UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
__________________
FORM 10-K
(Mark
One)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For the
fiscal year ended December 31, 2007
OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
The Transition Period From ____________ To
______________
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Commission
file number 0-21803
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AFTERMARKET
TECHNOLOGY CORP.
(Exact
name of registrant as specified in its charter)
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DELAWARE
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95-4486486
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(State or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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1400
Opus Place, Suite 600, Downers Grove, IL
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60515
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (630) 271-8100
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Listed
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Common
Stock, $.01 par value
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Nasdaq
Global Select Market
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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
No x
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. x
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, 2007) was $646 million.
The
Registrant had 22,173,043 shares of Common Stock outstanding as of February 15,
2008.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
ANNUAL
REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007
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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
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BUSINESS
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Overview
Aftermarket
Technology Corp. and its subsidiaries provide outsourced engineering solutions
and supply chain logistics services to the consumer electronics industries and
light and medium/heavy-duty vehicle aftermarket. Through our
Logistics Business, we offer value-added supply-chain services primarily to the
wireless, high-end consumer electronics, broadband and cable and light vehicle
automotive electronics markets. These services include fulfillment, returns
management, reverse logistics, repair and other related
services. Through our Drivetrain Business, we provide customized
remanufacturing services focused on complex light and medium/heavy-duty vehicle
drivetrain products, consisting principally of automatic transmissions and to a
lesser extent engines, that are primarily sold through the service, repair and
parts organizations of our customers. 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.
Aftermarket Technology
Corp. was incorporated in Delaware in 1994 and became a publicly traded company
in 1996.
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, packaging 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, our
working capital needs are relatively less 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 (“AT&T”) (formerly Cingular Wireless), General Motors
(“GM”), TomTom, Nokia, LG, Magellan, T-Mobile, Delphi, Visteon, TiVo and
SonyEricsson. Logistics Business segment sales accounted for 55.4%,
52.9%, 36.5%, 27.8% and 25.3% of our 2007, 2006, 2005, 2004 and 2003 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 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 wireless devices for
AT&T and its partners. We deliver products both to AT&T retail
locations and directly to individuals, and provide inventory tracking and
management, process all warranty-service exchanges and perform test and repair
services. Growth in our Logistics Business has largely been with
AT&T. Additionally, we (i) provide fulfillment and packaging
services primarily for GM, TomTom, Nokia, LG, Magellan, and SonyEricsson, (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,
TomTom, and Magellan, and (iii) offer returned material reclamation and core
management and disposition services. We generally provide our
services to each customer pursuant to a contract with detailed statements of
work. These contracts typically may be terminated by the customer on 180 days
notice or less. The statement of work for forward logistics services with
AT&T runs through 2010. The statement of work for reverse logistics and test
& repair programs with AT&T expired in February 2008 and has been
extended to March 31, 2008 while we finalize the terms of a new statement of
work with AT&T.
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, engines and
turbochargers. Our principal drivetrain customers are Honda, Ford,
Chrysler, Allison and GM. Drivetrain Business net sales
accounted for 44.6%, 47.1%, 63.5%, 72.2%, and 74.7% of our 2007, 2006, 2005,
2004 and 2003 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, Chrysler, Allison, GM and certain
foreign OEMs, primarily for use in the United States service and repair
organizations of their dealer networks, and we recently launched a turbocharger
reclamation and remanufacturing program with BorgWarner. Additionally, our
European facility remanufactures OEM-approved gas and diesel engines for several
European OEMs, including Jaguar, Land Rover 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 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 Chrysler 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, GM, Chrysler, Jaguar, Land Rover and Isuzu. We believe
that we are the largest provider of remanufactured transmissions to Chrysler,
Ford and Honda for light vehicles in North America.
We
generally sell our products to each customer pursuant to a supply arrangement
that typically may be terminated by the customer on 90 days notice or less.
Our contract with Honda does not have a specific term and our contracts
for transmission remanufacturing with Chrysler, Ford and Allison run through
2008, 2009 and 2012, respectively.
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.
Industry
Background
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 Armstrong & Associates, Inc.’s 2007 North
American 3PL Market Overview report, this market size was estimated to be $23.4
billion of gross revenues in 2006.
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 a 2007 Frost
& Sullivan report, the North American replacement and repair component of
this market for transmissions was approximately $4.4 billion in 2006 and
expected to grow at a compound annual rate of 5.7% from 2006 to 2013 due to
changes in technology and an increasing number of prime replacement age
vehicles.
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:
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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;
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replace
the assembly with an assembly from a remanufacturer such as us;
or
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replace
the assembly with a new assembly manufactured by the
OEM.
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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:
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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.
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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.
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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.
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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.
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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 TomTom, Allison, Nokia, T-Mobile, LG, Magellan, TiVo and BorgWarner as
new customers over the past three years.
High
Quality Through Engineering and Technical Know-How
Our
remanufactured products are of consistently 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
over 30 years of experience in the logistics and automotive industries,
including five years with Ford as Global Director of Parts, Supply and
Logistics, and more than 20 years with Caterpillar’s Parts and Service and
Logistics organizations, including serving as Vice President, Caterpillar
Logistics. Our Vice President and Chief Financial Officer, Todd R.
Peters, has over 20 years of financial, acquisition and integration, and
automotive operations experience. The President of our ATC Logistics
Business, William L. Conley, Jr., has nearly 30 years of logistics experience,
and the President of our ATC Drivetrain Business, Richard L. Stanley, has nearly
30 years of operational experience in the automotive industry.
Our
Growth Strategies
Our
strategy is to be a valued partner that provides logistics, return and repair
services and remanufacturing 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 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, broadband and cable, and
vehicle industries, by offering customized, reliable and cost effective
solutions for customers with complex logistics requirements involving high-value
products. In 2007, we were awarded new logistics business that we
expect to generate $96 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 and broadband and cable
providers to our customer base and through penetration of and into other
vertical markets, including electronics and computers, and medical
equipment. We have also identified and targeted several new market
segments, including additional classes of consumer electronics.
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’ dealers 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 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 2007 we were
awarded a turbocharger reclamation/remanufacturing program with BorgWarner. We
believe that our expertise in drivetrain remanufacturing will be directly
transferable to these other markets over time.
Expand Our International
Presence. In 2007, 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 significant 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.
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 stockholder 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
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.
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.
Employees
As of
December 31, 2007, we had approximately 3,900 full-time and temporary
employees. We believe our employee and labor relations are good. We
have not experienced any work stoppages 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 former Distribution Group
business, we agreed to indemnify the buyer against environmental liability at
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 Logistics segment and the Drivetrain
segment. See Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and Item 8. “Consolidated
Financial Statements and Supplementary Data - Note
16.”
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 at www.sec.gov that
contains reports and other information regarding issuers like us that file
electronically with the Securities and Exchange Commission. We will provide a
copy of any of the foregoing documents to stockholders without charge upon
written request to us at 1400 Opus Place, Suite 600, Downers Grove,
Illinois 60515, attention: Corporate Secretary. The contents of our
website are not part of this Annual Report.
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 2007, we had three customers that individually accounted for
more than 10% of our net sales. AT&T accounted for 36.8%, 41.8%
and 29.9% of our net sales during 2007, 2006 and 2005, respectively, Ford
accounted for 15.6%, 15.4% and 24.4% of our net sales for 2007, 2006 and 2005,
respectively, and Honda accounted for 15.6%, 15.6% and 19.3% of our net sales
during 2007, 2006 and 2005, respectively. In addition, Chrysler
accounted for 5.5%, 7.3% and 15.4% of our net sales in 2007, 2006 and 2005,
respectively. If we lose any of these customers, or if any of them
reduces or cancels a significant order or program, 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 have a term of three years or
less and are terminable by the customer subject to a notice period that ranges
from 30 days or less to 180 days. In addition, we periodically
renegotiate prices and other terms 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.
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 66.4% of our Logistics segment net sales for 2007, operates
in a highly competitive technology market. The number of wireless
devices sold by AT&T, whether to new subscribers or as replacements 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 wireless devices
sold by AT&T. Consequently, any material decrease in wireless
devices 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, 2007, we had no debt outstanding. However, our
indebtedness could 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 might 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.
None.
|
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(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
|
2009
|
radios,
telematics and instrument and display clusters(3)
|
|||
|
Ft.
Worth, TX
|
414,000
|
2013
|
wireless
device and accessory distribution, electronics packaging and related
services(3)
|
|||
|
Ft.
Worth, TX
|
375,000
|
2010
|
wireless
device and electronics test and repair, returns processing, accessory
packaging(3)
|
|||
|
Ft.
Worth, TX
|
180,000
|
2009
|
wireless
device and accessory packaging, 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, as well as land for a facility we intend to develop in the
Czech Republic where we are planning to reduce production costs and develop new
business in our Drivetrain segment. 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.
|
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.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No
matters were submitted to a vote of our stockholders during the quarter ended
December 31, 2007.
PART
II
|
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, 2008, there were 138 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
|
||||
|
2007
|
|||||
|
First quarter
|
$ | 25.67 | $ | 20.31 | |
|
Second quarter
|
32.44 | 24.11 | |||
|
Third quarter
|
33.75 | 25.41 | |||
|
Fourth quarter
|
35.00 | 25.88 | |||
|
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 | |||
On
February 15, 2008, the last sale price of our common stock, as reported by
Nasdaq, was $20.03 per share.
Stock
Repurchases
During
December 2007, an employee delivered to us a total of 53 shares of our
outstanding common stock in payment of $1,599 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 $30.17 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, 2007:
|
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, 2007
|
–
|
−
|
–
|
–
|
|
November
1-30, 2007
|
–
|
−
|
–
|
–
|
|
December
1-31, 2007
|
53
|
$
30.17
|
53(1)
|
–
|
|
_______________
|
|
(1)
|
Repurchases
were made pursuant to our stock incentive plans. See Item 8.
"Consolidated Financial Statements and Supplementary Data - Note
11."
|
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 two peer
groups and the Nasdaq Market Index over the period from December 31, 2002 to
December 31, 2007. 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, 2002. The graph then presents the value of these
investments, assuming reinvestment of dividends, through the close of trading on
December 31, 2007.
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/30/06
|
12/28/07
|
|
|
Aftermarket
Technology Corp.
|
100.00
|
94.62
|
111.03
|
134.07
|
146.76
|
188.00
|
|
New
Peer Group Index
|
100.00
|
118.87
|
168.28
|
187.12
|
201.05
|
189.09
|
|
Old
Peer Group Index
|
100.00
|
115.76
|
157.07
|
166.54
|
183.51
|
184.56
|
|
NASDAQ
Market Index
|
100.00
|
150.36
|
163.00
|
166.58
|
183.68
|
201.91
|
The new
peer group consists of Genuine Parts Co. and Standard Motor Products
(publicly-traded companies engaged primarily in businesses in the automotive
aftermarket) and Brightpoint, Inc. and UTI Worldwide Inc. (publicly-traded
companies engaged in third party logistics businesses), which, in management’s
opinion, most closely represent the peer group for our two business
segments. The old peer group consists of Genuine Parts Co., Standard
Motor Products and Brightpoint, Inc. In past years the old peer group
also included Federal Mogul Corp., which ceased to be publicly traded during
2007. UTI Worldwide Inc. has been added to the new peer group to
replace Federal Mogul. The replacement of an automotive company in
our peer group with a logistics company reflects the increased importance of our
logistics business.
The
cumulative total return shown on the stock performance graph indicates
historical results only and is not necessarily indicative of future
results.
The
selected financial data presented below with respect to the statements of income
data for the years ended December 31, 2007, 2006 and 2005 and the balance
sheet data as of December 31, 2007 and 2006 are derived from our
Consolidated Financial Statements 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, 2004 and 2003
and the balance sheet data as of December 31, 2005, 2004 and 2003, are
derived from our Consolidated Financial Statements 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.
|
Year
Ended December 31,
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
(In
thousands, except per share data)
|
|||||||||||||||||||
|
Statements
of Income Data:
|
|||||||||||||||||||
|
Net
sales
|
$ | 530,706 | $ | 497,974 | $ | 419,618 | $ | 375,600 | $ | 322,657 | |||||||||
|
Cost
of sales
|
397,670 | 393,269 | 315,507 | 275,453 | 227,239 | ||||||||||||||
|
Exit,
disposal, certain severance and other
charges(1)
|
1,962 | − | − | − | 200 | ||||||||||||||
|
Gross
profit
|
131,074 | 104,705 | 104,111 | 100,147 | 95,218 | ||||||||||||||
|
Selling,
general and administrative expense
|
66,131 | 54,538 | 48,993 | 45,034 | 45,332 | ||||||||||||||
|
Amortization
of intangible assets
|
435 | 269 | 125 | 125 | 299 | ||||||||||||||
|
Impairment
of goodwill
|
− | 14,592 | − | − | − | ||||||||||||||
|
Exit,
disposal, certain severance and other
charges(1)
|
1,411 | 1,938 | 523 | 3,766 | 8,273 | ||||||||||||||
|
Operating
income
|
63,097 | 33,368 | 54,470 | 51,222 | 41,314 | ||||||||||||||
|
Interest
income
|
1,141 | 605 | 2,026 | 2,658 | 2,863 | ||||||||||||||
|
Interest
expense
|
(969 | ) | (4,297 | ) | (7,696 | ) | (7,271 | ) | (8,169 | ) | |||||||||
|
Other
income, net
|
116 | 262 | 542 | 19 | 70 | ||||||||||||||
|
Equity
in income of investee
|
− | − | − | 146 | 277 | ||||||||||||||
|
Write-off
of debt issuance costs
|
− | (1,691 | ) | − | − | − | |||||||||||||
|
Income
tax expense
|
(23,404 | ) | (10,506 | ) | (16,344 | ) | (16,698 | ) | (13,477 | ) | |||||||||
|
Income
from continuing operations
|
$ | 39,981 | $ | 17,741 | $ | 32,998 | $ | 30,076 | $ | 22,878 | |||||||||
|
Income
from continuing operations per diluted
share(2)
|
$ | 1.81 | $ | 0.81 | $ | 1.53 | $ | 1.40 | $ | 0.93 | |||||||||
|
Shares
used in computation of income from continuing operations per
diluted share(2)
|
22,144 | 21,927 | 21,579 | 21,411 | 24,486 | ||||||||||||||
|
Other
Data:
|
|||||||||||||||||||
|
Capital
expenditures
|
$ | 23,027 | $ | 11,910 | $ | 17,292 | $ | 10,820 | $ | 12,927 | |||||||||
|
As
of December 31,
|
||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||
|
(In
thousands)
|
||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||
|
Cash
and cash equivalents
|
$ | 40,149 | $ | 7,835 | $ | 45,472 | $ | 18,085 | $ | 59,628 | ||||
|
Working
capital, continuing operations
|
117,161 | 89,262 | 109,226 | 88,221 | 103,855 | |||||||||
|
Property,
plant and equipment, net
|
60,987 | 53,008 | 54,153 | 51,416 | 53,435 | |||||||||
|
Total
assets
|
389,374 | 345,677 | 407,780 | 390,277 | 451,862 | |||||||||
|
Current
and long-term debt outstanding
|
– | 17,800 | 90,779 | 112,406 | 127,342 | |||||||||
|
Long-term
liabilities, less current portion
|
35,389 | 46,194 | 107,077 | 122,225 | 134,545 | |||||||||
|
Total
stockholders' equity
|
280,513 | 232,330 | 221,230 | 186,373 | 229,251 | |||||||||
|
_______________
|
|
(1)
|
See
Item 8. “Consolidated Financial Statements and Supplementary Data – Note
17” for a description of exit, disposal, certain severance and other
charges.
|
|
(2)
|
See
Item 8. “Consolidated Financial Statements and Supplementary Data – Note
12” for a description of the computation of earnings per
share.
|
|
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.
Overview
Operations. We
provide supply chain logistics services and outsourced engineered solutions to
the consumer electronics industries and light and medium/heavy duty vehicle
aftermaket. Through our Logistics Business, we offer value-added
supply-chain services primarily to the wireless, high-end consumer electronics,
broadband and cable and light vehicle automotive electronics markets. These
services include fulfillment, returns management, reverse logistics, repair and
other related services. Through our Drivetrain Business, we provide
customized remanufacturing services focused on complex light and medium/heavy
duty vehicle drivetrain products, consisting principally of automatic
transmissions and to a lesser extent engines, that are primarily sold through
the service, repair and parts organizations of our customers. We
generally provide our services under contractual relationships with customers
that distribute high-value, complex products.
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, packaging 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, our
working capital needs are less than other logistics services providers who do
take ownership of inventory. Additionally, our business model does
not require substantial capital investments in transportation equipment or
facilities.
For the
year ended December 31, 2007, net sales from our Logistics Business
increased $30.5 million, or 11.6%, to $293.9 million, which represented 55.4% of
our total net sales. AT&T accounted for 66.4% of our Logistics
Business sales in 2007. 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. Additionally, over the past
three years, we have been awarded and launched new programs with a number of
existing and new logistics customers that generated additional sales in 2006 and
2007 and will generate incremental sales in 2008. However, 2007 sales also
benefited significantly from a product upgrade campaign by one of our customers
that will be substantially completed during the first quarter of
2008. We believe our Logistics Business represents a key growth
opportunity and we continue to actively pursue customer
diversification.
In our
Drivetrain segment, demand for replacement or repair of products is a function
of numerous factors, such as product quality, 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. Significant policy revisions that have negatively
impacted demand for our products occurred in late 2002 and early 2003 and again
in late 2004. For 2007, our Drivetrain Business reported net sales of
$236.8 million, or 44.6% of our total net sales. During 2006 and 2007 we were
awarded new transmission programs with Ford and GM and a turbocharger program
with BorgWarner that are expected to increase sales in 2008. However, 2007 sales
benefited from an increase in volume of Honda transmissions believed to be
associated with an extension of the warranty period on certain models that
substantially ended during the third quarter of 2007. Our volumes with Honda may
be additionally impacted by the finalization of sourcing allocations for 2008
and beyond.
Financing. During
2007 we generated $75.2 million of cash from operating activities-continuing
operations and $4.8 million of cash primarily from the exercise of stock
options, invested $23.0 million in property, plant and equipment and reduced
total debt outstanding by $17.8 million. As of December 31, 2007, we
had no amounts drawn on our credit facility, $40.1 million of cash and cash
equivalents on hand and $148.5 million of borrowing capacity under our credit
facility.
Components
of Income and Expense
Net
Sales. In our Logistics segment, sales are
primarily related to providing:
|
|
·
|
value-added
warehouse, packaging 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. 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.
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. We have periodically incurred 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 or impairments of fixed assets, write down of certain
inventories and certain legal and other professional fees. 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 17” 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 regarding matters that are inherently uncertain. 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, 2007, 2006 and 2005, our net write-offs
were less than $0.1 million. As of December 31, 2007, we had
$71.4 million of accounts receivable, net of allowance for doubtful accounts of
$0.6 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, 2007, 2006 and 2005, we recorded charges for excess and
obsolete inventory of approximately $4.4 million (including $1.4 million
classified as exit, disposal, certain severance and other charges), $1.8 million
and $0.8 million, respectively. The increased charges for excess and
obsolete inventory during 2007 were primarily related to growth in our Logistics
segment’s test and repair services. As of December 31, 2007, we had
inventory of $65.6 million, net of a reserve for excess and obsolete inventory
of $6.1 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, 2007, 2006 and 2005, we (i) recorded charges for estimated warranty
costs for sales made in the respective year of approximately $1.6 million, $1.3
million and $1.3 million, respectively, and (ii) paid and/or settled warranty
claims of approximately $0.8 million, $1.3 million and $1.5 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 30 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. Our annual impairment tests made as
of September 30, 2007 resulted in no adjustment to the carrying value of our
goodwill. As of December 31, 2007, goodwill was recorded at a
carrying value of approximately $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. We apply the fair value recognition provisions of SFAS
No. 123R, Share-Based
Payment, and adopted this standard using the modified prospective
transition method. Under the modified prospective method, (i)
compensation expense for share-based awards granted prior to January 1, 2006 was
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. Our stock option valuations are
estimated by using the Black-Scholes option pricing model and restricted stock
awards are measured at the market value of our common stock on the date of
issuance. During 2007 we awarded (i) our Chief Executive Officer
87,700 stock options and 29,400 shares of restricted stock at the time he
entered into a new employment agreement, (ii) non-employee directors, executive
officers and certain employees an aggregate of 119,604 stock options and 75,600
shares of restricted stock as part of an annual award program, and (iii) newly
hired executive
officers
and certain employees an aggregate of 46,500 stock options and 35,075 shares of
restricted stock. Total estimated compensation of $6.0 million
related to stock-based awards granted during 2007 is being amortized over the
requisite service periods. For all stock-based awards outstanding as
of December 31, 2007, we have yet to record, on a pre-tax basis, an estimated
total of $4.7 million of compensation expense to be recognized over a
weighted-average period of 1.4 years.
See Item
8. “Consolidated Financial Statements and Supplementary Data – Note 2 and Note
10” for additional information related to our accounting for stock-based
awards.
Segment
Reporting
We have
two reportable segments: the Logistics segment and the Drivetrain
segment. Our Logistics segment provides value-added warehousing,
packaging 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. Our Drivetrain
segment primarily sells remanufactured transmissions to Honda, Ford, Chrysler,
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.
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,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||
|
Net
sales
|
$ | 530.7 | 100.0 | % | $ | 498.0 | 100.0 | % | $ | 419.6 | 100.0 | % | ||||||||
|
Gross
profit
|
131.1 | 24.7 | 104.7 | 21.0 | 104.1 | 24.8 | ||||||||||||||
|
SG&A
expense
|
66.1 | 12.5 | 54.5 | 10.9 | 49.0 | 11.7 | ||||||||||||||
|
Impairment
of goodwill
|
− | − | 14.6 | 2.9 | − | − | ||||||||||||||
|
Exit,
disposal, certain severance and other
charges(1)
|
3.4 | 0.6 | 1.9 | 0.4 | 0.5 | 0.1 | ||||||||||||||
|
Operating
income
|
63.1 | 11.9 | 33.4 | 6.7 | 54.5 | 13.0 | ||||||||||||||
|
Interest
income
|
1.1 | 0.2 | 0.6 | 0.1 | 2.0 | 0.5 | ||||||||||||||
|
Other
income, net
|
0.1 | − | 0.3 | − | 0.5 | 0.1 | ||||||||||||||
|
Write-off
of debt issuance costs
|
− | − | (1.7 | ) | (0.3 | ) | − | − | ||||||||||||
|
Interest
expense
|
(1.0 | ) | (0.2 | ) | (4.3 | ) | (0.9 | ) | (7.7 | ) | (1.8 | ) | ||||||||
|
Income
from continuing operations
|
40.0 | 7.5 | 17.7 | 3.6 | 33.0 | 7.9 | ||||||||||||||
________________
|
(1)
|
Includes
charges of $2.0 million primarily related to the wind-down of activities
with certain low-volume customers classified as cost of sales in the
consolidated statement of income for
2007.
|
Year
Ended December 31, 2007 Compared to the Year Ended December 31,
2006
Income
from continuing operations increased $22.3 million, or 126.0%, to $40.0 million
in 2007 from $17.7 million in 2006. Income from continuing operations
per diluted share was $1.81 in 2007 as compared to $0.81 in
2006. Our results for 2007 included exit, disposal, certain severance
and other charges of $2.1 million (net of tax). Our results for 2006
included (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) exit, disposal,
certain severance and other charges of $1.2 million (net of tax), and (iii) 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 a credit
facility. Other factors which caused income from continuing
operations to increase in 2007 as compared to 2006 included:
|
|
·
|
growth
in our Logistics segment, primarily related to increases in our programs
with GM (primarily an automotive electronics upgrade program that we
expect to be substantially completed by the end of the first quarter of
2008), TomTom, SonyEricsson, LG, T-Mobile, TiVo and a favorable mix of
services in our base business with
AT&T;
|
|
|
·
|
a
reduction in interest expense and a corresponding increase in interest
income in 2007 as compared to 2006 primarily due to a reduction in total
debt outstanding and an increase in cash and cash
equivalents;
|
|
|
·
|
recovery
from the costs in our Logistics segment incurred during 2006 associated
with the vertical integration of a test and repair program for Nokia that
had been previously outsourced and was subsequently terminated in
2007;
|
|
|
·
|
recovery
from the costs in our Logistics segment incurred during 2006 associated
with the launch of a new test and repair program in a new
market;
|
|
|
·
|
increased
volumes of Ford remanufactured transmissions compared to lower sales in
2006 that were due to inventory reductions in Ford’s distribution channel
during the first half of 2006;
|
|
|
·
|
increased
volumes of Honda remanufactured transmissions believed to be associated
with an extension of the warranty period for certain models, the impact of
which substantially ended during the third quarter of 2007;
and
|
|
|
·
|
benefits
from our on-going lean and continuous improvement program and other cost
reduction initiatives,
|
|
partially
offset by:
|
|
|
·
|
an
increase in product development, market development and start-up costs in
our Drivetrain segment associated with our NuVinci® CVP
project, which we expect to discontinue in the first quarter of
2008;
|
|
|
·
|
scheduled
price concessions to certain customers in our Logistics and Drivetrain
segments granted in connection with previous contract renewals;
and
|
|
|
·
|
lower
volumes of Chrysler remanufactured transmissions due to Chrysler’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.
|
|
Net
Sales
|
Net sales
increased $32.7 million, or 6.6%, to $530.7 million for 2007 from $498.0 million
for 2006. This increase was primarily due to:
|
|
·
|
growth
in our Logistics segment, primarily related to increases in our programs
with GM (primarily an automotive electronics upgrade program that we
expect to be substantially completed by the end of the first quarter of
2008), TomTom, SonyEricsson, LG, T-Mobile and
TiVo;
|
|
|
·
|
increased
volumes of Ford remanufactured transmissions compared to lower sales in
2006 that were due to inventory reductions in Ford’s distribution channel
during the first half of 2006; and
|
|
|
·
|
increased
volumes of Honda remanufactured transmissions believed to be associated
with the extension of the warranty period for certain models, the impact
of which substantially ended during the third quarter of
2007,
|
partially
offset by:
|
|
·
|
a
decline in Nokia revenues due to the termination of a test and repair
program in June 2007, partially offset by revenue from additional new
programs with Nokia;
|
|
|
·
|
a
reduction in sales to AT&T primarily resulting from a reduced mix of
component repair parts passed through our test and repair
services;
|
|
|
·
|
lower
volumes of Chrysler remanufactured transmissions due to Chrysler’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;
|
|
|
·
|
scheduled
price concessions to certain customers in our Logistics and Drivetrain
segments granted in connection with previous contract renewals;
and
|
|
|
·
|
lower
sales for medium/heavy duty remanufactured transmissions in our Drivetrain
segment with Allison primarily resulting from a reduction in the cost of
component parts passed through the remanufacturing
process.
|
Of our
net sales for 2007 and 2006, AT&T accounted for 36.8% and 41.8%, Honda
accounted for 15.6% and 15.6% and Ford accounted for 15.6% and 15.4%,
respectively.
Gross
Profit
Gross
profit increased $26.4 million, or 25.2%, to $131.1 million for 2007
from $104.7 million for 2006. The increase was primarily the
result of the factors described above under “Net Sales,” combined with a
recovery from the vertical integration and program launch costs incurred in our
Logistics segment in 2006, and benefits from our on-going lean and continuous
improvement program and other cost reduction initiatives, partially offset by
start-up costs associated with our NuVinci CVP project (which we expect to
discontinue in the first quarter of 2008), and scheduled price concessions
granted to certain customers in connection with previous contract
renewals.
Gross
profit as a percentage of net sales increased to 24.7% for 2007 from 21.0% for
2006. This increase was primarily due to a favorable mix of services
in our Logistics segment (including the automotive electronics upgrade program
that is expected to be substantially completed by the end of the first quarter
of 2008), recovery from the vertical integration and program launch costs
incurred in our Logistics segment in 2006, operating leverage from increased
volume in our Drivetrain segment, benefits from our on-going lean and continuous
improvement program and other cost reduction initiatives, and a favorable
resolution to all receivable and inventory issues associated with the
termination of a test and repair program.
SG&A
Expense
SG&A
expense increased $11.6 million, or 21.3%, to $66.1 million for 2007 from $54.5
million for 2006. The net increase was primarily the result of an
increase in (i) costs for incentive compensation programs and (ii) costs
associated with revenue growth in our Logistics 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 increased to 12.5% for 2007 from 10.9% for 2006.
Impairment
of Goodwill
Our
annual evaluation of goodwill made as of September 30, 2007, as required by SFAS
No. 142, Goodwill and Other
Intangible Assets, resulted in no impairment to goodwill.
During
2006, our annual evaluation of goodwill resulted in goodwill impairment charges
of $11.7 million related to the United Kingdom-based Drivetrain remanufacturing
operation and $2.9 million related to the Logistics segment’s automotive
materials reclamation operation. Because key new business
opportunities considered in our 2005 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
2007, we recorded $3.4 million ($2.1 million net of tax) of exit, disposal,
certain severance and other charges which included (i) $1.4 million ($0.9
million net of tax) for the write-down of raw materials inventory related to the
wind-down of activities with certain low-volume customers (classified as cost of
sales), (ii) $0.7 million ($0.5 million net of tax) of severance and other costs
primarily related to certain management upgrades and cost reduction activities,
(iii) $0.7 million ($0.4 million net of tax) of certain legal and other
professional fees unrelated to our ongoing operations, and (iv) $0.6 million
($0.3 million net of tax) of costs primarily related to fixed asset disposals
related to the exit from a leased facility, a change in the estimated useful
life of certain fixed assets and to a lesser extent the disposal of certain
fixed assets related to the wind-down of activities with certain low-volume
customers (classified as cost of sales).
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 may be contractually obligated to perform in order to restore
certain leased facilities to a condition specified in the lease
agreement.
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 increased $29.7 million, or 88.9%, to $63.1 million for 2007 from $33.4
million for 2006. This net increase was primarily due to the $14.6
million of goodwill impairment charges recorded in 2006, coupled with the
factors described above under “Net Sales,” “Gross Profit” and “Selling, General
and Administrative Expense.” As a percentage of net sales, operating
income increased to 11.9% from 6.7%.
Interest
Income
Interest
income increased $0.5 million, or 83.3%, to $1.1 million for 2007 from $0.6
million for 2006. The increase was primarily attributable to higher cash
balances invested in cash and equivalents during 2007 as compared to
2006.
Write-Off
of Debt Issuance Costs
During
2006, we paid the balance outstanding under a 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 this facility.
Interest
Expense
Interest
expense decreased $3.3 million, or 76.7%, to $1.0 million for 2007
from $4.3 million for 2006. This decrease was primarily due to a
reduction in total debt outstanding in 2007 as compared to 2006. As
of December 31, 2007, there were no borrowings outstanding under our credit
facility.
Income
Tax Expense
Income
tax expense as a percentage of income from continuing operations decreased to
36.9% for 2007, from 37.2% for 2006. The decrease was primarily due
to the impact of the $14.6 million goodwill impairment charge recorded in 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%, partially offset by the impact of the Texas Margin Tax which became
effective in 2007. Based upon our current estimate of taxable income
by state and currently enacted laws, we expect an effective income tax rate of
approximately 39.0% for 2008.
Discontinued
Operations
During
2007 and 2006 we recorded after-tax losses from discontinued operations of $0.4
million and $9.7 million, respectively.
The loss
for 2007 of $0.4 million primarily related to the run-out of warranty claims in
our discontinued Independent Aftermarket businesses.
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.
See Item
8. “Consolidated Financial Statements and Supplementary Data - Note 14” for a further
discussion of these charges.
|
Reportable
|
Segments
|
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,
|
|||||||||||
|
2007
|
2006
|
||||||||||
|
Net
sales
|
$ | 293.9 | 100.0 | % | $ | 263.4 | 100.0 | % | |||
|
Segment
profit
|
$ | 45.0 | 15.3 | % | $ | 24.4 | 9.3 | % | |||
Net Sales. Net
sales increased $30.5 million, or 11.6%, to $293.9 million for 2007
from $263.4 million for 2006. This increase was primarily
related to increases in our programs with GM (primarily an automotive
electronics upgrade program that we expect to be substantially completed by the
end of the first quarter of 2008), TomTom, SonyEricsson, LG, T-Mobile and TiVo,
partially offset by:
|
|
·
|
a
reduction of sales to AT&T primarily resulting from a reduced mix of
component repair parts passed through our test and repair services;
|
|
|
·
|
a
decline in Nokia revenues due to the termination of a test and repair
program in June 2007, partially offset by revenue from additional new
programs with Nokia; and
|
|
|
·
|
scheduled
price concessions granted to a customer in connection with a previous
contract renewal.
|
Of our
segment net sales for 2007 and 2006, AT&T accounted for 66.4% and 79.1% and
GM accounted for 12.2% and 2.7%, respectively.
Impairment of
Goodwill. During 2006, our annual evaluation of goodwill as
required by SFAS No. 142, Goodwill and Other Intangible Assets, resulted in 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
2007.
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. These
costs were nominal in 2007.
Segment
Profit. Segment profit increased $20.6 million, or 84.4%,
to $45.0 million (15.3% of segment net sales) for 2007 from $24.4 million
(9.3% of segment net sales) for 2006. The increase was primarily the
result of the factors described above under “Net Sales” and “Impairment of
Goodwill” combined with a favorable mix of services (including the automotive
electronics upgrade program that is expected to be substantially completed by
the end of the first quarter of 2008), recovery from the vertical integration
and program launch costs incurred in our Logistics segment in 2006, a favorable
resolution to all receivable and inventory issues associated with the
termination of a test and repair program, and benefits of our lean and
continuous improvement program and other cost reduction initiatives, partially
offset by scheduled price concessions granted to a customer in connection with a
previous contract renewal and an increase in costs for incentive compensation
programs.
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,
|
|||||||||||
|
2007
|
2006
|
||||||||||
|
Net
sales
|
$ | 236.8 | 100.0 | % | $ | 234.6 | 100.0 | % | |||
|
Segment
profit
|
$ | 18.1 | 7.6 | % | $ | 9.0 | 3.8 | % | |||
Net Sales. Net
sales increased $2.2 million, or 0.9%, to $236.8 million for 2007 from
$234.6 million for 2006. The increase was primarily due
to:
|
|
·
|
increased
volumes of Ford remanufactured transmissions compared to lower sales in
2006 that were due to inventory reductions in Ford’s distribution channel
during the first half of 2006; and
|
|
|
·
|
increased
volumes of Honda remanufactured transmissions believed to be associated
with the extension of the warranty period for certain models, the impact
of which substantially ended during the third quarter of
2007,
|
partially
offset by:
|
|
·
|
lower
volumes of Chrysler remanufactured transmissions due to Chrysler’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;
|
|
|
·
|
lower
sales for medium/heavy duty remanufactured transmissions with Allison
primarily resulting from a reduction in the cost of component parts passed
through the remanufacturing process;
and
|
|
|
·
|
scheduled
price concessions granted to certain customers in connection with previous
contract renewals.
|
Of our
segment net sales for 2007 and 2006, Honda accounted for 35.1% and 33.1%, Ford
accounted for 34.9% and 32.7% and Chrysler accounted for 12.4% and 15.6%,
respectively.
Impairment of
Goodwill. During 2006, our annual evaluation of goodwill as
required by SFAS No. 142, Goodwill and Other Intangible
Assets resulted in 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 2007.
Exit, Disposal, Certain Severance
and Other Charges. During, 2007, we recorded $3.4 million of
these costs consisting of (i) $1.4 million for the write-down of raw materials
inventory related to the wind-down of activities with certain low-volume
customers, (ii) $0.7 million of certain legal and other professional fees
unrelated to ongoing operating activities of the segment, (iii) $0.7 million of
severance and other costs primarily related to certain management upgrades and
cost reduction activities, (iv) $0.6 million primarily related to fixed asset
disposals related to the exit from a leased facility, a change in the estimated
useful life of certain fixed assets and to a lesser extent the disposal of
certain fixed assets related to the wind-down of activities with certain
low-volume customers. During 2006, we recorded $1.5 million of
these costs consisting primarily of $1.0 million for severance and related costs
associated with cost reduction activities and the reorganization of certain
management functions, as well as (i) costs related to a potential acquisition
that we ultimately decided not to pursue and (ii) 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.
Segment
Profit. Segment profit increased $9.1 million, or 101.1%, to
$18.1 million (7.6% of segment net sales) for 2007 from $9.0 million (3.8%
of segment net sales) for 2006. This resulted primarily from the
factors described above under “Net Sales” and “Impairment of Goodwill,”
operating leverage from increased volumes, and benefits resulting from our lean
and continuous improvement program and other cost reductions, partially offset
by an increase in product development, market development and start-up costs
associated with our NuVinci CVP project and increased “Exit, Disposal, Certain
Severance and Other Charges.”
During
the first quarter of 2008, we concluded that the return on investment potential
for the NuVinci CVP project was not sufficient to continue development
activities and on February 15, 2008, the Company sold the intangible assets of
the project to Fallbrook Technologies Inc. and entered into an agreement,
subject to certain financing conditions, to sell most of the other assets
related to the NuVinci project to Fallbrook. These assets were
classified as held and used (as defined in SFAS No. 144) as of December 31,
2007. We’ve estimated that activities related to the NuVinci project
lowered segment profit by approximately $10.9 million and $5.9 million during
2007 and 2006, respectively. We expect to reclassify the results of
this asset group to discontinued operations during the first quarter of
2008.
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 Chrysler remanufactured transmissions due to (i)
Chrysler’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
Chrysler’s distribution channel;
|
|
|
·
|
an
increase in product development and startup cost in our Drivetrain segment
associated with our NuVinci CVP
project;
|
|
|
·
|
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 Chrysler remanufactured transmissions due to (i)
Chrysler’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
Chrysler’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 29.9%, Honda
accounted for 15.6% and 19.3%, Ford accounted for 15.4% and 24.4%, and Chrysler
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 our
NuVinci CVP
project. 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 our
2005 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.
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 a 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.
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 14” for a further
discussion of these charges.
Reportable
Segments
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 79.1% and 81.9%, respectively.
Impairment of
Goodwill. During 2006, our annual evaluation of goodwill as
required by SFAS No. 142, Goodwill and Other Intangible Assets
resulted in 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.
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 Chrysler remanufactured transmissions due to (i)
Chrysler’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
Chrysler’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%, and Chrysler accounted for 15.6% and 24.3%,
respectively.
Impairment of
Goodwill. During 2006, our annual evaluation of goodwill as
required by SFAS No. 142, Goodwill and Other Intangible
Assets resulted in 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 our
NuVinci CVP
project, 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.
Liquidity
and Capital Resources
Cash Flow & Capital
Expenditures
We had
total cash and cash equivalents on hand of $40.1 million at December 31,
2007. Net cash provided by operating activities from continuing
operations was $75.2 million in 2007. During the year, we provided
$11.4 million of cash from our working capital accounts, which included (i)
$13.7 million from accounts payable and accrued expenses primarily due to
increased compensation accruals and accrued income taxes payable and (ii) $6.7
million from accounts receivable primarily as the result of the favorable timing
of cash collections in our Logistics segment, partially offset by cash used of
(x) $8.6 million for inventories primarily related to increased test and repair
volume in our Logistics segment and new product launches in our Drivetrain
segment and (y) $0.4 million for prepaid and other assets.
Net cash
used in investing activities from continuing operations was $23.9 million for
the year, which included $23.0 million of capital spending primarily related to
machinery and equipment for new business initiatives, hardware and software
technology enhancements, and capacity maintenance efforts and $1.0 million of
net purchases of available-for-sale securities for our nonqualified deferred
compensation plan. Net cash used in financing activities of $18.7
million included payments of $17.8 million made on our credit facility, $5.1
million from the reduction of our book overdrafts, and $0.5 million for treasury
stock repurchases of our common stock, partially offset by $3.8 million of cash
proceeds and $1.0 million of tax benefits from the exercise of stock-based
awards by our employees and non-employee directors.
During
2006, we made a payment of $1.0 million for intangible assets consisting of a
license fee that was paid to Fallbrook Technologies Inc. to license the right
to develop, manufacture and sell Fallbrook's NuVinci CVP technology in
specified fields of use.
For 2008,
we estimate $20-$26 million for capital expenditures, consisting of
approximately $10-$16 million in support of new business and capacity expansion
initiatives in both our Logistics and Drivetrain segments and approximately $10
million in support of maintenance and cost reduction initiatives.
For 2008,
we expect our effective tax rate to be 39.0%, an increase from our 2007
effective tax rate of 36.9%. This increase is primarily the result of
our current estimates of the distribution of taxable income by
state.
Additionally,
in 2007, 2006 and 2005 we utilized $0.9 million, $4.9 million and $5.1 million,
respectively, of net operating loss carryforwards to reduce our net income tax
payments to $14.0 million, $0.8 million and $4.8 million,
respectively. As of December 31, 2007, we had utilized all of our
federal operating loss carryforwards.
Financing
On March
21, 2006, we entered into a credit agreement and a related security agreement
with certain banks. This 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, 2007, 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%
|
At
December 31, 2007, our borrowing capacity under the credit facility was $148.5
million, net of $1.5 million for outstanding letters of credit.
We were
in compliance with all the credit facility’s debt covenants as of December 31,
2007.
We had
cash and cash equivalents on hand of $40.1 million at December 31,
2007.
We
believe that cash on hand, cash flow from operations and existing borrowing
capacity will be sufficient to fund ongoing operations, budgeted capital
expenditures and potential repurchases of our common stock. 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
In
December 2006, our Board of Directors authorized the repurchase of up to
approximately 2% of our outstanding common stock during 2007 to offset the
dilutive impact of new shares issued for stock option exercises and restricted
stock grants under our stock incentive plans. During 2007, no open
market purchases had been made under this authorization, which expired on
December 31, 2007.
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
15."
Contractual
Obligations
The
following table summarizes our contractual obligations from continuing
operations expressed in millions of dollars as of December 31,
2007:
|
Total
|
Less
than
1 year
|
1 – 3
years
|
3 – 5
years
|
More
than
5
years
|
||||||||||
|
Debt
Obligations:
|
||||||||||||||
|
Letters
of
credit
|
$ | 1.5 | $ | − | $ | − | $ | 1.5 | $ | − | ||||
|
Interest
on credit facility(1)
|
1.0 | 0.3 | 0.6 | 0.1 | – | |||||||||
|
Total
debt obligations
|
2.5 | 0.3 | 0.6 | 1.6 | – | |||||||||
|
Operating lease
obligations
|
28.1 | 7.7 | 10.2 | 5.0 | 5.2 | |||||||||
|
Purchase
obligations(2)
|
29.5 | 29.5 | − | − | − | |||||||||
|
Executive
compensation agreements(3)
|
0.4 | 0.3 | 0.1 | − | − | |||||||||
|
Nonqualified
deferred compensation(4)
|
3.0 | 0.1 | 0.2 | 0.1 | 2.6 | |||||||||
|
Deferred
compensation(5)
|
0.5 | 0.1 | 0.3 | 0.1 | − | |||||||||
|
Total
|
$ | 64.0 | $ | 38.0 | $ | 11.4 | $ | 6.8 | $ | 7.8 | ||||
________________
|
(1)
|
Amount
represents estimated interest expense related to the unused portion of our
credit facility as of December 31, 2007. Interest is determined
assuming the credit facility was terminated on March 31, 2011, its
expiration date. There were no borrowings outstanding under the
credit facility at December 31,
2007.
|
|
(2)
|
Purchase
obligations primarily consist of contractual arrangements in the form of
purchase orders and other commitments with suppliers where there is a
fixed non-cancelable payment schedule or minimum payments due with a
reduced delivery schedule.
|
|
(3)
|
Represents
amounts payable to our former CEO, former CFO and another former
executive.
|
|
(4)
|
Represents
amounts payable to certain of our employees and directors under a
nonqualified deferred compensation
plan.
|
|
(5)
|
Relates
to the 1997 acquisition of a former Drivetrain segment business, which
requires us to make certain payments to key employees of the seller on
various dates subsequent to the closing date. Through December
31, 2007, we had made $3.2 million of these payments (including $0.1
million paid in 2007).
|
Impact
of New Accounting Standards
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. In December 2007, the FASB released a
proposed FASB Staff Position (FSP FAS 157-b), which if adopted as proposed by
the FASB, would delay the effective date of SFAS No. 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements as a recurring basis (at
least annually). Based on our current operations, the adoption of
SFAS No. 157 is not expected to have a material effect on our financial
statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment to FASB Statement
No. 115, which permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. The statement is effective for fiscal
years beginning after November 15, 2007. We have elected not to
apply the fair value option to any of our financial
instruments. Based on our current operations, the adoption of SFAS
No. 159 is not expected to have a material effect on our financial
statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations. SFAS No. 141R will significantly change the
accounting for business combinations. Under SFAS No. 141R, an
acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS No. 141R will change the accounting
treatment for certain specific items, including (i) acquisition costs will be
generally expensed as incurred, (ii) noncontrolling interests (formerly known as
“minority interests”) will be valued at fair value at the acquisition date,
(iii) acquired contingent liabilities will be recorded at fair value at the
acquisition date and subsequently measured at either the higher of such amount
or the amount determined under existing guidance for non-acquired contingencies,
(iv) in-process research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date, (v) restructuring
costs associated with a business combination will be generally expensed
subsequent to the acquisition date, and (vi) changes in deferred tax asset
valuation allowances and income tax uncertainties after acquisition date
generally will affect income tax expense. SFAS 141R also includes a
substantial number of new disclosure requirements. SFAS No.
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. Earlier adoption in
prohibited. Based on our current operations, the adoption of SFAS No.
141R 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.
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, 2007, we were not using any derivative
financial instruments.
Interest Rate
Exposure. Based on our overall interest rate exposure during
the year ended December 31, 2007 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, 2007, we had no amounts
outstanding under our credit facility and therefore no interest rate
exposure.
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, 2007, a 10% change in the foreign exchange rate would
increase or decrease our consolidated net income by less than $0.1
million.
Contents
The Board
of Directors snd Stockholders of Aftermarket Technology Corp.
We have
audited the accompanying consolidated balance sheets of Aftermarket Technology
Corp. and subsidiaries (the Company) as of December 31, 2007 and 2006, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended
December 31, 2007. Our audits also included the financial
statement schedule listed in the Index at 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 financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Aftermarket Technology
Corp. and subsidiaries at December 31, 2007 and 2006, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2007, 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 9 in the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No. 48, Accounting
for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109, as
of January 1, 2007. As discussed in Note 2 to the consolidated financial
statements, 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), Aftermarket Technology Corp.’s internal control
over financial reporting as of December 31, 2007, 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 27, 2008
expressed an unqualified opinion thereon.
/s/
ERNST & YOUNG LLP
Chicago,
Illinois
February
27, 2008
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
The Board
of Directors snd Stockholders of Aftermarket Technology Corp.
We have
audited Aftermarket Technology Corp.’s internal control over financial reporting
as of December 31, 2007, 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 included in the accompanying Form 10-K. Our
responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, 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, Aftermarket Technology Corp. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
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, 2007 and 2006, and the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2007, and our report dated February 27,
2008 expressed an unqualified opinion thereon.
/s/ ERNST
& YOUNG LLP
Chicago,
Illinois
February
27, 2008
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
(In
thousands, except share and per share data)
|
|||||||
|
December
31,
|
December
31,
|
||||||
|
2007
|
2006
|
||||||
|
Assets
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$ | 40,149 | $ | 7,835 | |||
|
Accounts
receivable, net
|
71,363 | 77,720 | |||||
|
Inventories
|
65,595 | 56,904 | |||||
|
Prepaid
and other assets
|
3,467 | 3,788 | |||||
|
Refundable
income taxes
|
2,036 | 1,382 | |||||
|
Deferred
income taxes
|
7,740 | 7,771 | |||||
|
Assets
of discontinued operations
|
- | 766 | |||||
|
Total
current assets
|
190,350 | 156,166 | |||||
|
Property,
plant and equipment, net
|
60,987 | 53,008 | |||||
|
Debt
issuance costs, net
|
507 | 664 | |||||
|
Goodwill
|
132,375 | 132,375 | |||||
|
Intangible
assets, net
|
892 | 1,327 | |||||
|
Long-term
investments
|
3,019 | 1,966 | |||||
|
Other
assets
|
1,244 | 171 | |||||
|
Total
assets
|
$ | 389,374 | $ | 345,677 | |||
|
Liabilities
and Stockholders' Equity
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
payable
|
$ | 35,140 | $ | 41,889 | |||
|
Accrued
expenses
|
34,617 | 19,060 | |||||
|
Book
overdraft
|
- | 5,059 | |||||
|
Income
taxes payable
|
3,308 | - | |||||
|
Deferred
compensation
|
124 | 130 | |||||
|
Liabilities
of discontinued operations
|
283 | 1,015 | |||||
|
Total
current liabilities
|
73,472 | 67,153 | |||||
|
Amount
drawn on credit facility
|
- | 17,800 | |||||
|
Deferred
compensation, less current portion
|
3,308 | 2,352 | |||||
|
Other
long-term liabilities
|
2,819 | 2,335 | |||||
|
Liabilities
related to uncertain tax positions
|
1,608 | - | |||||
|
Deferred
income taxes
|
27,654 | 23,707 | |||||
|
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) - 27,479,944
and 27,109,709
|
|||||||
|
as
of December 31, 2007 and 2006, respectively
|
275 | 271 | |||||
|
Additional
paid-in capital
|
232,312 | 223,288 | |||||
|
Retained
earnings
|
125,336 | 85,913 | |||||
|
Accumulated
other comprehensive income
|
3,766 | 3,537 | |||||
|
Common
stock held in treasury, at cost - 5,328,423 and 5,303,083
shares
|
|||||||
|
as
of December 31, 2007 and 2006, respectively
|
(81,176 | ) | (80,679 | ) | |||
|
Total
stockholders' equity
|
280,513 | 232,330 | |||||
|
Total
liabilities and stockholders' equity
|
$ | 389,374 | $ | 345,677 | |||
|
See
accompanying notes.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|||||||||||
|
(In
thousands, except per share data)
|
|||||||||||
|
For
the years ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
Net
sales:
|
|||||||||||
|
Services
|
$ | 293,917 | $ | 263,405 | $ | 153,220 | |||||
|
Products
|
236,789 | 234,569 | 266,398 | ||||||||
|
Total
net sales
|
530,706 | 497,974 | 419,618 | ||||||||
|
Cost
of sales:
|
|||||||||||
|
Services
|
211,937 | 210,055 | 115,019 | ||||||||
|
Products
|
185,733 | 183,214 | 200,488 | ||||||||
|
Products
- exit, disposal, certain severance and other charges
|
1,962 | - | - | ||||||||
|
Total
cost of sales
|
399,632 | 393,269 | 315,507 | ||||||||
|
Gross
profit
|
131,074 | 104,705 | 104,111 | ||||||||
|
Selling,
general and administrative expense
|
66,131 | 54,538 | 48,993 | ||||||||
|
Amortization
of intangible assets
|
435 | 269 | 125 | ||||||||
|
Impairment
of goodwill
|
- | 14,592 | - | ||||||||
|
Exit,
disposal, certain severance and other charges
|
1,411 | 1,938 | 523 | ||||||||
|
Operating
income
|
63,097 | 33,368 | 54,470 | ||||||||
|
Interest
income
|
1,141 | 605 | 2,026 | ||||||||
|
Other
income, net
|
116 | 262 | 542 | ||||||||
|
Write-off
of debt issuance costs
|
- | (1,691 | ) | - | |||||||
|
Interest
expense
|
(969 | ) | (4,297 | ) | (7,696 | ) | |||||
|
Income
from continuing operations before income taxes
|
63,385 | 28,247 | 49,342 | ||||||||
|
Income
tax expense
|
23,404 | 10,506 | 16,344 | ||||||||
|
Income
from continuing operations
|
39,981 | 17,741 | 32,998 | ||||||||
|
Loss
from discontinued operations,
|
|||||||||||
|
net
of income taxes
|
(374 | ) | (9,718 | ) | (1,990 | ) | |||||
|
Net
income
|
$ | 39,607 | $ | 8,023 | $ | 31,008 | |||||
|
Per
common share - basic:
|
|||||||||||
|
Income
from continuing operations
|
$ | 1.83 | $ | 0.82 | $ | 1.55 | |||||
|
Loss
from discontinued operations
|
$ | (0.02 | ) | $ | (0.45 | ) | $ | (0.09 | ) | ||
|
Net
income
|
$ | 1.82 | $ | 0.37 | $ | 1.45 | |||||
|
Per
common share - diluted:
|
|||||||||||
|
Income
from continuing operations
|
$ | 1.81 | $ | 0.81 | $ | 1.53 | |||||
|
Loss
from discontinued operations
|
$ | (0.02 | ) | $ | (0.44 | ) | $ | (0.09 | ) | ||
|
Net
income
|
$ | 1.79 | $ | 0.37 | $ | 1.44 | |||||
|
See
accompanying notes.
|
|||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|||||||||||||||||||||||||||||
|
(In
thousands, except share data)
|
|||||||||||||||||||||||||||||
|
Accumulated
|
|||||||||||||||||||||||||||||
|
Additional
|
Other
|
Common
|
|||||||||||||||||||||||||||
|
Preferred
|
Common
|
Paid-In
|
Retained
|
Comprehensive
|
Unearned
|
Stock
in
|
|||||||||||||||||||||||
|
Stock
|
Stock
|
Capital
|
Earnings
|
Income
|
Compensation
|
Treasury
|
Total
|
||||||||||||||||||||||
|
Balance
at January 1, 2005
|
$ | - | $ | 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 | ||||||||||||||||||||
|
Net
income
|
- | - | - | 39,607 | - | - | - | 39,607 | |||||||||||||||||||||
|
Translation
adjustments
|
- | - | - | - | 258 | - | - | 258 | |||||||||||||||||||||
|
Unrealized
loss on available-
for-sale
securities, net of
income
taxes
|
- | - | - | - | (29 | ) | - | - | (29 | ) | |||||||||||||||||||
|
Comprehensive
income
|
39,836 | ||||||||||||||||||||||||||||
|
Issuance
of 140,075 shares of
common
stock from incentive stock awards
|
- | 1 | (1 | ) | - | - | - | - | - | ||||||||||||||||||||
|
Issuance
of 230,160 shares of
common
stock from exercise of stock options
|
- | 3 | 3,763 | - | - | - | - | 3,766 | |||||||||||||||||||||
|
Tax
benefit from stock-based award transactions
|
- | - | 1,136 | - | - | - | - | 1,136 | |||||||||||||||||||||
|
Noncash
stock-based compensation
|
- | - | 4,126 | - | - | - | - | 4,126 | |||||||||||||||||||||
|
Repurchase
of 17,362 shares of common stock for treasury
|
- | - | - | - | - | - | (497 | ) | (497 | ) | |||||||||||||||||||
|
Adjustment
to uncertain
tax
positions upon adoption
of
FIN 48
|
- | - | - | (184 | ) | - | - | - | (184 | ) | |||||||||||||||||||
|
Balance
at December 31, 2007
|
$ | - | $ | 275 | $ | 232,312 | $ | 125,336 | $ | 3,766 | $ | - | $ | (81,176 | ) | $ | 280,513 | ||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||||||
|
(In
thousands)
|
|||||||||||
|
For
the years ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
Operating
Activities:
|
|||||||||||
|
Net
income
|
$ | 39,607 | $ | 8,023 | $ | 31,008 | |||||
|
Adjustments
to reconcile net income to net cash provided by
|
|||||||||||
|
operating
activities - continuing operations:
|
|||||||||||
|
Net
loss from discontinued operations
|
374 | 9,718 | 1,990 | ||||||||
|
Impairment
of goodwill
|
- | 14,592 | - | ||||||||
|
Write-off
of debt issuance costs
|
- | 1,691 | - | ||||||||
|
Depreciation
and amortization
|
15,403 | 13,871 | 13,062 | ||||||||
|
Noncash
stock-based compensation
|
4,126 | 2,756 | 1,065 | ||||||||
|
Amortization
of debt issuance costs
|
157 | 412 | 1,254 | ||||||||
|
Adjustments
to provision for losses on accounts receivable
|
(217 | ) | (23 | ) | 334 | ||||||
|
Loss
on sale of equipment
|
105 | 160 | 55 | ||||||||
|
Deferred
income taxes
|
4,291 | 3,916 | 9,311 | ||||||||
|
Changes
in operating assets and liabilities,
|
|||||||||||
|
net
of businesses acquired or discontinued/sold:
|
|||||||||||
|
Accounts
receivable
|
6,655 | (5,262 | ) | (24,919 | ) | ||||||
|
Inventories
|
(8,585 | ) | (5,013 | ) | 12,635 | ||||||
|
Prepaid
and other assets
|
(423 | ) | (244 | ) | 2,715 | ||||||
|
Accounts
payable and accrued expenses
|
13,714 | 8,346 | 1,305 | ||||||||
|
Net
cash provided by operating activities - continuing
operations
|
75,207 | 52,943 | 49,815 | ||||||||
|
Net
cash provided by (used in) operating activities - discontinued
operations
|
(339 | ) | 4,425 | 257 | |||||||
|
Investing
Activities:
|
|||||||||||
|
Purchases
of property, plant and equipment
|
(23,027 | ) | (11,910 | ) | (17,292 | ) | |||||
|
Purchases
of available-for-sale securities
|
(4,301 | ) | (3,981 | ) | (561 | ) | |||||
|
Purchase
of assets of a business
|
- | (1,746 | ) | - | |||||||
|
Purchase
of intangible assets
|
- | (950 | ) | - | |||||||
|
Proceeds
from sales of available-for-sale securities
|
3,348 | 2,511 | 218 | ||||||||
|
Proceeds
from redemption of note receivable from sale of business
|
- | - | 8,365 | ||||||||
|
Proceeds
from sale of property, plant and equipment
|
42 | 57 | 42 | ||||||||
|
Net
cash used in investing activities - continuing operations
|
(23,938 | ) | (16,019 | ) | (9,228 | ) | |||||
|
Net
cash provided by investing activities - discontinued
operations
|
- | 2,161 | 155 | ||||||||
|
Financing
Activities:
|
|||||||||||
|
Payments
on term debt
|
- | (90,685 | ) | (19,188 | ) | ||||||
|
(Payments)
borrowings on revolving credit facility, net
|
(17,800 | ) | 17,800 | - | |||||||
|
Debt
issuance costs
|
- | (786 | ) | 118 | |||||||
|
Net
change in book overdraft
|
(5,059 | ) | (5,426 | ) | 4,184 | ||||||
|
Proceeds
from exercise of stock options
|
3,766 | 7,495 | 4,270 | ||||||||
|
Tax
benefit from stock-based award transactions
|
996 | 1,329 | - | ||||||||
|
Repurchases
of common stock for treasury
|
(497 | ) | (11,050 | ) | (320 | ) | |||||
|
Payments
on amounts due to sellers of acquired companies
|
- | (29 | ) | (2,450 | ) | ||||||
|
Payments
of deferred compensation related to acquired company
|
(130 | ) | (136 | ) | (142 | ) | |||||
|
Net
cash used in financing activities
|
(18,724 | ) | (81,488 | ) | (13,528 | ) | |||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
108 | 341 | (84 | ) | |||||||
|
Increase
(decrease) in cash and cash equivalents
|
32,314 | (37,637 | ) | 27,387 | |||||||
|
Cash
and cash equivalents at beginning of year
|
7,835 | 45,472 | 18,085 | ||||||||
|
Cash
and cash equivalents at end of year
|
$ | 40,149 | $ | 7,835 | $ | 45,472 | |||||
|
Cash
paid during the year for:
|
|||||||||||
|
Interest
|
$ | 830 | $ | 4,682 | $ | 6,733 | |||||
|
Income
taxes, net
|
13,957 | 809 | 4,821 | ||||||||
|
See
accompanying notes.
|
|||||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share data)
Note
1. The Company
Aftermarket Technology
Corp. (the "Company") has two reportable segments: the Logistics
segment and the Drivetrain segment. The Logistics segment provides
value-added warehousing, packaging 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 (“AT&T”)
(formerly Cingular Wireless), General Motors (“GM”), TomTom, Nokia, LG,
Magellan, T-Mobile, Delphi, Visteon, TiVo and SonyEricsson. The
Company’s Drivetrain segment primarily sells remanufactured transmissions to
Honda, Ford, Chrysler (formerly 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. Established in 1994, the Company maintains manufacturing
facilities and logistics operations in the United States and a manufacturing
facility in the United Kingdom.
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. In accordance with Financial
Accounting Standards Board (“FASB”) Interpretation No. 46R, Consolidation of Variable Interest
Entities, we also consolidate any variable interest entities of which we
are the primary beneficiary, as defined.
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) component electronic equipment repair parts for the
Logistics segment and (ii) new and used transmission parts, cores and finished
goods for the Drivetrain 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: two to ten years for machinery and equipment, three to seven years
for autos and trucks, four to seven years for furniture and fixtures, up to 39
years for buildings and the lesser of 15 years or the remaining term of the
related lease, including any periods covered by reasonably assured lease
renewals, for leasehold improvements. Depreciation expense was
$14,968, $13,602 and $12,937 for the years ended December 31, 2007, 2006
and 2005, respectively. Maintenance and repairs are charged to
expense as incurred.
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 incurred in connection with the Credit Facility (see Note 8 –
Credit Facility) are being amortized on a straight-line basis over the life of
the Credit Facility. As of December 31, 2007 and 2006, debt issuance
costs of $507 and $664 are reflected net of accumulated amortization of $279 and
$122, respectively.
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 30 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. The annual impairment tests made by the Company as of
September 30, 2007 resulted in no adjustment to the carrying value of its
goodwill.
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. Because key new
business opportunities considered in the 2005 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. 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 5 – 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 14 − Discontinued Operations and Note 17 − 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, 2007 and 2006, the fair value of ARO liabilities was $419 and $387,
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, GM, Allison and Chrysler, 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 $583 and $871 at December 31, 2007
and 2006, 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 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.
New
Product Research and Development Expenses
The cost related to research, design
and development of new products charged to expense was $2,132, $3,231 and
$1,238 for the years ended December 31, 2007, 2006 and 2005,
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. 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.
Also in
2006, the Company elected to adopt the alternative method provided in FASB Staff
Position No. FAS 123R-3, Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards 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.
During
the years ended December 31, 2007, 2006 and 2005, the consolidated statements of
income reflect compensation cost related to stock-based payments, which includes
stock options and Restricted Stock (defined below), of $2,636 (net of income
taxes of $1,490), $1,740 (net of income taxes of $1,016) and $670 (net of income
taxes of $395), respectively. The Company classified the pre-tax
stock-based compensation cost of $4,126, $2,756 and $1,065 for 2007, 2006 and
2005, respectively, as part of selling, general and administrative expense in
its consolidated statements of income. 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,
|
|||||
|
2007
|
2006
|
2005
|
|||
|
Expected
volatility
|
31.38%
|
38.11%
|
39.39%
|
||
|
Risk-free
interest rates
|
4.87%
|
5.01%
|
3.69%
|
||
|
Expected
term
|
3.9
years
|
3.7
years
|
2.5
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. For purposes of applying the
Black-Scholes option-pricing model, the Company has identified two groups of
optionees with similar option exercise and forfeiture activity
experience. 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, and is updated by the Company on an annual
basis.
Forfeitures rate:
Compensation expense recognized in the consolidated statements of income
for the year ended December 31, 2007 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
Prior to
the January 1, 2006 adoption of SFAS No. 123R, 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 year ended December 31,
|
|||
|
2005
|
|||
|
Income
from continuing operations as reported
|
$ | 32,998 | |
|
Stock-based
employee compensation costs included in the determination of income from
continuing operations as reported, net of income taxes
|
670 | ||
|
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 | ) | |
|
Pro
forma income from continuing operations as if the fair value based method
had been applied to all awards
|
$ | 30,276 | |
|
Basic
earnings per common share:
|
|||
|
Income
from continuing operations as
reported
|
$ | 1.55 | |
|
Pro
forma as if the fair value based method had been applied to all
awards
|
$ | 1.42 | |
|
Diluted
earnings per common share:
|
|||
|
Income
from continuing operations as
reported
|
$ | 1.53 | |
|
Pro
forma as if the fair value based method had been applied to all
awards
|
$ | 1.40 | |
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.
New
Accounting Standards
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. In December 2007, the FASB released a
proposed FASB Staff Position (FSP FAS 157-b), which if adopted as proposed by
the FASB, would delay the effective date of SFAS No. 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements as a recurring basis (at
least annually). Based on the Company’s current operations, the
adoption of SFAS No. 157 is not expected to have a material effect on its
consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment to FASB Statement
No. 115, which permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. The statement is effective for fiscal
years beginning after November 15, 2007. The Company has elected
not to apply the fair value option to any of its financial
instruments. Based on the Company’s current operations, the adoption
of SFAS No. 159 is not expected to have a material effect on its consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations. SFAS No. 141R
will significantly change the accounting for business
combinations. Under SFAS No. 141R, an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited
exceptions. SFAS No. 141R will change the accounting treatment for
certain specific items, including (i) acquisition costs will be generally
expensed as incurred, (ii) noncontrolling interests (formerly known as “minority
interests”) will be valued at fair value at the acquisition date, (iii) acquired
contingent liabilities will be recorded at fair value at the acquisition date
and subsequently measured at either the higher of such amount or the amount
determined under existing guidance for non-acquired contingencies, (iv)
in-process research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date, (v) restructuring
costs associated with a business combination will be generally expensed
subsequent to the acquisition date, and (vi) changes in deferred tax asset
valuation allowances and income tax uncertainties after acquisition date
generally will affect income tax expense. SFAS 141R also includes a
substantial number of new disclosure requirements. SFAS No.
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. Earlier adoption in
prohibited. Based on the Company’s current operations, the adoption
of SFAS No. 141R is not expected to have a material effect on its consolidated
financial statements.
Reclassifications
Certain prior-year amounts have been
reclassified to conform to the 2007 presentation.
Note
3. Inventories
Inventories
of continuing operations consist of the following:
|
December 31,
|
|||||
|
2007
|
2006
|
||||
|
Raw materials,
including core inventories
|
$ | 59,296 | $ | 49,984 | |
|
Work-in-process
|
1,467 | 1,717 | |||
|
Finished
goods
|
4,832 | 5,203 | |||
| $ | 65,595 | $ | 56,904 | ||
Note
4. Property,
Plant and Equipment
Property,
plant and equipment are summarized as follows:
|
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Land
|
$ | 2,463 | $ | 2,520 | |||
|
Buildings
|
12,639 | 12,888 | |||||
|
Machinery
and equipment
|
111,531 | 100,438 | |||||
|
Autos
and trucks
|
2,239 | 2,063 | |||||
|
Furniture
and fixtures
|
3,124 | 2,664 | |||||
|
Leasehold
improvements
|
15,886 | 15,076 | |||||
|
Construction
in process
|
1,268 | 844 | |||||
|
|
149,150 | 136,493 | |||||
|
Less: Accumulated
depreciation and amortization
|
(88,163 | ) | (83,485 | ) | |||
| $ | 60,987 | $ | 53,008 | ||||
During
2007, the Company disposed of obsolete property, plant and equipment with a
gross value totaling $10,755 and accumulated depreciation of
$10,277.
Note
5. Goodwill
and Intangible Assets
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:
|
Logistics
|
Drivetrain
|
Consolidated
|
|||||||||
|
Balance
at December 31, 2005
|
$ | 19,108 | $ | 127,068 | $ | 146,176 | |||||
|
Impairment
|
(2,870 | ) | (11,722 | ) | (14,592 | ) | |||||
|
Effect
of exchange rate changes from the translation of U.K.
subsidiary
|
− | 791 | 791 | ||||||||
|
Balances
at December 31, 2006 and 2007
|
$ | 16,238 | $ | 116,137 | $ | 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,
|
|||||||
|
2007
|
2006
|
||||||
|
Intangible
assets
|
$ | 2,575 | $ | 2,575 | |||
|
Less: Accumulated
amortization
|
(1,683 | ) | (1,248 | ) | |||
| $ | 892 | $ | 1,327 | ||||
During
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.
Also in
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 Company is amortizing the license fee over a five year
term. (See Note 19 - Subsequent
Event.)
Estimated
amortization expense for the five succeeding fiscal years is as
follows:
|
Estimated
Amortization Expense
|
||
|
2008
|
$ | 328 |
|
2009
|
245 | |
|
2010
|
191 | |
|
2011
|
112 | |
|
2012
|
1 | |
Note
6. Accrued
Expenses
Accrued
expenses of continuing operations are summarized as follows:
|
December 31,
|
|||||
|
2007
|
2006
|
||||
|
Payroll,
employee benefits and related costs
|
$ | 22,003 | $ | 11,606 | |
|
Customer
related allowances, discounts and other credits
|
3,565 | 714 | |||
|
Warranty
|
2,154 | 1,985 | |||
|
Liability
for insured losses
|
1,484 | – | |||
|
Other
|
5,411 | 4,755 | |||
| $ | 34,617 | $ | 19,060 | ||
Note
7. 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, 2005, 2006 and 2007 are summarized as follows:
|
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 | ||
|
Warranties
issued
|
1,592 | ||
|
Claims
paid / settlements
|
(845 | ) | |
|
Changes
in liability for pre-existing warranties
|
(578 | ) | |
|
Balance
at December 31, 2007
|
$ | 2,154 |
Note
8. Credit
Facility
On March
21, 2006, the Company executed a 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, 2007.
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, 2007, the Company had no amounts outstanding under the Credit
Facility and had $1,490 of letters of credit issued against the Credit Facility,
resulting in a borrowing capacity of $148,510. As of December 31,
2006, the Company had $17,800 outstanding under the Credit Facility, which
approximated its fair value.
|
|
Note
9. Income
Taxes
Income
tax expense (benefit) from continuing operations consists of the
following:
|
For
the years ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
Current:
|
|||||||||||
|
Federal
|
$ | 16,679 | $ | 8,012 | $ | 7,178 | |||||
|
State
|
2,065 | 679 | 435 | ||||||||
|
Foreign
|
317 | 241 | 206 | ||||||||
|
Total
current
|
19,061 | 8,932 | 7,819 | ||||||||
|
Deferred:
|
|||||||||||
|
Federal
|
4,615 | 4,870 | 8,537 | ||||||||
|
State
|
(382 | ) | (409 | ) | 142 | ||||||
|
Foreign
|
110 | (2,887 | ) | (154 | ) | ||||||
|
Total
deferred
|
4,343 | 1,574 | 8,525 | ||||||||
| $ | 23,404 | $ | 10,506 | $ | 16,344 | ||||||
Income
from continuing operations before income taxes is summarized as
follows:
|
For
the years ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Domestic
|
$ | 63,727 | $ | 37,399 | $ | 49,338 | ||||
|
Foreign
|
(342 | ) | (9,152 | ) | 4 | |||||
|
Total
|
$ | 63,385 | $ | 28,247 | $ | 49,342 | ||||
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,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||
|
Tax
at U.S. statutory rates
|
$ | 22,185 | 35.0 | % | $ | 9,886 | 35.0 | % | $ | 17,270 | 35.0 | % | ||||||||
|
State
income taxes, net of federal tax benefit
|
1,130 | 1.8 | 442 | 1.6 | 578 | 1.2 | ||||||||||||||
|
Foreign
income taxes
|
17 | − | 458 | 1.6 | − | − | ||||||||||||||
|
Increase
in valuation allowance
|
– | − | 54 | 0.1 | – | − | ||||||||||||||
|
Nondeductible
expenses
|
128 | 0.2 | 108 | 0.4 | 91 | 0.2 | ||||||||||||||
|
Federal
and state credits
|
(500 | ) | (0.8 | ) | (183 | ) | (0.6 | ) | (1,558 | ) | (3.2 | ) | ||||||||
|
Other
|
444 | 0.7 | (259 | ) | (0.9 | ) | (37 | ) | (0.1 | ) | ||||||||||
| $ | 23,404 | 36.9 | % | $ | 10,506 | 37.2 | % | $ | 16,344 | 33.1 | % | |||||||||
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. Effective April
1, 2008, the tax rate in the U.K. will be reduced to 28% from
30%. During 2007, the Company recorded foreign income tax expense of
$118 to adjust the deferred tax assets of its U.K. subsidiary to the new
rate.
Significant
components of the Company's deferred tax assets and liabilities are as
follows:
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Inventory
obsolescence reserve
|
$ | 1,998 | $ | 1,677 | |||
|
Product
warranty accruals
|
734 | 660 | |||||
|
Exit,
disposal, certain severance and other charges accruals
|
281 | 299 | |||||
|
Other
nondeductible accruals
|
4,932 | 3,541 | |||||
|
Credit
carryforwards
|
996 | 3,547 | |||||
|
Net
operating loss carryforwards
|
6,194 | 13,754 | |||||
|
Goodwill
impairment
|
4,739 | 4,868 | |||||
|
Total
deferred tax assets
|
19,874 | 28,346 | |||||
|
Deferred
tax liabilities:
|
|||||||
|
Amortization
of intangible assets
|
31,272 | 28,703 | |||||
|
Property,
plant and equipment
|
2,071 | 3,000 | |||||
|
Other
deferred items
|
– | 336 | |||||
|
Total
deferred tax liabilities
|
33,343 | 32,039 | |||||
|
Valuation
allowance
|
(6,445 | ) | (12,243 | ) | |||
|
Net
deferred tax (liability) asset
|
$ | (19,914 | ) | $ | (15,936 | ) | |
As of
December 31, 2007, the Company had utilized all of its federal operating loss
carryforwards. As of December 31, 2007, the Company had state loss carryforwards
of approximately $2,540 (expiring in varying amounts from 2013 to 2025)
attributable to states in which the Company’s primary operations are
located. 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 2007 and 2006, the
Company utilized income tax benefits associated with continuing operations of
$813 and $4,854 from federal operating loss carryforwards, and $42 and $84 from
state operating loss carryforwards, respectively.
During
2007, the Company utilized Alternative Minimum Tax (“AMT”) credit carryforwards
of approximately $850. Also during 2007, the Company completed a
study of research and development credits and recorded a tax benefit of $295
available to offset its current federal tax payable. 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 surplus ACT can be carried forward
indefinitely. The Company did not utilize any tax benefits associated
with its ACT carryforward in 2007, 2006 or 2005.
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
2007, the Company’s income tax valuation allowance decreased by $5,798 to $6,445
from $12,243 primarily due to the expiration of certain state net operating loss
carryforwards that had full valuation allowances recorded against
them.
As of
December 31, 2007, there were approximately $7,749 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.
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.
In
connection with the Company’s adoption of FIN 48, as of January 1, 2007, the
Company recorded a net decrease to retained earnings of $184 and reclassified
certain previously recognized deferred tax attributes as FIN 48 liabilities
related to the recognition and measurement of positions the Company had taken
with respect to certain tax credits allowed in its state income tax filings with
the State of Oklahoma. The total liabilities associated with
unrecognized tax benefits that, if recognized, would impact the effective tax
rates were $1,608 and $1,719 as of December 31, 2007 and January 1, 2007,
respectively.
A
reconciliation of the beginning and ending balance for liabilities associated
with unrecognized tax benefits is as follows:
|
Balances
at January 1, 2007
|
$ | 1,719 | |
|
Tax
positions related to the current year
|
73 | ||
|
Settlements
with tax authorities
|
(184 | ) | |
|
Balance
at December 31, 2007
|
$ | 1,608 |
Settlement
with the Oklahoma Tax Commission was reached during the fourth quarter of 2007
regarding the measurement of certain tax credits, which resulted in a reduction
of the FIN 48 liability by $184.
The last
year examined by the IRS was 2004, and all years up through and including that
year are closed by examination. The Company’s primary state tax
jurisdictions are Illinois, Missouri, Oklahoma, and Texas and its only
international jurisdiction is the United Kingdom. The following table
summarizes the open tax years for each major jurisdiction:
|
Jurisdiction
|
Open
Tax Years
|
|
Federal
|
2005-2006
|
|
Illinois
|
2004-2006
|
|
Missouri
|
2004-2006
|
|
Oklahoma
|
1999-2006
|
|
Texas
|
2003-2006
|
|
United
Kingdom
|
2005-2006
|
The
Company was contacted by the Illinois Department of Revenue for an income tax
examination of the periods 2004-2006 which began in February 2008. No
tax positions taken on these returns have been assessed at less than the
more-likely-than-not threshold.
Consistent
with its historical financial reporting, the Company has elected to classify
interest expense related to income tax liabilities, when applicable, as part of
the interest expense in its consolidated statements of income rather than income
tax expense. The Company will continue to classify any income tax
penalties as part of selling, general and administrative expense in its
consolidated statements of income.
Note
10. 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 stockholders. 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 842,169, 1,195,679 and 346,559 as of
December 31, 2007, 2006 and 2005, respectively.
Stock
Options
A summary
of the Plans’ stock option activities during the year ended December 31, 2007 is
presented below:
|
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining Contractual Term (in years)
|
Aggregate
Intrinsic Value
|
|||||||
|
Outstanding
at January 1, 2007
|
1,506,448 | $ | 20.10 | |||||||
|
Granted
at market price
|
253,804 | $ | 27.16 | |||||||
|
Exercised
|
(230,160 | ) | $ | 16.36 | ||||||
|
Forfeited
|
(13,865 | ) | $ | 20.51 | ||||||
|
Expired
|
(1,500 | ) | $ | 22.90 | ||||||
|
Outstanding
at December 31, 2007
|
1,514,727 | $ | 21.84 |
6.4
|
$ | 9,708 | ||||
|
Vested
and expected to vest at December 31, 2007
|
1,492,725 | $ | 21.76 |
6.3
|
$ | 8,656 | ||||
|
Exercisable
at December 31, 2007
|
1,123,222 | $ | 20.44 |
5.6
|
$ | 8,616 | ||||
The
aggregate intrinsic value in the table above represents the difference between
the Company’s closing stock price on December 31, 2007 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, 2007,
2006 and 2005 was $3,119, $3,778 and $3,167. The weighted average
fair value of stock options granted during the years ended December 31, 2007,
2006 and 2005 is estimated at $8.79, $8.67 and $4.50, respectively.
The
following summarizes information about options outstanding as of
December 31, 2007:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||
|
Range
of
Exercise
Prices
|
Shares
|
Weighted-
Average
Remaining
Contractual
Life
|
Weighted-
Average
Exercise
Prices
|
Shares
|
Weighted-
Average
Exercise
Prices
|
|||||||
|
$5.00
- $8.00
|
31,333 |
3.4
years
|
$ | 5.06 | 31,333 | $ | 5.06 | |||||
|
$8.01
- $12.00
|
88,000 |
4.3
years
|
$ | 10.06 | 78,667 | $ | 10.11 | |||||
|
$12.01
- $18.00
|
501,312 |
6.7
years
|
$ | 15.36 | 500,312 | $ | 15.37 | |||||
|
$18.01
- $27.00
|
377,978 |
7.4
years
|
$ | 23.20 | 162,910 | $ | 23.45 | |||||
|
$27.01
- $32.00
|
516,104 |
6.0
years
|
$ | 30.17 | 350,000 | $ | 30.00 | |||||
| 1,514,727 |
6.4
years
|
$ | 21.84 | 1,123,222 | $ | 20.44 | ||||||
Restricted
Stock
The
following summarizes the status of Restricted Stock as of December 31, 2007
and changes during the year ended December 31, 2007:
|
Number of
Shares
|
Weighted
Average Grant-Date
Fair Value
|
||||
|
Unvested
balance at January 1, 2007
|
171,999 | $ | 20.56 | ||
|
Granted
|
140,075 | $ | 28.43 | ||
|
Vested
|
(79,471 | ) | $ | 19.09 | |
|
Forfeited
|
(7,978 | ) | $ | 24.85 | |
|
Unvested
balance at December 31, 2007
|
224,625 | $ | 25.83 | ||
The
Company estimates that as of December 31, 2007 it had $3,089 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, 2007, 2006 and 2005 was $2,312,
$1,375 and $1,082, respectively. During the years
ended December 31, 2007, 2006 and 2005, the Company recognized compensation
expense of $2,542 ($1,624 net of income taxes), $1,509 ($953 net of income
taxes) and $1,065 ($670 net of income taxes), respectively, related to
Restricted Stock awards. The weighted average grant-date fair
value of Restricted Stock granted during 2006 and 2005 was $24.51 and $15.85,
respectively.
Note
11. Repurchases
of Common Stock
During
2007, the Company had authorization to repurchase shares of its outstanding
common stock to offset the dilutive impact of stock option exercises and
Restricted Stock grants made during the year under the Company’s stock incentive
plans. The Company estimated the number of shares that could have
been repurchased under this authorization to be up to approximately 2% of the
total shares outstanding. During 2007, no shares were repurchased by
the Company under this authorization, which expired on
December 31, 2007.
During
the years ended December 31, 2007 and 2006, certain officers and employees of
the Company delivered to the Company 17,026 and 15,453 shares of the Company’s
common stock in payment of $487 and $366, respectively, of withholding tax
obligations arising from the vesting of Restricted Stock awards. Per
the stock incentive plans 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. Also during 2007,
336 shares were returned as payment of $10 towards an outstanding employee
advance.
In
addition, 7,978 and 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
2007 and 2006, respectively.
Note
12. 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,
|
||||||||
|
2007
|
2006
|
2005
|
||||||
|
Numerator:
|
||||||||
|
Income
from continuing operations
|
$ | 39,981 | $ | 17,741 | $ | 32,998 | ||
|
Denominator:
|
||||||||
|
Weighted-average
common shares outstanding
|
21,806,115 | 21,714,161 | 21,351,829 | |||||
|
Common
stock equivalents
|
337,608 | 213,131 | 227,251 | |||||
|
Denominator
for diluted earnings per common share
|
22,143,723 | 21,927,292 | 21,579,080 | |||||
|
Per
common share -
basic
|
$ | 1.83 | $ | 0.82 | $ | 1.55 | ||
|
Per
common share -
diluted
|
$ | 1.81 | $ | 0.81 | $ | 1.53 | ||
Note
13. 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 $1,357, $1,156
and $1,103 for the years ended December 31, 2007, 2006, and 2005,
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 twelve years from December
31, 2007. 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. The Company applies the
provisions of EITF No. 97-14, Accounting for Deferred Compensation
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested.
Accordingly, the deferred compensation obligation has been classified as a
liability and is adjusted, with a corresponding charge (or credit) to
compensation cost, to reflect changes in the fair value of the amount owed to
the employee. The Company consolidates the assets and liabilities related to the
nonqualified deferred compensation plan into its financial
statements. At December 31, 2007 and 2006, the trust’s assets were
$3,019 and $1,966 and the corresponding compensation liability, included in the
long term portion of deferred compensation, was $3,000 and $1,948,
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,
|
|||||||
|
2007
|
2006
|
||||||
|
Cost
basis of
investments
|
$ | 3,043 | $ | 1,945 | |||
|
Gross
unrealized holding
gains
|
10 | 30 | |||||
|
Gross
unrealized holding
losses
|
(34 | ) | (9 | ) | |||
|
Aggregate
fair
value
|
$ | 3,019 | $ | 1,966 | |||
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 $370, $334 and $383 for the years
ended December 31, 2007, 2006 and 2005, respectively.
Note
14. Discontinued
Operations
During
2006, the Company discontinued its Independent Aftermarket businesses. These
businesses, which had incurred losses since their beginning, remanufactured
engines and distributed non-OEM branded remanufactured engines and transmissions
directly to independent transmission and general repair shops and certain
aftermarket parts retailers. The Company received proceeds of $2,051
for the sale of the Independent Aftermarket engine business and ceased the
operations of the Independent Aftermarket transmission business, with the
exception of contractual obligations for the warranty replacement for units sold
prior to its closure.
During
2007, the Company recorded a pre-tax charge of $613 primarily related to costs
to service the run-out of warranty claims on sales made prior to the closure of
the Independent Aftermarket transmission business. 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 and $22,345 for the years
ended December 31, 2006 and 2005, respectively. As of December 31,
2007, the current liabilities of discontinued operations primarily related to a
warranty accrual to service the run-out of warranty claims on sales made prior
to the closure of the transmission business. 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.
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 owned by Transtar Industries, Inc.), 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
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,
|
|||||||||||
|
2007
|
2006
|
2005
|
|||||||||
|
Exit
from Independent Aftermarket:
|
|||||||||||
|
Loss
from closure and sale of businesses
|
$ | (266 | ) | $ | (13,261 | ) | $ | − | |||
|
Operating
loss
|
(355 | ) | (1,576 | ) | (1,795 | ) | |||||
|
Non-operating
income
|
8 | 143 | 43 | ||||||||
|
Loss
before income taxes
|
(613 | ) | (14,694 | ) | (1,752 | ) | |||||
|
Income
tax benefit
|
239 | 4,960 | 633 | ||||||||
|
Loss
from Independent Aftermarket, net of income taxes
|
(374 | ) | (9,734 | ) | (1,119 | ) | |||||
|
Disposal
of Gastonia Operations:
|
|||||||||||
|
Exit,
disposal, certain severance and other charges
|
$ | − | $ | − | $ | (1,012 | ) | ||||
|
Other
costs and expenses
|
− | (68 | ) | (131 | ) | ||||||
|
Loss
before income taxes
|
− | (68 | ) | (1,143 | ) | ||||||
|
Income
tax benefit
|
− | 24 | 416 | ||||||||
|
Loss
from Gastonia operation, net of income taxes
|
− | (44 | ) | (727 | ) | ||||||
|
Sale
of Distribution Group:
|
|||||||||||
|
Income
before income taxes
|
− | 90 | − | ||||||||
|
Income
tax expense
|
− | (30 | ) | − | |||||||
|
Adjustment
to valuation allowance on capital losses
|
− | − | (144 | ) | |||||||
|
Gain
(loss) from Distribution Group, net of income taxes
|
− | 60 | (144 | ) | |||||||
|
Loss
from discontinued operations, net of income taxes
|
$ | (374 | ) | $ | (9,718 | ) | $ | (1,990 | ) | ||
Details
of assets and liabilities of discontinued operations are as
follows:
|
December 31,
|
|||||
|
2007
|
2006
|
||||
|
Assets:
|
|||||
|
Exit
from Independent Aftermarket:
|
|||||
|
Accounts
receivable
|
$ | − | $ | 158 | |
|
Promissory
note receivable
|
− | 459 | |||
|
Inventory
|
− | 149 | |||
|
Total
assets of discontinued operations
|
$ | − | $ | 766 | |
|
Liabilities:
|
|||||
|
Exit
from Independent Aftermarket:
|
|||||
|
Current
liabilities
|
$ | 283 | $ | 847 | |
|
Disposal of Gastonia
Operations:
|
|||||
|
Current
liabilities
|
− | 148 | |||
|
Sale
of Distribution Group:
|
|||||
|
Obligations
from the sale of the distribution group
|
− | 20 | |||
|
Total
liabilities of discontinued operations
|
$ | 283 | $ | 1,015 | |
Note
15. 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
|
|
|
2008
|
$ | 7,696 |
|
2009
|
6,250 | |
|
2010
|
3,954 | |
|
2011
|
2,571 | |
|
2012
|
2,428 | |
|
2013
and thereafter
|
5,178 | |
|
Total
minimum lease payments
|
$ | 28,077 |
Rent
expense for all operating leases approximated $9,245, $8,805 and $8,522 for the
years ended December 31, 2007, 2006 and 2005, 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, 2007, 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
owned by Transtar Industries, Inc., 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.
Note
16. 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 Logistics segment and the Drivetrain
segment. The Logistics segment provides value-added warehousing and
distribution, reverse logistics, turnkey order fulfillment, electronic equipment
testing, and refurbishment and repair services. The principal customers are
currently in the wireless, consumer electronics and automotive industries and
include AT&T, GM, TomTom, Nokia, LG, Magellan, T-Mobile, Delphi, Visteon,
TiVo and SonyEricsson. The Drivetrain segment primarily sells
remanufactured transmissions to Honda, Ford, Chrysler, 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 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 of the
Company. Prior to 2007, the Company allocated corporate overhead
based upon budgeted full year profit before tax. As the result of (i)
significant growth in the Logistics segment and (ii) significant investment in
new product and market development in the Drivetrain segment, the Company
revised its estimate of the usage of corporate resources. Accordingly
and beginning in 2007, fixed corporate overhead is allocated equally to each of
the Company’s reportable segments while certain costs that are variable in
nature are allocated based on the cost driver. Internal information
systems costs are allocated 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:
|
Logistics
|
Drivetrain
|
Corporate
|
Discontinued
Assets
|
Consolidated
|
||||||||||||
|
2007:
|
||||||||||||||||
|
Net
sales from external customers
|
$ | 293,917 | $ | 236,789 | $ | − | $ | − | $ | 530,706 | ||||||
|
Depreciation
and amortization expense
|
5,643 | 9,760 | − | − | 15,403 | |||||||||||
|
Exit,
disposal, certain severance and other charges (credits)
|
(17 | ) | 3,390 | − | − | 3,373 | ||||||||||
|
Operating
income
|
45,038 | 18,059 | − | − | 63,097 | |||||||||||
|
Total
assets
|
96,688 | 240,255 | 52,431 | − | 389,374 | |||||||||||
|
Goodwill
|
16,238 | 116,137 | − | − | 132,375 | |||||||||||
|
Expenditures
of long-lived assets, net
|
9,848 | 13,041 | 138 | − | 23,027 | |||||||||||
|
2006:
|
||||||||||||||||
|
Net
sales from external customers
|
$ | 263,405 | $ | 234,569 | $ | − | $ | − | $ | 497,974 | ||||||
|
Depreciation
and amortization expense
|
5,455 | 8,416 | − | − | 13,871 | |||||||||||
|
Impairment
of goodwill
|
2,870 | 11,722 | − | − | 14,592 | |||||||||||
|
Exit,
disposal, certain severance and other charges
|
459 | 1,479 | − | − | 1,938 | |||||||||||
|
Operating
income
|
24,392 | 8,976 | − | − | 33,368 | |||||||||||
|
Total
assets
|
90,604 | 236,430 | 17,877 | 766 | 345,677 | |||||||||||
|
Goodwill
|
16,238 | 116,137 | − | − | 132,375 | |||||||||||
|
Expenditures
of long-lived assets, net
|
5,871 | 5,932 | 107 | − | 11,910 | |||||||||||
|
2005:
|
||||||||||||||||
|
Net
sales from external customers
|
$ | 153,220 | $ | 266,398 | $ | − | $ | − | $ | 419,618 | ||||||
|
Depreciation
and amortization expense
|
5,022 | 8,040 | − | − | 13,062 | |||||||||||
|
Exit,
disposal, certain severance and other charges (credits)
|
543 | (20 | ) | − | − | 523 | ||||||||||
|
Operating
income
|
18,052 | 36,418 | − | − | 54,470 | |||||||||||
|
Total
assets
|
75,033 | 253,348 | 58,590 | 20,809 | 407,780 | |||||||||||
|
Goodwill
|
19,108 | 127,068 | − | − | 146,176 | |||||||||||
|
Expenditures
of long-lived assets
|
11,053 | 5,758 | 481 | − | 17,292 | |||||||||||
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,
|
||||||||
|
2007
|
2006
|
2005
|
||||||
|
Net
sales:
|
||||||||
|
United
States
|
$ | 502,059 | $ | 471,513 | $ | 388,849 | ||
|
Europe
and
Canada
|
28,647 | 26,461 | 30,769 | |||||
|
Consolidated
net
sales
|
$ | 530,706 | $ | 497,974 | $ | 419,618 | ||
|
Long-lived
assets:
|
||||||||
|
United
States
|
$ | 195,563 | $ | 185,319 | $ | 186,254 | ||
|
Europe
|
2,954 | 3,528 | 14,794 | |||||
|
Assets
of discontinued
operations
|
– | – | 2,247 | |||||
|
Consolidated
long-lived
assets
|
$ | 198,517 | $ | 188,847 | $ | 203,295 | ||
During
the year ended December 31, 2007, 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, 2007, 2006 and 2005, sales to AT&T (Logistics
segment) accounted for $195,302, $208,250 and $125,519, Honda (Drivetrain
segment) accounted for $83,040, $77,630 and $81,049, and Ford (Drivetrain
segment) accounted for $82,624, $76,659 and $102,281,
respectively. During the year ended December 31, 2005, net sales to
Chrysler (Drivetrain segment) were $64,609.
Note
17. Exit,
Disposal, Certain Severance and Other Charges
The
Company has periodically incurred 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. 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 or impairments of fixed assets, write-down of certain
inventories, and certain legal and other professional fees.
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. Also in
2006, 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.
During
2007, the Company recorded charges of $3,390 in its Drivetrain segment
consisting of (i) $1,389 for the write-down of raw materials
inventory related to the wind-down of activities with certain low-volume
customers (classified as Cost of Sales – Products), (ii) $753 of severance and
other costs primarily related to certain management upgrades and cost reduction
activities, (iii) $675 of certain legal and other professional fees unrelated to
ongoing operating activities of the segment, and (iv) $573 of costs primarily
related to fixed asset disposals related to the exit from a leased facility, a
change in the estimated useful life of certain fixed assets and to a lesser
extent the disposal of certain fixed assets related to the wind-down of
activities with certain low-volume customers (classified as Cost of Sales –
Products).
Also in
2007, in the Logistics segment, the Company recorded a gain of $67 primarily
related to the recovery of an insurance claim originating in 2003, partially
offset by a charge of $50 related to a potential acquisition that the Company
ultimately decided not to pursue.
Note
18. Selected
Quarterly Financial Data (Unaudited)
|
Quarter
|
|||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
||||||||||
|
2007
|
|||||||||||||
|
Net
sales
|
$ | 131,795 | $ | 130,809 | $ | 133,472 | $ | 134,630 | |||||
|
Gross
profit
|
30,227 | 32,839 | 33,394 | 34,614 | |||||||||
|
Exit,
disposal, certain severance and other charges
|
– | 1,226 | 62 | 2,085 | |||||||||
|
Income
from continuing operations
|
9,659 | 10,144 | 11,015 | 9,163 | |||||||||
|
Net
income
|
9,674 | 10,072 | 10,741 | 9,120 | |||||||||
|
Income
from continuing operations per common share – basic
|
$ | 0.45 | $ | 0.47 | $ | 0.50 | $ | 0.42 | |||||
|
Income
from continuing operations per common share diluted
|
$ | 0.44 | $ | 0.46 | $ | 0.50 | $ | 0.41 | |||||
|
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
(loss) from continuing operations per common share – basic and
diluted
|
$ | 0.26 | $ | 0.31 | $ | (0.18 | ) | $ | 0.42 | ||||
Exit,
disposal, certain severance and other charges include $713 and $1,249 of costs
primarily related to the wind-down of activities with certain low-volume
customers, classified as cost of sales in the consolidated statement of income
during the second and fourth quarters of 2007, respectively.
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.
Note
19. Subsequent
Event
During
the first quarter of 2008, the Company concluded that the return on investment
potential for the NuVinci® CVP
project was not sufficient to continue development activities and on
February 15, 2008, the Company sold the intangible assets of the
NuVinci project to Fallbrook Technologies Inc. for $700 and entered into an
agreement, subject to certain financing conditions, to sell to Fallbrook (i)
certain tangible assets of the NuVinci project for $3,952 and (ii) the NuVinci
inventory for the Company’s cost. As of December 31, 2007, these
assets were considered by the Company to be an asset group and to be held and
used, as those terms are defined in SFAS No. 144, Accounting for the Impairment or
Disposal of Long Lived Assets. The assets and operating
results of NuVinci were included with the Drivetrain segment for all periods
presented (see Note 16 – Segment Information). The Company expects to
(i) finalize the terms of the sale and (ii) reclassify the results of this asset
group to discontinued operations, during the first quarter of
2008. Details of the assets and liabilities of NuVinci are as
follows:
|
December 31,
|
||
|
2007
|
||
|
Assets:
|
||
|
Accounts
receivable
|
$ | 476 |
|
Inventories
|
1,601 | |
|
Prepaid
and other assets
|
331 | |
|
Property,
plant and equipment, net
|
4,525 | |
|
Intangible
assets, net
|
681 | |
| $ | 7,614 | |
|
Liabilities:
|
||
|
Current
liabilities
|
$ | 506 |
The Company expects to
collect the accounts receivable and to redeploy or dispose of those assets not
being purchased by Fallbrook and does not expect to incur any material asset
impairment charges in connection with the termination of the NuVinci
project.
None.
(i) Disclosure Controls and
Procedures.
We have
performed an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO) of the effectiveness of our disclosure controls and procedures, as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act). Based on that evaluation, our management including our CEO and
CFO, concluded that our disclosure controls and procedures were effective as of
December 31, 2007 to provide assurance that information required to be disclosed
by us in the reports filed or submitted by us under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms.
(ii) Internal Control Over
Financial Reporting.
(a) Management’s annual
report on internal control over financial reporting.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Under the supervision and with the
participation of our management, including the CEO and the CFO, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on 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, management concluded that our internal control over financial
reporting was effective at December 31, 2007.
(b) Attestation report of the
registered public accounting firm.
Ernst
& Young LLP, the independent registered public accounting firm that audited
the consolidated financial statements included in this annual report on Form
10-K, has issued an attestation report on our internal control over financial
reporting, which is included herein.
(c) Changes in internal
control over financial reporting.
There
were no changes in our internal control over financial reporting that occurred
during the fourth quarter of 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
None.
PART
III
Directors
and Executive Officers
The
following lists our executive officers and directors and their respective ages
and positions as of December 31, 2007:
|
Name
|
Age
|
Positions
|
|
Donald
T. Johnson, Jr.
|
55
|
Chairman
of the Board, President and Chief Executive Officer
|
|
Todd
R. Peters
|
45
|
Vice
President and Chief Financial Officer
|
|
John
J. Machota
|
55
|
Vice
President, Human Resources
|
|
John
M. Pinkerton
|
50
|
Vice
President and Controller
|
|
Mary
T. Ryan
|
54
|
Vice
President, Communications and Investor Relations
|
|
Joseph
Salamunovich
|
48
|
Vice
President, General Counsel and Secretary
|
|
William
L. Conley, Jr.
|
59
|
President,
ATC Logistics
|
|
Richard
L. Stanley
|
51
|
President,
ATC Drivetrain
|
|
Brett
O. Dickson
|
43
|
Vice
President, North American Remanufacturing Operations
|
|
Robert
L. Evans
|
55
|
Director
|
|
Curtland
E. Fields
|
56
|
Director
|
|
Dr.
Michael J. Hartnett
|
62
|
Director
|
|
Michael
D. Jordan
|
61
|
Lead
Director
|
|
S.
Lawrence Prendergast
|
66
|
Director
|
|
Edward
Stewart
|
65
|
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
lead director and chairman of the compensation committee of the board of
directors 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.
Richard L. Stanley joined us
in July 2007 as President of our ATC Drivetrain business. From 1998
to 2006 Mr. Stanley was President of Remy Inc. (formerly Delco Remy America),
the largest division of Remy International, a global manufacturer/remanufacturer
of starters and alternators for both automotive/heavy duty/industrial OEMs and
the aftermarket (Remy International filed for protection under Chapter 11 of the
United States Bankruptcy Code in October 2007). From 1994 to 1998 Mr.
Stanley served as Senior Vice President and General Manager of Remy’s Automotive
Systems division. Between 1978 to 1994 he held increasingly
responsible engineering and operations management positions at the Delco Remy
division of General Motors Corporation. Mr. Stanley holds an
M.S. in Manufacturing Management from Kettering 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 served 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 of
Directors 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 2007 were filed on a timely basis.
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. In the future if we amend our code of
ethics or grant waivers thereof to any executive officer or director, we will
disclose it on our website within five business days following the date of such
amendment or waiver.
Compensation
Discussion and Analysis
Overview
of Compensation Program
Decisions
about the compensation of our executive officers are made by the Compensation
and Nominating Committee of our Board of Directors (the “Committee”), all the
members of which are independent of management. The Committee is appointed by
our Board of Directors and has responsibility for establishing, implementing and
monitoring adherence with our compensation philosophy. The Committee reviews
with the CEO the performance of the other executive officers, reviews and
approves the compensation for the Named Executive Officers (“NEOs”), conducts
the annual performance appraisal of our CEO, and recommends to the Board the CEO
compensation package including incentive compensation plans in which the CEO
participates. 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 NEOs are similar to those provided to other executive
officers.
Compensation
Philosophy and Objectives
Our
executive compensation philosophy is as follows:
|
|
·
|
to
align compensation of our executive officers with stockholder 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 an appropriate
level of incentive for the CEO and our other executive officers to perform at
superior levels and in a manner directly aligned with the economic interests of
our stockholders. 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, (ii) compensation provided to executive officers remains
competitive relative to the compensation paid to similarly situated executives
in the competitive market, and (iii) compensation encourages a
pay-for-performance environment. 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.
Our
current executive compensation program consists of four basic
elements:
|
|
·
|
Base
salary;
|
|
|
·
|
Annual
performance based incentive
compensation;
|
|
|
·
|
Long-term
incentive/equity-based awards; and
|
|
|
·
|
Supplemental
benefits.
|
Independent
Compensation 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 2007, 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.
Additionally, the independent compensation consultant provided the Committee
with input on executive compensation items such as executive employment
agreements, change-in-control, and long-term incentive design.
2007
Compensation
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 conducted during 2007 for all executive officers
including the CEO.
For
purposes of competitive market analysis, the Committee reviews competitive
market data for comparable executive positions as provided by the independent
compensation consultant. For purposes of executive compensation
benchmarking, our executive officers are matched based on job functions and
responsibilities. During 2007, we compared compensation at similarly
sized companies in general industry (the “comparator group”) as we feel this is
the industry segment in which we compete for executive talent. In
2006, the Committee utilized similarly sized general manufacturing companies
that produce both durable and nondurable goods for comparison
purposes. For 2007, the Committee determined it was appropriate
to expand the definition of the competitive market to include general industry
because this better reflects the increasing importance of the logistics side of
our business. Our decision to broaden the market definition to
include general industry did not have a material impact on the market data as
compared to the prior year. All compensation data is size-adjusted to
reflect our business size.
In
addition to reviewing general market data for the purpose of evaluating the
CEO’s total compensation, the Committee also reviewed market data for specific
logistics and manufacturing companies representing our business mix. This group
of companies was originally selected and is modified from time to time with
assistance from the independent compensation consultant. The named
companies used for benchmarking during 2007 include:
|
Accuride
Corporation
|
Jabil
Circuit Inc.
|
|
Agilysis,
Inc.
|
Keystone
Automotive Industries Inc.
|
|
BorgWarner
Inc.
|
LKQ
Corporation
|
|
Brightpoint,
Inc.
|
Richardson
Electronics Ltd.
|
|
CH
Robinson Worldwide Inc.
|
Ryder
System Inc.
|
|
Celestica
Inc.
|
Solectron
Corporation
|
|
Con-way
Inc.
|
Standard
Motor Products Inc.
|
|
Expeditors
International of Washington, Inc.
|
Tenneco,
Inc.
|
|
Hub
Group Inc.
|
UTi
Worldwide Inc.
|
|
Innotrac
Corporation
|
YRC
Worldwide
|
Competitive
Compensation Objectives
Our
executive compensation is based on a pay-for-performance philosophy, emphasizing
performance against measures that correlate with increases in stockholder
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 with awards above the 50th percentile tied to the
achievement of “stretch” performance goals.
We
believe that in order to emphasize a long-term perspective directly tied to
stockholder value, a significant portion of the executive’s compensation should
be in the form of incentive awards and long-term equity awards, or
“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.
The 2007
mix of total compensation for the NEOs is described in the table below. The
Committee believes this compensation structure aligns the financial interests of
the NEOs and other executive officers with the interests of our stockholders
because it rewards management for the achievement of long-term financial results
and stockholder value creation.
|
Named
Executive
Officers
|
Base
Salary
|
Annual
Incentive
Target
|
Long-Term
Incentive
Target
|
Total
|
||||
|
Donald
T. Johnson
|
21%
|
18%
|
61%
|
100%
|
||||
|
Todd
R. Peters
|
35%
|
21%
|
44%
|
100%
|
||||
|
William
L. Conley
|
36%
|
18%
|
46%
|
100%
|
||||
|
Joseph
Salamunovich
|
46%
|
20%
|
34%
|
100%
|
||||
|
Richard
L. Stanley
|
36%
|
18%
|
46%
|
100%
|
The Base
Salary percentage included in the table above was calculated using the amounts
disclosed in the Summary Compensation Table. The Annual Incentive
Target and Long-Term Incentive Target percentages were calculated using amounts
disclosed in the Grants of Plan-Based Awards table. The elements of
our executive compensation program are described in more detail
below.
Base
Salary
We
provide NEOs 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, level of experience and knowledge, the market
data on salaries, internal comparability, individual performance, and
recommendations provided by the independent compensation consultant. Within that
range a specific base salary is then determined. It is our policy to
provide a base salary for a given position that is between 75% and 125% of the
midpoint of the base salary range established for that position.
Each
year, the individual performance of the executive officers is reviewed by the
CEO. These performance assessments and the salary recommendations, if any, are
then reviewed with the Committee which, utilizing the provided market data and
existing officer salary data, either approves the recommendations or revises
them as it deems appropriate.
In the
case of the CEO, his performance is evaluated annually by the Committee 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 utilizes the performance review and the competitive market data to
determine the appropriate salary level for the CEO. The salary for
the CEO is then recommended by the Committee and reviewed and approved by the
full Board of Directors.
For 2007,
the CEO received a base salary increase of 4.7% 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 2007 for
the other NEOs was 3.7%, which closely reflected the average salary movement
within the comparator group.
The CEO’s
salary was not adjusted for 2008. Base salary adjustments for 2008
for the other NEOs became effective January 1, 2008 and are noted in the
footnotes to the Summary Compensation Table below.
Performance-Based
Incentive Compensation
We
provide annual incentive opportunities through our Management Incentive
Compensation Plan (the "IC Plan"), which rewards executive officers and other
senior management for the achievement of annual financial results. We
believe this focuses the executives on achieving annual financial goals that are
indicative of improved year-over-year performance. The IC Plan
constitutes at-risk compensation which is payable only if the goals are achieved
and represents common market practice. All of the performance
measures in the IC Plan reflect our business strategy and key financial metrics
that we believe will drive stockholder value while rewarding the executive team
for exceptional individual and corporate performance.
Performance
Measures. We believe earnings per share (EPS) and adjusted
earnings before interest and taxes (EBIT) are key indicators of financial
performance. Therefore, the primary corporate financial measure in
the IC Plan for 2007 was EPS while EBIT served as the primary financial metric
for the business segment leadership. 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. For each of these
metrics, it is necessary that a minimum performance level be met before any
payment is made for that metric. For 2007, the threshold levels were
as follows:
|
·
|
EPS
- 93% of target
|
|
·
|
EBIT
- 85%
of target (both Drivetrain and
Logistics)
|
In
addition, we believe all employees must be fully committed to customer quality
and service. Therefore, the IC 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 of
Directors 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.
Target 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 market. For 2007, 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 the other NEOs, in each case with a minimum
“cut-off” award equal to 25% of the target award and a maximum “stretch” award
equal to 300% of the target award.
Actual 2007
results. The
actual financial performance against targets for 2007 was as
follows:
|
IC
Plan
|
||||
|
Financial
Measure
|
2007
IC Goal
|
2007
Actual
|
||
|
Corporate
EPS
|
$
1.45
|
$
1.81
|
||
|
Drivetrain
adjusted EBIT
|
$
27.996 million
|
$
26.002 million
|
||
|
Logistics
adjusted EBIT
|
$
35.362 million
|
$
46.209 million
|
||
Based on
strong 2007 financial results, the IC Plan payments to the NEOs were as
follows:
|
Named
Executive Officers
|
Payout
$
Related
to
Corporate
EPS
|
Payout
$ Related
to
Adjusted Drivetrain EBIT
|
Payout
Related to Adjusted Logistics EBIT
|
Total
2007 Payout under the IC Plan
|
||||||||||
|
Donald
T. Johnson
|
$ | 1,512,000 | - | - | $ | 1,512,000 | ||||||||
|
Todd
R. Peters
|
$ | 607,500 | - | - | $ | 607,500 | ||||||||
|
William
L. Conley
|
$ | 117,000 | - | $ | 235,867 | $ | 352,867 | |||||||
|
Joseph
Salamunovich
|
$ | 329,400 | - | - | $ | 329,400 | ||||||||
|
Richard
L. Stanley
|
$ | 72,691 | (1) | $ | 45,490 | (1) | - | $ | 118,181 | (1) | ||||
________________
|
(1)
|
Prorated
from Mr. Stanley’s July 9, 2007 hire date. Based on a full year
of employment, his 2007 EPS, adjusted EBIT and total payouts would have
been $150,750, $94,340, and $245,090,
respectively.
|
There
were no discretionary adjustments to the bonus amounts made during 2007 for
quality and service performance.
The above
payments under the IC Plan are consistent with our strong EPS and EBIT
performance and provide the pay-for-performance alignment we are
seeking.
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 stockholder value
by linking a significant portion of executive compensation directly to
stock price growth or decline. As a result, our long-term incentive compensation
historically has consisted of awards of stock options and restricted
stock.
Effective
January 1, 2007 we implemented a new long-term incentive plan (LTIP) that
includes a stock component (both options and restricted stock) and a cash
component and rewards management for achieving value targets over a three-year
performance period.
LTIP Award
Opportunities. The target LTIP 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 2007, the economic value of the total LTIP
incentive award was set at 300% of salary for the CEO, 125% of salary for the
CFO and Business Segment Presidents, and 75% of salary for the Vice
President, General Counsel and Secretary. These award sizes are
consistent with the 75th percentile of LTIP awards within the competitive
marketplace.
The
current value mix in the LTIP provides approximately 70% of the value through
the stock component and 30% of the value through the cash
component. Each of these components is discussed in more detail below
and the Grants of Plan-Based Award Table contains the long-term awards for each
of the NEOs.
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 stockholder value creation. The annual awards of
stock options for 2007 for the NEOs other than the CEO and Mr. Stanley took
place at the Committee’s regularly scheduled meeting on June 5,
2007. These stock option grants have an exercise price of $30.44,
which represented our closing stock price on the date of
grant. With regard to the CEO, his grant was approved by the
Board on January 19, 2007, concurrent with the signing of a new employment
agreement. The CEO’s stock option grant has an exercise price of
$20.80, equal to the closing stock price on the date of grant. The
Committee granted options to Mr. Stanley at the time of his hiring on July 9,
2007. The exercise price of Mr. Stanley's options is $30.17, 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 stockholder
approval. All awards of stock options require approval of the
Committee (or the Board of Directors 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 for the NEOs
other than the CEO. For the CEO, vesting will continue
post-employment if the Board determines there has been an orderly transition to
the CEO’s successor.
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. 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 the NEOs other than the
CEO and Mr. Stanley on June 5, 2007 when the stock price was
$30.44. These restricted stock awards are nontransferable and will
vest at the rate of 33⅓% per year. The CEO, in conjunction with the
signing of a new employment agreement, was granted a restricted stock award
January 19, 2007 when the stock price was $20.80. Mr. Stanley was granted
a restricted stock award when he was hired on July 9, 2007, when the stock price
was $30.17. All restricted stock awards have dividend and voting
rights. Awards of all restricted stock require approval of the
Committee (or the Board of Directors in the case of an award to the
CEO).
Long-Term
Cash. The cash component of the LTIP is intended
to focus the executives on financial and strategic goals important to us over a
three-year period. The target opportunities for the cash
component range from 90% of base salary for the CEO to an average of 25% of base
salary for the other NEOs. In each case there is a “cut-off” award
equal to 90% of the target award and a “stretch” award equal to 150% of the
target award.
The
financial performance metrics for the 2006-2008 LTIP performance period are
compounded annual growth rate (CAGR) for both revenue and operating income and
return on invested capital (ROIC). These three financial metrics all
have equal weight. Utilizing the same approach as the annual plan,
corporate officer positions are measured entirely on our results while business
segment leadership is measured 70% on such segment’s results and 30% on our
results.
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 NEOs, 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 50% on the first 6% of
compensation that is contributed by an employee to the plan. However,
due to the legal contribution limits on defined contribution retirement plans,
the actual benefit to executive officers under the plan is severely
limited. All employee contributions are fully vested upon
contribution, while the matching contribution vests at the rate of 20% per
year.
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
annual cash incentive compensation and/or commission awards. For
2007, the Committee (and the Board of Directors 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 2007 is included in the “Other
Compensation” column of the Summary Compensation Table below.
Perquisites
and other Personal Benefits
We
provide a car allowance of $24,000 per year for the CEO and $9,600 per year for
the other executive officers, except for two executive officers who have the use
of drive audit vehicles (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
practice for company car programs and is part of offering a market-competitive
total compensation program.
Each
executive officer, other than the CEO, 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. The CEO receives
$20,000 annually for such expenses. 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 NEOs and believes they are reasonable and
consistent with our overall compensation program.
All of
the compensation to the NEOs associated with these perquisites and other
personal benefits for 2007 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 $1 million annually to
each of the chief executive officer and the four other most highly compensated
executive officers of publicly-held companies. There is an exception
to this rule for “performance-based compensation.”
The
Committee’s long-term objective is that our compensation programs qualify as
performance-based compensation for purposes of Section 162(m) in order to
maximize our corporate tax deduction. Therefore, as required by
Section 162(m) both the annual incentive plans and long-term incentive plans
were approved by stockholders to qualify applicable compensation as “performance
based.” Furthermore, the incentive plans are administered by the
Committee in order to be compliant with Section 162(m). Since May
2004, the Committee has been composed solely of outside directors for purposes
of Section 162(m). While the Committee’s general policy is to
preserve the deductibility of most compensation paid to our covered executives,
it may from time to time authorize payments that might not be deductible if the
Committee believes that those payments are in the best interests of
stockholders.
Summary
Compensation Table
The
following table sets forth the compensation for 2007 and 2006, for services to
us in all capacities, of the NEOs:
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)(1)
|
Option
Awards
($)(1)
|
Non-Equity
Incentive Plan Compensation
($)(2)
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|||||||||||||||||||
|
Donald
T. Johnson Jr.
Chairman,
President, CEO
|
2007
|
$ | 560,000 | (3) | $ | 0 | $ | 618,324 | $ | 501,860 | $ | 1,512,000 | (4) | $ |
0
|
$ | 79,443 | (5) | $ | 3,271,627 | ||||||||
|
2006
|
$ | 535,000 | (6) | $ | 0 | $ | 330,557 | $ | 281,421 | $ | 0 | $ |
0
|
$ | 66,178 | (7) | $ | 1,213,156 | ||||||||||
|
Todd
R. Peters
Vice
President and CFO
|
2007
|
$ | 337,500 | (8) | $ | 0 | $ | 138,567 | $ | 120,864 | $ | 607,500 | $ |
0
|
$ | 17,620 | (9) | $ | 1,222,051 | |||||||||
|
2006
|
$ | 324,500 | $ | 0 | $ | 151,876 | $ | 125,414 | $ | 0 | $ |
0
|
$ | 17,009 | (10) | $ | 618,799 | |||||||||||
|
William
L. Conley, Jr.
President,
ATC Logistics
&
Electronics
|
2007
|
$ | 260,000 | (11) | $ | 0 | $ | 80,945 | $ | 71,964 | $ | 352,867 | (12) | $ |
0
|
$ | 37,130 | (13) | $ | 802,906 | ||||||||
|
2006
|
$ | 252,000 | (14) | $ | 0 | $ | 55,964 | $ | 37,796 | $ | 159,472 | (12) | $ |
0
|
$ | 36,680 | (15) | $ | 541,912 | |||||||||
|
Joseph
Salamunovich
Vice
President, General
Counsel
and Secretary
|
2007
|
$ | 244,000 | (16) | $ | 0 | $ | 65,038 | $ | 54,523 | $ | 329,400 | $ |
0
|
|
$ | 21,135 | (17) | $ | 714,096 | ||||||||
|
2006
|
$ | 234,600 | $ | 0 | $ | 68,087 | $ | 37,796 | $ | 0 | $ |
0
|
$ | 21,763 | (18) | $ | 362,246 | |||||||||||
|
Richard
L. Stanley(19)
President,
ATC Drivetrain
|
2007
|
$ | 162,346 | (20) | $ | 50,000 | $ | 247,937 | $ | 82,354 | $ | 118,181 | $ |
0
|
$ | 52,511 | (21) | $ | 713,329 | |||||||||
|
2006
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ |
0
|
$ | 0 | $ | 0 | ||||||||||||
________________
|
(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 and option award fair
values.
|
|
(2)
|
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.
|
|
(3)
|
Mr.
Johnson deferred $420,000 of this amount pursuant to our executive
deferred compensation plan.
|
|
(4)
|
Mr.
Johnson deferred 100% of this amount pursuant to our executive deferred
compensation plan.
|
|
(5)
|
Consists
of $4,200 Company matching contribution under our 401(k) Plan, $28,876
Company matching contribution under our executive deferred compensation
plan, $24,000 automobile allowance, $18,939 in reimbursement for club dues
and personal financial planning costs, and $3,428 in Company-paid life
insurance premiums.
|
|
(6)
|
Mr.
Johnson deferred $267,500 of this amount pursuant to our executive
deferred compensation plan.
|
|
(7)
|
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 in reimbursement for club dues
and personal financial planning costs, and $960 in Company-paid life
insurance premiums.
|
|
(8)
|
Mr.
Peters' base salary was increased to $344,500 effective January 1,
2008.
|
|
(9)
|
Consists
of $9,600 automobile allowance; $5,954 in reimbursement for club dues and
financial planning costs; and $2,066 in Company-paid life insurance
premiums.
|
|
(10)
|
Consists
of $9,600 automobile allowance; $6,490 in reimbursement for club dues and
financial planning costs; and $919 in Company-paid life insurance
premiums.
|
|
(11)
|
Mr.
Conley deferred $26,000 of this amount pursuant to our executive deferred
compensation plan. His base salary was increased to $280,000
effective January 1, 2008.
|
|
(12)
|
Mr.
Conley deferred 50% of this amount pursuant to our executive deferred
compensation plan.
|
|
(13)
|
Consists
of $6,750 Company matching contribution under our 401(k) Plan, $13,989
Company matching contribution under our executive deferred compensation
plan, $9,600 automobile allowance, $5,200 in reimbursement for club dues
and personal financial planning costs; and $1,591 in Company-paid life
insurance premiums.
|
|
(14)
|
Mr.
Conley deferred $25,200 of this amount pursuant to our executive deferred
compensation plan.
|
|
(15)
|
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 in reimbursement for club dues
and personal financial planning costs; and $890 in Company-paid life
insurance premiums.
|
|
(16)
|
Mr.
Salamunovich's base salary was increased to $256,000 effective January 1,
2008.
|
|
(17)
|
Consists
of $6,750 Company matching contribution under our 401(k) Plan, $9,600
automobile allowance, $3,292 in reimbursement for club dues and personal
financial planning costs, and $1,493 in company-paid life insurance
premiums.
|
|
(18)
|
Consists
of $6,600 Company matching contribution under our 401(k) Plan, $9,600
automobile allowance, $4,692 in reimbursement for club dues and personal
financial planning costs, and $871 in company-paid life insurance
premiums.
|
|
(19)
|
Mr.
Stanley was hired July 9,
2007.
|
| (20) | Mr. Stanley deferred 10% of this amount pursuant to our executive deferred compensation plan. His full year annual base salary is $335,000. |
|
(21)
|
Consists
of $1,392 Company matching contribution under our 401(k) Plan, $7,087
Company matching contribution under our executive deferred compensation
plan, $3,350 in reimbursement for club dues and personal financial
planning costs, $2,050 in Company-paid life insurance premiums, and
$38,632 in relocation costs.
|
We have a
written employment agreement with each of our NEOs. The agreement
with Mr. Johnson expires on December 31, 2008, subject to a single one-year
automatic renewal, while the agreement with each of the other NEOs is on a
year-to-year basis with unlimited automatic renewals.
Each
agreement provides for a base salary, participation in our various incentive and
benefit plans, and various perquisites, including an annual car allowance
($24,000 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 $20,000 per year for Mr. Johnson and 2% of annual
base salary for other executives).
Each
agreement includes a noncompetition provision that runs for a specified period
after the executive ceases to be employed by Aftermarket Technology
Corp. The period is 24 months in the case of Messrs. Johnson and
Peters and 18 months in the case of the other executive
officers. Each agreement also contains a confidentiality provision
and a provision that prohibits the executive officer from soliciting our
employees for employment by other companies during a specified period after
leaving Aftermarket Technology Corp.
Each of
the employment agreements provides for severance payments to the executive
officer in certain circumstances. See “Potential Payments Upon
Termination or Change-in-Control” below.
Grants
of Plan-Based Awards Table
The
following table sets forth information regarding each grant of an award made in
2007 to the NEOs under our various incentive plans:
|
Name
|
Grant
Date
|
Estimated
Future Payouts under Non-
Equity
Incentive Plan Awards
|
Estimated
Future Payouts Under Equity Incentive Plan Awards
|
All
Other Stock Awards: Number of Shares of Stock or Units
(#)
|
All
Other Option Awards: Number of Securities Underlying Options
(#)
|
Exercise
or Base Price of Option Awards ($/Share)
|
Grant
Date Fair Value of Stock and Option Awards
|
||||||||||||||||||||||
|
Threshold
$
|
Target
$
|
Maximum
$
|
Threshold
#
|
Target
#
|
Maximum
#
|
||||||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
(k)
|
(l)
|
||||||||||||||||||
|
Donald
T. Johnson Jr.
Chairman,
President
and
CEO
|
$ | 126,000 | $ | 504,000 | $ | 1,512,000 | (1) | - | - | - | |||||||||||||||||||
| $ | 453,600 | $ | 504,000 | $ | 756,000 | (2) | |||||||||||||||||||||||
|
1/19/07
|
29,400 | (3) | - | - | $ | 611,520 | |||||||||||||||||||||||
|
1/19/07
|
- | 87,700 | (3) | $ | 20.80 | $ | 531,024 | ||||||||||||||||||||||
|
Todd
R. Peters
Vice
President and CFO
|
$ | 50,625 | $ | 202,500 | $ | 607,500 | (1) | - | - | - | |||||||||||||||||||
| $ | 113,873 | $ | 126,525 | $ | 189,788 | (2) | |||||||||||||||||||||||
|
6/05/07
|
4,849 | (3) | - | - | $ | 147,604 | |||||||||||||||||||||||
|
6/05/07
|
- | 15,588 | (3) | $ | 30.44 | $ | 147,992 | ||||||||||||||||||||||
|
William
L. Conley, Jr.
President,
ATC Logistics & Electronics
|
$ | 32,500 | $ | 130,000 | $ | 390,000 | (1) | - | - | - | |||||||||||||||||||
| $ | 87,750 | $ | 97,500 | $ | 146,250 | (2) | |||||||||||||||||||||||
|
6/05/07
|
3,737 | (3) | - | - | $ | 113,754 | |||||||||||||||||||||||
|
6/05/07
|
- | 12,012 | (3) | $ | 30.44 | $ | 114,042 | ||||||||||||||||||||||
|
Joseph
Salamunovich
Vice
President, General Counsel and Secretary
|
$ | 27,450 | $ | 109,800 | $ | 329,400 | (1) | - | - | - | |||||||||||||||||||
| $ | 49,410 | $ | 54,900 | $ | 82,350 | (2) | |||||||||||||||||||||||
|
6/05/07
|
2,104 | (3) | - | - | $ | 64,046 | |||||||||||||||||||||||
|
6/05/07
|
- | 6,764 | (3) | $ | 30.44 | $ | 64,217 | ||||||||||||||||||||||
|
Richard
L. Stanley
President,
ATC Drivetrain
|
$ | 20,192 | $ | 80,767 | $ | 242,301 | (1) | - | - | - | |||||||||||||||||||
| $ | 56,531 | $ | 62,813 | $ | 94,219 | (2) | |||||||||||||||||||||||
|
7/09/07
|
28,000 | (4) | - | - | $ | 844,760 | |||||||||||||||||||||||
|
7/09/07
|
- | 30,000 | (4) | $ | 30.17 | $ | 280,626 | ||||||||||||||||||||||
________________
|
(1)
|
Established
under the annual IC Plan and payable if we achieve or exceed specified EPS
and other financial targets for the year ended December 31, 2007 (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 IC Plan which are 25% of the
target amounts shown in column (d). The amounts shown in column
(e) are 300% of such target amounts. These amounts are based on
the individual's current salary, position and eligibility
period.
|
|
(2)
|
Established
under the LTIP (3-year) and payable if we achieve or exceed specified
financial targets (CAGR - Revenue, CAGR - EBIT, ROIC) for the three-year
period ending December 31, 2008. The amounts shown in
column (c) reflect the minimum payments under the LTIP which are 90% of
the target amounts shown in column (d). The amounts shown in
column (e) are 150% of such target amounts. These amounts are
based on the individual's 2007 salary, position and eligibility
period.
|
|
(3)
|
Awarded
under the 2006 Stock Incentive Plan. No consideration was paid
for the award.
|
|
(4)
|
Awarded
under the 2004 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 NEO
outstanding as of December 31, 2007:
| Name |
Options
Awards
|
Stock
Awards
|
||||||||||||||||||||
|
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.
|
50,233 | (1) | $ | 1,369,352 | - | - | ||||||||||||||||
| 108,146 | 0 | $ | 14.0000 |
01/02/14
|
||||||||||||||||||
| 75,000 | 0 | $ | 15.8500 |
06/02/15
|
||||||||||||||||||
| 18,750 | 37,500 | (2) | $ | 24.6900 |
06/01/16
|
|||||||||||||||||
| 0 | 87,700 | (3) | $ | 20.8000 |
01/19/17
|
|||||||||||||||||
|
Todd
R. Peters
|
11,099 | (4) | $ | 302,559 | - | - | ||||||||||||||||
| 5,625 | 11,250 | (2) | $ | 24.6900 |
06/01/16
|
|||||||||||||||||
| 0 | 15,588 | (5) | $ | 30.4400 |
06/05/17
|
|||||||||||||||||
|
William
L.
Conley,
Jr.
|
6,862 | (6) | $ | 187,058 | - | - | ||||||||||||||||
| 25,000 | 0 | $ | 14.1100 |
08/07/12
|
||||||||||||||||||
| 10,000 | 0 | $ | 14.9000 |
05/12/14
|
||||||||||||||||||
| 11,250 | 0 | $ | 15.8500 |
06/02/15
|
||||||||||||||||||
| 2,813 | 5,624 | (2) | $ | 24.6900 |
06/01/16
|
|||||||||||||||||
| 0 | 12,012 | (5) | $ | 30.4400 |
06/05/17
|
|||||||||||||||||
|
Joseph
Salamunovich
|
5,229 | (7) | $ | 142,543 | - | - | ||||||||||||||||
| 20,000 | 0 | $ | 22.9000 |
05/08/12
|
||||||||||||||||||
| 10,000 | 0 | $ | 14.9000 |
05/12/14
|
||||||||||||||||||
| 11,250 | 0 | $ | 15.8500 |
06/02/15
|
||||||||||||||||||
| 2,813 | 5,624 | (2) | $ | 24.6900 |
06/01/16
|
|||||||||||||||||
| 0 | 6,764 | (5) | $ | 30.4400 |
06/05/17
|
|||||||||||||||||
|
Richard
L. Stanley
|
28,000 | (8) | $ | 763,280 | - | - | ||||||||||||||||
| 0 | 30,000 | (8) | $ | 30.1700 |
07/09/17
|
|||||||||||||||||
________________
|
(1)
|
9,800
shares vested in January 2008; 14,583 shares vest in June 2008; 9,800
shares vest in January 2009; 6,250 shares vest in June 2009 and 9,800
shares vest in January 2010.
|
|
(2)
|
Vest
in equal installments in June 2008 and June
2009.
|
|
(3)
|
29,234
options vested in January 2008 and the balance vest in equal installments
in January 2009 and January 2010.
|
|
(4)
|
5,992
shares vest in June 2008; 3,491 shares vest in June 2009; and 1,616 shares
vest in June 2010.
|
|
(5)
|
Vest
in equal installments in June 2008, June 2009 and June
2010.
|
|
(6)
|
3,433
shares vest in June 2008; 2,183 shares vest in June 2009; and 1,246 shares
vest in June 2010.
|
|
(7)
|
2,889
shares vest in June 2008; 1,639 shares vest in June 2009; and 701 shares
vest in June 2010.
|
|
(8)
|
Vest
in equal installments in July 2008, July 2009 and July
2010.
|
Option
Exercise and Stock Vesting Table
The
following table sets forth information regarding the exercise of stock options
and vesting of restricted stock in 2007 for the NEOs:
|
|
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.
|
31,854 | $ | 642,972 | 14,583 | $ | 442,886 | |||
|
Todd
R. Peters
|
23,333 | $ | 371,683 | 12,708 | $ | 321,028 | |||
|
William
L. Conley, Jr.
|
0 | $ | 0 | 3,021 | $ | 89,574 | |||
|
Joseph
Salamunovich
|
15,000 | $ | 159,875 | 3,855 | $ | 112,725 | |||
|
Richard
L. Stanley
|
0 | $ | 0 | 0 | $ | 0 | |||
Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation
Plans
The
following table sets forth information regarding the NEOs’ participation in our
deferred compensation plan during 2007:
|
Name
|
Executive
Contributions in Last FY
($)(1)
|
Registrant
Contributions in
Last
FY
($)(2)(3)
|
Aggregate
Earnings
in
Last FY
($)(4)
|
Aggregate
Withdrawals/ Distributions
($)
|
Aggregate
Balance
at
Last
FYE
($)
|
|||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
|||||||||||
|
Donald
T. Johnson Jr.
Chairman,
President, CEO
|
$ | 420,000 | $ | 28,876 | (5) | $ | (3,999 | ) | $ | 0 | $ | 1,699,095 | ||||
|
Todd
R. Peters
Vice
President and CFO
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||
|
William
L. Conley, Jr.
President,
ATC Logistics & Electronics
|
$ | 105,705 | $ | 13,989 | (6) | $ | 20,013 | $ | 0 | $ | 316,324 | |||||
|
Joseph
Salamunovich
Vice
President, General Counsel and
Secretary
|
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||
|
Richard
L. Stanley
President,
ATC Drivetrain
|
$ | 14,173 | $ | 7,087 | $ | 232 | $ | 0 | $ | 21,492 | ||||||
________________
|
(1)
|
All
of these amounts are reported as 2007 compensation in the Summary
Compensation Table.
|
|
(2)
|
All
of these amounts are reported as "All Other Compensation" in the Summary
Compensation Table.
|
|
(3)
|
In
2007, the Company provided a matching contribution of 50% of the first 10%
of base salary deferred.
|
|
(4)
|
None
of these amounts are reported as 2007 compensation in the Summary
Compensation Table.
|
|
(5)
|
Includes
special Company contribution of $876 to replace a forfeited 401(k) Plan
Company matching contribution.
|
|
(6)
|
Includes
special Company contribution of $1,004 to replace a forfeited 401(k) Plan
Company matching contribution.
|
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, 2007, 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
|
1.43%
|
Principal
Investors Money Market Pfd. Fund
|
4.76
%
|
|
American
Funds EuroPacific Growth R3 Fund
|
18.58%
|
Principal
Investors Partners MidCap Value Pfd. Fund
|
(2.04)%
|
|
American
Funds Growth Fund of America R3 Fund
|
10.59%
|
Principal
Investors Real Estate Securities Pfd. Fund
|
(17.74)%
|
|
Calvert
Social Investment Bond A Fund
|
6.66%
|
Principal
Investors SmallCap Blend Pfd. Fund
|
1.63
%
|
|
Lord
Abbett All Value P Fund
|
7.39%
|
Principal
Investors SmallCap Value Pfd. Fund
|
(7.67)%
|
|
Principal
Investors International Growth Pfd. Fund
|
12.16%
|
Russell
LifePoints® Balanced Strategy E Fund
|
6.78
%
|
|
Principal
Investors LargeCap Growth Pfd. Fund
|
22.73%
|
Russell
LifePoints® Equity Growth Strategy E Fund
|
7.38
%
|
|
Principal
Investors MidCap Blend Pfd. Fund
|
9.16%
|
Potential
Payments Upon Termination or Change-in-Control
Each of
the employment agreements with our NEOs 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.
Mr.
Johnson’s severance is equal to two years of base salary and 2.0 times his
target bonus under our annual IC Plan, plus a prorated portion of any cash bonus
under our LTIP. Severance is payable if (i) he is terminated
without cause or resigns for “good reason” (see below), (ii) his employment
agreement is not renewed within 18 months after a “change in control” (see
below), or (iii) he becomes disabled. Severance 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. Mr. Johnson’s medical coverage runs for five
years after termination. In February 2008 his employment agreement
was amended to increase his severance if, within 18 months after a change in
control, he is terminated without cause, he resigns for good reason, or his
agreement is not renewed, in which case his severance will equal three years of
base salary, 3.0 times his target bonus under our annual IC Plan, and a prorated
portion of any cash bonuses under our annual IC Plan and our LTIP.
Mr.
Johnson’s 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 is terminated for cause
or voluntarily resigns without providing an orderly transition, 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.
Mr.
Johnson’s severance payments are subject to a tax “gross-up” of up to $5,000,000
to offset the “parachute” excise tax under Internal Revenue Code
Section 4999 if a change in control occurs within 18 months prior to his
termination date.
Severance
is payable to an executive officer other than Mr. Johnson if (i) the
executive is terminated without cause or resigns for good reason, or
(ii) his or her employment agreement is not renewed. Severance
is equal to 12 months of base salary (18 months for Mr. Peters) plus a
prorated portion of the cash bonus that would be payable under our annual IC
Plan for the year in which the termination date occurs. If the
termination date occurs within 18 months after a change in control, the
executive officer would also receive a payment equal to his target bonus under
the IC Plan for the year in which the termination date occurs. The
severance also includes continued medical benefits during the severance
period. In February 2008 our Compensation Committee
increased the severance payable to each of Messrs. Peters, Conley, Salamunovich
and three other executive officers in the event of termination within 18 months
after a change in control. In that event, severance will equal 18
months of base salary (24 months for Mr. Peters), 1.5 times the target bonus
under our annual IC Plan (2.0 times for Mr. Peters) and a prorated portion of
any cash bonuses under our annual IC Plan and our LTIP.
Severance
payments to an executive officer will ordinarily be made over the severance
period 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 (other than Mr. Johnson) terminates, all of
his unvested stock options and shares of restricted stock will terminate on the
termination date, unless either (i) a change in control has occurred within
18 months prior to the termination date or (ii) termination is due to the
executive’s death or permanent disability, in which case all such unvested
options and restricted stock will vest on the termination
date. Generally an executive will have 30 days after his or her
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, upon 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, 2007 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.
None of
the executive employment agreements, other than Mr. Johnson’s, provide for
a tax “gross-up” to offset the “parachute” excise tax under Internal Revenue
Code Section 4999.
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 or she has or may
have as of the termination date.
“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 stockholder
(or group of stockholders) 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 stockholders 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 NEOs could receive in
the event of certain termination events, based on their employment agreements as
in effect on December 31, 2007:
|
Donald T. Johnson
Jr.
|
|||||||||||||||||||||
|
Executive
Benefits and Payments
Upon Termination
|
Voluntary
Termination Without Board- approved Transition
|
Voluntary
Termination With Board- approved Transition
|
For
Cause Termination
|
Involuntary
Termination Without
Cause(1)
|
Involuntary
Termination Without Cause Within 18 Months after CIC(1)
|
Death
|
Disability
|
||||||||||||||
|
Compensation:
|
|||||||||||||||||||||
|
Severance
Allowance
|
- | - | - | $ | 2,128,000 | $ | 2,128,000 | - | $ | 1,120,000 | |||||||||||
|
Short-term
Incentive
|
|||||||||||||||||||||
|
Earned
Annual Incentive Award
|
$ | 1,512,000 | $ | 1,512,000 | $ | 1,512,000 | $ | 1,512,000 | $ | 1,512,000 | $ | 1,512,000 | $ | 1,512,000 | |||||||
|
Long-term
Incentives
|
|||||||||||||||||||||
|
3-year
Incentive Award
|
$ | 336,000 | - | - | $ | 336,000 | $ | 336,000 | $ | 336,000 | $ | 336,000 | |||||||||
|
Stock
Options(2)
|
- | $ | 662,917 | - | $ | 662,917 | $ | 662,917 | $ | 662,917 | $ | 662,917 | |||||||||
|
Restricted
Stock(3)
|
- | $ | 1,369,352 | - | $ | 1,369,352 | $ | 1,369,352 | $ | 1,369,352 | $ | 1,369,352 | |||||||||
|
Benefits
and Perquisites:
|
|||||||||||||||||||||
|
Medical
Plan Coverage(4)
|
- | - | - | $ | 30,461 | $ | 30,461 | $ | 30,461 | $ | 30,461 | ||||||||||
|
Life
Insurance Proceeds
|
- | - | - | - | - | $ | 1,680,000 | - | |||||||||||||
|
Vested
Portion of Company
Match
of Deferred Comp.
|
$ | 42,424 | $ | 42,424 | $ | 42,424 | $ | 42,424 | $ | 70,707 | $ | 70,707 | $ | 70,707 | |||||||
|
Accrued
Vacation Pay
|
$ | 2,057 | $ | 2,057 | $ | 2,057 | $ | 2,057 | $ | 2,057 | $ | 2,057 | $ | 2,057 | |||||||
|
Outplacement
Assistance
|
- | - | - | $ | 25,000 | $ | 25,000 | - | - | ||||||||||||
|
280G
Tax Gross Up
|
- | - | - | - | - | - | - | ||||||||||||||
|
Total:
|
$ | 1,892,481 | $ | 3,588,750 | $ | 1,556,481 | $ | 6,108,211 | $ | 6,136,494 | $ | 5,663,494 | $ | 5,103,494 | |||||||
________________
|
(1)
|
Includes
resignation for good reason.
|
|
(2)
|
Unvested
awards that either (a) continue to vest according to its terms or (b)
accelerate upon the terminating event multiplied by (i) our closing stock
price on December 31, 2007 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 31,
2007.
|
|
(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
|
|||||||||||
|
Compensation:
|
|||||||||||||||||
|
Severance
Allowance
|
- | - | $ | 506,250 | $ | 708,750 | - | - | |||||||||
|
Short-term
Incentive
|
|||||||||||||||||
|
Earned
Annual Incentive Award
|
$ | 607,500 | $ | 607,500 | $ | 607,500 | $ | 607,500 | $ | 607,500 | $ | 607,500 | |||||
|
Long-term
Incentives
|
|||||||||||||||||
|
3-year
Incentive Award
|
$ | 84,350 | |||||||||||||||
|
Stock
Options(2)
|
- | - | - | $ | 28,913 | $ | 28,913 | $ | 28,913 | ||||||||
|
Restricted
Stock(3)
|
- | - | - | $ | 302,559 | $ | 302,559 | $ | 302,559 | ||||||||
|
Benefits and Perquisites:
|
|||||||||||||||||
|
Medical
Plan Coverage(4)
|
- | - | $ | 12,342 | $ | 12,342 | - | - | |||||||||
|
Life
Insurance Proceeds
|
- | - | - | - | $ | 1,013,000 | - | ||||||||||
|
Vested
Portion of Company
Match
of Deferred
Comp.
|
- | - | - | - | - | - | |||||||||||
|
Accrued
Vacation Pay
|
$ | 1,298 | $ | 1,298 | $ | 1,298 | $ | 1,298 | $ | 1,298 | $ | 1,298 | |||||
|
Outplacement
Assistance
|
- | - | $ | 25,000 | $ | 25,000 | - | - | |||||||||
|
280G
Tax Gross Up
|
- | - | - | - | - | - | |||||||||||
|
Total:
|
$ | 608,798 | $ | 608,798 | $ | 1,152,390 | $ | 1,770,712 | $ | 1,953,270 | $ | 940,270 | |||||
________________
|
(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 31, 2007 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 31,
2007.
|
|
(4)
|
Estimated
employer subsidy.
|
|
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
|
|||||||||||
|
Compensation:
|
|||||||||||||||||
|
Severance
Allowance
|
- | - | $ | 260,000 | $ | 390,000 | - | - | |||||||||
|
Short-term
Incentive
|
|||||||||||||||||
|
Earned
Annual Incentive Award
|
$ | 352,867 | $ | 352,867 | $ | 352,867 | $ | 352,867 | $ | 352,867 | $ | 352,867 | |||||
|
Long-term
Incentives
|
|||||||||||||||||
|
3-year
Incentive Award
|
$ | 65,000 | |||||||||||||||
|
Stock
Options(2)
|
- | - | - | $ | 14,454 | $ | 14,454 | $ | 14,454 | ||||||||
|
Restricted
Stock(3)
|
- | - | - | $ | 187,058 | $ | 187,058 | $ | 187,058 | ||||||||
|
Benefits
and Perquisites:
|
|||||||||||||||||
|
Medical
Plan Coverage(4)
|
- | - | $ | 6,092 | $ | 6,092 | - | - | |||||||||
|
Life
Insurance Proceeds
|
- | - | - | - | $ | 780,000 | - | ||||||||||
|
Vested
Portion of Company
Match
of Deferred Comp.
|
$ | 38,299 | $ | 38,299 | $ | 38,299 | $ | 38,299 | $ | 38,299 | $ | 38,299 | |||||
|
Accrued
Vacation Pay
|
$ | 14,000 | $ | 14,000 | $ | 14,000 | $ | 14,000 | $ | 14,000 | $ | 14,000 | |||||
|
Outplacement
Assistance
|
- | - | $ | 25,000 | $ | 25,000 | - | - | |||||||||
|
280G
Tax Gross Up
|
- | - | - | - | - | - | |||||||||||
|
Total:
|
$ | 405,166 | $ | 405,166 | $ | 696,258 | $ | 1,092,770 | $ | 1,386,678 | $ | 606,678 | |||||
________________
|
(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 31, 2007 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 31,
2007.
|
|
(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
|
|||||||||||
|
Compensation:
|
|||||||||||||||||
|
Severance
Allowance
|
- | - | $ | 244,000 | $ | 353,800 | - | - | |||||||||
|
Short-term
Incentive
|
|||||||||||||||||
|
Earned
Annual Incentive Award
|
$ | 329,400 | $ | 329,400 | $ | 329,400 | $ | 329,400 | $ | 329,400 | $ | 329,400 | |||||
|
Long-term
Incentives
|
|||||||||||||||||
|
3-year
Incentive Award
|
$ | 36,600 | |||||||||||||||
|
Stock
Options(2)
|
- | - | - | $ | 14,454 | $ | 14,454 | $ | 14,454 | ||||||||
|
Restricted
Stock(3)
|
- | - | - | $ | 142,543 | $ | 142,543 | $ | 142,543 | ||||||||
|
Benefits
and Perquisites:
|
|||||||||||||||||
|
Medical
Plan Coverage(4)
|
- | - | $ | 8,228 | $ | 8,228 | - | - | |||||||||
|
Life
Insurance Proceeds
|
- | - | - | - | $ | 732,000 | - | ||||||||||
|
Vested
Portion of Company
Match
of Deferred Comp.
|
- | - | - | - | - | - | |||||||||||
|
Accrued
Vacation Pay
|
$ | 938 | $ | 938 | $ | 938 | $ | 938 | $ | 938 | $ | 938 | |||||
|
Outplacement
Assistance
|
- | - | $ | 25,000 | $ | 25,000 | - | - | |||||||||
|
280G
Tax Gross Up
|
- | - | - | - | - | - | |||||||||||
|
Total:
|
$ | 330,338 | $ | 330,338 | $ | 607,566 | $ | 910,963 | $ | 1,219,335 | $ | 487,335 | |||||
________________
|
(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 31, 2007 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 31,
2007.
|
|
(4)
|
Estimated
employer subsidy.
|
|
Richard L.
Stanley
|
|||||||||||||||||
|
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
|
|||||||||||
|
Compensation:
|
|||||||||||||||||
|
Severance
Allowance
|
- | - | $ | 335,000 | $ | 502,500 | - | - | |||||||||
|
Short-term
Incentive
|
|||||||||||||||||
|
Earned
Annual Incentive Award
|
$ | 118,181 | $ | 118,181 | $ | 118,181 | $ | 118,181 | $ | 118,181 | $ | 118,181 | |||||
|
Long-term
Incentives
|
|||||||||||||||||
|
3-year
Incentive Award
|
$ | 20,938 | |||||||||||||||
|
Stock
Options(2)
|
- | - | - | $ | 0 | $ | 0 | $ | 0 | ||||||||
|
Restricted
Stock(3)
|
- | - | - | $ | 763,280 | $ | 763,280 | $ | 763,280 | ||||||||
|
Benefits
and Perquisites:
|
|||||||||||||||||
|
Medical
Plan Coverage(4)
|
- | - | $ | 3,241 | $ | 3,241 | - | - | |||||||||
|
Life
Insurance Proceeds
|
- | - | - | - | $ | 1,005,000 | - | ||||||||||
|
Vested
Portion of Company
Match
of Deferred Comp.
|
- | - | - | $ | 7,164 | $ | 7,164 | $ | 7,164 | ||||||||
|
Accrued
Vacation Pay
|
- | - | - | - | - | - | |||||||||||
|
Outplacement
Assistance
|
- | - | $ | 25,000 | $ | 25,000 | - | - | |||||||||
|
280G
Tax Gross Up
|
- | - | - | - | - | - | |||||||||||
|
Total:
|
$ | 118,181 | $ | 118,181 | $ | 481,422 | $ | 1,440,304 | $ | 1,893,625 | $ | 888,625 | |||||
________________
|
(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 31, 2007 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 31,
2007.
|
|
(4)
|
Estimated
employer subsidy.
|
Compensation
of Directors
The
following table sets forth the compensation for 2007 for those persons who
served as members of our Board of Directors during 2007 (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
($)(1)
|
Non-Equity
Incentive Plan Compensation
($)
|
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 | (2) | $ | 43,775 | (3) (4) | $ | 48,225 | (5) (6) | $ |
0
|
$ |
0
|
$ |
0
|
$ | 142.000 | ||||||
|
Curtland
E. Fields
|
$ | 50,000 | $ | 43,775 | (3) (4) | $ | 48,225 | (5) (6) | $ |
0
|
$ |
0
|
$ |
0
|
$ | 142,000 | |||||||
|
Michael
J. Hartnett
|
$ | 50,000 | $ | 43,775 | (3) (4) | $ | 48,225 | (5) (7) | $ |
0
|
$ |
0
|
$ |
0
|
$ | 142,000 | |||||||
|
Michael
D. Jordan
|
$ | 50,000 | (2) | $ | 43,775 | (3) (4) | $ | 53,668 | (5) (6) | $ |
0
|
$ |
0
|
$ |
0
|
|
$ | 147,443 | |||||
|
S.
Lawrence Prendergast
|
$ | 50,000 | $ | 43,775 | (3) (4) | $ | 53,668 | (5) (6) | $ |
0
|
$ |
0
|
$ |
0
|
$ | 147,443 | |||||||
|
Edward
Stewart
|
$ | 50,000 | (2) | $ | 43,775 | (3) (4) | $ | 48,225 | (5) (6) | $ |
0
|
$ |
0
|
$ |
0
|
$ | 142,000 | ||||||
________________
| (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/option
award fair values.
|
| (2) |
Entire
2007 cash retainer has been deferred in Company's Nonqualified Deferred
Compensation Plan.
|
| (3) |
The
grant date fair value of 2,000 shares of restricted stock granted in 2007
is $60,960.
|
| (4) |
As
of December 31, 2007, the director held 3,833 shares of restricted
stock.
|
| (5) |
The
grant date fair value of 6,000 options to purchase common stock granted in
2007 is $78,522.
|
| (6) |
As
of December 31, 2007, the director held 29,000 options to purchase common
stock.
|
| (7) |
As
of December 31, 2007, the director held 124,000 options to purchase common
stock.
|
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 2007 the grant was 2,000 shares of restricted stock and
6,000 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 $30.48 (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
2017.
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, 2008, there
were 236,123 shares of restricted stock issued to our directors, officers and
employees and 1,586,002 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
749,372.
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 2007 was, independent as defined in the Nasdaq listing standards and the
regulations of the Securities and Exchange Commission. During 2007
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.
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, 2008 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, 2007, our directors and executive
officers as a group, and each person who at February 15, 2008 was known to
us to beneficially own more than 5% of our outstanding common
stock.
|
Beneficial
Owner(1)
|
Number
of
Shares(2)
|
|
Voting
Percentage
|
|
|
FMR
Corp.(3)
|
2,875,527
|
13.0
|
||
|
Wells
Fargo & Company(4)
|
1,485,704
|
6.7
|
||
|
Daruma
Asset Management, Inc.(5)
|
1,358,400
|
6.1
|
||
|
Barclays
Global Investors(6)
|
1,341,644
|
6.1
|
||
|
Donald
T. Johnson, Jr.(7)
|
318,177
|
1.4
|
||
|
Todd
R. Peters(8)
|
38,738
|
*
|
||
|
William
L. Conley, Jr.(9)
|
61,863
|
|
*
|
|
|
Richard
L. Stanley(10)
|
28,000
|
|
*
|
|
|
Joseph
Salamunovich(11)
|
58,763
|
|
*
|
|
|
Robert
L. Evans(12)
|
35,000
|
*
|
||
|
Curtland
E. Fields(12)
|
35,000
|
*
|
||
|
Dr.
Michael J. Hartnett(13)
|
130,000
|
*
|
||
|
Michael
D. Jordan(12)
|
35,000
|
*
|
||
|
S.
Lawrence Prendergast(12)
|
36,000
|
|
*
|
|
|
Edward
Stewart(12)
|
52,000
|
*
|
||
|
All
directors and officers as a group (15 persons)(14)
|
998,137
|
4.4
|
_______________
* 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, 2008 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)
|
FMR
Corp.’s address is 82 Devonshire Street, Boston, MA
02109.
|
|
(4)
|
Wells
Fargo & Company’s address is 420 Montgomery Street, San Francisco, CA
94104.
|
|
(5)
|
Daruma
Asset Management, Inc.’s address is 80 West 40th Street, 9th Floor, New
York, NY 10018.
|
|
(6)
|
Barclays
Global Investors’ address is 45 Fremont Street, San Francisco, CA
94105.
|
|
(7)
|
Includes
62,664 shares of restricted stock and 231,130 shares subject to
exercisable options. Excludes 167,241 shares subject to options
that are not exercisable.
|
|
(8)
|
Includes
11,099 shares of restricted stock and 5,625 shares subject to exercisable
options. Excludes 26,838 shares subject to options that are not
exercisable. 20,000 shares are pledged as security for a personal
loan from the Northern Trust.
|
|
(9)
|
Includes
6,862 shares of restricted stock and 49,063 shares subject to exercisable
options. Excludes 17,636 shares subject to options that are not
exercisable.
|
|
(10)
|
Consists
of 28,000 shares of restricted stock. Excludes 30,000 shares
subject to options that are not
exercisable.
|
|
(11)
|
Includes
5,229 shares of restricted stock and 44,063 shares subject to exercisable
options. Excludes 12,388 shares subject to options that are not
exercisable.
|
|
(12)
|
Includes
3,833 shares of restricted stock and 29,000 shares subject to exercisable
options. Excludes 9,000 shares subject to options that are not
exercisable.
|
|
(13)
|
Includes
3,833 shares of restricted stock and 124,000 shares subject to exercisable
options. Excludes 9,000 shares subject to options that are not
exercisable.
|
|
(14)
|
Includes
156,322 shares of restricted stock and 735,300 shares subject to
exercisable options. Excludes 353,002 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, 2007:
|
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
|
1,514,727
|
$
21.84
|
842,169
|
|||
|
Equity
compensation plans not approved by security holders
|
—
|
—
|
—
|
|||
|
Total
|
1,514,727
|
842,169
|
Our Board
of Directors presently consists, and at all times during 2007 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 2007, 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 Audit
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.
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:
|
2007
|
2006
|
||||
|
Audit
Fees(1)
|
$ | 1,024,565 | $ | 1,140,510 | |
|
Audit-Related
Fees(2)
|
359,907 | 178,896 | |||
|
Tax
Fees (3)
|
67,016 | 44,958 | |||
|
All
Other Fees(4)
|
– | 6,600 | |||
|
Total
Fees
|
$ | 1,451,488 | $ | 1,370,964 | |
______________
|
(1)
|
The
fees for 2006 are $39,080 higher than reported in our Annual Report on
Form 10-K for the year ended December 31, 2006 due to audit fees
incurred
but not communicated until after the filing of the 2006 Annual Report on
Form 10-K.
|
|
(2)
|
For
2007 consists of fees and expenses for services relating to a Statement of
Auditing Standards No. 70 review ($134,907) and fees related to
certain
due diligence services ($225,000). For 2006 consists of fees
and expenses for services relating to a Statement of Auditing Standards
No. 70
review ($128,896) and diligence for a potential acquisition
($50,000).
|
|
(3)
|
Consists
of fees and expenses for assistance with (i) state, federal and
foreign tax returns ($67,016 for 2007 and $35,939 for 2006) and (ii)
other
foreign tax related assistance ($9,019 for
2006).
|
|
(4)
|
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 Audit
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 2007
and 2006.
PART
IV
|
(a)
|
Index
to Financial Statements, Financial Statement Schedules and
Exhibits:
|
|
1.
|
Financial
Statements Index
|
||
|
See
Index to Financial Statements and Supplemental Data on page
40.
|
|||
|
2.
|
Financial
Statement Schedules Index
|
||
|
II
– Valuation and Qualifying Accounts
|
S-1
|
||
|
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
|
||
|
February
27, 2008
|
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.
|
February
27, 2008
|
/s/
Donald T. Johnson, Jr.
|
|
|
Donald
T. Johnson, Jr.
Chairman,
President and Chief Executive Officer
(principal
executive officer)
|
||
|
February
27, 2008
|
/s/
Todd R. Peters
|
|
|
Todd
R. Peters
Vice
President and Chief Financial Officer
(principal
financial officer)
|
||
|
February
27, 2008
|
/s/
John M. Pinkerton
|
|
|
John
M. Pinkerton
Vice
President and Controller
(principal
accounting officer)
|
||
|
February
27, 2008
|
/s/
Robert L. Evans
|
|
|
Robert
L. Evans, Director
|
||
|
February
27, 2008
|
/s/
Curtland E. Fields
|
|
|
Curtland
E. Fields, Director
|
||
|
February
27, 2008
|
/s/
Michael J. Hartnett
|
|
|
Michael
J. Hartnett, Director
|
||
|
February
27, 2008
|
/s/
Michael D. Jordan
|
|
|
Michael
D. Jordan, Director
|
||
|
February
27, 2008
|
/s/
S. Lawrence Prendergast
|
|
|
S.
Lawrence Prendergast, Director
|
||
|
February
27, 2008
|
/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, 2005:
|
|||||||||||||||||
|
Reserve
and allowances deducted from asset accounts:
|
|||||||||||||||||
|
Allowance
for uncollectible accounts
|
$ | 474 | $ | 334 | $ | 194 | (1) | $ | 39 | (2) | $ | 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 | (2) | 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 | ||||||||||||
|
Year
ended December 31, 2007:
|
|||||||||||||||||
|
Reserve
and allowances deducted from asset accounts:
|
|||||||||||||||||
|
Allowance
for uncollectible accounts
|
871 | (217 | ) | − | 71 | (2) | 583 | ||||||||||
|
Reserve
for excess and obsolete inventory
|
5,190 | 4,383 | − | 3,479 | 6,094 | ||||||||||||
|
Valuation
allowance on deferred tax assets
|
12,243 | (62 | ) | − | 5,736 | (3) | 6,445 | ||||||||||
________________
|
|
(1)
|
Balance
reclassified in current year.
|
|
|
(2)
|
Accounts
written off, net of recoveries.
|
|
|
(3)
|
Related
to the expiration of capital loss
carryforwards.
|
S-1