Attached files

file filename
EX-31.01 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER REQUIRED BY RULE 13A-14(A) - WILLIAMS CONTROLS INCexhibit31-01.htm
EX-23.01 - CONSENT OF MOSS ADAMS LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING - WILLIAMS CONTROLS INCexhibit23-01.htm
EX-32.01 - CERTIFICATION OF PATRICK W. CAVANAGH PURSUANT TO 18 U.S.C. SECTION 1350 - WILLIAMS CONTROLS INCexhibit32-01.htm
EX-31.02 - CERTIFICATION OF CHIEF FINANCIAL OFFICER REQUIRED BY RULE 13A-14(A) - WILLIAMS CONTROLS INCexhibit31-02.htm
EX-21.01 - SCHEDULE OF SUBSIDIARIES (FILED HEREWITH) - WILLIAMS CONTROLS INCexhibit21-01.htm
EX-32.02 - CERTIFICATION OF DENNIS E. BUNDAY PURSUANT TO 18 U.S.C. SECTION 1350 - WILLIAMS CONTROLS INCexhibit32-02.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________
 
FORM 10-K
 
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended: September 30, 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 0-18083
________________
 
Williams Controls, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware       84-1099587
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
     
14100 SW 72nd Avenue    
Portland, Oregon   97224
(Address of principal executive office)   (Zip code)

Registrant’s telephone number, including area code:
(503) 684-8600
 
Securities registered pursuant to Section 12(b) of the Act:
None
 
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.01 par value)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [   ] No [ X ]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [   ] No [ X ]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [ X ] No [   ]
 
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 to Rule 405 of Regulation S-T (section 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]
 

 

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 [   ]     
  Non-accelerated filer [   ]   Smaller reporting company [ X ]  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)    Yes [ ] No [ X ]
The aggregate market value of voting common shares (based upon the closing price of the shares as reported on the NASDAQ Global Market) of Williams Controls, Inc. held by non-affiliates was approximately $31,626,198 as of March 31, 2010.
 
As of December 1, 2010, there were 7,289,745 shares of Common Stock outstanding.
 
Documents Incorporated by Reference
 
The Registrant has incorporated by reference into Part III of this Form 10-K portions of its
Proxy Statement for the Annual Meeting of Stockholders to be held February 22, 2011.
 
2
 

 

Williams Controls, Inc.
 
Index to 2010 Form 10-K
 
                      Page
Part I        
  Item 1.   Business   4-7
  Item 1A.   Risk Factors   8-11
  Item 2.   Properties   11
  Item 3.   Legal Proceedings   11
  Item 4.   Submission of Matters to a Vote of Security Holders   11
           
Part II        
  Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and   12
      Issuer Purchases of Equity Securities    
  Item 6.   Selected Financial Data   13
  Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   13-22
  Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   22
  Item 8.   Financial Statements and Supplementary Data   23
  Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   51
  Item 9A.   Controls and Procedures   51
  Item 9B.   Other Information   51
           
Part III        
  Item 10.   Directors, Executive Officers and Corporate Governance   52
  Item 11.   Executive Compensation   52
  Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related   52
      Stockholder Matters    
  Item 13.   Certain Relationships and Related Transactions, and Director Independence   52
  Item 14.   Principal Accountant Fees and Services   52
           
Part IV        
  Item 15.   Exhibits and Financial Statement Schedules   53
           
Signatures     54

3
 

 

WILLIAMS CONTROLS, INC.
FORM 10-K
 
PART I
(Dollar amounts in thousands, unless otherwise indicated)
 
ITEM 1. BUSINESS
 
     We are a Delaware corporation formed in 1988. The following are our wholly-owned subsidiaries:
 
     Williams Controls Industries, Inc. (“Williams”); Williams (Suzhou) Controls Co. Ltd. (“Williams Controls Asia”); Williams Controls Europe GmbH (“Williams Controls Europe”); and Williams Controls India Private Limited (“Williams Controls India”).
 
General
 
     We primarily design, manufacture and sell electronic throttle controls, pneumatic controls, and electronic sensors for heavy trucks, transit buses, off-road equipment and military applications. Electronic throttle controls send a signal proportional to throttle position to adjust the speed of electronically controlled engines. The use of electronically controlled engines is influenced primarily by emissions regulations, because these engines generally produce lower emissions. The original applications of electronic engines and electronic throttle controls were in heavy trucks and transit buses in the United States and Europe in the late 1980’s. As a result of the continuing implementation of more stringent emissions standards worldwide, demand for electronically controlled engines and electronic throttle control systems is expanding both geographically and into lower horsepower engines. China, India and Russia are implementing more stringent emissions standards for heavy trucks and transit buses, which we believe will increase the penetration of electronic throttle controls worldwide. Additionally, countries around the world have adopted emissions regulations that we expect will continue to increase the use of electronic throttle controls in off-road equipment.
 
     We also produce a line of pneumatic control products, which are generally sold to the same customer base as our electronic throttle controls. These pneumatic products are used for vehicle control system applications such as power take-off’s, or PTO’s, and air-control applications.
 
     Electronic sensors are a significant component of our electronic throttle controls. The two principal sensor technologies are contacting and non-contacting. We have been producing contacting electronic sensors for use in our electronic throttle control systems since 2005 and began producing non-contacting sensors in 2006. Prior to 2005, we only used contacting sensors and we purchased those from third parties. In addition to internal use, we also have begun selling sensors as separate product lines. As part of our sensor strategy, we have a license to use certain non-contacting sensor technology from Moving Magnet Technology S.A. Since 2007, the majority of our sensors have been produced internally.
 
     We also design and manufacture a line of adjustable foot pedals and arm rests, and we are developing joysticks primarily for the off-road market. Adjustable foot pedals are devices that move the throttle, brake and, if applicable, the clutch pedal, closer or further away from the vehicle driver to compensate for driver heights. We have a licensing agreement for an adjustable pedal technology, which allows us to sell adjustable pedals in the medium and heavy truck and transit bus markets.
 
     We sell our products worldwide. During fiscal 2010, approximately 59% of our products were sold in the United States and an additional 8% of our products were sold to customers in Canada and Mexico for vehicles that are produced, in part, for the United States market. Approximately 33% of our products, measured in terms of unit volume, were sold to other international markets. We sell the majority of our products directly to large heavy truck, transit bus and off-road original equipment manufacturers worldwide. Our largest customers include The Volvo Group, Paccar, Inc., Daimler Trucks NA, Navistar International Corporation, Caterpillar, Inc., and Bendix Commercial Vehicle Systems. We also sell our products through a network of independent distributors and representatives, which sell to smaller original equipment manufacturers (“OEMs”) and to truck and bus owners as replacement parts.
 
4
 

 

     While we are a leader in the market for electronic throttle control systems for heavy trucks, transit buses and off-road equipment, the markets for our products are highly competitive worldwide. The existing and developing worldwide heavy truck, transit bus and off-road markets will require competitive worldwide manufacturing capabilities. We expect to begin selling electronic throttle controls for light commercial vehicles in the Asian market in fiscal 2011. We believe our operating facilities in Portland, Oregon, Suzhou, China and Pune, India have us well positioned to meet the needs of these markets. In addition to our manufacturing facilities, we have sales offices in Shanghai, China and Munich, Germany. We also have exclusive distributor relationships in Japan, Korea and India to serve those markets.
 
Competition
 
     We are a worldwide market leader for electronic throttle control systems for heavy trucks, transit buses and off-road vehicles. We also are the largest domestic producer in the market. We have a much smaller portion of the European and Asian markets. The markets for our products are highly competitive, with many of our competitors having substantial financial resources and significant technological capabilities. Our competitive position varies among our product lines.
 
     The major competitors for our electronic throttle controls include AB Eletronik GmbH, Kongsberg Automotive, Siemens VDO Automotive AG, Felsted Products, LLC, Hella KGaA Hueck & Co., Heinrich Kubler AG (“KSR”) and Comesys, Ltd. Several Chinese competitors, most notably Alion and GoFa, are also significant competitors. Other companies, including Dura Automotive Systems, Inc. and CTS Corporation compete in the passenger car and light truck market and may attempt to compete in the heavy truck and transit bus market in the future.
 
     We also manufacture pneumatic control systems for the diesel heavy truck, transit bus and off-road vehicle markets. The market for these pneumatic control systems is highly competitive and characterized by many competitors. Many of the customers for these products are the same customers as for our heavy truck and transit bus electronic throttle control systems.
 
     When choosing among competing electronic throttle control systems, we believe purchasers of these systems focus on price, quality, value added engineering and reputation. In addition, we believe attainment of the TS 16949 quality certification and the ISO 14001 Environmental Management System certification are critical to qualifying as a supplier. Our manufacturing facilities in Portland and Suzhou have attained the TS 16949 and ISO 14001 certifications and our entire product line is produced using these standards. When our Pune, India facility becomes fully operational we intend to seek TS 16949 and ISO 14001 certifications.
 
Marketing and Distribution
 
     We sell our products to customers primarily in the heavy truck, transit bus and off-road equipment industries. For the years ended September 30, 2010, 2009 and 2008, The Volvo Group accounted for 16%, 16% and 19%; Paccar, Inc. accounted for 9%, 9% and 11%; and Daimler Trucks NA accounted for 8%, 9% and 9%, of net sales from operations, respectively. Approximately 41%, 37% and 46% of net sales in fiscal 2010, 2009 and 2008, respectively, were to customers outside of the United States, primarily in Canada, Belgium, Sweden, Mexico, China and Korea, and, to a lesser extent, in other European countries, South America, Pacific Rim nations and Australia. We market our products from our sales facilities in Portland, Oregon, Shanghai, China, Munich, Germany and through distributor networks.
 
     In fiscal 2010, 2009 and 2008, approximately 84%, 83% and 86%, respectively, of our sales were from sales of electronic throttle controls, with the remainder being sales of pneumatic control systems.
 
Environmental
 
     We produce minimal quantities of hazardous waste in our operations and we are subject to federal and state air, water and land pollution control laws and regulations. Compliance with these laws generally requires us to incur operating costs and capital expenditures. Substantial liability may result from the failure to properly handle hazardous waste.
 
     The soil and groundwater at the Company’s Portland, Oregon facility contains certain contaminants, which were deposited from approximately 1968 through 1995. Some of this contamination has migrated offsite to neighboring properties. The Company has retained an environmental consulting firm to investigate the extent of the contamination and to determine what remediation will be required and the associated costs. During fiscal 2004, the Company entered into the Oregon Department of Environmental Quality’s voluntary clean-up program. As of September 30, 2010, the total liability recorded for the clean-up is $900 and is classified in accrued expenses in the accompanying consolidated balance sheet. We asserted and filed a contractual indemnity claim against Dana Holding CP (“Dana”), from whom we acquired the property, and contribution claims against the other prior owner of the property as well as businesses previously located on the property (including Blount, Inc. (“Blount”) and Rosan, Inc. (“Rosan”)) under the Federal Superfund Act and the Oregon Cleanup Law. During 2008, we entered into a settlement agreement with Dana, Blount and Rosan under which we received total cash payments from Dana, Blount and Rosan of $735, and shares of Dana stock equal to approximately $337 at the time of settlement, and assumed the full obligation to, and risks associated with, completing the remediation. 
 
5
 

 

Government Regulation
 
     Our vehicle component products must comply with the National Traffic and Motor Vehicle Safety Act of 1966, as amended, and regulations promulgated there under, which are administered by the National Highway Traffic Safety Administration (“NHTSA”). If, after an investigation, NHTSA finds that we are not in compliance with any of its standards or regulations, among other things, it may require that we recall products found not to be in compliance, and repair or replace such products. During fiscal 2010, we had no product recalls. We are not aware of any instances of material non-compliance with the statute and applicable regulations.
 
Product Research and Development
 
     We conduct engineering, research and development and quality control activities to maintain and improve the performance, reliability and cost-effectiveness of our products and to develop new products. Our engineering staff works closely with our customers to design and develop new products and to adapt existing products for new applications. During fiscal 2010, 2009 and 2008, the Company spent $4,505, $3,981and $4,015, respectively, on these activities. We anticipate that these expenses may increase as we continue to expand into new markets and new products.
 
Patents, Trademarks and Licenses
 
     We believe our products generally have strong name recognition in their respective markets. We own numerous patents, primarily under the “Williams” name, which expire at various times. We believe that, in the aggregate, the rights under our patents are generally important to our operations. We do not, however, consider any individual patent or group of patents to be of material importance to our total business.
 
     During fiscal 2003 the Company obtained an exclusive license for use in our adjustable pedal product lines. The initial agreement was for a period of three years and contained annual renewal provisions if certain sales thresholds were met. With the general economic decline in fiscal 2009 and the significant decline in recreational vehicle sales, a primary market for adjustable pedals, the contractual thresholds have not been met and the license reverted to a non-exclusive license where it remains today. The Company is obligated to make royalty payments based on the number of units we sell. Additionally, as part of the sale of our passenger car and light truck product lines to Teleflex Incorporated on September 30, 2003, we obtained the right to use certain of Teleflex’s (now Kongsberg Automotive) adjustable pedal patents in exchange for Teleflex receiving fully paid licenses for certain of our patents.
 
     In fiscal 2005, we entered into an agreement with Moving Magnet Technology SA (“MMT”) to license certain non-contacting sensor technology. We use this license to internally produce non-contacting sensors for use in our electronic throttle controls. We make royalty payments based on the number of units sold, which includes minimum yearly royalties beginning in 2008. This agreement is for a period of ten years and may be renewed annually based on written mutual agreement. This agreement may be terminated by the licensor if certain sales thresholds are not met.
 
Raw Materials; Reliance on Single Source Suppliers
 
     We purchase certain of our component parts that are derived from raw materials, including brass, aluminum, steel, plastic, rubber and zinc. These materials currently are widely available at reasonable terms, but are subject to volatility of prices due to fluctuations in the commodity markets. Future demand and other factors, such as currency fluctuations, supply shortages or disruptions, may result in price increases causing higher costs for some of our components. Although historically commodities and component prices have increased, we have not been subject to supply constraints as a result of these factors.
 
6
 

 

Product Warranty
 
     We warrant our products to the first purchaser and subsequent owners against malfunctions occurring during the warranty period resulting from defects in material or workmanship, subject to specified limitations. The warranty on vehicle components is limited to a specified time period, mileage or hours of use, and varies by product, application and customer. We have established a warranty liability based upon our estimate of the future cost of warranty and related service costs. We regularly monitor our warranty liability for adequacy in response to historical experience and other factors.
 
Employees
 
     As of September 30, 2010, we employed 128 employees in our Portland, Oregon facility, of which approximately 59 were engaged in manufacturing and 69 were involved in sales, engineering and administrative functions. As of September 30, 2010, we employed 104 employees in China, of which 60, were engaged in manufacturing and approximately 44 were engaged in sales, engineering and administrative functions. We are in the process of starting-up our Pune, India facility and have two employees in that facility. We also have 2 employees in Europe as of September 30, 2010. Our hourly employees engaged in manufacturing in the Portland, Oregon facility are represented by the International Union, United Automobile Workers of America and Amalgamated Local 492. In February 2009, we signed a new labor agreement which will expire on August 31, 2013. As of September 30, 2010, we employed a total of 35 people pursuant to this labor agreement.
 
Forward-Looking Statements
 
     This report on Form 10-K contains forward-looking statements within the meaning of Section 21D of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include all statements other than those that expressly state historical fact. Among others, this report includes forward looking statements that describe our plans and intentions regarding future courses of action and the possible outcomes of those intentions, and that set forth our expectations regarding our prospective financial condition, results of operations, and cash flows. Forward-looking statements can sometimes be identified by the use of forward-looking terminology, such as “may”, “will”, “should”, “expect”, “anticipate”, “estimate”, “continue”, “plans” and “intends”. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such forward-looking statements are subject to risks and uncertainties that could cause us to deviate from our current plans, and could cause our actual results to differ materially from those indicated by the forward-looking statements. Similarly, we may deviate from the plans and intentions expressed in this report, which may further cause our results to vary. Some of the factors that could cause our actions or performance to differ from, or our results to fall short of, our expectations are described in the section of this report entitled “Section 1A: Risk Factors,” and in our other reports to and filings with the Securities and Exchange Commission from time to time. These risks and uncertainties are beyond our control and, in many cases, we cannot predict the risks and uncertainties that could cause our actual results to differ materially from those indicated by the forward-looking statements.
 
     The forward-looking statements are made as of the date hereof, and, except as otherwise required by law, we cannot undertake to update or revise these statements.
 
Available Information
 
     The Company maintains a website on the Internet at www.wmco.com. The Company makes available free of charge through its website its reports and other communications filed or furnished pursuant to Sections 13 (a) and 14 (a) of the Exchange Act. The information on our website is not part of this report and is not otherwise to be considered filed with or furnished to the SEC.
 
7
 

 

ITEM 1A. RISK FACTORS
 
     An investment in our common stock involves a high degree of risk. You should carefully consider the risks discussed below and the other information in this report on Form 10-K before deciding whether to invest in our common stock.
 
A significant portion of our sales are derived from a limited number of customers, and results of operations could be adversely affected and stockholder value harmed if we lose any of these customers.
 
     A significant portion of our revenues historically have been derived from a limited number of customers. Further, each of these customers is a manufacturer of heavy trucks or components, and the worldwide truck and off-road industries have historically been cyclical markets and at times have been, and presently are, subject to significant financial stress and uncertainty. Were any of our key customers to place some or all of their business with one or more of our competitors or cease operations, we may face a material adverse impact upon our revenues, net income, cash flows and financial condition.
 
Reduced spending due to weakness in the financial and credit markets and uncertainties in the economy, domestically and internationally, may adversely affect our revenues and operating results.
 
     We depend on demand from the heavy truck, bus and off-road OEMs and the demand for such OEMs for their products in the markets they serve. All of these markets have been, and may continue to be, adversely affected by worldwide economic conditions, including the current global economic downturn. Accordingly, our business may be adversely impacted by reductions in demand for our products as a result of uncertain conditions in the macroeconomic environment, such as volatile energy prices, inflation, fluctuations in interest rates, difficulty securing credit, volatility in security prices and the corresponding uncertainties surrounding equity finance markets, diminished liquidity and other economic factors. The resulting decrease in demand has and may continue to adversely impact our revenues and stockholder value. Demand for our products declined significantly in fiscal 2009 and only recovered slightly in fiscal 2010, which impacted overall sales and net income.
 
     Negative economic conditions also may materially impact our customers, suppliers and other parties with which we do business. Economic and financial market conditions that adversely affect our customers may cause them to terminate existing purchase orders or to reduce the volume of products they purchase from us in the future. We normally do not require customers to post collateral as security for receivables and we do not purchase credit insurance. We may have significant balances owing from customers who operate in cyclical industries or who may not be able to secure sufficient credit in order to honor their obligations to us. Failure to collect a significant portion of amounts due on those receivables could have an adverse effect on our results of operations and financial condition.
 
     Adverse economic and financial market conditions also may cause our suppliers to be unable to provide materials and components to us or may cause suppliers to make changes in the credit terms they extend to us, such as shortening the required payment period for our amounts owing them or reducing the maximum amount of trade credit available to us. While we have not yet experienced changes of this type, they could significantly affect our liquidity and could have an adverse effect on our results of operations and financial condition. If we are unable to successfully anticipate and address changing economic and financial markets conditions, our business could be negatively affected.
 
Our products could be recalled, which could increase our costs and decrease our revenues.
 
     Our vehicle component products must comply with the National Traffic and Motor Vehicle Safety Act of 1966, as amended, and regulations promulgated thereunder, which are administered by the National Highway Traffic Safety Administration (“NHTSA”). If NHTSA finds that we are not in compliance with its standards or regulations, it may, among other things, require that we recall products found not to be in compliance, and repair or replace such products. Such a recall could increase our costs and adversely impact our reputation in our industry, both of which would adversely affect our revenues, profit margins, results of operations and stockholder value.
 
8
 

 

We purchase component parts from suppliers and changes in the relationships with such suppliers, as well as increases in the costs of raw materials that comprise our component and/or the component parts, would adversely affect our ability to produce and market our products, which would adversely affect our profit margins, results of operations and stockholder value.
 
     We purchase component parts from suppliers to be used in the manufacturing of our products. If a supplier fails to provide necessary component parts, we may be unable to produce, or may face delays or cost increases in producing, certain products. These potentialities could result in a decrease in revenue, a loss of timeliness in product deliveries, and adverse impacts on our reputation in our industry. Also, if prices of raw materials that comprise our component parts and/or the component parts increase, or if a supplier increased prices for other reasons, and we are not able to mitigate these costs or pass on such increase to our customers, our profit margins would decrease. Finally, if our suppliers (or any alternative suppliers from which we choose or are required to acquire components) delivers products that do not meet our specifications or cause us to fail to meet our product standards, we may face losses in revenues, reputational harm, and potentially other adverse business consequences. The occurrence of any of these events could adversely affect our results of operations and stockholder value.
 
Our products could be subject to product liability claims by customers and/or consumers, which would adversely affect our profit margins, results of operations and stockholder value.
 
     The majority of our products are used on heavy trucks and transit buses. If our products are not properly designed or built and/or personal injuries or property damages are attributed to the performance of our equipment, we could be subject to claims for damages based on theories of product liability and other legal theories. We maintain liability insurance for these personal injury and property damage risks, but not for claims that do not involve personal injury or property damage. The costs and resources to defend such claims could be substantial, and if such claims are successful, we could be responsible for paying some or all of the damages. Also, our reputation could be adversely affected, regardless of whether such claims are successful. Any of these results would adversely affect our profit margins, results of operations and stockholder value. During fiscal 2010 we settled such a product liability case which was not covered by our liability insurance. Refer to ITEM 3 – LEGAL PROCEEDINGS.
 
Our defined benefit pension plans are under-funded and, therefore, we may be required to increase our contributions to the plans, which would adversely affect our cash flows.
 
     We maintain two defined benefit pension plans among the retirement plans we sponsor. No new employees are being admitted to participate in these two plans. Participants in these two plans are entitled to a fixed formula benefit upon retirement. Although we make regular contributions to these two plans in accordance with minimum ERISA funding requirements, investment earnings may be less than expected, and we may be required to increase contributions to the under-funded plan(s), which would adversely affect our cash flows.
 
The market price of our stock has been and may continue to be volatile, which could result in losses for stockholders.
 
     Our common stock is currently listed on the NASDAQ Global Market and is thinly traded. Volatility of thinly traded stocks is typically higher than the volatility of more liquid stocks with higher trading volumes. The market price of our common stock has been and, in the future, could be subject to significant fluctuations as a result of the foregoing, as well as variations in our operating results, announcements of technological innovations or new products by us or our competitors, announcements of new strategic relationships by us or our competitors, general conditions in our industries or market conditions unrelated to our business and operating results. Any of these results could adversely impact stockholder value.
 
Current economic conditions could adversely affect our operations.
 
     During fiscal 2010, financial markets in the United States and abroad have experienced extreme disruption, including severely diminished liquidity and credit availability similar as what occurred in fiscal 2009. These conditions could impair our ability to access credit markets and there can be no assurance that these conditions will not adversely affect our business in the future.
 
9
 

 

     At September 30, 2010, we had on hand cash and cash equivalents of $3,016. In June 2010, the Company entered into a revolving loan facility with U.S. Bank, which expires on June 30, 2012. As of September 30, 2010, there was no balance outstanding on the revolving loan facility and the Company had available under its revolving credit facility $6,241. We believe our cash on hand and the revolving credit facility will be sufficient to meet our working capital needs for the foreseeable future.
 
The soil and groundwater at our Portland, Oregon facility contains certain contaminants that may require us to incur substantial expense to investigate and remediate, which would adversely affect our profit margins, results from operations and stockholder value.
 
     The soil and groundwater at our Portland, Oregon facility contain certain contaminants. Some of this contamination has migrated offsite to neighboring properties and potentially to other properties. We have retained an environmental consulting firm to investigate the extent of the contamination and to determine what remediation will be required and the associated costs. In fiscal 2004, we entered the Oregon Department of Environmental Quality’s voluntary clean-up program and established a liability for this matter. At September 30, 2010, this liability totaled $900. Our overall costs ultimately may exceed our estimates, or we may be forced to increase the amount of our estimates, either or both of which could adversely affect our financial condition, results of operations or cash flows.
 
Complying with the laws applicable to the United States and foreign markets may become more difficult and expensive in the future, which could adversely affect our results of operations and stockholder value.
 
     Our operations in the United States and foreign markets are subject to the laws of such markets. Compliance with these laws may become more difficult and costly in the future. In addition, these laws may change and such change may require us to change our operations. Any of these results could adversely affect our results of operations and stockholder value by increasing expenses and reducing revenues, thereby reducing profits.
 
We face risks related to our foreign operations.
 
     In addition to our operations in the United States, we currently operate in China, and in fiscal 2010 established an operation in India. We also have a sales presence in other countries such as Japan, Korea and a number of countries in the European Union, and we market our products and technologies in those and other international markets, including both industrialized and developing countries. Our combined international operations are subject to various risks common to international activities, such as:
  • our ability to maintain good relations with our overseas employees and distributors and to collect amounts owed from our overseas customers;
     
  • exposure to currency fluctuations;
     
  • potential difficulties in enforcing contractual obligations;
     
  • complying with a wide variety of laws and regulations, including product certification, environmental, and import and export laws;
     
  • the challenges of operating in disparate geographies and cultures;
     
  • political and economic instability; and
     
  • restrictions on our ability to repatriate dividends from our subsidiaries, particularly from our Chinese subsidiary.
10
 

 

Fluctuations in the value of currencies could adversely affect our international sales, which would result in reduced revenues and stockholder value.
 
     We sell products in North America, Europe, Mexico, China, Korea, India, South America, the Pacific Rim nations, Australia, and other member nations of the European Union and Asia; we purchase components from suppliers in China, Mexico and Europe; we have manufacturing and sales operations in China and India; and we maintain a sales and technical center in Germany. For fiscal 2010, 2009 and 2008, foreign sales were approximately 41%, 37%, and 46% of net sales, respectively. Although currently a majority of our sales and purchases are made in U.S. dollars, an increasing amount of our purchases and sales are made in Chinese RMB and we anticipate that over time more of our purchases of component parts and sales of our products will be denominated in foreign currencies. We do not presently engage in any hedging of foreign currency risk. In the future, our operations in the foreign markets will likely become subject to fluctuations in currency values between the U.S. dollar and the currency of the foreign markets. Our results of operations and stockholder value could be adversely affected if currency of any of the foreign markets increases in value relative to the U.S. dollar.
 
Political and economic instability in the foreign markets may make doing business there more difficult and costly, which could adversely affect our results of operations and stockholder value.
 
     Economic and political instability may increase in the future in foreign markets. Such instability may make it more difficult to do business in those countries, may make it more expensive to operate and could disrupt supplies of components into our Portland, Suzhou, or Pune facilities. If our operations were nationalized by the government of China, this could cause us to write off the value of our operations in such foreign markets and eliminate revenues generated by such operations. Any of these results could result in onetime charges or increased expenses as well as lower revenues, which would adversely affect our results of operations and harm stockholder value.
 
ITEM 2. PROPERTIES
 
     We own a 120,000 square foot manufacturing facility and office building in Portland, Oregon. We believe the Portland facility is adequate for our existing needs and the needs for the foreseeable future. This manufacturing facility is equipped with the machinery and equipment necessary to manufacture and assemble our products. We believe that this facility has been maintained adequately.
 
     We lease approximately 63,000 square feet in Suzhou, China for manufacturing and office and approximately 500 square feet for our Shanghai, China sales office. We also lease approximately 15,000 square feet of manufacturing and office space in Pune, India and approximately 1,400 square feet in Munich, Germany for our Williams Controls Europe sales operation. We believe that these facilities will be adequate to meet our existing needs and our needs for the foreseeable future.
 
ITEM 3. LEGAL PROCEEDINGS
 
     The Company and its subsidiaries are parties to various pending judicial and administrative proceedings arising in the ordinary course of business. The Company’s management and legal counsel have reviewed the probable outcome of these proceedings, the costs and expenses reasonably expected to be incurred, the availability and limits of the Company’s insurance coverage, and the Company’s established liabilities. While the outcome of the pending proceedings cannot be predicted with certainty, based on its review, the Company believes that any unrecorded liability that may result is not more than likely to have a material effect on the Company’s liquidity, financial condition or results of operations.
 
     On October 1, 2004, the Company was named as a co-defendant in a product liability case (Cuesta v. Ford, et al), brought in the Oklahoma State District Court in Bryant, Oklahoma. During the second quarter of fiscal 2010 the Company entered into a settlement agreement between and among Ford and the plaintiff group and recorded a $775 provision for full settlement and release of all claims. The complaint sought an unspecified amount of damages on behalf of the class based on allegations that certain of our products, as incorporated into certain models of Ford motor vehicles, are defective. The settlement agreement involves settlements with both Ford and the Company, with the Company’s settlement costs of $775. In September 2010, the Company has made cash payment of a $775 for the settlement.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2010.
 
11
 

 

PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Prices of Common Stock
 
     Our common stock is traded on the NASDAQ Global Market under the symbol “WMCO.” The following table sets forth the high and low closing prices of our common stock for each fiscal quarter for the past two fiscal years as reported on the NASDAQ Global Market:
 
  2010   2009
  High       Low       High       Low
First Quarter $      8.73   $      7.74   $      13.02   $      6.21
Second Quarter $ 8.12   $ 7.15   $ 7.81   $ 4.15
Third Quarter $ 9.76   $ 8.20   $ 7.25   $ 4.95
Fourth Quarter $ 10.47   $ 7.51   $ 9.40   $ 5.90

Dividend Policy
 
     There were 233 record holders of our common stock as of December 1, 2010. During fiscal 2010 we paid a $1 per share cash dividend. We had never paid a dividend with respect to our common stock prior to that time and payment of cash dividends in the future will be at the exclusive discretion of the Board of Directors and will depend upon our earnings levels, capital requirements, any restrictive loan covenants and other factors the Board considers relevant.
 
Performance Graph
 
     The graph below compares the cumulative total stockholder return of our common stock with the cumulative total return of the NASDAQ Composite Index and a peer group of companies primarily traded on the NASDAQ Stock Market in the Standard Industry Classification Code 3714 (motor vehicle parts and accessories) (the “Peer Group”). The graph shows the value for the period beginning October 1, 2005 and ending September 30, 2010. The graph assumes that $100 was invested on September 30, 2005.
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Williams Controls, Inc., The NASDAQ Composite Index
And A Peer Group
 
 
Total Return Analysis
  9/30/05       9/30/06       9/30/07       9/30/08       9/30/09       9/30/10
Williams Controls, Inc. $      100.00   $      166.93   $      237.42   $      169.70   $      118.31   $      133.01
NASDAQ Composite $ 100.00   $ 106.39   $ 127.37   $ 96.70   $ 100.00   $ 112.86
Peer Group $ 100.00   $ 104.99   $ 144.38   $ 95.54   $ 96.05   $ 137.69
 
12
 

 

ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands - except per share amounts)
 
Consolidated Statement of Operations Data: Year ended September 30
  2010       2009       2008       2007       2006
Net sales $      52,266   $      38,809     $      65,781   $      68,924   $      74,634
Net income (loss)   1,377     (2,009 )     7,830     7,937     9,549
Net income (loss) per common share – basic   0.19     (0.27 )     1.04     1.06     1.29
Net income (loss) per common share – diluted   0.19     (0.27 )     1.01     1.03     1.25
Cash dividends per common share   1.00     -       -     -     -
                               
Consolidated Balance Sheet Data: September 30
  2010   2009   2008   2007   2006
Current Assets $ 21,249   $ 24,104     $ 28,694   $ 21,041   $ 23,991
Current Liabilities   10,503     7,707       9,447     9,857     17,651
Working Capital   10,746     16,397       19,247     11,184     6,340
Total Assets   34,205     36,384       39,762     32,078     35,703
Long-Term Liabilities   8,938     8,587       4,667     5,052     9,790
Stockholders’ Equity   14,764     20,090       25,648     17,169     8,262

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
(Dollars in thousands – except share and per share amounts)
 
     This section summarizes the significant factors affecting our consolidated results of operations, financial condition and liquidity position for each year comprising the three year period ended September 30, 2010. This section should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this document, and readers should note that dollar figures in this section, other than per-share data, are presented in thousands. Statements in this report that relate to future results and events are based on our current expectations. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties. For a discussion of factors affecting our business, see “ITEM 1 – BUSINESS” in this Annual Report on Form 10-K. Further, this section includes forward-looking statements which should be read in conjunction with the section entitled “Item 1A – Risk Factors.”
 
Overview
 
     Net sales increased to $52,266 in fiscal 2010, up 35% when compared to fiscal 2009. The low point of the economic cycle relevant to our operations appears to have occurred during our third quarter of fiscal 2009 and sales have steadily increased since that time. Although we have seen improvement from our low point in fiscal 2009, the heavy truck industry is still significantly below levels prior to the economic downturn with our fiscal 2010 sales being 21% below fiscal 2008 sales levels. While we continue to closely monitor all of our costs, and we remain committed to spending on new product development and technology for existing and new customers. During the fourth quarter of fiscal 2010, the Company paid a cash dividend of $1.00 per share to stockholders of record as of July 14, 2010. Although no assurances can be given, management believes that it is likely that our $3,016 in cash on hand plus available borrowing of $6,241 under our revolving loan facility will be adequate to sustain the Company through the foreseeable future.
 
     As we move forward into fiscal 2011 and beyond, we will continue to work closely with our existing and potential customers to design and develop new products and adapt existing products to new applications, and to improve the performance, reliability and cost-effectiveness of our products.
 
13
 

 

Results of Operations
 
Financial Summary
(Dollars in Thousands)
 
                          2009 to   2008 to
  2010       2009       2008       2010       2009
Net sales $      52,266     $      38,809     $      65,781          34.7 %        (41.0 %)
Cost of sales   37,446       30,173       42,960     24.1 %   (29.8 %)
                                   
Gross profit   14,820       8,636       22,821     71.6 %   (62.2 %)
                                   
Research and development   4,505       3,981       4,015     13.2 %   (0.8 %)
Selling   2,836       2,425       2,727     16.9 %   (11.1 %)
Administration   5,480       5,522       5,500     (0.8 %)   0.4 %
Class action settlement   775       -       -     NM   NM
Gain from settlement of environmental claims   -       -       (1,072 )   NM   NM
                                   
Operating income (loss) $ 1,224     $ (3,292 )   $ 11,651              
                                   
As a percentage of net sales:                                  
       Cost of sales   71.6 %     77.7 %     65.3 %            
       Gross margin   28.4 %     22.3 %     34.7 %            
       Research and development   8.6 %     10.3 %     6.1 %            
       Selling   5.4 %     6.2 %     4.1 %            
       Administration   10.5 %     14.2 %     8.4 %            
       Class action settlement   1.5 %     -       -              
       Gain from settlement of environmental claims   -       -       (1.6 %)            
       Operating income (loss)   2.3 %     (8.5 %)     17.7 %            

NM – not meaningful
 
Comparative Years Ended September 30, 2010, 2009 and 2008
                      Percent Change
                      2009 to   2008 to
For the Year Ended September 30:       2010       2009       2008       2010       2009
Net sales   $      52,266   $      38,809   $      65,781        34.7 %        (41.0 %)

     Net sales increased $13,457 for fiscal 2010 as compared fiscal 2009. The overall increase in sales in fiscal 2010 results from volume increases in essentially all of our principal geographic markets. In fiscal 2009, we saw significant reductions in the number of units of trucks, buses and off-road vehicles built worldwide due to the significant recessionary pressures in the United States and many parts of the rest of the world and as a result, essentially all of our large truck OEM customers had reductions in build rates and took extensive down-time in 2009. As the economic climate has improved worldwide in fiscal 2010 and our truck OEM customers have increased build rates, the result has been an overall increase in sales volumes in all our markets.
 
     Net sales to customers in Asia increased 54% over the prior year primarily due to increased sales volumes of heavy trucks in Korea and heavy trucks and off-road vehicles in China. Increases in off-road volumes in China primarily results from adoption of more stringent emissions standards, which mandate the inclusion of electronic throttle controls on new vehicles, thus allowing us to expand our customer base in this market. Korean sales have increased due to improvements in the economic climate in Korea and an increase in the number of truck sales. European truck sales were up 80% in fiscal 2010 when compared to fiscal 2009 due to our European customers increasing their heavy truck build rates and working through the build up of inventory levels experienced in fiscal 2009. Net sales to NAFTA truck customers were up 21% over fiscal 2009 due to continued improvements in the economic environment and freight hauling. These improvements more than offset the Company’s expected declines associated with the emission standards enacted in North America in calendar 2010 which drove higher truck costs to comply with these new emission standards. We believe that NAFTA truck sales may improve slightly over the next few quarters as the economic environment continues to improve. Worldwide off-road sales were up 57% for the fiscal year ended September 30, 2010. The largest contributor to this increase in off-road sales occurred in the NAFTA market, where off-road sales were up 49% primarily due to continued increases in sales related to United States military vehicle applications.
 
14
 

 

    We expect that electronic throttle control sales generally will continue to vary directly with future changes in the overall economy and the demand for heavy trucks, transit buses and off-road vehicles in particular. These variations are largely dependent upon, and are expected to vary directly with, production volumes in the various geographic markets in which we serve. Additionally, competitive pricing may reduce margins and gross sales.
 
    Net sales decreased $26,972 for fiscal 2009 as compared to fiscal 2008. The decrease in sales resulted from volume reductions in essentially all of our principal markets, which we believe was due to the decline in the world economic climate and the impact that decline has had on our customers and the end markets for their products. In the North American market, sales to heavy truck customers were down 43% compared to fiscal 2008, which is the direct result of the overall reductions in truck build rates in North America. Our share of that market and unit pricing remained essentially unchanged from the prior year. The sales declines to our European truck customers were even more dramatic, decreasing 64% over the prior year. On a year over year basis, sales to Asia decreased 44%. Net sales to off-road customers decreased 39% as that market also experienced reduced production rates in response to the lower levels of construction activity worldwide.
 
                                  Percent Change
                  2009 to       2008 to
For the Year Ended September 30:     2010   2009   2008   2010   2009
Cost of sales     $       37,446   $       30,173   $       42,960          24.1%          (29.8%)

    The types of expenses included in cost of sales include raw materials; freight and duty; warranty; wages and benefits; depreciation and amortization; production utilities; shipping and production supplies; repairs and maintenance; production facility property insurance; and other production overhead.
 
    As a percent of sales, cost of sales decreased in fiscal 2010 compared to fiscal 2009 primarily due to higher sales volumes to distribute fixed overhead. Additionally, fiscal 2009 included settlement of outstanding labor issues and severance costs totaling $320 and a $116 write-down to our capitalized license fee related to adjustable pedal technology due to the significant decline in business in the recreational vehicle industry. Repairs and maintenance costs and pension/postretirement medical costs decreased $121 and $115, respectively, in fiscal 2010 from the comparable period in fiscal 2009. Slightly offsetting some of these decreases was an increase in warranty costs of $399 in fiscal 2010 when compared to fiscal 2009 and primarily relates to warranty claims with one customer. In addition, freight and duty costs increased $719 in fiscal 2010 when compared to fiscal 2009.
 
    Cost of sales increased as a percent of sales in fiscal 2009 when compared to fiscal 2008, primarily due to significantly lower sales volumes to cover fixed overhead costs. Fiscal 2009 also included settlement of outstanding labor issues and severance costs of $320; a $116 write-down in our capitalized license fee related to adjustable pedals; and an overall increase in warranty costs over fiscal 2008. Offsetting some of these cost increases were overall reductions in salary cost related to our cost reduction program in fiscal 2009.
 
                                  Percent Change
                  2009 to       2008 to
For the Year Ended September 30:     2010   2009   2008   2010   2009
Gross profit     $       14,820   $       8,636   $       22,821          71.6%          (62.2%)

    Gross profit was $14,820, or 28.4% of net sales for fiscal 2010, an increase of $6,184 from the gross profit of $8,636, or 22.3% of net sales in the comparable fiscal 2009 period.
 
    The increase in gross profit in fiscal 2010 was primarily driven by the 35% net increase in sales of electronic throttle control systems to our heavy truck, bus and off-road customers. Manufacturing overhead costs were 8% lower as a percent of sales in fiscal 2010 than in fiscal 2009, primarily due to the factors described above under cost of sales.
 
    Gross profit was $8,636, or 22.3% of net sales for fiscal 2009, a decrease of $14,185 from the gross profit of $22,821, or 34.7% of net sales, in fiscal 2008.
 
15
 

 

    The gross profit decline in fiscal 2009 compared to fiscal 2008 was primarily driven by the 41% net decrease in sales of electronic throttle control systems to our heavy truck, transit bus and off-road customers. Our business is not entirely scalable, which means that certain overhead costs will not vary directly in proportion to sales volumes, particularly during periods of declining sales. However, direct production costs such as materials and labor generally fluctuate with sales volumes.
 
                                  Percent Change
                  2009 to       2008 to
For the Year Ended September 30:     2010   2009   2008   2010   2009
Research and development     $       4,505   $       3,981   $       4,015          13.2%          (0.8%)

    Research and development expenses increased $524 in fiscal 2010 when compared to fiscal 2009. The increase is primarily due to increased resources, including additional headcount, being committed to new project development for sensors and joysticks. The Company’s research and development expenditures generally will fluctuate based on the products under development at any given point in time, and that fluctuation often does not coincide with sales cycles.
 
    Research and development expenses in fiscal 2009 were essentially unchanged when compared to fiscal 2008. Although our sales were down 41%, our cash flows were negatively impacted and we instituted temporary Company-wide salary reductions in fiscal 2009, we felt that it was strategically important to continue our commitment to and spending for new product development and technology for existing and new customers and programs.
 
                                  Percent Change
                  2009 to       2008 to
For the Year Ended September 30:     2010   2009   2008   2010   2009
Selling     $       2,836   $       2,425   $       2,727          16.9%          (11.1%)

    Selling expenses increased $411 in fiscal 2010 as compared to fiscal 2009 mainly due to an increase in travel expenses and sales commissions, which tend to correlate with relatively higher sales volumes.
 
    Selling expenses decreased $302 for fiscal 2009 as compared to fiscal 2008 mainly due to lower overall travel expenses, reduction in salary costs as a result of our cost reduction program in fiscal 2009 and reductions in sales commission expenses as a result of lower commission sales.
 
                                  Percent Change
                  2009 to       2008 to
For the Year Ended September 30:     2010   2009   2008   2010   2009
Administration     $       5,480   $       5,522   $      5,500          (0.8%)          0.4%

    Administration expenses for fiscal 2010 decreased slightly when compared to fiscal 2009. The decrease in administration expenses is primarily due to fiscal 2009’s having included $297 in non-cash compensation expense related to our unfunded deferred compensation plan, compared to a like expense of $25 in fiscal 2010. In addition, bad debt expense decreased $164 from the prior year. Offsetting these decreases in administration expense during fiscal 2010 was a $182 increase in legal fees, primarily associated with the Cuesta class action lawsuit, which is also discussed in Note 10 in the Notes to Consolidated Financial Statements. Additionally, wage related expenses increased in fiscal 2010 due to reinstating full wages at the beginning of the second quarter of fiscal 2010. In fiscal 2009, wage related expenses were reduced during the last half of the year as part of the cost reduction program put into place in fiscal 2009. 
 
16
 

 

    Administration expenses for fiscal 2009 were essentially unchanged when compared to fiscal 2008. Increases in administration expenses included a $297 non-cash compensation expense recognized in conjunction with our unfunded deferred compensation plan during fiscal 2009 and an overall increase in bad debt expense of $169. Offsetting some of these increases in administration expenses were reductions in salary costs and director fees resulting from implementing certain cost cutting measures during fiscal 2009, including temporary Company-wide salary reductions and a 20% reduction in fees paid to the members of the Company’s Board of Directors. In addition, audit fees related to our compliance with Section 404 (b) of the Sarbanes-Oxley Act decreased. At September 30, 2009, we were not required to be audited under the requirements of Section 404 (b) of the Sarbanes-Oxley Act due to our public float decreasing below the required level for an audit of internal controls; however we maintained all of our internally generated internal control measures. This change resulted in a corresponding decrease in audit fees related to such services.
 
                                  Percent Change
                  2009 to       2008 to
For the Year Ended September 30:     2010   2009   2008   2010   2009
Class action settlement     $       775   $       -   $      -        NM            NM    

    During fiscal 2010, the Company recorded a $775 liability which represents the agreed upon obligation for the Company per the settlement agreement related to the Cuesta class action lawsuit discussed in Note 10 to Consolidated Financial Statements. During the fourth quarter of fiscal 2010, the $775 was paid for full settlement and release of any future obligations.
 
                                  Percent Change
                  2009 to       2008 to
For the Year Ended September 30:       2010   2009   2008   2010   2009
Gain from settlement of environmental claims     $       -   $       -   ($1,072)        NM            NM    

    As part of our contractual indemnity claim against Dana and contribution claims against Blount and Rosan, as described in Note 10 in the Notes to Consolidated Financial Statements, during fiscal 2008 we received cash payments totaling $735 from Dana, Blount and Rosan and shares in Dana equal to approximately $337 at the time of settlement. As of September 30, 2008, we recorded a gain of $1,072 in operating expenses in the accompanying consolidated financial statements.
 
                                  Percent Change
                  2009 to       2008 to
For the Year Ended September 30:       2010   2009   2008   2010   2009
Gain on sale of investments     $       (441)   $       -   $       -        NM            NM    

    During the third quarter of fiscal 2010, we sold our short-term investments and recorded a $441 gain related to the sale. The majority of the shares sold related to the Company’s investment in Dana as part of the environmental settlement discussed in Note 10 to Consolidated Financial Statements. The gain recognized in fiscal 2010 was primarily the result of writing down the basis of our investments as discussed below with the impairment charge recorded in fiscal 2009.
 
                                  Percent Change
                  2009 to       2008 to
For the Year Ended September 30:       2010   2009   2008   2010   2009
Loss on impairment of investments     $       -   $       317   $       -        NM            NM    

    Loss on impairment of investments is a non-cash, other-than-temporary impairment charge relating to our common stock of Dana during the first quarter of fiscal 2009. The impairment charge assumes no income tax benefit given the uncertainty of the Company’s ability to generate future taxable investment gains required to utilize these investment losses. Prior to recording the impairment charge, the decline in market value was carried net of tax in other comprehensive loss. Following the recording of this impairment charge, all subsequent changes in market value of our short-term investments is recorded net of tax in other comprehensive income (loss).
 
                                  Percent Change
                  2009 to       2008 to
For the Year Ended September 30:       2010   2009   2008   2010   2009
Other (income) expense, net     $       (54)   $       84   $       (205)        NM            NM    

17
 

 

    Other income of $54 in fiscal 2010 consisted primarily of a $90 gain from the extinguishment of old outstanding accounts payable balances of various insolvent subsidiaries offset slightly by losses related to the disposal of certain fixed assets. Other expense of $84 in fiscal 2009 primarily consisted of losses related to the disposal of certain fixed assets. Other income of $205 in fiscal 2008 consisted primarily of a $109 gain related to the sales and disposal of certain fixed assets and foreign currency gains.
 
                                  Percent Change
                  2009 to       2008 to
For the Year Ended September 30:       2010   2009   2008   2010   2009
Income tax expense (benefit)     $       338   $       (1,677)   $       3,950          120.2%          (142.5%)

    In fiscal 2010, the Company recorded income tax expense of $338 compared to an income tax benefit of $1,677 in fiscal 2009 and income tax expense of $3,950 in fiscal 2008. The overall tax rate was 19.7% in fiscal 2010 compared to 45.5% in fiscal 2009 and 33.5% in fiscal 2008. The decrease in the effective tax rate is primarily due to the mix of pretax earnings between domestic and foreign jurisdictions, primarily in China. The mix of earnings combined with lower tax rates in our foreign jurisdictions caused the tax rate to decline from prior years.
 
    The increase in the effective tax rate when comparing fiscal 2009 and 2008 is primarily due to the mix of pretax earnings/losses between domestic and foreign jurisdictions, particularly in China. Additionally, a favorable R&D credit adjustment was recorded due to a change in United States tax law and the initial recording of our Chinese deferred tax assets during fiscal 2009 which combined to increase the tax rate by 4.0%. This increase was partially offset by a valuation allowance against an unrealized investment loss and an unfavorable Domestic Production Activities Deduction adjustment related to the federal net operating loss carry-back.
 
    Refer to Note 9 in the Notes to Consolidated Financial Statements for further details of changes in our overall tax rate.
 
Financial Condition, Liquidity and Capital Resources
 
    At September 30, 2010, we had cash and cash equivalents of $3,016. During the fourth quarter, we paid a $1.00 per share cash dividend to all stockholders of record totaling $7,278. During the third quarter of fiscal 2010, we entered into a revolving loan facility with U.S. Bank and as of September 30, 2010 we had $6,241 available under our revolving loan facility. We believe our cash on hand and our capacity under the new revolving loan facility will be sufficient to meet our working capital needs for the foreseeable future.
 
    Cash generated from operations was $2,680 for fiscal 2010; a decrease of $1,558 from the cash generated from operations of $4,238 for fiscal 2009. Net income (loss) plus non-cash charges for depreciation, amortization and stock based compensation contributed cash of $4,421 in fiscal 2010 compared to $719 for fiscal 2009.
 
    Changes in working capital items used cash of $745 for fiscal 2010 compared to generating cash of $3,566 in fiscal 2009. Changes in receivables in fiscal 2010 were a use of cash of $1,267 compared to a $2,241 generation of cash in fiscal 2009. The significant cash generation from the collection of receivables in fiscal 2009 was due to the reduction in sales and accounts receivable due to the deterioration of the general economy during that quarter. The increase in receivables in fiscal 2010 is the result of higher sales levels. Inventories increased $1,973 in fiscal 2010 in relation to increased sales compared to a decrease of $2,676 in fiscal 2009. Accounts payable and accrued expenses increased in fiscal 2010 primarily due to increases in purchases of inventory and supplies to remain in line with the significant increase in sales volumes, whereas the decrease in accounts payable and accrued expenses in 2009 was primarily due to the lower sales and inventory purchases. Cash flows from operations for fiscal 2010 included payments to our pension plans of $571 compared to contributions of $183 for fiscal 2009. Also included in cash flows from operations in fiscal 2010 was the $775 Cuesta class action settlement payment as discussed in Note 10 to Consolidated Financial Statements. We believe it is likely we will continue to generate positive cash from operations, however, depending on changes in the worldwide economic market, we could experience periods of negative cash flow from operations.
 
    Cash used in investing activities was $1,704 for fiscal 2010 and $1,861 for fiscal 2009. Cash flows from investing activities for fiscal 2010 included purchases of equipment of $2,238 and were offset slightly by $511 of proceeds related to the sale of investments. Cash flows from investing activities for fiscal 2009 included purchases of equipment of $1,876. We expect our cash use for investing activities to at least remain constant and potentially increase in the future as we continue to purchase capital equipment to expand and support our operations worldwide. We currently anticipate spending approximately $4,200 in capital expenditures for fiscal 2011.
 
18
 

 

    Cash used in financing activities was $7,205 for fiscal 2010, compared to cash used in financing activities of $2,192 for fiscal 2009. During the fourth quarter of fiscal 2010, we paid a cash dividend to stockholders of record as of the close of business on July 14, 2010 totaling $7,278. In October 2008, we announced a share repurchase plan whereby the Company can, but is under no obligation, to repurchase up to $5,000 of the Company’s common stock. Repurchases may be made in the open market or through bock trades, in compliance with Securities and Exchange Commission guidelines, subject to market conditions, applicable legal requirements and other factors. In fiscal 2009, we purchased 310,893 shares of common stock at a total value of $2,357. We did not make any repurchases during fiscal 2010. In addition, fiscal 2010 and 2009 included cash generation of $73 and $165, respectively, related to proceeds from the exercise of stock options.
 
Contractual Obligations as of September 30, 2010
 
    At September 30, 2010, our contractual obligations consisted of operating lease obligations and a license agreement. We do not have any letters of credit or debt guarantees outstanding at September 30, 2010. Maturities of these contractual obligations consist of the following:
 
  Payments due by period
            Less than       1 – 3       3 – 5
  Total   1 year   years   years
Operating leases $       1,583   $       753   $       830   $       -
License - minimum                      
    royalties   250     50     150     50
  $ 1,833   $ 803   $ 980   $ 50
                       
    Certain liabilities, including those related to our pension and post-retirement benefit plans, are reported in the accompanying consolidated balance sheets but are not reflected in the table above due to the absence of stated maturities. We have net obligations at September 30, 2010 related to our pension plans and post-retirement medical plan of $6,275 and $2,631, respectively. We funded $571 to our pension plans in fiscal 2010 compared to $183 in fiscal 2009 and we expect to make payments of $1,053 in fiscal 2011 to fund our pension plans.
 
Critical Accounting Policies and Estimates
 
    Management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, cost of sales and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies and the related judgments and estimates affect the preparation of our consolidated financial statements.
 
Revenue recognition
 
    Revenue is recognized at the time of product shipment, which is when title and risk of loss transfers to customers, and when all of the following have occurred: a firm sales agreement is in place, pricing is fixed or determinable, and collection is reasonably assured. Revenues are reported net of estimated returns, rebates and customer discounts. Discounts and rebates are recorded during the period they are earned by the customer.
 
19
 

 

Product Warranty
 
    We provide a warranty covering defects arising from products sold. The product warranty liability is based on historical return rates of products and amounts for significant and specific warranty issues. The warranty is limited to a specified time period, mileage or hours of use, and varies by product, application and customer. The Company has recorded a warranty liability which, in the opinion of management, is adequate to cover such costs. While we believe our estimates are reasonable, they are subject to change and such change could be material.
 
Legal
 
    We are involved in various claims, lawsuits and other proceedings from time to time. Such litigation involves uncertainty as to possible losses we may ultimately realize when one or more future events occur or fail to occur. In connection with such claims and lawsuits, we estimate the probability of losses based on advice of legal counsel, the outcomes of similar litigation, legislative development and other factors. Due to the numerous variables associated with these judgments and assumptions, both the precision and reliability of the resulting estimates of the related loss contingencies are subject to substantial uncertainties. We regularly monitor our estimated exposure to these contingencies and, as additional information becomes known, may change our estimates significantly. We expense legal expenses related to claims in the period incurred, including, in the case of expenses subject to contingencies, in the period in which we determine that it is probable that all remaining contingencies will be satisfied and the amount of such expenses have been established with reasonable certainty. A significant change in our estimates, or a result that materially differs from our estimates, could have a significant impact on our financial position, results of operations and cash flows.
 
Environmental Costs
 
    We estimate the costs of investigation and remediation for certain soil and groundwater contaminants at our Portland, Oregon facility. The ultimate costs to the Company for the investigation, remediation and monitoring of this site cannot be predicted with certainty due to the often unknown magnitude of the pollution or the necessary cleanup, the varying costs of alternative cleanup methods, the amount of time necessary to accomplish such cleanups and the evolving nature of cleanup technologies and governmental regulations. Management has recognized a liability for environmental remediation costs for this site in an amount that management believes is probable and reasonably estimable. When the estimate of a probable loss is within a range, the minimum amount in the range is accrued when no estimate within the range is better than another. In making these judgments and assumptions, management considers, among other things, the activity to-date at the site and information obtained through consultation with applicable regulatory authorities and third party consultants and contractors. Management regularly monitors the Company’s exposure to environmental loss contingencies. As additional information becomes known, it is at least reasonably possible that a change in the estimated liability accrual will occur in the near future.
 
Pensions and Post-Retirement Benefit Obligations
 
    Pension and post-retirement benefit obligations and net period benefit cost are calculated using actuarial models. The most important assumptions that affect these computations are the discount rate, expected long-term rate of return on plan assets, and healthcare cost trend rates. We evaluate these assumptions at least annually. Other assumptions involve demographic factors such as retirement, mortality and turnover. These assumptions are evaluated at least annually and are updated to reflect our experience. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.
 
    Our discount rate assumption is intended to reflect the rate at which retirement benefits could be effectively settled based upon the assumed timing of the benefit payments. To determine our discount rate, we discounted the expected benefit payments using the Principal Pension Discount Yield Curve. The equivalent level interest rate that produces the same present value of benefits was then determined. Our assumed rate does not differ significantly from this benchmark rate. We assumed a discount rate of 5.00% to determine our pension benefit obligations at September 30, 2010 and a rate of 5.50% to determine our net periodic benefit cost in fiscal 2010. A 1.0% decrease in these discount rates would have increased our pension benefit obligations at the end of fiscal 2010 by $1,848 and increased our net periodic benefit cost in 2010 by $11. A 1.0% increase in discount rates would have decreased our pension obligations at September 30, 2010 by $1,531 and decreased our net periodic benefit cost in fiscal 2010 by $13. To determine the discount rate for our post-retirement benefit plan, we also discounted the expected benefit payments using the Principal Pension Discount Yield Curve and assumed a discount rate of 5.00% to determine our post-retirement benefit obligations at September 30, 2010 and a rate of 5.50% to determine our post-retirement benefit cost in fiscal 2010. A 1.0% decrease in discount rate for our post-retirement benefit plan would have increased our post-retirement benefit obligation at September 30, 2010 by $278 and increased our post-retirement benefit expense in fiscal 2010 by $5. A 1.0% increase in discount rate would have decreased our post-retirement benefit obligation at September 30, 2010 by $234 and our post-retirement benefit expense in fiscal 2010 would have been essentially the same.
 
20
 

 

    To determine the expected long-term rate of return on pension plan assets, we consider the current asset allocations and the historical and future expected returns of multiple asset classes to develop a risk-free real rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk-free real rate of return, and the associated risk premium. A weighted average rate was then developed based on those overall rates and the target asset allocation of the plan. Information regarding our asset allocations is included in Note 8 of the Notes to Consolidated Financial Statements. A 1.0% increase or decrease in the assumed rate of return on plan assets would have impacted net periodic benefit cost in fiscal 2010 by $84. Our post-retirement plan does not contain any plan assets.
 
    We assumed healthcare cost trend rates for our post-retirement plan of 5.0% - 9.0% in fiscal 2010, decreasing gradually to 5.0% in fiscal 2017 and remaining at 5.0% thereafter. A 1.0% increase in assumed healthcare cost trend rates would have increased our post-retirement benefit obligation at September 30, 2010 by $241 and increased post-retirement benefit expense in 2010 by $12. A 1.0% decrease in assumed healthcare cost trend rates would have decreased the post-retirement benefit obligation by $207 at the end of fiscal 2009 and decreased post-retirement benefit expense in fiscal 2009 by $10.
 
Share Based Compensation Expense
 
    We measure compensation cost for all outstanding unvested share-based awards, and awards we grant, modify, repurchase or cancel in the future, at fair value and recognize compensation over the requisite service period for awards expected to vest. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from our estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when calculating fair value including estimated stock price volatility, expected term and expected forfeitures. Factors considered in estimating forfeitures include the types of awards, employee class, and historical experience. Actual results may differ substantially from these estimates.
 
Income Taxes
 
    For each jurisdiction that we operate in, we are required to estimate our annual effective tax rate together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income and unless we believe that recovery is more likely than not, a valuation allowance is established. Our income tax provision on the consolidated statement of operations is impacted by changes in the valuation allowance. This process is complex and involves significant management judgment in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowances recorded against our net deferred tax assets.
 
Recently Issued Accounting Standards
 
    In April 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that establishes criteria for a milestone to be considered substantive and allows revenue recognition when the milestone is achieved in research and development arrangements. In addition, this guidance requires disclosure of certain information with respect to arrangements that contain milestones. This guidance is effective for the Company prospectively beginning October 1, 2010. The Company has evaluated this guidance and does not expect its adoption will have a significant impact on the Company’s consolidated financial statements.
 
    In December 2008, the FASB issued authoritative guidance to require employers to provide additional disclosures about plan assets of a defined benefit pension or other post-retirement plan. These disclosures include information detailing investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets and an understanding of significant concentrations of risk within plan assets. This guidance was effective for the Company beginning in fiscal 2010 (October 1, 2009). This guidance is not required to be applied to earlier periods that are presented for comparative purposes and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
 
21
 

 

    In February 2008, the FASB issued guidance that is effective for specified fair value measures of non-financial assets and liabilities for financial statements issued for fiscal years beginning after November 15, 2008. Adoption of this guidance in the first quarter of fiscal 2010 did not have any impact on the Company’s consolidated financial statements.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
    Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and changes in the market value of investments. The Company’s primary market risk results from fluctuations in exchange rates of foreign currencies.
 
Interest Rate Risk
 
    The Company has a revolving loan facility with U.S. Bank, which expires on June 30, 2012.
 
    As of September 30, 2010, there was no balance outstanding on the revolving loan. Management does not believe a change in end of period interest rates of 10% or less, or changes in future interest rates on this variable rate obligation would have a material effect on its financial position, results of operations, or cash flows. The Company has not hedged its exposure to interest rate fluctuations.
 
Foreign Currency Risk
 
    We sell our products to customers in the heavy truck, transit bus and off-road equipment industries. For the fiscal years ended September 30, 2010 and 2009, the Company had foreign sales of approximately 41% and 37% of net sales, respectively. All worldwide sales in fiscal 2010 and 2009, with the exception of $2,874 and $2,009, respectively, were denominated in U.S. dollars. We have established a manufacturing facility in Suzhou, China and sales offices in Shanghai, China and Munich, Germany. During fiscal 2010, we established a manufacturing facility in Pune, India. We purchase components internationally for use in both our products whose sales are denominated in U.S. dollars and other currencies. Although the Company is expanding its international exposure, it does not believe that changes in future exchange rates would have a material effect on its financial position, results of operations, or cash flows at this time. As a result, the Company has not entered into forward exchange or option contracts for transactions to hedge against foreign currency risk. The Company will continue to assess its foreign currency risk as its international operations, international purchases and sales increase.
 
Investment Risk
 
    The Company does not use derivative financial or commodity instruments. The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and long-term obligations. The Company’s cash and cash equivalents, accounts receivable and accounts payable balances are short-term in nature, and, thus, the Company believes they are not exposed to material investment risk.
 
22
 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Williams Controls, Inc.
Index to Consolidated Financial Statements
 
        Page
Report of Independent Registered Public Accounting Firm   24
     
Consolidated Balance Sheets at September 30, 2010 and 2009   25
     
Consolidated Statements of Operations for the years ended September 30, 2010, 2009 and 2008   26
     
Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2010, 2009 and 2008   27
     
Consolidated Statements of Comprehensive Income (Loss) for the years ended September 30, 2010, 2009    
and 2008   28
     
Consolidated Statements of Cash Flows for the years ended September 30, 2010, 2009 and 2008   29
     
Notes to Consolidated Financial Statements   30

See pages 55-56 for Index to Exhibits
 
23
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Stockholders and Board of Directors of
Williams Controls, Inc.:
 
     We have audited the accompanying consolidated balance sheets of Williams Controls, Inc. as of September 30, 2010 and 2009 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended September 30, 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Williams Controls, Inc. as of September 30, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2010, in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Moss Adams LLP
Portland, Oregon
December 22, 2010
 
24
 

 

Williams Controls, Inc.
Consolidated Balance Sheets

(Dollars in thousands, except per share information)
 
    September 30,   September 30,
        2010       2009
ASSETS                
Current Assets:                
       Cash and cash equivalents   $      3,016     $      9,245  
       Short-term investments     -       286  
       Trade accounts receivable, net     8,854       6,677  
       Other accounts receivable     599       1,509  
       Inventories     7,512       5,539  
       Deferred income taxes     927       579  
       Prepaid expenses and other current assets     341       269  
              Total current assets     21,249       24,104  
                 
Property, plant and equipment, net     9,025       8,893  
Deferred income taxes     3,493       3,019  
Other assets, net     438       368  
              Total assets   $ 34,205     $ 36,384  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current Liabilities:                
       Accounts payable   $ 4,593     $ 2,990  
       Accrued expenses     5,698       4,492  
       Current portion of employee benefit obligations     212       225  
              Total current liabilities     10,503       7,707  
                 
Long-term Liabilities:                
       Employee benefit obligations     8,694       8,297  
       Other long-term liabilities     244       290  
                 
Commitments and contingencies                
                 
Stockholders’ Equity:                
       Preferred stock ($.01 par value, 50,000,000 authorized)                
              Series C (No shares were issued and outstanding at                
              September 30, 2010 and 2009, respectively)     -       -  
       Common stock ($.01 par value, 12,500,000 authorized;                
              7,289,745 and 7,270,820 issued and outstanding at                
              September 30, 2010 and 2009, respectively)     73       73  
       Additional paid-in capital     37,623       36,643  
       Accumulated deficit     (12,677 )     (6,776 )
       Treasury stock (332,593 shares at September 30, 2010 and 2009)     (2,734 )     (2,734 )
       Accumulated other comprehensive loss     (7,521 )     (7,116 )
              Total stockholders’ equity     14,764       20,090  
                 
              Total liabilities and stockholders’ equity   $ 34,205     $ 36,384  
                 
See accompanying notes to Consolidated Financial Statements.
 
25
 

 

Williams Controls, Inc.
Consolidated Statements of Operations

(Dollars in thousands, except share and per share information)
 
    For the year ended September 30,
        2010       2009       2008
Net sales   $      52,266     $      38,809     $      65,781  
Cost of sales     37,446       30,173       42,960  
                         
Gross profit     14,820       8,636       22,821  
                         
Operating expenses                        
       Research and development     4,505       3,981       4,015  
       Selling     2,836       2,425       2,727  
       Administration     5,480       5,522       5,500  
       Class action settlement     775       -       -  
       Gain from settlement of environmental claims     -       -       (1,072 )
              Total operating expenses     13,596       11,928       11,170  
                         
Operating income (loss)     1,224       (3,292 )     11,651  
                         
Other (income) expenses:                        
       Interest income     (13 )     (26 )     (64 )
       Interest expense     17       19       140  
       Gain on sale of investments     (441 )     -       -  
       Loss on impairment of investments     -       317       -  
       Other (income) loss, net     (54 )     84       (205 )
              Total other (income) expenses     (491 )     394       (129 )
                         
Income (loss) before income taxes     1,715       (3,686 )     11,780  
Income tax (benefit) expense     338       (1,677 )     3,950  
                         
Net income (loss)   $ 1,377     $ (2,009 )   $ 7,830  
                         
Net income (loss) per common share – basic   $ 0.19     $ (0.27 )   $ 1.04  
                         
Weighted average shares used in per share calculation – basic     7,276,544       7,315,343       7,522,885  
                         
Net income (loss) per common share – diluted   $ 0.19     $ (0.27 )   $ 1.01  
                         
Weighted average shares used in per share calculation – diluted     7,387,939       7,315,343       7,747,920  
                         
See accompanying notes to Consolidated Financial Statements.
 
26
 

 

Williams Controls, Inc.
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands)
 
                                        Other        
                  Additional                   Comprehensive        
    Common Stock   Paid-in   Accumulated   Treasury   Income   Stockholders’
        Shares       Amount       Capital       Deficit       Stock       (Loss)       Equity
Balance, September 30, 2007   7,495,482     $      75     $      34,899   $      (12,477 )   $      (377 )   $      (4,951 )   $      17,169  
                                                     
Net income   -       -       -     7,830       -       -       7,830  
Exercise of stock options   37,198       -       173     -       -       -       173  
Share based compensation   1,962       -       672     -       -       -       672  
Adjustment to record                                                    
       uncertain tax positions   -       -       -     (82 )     -       -       (82 )
Foreign currency translation                                                    
       adjustment   -       -       -     -       -       172       172  
Change in pension liability                                                    
       adjustment   -       -       -     -       -       (220 )     (220 )
Unrealized loss, net of tax   -       -       -     -       -       (66 )     (66 )
Balance, September 30, 2008   7,534,642       75       35,744     (4,729 )     (377 )     (5,065 )     25,648  
                                                     
Net loss   -       -       -     (2,009 )     -       -       (2,009 )
Exercise of stock options   41,666       -       165     -       -       -       165  
Share based compensation   5,405       -       732     -       -       -       732  
Repurchase of common                                                    
       stock   (310,893 )     (2 )     2     -       (2,357 )     -       (2,357 )
Foreign currency translation                                                    
       adjustment   -       -       -     -       -       6       6  
Change in pension liability                                                    
       adjustment   -       -       -     -       -       (2,271 )     (2,271 )
Unrealized gain, net of tax   -       -       -     -       -       214       214  
Effect of changing pension                                                    
       plan measurement date   -       -       -     (38 )     -       -       (38 )
Balance, September 30, 2009   7,270,820       73       36,643     (6,776 )     (2,734 )     (7,116 )     20,090  
                                                     
Net income   -       -       -     1,377       -       -       1,377  
Exercise of stock options   15,833       -       73     -       -       -       73  
Share based compensation   3,092       -       907     -       -       -       907  
Cash dividend payment   -       -       -     (7,278 )     -       -       (7,278 )
Foreign currency translation                                                    
       adjustment   -       -       -     -       -       94       94  
Change in pension liability                                                    
       adjustment   -       -       -     -       -       (352 )     (352 )
Unrealized loss, net of tax   -       -       -     -       -       (147 )     (147 )
Balance, September 30, 2010   7,289,745     $ 73     $ 37,623   $ (12,677 )   $ (2,734 )   $ (7,521 )   $ 14,764  
                                                     
See accompanying notes to Consolidated Financial Statements.
 
27
 

 

Williams Controls, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Dollars in thousands)
 
    For the year ended September 30,
        2010       2009       2008
Net income (loss)   $      1,377     $      (2,009 )   $      7,830  
Change in pension liability adjustment, net of tax of ($214),                        
       ($1,387), and ($384) in 2010, 2009 and 2008, respectively     (352 )     (2,271 )     (220 )
Unrealized (gain) loss, net of tax of ($88), $126 and ($39) in 2010,                        
       2009 and 2008, respectively     (147 )     214       (66 )
Foreign currency translation adjustments     94       6       172  
                         
Comprehensive income (loss)   $ 972     $ (4,060 )   $ 7,716  
                         
See accompanying notes to Consolidated Financial Statements.
 
28
 

 

Williams Controls, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
 
    For the year ended September 30,
        2010       2009       2008
Cash flows from operating activities:                        
       Net income (loss)   $      1,377     $      (2,009 )   $      7,830  
Adjustments to reconcile net income (loss) to net cash provided by                        
operating activities:                        
       Depreciation and amortization     2,137       1,996       1,803  
       Deferred income taxes     (520 )     (444 )     495  
       Share based compensation     907       732       672  
       Loss on impairment of investments     -       317       -  
       Gain from sale of available-for-sale securities     (441 )     -       -  
       Gain from stock settlement of environmental claims     (19 )     -       (337 )
       (Gain) loss from sale and disposal of fixed assets     (16 )     80       (109 )
       Changes in operating assets and liabilities:                        
              Receivables, net     (1,267 )     2,241       (942 )
              Inventories     (1,973 )     2,676       937  
               Prepaid expenses and other current assets     (72 )     32       (4 )
               Accounts payable and accrued expenses     2,821       (1,680 )     511  
              Other     (254 )     297       (910 )
                         
Net cash provided by operating activities     2,680       4,238       9,946  
                         
Cash flows from investing activities:                        
       Payments for property, plant and equipment     (2,238 )     (1,876 )     (1,791 )
       Proceeds from sale of property, plant and equipment     23       15       111  
       Proceeds from sale of available-for-sale securities     511       -       -  
                         
Net cash used in investing activities     (1,704 )     (1,861 )     (1,680 )
                         
Cash flows from financing activities:                        
       Payments of dividend on common stock     (7,278 )     -       -  
       Repayments of debt     -       -       (1,000 )
       Repurchase of common stock     -       (2,357 )     -  
       Net proceeds from exercise of stock options     73       165       173  
                         
Net cash used in financing activities     (7,205 )     (2,192 )     (827 )
                         
Net increase (decrease) in cash and cash equivalents     (6,229 )     185       7,439  
Cash and cash equivalents at beginning of year     9,245       9,060       1,621  
                         
Cash and cash equivalents at end of year   $ 3,016     $ 9,245     $ 9,060  
                         
Supplemental disclosure of cash flow information:                        
       Interest paid   $ -     $ 4     $ 91  
       Income taxes paid     505       171       2,284  
                         
Supplemental disclosure of non-cash investing and financing                        
activities:                        
       Pension liability adjustment   $ (352 )   $ (2,271 )   $ (220 )
See accompanying notes to Consolidated Financial Statements.
 
29
 

 

Notes to Consolidated Financial Statements
Years Ended September 30, 2010, 2009 and 2008
(Dollars in thousands, except share and per share amounts)
 
Note 1. Organization and Basis of Presentation
 
Organization:
 
     Williams Controls, Inc., including its wholly-owned subsidiaries as follows, is hereinafter referred to as the “Company,” “Registrant,” “we,” “our,” or “us”:
 
     The following are the Company’s wholly-owned subsidiaries: Williams Controls Industries, Inc. (“Williams”); Williams (Suzhou) Controls Co. Ltd. (“Williams Controls Asia”); Williams Controls Europe GmbH (“Williams Controls Europe”); and Williams Controls India Private Limited (“Williams Controls India”)
 
Basis of Presentation:
 
     The consolidated financial statements include all of the accounts of Williams Controls, Inc. and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
 
     The preparation of consolidated financial statements in conformity with US generally accepted accounting principles requires management to make estimates and assumptions, based upon all known facts and circumstances, that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of issuance of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates. Estimates are used in accounting for, among other things, allowance for doubtful accounts, excess and obsolete inventory, useful lives for depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, pension and post-retirement benefit obligations, product warranty, share-based compensation expense, income taxes and commitments and contingencies.
 
     Certain reclassifications of amounts reported in the prior period financial statements have been made to conform to classifications used in the current period financial statements. These reclassifications were to change the presentation of certain foreign VAT accounts from a gross basis to a net basis. These reclassifications did not have any impact on the Company’s results of operations or net cash provided by operating activities for the periods presented.
 
Concentration of Risk and Sales by Customer:
 
     For the years ended September 30, 2010, 2009 and 2008, The Volvo Group accounted for 16%, 16% and 19%; Paccar, Inc. accounted for 9%, 9% and 11%; and Daimler Trucks NA accounted for 8%, 9% and 9%, of net sales from operations, respectively. Approximately 41%, 37% and 46% of net sales in fiscal 2010, 2009 and 2008 respectively, were to customers outside of the United States, primarily in Belgium, Canada, China, France, Korea, Mexico and Sweden, and, to a lesser extent, in other European countries, South America, Pacific Rim nations and Australia. At September 30, 2010 and 2009, The Volvo Group represented 25% and 28%, Paccar, Inc. represented 10% and 4%, Navistar International Corporation represented 9% and 9%, Caterpillar, Inc. represented 9% and 2%, Hyundai Motor, Co. represented 8% and 4%, Daimler Trucks NA represented 6% and 9%, and Bendix Commercial Vehicle Systems represented 6% and 11% of trade accounts receivable, respectively.
 
Note 2. Significant Accounting Policies
 
Cash and Cash Equivalents:
 
     Cash and cash equivalents include highly liquid investments with original maturities of three months or less. At September 30, 2010, cash and cash equivalents primarily consisted of cash deposits held in one major U.S. financial institution. At September 30, 2010, approximately 73% of the Company’s cash and cash equivalents were held with one major financial institution in the United States with the remainder held in foreign banks or foreign currency denominated accounts. The Company maintains cash balances in bank accounts that normally exceed FDIC insured limits. As of September 30, 2010, cash and cash equivalents held in the United States exceeded federally insured limits by approximately $1,939. The Company has not experienced any losses related to this cash concentration.
 
30
 

 

Short-term Investments:
 
     Short-term investments consist of equity securities and are classified as available-for-sale securities and recorded at fair value with any unrealized gains and losses reported, net of tax, in other comprehensive income (loss). The carrying value of available-for-sale securities approximates fair value due to their short maturities.
 
Trade Accounts Receivable:
 
     The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. Trade accounts receivable are presented net of an allowance for doubtful accounts of $150 and $246 at September 30, 2010 and 2009, respectively. Activity related to the allowance for doubtful accounts for years ended September 30, 2010 and 2009 consisted of the following:
 
       September 30,      September 30,
    2010   2009
Beginning balance   $                  246     $                  47  
       Charges to bad debt expense     69       233  
       Write-offs, recoveries and adjustments     (165 )     (34 )
Ending balance   $ 150     $ 246  
                 
Inventories:
 
     Inventories are valued at the lower of cost or market. Cost is determined using standard costs, which approximate the first in, first out, or FIFO method. Cost includes the acquisition of purchased components, parts and subassemblies, labor and overhead. Market with respect to raw materials is replacement cost and, with respect to work-in-process and finished goods, is net realizable value. The Company periodically reviews its inventories for excess or slow moving items and makes provisions as necessary to properly reflect inventory value.
 
Property, Plant and Equipment:
 
     Property, plant and equipment are stated at cost, net of accumulated depreciation. Property, plant and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. The principal estimated lives are: 31.5 years for buildings, 5 to 12 years for machinery and equipment, and 3 to 5 years for office furniture and equipment. Maintenance and repairs are expensed as incurred.
 
Impairment of Long-Lived Assets:
 
     Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the estimated undiscounted future cash flows of the operation to which the assets relate, to the carrying value of such assets. If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying value or fair value less costs to sell.
 
Deferred Income Taxes:
 
     Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of operations in the period that includes the enactment date. Valuation allowances are established as necessary to reduce deferred tax assets unless realization of the assets is considered more likely than not. 
 
31
 

 

Product Warranty:
 
     The Company establishes a product warranty liability based on a percentage of product sales. The liability is based on historical return rates of products and amounts for significant and specific warranty issues, and is included in accrued expenses on the accompanying consolidated balance sheets. Warranty is limited to a specified time period, mileage or hours of use, and varies by product, application and customer. The Company has recorded a liability, which in the opinion of management, is adequate to cover such warranty costs. Warranty payments can vary significantly from year to year depending on the timing of the settlement of warranty claims with various customers. Following is a reconciliation of the changes in the Company’s warranty liability for the years ended September 30, 2010, 2009 and 2008.
 
Year ended September 30,       2010       2009       2008
Balance at beginning of period   $      751     $      762     $      1,712  
       Payments     (557 )     (995 )     (1,359 )
       Warranty claims accrued     1,384       984       810  
       Adjustments and changes in estimates     -       -       (401 )
Balance at end of period   $ 1,578     $ 751     $ 762  
                         
     The increase in the ending warranty liability between fiscal 2009 and fiscal 2010 is primarily due to accrued yet unpaid warranty claims related to one customer. From September 30, 2010 through the date of this report, $392 of these unpaid claims with this one customer was paid.
 
     During fiscal 2008, the Company recorded a reduction of warranty liability of $324 related to warranty claims with one customer. The Company reviewed its assumptions for its warranty liability with this one customer, which covers a period in excess of one year, and determined a reduction in liability was necessary. This reduction in the liability has been recorded as a reduction of cost of sales in the accompanying consolidated statement of operations. Warranty payments in fiscal 2008 were higher than historical rates as the Company settled and paid a significant number of claims dating back to fiscal 2006 with one customer.
 
Environmental Costs:
 
     Liabilities for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, or if an amount is likely to fall within a range and no amount within that range can be determined to be the better estimate, the minimum amount of the range is recorded. Liabilities for environmental matters exclude claims for recoveries from prior owners or operators until it is probable that such recoveries will be realized.
 
Revenue Recognition:
 
     Revenue is recognized at the time of product shipment, which is when title and risk of loss transfers to customers, and when all of the following have occurred: a firm sales agreement is in place, pricing is fixed or determinable, and collection is reasonably assured. Revenues are reported net of estimated returns, rebates and customer discounts.
 
Research and Development Costs:
 
     Research and development costs are expensed as incurred. Research and development costs consist primarily of employee costs, cost of consumed materials, depreciation and engineering related costs.
 
Pensions and Post-retirement Benefit Obligations:
 
     The Company provides various benefits to certain current and former employees through defined benefit plans and retirement healthcare benefit plans. For financial reporting purposes, net periodic benefit cost and related obligations are calculated using a number of significant actuarial assumptions, including a discount rate assumption and a long-term rate of return on assets assumption. Changes in net periodic benefit cost and funding status may occur in the future due to changes in these assumptions. The funded status of defined pension and postretirement plans recognized in the statement of financial position is measured as the difference between the fair market value of the plan assets and the benefit obligation. For a defined benefit pension plan, the benefit obligation is the projected benefit obligation; for any other defined benefit postretirement plan, such as a retiree health care plan, the benefit obligation is the accumulated benefit obligation. Any over-funded status is recognized as an asset and any underfunded status is recognized as a liability. 
 
32
 

 

     Projected benefit obligation is the actuarial present value as of the measurement date of all benefits attributed by the plan benefit formula to employee service rendered before the measurement date using assumptions as to future compensation levels if the plan benefit formula is based on those future compensation levels. Accumulated benefit obligation is the actuarial present value of benefits (whether vested or unvested) attributed by the plan benefit formula to employee service rendered before the measurement date and based on employee service and compensation, if applicable, prior to that date. Accumulated benefit obligation differs from projected benefit obligation in that it includes no assumption about future compensation levels.
 
Earnings (Losses) Per Share:
 
     Basic EPS is based on the weighted-average number of common shares outstanding during the period. Diluted EPS is based on the weighted-average number of common shares outstanding and the dilutive impact of common equivalent shares outstanding.
 
     Following is a reconciliation of basic EPS and diluted EPS:
 
    Year Ended   Year Ended
    September 30, 2010   September 30, 2009
                          Per Share                       Per Share
    Income   Shares   Amount   Loss   Shares       Amount
Basic EPS –   $        1,377        7,276,544   $      0.19   $        (2,009 )        7,315,343   $        (0.27 )
Effect of dilutive securities – Stock options     -   111,395           -     -        
                                     
Diluted EPS –   $ 1,377   7,387,939   $ 0.19   $ (2,009 )   7,315,343   $ (0.27 )
 
    Year Ended                    
    September 30, 2008                    
              Per Share                    
    Income   Shares   Amount                    
Basic EPS –   $ 7,830   7,522,885   $ 1.04                    
Effect of dilutive securities – Stock options     -   225,035                          
                                     
Diluted EPS –   $ 7,830   7,747,920   $ 1.01                    
                                     
     At September 30, 2010, 2009 and 2008, the Company had options covering 425,232, 598,769 and 111,658 shares, respectively, which were not considered in the diluted EPS calculation since they would have been antidilutive.
 
Share Based Compensation:
 
     The Company uses the Black-Scholes option pricing model to value its stock option grants. Share-based compensation expense is recognized on a straight-line basis over the requisite service period, which equals the vesting period. When determining share-based compensation expense, the Black-Scholes option pricing model takes into account highly subjective and complex assumptions. The expected life of options granted is derived from the vesting period of the award, as well as historical exercise behavior, and represents the period of time that options granted are expected to be outstanding. Expected volatilities are based on historical volatility looking back over a period equal to the expected life. The risk-free interest rate is equal to the U.S. Treasury constant maturity with a remaining term equal to the expected life of the option on the date of grant. The Company is required to estimate forfeitures in calculating the expense related to share-based compensation. In addition, the Company is also required to reflect the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash inflow. 
 
33
 

 

Contingencies:
 
     Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s management and legal counsel evaluate the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be recorded in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. All legal costs to defend against such contingent liabilities are expensed as incurred.
 
Fair Value of Financial Instruments:
 
     The carrying amounts reflected in the accompanying consolidated balance sheet for cash and cash equivalents, short-term investments, accounts receivable, other accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued expenses approximate fair value due to the short-term nature of the instruments.
 
Foreign Currency Translation:
 
     Assets and liabilities of non-domestic subsidiaries denominated in local currencies are translated into U.S. dollars at the rate of exchange at the balance sheet date and income and expenses are translated at the average rates of exchange prevailing during the year. The resulting translation adjustments are reported as a component of accumulated other comprehensive loss in stockholders’ equity.
 
Recently Adopted Accounting Standards:
 
     In April 2010, the FASB issued authoritative guidance which establishes criteria for a milestone to be considered substantive and allows revenue recognition when the milestone is achieved in research and development arrangements. In addition, this guidance requires disclosure of certain information with respect to arrangements that contain milestones. This guidance is effective for the Company prospectively beginning October 1, 2010. The Company has evaluated this guidance and does not expect its adoption will have a significant impact on the Company’s consolidated financial statements.
 
     In December 2008, the FASB issued authoritative guidance to require employers to provide additional disclosures about plan assets of a defined benefit pension or other post-retirement plan. These disclosures include information detailing investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets and an understanding of significant concentrations of risk within plan assets. This guidance was effective for the Company beginning in fiscal 2010 (October 1, 2009). This guidance is not required to be applied to earlier periods that are presented for comparative purposes and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
 
34
 

 
 
Note 3. Inventories
 
     Inventories consist of the following at September 30:
 
        2010       2009
Raw material   $      5,767   $      4,247
Work in process     55     39
Finished goods     1,690     1,253
    $ 7,512   $ 5,539
             
Note 4. Property, Plant and Equipment
 
     Property, plant and equipment consist of the following at September 30:
 
        2010       2009
Land and land improvements   $      828     $      828  
Buildings     4,537       4,484  
Machinery and equipment     13,587       12,429  
Office furniture, computers & software     5,216       4,980  
Construction in progress     1,475       760  
      25,643       23,481  
Less accumulated depreciation     (16,618 )     (14,588 )
    $ 9,025     $ 8,893  
                 
     Depreciation expense for the years ended September 30, 2010, 2009 and 2008 was $2,137, $1,996 and $1,763, respectively.
 
Note 5. Accrued expenses
 
Accrued expenses consist of the following at September 30:
 
        2010       2009
Environmental liability   $      900   $      1,001
Accrued product warranty     1,578     751
Accrued compensation and benefits     1,962     1,857
Income tax payable     522     90
Other     736     793
    $ 5,698   $ 4,492
             
     For further discussion related to the Company’s environmental liability, product warranty liability, and income tax payable, refer to Notes 10, 2 and 9, respectively.
 
Note 6. Fair Value Measurement
 
     Financial assets and liabilities recorded at fair value in the consolidated balance sheet are categorized based upon a fair value hierarchy established by U.S. GAAP, which prioritizes the inputs used to measure fair value into the following levels:
 
     Level 1 –  observable inputs such as quoted prices in active markets for identical assets or liabilities;
     
  Level 2 – inputs, other than the quoted market prices in active markets, which are observable, either directly or indirectly; and
     
  Level 3 – unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions.

     Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2010 included cash and cash equivalents of $3,016 which were considered level 1 assets. We use a market approach to determine the fair value of cash and cash equivalents, which include highly liquid investments with original maturities of three months or less. There were no assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2010.
 
35
 

 

     During the third quarter of fiscal 2010, the Company sold its short-term investments for cash proceeds of $511 and recorded a $441 net gain related to the sale. The majority of the shares sold related to the Company’s investment in Dana Holding CP (“Dana”) as part of the environmental settlement discussed in Note 10. Before the sale of short-term investments, all changes in market value of the Company’s short-term investments had been recorded net of tax in other comprehensive income (loss), except that in the first quarter of fiscal 2009, the Company recorded a non-cash, mark-to-market impairment charge of approximately $317 relating to its investment in Dana. The decision to record the impairment charge was based on the continued decline in the market value of the Dana stock, as well as the contraction of the market in which Dana operated.
 
Note 7. Debt
 
     In June 2010, the Company entered into a revolving loan facility with U.S. Bank, which expires on June 30, 2012. As of September 30, 2010, there was no balance outstanding on the revolving loan facility.
 
     The revolving loan facility provides for $8,000 in borrowing capacity and is secured by substantially all the assets of the Company. Borrowings under the revolving loan facility are subject to a borrowing base equal to 75% of eligible accounts receivables and 50% of eligible inventories. Interest rates under the new agreement are based on the election of the Company of either a LIBOR rate or at Prime rate. Under the LIBOR rate option, the revolving loan facility will bear interest at the LIBOR rate plus 2.25% per annum for borrowings under the revolving loan facility. Fees under the loan agreement include an unused line fee of .15% per annum on the unused portion of the revolving loan facility. The Company is subject to certain quarterly and annual financial covenants under the revolving loan facility. At September 30, 2010, the Company was in compliance with all its financial covenants.
 
     The Company had available under its revolving credit facility $6,241 at September 30, 2010.
 
Note 8. Employee Benefit Plans
 
     The Company maintains two pension plans, an hourly employee plan and a salaried employee plan. The hourly plan covers certain of the Company’s union employees. The salaried plan covers certain salaried employees. Annual net periodic pension costs under the pension plans are determined on an actuarial basis. The Company’s policy is to fund these costs over 7 years and obligations arising due to plan amendments over the period benefited. The assets and liabilities are adjusted annually based on actuarial results.
 
     The Company also provides health care and life insurance benefits for certain of its retired employees (“Post Retirement Plan”). These benefits are subject to deductibles, co-payment provisions and other limitations. The Company may amend or change the Post Retirement Plan periodically. The Company has elected to amortize the accumulated post retirement benefit obligation (“APBO”) at October 1, 1993 over twenty years as a component of post retirement benefit expense.
 
     In 2003, the Company modified the provisions of the salaried plan to limit the number of eligible employees to those currently in the plan at the time of the modification and to limit benefits under the plan to those earned to that date. As part of the 2003 contract and strike settlement agreement with the union hourly workers, the hourly plan was also modified in 2003 to limit participation in the plan to those employees in the plan at August 31, 2002.
 
36
 

 

Pension Plans
 
     The following table reports the changes in the projected benefit obligation, the fair value of plan assets, and the determination of the amounts recognized in the consolidated balance sheets for the Company’s pension plans at September 30:
 
        Salaried Plan       Hourly Plan
September 30,     2010       2009   2010       2009
Accumulated benefit obligation   $       5,494     $       5,254     $       9,898     $       9,146  
Change in projected benefit obligation:                                
Benefit obligation at beginning of year   $ 5,254     $ 4,695     $ 9,146     $ 7,641  
Service cost     -       -       49       59  
Interest cost     279       340       486       555  
Actuarial loss     296       591       785       1,518  
Benefits paid     (335 )     (372 )     (568 )     (627 )
Benefit obligation at end of year   $ 5,494     $ 5,254     $ 9,898     $ 9,146  
                                 
Change in plan assets:                                
Fair value of plan assets at beginning of year   $ 3,409     $ 4,291     $ 5,288     $ 6,593  
Actual return on plan assets     285       (552 )     467       (819 )
Employer contributions     96       42       475       141  
Benefits paid     (335 )     (372 )     (568 )     (627 )
Fair value of plan assets at end of year   $ 3,455     $ 3,409     $ 5,662     $ 5,288  
Funded status at end of year   $ (2,039 )   $ (1,845 )   $ (4,236 )   $ (3,858 )
                                 
     Weighted-average assumptions used to determine benefit obligations at September 30:
 
    Salaried Plan   Hourly Plan
        2010       2009       2010       2009
Discount rate   5.00 %   5.50 %   5.00 %   5.50 %
Rate of compensation increase   -     -     -     -  

     The amounts included in accumulated other comprehensive losses that have not yet been recognized in net periodic benefit cost as of September 30, 2010 and 2009 consist of the following:
 
    Salaried Plan   Hourly Plan
        2010       2009       2010       2009
Actuarial loss   $      3,305   $      3,206   $      5,832   $      5,343
Prior service cost     -     -     18     32
    $ 3,305   $ 3,206   $ 5,850   $ 5,375
                         
     Amounts in fiscal 2011 that will be amortized from accumulated other comprehensive loss into net periodic benefit cost include the following:
 
        Salaried       Hourly
    Plan   Plan
Actuarial loss   $      136   $      200
Prior service cost     -     14
    $ 136   $ 214
             
37
 

 

     Net periodic benefit cost for the years ended September 30 includes the following:
 
    Salaried Plan   Hourly Plan
Year ended September 30:         2010       2009       2008       2010       2009       2008
Service cost   $      -     $      -     $      -     $      49     $      59     $      66  
Interest cost     279       340       296       486       555       460  
Expected return on plan assets     (220 )     (301 )     (310 )     (349 )     (464 )     (470 )
Amortization of prior service cost     -       -       -       14       17       21  
Curtailment     -       -       -       -       -       -  
Recognized net actuarial loss     131       114       64       179       341       166  
                                                 
Net periodic benefit cost   $ 190     $ 153     $ 50     $ 379     $ 508     $ 243  
                                                 
     Weighted-average assumptions used to determine Net Periodic Benefit Cost for the years ended September 30:
 
    Salaried Plan   Hourly Plan
        2010       2009       2008       2010       2009       2008
Discount rate   5.50 %   6.97 %   6.25 %   5.50 %   6.97 %   6.25 %
Expected return on plan assets   6.75 %   6.75 %   6.75 %   6.75 %   6.75 %   6.75 %
Rate of compensation increase   -     -     -     -     -     -  

     The overall expected long-term rate of return assumptions for fiscal 2010 were developed using historical and future return expectations of multiple asset classes, which were analyzed to develop a risk-free real rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk-free real rate of return, and the associated risk premium. The weighted average rate was developed based on those overall rates and the target asset allocation of the plan.
 
     Plan Assets:
 
     The Company’s overall investment strategy is to build an efficient, well-diversified portfolio based on a long-term, strategic outlook of investment markets. The investment market outlook utilizes both historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are then used to develop a core asset allocation based on the needs of the plan. The target allocations for plan assets are 39% equity securities, 55% debt securities, and 6% real estate investments. Equity securities primarily include investments in large-cap funds primarily located in the United States but also include investments in US small/mid-cap funds as well as international equity funds. Debt securities primarily consist of corporate bond funds.
 
     The fair value of the Company’s salaried pension plan asset allocations at September 30, 2010, by asset class are as follows:
 
          Salaried Plan - Fair Value Measurements at September 30, 2010
          Quoted Prices in          
          Active Markets for   Significant   Significant
          Identical Assets or   Observable   Unobservable
          Liabilities   Inputs   Inputs
Asset Class      Total      (Level 1)      (Level 2)      (Level 3)
Equity securities:                        
       U.S. large cap funds   $       922   $       -   $       922   $       -
       U.S. mid cap funds     90     -     90     -
       U.S. small cap funds     88     -     88     -
       International funds     292     -     292     -
       WMCO stock     264     264     -     -
Fixed income securities:     1,623     -     1,623     -
Real estate securities:     176     -     40     136
              Total   $ 3,455   $ 264   $ 3,055   $ 136
                         
38
 

 


    The following table represents a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3):
 
  Fair Value
  Measurements
  Using Significant
  Unobservable
  Inputs (Level 3)
  Real Estate Fund
Beginning balance at September 30, 2009 $ 129
Actual return on plan assets:    
    Relating to assets still held at    
    the reporting date   7
    Purchases, sales and settlements   -
Ending balance at September 30, 2010 $ 136
      
    The fair value of the Company’s hourly pension plan asset allocations at September 30, 2010, by asset class are as follows:
 
                    Hourly Plan - Fair Value Measurements at September 30, 2010
          Quoted Prices in                  
          Active Markets for         Significant
          Identical Assets or   Significant   Unobservable
          Liabilities   Observable Inputs   Inputs
Asset Class   Total   (Level 1)   (Level 2)   (Level 3)
Equity securities:                        
    U.S. large cap funds   $       1,517   $       -   $       1,517   $       -
    U.S. mid cap funds     149     -     149     -
    U.S. small cap funds     145     -     145     -
    International funds     482     -     482     -
    WMCO stock     427     427     -     -
Fixed income securities:     2,666     -     2,666     -
Real estate securities:     276     -     67     209
       Total   $ 5,662   $ 427   $ 5,026   $ 209
                          
    The following table represents a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3):
 
  Fair Value
  Measurements
  Using Significant
  Unobservable
  Inputs (Level 3)
  Real Estate Fund
Beginning balance at September 30, 2009 $ 198
Actual return on plan assets:    
    Relating to assets still held at    
    the reporting date   11
    Purchases, sales and settlements   -
Ending balance at September 30, 2010 $ 209
     
    The Company’s investment strategy is to build an efficient, well-diversified portfolio based on a long-term, strategic outlook of the investment markets. The investment markets outlook utilizes both historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are used to develop a core asset allocation based on the specific needs of the plan. The core asset allocation utilizes multiple investment managers in order to maximize the plan’s return while minimizing risk.
 
39
 

 

    Cash Flows:
 
    The Company expects to recognize $614 in expense in fiscal 2011 related to its pension plans and make payments of $1,053 in fiscal 2011.
 
    Based on current data and assumptions, the following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next 10 fiscal years:
 
                  Benefit Payments
  Year ending: Salaried Plan       Hourly Plan
      2011 $       370   $       630
      2012   370     610
      2013   360     630
      2014   360     640
      2015   370     630
      Years 2016-2020   1,930     3,260

Post Retirement Plan
 
    The following table sets forth the changes in benefit obligation and the determination of the amounts recognized in the consolidated balance sheets for the Post Retirement Plan at September 30:
 
                  2010       2009
  Change in benefit obligation:              
  Benefit obligation at beginning of year $       2,819     $       3,155  
  Service cost   1       3  
  Interest cost   149       222  
  Actuarial gain   (109 )     (141 )
  Benefits paid   (229 )     (350 )
  Other   -       (70 )
                 
  Benefit obligation at end of year $ 2,631     $ 2,819  
                 
  Change in plan assets:              
  Fair value of plan assets at beginning of year $ -     $ -  
  Employer contributions   229       350  
  Benefits paid   (229 )     (350 )
                 
  Fair value of plan assets at end of year $ -     $ -  
                 
  Funded status at end of year $ (2,631 )   $ (2,819 )
                 
    Weighted-average assumptions used to determine benefit obligations at September 30:
 
                             
      2010   2009
  Discount rate          5.00 %          5.50 %
  Rate of compensation increase   -     -  
 
40
 

 

    The amounts included in accumulated other comprehensive losses that have not yet been recognized in net periodic benefit cost as of September 30, 2010 and 2009 consist of the following:
 
                  2010       2009
  Actuarial loss $       362     $       485  
  Prior service credit   (468 )     (604 )
  Transition obligation   58       79  
  Actuarial loss $ (48 )   $ (40 )
                 
    Amounts in fiscal 2011 that will be amortized from accumulated other comprehensive loss into net periodic benefit cost include the following:
 
                Actuarial loss $       7  
  Prior service credit   (136 )
  Transition obligation   20  
    $ (109 )
         
    Net periodic post retirement benefit cost for the years ended September 30 included the following:
 
                Year ended September 30:   2010       2009       2008
  Service cost $       1     $       3     $       5  
  Interest cost   149       222       237  
  Amortization   (102 )     (95 )     (34 )
  Net periodic post retirement benefit cost $ 48     $ 130     $ 208  
                         
    Weighted-average assumptions used to determine net post retirement benefit cost for the years ended September 30:
 
                  2010        2009        2008
  Discount rate        5.50%          6.80%          6.17%

    Based on current data and assumptions, the following benefit payments, which reflect expected future service, as appropriate, are expected to be paid over the next 10 fiscal years:
 
                  Benefit
  Year ending: Payments
      2011 $       212
      2012   216
      2013   210
      2014   188
      2015   190
      Years 2016-2020   900

    The assumed health care cost trend rate used in measuring the benefit obligation ranged between 5.0%-9.0% in the first year, declining gradually to 5.0% in 2017 and remaining at 5.0% thereafter.
 
    If the assumed medical costs trends were increased by 1%, the benefit obligation as of September 30, 2010 would increase by $241, and the aggregate of the services and interest cost components of the net post retirement benefit cost would be increased by $12. If the assumed medical costs trends were decreased by 1%, the benefit obligation as of September 30, 2010 would decrease by $207, and the aggregate of the services and interest cost components of the net post retirement benefit cost would be decreased by $10.
 
    As part of the strike settlement agreement entered into in August 2003, the Company modified the provisions of the Post Retirement Plan to limit the number of eligible employees to those currently in the plan at August 31, 2002. The plan was further modified so that the benefits for any plan participant who had not retired under the union pension plan as of September 17, 2003 would be limited to a one-time lump sum payment under the plan of $6 at the time of a qualified retirement under the union pension plan.
 
41
 

 

Other Benefit Plans
 
    The Company sponsors a matching 401(k) plan for salaried employees and certain union employees, in which eligible employees may elect to contribute a portion of their compensation. The Company suspended the employer match in March 2009 as part of its actions to more closely align operating costs with reduced sales volumes. The employer match was reinstated effective October 1, 2009. Employer matching contributions in fiscal 2010, 2009 and 2008 were $252, $129 and $276, respectively.
 
    In December 2008, the Company adopted the 2008 Deferred Compensation Plan (the “Plan”). The purpose of the Plan is to (i) provide deferred compensation to select senior management employees of the Company (“Eligible Executives”) and members of the Company’s board of directors, (ii) permit Eligible Executives to elect to defer a percentage of their base compensation and/or bonus compensation, and (iii) permit members of the Company’s board of directors to elect to defer a portion of their board fees. The initial Eligible Executives are Patrick W. Cavanagh, President and Chief Executive Officer, and Dennis E. Bunday, Executive Vice President and Chief Financial Officer. As of September 30, 2010, Mr. Cavanagh and Mr. Bunday have been awarded un-funded, fully-vested deferred compensation of $272 and $80, respectively. Payment of the deferred compensation has not been scheduled.
 
Note 9. Income Taxes
 
    The provision for income tax expense is as follows for the years ended September 30:
 
  2010       2009       2008
Current:                    
    Federal $       701     $       (1,312 )   $       2,957
    State   (11 )     (18 )     467
    Foreign   168       97       31
    858       (1,233 )     3,455
Deferred:                    
    Federal   (448 )     (69 )     428
    State   36       (233 )     67
    Foreign   (108 )     (142 )     -
    (520 )     (444 )     495
                      
Total $ 338     $ (1,677 )   $ 3,950
                     
    The reconciliation between the effective tax rate and the statutory federal tax rate on income in fiscal 2010 and 2008 or a loss in fiscal 2009 as a percent is as follows:
 
Provision       2010       2009       2008
Statutory federal income tax rate   34.0 %          34.0 %          34.0 %
State taxes, net of federal income tax benefit   2.5     3.6     2.6  
Change in deferred tax assets due to change                  
    in state tax law   (2.8 )   2.1     -  
Impact of foreign income taxed at lower tax                  
    rates          (19.0 )   9.5     (3.0 )
Effect of change in valuation allowance   (2.4 )   (1.3 )   (0.5 )
Share based compensation   12.3     (3.7 )   1.1  
Section 199 deduction   (2.8 )   (1.4 )   (1.5 )
Research and development credits   (1.7 )   2.1     0.2  
Other   (0.4 )   0.6     0.6  
    19.7 %   45.5 %   33.5 %
                   
    At September 30, 2010, the Company had recorded an income tax payable of $522, which is included in accrued expenses in the accompanying consolidated balance sheets.
 
42
 

 

    The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2010 and 2009 are as follows:
 
  2010       2009
Deferred tax assets:              
Inventories $       169     $       104  
Warranty liability   577       262  
Accrual for compensated absences   139       111  
Share based compensation   472       372  
Accrual for retiree medical benefits   927       990  
Loss from investment in affiliate (Ajay Sports, Inc.)   3,911       3,889  
Tax gain on sale/leaseback   659       655  
Accrued environmental obligations   337       373  
Accrued other liabilities   570       317  
Pension plan comprehensive loss adjustment   2,160       2,001  
State net operating loss carryforwards   144       207  
Other   56       133  
               
Total deferred tax assets   10,121       9,414  
Less valuation allowance   (5,199 )     (5,241 )
               
Deferred tax assets, net of valuation allowance   4,922       4,173  
               
Deferred tax liabilities:              
Plant and equipment   502       575  
Net deferred income tax assets $ 4,420     $ 3,598  
               
Current deferred income tax assets $ 1,870     $ 1,280  
Long-term deferred income tax assets   8,519       8,330  
Long-term deferred income tax liabilities   (770 )     (771 )
Valuation allowance   (5,199 )     (5,241 )
  $ 4,420     $ 3,598  
               
    At September 30, 2010, the Company has approximately $2,724 of state net operating loss carry-forwards, which are available to the Company in certain state tax jurisdictions and begin to expire in 2016, if not utilized. The Company has recorded a valuation allowance against state net operating losses that it does not believe are more-likely-than-not to be utilized.
 
    As of September 30, 2010, the Company had unrecognized tax benefits of $69, of which $46 will favorably affect the effective tax rate, if recognized. Additionally, at September 30, 2010, interest and penalties related to the unrecognized tax benefits were $13. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company believes that it is reasonably possible that unrecognized tax benefits could decrease by $69 within the 12 months of this reporting date.
 
    Following is a reconciliation of the Company’s unrecognized tax benefits at September 30:
 
  2010       2009       2008
Beginning Balance $       81     $       104     $       109  
    Additions based on tax positions related to the current year   -       -       6  
    Additions based on tax positions of prior years   -       -       63  
    Reductions for tax positions of prior years   (12 )     (23 )     -  
    Settlements   -       -       (74 )
Ending Balance $ 69     $ 81     $ 104  
                       
    During the fourth quarter of fiscal 2008, the Company settled with the State of Oregon on all outstanding examination issues for tax years September 30, 2006 and prior. The settlement did not have a material adverse effect on the Company’s results of operations. The settlement liability was paid in October 2008. The Company is not currently under examination in any other states or foreign jurisdictions.
 
43
 

 

    The Company is subject to income taxes in the United States and foreign jurisdictions. In November 2010, the Company was notified by the Internal Revenue Service of an examination of its September 30, 2008 tax return. To date, there have been no proposed adjustments communicated to the Company. While the Company believes it is adequately reserved, if the examination results in an unfavorable outcome, there could be a material impact on the financial results in the period the outcome is determined. The Company is no longer subject to U.S. federal, state or foreign income tax examinations for tax years ended before September 30, 2007, September 30, 2006 and December 31, 2005, respectively. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or credit carryforward amount.
 
    In the ordinary course of the Company’s business there are transactions where the ultimate tax determination is uncertain. The Company believes that is has adequately provided for income tax issues not yet resolved with federal, state, local and foreign tax authorities. If an ultimate tax assessment exceeds the Company’s estimate of tax liabilities, an additional charge to expense would result.
 
    Earnings of a foreign subsidiary or affiliate are subject to U.S. taxation when effectively repatriated. U.S. income taxes and foreign withholding taxes have not been provided on undistributed earnings of foreign subsidiaries. The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. It is not practical to determine the amount of income tax payable in the event the Company repatriated all undistributed foreign earnings. However, if these earnings were distributed to the U.S. in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes and foreign withholding taxes.
 
    The Company’s subsidiary in China is entitled to a five-year tax holiday, pursuant to which it was exempted from paying the enterprise income tax for calendar 2007, the year in which it first had positive earnings, and calendar 2008. Additionally, the Company is subject to reduced enterprise income tax rates of 10%, 11% and 12% for the calendar years 2009, 2010 and 2011, respectively. The income tax benefit of the tax holiday for the years ended September 30, 2010 and September 30, 2009 was $198 and $132, respectively.
 
Note 10. Commitments and Contingencies
 
    The Company and its subsidiaries are parties to various pending judicial and administrative proceedings arising in the ordinary course of business. The Company’s management and legal counsel have reviewed the probable outcome of these proceedings, the costs and expenses reasonably expected to be incurred, the availability and limits of the Company’s insurance coverage, and the Company’s established liabilities. While the outcome of the pending proceedings cannot be predicted with certainty, based on its review, the Company believes that any unrecorded liability that may result is not more than likely to have a material effect on the Company’s liquidity, financial condition or results of operations.
 
    The soil and groundwater at the Company’s Portland, Oregon facility contains certain contaminants, which were deposited from approximately 1968 through 1995. Some of this contamination has migrated offsite to neighboring properties. The Company has retained an environmental consulting firm to investigate the extent of the contamination and to determine what remediation will be required and the associated costs. During fiscal 2004, the Company entered into the Oregon Department of Environmental Quality’s voluntary clean-up program and during fiscal 2004 the Company established a liability for this matter. As of September 30, 2010, the total liability recorded for the clean-up is $900 and is classified in accrued expenses in the accompanying consolidated balance sheet. The Company asserted and filed a contractual indemnity claim against Dana Corporation (“Dana”), from which it acquired the property, and contribution claims against the other prior owner of the property as well as businesses previously located on the property (including Blount, Inc. (“Blount”) and Rosan, Inc. (“Rosan”)) under the Federal Superfund Act and the Oregon Cleanup Law. During 2008, the Company entered into a settlement agreement with Dana, Blount and Rosan under which it received total cash payments from Dana, Blount and Rosan of $735, and shares of Dana stock equal to approximately $337 at the time of settlement, and assumed the full obligation to, and risks associated with, completing the remediation. The Company has recorded a total gain of $1,072 in the consolidated financial statements for the receipt of the cash and stock in fiscal year 2008.
 
    On October 1, 2004, the Company was named as a co-defendant in a product liability case (Cuesta v. Ford, et al), brought in the Oklahoma State District Court in Bryant, Oklahoma. During the second quarter of fiscal 2010 the Company entered into a settlement agreement between and among Ford and the plaintiff group and recorded a $775 provision for full settlement and release of all claims. The complaint sought an unspecified amount of damages on behalf of the class based on allegations that certain of our products, as incorporated into certain models of Ford motor vehicles, are defective. The settlement agreement involves settlements with both Ford and the Company, with the Company’s settlement cost at $775. In September 2010, the Company made cash payment of a $775 for the settlement.
 
44
 

 

    The Company leases certain facilities under non-cancelable operating leases. In addition, the Company leases certain equipment used in their operations. Future minimum lease payments under all non-cancelable operating leases are approximately as follows for annual periods ending September 30,
 
2011 $       753
2012   582
2013   232
2014   16
    Total $ 1,583
     
    Rent expense under operating leases was $648, $623 and $707 for the years ended September 30, 2010, 2009 and 2008, respectively.
 
Note 11. Share-Based Compensation
 
    The Company currently has two qualified equity compensation plans. At the February 24, 2010 Annual Meeting, our stockholders approved the adoption of the 2010 Restated Stock Option Plan (the "Employee Plan"), which amends, restates and renames the Company’s 1993 Restated Stock Option Plan and provides for issuance of either incentive stock options or restricted stock. The Employee Plan reserves an aggregate of 1,170,000 shares of the Company’s common stock for issuance under the plan, which includes a 300,000 share increase in authorized shares approved by the stockholders at the 2010 Annual Meeting. These shares may be granted to employees, officers and directors of and consultants to the Company. Under the terms of the Employee Plan, the Company may grant “incentive stock options” or “non-qualified options” with an exercise price of not less than the fair market value on the date of grant or restricted stock. Options granted under the Employee Plan have a vesting schedule determined by the Compensation Committee of the Board of Directors. Stock options expire ten years after the date of grant. The Employee Plan also permits the Compensation Committee to establish the terms of each award made under the plan and allows the committee to vary from the plan’s standard terms under circumstances the committee deems appropriate. Our stockholders also approved the adoption of the 2010 Restated Formula Stock Option Plan for non-employee Directors (the “Formula Plan”), which amends, restates and renames the Company’s 1995 Formula Stock Option Plan. The Formula Plan reserves an aggregate of 106,666 shares of the Company’s common stock for the issuance of stock options, which includes a 20,000 share increase in authorized shares approved by the stockholders at the 2010 Annual Meeting. These shares may be granted to non-employee directors of the Company. Under this plan the non-employee directors are each automatically granted 1,666 options at a price equal to the market value on the date of grant which is the date of the Annual Meeting of Stockholders each year, exercisable for 10 years after the date of the grant. These options are exercisable as to 25% of the shares thereby on the date of grant and as to an additional 25%, cumulatively on the first, second and third anniversaries of the date of grant.
 
    As of September 30, 2010, there was $1,622 of total unrecognized compensation costs related to nonvested stock options. That cost is expected to be recognized over a weighted average period of 3 years.
 
45
 

 

    The Company’s share-based compensation expenses were recorded in the following expense categories for the years ended September 30, 2010, 2009 and 2008:
 
      2010       2009       2008
  Cost of sales $       166   $       124   $       111
  Research and development   126     79     73
  Selling   107     74     76
  Administration   508     455     412
  Total share-based compensation expense $ 907   $ 732   $ 672
                   
  Total share-based compensation                
      expense (net of tax) $ 811   $ 620   $ 572
                   
    Included in the above breakdown of share-based compensation expense and as part of the employment agreement with Patrick W. Cavanagh, President and Chief Executive Officer, the Company has the option to pay Mr. Cavanagh up to 7% of his annual base salary in shares of common stock of the Company. The Compensation Committee exercised that option for each of fiscal years 2010, 2009 and 2008. The Company issued 2,196 shares of restricted common stock at $8.92 per share in fiscal 2010; 3,839 shares of restricted common stock at $5.10 per share in fiscal 2009; and 1,364 shares of restricted common stock at $13.34 per share in fiscal 2008.
 
    The Company also elected to pay per their respective employment agreements, $5 of Dennis E. Bunday’s, Executive Vice President and Chief Financial Officer, and $3 of Mark S. Koenen’s, Vice President of Sales and Marketing, salary in common stock of the Company for each of fiscal years 2010, 2009 and 2008. The Company issued 560 and 336 shares, respectively, of restricted common stock at $8.92 per share in fiscal 2010; 979 and 587 shares, respectively, of restricted common stock at $5.10 per share in fiscal 2009; and 374 and 224 shares, respectively, of restricted common stock at $13.34 per share in fiscal 2008.
 
    The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants issued during the years ended September 30, 2010, 2009 and 2008.
 
      2010       2009       2008
  Risk-free interest rate 2.60%   2.03%   3.55%
  Expected dividend yield 0%   0%   0%
  Expected term 6.5 years   5.8 years   6.4 years
  Expected volatility 45%   46%   68%

    Using the Black-Scholes methodology, the total value of options granted during the years ended September 30, 2010, 2009 and 2008, was $1,217, $23 and $712, respectively, which would be amortized over the vesting period of the options. The weighted average grant date fair value of stock options granted during the years ended September 30, 2010, 2009 and 2008 was $4.10, $2.32 and $8.79 per share, respectively.
 
    The Company uses the US Treasury (constant maturity) interest rate on the date of grant as the risk-free interest rate. The expected term of options granted represents the weighted average period the stock options are expected to remain outstanding. Expected volatilities are based on the historical volatility of the Company’s common stock and fluctuate based on the changes in price of the Company’s common stock looking back over an equivalent period as the expected term of the new option grant.
 
    The following table summarizes stock options outstanding as of September 30, 2010:
 
                Weighted Average
    Shares   Exercise Price
  Outstanding at September 30, 2009        598,769     $       7.76
  Granted 297,006       8.52
  Exercised (15,833 )     4.63
  Forfeited (5,165 )     12.28
  Outstanding at September 30, 2010 874,777     $ 9.17
  Exercisable at September 30, 2010 529,892     $ 8.53
              
46
 

 

     At September 30, 2010, the weighted average remaining contractual term of options outstanding and options exercisable was 6.5 years and 5.0 years, respectively.
 
     The aggregate intrinsic value of options outstanding and options exercisable at September 30, 2010 was $1,342 and $1,144, respectively (the intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option). The intrinsic value of all stock options exercised during the years ended September 30, 2010, 2009 and 2008 was $67, $138 and $421, respectively. Cash received from the exercise of stock options for the years ended September 30, 2010, 2009 and 2008 was $73, $165 and $173, respectively.
 
     Stock option activity during the periods indicated under the Employee Plan is as follows:
 
  Shares Available   Shares Subject      
  For Grant       To Options       Option Prices
Outstanding at September 30, 2007 55,471             573,635     $      3.96 – 18.05
Newly authorized            120,000     -        
Granted (71,000 )   71,000       13.17 – 15.46
Exercised -     (37,198 )     3.96 – 14.03
Forfeited 19,396     (19,396 )     3.96 – 17.25
                 
Outstanding at September 30, 2008 123,867     588,041       3.96 – 18.05
Exercised -     (41,666 )     3.96
Forfeited 13,416     (13,416 )     3.96 – 14.03
                 
Outstanding at September 30, 2009 137,283     532,959       3.96 – 18.05
Newly authorized 300,000     -        
Granted (287,010 )   287,010       7.95 – 9.10
Exercised -     (15,833 )     4.62 – 4.68
Forfeited 3,499     (3,499 )     3.96 – 18.05
                 
Outstanding at September 30, 2010 153,772     800,637     $ 3.96 – 18.05
                 
     Stock option activity during the periods indicated under the Formula Plan is as follows:
 
  Shares Available   Shares Subject      
  For Grant       To Options       Option Prices
Outstanding at September 30, 2007              16,684              49,150     $      3.96 –17.69
Newly authorized 20,000     -        
Granted (9,996 )   9,996       15.25
Forfeited 1,666     (1,666 )     14.64
                 
Outstanding at September 30, 2008 28,354     57,480       3.96 –17.69
Granted (9,996 )   9,996       5.13
Forfeited 1,666     (1,666 )     16.13
                 
Outstanding at September 30, 2009 20,024     65,810       3.96 –17.69
Newly authorized 20,000     -        
Granted (9,996 )   9,996       7.92
Forfeited 1,666     (1,666 )     12.75
                 
Outstanding at September 30, 2010 31,694     74,140     $ 3.96 –17.69
                 
47
 

 

     The following table summarizes information about stock options under both plans outstanding at September 30, 2010:
 
      Options Outstanding   Options Exercisable
      Number   Weighted                
      Outstanding   Average   Weighted   Number   Weighted
Range of   at   Remaining   Average   Exercisable at   Average
Exercise   September 30,   Contractual   Exercise   September 30,   Exercise
Prices   2010       Life – Years       Price       2010       Price
$      3.96 – 5.13        168,655        3.2   $      4.31        163,657   $      4.28
  7.20 – 13.57   570,996   7.4     8.77   278,526     8.40
  14.03 – 18.05   135,126   6.6     16.94   87,709     16.91
$ 3.96 – 18.05   874,777   6.5   $ 9.17   529,892   $ 8.53
                           
     At September 30, 2009 and 2008, 417,629 and 362,833 options, respectively, were exercisable at weighted average exercise prices of $7.76 and $6.80 per share, respectively.
 
Note 12. Geographic Information
 
     Geographic information for revenues are allocated between the United States and International countries, depending on whether the shipments are to customers within the United States or located outside the United States. Revenues for each geographic location are as follows:
 
Year ended September 30,          2010       2009       2008
North America (NAFTA):                  
       United States   $      30,701   $      24,289   $      35,240
       Canada     2,238     2,146     3,700
       Mexico     1,840     1,257     2,817
    $ 34,779   $ 27,692   $ 41,757
Europe:                  
       Belgium   $ 4,386   $ 2,411   $ 5,544
       France     1,774     1,220     3,256
       Sweden     1,488     1,290     4,038
       Other     1,680     1,016     1,924
    $ 9,328   $ 5,937   $ 14,762
Asia:                  
       Korea   $ 3,147   $ 1,961   $ 3,800
       China     2,894     2,086     3,262
       Other     1,431     806     1,539
    $ 7,472   $ 4,853   $ 8,601
                   
Other:     687     327     661
Consolidated net sales   $ 52,266   $ 38,809   $ 65,781
                   
Foreign sales   $ 21,565   $ 14,520   $ 30,541
United States sales     30,701     24,289     35,240
Consolidated net sales   $ 52,266   $ 38,809   $ 65,781
                   
48
 

 

     During the years ended September 30, 2010, 2009 and 2008, the Company operated in two geographic reportable regions as shown in the table below.
 
Year ended September 30,   2010       2009       2008
Revenue – External Customers:                      
       United States $      49,392     $      36,800     $      62,516  
       China   2,874       2,009       3,265  
  $ 52,266     $ 38,809     $ 65,781  
Revenue – Intersegments:                      
       United States $ 1,010     $ 480     $ 1,472  
       China   12,504       7,217       12,177  
       Other   775       602       626  
       Eliminations   (14,289 )     (8,299 )     (14,275 )
  $ -     $ -     $ -  
Income before income taxes:                      
       United States $ 580     $ (4,585 )   $ 10,642  
       China   1,180       860       1,085  
       Other   (45 )     39       53  
  $ 1,715     $ (3,686 )   $ 11,780  
Total assets:                      
       United States $ 28,214     $ 31,745     $ 34,579  
       China   4,967       4,512       5,041  
       Other   1,024       127       142  
  $ 34,205     $ 36,384     $ 39,762  
Long-lived assets:                      
       United States $ 7,297     $ 7,823     $ 8,257  
       China   1,495       1,384       1,316  
       Other   671       54       48  
  $ 9,463     $ 9,261     $ 9,621  
                       
Note 13. Employment Agreements
 
     In January 2008, the Company entered into an employment agreement with Scott J. Thiel, Vice President of Engineering and Development. The contract specifies an initial base salary per year, plus a bonus based on parameters established by the board of directors. The agreement also provides for a one-year severance payment under certain circumstances in the event the Company terminates his employment.
 
     In March 2007, the Company entered into employment agreements with Dennis E. Bunday, its Executive Vice President and Chief Financial Officer, Mark S. Koenen, Vice President of Sales and Marketing and Gary A. Hafner, Vice President of Manufacturing. The contracts specify an initial base salary per year, plus bonuses based on parameters established by the board of directors. The agreements also provide for a one-year severance payment under certain circumstances in the event the Company terminates their employment.
 
     On October 1, 2004, the Company entered into an employment agreement with Patrick W. Cavanagh for the position of President and Chief Executive Officer. The contract specifies an initial base salary per year, bonus parameters established by the board of directors, relocation assistance and stock options grants to be made in fiscal 2005. The agreement also provides for severance payments under certain circumstances in the event the Company terminates his employment.
 
49
 

 

Note 14. Stock Repurchase Program
 
     In October 2008, the Company’s Board of Directors authorized the purchase, from time to time, of up to $5,000 of shares of the Company’s common stock. Repurchases may be made in the open market or through block trades, in compliance with Securities and Exchange Commission guidelines, subject to market conditions, applicable legal requirements and other factors. The Company has no obligation to repurchase shares under the repurchase program and the timing, actual number and price of shares to be purchased will depend on the performance of the Company’s stock price, general market conditions, and various other factors within the discretion of management. As of September 30, 2010, the Company has repurchased 310,893 shares of common stock at a total value of $2,357. The Company purchased no shares under the share repurchase program in fiscal 2010.
 
Note 15. Quarterly Data (unaudited)
 
     The following table summarizes the Company’s quarterly financial data for the past two fiscal years ended September 30, 2010 and 2009:
 
    First   Second   Third   Fourth        
2010       Quarter       Quarter       Quarter       Quarter       Annual
       Net sales   $      11,709     $      12,649     $      13,764     $      14,144   $      52,266  
       Cost of sales     8,122       9,294       9,714       10,316     37,446  
       Gross profit   $ 3,587     $ 3,355     $ 4,050     $ 3,828   $ 14,820  
       Operating expenses   $ 3,059     $ 4,147     $ 3,110     $ 3,280   $ 13,596  
Net income (loss)   $ 396     $ (432 )   $ 903     $ 510   $ 1,377  
Earnings per common share                                      
       Basic   $ 0.05     $ (0.06 )   $ 0.12     $ 0.07   $ 0.19  
       Diluted   $ 0.05     $ (0.06 )   $ 0.12     $ 0.07   $ 0.19  
                                       
    First   Second   Third   Fourth        
2009   Quarter   Quarter   Quarter   Quarter   Annual
       Net sales   $ 10,691     $ 9,131     $ 8,444     $ 10,543   $ 38,809  
       Cost of sales     8,137       7,908       6,536       7,592     30,173  
       Gross profit   $ 2,554