ATC TECHNOLOGY CORPORATION (ATAC) filed Quarterly Report for the period ended 2009-09-30.
ATC Technology Corporation provides outsourced engineering solutions and supply chain logistics services primarily to the light vehicle aftermarket and consumer electronics industries.They are the largest independent provider of light vehicle drivetrain remanufacturing and logistics services to service and repair organizations of OEMs.They also provide medium and heavy duty drivetrains and other proprietary transmission products. Atc Technology Corporation has a market cap of $410.1 million; its shares were traded at around $20.66 with a P/E ratio of 10.3 and P/S ratio of 0.8.
Highlight of Business Operations:
Inventory Valuation. We make adjustments to write down our inventories for estimated excess and obsolete inventory equal to the difference between the cost of the inventory and the estimated market value based on assumptions about market conditions, future demand and expected usage rates. Changes in economic conditions, customer demand, product introductions or pricing changes can affect the carrying value of our inventory. Demand for our products has fluctuated in the past and may do so in the future, which could result in an increase in excess quantities on hand. If actual market conditions are less favorable than those projected by management, causing usage rates to vary from those estimated, additional inventory write-downs may be required. Although no assurance can be given, these write-downs would not be expected to have a material adverse effect on our financial statements. During 2008, as part of the restructuring and consolidation of our Drivetrain business and changes in the economic and financial condition of the automotive sector, we revised our estimates of net realizable value for inventory in our Drivetrain businesses. For the years ended December 31, 2008, 2007 and 2006, we recorded charges for excess and obsolete inventory of approximately $10.4 million (including $7.3 million classified as exit, disposal, certain severance and other charges), $4.4 million (including $1.4 million classified as exit, disposal, certain severance and other charges), and $1.7 million, respectively. For the nine months ended September 30, 2009 and 2008, we recorded charges for excess and obsolete inventory of approximately $2.9 million and $1.5 million, respectively. As of September 30, 2009 we had inventory of $57.5 million, net of a reserve for excess and obsolete inventory of $8.3 million.
Warranty Liability. We provide an allowance for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including inspection and testing at various stages of the remanufacturing process and the testing of each finished assembly on equipment designed to simulate performance under operating conditions, our warranty obligation is affected by the number of products sold, historical and anticipated rates of warranty claims and costs per unit and actual product failure rates. Additionally, we participate in the tear-down and analysis of returned products with certain of our customers to assess responsibility for product failures. For the years ended December 31, 2008, 2007 and 2006, we (i) recorded charges for estimated warranty costs for sales made in the respective year of approximately $1.0 million, $1.6 million and $1.3 million, respectively, and (ii) paid and/or settled warranty claims of approximately $0.7 million, $0.8 million and $1.3 million, respectively. For the nine months ended September 30, 2009 and 2008, we (i) recorded charges for estimated warranty costs of approximately $0.5 million and $0.8 million, respectively, and (ii) paid and/or settled warranty claims of approximately $0.6 million and $0.5 million, respectively. Should actual product failure rates differ from our estimates, revisions to the estimated warranty liability may be required. Although no assurance can be given, these revisions are not expected to have a material adverse effect on our financial statements.
During the three months ended September 30, 2009, we recorded a net credit of $1.0 million ($0.6 million net of tax) related to the Drivetrain segment, which included: (i) income of $2.6 million ($1.6 million net of tax) from an adjustment to materials cost related to the wind-down of our relationship with a customer (classified as cost of sales – products), (ii) $1.1 million ($0.7 million net of tax) of estimated costs related to a customer inventory reimbursement obligation negotiated during the quarter (classified as cost of sales – products), and (iii) $0.5 million ($0.3 million net of tax) of severance and other costs related to additional cost reduction activities.
Income from continuing operations decreased $26.2 million, or 86.8%, to $4.0 million for the nine months ended September 30, 2009 from $30.2 million for the nine months ended September 30, 2008. Income from continuing operations per diluted share was $0.20 for the nine months ended September 30, 2009 and $1.41 for the nine months ended September 30, 2008. Our results for 2009 included (i) the goodwill impairment charge of $26.0 million (net of tax) in our Drivetrain segment, and (ii) net exit, disposal, certain severance and other charges of $2.7 million (net of tax) in the Drivetrain segment. Our results for 2008 included exit, disposal, certain severance and other charges of $0.8 million (net of tax). Excluding these charges, income from continuing operations increased primarily as a result of:
During 2008, our Drivetrain customers and the supporting supply base experienced unprecedented distress due to the economic slowdown and adverse changes in the North American vehicle industry. As a result, during 2008 we began to take actions to restructure our Drivetrain operations, including the closure and consolidation of our Springfield, Missouri automatic transmission remanufacturing operations into our Drivetrain operations located in Oklahoma City, Oklahoma. In connection with this restructuring, we recorded pre-tax charges of $5.3 million ($3.3 million net of tax) during 2009, consisting of (i) $3.9 million ($2.4 million net of tax) of costs to transfer production from the Springfield facility to the Oklahoma City facility and other facility exit costs (including $0.9 million of costs classified as cost of sales – products) and (ii) $1.4 million ($0.9 million net of tax) of severance and related costs for employees terminated as part of the closure of the Springfield facility. This consolidation and restructuring, which is expected to result in pre-tax annual cost savings of $6 million, is essentially complete and we do not expect to incur any significant additional charges over the remainder of 2009.
In addition, during the three months ended September 30, 2009, we recorded a net credit of $1.0 million ($0.6 million net of tax) related to the Drivetrain segment, which included: (i) income of $2.6 million ($1.6 million net of tax) from an adjustment to materials cost related to the wind-down of our relationship with a customer (classified as cost of sales – products), (ii) $1.1 million ($0.7 million net of tax) of estimated costs related to a customer inventory reimbursement obligation negotiated during the quarter (classified as cost of sales – products), and (iii) $0.5 million ($0.3 million net of tax) of severance and other costs related to additional cost reduction activities.
ATAC is in the portfolios of Richard Pzena of Pzena Investment Management LLC.
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