to period and as a result, we may
experience fluctuations in our reported net income and earnings per share due
to
the timing of these actions. See Item 8. “Consolidated Financial Statements and
Supplementary Data -
Note 18”
for a further discussion of these costs.
Critical
Accounting Policies and Estimates
Our
financial statements are based on the selection and application of significant
accounting policies, some of which require management to make estimates and
assumptions. We believe that the following are some of the more critical
judgmental areas in the application of our accounting policies that currently
affect our financial condition and results of operations.
Allowance
for Doubtful Accounts. We
maintain allowances for doubtful accounts for estimated losses resulting from
the failure of our customers to make required payments. We evaluate the adequacy
of our allowance for doubtful accounts and make judgments and estimates in
determining the appropriate allowance at each reporting period based on
historical experience, credit evaluations, specific customer collection issues
and the length of time a receivable is past due. Since
our
accounts receivable are often concentrated in a relatively few number of
customers, a significant change in the liquidity or financial position of any
one of these customers could have a material adverse impact on our financial
statements. For each of the years ended December 31, 2006, 2005 and 2004, our
write-offs were less than $0.1 million. As of December 31, 2006, we had
$77.7 million of accounts receivable, net of allowance for doubtful accounts
of
$0.9 million.
Inventory
Valuation.
We make
adjustments to write down our inventories for estimated excess and obsolete
inventory equal to the difference between the cost of the inventory and the
estimated market value based on assumptions about market conditions, future
demand and expected usage rates. Changes in economic conditions, customer
demand, product introductions or pricing changes can affect the carrying value
of our inventory. Demand for our products has fluctuated in the past and may
do
so in the future, which could result in an increase in excess quantities on
hand. If actual market conditions are less favorable than those projected by
management, causing usage rates to vary from those estimated, additional
inventory write-downs may be required. Although no assurance can be given,
these
write-downs would not be expected to have a material adverse impact on our
financial statements. For the years ended December 31, 2006, 2005 and 2004,
we recorded charges for excess and obsolete inventory of approximately $1.8
million, $0.8 million and $1.9 million, respectively. As of December 31, 2006,
we had inventory of $56.9 million, net of a reserve for excess and obsolete
inventory of $5.2 million.
Warranty
Liability.
We
provide an allowance for the estimated cost of product warranties at the time
revenue is recognized. While we engage in extensive product quality programs
and
processes, including inspection and testing at various stages of the
remanufacturing process and the testing of each finished assembly on equipment
designed to simulate performance under operating conditions, our warranty
obligation is affected by the number of products sold, historical and
anticipated rates of warranty claims and costs per unit and actual product
failure rates. Additionally, we participate in the tear-down and analysis of
returned products with certain of our customers to assess responsibility for
product failures. For the years ended December 31, 2006, 2005 and 2004, we
(i)
recorded charges for estimated warranty costs of approximately $1.3 million,
$1.3 million and $3.4 million, respectively, and (ii) paid and/or settled
warranty claims of approximately $1.3 million, $1.5 million and $3.7 million,
respectively. Should actual product failure rates differ from our estimates,
revisions to the estimated warranty liability may be required. Although no
assurance can be given, these revisions would not be expected to have a material
adverse impact on our financial statements.
Goodwill
and Indefinite Lived Intangible Assets. Our
goodwill and indefinite lived intangible assets are tested for impairment
annually as of September 30th
of each
year unless events or circumstances would require an immediate review. Goodwill
is tested for impairment at a level of reporting referred to as a reporting
unit, which generally is an operating segment or a component of an operating
segment as defined in paragraph 10 of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information
and
paragraph 30 of SFAS No. 142, Goodwill
and Other Intangible Assets.
In
accordance with paragraph 30 of SFAS No. 142, certain components of an operating
segment with similar economic characteristics are aggregated and deemed a single
reporting unit. Goodwill amounts are generally allocated to the reporting units
based upon the amounts allocated at the time of their respective acquisition,
adjusted for significant transfers of business between reporting units. In
estimating the fair value of our reporting units, we utilize a valuation
technique based on multiples of projected cash flow, giving consideration to
unusual items, cost reduction initiatives, new business initiatives and other
factors that generally would be considered in determining value. Impairments
are
recorded (i) if the fair value is less than the carrying value or (ii) when
an
individual reporting unit is disposed of. Actual results may differ from these
estimates under different assumptions or conditions. If we were to lose a key
customer within a particular operating segment or its sales were to decrease
materially, impairment adjustments that may be required could have a material
adverse impact on our financial statements.
Because
key new business opportunities considered in the prior year goodwill assessment
in both the Drivetrain segment’s United Kingdom-based operation and the
Logistics segment’s automotive materials reclamation operation did not
materialize, and other near-term growth opportunities were considered limited,
we concluded that the fair value of these reporting units no longer supported
the assigned goodwill. Accordingly, based upon our annual goodwill impairment
tests made as of September 30, 2006, we recorded goodwill impairment charges
of
$11.7 million related to our Drivetrain segment’s United Kingdom-based
operation, and $2.9 million related to the automotive materials reclamation
business within our Logistics segment. The fair value of the reporting units
was
estimated by applying a range of multiples to adjusted EBITDA. As of December
31, 2006, goodwill was recorded at a carrying value of $132.4 million.
Deferred
Income Taxes and Valuation Allowances. Tax
law
requires items to be included in the tax return at different times than when
these items are reflected in the consolidated financial statements. As a result,
our annual tax rate reflected in our consolidated financial statements is
different than that reported in our tax return. Some of these differences are
permanent, such as expenses that are not deductible in our tax return, and
some
differences reverse over time, such as depreciation expense. These timing
differences create deferred tax assets and liabilities. Deferred tax assets
and
liabilities are determined based on temporary differences between the financial
reporting and tax bases of assets and liabilities. The tax rates used to
determine deferred tax assets or liabilities are the enacted tax rates in effect
for the year in which the differences are expected to reverse. Based on the
evaluation of all available information, we recognize future tax benefits,
such
as net operating loss carryforwards, to the extent that realizing these benefits
is considered more likely than not.
We
evaluate our ability to realize the tax benefits associated with deferred tax
assets by analyzing our forecasted taxable income using both historical and
projected future operating results, the reversal of existing temporary
differences, taxable income in prior carry-back years (if permitted) and the
availability of tax planning strategies. A valuation allowance is required
to be
established unless management determines that it is more likely than not that
we
will ultimately realize the tax benefit associated with a deferred tax
asset.
Accounting
for Stock-Based Awards. On
January 1, 2006, we adopted SFAS No. 123R,
Share-Based Payment. Prior
to
January 1, 2006, we had applied the intrinsic value method of accounting for
stock options granted to our employees and directors under the provisions of
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations, as permitted by SFAS No. 123, Accounting
for Stock-Based Compensation.
Accordingly, employee and director compensation expense was recognized only
for
those options whose exercise price was less than the market value of our common
stock at the measurement date.
We
adopted the fair value recognition provisions of SFAS No. 123R, using the
modified prospective transition method. Under the modified prospective method,
(i) compensation expense for share-based awards granted prior to January 1,
2006
are recognized over the remaining service period using the compensation cost
calculated for pro forma disclosure purposes under SFAS No. 123 and (ii)
compensation expense for all share-based awards granted subsequent to December
31, 2005 are based on the grant date fair value estimated in accordance with
the
provisions of SFAS No. 123R. Results for periods prior to January 1, 2006 have
not been restated. As a result of adopting SFAS No. 123R, during 2006 we
recorded pre-tax expense of $1.2 million for stock options compensation and
classified this cost as part of selling, general and administrative expense
in
our consolidated statement of income. The impact on both basic and diluted
earnings per share for the year ended December 31, 2006 was approximately $0.04
per share. The pro forma pre-tax cost of stock options compensation for the
years ended December 31, 2005 and 2004 was $4.3 million and $5.7 million,
respectively. For stock options outstanding as of December 31, 2006, we have
yet
to record, on a pre-tax basis, an estimated total of $1.1 million of
compensation expense to be recognized over a weighted-average period of 1.4
years.
During
2006, we awarded share-based compensation to our employees and non-employee
directors. A mix of stock options and restricted stock was granted to our
non-employee directors, executive officers and business unit vice presidents
and
only restricted stock was granted to other employees. As compared to past
awards, this award generally contained a greater number of restricted stock
awards and a lower number of stock options. We made this change to match current
market practice. For restricted stock outstanding as of December 31, 2006,
we
have yet to record, on a pre-tax basis, an estimated total of $1.8 million
of
compensation expense to be recognized over a weighted-average period of 1.4
years.
Also
during 2006, we elected to adopt the alternative method for calculating the
tax
effects of stock-based compensation per the provisions of FASB Staff Position
No. FAS 123R-3, Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards.
The
alternative transition (i) provides a simplified method to establish the
beginning balance of the additional paid-in capital pool available to absorb
tax
deficiencies recognized subsequent to the adoption of SFAS No. 123R related
to
the tax effects of stock-based compensation, and (ii) determines the subsequent
impact on the Consolidated Statements of Cash Flows of the tax effects of
stock-based compensation awards that were partially vested upon adoption of
SFAS
No. 123R.
SFAS
No.
123R prohibits recognition of a deferred tax asset for an excess tax benefit
that has not been realized. We recognize a benefit from stock-based compensation
in equity if an incremental tax benefit is realized by following the ordering
provisions of the tax law.
See
Item
8. “Consolidated Financial Statements and Supplementary Data - Note 2 and Note
11” for additional disclosures related to our accounting for stock-based awards.
Segment
Reporting
We
have
two reportable segments: the Drivetrain segment and the Logistics segment.
Our
Drivetrain segment primarily sells remanufactured transmissions to Honda,
Ford,
DaimlerChrysler, Allison and certain foreign OEMs, primarily for use as
replacement parts by their domestic dealers during the warranty and/or
post-warranty periods following the sale of a vehicle. In
addition, the Drivetrain segment sells select remanufactured engines primarily
to certain European OEMs. Our Logistics segment provides value-added warehousing
and distribution, reverse logistics, turnkey order fulfillment, electronic
equipment testing, and refurbishment and repair services to customers in
the
wireless, consumer electronics and automotive industries. The Logistics
segment’s primary customer is AT&T.
We
evaluate the performance of each business based upon operating income (segment
profit). Our reportable segments are each managed and measured separately
primarily due to the differing customers and distribution channels.
Results
of Operations
The
following table sets forth financial statement data expressed in millions
of
dollars and as a percentage of net sales.
|
Year
Ended December 31,
|
||||||||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||||||||
|
Net
sales
|
$
|
498.0
|
100.0
|
%
|
$
|
419.6
|
100.0
|
%
|
$
|
375.6
|
100.0
|
%
|
||||||||||
|
Gross
profit
|
104.7
|
21.0
|
104.1
|
24.8
|
100.1
|
26.7
|
||||||||||||||||
|
SG&A
expense
|
54.5
|
10.9
|
49.0
|
11.7
|
45.0
|
12.0
|
||||||||||||||||
|
Impairment
of goodwill
|
14.6
|
2.9
|
−
|
−
|
−
|
−
|
||||||||||||||||
|
Exit,
disposal, certain severance and other charges
|
1.9
|
0.3
|
0.5
|
0.1
|
3.8
|
1.0
|
||||||||||||||||
|
Operating
income
|
33.4
|
6.7
|
54.5
|
13.0
|
51.2
|
13.6
|
||||||||||||||||
|
Interest
income
|
0.6
|
0.1
|
2.0
|
0.5
|
2.7
|
0.7
|
||||||||||||||||
|
Other
income, net
|
0.3
|
−
|
0.5
|
0.1
|
−
|
−
|
||||||||||||||||
|
Write-off
of debt issuance costs
|
(1.7
|
)
|
(0.3
|
)
|
−
|
−
|
−
|
−
|
||||||||||||||
|
Interest
expense
|
(4.3
|
)
|
(0.9
|
)
|
(7.7
|
)
|
(1.8
|
)
|
(7.3
|
)
|
(1.9
|
)
|
||||||||||
|
Income
from continuing operations
|
17.7
|
3.6
|
33.0
|
7.9
|
30.1
|
8.0
|
||||||||||||||||
Year
Ended December 31, 2006 Compared to the Year Ended December 31,
2005
Income
from continuing operations decreased $15.3 million, or 46.4%, to $17.7 million
in 2006 from $33.0 million in 2005. Income from continuing operations per
diluted share was $0.81 in 2006 as compared to $1.53 in 2005. Our results
for 2006 include (i) goodwill impairment charges of $9.9 million (net of tax),
related to our Drivetrain segment’s United Kingdom-based operation and our
Logistics segment’s automotive materials reclamation business, (ii) a charge of
$1.1 million (net of tax) related to the write-off of deferred debt issuance
costs associated with the early termination of our old credit facility, and
(iii) exit, disposal, certain severance and other charges of $1.2 million (net
of tax), partially offset by income tax benefits of (x) $0.3 million related
to
the revaluation of our deferred income tax attributes and (y) $0.2 million
related to research and development tax credits. Our results for 2005 included
(a) a gain of $0.9 million (net of tax) related to $1.4 million of research
and
development tax credits, net of fees and related expenses of $0.5 million (net
of tax), (b) a gain of $0.4 million (net of tax) from the early redemption
of
the note receivable from the Distribution Group, (c) exit, disposal, certain
severance and other charges of $0.3 million (net of tax) and (d) a gain of
$0.2
million (net of tax) related to an investment tax credit from the state of
Oklahoma. Other factors which caused income from continuing operations to
decrease in 2006 as compared to 2005 included:
|
•
|
scheduled
price reductions to certain customers in our Drivetrain and Logistics
segments pursuant to recent contract
renewals;
|
|
•
|
a
lower volume of Ford remanufactured transmissions we believe to be
largely
the result of (i) comparatively higher sales in 2005 due to inventory
increases in Ford’s distribution channel during the third and fourth
quarters of 2005 (we believe these higher inventory positions returned
to
historical levels during the first half of 2006), and (ii) declining
new
vehicle sales resulting in a reduction in the population of Ford
vehicles
in the zero to eight-year age category, which category we believe
drives
the majority of demand for our Ford
products;
|
|
•
|
a
reduction in volume of DaimlerChrysler remanufactured transmissions
due to
(i) DaimlerChrysler’s decision not to use remanufactured transmissions for
warranty repairs generally for model years 2003 and later,
resulting in one less model year being in our warranty program each
year
and (ii) comparatively
higher sales in 2005 due to inventory increases in DaimlerChrysler’s
distribution channel;
|
|
•
|
an
increase in product development and startup cost in our Drivetrain
segment
associated with the NuVinci™
CVP technology;
|
|
•
|
an
increase in cost in our Logistics segment associated with the vertical
integration of certain test and repair services that were previously
outsourced; and
|
|
•
|
an
increase in cost in our Logistics segment associated with the launch
of a
new test and repair program in a new
market,
|
partially
offset by an increase in volumes in our Logistics segment, primarily related
to
an increase in our base business with AT&T and the launch and roll-out of
new business added during 2005 with AT&T, and to a lesser extent, Nokia, LG,
Magellan, T-Mobile and others, the roll-out of our medium/heavy duty
transmission remanufacturing program with Allison, benefits of our on-going
lean
and continuous improvement program and a reduction in interest
expense.
Net
Sales
Net
sales
increased $78.4 million, or 18.7%, to $498.0 million for 2006 from $419.6
million for 2005. This increase was primarily due to:
|
•
|
an
increase in volumes in our Logistics segment, primarily related to
the
launch and roll-out of new business added during 2005 with AT&T, and
to a lesser extent, Nokia, LG, Magellan, T-Mobile and others, coupled
with
an increase in our base business with AT&T; and
|
|
•
|
an
increase in volume of medium/heavy duty remanufactured transmissions
in
our Drivetrain segment related to the roll-out of the program we
launched
for Allison in the fourth quarter of 2005 (under the terms of our
remanufacturing program with Allison, we are required to purchase
the
transmission core; accordingly, our results for 2006 and 2005 reflect
$23.6 million and $3.2 million, respectively, for core included in
both
net sales and cost of goods sold);
|
partially
offset by:
|
•
|
a
lower volume of Ford remanufactured transmissions we believe to be
largely
the result of (i) comparatively higher sales in 2005 due to inventory
increases in Ford’s distribution channel during the third and fourth
quarters of 2005 (we believe these higher inventory positions returned
to
historical levels during the first half of 2006), and (ii) declining
new
vehicle sales resulting in a reduction in the population of Ford
vehicles
in the zero to eight-year age category, which category we believe
drives
the majority of demand for our Ford
products;
|
|
•
|
a
reduction in volume of DaimlerChrysler remanufactured transmissions
due to
(i) DaimlerChrysler’s decision not to use remanufactured transmissions for
warranty repairs generally for model years 2003 and later,
resulting in one less model year being in our warranty program each
year
and (ii) comparatively
higher sales in 2005 due to inventory increases in DaimlerChrysler’s
distribution channel;
|
|
•
|
a
one-time sale in 2005 of $12.5 million of transmission components
at cost
relating to end-of-life support for an OEM transmission program that
ceased production in late 2000; and
|
|
•
|
scheduled
price reductions to certain customers in our Drivetrain and Logistics
segments pursuant to recent contract
renewals.
|
Of
our
net sales for 2006 and 2005, AT&T accounted for 41.8% and 29.8%, Honda
accounted for 15.6% and 19.3%, Ford accounted for 15.4% and 24.4%, and
DaimlerChrysler accounted for 7.3% and 15.4%, respectively.
Gross
Profit
Gross
profit increased $0.6 million, or 0.6%, to $104.7 million for
2006
from
$104.1 million for
2005.
The
increase was primarily the result of the factors described above under “Net
Sales” and benefits from our on-going lean and continuous improvement program
and other cost reduction initiatives, partially offset by (i) an
increase in cost in our Logistics segment associated with the vertical
integration of certain test and repair services that were previously outsourced,
(ii) an increase in cost in our Logistics segment associated with the launch
of
a new test and repair program in a new market and (iii) start-up costs
associated with the launch of products
utilizing the NuVinci™
CVP
technology.
Primarily as a result of the higher percentage of test and repair services
in
Logistics, reverse operating leverage resulting from lower Drivetrain volume
and
the integration and start-up costs described herein, gross profit as a
percentage of net sales decreased to 21.0% for 2006 from 24.8% for 2005.
SG&A
Expense
SG&A
expense increased $5.5 million, or 11.2%, to $54.5 million for 2006 from $49.0
million for 2005. The net increase is primarily the result of an increase in
costs associated with revenue growth in our Logistics segment, as well as for
new product development in our Drivetrain segment, partially offset by benefits
from our on-going lean and continuous improvement program and other cost
reduction initiatives. As a percentage of net sales, SG&A expense decreased
to 10.9% for 2006 from 11.7% for 2005.
Impairment
of Goodwill
During
2006, our annual evaluation of goodwill as required by SFAS No. 142,
Goodwill
and Other Intangible Assets resulted
in goodwill impairment charges of $11.7 million related to our United
Kingdom-based Drivetrain remanufacturing operation and $2.9 million related
to
our Logistics segment’s automotive materials reclamation operation. Because key
new business opportunities considered in the prior year assessment for both
of
these reporting units did not materialize, and other near-term growth
opportunities were considered limited, we concluded that the fair value of
these
reporting units no longer supported the assigned goodwill.
Exit,
Disposal, Certain Severance and Other Charges
During
2006, we recorded $1.9 million ($1.2 million net of tax) of exit, disposal,
certain severance and other charges consisting of (i) $1.1 million ($0.7 million
net of tax) for severance and related costs associated with cost reduction
activities and the reorganization and upgrade of certain management functions,
(ii) $0.5 million ($0.3 million net of tax) for due diligence and other costs
related to potential acquisitions that we ultimately decided not to pursue,
and
(iii) $0.3 million ($0.2 million net of tax) of costs for asset retirement
obligations we are contractually obligated to perform in order to restore
certain leased facilities to a condition specified in the lease
agreement.
During
2005, we recorded $0.5 million ($0.3 million net of tax) of exit,
disposal, certain severance and other charges
primarily related to the closure of an old facility and the move to a new larger
facility as part of our capacity expansion within the Logistics
segment.
As
an
on-going part of our planning process, we continue to identify and evaluate
areas where cost efficiencies can be achieved through consolidation of redundant
facilities, outsourcing functions or changing processes or systems.
Implementation of any of these could require us to incur additional costs of
a
nature described above, which would be offset over time by the projected cost
savings.
Operating
Income
Operating
income decreased $21.1 million, or 38.7%, to $33.4 million for 2006 from $54.5
million for 2005. This net decrease is primarily the result of the goodwill
impairment charges, and the factors described above under “Net Sales,” “Gross
Profit,” “SG&A Expense” and “Exit,
Disposal, Certain Severance and Other Charges.” As
a
percentage of net sales, operating income decreased to 6.7% from 13.0%.
Interest
Income
Interest
income decreased $1.4
million, or 70.0%, to $0.6 million for
2006
from
$2.0 million for
2005. This
decrease was primarily due to the redemption of the note receivable from the
Distribution Group in the second quarter of 2005, coupled with lower cash
balances invested in cash and equivalents during 2006 as compared to 2005
resulting from the structure of our new credit facility, which allows us to
use
cash to repay outstanding debt without a corresponding reduction in borrowing
capacity.
Other
Income, net
Other
income, net decreased $0.2
million, or 40.0%, to $0.3 million for
2006
from
$0.5 million for
2005.
This
decrease was primarily due to a gain
of $0.6
million
recorded
from the early redemption of the note receivable from the Distribution Group
during 2005.
Write-Off
of Debt Issuance Costs
During
2006, we paid the balance outstanding under our old credit facility and
terminated the related credit and security agreements. As a result, we
recorded a non-cash charge of $1.7 million during 2006 to write off deferred
debt issuance costs associated with the early termination of the
facility.
Interest
Expense
Interest
expense decreased $3.4 million, or 44.2%, to $4.3 million for
2006
from
$7.7 million for
2005.
This
decrease was primarily due to a reduction in total debt outstanding, partially
offset by a general
increase
in interest rates in 2006 as compared to 2005.
Additionally, we experienced lower
interest expense in 2006 as compared to 2005 due to the structure of our new
revolving credit facility, which in addition to a reduced borrowing cost, allows
us to use cash to repay outstanding debt, thereby reducing our total debt
outstanding, without a corresponding reduction in borrowing capacity.
Income
Tax Expense
Income
tax expense as a percentage of income from continuing operations before income
taxes increased to 37.2% for 2006 from 33.1% for 2005. The increase was
primarily due to the impact of the $14.6 million goodwill impairment charge
recorded during 2006, a significant portion of which (relating to the goodwill
previously recorded on the books of our United Kingdom-based subsidiary)
received a tax benefit at a rate of 30%. In addition, during 2005, we recorded
tax benefits of $1.4 million related to previously unclaimed research and
development tax credits and $0.2 million related to an investment tax credit
from the State of Oklahoma. Based on our current estimate of the distribution
of
taxable income by state and currently enacted laws, we expect an effective
income tax rate of approximately 39% for 2007.
Discontinued
Operations
During
2006 and 2005 we recorded after-tax losses from discontinued operations of
$9.7
million and $2.0 million, respectively.
The
loss
from 2006 includes after-tax charges of $9.7 million for the discontinued
Independent Aftermarket businesses. On a pre-tax basis, this loss included
$1.6
million of losses from the operations of these businesses during the year ended
December 31, 2006 along with charges related to the closure and sale of these
businesses of (i) $9.8 million of inventory write-downs, (ii) $1.4 million
for
the impairment of goodwill, (iii) $0.8 million of fixed asset impairment
charges, (iv) $0.7 million of severance costs, (v) $0.4 million related to
the
write-down of accounts receivable and (vi) $0.2 million of other costs primarily
related to a settlement with a customer.
The
loss
from 2006 also includes $0.1 million for certain workers compensation claims
at
our previously discontinued Drivetrain operation located in Gastonia, North
Carolina, offset by a gain of $0.1 million for a change in estimated costs
related to the sale of our former Distribution Group business, which we sold
in
October 2000.
The
loss
from 2005
includes
after-tax charges of (i) $1.1
million related to the discontinued Independent Aftermarket businesses, (ii)
$0.7
million related
to the previously discontinued Drivetrain operation located in Gastonia, North
Carolina, and (iii) $0.2 million for a valuation allowance related to the
expected expiration of a capital loss carryforward from the sale of our former
Distribution Group business, which we sold in October 2000.
See
Item
8. “Consolidated Financial Statements and Supplementary Data -
Note 15”
for a further discussion of these charges.
Reportable
Segments
Drivetrain
Segment
The
following table presents net sales and segment profit expressed in millions
of
dollars and as a percentage of net sales:
|
Year
Ended December 31,
|
|||||||||||
|
2006
|
2005
|
||||||||||
|
Net
sales
|
$
|
234.6
|
100.0
|
%
|
$
|
266.4
|
100.0
|
%
|
|||
|
Segment
profit
|
$
|
9.0
|
3.8
|
%
|
$
|
36.4
|
13.7
|
%
|
|||
Net
Sales.
Net
sales decreased $31.8
million, or 11.9%, to $234.6 million for 2006 from $266.4 million for
2005. The decrease was primarily due to:
|
•
|
a
lower volume of Ford remanufactured transmissions we believe to be
largely
the result of (i) comparatively higher sales in 2005 due to inventory
increases in Ford’s distribution channel during the third and fourth
quarters of 2005 (we believe these higher inventory positions returned
to
historical levels during the first half of 2006), and (ii) declining
new
vehicle sales resulting in a reduction in the population of vehicles
in
the zero to eight-year age category, which category we believe drives
the
majority of demand for our Ford
products;
|
|
•
|
a
reduction in volume of DaimlerChrysler remanufactured transmissions
due to
(i) DaimlerChrysler’s decision not to use remanufactured transmissions for
warranty repairs generally for model years 2003 and later,
resulting in one less model year being in our warranty program each
year
and (ii) comparatively
higher sales in 2005 due to inventory increases in DaimlerChrysler’s
distribution channel;
|
|
•
|
a
one-time sale in 2005 of $12.5 million of transmission components
at cost
relating to end-of-life support for an OEM transmission program
that
ceased production in late 2000;
|
|
•
|
a
reduction in volume of remanufactured engines for certain older
European
engine programs;
|
|
•
|
a
reduction in volume of Honda remanufactured transmissions used
in warranty
applications; and
|
|
•
|
scheduled
price reductions to certain customers pursuant to recent contract
renewals,
|
partially
offset by an
increase in volume of medium/heavy duty remanufactured transmissions related
to
the roll-out of the program we launched for Allison in the fourth quarter of
2005 (under the terms of our remanufacturing program with Allison, we are
required to purchase the transmission core; accordingly, our results for 2006
and 2005 reflect $23.6 million and $3.2 million, respectively, for core included
in both net sales and cost of goods sold).
Of
our
segment net sales for 2006 and 2005, Ford accounted for 32.7% and 38.2%, Honda
accounted for 33.1% and 30.4%, General Motors accounted for 16.1% and 2.6%,
and
DaimlerChrysler accounted for 15.6% and 24.3%, respectively.
Impairment
of Goodwill.
During
2006, we completed our annual evaluation of goodwill as required by SFAS No.
142, Goodwill and Other Intangible Assets. As a result of the
evaluation, we recorded a charge of $11.7 million for the impairment of goodwill
assigned to our United Kingdom-based remanufacturing operation. There were
no
similar costs recorded in 2005.
Exit,
Disposal, Certain Severance and Other Charges.
During
2006, we recorded $1.5 million of these costs for (i) severance and related
costs associated with cost reduction activities and the reorganization of
certain management functions, (ii) costs related to a potential acquisition
that
we ultimately decided not to pursue, and (iii) costs for asset retirement
obligations we are contractually obligated to perform in order to restore
certain leased facilities back to a condition specified in the lease agreement.
There were no similar costs recorded in 2005.
Segment
Profit.
Segment
profit decreased $27.4 million, or 75.3%, to $9.0 million (3.8% of segment
net sales) for 2006 from $36.4 million (13.7% of segment net sales) for
2005. This resulted primarily from the goodwill impairment charge, coupled
with
the factors described above under “Net Sales” and “Exit, Disposal, Certain
Severance and Other Charges” and an
increase in product development and start-up costs associated with NuVinci™
CVP
products,
partially offset by benefits resulting from our lean and continuous improvement
program and other cost reductions and a reduction of $2.4 million in allocated
corporate overhead pursuant to our accounting policy of allocating corporate
overhead based upon segment profitability.
Logistics
Segment
The
following table presents net sales and segment profit expressed in millions
of
dollars and as a percentage of net sales:
|
|
Year
Ended December 31,
|
||||||||||||
|
2006
|
2005
|
||||||||||||
|
Net
sales
|
$
|
263.4
|
100.0
|
%
|
$
|
153.2
|
100.0
|
%
|
|||||
|
Segment
profit
|
$
|
24.4
|
9.3
|
%
|
$
|
18.1
|
11.8
|
%
|
|||||
Net
Sales.
Net
sales increased $110.2 million,
or 71.9%, to $263.4 million for 2006 from $153.2 million for 2005.
This increase was primarily attributable to the launch and roll-out of new
business added during 2005 with AT&T, and to a lesser extent, Nokia, LG,
Magellan, T-Mobile and others, coupled with an increase in our base business
with AT&T, partially offset by scheduled price reductions to certain
customers pursuant to recent contract renewals. Of our segment net sales for
2006 and 2005, AT&T accounted for 79.0% and 81.5%, respectively.
Impairment
of Goodwill. During 2006, we completed our annual evaluation of goodwill as
required by SFAS No. 142, Goodwill and Other Intangible Assets. As a result
of
the evaluation, we recorded a charge of $2.9 million for the impairment of
goodwill assigned to our automotive materials reclamation operation. There
were
no similar costs recorded in 2005.
Exit,
Disposal, Certain Severance and Other Charges.
During
2006, we recorded $0.5 million of these costs for severance and related
costs associated with the reorganization and upgrade of certain management
functions and costs related to a potential acquisition that we ultimately
decided not to pursue. During 2005, we recorded $0.5 million of
these
costs primarily related to our capacity expansion.
Segment
Profit.
Segment
profit increased $6.3 million, or 34.8%, to $24.4 million (9.3% of
segment net sales) for 2006 from $18.1 million (11.8% of segment net sales)
for
2005. The increase was primarily the result of the factors described above
under
“Net Sales” combined with the benefits of our lean and continuous improvement
program and other cost reductions, partially offset by (i) the goodwill
impairment charge, (ii) an
increase in cost associated with the vertical integration of certain test and
repair services that were previously outsourced, (iii) an increase in cost
associated with the launch of a new test and repair program in a new
market,
and (iv)
an increase of $2.1 million in allocated corporate overhead pursuant to our
accounting policy of allocating corporate overhead based upon segment
profitability.
Year
Ended December 31, 2005 Compared to the Year Ended December 31,
2004
Income
from continuing operations increased $2.9 million, or 9.6%, to $33.0 million
in
2005 from $30.1 million in 2004. Income from continuing operations per diluted
share was $1.53 in 2005 as compared to $1.40 in 2004. Our results for 2005
included (i) a gain of $0.9 million (net of tax) related to $1.4 million of
research and development tax credits, net of fees and related expenses of $0.5
million, net of tax, (ii) a gain of $0.4 million (net of tax) from the early
redemption of the note receivable from the Distribution Group, (iii) exit,
disposal, certain severance and other charges of $0.3 million (net of tax)
and
(iv) a gain of $0.2 million (net of tax) related to an investment tax credit
from the state of Oklahoma. For 2004, our results included (i) exit, disposal,
certain severance and other charges of $2.3 million (net of tax) and (ii) an
income
tax benefit of $0.4 million related to the favorable resolution of an IRS audit
of our 1999 tax year.
Other
factors which caused income from continuing operations to increase in 2005
as
compared to 2004 included:
|
•
|
benefits
from our on-going lean and continuous improvement program and other
cost
reduction initiatives;
|
|
•
|
new
business wins in our Logistics segment, including our test and repair
program with AT&T and, to a lesser extent, Nokia, LG and
T-Mobile;
|
|
•
|
an
increase in our base logistics business with AT&T;
and
|
|
•
|
an
increase in volume of Honda remanufactured transmissions as we realized
the full-year benefit of that program, which did not fully ramp up
until
the second quarter of 2004,
|
partially
offset by:
|
•
|
scheduled
price reductions to certain customers in our Drivetrain and Logistics
segments pursuant to contracts entered into primarily in
2003;
|
|
•
|
a
reduction in volume of remanufactured engines for certain older European
engine programs;
|
|
•
|
an
increase in costs related to new business and product development
in our
Drivetrain Remanufacturing segment;
and
|
|
•
|
a
reduction in volume of Ford remanufactured transmissions that is
believed
to result from repair cost-cap adjustments on certain transmission
models.
|
Net
Sales.
Net
sales increased $44.0 million, or 11.7%, to $419.6 million for 2005 from $375.6
million for 2004. This increase was primarily due to:
|
•
|
new
business wins in our Logistics segment, including our test and repair
program and other programs with AT&T and, to a lesser extent, Nokia,
LG and T-Mobile;
|
|
•
|
increases
in our base logistics volume with
AT&T;
|
|
•
|
a
one-time sale in 2005 of $12.5 million of transmission components
at cost
relating to end-of-life support for an OEM transmission program that
ceased production in late 2000 and
from which we do not expect any future sales;
and
|
|
•
|
an
increase in volume of Honda remanufactured transmissions as we realized
the full-year benefit of that program, which did not fully ramp up
until
the second quarter of 2004,
|
partially
offset by:
| • |
scheduled
price reductions to certain customers in our Drivetrain and Logistics
segments pursuant to contracts entered into primarily in
2003;
|
|
•
|
a
reduction in volume of remanufactured engines for certain older European
engine programs;
|
|
•
|
a
reduction in volume of Ford remanufactured transmissions that is
believed
to result from repair cost-cap adjustments on certain transmission
models;
and
|
|
•
|
a
reduction in sales for certain remanufacturing-related services and
certain other low volume remanufacturing
programs.
|
Of
our
net sales for 2005 and 2004, AT&T accounted for 29.8% and 23.5%, Ford
accounted for 24.4% and 31.2%, Honda accounted for 19.3% and 20.4%, and
DaimlerChrysler accounted for 15.4% and 15.5%, respectively.
Gross
Profit.
Gross
profit increased $4.0 million, or 4.0%, to $104.1 million for
2005
from
$100.1 million for
2004.
The
increase was primarily the result of benefits from our lean and continuous
improvement program and other cost reduction initiatives, which were largely
offset by the factors described above under “Net Sales.” Additionally, gross
profit as a percentage of net sales decreased to 24.8% for 2005 from 26.7%
for
2004. This decrease in gross profit as a percentage of net sales was primarily
due to (i) the scheduled price reductions, (ii) the change in mix of new
business in our Logistics segment, and (iii) the unwinding of the end-of-life
support for the out-of-production OEM transmission program, which resulted
in a
one-time sale of $12.5 million of transmissions components at cost in 2005,
which reduced gross profit as a percentage of net sales for 2005 by 0.7%,
partially offset by benefits from our on-going lean and continuous improvement
program and other cost reduction initiatives. In
the
fourth quarter of 2005, we launched a remanufacturing program for
medium/heavy-duty transmissions and expect to realize growth resulting from
the
ramp-up of that program. Unlike our light vehicle remanufacturing programs,
the
terms of this medium/heavy-duty remanufacturing contract require us to take
title to the core. As a result, the core value is reflected in both revenue
and
cost of goods sold and is expected to reduce gross profit margins.
SG&A
Expense. SG&A
expense increased $4.0 million,
or 8.9%, to
$49.0
million for 2005 from $45.0 million for 2004. The net increase is primarily
the
result of an increase in costs associated with revenue growth in our Logistics
Segment as well as for new business and product development in our Drivetrain
segment, partially offset by benefits from our on-going lean and continuous
improvement program and other cost reduction initiatives. As a percentage of
net
sales, SG&A expense decreased to 11.7% for 2005 from 12.0% for 2004. The
one-time sale of transmission components at cost as described above under “Net
Sales” reduced SG&A expense as a percentage of net sales for 2005 by 0.3%.
Exit,
Disposal, Certain Severance and Other Charges.
During
2005, we recorded $0.5 million ($0.3 million net of tax) of exit,
disposal, certain severance and other charges
primarily related to the closure of an old facility and the move to a new larger
facility as part of our capacity expansion within the Logistics
segment.
During
2004, we recorded $3.8 million ($2.3 million net of tax) of these costs
including (i) $3.3
million of certain non-cash stock-based compensation costs related to
modifications
to unexercised stock options previously granted to our former Chief Executive
Officer and former Chief Financial Officer, per the provisions of the Financial
Accounting Standards Board’s Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation (an Interpretation of
APB
Opinion No. 25),
(ii)
$0.6
million of costs to terminate an agreement with an independent contractor,
facility exit and other costs, (iii) $0.5
million of certain non-cash stock-based compensation costs related to the hiring
of our current CEO, (iv) $0.3 million of severance and related costs associated
with the reorganization and upgrade of certain management
functions and other cost reduction initiatives, and
(v)
$0.3 million of relocation costs related to the hiring of our current CFO,
partially offset by a gain of $1.2 million
attributed to the reversal of a previously established provision related to
the
Drivetrain segment for a potential non-income state tax liability upon the
finalization of an audit by the state tax authorities.
Operating
Income.
Operating income increased $3.3 million, or 6.4%, to $54.5 million for 2005
from
$51.2 million for 2004. This increase is primarily the result of the factors
described above under “Net Sales,” “Gross Profit” and “Exit,
Disposal, Certain Severance and Other Charges.”
As a
percentage of net sales, operating income decreased to 13.0% from 13.6%. The
one-time sale of transmission components at cost as described above under “Net
Sales” adversely affected operating income as a percentage of net sales for 2005
by 0.4%.
Interest
Income.
Interest
income decreased $0.7 million, or 25.9%, to $2.0 million for
2005
from
$2.7
million for
2004.
This
decrease was primarily due to the early redemption in 2005 of the note
receivable from the Distribution Group, partially offset by higher cash balances
invested in cash and equivalents during 2005 as compared to 2004 and a general
increase in interest rates.
Other
Income, net. Other
income increased to $0.5 million for
2005
from
$19 thousand for
2004.
This
increase was due to a gain recorded in 2005 from the early redemption of the
note receivable from the Distribution Group.
Interest
Expense.
Interest
expense increased $0.4 million, or 5.5%, to $7.7 million for
2005
from
$7.3 million for
2004.
This
increase was primarily due to a general increase in interest rates in 2005
as
compared to 2004, partially offset by a reduction in total debt
outstanding.
Income
Tax Expense.
Income
tax expense as a percentage of income from continuing operations before income
taxes decreased to 33.1% in 2005 from 35.7% for
2004.
The 2005 rate reflects income tax benefits of (i) $1.4 million related to
previously unclaimed research and development tax credits and (ii) $0.2 million
related to an investment tax credit from the state of Oklahoma. During 2004
we
recorded an income
tax benefit of $0.4 million related to the favorable resolution of an IRS audit
of our 1999 tax year.
Discontinued
Operations. The
loss
from 2005,
includes after-tax charges of (i) $1.1
million related to the discontinued Independent Aftermarket businesses, (ii)
$0.7
million related
to the previously discontinued Drivetrain operation located in Gastonia, North
Carolina and (iii) a charge of $0.2 million for a valuation allowance related
to
the expected expiration of a capital loss carryforward from the sale of our
former Distribution Group business, which we sold in October 2000.
In
2004,
General Motors’ consolidated its vendor base and resourced its remanufactured
transmission program from our facility located in Gastonia, North Carolina,
in
connection with which we closed this facility and discontinued this operation
in
accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets and
recorded an after-tax loss of $20.2 million. On a pre-tax basis, this loss
included (i) $22.1 million for the impairment of goodwill assigned to this
reporting unit, (ii) $1.9 million of costs related to the exit from this
facility and the termination of our contract with GM, (iii) $1.7 million of
inventory write-downs, (iv) $1.8 million for severance and related costs
and (v) $1.5 million of fixed asset impairment charges.
Also
in
2004,
our
discontinued operations include after-tax charges of $3.3 million related to
the
discontinued Independent Aftermarket businesses and $0.8 million related to
our
former Distribution Group business.
Reportable
Segments
Drivetrain
Remanufacturing Segment
The
following table presents net sales and segment profit expressed in millions
of
dollars and as a percentage of net sales:
|
|
Year
Ended December 31,
|
||||||||||||
|
2005
|
2004
|
||||||||||||
|
Net
sales
|
$
|
266.4
|
100.0
|
%
|
$
|
271.2
|
100.0
|
%
|
|||||
|
Segment
profit
|
$
|
36.4
|
13.7
|
%
|
$
|
40.0
|
14.7
|
%
|
|||||
Net
Sales.
Net
sales decreased $4.8 million, or 1.8%, to $266.4 million for 2005 from
$271.2 million for 2004. The decrease was primarily due to:
|
•
|
a
reduction in volume of remanufactured engines for certain older European
engine programs;
|
|
•
|
scheduled
price reductions to certain customers pursuant to contracts entered
into
primarily in 2003;
|
|
•
|
a
reduction in volume of Ford remanufactured transmissions that is
believed
to result from repair cost-cap adjustments on certain transmission
models;
and
|
|
•
|
a
reduction in sales for certain remanufacturing-related services and
certain other low volume remanufacturing
programs,
|
partially
offset by (i) a one-time sale of $12.5 million of transmission components at
cost in 2005, relating to end-of-life support for an OEM transmission program
that ceased production in late 2000 and from which we do not expect any future
sales, (ii)
an
increase in volume of Honda remanufactured transmissions as we realized the
full-year benefit of that program, which did not fully ramp up until the second
quarter of 2004
and
(iii) the launch in the fourth quarter of 2005 of a medium/heavy duty
transmission remanufacturing program for Allison.
Of
our
segment net sales for 2005 and 2004, Ford accounted for 38.2% and 42.9%, Honda
accounted for 30.4% and 28.3% and DaimlerChrysler accounted for 24.3% and 21.5%,
respectively.
Exit,
Disposal, Certain Severance and Other Charges.
During
2004, we recorded a net credit of $0.7 million consisting of income of
$1.2
million
due to
the reversal of a previously established provision for a potential non-income
state tax liability upon the finalization of an audit by the state tax
authorities, partially offset by (i) $0.4 million of costs primarily related
to
the termination of an independent contractor agreement and (ii) $0.1
million of severance and related costs primarily associated with the
reorganization and upgrade of certain management
functions and other cost reduction initiatives. There
were no similar costs recorded in 2005.
Segment
Profit.
Segment
profit decreased $3.6 million, or 9.0%, to $36.4 million (13.7% of segment
net
sales) for 2005 from $40.0 million (14.7% of segment net sales) for 2004.
This decrease resulted primarily from (i) the factors described above under
“Net
Sales”, (ii) the 2004 gain of $0.7 million described above under “Exit,
Disposal, Certain
Severance and Other Charges”, (iii) an increase in costs related to new business
and product development,
partially offset by benefits from our lean and continuous improvement program
and other cost reductions. The “Exit,
Disposal, Certain Severance and Other Charges” positively affected segment
profit as a percentage of net sales for 2004 by 0.2%. The one-time sale of
transmission components at cost as described above under “Net Sales,” adversely
affected segment profit as a percentage of net sales for 2005 by 0.6%.
In
the
fourth quarter of 2005, we launched a remanufacturing program for
medium/heavy-duty transmissions and expect to realize growth resulting from
the
ramp-up of that program. Unlike our light vehicle remanufacturing programs,
the
terms of this medium/heavy-duty remanufacturing contract require us to take
title to the core. As a result, the core value is reflected in both revenue
and
cost of goods sold and is expected to reduce segment margins.
Logistics
Segment
The
following table presents net sales and segment profit expressed in millions
of
dollars and as a percentage of net sales:
|
|
Year
Ended December 31,
|
||||||||||||
|
2005
|
2004
|
||||||||||||
|
Net
sales
|
$
|
153.2
|
100.0
|
%
|
$
|
104.4
|
100.0
|
%
|
|||||
|
Segment
profit
|
$
|
18.1
|
11.8
|
%
|
$
|
15.5
|
14.8
|
%
|
|||||
Net
Sales.
Net
sales increased $48.8 million, or 46.7%, to $153.2 million for 2005
from $104.4 million for 2004. This increase was primarily attributable to
new business programs, including our test and repair, kitting and other programs
with AT&T and, to a lesser extent, Nokia, LG and T-Mobile, combined with an
increase in our base fulfillment business with AT&T, partially offset by
scheduled price reductions to a customer pursuant to a contract entered into
in
2003. Of our segment net sales for 2005 and 2004, AT&T accounted for 81.5%
and 84.5%, respectively.
Exit
and Certain Severance Charges.
During
2005, we recorded $0.5 million of these costs primarily related to the
closure of an old facility and the move to a new larger facility as part of
our
capacity expansion. During 2004, we recorded $0.2 million of these costs
consisting of (i) $0.1
million of facility exit costs and (ii) $0.1 million of severance and related
costs associated with cost
reduction initiatives.
Segment
Profit.
Segment
profit increased $2.6 million, or 16.8%, to $18.1 million (11.8% of
segment net sales) for 2005 from $15.5 million (14.8% of segment net sales)
for 2004. The increase was primarily the result of the factors described above
under “Net Sales,” combined with the benefits of our lean and continuous
improvement program and other cost reductions, partially offset by costs and
other start-up inefficiencies associated with our capacity expansion efforts.
Liquidity
and Capital Resources
Cash
Flow & Capital Expenditures
We
had
total cash and cash equivalents on hand of $7.8 million at December 31, 2006.
Net cash provided by operating activities from continuing operations was $47.5
million in 2006. During the period, we used $7.6 million of cash for our working
capital accounts, which included the use of $5.3 million for accounts receivable
primarily as the result of increased sales to our Logistics segment customers
and $5.0 million for inventories primarily related to increased test and repair
volume in the Logistics segment, partially offset by an increase in cash of
$2.9
million from accounts payable and accrued expenses.
Net
cash
used in investing activities from continuing operations was $16.0 million for
the period, which included $11.9 million of capital spending primarily related
to machinery and equipment for new business initiatives and capacity maintenance
efforts, $1.7 million for assets of a business purchased from one of our
suppliers, $1.5 million of net purchases of available-for-sale securities for
our nonqualified deferred compensation plan and $1.0 million for the purchase
of
intangible assets. Net cash used in financing activities of $76.1 million
included
payments of $90.7 million related to the termination of our old credit facility,
$11.1 million for treasury stock repurchases of 516,950 shares of our common
stock, and $0.8 million of payments for debt issuance costs related to our
new
credit facility (see discussion below), partially offset by $17.8 million of
net
borrowings under our new credit facility and $7.5 million of cash proceeds
and
$1.3 million of tax benefits from the exercise of stock-based awards by our
employees and non-employee directors.
The
$1.0
million payment for intangible assets consists of a license fee that we paid
in
August 2006 to Fallbrook Technologies Inc to license the right
to develop, manufacture and sell Fallbrook's NuVinci™
CVP
technology in specified fields of use. The Fallbrook license agreement also
provides that in the future we may elect
to obtain a license for the automotive field of use by
paying an additional $1.0 million license fee.
For
2007,
we estimate $18-$22 million for capital expenditures, consisting of
approximately $12-$14 million in support of new business and capacity expansion
initiatives in our Logistics and Drivetrain segments and $6-$8 million in
support of maintenance and cost reduction initiatives.
For
2007,
we expect our effective tax rate to be 39.0%, an increase from our 2006
effective tax rate of 37.2%. This increase is primarily the result of the
enactment of tax laws in the state of Texas that are expected to increase our
taxable income in that state. These new tax laws are effective as of January
1,
2007. Additionally, in 2006 and 2005 we utilized $4.9 million and $5.1 million
of net operating loss carryforwards, reducing our net income tax payments to
$0.8 million and $4.8 million, respectively. In 2004, we incurred a tax loss
and
did not utilize any of our operating loss carryforwards. For 2007, we expect
to
utilize approximately $4.7 million of remaining net operating loss carryforwards
and other available tax credits and expect our tax payments to increase to
$11-$13 million.
Financing
On
March
21, 2006, we entered into a new credit agreement and a related security
agreement with certain banks. This new credit agreement provides for a $150.0
million revolving credit facility available through March 2011. This agreement
also provides for the ability to increase the facility size by up to $75.0
million in the aggregate, subject to certain conditions (including the receipt
from one or more lenders of the additional commitments that may be requested)
and achievement of certain financial ratios. Amounts advanced under the credit
facility are guaranteed by all of our domestic subsidiaries and secured by
substantially all of our assets and the assets of our domestic subsidiaries.
At
our
election, amounts advanced under the revolving credit facility will bear
interest at either (i) the Base Rate plus a specified margin or (ii) the
Eurocurrency Rate plus a specified margin. The Base Rate is equal to the higher
of (a) the lender’s prime rate or (b) the federal funds rate plus 0.50%. The
applicable margins for both Base Rate and Eurodollar Rate loans are subject
to
quarterly adjustments based on our leverage ratio as of the end of the four
fiscal quarters then completed. At December 31, 2006, the applicable margins
for
Base Rate and Eurodollar Rate loans were zero and 1.00%, respectively. As
specified in our credit agreement, the following table sets forth the rates
based upon our leverage ratio:
|
Applicable
Rate
|
||||||
|
Consolidated
Leverage Ratio
|
LIBOR
Margin and
Letters
of Credit
|
Commitment
Fee
|
Prime
Rate
Margin
|
|||
|
Less
than 1.00:1
|
1.00%
|
0.20%
|
0.00%
|
|||
|
Greater
or equal to 1.00:1 but less than 1.75:1
|
1.25%
|
0.25%
|
0.25%
|
|||
|
Greater
or equal to 1.75:1 but less than 2.50:1
|
1.50%
|
0.30%
|
0.50%
|
|||
|
Greater
or equal to 2.50:1
|
1.75%
|
0.35%
|
0.75%
|
|||
With
the
proceeds from the new credit facility, on March 21, 2006 we repaid the $86.0
million balance outstanding under our 2002 credit facility and terminated the
related credit and security agreements.
At
December 31, 2006, our borrowing capacity under the new credit facility was
$130.6 million, net of $1.6 million for outstanding letters of credit.
We
were
in compliance with all the new credit facility’s debt covenants as of December
31, 2006.
In
addition, in order to finance its working capital requirements, our U.K.
subsidiary has a revolving
credit agreement with HSBC Bank Plc for £0.5 million, or approximately $1.0
million in U.S. dollars. Amounts advanced are secured by substantially all
the
assets of our U.K. subsidiary. Interest accrues at the HSBC Bank prime lending
rate plus 1.50% and is payable monthly. HSBC Bank may at any time demand
repayment of all sums owing. At December 31, 2006, there were no amounts
outstanding under this line of credit.
We
had
cash and cash equivalents on hand of $7.8 million at December 31,
2006.
We
believe that cash on hand, cash flow from operations and existing borrowing
capacity will be sufficient to fund ongoing operations and budgeted capital
expenditures. In pursuing future acquisitions, we will continue to consider
the
effect any such acquisition costs may have on liquidity. In order to consummate
such acquisitions, we may need to seek funds through additional borrowings
or
equity financing.
Other
On
February 16, 2006, we announced our intention to commence a program for the
repurchase of up to approximately 2% of our outstanding common stock during
the
balance of 2006 to offset the dilutive impact of new shares issued for stock
option exercises and restricted stock grants under our stock incentive plans.
During 2006, we repurchased 501,497 shares of our common stock for approximately
$10.7 million pursuant to this program. In December 2006, the Board of Directors
approved a stock repurchase plan for 2007 with the same terms as the 2006 plan.
On
July
17, 2006, we completed the sale of our Independent Aftermarket engine business
and received proceeds of $2.1 million.
Off-Balance
Sheet Arrangements
We
are
not engaged in any off-balance sheet arrangements that have a material current
effect or are reasonably likely to have a material future effect on our
financial condition or results of operations. However, we are subject to various
other commitments and contingencies as disclosed in Item 8. "Consolidated
Financial Statements and Supplementary Data - Note 16."
Contractual
Obligations
The
following table summarizes our contractual obligations from continuing
operations expressed in millions of dollars as of December 31,
2006:
|
Total
|
Less
than
1
year
|
1
- 3 years
|
3
- 5 years
|
More
than
5
years
|
|||||||||||
|
Debt
Obligations:
|
|||||||||||||||
|
Principal
balance on credit facility
|
$
|
17.8
|
$
|
−
|
$
|
−
|
$
|
17.8
|
$
|
−
|
|||||
|
Letters
of credit
|
1.6
|
−
|
−
|
1.6
|
−
|
||||||||||
|
Interest
on credit facility (1)
|
5.9
|
1.4
|
2.8
|
1.7
|
−
|
||||||||||
|
Total
debt obligations
|
25.3
|
1.4
|
2.8
|
21.1
|
−
|
||||||||||
|
Operating
lease obligations
|
23.6
|
7.8
|
9.3
|
2.3
|
4.2
|
||||||||||
|
Purchase
obligations
|
11.0
|
10.9
|
0.1
|
−
|
−
|
||||||||||
|
Executive
compensation agreements (2)
|
1.0
|
0.7
|
0.3
|
−
|
−
|
||||||||||
|
Nonqualified
deferred compensation
(3)
|
2.0
|
−
|
0.2
|
−
|
1.8
|
||||||||||
|
Deferred
compensation (4)
|
0.6
|
0.1
|
0.3
|
0.2
|
−
|
||||||||||
|
Total
|
$
|
63.5
|
$
|
20.9
|
$
|
13.0
|
$
|
23.6
|
$
|
6.0
|
|||||
|
(1)
|
Amount
represents estimated interest expense obligations on borrowings
outstanding under our credit facility at December 31, 2006. Interest
is
determined assuming the revolving balance outstanding was paid off
on
March 31, 2011, the expiration date of the credit facility. Interest
on
floating rate debt is estimated using interest rates in effect at
December
31, 2006.
|
|
(2)
|
Represents
amounts payable to our former CEO, former CFO and other former executives.
|
|
(3)
|
Represents
amounts payable to certain of our employees and directors under a
nonqualified deferred compensation plan.
|
|
(4)
|
Relates
to the 1997 acquisition of ATS, which requires us to make certain
payments
to key employees of the seller on various dates subsequent to the
closing
date. Through December 31, 2006, we had made $3.0 million of these
payments (including $0.1 million paid in 2006).
|
Impact
of New Accounting Standards
In
June
2006, the Financial Accounting Standards Board issued Interpretation No.
48,
Accounting
for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
109.
FIN
48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes. This
Interpretation prescribes a recognition threshold and measurement attribute
for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. This Interpretation also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This new standard will require several
new
disclosures in annual financial statements, including (i) the income statement
classification of income tax-related interest and penalties, and (ii) a
reconciliation of the total amount of unrecognized tax benefits. FIN
48
is
effective for financial statements issued for fiscal years beginning after
December 15, 2006. We are currently evaluating FIN 48 and we do not anticipate
that the initial adoption of this standard will have a material effect on our
financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements. SFAS
No.
157 provides guidance for using fair value to measure assets and liabilities.
In
addition, this statement defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
Where applicable, this statement simplifies and codifies related guidance within
generally accepted accounting principles. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The adoption of SFAS No. 157
is
not expected to have a material effect on our financial statements.
Inflation;
Lack of Seasonality
Although
we are subject to the effects of changing prices, the impact of inflation has
not been a significant factor in results of operations for the periods
presented. In some circumstances, market conditions or customer expectations
may
prevent us from increasing the prices of our products to offset the inflationary
pressures that may increase our costs in the future. Historically, there has
been little aggregate seasonal fluctuation in our business.
Environmental
Matters
See
Item
1. "Business-Environmental" for a discussion of environmental matters relating
to us.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative
Financial Instruments.
We do
not hold or issue derivative financial instruments for trading purposes. We
have
used derivative financial instruments to manage our exposure to fluctuations
in
interest rates. Neither the aggregate value of these derivative financial
instruments nor the market risk posed by them has been material to our business.
At December 31, 2006, we were not using any derivative financial instruments.
Interest
Rate Exposure.
Based on
our overall interest rate exposure during the year ended December 31, 2006
and assuming similar interest rate volatility in the future, a near-term
(12 months) change in interest rates would not materially affect our
consolidated financial position, results of operation or cash flows. As of
December 31, 2006, interest rate movements of 100 basis points would result
in
an approximate $0.2 million increase or decrease in interest expense over a
one-year period.
Foreign
Exchange Exposure.
Our
revenue, expense and capital purchasing activities are primarily transacted
in
U.S. dollars. We have one foreign operation that exposes us to translation
risk
when the local currency financial statements are translated to U.S. dollars.
Since changes in translation risk are reported as adjustments to stockholders'
equity, a 10% change in the foreign exchange rate would not have a material
effect on our financial position, results of operation or cash flows. For the
year ended December 31, 2006, a 10% change in the foreign exchange rate would
increase or decrease our consolidated net income by approximately
$0.6 million.
ITEM
8. CONSOLIDATED
FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
Contents
Management
of Aftermarket
Technology Corp.
is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Securities Exchange Act of
1934
Rule 13a-15(f).
The
Company's internal control over financial reporting is supported by written
policies and procedures that (i) pertain to the maintenance of records
that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company's assets; (ii) provide reasonable assurance
that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles,
and that
receipts and expenditures of the Company are being made only in accordance
with
authorizations of the Company's management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have
a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting
may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that control may become inadequate
because of changes in conditions, or that the degree of compliance with
the
policies or procedures may deteriorate.
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2006 as required by Securities Exchange Act of
1934
Rule 13a-15(c). In making this assessment, we used the criteria set forth in
the
framework in Internal
Control-Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. Based
on
our evaluation under the framework in Internal
Control-Integrated Framework,
our
management concluded that our internal control over financial reporting was
effective as of December 31, 2006.
Our
management’s assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2006 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their
report which appears on page 43.
Aftermarket
Technology Corp.
Downers
Grove, Illinois
February
26, 2007
Report
of
Independent Registered Public Accounting
Firm
To
the
Stockholders and Board of Directors
Aftermarket
Technology Corp.
We
have
audited the accompanying consolidated balance sheets of Aftermarket Technology
Corp. and subsidiaries (the Company) as of December 31, 2006 and 2005, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended
December 31, 2006. Our audits also included the financial statement
schedule listed in the Index of Item 15 (a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on
our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Aftermarket
Technology Corp. and subsidiaries at December 31, 2006 and 2005, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2006, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As
discussed in Note 2 to the consolidated
financial statements, effective January 1, 2006, the Company changed
its method of accounting for stock-based compensation.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Aftermarket Technology
Corp.’s internal control over financial reporting as of December 31, 2006, based
on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 26, 2007 expressed an unqualified opinion thereon.
/s/
ERNST & YOUNG LLP
Chicago,
Illinois
February
26, 2007
Report
of
Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
To
the
Stockholders and Board of Directors
Aftermarket
Technology Corp.
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that Aftermarket
Technology Corp. maintained
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control-Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Aftermarket Technology Corp.’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the company’s internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Aftermarket Technology Corp. maintained
effective internal control over financial reporting as of December 31, 2006,
is
fairly stated, in all material respects, based on the COSO criteria. Also,
in
our opinion, Aftermarket Technology Corp. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on the COSO criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated
balance sheets of Aftermarket Technology Corp. as
of
December 31, 2006 and 2005, and the related consolidated
statements of income, stockholders’ equity, and cash flows for
each
of the three years in the period ended December 31, 2006, and our report dated
February 26, 2007 expressed an unqualified opinion thereon.
/s/
ERNST
& YOUNG LLP
Chicago,
Illinois
February
26, 2007
43
Table
of Contents
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
(In
thousands, except share and per share data)
|
|||||||
|
December
31,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
Assets
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
7,835
|
$
|
45,472
|
|||
|
Accounts
receivable, net
|
77,720
|
71,881
|
|||||
|
Inventories
|
56,904
|
50,058
|
|||||
|
Prepaid
and other assets
|
3,788
|
4,396
|
|||||
|
Refundable
income taxes
|
1,382
|
689
|
|||||
|
Deferred
income taxes
|
7,771
|
11,446
|
|||||
|
Assets
of discontinued operations
|
766
|
18,562
|
|||||
|
Total
current assets
|
156,166
|
202,504
|
|||||
|
Property,
plant and equipment, net
|
53,008
|
54,153
|
|||||
|
Debt
issuance costs, net
|
664
|
1,981
|
|||||
|
Goodwill
|
132,375
|
146,176
|
|||||
|
Intangible
assets, net
|
1,327
|
292
|
|||||
|
Long-term
investments
|
1,966
|
347
|
|||||
|
Other
assets
|
171
|
80
|
|||||
|
Assets
of discontinued operations
|
-
|
2,247
|
|||||
|
Total
assets
|
$
|
345,677
|
$
|
407,780
|
|||
|
Liabilities
and Stockholders' Equity
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
payable
|
$
|
46,906
|
$
|
41,294
|
|||
|
Accrued
expenses
|
19,102
|
23,130
|
|||||
|
Credit
facility
|
-
|
10,062
|
|||||
|
Amounts
due to sellers of acquired companies
|
-
|
94
|
|||||
|
Deferred
compensation
|
130
|
136
|
|||||
|
Liabilities
of discontinued operations
|
1,015
|
4,757
|
|||||
|
Total
current liabilities
|
67,153
|
79,473
|
|||||
|
Amount
drawn on credit facility, less current portion
|
17,800
|
80,623
|
|||||
|
Deferred
compensation, less current portion
|
2,352
|
847
|
|||||
|
Other
long-term liabilities
|
2,335
|
2,200
|
|||||
|
Deferred
income taxes
|
23,707
|
23,407
|
|||||
|
Stockholders'
Equity:
|
|||||||
|
Preferred
stock, $.01 par value; shares authorized - 2,000,000; none
issued
|
-
|
-
|
|||||
|
Common
stock, $.01 par value; shares authorized - 30,000,000;
|
|||||||
|
Issued
(including shares held in treasury) - 27,109,709 and 26,539,926
|
|||||||
|
as
of December 31, 2006 and 2005, respectively
|
271
|
265
|
|||||
|
Additional
paid-in capital
|
223,288
|
212,678
|
|||||
|
Retained
earnings
|
85,913
|
77,890
|
|||||
|
Accumulated
other comprehensive income
|
3,537
|
1,186
|
|||||
|
Unearned
compensation
|
-
|
(1,160
|
)
|
||||
|
Common
stock held in treasury, at cost - 5,303,083 and 4,774,374
shares
|
|||||||
|
as
of December 31, 2006 and 2005, respectively
|
(80,679
|
)
|
(69,629
|
)
|
|||
|
Total
stockholders' equity
|
232,330
|
221,230
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
345,677
|
$
|
407,780
|
|||
|
See
accompanying notes.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
||||||||||
|
(In
thousands, except per share data)
|
||||||||||
|
For
the years ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Net
sales:
|
||||||||||
|
Products
|
$
|
234,569
|
$
|
266,398
|
$
|
271,215
|
||||
|
Services
|
263,405
|
153,220
|
104,385
|
|||||||
|
Total
net sales
|
497,974
|
419,618
|
375,600
|
|||||||
|
Cost
of sales:
|
||||||||||
|
Products
|
183,214
|
200,488
|
202,633
|
|||||||
|
Services
|
210,055
|
115,019
|
72,820
|
|||||||
|
Total
cost of sales
|
393,269
|
315,507
|
275,453
|
|||||||
|
Gross
profit
|
104,705
|
104,111
|
100,147
|
|||||||
|
Selling,
general and administrative expense
|
54,538
|
48,993
|
45,034
|
|||||||
|
Amortization
of intangible assets
|
269
|
125
|
125
|
|||||||
|
Impairment
of goodwill
|
14,592
|
-
|
-
|
|||||||
|
Exit,
disposal, certain severance and other charges
|
1,938
|
523
|
3,766
|
|||||||
|
Operating
income
|
33,368
|
54,470
|
51,222
|
|||||||
|
Interest
income
|
605
|
2,026
|
2,658
|
|||||||
|
Other
income, net
|
262
|
542
|
19
|
|||||||
|
Equity
in income of investee
|
-
|
-
|
146
|
|||||||
|
Write-off
of debt issuance costs
|
(1,691
|
)
|
-
|
-
|
||||||
|
Interest
expense
|
(4,297
|
)
|
(7,696
|
)
|
(7,271
|
)
|
||||
|
Income
from continuing operations before income taxes
|
28,247
|
49,342
|
46,774
|
|||||||
|
Income
tax expense
|
10,506
|
16,344
|
16,698
|
|||||||
|
Income
from continuing operations
|
17,741
|
32,998
|
30,076
|
|||||||
|
Loss
from discontinued operations,
|
||||||||||
|
net
of income taxes
|
(9,718
|
)
|
(1,990
|
)
|
(24,300
|
)
|
||||
|
Net
income
|
$
|
8,023
|
$
|
31,008
|
$
|
5,776
|
||||
|
Per
common share - basic:
|
||||||||||
|
Income
from continuing operations
|
$
|
0.82
|
$
|
1.55
|
$
|
1.43
|
||||
|
Loss
from discontinued operations
|
$
|
(0.45
|
)
|
$
|
(0.09
|
)
|
$
|
(1.15
|
)
|
|
|
Net
income
|
$
|
0.37
|
$
|
1.45
|
$
|
0.27
|
||||
|
Per
common share - diluted:
|
||||||||||
|
Income
from continuing operations
|
$
|
0.81
|
$
|
1.53
|
$
|
1.40
|
||||
|
Loss
from discontinued operations
|
$
|
(0.44
|
)
|
$
|
(0.09
|
)
|
$
|
(1.13
|
)
|
|
|
Net
income
|
$
|
0.37
|
$
|
1.44
|
$
|
0.27
|
||||
|
See
accompanying notes.
|
||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|||||||||||||||||||||||||
|
(In
thousands, except share data)
|
|||||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
Additional
Paid-In
Capital
|
Retained
Earnings
|
Accumulated
Other Comprehensive
Income
|
Unearned
Compensation
|
Common
Stock in
Treasury
|
Total
|
||||||||||||||||||
|
Balance
at January 1, 2004
|
$
|
-
|
$
|
252
|
$
|
194,204
|
$
|
41,106
|
$
|
1,891
|
$
|
(231
|
)
|
$
|
(7,971
|
)
|
$
|
229,251
|
|||||||
|
Net
income
|
-
|
-
|
-
|
5,776
|
-
|
-
|
-
|
5,776
|
|||||||||||||||||
|
Translation
adjustments
|
-
|
-
|
-
|
-
|
1,651
|
-
|
-
|
1,651
|
|||||||||||||||||
|
Comprehensive
income
|
7,427
|
||||||||||||||||||||||||
|
Issuance
of 141,500 shares of common stock from incentive stock
awards
|
-
|
1
|
2,039
|
-
|
-
|
(2,040
|
)
|
-
|
-
|
||||||||||||||||
|
Issuance
of 708,063 shares of common stock from exercise of stock
options
|
-
|
7
|
5,753
|
-
|
-
|
-
|
-
|
5,760
|
|||||||||||||||||
|
Tax
benefit from stock-based award transactions
|
-
|
-
|
428
|
-
|
-
|
-
|
-
|
428
|
|||||||||||||||||
|
Stock-based
compensation expense from modification of stock options
|
-
|
-
|
3,323
|
-
|
-
|
-
|
-
|
3,323
|
|||||||||||||||||
|
Amortization
of unearned compensation
|
-
|
-
|
-
|
-
|
-
|
1,522
|
-
|
1,522
|
|||||||||||||||||
|
Repurchase
of 3,820,967 shares of common stock for treasury
|
-
|
-
|
-
|
-
|
-
|
-
|
(61,338
|
)
|
(61,338
|
)
|
|||||||||||||||
|
Balance
at December 31, 2004
|
-
|
260
|
205,747
|
46,882
|
3,542
|
(749
|
)
|
(69,309
|
)
|
186,373
|
|||||||||||||||
|
Net
income
|
-
|
-
|
-
|
31,008
|
-
|
-
|
-
|
31,008
|
|||||||||||||||||
|
Translation
adjustments
|
-
|
-
|
-
|
-
|
(2,356
|
)
|
-
|
-
|
(2,356
|
)
|
|||||||||||||||
|
Comprehensive
income
|
28,652
|
||||||||||||||||||||||||
|
Issuance
of 93,125 shares of common stock from incentive stock
awards
|
-
|
1
|
1,475
|
-
|
-
|
(1,476
|
)
|
-
|
-
|
||||||||||||||||
|
Issuance
of 423,382 shares of common stock from exercise of stock
options
|
-
|
4
|
4,266
|
-
|
-
|
-
|
-
|
4,270
|
|||||||||||||||||
|
Tax
benefit from stock-based award transactions
|
-
|
-
|
1,190
|
-
|
-
|
-
|
-
|
1,190
|
|||||||||||||||||
|
Amortization
of unearned compensation
|
-
|
-
|
-
|
-
|
-
|
1,065
|
-
|
1,065
|
|||||||||||||||||
|
Repurchase
of 19,670 shares of common stock
for
treasury
|
-
|
-
|
-
|
-
|
-
|
-
|
(320
|
)
|
(320
|
)
|
|||||||||||||||
|
Balance
at December 31, 2005
|
-
|
265
|
212,678
|
77,890
|
1,186
|
(1,160
|
)
|
(69,629
|
)
|
221,230
|
|||||||||||||||
|
Net
income
|
-
|
-
|
-
|
8,023
|
-
|
-
|
-
|
8,023
|
|||||||||||||||||
|
Translation
adjustments
|
-
|
-
|
-
|
-
|
2,337
|
-
|
-
|
2,337
|
|||||||||||||||||
|
Unrealized
gain on available-for-sale securities,
net
of income taxes
|
-
|
-
|
-
|
-
|
14
|
-
|
-
|
14
|
|||||||||||||||||
|
Comprehensive
income
|
10,374
|
||||||||||||||||||||||||
|
Issuance
of 97,429 shares of common stock from incentive stock
awards
|
-
|
1
|
(1
|
)
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||
|
Issuance
of 472,354 shares of common stock from exercise of stock
options
|
-
|
5
|
7,490
|
-
|
-
|
-
|
-
|
7,495
|
|||||||||||||||||
|
Tax
benefit from stock-based award transactions
|
-
|
-
|
1,525
|
-
|
-
|
-
|
-
|
1,525
|
|||||||||||||||||
|
Noncash
stock-based compensation
|
-
|
-
|
2,756
|
-
|
-
|
-
|
-
|
2,756
|
|||||||||||||||||
|
Repurchase
of 516,950 shares of common stock for treasury
|
-
|
-
|
-
|
-
|
-
|
-
|
(11,050
|
)
|
(11,050
|
)
|
|||||||||||||||
|
Reclassification
of unearned compensation upon adoption of SFAS 123R
|
-
|
-
|
(1,160
|
)
|
-
|
-
|
1,160
|
-
|
-
|
||||||||||||||||
|
Balance
at December 31, 2006
|
$
|
-
|
$
|
271
|
$
|
223,288
|
$
|
85,913
|
$
|
3,537
|
$
|
-
|
$
|
(80,679
|
)
|
$
|
232,330
|
||||||||
|
See
accompanying notes.
|
|||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||
|
(In
thousands)
|
||||||||||
|
For
the years ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Operating
Activities:
|
||||||||||
|
Net
income
|
$
|
8,023
|
$
|
31,008
|
$
|
5,776
|
||||
|
Adjustments
to reconcile net income to net cash provided by
|
||||||||||
|
operating
activities - continuing operations:
|
||||||||||
|
Net
loss from discontinued operations
|
9,718
|
1,990
|
24,300
|
|||||||
|
Impairment
of goodwill
|
14,592
|
-
|
-
|
|||||||
|
Write-off
of debt issuance costs
|
1,691
|
-
|
-
|
|||||||
|
Depreciation
and amortization
|
13,871
|
13,062
|
11,681
|
|||||||
|
Noncash
stock-based compensation
|
2,756
|
1,065
|
4,845
|
|||||||
|
Amortization
of debt issuance costs
|
412
|
1,254
|
1,323
|
|||||||
|
Adjustments
to provision for losses on accounts receivable
|
(23
|
)
|
334
|
204
|
||||||
|
Loss
on sale of equipment
|
160
|
55
|
20
|
|||||||
|
Deferred
income taxes
|
3,916
|
9,311
|
3,891
|
|||||||
|
Changes
in operating assets and liabilities,
|
||||||||||
|
net
of businesses acquired or discontinued/sold:
|
||||||||||
|
Accounts
receivable
|
(5,262
|
)
|
(24,919
|
)
|
(9,123
|
)
|
||||
|
Inventories
|
(5,013
|
)
|
12,635
|
(2,697
|
)
|
|||||
|
Prepaid
and other assets
|
(244
|
)
|
2,715
|
(500
|
)
|
|||||
|
Accounts
payable and accrued expenses
|
2,920
|
5,489
|
(5,693
|
)
|
||||||
|
Net
cash provided by operating activities - continuing
operations
|
47,517
|
53,999
|
34,027
|
|||||||
|
Net
cash provided by operating activities - discontinued
operations
|
4,425
|
257
|
3,208
|
|||||||
|
Investing
Activities:
|
||||||||||
|
Purchases
of property, plant and equipment
|
(11,910
|
)
|
(17,292
|
)
|
(10,820
|
)
|
||||
|
Purchases
of available-for-sale securities
|
(3,981
|
)
|
(561
|
)
|
-
|
|||||
|
Purchase
of assets of a business
|
(1,746
|
)
|
-
|
-
|
||||||
|
Purchase
of intangible assets
|
(950
|
)
|
-
|
-
|
||||||
|
Proceeds
from sales of available-for-sale securities
|
2,511
|
218
|
-
|
|||||||
|
Proceeds
from redemption of note receivable from sale of business
|
-
|
8,365
|
-
|
|||||||
|
Proceeds
from sale of property, plant and equipment
|
57
|
42
|
3,882
|
|||||||
|
Net
cash used in investing activities - continuing operations
|
(16,019
|
)
|
(9,228
|
)
|
(6,938
|
)
|
||||
|
Net
cash provided by (used in) investing activities - discontinued
operations
|
2,161
|
155
|
(1,694
|
)
|
||||||
|
Financing
Activities:
|
||||||||||
|
Payments
on term debt
|
(90,685
|
)
|
(19,188
|
)
|
(10,018
|
)
|
||||
|
Borrowings
on revolving credit facility, net
|
17,800
|
-
|
-
|
|||||||
|
Debt
issuance costs
|
(786
|
)
|
118
|
-
|
||||||
|
Payments
on capital lease obligation
|
-
|
-
|
(351
|
)
|
||||||
|
Proceeds
from exercise of stock options
|
7,495
|
4,270
|
5,760
|
|||||||
|
Tax
benefit from stock-based award transactions
|
1,329
|
-
|
-
|
|||||||
|
Repurchases
of common stock for treasury
|
(11,050
|
)
|
(320
|
)
|
(61,338
|
)
|
||||
|
Payments
on amounts due to sellers of acquired companies
|
(29
|
)
|
(2,450
|
)
|
(4,067
|
)
|
||||
|
Payments
of deferred compensation related to acquired company
|
(136
|
)
|
(142
|
)
|
(148
|
)
|
||||
|
Net
cash used in financing activities
|
(76,062
|
)
|
(17,712
|
)
|
(70,162
|
)
|
||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
341
|
(84
|
)
|
16
|
||||||
|
Increase
(decrease) in cash and cash equivalents
|
(37,637
|
)
|
27,387
|
(41,543
|
)
|
|||||
|
Cash
and cash equivalents at beginning of year
|
45,472
|
18,085
|
59,628
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
7,835
|
$
|
45,472
|
$
|
18,085
|
||||
|
|
||||||||||
|
Cash
paid during the year for:
|
||||||||||
|
Interest
|
$
|
4,682
|
$
|
6,733
|
$
|
5,300
|
||||
|
Income
taxes, net
|
809
|
4,821
|
1,828
|
|||||||
|
See
accompanying notes.
|
||||||||||
AFTERMARKET
TECHNOLOGY CORP.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share data)
Note
1. The
Company
The
Company has two reportable segments: the Drivetrain segment and the Logistics
segment. The Drivetrain segment primarily sells remanufactured transmissions
to
Honda, Ford, DaimlerChrysler, Allison and certain foreign Original Equipment
Manufacturers (“OEMs”), primarily for use as replacement parts by their domestic
dealers during the warranty and/or post-warranty periods following the sale
of a
vehicle. In addition, the Drivetrain segment sells select remanufactured engines
primarily to certain European OEMs. The Company’s Logistics segment provides
value-added warehousing and distribution, reverse logistics, turnkey order
fulfillment, electronic equipment testing, and refurbishment and repair
services. Our principal customers are currently in the wireless, consumer
electronics and automotive industries and include AT&T Mobility (formerly
Cingular Wireless), Nokia, General Motors, LG, Magellan, T-Mobile, Delphi,
Visteon, TiVo and TomTom.
Established in 1994, the Company maintains manufacturing facilities and
logistics operations in the United States and a manufacturing facility in the
United Kingdom.
During
the first quarter of 2006, the Company discontinued its Independent Aftermarket
businesses. These
businesses were reported as “Other” in segment information previously disclosed.
The
results of these businesses are presented as part of discontinued operations
in
the accompanying financial statements. As a result of the discontinuance of
the
Independent Aftermarket businesses, for the years ended December 31, 2006,
2005
and 2004, (i) revenues of $8,030, $22,345 and $19,977 and (ii) after-tax losses
of $9,734, $1,119 and $3,281, respectively, were reported as part of
discontinued operations. (See Note 15 - Discontinued Operations.)
Note
2. Summary
of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Use
of Estimates
The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and
accompanying notes. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with original effective
maturities of three months or less to be cash equivalents.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out method) or market and
consist primarily of (i) new and used transmission parts, cores and finished
goods for the Drivetrain segment and (ii) component electronic equipment repair
parts for the Logistics segment. Consideration is given to deterioration,
obsolescence and other factors in evaluating the estimated market value of
inventory based upon management’s judgment and available information which
includes assumptions
about market conditions, future demand and expected usage rates which may vary
from those estimated.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation
is computed using straight-line methods over the estimated useful lives of
the
assets for financial reporting purposes, as follows: three to ten years for
machinery and equipment, three to seven years for autos and trucks, four to
seven years for furniture and fixtures, one to 13 years for leasehold
improvements and up to 39 years for buildings. Depreciation expense was $13,602,
$12,937 and $11,556 for the years ended December 31, 2006, 2005 and 2004,
respectively.
Internal
Use Computer Software
The
Company accounts for these costs in accordance with the provisions of Statement
of Position (“SOP”) 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use.
Accordingly, the Company expenses costs incurred in the preliminary stage and,
thereafter, capitalizes costs incurred in developing or obtaining internal
use
software and Web site development. Such capitalized costs are included in
property, plant and equipment as part of machinery and equipment and are
amortized over a period of not more than five years.
Foreign
Currency Translation
The
functional currency for the Company’s foreign operations is the applicable local
currency. Accordingly, all balance sheet accounts have been translated using
the
exchange rates in effect at the balance sheet date, and income statement amounts
have been translated using the average exchange rates for the year. The
translation adjustments resulting from the changes in exchange rates have been
reported separately as a component of stockholders' equity. The effects of
transaction gains and losses, which were reported in income, were not material
for the periods presented.
Debt
Issuance Costs
Debt
issuance costs of $786 were incurred during 2006 in connection with the Credit
Facility (see Note 9 - Credit Facility) and are being amortized on a
straight-line basis over the life of the Credit Facility. As of December 31,
2006 and 2005, debt issuance costs
of $664
and $1,981 are reflected net of accumulated amortization of $122 and $4,644,
respectively. During 2006, the Company terminated its old credit facility and
recorded a non-cash charge of $1,691 related to the write off of unamortized
deferred debt issuance costs associated with the facility.
Goodwill
and Other Intangible Assets
In
accordance with the provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 142, Goodwill
and Other Intangible Assets, the
Company tests its goodwill and indefinite lived intangible assets for impairment
annually as of September 30th
of each
year unless events or circumstances would require an immediate review. Goodwill
is tested for impairment at a level of reporting referred to as a reporting
unit, which generally is an operating segment or a component of an operating
segment as defined in paragraph 10 of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information
and
paragraph 30 of SFAS No. 142. In accordance with paragraph 30 of SFAS No. 142,
certain components of an operating segment with similar economic characteristics
are aggregated and deemed a single reporting unit. In estimating the fair value
of its reporting units, the Company utilizes a valuation technique based on
multiples of projected cash flow, giving consideration to unusual items, cost
reduction initiatives, new business initiatives and other factors that generally
would be considered in determining value. Impairments are recorded (i) if the
fair value is less than the carrying value or (ii) when an individual reporting
unit is disposed of. Goodwill amounts are generally allocated to the reporting
units based upon the amounts allocated at the time of their respective
acquisition, adjusted for significant transfers of business between reporting
units.
Because
key new business opportunities considered in the prior year goodwill assessment
in both the Drivetrain segment’s United Kingdom-based operation and the
Logistics segment’s automotive materials reclamation operation did not
materialize, and other near-term growth opportunities were considered limited,
the Company concluded that the fair value of these reporting units no longer
supported the assigned goodwill. Accordingly, based upon on the Company’s annual
goodwill impairment tests made as of September 30, 2006, the Company recorded
goodwill impairment charges of $11,722 and $2,870 in its Drivetrain and
Logistics segments, respectively. The fair value of the reporting units were
estimated by applying a range of multiples to adjusted EBITDA.
Per
the
provisions of SFAS No. 142, the Company’s definite lived intangible assets,
consisting of non-compete agreements and a licensing agreement, are amortized
over their estimated useful lives. (See Note 6 - Goodwill and Intangible
Assets.)
Impairment
of Long-Lived and Intangible Assets
Long-lived
assets and identifiable intangibles are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the related
asset may not be recoverable. Recoverability of assets to be held and used
is
measured by a comparison of the carrying amount of the asset to future
undiscounted cash flows expected to be generated by the asset. If the asset
is
determined to be impaired, the impairment recognized is measured by the amount
by which the carrying value of the asset exceeds its fair value. For a
discussion of impairments to property, plant and equipment recorded by the
Company, see Note 15 − Discontinued Operations and Note 18 − Exit, Disposal,
Certain Severance and Other Charges.
Asset
Retirement Obligations
The
Company follows FASB Interpretation No. 47 (“FIN 47”), Accounting
for Conditional Asset Retirement Obligations - An Interpretation of FASB
Statement No. 143,
which
requires entities to record a liability equal to the fair value of the estimated
future cost to retire an asset, if the liability’s fair value can be reasonably
estimated. The Company’s asset retirement obligation (“ARO”) liabilities are
associated with estimated costs to restore certain leased facilities to a
condition specified in the lease agreement. The Company estimates the fair
value
of these liabilities based on the current condition of the property. In future
periods, we may make adjustments to the ARO liability as a result of the
availability of new information, changes in labor costs and other factors.
The
estimate of the ARO liability is based on a number of assumptions requiring
professional judgment, and we cannot predict what revisions to these assumptions
will be required in future periods. In connection with property leases, we
record the ARO as a liability and also record a related asset in an amount
equal
to the estimated fair value of the liability. The capitalized asset is then
depreciated on a straight-line basis over the estimated useful life of the
asset. Upon retirement of
the
asset, any difference between the actual retirement costs incurred and the
previously recorded estimated ARO liability is recognized as a gain or loss
in
the Consolidated Statements of Income. As of December 31, 2006 and 2005, the
fair value of ARO liabilities was $387 and $50, respectively.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to a significant concentration
of credit risk consist of accounts receivable from its customers including
AT&T, Honda, Ford, General Motors, Nokia and DaimlerChrysler, which are
located throughout the United States and, to a lesser extent, the United
Kingdom. The estimated fair value of these financial instruments approximate
their carrying values as of their respective balance sheet dates. The
Company performs ongoing credit evaluation of its customers and maintains
sufficient allowances for potential credit losses. The Company evaluates the
collectibility of its accounts receivable based on the length of time the
receivable is past due and the anticipated future write-off based on historic
experience. Accounts receivable balances are written off against allowance
for
doubtful accounts after a final determination of uncollectibility has been
made.
The
credit risk associated with the Company's accounts receivable is mitigated
by
its credit evaluation process, although collateral is not required. The Company
grants credit to certain customers who meet pre-established credit requirements.
Accounts
receivable is recorded at the time of revenue recognition and
is
reflected net of an allowance for doubtful accounts of $871 and $963 at
December 31, 2006 and 2005, respectively.
Revenue
Recognition
The
Company recognizes revenues when all of the following conditions are satisfied:
(i) persuasive evidence of an arrangement exists; (ii) the price is fixed or
determinable; (iii) collectibility is reasonably assured; and (iv) delivery
has
occurred or when services have been rendered. In
addition, the Company separately classifies its shipping and handling costs
reimbursed by its customers as revenue and cost of sales in its Consolidated
Statements of Income.
Warranty
Cost Recognition
The
Company accrues for estimated warranty costs as revenue is recognized.
Costs
Associated with Exit or Disposal Activities
In
accordance with the provisions of SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities,
the
Company recognizes a liability for costs associated with exit or disposal
activities in the period in which the liability is incurred. The Company
classifies the costs associated with exit or disposal activities as a part
of
Exit, Disposal, Certain Severance and Other Charges on its Consolidated
Statements of Income. (See Note 18 -
Exit,
Disposal, Certain Severance and Other Charges.)
New
Product Research and Development Expenses
The
cost
related to research, design and development of new products charged to expense
was $5,566, $1,238 and $- for the years ended December 31, 2006, 2005
and 2004, respectively.
Stock-
Based Compensation
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of
SFAS No. 123R, Share-Based
Payment (“SFAS
No. 123R”), using the modified prospective transition method. Under the modified
prospective method, (i) compensation expense for share-based awards granted
prior to January 1, 2006 are recognized over the remaining service period using
the compensation cost calculated for pro forma disclosure purposes under SFAS
No. 123,
Accounting for Stock-Based Compensation,
and (ii)
compensation expense for all share-based awards granted subsequent to December
31, 2005 are based on the grant date fair value estimated in accordance with
the
provisions of SFAS No. 123R. Results for periods prior to January 1, 2006 have
not been restated. Prior to January 1, 2006, the Company applied the intrinsic
value method of accounting for the stock options granted to its employees and
directors under the provisions of Accounting Principles Board (“APB”) Opinion
No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations, as permitted by SFAS No. 123. Accordingly, employee
and
director compensation expense was recognized only for those options whose
exercise price was less than the market value of the Company’s common stock at
the measurement date.
During
November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position No. FAS 123R-3, Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards
(“FAS
123R-3”). During the fourth quarter of 2006, the Company elected to adopt the
alternative method provided in FAS 123R-3 for calculating the tax effects of
stock-based compensation pursuant to SFAS No. 123R. The alternative transition
(i) provides a simplified method to establish the beginning balance of the
additional paid-in capital pool (“APIC Pool”) available to absorb tax
deficiencies recognized subsequent to the adoption of SFAS No. 123R related
to
the tax effects of stock-based compensation, and (ii) determines the subsequent
impact on the Consolidated Statements of Cash Flows of the tax effects of
stock-based compensation awards that were partially vested upon adoption of
SFAS
No. 123R.
SFAS
No.
123R prohibits recognition of a deferred tax asset for an excess tax benefit
that has not been realized. The Company recognizes a benefit from stock-based
compensation in equity if an incremental tax benefit is realized by following
the ordering provisions of the tax law.
As
a
result of adopting SFAS No. 123R on January 1, 2006, the Company’s income from
continuing operations for the three and twelve months ended December 31, 2006
was lowered by $229 (net of income taxes of $131) and $787 (net of income taxes
of $460), respectively. The Company classified the pre-tax stock options
compensation cost of $1,247 for 2006, as part of selling, general and
administrative expense in its Consolidated Statements of Income. The impact
on
both basic and diluted earnings per share for the year ended December 31, 2006
was $0.04 per share. In addition, prior to the adoption of SFAS No. 123R, the
Company presented the tax benefit of stock option exercises as operating cash
flows in the Consolidated Statements of Cash Flows. Upon the adoption of SFAS
No. 123R, tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options are classified as financing
cash
inflows.
The
fair
value of stock options granted was estimated by using the Black-Scholes option
pricing model assuming no expected dividends and the following weighted-average
assumptions during the time periods indicated:
|
For
the years ended December 31,
|
|||||||||
|
2006
|
2005
|
2004
|
|||||||
|
Expected
volatility
|
38.11
|
%
|
39.39
|
%
|
65.71
|
%
|
|||
|
Risk-free
interest rates
|
5.01
|
%
|
3.69
|
%
|
3.05
|
%
|
|||
|
Expected
term
|
3.7
years
|
2.5
years
|
3.7
years
|
||||||
Expected
volatility:
For all
periods presented, the expected volatility assumption is based on the historical
volatility of the Company’s stock over a term equal to the expected term of the
option granted.
Risk-free
interest rates:
For all
periods presented, the risk-free interest rate is based on the implied yield
on
a U.S Treasury constant maturity with a remaining term equal to the expected
term of the option granted.
Expected
term: The
Company’s expected term represents the period that the Company’s stock option
awards are expected to be outstanding, and in 2006 the Company performed a
review of past stock option exercise and forfeiture activity and identified
two
groups of optionees for purposes of applying the Black-Scholes option-pricing
model. The expected term of stock option awards granted is derived from
historical exercise and forfeiture experience for each of the two groups of
optionees and represents the period of time that stock option awards are
expected to be outstanding for each optionee group. The expected term assumption
incorporates the contractual term of an option grant as well as the vesting
period of an award.
Forfeitures
rate: Compensation
expense recognized in the consolidated statements of income for the year ended
December 31, 2006 is based on awards ultimately expected to vest and it reflects
estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at
the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Prior to adoption of SFAS No. 123R,
the
Company made estimates of forfeitures at the time of grant and adjusted the
estimates as stock options were actually forfeited.
For
stock-based awards granted by the Company with graded vesting provisions, the
Company applies an accelerated attribution method and separately amortizes
each
vesting tranche over its particular vesting period.
The
Company also awards shares of its common stock to certain directors and
employees in the form of unvested stock (“Restricted Stock”). These awards are
measured at the market value of
the
Company’s common stock on
the
date of issuance.
Pro
Forma Information under SFAS No. 123
Had
compensation cost for the Company’s stock-based award plans been determined in
accordance with SFAS No. 123, and
recognized as compensation expense on a ratable basis over the applicable
vesting period, the Company’s reported income from continuing operations and
earnings per share would have been adjusted to the pro forma amounts indicated
below:
|
For
the years ended December 31,
|
||||||||
|
2005
|
2004
|
|||||||
|
Income
from continuing operations as reported
|
$
|
32,998
|
$
|
30,076
|
||||
|
Stock-based
employee compensation costs included in the determination of income
from
continuing operations as
reported,
net of income taxes
|
670
|
2,981
|
||||||
|
Stock-based
employee compensation costs that would have been included in the
determination of income from
continuing
operations if the fair value based method had been applied to all
awards,
net of income taxes
|
(3,392
|
)
|
(4,459
|
)
|
||||
|
Pro
forma income from continuing operations as if the fair value based
method
had been applied to all awards
|
$
|
30,276
|
$
|
28,598
|
||||
|
Basic
earnings per common share:
|
||||||||
|
Income
from continuing operations as reported
|
$
|
1.55
|
$
|
1.43
|
||||
|
Pro
forma as if the fair value based method had been applied to all
awards
|
$
|
1.42
|
$
|
1.36
|
||||
|
Diluted
earnings per common share:
|
||||||||
|
Income
from continuing operations as reported
|
$
|
1.53
|
$
|
1.40
|
||||
|
Pro
forma as if the fair value based method had been applied to all awards
|
$
|
1.40
|
$
|
1.34
|
||||
During
June 2005, the Company granted 406,125 stock options to certain directors and
employees at an exercise price equal to the market price of the Company’s common
stock on the grant date. These options became fully exercisable after a six
month vesting period. For the year ended December 31, 2005, the Company
recognized pro forma compensation expense related to this grant of $1,128,
net
of tax. Also during June 2005, the Company accelerated the vesting of 74,672
stock options whose exercise prices were above the Company’s closing stock price
on the date the vesting of the options was accelerated. As a result, included
in
pro forma compensation expense for the twelve months ended December 31, 2005
is
a charge of $376, net of tax, resulting from the accelerated vesting of such
options. The accelerated vesting of these stock options was intended to
eliminate a possible compensation expense associated with these options in
future periods due to the adoption of SFAS No. 123R.
During
2004, in accordance with APB No. 25 and related interpretations, the Company
recorded compensation expense of $3,323 ($2,044 net of income taxes) from the
effective modification of stock options held by the Company’s former Chief
Executive Officer and former Chief Financial Officer.
New
Accounting Standards
In
June
2006, the FASB issued Interpretation No. 48 (“FIN 48”),
Accounting
for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
109.
FIN
48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, Accounting
for Income Taxes. This
Interpretation prescribes a recognition threshold and measurement attribute
for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. This Interpretation also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This new standard will require several
new
disclosures in annual financial statements, including (i) the income statement
classification of income tax-related interest and penalties, and (ii) a
reconciliation of the total amount of unrecognized tax benefits. FIN
48
is
effective for financial statements issued for fiscal years beginning after
December 15, 2006. The Company is currently evaluating FIN 48 and does not
anticipate that the initial adoption of this standard will have a material
effect on its financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements. SFAS
No.
157 provides guidance for using fair value to measure assets and liabilities.
In
addition, this statement defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
Where applicable, this statement simplifies and codifies related guidance within
generally accepted accounting principles. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company’s adoption of SFAS
No. 157 is not expected to have a material effect on its financial
statements.
Reclassifications
Certain
prior-year amounts have been reclassified to conform to the 2006
presentation.
Note
3. Related-Party
Transactions
During
March
2005, partnerships controlled by Aurora Capital Group (“Aurora Capital”), which
partnerships were among the Company’s largest stockholders, sold all of their
shares of the Company’s common stock as part of a public offering pursuant to a
shelf registration statement previously filed by the Company. The Company
received no proceeds from the sale of the shares. As a result of the sale,
the
management services agreement between the Company and Aurora Capital terminated
and as such, the Company was no longer obligated to pay management fees to
Aurora Capital. During 2005 and 2004 the Company paid management fees to Aurora
Capital of $32 and $348, respectively. The Company also reimbursed Aurora
Capital for out-of-pocket expenses incurred in connection with providing
management services.
Note
4. Inventories
Inventories
of continuing operations consist of the following:
|
December 31,
|
||||||
|
2006
|
2005
|
|||||
|
Raw
materials, including core inventories
|
$
|
49,984
|
$
|
42,743
|
||
|
Work-in-process
|
1,717
|
1,538
|
||||
|
Finished
goods
|
5,203
|
5,777
|
||||
|
$
|
56,904
|
$
|
50,058
|
|||
Note
5. Property,
Plant and Equipment
Property,
plant and equipment of
continuing operations are
summarized as follows:
|
December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Land
|
$
|
2,520
|
$
|
2,433
|
|||
|
Buildings
|
12,888
|
12,684
|
|||||
|
Machinery
and equipment
|
100,438
|
89,672
|
|||||
|
Autos
and trucks
|
2,063
|
2,103
|
|||||
|
Furniture
and fixtures
|
2,664
|
2,549
|
|||||
|
Leasehold
improvements
|
15,076
|
14,192
|
|||||
|
Construction
in process
|
844
|
1,064
|
|||||
|
136,493
|
124,697
|
||||||
|
Less:
Accumulated depreciation and amortization
|
(83,485
|
)
|
(70,544
|
)
|
|||
|
$
|
53,008
|
$
|
54,153
|
||||
Goodwill
The
change in the carrying amount of goodwill of continuing operations by reportable
segment and a reconciliation to the consolidated financial statements is
summarized as follows:
|
|
Drivetrain
|
Logistics
|
Other
|
Consolidated
|
||||||||||
|
Balance
at December 31, 2004
|
$
|
128,096
|
$
|
18,973
|
$
|
135
|
$
|
147,204
|
||||||
|
Effect
of exchange rate changes from the translation of U.K.
subsidiary
|
(1,028
|
)
|
−
|
−
|
(1,028
|
)
|
||||||||
|
Balance
at December 31, 2005
|
127,068
|
18,973
|
135
|
|
146,176
|
|||||||||
|
Impairment
|
(11,722
|
)
|
(2,870
|
)
|
−
|
(14,592
|
)
|
|||||||
|
Effect
of exchange rate changes from the translation of U.K.
subsidiary
|
791
|
−
|
−
|
791
|
||||||||||
|
Balance
at December 31, 2006
|
$
|
116,137
|
$
|
16,103
|
$
|
135
|
$
|
132,375
|
||||||
Intangible
Assets
The
Company’s intangible assets of continuing operations, consisting of non-compete
agreements and a licensing agreement, are being amortized over their estimated
useful lives and are summarized as follows:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Intangible
assets
|
$
|
2,575
|
$
|
1,261
|
|||
|
Less:
Accumulated amortization
|
(1,248
|
)
|
(969
|
)
|
|||
|
$
|
1,327
|
$
|
292
|
||||
During
June 2006, the Company purchased assets valued at $1,746 from one of its
suppliers, acquiring a business which the Company had previously outsourced
to
this supplier. As part of the asset purchase agreement, the Company received
from the supplier a three year non-compete agreement valued at $348.
In
August
2006, the Company paid a $950 license fee to Fallbrook Technologies Inc to
license the right to develop, manufacture and sell Fallbrook’s NuVinci™
continuously variable planetary (“CVP”) technology in specified fields of use.
The provisions of the license agreement provide for an initial term expiring
in
2011 with rights to renew the license with respect to certain products at the
discretion of the Company for three additional renewal terms of five years
each,
by paying additional license fees. The Company is amortizing the license fee
over the initial five year term.
Estimated
amortization expense for the five succeeding fiscal years is as
follows:
|
Estimated
Amortization Expense
|
||
|
2007
|
$
|
432
|
|
2008
|
328
|
|
|
2009
|
245
|
|
|
2010
|
191
|
|
|
2011
|
112
|
|
Note
7. Accrued
Expenses
Accrued
expenses of continuing operations are summarized as follows:
|
December 31,
|
|||||
|
2006
|
2005
|
||||
|
Payroll,
employee benefits and related costs
|
$
|
11,648
|
$
|
13,913
|
|
|
Customer
related allowances, discounts and other credits
|
714
|
863
|
|||
|
Warranty
|
1,985
|
2,499
|
|||
|
Exit,
disposal, certain severance and other charges
|
423
|
343
|
|||
|
Interest
payable
|
37
|
840
|
|||
|
Other
|
4,295
|
4,672
|
|||
|
$
|
19,102
|
$
|
23,130
|
||
Note
8. Warranty
Liability
The
Company offers various product warranties for transmissions and engines sold
to
its customers in the Drivetrain segment. The specific terms and conditions
of
the warranties vary depending upon the customer and the product sold. Factors
that affect the Company’s warranty liability include number of products sold,
historical and anticipated rates of warranty claims and cost per claim. The
Company accrues for estimated warranty costs as sales are made and periodically
assesses the adequacy of its recorded warranty liability, included in accrued
expenses, and adjusts the amount as necessary.
Changes
to the Company’s warranty liability of continuing operations during the years
ended December 31, 2004, 2005 and 2006 are summarized as follows:
|
Balance
at December 31, 2003
|
$
|
3,195
|
|
|
Warranties
issued
|
3,449
|
||
|
Claims
paid / settlements
|
(3,742
|
)
|
|
|
Changes
in liability for pre-existing warranties
|
(136
|
)
|
|
|
Balance
at December 31, 2004
|
2,766
|
||
|
Warranties
issued
|
1,334
|
||
|
Claims
paid / settlements
|
(1,471
|
)
|
|
|
Changes
in liability for pre-existing warranties
|
(130
|
)
|
|
|
Balance
at December 31, 2005
|
2,499
|
||
|
Warranties
issued
|
1,292
|
||
|
Claims
paid / settlements
|
(1,297
|
)
|
|
|
Changes
in liability for pre-existing warranties
|
(509
|
)
|
|
|
Balance
at December 31, 2006
|
$
|
1,985
|
Note
9. Credit
Facility
On
March
21, 2006, the Company entered into a new credit agreement and related security
agreement with certain banks (the “Credit Facility”). The Credit Facility
provides the Company with a $150,000 five-year senior secured revolving credit
facility. The Credit Facility can be increased by up to $75,000 under certain
circumstances and subject to certain conditions (including the receipt from
one
or more lenders of the additional commitment).
Amounts
outstanding under the Credit Facility generally bear interest at LIBOR plus
a
specified margin or the prime rate plus a specified margin, depending on the
type of borrowing being made. The applicable margin is based on the Company’s
ratio of debt to EBITDA from time to time. Currently, the Company’s LIBOR
margin is 1.0% and its prime rate margin is zero. Additionally, the Company
is
required to pay quarterly in arrears a commitment fee based on the average
daily
unused portion of the Credit Facility during such quarter, currently at a rate
0.20% per annum. The Company must also pay fees on outstanding letters of credit
at a rate per annum equal to the applicable LIBOR margin then in
effect.
Amounts
advanced under the Credit Facility are guaranteed by all of the Company’s
domestic subsidiaries and secured by substantially all of the Company’s assets
and its domestic subsidiaries' assets. The Credit Facility contains several
covenants, including ones that require the Company to maintain specified levels
of net worth, leverage and interest coverage and others that may limit its
ability to create liens, make investments, incur indebtedness, make fundamental
changes, make asset dispositions, make restricted payments (including dividends)
and engage in transactions with the Company’s affiliates and affiliates of its
subsidiaries. The Company was in compliance with all debt covenants at
December
31,
2006.
Amounts
outstanding under the Credit Facility are generally due and payable on the
March 31, 2011 expiration date of the credit agreement. The Company can
elect to prepay some or all of the outstanding balance from time to time without
penalty or capacity reduction.
As
of
December
31,
2006,
$17,800
was outstanding under the Credit Facility and the Company had $1,615 of letters
of credit issued against the Credit Facility, resulting in a borrowing capacity
of $130,585.
On
March
21, 2006, the Company used $57,000 of borrowings under the Credit Facility
plus
available cash on hand to repay the $85,985 balance under its 2002 credit
facility and terminated the related credit and security agreements.
The
following table summarizes the balances outstanding under its credit
facilities:
|
December
31,
|
||||||
|
2006
|
2005
|
|||||
|
A-Loan
|
$
|
−
|
$
|
10,273
|
||
|
B-Loans
|
−
|
80,412
|
||||
|
Revolver
|
17,800
|
−
|
||||
|
17,800
|
90,685
|
|||||
|
Less
current portion of credit facility
|
−
|
(10,062
|
)
|
|||
|
Total
long-term portion of credit facility
|
$
|
17,800
|
$
|
80,623
|
||
As
of
December 31, 2006 and 2005, the carrying amount of the Company’s current and
long-term debt, approximates its fair value.
Note
10. Income
Taxes
Income
tax expense (benefit) from continuing operations consists of the
following:
|
For
the years ended December
31,
|
|||||||||||
|
2006
|
2005
|
2004
|
|||||||||
|
Current:
|
|||||||||||
|
Federal
|
$
|
8,012
|
$
|
7,178
|
$
|
5,541
|
|||||
|
State
|
679
|
435
|
(57
|
)
|
|||||||
|
Foreign
|
241
|
206
|
519
|
||||||||
|
Total
current
|
8,932
|
7,819
|
6,003
|
||||||||
|
Deferred:
|
|||||||||||
|
Federal
|
4,870
|
8,537
|
9,005
|
||||||||
|
State
|
(409
|
)
|
142
|
1,529
|
|||||||
|
Foreign
|
(2,887
|
)
|
(154
|
)
|
161
|
||||||
|
Total
deferred
|
1,574
|
8,525
|
10,695
|
||||||||
|
$
|
10,506
|
$
|
16,344
|
$
|
16,698
|
||||||
Income
from continuing operations before income taxes is summarized as
follows:
|
For
the years ended December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Domestic
|
$
|
37,399
|
$
|
49,338
|
$
|
44,655
|
||||
|
Foreign
|
(9,152
|
)
|
4
|
2,119
|
||||||
|
Total
|
$
|
28,247
|
$
|
49,342
|
$
|
46,774
|
||||
The
reconciliation of income tax expense computed at the U.S. federal statutory
tax
rates to income tax expense from continuing operations is as
follows:
|
For
the years ended December 31,
|
|||||||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||||||
|
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||
|
Tax
at U.S. statutory rates
|
$
|
9,886
|
35.0
|
%
|
$
|
17,270
|
35.0
|
%
|
$
|
16,371
|
35.0
|
%
|
|||||||||||
|
State
income taxes, net of federal tax benefit
|
442
|
1.6
|
578
|
1.2
|
1,079
|
2.3
|
|||||||||||||||||
|
Foreign
income taxes
|
458
|
1.6
|
−
|
−
|
(106
|
)
|
(0.2
|
)
|
|||||||||||||||
|
Increase
(decrease) in valuation allowance
|
54
|
0.1
|
-
|
−
|
(8
|
)
|
−
|
||||||||||||||||
|
Nondeductible
expenses
|
108
|
0.4
|
91
|
0.2
|
96
|
0.2
|
|||||||||||||||||
|
Federal
and state credits
|
(183
|
)
|
(0.6
|
)
|
(1,558
|
)
|
(3.2
|
)
|
−
|
−
|
|||||||||||||
|
Federal
and state impact of IRS audit resolution
|
−
|
−
|
−
|
−
|
(441
|
)
|
(1.0
|
)
|
|||||||||||||||
|
Other
|
(259
|
)
|
(0.9
|
)
|
(37
|
)
|
(0.1
|
)
|
(293
|
)
|
(0.6
|
)
|
|||||||||||
|
$
|
10,506
|
37.2
|
%
|
$
|
16,344
|
33.1
|
%
|
$
|
16,698
|
35.7
|
%
|
||||||||||||
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. The Company evaluates its deferred
tax
assets and liabilities at each reporting period in order to properly reflect
their tax effects at the currently enacted
tax rates. Based
on
the current expectations for the mix of income by state, the Company recorded
an
income tax benefit of $274 in 2006. Significant
components of the Company's deferred tax assets and liabilities are as follows:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Inventory
obsolescence reserve
|
$
|
1,677
|
$
|
2,358
|
|||
|
Product
warranty accruals
|
660
|
1,114
|
|||||
|
Exit,
disposal, certain severance and other charges accruals
|
299
|
187
|
|||||
|
Other
nondeductible accruals
|
3,541
|
2,155
|
|||||
|
Credit
carryforwards
|
3,547
|
2,431
|
|||||
|
Net
operating loss carryforwards
|
13,754
|
18,871
|
|||||
|
Goodwill
impairment
|
4,868
|
−
|
|||||
|
Total
deferred tax assets
|
28,346
|
27,116
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Amortization
of intangible assets
|
28,703
|
23,926
|
|||||
|
Property,
plant and equipment
|
3,000
|
3,103
|
|||||
|
Other
deferred items
|
336
|
289
|
|||||
|
Total
deferred tax liabilities
|
32,039
|
27,318
|
|||||
|
Valuation
allowance
|
(12,243
|
)
|
(11,759
|
)
|
|||
|
Net
deferred tax (liability) asset
|
$
|
(15,936
|
)
|
$
|
(11,961
|
)
|
|
As
of
December 31, 2006, the Company had federal operating loss carryforwards of
approximately $4,789 ($1,219 expiring in 2020 with the remainder expiring in
2024) and state loss carryforwards of approximately $3,874 (expiring in varying
amounts from 2009 to 2025) attributable to states in which the Company’s primary
operations are located. These loss carryforwards are available as an offset
to
the future taxable income of the Company and its subsidiaries. In addition,
the
Company has state loss carryforwards attributable to states in which the Company
no longer conducts business that are subject to a full valuation allowance.
During 2006 and 2005, the Company utilized income tax benefits associated with
continuing operations of $4,854 and $4,738 from federal operating loss
carryforwards, and $84 and $328 from state operating loss carryforwards,
respectively. In 2004, the Company incurred a tax loss and did not utilize
any
operating loss carryforwards.
The
Company also has Alternative Minimum Tax (“AMT”) credit carryforwards of
approximately $815 available to offset regular income tax payable in future
years. During 2006, the Company completed a study of research and development
credits and recorded a tax benefit of $183 available to offset federal tax
payable in future years. The Company, through its subsidiary in the U.K., has
surplus Advance Corporate Tax (“ACT”) of approximately $437 available as a
direct offset to future U.K. tax liability. The Company’s AMT credit and surplus
ACT can be carried forward indefinitely. The Company did not utilize any tax
benefits associated with its ACT carryforward in 2006, 2005 or
2004.
A
valuation allowance has been established for certain federal tax benefits due
to
limitations in the carryforward period. Also, a valuation allowance has been
established for the tax benefits associated with certain state loss
carryforwards as realization is not deemed likely due to limitations imposed
by
certain states on the Company’s ability to utilize these benefits. A valuation
allowance has also been established for certain foreign tax benefits due to
similar limitations imposed by the foreign tax jurisdiction. The Company
believes that, consistent with accounting principles generally accepted in
the
United States, it is more likely than not that the tax benefits associated
with
the balance of loss carryforwards and other deferred tax assets will be realized
through future taxable earnings or alternative tax strategies.
During
2006, the Company’s income tax valuation allowance increased by $484 to $12,243
from $11,759 due to (i) an additional valuation allowance of $431 placed on
state net operating loss carryforwards due to a change in business structure
that left losses in states in which the Company no longer conducts business,
and
(ii) an increase of $53 to reflect changes to the valuation of foreign
carryforwards due to exchange rate fluctuation.
As
of
December 31, 2006, there were approximately $5,203 of accumulated unremitted
earnings from the Company’s U.K. subsidiary with respect to which deferred tax
has not been provided because the undistributed earnings of the U.K. subsidiary
are indefinitely reinvested.
Note 11. Stock-Based Awards
The
Company provides stock options and other incentive stock awards (“Stock Awards”)
to employees, non-employee directors and independent contractors under its
2006
Stock Incentive Plan (the “2006 Plan”), its 2004 Stock Incentive Plan (the “2004
Plan”), its 2002 Stock Incentive Plan (the “2002 Plan”), its 2000 Stock
Incentive Plan (the “2000 Plan”), its 1998 Stock Incentive Plan (the “1998
Plan”) and its 1996 Stock Incentive Plan, which expired on July 29, 2004, (the
“1996 Plan”) (collectively the “Plans”), all of which have been approved by the
Company’s shareholders. The 1996, 1998, 2000 and 2002 plans provide for granting
of non-qualified and incentive stock option awards while the 2004 and 2006
plans
provide for the granting of non-qualified stock option awards but not incentive
options. Stock options under the Plans are generally granted with an exercise
price equal to the market price of the Company’s common stock on the date of
grant with vesting periods that have ranged from six months to five years,
as
determined by the Board of Directors or the Compensation and Nominating
Committee of the Board of Directors. Options under the Plans expire 10 years
from the date of grant. Upon exercise of stock options or granting of Restricted
Stock, the Company issues new shares of its common stock. The 2006, 2004, 2002,
2000 and 1998 plans authorize the issuance of 1,100,000, 1,000,000, 1,000,000,
750,000 and 1,200,000 shares of the Company’s common stock, respectively. Shares
available for grant under the Plans in the aggregate were 1,195,679, 346,559
and
746,248 as of December 31, 2006, 2005 and 2004, respectively.
Stock
Options
A
summary
of the Plans’ stock option activities during the year ended December 31, 2006 is
presented below:
|
|
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual Term (in years)
|
|
Aggregate
Intrinsic
Value
|
|||||
|
Outstanding
at January 1, 2006
|
1,798,139
|
$
|
18.43
|
|||||||
|
Granted
at market price
|
200,998
|
$
|
24.63
|
|||||||
|
Exercised
|
(472,354
|
)
|
$
|
15.86
|
||||||
|
Forfeited
|
(19,502
|
)
|
$
|
15.93
|
||||||
|
Expired
|
(833
|
)
|
$
|
19.70
|
||||||
|
Outstanding
at December 31, 2006
|
1,506,448
|
$
|
20.10
|
6.8
|
$
|
5,735
|
||||
|
Vested
and expected to vest at December 31, 2006
|
1,484,685
|
$
|
20.04
|
6.7
|
$
|
5,723
|
||||
|
Exercisable
at December 31, 2006
|
1,131,780
|
$
|
20.19
|
6.2
|
$
|
4,522
|
||||
The
aggregate intrinsic value in the table above represents the difference between
the Company’s closing stock price on December 29, 2006 and the exercise price of
each stock option, multiplied by the number of in-the-money stock options.
This
amount changes based upon the fair market value of the Company’s common stock.
The
total
intrinsic value of options exercised during the years ended December 31, 2006,
2005 and 2004 was $3,778, $3,167 and $4,387. The weighted average fair value
of
stock options granted during the years ended December 31, 2006, 2005 and 2004
is
estimated at $8.67, $4.50 and $7.49, respectively.
The
following summarizes information about options outstanding as of
December 31, 2006:
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||
|
Range
of
Exercise
Prices
|
Shares
|
Weighted-
Average
Remaining
Contractual
Life
|
Weighted-
Average
Exercise
Prices
|
Shares
|
Weighted-
Average
Exercise
Prices
|
||||||||||
|
$4.56
- $7.00
|
40,999
|
4.3
years
|
$
|
5.01
|
40,999
|
$
|
5.01
|
||||||||
|
$7.01
- $12.00
|
95,832
|
5.3
years
|
$
|
10.05
|
86,499
|
$
|
10.10
|
||||||||
|
$12.01
- $15.00
|
385,161
|
7.1
years
|
$
|
14.48
|
221,824
|
$
|
14.42
|
||||||||
|
$15.01
- $20.00
|
290,458
|
7.7
years
|
$
|
16.56
|
286,458
|
$
|
16.51
|
||||||||
|
$20.01
- $30.00
|
693,998
|
6.5
years
|
$
|
26.97
|
496,000
|
$
|
27.91
|
||||||||
|
1,506,448
|
6.7
years
|
$
|
20.10
|
1,131,780
|
$
|
20.19
|
|||||||||
Restricted
Stock
The
following summarizes the status of the Restricted Stock as of
December
31, 2006
and
changes during the year ended December
31,
2006:
|
|
Number
of
Shares
|
Weighted
Average Grant-Date Fair Value
|
|||
|
Unvested
balance at January 1, 2006
|
144,121
|
$
|
15.38
|
||
|
Granted
|
97,429
|
$
|
24.51
|
||
|
Vested
|
(57,792
|
)
|
$
|
15.16
|
|
|
Forfeited
|
(11,759
|
)
|
$
|
16.42
|
|
|
Unvested
balance at December 31, 2006
|
171,999
|
$
|
20.56
|
||
The
Company estimates that as of December 31, 2006 it had $1,845 of total
unrecognized compensation cost related to Restricted Stock granted under the
Plans. That cost is expected to be recognized over the weighted-average period
of 1.4 years. The total fair value of shares that vested during the years ended
December 31, 2006, 2005 and 2004 was $1,375, $1,082 and $641,
respectively.
During
the years ended December 31, 2006, 2005 and 2004, the Company recognized
compensation expense of $1,509 ($953 net of income taxes), $1,065 ($670 net
of
income taxes) and $1,522 ($937 net of income taxes), respectively, related
to
Restricted Stock awards. The weighted average grant-date fair value of
Restricted Stock granted during 2005 and 2004 was $15.85 and $14.41,
respectively.
Note 12. Repurchases of Common Stock
On
February 16, 2006, the Company announced its intention to commence a program
for
the repurchase of up to approximately 2% of its outstanding common stock during
the balance of 2006. As part of this program, the Company purchased 501,497
shares of its common stock at an aggregate cost of $10,684 during the year
ended
December 31, 2006. These repurchases were made by the Company to offset the
dilutive impact of new shares issued for stock options exercised and for
Restricted Stock granted under its stock incentive plans. As of December 31,
2006, the Company had completed its purchases of shares under this
program.
During
the years ended December 31, 2006 and 2005, certain officers and employees
of
the Company delivered to the Company 15,453 and 19,670 shares of the Company’s
common stock in payment of $366 and $320, respectively, of withholding tax
obligations arising from the vesting of Restricted Stock awards. Per
the
stock incentive plan under which the stock awards were granted, (i) the
withholding tax obligation was based upon the fair market value of the Company’s
common stock on the vesting date and (ii) the shares returned to the Company
in
satisfaction of the withholding tax obligation were returned to their respective
plan and are available for future grant.
In
addition, 11,759 shares of the Company’s common stock were returned to treasury,
at no cost, due to the forfeiture of Restricted Stock awards during 2006.
Note
13. Earnings
Per Share
The
following table sets forth the computation of basic and diluted earnings per
share from continuing operations:
|
For
the years ended December
31,
|
||||||||
|
2006
|
2005
|
2004
|
||||||
|
Numerator:
|
||||||||
|
Income
from continuing operations
|
$
|
17,741
|
$
|
32,998
|
$
|
30,076
|
||
|
Denominator:
|
||||||||
|
Weighted-average
common shares outstanding
|
21,714,161
|
21,351,829
|
21,096,921
|
|||||
|
Common
stock equivalents
|
213,131
|
227,251
|
314,341
|
|||||
|
Denominator
for diluted earnings per common share
|
21,927,292
|
21,579,080
|
21,411,262
|
|||||
|
Per
common share -
basic
|
$
|
0.82
|
$
|
1.55
|
$
|
1.43
|
||
|
Per
common share -
diluted
|
$
|
0.81
|
$
|
1.53
|
$
|
1.40
|
||
Note
14. Employee
Retirement Plans
The
Company’s defined contribution plan provides substantially all U.S. salaried and
hourly employees of the Company an opportunity to accumulate personal funds
for
their retirement, subject to minimum duration of employment requirements. As
determined by the provision of the plan, contributions are made on a before-tax
basis and the Company matches a portion of the employees' basic voluntary
contributions. Company matching contributions to defined contribution plans
were
approximately $1,156, $1,103 and $1,060 for the years ended December 31, 2006,
2005, and 2004, respectively.
During
2005, the Company adopted a nonqualified deferred compensation plan for certain
employees and directors. Under the terms of this plan, funds are withheld from
the participant’s pre-tax earnings, a portion of which are matched by the
Company, and are placed into a trust
in which
the use of the trust assets by the Company is restricted to future distributions
to plan participants. Distributions, as specified by the plan participants,
are
made upon the participants’ termination from the plan or over contractually
defined pay dates ranging from less than one year to thirteen years from
December 31, 2006. The assets of the trust primarily consist of mutual fund
securities and are available to satisfy claims of the Company’s general
creditors in the event of its bankruptcy. At December 31, 2006 and 2005, the
trust’s assets were $1,966 and $347 and the corresponding compensation
liability, included in the long term portion of deferred compensation, was
$1,948 and $346, respectively.
The
Company classifies these investments as available-for-sale securities, with
unrealized holding gains and losses reported net of tax in accumulated other
comprehensive income. The following is a summary of the trust’s
assets:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Cost
basis of investments
|
$
|
1,945
|
$
|
350
|
|||
|
Gross
unrealized holding gains
|
30
|
1
|
|||||
|
Gross
unrealized holding losses
|
(9
|
)
|
(4
|
)
|
|||
|
Aggregate
fair value
|
$
|
1,966
|
$
|
347
|
|||
In
addition, the Company’s subsidiary located in the U.K. provides a voluntary
retirement benefits plan for its employees. Company-matching contributions
to
this plan were approximately $466,
$519 and $562 for the years ended December 31, 2006, 2005 and 2004,
respectively.
Note
15. Discontinued
Operations
The
Company’s Independent Aftermarket businesses remanufactured engines and
distributed non-OEM branded remanufactured engines and transmissions directly
to
independent transmission and general repair shops and certain aftermarket parts
retailers. These businesses had incurred operating losses since their beginning.
On February 15, 2006, the Company made the decision to exit its Independent
Aftermarket transmission and engine businesses. The transmission business ceased
operations during the first quarter of 2006 and on July 17, 2006 the Company
completed the sale of its Independent Aftermarket engine business to Proformance
Technologies, LLC. As part of the sale, the Company received proceeds of $2,051.
The Independent Aftermarket businesses were not reportable segments and were
reported as “Other” in segment information previously disclosed.
During
2006, the Company recorded a pre-tax charge of $13,261 related to the exit
from
these businesses including (i) $9,779 for the write-down of inventory to
estimated net realizable value, (ii) $1,385 for the impairment of goodwill,
(iii) $775 for the write-down of property, plant and equipment, (iv) $707 of
severance costs, (v) $398 for the write-down of accounts receivable, and (vi)
$217 of other costs primarily related to a settlement with a customer.
Net
sales
for the Independent Aftermarket businesses were $8,030, $22,345 and $19,977
for
the years ended December 31, 2006, 2005 and 2004, respectively. As of December
31, 2006, the current assets of discontinued operations included a promissory
note, accounts receivable and inventory of $459, $158 and $149, respectively.
As
of December 31, 2005, the current assets of discontinued operations included
accounts receivable and inventory of $3,414 and $15,093, respectively.
During
2004, General Motors resourced its remanufactured transmission program from
the
Company’s facility located in Gastonia, North Carolina, and correspondingly, the
Company closed this facility. Upon the closure of the facility in the fourth
quarter of 2004, the operations of this operating unit within the Company’s
Drivetrain segment were reclassified as discontinued operations. In connection
with the Gastonia facility closure, the Company recorded a pre-tax charge of
$28,773 during 2004. During 2005 and 2006, the Company recorded additional
charges of $727 (net of income taxes of $416) and $44 (net of income taxes
of
$24), respectively, related to the closure of this operating unit.
In
October 2000, the Company sold the Distribution Group (a distributor of
remanufactured transmissions and related drivetrain components to independent
aftermarket customers now known as Axiom Automotive Technologies), classified
the results of this business as part of discontinued operations and recorded
a
pre-tax loss of $141,429 from the sale of this business. During 2004, the
Company recorded a loss of $794 related to the Distribution Group including
(i)
a charge of $2,218 for a valuation allowance related to the expected expiration
of a capital loss carryforward, (ii) a non-cash tax benefit of $1,368 based
upon
the resolution of prior year income tax issues with respect to the tax basis
of
the Distribution Group, and (iii) income of $56 (net of income taxes of $37)
based upon updated information regarding obligations and other costs related
to
the sale of the Distribution Group. During 2005, the Company recorded a charge
of $144 for an adjustment to the valuation allowance related to the expected
expiration of a capital loss carryforward, and during 2006 the Company recorded
income of $60 (net of income taxes of $30) based upon updated information
regarding obligations for certain costs related to the sale of this business.
Details
of the loss recorded from discontinued operations are as follows:
|
For
the years ended December 31,
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
Exit
from Independent Aftermarket:
|
||||||||||||
|
Loss
from closure and sale of businesses
|
$
|
(13,261
|
)
|
$
|
−
|
$
|
−
|
|||||
|
Operating
loss
|
(1,576
|
)
|
(1,795
|
)
|
(5,029
|
)
|
||||||
|
Non-operating
income
|
143
|
43
|
5
|
|||||||||
|
Loss
before income taxes
|
(14,694
|
)
|
(1,752
|
)
|
(5,024
|
)
|
||||||
|
Income
tax benefit
|
4,960
|
633
|
1,743
|
|||||||||
|
Loss
from Independent Aftermarket, net of income taxes
|
(9,734
|
)
|
(1,119
|
)
|
(3,281
|
)
|
||||||
|
Disposal
of Gastonia Operations:
|
||||||||||||
|
Sales
|
$
|
−
|
$
|
−
|
$
|
19,992
|
||||||
|
Impairment
of goodwill
|
−
|
−
|
(22,114
|
)
|
||||||||
|
Exit,
disposal, certain severance and other charges
|
−
|
(1,012
|
)
|
(6,906
|
)
|
|||||||
|
Other
costs and expenses
|
(68
|
)
|
(131
|
)
|
(21,788
|
)
|
||||||
|
Loss
before income taxes
|
(68
|
)
|
(1,143
|
)
|
(30,816
|
)
|
||||||
|
Income
tax benefit
|
24
|
416
|
10,591
|
|||||||||
|
Loss
from Gastonia operation, net of income taxes
|
(44
|
)
|
(727
|
)
|
(20,225
|
)
|
||||||
|
Sale
of Distribution Group:
|
||||||||||||
|
Income
before income taxes
|
90
|
−
|
93
|
|||||||||
|
Income
tax expense
|
(30
|
)
|
−
|
(37
|
)
|
|||||||
|
Adjustment
to valuation allowance on capital losses
|
−
|
(144
|
)
|
(2,218
|
)
|
|||||||
|
Adjustment
to income tax benefit
|
−
|
−
|
1,368
|
|||||||||
|
Gain
(loss) from Distribution Group, net of income taxes
|
60
|
(144
|
)
|
(794
|
)
|
|||||||
|
Loss
from discontinued operations, net of income taxes
|
$
|
(9,718
|
)
|
$
|
(1,990
|
)
|
$
|
(24,300
|
)
|
|||
Details
of assets and liabilities of discontinued operations are as follows:
|
December 31,
|
|||||
|
2006
|
2005
|
||||
|
Assets:
|
|||||
|
Exit
from Independent Aftermarket:
|
|||||
|
Accounts
receivable
|
$
|
158
|
$
|
3,414
|
|
|
Promissory
note receivable
|
459
|
−
|
|||
|
Inventory
|
149
|
15,093
|
|||
|
Other
current assets
|
−
|
55
|
|||
|
Total
current assets of discontinued operations
|
766
|
18,562
|
|||
|
Property,
plant and equipment
|
−
|
862
|
|||
|
Goodwill
|
−
|
1,385
|
|||
|
Total
long term assets of discontinued operations
|
−
|
2,247
|
|||
|
Total
assets of discontinued operations
|
$
|
766
|
$
|
20,809
|
|
|
Liabilities:
|
|||||
|
Exit
from Independent Aftermarket:
|
|||||
|
Accounts
payable
|
$
|
−
|
$
|
1,557
|
|
|
Accrued
expenses
|
847
|
2,969
|
|||
|
Disposal
of Gastonia Operations:
|
|||||
|
Current
liabilities
|
148
|
105
|
|||
|
Sale
of Distribution Group:
|
|||||
|
Obligations
from the sale of the distribution group
|
20
|
126
|
|||
|
Total
liabilities of discontinued operations
|
$
|
1,015
|
$
|
4,757
|
|
Note
16. Commitments
and Contingencies
The
Company leases certain facilities and equipment under various operating lease
agreements, which expire on various dates through 2019. Facility leases that
expire generally are expected to be renewed or replaced by other leases. Future
minimum rental commitments under non-cancelable operating leases with terms
in
excess of one year are as follows:
|
For
the years ended December 31,
|
Operating
Leases
|
|
|
2007
|
$
|
7,830
|
|
2008
|
5,745
|
|
|
2009
|
3,496
|
|
|
2010
|
1,566
|
|
|
2011
|
770
|
|
|
2012
and thereafter
|
4,177
|
|
|
Total
minimum lease payments
|
$
|
23,584
|
Rent
expense for all operating leases approximated $8,805, $8,522 and $8,726 for
the
years ended December 31, 2006, 2005 and 2004, respectively.
From
time
to time, the Company has been, and currently is, involved in various legal
claims arising in connection with its business. While the results of these
claims cannot be predicted with certainty, as of December 31, 2006, there were
no asserted claims against the Company that, in the opinion of management,
if
adversely decided, would have a material effect on the Company’s financial
position, results of operations or cash flows.
The
Company is subject to various evolving federal, state, local and foreign
environmental laws and regulations governing, among other things, emissions
to
air, discharge to waters and the generation, handling, storage, transportation,
treatment and disposal of a variety of hazardous and non-hazardous substances
and wastes. These laws and regulations provide for substantial fines and
criminal sanctions for violations and impose liability for the costs of cleaning
up, and damages resulting from, past spills, disposals or other releases of
hazardous substances.
In
connection with the acquisition of certain subsidiaries, some of which have
been
subsequently divested or relocated, the Company conducted certain investigations
of these companies' facilities and their compliance with applicable
environmental laws. The investigations, which included Phase I assessments
by independent consultants of all manufacturing and various distribution
facilities, found that a number of these facilities have had or may have had
releases of hazardous materials that may require remediation and also may be
subject to potential liabilities for contamination from off-site disposal of
substances or wastes. These assessments also found that reporting and other
regulatory requirements, including waste management procedures, were not or
may
not have been satisfied. Although there can be no assurance, the Company
believes that, based in part on the investigations conducted, in part on certain
remediation completed prior to or since the acquisitions, and in part on the
indemnification provisions of the agreements entered into in connection with
the
Company's acquisitions, the Company will not incur any material liabilities
relating to these matters.
In
connection with the sale of the Distribution Group, a former segment of the
Company’s business discontinued and sold during 2000 (the "DG Sale") and now
known as Axiom Automotive Technologies, the Company agreed to certain matters
with the buyer that could result in contingent liability to the Company in
the
future. These include the Company's indemnification of the buyer against
(i) environmental liability at former Distribution Group facilities that
had been closed prior to the DG Sale, including
former manufacturing facilities in Azusa, California, Mexicali, Mexico and
Dayton, Ohio, (ii) any other environmental liability of the Distribution
Group relating to periods prior to the DG Sale, in most cases subject to a
$750
deductible and a $12,000 cap except with respect to closed facilities, and
(iii) any tax liability of the Distribution Group relating to periods prior
to the
DG
Sale.
During 2002, the Company negotiated an additional $100 deductible applicable
to
all Distribution Group claims for indemnification. In addition, prior to the
DG
Sale several of the Distribution Group's real estate and equipment leases with
terms ending on various dates through 2007, were guaranteed by the Company.
These guarantees, which originated prior to the time of the DG Sale, remain
in
effect after the DG Sale so the Company continues to be liable for the
Distribution Group's obligations under such leases in the event that the
Distribution Group does not honor those obligations. As of December 31, 2006,
minimum lease obligations related to these leases totaled $226 for which the
Company has no liability recognition requirement. The Distribution Group has
indemnified the Company against any damages relating to the Company’s
guarantees; however, the Company holds no assets as collateral for these
obligations.
Note
17. Segment
Information
Within
the Company, financial performance is measured by lines of business. The Company
aggregates certain of its operating units to form two reportable segments:
the
Drivetrain segment and the Logistics segment. The
Drivetrain segment primarily sells remanufactured transmissions to Honda, Ford,
DaimlerChrysler, Allison and certain foreign OEMs, primarily for use as
replacement parts by their domestic dealers during the warranty and/or
post-warranty periods following the sale of a vehicle. In addition, the
Drivetrain segment sells select remanufactured engines primarily to certain
European OEMs. The Company’s Logistics segment provides value-added warehousing
and distribution, reverse logistics, turnkey order fulfillment, electronic
equipment testing, and refurbishment and repair services. Our principal
customers are currently in the wireless, consumer electronics and automotive
industries and include AT&T, Nokia, General Motors, LG, Magellan, T-Mobile,
Delphi, Visteon, TiVo and TomTom. The reportable segments are each managed
and
measured separately primarily due to the differing customers and distribution
channels.
The
Company evaluates performance based upon operating income. The reportable
segments’ accounting policies are the same as those described in the summary of
significant accounting policies (see Note 2 - Summary of Significant
Accounting Policies). The Company fully allocates (i) corporate overhead
generally based upon budgeted full year profit before tax, and (ii) internal
information systems costs based upon usage estimates.
Financial
information relating to the Company’s reportable segments and a reconciliation
to the consolidated financial statements are as follows as of and for the years
ended December 31:
|
Drivetrain
|
Logistics
|
Corporate
|
Discontinued
Assets
|
Consolidated
|
||||||||||||
|
2006:
|
||||||||||||||||
|
Net
sales from external customers
|
$
|
234,569
|
$
|
263,405
|
$
|
−
|
$
|
−
|
$
|
497,974
|
||||||
|
Depreciation
and amortization expense
|
8,416
|
5,455
|
−
|
−
|
13,871
|
|||||||||||
|
Impairment
of goodwill
|
11,722
|
2,870
|
−
|
−
|
14,592
|
|||||||||||
|
Exit,
disposal, certain severance and other charges
|
1,479
|
459
|
−
|
−
|
1,938
|
|||||||||||
|
Operating
income
|
8,976
|
24,392
|
−
|
−
|
33,368
|
|||||||||||
|
Total
assets
|
236,430
|
90,604
|
17,877
|
766
|
345,677
|
|||||||||||
|
Goodwill
|
116,137
|
16,103
|
135
|
−
|
132,375
|
|||||||||||
|
Expenditures
of long-lived assets, net
|
5,932
|
5,871
|
107
|
−
|
11,910
|
|||||||||||
|
2005:
|
||||||||||||||||
|
Net
sales from external customers
|
$
|
266,398
|
$
|
153,220
|
$
|
−
|
$
|
−
|
$
|
419,618
|
||||||
|
Depreciation
and amortization expense
|
8,040
|
5,022
|
−
|
−
|
13,062
|
|||||||||||
|
Exit,
disposal, certain severance and other charges (credits)
|
(20
|
)
|
543
|
−
|
−
|
523
|
||||||||||
|
Operating
income
|
36,418
|
18,052
|
−
|
−
|
54,470
|
|||||||||||
|
Total
assets
|
253,348
|
75,033
|
58,590
|
20,809
|
407,780
|
|||||||||||
|
Goodwill
|
127,068
|
18,973
|
135
|
−
|
146,176
|
|||||||||||
|
Expenditures
of long-lived assets, net
|
5,758
|
11,053
|
481
|
−
|
17,292
|
|||||||||||
|
2004:
|
||||||||||||||||
|
Net
sales from external customers
|
$
|
271,215
|
$
|
104,385
|
$
|
−
|
$
|
−
|
$
|
375,600
|
||||||
|
Depreciation
and amortization expense
|
7,786
|
3,895
|
−
|
−
|
11,681
|
|||||||||||
|
Exit,
disposal, certain severance and other charges (credits)
|
(705
|
)
|
156
|
4,315
|
−
|
3,766
|
||||||||||
|
Operating
income (loss)
|
40,045
|
15,492
|
(4,315
|
)
|
−
|
51,222
|
||||||||||
|
Total
assets
|
270,243
|
48,352
|
47,823
|
23,859
|
390,277
|
|||||||||||
|
Goodwill
|
128,096
|
18,973
|
135
|
−
|
147,204
|
|||||||||||
|
Expenditures
of long-lived assets
|
8,051
|
2,253
|
516
|
−
|
10,820
|
|||||||||||
Geographic
information for revenues, determined by destination of sale and long-lived
assets, determined by the location of the Company’s facilities is as
follows:
|
As
of and for the
|
||||||||
|
Years
ended December 31,
|
||||||||
|
2006
|
2005
|
2004
|
||||||
|
Net
sales:
|
||||||||
|
United
States
|
$
|
471,513
|
$
|
388,849
|
$
|
342,418
|
||
|
Europe
and Canada
|
26,461
|
30,769
|
33,182
|
|||||
|
Consolidated
net sales
|
$
|
497,974
|
$
|
419,618
|
$
|
375,600
|
||
|
Long-lived
assets:
|
||||||||
|
United
States
|
$
|
185,319
|
$
|
186,254
|
$
|
182,254
|
||
|
Europe
|
3,528
|
14,794
|
17,188
|
|||||
|
Assets
of discontinued operations
|
−
|
2,247
|
2,804
|
|||||
|
Consolidated
long-lived assets
|
$
|
188,847
|
$
|
203,295
|
$
|
202,246
|
||
During
the year ended December 31, 2006,
net
sales from each of three customers amounted to 10 percent or more of the
Company’s net sales. For the years ended December 31, 2006, 2005 and 2004, sales
to AT&T (Logistics segment) accounted for $208,008, $124,878 and $88,233,
Ford (Drivetrain and Logistics segments) accounted for $76,659, $102,281 and
$117,083, Honda (Drivetrain segment) accounted for $77,630, $81,049 and $76,671,
and DaimlerChrysler (Drivetrain segment) accounted for $36,588, $64,609 and
$58,220, respectively.
The
Company has periodically
incurred certain costs, primarily associated with restructuring and other
initiatives that include consolidation of operations or facilities, management
reorganization and cost-outs, rationalization of certain products, product
lines
and services and asset impairments. Examples of these costs include severance
benefits for terminated employees, lease termination and other facility exit
costs, moving and relocation costs, losses on impairments of fixed assets,
and
write-down of inventories.
General
Activities Relating to Exit, Disposal, Certain Severance and Other
Charges:
In
2003,
the Company recorded compensation costs payable to its former CEO of $1,953,
related to his conversion from full-time to part-time employment. During 2006,
the Company paid the remaining amounts related to this obligation.
In
2004,
the Company recorded a net charge of $3,779 consisting of (i) $3,323 of non-cash
compensation expense related to modifications to unexercised stock options
previously granted to the Company’s former CEO and former CFO, (ii) $530 of exit
and other costs primarily related to the termination of an independent
contractor agreement and costs related to the closure of two facilities, (iii)
$525
of
certain stock-based compensation costs related to the hiring of the
Company’s
current
CEO,
(iv)
$292 of severance
and related costs for 10 management and operational support personnel associated
with the reorganization and upgrade of certain management
functions and other cost reduction initiatives, and (v) $260 of
relocation costs primarily related to the hiring of the
Company’s
current
CFO,
partially offset by a gain of $1,151 related to the reversal of a previously
established provision related to the Drivetrain segment for a potential
non-income state tax liability that was reduced through the finalization of
an
audit by the state tax authorities.
In
2005,
in order to accommodate increased service volumes within its Logistics segment,
the Company expanded its capacity by moving certain of its operations to a
larger facility and recorded a charge of $543 consisting of (i) $282 related
to
the write-down of certain fixed assets, and (ii) $261 of exit and other costs
related to the move. The Company completed this facilities transition during
2005. In addition, the Company recorded a gain of $20 during 2005 primarily
due
to the adjustment of estimated exit costs.
In
2006,
the Company incurred severance and related charges primarily related to cost
reduction initiatives of (i) $844 for its Drivetrain segment manufacturing
facilities in the United States, (ii) $209 for its Logistics segment, and (iii)
$106 at its manufacturing facility in the United Kingdom.
Additionally,
the Company recorded (i) third-party acquisition diligence and other costs
of
$496 related to potential acquisitions that the Company ultimately decided
not
to pursue, and (ii) $283 of costs for asset retirement obligations the Company
is contractually obligated to perform in order to restore certain leased
facilities to a condition specified in the lease agreement.
Following
is an analysis of the reserves relating to these activities:
|
|
Termination
Benefits
|
Exit
/ Other
Costs
|
Loss
on
Write-Down
Of
Assets
|
Total
|
|||||||||||
|
Reserve
as of December 31, 2003
|
$
|
3,690
|
$
|
1,584
|
$
|
−
|
$
|
5,274
|
|||||||
|
Provision
2004
|
3,615
|
164
|
−
|
3,779
|
|||||||||||
|
Payments
2004
|
(2,166
|
)
|
(1,220
|
)
|
−
|
(3,386
|
)
|
||||||||
|
Non-cash
stock-based compensation write-offs 2004
|
(3,323
|
)
|
(525
|
)
|
−
|
(3,848
|
)
|
||||||||
|
Reserve
as of December 31, 2004
|
1,816
|
3
|
−
|
1,819
|
|||||||||||
|
Provision
2005
|
(17
|
)
|
258
|
282
|
523
|
||||||||||
|
Payments
2005
|
(1,539
|
)
|
(261
|
)
|
−
|
(1,800
|
)
|
||||||||
|
Asset
write-offs 2005
|
−
|
−
|
(282
|
)
|
(282
|
)
|
|||||||||
|
Reserve
as of December 31, 2005
|
260
|
−
|
−
|
260
|
|||||||||||
|
Provision
2006
|
1,159
|
779
|
−
|
1,938
|
|||||||||||
|
Payments
2006
|
(999
|
)
|
(496
|
)
|
−
|
(1,495
|
)
|
||||||||
|
Adjustment
2006
|
3
|
104
|
−
|
107
|
|||||||||||
|
Reserve
as of December 31, 2006
|
$
|
423
|
$
|
387
|
$
|
−
|
$
|
810
|
|||||||
Facilities
Consolidation Costs - Drivetrain Segment
On
June
23, 2003, the Company announced its decision to consolidate one of its
transmission
remanufacturing operations from a leased facility located in Mahwah, New Jersey
into a Company-owned under utilized facility in Oklahoma City, Oklahoma. This
decision was primarily driven by an expectation of lower operating costs
(primarily labor and facility related). The relocation from the Mahwah facility
to the Oklahoma City facility was completed during November 2003 and the Mahwah
lease expired on December 31, 2003. Following is an analysis of the reserves
related to this activity:
|
|
Termination
Benefits
|
Exit
/ Other
Costs
|
Loss
on
Write-Down
of
Assets
|
Total
|
|||||||||||
|
Total
amount expected to be incurred
|
$
|
1,186
|
$
|
2,065
|
$
|
817
|
$
|
4,068
|
|||||||
|
Total
amount incurred to date
|
$
|
1,186
|
$
|
2,065
|
$
|
817
|
$
|
4,068
|
|||||||
|
Reserve
as of December 31, 2003
|
$
|
571
|
$
|
399
|
$
|
200
|
$
|
1,170
|
|||||||
|
Provision
2004
|
(24
|
)
|
11
|
−
|
(13
|
)
|
|||||||||
|
Payments
- 2004
|
(547
|
)
|
(99
|
)
|
−
|
(646
|
)
|
||||||||
|
Reserve
as of December 31, 2004
|
−
|
311
|
200
|
511
|
|||||||||||
|
Payments
- 2005
|
−
|
(228
|
)
|
−
|
(228
|
)
|
|||||||||
|
Reserve
as of December 31, 2005
|
−
|
83
|
200
|
283
|
|||||||||||
|
Payments
2006
|
−
|
(23
|
)
|
−
|
(23
|
)
|
|||||||||
|
Asset
write-offs 2006
|
−
|
−
|
(200
|
)
|
(200
|
)
|
|||||||||
|
Adjustment
2006
|
−
|
(60
|
)
|
−
|
(60
|
)
|
|||||||||
|
Reserve
as of December 31, 2006
|
$
|
−
|
$
|
−
|
$
|
−
|
$
|
−
|
|||||||
Note
19. Selected
Quarterly Financial Data (Unaudited)
|
Quarter
|
|||||||||||||||
|
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||
|
2006
|
|||||||||||||||
|
Net
sales
|
$
|
119,406
|
$
|
122,021
|
$
|
128,952
|
$
|
127,595
|
|||||||
|
Gross
profit
|
24,239
|
26,446
|
24,887
|
29,133
|
|||||||||||
|
Exit,
disposal, certain severance and other charges
|
106
|
581
|
918
|
333
|
|||||||||||
|
Impairment
of goodwill
|
-
|
-
|
14,592
|
-
|
|||||||||||
|
Income
(loss) from continuing operations
|
5,729
|
6,812
|
(3,941
|
)
|
9,141
|
||||||||||
|
Net
income (loss)
|
(3,200
|
)
|
6,764
|
(4,625
|
)
|
9,084
|
|||||||||
|
Income
from continuing operations per common share - basic and
diluted
|
$
|
0.26
|
$
|
0.31
|
$
|
(0.18
|
)
|
$
|
0.42
|
||||||
|
2005
|
|||||||||||||||
|
Net
sales
|
$
|
87,921
|
$
|
99,094
|
$
|
117,536
|
$
|
115,067
|
|||||||
|
Gross
profit
|
21,733
|
24,966
|
27,605
|
29,807
|
|||||||||||
|
Exit,
disposal, certain severance and other charges
|
86
|
348
|
89
|
-
|
|||||||||||
|
Income
from continuing operations
|
5,687
|
7,430
|
9,053
|
10,828
|
|||||||||||
|
Net
income
|
5,350
|
7,454
|
7,967
|
10,237
|
|||||||||||
|
Income
from continuing operations per common share - basic and
diluted
|
$
|
0.27
|
$
|
0.35
|
$
|
0.42
|
$
|
0.50
|
|||||||
During
the third quarter of 2006, the Company recorded goodwill impairment charges
of
$11,722 ($8,050 net of income taxes) related to the Drivetrain segment’s United
Kingdom-based operation and $2,870 ($1,812 net of income taxes) related to
the
automotive materials reclamation business within the Logistics
segment.
During
the fourth quarter of 2005, the Company recorded income on an after-tax basis
of
$874 (tax benefits of $1,365 offset by fees and related expenses of $491, net
of
tax) related primarily to previously unclaimed research and development tax
credits.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS
AND PROCEDURES
(i) Disclosure
Controls and Procedures.
Our
Chief
Executive Officer and Chief Financial Officer conducted an evaluation of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of December 31,
2006.
(ii) Internal
Control Over Financial Reporting.
(a) Management’s
annual report on internal control over financial reporting.
Our
management report on internal control over financial reporting is set forth
in
Item 8 "Consolidated
Financial Statements and Supplementary Data" on page 41 of this Annual
Report.
(b) Attestation
report of the registered public accounting firm.
The
attestation report of Ernst & Young LLP, our independent registered public
accounting firm, on management’s assessment of the effectiveness of our internal
control over financial reporting and the effectiveness of our internal control
over financial reporting is set forth in Item 8 "Consolidated
Financial Statements and Supplementary Data" on page 43 of this Annual
Report.
(c) Changes
in internal control over financial reporting.
During
the second quarter of 2006 we began the process of converting our two U.S.-based
Drivetrain operations to a general ledger system also used by our Logistics
business. We converted one of the Drivetrain operations during the second
quarter of 2006 and the conversion of the other Drivetrain operation was
completed during the fourth quarter of 2006. We believe these conversions did
not have a material effect on our internal controls over financial
reporting.
There
were no other changes in our internal control over financial reporting during
the fourth quarter of 2006 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
ITEM
9B. OTHER
INFORMATION
None.
PART
III
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
Directors
and Executive Officers
The
following lists our executive officers and directors and their respective ages
and positions as of December 31, 2006:
|
Name
|
Age
|
Positions
|
|
Donald
T. Johnson, Jr.
|
54
|
Chairman
of the Board, President and Chief Executive Officer
|
|
Todd
R. Peters
|
44
|
Vice
President and Chief Financial Officer
|
|
John
J. Machota
|
54
|
Vice
President, Human Resources
|
|
John
M. Pinkerton
|
49
|
Vice
President and Controller
|
|
Mary
T. Ryan
|
53
|
Vice
President, Communications and Investor Relations
|
|
Joseph
Salamunovich
|
47
|
Vice
President, General Counsel and Secretary
|
|
William
L. Conley, Jr.
|
58
|
President,
ATC Logistics
|
|
Brett
O. Dickson
|
42
|
Vice
President, North American Remanufacturing Operations
|
|
Robert
L. Evans
|
54
|
Director
|
|
Curtland
E. Fields
|
55
|
Director
|
|
Dr.
Michael J. Hartnett
|
61
|
Director
|
|
Michael
D. Jordan
|
60
|
Lead
Director
|
|
S.
Lawrence Prendergast
|
65
|
Director
|
|
Edward
Stewart
|
64
|
Director
|
Donald
T. Johnson, Jr.
joined
us as President
and Chief Operating Officer in January 2004. In February 2004 Mr. Johnson
became Chief Executive Officer, and became a member of the Board of Directors
in
May 2004 and Chairman of the Board in June 2005. Before joining us,
Mr. Johnson was Global Director, Parts, Supply and Logistics for Ford Motor
Company since 1999. Prior to that, Mr. Johnson spent 26 years working for
Caterpillar, Inc. and its subsidiaries, including serving as Vice President
of
Caterpillar Logistics Services, Inc. from 1992 until he joined Ford.
Mr. Johnson is a director and member of the audit committee of Accuride
Corporation. Mr. Johnson holds a B.A. in Management from the University of
Illinois.
Todd
R. Peters
joined
us as Vice President, Finance in March 2004 and was appointed Chief Financial
Officer in May 2004. Before joining us, Mr. Peters served TriMas
Corporation, a manufacturer of automotive accessories and industrial products,
as Executive Vice President and Chief Financial Officer from 2002 to 2003 and
as
Vice President of Finance from 2001 to 2002. From 1994 to 2001, he held various
positions with Dana Corporation, a manufacturer in the automotive, commercial
vehicle, and off-highway markets, including Global Working Capital Team Leader
from 2000 to 2001, Director of Operations - Long Manufacturing from 1999 to
2000
and Vice President of Finance from 1994 to 1999. Prior to that, Mr. Peters
worked for Coopers & Lybrand for over eight years. Mr. Peters holds a
B.S. in Business Administration from Central Michigan University and is a
certified public accountant.
John
J. Machota
joined
us as Vice President, Human Resources in 1997. From 1996 to 1997, he was a
self-employed human resources consultant. From 1995 to 1996, Mr. Machota
was Vice President, Compensation for Waste Management, Inc. and from 1993
to 1995, served as Waste Management's Vice President, Human Resource Services.
From 1986 to 1993, Mr. Machota was Vice President, Human Resources for a
subsidiary of Waste Management and prior to that held various other positions
in
the human resources area. Mr. Machota holds an M.S. in Industrial Relations
from Loyola University, Chicago.
John
M. Pinkerton
joined
us as Manager, Planning and Analysis in 1999, became Corporate Controller in
2000 and became an executive officer in June 2005 when he was appointed Vice
President and Controller. Prior to joining us, he was an independent financial
consultant during 1998 and prior to that he spent ten years with Grimes
Aerospace Company,
an
international engineering, manufacturing and distribution company,
where he
held various financial analysis and planning related positions, including
Director, Strategic Planning. From 1980 to 1988, Mr. Pinkerton worked for
Cooper Industries (Power Systems Division) in various accounting and related
positions. Mr. Pinkerton holds an M.B.A. from the University of
Wisconsin-Milwaukee and is a certified public accountant
(inactive).
Mary
T. Ryan
joined
us as Vice President, Communications and Investor Relations in 1999. From 1996
to 1998, Ms. Ryan served as Vice President, Corporate Affairs for American
Disposal Services, Inc. From 1995 to 1996, she was a self-employed public
relations consultant. Prior to that, Ms. Ryan was employed for more than
ten years with Waste Management, Inc. Ms. Ryan holds an M.B.A. from
DePaul University.
Joseph
Salamunovich
joined
us as Vice President, General Counsel and Secretary in 1997. From 1986 to 1994
Mr. Salamunovich was an associate, and from 1995 to 1997 he was a partner,
in
the law firm of Gibson, Dunn & Crutcher LLP, where he specialized in
corporate and securities law matters. Mr. Salamunovich holds a J.D. from
Loyola Law School, Los Angeles.
William
L. Conley, Jr.
joined
us in 2002 as President of our ATC Logistics business. Prior to joining us
Mr. Conley spent nearly 24 years with FedEx Corporation in a series of
increasingly responsible sales and leadership positions. Most recently, Mr.
Conley served as Vice President and General Manager - Europe, Middle East and
Africa for FedEx Supply Chain Services (FedEx’s logistics operations).
Mr. Conley holds a B.S. in Aeronautics from Parks College of Aeronautical
Technology of St. Louis University.
Brett
O. Dickson
joined
us in 2001 as Director of Lean and Continuous Improvement. That same year he
became Vice President and General Manager of our Autocraft Industries business
and became an executive officer in 2004 when he was promoted to Vice President
of our North American Remanufacturing Operations. Prior to joining us, Mr.
Dickson held increasingly responsible positions in operations, supply chain
management and repositioning within Grimes Aerospace Company
from
1995 to 2000, most recently serving as the Business Unit Manager for Grimes’
Exterior Lighting business. Between 1985 and 1995 he held various positions
with
Honeywell (formerly AlliedSignal) including Plant Manager, Production
Engineering Manager and Six Sigma specialist. Mr. Dickson holds a B.S. in
Electronic Engineering Technology from the DeVry Institute of
Technology.
Robert
L. Evans became
a
director of Aftermarket Technology Corp. in December 2004. Since August 2006,
Mr. Evans has serves as President, Chief Executive Officer and a member of
the
Board of Directors of Churchill Downs Inc., a publicly held owner and operator
of horse racing venues. Previously, Mr. Evans was
Managing
Director of Symphony Technology Group (a strategic holding company that invests
primarily in software and services firms) and a predecessor firm, the Valent
Group, from 2001 until October 2004. Prior to that, he was President and Chief
Operating Officer of Aspect Development, Inc. from 1999 until its acquisition
by
i2
Technologies, Inc. in 2000, after which he served as Chief Operating Officer
of
i2
Technologies. Mr. Evans was employed by Accenture (formerly Andersen Consulting)
from 1993 to 1999, where he held a variety of positions, including Managing
Partner of the Americas Supply Chain practice. From 1990 to 1993 Mr. Evans
served as Vice President, Customer Support (Parts & Service) for Mazda Motor
of America, and between 1975 and 1990 he held various positions with Caterpillar
Inc., including President of Caterpillar Logistics Services.
Mr. Evans serves on our Compensation and Nominating Committee.
Curtland
E. Fields became
a
director of Aftermarket Technology Corp. in December 2004. Mr. Fields is the
Executive
Director and chief executive officer and a trustee of the Turrell Fund, a $130
million foundation. Prior to joining the Turrell Fund in 2003, Mr. Fields was
employed by AT&T Corporation for over 30 years, serving most recently as
President of the Consumer Transactions Services Group between 2000 and 2003,
as
President of the Consumer Markets Group (Central Region) from 1999 to 2000
and
Vice President, Strategy and Marketing for the Business Markets Group from
1998
to 1999. Prior to that he held other positions with AT&T including Financial
Vice President for Investor Relations.
Mr. Fields is Chairman of our Compensation and Nominating
Committee.
Dr. Michael
J. Hartnett
became a
director
of
Aftermarket Technology Corp.
in 1994.
Since 1992, Dr. Hartnett has been President and Chief Executive Officer,
and since 2005 has been Chairman of the Board, of RBC Bearings Incorporated,
a
publicly held manufacturer of ball and roller bearings. Prior to joining RBC
in
1990 as General Manager of its Industrial Tectonics subsidiary, he spent
18 years with The Torrington Company, a subsidiary of Ingersoll-Rand.
Dr. Hartnett serves on our Audit Committee.
Michael
D. Jordan
became a
director of Aftermarket Technology Corp. in May 2004 and Lead Director in June
2005. Prior to retirement in 2001, he was employed by Ford Motor Company for
over 30 years, serving most recently as President of Ford’s Automotive Consumer
Services Group since 1997. Prior to that he was President of the Ford Customer
Service Division—Europe for three years. Mr. Jordan
serves on our Compensation and Nominating Committee.
S.
Lawrence Prendergast
became a
director of Aftermarket Technology Corp. in May 2004. Between 1999 and his
retirement in June 2005, he was Executive Vice President of Finance of
LaBranche & Co. Inc., a New York Stock Exchange specialist firm. Prior
to that he spent over 30 years with AT&T Corporation, including serving as
Chairman of the Board and Chief Executive Officer of AT&T Investment
Management Corp. from 1997 to 1999 and as Vice President and Treasurer of
AT&T Corporation for 14 years before that. Mr. Prendergast is Chairman
of our Audit Committee.
Edward
Stewart became
a
director of Aftermarket Technology Corp. in December 2004. Prior to his
retirement in 2002, he was
employed by General Electric Company for 37 years, serving most recently as
Executive Vice President of GE Capital and Chief Executive Officer of GE Card
Services from 1997, and prior to that he was a Vice President of General
Electric since 1991.
Mr.
Stewart serves on our Audit Committee.
Directors
serve one-year terms and are elected annually. Executive officers serve until
they resign or replacements are appointed by the Board of
Directors.
Audit
Committee
We
have
an Audit Committee, established in accordance with Section 3(a)(58)(A) of
the Exchange Act, composed of S. Lawrence Prendergast (Chairman),
Dr. Michael J. Hartnett, and Edward Stewart. The Board has determined
that Mr. Prendergast is an audit committee financial expert for purposes of
Item
407(d)(5) of Regulation S-K under the Exchange Act and that Mr. Prendergast
and
each of the other members of the Audit Committee is an independent director
as
defined in the Nasdaq listing standards.
Section
16(a) Beneficial Ownership Reporting Compliance
Section 16(a)
of the Exchange Act requires our officers, directors and persons who own more
than 10% of our outstanding common stock to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and to furnish
copies of these reports to us. Based solely on a review of the copies of the
forms that we have received, we believe that all such forms required during
2006
were filed on a timely basis except for a Form 4 regarding the sale of 469
shares on May 17 by Mr. Pinkerton, which was filed one day late.
Code
of Ethics
We
have
adopted a code of ethics that applies to our directors, officers and employees.
The code of ethics contains written standards that we believe are reasonably
designed to deter wrongdoing and to promote (i) honest and ethical conduct,
including the ethical handling of actual or apparent conflicts of interest,
(ii) full, fair, accurate, timely and understandable disclosure in the
reports that we file with or submit to the Securities and Exchange Commission
and our other public communications, (iii) compliance with applicable
governmental laws, rules and regulations, (iv) prompt internal reporting of
violations of the code of ethics to an appropriate person, and
(v) accountability for adherence to the code.
The
full
text of our code of ethics was filed as an exhibit to our 2003 Annual Report
on
Form 10-K and is posted on our website at www.goATC.com.
A copy
of the code of ethics may be obtained without charge by sending a written
request to us at 1400 Opus Place, Suite 600, Downers Grove, Illinois 60515,
attention: Corporate Secretary. We intend to disclose future amendments to
certain provisions of our code of ethics, or waivers of such provisions granted
to executive officers and directors, on our website within five business days
following the date of such amendment or waiver.
ITEM
11. EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Overview
of Compensation Program
The
Compensation and Nominating Committee of our Board of Directors (the
“Committee”) has responsibility for establishing, implementing and monitoring
adherence with our compensation philosophy. The Committee’s goal is that the
total compensation paid to our executive officers is fair, reasonable and
competitive. The types of compensation and benefits provided to the actively
employed named executive officers are similar to those provided to other
executive officers. The “named executive officers” are the five persons who
were, as of December 31, 2006, the principal executive officer (CEO), the
principal financial officer (CFO), and the three most highly compensated
executive officers, other than the CEO and CFO, of Aftermarket Technology Corp.
and its subsidiaries.
Compensation
Philosophy and Objectives
Our
executive compensation philosophy is as follows:
|
•
|
to
align compensation with shareholder value
creation;
|
|
•
|
to
provide market competitive compensation to attract and retain talented
executives; and
|
|
•
|
to
link incentive compensation to continuous improvements in strategic
and
operating performance.
|
The
Committee believes the current compensation arrangements provide the CEO and
our
other executive officers incentive to perform at superior levels and in a manner
directly aligned with the economic interests of our shareholders. The Committee
approves and continually evaluates our compensation policies applicable to
the
executive officers so that (i) we maintain the ability to attract and
retain excellent employees in key positions, and (ii) compensation provided
to executive officers remains competitive relative to the compensation paid
to
similarly situated executives in the competitive market. To this end, the
Committee believes that executive compensation should include both cash and
stock-based compensation that rewards performance as measured against
established goals.
Independent
Consultant
The
Committee periodically uses the services of an independent executive
compensation consulting firm (the “independent compensation consultant”),
currently Watson Wyatt Worldwide, which reports directly to the Committee and
works with management on behalf of the Committee as the Committee determines
is
necessary. During 2006, the independent compensation consultant provided the
Committee with relevant market data and alternatives to consider when making
compensation decisions for the CEO and the other executive officers. The
independent compensation consultant also provided the Committee with input
on
items including long-term incentive plan design and the CEO’s new employment
agreement.
2006
Executive Compensation Components
The
existing executive compensation program consists of four primary elements:
|
•
|
base
salary;
|
|
•
|
performance
based incentive compensation;
|
|
•
|
long-term
incentive/stock-based awards; and
|
|
•
|
supplemental
benefits.
|
Each
of
these compensation elements is described in detail in this discussion and
analysis.
Competitive
Benchmarking - Definition of Market
The
Committee periodically reviews compensation data for comparable executive
positions in the competitive market. The independent compensation consultant
assists with this analysis. An extensive competitive compensation analysis
was
last completed in December 2005 for all executive officers, with a market review
of the CEO position conducted in August 2006 as part of the Committee’s
negotiations with the CEO on his new employment agreement. The Committee
reviewed updated market data for all other executive officers in December
2006.
For
purposes of competitive market analysis, the Committee reviews compensation
data
provided by the independent compensation consultant regarding a “comparator
group” of general manufacturing companies that produce both durable and
nondurable goods, rather than data from a peer group of selected companies.
Due
to our current business mix (remanufacturing and logistics) and revenue size,
there is no peer group of selected companies that could provide more direct
competitive compensation data. The general manufacturing data provides a broad
view of the executive labor market against which we compete for executive-level
talent. All compensation data is size-adjusted to reflect our business size
of
approximately $450 million in annual revenues.
Competitive
Compensation Objectives
Our
executive compensation is based on a pay-for-performance philosophy, emphasizing
performance against measures that correlate with increases in shareholder value.
It is the policy of the Committee to set compensation targets for fixed pay
(base salary and benefits) at approximately the 50th
percentile of the market as defined by the comparator group. Variable
compensation (annual incentives and long-term incentives) is targeted at the
50th
to
75th
percentile of the market. Any variable compensation awards targeted above the
50th
percentile are tied to the expected achievement of “stretch” performance
goals.
The
Committee has begun to periodically review the various elements of our total
compensation using a tally sheet approach.
Pay-for-Performance
- “Variable Pay At Risk”
The
percentage of pay at risk increases as the level of employment position
increases. This provides additional upside potential and downside risk for
senior positions, recognizing that these roles have greater influence on our
overall performance. In the case of the CEO, over 72% of total compensation
is
at risk in the form of variable pay, and approximately 48% of his total
compensation is in the form of long-term incentives. In the case of the other
named executive officers, approximately 50%-60% of total compensation is in
the
form of variable pay, and 22%-25% of their total compensation is in the form
of
long-term incentives. The Committee believes this compensation structure aligns
the financial interests of the named executive officers and other executive
officers with the interests of our shareholders because it rewards management
for the achievement of long-term financial results and shareholder value
creation.
Base
Salary
We
provide named executive officers and other executive officers with base salary
to compensate them for services rendered during the fiscal year. For each
position, the Committee establishes a base salary range that takes into
consideration the position and its responsibility and the market data and
recommendations provided by the independent compensation consultant. Within
that
range a specific base salary is then determined. It is our policy to provide
base salary for a given position that is between 75% and 125% of the midpoint
of
the base salary range established for that position.
During
its review of base salaries for executives, the Committee primarily
considers:
|
•
|
market
data provided by the independent compensation
consultant;
|
|
•
|
internal
review of the executive’s compensation, both individually and relative to
other officers;
|
|
•
|
recommendations
of the CEO; and
|
|
•
|
individual
performance.
|
Salary
levels are typically reviewed annually as well as upon promotion or other
changes in job responsibilities. Increases for named executive officers other
than the CEO are reviewed and approved by the Committee based on the criteria
listed above. Increases for the CEO are recommended by the Committee and
reviewed and approved by the full Board.
For
2006,
the CEO received a base salary increase of 7% effective January 1, which
reflected the Committee’s evaluation of his performance during the prior year
and the competitive market. The average salary increase in 2006 for the other
named executive officers was 3.5%, which closely reflected the average salary
movement within the comparator group.
Base
salary adjustments for 2007 for the named executive officers other than the
CEO
became effective January 1, 2007 and are noted in the footnotes to the Summary
Compensation Table below. The CEO’s base salary for 2007 was set as part of the
negotiation of his new employment agreement and also became effective January
1,
2007.
Performance-Based
Incentive Compensation
We
provide annual incentive opportunities through our Management Incentive
Compensation Plan (IC plan), which rewards executive officers and other senior
management for the achievement of annual financial results. All of the
performance measures in the plan reflect our business strategy and key financial
metrics.
Performance
Metrics.
The
primary corporate financial measure in the IC plan for 2006 was earnings per
share (EPS). For business segment leadership, adjusted earnings before interest
and taxes (EBIT) served as the primary financial metric. We believe that these
two financial metrics are key indicators of long-term shareholder value.
Corporate officer positions are measured entirely on EPS while business segment
leadership is measured 70% on such segment’s adjusted EBIT and 30% on EPS. For
business segment leadership, we believe this weighting provides the appropriate
incentive to drive business segment performance.
In
addition, we believe all employees must be fully committed to customer quality
and service. Therefore, the plan includes a “quality and service” component
pursuant to which the Committee may reduce plan awards by up to 20% if we or
a
business segment or a business unit do not achieve established quality and
service objectives. The quality and service objectives include items such as
service levels required by customer contracts, failure rates and warranty costs,
and are reviewed regularly by the CEO with the appropriate business team. At
the
conclusion of the year, the Committee (or the Board in the case of the CEO)
reviews the quality and service performance and, based on the recommendations
from the CEO, determines whether any bonus reduction is to be implemented.
Award
Opportunities.
The
target awards under the IC plan have been established based on recommendations
from the independent compensation consultant to reflect the 50th
percentile of annual target incentive awards for similar positions within the
comparator group. For 2006, the target incentive award was 90% of base salary
for the CEO, 60% of base salary for the CFO, and 45% or 50% of base salary
for
our other executive officers, in each case with a “cut-off” award equal to 75%
of the target award and a “stretch” award equal to 300% of the target
award.
Actual
2006 Results. The
actual financial performance against targets for 2006 was as
follows:
|
IC
Plan
|
||
|
Financial
Measure
|
2006
IC Goal
|
2006
Actual
|
|
Corporate
EPS
|
$1.55
|
$0.81
|
|
Drivetrain
adjusted EBIT
|
$42.4
million
|
$18.7
million
|
|
Logistics
adjusted EBIT
|
$23.2
million
|
$29.1
million
|
Based
on
the 2006 financial performance against goals, four of the five named executive
officers did not earn a bonus under the IC plan for the year. The only named
executive officer to earn a 2006 plan bonus was William Conley, President of
ATC
Logistics, whose earned bonus represented 226% of his target bonus award because
the actual financial performance of the Logistics segment significantly exceeded
its financial target. However, due to service problems associated with certain
2006 program launches within the Logistics segment, the Committee reduced Mr.
Conley’s 2006 earned bonus by the full 20% reduction factor described
above.
Long-Term
Incentives
Our
long-term incentive program is a key element of our total compensation program.
Long-term incentives are the largest component of variable compensation and
provide the strongest tie to long-term shareholder value. Our long-term
incentive compensation historically has consisted of awards of stock options
and
restricted stock.
Stock
Options.
Stock
options reward management for increases in our stock price above the price
at
the time the options are granted and thus provide a direct link to shareholder
value creation. The annual awards of stock options for 2006 took place at the
Committee’s and the Board’s regularly scheduled meetings on June 1, 2006.
These stock option grants have an exercise price of $24.69, which represented
the closing stock price on the date of grant. The Committee and the Board have
never granted options with an exercise price that is less than the closing
price
of our common stock on the grant date, nor have they granted options that are
priced on a date other than the grant date. Since the end of 1998, we have
maintained a policy against repricing stock options without shareholder
approval. All awards of stock options require approval of the Committee (or
the
Board in the case of an award to the CEO).
All
stock
option grants are granted in the form of nonqualified stock options and vest
at
the rate of 33⅓% per year over the first three years of the ten-year option
term. Vesting and exercise rights cease in connection with termination of
employment except in the case of death or disability.
It
is the
Committee’s intent to generally grant stock options at approximately the same
time each year - at the time of our annual meeting, which typically takes place
in late May or early June. However, the annual grant to our CEO for 2007 took
place in January 2007. We do not have a formal policy with regards to the timing
of stock option or restricted stock grants and the release of material
non-public information.
Restricted
Stock.
Restricted stock grants build executive stock ownership and focus executives
on
long-term company performance. Furthermore, awards of restricted stock are
consistent with current market practice. Restricted shares were granted to
named
executive officers on June 1, 2006 when the stock price was $24.69. These
restricted stock awards are nontransferable and will vest at the rate of 33⅓%
per year. All restricted stock awards have dividend and voting rights. Awards
of
all restricted stock require approval of the Committee (or the Board in the
case
of an award to the CEO).
Award
Opportunities.
The
target long-term incentive opportunities have been established based on the
independent compensation consultant’s review of comparator group long-term
incentive practices and our compensation philosophy described above. For 2006,
the economic value of long-term incentive grants ranged from 175% of salary
for
the CEO to 85% of salary for the CFO to an average of 55% of salary for the
other executive officers. For 2006, these award sizes were consistent with
the
75th
percentile of the competitive marketplace. The stock-based compensation expense
associated with the equity awards is disclosed in the Summary Compensation
Table
below.
For
2006,
the value of long-term incentive awards for named executive officers consisted
of approximately 50% in stock options and 50% in restricted stock. The Committee
believes this balanced long-term incentive portfolio will further align
management’s interests with the interests of our shareholders by focusing
management on achieving the value targets outlined in the Company’s strategic
plan.
New
Long-Term Incentive Plan.
Effective January 1, 2007 we implemented a long-term incentive plan (LTIP)
with
a stock component (both options and restricted stock) and a cash component
to
reward management for achieving value targets over a three-year period. The
financial performance metrics for this plan are compounded annual growth rate
(CAGR) for both revenue and operating income for the 2006-2008 LTIP performance
period, and return on invested capital (ROIC) for the same period. The current
intention is to target a value mix in the LTIP of approximately 70% for the
stock component and 30% for the cash component with the target opportunities
for
the cash component ranging from 90% of base salary for the CEO to an average
of
25% of base salary for the other named executive officers.
Performance
Evaluation and Role of Officers in Setting
Compensation
The
Committee makes all final decisions regarding compensation for all executive
officers other than the CEO. The CEO evaluates the performance of each of the
other executive officers, discusses his assessments with the Committee and
makes
recommendations to the Committee for base salary adjustments and incentive
award
targets, which are reviewed and approved by the Committee.
In
the
case of the CEO, the Committee evaluates his performance against a detailed
list
of performance objectives that have been mutually agreed upon by the Committee
and the CEO at the beginning of the year. These objectives include specific
measurable financial performance metrics, business strategy implementation
milestones, and leadership development/succession planning goals. The Committee
monitors the performance of the CEO against these goals throughout the year
and
determines the final year-end evaluation. Based on this evaluation, the
Committee submits a compensation recommendation to the full Board for review
and
approval.
Retirement
and Other Benefits
Retirement
Savings Plan and Deferral Plan
Unlike
many of our competitors, we do not offer a defined benefit retirement plan.
Executive officers participate in our Retirement Savings Plan, a tax-qualified
401(k) plan pursuant to which all our U.S.-based employees, including the named
executive officers, are able to contribute the lesser of (i) up to 75% of
their annual compensation (salary and bonus) or (ii) the limit prescribed
by the Internal Revenue Service. We match up to 50% on the first 6% of
compensation that is contributed by an employee to the plan. All employee
contributions are fully vested upon contribution, while the matching
contribution vests at the rate of 20% per year. However, due to the legal
contribution limits on defined contribution retirement plans, the actual benefit
to executive officers under the plan is severely limited.
To
provide somewhat more competitive retirement benefits, we offer our executive
officers and selected U.S.-based key employees the right to participate in
a
nonqualified deferred compensation plan. Under this plan, key employees are
eligible to defer up to 75% of annual base salary and 100% of cash incentive
compensation and/or commission awards. For 2006, the Committee (and the Board
in
the case of the CEO) approved a matching contribution of 50% of the first 10%
of
base salary deferred during the year. The matching contribution vests at the
rate of 20% per year. Outside directors are also eligible to defer up to 100%
of
their annual retainer but without a matching contribution.
All
of
the compensation associated with these plans for 2006 is included in the “Other
Compensation” column of the Summary Compensation Table below.
Perquisites
and other Personal Benefits
We
provide a car allowance of $20,000 per year for the CEO and $9,600 per year
for
the other executive officers, except for one executive officer who has the
use
of a drive audit vehicle (i.e., a vehicle provided to an employee, without
charge, for the purpose of testing our remanufactured products). The Committee
believes this auto allowance is consistent with typical market practices for
company car programs and is part of offering a market competitive total
compensation program.
Each
executive officer also receives an annual allowance equal to 2% of base salary
for expenses related to financial counseling, tax and legal services, club
dues,
home office and the like. This flexible structure enables executives to select
benefits based on their specific circumstances and thereby raises the perceived
value of the program.
These
perquisites and benefits are offered in order to (i) provide executives
with certain conveniences so that they can focus more on our business matters,
and (ii) offer a market-competitive total compensation package. The
Committee periodically reviews the levels of perquisites and other personal
benefits to the named executive officers and believes they are reasonable and
consistent with our overall compensation program.
All
of
the compensation to the named executive officers associated with these
perquisites and other personal benefits for 2006 is included in the “Other
Compensation” column of the Summary Compensation Table below.
Executive
Compensation Employment Agreements
We
have
entered into written employment agreements with each of our executive officers,
which provide for various benefits, including severance payable under certain
circumstances. These employment agreements are designed to promote stability
and
continuity among our senior management team. For information regarding these
agreements for the named executive officers, see “Summary Compensation Table”
and “Potential Payments Upon Termination or Change-in-Control”
below.
Tax
and Accounting Implications
Deductibility
of Executive Compensation - Section 162(m) Compliance
Section
162(m) of the Internal Revenue Code generally disallows the corporate tax
deduction for certain compensation paid in excess of $1 million annually to
each of the chief executive officer and the four other most highly compensated
executive officers of publicly-held companies. There is an exception to this
rule for “performance-based compensation.”
The
Committee’s long-term objective is that our compensation programs qualify as
performance-based compensation for purposes of Section 162(m) in order to
maximize our corporate tax deduction. Therefore, as required by Section 162(m)
both the annual incentive plans and long-term incentive plans were approved
by
shareholders to qualify applicable compensation as “performance based.”
Furthermore, the incentive plans are administered by the Committee in order
to
be compliant with Section 162(m). Since May 2004, the Committee has been
composed solely of outside directors for purposes of Section 162(m). While
the
Committee’s general policy is to preserve the deductibility of most compensation
paid to our covered executives, it may from time to time authorize payments
that
might not be deductible if the Committee believes that those payments are in
the
best interests of shareholders.
Nonqualified
Deferred Compensation - IRC Section 409A Compliance
The
American Jobs Creation Act, which became effective January 1, 2005, changed
those tax rules applicable to nonqualified deferred compensation arrangements.
While final regulations under the Act have not yet become effective, we believe
we are operating in good faith compliance with the statutory provisions as
currently in effect. For a more detailed discussion of our nonqualified deferred
compensation arrangements, see “Nonqualified Deferred Compensation”
below.
Summary
Compensation Table
The
following table sets forth the compensation for 2006, for services to us in
all
capacities, of the named executive officers:
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
|
Stock
Awards
($)(1)
|
|
Option
Awards
($)(2)
|
Non-Equity
Incentive
Plan
Compen-sation
($)(3)
|
Change
in Pension Value and Non-qualified Deferred Compensation
Earnings
($)
|
|
All
Other Compen-
sation
($)
|
Total
($)
|
|||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
||||||||||||||||||||
|
Donald
T. Johnson, Jr.
Chairman,
President, CEO
|
2006
|
$
|
535,000
|
(4) |
$
|
0
|
$
|
330,557
|
$
|
281,421
|
$
|
0
|
$
|
0
|
$
|
66,178
|
(5) |
$
|
1,213,156
|
||||||||||
|
Todd
R. Peters
Vice
President and CFO
|
2006
|
$
|
324,500
|
(6) |
$
|
0
|
$
|
151,876
|
$
|
125,414
|
$
|
0
|
$
|
0
|
$
|
17,009
|
(7) |
$
|
618,799
|
||||||||||
|
William
L. Conley, Jr.
President,
ATC Logistics & Electronics
|
2006
|
$
|
252,000
|
(8) |
$
|
0
|
$
|
55,964
|
$
|
37,796
|
$
|
159,472
|
(9) |
$
|
0
|
$
|
36,680
|
(10) |
$
|
541,912
|
|||||||||
|
Brett
O. Dickson
Vice
President, N.A.,
Reman
Operations
|
2006
|
$
|
260,000
|
(11) |
$
|
0
|
$
|
75,096
|
$
|
44,214
|
$
|
0
|
$
|
0
|
$
|
19,735
|
(12) |
$
|
399,045
|
||||||||||
|
Joseph
Salamunovich
Vice
President, General Counsel and Secretary
|
2006
|
$
|
234,600
|
(13) |
$
|
0
|
$
|
68,087
|
$
|
37,796
|
$
|
0
|
$
|
0
|
$
|
21,763
|
(14) |
$
|
362,246
|
||||||||||
|
(1)
|
See
Item 8. "Consolidated Financial Statements and Supplementary Data
- Note 2
- Stock-Based Compensation" for a description of the assumptions
used in the computation of our stock award fair
values.
|
|
(2)
|
See
Item 8. "Consolidated Financial Statements and Supplementary Data
- Note 2
- Stock-Based Compensation" for a description of the assumptions
used in the computation of our option award fair
values.
|
|
(3)
|
Bonuses
are paid under our incentive compensation plan for a particular year
if we
achieve or exceed specified EPS and other financial targets for the
year,
and are paid during the first quarter of the following
year.
|
|
(4)
|
Mr.
Johnson deferred $267,500 of this amount pursuant to our executive
deferred compensation plan. His base salary was increased to $560,000
effective January 1, 2007.
|
|
(5)
|
Consists
of $6,442 Company matching contribution under our 401(k) Plan, $28,076
Company matching contribution under our executive deferred compensation
plan, $20,000 automobile allowance, $10,700 reimbursement for club
dues
and personal financial planning costs, and $960 Company-paid life
insurance premiums.
|
|
(6)
|
Mr.
Peters' base salary was increased to $337,500 effective January 1,
2007.
|
|
(7)
|
Consists
of $9,600 automobile allowance; $6,490 reimbursement for club dues
and
financial planning costs; and $919 Company-paid life insurance
premiums.
|
|
(8)
|
Mr.
Conley deferred $25,200 of this amount pursuant to our executive
deferred
compensation plan. His base salary was increased to $260,000 effective
January 1, 2007.
|
|
(9)
|
Mr.
Conley deferred 50% of this amount pursuant to our executive deferred
compensation plan.
|
|
(10)
|
Consists
of $6,600 Company matching contribution under our 401(k) Plan, $14,550
Company matching contribution under our executive deferred compensation
plan, $9,600 automobile allowance, $5,040 reimbursement for club
dues and
personal financial planning costs; and $890 Company-paid life insurance
premiums.
|
|
(11)
|
Mr.
Dickson deferred $13,000 of this amount pursuant to our executive
deferred
compensation plan.
|
|
(12)
|
Consists
of $5,418 Company matching contribution under our 401(k) Plan, $8,510
Company matching contribution under our executive deferred compensation
plan, $4,900 reimbursement for club dues and personal financial planning
costs, and $907 Company-paid life insurance
premiums.
|
|
(13)
|
Mr.
Salamunovich's base salary was increased to $244,000 effective January
1,
2007.
|
|
(14)
|
Consists
of $6,600 Company matching contribution under our 401(k) Plan, $9,600
automobile allowance, $4,692 reimbursement for club dues and personal
financial planning costs, and $871 Company-paid life insurance
premiums.
|
Based
on
the fair value of equity awards granted to named executive officers in 2006
and
the base salary of the named executive officers, “Salary” accounted for
approximately 47% of the total compensation of the named executive officers
while incentive compensation (i.e., stock awards, option awards and non-equity
incentive plan compensation) accounted for approximately 53% of the total
compensation of the named executive officers. Because the value of certain
equity awards included in the Summary Compensation Table above reflects the
stock-based compensation expense rather than the total fair value of the awards,
these percentages may not be able to be derived using the amounts reflected
in
the above table.
During
2006 we had a written employment agreement with each of our named executive
officers. These agreements, which are on a year-to-year basis with unlimited
automatic renewals, provide for a base salary, participation in our various
incentive and benefit plans, and various perquisites, including an annual car
allowance ($20,000 for Mr. Johnson, $9,600 for other executive officers) and
reimbursement of the executive’s expenses for financial planning, club dues and
similar matters (capped at 2% of annual base salary).
Each
agreement includes a noncompetition provision that runs for a specified period
after the executive ceases to be employed by us. The period is 24 months in
the
case of Mr. Peters and 18 months in the case of the other executive officers.
Each agreement also contains a confidentiality provision and a provision that
prohibits the executive officer from soliciting our employees for employment
by
other companies during a specified period after leaving Aftermarket Technology
Corp.
Each
of
the employment agreements provides for severance payments to the executive
officer in certain circumstances. See “Potential Payments Upon Termination or
Change-in-Control” below.
In
January 2007 we entered into a new written employment agreement with Mr. Johnson
that replaces the agreement described above. The new agreement expires on
December 31, 2007, subject to two one-year automatic renewals, and provides
for a base salary, participation in our various incentive and benefit plans,
and
various perquisites, including an annual car allowance of $24,000 and
reimbursement of up to $20,000 per year of Mr. Johnson’s expenses for
financial planning, club dues and similar matters. The new agreement also
includes a noncompetition provision that runs for 24 months after Mr. Johnson
ceases to be employed by us. Like the old agreement, the new agreement also
contains a confidentiality provision and a provision that prohibits Mr. Johnson
from soliciting our employees for employment by other companies during a
specified period after leaving Aftermarket Technology Corp.
Grants of Plan-Based Awards Table
The
following table sets forth information regarding each grant of an award made
in
2006 to the named executive officers under our various incentive
plans:
|
|
|
|
|
Estimated
Future Payouts under Non-equity Incentive Plan
Awards(1)
|
Estimated
Future Payouts under Equity Incentive Plan
Awards
|
||||||||||||||||||||||||
|
Name
|
|
Grant
Date
|
|
Threshold
$
|
|
Target
$
|
|
Maximum
$
|
|
Threshold
#
|
|
Target
#
|
|
Maximum
#
|
|
All
Other Stock Awards: Num-
ber
of Shares of Stock or Units
(#)
|
|
All
Other Option
Awards:
Number
of
Securities Underlying Options
(#)
|
|
Exercise
or Base Price of Option Awards ($/Share)
|
|
Grant
Date Fair Value of Stock and Option Awards
|
|||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|
(k)
|
(l)
|
|||||||||||||||||
|
Donald
T. Johnson, Jr.
|
$
|
361,125
|
$
|
481,500
|
$
|
1,444,500
|
-
|
-
|
-
|
- |
|
|
|
||||||||||||||||
|
6/1/06
|
|
|
|
|
|
18,750
|
(2) |
-
|
-
|
$
|
462,938
|
||||||||||||||||||
|
|
6/1/06
|
|
|
|
|
|
-
|
56,250
|
(3) |
$
|
24.69
|
$
|
465,677
|
||||||||||||||||
|
Todd
R. Peters
|
$
|
146,025
|
$
|
194,700
|
$
|
584,100
|
-
|
-
|
-
|
-
|
|
|
|
||||||||||||||||
|
|
6/1/06
|
|
|
|
|
|
5,625
|
(2) |
-
|
-
|
$
|
138,881
|
|||||||||||||||||
|
|
6/1/06
|
|
|
|
|
|
-
|
16,875
|
(2) |
$
|
24.69
|
$
|
139,703
|
||||||||||||||||
|
William
L. Conley, Jr.
|
$
|
94,500
|
$
|
126,000
|
$
|
378,000
|
-
|
-
|
-
|
-
|
|
|
|
||||||||||||||||
|
|
6/1/06
|
|
|
|
|
|
2,813
|
(2) |
-
|
-
|
$
|
69,453
|
|||||||||||||||||
|
|
6/1/06
|
|
|
|
|
|
-
|
8,437
|
(2) |
$
|
24.69
|
$
|
69,847
|
||||||||||||||||
|
Brett
O. Dickson
|
$
|
97,500
|
$
|
130,000
|
$
|
390,000
|
-
|
-
|
-
|
-
|
|
|
|
||||||||||||||||
|
|
6/1/06
|
|
|
|
|
|
2,813
|
(2) |
-
|
-
|
$
|
69,453
|
|||||||||||||||||
|
|
6/1/06
|
|
|
|
|
|
-
|
8,437
|
(2) |
$
|
24.69
|
$
|
69,847
|
||||||||||||||||
|
Joseph
Salamunovich
|
$
|
79,178
|
$
|
105,570
|
$
|
316,710
|
-
|
-
|
-
|
-
|
|
|
|
||||||||||||||||
|
|
6/1/06
|
|
|
|
|
|
2,813
|
(2) |
-
|
-
|
$
|
69,453
|
|||||||||||||||||
|
|
6/1/06
|
|
|
|
|
|
-
|
8,437
|
(2) |
$
|
24.69
|
$
|
69,847
|
||||||||||||||||
| (1) |
Established
under the annual Incentive Compensation Plan and payable if we
achieve or
exceed specified EPS and other financial targets for the year
ended
December 31, 2006 (provided that any bonus may be reduced by
up to 20% if
certain quality and service metrics are not achieved). The amounts
shown
in column (c) reflect the minimum payments under the Incentive
Compensation Plan which is 75% of the target amount shown in
column (d).
The amount shown in column (e) is 300% of such target amount.
These
amounts are based on the individual’s current salary and position. Based
on our performance in 2006, none of these amounts are payable
except in
the case of Mr. Conley.
|
| (2) |
Awarded
under the 2004 Stock Incentive Plan. No consideration was paid
for the
award.
|
| (3) |
Awarded
under the 2000 Stock Incentive Plan. No consideration was paid
for the
award.
|
Outstanding
Equity Awards at Fiscal Year-End Table
The
following table sets forth information regarding unexercised stock options,
unvested restricted stock, and equity incentive plan awards for each named
executive officer outstanding as of December 31, 2006:
|
Options
Awards
|
Stock
Awards
|
||||||||||||||||||||||||||||
|
Name
|
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
|
Equity
Incentive
Plan
Awards Number of Securities Underlying Unexercised Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expi-ration
Date
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
Market
Value of Shares or Units of Stock That Have Not
Vested
($)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested
(#)
|
Equity
Incentive
Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other
Rights That Have Not Vested
($)
|
|||||||||||||||||
|
(a)
|
|
(b)
|
|
(c)
|
(d)
|
|
(e)
|
|
(f)
|
(g)
|
(h)
|
|
(i)
|
(j)
|
|||||||||||||||
|
Donald
T. Johnson, Jr.
|
-
|
35,416
|
(1)
|
$
|
753,652
|
-
|
-
|
||||||||||||||||||||||
|
93,333
|
46,667
|
(2)
|
$
|
14.0000
|
01/02/14
|
||||||||||||||||||||||||
|
75,000
|
-
|
$
|
15.8500
|
06/02/15
|
|||||||||||||||||||||||||
|
-
|
56,250
|
(3)
|
|
$
|
24.6900
|
06/01/16
|
|
|
|
|
|||||||||||||||||||
|
Todd
R. Peters
|
-
|
18,958
|
(4)
|
$
|
403,426
|
-
|
-
|
||||||||||||||||||||||
|
-
|
23,333
|
(5)
|
$
|
14.8500
|
03/09/14
|
||||||||||||||||||||||||
|
-
|
16,875
|
(3)
|
$
|
24.6900
|
06/01/16
|
||||||||||||||||||||||||
|
William
L. Conley, Jr.
|
-
|
6,146
|
(6)
|
$
|
130,787
|
-
|
-
|
||||||||||||||||||||||
|
25,000
|
-
|
$
|
14.1100
|
08/07/12
|
|||||||||||||||||||||||||
|
6,667
|
3,333
|
(7)
|
$
|
14.9000
|
05/12/14
|
||||||||||||||||||||||||
|
11,250
|
-
|
$
|
15.8500
|
06/02/15
|
|||||||||||||||||||||||||
|
-
|
8,437
|
(3)
|
$
|
24.6900
|
06/01/16
|
||||||||||||||||||||||||
|
Brett
O. Dickson
|
-
|
8,646
|
(8)
|
$
|
183,987
|
-
|
-
|
||||||||||||||||||||||
|
5,000
|
-
|
$
|
22.9000
|
05/08/12
|
|||||||||||||||||||||||||
|
-
|
5,000
|
(7)
|
$
|
14.9000
|
05/12/14
|
||||||||||||||||||||||||
|
-
|
8,437
|
(3)
|
$
|
24.6900
|
06/01/16
|
||||||||||||||||||||||||
|
Joseph
Salamunovich
|
-
|
6,980
|
(9)
|
$
|
148,534
|
-
|
-
|
||||||||||||||||||||||
|
10,000
|
-
|
$
|
18.1250
|
05/12/08
|
|||||||||||||||||||||||||
|
25,000
|
-
|
$
|
22.9000
|
05/08/12
|
|||||||||||||||||||||||||
|
6,667
|
3,333
|
(7)
|
$
|
14.9000
|
05/12/14
|
||||||||||||||||||||||||
|
11,250
|
-
|
$
|
15.8500
|
06/02/15
|
|||||||||||||||||||||||||
|
-
|
8,437
|
(3)
|
$
|
24.6900
|
06/01/16
|
||||||||||||||||||||||||
| (1) |
14,583
vest in June 2007; 14,583 vest in June 2008; and 6,250 vest in June
2009.
|
| (2) |
Vest
in January 2007.
|
| (3) |
Vest
in equal installments in June 2007, June 2008 and June
2009.
|
| (4) |
8,333
shares vest in March 2007; 4,375 shares vest in June 2007; 4,375
vest in
June 2008; and 1,875 shares vest in June
2009.
|
| (5) |
Vest
in March 2007.
|
| (6) |
833
shares vest in May 2007; 2,188 shares vest in June 2007; 2,188 shares
vest
in June 2008; and 937 shares vest in June
2009.
|
| (7) |
Vest
in May 2007.
|
| (8) |
3,333
shares vest in May 2007; 2,188 shares vest in June 2007; 2,188 shares
vest
in June 2008; and 937 shares vest in June
2009.
|
| (9) |
1,667
shares vest in May 2007; 2,188 shares vest in June 2007; 2,188 shares
vest
in June 2008; and 937 shares vest in June
2009.
|
Option
Exercise and Stock Vesting Table
The
following table sets forth information regarding the exercise of stock options
and vesting of restricted stock in 2006 for the named executive
officers:
|
|
Option
Awards
|
Restricted
Stock Awards
|
||||||||||
|
Name
|
Number
of Shares Acquired on Exercise
(#)
|
Value
Realized Upon Exercise
($)
|
Number
of Shares Acquired on Vesting
(#)
|
Value
Realized Upon Vesting
($)
|
||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
||||||||
|
Donald
T. Johnson, Jr.
|
-
|
-
|
8,334
|
$
|
207,350
|
|||||||
|
Todd
R. Peters
|
69,167
|
$
|
769,804
|
10,833
|
$
|
243,859
|
||||||
|
William
L. Conley, Jr.
|
-
|
-
|
2,083
|
$
|
51,758
|
|||||||
|
Brett
O. Dickson
|
33,750
|
$
|
328,299
|
4,583
|
$
|
113,758
|
||||||
|
Joseph
Salamunovich
|
-
|
-
|
4,583
|
$
|
101,773
|
|||||||
Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation
Plans
The
following table sets forth information regarding the named executive officers’
participation in our deferred compensation plan during 2006:
|
Name
|
Executive
Contributions in Last FY
($)(1)
|
Registrant
Contributions in
Last
FY
($)(2)(3)
|
Aggregate
Earnings
in
Last FY
($)(4)(5)
|
Aggregate
Withdrawals/ Distributions
($)
|
Aggregate
Balance
at
Last
FYE
($)
|
||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
||||||||||||
|
Donald
T. Johnson, Jr.
|
$
|
956,614
|
$
|
28,076
|
(6)
|
$
|
84,784
|
-
|
$
|
1,254,218
|
(7)
|
||||||
|
Todd
R. Peters
|
-
|
-
|
-
|
-
|
-
|
||||||||||||
|
William
L. Conley, Jr.
|
$
|
128,200
|
$
|
14,550
|
(8)
|
$
|
16,736
|
-
|
$
|
176,617
|
(9)
|
||||||
|
Brett
O. Dickson
|
$
|
13,000
|
$
|
8,510
|
(10)
|
$
|
3,810
|
-
|
$
|
34,603
|
(11)
|
||||||
|
Joseph
Salamunovich
|
-
|
-
|
-
|
-
|
-
|
||||||||||||
|
(1)
|
A
portion of these amounts were reported as compensation in the Summary
Compensation Table in prior years.
|
|
(2)
|
All
of these amounts are reported as "All Other Compensation" in the
Summary
Compensation Table.
|
|
(3)
|
In
2006, the Company provided a matching contribution of $0.50 per $1.00
of
the first 10% of base salary
deferred.
|
|
(4)
|
None
of these amounts are reported as 2006 compensation in the Summary
Compensation Table.
|
|
(5)
|
The
aggregate earnings for 2006 are based on the returns of externally
managed
mutual funds. We maintain a grantor trust underlying the deferred
compen-
sation
plan
through which we generally seek to match assets to liabilities under
the
plan.
|
|
(6)
|
Includes
special Company contribution of $1,393 to replace a forfeited 401(k)
Plan
Company matching contribution.
|
|
(7)
|
Includes
$885,077 previously reported as compensation in the Summary Compensation
Table for prior years.
|
|
(8)
|
Includes
special Company contribution of $1,973 to replace a forfeited 401(k)
Plan
Company matching contribution.
|
|
(9)
|
Includes
$119,642 previously reported as compensation in the Summary Compensation
Table for prior years.
|
|
(10)
|
Includes
special Company contribution of $1,760 to replace a forfeited 401(k)
Plan
Company matching contribution.
|
|
(11)
|
Includes
$9,000 previously reported as compensation in the Summary Compensation
Table for prior years.
|
Our
nonqualified deferred compensation plan, which is designed to comply with the
requirements of Section 409A of the Internal Revenue Code, enables our
executive officers and directors to defer a portion of the cash compensation
payable to them. Officers may defer up to 75% of base salary and up to 100%
of
annual incentive bonus and directors may defer up to 100% of annual retainer.
The plan provides for a Company contribution of 50 cents for each dollar of
the
first 10% of base salary deferred by an officer. Plan participants elect to
invest contributions in assorted mutual funds available under the plan.
Distributions from the plan can be made in a lump sum payment or in annual
payments over a period not to exceed 15 years. “In-service” distributions (i.e.,
distributions made while the participant is still employed by us) may not be
made prior to two years after the establishment of the in-service account in
question. “Post-separation” distributions (i.e., distributions made after the
participant ceases to be employed by us) may not be made until six months after
the separation. A participant may also receive a one-time distribution of some
or all of such participant’s deferred account in the event of financial hardship
caused by certain “unforeseen emergencies” (as defined in the
plan).
The
following table shows the funds available under the deferred compensation plan
and their annual rate of return for the year ended December 31, 2006, as
reported by the administrator of the plan:
|
Name
of Fund
|
Rate
of
Return
|
Name
of Fund
|
Rate
of
Return
|
|
American
Century Equity Income Adv. Fund
|
19.3%
|
Principal
Investors Money Market Pfd. Fund
|
4.50%
|
|
American
Funds EuroPacific Growth R3 Fund
|
21.43%
|
Principal
Investors Partners MidCap Value Pfd. Fund
|
13.29%
|
|
American
Funds Growth Fund of America R3 Fund
|
10.62%
|
Principal
Investors Real Estate Securities Pfd. Fund
|
36.16%
|
|
Calvert
Social Investment Bond A Fund
|
4.28%
|
Principal
Investors SmallCap Blend Pfd. Fund
|
13.95%
|
|
Lord
Abbett All Value P Fund
|
13.62%
|
Principal
Investors SmallCap Value Pfd. Fund
|
18.50%
|
|
Principal
Investors International Growth Pfd. Fund
|
24.01%
|
Russell
LifePoints® Balanced Strategy E Fund
|
12.84%
|
|
Principal
Investors LargeCap Growth Pfd. Fund
|
9.59%
|
Russell
LifePoints® Equity Growth Strategy E Fund
|
18.59%
|
|
Principal
Investors MidCap Blend Pfd. Fund
|
13.81%
|
Potential
Payments Upon Termination or Change-in-Control
Each
of
the employment agreements with our named executive officers as of
December 31, 2006 provides that we will make severance payments and provide
severance benefits to the executive if his employment with us terminates under
certain circumstances. For purposes of the following discussion, the
“termination date” means the date the executive ceases to be our employee,
whether due to nonrenewal of the employment agreement, termination by us, or
the
executive’s resignation, death or disability.
Severance
for Messrs. Johnson and Peters is equal to 18 months of base salary and the
severance for each of the other executive officers is equal to 12 months of
base
salary. In addition, an executive officer would receive a prorated portion
of
the cash bonus that would be payable under our annual incentive compensation
plan for the year in which the termination date occurs. If the termination
date
occurs within 18 months after a “change in control” (see below), the
executive officer would also receive a payment equal to his target bonus under
the incentive compensation plan for the year in which the termination date
occurs. The severance also includes continued medical benefits during the
severance period. It is a condition to receiving severance payments and benefits
that the executive officer release us from all legal claims of any nature that
he has or may have as of the termination date.
Severance
is payable if (i) the executive is terminated without cause or resigns for
“good reason,” (see below) or (ii) his employment agreement is not renewed.
In addition, Mr. Johnson would receive severance if (x) he voluntarily
resigns and the Board determines that he has provided an orderly transition
to
his successor, or (y) he becomes disabled.
Severance
payments to an executive officer will ordinarily be made over the severance
period (18 months for Messrs. Johnson and Peters, and 12 months for all other
executive officers) unless the termination date occurs within 18 months
after a change in control, in which case the severance will be made in a single
payment within ten days after the termination date.
If
the
employment of an executive officer terminates, all of his unvested stock options
and shares of restricted stock will terminate on the termination date, unless
a
change in control has occurred within 18 months prior to the termination date,
in which case all such unvested options and restricted stock will vest on the
termination date. The executive will have 30 days after his termination date
in
which to exercise any stock options that vested on or before the executive’s
termination date, except in the case of termination without cause within 18
months after a change in control, death or disability, in which case the
executive (or his estate) has one year from the termination date in which to
exercise such vested options.
None
of
the executive employment agreements in place at December 31, 2006 provides
for any payments or benefits upon a change in control unless the executive’s
employment terminates at the time of the change in control. Neither do any
of
those agreements provide for a tax “gross-up” to offset the “parachute” excise
tax under Internal Revenue Code Section 4999.
“Change
in control” (CIC) occurs if (i) a reorganization, merger or consolidation
of Aftermarket Technology Corp. or sale of all or substantially all of our
assets occurs unless after such transaction at least 85% of the total voting
power of the entity surviving or resulting from such transaction is beneficially
owned by persons who prior to the transaction beneficially owned 100% of the
total voting power of Aftermarket Technology Corp., (ii) any shareholder
(or group of shareholders) becomes the beneficial owner of more than 35% of
the
total voting power of Aftermarket Technology Corp., or (iii) during any 12
month period individuals who at the beginning of such 12-month period
constituted our Board of Directors (together with any new directors whose
election by such Board or whose nomination for election by our shareholders
was
approved by a vote of a majority of the directors then still in office who
were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute
a
majority of our Board of Directors.
“Good
reason” means (i) a material diminution in the executive officer’s
compensation, authority or responsibilities that is not justified by the
executive’s performance, or (ii) our material breach of the employment
agreement, where such diminution or breach is not cured within 30 days after
notice from the executive officer.
The
following tables show the payments and benefits
that the named executive officers could receive in the event of certain
termination events, based on their employment agreements as in effect on
December 31, 2006:
Donald
T. Johnson, Jr.
|
Executive
Benefits and
Payments
Upon Termination
|
Voluntary
Termination Without Board- approved Transition
|
Voluntary
Termina-tion With Board- approved Transition
|
For
Cause Termi-nation
|
Involuntary
Termination Without Cause(1)
|
Involuntary
Termination Without Cause Within 18
Months
after
CIC(1)
|
Death
|
Disability
|
Retirement
|
||||||||||||||||
|
Compensation:
|
||||||||||||||||||||||||
|
Base
Salary
|
-
|
$
|
802,500
|
-
|
$
|
802,500
|
$
|
802,500
|
-
|
$
|
802,500
|
-
|
||||||||||||
|
Short-term
Incentive
|
||||||||||||||||||||||||
|
Pro-rated
award
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||
|
Earned
award
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||
|
Pro-Forma
award
|
-
|
-
|
-
|
-
|
$
|
481,500
|
-
|
-
|
-
|
|||||||||||||||
|
Stock
Options(2)
|
-
|
-
|
-
|
-
|
$
|
339,736
|
$
|
339,736
|
$
|
339,736
|
-
|
|||||||||||||
|
Restricted
Stock(3)
|
-
|
-
|
-
|
-
|
$
|
753,652
|
$
|
753,652
|
$
|
753,652
|
-
|
|||||||||||||
|
Benefits
and Perquisites:
|
||||||||||||||||||||||||
|
Medical
Plan Coverage(4)
|
-
|
$
|
9,000
|
-
|
$
|
9,000
|
$
|
9,000
|
-
|
$
|
9,000
|
-
|
||||||||||||
|
Life
Insurance Proceeds
|
-
|
-
|
-
|
-
|
-
|
$
|
500,000
|
-
|
-
|
|||||||||||||||
|
Vested
Portion of Company
Match
of Deferred Comp.
|
$
|
16,939
|
$
|
16,939
|
$
|
16,939
|
$
|
16,939
|
$
|
42,346
|
$
|
42,346
|
$
|
42,346
|
$
|
42,346
|
||||||||
|
Accrued
Vacation Pay
|
$
|
5,200
|
$
|
5,200
|
$
|
5,200
|
$
|
5,200
|
$
|
5,200
|
$
|
5,200
|
$
|
5,200
|
$
|
5,200
|
||||||||
|
Outplacement
Assistance
|
-
|
$
|
25,000
|
-
|
$
|
25,000
|
$
|
25,000
|
-
|
-
|
-
|
|||||||||||||
|
280G
Tax Gross Up
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||
|
Total:
|
$
|
22,139
|
$
|
858,639
|
$
|
22,139
|
$
|
858,639
|
$
|
2,458,934
|
$
|
1,640,934
|
$
|
1,952,434
|
$
|
47,546
|
||||||||
(1) Includes
nonrenewal of agreement and resignation for good reason.
(2) Unvested
awards that accelerate upon the terminating event multiplied by (i) our
closing stock price on December 29, 2006 minus (ii) the exercise price of
such awards.
(3) Unvested
awards that accelerate upon the terminating event multiplied by our closing
stock price on December 29, 2006.
(4) Estimated
employer subsidy.
Todd
R. Peters
|
Executive
Benefits and
Payments
Upon Termination
|
Voluntary
Termination
|
For
Cause Termination
|
Involuntary
Termination Without Cause(1)
|
Involuntary
Termination Without Cause Within 18 Months after CIC(1)
|
Death
|
Disability
|
Retirement
|
||||||||||||||
|
Compensation:
|
|||||||||||||||||||||
|
Base
Salary
|
-
|
-
|
$
|
486,750
|
$
|
486,750
|
-
|
-
|
-
|
||||||||||||
|
Short-term
Incentive
|
|||||||||||||||||||||
|
Pro-rated
award
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Earned
award
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Pro-Forma
award
|
-
|
-
|
-
|
$
|
194,700
|
-
|
-
|
-
|
|||||||||||||
|
Stock
Options(2)
|
-
|
-
|
-
|
$
|
150,031
|
$
|
150,031
|
$
|
150,031
|
-
|
|||||||||||
|
Restricted
Stock(3)
|
-
|
-
|
-
|
$
|
403,426
|
$
|
403,426
|
$
|
403,426
|
-
|
|||||||||||
|
Benefits
and Perquisites:
|
|||||||||||||||||||||
|
Medical
Plan Coverage(4)
|
-
|
-
|
$
|
12,200
|
$
|
12,200
|
-
|
-
|
-
|
||||||||||||
|
Life
Insurance Proceeds
|
-
|
-
|
-
|
-
|
$
|
500,000
|
-
|
-
|
|||||||||||||
|
Vested
Portion of Company
Match
of Deferred Comp.
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Accrued
Vacation Pay
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Outplacement
Assistance
|
-
|
-
|
$
|
25,000
|
$
|
25,000
|
-
|
-
|
-
|
||||||||||||
|
280G
Tax Gross Up
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Total:
|
-
|
-
|
$
|
523,950
|
$
|
1,272,107
|
$
|
1,053,457
|
$
|
553,457
|
-
|
||||||||||
(1) Includes
nonrenewal of agreement and resignation for good reason.
(2) Unvested
awards that accelerate upon the terminating event multiplied by (i) our
closing stock price on December 29, 2006 minus (ii) the exercise price of
such awards.
(3) Unvested
awards that accelerate upon the terminating event multiplied by our closing
stock price on December 29, 2006.
(4) Estimated
employer subsidy.
(1)
William
L. Conley, Jr.
|
Executive
Benefits and
Payments
Upon Termination
|
Voluntary
Termination
|
For
Cause Termination
|
Involuntary
Termination Without Cause(1)
|
Involuntary
Termination Without Cause Within 18 Months after CIC(1)
|
Death
|
Disability
|
Retirement
|
||||||||||||||
|
Compensation:
|
|||||||||||||||||||||
|
Base
Salary
|
-
|
-
|
$
|
252,000
|
$
|
252,000
|
-
|
-
|
-
|
||||||||||||
|
Short-term
Incentive
|
|||||||||||||||||||||
|
Pro-rated
award
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Earned
award
|
$
|
159,472
|
$
|
159,472
|
$
|
159,472
|
$
|
159,472
|
$
|
159,472
|
$
|
159,472
|
$
|
159,472
|
|||||||
|
Pro-Forma
award
|
-
|
-
|
-
|
$
|
126,000
|
-
|
-
|
-
|
|||||||||||||
|
Stock
Options(2)
|
-
|
-
|
-
|
$
|
21,265
|
$
|
21,265
|
$
|
21,265
|
-
|
|||||||||||
|
Restricted
Stock(3)
|
-
|
-
|
-
|
$
|
130,787
|
$
|
130,787
|
$
|
130,787
|
-
|
|||||||||||
|
Benefits
and Perquisites:
|
|||||||||||||||||||||
|
Medical
Plan Coverage(4)
|
-
|
-
|
$
|
6,000
|
$
|
6,000
|
-
|
-
|
-
|
||||||||||||
|
Life
Insurance Proceeds
|
-
|
-
|
-
|
-
|
$
|
500,000
|
-
|
-
|
|||||||||||||
|
Vested
Portion of Company
Match
of Deferred Comp.
|
$
|
17,841
|
$
|
17,841
|
$
|
17,841
|
$
|
22,302
|
$
|
22,302
|
$
|
22,302
|
$
|
22,302
|
|||||||
|
Accrued
Vacation Pay
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Outplacement
Assistance
|
-
|
-
|
$
|
25,000
|
$
|
25,000
|
-
|
-
|
-
|
||||||||||||
|
280G
Tax Gross Up
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Total:
|
$
|
177,313
|
$
|
177,313
|
$
|
460,313
|
$
|
742,826
|
$
|
833,826
|
$
|
333,826
|
$
|
181,774
|
|||||||
(1) Includes
nonrenewal of agreement and resignation for good reason.
(2) Unvested
awards that accelerate upon the terminating event multiplied by (i) our
closing stock price on December 29, 2006 minus (ii) the exercise price of
such awards.
(3) Unvested
awards that accelerate upon the terminating event multiplied by our closing
stock price on December 29, 2006.
(4) Estimated
employer subsidy.
Brett
O. Dickson
|
Executive
Benefits and
Payments
Upon Termination
|
Voluntary
Termination
|
For
Cause Termination
|
Involuntary
Termination Without Cause(1)
|
Involuntary
Termination Without Cause Within 18 Months after CIC(1)
|
Death
|
Disability
|
Retirement
|
||||||||||||||
|
Compensation:
|
|||||||||||||||||||||
|
Base
Salary
|
-
|
-
|
$
|
260,000
|
$
|
260,000
|
-
|
-
|
-
|
||||||||||||
|
Short-term
Incentive
|
|||||||||||||||||||||
|
Pro-rated
award
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Earned
award
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Pro-Forma
award
|
-
|
-
|
-
|
$
|
130,000
|
-
|
-
|
-
|
|||||||||||||
|
Stock
Options(2)
|
-
|
-
|
-
|
$
|
31,900
|
$
|
31,900
|
$
|
31,900
|
-
|
|||||||||||
|
Restricted
Stock(4)
|
-
|
-
|
-
|
$
|
183,987
|
$
|
183,987
|
$
|
183,987
|
-
|
|||||||||||
|
Benefits
and Perquisites:
|
|||||||||||||||||||||
|
Medical
Plan Coverage(4)
|
-
|
-
|
$
|
8,100
|
$
|
8,100
|
-
|
-
|
-
|
||||||||||||
|
Life
Insurance Proceeds
|
-
|
-
|
-
|
-
|
$
|
500,000
|
-
|
-
|
|||||||||||||
|
Vested
Portion of Company
Match
of Deferred Comp.
|
$
|
13,089
|
$
|
13,089
|
$
|
13,089
|
$
|
13,089
|
$
|
13,089
|
$
|
13,089
|
$
|
13,089
|
|||||||
|
Accrued
Vacation Pay
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Outplacement
Assistance
|
-
|
-
|
$
|
25,000
|
$
|
25,000
|
-
|
-
|
-
|
||||||||||||
|
280G
Tax Gross Up
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Total:
|
$
|
13,089
|
$
|
13,089
|
$
|
306,189
|
$
|
652,076
|
$
|
728,976
|
$
|
228,976
|
$
|
13,089
|
|||||||
(1) Includes
nonrenewal of agreement and resignation for good reason.
(2) Unvested
awards that accelerate upon the terminating event multiplied by (i) our
closing stock price on December 29, 2006 minus (ii) the exercise price of
such awards.
(3) Unvested
awards that accelerate upon the terminating event multiplied by our closing
stock price on December 29, 2006.
(4) Estimated
employer subsidy.
Joseph
Salamunovich
|
Executive
Benefits and
Payments
Upon Termination
|
Voluntary
Termination
|
For
Cause Termination
|
Involuntary
Termination Without Cause(1)
|
Involuntary
Termination Without Cause Within 18 Months after CIC(1)
|
Death
|
Disability
|
Retirement
|
||||||||||||||
|
Compensation:
|
|||||||||||||||||||||
|
Base
Salary
|
-
|
-
|
$
|
234,600
|
$
|
234,600
|
-
|
-
|
-
|
||||||||||||
|
Short-term
Incentive
|
|||||||||||||||||||||
|
Pro-rated
award
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Earned
award
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Pro-Forma
award
|
-
|
-
|
-
|
$
|
105,570
|
-
|
-
|
-
|
|||||||||||||
|
Stock
Options(2)
|
-
|
-
|
-
|
$
|
21,265
|
$
|
21,265
|
$
|
21,265
|
-
|
|||||||||||
|
Restricted
Stock(3)
|
-
|
-
|
-
|
$
|
148,534
|
$
|
148,534
|
$
|
148,534
|
-
|
|||||||||||
|
Benefits
and Perquisites
|
|||||||||||||||||||||
|
Medical
Plan Coverage(4)
|
-
|
-
|
$
|
8,100
|
$
|
8,100
|
-
|
-
|
-
|
||||||||||||
|
Life
Insurance Proceeds
|
-
|
-
|
-
|
-
|
$
|
469,200
|
-
|
-
|
|||||||||||||
|
Vested
Portion of Company
Match
of Deferred Comp.
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Accrued
Vacation Pay
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Outplacement
Assistance
|
-
|
-
|
$
|
25,000
|
$
|
25,000
|
-
|
-
|
-
|
||||||||||||
|
280G
Tax Gross Up
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||
|
Total:
|
-
|
-
|
$
|
267,700
|
$
|
543,069
|
$
|
638,999
|
$
|
169,799
|
-
|
||||||||||
(1) Includes
nonrenewal of agreement and resignation for good reason.
(2) Unvested
awards that accelerate upon the terminating event multiplied by (i) our
closing stock price on December 29, 2006 minus (ii) the exercise price of
such awards.
(3) Unvested
awards that accelerate upon the terminating event multiplied by our closing
stock price on December 29, 2006.
(4) Estimated
employer subsidy.
Mr.
Johnson’s new employment agreement entered into in January 2007 changes his
severance from what is described above to an amount equal to two years of base
salary and two years of target bonus under our annual incentive compensation
plan, plus a prorated portion of any cash bonus under our long-term incentive
plan. These payments are subject to a tax “gross-up” to offset the “parachute”
excise tax under Internal Revenue Code Section 4999 if a change in control
occurs within 18 months prior to the termination date. Mr. Johnson’s medical
coverage runs for five years after termination. Mr. Johnson’s severance is
payable if (i) he is terminated without cause or resigns for good reason,
(ii) his employment agreement is not renewed within 18 months after a
change in control, or (iii) he becomes disabled, and payments will be made
over the 24-month period following his termination date unless the termination
date occurs within 18 months after a change in control, in which case the
severance will be made in a single payment within ten days after the termination
date.
Under
Mr.
Johnson’s new agreement, unvested stock options and restricted stock as of his
termination date will continue to vest according to their vesting schedules
after the termination date under the following circumstances: (i) the
expiration of his employment agreement without renewal; (ii) his
termination without cause or resignation for good reason; (iii) his
permanent disability; or (iv) his voluntary resignation if the Board
determines that Mr. Johnson has provided an orderly transition to his
successor. If
Mr.
Johnson ceases to be our employee due to his death, then all his unvested stock
options and restricted stock will immediately vest. If he ceases to be our
employee for any other reason, then his stock options and restricted stock
that
are unvested as of the termination date will terminate. His options that are
vested on his termination date or that subsequently vest will be exercisable
until the tenth anniversary of the date of their grant.
Compensation
of Directors
The
following table sets forth the compensation for 2006 for those persons who
served as members of our Board of Directors during 2006 (other than the Chairman
of the Board, whose compensation is included in the above tables as a named
executive officer):
|
Name
|
Fees
earned
or
paid
in
cash
($)
|
Stock
Awards
($)(1)
|
Option
Awards
($)(2)
|
Non-
Equity
Incentive
Plan
Compen-sation
($)
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
($)
|
All
Other Compen-sation
($)
|
Total
($)
|
||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
||||||||||||||||||
|
Robert
L. Evans
|
$
|
50,000
|
$
|
29,750
|
(3)
(4)
|
$
|
17,954
|
(5)
(6)
|
-
|
-
|
-
|
$
|
97,704
|
||||||||||||
|
Curtland
E. Fields
|
$
|
50,000
|
$
|
29,750
|
(3)
(4)
|
$
|
17,954
|
(5)
(6)
|
-
|
-
|
-
|
$
|
97,704
|
||||||||||||
|
Michael
J. Hartnett
|
$
|
50,000
|
$
|
29,750
|
(3)
(4)
|
$
|
28,552
|
(5)
(7)
|
-
|
-
|
-
|
$
|
108,302
|
||||||||||||
|
Michael
D. Jordan
|
$
|
50,000
|
(8)
|
$
|
29,750
|
(3)
(4)
|
$
|
41,080
|
(5)
(6)
|
-
|
-
|
-
|
$
|
120,830
|
|||||||||||
|
S.
Lawrence Prendergast
|
$
|
50,000
|
$
|
29,750
|
(3)
(4)
|
$
|
41,080
|
(5)
(6)
|
-
|
-
|
-
|
$
|
120,830
|
||||||||||||
|
Edward
Stewart
|
$
|
50,000
|
(8)
|
$
|
29,750
|
(3)
(4)
|
$
|
17,954
|
(5)
(6)
|
-
|
-
|
-
|
$
|
97,704
|
|||||||||||
|
(1)
|
See
Item 8. "Consolidated Financial Statements and Supplementary Data
- Note 2
- Stock-Based
Compensation"
for a description of the assumptions used in the computation of our
stock
award fair values.
|
|
(2)
|
See
Item 8. "Consolidated Financial Statements and Supplementary Data
- Note 2
- Stock-Based
Compensation"
for a description of the assumptions used in the computation of our
option
award fair values.
|
|
(3)
|
The
grant date fair value of 1,500 shares of restricted stock granted
on June
1, 2006 was $37,035.
|
|
(4)
|
As
of December 31, 2006, the director held 3,166 shares of restricted
stock.
|
|
(5)
|
The
grant date fair value of 4,500 options to purchase common stock granted
on
June 1, 2006 to a director was
$50,245.
|
|
(6)
|
As
of December 31, 2006, the director held 32,000 options to purchase
common
stock.
|
|
(7)
|
As
of December 31, 2006, the director held 127,000 options to purchase
common
stock.
|
|
(8)
|
Entire
2006 cash retainer has been deferred in Company's Nonqualified Deferred
Compensation Plan.
|
We
pay our
outside directors an annual fee of $50,000 for serving on the Board and we
reimburse them
for
their expenses in connection with attending Board and committee meetings.
Directors do not receive any compensation for serving on a committee or serving
as lead director or a committee chairman. In
addition to the annual fee, each outside director receives an annual grant
of
restricted stock and options to purchase our common stock. For 2006 the grant
was 1,500 shares of restricted stock and 4,500 stock options. Each director’s
restricted stock (for which no consideration was paid) vests in one-third
increments on the first, second and third anniversaries of the date of grant.
The option exercise price is $24.69 (the closing price of our common stock
on
Nasdaq on the date the options were granted), the options vest in one-third
increments on the first, second and third anniversaries of the date of grant,
and they expire in 2016.
Stock
Incentive Plans
Pursuant
to our 1998, 2000, 2002, 2004 and 2006 stock incentive plans, officers,
directors, employees and consultants of Aftermarket Technology Corp. and its
affiliates are eligible to receive stock options, annual incentive bonuses
and
incentive stock. In addition, we have stock options outstanding under a 1996
stock incentive plan under which awards may no longer be made.
The
stock
incentive plans are administered by the Compensation and Nominating Committee
of
our Board of Directors, although the Board of Directors makes decisions with
respect to awards for our Chief Executive Officer and may exercise any of the
Committee’s other authority under the plans in lieu of the Committee’s exercise
thereof. Subject to the express provisions of the stock incentive plans, the
Committee has broad authority in administering and interpreting the plans.
Awards to employees may include a provision terminating the award upon
termination of employment under certain circumstances or accelerating the
receipt of benefits upon the occurrence of specified events. Restricted stock
granted under the stock incentive plans are subject to vesting provisions.
Stock
options are also subject to vesting provisions and expire on the tenth
anniversary of the date of grant.
As
of
February 15, 2007,
there
were 200,225 shares of restricted stock issued to our directors, officers and
employees and 1,584,649 options to purchase common stock granted to our
directors, officers and employees pursuant to the plans, and the number of
shares available for future issuance pursuant to the plans was
1,081,196.
For
information regarding the number of shares of restricted stock and stock options
held by our directors and officers, see Item 12. "Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters."
Compensation
Committee Interlocks and Insider Participation
The
Compensation and Nominating Committee of our Board of Directors is composed
of
Robert L. Evans, Curtland E. Fields (Chairman) and Michael D.
Jordan, none of whom are or have ever been an officer or employee of Aftermarket
Technology Corp. or its subsidiaries and each of whom is, and at all times
during 2006 was, independent as defined in the Nasdaq listing standards and
the
regulations of the Securities and Exchange Commission. During 2006 none of
our
executive officers served on the board of directors or compensation committee
of
any entity with which any of Messrs. Evans, Fields or Jordan or any other member
of our Board of Directors had any affiliation.
Compensation
Committee Report
The
Compensation and Nominating Committee of our Board of Directors has reviewed
and
discussed the Compensation Discussion and Analysis appearing elsewhere in this
Item 11 with our management and based on such review and discussions, the
Compensation and Nominating Committee has recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in this Annual Report
on Form 10-K.
Compensation
and Nominating Committee
Curtland
E. Fields, Chairman
Robert
L.
Evans
Michael
D. Jordan
The
foregoing report of the Compensation and Nominating Committee shall not be
deemed incorporated by reference by any general statement incorporating by
reference this Annual Report on Form 10-K into any filing under the
Securities Act of 1933 or under the Exchange Act, except to the extent that
we
specifically incorporate this information by reference, and shall not otherwise
be deemed filed under such Acts.
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Security
Ownership
The
following table sets forth the beneficial ownership of our common stock (the
only class of our issued and outstanding voting securities), as of
February 15, 2007 by each of our directors, our Chief Executive Officer,
our Chief Financial Officer, each of our three other most highly compensated
executive officers as of December 31, 2006, our directors and executive
officers as a group, and each person who at February 15, 2007 was known to
us to beneficially own more than 5% of our outstanding common
stock.
|
Beneficial
Owner (1)
|
Number
of
Shares(2)
|
Voting
Percentage
|
||
|
Wells
Fargo & Company (3)
|
1,939,108
|
8.9
|
||
|
Daruma
Asset Management, Inc. (4)
|
1,703,300
|
7.8
|
||
|
Pzena
Investment Management, LLC (5)
|
1,645,394
|
7.5
|
||
|
FMR
Corp. (6)
|
1,381,702
|
6.3
|
||
|
Donald
T. Johnson, Jr. (7)
|
338,607
|
1.5
|
||
|
Todd
R. Peters (8)
|
55,429
|
*
|
||
|
Brett
O. Dickson (9)
|
13,646
|
*
|
||
|
William
L. Conley, Jr. (10)
|
51,980
|
*
|
||
|
Joseph
Salamunovich (11)
|
66,656
|
*
|
||
|
Robert
L. Evans (12)
|
31,500
|
*
|
||
|
Curtland
E. Fields (12)
|
31,500
|
*
|
||
|
Dr.
Michael J. Hartnett (13)
|
126,500
|
*
|
||
|
Michael
D. Jordan (14)
|
24,833
|
*
|
||
|
S.
Lawrence Prendergast (14)
|
25,833
|
*
|
||
|
Edward
Stewart (12)
|
48,500
|
*
|
||
|
All
directors and officers as a group (14 persons)
(15)
|
975,307
|
4.3
|
_______________
*
Less
than 1%.
|
(1)
|
Unless
otherwise noted, the address of each beneficial owner is 1400 Opus
Place,
Suite 600, Downers Grove, IL 60515.
|
|
(2)
|
The
shares of common stock underlying options granted under our stock
incentive plans that are exercisable as of February 15, 2007 or that
will become exercisable within 60 days thereafter (such options being
referred to as “exercisable”) are deemed to be outstanding for the purpose
of calculating the beneficial ownership of the holder of such options,
but
are not deemed to be outstanding for the purpose of computing the
beneficial ownership of any other person.
|
|
(3)
|
Wells
Fargo & Company’s address is 420 Montgomery Street, San Francisco, CA
94104.
|
|
(4)
|
Daruma
Asset Management, Inc.’s address is 80 West 40th
Street, 9th
Floor, New York, NY 10018.
|
|
(5)
|
Pzena
Investment Management, LLC’s address is 120 West 45th
Street, 20th
Floor, New York, NY 10036.
|
|
(6)
|
FMR
Corp.’s address is 82 Devonshire Street, Boston, MA
02109.
|
|
(7)
|
Includes
64,816 shares of restricted stock and 215,000 shares subject to
exercisable options. Excludes 143,950 shares subject to options that
are
not exercisable.
|
|
(8)
|
Includes
18,958 shares of restricted stock and 23,333 shares subject to exercisable
options. Excludes 16,875 shares subject to options that are not
exercisable.
|
|
(9)
|
Consists
of 8,646 shares of restricted stock and 5,000 shares subject to
exercisable options. Excludes 13,437 shares subject to options that
are
not exercisable.
|
|
(10)
|
Includes
6,146 shares of restricted stock and 42,917 shares subject to exercisable
options. Excludes 11,770 shares subject to options that are not
exercisable.
|
|
(11)
|
Includes
6,980 shares of restricted stock and 52,917 shares subject to exercisable
options. Excludes 11,770 shares subject to options that are not
exercisable.
|
|
(12)
|
Includes
3,166 shares of restricted stock and 27,500 shares subject to exercisable
options. Excludes 4,500 shares subject to options that are not
exercisable.
|
|
(13)
|
Includes
3,166 shares of restricted stock and 122,500 shares subject to exercisable
options. Excludes 4,500 shares subject to options that are not
exercisable.
|
|
(14)
|
Includes
3,166 shares of restricted stock and 20,833 shares subject to exercisable
options. Excludes 11,167 shares subject to options that are not
exercisable.
|
|
(15)
|
Includes
144,482 shares of restricted stock and 714,167 shares subject to
exercisable options. Excludes 272,780 shares subject to options
that are
not exercisable.
|
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth certain information regarding our equity compensation
plans as of December 31, 2006:
|
Plan
category
|
Number
of securities
to
be issued
upon
exercise of
outstanding
options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available for
future
issuances under
equity
compensation plans
(excluding
securities
reflected
in column (a))
|
|||
|
(a)
|
(b)
|
(c)
|
||||
|
Equity
compensation plans
approved
by security holders
|
1,506,448
|
$ 20.10
|
1,195,679
|
|||
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|||
|
Total
|
1,506,448
|
1,195,679
|
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE
Our
Board
of Directors presently consists, and at all times during 2006 consisted, of
Chairman Donald T. Johnson, Jr., lead director Michael D. Jordan, and
directors Robert L. Evans, Curtland E. Fields,
Dr. Michael J. Hartnett, S. Lawrence Prendergast and Edward
Stewart. The Board has determined that all of our directors, with the exception
of Mr. Johnson (who is also an employee of Aftermarket Technology Corp.), are
independent as defined in the Nasdaq listing standards and the regulations
of
the Securities and Exchange Commission. Our Compensation and Nominating
Committee and our Audit Committee are composed entirely of independent
directors.
Since
the
beginning of 2006, we have not engaged in, nor is there any current proposal
that we engage in, any transaction or series of related transactions with any
of
our directors, executive officers, anyone known by us to own (of record or
beneficially) more than 5% of our outstanding common stock, or any member of
the
immediate family of any of the foregoing.
The
Audit
Committee of our Board of Directors is responsible for reviewing and approving
all “related party transactions” (as defined in the applicable Nasdaq listing
standards). Before approving such a transaction, the Audit Committee would
take
into account all relevant factors that it deems appropriate, including whether
the related party transaction is on terms no less favorable to us than terms
generally available from an unaffiliated third party under the same or similar
circumstances, and the extent of the related person’s interest in the
transaction. The Audit Committee’s responsibility for related party transactions
is set forth in the Committee’s written charter (a copy of which was attached to
the proxy statement for our 2006 annual meeting and is available on our website
at www.goATC.com).
The
Committee’s policy regarding related party transactions is not in writing, but
is the result of the oral consensus of the members of the
Committee.
ITEM
14. PRINCIPAL ACCOUNTANT
FEES AND
SERVICES
Our
principal outside accountant is Ernst & Young LLP. Set forth below are the
fees and expenses for Ernst & Young for each of the last two years for
the following services provided to us:
|
2006
|
2005
|
||||
|
Audit
Fees (1)
|
$
|
1,101,430
|
$
|
1,088,424
|
|
|
Audit-Related
Fees (2)
|
178,896
|
120,537
|
|||
|
Tax
Fees (3)
|
44,958
|
69,081
|
|||
|
All
Other Fees (4)
|
6,600
|
-
|
|||
|
Total
Fees
|
$
|
1,331,884
|
$
|
1,278,042
|
_______________
|
(1)
|
The
fees for 2005 are $39,024 higher than reported in our Annual Report
on
Form 10-K for the year ended December 31, 2005 due to audit fees
incurred
but not
communicated until after the filing of the 2005 Annual Report. |
|
(2)
|
For
2006 consists of fees and expenses for services relating to (i) a
Statement of Auditing Standards No. 70 review ($128,896) and (ii)
diligence for a potential
acquisition ($50,000). For 2005 consists of fees and expenses for services relating to a Statement of Auditing Standards No. 70 review and was reclassified from "All Other Fees" as reported in the 2005 Annual Report. |
|
(3)
|
For
2006 consists of fees and expenses for assistance with (i) state,
federal and foreign tax returns ($35,939) and (ii) other foreign tax
related assistance ($9,019).
For 2005 consists of fees and expenses for assistance with (i) state, federal and foreign tax returns ($63,712) and (ii) other tax audits ($5,369). |
|
(4)
|
For
2006 consists of fees and expenses for services relating to assurance
services for a customer.
|
The
Audit
Committee of our Board of Directors pre-approves each non-audit engagement
or
service with or by our independent auditor. Prior to pre-approving any such
non-audit engagement or service, it is the Committee's practice to first receive
information regarding the engagement or service that (i) is detailed as to
the
specific engagement or service, and (ii) enables the Committee to make a
well-reasoned assessment of the impact of the engagement or service on the
auditor’s independence. In addition, the Chairman of the Audit Committee is
authorized to pre-approve any non-audit service between regularly scheduled
meetings of the Audit Committee provided that the fees for such service do
not
exceed $50,000 and the Chairman’s approvals are reported to the full Audit
Committee at the next Audit Committee meeting. The Audit Committee or the Audit
Committee Chairman pre-approved all non-audit engagements with, and services
provided by, our independent auditor during 2006 and 2005.
PART
IV
|
(a)
|
Index
to Financial Statements, Financial Statement Schedules and
Exhibits:
|
|
|
|||
|
See
Index to Financial Statements and Supplemental Data on page
40.
|
|||
|
2.
|
Financial
Statement Schedules Index
|
||
|
All
other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore
have been
omitted.
|
|||
|
3.
|
Exhibit
Index
|
||
|
The
following exhibits are filed as part of this Annual Report on Form
10-K,
or are incorporated herein by reference:
|
|||
|
Exhibit
Number
|
Description
|
||
|
3.1
|
Restated
Certificate of Incorporation of Aftermarket Technology Corp (previously
filed as Exhibit 3.1 to the Company's Current Report on Form 8-K
filed on
December 21, 2001 and incorporated herein by this
reference)
|
||
|
3.2
|
Bylaws
of Aftermarket Technology Corp. (previously filed as Exhibit 3.2
to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2005 and incorporated herein by this
reference)
|
||
|
10.1
|
Amended
and Restated Tax Sharing Agreement, dated as of December 20, 1996,
among Aftermarket Technology Holdings Corp., Aaron's Automotive
Products, Inc., ATC Components, Inc., CRS Holdings Corp.,
Diverco Acquisition Corp., H.T.P., Inc., Mamco Converters, Inc.,
R.P.M. Merit, Inc. and Tranzparts Acquisition Corp. (previously filed
as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by this
reference)
|
||
|
10.2†
|
Aftermarket
Technology Corp. 1996 Stock Incentive Plan (previously filed as Exhibit
10.10 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by this
reference)
|
||
|
10.3†
|
Form
of Non-Qualified Stock Option Agreement
under the Aftermarket Technology Corp. 1996 Stock Incentive
Plan
(previously filed as Exhibit 10.37 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed on October 25, 1996,
Commission File No. 333-5597, and incorporated herein by this
reference)
|
||
|
10.4†
|
Aftermarket
Technology Corp. 1998 Stock Incentive Plan (previously filed as
Exhibit 10.55 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by this
reference)
|
||
|
10.5†
|
Aftermarket
Technology Corp. 2000 Stock Incentive Plan (previously filed as
Exhibit 10.57 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000 and incorporated herein by this
reference)
|
||
|
10.6†
|
Aftermarket
Technology Corp. 2002 Stock Incentive Plan (previously filed as
Exhibit 10.31 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2002 and incorporated herein by this
reference)
|
||
|
10.7†
|
Aftermarket
Technology Corp. 2004 Stock Incentive Plan
(previously filed as Exhibit 10.1 to the Company's Current Report
on Form
8-K filed on December 14, 2004 and incorporated herein by this
reference)
|
||
|
10.8†
|
Standard
Terms and Conditions Governing Nonemployee Director Stock Options
Granted
on or after May 12, 2004 under the Aftermarket Technology Corp. 1998,
2000, 2002, and 2004 Stock Incentive Plans
(previously filed as Exhibit 10.2 to the Company's Current Report
on Form
8-K filed on December 14, 2004 and incorporated herein by this
reference)
|
|
10.9†
|
Standard
Terms and Conditions Governing Employee Non-Qualified Stock Options
Granted on or after May 12, 2004 under the Aftermarket Technology
Corp. 1998, 2000, 2002, and 2004 Stock Incentive Plans
(previously filed as Exhibit 10.3 to the Company's Current Report
on Form
8-K filed on December 14, 2004 and incorporated herein by this
reference)
|
|
10.10†
|
Standard
Terms and Conditions Governing Nonemployee Director Stock Options
under
the Aftermarket Technology Corp. 1998, 2000 and 2002 Stock Incentive
Plans
(previously filed as Exhibit 10.4 to the Company's Current Report
on Form
8-K filed on December 14, 2004 and incorporated herein by this
reference)
|
|
10.11†
|
Standard
Terms and Conditions Governing Employee Non-Qualified Stock Options
under
the Aftermarket Technology Corp. 1998, 2000 and 2002 Stock Incentive
Plans
(previously filed as Exhibit 10.5 to the Company's Current Report
on Form
8-K filed on December 14, 2004 and incorporated herein by this
reference)
|
|
10.12†
|
Aftermarket
Technology Corp. 2006 Stock Incentive Plan
(previously filed as Exhibit 10.1 to the Company's Current Report
on Form
8-K filed on June 6, 2006 and incorporated herein by this
reference)
|
|
10.13†
|
Standard
Terms and Conditions Governing Nonemployee Director Stock Options
under
the Aftermarket Technology Corp. 2006 Stock Incentive Plan
(previously filed as Exhibit 10.2 to the Company's Current Report
on Form
8-K filed on June 6, 2006 and incorporated herein by this
reference)
|
|
10.14†
|
Standard
Terms and Conditions Governing Employee Non-Qualified Stock Options
under
the Aftermarket Technology Corp. 2006 Stock Incentive Plan
(previously filed as Exhibit 10.3 to the Company's Current Report
on Form
8-K filed on June 6, 2006 and incorporated herein by this
reference)
|
|
10.15†
|
Form
of Restricted Stock Agreement for Nonemployee Directors under
the Aftermarket Technology Corp. 1998, 2000, 2002, 2004 and 2006
Stock
Incentive Plans
(previously filed as Exhibit 10.4 to the Company's Current Report
on Form
8-K filed on June 6, 2006 and incorporated herein by this
reference)
|
|
10.16†
|
Form
of Restricted Stock Agreement for Employee under
the Aftermarket Technology Corp. 1998, 2000, 2002, 2004 and 2006
Stock
Incentive Plans
(previously filed as Exhibit 10.5 to the Company's Current Report
on Form
8-K filed on June 6, 2006 and incorporated herein by this
reference)
|
|
10.17†
|
Aftermarket
Technology Corp. Executive Nonqualified Excess Plan (previously filed
as
Exhibit 10 to the Company's Current Report on Form 8-K filed on
June 6, 2005 and incorporated herein by this
reference)
|
|
10.18†
|
Aftermarket
Technology Corp. Executive Nonqualified Excess Plan Adoption Agreement
(previously filed as Exhibit 10 to the Company's Current Report on
Form
8-K filed on September 18, 2006 and incorporated herein by this
reference)
|
|
10.20†
|
Executive
Employment Agreement, dated as of March 9, 2004, between Aftermarket
Technology Corp. and Todd R. Peters (previously filed as
Exhibit 10.22 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2004 and incorporated herein by this
reference)
|
|
10.21†
|
Form
of Executive Employment Agreement between Aftermarket Technology
Corp. and
certain of its officers (previously filed as Exhibit 10.27 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002 and incorporated herein by this
reference)
|
|
10.22†
|
Form
of Indemnification Agreement between Aftermarket Technology Corp.
and
directors and certain officers (previously filed as Exhibit 10.46
to
Amendment No. 1 the Company's Registration Statement on Form S-1
(File
No. 333-35543) filed on October 1, 1997 and incorporated herein by
this reference)
|
|
10.23
|
Stock
Purchase Agreement dated as of September 1, 2000 between Aftermarket
Technology Corp. and ATCDG Acquisition Corp., Inc. (previously
filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K dated October 27, 2000 and incorporated herein by this
reference)
|
|
10.24
|
Amendment
to Stock Purchase Agreement dated as of October 27, 2000 between
Aftermarket Technology Corp. and ATCDG Acquisition Corp., Inc.
(previously
filed as Exhibit 10.2 to the Company's Current Report on
Form 8-K dated October 27, 2000 and incorporated herein by this
reference)
|
|
10.25
|
Amendment
No. 2 to Stock Purchase Agreement dated as of May 25, 2001
between Aftermarket Technology Corp. and ATC Distribution Group (as
the
successor to ATCDG Acquisition Corp., Inc.) (previously filed as
Exhibit
10.1 to the Company's Current Report on Form 8-K filed on
December 21, 2001 and incorporated herein by this
reference)
|
|
10.26
|
Agreement
dated as of July 2, 2001 between Aftermarket Technology Corp. and ATC
Distribution Group (as the successor to ATCDG Acquisition Corp.,
Inc.)
(previously filed as Exhibit 10.2 to the Company's Current Report
on Form
8-K filed on December 21, 2001 and incorporated herein by this
reference)
|
|
10.27
|
Amendment
No. 3 to Stock Purchase Agreement dated as of October 19, 2001
between Aftermarket Technology Corp. and ATC Distribution Group (as
the
successor to ATCDG Acquisition Corp., Inc.) (previously filed as
Exhibit
10.3 to the Company's Current Report on Form 8-K filed on
December 21, 2001 and incorporated herein by this
reference)
|
|
10.28
|
Amendment
No. 4 to Stock Purchase Agreement dated as of December 28, 2001
between Aftermarket Technology Corp. and ATC Distribution Group (as
the
successor to ATCDG Acquisition Corp., Inc.)
(previously filed as Exhibit 10.40 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001 and incorporated
herein by this reference)
|
|
10.29
|
Amendment
No. 5 to Stock Purchase Agreement dated as of August 2, 2002 between
Aftermarket Technology Corp. and ATC Distribution Group (as the successor
to ATCDG Acquisition Corp., Inc.) (previously
filed as Exhibit 10.29 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2002 and incorporated
herein by this reference)
|
|
10.30
|
Credit
Agreement dated as of March 21, 2006 among Aftermarket Technology
Corp.,
Bank of America, N.A., as Administrative Agent, and the other Lenders
party thereto, Banc of America Securities LLC, J.P. Morgan Securities
Inc., JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A. and Charter
One
Bank, N.A. (previously filed as Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006 and incorporated
herein by reference)
|
|
10.31
|
Guaranty
and Collateral Agreement dated as of March 21, 2006 made by Aftermarket
Technology Corp. and certain of its subsidiaries in favor of Bank
of
America, N.A., as Administrative Agent (previously filed as Exhibit
10.2
to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2006 and incorporated herein by reference)
|
|
14
|
Code
of Ethics (previously filed as Exhibit 14 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2003 and
incorporated herein by this reference)
|
______________
†
Compensation
plan or arrangements in which directors or executive officers are eligible
to
participate.
*
Filed
herewith.
|
(b)
|
Refer
to (a) 3 above.
|
|
(c)
|
Refer
to (a) 2 above.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
| AFTERMARKET TECHNOLOGY CORP. | ||
|
By:
|
/s/
Donald T. Johnson, Jr.
|
|
|
Donald
T. Johnson, Jr.
Chairman,
President and Chief Executive Officer
|
||
|
March
1, 2007
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report
on Form 10-K has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
|
March
1, 2007
|
/s/
Donald T. Johnson, Jr.
|
|
|
Donald
T. Johnson, Jr.
Chairman,
President and Chief Executive Officer
(principal
executive officer)
|
||
|
|
March
1, 2007
|
/s/
Todd R. Peters
|
|
Todd
R. Peters
Vice
President and Chief Financial Officer
(principal
financial officer)
|
||
|
|
March
1, 2007
|
/s/
John M. Pinkerton
|
|
John
M. Pinkerton
Vice
President and Controller
(principal
accounting officer)
|
||
|
|
March
1, 2007
|
/s/
Robert L. Evans
|
|
Robert
L. Evans, Director
|
||
|
|
March
1, 2007
|
/s/
Curtland E. Fields
|
|
Curtland
E. Fields, Director
|
||
|
|
March
1, 2007
|
/s/
Michael J. Hartnett
|
|
Michael
J. Hartnett, Director
|
||
|
|
March
1, 2007
|
/s/
Michael D. Jordan
|
|
Michael
D. Jordan, Director
|
||
|
|
March
1, 2007
|
/s/
S. Lawrence Prendergast
|
|
S.
Lawrence Prendergast, Director
|
||
|
March
1, 2007
|
/s/
Edward Stewart
|
|
|
Edward
Stewart, Director
|
Aftermarket
Technology Corp.
Schedule
II - Valuation and Qualifying Accounts
(In
Thousands)
|
Additions
|
||||||||||||||
|
Balance
at
Beginning
of
Period
|
Charge
(Income)
to
Costs
and
Expenses
|
Adjustments
to
Other
Accounts
|
Deductions
|
Balance
at
End
of Period
|
||||||||||
|
Year
ended December 31, 2004:
|
||||||||||||||
|
Reserve
and allowances deducted from asset accounts:
|
||||||||||||||
|
Allowance
for uncollectible accounts
|
$
|
365
|
$
|
204
|
$
|
−
|
$
|
95
|
(1)
|
$
|
474
|
|||
|
Reserve
for excess and obsolete inventory
|
3,421
|
1,859
|
−
|
224
|
5,056
|
|||||||||
|
Valuation
allowance on deferred tax assets
|
10,086
|
3,795
|
−
|
−
|
13,881
|
|||||||||
|
Year
ended December 31, 2005:
|
||||||||||||||
|
Reserve
and allowances deducted from asset accounts:
|
||||||||||||||
|
Allowance
for uncollectible accounts
|
474
|
334
|
194(2
|
)
|
39
|
(1)
|
963
|
|||||||
|
Reserve
for excess and obsolete inventory
|
5,056
|
847
|
−
|
826
|
5,077
|
|||||||||
|
Valuation
allowance on deferred tax assets
|
13,881
|
96
|
−
|
2,218
|
(3)
|
11,759
|
||||||||
|
Year
ended December 31, 2006:
|
||||||||||||||
|
Reserve
and allowances deducted from asset accounts:
|
||||||||||||||
|
Allowance
for uncollectible accounts
|
963
|
(23)
|
|
−
|
69
|
(1)
|
871
|
|||||||
|
Reserve
for excess and obsolete inventory
|
5,077
|
1,751
|
−
|
1,638
|
5,190
|
|||||||||
|
Valuation
allowance on deferred tax assets
|
11,759
|
484
|
−
|
−
|
12,243
|
|||||||||
|
(1)
|
Accounts
written off, net of recoveries.
|
|
(2)
|
Balance
reclassified in current year.
|
|
(3)
|
Related
to the expiration of capital loss carryforwards.
|
S-1