atc10q_033110.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the quarterly period ended March 31, 2010
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the transition period from______________________ to ______________________
Commission File Number 0-21803
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
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
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
As of April 23, 2010, there were 20,087,111 shares of common stock of the Registrant outstanding.
FORM 10-Q
Table of Contents
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Page Number
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PART I.
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Financial Information
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Item 1.
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Financial Statements:
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PART II.
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Other Information
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CONSOLIDATED BALANCE SHEETS
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(In thousands, except share and per share data)
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March 31,
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December 31,
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2010
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2009
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Assets
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(Unaudited)
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Current Assets:
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Cash and cash equivalents
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$ |
86,897 |
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$ |
73,803 |
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Short-term investments
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332 |
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3,976 |
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Accounts receivable, net
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81,327 |
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80,840 |
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Inventories
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47,957 |
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55,236 |
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Prepaid and other assets
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3,845 |
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3,398 |
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Refundable income taxes
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114 |
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495 |
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Deferred income taxes
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7,713 |
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8,278 |
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Total current assets
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228,185 |
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226,026 |
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Property, plant and equipment, net
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46,140 |
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46,939 |
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Debt issuance costs, net
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153 |
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193 |
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Goodwill
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16,238 |
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16,238 |
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Long-term investments
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1,859 |
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1,689 |
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Other assets
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868 |
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980 |
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Total assets
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$ |
293,443 |
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$ |
292,065 |
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Liabilities and Stockholders' Equity
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Current Liabilities:
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Accounts payable
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$ |
27,708 |
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$ |
34,272 |
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Accrued expenses and other
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22,309 |
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22,426 |
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Income taxes payable
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5,145 |
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2,496 |
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Deferred compensation
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449 |
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4,088 |
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Total current liabilities
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55,611 |
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63,282 |
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Deferred compensation, less current portion
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1,942 |
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1,776 |
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Other long-term liabilities
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2,114 |
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2,082 |
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Liabilities related to uncertain tax positions
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- |
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546 |
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Deferred income taxes
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1,877 |
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453 |
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Stockholders' Equity:
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Preferred stock, $.01 par value; shares authorized - 2,000,000; none issued
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- |
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- |
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Common stock, $.01 par value; shares authorized - 30,000,000;
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Issued (including shares held in treasury) - 28,043,616 and 27,999,389
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as of March 31, 2010 and December 31, 2009, respectively
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280 |
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280 |
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Additional paid-in capital
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245,371 |
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243,907 |
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Retained earnings
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119,001 |
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111,916 |
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Accumulated other comprehensive income (loss)
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(370 |
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176 |
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Common stock held in treasury, at cost - 7,956,505 and 7,930,699 shares
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as of March 31, 2010 and December 31, 2009, respectively
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(132,383 |
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(132,353 |
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Total stockholders' equity
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231,899 |
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223,926 |
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Total liabilities and stockholders' equity
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$ |
293,443 |
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$ |
292,065 |
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See accompanying notes.
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CONSOLIDATED STATEMENTS OF INCOME
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(In thousands, except per share data)
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For the three months ended March 31,
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2010
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2009
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(Unaudited)
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Net sales:
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Services
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$ |
75,097 |
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$ |
77,316 |
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Products
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29,433 |
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36,160 |
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Total net sales
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104,530 |
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113,476 |
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Cost of sales:
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Services
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56,656 |
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55,307 |
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Products
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26,670 |
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30,638 |
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Products - exit, disposal, certain severance and other charges
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- |
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380 |
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Total cost of sales
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83,326 |
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86,325 |
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Gross profit
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21,204 |
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27,151 |
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Selling, general and administrative expense
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10,409 |
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12,781 |
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Exit, disposal, certain severance and other charges
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155 |
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2,782 |
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Operating income
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10,640 |
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11,588 |
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Interest income
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56 |
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63 |
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Other income (expense), net
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(160 |
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11 |
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Interest expense
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(132 |
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(258 |
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Income before income taxes
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10,404 |
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11,404 |
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Income tax expense
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3,319 |
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4,220 |
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Net income
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7,085 |
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$ |
7,184 |
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Per common share - basic:
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Net income
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$ |
0.35 |
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$ |
0.36 |
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Per common share - diluted:
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Net income
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$ |
0.35 |
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$ |
0.36 |
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See accompanying notes.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(In thousands)
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For the three months ended March 31,
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2010
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2009
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(Unaudited)
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Operating Activities:
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Net income
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$ |
7,085 |
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$ |
7,184 |
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Adjustments to reconcile net income to net cash provided by (used in)
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operating activities - continuing operations:
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Depreciation and amortization
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3,219 |
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3,561 |
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Noncash stock-based compensation
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797 |
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1,286 |
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Amortization of debt issuance costs
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39 |
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39 |
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Adjustments to provision for losses on accounts receivable
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(7 |
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(6 |
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Gain on sale of equipment
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(2 |
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(2 |
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Deferred income taxes
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1,443 |
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(285 |
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Changes in operating assets and liabilities,
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net of businesses discontinued/sold:
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Accounts receivable
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(580 |
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(19,245 |
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Inventories
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7,076 |
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(3,385 |
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Prepaid and other assets
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60 |
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(152 |
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Accounts payable and accrued expenses and other
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(7,412 |
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3,571 |
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Net cash provided by (used in) operating activities - continuing operations
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11,718 |
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(7,434 |
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Net cash used in operating activities - discontinued operations
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- |
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(281 |
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Investing Activities:
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Purchases of property, plant and equipment
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(2,530 |
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(1,119 |
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Purchases of available-for-sale securities
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(1,244 |
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(182 |
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Proceeds from sales of available-for-sale securities
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4,706 |
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379 |
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Proceeds from sale of equipment
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20 |
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2 |
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Net cash provided by (used in) investing activities
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952 |
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(920 |
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Financing Activities:
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Borrowings on revolving credit facility
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- |
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70,000 |
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Proceeds from exercise of stock options
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621 |
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- |
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Tax benefit from stock-based award transactions
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104 |
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- |
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Repurchases of common stock for treasury
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(30 |
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(70 |
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Net cash provided by financing activities
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695 |
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69,930 |
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Effect of exchange rate changes on cash and cash equivalents
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(271 |
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(39 |
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Increase in cash and cash equivalents
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13,094 |
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61,256 |
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Cash and cash equivalents at beginning of period
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73,803 |
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17,188 |
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Cash and cash equivalents at end of period
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$ |
86,897 |
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$ |
78,444 |
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Cash paid (received) during the period for:
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Interest
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$ |
75 |
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$ |
179 |
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Income taxes, net
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(1,179 |
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1,901 |
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See accompanying notes.
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Notes to Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share data)
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Note 1.
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Basis of Presentation
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The accompanying unaudited consolidated financial statements of ATC Technology Corporation (the “Company”) as of March 31, 2010 and for the three months ended March 31, 2010 and 2009 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments of a normal and recurring nature considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company consolidates any variable interest entities of which it is the primary beneficiary.
Certain prior-year amounts have been reclassified to conform to the 2010 presentation.
Recently Issued Accounting Standards
In January 2010, the Financial Accounting Standards Board (FASB) issued an accounting standards update (Improving Disclosures about Fair Value Measurements) which requires new disclosures about fair value measurements. The guidance requires new disclosures related to significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons why, as well as activity in Level 3 fair value measurements. The guidance also provides clarification to existing disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted this accounting standards update in the first quarter of 2010. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements. The Company will adopt the disclosure requirement related to activity in Level 3 fair value measurements in the first quarter of 2011 and does not expect this adoption will have a material effect on its consolidated financial statements.
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Note 2.
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Fair Value Measurements
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The Company records its financial assets and liabilities at fair value. The accounting standard for fair value (i) defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date, (ii) establishes a framework for measuring fair value, (iii) establishes a hierarchy of fair value measurements based upon the observability of inputs used to value assets and liabilities, (iv) requires consideration of nonperformance risk, and (v) expands disclosures about the methods used to measure fair value.
The accounting standard establishes a three-level hierarchy of measurements based upon the reliability of observable and unobservable inputs used to arrive at fair value. Observable inputs are independent market data, while unobservable inputs reflect the Company’s assumptions about valuation. The three levels of the hierarchy are defined as follows:
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Level 1: Observable inputs such as quoted prices in active markets for identical assets and liabilities;
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·
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Level 2: Inputs other than quoted prices but are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
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·
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Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
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The following tables present the Company’s fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis:
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March 31, 2010:
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Level 1
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Level 2
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Level 3
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Assets:
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Cash and cash equivalents
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$ |
86,897 |
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$ |
− |
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$ |
− |
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Short-term and long-term investments
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$ |
2,191 |
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$ |
− |
|
$ |
− |
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Liabilities:
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|
|
|
|
|
|
|
|
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Nonqualified deferred compensation
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$ |
2,173 |
|
$ |
− |
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$ |
− |
|
December 31, 2009:
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Level 1
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Level 2
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Level 3
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Assets:
|
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|
|
|
|
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Cash and cash equivalents
|
$ |
73,803 |
|
$ |
− |
|
$ |
− |
|
Short-term and long-term investments
|
$ |
5,665 |
|
$ |
− |
|
$ |
− |
|
Liabilities:
|
|
|
|
|
|
|
|
|
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Nonqualified deferred compensation
|
$ |
5,646 |
|
$ |
− |
|
$ |
− |
The Company’s cash and cash equivalents as of March 31, 2010 and December 31, 2009 were primarily invested in highly liquid money market funds. The short-term and long-term investments and the nonqualified deferred compensation liability are described in Note 3 – Short and Long-Term Investments. The deferred compensation liability on the consolidated balance sheets as of March 31, 2010 and December 31, 2009, included $218 of amounts payable to an employee of a previously acquired former Drivetrain segment business.
The carrying value of accounts receivable, inventories, prepaid and other assets, refundable income taxes, accounts payable, accrued expenses and other, and income taxes payable as of March 31, 2010 and December 31, 2009, approximated fair value because of the short-term nature of these instruments.
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Note 3.
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Short and Long-Term Investments
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The Company maintains 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 in certain circumstances, 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. On its consolidated balance sheets, the Company classifies its investments related to planned distributions (i) for the next twelve months in short-term investments and (ii) beyond twelve months in long-term investments. Distributions, which are contractually specified by the plan participants as either “in-service” or “post-separation,” can be made in a lump sum payment or in annual installments over a period not to exceed 15 years. 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 classifies these average cost method investments as available-for-sale securities, with unrealized holding gains and losses reported net of tax in accumulated other comprehensive income (loss). The cost basis of investments at March 31, 2010 and December 31, 2009, were $2,237 and $5,768, respectively. The fair value of investments at March 31, 2010 and December 31, 2009 were $2,191 and $5,665, respectively. The Company’s net unrealized holding losses on a pre-tax basis as of March 31, 2010 and December 31, 2009, were $46 and $103, respectively.
Inventories consist of the following:
| |
March 31, 2010
|
|
December 31, 2009
|
| |
|
|
|
|
Raw materials, including core inventories
|
$ |
43,627 |
|
$ |
48,451 |
|
Work-in-process
|
|
676 |
|
|
597 |
|
Finished goods
|
|
3,654 |
|
|
6,188 |
| |
$ |
47,957 |
|
$ |
55,236 |
As of March 31, 2010 and December 31, 2009, the raw materials inventory balances were net of inventory reserves of $6,817 and $6,894, respectively.
|
|
Note 5.
|
Property, Plant and Equipment
|
Property, plant and equipment, stated at cost less accumulated depreciation, are summarized as follows:
| |
March 31, 2010
|
|
December 31, 2009
|
| |
|
|
|
|
Property, plant and equipment
|
$ |
146,005 |
|
|
$ |
144,513 |
|
|
Accumulated depreciation
|
|
(99,865 |
) |
|
|
(97,574 |
) |
| |
$ |
46,140 |
|
|
$ |
46,939 |
|
During the three months ended March 31, 2010, property, plant, and equipment and accumulated depreciation decreased by $868 and $776, respectively, due to changes in the foreign exchange conversion rate between the U.S. dollar and the British pound.
|
|
Note 6.
|
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 the 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 other, and adjusts the amount as necessary.
Changes to the Company’s warranty liability are summarized as follows:
| |
For the three months ended March 31,
|
| |
2010
|
|
2009
|
|
Balance at beginning of period
|
$ |
1,246 |
|
|
$ |
1,885 |
|
|
Warranties issued
|
|
272 |
|
|
|
140 |
|
|
Claims paid / settlements
|
|
(69 |
) |
|
|
(47 |
) |
|
Changes in liability for pre-existing warranties
|
|
(6 |
) |
|
|
(24 |
) |
|
Balance at end of period
|
$ |
1,443 |
|
|
$ |
1,954 |
|
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 of 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 March 31, 2010.
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 March 31, 2010, the Company had no amounts outstanding under the Credit Facility and had $1,590 of letters of credit issued against the Credit Facility, resulting in a borrowing capacity of $148,410.
The Company’s consolidated effective income tax rate was 31.9% and 37.0% for the three months ended March 31, 2010 and 2009, respectively. The effective tax rate for the three months ended March 31, 2010 was lower than the U.S. federal rate of 35% primarily due to the reversal of the Company’s liability related to uncertain tax positions, partially offset by the state income tax provision.
The IRS examination of the Company’s 2006-2008 tax returns has been completed as of March 31, 2010 and all uncertain tax positions have been resolved.
A reconciliation of the beginning and ending balance for liabilities associated with unrecognized tax benefits is as follows:
|
Balance at December 31, 2009
|
$ |
546 |
|
|
Settlements with tax authorities
|
|
(546 |
) |
|
Balance at March 31, 2010
|
$ |
– |
|
|
|
Note 9.
|
Comprehensive Income
|
The following table sets forth the components of comprehensive income for the three months ended March 31, 2010 and 2009, respectively:
| |
For the three months ended March 31,
|
| |
2010
|
|
2009
|
|
Net income
|
$ |
7,085 |
|
|
$ |
7,184 |
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
(582 |
) |
|
|
(178 |
) |
|
Change in unrealized income (loss) on available-for-sale securities, net of income taxes
|
|
36 |
|
|
|
(109 |
) |
| |
$ |
6,539 |
|
|
$ |
6,897 |
|
|
|
Note 10.
|
Stock-Based Compensation
|
The Company awards (i) stock options and (ii) unvested shares of its common stock (“Restricted Stock”) to its directors and employees. Stock option valuations are estimated by using the Black-Scholes option pricing model and Restricted Stock awards are measured at the market value of the Company’s common stock on the date of issuance. 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 recognized pre-tax compensation expense related to stock-based awards of $797 and $1,286 for the three months ended March 31, 2010 and 2009, respectively.
A summary of stock-based award activities during the three months ended March 31, 2010 is presented below:
| |
Stock Options
|
|
Restricted Stock(1)
|
|
Outstanding at January 1, 2010
|
1,769,724 |
|
|
225,695 |
|
|
Exercised / vested
|
(44,227 |
) |
|
(3,334 |
) |
|
Forfeited
|
(55,154 |
) |
|
(24,572 |
) |
|
Outstanding at March 31, 2010
|
1,670,343 |
|
|
197,789 |
|
______________
(1) Restricted stock becomes unrestricted at the time the awards vest.
|
|
Note 11.
|
Segment Information
|
Within the Company, financial performance is measured by lines of business. 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, refurbishment and repair, and transportation management services. The principal customers are currently in the wireless, consumer electronics and automotive industries and include AT&T and TomTom. The Drivetrain segment primarily sells remanufactured transmissions to 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 to certain OEMs in the U.S. and Europe. The principal customers are Ford, Allison, and Chrysler. 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. In 2009, approximately 75% of the fixed corporate overhead was allocated to the Logistics segment and 25% to the Drivetrain segment. In 2010, as the result of (i) growth in the Logistics segment and (ii) a reduction in volumes for the Drivetrain segment, approximately 85% of the fixed corporate overhead is being allocated to the Logistics segment and 15% to the Drivetrain segment, while certain costs that are variable in nature are allocated to the segment for whose benefit the costs are incurred. Internal information systems costs are allocated based upon usage estimates.
The following table summarizes selected financial information relating to the Company’s reportable segments:
| |
Logistics
|
|
Drivetrain
|
|
Consolidated
|
|
For the three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
Net sales from external customers
|
$ |
75,097 |
|
|
$ |
29,433 |
|
|
$ |
104,530 |
|
Exit, disposal, certain severance and other charges
|
|
64 |
|
|
|
91 |
|
|
|
155 |
|
Operating income (loss)
|
|
10,680 |
|
|
|
(40 |
) |
|
|
10,640 |
| |
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
Net sales from external customers
|
$ |
77,316 |
|
|
$ |
36,160 |
|
|
$ |
113,476 |
|
Exit, disposal, certain severance and other charges (credits)
|
|
(5 |
) |
|
|
3,167 |
|
|
|
3,162 |
|
Operating income (loss)
|
|
13,498 |
|
|
|
(1,910 |
) |
|
|
11,588 |
|
|
Note 12.
|
Exit, Disposal, Certain Severance and Other Charges
|
The Company has periodically incurred certain costs 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.
During the three months ended March 31, 2010, the Company recorded $155 of these charges consisting of (i) $91 to terminate a lease in its Drivetrain segment and (ii) $64 of severance related to the wind-down of certain activities in its Logistics segment.
During 2009, the Company completed restructuring activities within its Drivetrain segment, which included the consolidation of certain of its North American remanufacturing plants. The remaining reserve balance of $1,016 as of March 31, 2010 is related to the write-down of raw materials inventory at its Drivetrain remanufacturing facility located in the United Kingdom, and is classified as part of inventories on the consolidated balance sheet.
|
|
Note 13.
|
Earnings Per Share
|
The Company’s unvested Restricted Stock are considered participating securities, which requires the Company to calculate earnings per share under the two-class method. Per the two-class method, the Company’s reported net income is reduced by the amount allocated to participating securities to arrive at net income available to common shareholders for purposes of calculating earnings per share. Earnings per common share - basic for each period is calculated by dividing net income available to common shareholders by the weighted average common shares outstanding for that period. During loss periods, no amounts are allocated to participating securities, as the Company’s holders of unvested Restricted Stock have no contractual obligation to fund the Company’s losses. Earnings per common share - diluted for each particular period is calculated using the more dilutive of the treasury stock or the two-class method. The Company has determined the two-class method to be the more dilutive method for all periods presented. As a result, earnings per common share - diluted is calculated by dividing net income available to common shareholders by the weighted-average number of common shares outstanding, as adjusted for the potential dilutive effect of non-participating share-based awards (stock options).
Prior period earnings per share amounts have been restated to conform to the current period presentation, although there was no material impact on the previously reported earnings per common share - basic or diluted.
The following table sets forth the computation of basic and diluted earnings per share:
| |
For the three months ended March 31,
|
| |
2010
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
|
Net income
|
$ |
7,085 |
|
|
$ |
7,184 |
|
|
Income allocated to participating securities
|
|
(70 |
) |
|
|
(84 |
) |
|
Net income available to common shareholders
|
$ |
7,015 |
|
|
$ |
7,100 |
|
| |
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
19,864,018 |
|
|
|
19,544,182 |
|
|
Effect of dilutive securities: stock options
|
|
166,685 |
|
|
|
19,091 |
|
|
Denominator for diluted earnings per common share
|
|
20,030,703 |
|
|
|
19,563,273 |
|
| |
|
|
|
|
|
|
|
|
Per common share - basic
|
$ |
0.35 |
|
|
$ |
0.36 |
|
|
Per common share - diluted
|
$ |
0.35 |
|
|
$ |
0.36 |
|
The Company’s outstanding stock options as of March 31, 2010 and 2009 were 1,670,343 and 1,742,022, respectively. Stock options are included in the diluted earnings per share calculation using the two-class method, unless the effect of including stock options would be anti-dilutive. For the three months ended March 31, 2010 and 2009, 703,558 and 1,629,022 anti-dilutive stock options, respectively, were excluded from the diluted earnings per share calculation.
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 that was discontinued and sold during 2000 (the "DG Sale") and is 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.
Forward-Looking Statement Notice
Readers are cautioned that certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations that are not related to historical results are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are predictive, that depend upon or refer to future events or conditions, or that include words such as "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. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions are also forward-looking statements.
Forward-looking statements are based on current expectations, projections and assumptions regarding future events that may not prove to be accurate. These statements reflect our judgment as of the date of this Quarterly Report with respect to future events, the outcome of which are 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 differ materially from those described herein. We undertake no obligation to update forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, dependence on significant customers, possible component parts and/or core shortages, the ability to achieve and manage growth, future indebtedness and liquidity, environmental matters, and competition. For a discussion of these and certain other factors, please refer to Item 1A. “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2009. Please also refer to our other filings with the Securities and Exchange Commission.
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. For a description of our critical accounting policies and estimates, please refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2009.
Results of Operations for the Three Month Period Ended March 31, 2010 Compared to the Three Month Period Ended March 31, 2009.
Net income decreased $0.1 million, or 1.4%, to $7.1 million for the three months ended March 31, 2010 from $7.2 million for the three months ended March 31, 2009. Net income per diluted share was $0.35 for the three months ended March 31, 2010 and $0.36 for the three months ended March 31, 2009. Our results for 2010 included exit, disposal, certain severance and other charges of $0.1 million (net of tax). Our results for 2009 included exit, disposal, certain severance and other charges of $2.0 million (net of tax). Other factors that contributed to the lower net income in 2010 as compared to 2009 included:
|
|
·
|
lower sales to Honda related to the transmission remanufacturing program, which wound down and was completed during the first quarter of 2010;
|
|
|
·
|
lower sales to AT&T primarily related to lower returns volume during 2010 as compared to 2009; and
|
|
|
·
|
scheduled price concessions granted to certain customers, primarily AT&T, in connection with contract renewals;
|
partially offset by:
|
|
·
|
realization of savings from the consolidation and restructuring of our North American Drivetrain operation and benefits from our on-going lean and continuous improvement program and other cost reduction initiatives in our Logistics segment;
|
|
|
·
|
the contribution from new programs in our Logistics segment; and
|
|
|
·
|
tax benefits associated with the resolution of previously uncertain tax positions.
|
Net Sales
Net sales decreased $9.0 million, or 7.9%, to $104.5 million for the three months ended March 31, 2010 from $113.5 million for the three months ended March 31, 2009. This decrease was primarily due to:
|
|
·
|
lower sales to Honda related to the transmission remanufacturing program, which wound down and was completed during the first quarter of 2010;
|
|
|
·
|
lower sales to AT&T primarily related to lower returns volume during 2010 as compared to 2009; and
|
|
|
·
|
scheduled price concessions granted to certain customers, primarily AT&T, in connection with contract renewals;
|
partially offset by increased sales from new programs in our Logistics segment.
Of our net sales for the three months ended March 31, 2010 and 2009, AT&T accounted for 48.8% and 50.5%, Ford accounted for 11.0% and 10.8%, TomTom accounted for 6.5% and 6.6%, and Honda accounted for 2.4% and 10.1%, respectively.
Gross Profit
Gross profit decreased $6.0 million, or 22.1%, to $21.2 million for the three months ended March 31, 2010 from $27.2 million for the three months ended March 31, 2009. The decrease was primarily the result of the factors described above under “Net Sales.” As a percentage of net sales, gross profit decreased to 20.3% for 2010 from 23.9% for 2009. The wind-down of the Honda transmission remanufacturing program, a comparatively less favorable mix of Logistics revenues, and scheduled price concessions were the primary factors contributing to this decline.
Selling, General and Administrative Expense
Selling, general and administrative (“SG&A”) expense decreased $2.4 million, or 18.8%, to $10.4 million for the three months ended March 31, 2010 from $12.8 million for the three months ended March 31, 2009. The net decrease is primarily the result of savings from the consolidation and restructuring of our North American Drivetrain operation, benefits from our on-going lean and continuous improvement program and other cost reduction initiatives in our Logistics segment, and a reduction in cost for incentive compensation programs. As a percentage of net sales, SG&A expense decreased to 10.0% for the three months ended March 31, 2010 from 11.3% for the three months ended March 31, 2009.
Exit, Disposal, Certain Severance and Other Charges
During the three months ended March 31, 2010, we recorded $0.2 million of exit, disposal, certain severance and other charges consisting of $0.1 million to terminate a lease in our Drivetrain segment and $0.1 million of severance related to the wind-down of certain activities in the Logistics segment.
During the three months ended March 31, 2009, in connection with the restructuring activities in our Drivetrain segment, we recorded pre-tax charges of $3.2 million ($2.0 million net of tax), consisting of (i) $2.2 million ($1.4 million net of tax) of costs to transfer production from our closed Springfield facility to the Oklahoma City facility and other facility exit costs (including $0.4 million of costs classified as cost of sales – products) and (ii) $1.0 million ($0.6 million net of tax) of severance and related costs for employees being terminated as part of the closure of the Springfield facility.
As an on-going part of our planning process, we continue to identify and evaluate areas where cost efficiencies can be achieved through actions such as consolidation of redundant facilities, outsourcing functions, or changing processes or systems. Implementation of any of these could require us to incur additional exit, disposal, certain severance and other charges, which would be offset over time by the projected cost savings.
Operating Income
Operating income decreased $1.0 million, or 8.6%, to $10.6 million for the three months ended March 31, 2010 from $11.6 million for the three months ended March 31, 2009. This decrease was primarily the result of the factors described above under “Net Sales” and “Gross Profit,” partially offset by the reduction of exit, disposal, certain severance and other charges and SG&A expenses. As a percentage of net sales, operating income remained constant at 10.2% for the three months ended March 31, 2010 and 2009.
Interest Expense
Interest expense decreased to $0.1 million for the three months ended March 31, 2010 from $0.3 million for the three months ended March 31, 2009. This decrease was primarily due to the repayment during the fourth quarter of 2009 of the $70.0 million borrowing we made under our credit facility during the three months ended March 31, 2009 to increase our cash position and preserve our financial flexibility in light of the then-current uncertainty in the capital markets. There were no such borrowings outstanding during 2010.
Income Tax Expense
Income tax expense as a percentage of income before income taxes decreased to 31.9% for the three months ended March 31, 2010, from 37.0% for the three months ended March 31, 2009. This decrease was primarily due to the tax benefits associated with the resolution of previously uncertain tax positions. Our normalized effective income tax rate (excluding this tax benefit) is expected to be approximately 37.8% for 2010.
Reportable Segments
Logistics Segment
The following table presents net sales, exit, disposal, certain severance and other charges, and segment profit expressed in millions of dollars and as a percentage of net sales:
| |
For the Three Months Ended March 31,
|
| |
2010
|
|
2009
|
|
Net sales
|
$ |
75.1 |
|
100.0 |
% |
|
$ |
77.3 |
|
100.0 |
% |
|
Exit, disposal, certain severance and other charges
|
$ |
0.1 |
|
0.1 |
% |
|
$ |
− |
|
− |
|
|
Segment profit
|
$ |
10.7 |
|
14.2 |
% |
|
$ |
13.5 |
|
17.5 |
% |
Net Sales. Net sales decreased $2.2 million, or 2.8%, to $75.1 million for the three months ended March 31, 2010 from $77.3 million for the three months ended March 31, 2009. This decrease was primarily related to:
|
|
·
|
lower sales to AT&T primarily related to lower returns volumes during 2010 as compared to 2009; and
|
|
|
·
|
scheduled price concessions granted to certain customers, primarily AT&T, in connection with contract renewals;
|
partially offset by increased sales from new programs primarily with a leading handset manufacturer that is expected to exceed 10% of our net sales for full year 2010.
Of our segment net sales for the three months ended March 31, 2010 and 2009, AT&T accounted for 67.9% and 74.2% and TomTom accounted for 9.0% and 9.7%, respectively.
Exit, Disposal, Certain Severance and Other Charges. During the three months ended March 31, 2010, we recorded $0.1 million of severance costs. There were no similar costs recorded in 2009.
Segment Profit. Segment profit decreased $2.8 million, or 20.7%, to $10.7 million (14.2% of segment net sales) for the three months ended March 31, 2010 from $13.5 million (17.5% of segment net sales) for the three months ended March 31, 2009. The decrease was primarily the result of the factors described above under “Net Sales,” partially offset by benefits from our lean and continuous improvement program and other cost reduction initiatives.
Drivetrain Segment
The following table presents net sales, exit, disposal, certain severance and other charges, and segment loss expressed in millions of dollars and as a percentage of net sales:
| |
For the Three Months Ended March 31,
|
| |
2010
|
|
2009
|
|
Net sales
|
$ |
29.4 |
|
100.0 |
% |
|
$ |
36.2 |
|
|
100.0 |
% |
|
Exit, disposal, certain severance and other charges
|
$ |
0.1 |
|
0.3 |
% |
|
$ |
3.2 |
|
|
8.8 |
% |
|
Segment loss
|
$ |
− |
|
− |
|
|
$ |
(1.9 |
) |
|
− |
|
Net Sales. Net sales decreased $6.8 million, or 18.8%, to $29.4 million for the three months ended March 31, 2010 from $36.2 million for the three months ended March 31, 2009. The decrease was primarily due to lower sales to Honda related to the transmission remanufacturing program, which wound down and was completed during the first quarter of 2010.
Of our segment net sales for the three months ended March 31, 2010 and 2009, Ford accounted for 39.0% and 34.0% and Honda accounted for 8.6% and 31.5%, respectively.
Exit, Disposal, Certain Severance and Other Charges. During the three months ended March 31, 2010, we recorded $0.1 million of these costs related to the termination of a lease. During the three months ended March 31, 2009, we recorded $3.2 million of these costs consisting of (i) $2.2 million of costs to transfer production from Springfield to Oklahoma City and other facility exit costs and (ii) $1.0 million of severance and related costs for employees being terminated as part of the closure of the Springfield facility.
Segment Loss. Segment loss improved by $1.9 million, to approximately breakeven for the three months ended March 31, 2010 from a loss of $1.9 million for the three months ended March 31, 2009. This improvement was primarily due to the factors described above under “Exit, Disposal, Certain Severance and Other Charges.” Excluding these costs, a decrease in segment profit in 2010 as compared to 2009 was primarily the result of the lower sales related to the loss of the Honda transmission remanufacturing program, partially offset by savings from our consolidation and restructuring activities.
Liquidity and Capital Resources
We had total cash and cash equivalents on hand of $86.9 million at March 31, 2010. Net cash provided by operating activities was $11.7 million for the three-month period then ended. During the period, we used $0.9 million of cash from our working capital accounts including:
|
|
·
|
$7.4 million for accounts payable and accrued expenses and other, which included (i) $3.7 million related to distributions from our nonqualified deferred compensation program and (ii) $3.2 million related to our 2009 incentive compensation programs; and
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$0.6 million for accounts receivable primarily as the result of timing of payments;
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partially offset by $7.1 million of cash provided by inventories primarily related to the end of our transmission remanufacturing program with Honda and a reduction of inventory for certain Logistics customers.
Net cash provided by investing activities from continuing operations was $1.0 million for the period, consisting of $3.5 million of net proceeds from available-for-sale securities for our nonqualified deferred compensation plan, partially offset by $2.5 million of capital spending primarily related to machinery and equipment for new business initiatives and capacity maintenance efforts. Net cash provided by financing activities of $0.7 million was primarily related to proceeds received from the exercise of stock options.
For 2010, we estimate $11-$13 million for capital expenditures, consisting of approximately $5-$6 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.
Our 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 LIBOR 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 LIBOR rate loans are subject to quarterly adjustments based on our leverage ratio as of the end of the four fiscal quarters then completed.
We were in compliance with all the credit facility’s covenants as of March 31, 2010.
As of March 31, 2010, our liquidity included (i) borrowing capacity under the credit facility of $148.4 million, net of $1.6 million for outstanding letters of credit, and (ii) $86.9 million of cash on hand.
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.
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. As of March 31, 2010, we were not using any derivative financial instruments.
Interest Rate Exposure. Based on our overall interest rate exposure during the three months ended March 31, 2010 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 March 31, 2010, 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 three months ended March 31, 2010, a 10% change in the foreign exchange rate would have increased or decreased our consolidated net income by approximately $9,000.
Our management, including Chief Executive Officer Todd R. Peters, and Chief Financial Officer John M. Pinkerton, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Under rules promulgated by the Securities and Exchange Commission, disclosure controls and procedures are defined as those "controls or other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms." Based on the evaluation of our disclosure controls and procedures, management determined that such controls and procedures were effective as of March 31, 2010, the date of the conclusion of the evaluation.
Further, there were no significant changes in the internal controls or in other factors that could significantly affect these controls after March 31, 2010, the date of the conclusion of the evaluation of disclosure controls and procedures.
There were no changes in our internal control over financial reporting during the first quarter of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ATC TECHNOLOGY CORPORATION
Part II. Other Information
During the three months ended March 31, 2010, an employee delivered to us 1,234 shares of our outstanding common stock in payment of $30,406 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 $24.64 per share, the closing price of our common stock on the vesting date of the restricted stock.
Following is a summary of treasury stock acquisitions made during the three-month period ended March 31, 2010:
|
Period
|
|
Total
number of
Shares
Purchased
|
|
Average Price
Paid per Share
|
|
Total Number of Shares
Purchased as
Part of Publicly Announced Plans or Programs
|
|
Maximum
Number (or Approximate
Dollar Value) of Shares that May Yet Be Purchased
Under the Plan(1)
|
|
January 1-31, 2010
|
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1,234 |
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$ |
24.64 |
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1,234 |
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– |
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February 1-28, 2010
|
|
– |
|
$ |
− |
|
– |
|
– |
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March 1-31, 2010
|
|
– |
|
$ |
− |
|
– |
|
– |
______________
| (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. |
As a holding company with no independent operations, our ability to pay cash dividends is dependent upon the receipt of dividends or other payments from our subsidiaries. In addition, the agreement for our bank credit facility contains certain covenants that, among other things, place significant limitations on the payment of dividends.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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ATC TECHNOLOGY CORPORATION
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Date: April 27, 2010
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By:
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/s/ John M. Pinkerton
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John M. Pinkerton, Vice President and Chief Financial Officer
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John M. Pinkerton is signing in the dual capacities as i) the principal financial officer, and ii) a duly authorized officer of the company.
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