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| ATAC > SEC Filings for ATAC > Form 10-K on 26-Feb-2009 | All Recent SEC Filings |
26-Feb-2009
Annual Report
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 . . .
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