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, 2008
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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ATC
TECHNOLOGY CORPORATION
(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, 2008) was $481 million.
The
Registrant had 19,775,728 shares of Common Stock outstanding as of February 17,
2009.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
ANNUAL
REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008
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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
Overview
ATC
Technology Corporation, through its subsidiaries, provides outsourced supply
chain logistics services and engineering solutions 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.
ATC
Technology Corporation was incorporated in Delaware in 1994 and became a
publicly traded company in 1996. Prior to June 2008, we were known as
Aftermarket Technology Corp.
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
and certain product accessories and packaging materials to support our packaging
services, we generally do not take ownership of inventory. As a
result, our working capital needs are relatively less than other logistics
service providers who take ownership of inventory. Our principal
customers are in the wireless, consumer electronics and automotive industries
and include AT&T, TomTom, Nokia, LG, T-Mobile, TiVo, SonyEricsson, General
Motors (“GM”) and Delphi. Logistics Business segment sales accounted
for 66.6%, 55.5%, 52.9%, 36.5% and 27.8% of our 2008, 2007, 2006, 2005 and 2004
net sales, respectively.
We
determine our logistics processes 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, broadband and cable
devices, and light vehicle audio systems and instrument clusters. As
part of our service offering, we provide bulk and direct fulfillment of wireless
devices and broadband and cable 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 & repair services. Growth in our
Logistics Business has largely been with AT&T and more recently with TomTom,
where we provide fulfillment, packaging, returns management, and test &
repair services. Additionally, we provide various of our suite of
logistics service offerings for GM, Nokia, LG, T-Mobile, SonyEricsson and TiVo
and provide returned material reclamation and core management and disposition
services for GM. 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 statements of work for forward & reverse logistics
services and test & repair programs with AT&T run through
2010.
Our Drivetrain
Business
Our
Drivetrain Business remanufactures drivetrain products, which we distribute
primarily to Original Equipment Service (“OES”) organizations and their outlets
(i.e., the service and repair organizations of automotive Original Equipment
Manufacturers (“OEMs”)). We believe we are the largest independent
light vehicle automatic transmission remanufacturer in the world. Our
drivetrain products consist principally of remanufactured automatic
transmissions and also include remanufactured torque converters, valve bodies
and engines. Our principal Drivetrain customers are Ford, Honda,
Allison, Chrysler and GM. Drivetrain Business net sales accounted for
33.4%, 44.5%, 47.1%, 63.5%, and 72.2% of our 2008, 2007, 2006, 2005 and 2004 net
sales, respectively.
During
the later part of 2008, our Drivetrain customers and the supporting supply base
experienced unprecedented distress due to the significant adverse changes in the
North American vehicle industry caused by the economic slowdown. In
conjunction with these adverse changes, we have taken actions to restructure our
North American Drivetrain operations, which include the 2009 closure and
consolidation of our operations at our Springfield, Missouri automatic
transmission remanufacturing facility into our existing Company-owned Drivetrain
facility in Oklahoma City, Oklahoma.
The
closure of our Springfield facility is another step in a series of cost-cutting
actions that began in early 2008 and have continued throughout the year to
streamline our North American Drivetrain business. We plan to move
production lines in stages, thereby continuing uninterrupted and seamless
delivery of product to our customers, transferring all current production to
Oklahoma City over the first six months of 2009 to coincide with the expiration
of the Springfield facility lease at the end of 2009. The
restructuring includes the streamlining of both administrative and operations
functions to more efficiently meet the needs of our customers while providing
adequate resources to pursue new opportunities as we work to drive growth in
this business.
In
connection with this restructuring, we recorded pre-tax charges of $9.7 million
during the fourth quarter of 2008 and expect to incur additional charges of
$5-$6 million in 2009. These events also caused us to reassess the
carrying value of goodwill of our North American Drivetrain business, and as a
result we recorded an impairment charge of $79.1 million during the fourth
quarter of 2008. 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 2 – Goodwill and Other Intangible
Assets, Note 5 and Note 18.”
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 Ford, Honda, Allison, Chrysler, GM and certain
foreign OEMs, primarily for use in the United States service and repair
organizations of their dealer networks. Additionally, our European
facility remanufactures OEM-approved gas and diesel engines for several European
OEMs, including Jaguar 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 Ford, Honda, GM, Chrysler, Jaguar, Land Rover and
Isuzu.
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 Ford and Allison run through
2009 and 2012, respectively, and our contract with Chrysler expired at the end
of 2008.
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 $27.6
billion of gross revenues in 2007.
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. We supply our products to the automotive
aftermarket, which consists of parts and services for light vehicles after their
original purchase.
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 faulty 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 enables 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, as well as the wireline segment of AT&T, and TiVo 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.
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 President and Chief Executive Officer, Todd R.
Peters, has over 20 years of financial, acquisition and integration, and
automotive operations experience. Our Chairman of the Board, 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, Ashoka
Achuthan, has nearly 30 years of financial and operational leadership experience
and our Vice President and Chief Accounting Officer, John M. Pinkerton, has
nearly 30 years of financial and strategic planning leadership experience, both
with large international businesses. The President of our ATC
Logistics Business, F. Antony Francis, has nearly 40 years of financial and
logistics operations 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 2008, we were awarded new logistics business that we
expect to generate $37 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, wireless OEMs, and
broadband and cable providers to our customer base and through penetration of
and into other vertical markets, including electronics and computers, and
medical devices. 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 customers and their dealers 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. We believe that our
expertise in drivetrain remanufacturing will be directly transferable to these
other markets over time.
Expand Our International
Presence. In 2008, we generated approximately 96% 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 Europe. 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 may 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.
Employees
As of
December 31, 2008, we had an aggregate workforce of approximately 3,500
individuals, including full-time employees and temporary workers. 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 an $850,000 deductible
($100,000 in the case of the closed facilities) and a $12.0 million cap
(except with respect to the closed facilities).
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 17.”
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 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 2008, we had four customers that individually accounted for
10% or more of our net sales: AT&T (43%), TomTom (14%), Ford (11%) and
Honda (10%). 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.
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. Furthermore, the current economic climate may lead our
customers (particularly those in the automotive industry) to more aggressively
pursue cost reduction initiatives, which could adversely affect the prices we
charge for our products and services. 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.
Current
economic conditions are causing certain of our customers to experience severe
financial difficulty, which could lead to such customers no longer utilizing our
products and services, resulting in a potentially material decline in our
revenue. Furthermore, the bankruptcy of any such customer would adversely
affect our ability to collect the related accounts receivable.
Loss of a
significant customer could also result in us incurring asset impairment charges
and restructuring costs associated with the loss of the customer.
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.
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
govern their dealer warranty repair-versus-replace decisions, which could result
in dealers repairing more transmissions and consequently replacing fewer
transmissions with remanufactured units, which would reduce demand for our
products.
Our
Logistics Business is dependent on the strength of AT&T.
AT&T,
which accounted for 64.2% of our Logistics segment net sales for 2008, 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 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 net
sales.
The
current economic crisis could impact the market for our customers’ products,
which would in turn adversely affect our results of operations.
The
current economic crisis could cause consumers to reduce their purchases of
discretionary items that are sold by our customers, such as cellular devices and
GPS units, which would in turn reduce the demand for our Logistics
services. It also could lead to automobile owners deferring the
repair of their out-of-warranty vehicles, which would reduce the demand for our
Drivetrain products. Such a reduction in demand could have a material
adverse effect on our results of operations.
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
financial 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:
|
|
•
|
transmission
designs that result in greater
reliability;
|
|
|
•
|
consumers
driving fewer miles per year due to high gasoline
prices;
|
|
|
•
|
consumers
delaying repairs; 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, business outlook changes of, 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 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 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.
We
may be subject to risks associated with future acquisitions.
An
element of our long-term 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
February 10, 2009, we had $70 million of debt outstanding and 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 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;
|
|
|
•
|
of
a prolonged recession and/or unforeseen regulatory changes;
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.
We
conduct our business from the following facilities:
|
Location
|
Approx.
Sq.
Feet
|
Lease
Expiration
Date
|
Products
Produced/Services Provided
|
|||
|
Springfield,
MO(1)
|
280,800
|
2009
|
transmissions,
transfer cases and assorted components(2)
|
|||
|
Oklahoma
City, OK
|
100,000
|
2019
|
transmissions,
transfer cases and assorted components(2)
|
|||
|
Oklahoma
City, OK(3)
|
200,000
|
owned
|
transmissions
and assorted components(2)
|
|||
|
Oklahoma
City, OK
|
94,000
|
2009
|
returned
material reclamation and disposition, core management(4)
|
|||
|
Carrollton
(Dallas), TX
|
39,000
|
2009
|
radios,
telematics and instrument and display clusters(4)
|
|||
|
Ft.
Worth, TX
|
414,000
|
2013
|
wireless
device and accessory distribution, electronics packaging and related
services(4)
|
|||
|
Ft.
Worth, TX
|
375,000
|
2010
|
wireless
device and electronics test and repair, returns processing, accessory
packaging(4)
|
|||
|
Ft.
Worth, TX
|
180,000
|
2009
|
wireless
device and accessory packaging, distribution and related services(4)
|
|||
|
Grantham,
England
|
120,000
|
owned
|
engines
and related components(2)
|
___________
|
(1)
|
We
will be exiting this facility in 2009 and consolidating its operations
into one of our Oklahoma City
facilities.
|
|
(2)
|
This
facility is used by the Drivetrain
segment.
|
|
(3)
|
This
property is subject to a mortgage securing our bank credit
facility.
|
|
(4)
|
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 are developing 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.
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.
No
matters were submitted to a vote of our stockholders during the quarter ended
December 31, 2008.
PART
II
Market
Information and Holders
Our
common stock is traded on the Nasdaq Global Select Market under the symbol
"ATAC". As of February 17, 2009, there were 127 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
|
||||
|
2008
|
|||||
|
First quarter
|
$ | 27.97 | $ | 18.27 | |
|
Second quarter
|
26.78 | 19.57 | |||
|
Third quarter
|
27.05 | 21.80 | |||
|
Fourth quarter
|
24.20 | 12.02 | |||
|
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 | |||
On
February 17, 2009, the last sale price of our common stock, as reported by
Nasdaq, was $10.86 per share.
Stock
Repurchases
On
February 28, 2008, our Board of Directors authorized a plan to repurchase up to
$50,000,000 of our common stock during 2008. The repurchases were
made (i) pursuant to a plan complying with Rule 10b5-1 under the Securities
Exchange Act of 1934, and (ii) in accordance with Rule 10b-18 under the
Securities Exchange Act. Pursuant to this program, we made open
market purchases of 955,836 shares of our common stock at an aggregate cost of
$17,621,421 (including broker commissions and transaction fees) during the three
months ended December 31, 2008. The repurchase program was
completed in December 2008.
Also
during the three months ended December 31, 2008, an employee delivered to us 53
shares of our outstanding common stock in payment of $900 of minimum withholding
tax obligations arising from the vesting of restricted stock previously awarded
under one of our stock incentive plans. Per the stock incentive plan,
the shares delivered to us were valued at $16.98 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 months ended
December 31, 2008:
|
Period
|
Total
number
of
Shares
Purchased
|
Average
Price
Paid
per Share
|
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans or
Programs
|
Maximum
Number (or
Approximate
Dollar
Value)
of Shares that May
Yet
Be Purchased Under
the
Plan(1)(2)
|
|
October
1-31, 2008
|
482,612
|
$
20.88
|
482,612
|
$
7,513,679
|
|
November
1-30, 2008
|
225,759
|
$
16.27
|
225,759
|
$
3,839,951
|
|
December
1-31, 2008
|
247,518
|
$
15.52
|
247,518
|
$ 12
|
|
_______
|
_______________
|
|
(1)
|
Excludes
amounts that could be used to repurchase shares acquired under our stock
incentive plans to satisfy withholding tax obligations of employees and
non-employee directors upon the vesting of restricted
stock.
|
|
(2)
|
Announced
on February 28, 2008, our stock repurchase plan authorized us to
repurchase up to $50,000,000 of our common stock through December 31,
2008, excluding broker commissions and transaction
fees.
|
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 ATC Technology Corporation 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 our peer
group and the Nasdaq Market Index over the period from December 31, 2003 to
December 31, 2008. 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, 2003. The graph then presents the value of these
investments, assuming reinvestment of dividends, through the close of trading on
December 31, 2008.
|
12/31/03
|
12/31/04
|
12/31/05
|
12/30/06
|
12/29/07
|
12/31/08
|
|
|
ATC
Technology Corporation.
|
100.00
|
117.35
|
141.69
|
155.10
|
198.69
|
106.63
|
|
Peer
Group Index
|
100.00
|
142.47
|
159.47
|
170.96
|
158.39
|
124.78
|
|
NASDAQ
Market Index
|
100.00
|
108.41
|
110.79
|
122.16
|
134.29
|
79.25
|
The peer
group consists of Brightpoint, Inc. and UTI Worldwide Inc. (publicly-traded
companies engaged in third party logistics businesses) and Genuine Parts Co. and
Standard Motor Products (publicly-traded companies engaged primarily in
businesses in the automotive aftermarket), which, in management’s opinion, most
closely represent the peer group for our two business segments.
The
cumulative total return shown on the stock performance graph indicates
historical results only and is not necessarily indicative of future
results.
The
selected financial data presented below with respect to the statements of
operations data for the years ended December 31, 2008, 2007 and 2006 and
the balance sheet data as of December 31, 2008 and 2007 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 operations data for the years ended December 31, 2005 and
2004 and the balance sheet data as of December 31, 2006, 2005 and 2004, 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. On April 2, 2008, we sold the asset
group related to our NuVinci CVP project, which was initiated in
2005. Accordingly, the results of operations for NuVinci, which was
reported as part of “Drivetrain” in segment information previously disclosed for
the periods ended from 2005 through 2007, has been reclassified to discontinued
operations for all periods presented and is excluded from the selected financial
data presented below.
|
Year
Ended December 31,
|
|||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
(In
thousands, except per share data)
|
|||||||||||||||||||
|
Statements
of Operations Data:
|
|||||||||||||||||||
|
Net
sales
|
$ | 530,560 | $ | 529,171 | $ | 497,891 | $ | 419,618 | $ | 375,600 | |||||||||
|
Cost
of sales
|
408,347 | 389,768 | 392,445 | 315,507 | 275,453 | ||||||||||||||
|
Exit,
disposal, certain severance and other charges(1)
|
7,614 | 1,962 | − | − | − | ||||||||||||||
|
Gross
profit
|
114,599 | 137,441 | 105,446 | 104,111 | 100,147 | ||||||||||||||
|
Selling,
general and administrative expense
|
56,965 | 61,001 | 48,936 | 47,755 | 45,034 | ||||||||||||||
|
Amortization
of intangible assets
|
149 | 243 | 190 | 125 | 125 | ||||||||||||||
|
Impairment
of
goodwill
|
79,146 | − | 14,592 | − | − | ||||||||||||||
|
Exit,
disposal, certain severance and other charges(1)
|
3,396 | 1,411 | 1,938 | 523 | 3,766 | ||||||||||||||
|
Operating
income (loss)
|
(25,057 | ) | 74,786 | 39,790 | 55,708 | 51,222 | |||||||||||||
|
Interest
income
|
624 | 1,141 | 605 | 2,026 | 2,658 | ||||||||||||||
|
Interest
expense
|
(696 | ) | (969 | ) | (4,297 | ) | (7,696 | ) | (7,271 | ) | |||||||||
|
Other
income,
net
|
17 | 116 | 262 | 542 | 19 | ||||||||||||||
|
Equity
in income of
investee
|
− | − | − | − | 146 | ||||||||||||||
|
Write-off
of debt issuance
costs
|
− | − | (1,691 | ) | − | − | |||||||||||||
|
Income
tax benefit
(expense)
|
2,423 | (27,952 | ) | (13,011 | ) | (16,827 | ) | (16,698 | ) | ||||||||||
|
Income
(loss) from continuing operations
|
$ | (22,689 | ) | $ | 47,122 | $ | 21,658 | $ | 33,753 | $ | 30,076 | ||||||||
|
Income
(loss) from continuing operations per diluted share(2)
|
$ | (1.09 | ) | $ | 2.13 | $ | 0.99 | $ | 1.56 | $ | 1.40 | ||||||||
|
Shares
used in computation of income (loss) from continuing operations per
diluted share(2) |
20,878 | 22,144 | 21,927 | 21,579 | 21,411 | ||||||||||||||
|
Other
Data:
|
|||||||||||||||||||
|
Capital
expenditures
|
$ | 11,332 | $ | 19,374 | $ | 10,636 | $ | 17,241 | $ | 10,820 | |||||||||
|
As
of December 31,
|
||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||
|
(In
thousands)
|
||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||
|
Cash
and cash equivalents
|
$ | 17,188 | $ | 40,149 | $ | 7,835 | $ | 45,472 | $ | 18,085 | ||||
|
Working
capital, continuing operations
|
109,887 | 115,259 | 89,353 | 109,143 | 88,221 | |||||||||
|
Property,
plant and equipment, net
|
52,728 | 56,462 | 51,767 | 54,108 | 51,416 | |||||||||
|
Total
assets
|
282,342 | 389,374 | 345,677 | 407,780 | 390,277 | |||||||||
|
Current
and long-term debt outstanding
|
– | – | 17,800 | 90,779 | 112,406 | |||||||||
|
Long-term
liabilities, less current portion
|
17,695 | 35,389 | 46,194 | 107,077 | 122,225 | |||||||||
|
Total
stockholders' equity
|
204,702 | 280,513 | 232,330 | 221,230 | 186,373 | |||||||||
|
(1)
|
See
Item 8. “Consolidated Financial Statements and Supplementary Data – Note
18” 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.
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto included elsewhere in this Annual
Report. See Item 8. “Consolidated Financial Statements and
Supplementary Data.”
Readers
are cautioned that the following discussion contains certain forward-looking
statements and should be read in conjunction with the “Special Note Regarding
Forward-Looking Statements” appearing at the beginning of this Annual
Report.
Discontinued
Operations
During
the three months ended March 31, 2008, we concluded that the potential return on
the investment for our NuVinci CVP project was not sufficient to continue
development activities. As a result, we sold the asset group related
to this project to Fallbrook Technologies Inc. and reclassified the results of
operations for NuVinci (which was reported as part of “Drivetrain” in segment
information previously disclosed) to discontinued operations for all periods
presented in the accompanying consolidated financial statements and management’s
discussion and analysis.
Overview
Operations. We
provide supply chain logistics services and outsourced engineered solutions 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 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
and certain product accessories and packaging materials to support our packaging
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.
2008 Summary. 2008 was a year with mixed
results. We had continued growth and efficiency improvements in our
Logistics business while our Drivetrain business suffered from a significant
decline in revenues related to a decline in Honda transmissions replaced under
warranty and normal life-cycle declines in legacy Ford and Chrysler transmission
remanufacturing programs coupled with the severe economic and financial
conditions impacting the automotive sector. These impacts were key factors
driving our decision to restructure and consolidate our Drivetrain
business. For the full year of 2008, net sales increased a nominal
0.3% to $530.6 million from $529.2 million in 2007. Loss from
continuing operations of $22.7 million for the year reflected a $79.1 million
goodwill impairment charge in our Drivetrain segment and $9.7 million in
restructuring charges. We ended the year at a loss from continuing
operations of $1.09 per share.
The
Logistics segment continued its growth during 2008, with net sales up 20.2% to a
record $353.4 million compared to full-year 2007. We continued to
benefit from our solid customer relationships across the board but most
specifically with AT&T and TomTom. Throughout 2008, our Logistics
business exceeded our expectations, driven by cost improvements in our
operations and efficient new program launches. We renewed our
contracts with AT&T, TomTom and T-Mobile, and also expanded our operational
reach into Mexico and to a lesser extent, Canada. During the year, we
continued to win new business and continued to expand our pipeline of new
business opportunities.
The
results of our Drivetrain Business were disappointing throughout
2008. Our net sales for 2008 were down 24.7% from 2007. We
experienced (i) a significant decline in revenues with Honda due to lower demand
for remanufactured transmissions for warranty applications compared to the
higher volumes in 2007 believed to be attributable to an extension of warranty
coverage on certain models, and (ii) declines in volume with Ford and Chrysler
related to normal life-cycle decay of legacy transmission programs while newer
platforms, which have been impacted by depressed new vehicle sales, have only
resulted in modest volumes to date. Additionally, the unprecedented
economic distress being experienced by our customers severely impacted our
volumes throughout the year and consequently, the valuation of our Drivetrain
business. Since the beginning of the year, we have been aggressive in
reducing costs and in the fourth quarter of 2008, initiated a restructuring and
consolidation of the Drivetrain business to improve capacity and asset
utilization.
Additionally,
we completed a $50 million stock repurchase program, representing approximately
11% of the diluted shares outstanding. We ended the year with a net
cash position of $17.2 million and no debt. Our liquidity continues
to provide us with the flexibility to pursue a mix of potential new business
opportunities and make investments for our future.
Logistics Segment Summary.
For the year ended December 31, 2008, net sales from our Logistics
Business increased $59.5 million, or 20.2%, to $353.4 million, which represented
66.6% of our total net sales. AT&T accounted for 64.2% of our
Logistics Business sales in 2008. Sales and growth in our Logistics
segment were largely the result of: (i) the launch and ramp-up of new logistics
programs with TomTom and AT&T; and (ii) increased volumes in our base
business programs with AT&T and other Logistics customers. We
continue to benefit from (i) demand for cellular phones and services and
AT&T’s share of cellular service volume, (ii) 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, and (iii) business initiatives and growth with new
customers such as TomTom. We believe our Logistics Business
represents a key growth opportunity and we are actively pursuing customer
diversification.
Drivetrain Segment Summary.
During the later part of 2008, our Drivetrain customers and
the supporting supply base experienced unprecedented distress due to the
significant adverse changes in the North American vehicle industry due to the
economic slowdown. As a result, we have taken actions to restructure
our North American Drivetrain operations, which include the 2009 closure and
consolidation of our operations at our Springfield, Missouri automatic
transmission remanufacturing facility into our existing Company-owned Drivetrain
facility located in Oklahoma City, Oklahoma. The closure of the
Springfield facility is another step in a series of cost-cutting moves that
began in early 2008 and have continued throughout the year to streamline our
North American Drivetrain business. We plan to move production lines
in stages, thereby continuing uninterrupted and seamless delivery of product to
our customers, transferring all current production to Oklahoma City over the
first six months of 2009, to coincide with the expiration of the Springfield
facility lease at the end of 2009. The restructuring includes the
streamlining of both administrative and operations functions to more efficiently
meet the needs of our customers while providing adequate resources to pursue new
opportunities as we work to drive growth in this business. In
connection with this restructuring, we recorded pre-tax charges of $9.7 million
($6.1 million net of tax) during the fourth quarter of 2008 and expect to incur
additional pre-tax charges of $5-$6 million ($3-$4 million net of tax) in
2009. Upon the completion of the restructuring activities in our
Drivetrain segment, we expect to achieve pre-tax annual cost savings of
approximately $6 million and we have targeted a 10% segment margin for
Drivetrain by the end of 2009. These events have also caused us to
reassess the carrying value of goodwill of our North American Drivetrain
business, and as a result we recorded an impairment charge during fourth quarter
2008 of $79.1 million ($56.8 million net of tax, which includes an income tax
benefit of $0.4 million from the revaluation of certain deferred tax assets
primarily related to tax deductible goodwill).
For 2008,
our Drivetrain Business reported net sales of $177.1 million, or 33.4% of our
total net sales. This represented a 24.7% decrease in net sales in 2008 as
compared to 2007, driven largely by reduced volumes with our two primary
Drivetrain customers, Honda and Ford. Our Drivetrain net sales with Honda in
2008 were down 37.3% as compared to 2007, primarily due to the comparatively
higher volumes in 2007 believed to be attributable to an extension of warranty
coverage on certain models. Our net sales with Ford in 2008 were down
23.4% as compared to 2007, driven primarily by lower sales over the last several
years of new vehicles using transmissions we remanufacture. In addition, we
believe that macro-economic factors have resulted in a reduction in miles driven
and the deferral of repairs, thus reducing demand for remanufactured
transmissions. Furthermore, during 2008 our volume related to new
Ford and GM six-speed platforms was low due to depressed new vehicle
sales.
Financing. During
2008 we generated $38.9 million of cash from operating activities-continuing
operations, completed our stock repurchase program of $50.0 million, and
invested $11.3 million in property, plant and equipment. As of
December 31, 2008, we had no amounts drawn on our $150 million revolving bank
credit facility, $17.2 million of cash and cash equivalents on hand, and $149.1
million of borrowing capacity under the credit facility. In February
2009, in order to increase our cash position and preserve our financial
flexibility in light of the current uncertainty in the capital markets, we
borrowed $70 million under the credit facility, lowering our borrowing
capacity to $79.1 million as of February 10, 2009.
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.
Impairment of
Goodwill. These costs occur when we have determined that the
implied fair value of goodwill for a reporting unit is less than its carrying
value or when an individual reporting unit is disposed of. We test
our goodwill assets for impairment on an annual basis or when events or
circumstances would require an immediate review.
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
operations 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 (loss) and earnings per share due to the timing of these
actions. See Item 8. “Consolidated Financial Statements and
Supplementary Data -
Note 18” for a further discussion of these costs.
Critical
Accounting Policies and Estimates
Our
financial statements are based on the selection and application of significant
accounting policies, some of which require management to make estimates and
assumptions 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 small 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. Our write-offs were $0.1 million for each of the years
ended December 31, 2008, 2007 and 2006. As of December 31, 2008, we
had $72.9 million of accounts receivable, net of allowance for doubtful accounts
of $0.5 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. During 2008, as part of the restructuring and
consolidation of our Drivetrain business and changes in the economic and
financial condition of the automotive sector, we revised our estimates of net
realizable value for inventory in our Drivetrain businesses. For the
years ended December 31, 2008, 2007 and 2006, we recorded charges for
excess and obsolete inventory of approximately $10.4 million (including $7.3
million classified as exit, disposal, certain severance and other charges), $4.4
million (including $1.4 million classified as exit, disposal, certain severance
and other charges) and $1.7 million, respectively. As of December 31,
2008, we had inventory of $63.3 million, net of a reserve for excess and
obsolete inventory of $6.9 million.
Goodwill and Indefinite Lived
Intangible Assets. Our goodwill and indefinite lived intangible assets
are tested for impairment on an annual basis 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. The goodwill impairment test is
a two-step process which requires us to make estimates regarding the fair value
of the reporting unit. The first step of the goodwill impairment test, used to
identify potential impairment, compares the fair value of the reporting unit
with its carrying value, including goodwill. If the fair value of the
reporting unit exceeds its carrying amount, goodwill of the reporting unit is
considered not impaired, thus the second step of the impairment test is not
required. However, if the carrying amount of the reporting unit
exceeds its fair value, the second step of the goodwill impairment test is
performed to measure the amount of impairment loss (if any), which compares the
implied fair value of reporting unit goodwill with the carrying amount of that
goodwill. If the carrying amount of reporting unit goodwill exceeds
the implied fair value, an impairment loss is recognized in an amount equal to
that excess. 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 step one impairment tests made as of
September 30, 2008 indicated the fair value of both our North American
Drivetrain and Logistics reporting units exceeded their carrying
value.
Subsequent
to the impairment tests made as of September 30, 2008, significant adverse
changes in the business climate in the North American vehicle industry occurred
due to the economic slowdown, placing unprecedented distress on our customers
and the supporting supply base. These changes in the business climate
and resulting reduction in our estimate of future revenues for our Drivetrain
business were determined to be indicators of impairment as described in SFAS No.
142 and as such, we conducted an interim step one test for the potential
impairment of the goodwill related to our Drivetrain business. In
estimating the fair value of our North American Drivetrain reporting unit, we
used a weighted average of the income approach and the market
approach. Under the income approach, the fair value of the reporting
unit is estimated based upon the present value of expected future cash
flows. The income approach is dependent on a number of factors
including probability weighted estimates of forecasted revenue and operating
costs, capital spending, working capital requirements, discount rates and other
variables. Under the market approach, we estimated the value of the
reporting unit by comparison to a group of businesses with similar
characteristics whose securities are actively traded in the public
markets. We used peer company multiples of earnings before interest,
taxes, depreciation and amortization (“EBITDA”) and revenues to develop a
weighted average estimate of fair value for the market
approach. The resulting estimate of fair value of the reporting
unit did not exceed its carrying value, requiring us to perform a step two
measurement of the impairment loss. In step two, the implied fair
value of the goodwill is estimated by subtracting the fair value of the
reporting unit’s tangible, recorded intangible and unrecorded intangible assets
from the fair value of the reporting unit. The impairment loss, if any, is the
amount by which the carrying amount of the goodwill exceeds its implied fair
value. As a result of the step two valuation, we recorded a goodwill
impairment charge of $79.1 million in our Drivetrain segment during the fourth
quarter of 2008.
Our fair
value estimate of goodwill for the North American Drivetrain reporting unit as
of December 31, 2008 was based upon level three inputs, as defined in SFAS
No. 157, Fair Value
Measurements, as unobservable inputs in which there is little or no
market data, which required us to develop our own assumptions as described
above.
As of
December 31, 2008, the remaining goodwill was recorded at a carrying value of
approximately $53.2 million, of which $37.0 million pertains to the Drivetrain
segment.
Effective
with the filing of this Form 10-K, we have changed our method of applying SFAS
No. 142 by changing the date of our annual goodwill and other indefinite lived
intangibles impairment assessment from the last day of the third quarter to the
first day of the fourth quarter of each year. We believe this change
is preferable due to the timing of our normal business processes for updating
annual and strategic plans, which are finalized each year during the three
months ending December 31. As a result of this change, beginning in
2009, our annual impairment testing procedures will be conducted during the
fourth quarter of each year with the results disclosed in our Annual Report
filed on Form 10-K. This change had no impact on our consolidated financial
statements for 2008.
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. Our valuation allowances, primarily related to
tax benefits associated with certain state loss carryforwards, were $6.3 million
and $6.4 million as of December 31, 2008 and 2007, respectively.
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, 2008, 2007 and 2006, we (i) recorded charges for estimated warranty
costs for sales made in the respective year of approximately $1.0 million, $1.6
million and $1.3 million, respectively, and (ii) paid and/or settled warranty
claims of approximately $0.7 million, $0.8 million and $1.3 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.
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 2008 we awarded (i) our Chairman and
then-Chief Executive Officer 71,275 stock options and 22,231 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
187,502 stock options and 88,891 shares of restricted stock as part of an annual
award program, and (iii) newly hired employees and certain executive officers an
aggregate of 30,000 stock options and 29,295 shares of restricted
stock.
Total
estimated compensation of $4.7 million related to stock-based awards granted
during 2008 is being amortized over the requisite service
periods. For all stock-based awards outstanding as of December 31,
2008, we have yet to record, on a pre-tax basis, an estimated total of $4.3
million of compensation expense to be recognized over a weighted-average period
of 1.3 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 customers are AT&T and TomTom. 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,
|
|||||||||||||||||||
|
2008
|
2007
|
2006
|
|||||||||||||||||
|
Net
sales
|
$ | 530.6 | 100.0 | % | $ | 529.2 | 100.0 | % | $ | 497.9 | 100.0 | % | |||||||
|
Gross
profit(1)
|
114.6 | 21.6 | 137.4 | 26.0 | 105.4 | 21.2 | |||||||||||||
|
SG&A
expense
|
57.0 | 10.7 | 61.0 | 11.5 | 48.9 | 9.8 | |||||||||||||
|
Impairment
of goodwill
|
79.1 | 14.9 | − | − | 14.6 | 2.9 | |||||||||||||
|
Exit,
disposal, certain severance and other charges(1)
|
11.0 | 2.1 | 3.4 | 0.6 | 1.9 | 0.4 | |||||||||||||
|
Operating
income (loss)
|
(25.1 | ) | (4.7 | ) | 74.8 | 14.1 | 39.8 | 8.0 | |||||||||||
|
Interest
income
|
0.6 | 0.1 | 1.1 | 0.2 | 0.6 | 0.1 | |||||||||||||
|
Other
income, net
|
− | − | 0.1 | − | 0.3 | − | |||||||||||||
|
Write-off
of debt issuance costs
|
− | − | − | − | (1.7 | ) | (0.3 | ) | |||||||||||
|
Interest
expense
|
(0.7 | ) | (0.1 | ) | (1.0 | ) | (0.2 | ) | (4.3 | ) | (0.9 | ) | |||||||
|
Income
(loss) from continuing operations
|
(22.7 | ) | (4.3 | ) | 47.1 | 8.9 | 21.7 | 4.4 | |||||||||||
|
_______________
|
|
(1)
|
Includes
charges in our Drivetrain segment classified as cost of sales in the
consolidated statements of operations of (i) $7.6 million for
restructuring activities recorded in 2008 and (ii) $2.0 million primarily
related to the wind-down of activities with certain low-volume customers
in 2007.
|
Year
Ended December 31, 2008 Compared to Year Ended December 31,
2007
Income
(loss) from continuing operations decreased to a loss of $22.7 million in 2008
from income of $47.1 million in 2007. In 2008 we reported a loss
from continuing operations of $1.09 per share as compared to income from
continuing operations per diluted share of $2.13 in 2007. Our results
for 2008 included (i) a goodwill impairment charge of $56.8 million (net of tax)
in our Drivetrain segment, which includes an income tax benefit of $0.4 million
from the revaluation of certain deferred tax assets primarily related to tax
deductible goodwill, and restructuring charges of $6.1 million (net of tax)
related to our Drivetrain segment’s North American operations which includes the
closure of our plant in Springfield, Missouri and consolidation of its
operations into our facility in Oklahoma City, Oklahoma, and (ii) other exit,
disposal, certain severance and other charges of $0.8 million (net of tax)
primarily related to certain cost reduction activities. Our results
for 2007 included exit, disposal, certain severance and other charges of $2.1
million (net of tax). Other factors which contributed to the lower
income (loss) from continuing operations in 2008 as compared to 2007
included:
|
|
•
|
a
decrease in sales to GM primarily due to higher sales in 2007 from an
automotive electronics upgrade program that was substantially completed at
the end of the first quarter of
2008;
|
|
|
•
|
lower
volumes of Honda remanufactured transmissions for warranty applications
compared to higher volumes in 2007 believed to be attributable to an
extension of warranty coverage on certain
models;
|
|
|
•
|
scheduled
price concessions to certain customers in our Logistics and Drivetrain
segments granted in connection with previous contract
renewals;
|
|
|
•
|
lower
volumes of Ford remanufactured transmissions resulting from lower sales
over the last several years of new vehicles using transmissions we
remanufacture, 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;
|
|
|
•
|
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 (however,
certain transmission models we remanufacture or programs we have been
awarded have recently been approved by Chrysler for use in its warranty
program); and
|
|
|
•
|
macro-economic
factors believed to have resulted in a reduction in the number of miles
driven and the deferral of repairs, thus reducing overall demand for
remanufactured transmissions in our Drivetrain
segment;
|
partially
offset by:
|
|
•
|
the
launch and ramp-up of new logistics programs with TomTom and
AT&T;
|
|
|
•
|
increased
volumes in our base business programs with AT&T and other customers in
our Logistics segment; and
|
|
|
•
|
benefits
from our on-going lean and continuous improvement program and other cost
reduction initiatives and a reduction in cost for incentive compensation
programs.
|
Net
Sales
Net sales
increased $1.4 million, or 0.3%, to $530.6 million for 2008 from $529.2 million
for 2007. This increase was primarily due to:
|
|
•
|
the
launch and ramp-up of new logistics programs with TomTom and AT&T;
and
|
|
|
•
|
increased
volumes in our base business programs with AT&T and other customers in
our Logistics segment;
|
partially
offset by:
|
|
•
|
lower
volumes of Honda remanufactured transmissions for warranty applications
compared to higher volumes in 2007 believed to be attributable to an
extension of warranty coverage on certain
models;
|
|
|
•
|
a
decrease in sales to GM primarily due to higher sales in 2007 from an
automotive electronics upgrade program that was substantially completed at
the end of the first quarter of
2008;
|
|
|
•
|
lower
volumes of Ford remanufactured transmissions resulting from lower sales
over the last several years of new vehicles using transmissions we
remanufacture, 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
decline in Nokia revenues due to the termination of a test and repair
program in June 2007;
|
|
|
•
|
scheduled
price concessions to certain customers in our Logistics segment granted in
connection with previous contract
renewals;
|
|
|
•
|
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 (however,
certain transmission models we remanufacture or programs we have been
awarded have been approved by Chrysler for use in its warranty program);
and
|
|
|
•
|
macro-economic
factors believed to have resulted in a reduction in the number of miles
driven and the deferral of repairs, thus reducing overall demand for
remanufactured transmissions in our Drivetrain
segment.
|
Of our
net sales for 2008 and 2007, AT&T accounted for 42.8% and 36.9%, TomTom
accounted for 13.8% and 3.1%, Ford accounted for 11.0% and 14.3%, and Honda
accounted for 9.8% and 15.7%, respectively.
Gross
Profit
Gross
profit decreased $22.8 million, or 16.6%, to $114.6 million for 2008
from $137.4 million for 2007. In addition, gross profit as a
percentage of net sales decreased to 21.6% for 2008 from 26.0% for
2007. The decrease was primarily the result of (i) $7.6 million of
exit, disposal, certain severance and other charges (described below) in 2008,
(ii) reduced operating leverage in our Drivetrain segment, (iii) a decrease in
sales to GM primarily due to higher sales in 2007 from an automotive electronics
upgrade program that was substantially completed at the end of the first quarter
of 2008, and (iv) scheduled price concessions to certain customers in our
Logistics and Drivetrain segments granted in connection with previous contract
renewals, partially offset by benefits from our on-going lean and continuous
improvement program and other cost reduction initiatives.
SG&A
Expense
SG&A
expense decreased $4.0 million, or 6.6%, to $57.0 million for 2008 from $61.0
million for 2007. The net decrease is primarily the result of
benefits from our on-going lean and continuous improvement program and other
cost reduction initiatives and a reduction in cost for incentive compensation
programs, partially offset by an increase in costs associated with revenue
growth in our Logistics segment. As a percentage of net sales,
SG&A expense decreased to 10.7% for 2008 from 11.5% for 2007.
Impairment
of Goodwill
Our
annual evaluation of goodwill made as of September 30, 2008, as required by SFAS
No. 142, Goodwill and Other
Intangible Assets, resulted in no impairment to goodwill.
However,
subsequent to the impairment tests made as of September 30, 2008, significant
adverse changes in the business climate in the North American vehicle industry
occurred due to the economic slowdown, placing unprecedented distress on our
customers and the supporting supply base. This change in the business
climate triggered an interim test for the potential impairment of goodwill
related to our Drivetrain business. As a result, we concluded that
the fair value of this reporting unit no longer supported the recorded goodwill,
thus we recorded a goodwill impairment charge in our Drivetrain segment during
the fourth quarter of 2008 of $79.1 million ($56.8 million net of tax, which
includes an income tax benefit of $0.4 million from the revaluation of certain
deferred tax assets primarily related to tax deductible goodwill).
Exit,
Disposal, Certain Severance and Other Charges
During
2008, we recorded $11.0 million ($6.9 million net of tax) of exit, disposal,
certain severance and other charges which included:
|
|
•
|
$9.7
million ($6.1 million net of tax) related to the restructuring activities
in our Drivetrain segment’s North American operations which includes the
closure of our plant in Springfield, Missouri and consolidation of its
operations into our facility in Oklahoma City, Oklahoma, comprised of (i)
$7.3 million ($4.6 million net of tax) for the write-down of raw materials
inventory, including the disposal of $6.6 million, due to the
determination of excess quantities of raw materials on hand as a result of
the recent decline in volume and the consolidation of facilities
(classified as cost of sales), (ii) $1.9 million ($1.2 million net of tax)
of severance and related costs, (iii) $0.3 million ($0.2 million net of
tax) of costs related to fixed asset disposals (classified as cost of
sales), and (iv) $0.2 million ($0.1 million net of tax) of other plant
consolidation costs; and
|
|
|
•
|
$1.3
million ($0.8 million net of tax) of costs primarily related to severance
and related benefits for certain cost reduction
activities.
|
During
2009, we expect to incur additional pre-tax charges of $5-$6 million related to
the Drivetrain restructuring activities primarily associated with the (i)
transfer of production from the Springfield facility to the Oklahoma City
facility and other facility exit costs, (ii) severance and related costs for
employees to be terminated as production lines are moved between the facilities,
and (iii) costs to accelerate the depreciation of certain fixed
assets. Upon the completion of these restructuring activities in our
Drivetrain segment, we expect to achieve pre-tax annual cost savings of
approximately $6 million.
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).
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 resulting cost savings.
Operating
Income (Loss)
Operating
income (loss) decreased to a loss of $25.1 million for 2008 from income of $74.8
million for 2007. This net decrease was primarily due to the $79.1
million goodwill impairment charge recorded in 2008, coupled with the factors
described above under “Exit, Disposal, Certain Severance and Other Charges” and
“Gross Profit.”
Interest
Income
Interest
income decreased $0.5 million, or 45.5%, to $0.6 million for 2008 from $1.1
million for 2007. The decrease was primarily attributable to lower cash balances
invested in cash and equivalents during 2008 as compared to 2007.
Interest
Expense
Interest
expense decreased $0.3 million, or 30.0%, to $0.7 million for 2008
from $1.0 million for 2007. This decrease was primarily due to a
slightly lower debt outstanding in 2008 as compared to 2007. As of
December 31, 2008, there were no borrowings outstanding under our credit
facility. As of February 10, 2009, there was $70.0 million
outstanding under our credit facility.
Income
Tax Expense (Benefit)
Our
income tax benefit of $2.4 million for 2008 included tax benefits of $22.4
million primarily related to the goodwill impairment charge of $79.1 million, of
which $17.8 million is nondeductible. The normalized effective income
tax rate for 2008 was approximately 36.9%, as compared to 37.2% for
2007. Based upon our current estimate of taxable income by state and
currently enacted laws, we expect an effective income tax rate of approximately
38.0% for 2009.
Discontinued
Operations
During
2008 and 2007 we recorded after-tax losses from discontinued operations of $2.5
million and $7.5 million, respectively.
During
the three months ended March 31, 2008, we concluded that the potential return on
the investment for our NuVinci CVP project was not sufficient to continue
development activities. As a result, we sold certain tangible and
intangible assets related to the NuVinci project to Fallbrook Technologies Inc.
for a total of $6.1 million. The after-tax loss of $2.5 million from 2008 is
primarily related to our discontinued NuVinci CVP project. On a
pre-tax basis, the loss of $4.3 million included $2.4 million of operating
losses from NuVinci and a charge of $1.9 million related to the exit from this
project, which included charges of (i) $1.0 million for termination benefits,
(ii) $0.5 million for certain inventory deemed unusable by Fallbrook, (iii) $0.2
million primarily related to the write-off of capitalized patent development
costs, and (iv) $0.2 million related to the disposal of certain fixed
assets.
For 2007,
the after-tax loss of $7.5 million included (i) $7.1 million related to the
operating results of the NuVinci project, and (ii) $0.4 million related to the
run-out of warranty claims in our discontinued Independent Aftermarket
businesses.
See Item
8. “Consolidated Financial Statements and Supplementary Data - Note 15” 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,
|
|||||||||||
|
2008
|
2007
|
||||||||||
|
Net
sales
|
$ | 353.4 | 100.0 | % | $ | 293.9 | 100.0 | % | |||
|
Segment
profit
|
$ | 56.2 | 15.9 | % | $ | 45.0 | 15.3 | % | |||
Net Sales. Net
sales increased $59.5 million, or 20.2%, to $353.4 million for 2008
from $293.9 million for 2007. This increase was primarily
related to:
|
|
•
|
the
launch and ramp-up of new programs with TomTom and AT&T;
and
|
|
|
•
|
increased
volumes in our base business programs with AT&T and other
customers;
|
partially
offset by:
|
|
•
|
a
decline in sales to GM primarily due to higher sales in 2007 from an
automotive electronics upgrade program that was substantially completed at
the end of the first quarter of
2008;
|
|
|
•
|
a
decline in Nokia revenues due to the termination of a test and repair
program in June 2007; and
|
|
|
•
|
scheduled
price concessions granted to a customer in connection with previous
contract renewals.
|
Of our
segment net sales for 2008 and 2007, AT&T accounted for 64.2% and 66.4%,
TomTom accounted for 20.8% and 5.6% and GM accounted for 3.4% and
12.2%, respectively.
Exit, Disposal, Certain Severance
and Other Charges. During 2008, we recorded $0.3 million of
these costs for severance related to cost reduction activities and the
reorganization of certain functions within the segment’s information technology
group. These costs were nominal in 2007.
Segment
Profit. Segment profit increased $11.2 million, or 24.9%,
to $56.2 million (15.9% of segment net sales) for 2008 from $45.0 million
(15.3% of segment net sales) for 2007. The increase was primarily the
result of the factors described above under “Net Sales” 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 previous contract renewals.
Drivetrain
Segment
The
following table presents net sales, impairment of goodwill, exit, disposal,
certain severance and other charges, and segment profit (loss) expressed in
millions of dollars and as a percentage of net sales:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
|||||||||||
|
Net
sales
|
$ | 177.1 | 100.0 | % | $ | 235.3 | 100.0 | % | ||||
|
Impairment
of goodwill
|
$ | 79.1 | 44.7 | % | $ | − | − | |||||
|
Exit,
disposal, certain severance and other charges
|
$ | 10.7 | 6.0 | % | $ | 3.4 | 1.4 | % | ||||
|
Segment
(loss)
profit
|
$ | (81.3 | ) | − | $ | 29.7 | 12.6 | % | ||||
Net Sales. Net
sales decreased $58.2 million, or 24.7%, to $177.1 million for 2008
from $235.3 million for 2007. The decrease was primarily due
to:
|
|
•
|
lower
volumes of Honda remanufactured transmissions for warranty applications
compared to higher volumes in 2007 believed to be attributable to an
extension of warranty coverage on certain
models;
|
|
|
•
|
lower
volumes of Ford remanufactured transmissions resulting from lower sales
over the last several years of new vehicles using transmissions we
remanufacture, 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;
|
|
|
•
|
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 (however,
certain transmission models we remanufacture or programs we have been
awarded have been approved by Chrysler for use in its warranty program);
and
|
|
|
•
|
macro-economic
factors believed to have resulted in a reduction in the number of miles
driven and the deferral of repairs, thus reducing overall demand for
remanufactured transmissions.
|
Of our
segment net sales for 2008 and 2007, Ford accounted for 32.8% and 32.3% and
Honda accounted for 29.4% and 35.3%, respectively.
Impairment of
Goodwill. During the fourth quarter of 2008, significant
adverse changes in the business climate in the North American vehicle industry
occurred due to the economic slowdown, placing unprecedented distress on our
customers and the supporting supply base. This change in the business
climate triggered an interim test for the potential impairment of goodwill
related to our Drivetrain business. As a result, we concluded that the fair
value of this reporting unit no longer supported the assigned goodwill and
recorded a goodwill impairment charge during the fourth quarter of 2008 of $79.1
million ($56.8 million net of tax, which includes an income tax benefit of $0.4
million from the revaluation of certain deferred tax assets primarily related to
tax deductible goodwill). There were no similar costs recorded in
2007.
Exit, Disposal, Certain Severance
and Other Charges. During 2008, we recorded $10.7 million of
these costs which included:
|
|
•
|
$9.7
million related to the restructuring activities in our North American
operations which includes the closure of our plant in Springfield,
Missouri and consolidation of its operations into our facility in Oklahoma
City, Oklahoma, comprised of (i) $7.3 million for the write-down of raw
materials inventories due to the determination of excess quantities of raw
materials on hand as a result of the recent decline in volume and the
consolidation of facilities, (ii) $1.9 million of severance and related
costs, (iii) $0.3 million of costs related to fixed asset disposals, and
(iv) $0.2 million of other plant consolidation costs;
and
|
|
|
•
|
$1.0
million of costs primarily related to severance and related benefits for
certain cost reduction activities.
|
During
2009, we expect to incur additional pre-tax charges of $5-$6 million related to
the restructuring activities primarily associated with the (i) transfer of
production from the Springfield facility to the Oklahoma City facility and other
facility exit costs, (ii) severance and related costs for employees to be
terminated as production lines are moved between the facilities, and (iii) costs
to accelerate the depreciation of certain fixed assets. Upon the
completion of these restructuring activities, we expect to achieve pre-tax
annual cost savings of approximately $6 million and we have targeted a 10%
segment margin by the end of 2009.
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, and (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.
Segment (Loss)
Profit. Segment (loss) profit decreased to a loss of $81.3
million for 2008 from a profit of $29.7 million (12.6% of segment net
sales) for 2007. The decrease was primarily due to the factors
described above under “Impairment of Goodwill” and “Exit, Disposal, Certain
Severance and Other Charges.” Excluding these costs, the decrease in segment
profit in 2008 as compared to 2007 was primarily the result of the negative
operating leverage experienced as volumes declined due to the factors described
above under “Net Sales.”
Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006
Income
from continuing operations increased $25.4 million, or 117.1%, to $47.1 million
in 2007 from $21.7 million in 2006. Income from continuing operations
per diluted share was $2.13 in 2007 as compared to $0.99 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 was
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:
|
|
•
|
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 $31.3 million, or 6.3%, to $529.2 million for 2007 from $497.9 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 was
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 36.9% and 41.8%, Honda
accounted for 15.7% and 15.6% and Ford accounted for 14.3% and 13.8%,
respectively.
Gross
Profit
Gross
profit increased $32.0 million, or 30.4%, to $137.4 million for 2007
from $105.4 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
scheduled price concessions granted to certain customers in connection with
previous contract renewals.
Gross
profit as a percentage of net sales increased to 26.0% for 2007 from 21.2% for
2006. This increase was primarily due to a favorable mix of services
in our Logistics segment (including the automotive electronics upgrade program
that was 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 $12.1 million, or 24.7%, to $61.0 million for 2007 from $48.9
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 11.5% for 2007 from 9.8% 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.
Operating
Income
Operating
income increased $35.0 million, or 87.9%, to $74.8 million for 2007 from $39.8
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 14.1% from 8.0%.
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
slightly to 37.2% for 2007, from 37.5% for 2006.
Discontinued
Operations
During
2007 and 2006 we recorded after-tax losses from discontinued operations of $7.5
million and $13.6 million, respectively.
For 2007,
the after-tax loss of $7.5 million included (i) $7.1 million related to the
operating results of our NuVinci project, and (ii) $0.4 million related to the
run-out of warranty claims in our discontinued Independent Aftermarket
businesses.
The loss
from 2006 included after-tax charges of (i) $9.7 million for the discontinued
Independent Aftermarket businesses, and (ii) $3.9 million related to the
operating results of the NuVinci project. On a pre-tax basis, this loss for the
discontinued Independent Aftermarket businesses included $1.6 million of losses
from the operations of these businesses during 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
2000.
See Item
8. “Consolidated Financial Statements and Supplementary Data - Note 15” 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 was 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 was 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
|
$ | 235.3 | 100.0 | % | $ | 234.5 | 100.0 | % | |||
|
Segment
profit
|
$ | 29.7 | 12.6 | % | $ | 15.4 | 6.6 | % | |||
Net Sales. Net
sales increased $0.8 million, or 0.3%, to $235.3 million for 2007 from
$234.5 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 35.3% and 33.1%, Ford
accounted for 32.3% and 29.3% and Chrysler accounted for 12.5% 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 $14.3 million, or 92.9%, to
$29.7 million (12.6% of segment net sales) for 2007 from $15.4 million
(6.6% 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 increased “Exit, Disposal, Certain Severance and Other Charges.”
Liquidity
and Capital Resources
Cash Flow & Capital
Expenditures
We had
total cash and cash equivalents on hand of $17.2 million at December 31,
2008. Net cash provided by operating activities from continuing
operations was $38.9 million in 2008. During the period, we used
$23.7 million of cash from our working capital accounts including:
|
|
•
|
$2.9
million for accounts receivable primarily as a result of (i) increased
volume in our Logistics segment, partially offset by lower volumes in our
Drivetrain segment, and (ii) the impact of a large customer payment that
was due in January 2008 but was received in the fourth quarter of 2007,
thereby lowering our receivables balance as of December 31,
2007;
|
|
|
•
|
$8.4
million for inventories primarily related to the launch and ramp-up of new
programs in our Logistics segment, partially offset by reductions in our
Drivetrain segment;
|
|
|
•
|
$10.3
million for accounts payable and accrued expenses, which included the use
of $9.4 million in cash for payments of our 2007 incentive compensation;
and
|
|
|
•
|
$2.1
million for prepaid and other
assets.
|
Net cash
used in investing activities from continuing operations was $13.8 million for
the year, which included $11.3 million of capital spending primarily related to
machinery and equipment for new business initiatives and capacity maintenance
efforts and $2.5 million of net purchases of available-for-sale securities for
our nonqualified deferred compensation plan. Net cash used in
financing activities of $50.3 million was primarily related to open market
repurchases of our common stock made during 2008.
For 2009,
we estimate $12-$15 million for capital expenditures, consisting of
approximately $6-$8 million in support of new business and capacity expansion
initiatives in both our Logistics and Drivetrain segments and approximately
$6-$7 million in support of maintenance and cost reduction
initiatives.
For 2009,
we expect our effective tax rate to be 38.0%.
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, 2008,
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, 2008, our borrowing capacity under the credit facility was $149.1
million, net of $0.9 million for outstanding letters of credit.
We were
in compliance with all the credit facility’s debt covenants as of December 31,
2008.
We had
cash and cash equivalents on hand of $17.2 million at December 31,
2008. Our cash position and expected free cash flow for 2009 provide
adequate resources to satisfy foreseeable business
obligations. However, on February 10, 2009, we borrowed $70 million
under our credit facility in order to increase our cash position and preserve
our financial flexibility in light of the current uncertainty in the capital
markets. The proceeds are being held in high quality, low risk
investments and are not expected to be used in the near
term. Following this borrowing, we had $79.1 million of borrowing
capacity remaining on the credit facility.
As of
December 31, 2008, we had not experienced any unusual delays in payments from
any of our significant customers. If any of our customers were to
file for protection under U.S. bankruptcy laws, we could be required to deliver
to the bankruptcy estate the amount of all payments received from that customer
in the 90 days prior to the bankruptcy filing, resulting in a one-time
disruption in cash flow from that customer, although we believe we would be able
to retain a large portion of those payments because they would be (i) made in
the ordinary course of business on ordinary business terms and/or (ii) offset by
amounts still owed us by the bankrupt and, as such, subject to protection by
affirmative defenses. Any amounts owed but not paid to us by the
customer at the time of the bankruptcy filing would be an unsecured claim that
would most likely not be resolved for an extended period of time and would most
likely be paid at a significant discount, if at all. We would expect
to be able to make up any temporary shortfall in cash flow due to the bankruptcy
of a customer from our other sources of cash, including borrowing under our
revolving credit facility.
Having
considered these and other matters, we believe that cash on hand, cash flow from
operations and existing borrowing capacity will be sufficient to fund ongoing
operations and budgeted capital expenditures. In pursuing future
acquisitions, we will continue to consider the effect any such acquisition costs
may have on liquidity. In order to consummate such acquisitions, we
may need to seek funds through additional borrowings or equity
financing.
Other
In
February 2008, our Board of Directors authorized a plan to repurchase up to
$50.0 million of our common stock during 2008, which was completed during the
fourth quarter of 2008. The repurchases were made (i) pursuant to a
plan complying with Rule 10b5-1 under the Securities Exchange Act of 1934, and
(ii) in accordance with Rule 10b-18 under the Securities Exchange Act. Pursuant to this program, we made open market
purchases of 2,489,671 shares of our common stock at an aggregate cost of $50.1
million, including broker commissions and transaction fees, during
2008.
Off-Balance
Sheet Arrangements
We are
not engaged in any off-balance sheet arrangements that have a material current
effect or are reasonably likely to have a material future effect on our
financial condition or results of operations. However, we are subject
to various other commitments and contingencies as disclosed in Item 8.
"Consolidated Financial Statements and Supplementary Data – Note
16."
Contractual
Obligations
The
following table summarizes our contractual obligations from continuing
operations expressed in millions of dollars as of December 31,
2008:
|
Total
|
Less
than
1 year
|
1 – 3 years
|
3 – 5 years
|
More
than
5 years
|
||||||||||
|
Debt
Obligations:
|
||||||||||||||
|
Letters
of credit
|
$ | 0.9 | $ | − | $ | 0.9 | $ | − | $ | − | ||||
|
Interest
on credit facility(1)
|
0.7 | 0.3 | 0.4 | – | – | |||||||||
|
Total
debt obligations
|
1.6 | 0.3 | 1.3 | – | – | |||||||||
|
Operating
lease obligations(2)
|
21.2 | 7.3 | 6.3 | 4.6 | 3.0 | |||||||||
|
Purchase
obligations(3)
|
17.8 | 17.8 | − | − | − | |||||||||
|
Liabilities
related to uncertain tax positions(4)
|
0.5 | − | 0.5 | − | − | |||||||||
|
Nonqualified
deferred compensation(5)
|
5.1 | 0.5 | 0.2 | 0.1 | 4.3 | |||||||||
|
Deferred
compensation(6)
|
0.3 | 0.1 | 0.2 | − | − | |||||||||
|
Total
|
$ | 46.5 | $ | 26.0 | $ | 8.5 | $ | 4.7 | $ | 7.3 | ||||
|
_______________
|
|
|
(1)
|
Represents
estimated interest expense related to the unused portion of our credit
facility as of December 31, 2008. 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,
2008. On February 10, 2009, we borrowed $70 million under our
credit facility.
|
|
(2)
|
A
portion of our operating leases expiring in 2009 and 2010, will be
renewed. See Item 8. "Consolidated Financial Statements and Supplementary
Data – Note 16."
|
|
(3)
|
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.
|
|
(4)
|
Represents
the portion of our liability related to uncertain tax positions that could
have an impact on our liquidity. The remaining portion of this
liability ($1.1 million as of December 31, 2008) is excluded from our
contractual obligations as this amount has no related demands on our
liquidity due to an offsetting asset classified in refundable income
taxes.
|
|
(5)
|
Represents
amounts payable to certain of our employees and directors under a
nonqualified deferred compensation
plan.
|
|
(6)
|
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, 2008, we had made $3.3 million of these payments (including $0.1
million paid in 2008).
|
Impact
of New Accounting Standards
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value in U.S generally
accepted accounting principles, and expands disclosures about fair value
measurements to include the methods and assumptions used to measure fair value
and the effect of fair value measures on earnings. In October
2008, the FASB issued FSP FAS No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active, which clarifies the
adoption of SFAS No. 157 in a market that is not active. Our adoption of
SFAS No. 157 on January 1, 2008 did not have a material effect on our
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. Under the provisions of
SFAS No. 159, we do not apply the fair value option to the asset and liability
related to our nonqualified deferred compensation plan. The adoption
of SFAS No. 159 did not have a material effect on our
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations. SFAS No. 141R significantly changes 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 changes the accounting treatment
for certain specific items, including (i) acquisition costs are generally
expensed as incurred, (ii) noncontrolling interests (formerly known as “minority
interests”) are valued at fair value at the acquisition date,
(iii) acquired contingent liabilities are 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 is recorded at fair value as an
indefinite-lived intangible asset at the acquisition date, (v) restructuring
costs associated with a business combination are generally expensed subsequent
to the acquisition date, and (vi) changes in deferred tax asset valuation
allowances and income tax uncertainties after acquisition date generally 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, except for the accounting treatment for changes in deferred tax asset
valuation allowances and income tax uncertainties, which applies to acquisitions
prior to the effective date. 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 consolidated financial
statements.
In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133. SFAS No. 161 enhances required disclosures
regarding derivatives and hedging activities, including how an entity uses
derivative instruments, how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and how derivative instruments and related
hedged items affect an entity’s financial position, financial performance and
cash flows. SFAS No. 161 is effective for financial statements
issued for fiscal years and interim periods beginning after
November 15, 2008, with early adoption encouraged. We have
determined that the adoption of SFAS No. 161 will not have a material
effect on our consolidated financial statements.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements that are presented in conformity with U.S.
generally accepted accounting principles. SFAS No. 162 became effective on
November 15, 2008. The adoption of SFAS No. 162 did not have a
material effect on our consolidated financial statements.
Inflation;
Lack of Seasonality
Although we are subject to the effects
of changing prices, the impact of inflation has not been a significant factor in
results of operations for the periods presented. In some
circumstances, market conditions or customer expectations may prevent us from
increasing the prices of our products to offset the inflationary pressures that
may increase our costs in the future. Historically, there has been
little aggregate seasonal fluctuation in our business.
Environmental
Matters
See Item 1. "Business–Environmental"
for a discussion of environmental matters relating to us.
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial
Instruments. We do not hold or issue derivative financial
instruments for trading purposes. We have used derivative financial
instruments to manage our exposure to fluctuations in interest
rates. Neither the aggregate value of these derivative financial
instruments nor the market risk posed by them has been material to our
business. At December 31, 2008, we were not using any derivative
financial instruments.
Interest Rate
Exposure. Based on our overall interest rate exposure during
the year ended December 31, 2008 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, 2008, 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, 2008, a 10% change in the foreign exchange rate would
increase or decrease our consolidated net income by less than $0.1
million.
ITEM
8. CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Contents
The Board
of Directors and Stockholders of ATC Technology Corporation
We have
audited the accompanying consolidated balance sheets of ATC Technology
Corporation and subsidiaries (the Company) as of December 31, 2008 and
2007, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2008. 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 ATC Technology
Corporation and subsidiaries at December 31, 2008 and 2007, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008, 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 to 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.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), ATC Technology Corporation’s internal control
over financial reporting as of December 31, 2008, 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 25, 2009
expressed an unqualified opinion thereon.
/s/
Ernst & Young LLP
Chicago,
Illinois
February
25, 2009
Report of Independent Registered Public Accounting
Firm on Internal Control Over Financial Reporting
The Board
of Directors and Stockholders of ATC Technology Corporation
We have
audited ATC Technology Corporation’s internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal
Control–Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). ATC Technology Corporation’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, ATC Technology Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
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 ATC
Technology Corporation as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2008, and our report
dated February 25, 2009 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
Chicago,
Illinois
February
25, 2009
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
(In
thousands, except share and per share data)
|
|||||||
|
December
31,
|
December
31,
|
||||||
|
2008
|
2007
|
||||||
|
Assets
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$ | 17,188 | $ | 40,149 | |||
|
Accounts
receivable, net
|
72,897 | 70,887 | |||||
|
Inventories
|
63,334 | 63,994 | |||||
|
Prepaid
and other assets
|
4,508 | 3,136 | |||||
|
Refundable
income taxes
|
2,509 | 2,036 | |||||
|
Deferred
income taxes
|
8,943 | 7,740 | |||||
|
Assets
of discontinued operations
|
52 | 2,408 | |||||
|
Total
current assets
|
169,431 | 190,350 | |||||
|
Property,
plant and equipment, net
|
52,728 | 56,462 | |||||
|
Debt
issuance costs, net
|
350 | 507 | |||||
|
Goodwill
|
53,229 | 132,375 | |||||
|
Intangible
assets, net
|
55 | 211 | |||||
|
Long-term
investments
|
5,126 | 3,019 | |||||
|
Other
assets
|
1,423 | 1,244 | |||||
|
Assets
of discontinued operations
|
- | 5,206 | |||||
|
Total
assets
|
$ | 282,342 | $ | 389,374 | |||
|
Liabilities
and Stockholders' Equity
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
payable
|
$ | 29,221 | $ | 34,756 | |||
|
Accrued
expenses
|
25,863 | 34,495 | |||||
|
Income
taxes payable
|
4,290 | 3,308 | |||||
|
Deferred
compensation
|
118 | 124 | |||||
|
Liabilities
of discontinued operations
|
453 | 789 | |||||
|
Total
current liabilities
|
59,945 | 73,472 | |||||
|
Deferred
compensation, less current portion
|
5,316 | 3,308 | |||||
|
Other
long-term liabilities
|
2,659 | 2,819 | |||||
|
Liabilities
related to uncertain tax positions
|
1,637 | 1,608 | |||||
|
Deferred
income taxes
|
8,083 | 27,654 | |||||
|
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) - 27,639,527
and 27,479,944
|
|||||||
|
as
of December 31, 2008 and 2007, respectively
|
276 | 275 | |||||
|
Additional
paid-in capital
|
236,994 | 232,312 | |||||
|
Retained
earnings
|
100,167 | 125,336 | |||||
|
Accumulated
other comprehensive income (loss)
|
(969 | ) | 3,766 | ||||
|
Common
stock held in treasury, at cost - 7,868,354 and 5,328,423
shares
|
|||||||
|
as
of December 31, 2008 and 2007, respectively
|
(131,766 | ) | (81,176 | ) | |||
|
Total
stockholders' equity
|
204,702 | 280,513 | |||||
|
Total
liabilities and stockholders' equity
|
$ | 282,342 | $ | 389,374 | |||
|
See
accompanying notes.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|||||||||||
|
(In
thousands, except per share data)
|
|||||||||||
|
For
the years ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
Net
sales:
|
|||||||||||
|
Services
|
$ | 353,416 | $ | 293,917 | $ | 263,405 | |||||
|
Products
|
177,144 | 235,254 | 234,486 | ||||||||
|
Total
net sales
|
530,560 | 529,171 | 497,891 | ||||||||
|
Cost
of sales:
|
|||||||||||
|
Services
|
262,685 | 211,937 | 210,055 | ||||||||
|
Products
|
145,662 | 177,831 | 182,390 | ||||||||
|
Products
- exit, disposal, certain severance and other charges
|
7,614 | 1,962 | - | ||||||||
|
Total
cost of sales
|
415,961 | 391,730 | 392,445 | ||||||||
|
Gross
profit
|
114,599 | 137,441 | 105,446 | ||||||||
|
Selling,
general and administrative expense
|
56,965 | 61,001 | 48,936 | ||||||||
|
Amortization
of intangible assets
|
149 | 243 | 190 | ||||||||
|
Impairment
of goodwill
|
79,146 | - | 14,592 | ||||||||
|
Exit,
disposal, certain severance and other charges
|
3,396 | 1,411 | 1,938 | ||||||||
|
Operating
income (loss)
|
(25,057 | ) | 74,786 | 39,790 | |||||||
|
Interest
income
|
624 | 1,141 | 605 | ||||||||
|
Other
income, net
|
17 | 116 | 262 | ||||||||
|
Write-off
of debt issuance costs
|
- | - | (1,691 | ) | |||||||
|
Interest
expense
|
(696 | ) | (969 | ) | (4,297 | ) | |||||
|
Income
(loss) from continuing operations before income taxes
|
(25,112 | ) | 75,074 | 34,669 | |||||||
|
Income
tax (benefit) expense
|
(2,423 | ) | 27,952 | 13,011 | |||||||
|
Income
(loss) from continuing operations
|
(22,689 | ) | 47,122 | 21,658 | |||||||
|
Loss
from discontinued operations, net of income taxes
|
(2,480 | ) | (7,515 | ) | (13,635 | ) | |||||
|
Net
income (loss)
|
$ | (25,169 | ) | $ | 39,607 | $ | 8,023 | ||||
|
Per
common share - basic:
|
|||||||||||
|
Income
(loss) from continuing operations
|
$ | (1.09 | ) | $ | 2.16 | $ | 1.00 | ||||
|
Loss
from discontinued operations
|
$ | (0.12 | ) | $ | (0.34 | ) | $ | (0.63 | ) | ||
|
Net
income (loss)
|
$ | (1.21 | ) | $ | 1.82 | $ | 0.37 | ||||
|
Per
common share - diluted:
|
|||||||||||
|
Income
(loss) from continuing operations
|
$ | (1.09 | ) | $ | 2.13 | $ | 0.99 | ||||
|
Loss
from discontinued operations
|
$ | (0.12 | ) | $ | (0.34 | ) | $ | (0.62 | ) | ||
|
Net
income (loss)
|
$ | (1.21 | ) | $ | 1.79 | $ | 0.37 | ||||
|
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 (Loss)
|
Compensation
|
Treasury
|
Total
|
||||||||||||||||||||||
|
Balance
at January 1, 2006
|
$ | - | $ | 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 compen-
sation 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 | ||||||||||||||||||||
|
Net
loss
|
- | - | - | (25,169 | ) | - | - | - | (25,169 | ) | |||||||||||||||||||
|
Translation
adjustments
|
- | - | - | - | (4,491 | ) | - | - | (4,491 | ) | |||||||||||||||||||
|
|
|||||||||||||||||||||||||||||
|
Unrealized
loss on available-for-
sale securities, net
of income taxes
|
- | - | - | - | (244 | ) | - | - | (244 | ) | |||||||||||||||||||
|
Comprehensive
loss
|
(29,904 | ) | |||||||||||||||||||||||||||
|
Issuance
of 140,417 shares of common stock from incentive
stock awards
|
- | 1 | (1 | ) | - | - | - | - | - | ||||||||||||||||||||
|
Issuance
of 19,166 shares of common stock from exercise
of stock options
|
- | - | 253 | - | - | - | - | 253 | |||||||||||||||||||||
|
Tax
benefit from stock-based award
transactions
|
- | - | 27 | - | - | - | - | 27 | |||||||||||||||||||||
|
Noncash
stock-based compensation
|
- | - | 4,403 | - | - | - | - | 4,403 | |||||||||||||||||||||
|
Repurchase
of 2,512,455 shares of
common stock for
treasury
|
- | - | - | - | - | - | (50,590 | ) | (50,590 | ) | |||||||||||||||||||
|
Balance
at December 31, 2008
|
$ | - | $ | 276 | $ | 236,994 | $ | 100,167 | $ | (969 | ) | $ | - | $ | (131,766 | ) | $ | 204,702 | |||||||||||
|
See
accompanying notes.
|
|||||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||||||
|
(In
thousands)
|
|||||||||||
|
For
the years ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
Operating
Activities:
|
|||||||||||
|
Net
income (loss)
|
$ | (25,169 | ) | $ | 39,607 | $ | 8,023 | ||||
|
Adjustments
to reconcile net income (loss) to net cash provided by
|
|||||||||||
|
operating
activities - continuing operations:
|
|||||||||||
|
Net
loss from discontinued operations
|
2,480 | 7,515 | 13,635 | ||||||||
|
Impairment
of goodwill
|
79,146 | - | 14,592 | ||||||||
|
Write-down
of inventories and other assets
|
7,614 | 1,389 | - | ||||||||
|
Write-off
of debt issuance costs
|
- | - | 1,691 | ||||||||
|
Depreciation
and amortization
|
14,568 | 14,873 | 13,713 | ||||||||
|
Noncash
stock-based compensation
|
4,403 | 4,126 | 2,756 | ||||||||
|
Amortization
of debt issuance costs
|
157 | 157 | 412 | ||||||||
|
Adjustments
to provision for losses on accounts receivable
|
15 | (217 | ) | (23 | ) | ||||||
|
Loss
on sale of equipment
|
(32 | ) | 105 | 160 | |||||||
|
Deferred
income taxes
|
(20,608 | ) | 4,291 | 3,916 | |||||||
|
Changes
in operating assets and liabilities,
|
|||||||||||
|
net
of businesses acquired or discontinued/sold:
|
|||||||||||
|
Accounts
receivable
|
(2,919 | ) | 7,041 | (5,172 | ) | ||||||
|
Inventories
|
(8,364 | ) | (8,614 | ) | (4,772 | ) | |||||
|
Prepaid
and other assets
|
(2,079 | ) | (229 | ) | (238 | ) | |||||
|
Accounts
payable and accrued expenses
|
(10,330 | ) | 13,770 | 7,833 | |||||||
|
Net
cash provided by operating activities - continuing
operations
|
38,882 | 83,814 | 56,526 | ||||||||
|
Net
cash provided by (used in) operating activities - discontinued
operations
|
13 | (8,946 | ) | 842 | |||||||
|
Investing
Activities:
|
|||||||||||
|
Purchases
of property, plant and equipment
|
(11,332 | ) | (19,374 | ) | (10,636 | ) | |||||
|
Purchases
of available-for-sale securities
|
(2,791 | ) | (4,301 | ) | (3,981 | ) | |||||
|
Purchase
of assets of a business
|
- | - | (1,746 | ) | |||||||
|
Proceeds
from sales of available-for-sale securities
|
242 | 3,348 | 2,511 | ||||||||
|
Proceeds
from sale of property, plant and equipment
|
72 | 42 | 57 | ||||||||
|
Net
cash used in investing activities - continuing operations
|
(13,809 | ) | (20,285 | ) | (13,795 | ) | |||||
|
Net
cash provided by (used in) investing activities - discontinued
operations
|
4,426 | (3,653 | ) | (63 | ) | ||||||
|
Financing
Activities:
|
|||||||||||
|
Payments
on term debt
|
- | - | (90,685 | ) | |||||||
|
(Payments)
borrowings on revolving credit facility, net
|
- | (17,800 | ) | 17,800 | |||||||
|
Debt
issuance costs
|
- | - | (786 | ) | |||||||
|
Net
change in book overdraft
|
- | (5,059 | ) | (5,426 | ) | ||||||
|
Proceeds
from exercise of stock options
|
253 | 3,766 | 7,495 | ||||||||
|
Tax
benefit from stock-based award transactions
|
130 | 996 | 1,329 | ||||||||
|
Repurchases
of common stock for treasury
|
(50,590 | ) | (497 | ) | (11,050 | ) | |||||
|
Payments
on amounts due to sellers of acquired companies
|
- | - | (29 | ) | |||||||
|
Payments
of deferred compensation related to acquired company
|
(124 | ) | (130 | ) | (136 | ) | |||||
|
Net
cash used in financing activities
|
(50,331 | ) | (18,724 | ) | (81,488 | ) | |||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(2,142 | ) | 108 | 341 | |||||||
|
Increase
(decrease) in cash and cash equivalents
|
(22,961 | ) | 32,314 | (37,637 | ) | ||||||
|
Cash
and cash equivalents at beginning of year
|
40,149 | 7,835 | 45,472 | ||||||||
|
Cash
and cash equivalents at end of year
|
$ | 17,188 | $ | 40,149 | $ | 7,835 | |||||
|
Cash
paid during the year for:
|
|||||||||||
|
Interest
|
$ | 562 | $ | 830 | $ | 4,682 | |||||
|
Income
taxes, net
|
15,943 | 13,957 | 809 | ||||||||
|
See
accompanying notes.
|
|||||||||||
ATC
TECHNOLOGY CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except share and per share data)
Note
1. The
Company
ATC
Technology Corporation (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. The principal customers are currently in the wireless, consumer
electronics and automotive industries and include AT&T, TomTom, Nokia, LG,
T-Mobile, TiVo, SonyEricsson, General Motors (“GM”) and Delphi. The
Company’s Drivetrain segment primarily sells remanufactured transmissions to
Ford, Honda, Allison, Chrysler, GM, 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 OEMs in Europe. Established in
1994, the Company maintains manufacturing facilities and logistics operations in
the United States and a manufacturing facility in the United
Kingdom.
On April
2, 2008, the Company sold the asset group related to its NuVinci CVP project
(“NuVinci”). Accordingly, the results of operations for NuVinci,
which was reported as part of “Drivetrain” in segment information disclosed for
the periods ended prior to 2008, has been reclassified to discontinued
operations for all periods presented. As a result of the
discontinuance of NuVinci, for the years ended December 31, 2008, 2007, and 2006
after-tax losses of $2,511 ($0.12 per common share – basic and diluted), $7,141
($0.33 per common share – basic and $0.32 per common share – diluted), and
$3,917 ($0.18 per common share – basic and diluted) respectively, are reflected
in discontinued operations. The balance from discontinued operations
recorded during the years ended December 31, 2008, 2007, and 2006 primarily
relate to the Independent Aftermarket businesses which were discontinued by the
Company during 2006. (See Note 15 – Discontinued
Operations)
Note
2. Summary of
Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances
and transactions have been eliminated. 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: three to ten years for machinery and equipment, three to five years
for autos and trucks, five to seven years for furniture and fixtures, up to 39
years for buildings and the lesser of 10 years or the remaining term of the
related lease, including any periods covered by reasonably assured lease
renewals, for leasehold improvements. Depreciation expense was
$14,419, $14,630 and $13,523 for the years ended December 31, 2008, 2007
and 2006, 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, 2008 and 2007, debt issuance
costs of $350 and $507, are reflected net of accumulated amortization of $436
and $279, 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 other indefinite lived intangibles for impairment
annually as of the last day of the third quarter 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. 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 goodwill impairment test is a
two-step process which requires the Company to make estimates regarding the fair value of the reporting unit. The first step of the goodwill impairment test, used
to identify potential impairment, compares the fair value of the reporting unit with its carrying value, including goodwill. If the fair value of the reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not
impaired, thus the second step of the impairment test is not
required. However, if the carrying amount of the reporting unit
exceeds its fair value, the second step of the goodwill impairment test is
performed to measure the amount of impairment loss (if any), which compares the
implied fair value of reporting unit goodwill with the carrying amount of that
goodwill. If the carrying amount of reporting unit goodwill exceeds
the implied fair value, an impairment loss is recognized in an amount equal to
that excess. 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. The annual step one impairment tests made by the
Company as of September 30, 2008, indicated the fair value of both the North
American Drivetrain and Logistics reporting units exceeded their carrying
value.
Subsequent
to the September 30, 2008 impairment test, significant adverse changes in the
business climate in the North American vehicle industry occurred due to the
economic slowdown, placing unprecedented distress on the Company’s customers and
supporting supply base. These changes in the business climate and the resulting
reduction in estimated future revenues for the North American Drivetrain
business were determined to be indicators of impairment as described in SFAS No.
142 and as such, the Company performed an interim step one test for the
potential impairment of the goodwill related to the Drivetrain
business. In estimating the fair value of the North American
Drivetrain reporting unit, the Company used a weighted average of the income
approach and the market approach. Under the income approach, the fair
value of the reporting unit is estimated based upon the present value of
expected future cash flows. The income approach is dependent on a
number of factors including probability weighted estimates of forecasted revenue
and operating costs, capital spending, working capital requirements, discount
rates and other variables. Under the market approach, the Company
estimated the value of the reporting unit by comparison to a group of businesses
with similar characteristics whose securities are actively traded in the public
markets. The Company used peer company multiples of earnings before
interest, taxes, depreciation and amortization (“EBITDA”) and revenues to
develop a weighted average estimate of fair value for the market
approach. The resulting estimate of fair value of the reporting unit
did not exceed its carrying value, requiring the Company to perform a step two
measurement of the impairment loss. In step two, the implied fair
value of the goodwill is estimated by subtracting the fair value of the
reporting unit’s tangible, recorded intangible and unrecorded intangible assets
from the fair value of the reporting unit. The impairment loss, if
any, is the amount by which the carrying amount of the goodwill exceeds its
implied fair value. As a result of the step two valuation, the Company
recorded a goodwill impairment charge of $79,146 in its Drivetrain segment
during the fourth quarter of 2008.
The
Company’s fair value estimate of goodwill for the North American Drivetrain
reporting unit as of December 31, 2008 was based upon level three inputs, as
defined in SFAS No. 157, Fair
Value Measurements, as unobservable inputs in which there is little or no
market data, which required us to develop our own assumptions as described
above.
Effective
with the filing of this Form 10-K, the Company has changed its method of
applying SFAS No. 142 by changing the date of its annual goodwill and other
indefinite lived intangibles impairment assessment from the last day of the
third quarter to the first day of the fourth quarter. The Company
believes this change is preferable due to the timing of its normal business
process for updating annual and strategic plans, which are finalized each year
during the three months ending December 31. As a result of this
change, beginning in 2009, the Company’s annual impairment testing procedures
will be conducted during the fourth quarter of each year with the results
disclosed in its Annual Report filed on Form 10-K. This change has had no impact
on the Company’s consolidated financial statements.
Based
upon 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 recorded
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 a non-compete agreement, is being amortized over its estimated
useful life. (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 15 − Discontinued Operations and Note 18 − Exit,
Disposal, Certain Severance and Other Charges.
Asset
Retirement Obligations
The
Company follows FASB Interpretation No. 47 (“FIN 47”), Accounting for Conditional Asset
Retirement Obligations – An Interpretation of FASB Statement
No. 143, which requires entities to record a liability equal to the
fair value of the estimated future cost to retire an asset, if the liability’s
fair value can be reasonably estimated. The Company’s asset retirement
obligation (“ARO”) liabilities are associated with estimated costs to restore
certain leased facilities to a condition specified in the lease agreement. The
Company estimates the fair value of these liabilities based on the current
condition of the property. In future periods, we may make adjustments
to the ARO liability as a result of the availability of new information, changes
in labor costs and other factors. The estimate of the ARO liability is based on
a number of assumptions requiring professional judgment, and we cannot predict
what revisions to these assumptions will be required in future
periods. In connection with property leases, we record the ARO as a
liability and also record a related asset in an amount equal to the estimated
fair value of the liability. The capitalized asset is then depreciated on a
straight-line basis over the estimated useful life of the asset. Upon
retirement of the asset, any difference between the actual retirement costs
incurred and the previously recorded estimated ARO liability is recognized as a
gain or loss in the consolidated statements of operations. As of
December 31, 2008 and 2007, the fair value of ARO liabilities were $381 and
$419, respectively.
Following
is an analysis of the ARO liability:
|
2008
|
2007
|
|||||
|
Asset
retirement obligations at beginning of year
|
$ | 419 | $ | 387 | ||
|
Liabilities
incurred
|
22 | – | ||||
|
Payments
made
|
(89 | ) | – | |||
|
Accretion
expense
|
29 | 32 | ||||
|
Asset
retirement obligations at end of
year
|
$ | 381 | $ | 419 | ||
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, TomTom, Honda, Ford, Allison, Chrysler and GM, 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 $469 and $583 at December 31, 2008
and 2007, 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 operations.
Warranty
Cost Recognition
The Company accrues for estimated
warranty costs as revenue is recognized.
Costs
Associated with Exit or Disposal Activities
In
accordance with the provisions of SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, the Company recognizes a liability for costs
associated with exit or disposal activities in the period in which the liability
is incurred. The Company classifies the costs associated with exit or
disposal activities as a part of exit, disposal, certain severance and other
charges on its consolidated statements of operations, within cost of sales and
operating expenses. (See Note 18 - Exit, Disposal, Certain
Severance and Other Charges.)
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.
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.
During
the years ended December 31, 2008, 2007 and 2006, the consolidated statements of
operations reflect compensation cost related to stock-based payments, which
includes stock options and Restricted Stock (defined below), of $2,774 (net of
income taxes of $1,629), $2,636 (net of income taxes of $1,490) and $1,740 (net
of income taxes of $1,016), respectively. The Company classified the
pre-tax stock-based compensation cost of $4,403, $4,126 and $2,756 for 2008,
2007 and 2006, respectively, as part of selling, general and administrative
expense in its consolidated statements of operations. Per the
provisions 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,
|
||||||||
|
2008
|
2007
|
2006
|
||||||
|
Expected
volatility
|
34.39 | % | 31.38 | % | 38.11 | % | ||
|
Risk-free
interest rates
|
2.67 | % | 4.87 | % | 5.01 | % | ||
|
Expected
term
|
3.9 years | 3.9 years | 3.7 years | |||||
Expected volatility: For all
periods presented, the expected volatility assumption is based on the historical
volatility of the Company’s stock over a term equal to the expected term of the
option granted.
Risk-free interest
rates: For all periods presented, the risk-free interest rate
is based on the implied yield on a U.S Treasury constant maturity with a
remaining term equal to the expected term of the option granted.
Expected term: The
Company’s expected term represents the period that the Company’s stock option
awards are expected to be outstanding. 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. On an annual
basis, based upon this historical exercise and forfeiture experience, the
Company calculates a weighted average expected term for each of the two
groups.
Forfeitures rate:
Compensation expense recognized in the consolidated statements of
operations for each of the three years in the period ended December 31, 2008 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.
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.
Fair
Value Measurements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
U.S generally accepted accounting principles, and expands disclosure about fair
value measurements to include the methods and assumptions used to measure fair
value and the effect of fair value measures on earnings. In October
2008, the FASB issued FASB Staff Position No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active (“FSP
157-3”). FSP 157-3 clarifies the adoption of SFAS No. 157 in a market
that is not active. The Company’s adoption of SFAS No. 157 on January
1, 2008 did not have a material effect on its consolidated financial
statements.
The
carrying value of assets and liabilities in the accompanying consolidated
balance sheet for cash and cash equivalents, accounts receivable, inventories,
prepaid and other assets, refundable income taxes, accounts payable, accrued
expenses, and income taxes payable at December 31, 2008 and 2007, approximate
fair value because of the short maturity of these instruments.
New
Accounting Standards
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. Under the provisions of
SFAS No. 159, the Company may not elect the fair value option for financial
assets and liabilities related to its nonqualified deferred compensation
plan. The adoption of SFAS No. 159 had no material effect on the
Company’s consolidated financial statements. (See Note 13 - Employee Retirement
Plans.)
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations. SFAS No. 141R
significantly changes 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 changes the accounting
treatment for certain specific items, including (i) acquisition costs are
generally expensed as incurred, (ii) noncontrolling interests (formerly known as
“minority interests”) are valued at fair value at the acquisition date, (iii)
acquired contingent liabilities are 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 is recorded at fair value as an
indefinite-lived intangible asset at the acquisition date, (v) restructuring
costs associated with a business combination are generally expensed subsequent
to the acquisition date, and (vi) changes in deferred tax asset valuation
allowances and income tax uncertainties after acquisition date generally affect
income tax expense. SFAS No. 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, except for the accounting treatment for changes
in deferred tax asset valuation allowances and income tax uncertainties, which
applies to acquisitions prior to the effective date. Earlier adoption
is 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.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an amendment of FASB Statement No.
133. SFAS No. 161 enhances required disclosures regarding derivatives and
hedging activities, including how an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted for under SFAS No.
133 and how derivative instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows. SFAS No. 161 is
effective for the Company on January 1, 2009. The Company has determined that
the adoption of SFAS No. 161 will not have a material effect on its consolidated
financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of
Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements that are presented in conformity
with U.S. generally accepted accounting
principles. The effective date of this statement
was November 15, 2008. The adoption of SFAS No. 162 had no
material effect on
the Company’s
consolidated financial
statements.
Reclassifications
Certain prior-year amounts have been
reclassified to conform to the 2008 presentation.
Note
3. Inventories
Inventories
of continuing operations consist of the following:
|
December 31,
|
|||||
|
2008
|
2007
|
||||
|
Raw
materials, including core inventories
|
$ | 57,621 | $ | 57,695 | |
|
Work-in-process
|
760 | 1,467 | |||
|
Finished
goods
|
4,953 | 4,832 | |||
| $ | 63,334 | $ | 63,994 | ||
As of
December 31, 2008 and 2007, the raw materials inventory balances were net of
inventory reserves of $6,943 and $6,094, respectively.
Note
4. Property,
Plant and Equipment
Property,
plant and equipment are summarized as follows:
|
December 31,
|
|||||||
|
2008
|
2007
|
||||||
|
Land
|
$ | 2,261 | $ | 2,463 | |||
|
Buildings
|
12,170 | 12,639 | |||||
|
Machinery
and
equipment
|
110,958 | 106,553 | |||||
|
Autos
and
trucks
|
2,162 | 2,239 | |||||
|
Furniture
and
fixtures
|
3,127 | 3,124 | |||||
|
Leasehold
improvements
|
17,334 | 15,886 | |||||
|
Construction
in
process
|
852 | 1,268 | |||||
| 148,864 | 144,172 | ||||||
|
Less: Accumulated
depreciation and amortization
|
(96,136 | ) | (87,710 | ) | |||
| $ | 52,728 | $ | 56,462 | ||||
For the
twelve months ended December 31, 2008, property, plant and equipment and
accumulated depreciation decreased by $5,593 and $4,792, respectively, due to
changes in the foreign exchange conversion rate between the U.S. dollar and
Great Britain pound.
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
|
||||||||
|
Balances
at December 31, 2006 and 2007
|
$ | 16,238 | $ | 116,137 | $ | 132,375 | ||||
|
Impairment
|
− | (79,146 | ) | (79,146 | ) | |||||
|
Balance
at December 31, 2008
|
$ | 16,238 | $ | 36,991 | $ | 53,229 | ||||
Intangible
Assets
The
Company’s intangible assets of continuing operations, consists of a non-compete
agreement. The non-compete agreement is being amortized over its estimated
useful life. As of December 31, 2008 and 2007, intangible assets of
$55 and $211, are reflected net of accumulated amortization of $1,518 and
$1,413, respectively. The non-compete agreement costs will be fully
amortized by December 31, 2009.
Note
6. Accrued
Expenses
Accrued
expenses of continuing operations are summarized as follows:
|
December 31,
|
|||||
|
2008
|
2007
|
||||
|
Payroll,
employee benefits and related costs
|
$ | 13,682 | $ | 21,912 | |
|
Customer
related allowances, discounts and other credits
|
4,388 | 3,565 | |||
|
Warranty
|
1,885 | 2,154 | |||
|
Exit,
disposal, certain severance and other charges
|
1,522 | 101 | |||
|
Liability
for insured losses
|
1,100 | 1,484 | |||
|
Other
|
3,286 | 5,279 | |||
| $ | 25,863 | $ | 34,495 | ||
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, 2006, 2007 and 2008 are summarized as follows:
|
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 | ||
|
Warranties
issued
|
951 | ||
|
Claims
paid /
settlements
|
(666 | ) | |
|
Changes
in liability for pre-existing
warranties
|
(554 | ) | |
|
Balance
at December 31,
2008
|
$ | 1,885 |
Note
8. Credit
Facility
On March
21, 2006, the Company executed a credit agreement and related security agreement
with certain banks that provide the Company with a $150,000 five-year senior
secured revolving credit facility (the “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 commitments that may be requested).
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 and security
agreements contain 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, 2008.
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, 2008 and 2007, the Company had no amounts outstanding under the
Credit Facility and had letters of credit issued against the Credit Facility of
$890 and $1,490, respectively. As of December 31, 2008, the borrowing
capacity of the Credit Facility was $149,110. (See Note 20 –
Subsequent Event.)
Note
9. Income
Taxes
Income
tax (benefit) expense from continuing operations consists of the
following:
|
For
the years ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
Current:
|
|||||||||||
|
Federal
|
$ | 16,083 | $ | 20,496 | $ | 10,106 | |||||
|
State
|
2,729 | 2,796 | 1,090 | ||||||||
|
Foreign
|
(65 | ) | 317 | 241 | |||||||
|
Total
current
|
18,747 | 23,609 | 11,437 | ||||||||
|
Deferred:
|
|||||||||||
|
Federal
|
(20,630 | ) | 4,615 | 4,870 | |||||||
|
State
|
(1,465 | ) | (382 | ) | (409 | ) | |||||
|
Foreign
|
925 | 110 | (2,887 | ) | |||||||
|
Total
deferred
|
(21,170 | ) | 4,343 | 1,574 | |||||||
| $ | (2,423 | ) | $ | 27,952 | $ | 13,011 | |||||
Income
(loss) from continuing operations before income taxes is summarized as
follows:
|
For
the years ended December 31,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
Domestic
|
$ | (23,107 | ) | $ | 75,416 | $ | 43,821 | ||||
|
Foreign
|
(2,005 | ) | (342 | ) | (9,152 | ) | |||||
|
Total
|
$ | (25,112 | ) | $ | 75,074 | $ | 34,669 | ||||
The
reconciliation of income tax (benefit) expense computed at the U.S. federal
statutory tax rates to income tax (benefit) expense from continuing operations
is as follows:
|
For
the years ended December 31,
|
|||||||||||||||||||||||
|
2008
|
2007
|
2006
|
|||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||||||
|
Tax
at U.S. statutory rates
|
$ | (8,790 | ) | 35.0 | % | $ | 26,276 | 35.0 | % | $ | 12,134 | 35.0 | % | ||||||||||
|
State
income taxes, net of federal tax benefit
|
943 | (3.7 | ) | 1,587 | 2.1 | 699 | 2.0 | ||||||||||||||||
|
Foreign
income taxes
|
131 | (0.5 | ) | 17 | − | 458 | 1.3 | ||||||||||||||||
|
Increase
in valuation allowance
|
– | − | – | − | 54 | 0.1 | |||||||||||||||||
|
Nondeductible
expenses
|
119 | (0.5 | ) | 128 | 0.2 | 108 | 0.3 | ||||||||||||||||
|
Federal
and state credits
|
(155 | ) | 0.6 | (500 | ) | (0.7 | ) | (183 | ) | (0.5 | ) | ||||||||||||
|
Nondeductible
portion of goodwill impairment
|
6,240 | (24.8 | ) | − | − | − | − | ||||||||||||||||
|
Other
|
(911 | ) | 3.6 | 444 | 0.6 | (259 | ) | (0.7 | ) | ||||||||||||||
| $ | (2,423 | ) | 9.7 | % | $ | 27,952 | 37.2 | % | $ | 13,011 | 37.5 | % | |||||||||||
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. was reduced to 28% from 30%.
Significant
components of the Company's deferred tax assets and liabilities are as
follows:
|
December
31,
|
|||||||
|
2008
|
2007
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Inventory
obsolescence reserve
|
$ | 1,997 | $ | 1,998 | |||
|
Product
warranty accruals
|
659 | 734 | |||||
|
Exit,
disposal, certain severance and other charges accruals
|
809 | 281 | |||||
|
Other
nondeductible accruals
|
6,815 | 4,932 | |||||
|
Credit
carryforwards
|
376 | 996 | |||||
|
Net
operating loss carryforwards
|
7,693 | 6,194 | |||||
|
Total
deferred tax assets
|
18,349 | 15,135 | |||||
|
Deferred
tax liabilities:
|
|||||||
|
Amortization
of intangible assets
|
8,613 | 26,533 | |||||
|
Property,
plant and equipment
|
2,542 | 2,071 | |||||
|
Total
deferred tax liabilities
|
11,155 | 28,604 | |||||
|
Valuation
allowance
|
(6,334 | ) | (6,445 | ) | |||
|
Net
deferred tax asset (liability)
|
$ | 860 | $ | (19,914 | ) | ||
As of
December 31, 2008, the Company had state loss carryforwards of approximately
$13,637 (expiring in varying amounts from 2013 to 2028) 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 2008, the Company created state operating loss
carryforwards of $696. During 2007, the Company utilized income tax benefits
associated with continuing operations of $813 from federal operating loss
carryforwards, and $42 from state operating loss carryforwards.Also, the Company
has foreign net operating losses which have an indefinite carryforward
period.
During
2007, the Company utilized Alternative Minimum Tax (“AMT”) credit carryforwards
of approximately $850. Also, during 2008 and 2007, the Company
completed a study of research and development credits and recorded a tax benefit
of $122 and $295, respectively, 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 $323 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 2008, 2007 or
2006.
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 the U.S generally
accepted accounting principles, 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
2008, the Company’s income tax valuation allowance decreased by $111 to $6,334
from $6,445, primarily due to the expiration of certain state net operating loss
carryforwards that had full valuation allowances recorded against
them.
As of
December 31, 2008, there were approximately $2,504 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 $1,637, $1,608 and $1,719 as of December 31, 2008, 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:
|
2008
|
2007
|
|||||
|
Balances
at beginning of
year
|
$ | 1,608 | $ | 1,719 | ||
|
Tax
positions related to the current
year
|
29 | 73 | ||||
|
Settlements
with tax
authorities
|
– | (184 | ) | |||
|
Balances
at end of
year
|
$ | 1,637 | $ | 1,608 | ||
The last
year of the Company’s tax returns that was 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
|
2005-2007
|
|
|
Illinois
|
2007-2007
|
|
|
Missouri
|
2005-2007
|
|
|
Oklahoma
|
1999-2007
|
|
|
Texas
|
2004-2007
|
|
|
United
Kingdom
|
2007-2007
|
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 operations rather than
income tax (benefit) expense. The Company classifies any income tax
penalties as part of selling, general and administrative expense in its
consolidated statements of operations.
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, which expired
on March 16, 2008, (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 ten 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 493,728, 842,169 and 1,195,679 as of December 31, 2008, 2007
and 2006, respectively.
Stock
Options
A summary
of the Plans’ stock option activities during the year ended December 31, 2008 is
presented below:
|
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining Contractual Term (in years)
|
Aggregate
Intrinsic Value
|
||||||||
|
Outstanding
at January 1, 2008
|
1,514,727 | $ | 21.84 | ||||||||
|
Granted
at market price
|
288,777 | $ | 22.10 | ||||||||
|
Exercised
|
(19,166 | ) | $ | 13.23 | |||||||
|
Forfeited
|
(28,336 | ) | $ | 28.12 | |||||||
|
Expired
|
(8,980 | ) | $ | 23.31 | |||||||
|
Outstanding
at December 31, 2008
|
1,747,022 | $ | 21.87 |
6.0
|
$ |
754
|
|||||
|
Vested
and expected to vest at December 31, 2008
|
1,738,290 | $ | 21.88 |
6.0
|
$ |
754
|
|||||
|
Exercisable
at December 31, 2008
|
1,247,422 | $ | 21.07 |
4.9
|
$ |
754
|
|||||
The
aggregate intrinsic value in the table above represents the difference between
the Company’s closing stock price on December 31, 2008 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, 2008,
2007 and 2006 was $160, $3,119 and $3,778, respectively. The weighted
average fair value of stock options granted during the years ended December 31,
2008, 2007 and 2006 is estimated at $6.74, $8.79 and $8.67, respectively. The
Company estimates that as of December 31, 2008 it had $1,598 of total
unrecognized compensation cost related to stock options granted under the Plans,
which is expected to be recognized over the weighted-average period of 1.3
years.
The
following summarizes information about options outstanding as of
December 31, 2008:
|
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 | 31,000 |
2.35
years
|
$ | 5.06 | 31,000 | $ | 5.06 | |||||
| $ | 8.01 - $12.00 | 82,000 |
3.28
years
|
$ | 10.09 | 82,000 | $ | 10.09 | |||||
| $ | 12.01 - $18.00 | 518,312 |
5.85
years
|
$ | 15.46 | 488,312 | $ | 15.37 | |||||
| $ | 18.01 - $27.00 | 616,506 |
7.66
years
|
$ | 22.96 | 243,703 | $ | 23.38 | |||||
| $ | 27.01 - $32.00 | 499,204 |
4.89
years
|
$ | 30.16 | 402,407 | $ | 30.07 | |||||
| 1,747,022 |
6.03
years
|
$ | 21.87 | 1,247,422 | $ | 21.07 | |||||||
Restricted
Stock
The
following summarizes the status of Restricted Stock as of December 31, 2008 and
changes during the year ended December 31, 2008:
|
Number
of
Shares
|
Weighted
Average Grant-Date Fair Value
|
||||
|
Unvested
balance at January 1, 2008
|
224,625 | $ |
25.83
|
||
|
Granted
|
140,417 | $ |
21.39
|
||
|
Vested
|
(96,040 | ) | $ |
23.96
|
|
|
Forfeited
|
(27,476 | ) | $ |
26.43
|
|
|
Unvested
balance at December 31, 2008
|
241,526 | $ |
23.93
|
||
The
Company estimates that as of December 31, 2008 it had $2,759 of total
unrecognized compensation cost related to Restricted Stock granted under the
Plans, which is expected to be recognized over the weighted-average period of
1.3 years. The total fair value of shares that vested during the
years ended December 31, 2008, 2007 and 2006 was $2,201, $2,312 and $1,375,
respectively. During the years
ended December 31, 2008, 2007 and 2006, the Company recognized compensation
expense of $2,607 ($1,645 net of income taxes), $2,542 ($1,624 net of income
taxes) and $1,509 ($953 net of income taxes), respectively, related to
Restricted Stock awards.The weighted average grant-date fair value of Restricted
Stock granted during 2007 and 2006 was $28.43 and $24.51,
respectively.
Note
11. Repurchases
of Common Stock
On
February 28, 2008, the Company’s Board of Directors authorized a plan for the
Company to repurchase up to $50,000 of its common stock during
2008. The repurchases were made (i) pursuant to a plan complying with
Rule 10b5-1 under the Securities Exchange Act of 1934, and (ii) in accordance
with Rule 10b-18 under the Securities Exchange Act. Pursuant to this
program, the Company purchased 2,489,671 shares of its common stock at an
aggregate cost of $50,075 including broker commissions and transaction fees,
during the year ended December 31, 2008.
During
the years ended December 31, 2008 and 2007, certain officers and employees of
the Company delivered to the Company 22,784 and 17,026 shares of the Company’s
common stock in payment of $515 and $487, respectively, of minimum 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, 27,476 and 7,978 shares of the Company’s common stock were returned to
treasury, at no cost, due to the forfeiture of Restricted Stock awards during
2008 and 2007, 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,
|
|||||||||
|
2008
|
2007
|
2006
|
|||||||
|
Numerator:
|
|||||||||
|
Income
(loss) from continuing operations
|
$ | (22,689 | ) | $ | 47,122 | $ | 21,658 | ||
|
Denominator:
|
|||||||||
|
Weighted-average
common shares outstanding
|
20,877,564 | 21,806,115 | 21,714,161 | ||||||
|
Effect
of dilutive securities: Common stock equivalents
|
- | 337,608 | 213,131 | ||||||
|
Denominator
for diluted earnings per common share
|
20,877,564 | 22,143,723 | 21,927,292 | ||||||
|
Per
common share -
basic
|
$ | (1.09 | ) | $ | 2.16 | $ | 1.00 | ||
|
Per
common share -
diluted
|
$ | (1.09 | ) | $ | 2.13 | $ | 0.99 | ||
Due to
the loss reported in 2008, the 2008 share calculation excludes the antidilutive
effect of stock options and Restricted Stock which would have been 207,861, had
the Company not reported a loss.
Note
13. Employee
Retirement Plans
The
Company’s defined contribution plan provides substantially all U.S. salaried and
hourly employees 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 $1,545, $1,346
and $1,134 for the years ended December 31, 2008, 2007, and 2006,
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, 2008. 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 consolidated
financial statements. At December 31, 2008 and 2007, the trust’s
assets were $5,126 and $3,019 and the corresponding compensation liability,
included in the long term portion of deferred compensation, was $5,107 and
$3,000, 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 (loss). The following is a summary of the
trust’s assets:
|
December
31,
|
|||||||
|
2008
|
2007
|
||||||
|
Cost
basis of
investments
|
$ | 5,612 | $ | 3,043 | |||
|
Gross
unrealized holding
gains
|
− | 10 | |||||
|
Gross
unrealized holding
losses
|
(486 | ) | (34 | ) | |||
|
Aggregate
fair
value
|
$ | 5,126 | $ | 3,019 | |||
During
2008, the Company’s gross realized gains and losses from its available-for-sale
securities were $64 and $184, respectively, and were classified in other income,
net. Prior to the 2008, gross realized gains and losses from these
investments were negligible.
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 $333, $370 and $334 for the years
ended December 31, 2008, 2007 and 2006, respectively.
Note
14. Accumulated Other
Comprehensive Income (Loss)
The
balances included in accumulated other comprehensive income (loss) were as
follows:
|
December
31,
|
|||||||
|
2008
|
2007
|
||||||
|
Foreign
currency translation adjustments
|
$ | (710 | ) | $ | 3,781 | ||
|
Unrealized
loss on available-for-sale securities, net of income taxes
|
(259 | ) | (15 | ) | |||
|
Accumulated
other comprehensive income (loss)
|
$ | (969 | ) | $ | 3,766 | ||
Note
15. Discontinued
Operations
During
2008, the Company concluded that the potential return on the investment for the
NuVinci CVP project was not sufficient to continue development
activities. As a result, the Company sold certain tangible and
intangible assets related to NuVinci to Fallbrook Technologies Inc. for a total
of $6,103 ($4,151 paid in cash and an 8% promissory note in the principal amount
of $1,952 which was paid in full on December 31, 2008). As part of
this decision, the Company recorded pre-tax charges of $1,911 during 2008
related to the exit from this project, including charges of (i) $1,020 for
termination benefits, (ii) $469 for certain inventory deemed unusable by
Fallbrook, (iii) $228 primarily related to the write-off of capitalized patent
development costs, and (iv) $194 related to the disposal of certain fixed
assets. Net sales for the NuVinci CVP project were $752, $1,535 and
$83 for the years ended December 31, 2008, 2007 and 2006,
respectively.
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 2008 and 2007, the Company recorded
pre-tax income of $53 and a pre-tax charge of $613, respectively, primarily
related to 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 for the year ended
December 31, 2006. As of December 31, 2008 and 2007, the current
liabilities of the discontinued Independent Aftermarket businesses were
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.
During
2004, GM 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 2006, the Company recorded a
charge of $44 (net of income taxes of $24), related to the closure of this
operating unit.
In
October 2000, the Company sold its ATC Distribution Group business unit (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 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,
|
|||||||||||
|
2008
|
2007
|
2006
|
|||||||||
|
NuVinci:
|
|||||||||||
|
Loss
from sale and exit
|
$ | (1,911 | ) | $ | − | $ | − | ||||
|
Operating
loss
|
(2,418 | ) | (11,689 | ) | (6,422 | ) | |||||
|
Loss
before income taxes
|
(4,329 | ) | (11,689 | ) | (6,422 | ) | |||||
|
Income
tax benefit
|
1,818 | 4,548 | 2,505 | ||||||||
|
Loss
from Nuvinci project, net of income taxes
|
(2,511 | ) | (7,141 | ) | (3,917 | ) | |||||
|
Independent
Aftermarket:
|
|||||||||||
|
Gain
(loss) from closure and sale of businesses
|
46 | (266 | ) | (13,261 | ) | ||||||
|
Operating
income (loss)
|
7 | (355 | ) | (1,576 | ) | ||||||
|
Non-operating
income
|
− | 8 | 143 | ||||||||
|
Income
(loss) before income taxes
|
53 | (613 | ) | (14,694 | ) | ||||||
|
Income
tax (expense) benefit
|
(22 | ) | 239 | 4,960 | |||||||
|
Gain
(loss) from Independent Aftermarket, net of income taxes
|
31 | (374 | ) | (9,734 | ) | ||||||
|
Gastonia
Operations:
|
|||||||||||
|
Other
costs and
expenses
|
− | − | (68 | ) | |||||||
|
Loss
before income
taxes
|
− | − | (68 | ) | |||||||
|
Income
tax
benefit
|
− | − | 24 | ||||||||
|
Loss
from Gastonia operations, net of income taxes
|
− | − | (44 | ) | |||||||
|
ATC Distribution
Group:
|
|||||||||||
|
Income
before income
taxes
|
− | − | 90 | ||||||||
|
Income
tax
expense
|
− | − | (30 | ) | |||||||
|
Gain
from ATC Distribution Group, net of income taxes
|
− | − | 60 | ||||||||
|
Loss
from discontinued operations, net of income taxes
|
$ | (2,480 | ) | $ | (7,515 | ) | $ | (13,635 | ) | ||
Details
of assets and liabilities of discontinued operations are as
follows:
|
December 31,
|
|||||
|
2008
|
2007
|
||||
|
Assets:
|
|||||
|
NuVinci:
|
|||||
|
Accounts
receivable
|
$ | 52 | $ | 476 | |
|
Inventory
|
− | 1,601 | |||
|
Prepaid
and other assets
|
− | 331 | |||
|
Property,
plant and equipment, net
|
− | 4,525 | |||
|
Intangible
assets, net
|
− | 681 | |||
|
Total
assets of discontinued operations
|
$ | 52 | $ | 7,614 | |
|
Liabilities:
|
|||||
|
NuVinci:
|
|||||
|
Current
liabilities
|
$ | 363 | $ | 506 | |
|
Independent
Aftermarket:
|
|||||
|
Current
liabilities
|
90 | 283 | |||
|
Total
liabilities of discontinued operations
|
$ | 453 | $ | 789 | |
Note
16. Commitments and
Contingencies
The
Company leases certain facilities and equipment under various operating lease
agreements, which expire on various dates through 2019. Facility
leases that expire generally are expected to be renewed or replaced by other
leases. Future minimum rental commitments under non-cancelable
operating leases with terms in excess of one year are as follows:
|
For the years ended
December 31,
|
Operating
Leases
|
||
|
2009
|
$ | 7,291 | |
|
2010
|
3,685 | ||
|
2011
|
2,649 | ||
|
2012
|
2,439 | ||
|
2013
|
2,129 | ||
|
2014
and thereafter
|
3,029 | ||
|
Total
minimum lease payments
|
$ | 21,222 | |
Rent
expense for all operating leases approximated $10,892, $9,245 and $8,805 for the
years ended December 31, 2008, 2007 and 2006, respectively. The
Company has several operating leases that expire in 2009 and 2010 with rental
commitments of $4,190 in 2009 and $724 in 2010. The Company expects
to renew most of these leases with the exception of the lease for the
Springfield, Missouri facility, which has a 2009 rental commitment of $568 and
is being closed in 2009 (see Note 18 - Exit, Disposal, Certain
Severance and Other Charges). The foregoing table does not reflect
the expected renewal of the expiring leases.
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, 2008, 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 consolidated
financial statements.
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 ATC Distribution Group, a former segment of the
Company’s business was 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 ATC 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 ATC Distribution Group
relating to periods prior to the DG Sale, subject to an $850
deductible ($100 in the case of the closed facilities) and a $12,000 cap (except
with respect to closed facilities) and (iii) any tax liability of the ATC
Distribution Group relating to periods prior to the DG Sale.
Note
17. Segment
Information
Within
the Company, financial performance is measured by lines of
business. The Company aggregates certain of its operating units to
form two reportable segments: the 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. The
principal customers are currently in the wireless, consumer electronics and
automotive industries and include AT&T, TomTom, Nokia, LG, T-Mobile, TiVo,
SonyEricsson, GM and Delphi. The Drivetrain segment primarily sells
remanufactured transmissions to Ford, Honda, Allison, Chrysler, GM 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 OEMs in Europe. 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. 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
|
|||||||||||||
|
2008:
|
|||||||||||||||||
|
Net
sales from external customers
|
$ | 353,416 | $ | 177,144 | $ | − | $ | − | $ | 530,560 | |||||||
|
Depreciation
and amortization expense
|
6,454 | 8,114 | − | − | 14,568 | ||||||||||||
|
Impairment
of goodwill
|
− | 79,146 | − | − | 79,146 | ||||||||||||
|
Exit,
disposal, certain severance and other charges
|
269 | 10,741 | − | − | 11,010 | ||||||||||||
|
Operating
income (loss)
|
56,234 | (81,291 | ) | − | − | (25,057 | ) | ||||||||||
|
Total
assets
|
124,959 | 129,952 | 27,379 | 52 | 282,342 | ||||||||||||
|
Goodwill
|
16,238 | 36,991 | − | − | 53,229 | ||||||||||||
|
Expenditures
of long-lived assets, net
|
7,747 | 2,942 | 643 | − | 11,332 | ||||||||||||
|
2007:
|
|||||||||||||||||
|
Net
sales from external customers
|
$ | 293,917 | $ | 235,254 | $ | − | $ | − | $ | 529,171 | |||||||
|
Depreciation
and amortization expense
|
5,643 | 9,230 | − | − | 14,873 | ||||||||||||
|
Exit,
disposal, certain severance and other charges (credits)
|
(17 | ) | 3,390 | − | − | 3,373 | |||||||||||
|
Operating
income
|
45,038 | 29,748 | − | − | 74,786 | ||||||||||||
|
Total
assets
|
96,688 | 232,641 | 52,431 | 7,614 | 389,374 | ||||||||||||
|
Goodwill
|
16,238 | 116,137 | − | − | 132,375 | ||||||||||||
|
Expenditures
of long-lived assets, net
|
9,848 | 9,388 | 138 | − | 19,374 | ||||||||||||
|
2006:
|
|||||||||||||||||
|
Net
sales from external customers
|
$ | 263,405 | $ | 234,486 | $ | − | $ | − | $ | 497,891 | |||||||
|
Depreciation
and amortization expense
|
5,455 | 8,258 | − | − | 13,713 | ||||||||||||
|
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 | 15,398 | − | − | 39,790 | ||||||||||||
|
Total
assets
|
90,604 | 233,849 | 17,877 | 3,347 | 345,677 | ||||||||||||
|
Goodwill
|
16,238 | 116,137 | − | − | 132,375 | ||||||||||||
|
Expenditures
of long-lived assets
|
5,871 | 4,658 | 107 | − | 10,636 | ||||||||||||
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,
|
||||||||
|
2008
|
2007
|
2006
|
||||||
|
Net sales:
|
||||||||
|
United
States
|
$ | 508,380 | $ | 502,048 | $ | 471,430 | ||
|
Europe
and
Canada
|
22,180 | 27,123 | 26,461 | |||||
|
Consolidated
net
sales
|
$ | 530,560 | $ | 529,171 | $ | 497,891 | ||
|
Long-lived assets:
|
||||||||
|
United
States
|
$ | 110,547 | $ | 190,357 | $ | 183,207 | ||
|
Europe
|
2,014 | 2,954 | 3,528 | |||||
|
Assets
of discontinued
operations
|
− | 5,206 | 2,112 | |||||
|
Consolidated
long-lived
assets
|
$ | 112,561 | $ | 198,517 | $ | 188,847 | ||
During
the year ended December 31, 2008, net sales from each of four customers amounted
to 10 percent or more of the Company’s net sales. For the years ended
December 31, 2008, 2007 and 2006, sales to AT&T (Logistics segment)
accounted for $226,994, $195,302 and $208,250, TomTom (Logistics segment)
accounted for $73,420, $16,440 and $1,096, Ford (Drivetrain segment) accounted
for $58,127, $75,922 and $68,710, and Honda (Drivetrain segment) accounted for
$52,092, $83,040 and $77,630, respectively.
Note
18. 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.
General Activities Relating
to Exit, Disposal, Certain Severance and Other Charges:
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.
In 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.
In 2008,
the Company recorded charges of $1,342 consisting of (i) $850 of termination
benefits primarily related to cost reduction activities and the reorganization
of certain management functions in the Drivetrain segment, (ii) $231 of
termination benefits primarily related to cost reduction activities and the
reorganization of certain functions within the Logistics segment’s information
technology group, (iii) $223 of certain legal and other
professional fees unrelated to ongoing operating activities of the Drivetrain
segment and, (iv) $38 of asset write-offs related to the wind-down of activities
with a customer in the Logistics segment.
Facilities Consolidation
Costs – Drivetrain Segment
During
2008, the Company’s Drivetrain customers and the supporting supply base
experienced unprecedented distress due to the significant adverse changes in the
North American vehicle industry due to the economic slowdown. On
December 9, 2008, the Company announced the restructuring of its North American
Drivetrain operations, including the 2009 closure of its Springfield, Missouri
automatic transmission remanufacturing facility and the consolidation of its
operations into the existing Company-owned Drivetrain facility in Oklahoma City,
Oklahoma. The closure of the Springfield facility is another step in
a series of cost-cutting moves that began in early 2008 and have continued
throughout the year to streamline the North American Drivetrain
business. The decision to consolidate these remanufacturing plants
was primarily driven by reduced customer volumes and the need for a
comprehensive restructuring of the Drivetrain business to align its capacity
with lower customer demand levels during this prolonged period of economic
uncertainty. The Company plans to move current production lines in
stages, thereby continuing uninterrupted and seamless delivery of product to its
customers, transferring all current Springfield production to Oklahoma City over
the first six months of 2009, to coincide with the expiration of the Springfield
facility lease at the end of 2009.
As a
result of these restructuring activities, during the fourth quarter of 2008, the
Company recorded $9,668 of exit, disposal, certain severance and other charges
which included (i) $7,310 for the write-down of raw materials inventory due to
the determination of excess quantities of raw materials on hand as a result of
the recent decline in volume and the consolidation of facilities (classified as
cost of sales – products), which includes the disposal of $6,598 of inventory,
(ii) $1,896 of severance costs primarily for employees being terminated as part
of the closure of the Springfield facility, (iii) $304 of costs related to fixed
asset disposals (classified as cost of sales – products), and (iv) $158 of other
plant consolidation costs.
Following
is an analysis of the reserves related to this activity:
|
Termination
Benefits
|
Exit/Other
Costs
|
Loss
on
Write-Down
of
Assets
|
Total
|
||||||||||||
|
Total
amount expected to be incurred
|
$ | 3,846 | $ | 2,808 | $ | 8,364 | $ | 15,018 | |||||||
|
Total
amount incurred to date
|
$ | 1,896 | $ | 158 | $ | 7,614 | $ | 9,668 | |||||||
|
Reserve
as of December 31, 2007
|
$ | − | $ | − | $ | − | $ | − | |||||||
|
Provision
2008
|
1,896 | 158 | 7,614 | 9,668 | |||||||||||
|
Payments 2008
|
(418 | ) | (128 | ) | − | (546 | ) | ||||||||
|
Asset
write-offs
|
− | − | (6,598 | ) | (6,598 | ) | |||||||||
|
Reserve
as of December 31, 2008
|
$ | 1,478 | $ | 30 | $ | 1,016 | $ | 2,524 | |||||||
The
balance in the loss on write-down of assets of $1,016 as of December 31, 2008,
is included in inventory reserves.
Note
19. Selected
Quarterly Financial Data (Unaudited)
|
Quarter
|
||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||
|
2008:
|
||||||||||||
|
Net
sales
|
$ | 129,542 | $ | 135,622 | $ | 138,919 | $ | 126,477 | ||||
|
Gross
profit
|
32,260 | 29,057 | 31,348 | 21,934 | ||||||||
|
Impairment
of goodwill
|
– | – | – | 79,146 | ||||||||
|
Exit,
disposal, certain severance and other charges
|
966 | 152 | 214 | 9,678 | ||||||||
|
Income
(loss) from continuing operations
|
11,085 | 8,960 | 10,164 | (52,898 | ) | |||||||
|
Net
income (loss)
|
8,573 | 8,994 | 10,162 | (52,898 | ) | |||||||
|
Income
(loss) from continuing operations per common share – basic
|
$ | 0.51 | $ | 0.43 | $ | 0.49 | $ | (2.66 | ) | |||
|
Income
(loss) from continuing operations per common share –
diluted
|
$ | 0.50 | $ | 0.42 | $ | 0.48 | $ | (2.66 | ) | |||
|
2007:
|
||||||||||||
|
Net
sales
|
$ | 131,269 | $ | 130,357 | $ | 133,260 | $ | 134,285 | ||||
|
Gross
profit
|
32,230 | 34,193 | 34,862 | 36,156 | ||||||||
|
Exit,
disposal, certain severance and other charges
|
– | 1,226 | 62 | 2,085 | ||||||||
|
Income
from continuing operations
|
11,611 | 11,638 | 12,848 | 11,025 | ||||||||
|
Net
income
|
9,674 | 10,072 | 10,741 | 9,120 | ||||||||
|
Income
from continuing operations per common share – basic
|
$ | 0.54 | $ | 0.53 | $ | 0.59 | $ | 0.50 | ||||
|
Income
from continuing operations per common share –diluted
|
$ | 0.53 | $ | 0.53 | $ | 0.58 | $ | 0.49 | ||||
Due to
the loss reported in the fourth quarter of 2008, the applicable per share
calculations above exclude the antidilutive effect of stock options and
Restricted Stock. As a result, loss per share – basic is the same as
loss per share – diluted during the fourth quarter of 2008.
In
addition, due to (i) quarterly share count changes caused in part by the
Company’s repurchases of common stock made during 2008 and its effect on the
weighted average number of common shares outstanding, and (ii) the loss reported
in the fourth quarter of 2008, the quarterly per share amounts in the table
above do not add up to the total loss per share for the year ended December 31,
2008.
During
the fourth quarter of 2008, the Company recorded (i) a goodwill impairment
charge of $79,146 ($56,776 net of income taxes, which includes an income tax
benefit of $412 from the revaluation of certain deferred tax assets primarily
related to tax deductible goodwill) related to the North American Drivetrain
segment operation, and (ii) exit, disposal, certain severance and other charges
of $9,668 ($6,091 net of income taxes) related to the restructuring activities
in the Drivetrain segment, including $7,614 of costs primarily related to the
write-down of raw materials inventory, which are classified as cost of sales –
products in the consolidated statement of operations.
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 – products in the consolidated statement
of operations during the second and fourth quarters of 2007,
respectively.
Note
20. Subsequent
Event
On
February 10, 2009, the Company borrowed $70,000 in principal amount under the
Credit Facility in order to increase its cash position to preserve financial
flexibility in light of the current uncertainty in the credit
markets. The remaining undrawn capacity of the Credit Facility after
giving effect to this borrowing and various outstanding letters of credit is
$79,110.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
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, 2008 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, 2008.
(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 2008 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, 2008:
|
Name
|
Age
|
Positions
|
|
Donald
T. Johnson, Jr.
|
56
|
Chairman
of the Board and Chief Executive Officer(1)
|
|
Todd
R. Peters
|
46
|
President
and Chief Operating Officer(2)
|
|
Ashoka
Achuthan
|
53
|
Vice
President and Chief Financial Officer
|
|
John
J. Machota
|
56
|
Vice
President, Human Resources
|
|
John
M. Pinkerton
|
51
|
Vice
President and Chief Accounting Officer
|
|
Mary
T. Ryan
|
55
|
Vice
President, Communications and Investor Relations
|
|
Joseph
Salamunovich
|
49
|
Vice
President, General Counsel and Secretary
|
|
F.
Antony Francis
|
59
|
President,
ATC Logistics
|
|
Richard
L. Stanley
|
52
|
President,
ATC Drivetrain
|
|
Robert
L. Evans
|
56
|
Director
|
|
Curtland
E. Fields
|
57
|
Director
|
|
Dr.
Michael J. Hartnett
|
63
|
Director
|
|
Michael
D. Jordan
|
62
|
Lead
Director(3)
|
|
S.
Lawrence Prendergast
|
67
|
Director
|
|
Edward
Stewart
|
66
|
Director(3)
|
_______________________
|
(1)
|
Mr.
Johnson ceased to be Chief Executive Officer effective January 1, 2009,
and will cease to be Chairman of the Board effective at the annual meeting
of stockholders in June 2009.
|
|
(2)
|
Mr.
Peters became President, Chief Executive Officer and a member of the Board
of Directors effective January 1,
2009.
|
|
(3)
|
Mr.
Stewart succeeded Mr. Jordan as Lead Director effective January 1,
2009.
|
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. In May 2008 he ceased to be President and in January 2009 he
ceased to be Chief Executive Officer. 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. He was appointed President and Chief Operating
Officer in May 2008 and became President, Chief Executive Officer and a member
of the Board of Directors in January 2009. 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.
Ashoka Achuthan, joined us as
Vice President and Chief Financial Officer on December 8, 2008. Prior
to joining us, Mr. Achuthan served as Vice President and Chief Financial Officer
of Cooper Power Systems, Inc. (a division of Cooper Industries) from 2005 to
2008. Before that, he spent 25 years with Siemens AG in increasingly
responsible financial positions, including serving as Executive Vice President
and CFO of Siemens VDO Automotive Corporation from 2000 to
2005. Mr. Achuthan holds an M.B.A. from Case Western Reserve
University and is a member of the Institute of Chartered Accountants of
India.
John J. Machota joined us as
Vice President, Human Resources in 1997. From 1996 to 1997, he was a
self-employed human resources consultant. Before that he spent ten
years with Waste Management , Inc. in various human resources positions
including Vice President, Compensation from 1995 to 1996 and Vice President,
Human Resource Services from 1993 to 1995. 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. In December 2008 Mr. Pinkerton became Vice
President and Chief Accounting Officer. 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. 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.
F. Antony Francis joined us
in July 2007 as Vice President and General Manager of OEM Services for our ATC
Logistics business and became President of ATC Logistics in June 2008. Prior to joining us, Mr.
Francis was President and Chief Operating Officer of Plan Express, Inc., a
provider of construction document management, printing, and logistics solutions,
from 2005. From 2001 to 2002 and again from 2003 to 2005
Mr. Francis was with Commerce Chain Consulting, during portions of which
time he served as interim Chief Executive Officer of MRM Fulfillment, Inc., a
third party logistics provider, and acting Chief Operating Officer of NewRoads,
Inc, a catalog and e-commerce fulfillment provider. Between 2002 and
2003, he was Vice President of worldwide customer operations for Perkin Elmer’s
Life and Analytical Sciences division. From 1999 to 2001 Mr. Francis
was Vice President of Global Operations of SciQuest.com, an e-commerce
transaction market place for scientific products. Between 1988 and
1999 Mr. Francis held increasingly responsible positions with Federal Express
Corporation, including Vice President/General Manager, Europe, Middle East and
Africa for FedEx’s Logistics, Electronic Commerce and Customer Services
division. Mr. Francis is a graduate of The City of London Polytechnic
and is a Fellow of the Institute of Chartered Accountants in England and
Wales.
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.
Robert L. Evans became a director of ATC
Technology Corporation 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 ATC
Technology Corporation in December 2004. Mr. Fields is President
and Chief Executive Officer and a trustee of the Turrell Fund, a private
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 ATC Technology Corporation 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 ATC Technology Corporation in May 2004 and served as Lead Director
from June 2005 to January 2009. 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 ATC Technology Corporation 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 ATC
Technology Corporation in December 2004 and Lead Director in January
2009. 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 2008 were filed on a timely basis.
Code
of Ethics
We have
adopted a code of ethics that applies to our directors, executive 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
Over the
following pages, we discuss how our Chief Executive Officer (“CEO”), Chief
Financial Officer (“CFO”) and four other most highly compensated executive
officers (our “Named Executive Officers” or “NEOs”) were compensated in 2008,
and describe how this compensation fits into our executive compensation
philosophy.
Company
Performance and Effect of Recent Economic Volatility
During
2008, we faced many of the same challenges confronting all of American business
as we had to deal with the unprecedented economic and financial conditions
impacting the US economy and, more specifically, the automotive
sector. While our Logistics segment continued its steady
year-over-year growth with revenue increasing by 20.2% during 2008, our
Drivetrain segment was severely impacted by the economic distress being
experienced by our automotive customers and saw annual revenues decrease by
approximately 25% from their 2007 levels. While our 2008 operating
plans included significant cost reductions from lean and continuous improvement
activities, both segments took additional actions throughout the year to further
control costs in light of the changing economic environment. To more
closely reflect the declining sales of our North American automotive customers,
we initiated a restructuring and consolidation of the Drivetrain segment and
recorded charges of $9.7 million related to these
activities. Furthermore, the recent adverse changes in the North
American automotive industry that have depressed the outlook and valuations for
automotive-related businesses coupled with the significant changes in volumes
from our North American automotive customers caused us to reassess the carrying
value of the goodwill related to this business. Based on our
valuation work we recorded a goodwill impairment charge of $79.1
million. As a result, we reported a loss from continuing operations
per share for 2008 of $1.09 or adjusted earnings per share (“EPS”) of $1.91
excluding the goodwill impairment and restructuring charges.
Changes
to Named Executive Officers During 2008
During
2008, several management changes occurred, predicated by the planned retirements
of key executives. Donald T. Johnson, Jr. announced his plans to
retire at the conclusion of his current Board term in June 2009. As part of the
Company’s leadership succession process, the Board appointed Todd R. Peters, who
had been serving as Vice President and CFO, to President and Chief Operating
Officer (“COO”) in May 2008 so that he could work more closely with Mr. Johnson
on operational issues. In July 2008, William L. Conley, Jr. retired
as President of our Logistics segment and was succeeded by F. Antony Francis,
who had been serving as Vice President and General Manager of our Logistics
segment. In December 2008 we hired Ashoka Achuthan to fill the CFO
position vacated as a result of Mr. Peters’ promotion and also appointed John
Pinkerton as Chief Accounting Officer (“CAO”). To complete the
leadership transition, Mr. Peters was promoted to President and CEO and elected
to the Board of Directors as of January 1, 2009, with Mr. Johnson retaining his
Chairman position.
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 and approves the compensation of all
executive officers including the 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 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 2008, 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 and change-in-control, along with providing market data on
independent director compensation programs.
2008
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. During 2008, the consultant
provided competitive compensation analysis relating to the CEO position that the
Committee and the Board used to establish the 2009 compensation level for our
new CEO. Additionally, the independent compensation consultant
conducted and provided similar compensation data for all other executive
officers, which was to be used in the 2009 compensation review
process.
For
purposes of competitive market analysis, the Committee reviews 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 2008, 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, especially in
light of the increasing importance of our Logistics segment. 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 2008 peer group is slightly different than the 2007
group, with increased emphasis on logistics businesses, reflecting the growing
importance of our Logistics segment to the Company. The named
companies used for benchmarking in 2008 include:
|
• Accuride
Corporation
|
• Landstar System,
Inc.
|
|
• Brightpoint,
Inc.
|
• LKQ
Corporation
|
|
• Dorman
Products, Inc.
|
• ModusLink Global
Solutions, Inc.
|
|
• Dynamex,
Inc.
|
• Pacer International,
Inc.
|
|
• Forward Air
Corporation
|
• Park-Ohio Holdings
Corp.
|
|
• Fuel Systems
Solutions, Inc.
|
• Proliance
International, Inc.
|
|
• Gentex
Corporation
|
• Standard Motor
Products, Inc.
|
|
• Hawk CP
CLA
|
• Stoneridge,
Inc.
|
|
• Hub Group,
Inc.
|
• UTi Worldwide,
Inc.
|
|
• InfoSonics
Corporation
|
• Velocity Express
Corporation
|
Competitive
Compensation Objectives
Our
executive compensation is based on a pay-for-performance philosophy, emphasizing
performance against measures that historically have correlated 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, while
variable compensation is targeted at the 50th percentile for annual incentives
and the 75th percentile for long-term incentives.
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 business responsibility increases. This provides additional upside potential
and downside risk for senior positions, recognizing that these roles have
greater influence on our overall performance.
The 2008
mix of total compensation for the NEOs is described in the table
below. Variable compensation represents 79% of CEO total target
compensation, and between 50%-70% of total target compensation for all other
NEOs. 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.
|
Name
|
Base
Salary
|
Annual
Incentive Target
|
Long-Term
Incentive Target
|
Total
|
||||
|
Donald
T. Johnson, Jr.
|
21%
|
18%
|
61%
|
100%
|
||||
|
Todd
R. Peters
|
31%
|
23%
|
46%
|
100%
|
||||
|
Ashoka
Achuthan
|
35%
|
21%
|
44%
|
100%
|
||||
|
F.
Antony Francis
|
35%
|
21%
|
44%
|
100%
|
||||
|
John
M. Pinkerton
|
46%
|
20%
|
34%
|
100%
|
||||
|
Richard
L. Stanley
|
35%
|
21%
|
44%
|
100%
|
The Base
Salary percentage included in the table above was calculated using the amounts
disclosed in the Summary Compensation Table appearing below. The
Annual Incentive Target and Long-Term Incentive Target percentages were
calculated using amounts disclosed in the Grants of Plan-Based Awards Table
appearing below. The elements of our executive compensation program
are described in more detail below.
Base
Salary
We
provide NEOs and other executive officers with a 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
market value 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 2008,
the Committee recommended and the Board concurred that Mr. Johnson’s base salary
be maintained at its 2007 level of $560,000. The Committee based this
decision on its evaluation of compensation data provided by the independent
compensation consultant showing that Mr. Johnson’s salary was reflective of the
competitive market. The average salary increase granted as of January
1, 2008 for the other executive officers, excluding Antony Francis and John
Pinkerton, was 3.4%, which closely reflected the average salary movement within
the comparator group. Messrs. Peters, Francis and Pinkerton received
promotional increases during the course of 2008, commensurate with their new
responsibilities, and are noted in the footnotes to the Summary Compensation
Table appearing below.
With his
appointment as CEO, effective January 1, 2009, Mr. Peters and the Board agreed
to a new employment agreement that set Mr. Peters’ base salary at $450,000 based
on his experience and competitive market data. Future increases, if
any, for Mr. Peters will be based on the Board’s assessment of his performance
and competitive compensation data.
While we
would have recommended 2009 merit increases and salary adjustments for the other
executive officers during the December 2008 Committee meeting, we decided to
freeze base salaries at 2008 levels until more is known about the impact of the
current economic environment on our businesses.
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 that is tied to business
results. 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 officers for exceptional
individual and corporate performance. Furthermore, under the terms of
the IC Plan, the Committee (or the Board in the case of the CEO) has the
discretion to evaluate the business results and exercise judgment to determine
the appropriate incentive payments.
Performance
Measures. We believe EPS and earnings before interest and
taxes (“EBIT”) are key indicators of financial
performance. Therefore, the primary corporate financial measure in
the IC Plan for 2008 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 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, a
minimum performance level must be achieved before any payment can be made for
that metric. For 2008, 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 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 (or the Committee in the case of
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 2008, the target incentive award was 90% of base salary
for the CEO, 75% of base salary for the COO, and 45% to 60% 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 2008
results. The
financial performance targets and results for 2008 were as follows:
|
Financial Measure
|
2008 IC Goal
|
2008 Actual
Results
|
2008
Adjusted Results(1)
|
|
Corporate
EPS
|
$1.86
|
$(1.09)
|
$1.91
|
|
Drivetrain
EBIT(2)
|
$28.6
million
|
$(81.3)
million
|
$7.5
million
|
|
Logistics
EBIT(2)
|
$49.8
million
|
$56.2
million
|
$56.2
million
|
_______________________
|
(1)
|
Excludes
$88.8 million of restructuring and goodwill impairment charges incurred in
the Drivetrain segment.
|
|
(2)
|
EBIT
is the operating income (loss) for the
segment.
|
The
Company’s reported loss from continuing operations per share of $1.09 for 2008
included (i) $9.7 million of restructuring charges in our Drivetrain segment and
(ii) $79.1 million of goodwill impairment charge based on a revaluation of
goodwill related to the Drivetrain business. These charges are
directly related to the economic conditions faced by our
automotive
customers and are considered by the Committee and the Board not to be indicative
of normal operations. As noted in the table above, if these charges
were excluded, the Company achieved adjusted EPS from continuing operations of
$1.91, which exceeded the $1.86 performance target for the IC
Plan. The Committee and the Board believe that the adjusted results
are a more accurate reflection of the Company’s 2008 performance.
In
addition to the adjusted EPS, other management achievements in 2008 included
completion of a $50 million stock repurchase program, ending the year with
approximately $17.2 million in cash and cash equivalents, and Logistics segment
growth of 20.2% over 2007.
In light
of the various actions taken by Management during 2008 to achieve the adjusted
EPS of $1.91 and the other 2008 achievements, the Committee determined that it
was appropriate to provide a bonus award for the EPS
component. Accordingly, the Committee (or the Board of Directors in
the case of the CEO) approved an incentive payment equal to 70% of target award
for the EPS component. In the judgment of the Committee and the
Board, this payment reflects the appropriate incentive reward for the strong
operating results and the strategic decisions made to reposition the
business. As a result, 2008 IC Plan payments to the NEOs were as
follows:
|
Name
|
Payout
Related
to
Adjusted
EPS
|
Payout
Related
to
Drivetrain
EBIT
|
PayoutRelated
to
Logistics
EBIT
|
Total
2008
Payout
under
the IC Plan
|
|||||||
|
Donald
T. Johnson, Jr.
|
$ | 352,800 |
NA
|
NA
|
$ | 352,800 | |||||
|
Todd
R. Peters
|
$ | 176,158 |
NA
|
NA
|
$ | 176,158 | |||||
|
Ashoka
Achuthan
|
NA
|
NA
|
NA
|
NA
|
|||||||
|
F.
Antony Francis
|
$ | 27,953 |
NA
|
$ | 128,174 | $ | 156,127 | ||||
|
John
M. Pinkerton
|
$ | 98,507 |
NA
|
NA
|
$ | 98,507 | |||||
|
Richard
L. Stanley
|
$ | 42,210 |
$0
|
NA
|
$ | 42,210 | |||||
There
were no discretionary adjustments to the bonus amounts made during 2008 for
quality and service performance.
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
performance. Our long-term incentive plan (“LTIP”), which was
approved and implemented in 2007, includes a stock component (both options and
restricted stock) and a cash component that rewards management for achieving
specific financial 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
the comparator group’s long-term incentive practices and our compensation
philosophy described above. For 2008, the economic value of the total
LTIP incentive award was set at 300% of salary for the CEO, 150% of salary for
the COO, 125% of salary for the CFO and business segment Presidents, and 75% of
salary for the Vice President and CAO. 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 appearing below 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 2008 for the NEOs, other than Messrs. Johnson and Achuthan,
took place at the Committee’s regularly scheduled meeting on June 3,
2008. These stock options have an exercise price of
$22.02. Mr. Johnson’s grant was approved by the Board on February 6,
2008, concurrent with the signing of his new employment agreement and his
options have an exercise price of $24.19. The Committee granted
options to Mr. Achuthan at the time of his hiring on December 8, 2008 with an
exercise price of $16.98. In each of these cases the exercise price
was equal to 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 33.3% per year over the first three years of the ten-year option
term. In the case of NEOs other than Mr. Johnson, vesting rights
cease in connection with termination of employment except in the case of the
NEO’s death, disability or termination without cause within 18 months after a
change in control, in which cases vesting is accelerated. For
Mr. Johnson, vesting may continue post-employment pursuant to a provision
of his employment agreement that provides for continued vesting under
certain circumstances. See “Potential Payments Upon Termination or
Change-In-Control” below.
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
Messrs. Johnson and Achuthan, on June 3, 2008 when the stock price was
$22.02. These restricted stock awards are nontransferable and will
vest at the rate of 33.3% per year. Mr. Johnson, in conjunction with
the signing of his new employment agreement, was granted a restricted stock
award on February 6, 2008 when the stock price was $24.19. On
December 8, 2008, when the stock price was $16.98, the Compensation Committee
granted Mr. Achuthan a restricted stock award based upon his employment and Mr.
Pinkerton a restricted stock award in recognition of his appointment as
CAO. All restricted stock awards have voting and dividend rights
(although we do not pay dividends). Awards of all restricted stock
require approval of the Committee (or the Board of Directors in the case of an
award to the CEO).
It is the
Committee’s intent to generally grant stock awards 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.
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 and the
2008-2010 LTIP performance period (we do not have a cash component of the LTIP
with respect to 2007-2009) 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. These metrics were selected because we believe that they are
key indicators and drivers of long-term stockholder value. Utilizing
the same approach as the annual plan, corporate officer positions are measured
entirely on Company results while business segment leadership is measured 70% on
such segment’s results and 30% on Company results.
Actual results for the
2006-2008 Performance Period. The financial
performance targets and results for the three years ended 2008 were as
follows:
|
Financial Measure
|
3-Year Goal
|
3-Year Actual
|
||||
|
ATC
|
||||||
|
CAGR
– Revenue
|
12.4 | % | 8.1 | % | ||
|
CAGR
– Net Income
|
12.9 | % | -164.9 | % | ||
|
ROIC
|
16.1 | % | -7.0 | % | ||
|
Drivetrain
|
||||||
|
CAGR
– Revenue
|
4.8 | % | -12.7 | % | ||
|
CAGR
– Net Income
|
3.5 | % | -225.5 | % | ||
|
ROIC
|
11.8 | % | -42.0 | % | ||
|
Logistics
|
||||||
|
CAGR
– Revenue
|
23.5 | % | 31.9 | % | ||
|
CAGR
– Net Income
|
28.2 | % | 46.8 | % | ||
|
ROIC
|
26.1 | % | 36.0 | % | ||
Based on
three-year financial results, the LTIP 2006-2008 performance period payments to
the NEOs were as follows:
|
Name
|
Payout
Related to Corporate Results
|
Payout
Related
to Drivetrain
Results
|
Payout
Related
to Logistics
Results
|
Total
2008
Payout
for the 2006-2008 LTIP
Performance
Period
|
|||||||
|
Donald
T. Johnson, Jr.
|
$ | 0 |
NA
|
NA
|
$ | 0 | |||||
|
Todd
R. Peters
|
$ | 0 |
NA
|
NA
|
$ | 0 | |||||
|
Ashoka
Achuthan
|
NA
|
NA
|
NA
|
NA
|
|||||||
|
F.
Antony Francis
|
$ | 0 |
NA
|
$ | 18,555 | $ | 18,555 | ||||
|
John
M. Pinkerton
|
$ | 0 |
NA
|
NA
|
$ | 0 | |||||
|
Richard
L. Stanley
|
$ | 0 |
$0
|
NA
|
$ | 0 | |||||
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 may 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 from the date of hire.
To
provide somewhat more competitive retirement benefits, we offer our executive
officers and other selected U.S.-based employees the opportunity 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
2008, 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
from the date of hire and is in addition to any matching contributions the NEO
receives under our Retirement Savings Plan. 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 2008 is included in the “Other
Compensation” column of the Summary Compensation Table appearing
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 one executive officer who has the use
of a drive audit vehicle (i.e., a vehicle provided to an employee, without
charge, for the purpose of testing our remanufactured products). The
Committee believes this auto allowance is consistent with typical market
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. Our former CEO
received $20,000 annually while our new CEO receives an annual allowance equal
to 3% of base salary for such expenses. This flexible structure
enables executives to select benefits based on their individual circumstances,
thereby raising 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 2008 is included in the “Other Compensation” column of the
Summary Compensation Table appearing 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 NEOs, see “Summary Compensation
Table” and “Potential Payments Upon Termination or Change-in-Control” appearing
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 2006, 2007 and 2008, for
services to us in all capacities, of the NEOs: