Attached files
file | filename |
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EX-32.1 - Colfax CORP | v204668_ex32-1.htm |
EX-31.2 - Colfax CORP | v204668_ex31-2.htm |
EX-31.1 - Colfax CORP | v204668_ex31-1.htm |
EX-32.2 - Colfax CORP | v204668_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
Amendment
No. 1
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Quarter ended April 2, 2010
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period
from to
Commission
file number - 001-34045
Colfax
Corporation
(Exact
name of registrant as specified in its charter)
Delaware
|
54-1887631
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
|
8730
Stony Point Parkway, Suite 150
Richmond,
Virginia
|
23235
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(804)
560-4070
(Registrant’s
telephone number, including area code)
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 þ No ¨
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 ¨ No ¨
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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer þ
Non-accelerated
filer ¨ (Do not check if a
smaller reporting
company) 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 ¨ No þ
As of
April 2, 2010, there were 43,247,057 shares of the registrant’s common stock,
par value $.001 per share, outstanding.
EXPLANATORY
NOTE
Overview
Colfax
Corporation (the “Company”) is filing this Amendment No. 1 on Form 10-Q/A
to our quarterly report on Form 10-Q for the quarter ended April 2, 2010,
originally filed on April 30, 2010 (the “Original Form 10-Q”), to restate our
financial statements and corresponding financial information for the quarter
ended April 2, 2010 for the effect of an overstatement of our pension
liability.
Restatement
While
preparing the 2010 census data for our defined benefit pension plan actuarial
valuations, the Company determined that previous actuarial valuations for the
plans of a U.S. subsidiary contained errors in participant data. The errors
largely originated in census data compiled by the subsidiary’s former actuaries
prior to our acquisition of the subsidiary in 1997. Because these
errors affected the valuation of pension liabilities at the date of the
acquisition, goodwill was also overstated.
As a
result of the errors, the pension liability was overstated by $22.1 million as
of April 2, 2010 and $21.7 million as of December 31,
2009. Additionally, goodwill was overstated by $3.8 million as of
April 2, 2010 and December 31, 2009 and shareholder’s equity was understated by
$18.3 million as of April 2, 2010 and $18.0 million as of December 31,
2009. Net income was understated by $0.3 million for the three months
ended April 2, 2010 and $0.2 million for the three months ended April 3,
2009. There is no cash flow impact from these errors. The impact on
other comprehensive income was insignificant.
The
Company has filed an amended Annual Report on Form 10-K/A for the year ended
December 31, 2009 and is filing an amended Quarterly Report on Form 10-Q/A for
the quarter ended July 2, 2010, to correct the errors described
above. Please refer to these amended reports for further discussion
of the restatement of these respective periods.
All of the information in this Form
10-Q/A is as of April 30, 2010, the date the Company filed the Original Form
10-Q with the Securities and Exchange Commission. This Form 10-Q/A
continues to speak as of the date of the Original Form 10-Q and does not reflect
any subsequent information or events other than the restatement discussed in
Note 2 to the Consolidated Financial Statements appearing in this Form 10-Q/A.
Accordingly, this Form 10-Q/A should be read in conjunction with our filings
made with the Securities and Exchange Commission subsequent to the filing of the
Original Form 10-Q, including any amendments to those filings. Among
other things, forward-looking statements made in the Original Form 10-Q have not
been revised to reflect events, results or developments that occurred or facts
that became known to us after the date of the Original Form 10-Q, other than the
restatement.
For the
convenience of the reader, this Form 10-Q/A sets forth the Original Form 10-Q in
its entirety. No attempt has been made in this Form 10-Q/A to modify
or update the disclosures in the Original Form 10-Q except as required to
reflect the effects of the restatement discussed in Note 2 to the Consolidated
Financial Statements. However, changes have been made to the following items
solely as a result of, and to reflect, the restatement, and no other information
in the Form 10-Q/A is amended hereby as a result of the
restatement:
· Part I, Item 1 - Financial
Statements
· Part I, Item 2 - Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
· Part I, Item 4 - Controls and
Procedures
· Part II — Item 6.
Exhibits.
In the
Form 10-Q as previously filed, the Company reported under Item 4 “Controls and
Procedures,” that its disclosure controls and procedures were
effective. Management, in consultation with the Audit Committee, has
concluded that the errors set forth herein constituted a material weakness
in the Company’s internal controls over financial reporting as of the date of
the Original Form 10-Q. The revised assessment is included under Part
II, Item 4 in this document.
The
Company is including currently dated Sarbanes-Oxley Act Section 302 and Section
906 certifications of the Chief Executive Officer and Chief Financial Officer
that are attached to this Form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and
32.2.
i
COLFAX
CORPORATION
FORM
10-Q
INDEX
Page
|
|
PART
I – FINANCIAL INFORMATION
|
|
Item
1. Financial Statements
|
1
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
17
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
26
|
Item
4. Controls and Procedures
|
27
|
PART II – OTHER
INFORMATION
|
27
|
Item
1. Legal Proceedings
|
27
|
Item
1A. Risk Factors
|
27
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
28
|
Item
3. Defaults Upon Senior Securities
|
28
|
Item
4. Other Information
|
28
|
Item
5. Exhibits
|
28
|
SIGNATURES
|
29
|
ii
PART I – FINANCIAL
INFORMATION
Item 1.
Financial Statements
COLFAX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Dollars
in thousands, except per share amounts
(unaudited)
Three
Months Ended
|
||||||||
April
2,
|
April
3,
|
|||||||
2010
|
2009
|
|||||||
Restated
|
||||||||
Net
sales
|
$ | 119,971 | $ | 136,323 | ||||
Cost
of sales
|
78,215 | 88,308 | ||||||
Gross
profit
|
41,756 | 48,015 | ||||||
Selling,
general and administrative expenses
|
29,489 | 29,204 | ||||||
Research
and development expenses
|
1,628 | 1,407 | ||||||
Restructuring
and other related charges
|
4,039 | 661 | ||||||
Asbestos
liability and defense costs
|
1,435 | 1,645 | ||||||
Asbestos
coverage litigation expenses
|
3,881 | 2,966 | ||||||
Operating
income
|
1,284 | 12,132 | ||||||
Interest
expense
|
1,813 | 1,846 | ||||||
(Loss)
income before income taxes
|
(529 | ) | 10,286 | |||||
(Benefit)
provision for income taxes
|
(155 | ) | 3,221 | |||||
Net
(loss) income
|
$ | (374 | ) | $ | 7,065 | |||
Net
(loss) income per share—basic and diluted
|
$ | (0.01 | ) | $ | 0.16 |
See
accompanying notes to condensed consolidated financial
statements.
- 1
-
COLFAX
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
Dollars
in thousands
April
2,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Restated
|
||||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 60,215 | $ | 49,963 | ||||
Trade
receivables, less allowance for doubtful accounts of $2,732 and
$2,837
|
80,038 | 88,493 | ||||||
Inventories,
net
|
65,381 | 71,150 | ||||||
Deferred
income taxes, net
|
6,804 | 7,114 | ||||||
Asbestos
insurance asset
|
32,207 | 31,502 | ||||||
Asbestos
insurance receivable
|
24,208 | 28,991 | ||||||
Prepaid
expenses
|
13,613 | 11,109 | ||||||
Other
current assets
|
2,479 | 2,426 | ||||||
Total
current assets
|
284,945 | 290,748 | ||||||
Deferred
income taxes, net
|
53,960 | 51,838 | ||||||
Property,
plant and equipment, net
|
88,097 | 92,090 | ||||||
Goodwill
|
159,870 | 163,418 | ||||||
Intangible
assets, net
|
11,289 | 11,952 | ||||||
Long-term
asbestos insurance asset
|
356,208 | 357,947 | ||||||
Long-term
asbestos insurance receivable
|
16,610 | 16,876 | ||||||
Deferred
loan costs, pension and other assets
|
14,487 | 14,532 | ||||||
Total
assets
|
$ | 985,466 | $ | 999,401 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Current
portion of long-term debt and notes payable
|
$ | 10,151 | $ | 8,969 | ||||
Accounts
payable
|
36,771 | 36,579 | ||||||
Accrued
asbestos liability
|
35,618 | 34,866 | ||||||
Accrued
payroll
|
20,125 | 17,756 | ||||||
Accrued
taxes
|
2,552 | 2,154 | ||||||
Accrued
termination benefits
|
4,792 | 9,473 | ||||||
Other
accrued liabilities
|
36,931 | 34,402 | ||||||
Total
current liabilities
|
146,940 | 144,199 | ||||||
Long-term
debt, less current portion
|
80,000 | 82,516 | ||||||
Long-term
asbestos liability
|
407,211 | 408,903 | ||||||
Pension
and accrued post-retirement benefits
|
98,952 | 105,230 | ||||||
Deferred
income tax liability
|
9,717 | 10,375 | ||||||
Other
liabilities
|
31,151 | 31,353 | ||||||
Total
liabilities
|
773,971 | 782,576 | ||||||
Shareholders’
equity:
|
||||||||
Common
stock: $0.001 par value; authorized 200,000,000; issued and
outstanding 43,247,057 and 43,229,104
|
43 | 43 | ||||||
Additional
paid-in capital
|
403,816 | 402,852 | ||||||
Retained
deficit
|
(76,647 | ) | (76,273 | ) | ||||
Accumulated
other comprehensive loss
|
(115,717 | ) | (109,797 | ) | ||||
Total
shareholders’ equity
|
211,495 | 216,825 | ||||||
Total
liabilities and shareholders' equity
|
$ | 985,466 | $ | 999,401 |
See
accompanying notes to condensed consolidated financial
statements.
- 2
-
COLFAX
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars
in thousands
(unaudited)
Three
Months Ended
|
||||||||
April
2,
|
April
3,
|
|||||||
2010
|
2009
|
|||||||
Restated
|
Restated
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
(loss) income
|
$ | (374 | ) | $ | 7,065 | |||
Adjustments
to reconcile net income (loss) to cash provided by operating
activities:
|
||||||||
Depreciation,
amortization and fixed asset impairment charges
|
3,735 | 3,543 | ||||||
Noncash
stock-based compensation
|
1,067 | 559 | ||||||
Amortization
of deferred loan costs
|
169 | 168 | ||||||
Deferred
income taxes
|
(2,504 | ) | (1,592 | ) | ||||
Changes
in operating assets and liabilities, net of acquisitions:
|
||||||||
Trade
receivables
|
5,946 | 10,293 | ||||||
Inventories
|
3,686 | (3,416 | ) | |||||
Accounts
payable and accrued liabilities, excluding asbestos related accrued
expenses
|
(2,400 | ) | (13,274 | ) | ||||
Other
current assets
|
(2,396 | ) | 1,885 | |||||
Change
in asbestos liability and asbestos-related accrued expenses, net of
asbestos insurance asset and receivable
|
10,994 | 3,464 | ||||||
Changes
in other operating assets and liabilities
|
(1,834 | ) | 1,973 | |||||
Net
cash provided by operating activities
|
16,089 | 10,668 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of fixed assets
|
(2,509 | ) | (3,137 | ) | ||||
Proceeds
from sale of fixed assets
|
23 | 51 | ||||||
Net
cash used in investing activities
|
(2,486 | ) | (3,086 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Payments
under term credit facility
|
(1,250 | ) | (1,250 | ) | ||||
Payments
on capital leases
|
(56 | ) | (264 | ) | ||||
Proceeds
from issuance of common stock
|
26 | - | ||||||
Net
cash used in financing activities
|
(1,280 | ) | (1,514 | ) | ||||
Effect
of exchange rates on cash
|
(2,071 | ) | (459 | ) | ||||
Increase
in cash and cash equivalents
|
10,252 | 5,609 | ||||||
Cash
and cash equivalents, beginning of period
|
49,963 | 28,762 | ||||||
Cash
and cash equivalents, end of period
|
$ | 60,215 | $ | 34,371 |
See
accompanying notes to condensed consolidated financial
statements.
- 3
-
COLFAX
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollars
in thousands, unless otherwise noted
1.
Organization and Nature of Operations
Colfax
Corporation (the “Company”, “Colfax”, “we” or “us”) is a global supplier of a
broad range of fluid handling products, including pumps, fluid handling systems
and controls, and specialty valves. We believe that we are a leading
manufacturer of rotary positive displacement pumps, which include screw pumps,
gear pumps and progressive cavity pumps. We have a global manufacturing
footprint, with production facilities in Europe, North America and Asia, as well
as worldwide sales and distribution channels. Our products serve a variety of
applications in five strategic markets: commercial marine, oil and gas, power
generation, global navy and general industrial. We design and engineer our
products to high quality and reliability standards for use in critical fluid
handling applications where performance is paramount. We also offer customized
fluid handling solutions to meet individual customer needs based on our in-depth
technical knowledge of the applications in which our products are used. Our
products are marketed principally under the Allweiler, Fairmount, Houttuin, Imo,
LSC, Portland Valve, Tushaco, Warren, and Zenith brand names. We believe that
our brands are widely known and have a premium position in our industry.
Allweiler, Houttuin, Imo and Warren are among the oldest and most recognized
brands in the fluid handling industry, with Allweiler dating back to
1860.
2.
Restatement
On
October 19, 2010, the Audit Committee of the Company’s Board of Directors
concluded, based upon the recommendation of the Company’s management, that the
Company should restate these financial statements to correct an overstatement of
its pension liability. The Company has restated all periods of the accompanying
unaudited condensed consolidated financial statements.
While
preparing the 2010 census data for our defined benefit pension plan actuarial
valuations, the Company determined that previous actuarial valuations for the
plans of a U.S. subsidiary contained errors in participant data. The errors
largely originated in census data compiled by the subsidiary’s former actuaries
prior to our acquisition of the subsidiary in 1997. Because these
errors affected the valuation of pension liabilities at the date of the
acquisition, goodwill was also overstated.
The
following tables set forth the effects of the restatement on affected line items
within the Company’s previously reported financial statements:
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
April 2, 2010
|
||||||||||||
As
|
||||||||||||
Previously
|
As
|
|||||||||||
Reported
|
Adjustment
|
Restated
|
||||||||||
Selling,
general and administrative expenses
|
$ | 29,880 | $ | (391 | ) | $ | 29,489 | |||||
Operating
income
|
893 | 391 | 1,284 | |||||||||
Loss
before income taxes
|
(920 | ) | 391 | (529 | ) | |||||||
Benefit
for income taxes
|
(267 | ) | 112 | (155 | ) | |||||||
Net
loss
|
(653 | ) | 279 | (374 | ) | |||||||
Net
loss per share—basic and diluted
|
$ | (0.02 | ) | $ | 0.01 | $ | (0.01 | ) |
- 4
-
Three Months Ended
|
||||||||||||
April 3, 2009
|
||||||||||||
As
|
||||||||||||
Previously
|
As
|
|||||||||||
Reported
|
Adjustment
|
Restated
|
||||||||||
Selling,
general and administrative expenses
|
$ | 29,526 | $ | (322 | ) | $ | 29,204 | |||||
Operating
income
|
11,810 | 322 | 12,132 | |||||||||
Income
before income taxes
|
9,964 | 322 | 10,286 | |||||||||
Provision
for income taxes
|
3,103 | 118 | 3,221 | |||||||||
Net
income
|
6,861 | 204 | 7,065 | |||||||||
Net
income per share—basic and diluted
|
$ | 0.16 | $ | - | $ | 0.16 |
CONDENSED
CONSOLIDATED BALANCE SHEETS
April 2, 2010
|
||||||||||||
As
|
||||||||||||
Previously
|
As
|
|||||||||||
Reported
|
Adjustment
|
Restated
|
||||||||||
Deferred
income taxes, net
|
$ | 6,513 | $ | 291 | $ | 6,804 | ||||||
Total
current assets
|
284,654 | 291 | 284,945 | |||||||||
Deferred
income taxes, net
|
54,213 | (253 | ) | 53,960 | ||||||||
Goodwill
|
163,706 | (3,836 | ) | 159,870 | ||||||||
Total
assets
|
989,264 | (3,798 | ) | 985,466 | ||||||||
Accrued
taxes
|
2,510 | 42 | 2,552 | |||||||||
Total
current liabilities
|
146,898 | 42 | 146,940 | |||||||||
Pension
and accrued post-retirement benefits
|
121,060 | (22,108 | ) | 98,952 | ||||||||
Total
liabilities
|
796,037 | (22,066 | ) | 773,971 | ||||||||
Retained
deficit
|
(92,232 | ) | 15,585 | (76,647 | ) | |||||||
Accumulated
other comprehensive loss
|
(118,400 | ) | 2,683 | (115,717 | ) | |||||||
Total
shareholders’ equity
|
193,227 | 18,268 | 211,495 | |||||||||
Total
liabilities and shareholders' equity
|
$ | 989,264 | $ | (3,798 | ) | $ | 985,466 |
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three
Months Ended
|
||||||||||||
April 2, 2010
|
||||||||||||
As
|
||||||||||||
Previously
|
As
|
|||||||||||
Reported
|
Adjustment
|
Restated
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss
|
$ | (653 | ) | $ | 279 | $ | (374 | ) | ||||
Deferred
income taxes
|
(2,574 | ) | 70 | (2,504 | ) | |||||||
Accounts
payable and accrued liabilities, excluding asbestos related accrued
expenses
|
(2,442 | ) | 42 | (2,400 | ) | |||||||
Changes
in other operating assets and liabilities
|
$ | (1,443 | ) | $ | (391 | ) | $ | (1,834 | ) | |||
Net
cash provided by operating activities
|
16,089 | - | 16,089 |
- 5
-
Three Months Ended
|
||||||||||||
April 3, 2009
|
||||||||||||
As
|
||||||||||||
Previously
|
As
|
|||||||||||
Reported
|
Adjustment
|
Restated
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 6,861 | $ | 204 | $ | 7,065 | ||||||
Deferred
income taxes
|
(1,678 | ) | 86 | (1,592 | ) | |||||||
Accounts
payable and accrued liabilities, excluding asbestos related accrued
expenses
|
(13,306 | ) | 32 | (13,274 | ) | |||||||
Changes
in other operating assets and liabilities
|
$ | 2,295 | $ | (322 | ) | $ | 1,973 | |||||
Net
cash provided by operating activities
|
10,668 | - | 10,668 |
3. General
The
unaudited condensed consolidated financial statements included in this quarterly
report have been prepared by the Company according to the rules and regulations
of the Securities and Exchange Commission (“SEC”) and according to accounting
principles generally accepted in the United States of America (“GAAP”) for
interim financial statements. The accompanying balance sheet information as of
December 31, 2009 is derived from our audited financial statements. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with GAAP have been omitted in accordance with the SEC’s
rules and regulations for interim financial statements. The unaudited condensed
consolidated financial statements included herein should be read in conjunction
with the audited financial statements and related footnotes included in our
Annual Report on Form 10-K/A for the year ended December 31, 2009 filed with the
SEC on December 13, 2010.
The
financial statements reflect, in the opinion of management, all adjustments
which consist solely of normal recurring adjustments necessary to present fairly
the Company’s financial position and results of operations as of and for the
periods indicated. Significant intercompany transactions and accounts are
eliminated in consolidation.
We make
certain estimates and assumptions in preparing our condensed consolidated
financial statements in accordance with GAAP. These estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the periods
presented. Actual results may differ from those
estimates.
Certain
prior period amounts have been reclassified to conform to current year
presentations.
The
results of operations for the three months ended April 2, 2010 are not
necessarily indicative of the results of operations that may be achieved for the
full year. Quarterly results are affected by seasonal variations in our fluid
handling business. As our customers seek to fully utilize capital
spending budgets before the end of the year, historically our shipments have
peaked during the fourth quarter. Also, our European operations
typically experience a slowdown during the July and August holiday
season. General economic conditions as well as backlog levels may,
however, impact future seasonal variations.
4. Recent
Accounting Pronouncements
In
October 2009, the Financial Accounting Standards Board issued Accounting
Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue
Arrangements—a consensus of the FASB Emerging Issues Task
Force. ASU No. 2009-13 addresses the unit of accounting for
arrangements involving multiple deliverables and how arrangement consideration
should be allocated to the separate units of accounting. The Company will be
required to adopt the provisions of ASU No. 2009-13 prospectively beginning
January 1, 2011. Earlier retrospective application is
permitted. The Company is evaluating the effects of implementing the
provisions of this new guidance.
- 6
-
5.
Warranty Costs
Estimated
expenses related to product warranties are accrued at the time products are sold
to customers and recorded as part of cost of sales. Estimates are established
using historical information as to the nature, frequency, and average costs of
warranty claims.
Warranty
activity for the three months ended April 2, 2010 and April 3, 2009 consisted of
the following:
Three Months Ended
|
||||||||
April 2,
|
April 3,
|
|||||||
2010
|
2009
|
|||||||
Warranty
liability at beginning of the period
|
$ | 2,852 | $ | 3,108 | ||||
Accrued
warranty expense, net of adjustments
|
239 | 283 | ||||||
Changes
in estimates related to pre-existing warranties
|
(144 | ) | (159 | ) | ||||
Cost
of warranty service work performed
|
(207 | ) | (115 | ) | ||||
Foreign
exchange translation effect
|
(105 | ) | (161 | ) | ||||
Warranty
liability at end of the period
|
$ | 2,635 | $ | 2,956 |
6.
Income Taxes
For the
three months ended April 2, 2010, the Company had a loss of approximately $0.5
million before taxes and had $0.2 million of income tax benefit. The
effective tax rate of 29.3% represents the estimated annual tax rate for the
year applied to the current period income before tax plus the tax effect of any
significant unusual items, discrete items or changes in tax law. This
effective tax rate of 29.3% differs from the U.S. federal statutory tax rate
primarily due to international tax rates which are lower than the U.S. tax
rate.
For the
three months ended April 3, 2009, the Company earned $10.3 million before taxes
and had $3.2 million of income tax expense. The effective tax rate of
31.3% differed from the U.S. statutory rate primarily due to
international tax rates which are lower than the U.S. tax rate, including the
impact of the reduction in 2009 of the Swedish tax rate from 28% to 26.3% that
is applied to our Swedish operations.
The
Company is subject to income tax in the U.S., state and international
locations. The Company’s significant operations outside the U.S. are
located in Germany and Sweden. In Sweden, tax years 2004 to 2009 and
in Germany, tax years 2003 and 2006 to 2009 remain subject to examination. In
the U.S., tax years 2005 and beyond generally remain open for examination by
U.S. and state tax authorities as well as tax years ending in 1997, 1998, 2000
and 2003 that have U.S. tax attributes available that have been carried forward
to open tax years or are available to be carried forward to future tax
years.
Due to
the difficulty in predicting with reasonable certainty when tax audits will be
fully resolved and closed, the range of reasonably possible significant
increases or decreases in the liability for unrecognized tax benefits that may
occur within the next 12 months is difficult to ascertain. Currently, we
estimate it is reasonably possible the expiration of various statutes of
limitations and resolution of tax audits may reduce our tax expense in the next
12 months ranging from zero to $1.2 million.
7. Restructuring
and Other Related Charges
The
Company initiated a series of restructuring actions during 2009 in response to
then current and expected future economic conditions. As a result, the Company
recorded pre-tax restructuring and related costs of $4.0 million during the
three months ended April 2, 2010 and $0.7 million during the three months ended
April 3, 2009. The costs incurred in the first quarter of 2010
include $2.2 million of termination benefits, including $0.6 million of non-cash
stock-based compensation expense, related to the departure of the Company’s
former President and Chief Executive Officer (CEO) in January
2010. The costs incurred in the first quarter of 2009 included $0.5
million of termination benefits and a $0.2 million non-cash asset impairment
charge related to closure of a repair facility.
- 7
-
As of
April 2, 2010, we have reduced our company-wide workforce by 337 associates from
December 31, 2008. Additionally, we are participating in a German
government-sponsored furlough program in which the government pays the
wage-related costs for participating associates. Payroll taxes and
other employee benefits related to employees’ furlough time are included in
restructuring costs. Our agreement with the German works council allowing
participation in the furlough program ends February 2011. We expect
to incur approximately $4.0 million of additional termination benefits and
furlough charges in the remainder of 2010 for actions implemented through the
date these financial statements are filed.
We
recognize the cost of involuntary termination benefits at the communication date
or ratably over any remaining expected future service
period. Voluntary termination benefits are recognized as a liability
and a loss when employees accept the offer and the amount can be reasonably
estimated. We record asset impairment charges to reduce the carrying amount of
long-lived assets that will be sold or disposed of to their estimated fair
values. Fair values are estimated using observable inputs including third
party appraisals and quoted market prices.
A
summary of restructuring activity for the three months ended April 2, 2010 is
shown below.
Three
Months Ended April 2, 2010
|
||||||||||||||||||||
Accrued
|
Accrued
|
|||||||||||||||||||
Termination
|
Foreign
|
Termination
|
||||||||||||||||||
Benefits
at
|
Currency
|
Benefits
at
|
||||||||||||||||||
Dec.
31, 2009
|
Provisions
|
Payments
|
Translation
|
April
2, 2010
|
||||||||||||||||
Restructuring
and Other Related Charges:
|
||||||||||||||||||||
Termination
benefits (1)
|
$ | 9,473 | $ | 2,710 | $ | (6,969 | ) | $ | (422 | ) | $ | 4,792 | ||||||||
Furlough
charges (2)
|
- | 220 | (220 | ) | - | - | ||||||||||||||
Facility
closure charges (3)
|
- | 535 | (535 | ) | - | - | ||||||||||||||
$ | 9,473 | 3,465 | $ | (7,724 | ) | $ | (422 | ) | $ | 4,792 | ||||||||||
Non-cash
termination benefits (4)
|
574 | |||||||||||||||||||
Total
|
$ | 4,039 |
(1)
|
Includes
severance and other termination benefits such as outplacement
services.
|
(2)
|
Includes
payroll taxes and other employee benefits related to German employees’
furlough time.
|
(3)
|
Includes
the cost of relocating and training associates and relocating equipment in
connection with the closing of the Sanford, NC
facility.
|
(4)
|
Includes
stock-based compensation expense related to the accelerated vesting of
certain share-based payments in connection with the departure of the
Company’s former President and CEO in January
2010.
|
- 8
-
8.
Earnings per Share
The
following table presents the computation of basic and diluted earnings per
share:
Three Months Ended
|
||||||||
April 2,
|
April 3,
|
|||||||
2010
|
2009
|
|||||||
Restated
|
||||||||
Numerator:
|
||||||||
Net
(loss) income available to common shareholders
|
$ | (374 | ) | $ | 7,065 | |||
Denominator:
|
||||||||
Weighted-average
shares of common stock outstanding - basic
|
43,242,659 | 43,211,026 | ||||||
Net
(loss) income per share - basic
|
$ | (0.01 | ) | $ | 0.16 | |||
Weighted-average
shares of common stock outstanding - basic
|
43,242,659 | 43,211,026 | ||||||
Net
effect of potentally dilutive securities
(1)
|
- | 101,280 | ||||||
Weighted-average
shares of common stock outstanding - diluted
|
43,242,659 | 43,312,306 | ||||||
Net
(loss) income per share - diluted
|
$ | (0.01 | ) | $ | 0.16 |
(1)
|
Potentially
dilutive securities consist of options and restricted stock
units.
|
Due to
our net loss for the three months ended April 2, 2010, 1.6 million potentially
dilutive stock options, restricted stock units and deferred stock units were
excluded from the calculation of diluted earnings per share, since their effect
would have been anti-dilutive. In the three months ended April 3,
2009, 0.7 million potentially dilutive stock options and restricted stock units
were excluded from the calculation of diluted earnings per share, since their
effect would have been anti-dilutive.
9.
Comprehensive Income (Loss)
Three
Months Ended
|
Three
Months Ended
|
|||||||||||||||||||||||
April 2, 2010
|
April 3, 2009
|
|||||||||||||||||||||||
As
|
As
|
|||||||||||||||||||||||
Previously
|
As
|
Previously
|
As
|
|||||||||||||||||||||
Reported
|
Adjustment
|
Restated
|
Reported
|
Adjustment
|
Restated
|
|||||||||||||||||||
Net
(loss) income
|
$ | (653 | ) | $ | 279 | $ | (374 | ) | $ | 6,861 | $ | 204 | $ | 7,065 | ||||||||||
Other
comprehensive (loss) income:
|
||||||||||||||||||||||||
Foreign
currency translation, net of tax
|
(6,970 | ) | - | (6,970 | ) | (7,255 | ) | - | (7,255 | ) | ||||||||||||||
Unrealized
losses on hedging activities, net of tax
|
(463 | ) | - | (463 | ) | 199 | - | 199 | ||||||||||||||||
Amounts
reclassified to net income:
|
||||||||||||||||||||||||
Losses
on hedging activities, net of tax
|
733 | - | 733 | 691 | - | 691 | ||||||||||||||||||
Net
pension and other postretirement benefit costs, net of tax
|
784 | (4 | ) | 780 | 600 | 16 | 616 | |||||||||||||||||
Other
comprehensive (loss) income
|
(5,916 | ) | (4 | ) | (5,920 | ) | (5,765 | ) | 16 | (5,749 | ) | |||||||||||||
Comprehensive
(loss) income
|
$ | (6,569 | ) | $ | 275 | $ | (6,294 | ) | $ | 1,096 | $ | 220 | $ | 1,316 |
- 9
-
10.
Inventories
Inventories
consisted of the following:
April 2,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Raw
materials
|
$ | 25,427 | $ | 28,445 | ||||
Work
in process
|
31,386 | 32,888 | ||||||
Finished
goods
|
22,050 | 21,013 | ||||||
78,863 | 82,346 | |||||||
Less-Customer
progress billings
|
(4,724 | ) | (3,171 | ) | ||||
Less-Allowance
for excess, slow-moving and obsolete inventory
|
(8,758 | ) | (8,025 | ) | ||||
$ | 65,381 | $ | 71,150 |
11.
Net Periodic Benefit Cost – Defined Benefit Plans
The
following table sets forth the components of net periodic benefit cost of the
non-contributory defined benefit pension plans and the Company’s other
post-retirement employee benefit plans for periods presented:
Three Months Ended
|
||||||||
April
2,
|
April
3,
|
|||||||
2010
|
2009
|
|||||||
Restated
|
Restated
|
|||||||
Pension
Benefits - U.S. Plans
|
||||||||
Service
cost
|
$ | - | $ | - | ||||
Interest
cost
|
2,984 | 3,128 | ||||||
Expected
return on plan assets
|
(4,406 | ) | (4,566 | ) | ||||
Amortization
|
1,051 | 722 | ||||||
Net
periodic benefit cost (credit)
|
$ | (371 | ) | $ | (716 | ) | ||
Pension
Benefits - Non U.S. Plans
|
||||||||
Service
cost
|
$ | 313 | $ | 273 | ||||
Interest
cost
|
926 | 1,046 | ||||||
Expected
return on plan assets
|
(182 | ) | (226 | ) | ||||
Amortization
|
89 | 174 | ||||||
Net
periodic benefit cost
|
$ | 1,146 | $ | 1,267 | ||||
Other
Post-Retirement Benefits
|
||||||||
Service
cost
|
$ | - | $ | - | ||||
Interest
cost
|
167 | 131 | ||||||
Amortization
|
120 | 88 | ||||||
Net
periodic benefit cost
|
$ | 287 | $ | 219 |
- 10
-
Employer
contributions to the pension plans during the period ended April 2, 2010 were
$2.9 million. Expected contributions to the pension plans for 2010
are $10.5 million, including $5.0 million of prepayments of 2011 required
contributions.
12.
Share-Based Payments
The
Company measures and recognizes compensation expense relating to share-based
payments based on the fair value of the instruments issued. Generally, our
stock-based compensation expense is recognized as a component of “Selling,
general and administrative expenses”, as payroll costs of the employees
receiving the awards are recorded in the same line item. Stock-based
compensation expense related to the departure of the Company’s former President
and CEO in January 2010 was recognized as a component of “Restructuring and
other related charges”. For the three months ended April 2, 2010, a
total of $1.1 million of compensation expense and $0.4 million of deferred tax
benefits were recognized, which included $0.6 million of compensation expense
related to the former President and CEO’s departure. Compensation
expense recognized for the former President and CEO reflects the accelerated
vesting of certain stock options and performance-based restricted stock units on
January 9, 2010. For the three months ended April 3, 2009, $0.6
million of compensation cost and deferred tax benefits of approximately $0.2
million were recognized. At April 2, 2010, the Company had $8.5 million of
unrecognized compensation expense related to stock-based awards that will be
recognized over a weighted-average period of approximately 2.5 years. At April
2, 2010, the Company had issued stock-based awards that are described
below.
Stock
Options
Stock-based
compensation expense for stock option awards was based on the grant-date fair
value using the Black-Scholes option pricing model. We recognize
compensation expense for stock option awards on a ratable basis over the
requisite service period of the entire award. The following table shows the
weighted-average assumptions we used to calculate fair value of stock option
awards using the Black-Scholes option pricing model, as well as the
weighted-average fair value of options granted during the three months ended
April 2, 2010.
Three Months Ended
|
||||
April 2, 2010
|
||||
Assumptions
used in Black-Scholes model:
|
||||
Expected
period that options will be outstanding (in
years)
|
4.50 | |||
Interest
rate (based on U.S.
Treasury yields at time of grant)
|
2.60 | % | ||
Volatility
|
52.20 | % | ||
Dividend
yield
|
- | |||
Fair
value of options granted
|
$ | 5.41 |
Expected
volatility is estimated based on the historical volatility of comparable public
companies. The Company uses historical data to estimate employee termination
within the valuation model. Separate groups of employees that have similar
historical exercise behavior are considered separately for valuation purposes.
Since the Company has limited option exercise history, it has elected to
estimate the expected life of an award based upon the SEC-approved “simplified
method” noted under the provisions of Staff Accounting Bulletin No. 107 with the
continued use of this method extended under the provisions of Staff Accounting
Bulletin No. 110.
- 11
-
Stock
option activity for the three months ended April 2, 2010 is as
follows:
Shares under
option
|
Weighted-
average
exercise price
|
Remaining
contractual
term (years)
|
Aggregate
intrinsic value
($000)
|
|||||||||||||
Options
outstanding at December 31, 2009
|
1,267,633 | $ | 11.40 | |||||||||||||
Granted
|
608,440 | 11.92 | ||||||||||||||
Exercised
|
(3,503 | ) | 7.44 | |||||||||||||
Forfeited
|
(86,228 | ) | 10.80 | |||||||||||||
Options
outstanding at April 2, 2010
|
1,786,342 | $ | 11.61 | 6.08 | $ | 3,031 | ||||||||||
Vested
or expected to vest at April 2, 2010
|
1,526,695 | $ | 11.77 | 6.08 | $ | 2,471 | ||||||||||
Exercisable
at April 2, 2010
|
488,926 | $ | 11.31 | 5.64 | $ | 1,285 |
The
aggregate intrinsic value is based on the difference between the Company’s
closing stock price at the balance sheet date and the exercise price of the
stock option, multiplied by the number of in-the-money options. The
amount of intrinsic value will change based on the fair value of the Company’s
stock.
Restricted Stock
Units
Stock-based
compensation expense for restricted stock awards was based on the grant-date
fair value. The fair value of each restricted stock unit is equal to
the market value of a share of common stock on the date of grant. We
recognize compensation expense for restricted stock awards ratably over the
requisite service period for the award, when it is expected any performance
criterion will be achieved.
The
following table summarizes the Company’s performance-based restricted stock
units (PRSUs) and restricted stock units (RSUs) and activity for the three
months ended April 2, 2010:
PRSUs
|
RSUs
|
|||||||||||||||
Nonvested shares
|
Shares
|
Weighted-
Average
Grant Date
Fair Value
|
Shares
|
Weighted-
Average
Grant Date
Fair Value
|
||||||||||||
Nonvested
at December 31, 2009
|
430,497 | $ | 10.22 | 92,928 | $ | 11.97 | ||||||||||
Granted
|
242,342 | 11.92 | 2,634 | 11.77 | ||||||||||||
Vested
|
(25,000 | ) | 18.00 | (4,537 | ) | 10.71 | ||||||||||
Cancelled
and forfeited (1)
|
(317,259 | ) | 7.49 | - | - | |||||||||||
Nonvested
at April 2, 2010
|
330,580 | $ | 13.50 | 91,025 | $ | 12.03 |
(1)
|
Includes
the cancellations of 315,870 performance-based restricted stock units
granted in March 2009, since the performance criterion was not
achieved.
|
13.
Financial Instruments
The
carrying values of financial instruments, including accounts receivable,
accounts payable and other accrued liabilities, approximate their fair values
due to their short-term maturities. The estimated fair value of the Company’s
long-term debt of $87.4 million and $88.6 million at April 2, 2010
and December 31, 2009, respectively, was based on current interest rates for
similar types of borrowings. The estimated fair values may not represent actual
values of the financial instruments that could be realized as of the balance
sheet date or that will be realized in the future.
- 12
-
A summary
of the Company’s assets and liabilities that are measured at fair value on a
recurring basis for each fair value hierarchy level for the periods presented
follows:
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
As
of April 2, 2010
|
||||||||||||||||
Assets:
|
||||||||||||||||
Cash
equivalents
|
$ | 46,145 | $ | 46,145 | $ | - | $ | - | ||||||||
Liabilities:
|
||||||||||||||||
Interest
rate swap
|
$ | 2,765 | $ | - | $ | 2,765 | $ | - | ||||||||
Foreign
currency contracts
|
357 | - | 357 | - | ||||||||||||
$ | 3,122 | $ | - | $ | 3,122 | $ | - | |||||||||
As
of December 31, 2009
|
||||||||||||||||
Assets:
|
||||||||||||||||
Cash
equivalents
|
$ | 33,846 | $ | 33,846 | $ | - | $ | - | ||||||||
Liabilities:
|
||||||||||||||||
Interest
rate swap
|
$ | 3,035 | $ | - | $ | 3,035 | $ | - | ||||||||
Foreign
currency contracts
|
121 | - | 121 | - | ||||||||||||
$ | 3,156 | $ | - | $ | 3,156 | $ | - |
There
were no significant transfers between level 1 and level 2 during the period
ended April 2, 2010.
Cash
Equivalents
The
Company’s cash equivalents consist of investments in interest-bearing deposit
accounts and money market mutual funds which are valued based on quoted market
prices. The fair value of these investments approximate cost due to
their short-term maturities and the high credit quality of the issuers of the
underlying securities. Interest rate swaps are valued based on
forward curves observable in the market. Foreign currency contracts
are measured using broker quotations or observable market transactions in either
listed or over-the-counter markets. There were no changes during the periods
presented in the Company’s valuation techniques used to measure asset and
liability fair values on a recurring basis.
Derivatives
The
Company periodically enters into foreign currency, interest rate swap, and
commodity derivative contracts. The Company uses interest rate swaps to manage
exposure to interest rate fluctuations. Foreign currency contracts are used to
manage exchange rate fluctuations and generally hedge transactions between the
Euro and the U.S. dollar. Commodity futures contracts are used to manage
costs of raw materials used in the Company’s production processes.
The
Company enters into such contracts with financial institutions of good standing,
and the total credit exposure related to non-performance by those institutions
is not material to the operations of the Company. The Company does not enter
into contracts for trading purposes.
We
designate a portion of our derivative instruments as cash flow hedges for
accounting purposes. For all derivatives designated as hedges, we formally
document the relationship between the hedging instrument and the hedged item, as
well as the risk management objective and the strategy for using the hedging
instrument. We assess whether the hedging relationship between the
derivative and the hedged item is highly effective at offsetting changes in the
cash flows both at inception of the hedging relationship and on an ongoing
basis. Any change in the fair value of the derivative that is not effective at
offsetting changes in the cash flows or fair values of the hedged item is
recognized currently in earnings.
- 13
-
Interest
rate swaps and other derivative contracts are recognized on the balance sheet as
assets and liabilities, measured at fair value on a recurring basis using
significant observable inputs, which is Level 2 as defined in the fair value
hierarchy. For transactions in which we are hedging the variability of cash
flows, changes in the fair value of the derivative are reported in accumulated
other comprehensive income (loss) (AOCI), to the extent they are effective at
offsetting changes in the hedged item, until earnings are affected by the hedged
item. Changes in the fair value of derivatives not designated as hedges are
recognized currently in earnings.
On June
24, 2008, the Company entered into an interest rate swap with an aggregate
notional value of $75 million whereby it exchanged its LIBOR-based variable rate
interest for a fixed rate of 4.1375%. The notional value decreases to
$50 million and then $25 million on June 30, 2010 and June 30, 2011,
respectively, and expires on June 29, 2012. The fair values of the swap
agreement were liabilities of $2.8 million at April 2, 2010 and $3.0 million at
December 31, 2009, and are recorded in “Other long-term liabilities” on the
consolidated balance sheets. The swap agreement has been designated
as a cash flow hedge, and therefore changes in its fair value are recorded as an
adjustment to other comprehensive income. There has been no ineffectiveness
related to this arrangement since its inception. For both the three
months ended April 2, 2010 and April 3, 2009, $0.7 million of losses on the
interest rate swap were reclassified from AOCI to interest
expense. As of April 2, 2010, the Company expects to reclassify $2.1
million of net losses on the interest rate swap from AOCI to earnings during the
next twelve months.
As of
April 2, 2010 and December 31, 2009, the Company had no open commodity futures
contracts, but in previous periods had copper and nickel futures contracts. The
Company did not elect hedge accounting for these contracts, and therefore
changes in the fair value were recognized in earnings. For the three
months ended April 3, 2009, the consolidated statements of operations include
$0.9 million of unrealized gains as a result of changes in the fair value of
these commodity contracts. Realized losses on these commodity
contracts of $0.4 million were recognized in the three months ended April 3,
2009.
The
Company had foreign currency contracts with notional values of $8.5 million at
April 2, 2010 and $10.5 million at December 31, 2009. The fair values of the
contracts were liabilities of 0.4 million at April 2, 2010 and $0.1 million at
December 31, 2009, and are recorded in “Other accrued liabilities” on the
consolidated balance sheets. The Company has not elected hedge accounting for
these contracts, and therefore changes in the fair value are recognized in
earnings. For the three months ended April 2, 2010 and April 3, 2009,
respectively, the consolidated statements of operations include $0.3 million and
$0.8 million of unrealized losses as a result of changes in the fair value of
these contracts. Realized losses on these contracts of $0.4 million
were recognized in the three months ended April 2, 2010, and realized gains of
$0.1 million were recognized in the three months ended April 3,
2009.
14.
Commitments and Contingencies
Asbestos
Liabilities and Insurance Assets
Two of
our subsidiaries are each one of many defendants in a large number of lawsuits
that claim personal injury as a result of exposure to asbestos from products
manufactured with components that are alleged to have contained asbestos. Such
components were acquired from third-party suppliers, and were not manufactured
by any of our subsidiaries nor were the subsidiaries producers or direct
suppliers of asbestos. The manufactured products that are alleged to have
contained asbestos generally were provided to meet the specifications of the
subsidiaries’ customers, including the U.S. Navy.
In most
instances, the subsidiaries settle asbestos claims for amounts management
considers reasonable given the facts and circumstances of each claim. The annual
average settlement payment per asbestos claimant has fluctuated during the past
several years. Management expects such fluctuations to continue in the future
based upon, among other things, the number and type of claims settled in a
particular period and the jurisdictions in which such claims arise. To date, the
majority of settled claims have been dismissed for no payment.
Of the
25,306 pending claims, approximately 4,100 of such claims have been brought in
various federal and state courts in Mississippi; approximately 3,100 of such
claims have been brought in the Supreme Court of New York County, New York;
approximately 200 of such claims have been brought in the Superior Court,
Middlesex County, New Jersey; and approximately 1,300 claims have been filed in
state courts in Michigan and the U.S. District Court, Eastern and Western
Districts of Michigan. The remaining pending claims have been filed in state and
federal courts in Alabama, California, Kentucky, Louisiana, Pennsylvania, Rhode
Island, Texas, Virginia, the U.S. Virgin Islands and
Washington.
- 14
-
Claims
activity related to asbestos is as follows (1):
Three Months Ended
|
||||||||
April 2,
|
April 3,
|
|||||||
2010
|
2009
|
|||||||
Claims
unresolved at the beginning of the period
|
25,295 | 35,357 | ||||||
Claims
filed (2)
|
1,330 | 953 | ||||||
Claims
resolved (3)
|
(1,319 | ) | (1,889 | ) | ||||
Claims
unresolved at the end of the period
|
25,306 | 34,421 |
(1)
|
Excludes
claims filed by one legal firm that have been “administratively
dismissed.”
|
(2)
|
Claims
filed include all asbestos claims for which notification has been received
or a file has been opened.
|
(3)
|
Claims
resolved include asbestos claims that have been settled or dismissed or
that are in the process of being settled or dismissed based upon
agreements or understandings in place with counsel for the
claimants.
|
The
Company has projected each subsidiary’s future asbestos-related liability costs
with regard to pending and future unasserted claims based upon the Nicholson
methodology. The Nicholson methodology is the standard approach used by most
experts and has been accepted by numerous courts.
It is the
Company’s policy to record a liability for asbestos-related liability costs for
the longest period of time that it can reasonably estimate. The Company
believes that it can reasonably estimate the asbestos-related liability for
pending and future claims that will be resolved in the next 15 years and has
recorded that liability as its best estimate. While it is reasonably possible
that the subsidiaries will incur costs after this period, the Company does not
believe the reasonably possible loss or range of reasonably possible loss is
estimable at the current time. Accordingly, no accrual has been recorded for any
costs which may be paid after the next 15 years. Defense costs, not expected to
be recovered from insurers, associated with asbestos-related liabilities as well
as costs incurred related to litigation against the subsidiaries’ insurers are
expensed as incurred.
Each
subsidiary has separate, substantial insurance coverage resulting from the
independent corporate history of each entity. In its evaluation of the insurance
asset, in addition to the criteria listed above, the Company used differing
insurance allocation methodologies for each subsidiary based upon the applicable
law pertaining to the affected subsidiary.
For one
of the subsidiaries, on October 14, 2009, the Delaware Court of Chancery ruled
that asbestos-related costs should be allocated among excess insurers using an
“all sums” allocation (which allows an insured to collect all sums paid in
connection with a claim from any insurer whose policy is triggered, up to the
policy’s applicable limits) and that the subsidiary has rights to excess
insurance policies purchased by a former owner of the business. Based
upon this ruling mandating an “all sums” allocation, as well as the language of
the underlying insurance policies and the determination that defense costs are
outside policy limits, the Company expects to be responsible for approximately
10% of all future asbestos-related costs.
In 2003,
the other subsidiary brought legal action against a large number of its insurers
and its former parent to resolve a variety of disputes concerning insurance for
asbestos-related bodily injury claims asserted against it. Although
none of these insurance companies contested coverage, they disputed the timing,
reasonableness and allocation of payments. For this subsidiary, it
was determined by court ruling in the fourth quarter of 2007, that the
allocation methodology mandated by the New Jersey courts will apply. Further
court rulings in December of 2009, clarified the allocation
calculation related to amounts currently due from insurers as well as
amounts the Company expects to be reimbursed for asbestos-related costs incurred
in future periods. The subsidiary expects to responsible for
approximately 14% of all future asbestos-related costs.
- 15
-
The
Company has established reserves of $442.8 million and $443.8 million as of
April 2, 2010 and December 31, 2009, respectively, for the probable and
reasonably estimable asbestos-related liability cost it believes the
subsidiaries will pay through the next 15 years. It has also
established recoverables of $388.4 million and $389.4 million as of
April 2, 2010 and December 31, 2009, respectively, for the insurance
recoveries that are deemed probable during the same time period. Net
of these recoverables, the expected cash outlay on a non-discounted basis for
asbestos-related bodily injury claims over the next 15 years was
$54.4 million and $54.3 million as of April 2, 2010 and
December 31, 2009, respectively. In addition, the Company has recorded a
receivable for liability and defense costs previously paid in the amount of
$40.8 million and $45.9 million as of April 2, 2010 and December 31, 2009,
respectively, for which insurance recovery is deemed probable. The
Company has recorded the reserves for the asbestos liabilities as “Accrued
asbestos liability” and “Long-term asbestos liability” and the related insurance
recoveries as “Asbestos insurance asset” and “Long-term asbestos insurance
asset”. The receivable for previously paid liability and defense
costs is recorded in “Asbestos insurance receivable” and “Long-term asbestos
insurance receivable” in the accompanying consolidated balance
sheets.
The
expense related to these liabilities and legal defense was $1.4 million, net of
estimated insurance recoveries, for the three months ended April 2, 2010
compared to $1.6 million for the three months ended April 3,
2009. Legal costs related to the subsidiaries’ action against their
asbestos insurers were $3.9 million for the three months ended April 2, 2010
compared to $3.0 million for the three months ended April 3, 2009.
Management’s
analyses are based on currently known facts and a number of assumptions.
However, projecting future events, such as new claims to be filed each year, the
average cost of resolving each claim, coverage issues among layers of insurers,
the method in which losses will be allocated to the various insurance policies,
interpretation of the effect on coverage of various policy terms and limits and
their interrelationships, the continuing solvency of various insurance
companies, the amount of remaining insurance available, as well as the numerous
uncertainties inherent in asbestos litigation could cause the actual liabilities
and insurance recoveries to be higher or lower than those projected or recorded
which could materially affect our financial condition, results of operations or
cash flow.
Guarantees
At April
2, 2010, there were $14.2 million of letters of credit
outstanding. Additionally, at April 2, 2010, we had issued $13.3
million of bank guarantees securing primarily customer prepayments, performance,
and product warranties in our European operations.
General
Litigation
On
June 3, 1997, one of our subsidiaries was served with a complaint in a case
brought by Litton Industries, Inc. (“Litton”) in the Superior Court of New
Jersey which alleges damages in excess of $10.0 million incurred as a result of
losses under a government contract bid transferred in connection with the sale
of its former Electro-Optical Systems business. In the third quarter of 2004,
this case was tried and the jury rendered a verdict of $2.1 million for the
plaintiffs. After appeals by both parties, the Supreme Court of New Jersey
upheld the plaintiffs’ right to a refund of their attorney’s fees and costs of
trial, but remanded the issue to the trial court to reconsider the amount of
fees using a proportionality analysis of the relationship between the fee
requested and the damages recovered. The date for the new trial on
additional claims allowed by the Appellate Division of the New Jersey Superior
Court and the recalculation of attorney’s fees has not been set. The
subsidiary intends to continue to defend this matter vigorously. At April 2,
2010, the Company’s consolidated balance sheet includes a liability, reflected
in “Other liabilities”, related to this matter of $9.5 million.
The
Company is also involved in various other pending legal proceedings arising out
of the ordinary course of the Company’s business. None of these legal
proceedings are expected to have a material adverse effect on the financial
condition, results of operations or cash flow of the Company. With respect
to these proceedings and the litigation and claims described in the
preceding paragraphs, management of the Company believes that it will
either prevail, has adequate insurance coverage or has established
appropriate reserves to cover potential liabilities. Any costs that management
estimates may be paid related to these proceedings or claims are accrued when
the liability is considered probable and the amount can be reasonably estimated.
There can be no assurance, however, as to the ultimate outcome of any of
these matters, and if all or substantially all of these legal proceedings were
to be determined adversely to the Company, there could be a material adverse
effect on the financial condition, results of operations or cash flow of the
Company.
- 16
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Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
accompanying Management's Discussion and Analysis of Financial Condition and
Results of Operations gives effect to the restatement of the Company's unaudited
condensed consolidated statements of operations for the three months ended April
2, 2010 and April 3, 2009 and for the condensed consolidated balance sheets as
of April 2, 2010 and December 31, 2009 as discussed in Note 2 to the Company's
condensed consolidated financial statements in Part I, Item 1.
The following discussion of our
financial condition and results of operations should be read in conjunction with
the financial statements and notes included in Part I, Item I “Financial
Statements” of this quarterly report and the audited financial statements and related
footnotes included in our Annual Report on Form 10-K/A for the year ended
December 31, 2009 filed with the SEC on December 13, 2010.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of
the statements contained in this Form 10-Q that are not historical facts are
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 (the “Exchange Act”). We intend such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in Section 21E of the Exchange Act.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date this Form 10-Q is filed with the
SEC. All statements other than statements of historical fact are
statements that could be deemed forward-looking statements, including statements
regarding: projections of revenue, profit margins, expenses, tax provisions and
tax rates, earnings or losses from operations, impact of foreign exchange rates,
cash flows, pension and benefit obligations and funding requirements, synergies
or other financial items; plans, strategies and objectives of management for
future operations including statements relating to potential acquisitions,
compensation plans, purchase commitments; developments, performance or industry
or market rankings relating to products or services; future economic conditions
or performance; the outcome of outstanding claims or legal proceedings including
asbestos-related liabilities and insurance coverage litigation; potential gains
and recoveries of costs; assumptions underlying any of the foregoing; and any
other statements that address activities, events or developments that we intend,
expect, project, believe or anticipate will or may occur in the future.
Forward-looking statements may be characterized by terminology such as
“believe,” “anticipate,” “should,” “would,” “intend,” “plan,” “will,” “expect,”
“estimate,” “project,” “positioned,” “strategy,” and similar expressions. These
statements are based on assumptions and assessments made by our management in
light of their experience and perception of historical trends, current
conditions, expected future developments and other factors we believe to be
appropriate. These forward-looking statements are subject to a number of risks
and uncertainties, including but not limited to the following:
|
•
|
risks
associated with our international
operations;
|
|
•
|
significant
movements in foreign currency exchange
rates;
|
|
•
|
changes
in the general economy, including the current global economic downturn, as
well as the cyclical nature of our
markets;
|
|
•
|
our
ability to accurately estimate the cost of or realize savings from our
restructuring programs;
|
|
•
|
availability
and cost of raw materials, parts and components used in our
products;
|
|
•
|
the
competitive environment in our
industry;
|
|
•
|
our
ability to identify, finance, acquire and successfully integrate
attractive acquisition targets;
|
|
•
|
the
amount of and our ability to estimate our asbestos-related
liabilities;
|
|
•
|
material
disruption at any of our significant manufacturing
facilities;
|
- 17
-
|
•
|
the
solvency of our insurers and the likelihood of their payment for
asbestos-related claims;
|
|
•
|
our
ability to manage and grow our business and execution of our business and
growth strategies;
|
|
•
|
loss
of key management;
|
|
•
|
our
ability and the ability of customers to access required capital at a
reasonable cost;
|
|
•
|
our
ability to expand our business in our targeted
markets;
|
|
•
|
our
ability to cross-sell our product portfolio to existing
customers;
|
|
•
|
the
level of capital investment and expenditures by our customers in our
strategic markets;
|
|
•
|
our
financial performance;
|
|
•
|
our
ability to identify, address and remediate any material weaknesses in our
internal control over financial reporting;
and
|
|
•
|
others
risks and factors, listed under the “Risk Factors” section of our Annual
Report on Form 10-K/A for the year ended December 31, 2009 filed with the
SEC on December 13, 2010.
|
Any such
forward-looking statements are not guarantees of future performance and actual
results, developments and business decisions may differ materially from those
envisaged by such forward-looking statements. These forward-looking statements
speak only as of the date the Original Form 10-Q was filed with the SEC. We do
not assume any obligation and do not intend to update any forward-looking
statement except as required by law.
Overview
We are a
global supplier of a broad range of fluid handling products, including pumps,
fluid handling systems and controls, and specialty valves. We believe that we
are a leading manufacturer of rotary positive displacement pumps, which include
screw pumps, gear pumps and progressive cavity pumps. We have a global
manufacturing footprint, with production facilities in Europe, North America and
Asia, as well as worldwide sales and distribution channels. Our products serve a
variety of applications in five strategic markets: commercial marine, oil and
gas, power generation, global defense and general industrial. We design and
engineer our products to high quality and reliability standards for use in
critical fluid handling applications where performance is paramount. We also
offer customized fluid handling solutions to meet individual customer needs
based on our in-depth technical knowledge of the applications in which our
products are used. Our products are marketed principally under the
Allweiler, Fairmount, Houttuin, Imo, LSC, Portland Valve, Tushaco, Warren and
Zenith brand names. We believe that our brands are widely known and have a
premium position in our industry. Allweiler, Houttuin, Imo and Warren are among
the oldest and most recognized brands in the markets in which we participate,
with Allweiler dating back to 1860.
We
believe that one of our most significant competitive advantages comes through a
comprehensive set of tools and processes we employ that we refer to as the
Colfax Business System (“CBS”). CBS is a disciplined strategic planning and
execution methodology designed to achieve excellence and world-class financial
performance in all aspects of our business by focusing on the Voice of the Customer and
continuously improving quality, delivery and cost.
Outlook
We
believe that we are well positioned to grow our business organically over the
long term by enhancing our product offerings and expanding our customer base in
our strategic markets. The current global economic downturn had a significant
impact on our orders, sales and operating profit in 2009 when compared to 2008
and when comparing the first quarter of 2010 to the first quarter of
2009. We have seen improvement in most of our end markets, as
evidenced by a 22% increase in orders from existing businesses in the first
quarter of 2010 compared to the fourth quarter of 2009. We have had
project delivery push-outs as well as order cancellations that may continue
throughout 2010. In addition, we will continue to monitor general global
economic conditions and expect the following market conditions:
- 18
-
|
•
|
In
the commercial marine industry, we expect international trade and demand
for crude oil and other commodities as well as the age of the global
merchant fleet to continue to create demand for new ship construction over
the long term. We also believe the increase in the size of the
global fleet will create an opportunity to supply aftermarket parts and
service. In addition, we believe pending and future
environmental regulations will enhance the demand for our products. Based
on the decline in orders in 2009 and our current backlog, we expect sales
to decline in 2010 from 2009 levels. We expect orders in 2010 to increase;
however, we are also likely to have additional order cancellations as well
as delivery date extensions in the near
term.
|
|
•
|
In
the crude oil industry, we expect long term activity to remain favorable
as capacity constraints and global demand drive further development of
heavy oil fields. In pipeline applications, we expect demand
for our highly efficient products to remain strong as our customers
continue to focus on total cost of ownership. In refinery
applications, a reduction in capital investment by our customers due to
recent weak economic conditions and volatile oil prices has been
negatively impacting sales and orders. Projects that were
delayed in 2009 are being restarted and we expect sales to be at similar
levels in 2010, while we expect growth in
orders.
|
|
•
|
In
the power generation industry, over the long term we expect activity in
Asia and the Middle East to remain solid as economic growth and
fundamental undersupply of power generation capacity continue to drive
investment in energy infrastructure projects. In the world’s
developed economies, we expect efficiency improvements will continue to
drive demand. In 2010, we expect sales to be at similar levels
versus 2009, but we expect orders to decline in part due to a policy
decision to exit certain business in the Middle
East.
|
|
•
|
In
the U.S. defense industry, we expect Congress to continue to appropriate
funds for new ship construction as older naval vessels are
decommissioned. We also expect increased demand for integrated fluid
handling systems for both new ship platforms and existing ship classes
that reduce operating costs and improve efficiency as the U.S. Navy seeks
to man vessels with fewer personnel. Outside of the U.S., we expect other
sovereign nations will continue to expand their fleets as they address
national security concerns. We expect growth in sales during
2010 and expect orders to decline as a result of the significant growth in
orders in 2009 and the timing of
projects.
|
|
•
|
In
the general industrial market, we expect long-term demand to be driven by
capital investment. While this market is very diverse, orders
in 2009 declined compared to 2008 in all submarkets and most significantly
in the chemical, distribution, machinery support and building products
markets and in portions of the general industrial market, primarily in
Europe and North America. We expect growth in both orders and
sales in 2010.
|
Our
global manufacturing sales and distribution network allows us to target fast
growing regions throughout the world. We have production and distribution
facilities in India and China and opened a Middle East sales and engineering
office in Bahrain in 2009. We intend to leverage these investments to grow our
market share in these emerging markets and plan to continue to invest in sales
and marketing resources to increase our overall coverage.
We will
also continue to target aftermarket opportunities in our strategic markets as we
generally are able to generate higher margins on aftermarket parts and service
than on foremarket opportunities. For the three months ended April 2, 2010,
aftermarket sales and services represented approximately 27% of our
revenues.
We also
expect to continue to grow as a result of strategic acquisitions. We believe
that the extensive experience of our management team in acquiring and
effectively integrating acquisition targets should enable us to capitalize on
opportunities in the future.
Based on
declining orders and our culture of continuous improvement, we initiated a
series of restructuring actions beginning in 2009 to better position the
Company’s cost structure for future periods. We continue to monitor
order rates and will adjust our manufacturing capacity and cost structure as
demand warrants.
- 19
-
Key
Performance Measures
The
discussion of our results of operations that follows focuses on some of the key
financial measures that we use to evaluate our business. We evaluate our
business using several measures, including net sales, orders and order backlog.
Our sales, orders and backlog are affected by many factors, particularly the
impact of acquisitions, the impact of fluctuating foreign exchange rates and
change from our existing businesses which may be driven by market conditions and
other factors. To facilitate the comparison between reporting periods, we
describe the impact of each of these three factors, to the extent they impact
the periods presented, on our sales, orders and backlog in tabular format under
the heading “Sales and Orders.”
Orders
and order backlog are highly indicative of our future revenue and thus are key
measures of anticipated performance. Orders consist of contracts for products or
services from our customers, net of cancellations. Order backlog consists of
unfilled orders.
Seasonality
We
experience seasonality in our fluid handling business. As our customers seek to
fully utilize capital spending budgets before the end of the year, our shipments
generally peak during the fourth quarter. Also, our European operations
typically experience a slowdown during the July and August holiday season.
General economic conditions as well as backlog levels may, however, impact
future seasonal variations.
Results
of Operations
Items
Affecting Comparability of Reported Results
The
comparability of our operating results for the three months ended April 2, 2010
and April 3, 2009 is affected by the following significant items:
Acquisitions
Acquisitions
affect our reported results and can make period to period comparisons of results
difficult. As a result, we disclose our sales growth between periods
both from existing and acquired businesses.
On August
31, 2009, we completed the acquisition of PD-Technik Ingenieurbüro GmbH
(“PD-Technik”), a provider of marine aftermarket related products and services
located in Hamburg, Germany, for $1.3 million, net of cash acquired in the
transaction.
Foreign Currency
Fluctuations
A
significant portion of our sales, approximately 68% for the three months ended
April 2, 2010, are derived from operations outside the U.S., with the majority
of those sales denominated in currencies other than the U.S. dollar, most
notably the Euro and the Swedish Krona. Because much of our manufacturing and
employee costs are outside the U.S., a significant portion of our costs are also
denominated in currencies other than the U.S. dollar. Changes in foreign
exchange rates can impact our results and are quantified, when significant, in
our discussion of the results of our operations.
Restructuring and Other
Related Charges
Our
results for the three months ended April 2, 2010 and April 3, 2009 include $4.0
million and $0.7 million, respectively, of restructuring and other related
charges incurred to better position the Company’s cost structure for future
periods. The costs incurred in the first quarter of 2010 include $2.2
million of termination benefits, including $0.6 million of non-cash stock-based
compensation expense, related to the departure of the Company’s former President
and CEO in January 2010.
- 20
-
Asbestos Liability and
Defense Costs
Asbestos
liability and defense costs is comprised of projected indemnity cost, changes in
the projected asbestos liability, changes in the probable insurance recovery of
the projected asbestos-related liability, changes in the probable recovery of
asbestos liability and defense costs paid in prior periods, and actual defense
costs expensed in the period.
The table
below presents asbestos liability and defense costs for the periods
indicated:
Three Months Ended
|
||||||||
April 2,
|
April 3,
|
|||||||
(Amounts
in millions)
|
2010
|
2009
|
||||||
Asbestos
liability and defense costs
|
$ | 1.4 | $ | 1.6 |
Asbestos
liability and defense costs were $1.4 million for the three months ended April
2, 2010 compared to $1.6 million for the three ended April 3, 2009. The decrease
in asbestos liability and defense costs for the quarter ended April 3, 2010 was
attributable to a slight decrease in legal spending.
Asbestos Coverage Litigation
Expense
Asbestos
coverage litigation expenses include legal costs related to the actions against
two of our subsidiaries’ respective insurers and a former parent company of one
of the subsidiaries.
The table
below presents coverage litigation expenses for the periods
indicated:
Three Months Ended
|
||||||||
April 2,
|
April 3,
|
|||||||
(Amounts
in millions)
|
2010
|
2009
|
||||||
Asbestos
coverage litigation expenses
|
$ | 3.9 | $ | 3.0 |
Legal
costs related to the subsidiaries’ action against their asbestos insurers were
$0.9 million higher than the prior year quarter primarily due to costs incurred
by one of our subsidiaries related to the trial of its litigation against a
number of its insurers and former parent that began in January
2010.
Sales
and Orders
Our
sales, orders and backlog are affected by many factors including but not limited
to acquisitions, fluctuating foreign exchange rates, and growth (decline) in our
existing businesses which may be driven by market conditions and other factors.
To facilitate the comparison between reporting periods, we disclose the impact
of each of these three factors to the extent they impact the periods presented.
The impact of foreign currency translation is the difference between sales from
existing businesses valued at current year foreign exchange rates and the same
sales valued at prior year foreign exchange rates. Growth due to acquisitions
includes incremental sales due to an acquisition during the period or
incremental sales due to reporting a full year’s sales for an acquisition that
occurred in the prior year. Sales growth (decline) from existing businesses
excludes both the impact of foreign exchange rate fluctuations and acquisitions,
thus providing a measure of growth (decline) due to factors such as price, mix
and volume.
Orders
and order backlog are highly indicative of our future revenue and thus key
measures of anticipated performance. Orders consist of contracts for products or
services from our customers, net of cancellations, during a period. Order
backlog consists of unfilled orders at the end of a period. The components of
order and backlog growth (decline) are presented on the same basis as sales
growth (decline).
- 21
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The
following tables present components of our sales and order growth (decline), as
well as, sales by fluid handling product for the periods indicated:
Backlog at
|
||||||||||||||||||||||||
(Amounts in millions)
|
Sales
|
Orders
|
Period End
|
|||||||||||||||||||||
Three
Months Ended April 3, 2009
|
$ | 136.3 | $ | 123.1 | $ | 322.3 | ||||||||||||||||||
Components
of Change:
|
||||||||||||||||||||||||
Existing
businesses
|
(23.3 | ) | (17.1 | )% | (10.0 | ) | (8.2 | )% | (50.9 | ) | (15.8 | )% | ||||||||||||
Acquisitions
|
0.5 | 0.4 | % | 0.8 | 0.7 | % | 1.3 | 0.4 | % | |||||||||||||||
Foreign
currency translation
|
6.5 | 4.7 | % | 5.7 | 4.6 | % | 8.6 | 2.7 | % | |||||||||||||||
Total
|
(16.3 | ) | (12.0 | )% | (3.5 | ) | (2.9 | )% | (41.0 | ) | (12.7 | )% | ||||||||||||
Three
Months Ended April 2, 2010
|
$ | 120.0 | $ | 119.6 | $ | 281.3 |
Three Months Ended
|
||||||||
April 2,
|
April 3,
|
|||||||
(Amounts
in millions)
|
2010
|
2009
|
||||||
Net
Sales by Product:
|
||||||||
Pumps,
including aftermarket parts and service
|
$ | 101.1 | $ | 121.4 | ||||
Systems,
including installation service
|
14.6 | 12.5 | ||||||
Valves
|
3.4 | 1.6 | ||||||
Other
|
0.9 | 0.8 | ||||||
Total
net sales
|
$ | 120.0 | $ | 136.3 |
As
detailed above, for the three months ended April 2, 2010, sales decreased by
$16.3 million, or 12.0% over the three months ended April 3, 2009. Sales from
existing businesses were down 17.1%, which was partially offset by a positive
currency translation effect of 4.7%, primarily due to a weaker average U.S.
dollar against the Euro exchange rate in the first quarter of 2010 compared to
the same period in 2009. Sales decline from existing businesses was primarily
attributable to decreased demand in the commercial marine, general industrial,
oil and gas and power generation end markets.
Although
orders for the three months ended April 2, 2010 of $119.6 million increased
$18.0 million over the fourth quarter of 2009, they declined $3.5 million, or
2.9%, over the three months ended April 3, 2009. Orders from existing
businesses declined 8.2%, which was partially offset by a positive currency
translation effect of 4.6%. The decline in orders from existing businesses was
primarily attributable to declines in demand in the global defense, power
generation and oil and gas end markets. These declines were partially
offset by order growth in the commercial marine and general industrial end
markets. We experienced commercial marine order cancellations of approximately
$2.9 million for the three months ended April 2, 2010, compared to $8.7 million
for the three months ended April 3, 2009. Backlog as of April 2, 2010
of $281.3 million decreased $50.9 million, or 15.8%, excluding the impact of
foreign currency translation and acquisitions, as compared to $322.3 million at
April 3, 2009. Since December 31, 2009, backlog decreased $0.4 million, or 0.1%,
excluding the impact of foreign currency translation which accounted for the
remaining $9.3 million of the decrease.
- 22
-
Gross
Profit
The
following table presents our gross profit figures for the periods
indicated:
Three Months Ended
|
||||||||
April 2,
|
April 3,
|
|||||||
(Amounts
in millions)
|
2010
|
2009
|
||||||
Gross
profit
|
$ | 41.8 | $ | 48.0 | ||||
Gross
profit margin
|
34.8 | % | 35.2 | % |
Gross
profit of $41.8 million for the three months ended April 2, 2010 decreased from
$48.0 million for the three months ended April 3, 2009. Gross profit from
existing businesses decreased $8.8 million, which was partially offset by a $2.3
million positive impact of foreign exchange rates. Gross profit margin decreased
40 basis points to 34.8% for the three months ended April 2, 2010 from 35.2% for
the three months ended April 3, 2009. The slight margin decline was driven by an
unfavorable global product mix shift as well as reduced production, which were
largely offset by cost savings from restructuring programs.
Selling,
General and Administrative Expenses (“SG&A”)
The
following table presents our selling, general and administrative expenses for
the periods indicated:
Three Months Ended
|
||||||||
April 2,
|
April 3,
|
|||||||
2010
|
2009
|
|||||||
(Amounts
in millions)
|
Restated
|
|||||||
SG&A
expenses
|
$ | 29.5 | $ | 29.2 | ||||
SG&A
expenses as a percentage of sales
|
24.6 | % | 21.4 | % |
Selling,
general and administrative expenses of $29.5 million for the three months ended
April 2, 2010 were relatively flat compared to the three months ended April 3,
2009. Excluding a $1.4 million unfavorable impact of foreign exchange rates,
SG&A declined $1.1 million, primarily due to lower losses on commodity and
foreign currency derivatives as well as lower commission expense, partially
offset by higher net periodic pension and other post-retirement benefit
costs.
Operating
Income
The table
below presents operating income data for the periods indicated:
Three Months Ended
|
||||||||
April 2,
|
April 3,
|
|||||||
2010
|
2009
|
|||||||
(Amounts
in millions)
|
Restated
|
|||||||
Operating
income
|
$ | 1.3 | $ | 12.1 | ||||
Operating
margin
|
1.1 | % | 8.9 | % |
Operating
income for the three months ended April 2, 2010 declined $10.8 million to
$1.3 million from $12.1 million for the three months ended April 3, 2009. The
decline was primarily due to lower sales volume from existing businesses and
unfavorable product mix changes in our European operations. An
additional $3.4 million of restructuring and other related charges compared to
the prior year quarter was partially offset by an $0.8 million favorable impact
of foreign exchange rates.
- 23
-
Interest
Expense
For a
description of our outstanding indebtedness, please refer to “—Liquidity and
Capital Resources” below.
Interest
expense was $1.8 million for both the three months ended April 2, 2010 and April
3, 2009. An increase in the weighted-average effective interest rate
on our variable rate borrowings that are not hedged, from 5.6% for three months
ended April 3, 2009 to 5.7% for the three months ended April 2, 2010 was offset
by lower debt levels in the current year quarter compared to the prior year
period.
Provision
for Income Taxes
The
effective income tax rate for the three months ended April 2, 2010 was 29.3% as
compared to an effective tax rate of 31.3% for the three months ended April 3,
2009. Our effective tax rate for the three months ended April 2, 2010 was lower
than the U.S. federal statutory rate primarily due to international tax rates
which are lower than the U.S. tax rate. For the three months ended
April 3, 2009, the effective tax rate of 31.3% was lower than the U.S. statutory
rate, including the impact of the reduction of the Swedish tax rate from 28% to
26.3% that is applied to our Swedish operations.
Liquidity
and Capital Resources
Overview
Historically,
we have financed our capital and working capital requirements through a
combination of cash flows from operating activities and borrowings under our
credit facility. We expect that our primary ongoing requirements for cash will
be for working capital, funding for potential acquisitions, capital
expenditures, asbestos-related outflows and pension plan funding. If additional
funds are needed for strategic acquisitions or other corporate purposes, we
believe we could raise additional funds in the form of debt or
equity. As of April 2, 2010, we had approximately $135.8 million
available on our revolver loan and we had $60.2 million of cash.
Borrowings
During
the three months ended April 2, 2010, we repaid $1.3 million of the outstanding
balance of our Term A Note, leaving $90.0 million outstanding at the end of the
period. At April 2, 2010, the interest rate on the Term A Note was
2.50% inclusive of 2.25% margin and the annual commitment fee on our $150.0
million revolver was 0.4%. At April 2, 2010, there was $14.2 million outstanding
on the letter of credit sub-facility, leaving approximately $135.8 million
available under the revolver loan. Of the total $135.8 million
available, it is unlikely that we would be able to draw on Lehman Brothers’ $6.0
million commitment due to their bankruptcy and resulting default under the terms
of the revolver.
Substantially
all assets and stock of the Company’s domestic subsidiaries and 65% of the
shares of certain European subsidiaries are pledged as collateral against
borrowings under our credit agreement. Certain European assets are pledged
against borrowings directly made to our European subsidiary. Our credit
agreement contains customary covenants limiting the Company’s ability to, among
other things, pay cash dividends, incur debt or liens, redeem or repurchase
Company stock, enter into transactions with affiliates, make investments, merge
or consolidate with others or dispose of assets. In addition, our credit
agreement contains financial covenants requiring the Company to maintain a total
leverage ratio of not more than 3.25 to 1.0 and a fixed charge coverage ratio of
not less than 1.5 to 1.0, measured at the end of each quarter for the previous
twelve months. If the Company does not comply with the various covenants under
our credit agreement and related agreements, the lenders may, subject to various
customary cure rights, require the immediate payment of all amounts outstanding
under the Term A Note and revolver and foreclose on the collateral. The Company
believes it is in compliance with all such covenants as of April 2, 2010 and
expects to be in compliance for the next 12 months.
- 24
-
Comparative
Cash Flows
The table
below presents selected cash flow data for the periods indicated:
Three Months Ended
|
||||||||
April 2,
|
April 3,
|
|||||||
(Amounts
in millions)
|
2010
|
2009
|
||||||
Net
cash provided by operating activities
|
$ | 16.1 | $ | 10.7 | ||||
Purchases
of fixed assets
|
(2.5 | ) | (3.1 | ) | ||||
Net
cash used in investing activities
|
$ | (2.5 | ) | $ | (3.1 | ) | ||
Repayment
of borrowings
|
(1.3 | ) | (1.3 | ) | ||||
Other
uses, net
|
- | (0.2 | ) | |||||
Net
cash used in financing activities
|
$ | (1.3 | ) | $ | (1.5 | ) |
Cash
flows from operating activities can fluctuate significantly from period to
period as working capital needs, the timing of payments for items such as
pension funding decisions and other items impact reported cash flows. Changes in
significant operating cash flow items are discussed below.
|
Ÿ
|
Cash
received (paid) for asbestos-related costs net of insurance proceeds,
including the disposition of claims, defense costs and legal expenses
related to litigation against our insurers, created variability in our
operating cash flows. For the three months ended April 2, 2010, net cash
received from insurance settlements, net of asbestos-related costs paid,
was $5.7 million. For the three months ended April 3, 2009, net
cash paid for asbestos-related costs, net of insurance settlements
received, was $(1.1) million.
|
|
Ÿ
|
Funding
requirements of our defined benefit plans, including both pensions and
other post-retirement benefits, can vary significantly from period to
period due to changes in the fair value of plan assets and actuarial
assumptions. For the three months ended April 2, 2010 and April 3, 2009,
cash contributions for defined benefit plans were $2.9 million and $1.3
million, respectively.
|
|
Ÿ
|
Changes
in working capital also affected the operating cash flows for the periods
presented. We define working capital as trade receivables plus inventories
less accounts payable.
|
|
Ÿ
|
Working
capital, excluding the effect of foreign currency translation, declined
$10.6 million from December 31, 2009 to April 2, 2010, primarily due to
decreases in trade receivables and inventory levels due to lower sales
volumes.
|
|
Ÿ
|
Net
working capital as a percentage of sales is a key ratio that we use to
measure working capital efficiency. For the three months ended April 2,
2010 and April 3, 2009, net working capital as a percentage of annualized
sales was 22.8% and 23.4%,
respectively.
|
Investing
activities consist primarily of purchases of fixed assets.
|
Ÿ
|
In
all periods presented, capital expenditures were invested in new and
replacement machinery, equipment and information technology. We generally
target capital expenditures at approximately 2.0% to 2.5% of annual
revenues.
|
Financing
cash flows consist primarily of repayments of indebtedness.
|
Ÿ
|
During
the three months ended April 2, 2010, we repaid $1.3 million of long-term
borrowings.
|
- 25
-
Critical
Accounting Estimates
The
methods, estimates and judgments we use in applying our critical accounting
policies have a significant impact on the results we report in our financial
statements. We evaluate our estimates and judgments on an ongoing basis. Our
estimates are based upon our historical experience, our evaluation of business
and macroeconomic trends, and information from other outside sources as
appropriate. Our experience and assumptions form the basis for our judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may vary from what our management anticipates
and different assumptions or estimates about the future could change our
reported results.
There
have been no significant changes for the three months ended April 2, 2010 to the
items that we disclosed as our critical accounting policies and estimates in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K/A for the year ended December 31,
2009 filed with the SEC on December 13, 2010.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We are
exposed to market risk from changes in interest rates, foreign currency exchange
rates and commodity prices that could impact our results of operations and
financial condition. We address our exposure to these risks through our normal
operating and financing activities.
Information
concerning market risk for the three months ended April 2, 2010 is discussed
below.
Interest
Rate Risk
We are
subject to exposure from changes in interest rates based on our financing
activities. Under our credit facility, all of our borrowings at April 2, 2010
are variable rate facilities based on LIBOR or EURIBOR. In order to mitigate our
interest rate risk, we periodically enter into interest rate swap or collar
agreements. A hypothetical increase in the interest rate of 1.00% on
the portion of our variable rate debt that is not hedged during the three months
ended April 2, 2010 would have increased our interest cost by approximately less
than $0.1 million.
On June
24, 2008, we entered into an interest rate swap with an aggregate notional value
of $75.0 million whereby we exchanged our LIBOR-based variable rate interest for
a fixed rate of 4.1375%. The notional value decreases to $50 million
and then $25 million on June 30, 2010 and June 30, 2011, respectively and
expires on June 29, 2012. The fair value of the swap agreement, based on
third-party quotes, was a liability of $2.8 million at April 2,
2010. The swap agreement has been designated as a cash flow hedge,
and therefore changes in its fair value are recorded as an adjustment to other
comprehensive income.
Exchange
Rate Risk
We have
manufacturing sites throughout the world and sell our products globally. As
a result, we are exposed to movements in the exchange rates of various
currencies against the U.S. dollar and against the currencies of other
countries in which we manufacture and sell products and services. During
the three months ended April 2, 2010, approximately 68% of our sales were
derived from operations outside the U.S., with approximately 64% generated from
our European operations. In particular, we have more sales in European
currencies than we have expenses in those currencies. Therefore, when
European currencies strengthen or weaken against the U.S. dollar, operating
profits are increased or decreased, respectively. To assist with the matching of
revenues and expenses and assets and liabilities in foreign currencies, we may
periodically enter into derivative instruments such as cross currency swaps or
forward contracts. To illustrate the potential impact of changes in foreign
currency exchange rates, assuming a 10% increase in average foreign exchange
rates compared to the U.S. dollar, the loss before income taxes for the three
months ended April 2, 2010 would have decreased by $0.9 million.
Commodity
Price Risk
We are
exposed to changes in the prices of raw materials used in our production
processes. Commodity futures contracts are periodically used to manage such
exposure; however, as of April 2, 2010, we had no open copper or nickel futures
contracts.
- 26
-
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
In
connection with this restatement on Form 10-Q/A, under the supervision and with
the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, the Company has re-evaluated the effectiveness of our
disclosure controls and procedures as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end
of the period covered by this report. Management, in consultation with the Audit
Committee, has concluded that the restatement errors, described in Note 2 to the
Unaudited Condensed Consolidated Financial Statements, constituted a material
weakness in the Company’s internal control over financial reporting as of the
date of the Original Form 10-Q. As a result of the material weakness,
management has concluded that the Company’s disclosure controls and procedures
were not effective in providing reasonable assurance that the information
required to be disclosed in this report has been recorded, processed, summarized
and reported as of the end of the period covered by this report.
Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in reports we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commissions rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
The
financial statements for the period covered by this amended report were prepared
with particular attention to the material weakness. Accordingly, management
believes that the condensed consolidated financial statements included in this
Quarterly Report fairly present, in all material respects, our financial
condition, results of operations and cash flows as of and for the periods
presented.
The
Company continually reviews its disclosure controls and procedures and makes
changes, as necessary, to ensure the quality of its financial reporting. As
detailed below, the Company has implemented certain additional controls that it
believes will remediate the issues that arose with respect to the material
weakness.
Changes
in Internal Control over Financial Reporting
Management
and the Board of Directors are committed to the remediation of the material
weakness set forth above as well as the continued improvement of the Company’s
overall system of internal control over financial reporting. Subsequent to the
period covered by this report, management has implemented measures to remediate
the material weakness in internal control over financial reporting described
above. Specifically, we have implemented procedures to enhance the maintenance
and review of participant data for benefit plans. As part of the
Company’s fiscal 2010 assessment of internal control over financial reporting,
management will conduct sufficient testing and evaluation of the implemented
controls to ascertain whether they are designed and operating
effectively. Management believes the implemented controls will
remediate the material weakness related to the maintenance and review of
participant data for benefit plans.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
Discussion
of legal matters is incorporated by reference to Part I, Item 1, Note 14,
“Commitments and Contingencies,” in the Notes to the Condensed Consolidated
Financial Statements.
Item
1A. Risk Factors
An
investment in our common stock involves a high degree of risk. You
should carefully consider the risks set forth in the Risk Factors section of our
Annual Report on Form 10-K/A for the year ended December 31, 2009 filed with the
SEC on December 13, 2010.
- 27
-
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Other Information
None.
Item
5. Exhibits
Exhibit No.
|
Exhibit Description
|
|
31.01
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934 as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
31.02
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934 as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
|
|
32.01
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.02
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
- 28
-
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.
Registrant: Colfax
Corporation
By:
/s/ CLAY
H. KIEFABER
|
President
and Chief Executive Officer
|
December
13, 2010
|
||
Clay H.
Kiefaber
|
(Principal
Executive Officer)
|
- 29
-