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Victor Technologies Group, Inc. 10-K 2008 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number 0-23378
Registrant’s telephone number, including area code:
(636) 728-3000
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $0.01 per share
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
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 o No þ
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 o No þ
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. þ
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. (Check one):
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes þ No o
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to
the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently
completed second fiscal quarter: approximately $114,344,882
based on the closing sales price of the Common Stock on
June 30, 2007.
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a
court. Yes þ No o
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock, as of the latest
practicable date: 13,371,435 shares of common stock,
outstanding at March 6, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s Proxy Statement for
the 2008 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Annual Report on
Form 10-K.
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The statements in this Annual Report on
Form 10-K
that relate to future plans, events or performance are
forward-looking statements within the meaning of
Section 27A of the Securities Act, Section 21E of the
Securities Exchange Act of 1934, or the Exchange Act, and the
Private Securities Litigation Reform Act of 1995, including
statements regarding our future prospects. These statements may
be identified by terms and phrases such as
“anticipate,” “believe,” “intend,”
“estimate,” “expect,” “continue,”
“should,” “could,” “may,”
“plan,” “project,” “predict,”
“will” and similar expressions and relate to future
events and occurrences. Actual results could differ materially
due to a variety of factors and the other risks described in
this Annual Report and the other documents we file from time to
time with the Securities and Exchange Commission. Factors that
could cause actual results to differ materially from those
expressed or implied in such statements include, but are not
limited to, the following and those discussed under the
“Risk Factors” section of this annual report on
Form 10-K:
(a) the cyclicality of the cutting and welding market;
(b) general economic and capital market conditions,
including liquidity availability for our customers and political
and economic uncertainty in various areas of the world where we
do business;
(c) actions taken by our competitors that affect our
ability to retain our customers;
(d) our international sales and operations pose risks of
trade barriers, attracting key personnel, foreign currency
exchange fluctuations, protection of intellectual property and
changes in laws and regulations;
(e) the cost of raw materials;
(f) consolidation within our customer base and the
resulting increased concentration of our sales;
(g) the effectiveness of our cost reduction initiatives;
(h) our ability to meet customer needs by introducing new
and enhanced products;
(i) unforeseen liabilities arising from litigation,
including risk associated with product liability;
(j) our ability to retain qualified management personnel
and attract new management personnel.
Actual results could differ materially due to a variety of
factors and the other risks described in this Annual Report,
including those described in the “Risk Factors”
section, and the other documents we file from time to time with
the Securities and Exchange Commission. Readers are cautioned
not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof and are not guarantees of
performance or results. We undertake no obligation to publicly
release the result of any revisions to these forward-looking
statements that may be made to reflect events or circumstances
after the date hereof or that reflect the occurrence of
unanticipated events.
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PART I
We are a leading global supplier of cutting and welding
products. We design, manufacture, market, sell and distribute
welding and cutting torches, consumables, power sources and
accessories globally. Our products are used by fabricating,
manufacturing, construction and foundry operations to cut and
weld ferrous and nonferrous steel, aluminum and other metals.
Common applications for our products include shipbuilding,
manufacturing of transportation, mining and agricultural
equipment, many types of construction such as offshore oil and
gas rigs, fabrication of metal structures, and repair and
maintenance of processing and manufacturing equipment and
facilities as well as demolition. Welding and cutting products
are critical to the operations of most businesses that fabricate
metal. We have very well established and widely recognized
brands. We were incorporated in Delaware in 1987. Our shares are
currently quoted on NASDAQ, and as of March 6, 2008, we had
an equity market capitalization of approximately
$133.7 million (based on a closing sale price of $10.00 and
13.4 million shares outstanding).
As used in this Annual Report on
Form 10-K,
the terms “Thermadyne Holdings Corporation,”
“Thermadyne,” “Reorganized Company,”
“the Company,” “we,” “our,” or
“us,” mean Thermadyne Holdings Corporation and its
subsidiaries.
On November 19, 2001, the Company and substantially all of
our domestic subsidiaries filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the Eastern District of Missouri
(the “Court”). On January 17, 2003, we filed with
the Court the First Amended and Restated Joint Plan of
Reorganization (the “Plan of Reorganization”) and the
First Amended and Restated Disclosure Statement describing the
Plan (the “Disclosure Statement”). The Plan of
Reorganization and the Disclosure Statement were filed with the
SEC on
Form 8-K
on February 6, 2003. On April 3, 2003, the Court
confirmed the Plan of Reorganization. The Plan of Reorganization
was consummated on May 23, 2003, and we emerged from
Chapter 11 bankruptcy protection.
The Plan of Reorganization provided for a substantial reduction
of our long-term debt. Under the Plan of Reorganization, total
debt was reduced to approximately $220 million, as compared
to the nearly $800 million in debt and $79 million in
preferred stock outstanding at the time we filed for
Chapter 11 protection in November 2001.
In accordance with AICPA Statement of Position
90-7, we
adopted fresh-start accounting whereby our assets, liabilities
and new capital structure were adjusted to reflect estimated
fair value at May 31, 2003. We determined the
reorganization value through consultation with our financial
advisors, by developing a range of values using both comparable
companies and net present value approaches. In determining the
$518 million reorganization value, we applied the income
approach. The income approach is predicated on developing either
cash flow or income projections over the useful lives of the
assets, which are then discounted for risk and time value. The
reorganized company’s financial statements are not
comparable to the predecessor company’s financial
statements.
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Although we operate our business in one reportable segment, we
have organized our business into five major product categories
within the cutting and welding industry: (1) gas equipment;
(2) arc accessories including torches, guns, related
consumable parts and accessories; (3) plasma power
supplies, torches and related consumable parts; (4) welding
equipment; and (5) filler materials. The following shows
the percent of total sales for each of the major product
categories for each of the previous three years:
Our gas equipment products include oxy-fuel torches, air fuel
torches, consumables (tips and nozzles), regulators, flow meters
and safety accessories that are used for cutting, heating and
welding applications. We also have gas flow and pressure
regulation equipment and manifold capabilities used for a
variety of gas management applications across an extensive range
of industries. These products are primarily sold under the
Victor®,
Cigweld®
and
TurboTorch®
brands and typically range in price from $10 to over $1,000 for
more complex gas management systems. Oxy-fuel torches use a
mixture of oxygen and fuel gas (predominantly acetylene) to
produce a high-temperature flame that is used to cut, heat or
weld steel. Gas torches are typically used in all the
applications noted above, as well as for welding, heating,
brazing and cutting in connection with maintenance of machinery,
equipment and facilities. Air fuel torches are used by the
plumbing, refrigeration and heating, ventilation and air
conditioning industries using similar principles with
Mapp®
or propane as the fuel gas. Gas flow and pressure regulation
equipment is used to control the pressure and flow of most
industrial, medical and specialty gases, including gases used in
many industrial process control applications as well as the
analytical laboratory and electronic industries. We believe we
are among the largest suppliers of gas equipment products in the
world, based on annual sales.
Our arc accessories include automatic and semiautomatic welding
guns and related consumable parts, ground clamps, electrode
holders, cable connectors and assemblies all sold under our
Tweco brand. We also have a line of carbon arc gouging and
exothermic cutting products. These products include torches and
consumable rods that are sold under our
Arcair®
brand. Our welding accessory products are designed to be used
with our arc welding power supplies, as well as those of our
competitors. Our arc welding metal inert gas (“MIG”)
guns typically range in price from $90 to $1,000. Arc welding
MIG guns are used to apply the current to the filler metal used
in welding, are typically handheld and require regular
replacement of consumable parts as a result of wear and tear, as
well as their proximity to intense heat. Our connectors, clamps
and electrode holders attach to the welding cable to connect the
power source to the metal to be welded. Our gouging products are
used to cut or gouge material to remove unwanted base or welded
material as well as in demolition. We believe we are among the
largest manufacturers of arc welding accessory products in the
United States based on our annual unit sales.
Filler metals are consumed in the welding process as the
material that is melted to join the materials to be welded
together. There are three basic types of filler metals used:
stick electrodes, solid wire and flux cored wire. Stick
electrodes are fixed length metal wires coated with a flux to
enhance weld properties. This is used in conjunction with a
power source and an electrode holder to weld the base material.
The main advantage of this process is simplicity, portability
and ease of use as it can be used to access most areas and no
gas is required. Solid wire is sold on spools or in drums and is
used in the semi-automated process with a MIG welding gun, power
source and shielding gas. The main advantage of this process is
ease of use and very high deposition rates making for higher
productivity. Flux cored wires are similar to solid wires;
however, they are tubular wires that allow the use of flux and
other alloys to improve deposition rates and weld quality.
Our plasma power supplies, torches and consumable parts are sold
under the Thermal
Dynamics®
brand. Manual plasma systems typically range in price from $900
to $5,000 with manual torch prices ranging from $300 to $800.
Our automated cutting systems range in price from $2,500 to
$50,000 with torches ranging in price from
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$1,000 to $2,500. Both manual and automated plasma systems use
front end torch parts that are consumed during the cutting
process and range in price from $5 to $50. Plasma cutting uses
electricity and gases (typically air or oxygen) to create a
high-temperature plasma arc capable of cutting any type of
metal. Electricity is converted by a power supply and supplied
to a torch where the gas and electricity form a plasma arc. The
plasma arc is then applied to the metal being cut. Plasma
cutting is a growing technology for cutting metal. Advantages of
the plasma cutting process over other methods include faster
cutting speeds, cleaner cuts and the ability to cut ferrous and
nonferrous alloys with minimum heat distortion to the metal
being cut. Plasma cutting systems are used in the construction,
fabrication and repair of both steel and nonferrous metal
products, including automobiles and related assemblies,
appliances, ships, railcars and heating, ventilation and
air-conditioning products, as well as for general maintenance.
We believe we are among the largest suppliers of plasma power
supplies, torches and consumable parts in the United States and
worldwide, based on our annual unit sales.
Our welding equipment line includes inverter and
transformer-based power sources used for all the main welding
processes as well as plasma welding power sources. These
products are primarily sold under the Thermal
Arc®,
Firepower®
and
Cigweld®
brands. These products typically range in price from $400 to
$6,000. Arc welding uses an electric current to melt together
either wire or electrodes (referred to as filler metals) and the
base materials. The power source converts the electrical line
power into the appropriate voltage to weld. This electricity is
applied to the filler metal using an arc welding accessory, such
as a welding gun for wire welding or an electrode holder for
stick electrode welding. Arc welding is the most common method
of welding and is used for a wide variety of manufacturing and
construction applications, including the production of ships,
railcars, farm and mining equipment and offshore oil and gas
rigs.
We sell most of our products through a network of national and
multinational industrial gas distributors including Airgas, Inc.
and Praxair, Inc., as well as a large number of other
independent welding distributors, wholesalers and dealers. In
2007, our sales to customers in the U.S. represented 59% of
our sales. In 2007 and 2006, we had one customer that comprised
13% and 10%, respectively of our global net sales.
We have wholly-owned subsidiaries or joint venture manufacturing
facilities located in the United States, Australia, Mexico,
People’s Republic of China, Indonesia, Malaysia, and Italy,
with distribution facilities in Canada and England. We manage
our operations by geographic location and by product category.
See Note 18 — Segment Information to the
consolidated financial statements for geographic and product
line information.
We had international sales from continuing operations of
approximately $201.4 million, $166.7 million, and
$154.2 million for the years ended December 31, 2007,
2006, and 2005, respectively, or approximately 41%, 37%, and
38%, respectively, of our net sales in each such period. Our
international sales are influenced by fluctuations in exchange
rates of foreign currencies, foreign economic conditions and
other risks associated with foreign trade. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Quantitative and
Qualitative Disclosures About Market Risk.” Our
international sales consist of: (a) export sales of our
products manufactured at U.S. manufacturing facilities and,
to a limited extent, products manufactured by third parties,
sold through our overseas field representatives and
(b) sales of our products manufactured at our international
manufacturing facilities and sold by our foreign subsidiaries.
The Sales and Marketing organization oversees all sales and
marketing activities, including strategic product pricing,
promotion, and marketing communications. It is the
responsibility of Sales and Marketing to profitably grow the
Company’s sales, market share, and margins in each region.
This is achieved through new product introductions, programs and
promotions, price management, and the implementation of
distribution strategies to penetrate new markets.
Sales and Marketing is organized into three regions: Americas,
Asia Pacific, and Europe including other regions. The Americas
is comprised of the U.S., Canada, Mexico and Latin and South
America; Asia Pacific includes South Pacific (Australia and New
Zealand) and South and North Asia. Our third region is comprised
of the U.K., Europe, Middle East, and the remaining countries
not included in the other two regions. In 2007, the Americas
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contributed approximately 65% of the Company’s revenues;
Asia Pacific contributed approximately 19%; and Europe and the
remaining countries contributed approximately 16%. All product
lines are sold in the three regions although there is some mix
variance among the regions.
The Sales and Marketing organization consists of sales,
marketing, technical support, and customer care in each region.
Sales and Marketing manages the Company’s relationship with
our customers and channel partners who include distributors,
wholesalers and retail customers. They provide feedback from the
customers on product and service needs of the end-user
customers, take our product lines to market, and provide
technical and after sales service support. A national accounts
team manages our largest accounts globally.
We distribute our cutting and welding products in the United
States through independent cutting and welding products
distributors that carry one or more of our product lines from
approximately 2,500 locations. We maintain relationships with
these distributors through our sales force. We distribute our
products internationally through our sales force, independent
distributors and wholesalers.
We have not experienced any difficulties in obtaining raw
materials for our operations because our principal raw
materials, which include copper, brass, steel and plastic, are
widely available and need not be specially manufactured for use
by us. Certain of the raw materials used in the hardfacing
products of our filler metals product line, such as cobalt and
chromium, are available primarily from sources outside the
United States, some of which are located in countries that may
be subject to economic and political conditions that could
affect pricing and disrupt supply. Although we have historically
been able to obtain adequate supplies of these materials at
acceptable prices, restrictions in supply or significant
increases in the prices of copper and other raw materials could
adversely affect our business. During 2007, 2006, and 2005, we
experienced significantly higher than historical average
material inflation on materials such as copper, steel and brass
which detrimentally impacted our gross margins.
We also purchase certain manufactured products that we either
use in our manufacturing processes or resell. These products
include electronic components, circuit boards, semiconductors,
motors, engines, pressure gauges, springs, switches, lenses,
forgings and chemicals. Some of these products are purchased
from international sources and thus our cost can be affected by
foreign currency fluctuations. We believe our sources of such
products are adequate to meet foreseeable demand at acceptable
prices.
We have development engineering groups for each of our product
lines. The development engineering group primarily performs
process and product development work to develop new products to
meet our customer needs. The sustaining engineering group
provides technical support to the operations and sales groups,
and the quality department supports established products. As of
December 31, 2007, we employed approximately
100 people in our development and sustaining engineering
groups, split between engineers, designers, technicians and
graphic service support. Our engineering costs consist primarily
of salaries, benefits for engineering personnel, and project
expenses. Our development engineering costs are not material to
our financial condition or results of operations.
We view the market as split into three types of competitors:
(1) three full-line welding equipment and filler metal
manufacturers (Lincoln Electric Company, ESAB, a subsidiary of
Charter PLC, and several divisions of Illinois Tool Works, Inc.,
including the ITW Miller and ITW Hobart Brothers divisions);
(2) many single-line brand-specific competitors; and
(3) a number of low-priced small niche competitors. Our
large competitors offer a wide portfolio of product lines with
an emphasis on filler metals and welding power supplies and
lines of niche products. Their position as full-line suppliers
and their ability to offer complete product solutions, filler
metal volume, sales force relationships and fast delivery are
their primary competitive strengths. Our single-line,
brand-specific competitors emphasize product expertise, a
specialized focused sales force, quick customer response time
and flexibility to special needs as their primary competitive
strengths. The low-priced manufacturers primarily use low
overhead, low market prices and direct selling to
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capture a portion of price-sensitive customers’
discretionary purchases. International competitors have been
less effective in penetrating the U.S. domestic markets due
to product specifications, lack of brand recognition and their
relative inability to access the welding distribution market
channel.
We expect to continue to see price pressure in the segments of
the market where little product differentiation exists. The
trends of improved performance at lower prices in the power
source market and further penetration of the automated market
are also expected to continue. Internationally, the competitive
profile is similar, with overall lower market prices, more
fragmented competition and a weaker presence of larger
U.S. manufacturers.
We compete on the performance, functionality, price, brand
recognition, customer service and support and availability of
our products. We believe we compete successfully through the
strength of our brands, by focusing on technology development
and offering innovative industry-leading products in our niche
product areas.
On December 21, 2007, the Company committed to a plan to
dispose of its cutting table business, C&G Systems. A
definitive sales agreement was signed with closing occurring on
January 18, 2008. Based on the sales price of
$0.5 million, a loss of $0.6 million (net of
$0.3 million of tax) was recorded in 2007 as a component of
discontinued operations.
The Company has agreed to purchase the other 50% of the China
joint venture manufacturing business from its joint venture
partner for an amount of approximately $3 million. The
transaction is expected to be completed by early in the second
quarter of 2008.
As of December 31, 2007, we employed approximately
2,950 people, 650 of whom were engaged in sales, marketing
and administrative activities, and 2,300 of whom were engaged in
manufacturing or other operating activities. None of our
U.S. workforce is represented by labor unions while most of
the manufacturing employees in our foreign operations are
represented by labor unions. We believe that our employee
relations are satisfactory. We have not experienced any
significant work stoppages.
Our products are sold under a variety of trademarks and trade
names. We own trademark registrations or have filed trademark
applications for of all our trademarks and have registered all
of our trade names that we believe are material to the operation
of our businesses. We also own various patents and from time to
time acquire licenses from owners of patents to apply such
patents to our operations. We do not believe any single patent
or license is material to the operation of our businesses taken
as a whole.
Set forth below is the name, age, position and a brief account
of the business experience of each of our executive officers.
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Copies of our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are available free of charge through our web site
(www.thermadyne.com) as soon as reasonably practicable
after we electronically file the materials with or furnish them
to the Securities and Exchange Commission.
The statements in this Annual Report on
Form 10-K
that relate to future plans, events or performance are
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, Section 21E
of the Securities Exchange Act of 1934, and the Private
Securities Litigation Reform Act of 1995, including statements
regarding our future prospects. These statements may be
identified by terms and phrases such as “anticipate,”
“believe,” “intend,” “estimate,”
“expect,” “continue,” “should,”
“could,” “may,” “plan,”
“project,” “predict,” “will”
9
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and similar expressions and relate to future events and
occurrences. Actual results could differ materially due to a
variety of factors and the other risks described in this Annual
Report and the other documents we file from time to time with
the Securities and Exchange Commission. Factors that could cause
actual results to differ materially from those expressed or
implied in such statements include, but are not limited to, the
following items discussed below.
You should carefully consider each of the risks and
uncertainties we describe below and all of the other information
in this report. The risks and uncertainties we describe below
are not the only ones we face. Additional risks and
uncertainties of which we are currently unaware or that we
currently believe to be immaterial may also adversely affect our
business.
Our business is highly cyclical because many of the end-users of
our products are themselves in highly cyclical industries, such
as commercial construction, steel shipbuilding, petrochemical
construction and maintenance, and general manufacturing. The
demand for our products and therefore our results of operations
are directly related to the level of production in these
end-user industries. Accordingly, our business is to a large
extent determined by general economic conditions and other
factors beyond our control.
Our business is subject to a number of general economic factors,
many of which are out of our control, which may have a material
adverse effect on our business, results of operations and
financial condition. These include recessionary economic cycles
and cyclical downturns in our customers’ businesses,
particularly customers in the manufacturing and construction
industries, fluctuations in the cost of raw materials, such as
copper, brass and steel, the substitution of plastic or other
materials for metal in many products and the movement of metal
fabrication operations outside the United States. Economic
conditions may adversely affect our customers’ business
levels, which can have the effect of reducing the amount of our
products they purchase. Furthermore, customers encountering
adverse economic conditions may have difficulty paying for our
products. Finally, terrorist activities, anti-terrorist efforts,
war or other armed conflicts involving the United States or its
interests abroad may have a material adverse effect on the
U.S. and global economies and on our business, results of
operations or financial condition.
We offer products in highly competitive
markets. We compete on the performance,
functionality, price, brand recognition, customer service and
support and availability of our products. We compete with
companies of various sizes, some of which have greater financial
and other resources than we do. Increased competition could
force us to lower our prices or to offer additional product
features or services at a higher cost to us, which could reduce
our sales and net earnings.
The greater financial resources of certain of our competitors
may enable them to commit larger amounts of capital in response
to changing market conditions. Certain competitors may also have
the ability to develop product innovations that could put us at
a disadvantage. In addition, some of our competitors have
achieved substantially more market penetration in certain of the
markets in which we operate. If we are unable to compete
successfully against other manufacturers in our marketplace, we
could lose customers, and our sales may decline. There can also
be no assurance that customers will continue to regard our
products favorably, that we will be able to develop new products
that appeal to customers, that we will be able to improve or
maintain our profit margins on sales to our customers or that we
will be able to continue to compete successfully in our core
markets.
Our products are used primarily in metal fabrication operations
to cut and join metal parts. Metal fabrication operations are
growing faster outside of the United States than they are in the
United States, and certain metal fabrication, as well as
manufacturing operations generally, is moving from the United
States to international
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locations where labor costs are lower. Selling products into
international markets, maintaining and expanding international
operations require significant coordination, capital and
resources. If these resources were to prove too costly or
difficult to obtain, we may be unable to grow our sales in these
international locations.
We sell our products to distributors located in approximately
100 countries. During the year ended December 31, 2007,
approximately 41% of our consolidated sales were derived from
markets outside the U.S. A part of our long-term strategy
is to increase our manufacturing, distribution and sales
presence in international markets. We have manufacturing
operations and assets located outside of the United States,
including Australia, Canada, England, Italy, Malaysia and
Mexico, and a 50% interest in an operation in China.
International operations are subject to a number of special
risks, in addition to the risks of our domestic business,
including currency exchange rate fluctuations, differing
protections of intellectual property, trade barriers, labor
unrest, exchange controls, regional economic uncertainty,
differing (and possibly more stringent) labor regulation, risk
of governmental expropriation, domestic and foreign customs and
tariffs, current and changing regulatory environments,
difficulty in obtaining distribution support, difficulty in
staffing and managing widespread operations, differences in the
availability and terms of financing, political instability and
unrest and risks of increases in taxes. Also, in some foreign
jurisdictions, we may be subject to laws limiting the right and
ability of entities organized or operating therein to pay
dividends or remit earnings to affiliated companies unless
specified conditions are met. These factors may adversely affect
our future profits.
Our products are sold in many countries around the world. A
portion of our operations are conducted in foreign markets.
These transactions are denominated in foreign currencies,
including the Australian dollar, Canadian dollar, euro, and
pound sterling. Accordingly, the costs of our operations in
these foreign locations are also denominated in those local
currencies. Because our financial statements are stated in
U.S. dollars, changes in currency exchange rates between
the U.S. dollar and other currencies have had, and will
continue to have, an impact on our reported earnings. We
currently do not have exchange rate hedges in place to reduce
the risk of an adverse currency exchange movement. Currency
fluctuations have affected our reported financial performance in
the past and will likely affect our reported financial
performance in the future.
We also face risks arising from the imposition of exchange
controls and currency devaluations. Exchange controls may limit
our ability to convert foreign currencies into U.S. dollars
or to remit dividends and other payments by our foreign
subsidiaries or businesses located in or conducted within a
country imposing controls. Currency devaluations result in a
diminished value of funds denominated in the currency of the
country instituting the devaluation. Actions of this nature, if
they occur or continue for significant periods of time, could
have an adverse effect on our results of operations and
financial condition in any given period.
We purchase a large amount of commodity raw materials and
particularly copper and brass. The raw materials industry as a
whole is highly cyclical, and at times pricing and supply can be
volatile due to a number of factors beyond our control,
including global demand, general economic and political
conditions, mine closures and labor unrest in various countries,
activities in the financial commodity markets, labor costs,
competition, import duties, tariffs and currency exchange rates.
This volatility can significantly affect our raw material costs
and has caused rapidly escalating costs over the last three
years in particular. In an environment of rapidly increasing raw
material prices, competitive conditions can affect how much of
these cost increases we can recover in the form of higher unit
sales prices. To the extent that our arrangements to lock in
supplier costs do not adequately contain cost increases and we
are unable to pass on any price increases to our customers, our
profitability could be adversely affected. Certain of the raw
materials used in our hardfacing products within our filler
metal product line, such as cobalt and chromium, are available
primarily from sources outside the United States. Restrictions
in the supply of cobalt, chromium and other raw materials could
adversely affect our operating results. In addition, certain of
our customers rely heavily on raw materials, and to the extent
there are fluctuations in prices, it could affect orders for our
products and our financial performance.
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We depend on independent distributors to sell our products and
provide service and after-market support to our ultimate
customers. Distributors play a significant role in determining
which of our products are stocked at branch locations and the
price at which they are sold, which impacts how accessible our
products are to our ultimate customers. Almost all of the
distributors with whom we transact business offer competing
products and services to our ultimate customers. There is a
trend on consolidation of these distributors which is escalating
in recent years such that one customer now represents 13% of our
total sales. The loss of a substantial number of these
distributors, or certain key distributors, or an increase in the
distributors’ sales of our competitors’ products to
our ultimate customers could materially reduce our sales and
earnings.
We have undertaken and may continue to undertake cost-reduction
initiatives including redesigning products and manufacturing
processes as well as re-evaluating the location of certain
manufacturing operations and the sourcing of vendor purchased
components. There can be no assurance that these initiatives
will be completed or beneficial to us or that any estimated cost
savings from such activities will be realized. If our
cost-reduction efforts are unsuccessful, it may have a material
adverse effect on our business.
Our financial and strategic performance depends partially on our
ability to meet customer demand for new and enhanced products.
We may not be able to sustain or expand existing levels of
research and development expenditures. We also may not be able
to develop or acquire innovative products or otherwise obtain
intellectual property in a timely and effective manner.
Furthermore, we cannot be sure that new products or product
improvements will be met with customer acceptance or contribute
positively to our results. In addition, competitors may be able
to direct more capital and more resources to new or emerging
technologies and changes in customer requirements.
Our Amended Credit Agreement and our Second-Lien Facility
contain certain financial covenants. The financial covenants
have been amended on several occasions and most recently in June
2007. While we believe that we will be able to comply with the
most recently amended financial covenants in future periods,
failure to do so would, unless the covenants were further
amended or waived, result in defaults under the Credit Agreement
and the Second-Lien Facility. An event of default under the
credit facilities, if not waived, could result in the
acceleration of those debt obligations and, consequently, our
debt obligations under our
91/4% Senior
Subordinated Notes. Such acceleration could result in exercise
of remedies by our creditors, which could have a material
adverse impact on our ability to operate our business and to
make payments under our debt instruments. In addition, an event
of default under the credit facilities, such as the failure to
maintain the applicable required financial ratios, would prevent
additional borrowing under our credit facilities, which could
have a material adverse effect on our ability to operate our
business and to make payments under our debt instruments.
For a description of our Credit Agreement, our Second-Lien
Facility and our Senior Subordinated Notes, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources.”
Changes in benchmark interest rates will impact the interest
cost associated with our variable interest rate debt and the
cost of future borrowings. Significant increases would effect
our financial condition and results of operations.
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At December 31, 2007, we were a co-defendant in many cases
alleging manganese induced illness. Manganese is an essential
element of steel and contained in all welding filler metals. We
are one of a large number of defendants. The claimants allege
that exposure to manganese contained in the welding filler
metals caused the plaintiffs to develop adverse neurological
conditions, including a condition known as manganism.
The aggregate long-term impact of the manganese loss
contingencies on operating cash flows and financial condition is
difficult to assess, particularly since claims are in many
different stages of development. While we intend to contest
these lawsuits vigorously, there are several risks and
uncertainties that may affect our liability for personal claims
relating to exposure to manganese, including the possibility
that our litigation experience changes overall. An adverse
change from our litigation experience to date could materially
diminish our profitability and impair our financial condition.
Our business exposes us to possible claims for personal injury
or death and property damage resulting from the products that we
sell. We maintain insurance for loss (excluding attorneys’
fees and expenses) through a combination of self-insurance
retentions and excess insurance coverage. We are not insured
against punitive damage awards. We monitor claims and potential
claims of which we become aware and establish reserves for the
self-insurance amounts based on our liability estimates for such
claims. We cannot give any assurance that existing or future
claims will not exceed our estimates for self-insurance or the
amount of our excess insurance coverage. In addition, we cannot
give any assurance that insurance will continue to be available
to us on economically reasonable terms or that our insurers
would not require us to increase our self-insurance amounts.
Claims brought against us that are not covered by insurance or
that result in recoveries in excess of insurance coverage could
have a material adverse effect on our results and financial
condition. Moreover, despite any insurance coverage, any
accident or incident involving us could negatively affect our
reputation among customers and the public. This may make it more
difficult for us to compete effectively.
Currently, in our U.S. operations (where none of our
employees are represented by labor unions) and in our foreign
operations (where the majority of our employees are represented
by labor unions), we have maintained a positive working
environment. Although we focus on maintaining a productive
relationship with our employees, we cannot ensure that unions,
particularly in the United States, will not attempt to organize
our employees or that we will not be subject to work stoppages,
strikes or other types of conflicts with our employees or
organized labor in the future. Any such event could have a
material adverse effect on our ability to operate our business
and serve our customers and could materially impair our
relationships with key customers and suppliers, which could
damage our business, results of operations and financial
condition.
Our ability to provide high-quality products and services for
our customers and to manage the complexity of our business is
dependent on our ability to retain and to attract skilled
personnel in the areas of product engineering, manufacturing,
sales and finance. Our businesses rely heavily on key personnel
in the engineering, design, formulation and manufacturing of our
products. Our success is also dependent on the management and
leadership skills of our senior management team.
Our operations are subject to federal, state, local and foreign
laws and regulations relating to the protection of the
environment, including those governing the discharge of
pollutants into the air and water, the use, management and
disposal of hazardous materials, and employee health and safety.
As an owner and operator of real property and
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a generator of hazardous waste, we may also be subject to
liability for the remediation of contaminated sites. While we
are not currently aware of any outstanding material claims or
obligations, we could incur substantial costs, including cleanup
costs, fines and civil or criminal sanctions, third-party
property damage or personal injury claims, as a result of
violations of or liabilities under environmental laws or
noncompliance with environmental permits required at our
facilities.
Contaminants have been detected at some of our present and
former sites. In addition, we have been named as a potentially
responsible party at certain Superfund sites. While we are not
currently aware of any contaminated or Superfund sites as to
which material outstanding claims or obligations exist, the
discovery of additional contaminants or the imposition of
additional cleanup obligations at these or other sites could
result in significant liability. In addition, the ultimate costs
under environmental laws and the timing of these costs are
difficult to predict. Liability under some environmental laws
relating to contaminated sites, including the Comprehensive
Environmental Response, Compensation, and Liability Act and
analogous state laws, can be imposed retroactively and without
regard to fault. Further, one responsible party could be held
liable for all costs at a site. Thus, we may incur material
liabilities under existing environmental laws and regulations or
environmental laws and regulations that may be adopted in the
future.
None.
We operate manufacturing facilities in the United States, Italy,
Malaysia, Australia and Mexico. All U.S. facilities, leases and
leasehold interests are encumbered by first priority liens
securing our obligations under our Amended Credit Agreement and
Second-Lien Facility. We consider our plants and equipment to be
modern and well maintained and believe our plants have
sufficient capacity to meet future anticipated expansion needs.
We lease a 19,500 square-foot facility located in St.
Louis, Missouri, that houses our executive offices, as well as
some of our centralized services.
The following table describes the location and general character
of our principal properties of our continuing operations as of
December 31, 2007:
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All of the above facilities are leased, except for the
manufacturing facilities located in Australia and Indonesia,
which are owned. We also have additional assembly and warehouse
facilities in the United Kingdom, China, Mexico, and Australia.
We closed our manufacturing business in Rio de Janeiro, Brazil
during 2007 and anticipate selling the building in that location
in 2008.
Our operations are subject to federal, state, local and foreign
laws and regulations relating to the protection of the
environment, including those governing the discharge of
pollutants into the air and water, the use, management and
disposal of hazardous materials and employee health and safety.
We are currently not aware of any citations or claims filed
against us by any local, state, federal and foreign governmental
agencies, which, if successful, would have a material adverse
effect on our financial condition or results of operations.
As an owner or operator of real property, we may be required to
incur costs relating to remediation of properties, including
properties at which we dispose waste, and environmental
conditions could lead to claims for personal injury, property
damage or damages to natural resources. We are aware of
environmental conditions at certain properties which we now own
or lease or previously owned or leased, which are undergoing
remediation. We do not believe the cost of such remediation will
have a material adverse effect on our business, financial
condition or results of operations.
Certain environmental laws, including, but not limited to, the
Comprehensive Environmental Response, Compensation, and
Liability Act and analogous state laws provide for liability
without regard to fault for investigation and remediation of
spills or other releases of hazardous materials, and liability
for the entire cleanup can be imposed upon any of a number of
responsible parties. Such laws may apply to conditions at
properties presently or formerly owned or operated by us or our
subsidiaries or by their predecessors or previously owned
business entities. Further, conditions at properties owned by
others may contain wastes or other contamination which are
attributed to us or our subsidiaries or their predecessors or
previously owned business entities. We have in the past and may
in the future be named a potentially responsible party at
off-site disposal sites to which we have sent waste. We do not
believe the ultimate cost relating to such sites will have a
material adverse effect on our financial condition or results of
operations.
At December 31, 2007, we were a co-defendant in 426 cases
alleging manganese induced illness. Manganese is an essential
element of steel and contained in all welding filler metals. We
are one of a large number of defendants. The claimants allege
that exposure to manganese contained in the welding filler
metals caused the plaintiffs to develop adverse neurological
conditions, including a condition known as manganism. As of
December 31, 2007, 178 of these cases had been filed in, or
transferred to, federal court where the Judicial Panel on
Multidistrict Litigation has consolidated these cases for
pretrial proceedings in the Northern District of Ohio (the
“MDL Court”). Between June 1, 2003 and
December 31, 2007, we were dismissed from 1,041 other cases
with similar allegations. While there is uncertainty relating to
any litigation, management is of the opinion that the outcome of
such litigation will not have a material adverse effect on the
Company’s financial condition or results of operations.
All other legal proceedings and actions involving us are of an
ordinary and routine nature and are incidental to the operations
of the Company. Management believes that such proceedings should
not, individually or in the aggregate, have a material adverse
effect on the Company’s business or financial condition or
on the results of operations.
No matters were submitted to a vote of the shareholders during
the fourth quarter of 2007.
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On October 8, 2007, NASDAQ approved the listing of the
Company’s common stock on The Nasdaq Capital Market under
the symbol “THMD.” Upon its emergence from
Chapter 11 in May of 2003, the Common Stock was quoted on
the OTC Bulletin Board until May 5, 2006 when it
became available for quotation only on the Pink Sheets
Electronic Quotation Service maintained by The Pink Sheets LLC.
In February 2007, our Common Stock was again quoted on the OTC
Bulletin Board. The following table shows, for the periods
indicated, the high and low sales or bid prices, as the case may
be, of a share of the new Common Stock for 2006 and 2007, as
reported by published financial sources. For each quarter in
2006 and for the first, second and third quarters in 2007, the
prices shown below reflect the high and low bid prices. For the
fourth quarter of 2007, the prices shown below reflect
(i) the high and low bid prices between October 1,
2007 and October 7, 2007, and (ii) the high and low
sales prices between October 8, 2007 and December 31,
2007.
On March 6, 2008, the last reported sale price for our
Common Stock as quoted on NASDAQ was $10.00 per share. As of
March 6, 2008 there were approximately 255 beneficial
owners of our Common Stock including the number of individual
participants in security position listings.
We have historically not paid any cash dividends on our Common
Stock, and we do not have any present intention to commence
payment of any cash dividends. We intend to retain earnings to
provide funds for the operation and expansion of our business
and to repay outstanding indebtedness. Our debt agreements
contain certain covenants restricting the payment of dividends
on or repurchases of Common Stock. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Overview.”
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On May 23, 2003, we emerged from Chapter 11 bankruptcy
protection. As a result, all shares of common stock outstanding
on May 23, 2003 were canceled on such date and new common
stock was issued. The following graph shows a comparison of our
cumulative total returns, the Russell 2000 Stock Index (the
“Russell 2000”) and the Standard &
Poor’s Composite 500 Stock Index (the “S&P
500”) for the periods from May 30, 2003 (the first day
of trading after the emergence from Chapter 11 bankruptcy)
to December 31, 2003, and the next four calendar years
ending December 31, 2007. A compatible peer-group index for
the welding industry, in general, was not readily available
since the industry is comprised of a relatively few competitors.
The Russell 2000 represents an index based on a concentration of
companies having relatively small market capitalization, similar
to the Company. The comparison assumes $100 was invested on
May 30, 2003 in each of our common stock, the Russell 2000,
and the S&P 500, and assumes compounded daily returns with
reinvestment of dividends.
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The selected financial data for the years ended
December 31, 2007, 2006, 2005, and 2004, the seven months
ended December 31, 2003, and the five months ended
May 31, 2003 set forth below has been derived from our
2003, 2004, 2005, 2006 and 2007 audited consolidated financial
statements. The selected financial data should be read in
conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and our
consolidated financial statements and the notes thereto, in each
case included elsewhere herein. Previously reported amounts have
been reclassified as a result of the discontinued operations.
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We are a leading global designer and manufacturer of gas and arc
cutting and welding products, including equipment, accessories
and consumables. Our products are used by manufacturing,
construction, fabrication and foundry operations to cut, join
and reinforce steel, aluminum and other metals. We design,
manufacture and sell products in five principal categories:
(1) gas equipment; (2) plasma power supplies, torches
and consumable parts; (3) welding equipment; (4) arc
accessories, including torches, guns, consumable parts and
accessories; and (5) filler metals. We operate our business
in one reportable segment.
Demand for our products is highly cyclical because many of the
end-users of our products are themselves in highly cyclical
industries, such as commercial construction, steel shipbuilding,
petrochemical construction and general manufacturing. The demand
for our products and, therefore, our results of operations are
directly related to the level of production in these end-user
industries.
The availability and the cost of the components of our
manufacturing processes, and particularly, raw materials are key
determinants in achieving future success in the marketplace and
in achieving profitability. Principal raw materials used are
copper, brass, steel and plastic, which are widely available and
need not be specifically manufactured for use by us. Certain
other raw materials used in our hardfacing products, such as
cobalt and chromium, are available primarily from sources
outside the United States. Historically, we have been able to
obtain adequate supplies of raw materials at acceptable prices.
During 2007, 2006 and 2005, we experienced higher than
historical average inflation on materials such as copper, steel
and brass which negatively affected margins. In recent years we
have taken steps to reduce our overhead and labor costs through
intensified focus on improving our operational efficiency,
relocation of jobs, consolidation of manufacturing operations
and outsourcing of certain components and products.
Our operating profit is affected by the mix of the products
sold, as margins are generally higher on torches and guns, as
compared to power supplies, and higher on consumables and
replacement parts, as compared to torches and guns.
Our products are sold domestically primarily through industrial
welding distributors, retailers and wholesalers.
Internationally, we sell our products through our sales force,
independent distributors and wholesalers.
For the year ended December 31, 2007, approximately 59% of
our sales were made to customers in the U.S. Approximately
one-half of our international sales are denominated in
U.S. dollars.
Key economic measures relevant to us include steel consumption,
industrial production trends and purchasing manager indices.
Industries that we believe provide a reasonable indication of
demand for our products include construction and transportation,
railcar manufacturing, oil and gas exploration, metal
fabrication and farm machinery, and shipbuilding. The trends in
these industries provide important data to us in forecasting our
business. Indicators with a more direct relationship to our
business that might provide a forward-looking view of market
conditions and demand for our products are not available.
Key performance measurements we use to manage the business
include orders, sales, commodity cost trends, operating expenses
and efficiencies, inventory levels and fill-rates. The timing of
these measurements varies, but may be daily, weekly and monthly
depending on the need for management information and the
availability of data.
Key financial measurements we use to evaluate the results of our
business as well as the operations of our individual units
include customer order levels and mix, sales order
profitability, production volumes and variances, selling,
general and administrative expenses, earnings before interest,
taxes, depreciation and amortization, operating cash flows,
capital expenditures and controllable working capital. We define
controllable working capital as accounts receivable, inventory,
and accounts payable. These measurements are reviewed monthly,
quarterly and annually and are compared with historical periods,
as well as objectives that are established by management and
approved by our Board of Directors.
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Discontinued
Operations
On December 21, 2007, the Company committed to a plan to
dispose of its cutting table business, C&G Systems. A
definitive sales agreement was signed with closing occurring on
January 18, 2008. Based on the sales price, a loss of
$0.6 million (net of $0.3 million of tax) was recorded
in 2007 as a component of discontinued operations. The assets
and liabilities are classified as held for sale at
December 31, 2007. The schedule below sets forth certain
information related to C&G Systems included in discontinued
operations. See Note 3 — Discontinued
Operations to the consolidated financial statements.
On December 30, 2006, the Company committed to sell its
Brazilian manufacturing operation which was established pursuant
to a 10 year agreement expiring in 2008 with a major
customer requiring Brazilian based manufacturing. Employees of
Thermadyne Brazil were informed of this decision on
February 16, 2007. As a result of this decision, the
Company recorded an impairment loss of approximately
$15.2 million (net of tax) in the fourth quarter of 2006
which was recorded as a component of discontinued operations.
During the second quarter of 2007, the Company corrected
reserves previously established to record certain tax and
related interest obligations which resulted in a loss of $400,
net of tax, which is included in the net results of discontinued
operations for the year ended December 31, 2007. The
Company closed the Brazilian manufacturing operations in the
fourth quarter of 2007 disposing of its cutting table business
and auctioning various remaining inventory and equipment. Final
negotiations associated with the sale of the building are
continuing. The Company also recorded potential tax liabilities
asserted by Brazilian authorities.
On December 30, 2006, the Company committed to divest its
two South African subsidiaries as part of the Company’s
evaluation of its non-core operations: Maxweld & Braze
Pty. Ltd. (“Maxweld”) and Thermadyne South Africa
(Pty.) Ltd. (“Thermadyne South Africa”). Maxweld is a
wholesaler with an outlet in Johannesburg, South Africa, and
Thermadyne South Africa is a retailer with a network of stores
throughout South Africa. On February 5, 2007, the Company
entered into an agreement to sell the subsidiaries. The closing
of the divestitures took place in May 2007 and the Company
received $13.8 million which was used to reduce debt. Under
the Sale Agreement the Company also received a note payable
bearing 14% interest payable in South African Rand in May 2010
which converts to U.S. $4.4 million at
December 31, 2007. As a result of this decision, the
Company recorded an impairment loss of approximately
$9.2 million (net of tax) in the fourth quarter of 2006
which was recorded as a component of discontinued operations.
See Note 3 — Discontinued Operations to
the consolidated financial.
On April 11, 2006, the Company completed the disposition of
Tec.Mo Srl (“TecMo”), an indirect wholly-owned
subsidiary which manufactures generic cutting and welding
torches and consumables, to Siparex, an investment fund in
France and the general manager of TecMo. Net cash proceeds from
this transaction of approximately $7.5 million were used to
repay a portion of the Company’s outstanding working
capital facility. The Company recorded an impairment loss of
approximately $663 during the quarter ended March 31, 2006.
On March 9, 2006, the Company completed a series of
transactions involving its South African subsidiaries. In a
simultaneous transaction (effective January 1, 2006), the
Company purchased the shares of its only minority shareholder in
Unique Welding Alloys Rustenburg (Proprietary) Ltd, d/b/a
Thermadyne Plant Rental South Africa (“Plant Rental”),
and sold 100% of the assets in Plant Rental to the minority
shareholder. Plant Rental is a contracting business that leases
cutting, welding and other equipment to large turn-key projects.
During the first quarter of 2006, the $4.0 million net cash
proceeds from the transaction were used by the Company to
purchase the shares held by the only minority shareholder of
Thermadyne South Africa (Proprietary) Ltd., d/b/a Unique Welding
Alloys and all of the shares held by the only minority
shareholder of Maxweld & Braze (Proprietary) Ltd. As a
result, the Company recorded an impairment loss of approximately
$1.9 million during the year ended December 31, 2005,
which has been recorded as a component of discontinued
operations.
On January 2, 2006, the Company completed the disposition
of Soldaduras Soltec Limitada (“Soltec”) and
Comercializadora Metalservice Limitada
(“Metalservice”), both wholly-owned subsidiaries which
distribute cutting and welding equipment, to Soldaduras PCR
Soltec Limitada, and Penta Capital de Riesgo S.A. Net cash
proceeds were approximately $6.4 million from the sale of
the Soltec and Metalservice interests of which $4.9 million
was used to repay a portion of the Company’s outstanding
long-term debt during the first quarter of 2006. Proceeds of
$1.5 million from the sale are being held in escrow by the
government of Chile until certain customary tax matters and
filings are made. As a result of this disposition, we recorded
an impairment loss of
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approximately $2.7 million, which has been recorded as a
component of discontinued operations for the year ended
December 31, 2005.
On December 29, 2005, the Company completed the disposition
of GenSet S.P.A. (“GenSet”), a wholly-owned subsidiary
which manufactures technologically advanced generators and
engine-driven welders, to Mase Generators S.P.A
(“Mase”). The $4.8 million net cash proceeds from
the sale of GenSet were used to repay a portion of the
Company’s outstanding long-term debt during the first
quarter of 2006. In addition, the buyer assumed approximately
$7.6 million of debt owed to local, Italian lenders.
Related to the disposition of GenSet, the Company recorded a
loss on disposal net of tax of approximately $10.4 million,
which is recorded as a component of discontinued operations for
the year ended December 31, 2005.
The results of operations set forth in the Income Statement on
page F-5
have been adjusted to reflect the impact of discontinued
operations. See Note 3 — Discontinued
Operations in our consolidated financial statements.
The following description of results of operations is presented
for the years ended December 31, 2007, 2006, and 2005.
Net sales from continuing operations for the year ended
December 31, 2007 were $494.0 million, which was a
10.8% increase over net sales of $445.7 million for the
same twelve months in 2006. U.S. sales were
$292.6 million for 2007, compared to $279.1 million
for 2006, which is an increase of 4.8%. International sales were
$201.4 million for the twelve months ended
December 31, 2007 compared to $166.7 million for the
same period of 2006, or an increase of 20.9%. Net sales for the
twelve months ended December 31, 2007 increased
approximately $48 million with approximately
$15 million from increased demand primarily associated with
new product introductions, $20 million from price
increases, and $13 million due to foreign currency
translation.
Gross margin from continuing operations for the twelve months
ended December 31, 2007 was $154.4 million, or 31.2%
of net sales, compared to $130.7 million, or 29.3% of net
sales, for the same period in 2006. The gross margin improvement
is due to manufacturing cost savings initiatives and improved
pricing administration consisting of better management of
rebates, discounts and sales price increases. The impact of cost
increases from inflation of material costs and production supply
cost increases reduced gross margin by an estimated
$22 million. These estimated cost increases were offset in
part by cost savings from productivity initiatives of an
estimated $20 million. The overall increase in material
cost was attributable to higher prices for key raw materials
such as copper, brass and steel.
Selling, general and administrative expenses
(“SG&A”) were $106.0 million, or 21.5% of
net sales, for the twelve months ended December 31, 2007 as
compared to $109.6 million, or 24.6% of net sales, for the
twelve months ended December 31, 2006. The decrease in
SG&A is principally related to incremental non-recurring
costs incurred in the prior year to complete the 2005 financial
statements and restatement of prior years. These incremental
costs of approximately $8 million were attributable to
accounting, audit and tax services related fees and bondholder
consent fees. The year 2007 reflects SG&A cost increases of
$5 million which arise primarily from general increases in
cost of the various functions.
Interest expense for the twelve months ended December 31,
2007 was $26.8 million, which compares to
$26.5 million for the twelve months ended December 31,
2006. The increased interest costs reflect the offsetting
effects of an increase of $1.5 million from the special
interest adjustment on the Senior Notes partially offset by
lower average borrowings.
Amortization of intangibles was $2.9 million for the year
ended December 31, 2007 compared to $2.9 million for
the year ended December 31, 2006, reflecting normal
amortization expenses.
Minority interest income was $0.1 million for the year
ended December 31, 2007 as compared to expense of
$0.1 million for 2006.
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An income tax provision of $5.5 million was recorded on
pretax income of $16.2 million from continuing operations
for the year ended December 31, 2007. An income tax benefit
of $4.0 million was recognized in 2007 due to the reduction
of previously recorded state income tax contingencies. For the
year ended December 31, 2006, an income tax benefit of
$0.4 million was recorded on a pretax income of
$2.1 million from continuing operations. In 2006, accruals
for income tax currently payable and deferred tax benefits are
largely offsetting. The income tax benefit is primarily the
result of the implementation of international tax planning that
reduced both current and prior period liability related to our
foreign operations. Valuation allowances offset a substantial
portion of the tax benefit of U.S. net operating losses in
2006.
Discontinued operations reported net loss of $2.0 million
for the twelve months ended December 31, 2007 compared to a
net loss of $25.5 million for the twelve months ended
December 31, 2006. In 2007, discontinued operations include
impairment losses of $1.2 million compared to impairment
losses of $24.4 million in 2006. See
Note 3 — Discontinued Operations to the
consolidated financial statements.
Net sales from continuing operations for the year ended
December 31, 2006 were $445.7 million, which was a
8.8% increase over net sales of $409.6 million for the same
twelve months in 2005. U.S. sales were $279.1 million
for year of 2006, compared to $255.4 million for the prior
year, which is an increase of 9.3%. International sales were
$166.7 million for the twelve months ended
December 31, 2006 compared to $154.2 million for the
same period of 2005, or an increase of 8.1%. Net sales for the
twelve months ended December 31, 2006 increased
approximately $17 million from increased demand and new
product initiatives and approximately $20 million as a
result of price increases and was partially offset by
$1 million as a result of the impact of foreign currency
translation. Net sales in the year of 2006 were reduced by
$19 million for rebates paid to customers compared to
$15 million in the same period of 2005. The increase in
rebates results from increased sales volume to customers
achieving volume levels providing higher rebate percentages.
Gross margin from continuing operations for the twelve months
ended December 31, 2006 was $130.7 million, or 29.3%
of net sales, compared to $117.4 million, or 28.7% of net
sales, for the same period in 2005. Gross margin dollars
increased approximately $17 million through new product
introductions, volume expansion and price increases. These
increases to gross margin were partially offset by approximately
$4 million increase in customer rebate costs arising from
increased sales volumes. The impact of cost increases from
inflation of material costs and production supply cost increases
reduced gross margin an estimated $17 million. These
estimated cost increases were offset in part by cost savings
from productivity initiatives of approximately $17 million.
The overall increase in material cost was attributable to higher
prices for key raw materials such as copper, brass and steel.
SG&A was $109.6 million, or 24.6% of net sales, for
the twelve months ended December 31, 2006 as compared to
$99.9 million, or 24.4% of net sales, for the twelve months
ended December 31, 2005. The increase in SG&A is
principally related to costs incurred for incremental auditing
fees to complete the 2005 financial statements and restatement
of prior years, costs incurred with accounting specialists and
contractors to maintain records following the departures of most
corporate accounting personnel during 2006, search firm fees
incurred in conjunction with hiring new personnel, fees incurred
to modify accounting processes in remediating material
weaknesses, fees incurred with international tax specialists to
assist in reducing foreign income tax expenses, the consents
obtained from bondholders in May and August 2006 and incremental
costs associated with the second and third quarter financial
statement reviews. These incremental costs approximated
$8 million. SG&A costs in 2006 increased in part due
to incremental stock option expense of $1.1 million was
charged to 2006 expense after adoption of SFAS 123R.
Net periodic postretirement benefits reflect income for the year
ended December 31, 2006 of $11.8 million compared to
an expense of $1.8 million for the year ended
December 31, 2005. As of January 1, 2006, the Company
changed its postretirement benefits plan to limit medical
benefits to only existing retirees and certain existing
employees who were 62 and had 15 years of service. This
resulted in a curtailment gain of $11.9 million during
2006. In addition, the on-going expense was substantially
reduced from prior years as a result of the change. See
Note 17 — Employee Benefit Plans to our
consolidated financial statements for additional information.
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Interest expense for the twelve months ended December 31,
2006 was $26.5 million, which compares to
$22.9 million for the twelve months ended December 31,
2005. The difference primarily results from an overall increase
in our average borrowing rate.
Amortization of intangibles was $2.9 million for the year
ended December 31, 2006 compared to $3.1 million for
the year ended December 31, 2005, reflecting normal
amortization expenses.
Minority interest expense was $0.1 million for the year
ended December 31, 2006 as compared to $0.6 million
for 2005. The decrease is a result of the disposal of a
minority-owned company at the end of 2005.
An income tax benefit of $0.4 million was recorded on
pretax income of $2.1 million from continuing operations
for the year ended December 31, 2006. For the same period
in 2005, an income tax provision of $3.3 million was
recorded on a pretax loss of $12.5 million from continuing
operations. The income tax benefit for 2006 is primarily the
result of the implementation of international tax planning that
reduced both current and prior period liability related to our
foreign operations. The income tax provision for 2005 includes
$3.6 million of taxes primarily related to income generated
in certain foreign jurisdictions. Accruals for income tax
currently payable and deferred tax benefits are largely
offsetting. Valuation allowances offset a substantial portion of
the tax benefit of U.S. net operating losses in both 2006
and 2005.
Discontinued operations reported a net loss of
$25.5 million for the twelve months ended December 31,
2006 compared to a net loss of $15.5 million for the twelve
months ended December 31, 2005. In 2006, discontinued
operations include impairment losses of $24.4 million
compared to impairment losses of $4.6 million along with
losses of disposal of $10.4 million in 2005. See
Note 3 — Discontinued Operations to the
consolidated financial statements.
During the five months ended May 31, 2003, the seven months
ended December 31, 2003, and the year ended
December 31, 2004, we incurred restructuring and other
special charges related to initiatives that we have undertaken
to lower costs and improve our operational performance. No
restructuring charges were incurred during the years ended
December 31, 2007, 2006 or 2005.
Liquidity. Our principal uses of cash will be
capital expenditures, working capital and debt service
obligations. We expect that ongoing requirements for debt
service, capital expenditures and working capital will be funded
from operating cash flow and borrowings under the Working
Capital Facility, which was renegotiated in June 2007 and
matures in June 2012 as discussed below.
In 2007, our net cash provided by continuing operations was
$4.8 million. Net debt repayments were $21.7 million
which included $14 million in repayment of the Second-Lien
Facility. The funding for the Second-Lien Facility repayments
arose primarily from the proceeds of the sale of our South
African discontinued operations.
In 2008, we anticipate our capital expenditures will be
approximately $15.0 million. In addition, we expect that
our overall debt service obligations excluding interest expense
and repayments on the Working Capital Facility will be
approximately $9 million. This includes the repayment of
approximately $7 million of indebtedness required under our
Second Lien Facility, described below, which we intend to make
during the first quarter of 2008. We expect our operating cash
flow, together with available borrowings under the Working
Capital Facility, will be sufficient to meet our anticipated
operating expenses, capital expenditures and the debt service
requirements of the Credit Agreement and Second-Lien Facility,
the Notes and our other long-term obligations for 2008. Our debt
structure, terms, covenants, and a history of these instruments
are described below.
Certain subsidiaries of the Company are borrowers under the
Third Amended and Restated Credit Agreement, dated June 29,
2007 (the “Credit Agreement”) with General Electric
Capital Corporation as agent and lender. The Credit Agreement:
(i) matures on June 29, 2012; (ii) provides a
revolving credit commitment of up to $100 million (the
“Working Capital Facility”), which includes (a) a
cash flow facility of up to $20 million with interest at
LIBOR
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plus 2.50%, (b) an asset based facility and (c) an
amortizing $8 million property, plant and equipment (PPE)
facility; (iii) provides for interest rate percentages
applicable to the asset based and PPE borrowings that range from
LIBOR plus 1.50% to 2.25% depending upon the fixed charge
coverage ratio; (iv) extends the time period for the 1%
prepayment fee to November 30, 2008; and (v) limits
the senior leverage ratio to 2.75 for the total leverage ratio.
Borrowings under the Working Capital Facility may not exceed 85%
of eligible receivables plus the lesser of (i) 85% of the
net orderly liquidation value of eligible inventories or
(ii) 65% of the book value of eligible inventories less
customary reserves, plus machinery at appraised value not to
exceed $8 million. Borrowings under the cash flow facility
are dependent on a minimum fixed charge coverage and EBITDA
amount. At December 31, 2007, $8.2 million of letters
of credit were outstanding. Unused availability was
$56.0 million as of December 31, 2007.
We have $36.0 million in outstanding indebtedness under our
Second-Lien Facility. The Second-Lien Facility is secured by a
second lien on substantially all of the assets of our domestic
subsidiaries. The Second-Lien Facility restricts how much
long-term debt we may have and has other customary provisions
including financial and non-financial covenants. On
June 29, 2007, the Company entered into Amendment
No. 19 and Waiver to the Second Lien Credit Agreement
between the Company and Credit Suisse, as administrative agent
and collateral agent, and the lenders party thereto (the
“Second Lien Facility Amendment”) to: (i) extend
the maturity date to November 7, 2010 and (ii) lower
the interest rate from LIBOR plus 4.50% to LIBOR plus 2.75%. The
lender of the Second Lien Facility Amendment is also an
affiliate of the holder of approximately 34% of the
Company’s outstanding shares of common stock. This
stockholder is the employer of one of the Company’s
directors. The terms of the Second Lien Credit Agreement, as
amended, were negotiated at arms-length, and the Company
believes that the terms of the Second Lien Facility are as
favorable as could be obtained from an unaffiliated lender. In
connection with this Amendment, the Company prepaid
$14 million of the outstanding indebtedness, reducing the
Second Lien Facility from $50 million to $36 million.
The prepayment was funded through the proceeds of the sale of
South African assets.
The Senior Subordinated Notes (the “Notes”) accrue
interest at
91/4%
per annum, which is payable semiannually in cash. The Notes are
guaranteed by our domestic subsidiaries, which are also
borrowers or guarantors under the Amended Credit Agreement, and
certain of our foreign subsidiaries. The Notes contain customary
covenants and events of default, including covenants that limit
our ability and our subsidiaries’ abilities to incur debt,
pay dividends and make certain investments. In May and August
2006, we amended the Indenture for the Senior Subordinated Notes
to, among other things, extend the time by which we had to file
with the Securities and Exchange Commission our Annual Report on
Form 10-K
for the year ended December 31, 2005 and any other reports
then due, and obtain waivers for the defaults resulting from our
failure to timely file the 2005 Annual Report and the Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2006. The amendments
require us, subject to certain conditions, to annually use our
excess cash flow (as defined in the Indenture) either to make
permanent repayments of our senior debt or to extend a
repurchase offer to the holders of the Notes pursuant to which
we will offer to repurchase outstanding Notes at a purchase
price of 101% of their principal amount. The “excess cash
flow” amount for 2007 was determined to be $7 million.
The Indenture was also amended to provide for the payment of
additional Special Interest on the Senior Subordinated Notes,
initially at a rate of 1.25% per annum. The Special Interest is
subject to adjustment increasing to 1.75% if the consolidated
leverage ratio exceeds 6.00 with incremental interest increases
to a maximum of 2.75% if the consolidated leverage ratio
increases to 7.0. The Special Interest declines to .75% if the
consolidated leverage ratio declines below 4.0 and declines
incrementally to 0% when the consolidated leverage ratio is less
than 3.0. In consideration for these amendments, we paid the
note holders consent fees aggregating $1.3 million.
At December 31, 2007, the Company was in compliance with
its financial covenants. The Company expects to remain in
compliance with the financial covenants during 2008 by achieving
its 2008 financial plan, which includes realizing sales of new
products to be introduced during 2008, the continuing impact of
2007 price increases for existing products, and successfully
implementing certain cost reduction initiatives, including its
global continuous improvement program referred to as TCP and its
program for foreign sourcing of manufacturing. If the Company is
unable to maintain compliance with its covenants, this could
result in a default under the Amended GE Credit Agreement and
the Second-Lien Facility Amendment which could result in a
material adverse impact on the Company’s financial
condition.
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Working Capital and Cash Flows. The operating
activities of our continuing operations provided
$23.0 million of cash during the year ended
December 31, 2007, compared to cash used of
$15.5 million during the year ended December 31, 2006.
This includes the change in operating assets and liabilities
which used $0.5 million of cash for the year ended
December 31, 2007, compared to $13.1 million of cash
used in the year ended December 31, 2006 and consisted of:
The sale of discontinued operations during 2007 as discussed in
Note 3 — Discontinued Operations to the
consolidated financial statements generated $13.8 million
of positive cash flow which was utilized to pay down the Second
Lien Facility in 2007.
Cash used for capital expenditures was $11.4 million during
the year ended December 31, 2007, compared to
$8.5 million in the year ended December 31, 2006.
Financing activities used $20.8 million of cash during
2007, which compares to $7.3 million of cash provided
during the year ended December 31, 2006. Net repayments
were $21.7 million during the year ended December 31,
2007. Financing activities also reflect $0.4 million of
deferred financing fees and an adjustment of $1.6 million
for stock option expenses. For the year ended December 31,
2006, net repayments amounted to $2.0 million.
In the normal course of business, we enter into contracts and
commitments that obligate us to make payments in the future. The
table below sets forth our significant future obligations by
time period.
The amounts shown for capital leases exclude the effective
interest expense component. Our purchase obligations relate
primarily to inventory purchase commitments. At
December 31, 2007, we had issued letters of credit totaling
$8.2 million under the revolving credit facility.
Our earnings and cash flows are subject to exposure to changes
in the prices of certain commodities, particularly copper, brass
and steel and fluctuations due to changes in foreign currency
exchange rates as well as changes in interest rates on our
long-term debt arrangements. In addition, our Working Capital
Facility, Second-
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Lien Facility and a $50 million fixed-to-floating interest
rate swap related to our Notes cause our related interest costs
to change with changes in LIBOR. See Item 7A.
“Quantitative and Qualitative Disclosures About Market
Risk,” for a further discussion.
In an environment of increasing raw material prices, competitive
conditions can affect how much of the price increases we can
recover in the form of higher unit sales prices. To the extent
we are unable to pass on any price increases to our customers,
our profitability could be adversely affected. Furthermore,
restrictions in the supply of cobalt, chromium and other raw
materials could adversely affect our operating results. In
addition, certain of our customers rely heavily on raw
materials, and to the extent there are fluctuations in prices,
it could affect orders for our products and our financial
performance. Our general operating expenses, such as salaries,
employee benefits and facilities costs, are subject to normal
inflationary pressures. Our operations are generally subject to
mild seasonal increases in the second and third calendar
quarters.
Our consolidated financial statements are based on the selection
and application of significant accounting policies, some of
which require management to make estimates and assumptions. We
review these estimates and assumptions periodically to assess
their reasonableness. If necessary, these estimates and
assumptions may be changed and updated. No material adjustments
to our accounting policies have been made in 2007. We believe
the following are some of the more critical judgmental areas in
the application of our accounting policies that affect our
financial condition and results of operations.
Inventories are a significant asset, representing 18% of total
assets at December 31, 2007. They are valued at the lower
of cost or market, with our U.S. subsidiaries using the
last in, first-out (LIFO) method, which represents 60% of
consolidated inventories, and our foreign subsidiaries using the
first-in,
first-out (FIFO) method, which represents 40% of consolidated
inventories.
We continually apply judgment in valuing our inventories by
assessing the net realizable value of our inventories based on
current expected selling prices, as well as factors such as
obsolescence and excess stock. We provide reserves as judged
necessary. Should we not achieve our expectations of the net
realizable value of our inventory, future losses may occur.
We maintain an allowance for doubtful accounts for estimated
losses from the failure of our customers to make required
payments for amounts owed. We estimate this allowance based on
knowledge and review of historical receivables, write-off trends
and reserve trends, the financial condition of our customers and
other pertinent information. If the financial condition of our
customers deteriorates or an unfavorable trend in receivable
collections is experienced in the future, additional allowances
may be required.
Patents and customer relationships are amortized on a
straight-line basis over their estimated useful lives, which
generally range from 10 to 20 years. Trademarks are not
amortized, but are periodically evaluated for impairment. Our
trademarks are associated with our well-established product
brands, and cash flows associated with these products are
expected to continue indefinitely and therefore the Company has
placed no limit on the end of our trademarks’ useful lives.
We account for our intangible assets, excluding goodwill and
trademarks, in accordance with SFAS No. 144, which
requires us to assess the recoverability of these assets when
events or changes in circumstances indicate that the carrying
amount of the long-lived asset group might not be recoverable.
If impairment indicators exist, we determine whether the
projected undiscounted cash flows will be sufficient to recover
the carrying value of such
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assets. This requires us to make significant judgments about the
expected future cash flows of the asset group. The future cash
flows are dependent on general and economic conditions and are
subject to change.
We test goodwill for impairment annually or more frequently if
events occur or circumstances change that would, more likely
than not, reduce the fair value of the reporting unit below its
carrying value. For purposes of applying the provisions, we
perform our impairment analysis on a consolidated enterprise
level. We use comparable market values, market prices and the
present value of expected future cash flows to estimate fair
value. We must make significant judgments and estimates about
future conditions to estimate future cash flows. Unforeseen
events and changes in circumstances and market conditions,
including general economic and competitive conditions, could
result in significant changes in those estimates. Based on an
impairment analysis we completed in the fourth quarter of 2007,
we concluded no adjustment to the carrying value of our goodwill
was necessary as of December 31, 2007.
The Company sells a majority of its products through
distributors with standard terms of sale of FOB shipping point
or FOB destination. The Company has certain consignment
arrangements whereby revenue is recognized when products are
used by the customer from consigned stock. Under all
circumstances, revenue is recognized when persuasive evidence of
an arrangement exists, delivery has occurred, the seller’s
price is fixed and determinable and collectibility is reasonably
assured.
The Company sponsors a number of incentive programs to augment
distributor sales efforts including certain rebate programs and
sales and market share growth incentive programs. The costs
associated with these sales programs are recorded as a reduction
of revenue.
Terms of sale generally include
30-day
payment terms, return provisions and standard warranties for
which reserves, based upon historical experience, have been
recorded. Restocking charges will generally be assessed for
product that is returned due to issues outside the scope of the
Company’s warranty agreements.
We establish provisions for taxes to take into account the
effects of timing differences between financial and tax
reporting. These differences relate primarily to the excess of
the fresh-start accounting valuation over the tax basis of our
primary operating subsidiary, net operating loss carryforwards,
fixed assets, intangible assets and post-employment benefits.
We record a valuation allowance when, in our assessment, it is
more likely than not that a portion or all of our deferred tax
assets will not be realized. In making this assessment we
consider the scheduled reversal of deferred tax liabilities, tax
planning strategies and projected future taxable income. At
December 31, 2007, a valuation allowance has been recorded
against our deferred tax assets based upon this assessment. The
amount of the deferred tax assets considered realizable could
change in the future if our assessment of future taxable income
or tax planning strategies changes.
Generally, no provision is made for U.S. income taxes on
the undistributed earnings of
non-U.S. subsidiaries.
These earnings are permanently invested or otherwise
indefinitely retained for continuing international operations.
Determination of the amount of taxes that might be paid on these
undistributed earnings is not practicable.
A portion of the earnings of our foreign subsidiaries are
included in our U.S. income tax return under I.R.C.
Section 956 relating to the earnings of a foreign
subsidiary which guarantees the borrowings of its
U.S. parent. Upon actual distribution of those earnings, we
may be subject to both U.S. income taxes (subject to an
adjustment for foreign tax credits) and withholding taxes
payable in amounts which differ from the estimates we have
recorded. See Note 12 — Income Taxes to
the consolidated financial statements.
We are periodically audited by U.S. and foreign tax
authorities regarding the amount of taxes due. In evaluating
issues raised in such audits, reserves are provided for
exposures as appropriate. To the extent we were to prevail in
matters for which accruals have been established or be required
to pay amounts in excess of reserves, the effective tax rate in
a given financial statement period may be impacted.
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As a result of the 2003 bankruptcy restructuring, the Company
recognized cancellation of indebtedness income. Under Internal
Revenue Code Section 108, this cancellation of indebtedness
income is not recognized for income tax purposes, but reduced
various tax attributes, primarily the tax basis in the stock of
a subsidiary, for which a deferred tax liability was recorded.
The final determination of the reduction in the tax attributes
was made following the bankruptcy restructuring with the filing
of the Company’s federal tax return.
Factors
That May Affect Future Results
For a discussion of factors that may affect future results see
“Risk Factors.”
Business Combinations. In December 2007, the
FASB issued SFAS No. 141 (revised 2007),
“Business Combinations”
(“SFAS No. 141R”). SFAS 141R
establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill
acquired. SFAS No. 141R also establishes disclosure
requirements to enable the evaluation of the nature and
financial effects of the business combination.
SFAS No. 141R is effective for financial statements
issued for fiscal years beginning after December 15, 2008.
The Company is currently evaluating the potential impact of
adoption of SFAS No. 141R on its consolidated
financial statements. However, the Company does not expect the
adoption of SFAS No. 141R to have a material effect on
its consolidated financial statements.
Noncontrolling Interests. In December 2007,
the FASB issued SFAS No. 160. “Noncontrolling
Interests in Consolidated Financial Statements-an Amendment of
ARB No. 51” (“SFAS No. 160”).
SFAS No. 160 establishes accounting and reporting
standards pertaining to ownership interests in subsidiaries held
by parties other than the parent, the amount of net income
attributable to the parent and to the noncontrolling interest,
changes in a parent’s ownership interest, and the valuation
of any retained noncontrolling equity investment when a
subsidiary is deconsolidated. This statement also establishes
disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 is effective for
fiscal years beginning on or after December 15, 2008. The
Company is currently evaluating the potential impact of adoption
of SFAS No. 160 on its consolidated financial
statements. However, the Company does not expect the adoption of
SFAS 160 to have a material effect on its consolidated
financial statements.
Fair Value Option. In February 2007, the FASB
issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities — Including
an Amendment of SFAS No. 115
(“SFAS No. 159”)”.
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. The company is in the process of
assessing the impact of SFAS No. 159 on its
consolidated financial statements. However, the Company does not
expect the adoption of SFAS No. 159 to have a material
effect on its consolidated financial statements.
Fair Value Measurements. In September 2006,
the FASB issued SFAS No. 157, “Fair Value
Measurements,” (“SFAS No. 157”).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. The impact of SFAS No. 157 is not expected to
have a significant impact on the financial condition, results of
operations, cash flows or disclosures of the Company.
Our primary financial market risk relates to fluctuations in
commodity price risk, currency exchange rates and interest rates.
Copper, brass and steel constitute a significant portion of our
raw material costs. These commodities are subject to price
fluctuations which we may not be able to pass on to our
customers. We have not experienced and do not anticipate
constraints on the availability of these commodities. A
hypothetical 10% adverse change in
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commodity prices on our projected annual purchases of these
three commodities would increase annual costs $5.0 million
with brass and copper comprising the majority of these commodity
purchases.
A substantial portion of our operations consists of
manufacturing and sales activities in foreign regions,
particularly Australia/Asia, Canada and Europe. As a result, our
financial results could be significantly affected by changes in
foreign currency exchange rates in the foreign markets in which
we distribute our products. A significant amount of the
approximately one-half of our international sales are export
sales from the United States which are primarily denominated in
U.S. dollars. Our exposure to foreign currency transactions
is further mitigated by having manufacturing locations in
Australia, China, Italy, Malaysia, and Mexico. A substantial
portion of the products manufactured in most of these regions is
sold locally and denominated in the local currency. We are most
susceptible to a strengthening U.S. dollar which would have
a negative effect on our export sales and a negative effect on
the translation of local currency financial statements into
U.S. dollars, our reporting currency. We do not believe our
exposure to transaction gains or losses resulting from changes
in foreign currency exchange rates is material to our financial
results of continuing operations. As a result, we do not
actively try to manage our exposure to continuing operations
through foreign currency forward or option contracts.
In order to manage interest costs, we entered into an interest
rate swap arrangement on February 24, 2004 to convert
$50.0 million of the Senior Subordinated Notes into
variable rate debt. We pay interest on the swap at LIBOR plus a
spread of 442 basis points. Interest rate risk management
agreements are not held or issued for speculative or trading
purposes. We are also exposed to changes in interest rates
primarily as a result of our Credit Agreement and Second-Lien
Facility that have LIBOR-based variable interest rates. At
December 31, 2007, the borrowings under these two
agreements was $48.7 million. With this amount of variable
rate debt, and including the effects of the $50.0 million
interest rate swap, a hypothetical 100 basis point change
in LIBOR would result in a change in interest expense of
approximately $1.0 million annually.
The financial statements that are filed as part of this Annual
Report on
Form 10-K
are set forth in the Index to Consolidated Financial Statements
at page 34 hereof.
None
We maintain disclosure controls and procedures that are designed
to provide reasonable assurances that information required to be
disclosed in the reports we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the
Commission’s rules and forms. These controls and procedures
are also designed to ensure that such information is accumulated
and communicated to our management, including our principal
executive and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure. In
designing and evaluating disclosure controls and procedures, we
have recognized that any controls and procedures, no matter how
well designed and operated, can provide only reasonable
assurance of achieving the desired control objective. Management
is required to apply judgment in evaluating its controls and
procedures.
Under the supervision of and with the participation of
management, including the Chief Executive Officer and Chief
Financial Officer, the Company conducted an evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures, as such term is defined in
Rules 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934. Based on this evaluation,
the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and
procedures were not effective as of December 31, 2007
because of a material weakness in our procedures for review and
approval of the accounting for non-routine transactions.
Specifically, our policies and procedures for such review and
approval were not effective. As a result of this deficiency,
errors existed in the Company’s presentation of
discontinued operations that were corrected prior to the
issuance of the 2007 consolidated financial statements.
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The Company’s management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Under the supervision of and with the participation of the
Company’s management, including the Chief Executive Officer
and Chief Financial Officer, the Company conducted an evaluation
of the effectiveness of internal control over financial
reporting as of December 31, 2007 based on the framework in
“Internal Control — Integrated Framework”
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on the Company’s
evaluation under such framework, management concluded that the
Company’s internal control over financial reporting was not
effective as of December 31, 2007 because of a material
weakness in our procedures for review and approval of the
accounting for nonroutine transactions. As a result of this
deficiency, errors existed in the Company’s presentation of
discontinued operations that were corrected prior to the
issuance of the 2007 consolidated financial statements.
The Company’s auditors, KPMG LLP, an independent registered
public accounting firm, has issued an audit report on the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2007, which is
included below.
There have been no changes in the Company’s internal
controls over financial reporting that occurred during the
fourth quarter of 2007 that materially affected, or are
reasonably likely to materially affect, the Company’s
internal control over financial reporting except for the
reallocation of the roles and responsibilities formerly
conducted by the Global Corporate Controller as a result of the
open position created with his resignation during the fourth
quarter.
The Company reported the same weakness in its amended
Form 10-K/A
filing for 2006 and further indicated the material weakness had
been remediated during the quarter ended June 30, 2007.
Remediation efforts included: modifications to the control
environment consisting of comprehensive and timely account
reconciliations and analyses in concert with appropriate
oversight and review by experienced personnel combined with
expanded use of computer systems capabilities. Additionally,
management believed the corporate office monitoring controls and
oversight had been established to prevent and detect any
material misstatement in this area. These controls by Thermadyne
corporate office occur on a monthly, quarterly and annual basis.
Examples of these controls include: quarterly account
reconciliations, experienced management review of the monthly
financial analyses and the quarterly audit submissions by the
affiliates, performance variance analysis, approval of journal
entries, and the use of monthly closing checklist to ensure all
items are accounted for.
Despite our efforts to enhance the rigor of the application of
these practices relative to non-routine transactions, we
conclude that we still have a material weakness. To remediate
this weakness, the Company will further expand its use of
outside accounting specialists to work with internal audit
resources to review unusual transactions and evaluate the impact
for external financial reporting purposes.
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The Board of Directors and Stockholders
Thermadyne Holdings Corporation:
We have audited Thermadyne Holdings Corporation’s (the
Company) internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the
accompanying Management’s Assessment of Internal Control
Over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis.
The following material weakness has been identified and included
in management’s assessment — the Company’s
procedures for review and approval of the accounting for
nonroutine transactions were not effective as of
December 31, 2007. We also have audited, in accordance with
the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets as of
December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders’ equity, and cash
flows for each of the years in the two-year period ended
December 31, 2007 of Thermadyne Holdings Corporation. This
material weakness was considered in determining the nature,
timing, and extent of audit tests applied in our audit of the
2007 consolidated financial statements, and this report does not
affect our report dated March 12, 2008, which expressed an
unqualified opinion on those consolidated financial statements.
In our opinion, because of the effect of the aforementioned
material weakness on the achievement of the objectives of the
control criteria, Thermadyne Holdings Corporation has not
maintained effective internal control over financial reporting
as of December 31, 2007, based on criteria established in
Internal Control — Integrated Framework issued
by the Committee Sponsoring Organizations of the Treadway
Commission.
/s/ KPMG
LLP
St. Louis, Missouri
March 12, 2008
Table of Contents
None
The Company plans to file the 2008 Proxy Statement pursuant to
Regulation 14A of the Exchange Act prior to April 29,
2008. Except for the information set forth in this Item 10
and the information concerning our executive officers set forth
in Part I, Item 1. Business of this annual
report on
Form 10-K
for the fiscal year ended December 31, 2007, which
information is incorporated herein by reference, the information
required by this item is incorporated by reference from the 2008
Proxy Statement.
The Company has adopted a code of ethics applicable to certain
members of Company management, including its principal executive
officer, principal financial officer, principal accounting
officer and controller, or persons performing similar functions.
The code of ethics is available on the Company’s website at
www.thermadyne.com. The Company intends to satisfy the
disclosure requirement under Item 10 of
Form 8-K
regarding the amendment to, or a waiver from, a provision of
this code of ethics that applies to the Company’s principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions and that relates to any element of the code of ethics
definition enumerated in Item 406(b) of
Regulation S-K
by posting such information on its website.
Certain information required by this item is set forth under the
caption “Compensation Discussion and Analysis” in the
2008 Proxy Statement and is incorporated herein by reference.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item is set forth under the
caption “Information about Stock Ownership” in the
2008 Proxy Statement and is incorporated herein by reference.
Information concerning securities authorized for issuance under
the Company’s equity compensation plans is set forth in the
table below:
The information required by this item is set forth under the
caption “Certain Relationships and Related
Transactions” and “Board and Committee Meetings”
in the 2008 Proxy Statement and is incorporated herein by
reference.
The information required by this item is set forth under the
caption “Independent Registered Public Accountant Fees and
Other Matters” in the 2008 Proxy Statement and is
incorporated herein by reference.
PART IV
The following documents are filed as part of this report:
All schedules for which provision is made in the applicable
accounting regulation of the Commission are not required under
the related instructions, are included in the financial
statements or are inapplicable and therefore have been omitted.
A listing of Exhibits is included following the financial
statements.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
Table of Contents
The Board of Directors and Stockholders
Thermadyne Holdings Corporation
We have audited the accompanying consolidated balance sheets of
Thermadyne Holdings Corporation (the Company) as of
December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders’ equity, and cash
flows for each of the years in the two-year period ended
December 31, 2007. These consolidated financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
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 audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the 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 financial
position of Thermadyne Holdings Corporation as of
December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the
two-year period ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Thermadyne Holding Corporation’s internal control over
financial reporting as of December 31, 2007, based on
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 12, 2008 expressed an adverse opinion on the
effectiveness of the Company’s internal control over
financial reporting.
As discussed in Note 2 to the consolidated financial
statements, effective as of the end of the fiscal year after
December 15, 2006, the Company adopted the recognition and
disclosure provisions as required by Statement of Financial
Accounting Standards No. 158, Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans.
As discussed in Note 14 to the consolidated financial
statements, effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123
(Revised 2004), Shared-Based Payment.
/s/ KPMG
LLP
St. Louis, Missouri
March 12, 2008
Table of Contents
The Board of Directors
Thermadyne Holdings Corporation
We have audited the accompanying consolidated statement of
operations, shareholders’ equity, and cash flows of
Thermadyne Holdings Corporation (the Company) for the year ended
December 31, 2005. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
results of operations and cash flows of Thermadyne Holdings
Corporation for the year ended December 31, 2005, in
conformity with U.S. generally accepted accounting
principles.
/s/ ERNST &
YOUNG LLP
August 2, 2006
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
CONSOLIDATED
BALANCE SHEETS
See accompanying notes to consolidated financial statements.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
(In
thousands, except share data)
Thermadyne Holdings Corporation (“Thermadyne” or the
“Company”), a Delaware corporation, is a global
designer and manufacturer of cutting and welding products,
including equipment, accessories and consumables. The
Company’s products are used by manufacturing, construction
and foundry operations to cut, join and reinforce steel,
aluminum and other metals. Common applications for the
Company’s products include shipbuilding, railcar
manufacturing, offshore oil and gas rig construction,
fabrication and the repair and maintenance of manufacturing
equipment and facilities. Welding and cutting products are
critical to the operations of most businesses that fabricate
metal, and the Company has well established and widely
recognized brands.
Principles of consolidation. The consolidated
financial statements include the Company’s accounts and
those of the majority-owned subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation. Unconsolidated subsidiaries and investments are
accounted for under the equity method.
Certain reclassifications have been made to the previously
reported financial information for the years ended
December 31, 2006 and 2005 to conform to the presentation
of such similar financial information for the year ended
December 31, 2007, primarily related to the restatement
required for our discontinued operations.
Estimates. Preparation of financial statements
in conformity with U.S. generally accepted accounting
principles requires certain estimates and assumptions to be made
that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Inventories. Inventories are valued at the
lower of cost or market. Cost is determined using the
last-in,
first-out (“LIFO”) method for domestic subsidiaries
and the
first-in,
first-out (“FIFO”) method for the Company’s
foreign subsidiaries. Inventories at foreign subsidiaries
amounted to $36,150 and $28,321 at December 31, 2007 and
2006, respectively.
Property, Plant and Equipment. Property, plant
and equipment are carried at cost and are depreciated using the
straight-line method. The average estimated lives utilized in
calculating depreciation are as follows: buildings —
25 years and machinery and equipment — three to
ten years. Property, plant and equipment recorded under capital
leases are depreciated based on the lesser of the lease term or
the underlying asset’s useful life. Impairment losses are
recorded on long-lived assets when events and circumstances
indicate the assets might be impaired and the undiscounted cash
flows estimated to be generated by those assets are less than
their carrying amounts. During the fourth quarter of 2007, the
Company recorded an impairment loss related to the decision to
dispose of its cutting table business. During the fourth quarter
of 2006, the Company recorded an impairment loss related to the
decision to dispose of the South Africa and Brazil businesses.
During the fourth quarter of 2005, the Company recorded an
impairment loss related to the Soltec and Plant Hire businesses.
These impairment losses were recorded as the fair value of the
businesses was determined to be below the carrying value of the
net assets. See Note 3 — Discontinued
Operations.
Deferred Financing Costs. Loan origination
fees and other costs incurred arranging long-term financing are
capitalized as deferred financing costs and amortized over the
term of the credit agreement. Deferred financing costs totaled
$10,494 and $10,133, less related accumulated amortization of
$5,953 and $4,508, at December 31, 2007 and 2006,
respectively, and are classified as other assets in the
accompanying consolidated balance sheets.
Intangibles. Goodwill and trademarks have
indefinite lives. Patents and customer relationships are
amortized on a straight-line basis over their estimated useful
lives, which generally range from 10 to 20 years.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Goodwill and trademarks are tested for impairment annually or
more frequently if events occur or circumstances change that
would more likely than not reduce the fair value of the
reporting unit below its carrying value. The impairment analysis
is completed on a consolidated enterprise level. Comparable
market values, market prices and the present value of expected
future cash flows are used to estimate fair value. Significant
judgments and estimates about future conditions are used to
estimate future cash flows. Unforeseen events and changes in
circumstances and market conditions including general economic
and competitive conditions could result in significant changes
in those estimates. Based on the annual impairment analysis
completed in the fourth quarter, no adjustment to the carrying
value of goodwill was deemed necessary as of December 31,
2007. However, adjustments have been made to the
December 31, 2007, 2006 and 2005 carrying value of goodwill
allocated to the Company’s discontinued operations. See
Note 3 — Discontinued Operations to the
consolidated financial statements.
Trademarks are generally associated with the Company’s
product brands, and cash flows associated with these products
are expected to continue indefinitely. The Company has placed no
limit on the end of the Company’s trademarks’ useful
lives.
Product Warranty Programs. Various products
are sold with product warranty programs. Provisions for warranty
programs are made as the products are sold and adjusted
periodically based on current estimates of anticipated warranty
costs. During the years ended December 31, 2007, 2006 and
2005, the Company recorded $3,780, $3,093, and $2,805 of
warranty expense, respectively, through cost of goods sold. As
of December 31, 2007 and 2006, the warranty accrual totaled
$3,092 and $2,978, respectively.
Derivative Instruments. The Company records
derivatives and hedging activities on the balance sheet at their
respective fair values. The Company does not use derivative
instruments for trading or speculative purposes. The Company
designates and documents all relationships between hedging
instruments and hedged items, as well as its risk management
objectives and strategies for undertaking hedge transactions.
The Company also assesses, both at the inception of the hedge
and on an on-going basis, whether the hedge is effective.
Income Taxes. Deferred tax assets and
liabilities are recognized for the estimated future tax
consequences attributable to temporary differences between the
carrying value of assets and liabilities for financial reporting
purposes and their tax basis. The measurement of current and
deferred tax assets and liabilities is based on provisions of
the enacted tax law; the effects of future changes in tax laws
or rates are not anticipated. Based on available evidence, the
measurement of deferred tax assets is reduced, if necessary, by
the amount of any tax benefits that are not expected to be
realized. The Company’s effective tax rate includes the
impact of certain of the undistributed foreign earnings for
which U.S. taxes have been provided because of the
applicability of I.R.C. Section 956 for earnings of foreign
entities which guarantee the indebtedness of a U.S. parent.
See Note 12 — Income Tax to the
consolidated financial statements.
Stock Option Accounting. The Company adopted
SFAS No. 123(R), Share-Based Payment, on
January 1, 2006. SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on
their fair values. The Company utilizes the modified prospective
method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of
SFAS No. 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements
of SFAS No. 123 for all awards granted to employees
prior to the effective date of SFAS No. 123(R) that
remain unvested on the effective date. As a result of adopting
SFAS No. 123(R) in 2006, the Company’s recorded
pre-tax stock-based compensation expense for the year of
$1.1 million within selling, general and administrative
expense. Prior to 2006, the Company applied the intrinsic value
method permitted under SFAS No. 123, as defined in
Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to
Employees” and related interpretations, in accounting for
the Company’s stock option plans. Accordingly, no
compensation cost was recognized in years prior to adoption
except the impact of the acceleration of non-vested options in
the fourth quarter of 2005. See Note 14 —
Stock Options and Stock-Based Compensation to the
consolidated financial statements.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Revenue Recognition. The Company sells a
majority of its products through distributors with standard
terms of sale of FOB shipping point or FOB destination. The
Company has certain consignment arrangements whereby revenue is
recognized when products are used by the customer from consigned
stock. Under all circumstances, revenue is recognized when
persuasive evidence of an arrangement exists, delivery has
occurred, the seller’s price is fixed and determinable and
collectibility is reasonably assured.
The Company sponsors a number of incentive programs to augment
distributor sales efforts including certain rebate programs and
sales and market share growth incentive programs. The costs
associated with these sales programs are recorded as a reduction
of revenue.
In both 2007 and 2006, the Company had one customer that
comprised 13% and 10%, respectively, of the Company’s
global net sales in each year.
Terms of sale generally include
30-day
payment terms, return provisions and standard warranties for
which reserves, based upon estimated warranty liabilities from
historical experience, have been recorded. For a product that is
returned due to issues outside the scope of the Company’s
warranty agreements, restocking charges will generally be
assessed.
Cash Equivalents. All highly liquid
investments purchased with a maturity of three months or less
are considered to be cash equivalents.
Foreign Currency Translation. Local currencies
have been designated as the functional currencies for all
subsidiaries with the exception of the Company’s
Hermosillo, Mexico operation whose functional currency has been
designated the U.S. dollar. Accordingly, assets and
liabilities of the other foreign subsidiaries are translated at
the rates of exchange at the balance sheet date. Income and
expense items of these subsidiaries are translated at average
monthly rates of exchange.
Accumulated Other Comprehensive Income. Other
comprehensive income (loss) is recorded as a component of
shareholders equity. As of December 31, it consists of:
Effect
of New Accounting Standards
Business Combinations. In December 2007, the
FASB issued SFAS No. 141 (revised 2007),
“Business Combinations”
(“SFAS No. 141R”). SFAS 141R
establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill
acquired. SFAS No. 141R also establishes disclosure
requirements to enable the evaluation of the nature and
financial effects of the business combination.
SFAS No. 141R is effective for financial statements
issued for fiscal years beginning after December 15, 2008.
The Company is currently evaluating the potential impact of
adoption of SFAS No. 141R on its consolidated
financial statements. However, the Company does not expect the
adoption of SFAS No. 141R to have a material effect on
its consolidated financial statements.
Noncontrolling Interests. In December 2007,
the FASB issued SFAS No. 160. “Noncontrolling
Interests in Consolidated Financial Statements-an Amendment of
ARB No. 51” (“SFAS No. 160”).
SFAS No. 160 establishes
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
accounting and reporting standards pertaining to ownership
interests in subsidiaries held by parties other than the parent,
the amount of net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of any retained noncontrolling
equity investment when a subsidiary is deconsolidated. This
statement also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners.
SFAS No. 160 is effective for fiscal years beginning
on or after December 15, 2008. The Company is currently
evaluating the potential impact of adoption of
SFAS No. 160 on its consolidated financial statements.
However, the Company does not expect the adoption of
SFAS 160 to have a material effect on its consolidated
financial statements.
Fair Value Option. In February 2007, the FASB
issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities — Including
an Amendment of SFAS No. 115
(“SFAS No. 159”)”.
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. The Company is in the process of
assessing the impact of SFAS No. 159 on its
consolidated financial statements. However, the Company does not
expect the adoption of SFAS No. 159 to have a material
effect on its consolidated financial statements.
Fair Value Measurements. In September 2006,
the FASB issued SFAS No. 157, “Fair Value
Measurements,” (“SFAS No. 157”).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years except for nonfinancial assets and liabilities that are
not required or permitted to be recognized at fair value on a
recurring basis for which the effective date is for fiscal years
beginning after November 15, 2008. The impact of
SFAS No. 157 is not expected to have a significant
impact on the financial condition, results of operations, cash
flows or disclosures of the Company.
On December 21, 2007, the Company committed to a plan to
dispose of its cutting table business, C&G Systems. A
definitive sales agreement was signed with closing occurring on
January 18, 2008. Based on the sales price of $500, a loss
of $570 (net of $350 of tax) was recorded in 2007 as a component
of discontinued operations. The assets and liabilities are
classified as held for sale at December 31, 2007. The
schedule below sets forth certain information related to
C&G Systems included in discontinued operations.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Select Balance Sheet items of C&G Systems are as follows:
On December 30, 2006, the Company committed to a plan to
sell its South Africa operations. On February 5, 2007, the
Company entered into an agreement to sell the South African
subsidiaries. The sale closed on May 25, 2007 with receipt
of $13,800 net cash received at closing and a note payable
bearing 14% interest payable in South African Rand in May 2010
which converts to U.S. $4.4 million at
December 31, 2007. A loss of $9,200 (net of $6,300 of tax)
was recorded in 2006 as a component of discontinued operations.
The assets and liabilities were classified as held for sale at
December 31, 2006. During the second quarter of 2007, the
Company corrected intercompany accounting by $2,900 and goodwill
impairment by $2,200 from the amounts previously recorded in
2006 which resulted in a non-cash gain of $700, net of tax,
which is included in the net results of discontinued operations
for the year ended December 31, 2007. In addition, the
Company also had routine revisions in estimates related to
discontinued operations in South Africa. The schedule below sets
forth certain information related to the South African
operations included in discontinued operations.
Select Balance Sheet items of South Africa are as follows:
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
On December 30, 2006, the Company also committed to a plan
to sell its Brazilian manufacturing operations. A loss of
approximately $15,200 (net of $1,200 of tax) was recorded in the
fourth quarter of 2006 based on the estimated net realizable
value of the assets related to the operation. This was recorded
as a component of discontinued operations. During the second
quarter of 2007, the Company corrected reserves previously
established to record certain tax and related interest
obligations which resulted in a loss of $400, net of tax, which
is included in the net results of discontinued operations for
the year ended December 31, 2007. The Company closed the
Brazilian manufacturing operations in the fourth quarter of 2007
disposing of its cutting table business and auctioning various
remaining inventory and equipment. Final negotiations associated
with the sale of the building are continuing. The Company also
recorded potential tax liabilities asserted by Brazilian
authorities. The schedule below sets forth certain information
related to Brazil’s operations included in discontinued
operations.
Select Balance Sheet items of Brazil are as follows:
On April 11, 2006, the Company completed the disposition of
Tec.Mo Srl (“TecMo”), an indirect wholly-owned
subsidiary which manufactures generic cutting and welding
torches and consumables, to Siparex, an investment fund in
France, and the general manager of TecMo. Net cash proceeds from
this transaction of approximately $7,540 were used to repay a
portion of the Company’s outstanding Working Capital
Facility balance. The Company recorded an impairment loss
related to TecMo of approximately $663 during the quarter ended
March 31, 2006.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The schedule below sets forth certain information related to
TecMo’s operations included in discontinued operations.
On December 29, 2005, the Company completed the disposition
of GenSet S.P.A. (“GenSet”), an indirect wholly-owned
subsidiary which manufactures technologically advanced
generators and engine-driven welders, to Mase Generators S.P.A
(“Mase”). The net cash proceeds from the sale of
GenSet of $4,797 were used to repay a portion of the
Company’s outstanding balance of the Working Capital
Facility during the first quarter of 2006. In addition, the
buyer assumed approximately $7,571 of debt owed to local Italian
lenders. Related to the disposition of GenSet, the Company
recorded a loss on disposal of approximately $10,383, net of tax
of $6,363 which is recorded as a component of discontinued
operations in the year ended December 31, 2005. The
schedule below sets forth certain information related to
GenSet’s operations included in discontinued operations.
On January 2, 2006, the Company completed the disposition
of Soldaduras Soltec Limitada (“Soltec”) and
Comercializadora Metalservice Limitada
(“Metalservice”), both indirect wholly-owned
subsidiaries which distribute cutting and welding equipment, to
Soldaduras PCR Soltec Limitada, and Penta Capital de Riesgo S.A.
At December 31, 2005, Soltec met the criteria of held for
sale and, as such, the assets and liabilities of Soltec were
classified as held for sale and the results of operations were
presented as discontinued operations. As a result, the Company
recorded an impairment loss of approximately $2,689 during the
year ended December 31, 2005 as the carrying value exceeded
the fair value. Net cash proceeds of approximately $6,420, less
amounts held in escrow of $1,536 were used to repay a portion of
the Company’s balance of the Working Capital Facility
during the first quarter of 2006. Of the $6,420 net
proceeds, approximately $1,536 is being held in escrow by the
government of Chile until certain customary tax filings are
made. During the second quarter of 2007, the Company recorded a
$300 charge, net of tax as a result of reducing the net
realizable value of remaining tax recoveries to $1,100.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The schedule below sets forth certain information related to
Soltec’s operations included in discontinued operations.
On March 9, 2006, the Company completed a series of
transactions involving its South African subsidiaries. In a
simultaneous transaction (effective January 1, 2006), the
Company purchased the shares of its minority shareholder in
Unique Welding Alloys Rustenburg (Proprietary) Ltd., d/b/a
Thermadyne Plant Rental South Africa (“Plant Rental”),
and sold 100% of the assets in Plant Rental to the former
minority shareholder. The cash proceeds of approximately $4,031
from the transaction were used in the first quarter of 2006 by
the Company to purchase all shares held by the minority
shareholder of Thermadyne South Africa (Proprietary) Ltd., d/b/a
Unique Welding Alloys, and all shares held by the minority
shareholder of Maxweld & Braze (Proprietary) Ltd.
At December 31, 2005 the Plant Rental operation met the
criteria of held for sale and as such the assets and liabilities
have been classified as held for sale and the results of
operations have been presented as discontinued operations. The
Company recorded an impairment loss of approximately $1,919
during the year ended December 31, 2005 as the carrying
value exceeded fair value. The schedule below sets forth certain
information related to Plant Rental’s operations included
in discontinued operations.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
As of December 31, 2007 and 2006, accounts receivable are
recorded at the amounts invoiced to customers less an allowance
for discounts and doubtful accounts. Management estimates the
allowance based on a review of the portfolio taking into
consideration historical collection patterns, the economic
climate and aging statistics based on contractual due dates.
Accounts are written off to the allowance once collection
efforts are exhausted.
For the year ended December 31, 2005, the Company revised
its method used to estimate the allowance for doubtful accounts
to more closely correlate with its historical experience of
actual bad debt losses. The effect of this revision resulted in
an $860 reduction in the allowance for doubtful accounts and was
included as a component of Net Write-offs and Adjustments in the
above analysis.
The composition of inventories at December 31 is as follows:
Amounts reported for December 31, 2006 have been
reclassified to be consistent with the presentation at
December 31, 2007. At December 31, 2006, $3,781 has
been reclassified to Finished goods and $14,576 to Raw materials
and component parts from
Work-in-process.
This reclassification had no impact on the Company’s
consolidated financial statements for the periods presented
herein.
The carrying value of inventories valued by the LIFO method was
$66,339 at December 31, 2007 and $72,668 at
December 31, 2006.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The composition of property, plant and equipment at December 31
is as follows:
Assets recorded under capitalized leases were $12,519
($6,333 net of accumulated depreciation) and $13,076
($8,944 net of accumulated depreciation) at
December 31, 2007 and 2006, respectively.
The composition of intangible assets at December 31 is as
follows:
The change in the carrying amount of goodwill was as follows:
As part of the accounting for the Company’s discontinued
operations at December 31, 2006, $8.1 million of
goodwill was reclassified to Assets Held for Sale. Accordingly,
the balance in goodwill for December 31, 2006 was reduced
from previously disclosed amounts.
The Company conducted its most recent annual goodwill impairment
test during the fourth quarter of 2007. In doing so, the Company
used comparable market values, market capitalization and the
present value of expected future cash flows to estimate fair
value. This process required significant judgments and estimates
about future conditions in arriving at the estimates of future
cash flows. Included in this analysis were actual results for
the nine months ended September 30, 2007 and expected
results for the years ended December 31, 2007 and 2008. As
a result of these procedures and after considering the effects
of the discontinued operations, management concluded that an
adjustment to the carrying value of goodwill was not necessary.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Amortization expense amounted to $2,921, $2,894, $3,146 for the
years ended December 31, 2007, 2006 and 2005, respectively.
Amortization expense for patents and customer relationships is
expected to be approximately $2,900 for each of the next five
fiscal years.
The composition of debt and capital lease obligations at
December 31 is as follows:
At December 31, 2007 the schedule of principal payments of
debt including the term loan as scheduled, excluding capital
lease obligations and the working capital facility, is as
follows:
For the years ended December 31, 2007 and 2006, the
Company’s weighted average interest rate on its short-term
borrowings was 8.31% and 9.25%, respectively. Interest paid for
each of the years ended December 31, 2007, 2006, and 2005
was $25,423, $28,507, and $22,159, respectively.
On June 29, 2007, certain subsidiaries of the Company
entered into the Third Amended and Restated Credit Agreement
with General Electric Capital Corporation as agent and lender
(the “Amended GE Credit Agreement”). The Amended GE
Credit Agreement: (i) extends the maturity date to
June 29, 2012; (ii) increases the revolving credit
commitment to $100,000 (the “Working Capital
Facility”), which includes (a) a new cash flow
facility of up to $20,000 with interest at LIBOR plus 2.50%,
(b) an asset based facility and (c) a new amortizing
$8,000 property, plant and equipment (PPE) facility;
(iii) provides for lower interest rate percentages
applicable to the asset based and PPE borrowings that range from
LIBOR plus 1.50% to 2.25% depending upon the fixed charge
coverage ratio; (iv) extends the time period for the 1%
prepayment fee to November 30, 2008; and
(v) substitutes a senior leverage ratio of 2.75 for the
previous total leverage ratio. Borrowings under the Working
Capital Facility may not exceed 85% of eligible receivables plus
the lesser of (i) 85% of the net orderly liquidation value
of eligible inventories or (ii) 65% of the book value of
eligible inventories less customary reserves, plus machinery at
appraised value not to exceed $8,000. Borrowings under the cash
flow facility are dependent on a minimum fixed charge coverage
and EBITDA amount. At December 31, 2007, $8,171 of letters
of credit were outstanding. Unused availability was $55,717 as
of December 31, 2007.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The Working Capital Facility includes a lockbox agreement which
requires all receipts to be swept daily to reduce borrowings
outstanding under the revolving line of credit. These
agreements, combined with the existence of a subjective Material
Adverse Effect (“MAE”) clause, cause the Working
Capital Facility to be classified as a current liability.
However, the Company does not expect to repay, or be required to
repay, within one year, the balance of the Working Capital
Facility classified as a current liability. The Company’s
intent is to continually use the Working Capital Facility
throughout the life of the agreement to fund working capital
needs. The MAE clause, which is a typical requirement in
commercial credit agreements, allows the lender to require the
loan to become due if it determines there has been a material
adverse effect on the Company’s operations, business,
assets or prospects.
Also on June 29, 2007, certain subsidiaries of the Company
entered into Amendment No. 19 and Waiver to the Second Lien
Credit Agreement between the Company and Credit Suisse, as
administrative agent and collateral agent, and the lenders party
thereto (the “Second Lien Facility Amendment”) to:
(i) extend the maturity date to November 7, 2010 and
(ii) lower the interest rates from LIBOR plus 4.50% to
LIBOR plus 2.75%. The lender for the Second Lien Facility
Amendment is an affiliate of the holder of approximately 34% of
the Company’s outstanding shares of common stock. The
stockholder employs one of the Company’s directors. The
terms of the Second Lien Credit Agreement, as amended, were
negotiated at arms-length, and the Company believes that the
terms of the Second Lien Facility are as favorable as could be
obtained from an unaffiliated lender. In connection with this
Amendment, the Company prepaid $14,000 of the loans reducing the
Second Lien Facility from $50,000 to $36,000.
During 2007, the Company amended its Denton, Texas
(“Denton”) and West Lebanon, New Hampshire (“West
Lebanon”) office, manufacturing and warehouse facility
leases that were held by the same lessor. The amendment included
revising certain monthly lease payments under the Denton lease,
extending the existing Denton lease commitment from
June 30, 2013 to June 30, 2015 and reducing the
existing West Lebanon lease commitment from June 30, 2013
to June 30, 2011. In addition, future renewal options were
also revised to provide lease extensions options to
June 30, 2025 (from June 30, 2018) for the Denton
lease and to June 30, 2021 (from June 30,
2018) for the West Lebanon lease.
During 2007, the Company also amended its Ontario, Canada
(“Canada”) office and warehouse facility lease. The
amendment included revising certain monthly lease payments under
the Canada lease and extending the existing lease commitment
from August 2008 to August 2015.
As a result of the above amendments, the Company’s net
investment in capital leases (included in Property, Plant and
Equipment in the consolidated financial statements) and related
obligations under these capital leases were reduced by $2,997.
This non-cash transaction had no impact on the Company’s
consolidated statement of cash flows.
At December 31, 2007, the Company was in compliance with
its financial covenants. The Company expects to remain in
compliance with the financial covenants during 2008 by achieving
its 2008 financial plan, which includes realizing sales of new
products to be introduced during 2008, the continuing impact of
2007 price increases for existing products, and successfully
implementing certain cost reduction initiatives, including its
global continuous improvement program referred to as TCP and its
program for foreign sourcing of manufacturing. If the Company is
unable to maintain compliance with its covenants, this could
result in a default under the Amended GE Credit Agreement and
the Second-Lien Facility Amendment which could result in a
material adverse impact on the Company’s financial
condition.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The Company is the issuer of $175,000 in aggregate principal of
91/4% Senior
Subordinated Notes due in 2014 (the “Senior Subordinated
Notes”). The Senior Subordinated Notes are unsecured senior
subordinated obligations and are subordinated in right of
payment to all existing and future Senior Indebtedness (as
defined in the Indenture). Interest accrues at the rate of
91/4%
per annum and is payable semi-annually in arrears on February 1
and August 1 of each year. The Senior Subordinated Notes contain
customary covenants and events of default, including covenants
that limit the Company’s ability to incur debt, pay
dividends and make certain investments. In an amendment dated
May 9, 2006, the Company is now required, subject to
certain conditions in the Amended GE Credit Agreement and Second
Lien Facility, to use the amount of “Excess Cash
Flow,” as defined in the Indenture, to either permanently
repay senior debt within 105 days after year end or
purchase the Senior Subordinated Notes through an offer of 101%
of the principal amount thereof.
In August 2006, the Company obtained consent to amend the
Indenture governing the Senior Subordinated Notes and to waive
existing defaults under that Indenture related to the late
filing of the Company’s 2005
Form 10-K
and first quarter 2006
Form 10-Q
with the SEC. The Indenture was amended to provide for the
payment of additional Special Interest on the Senior
Subordinated Notes, initially at a rate of 1.25% per annum. The
Special Interest is subject to adjustment increasing to 1.75% if
the consolidated leverage ratio exceeds 6.0 with incremental
interest increases to a maximum of 2.75% if the consolidated
leverage ratio increases to 7.0. The Special Interest declines
to .75% if the consolidated leverage ratio declines below 4.0
and declines incrementally to 0% if leverage is less than 3.0.
The Special Interest Adjustment calculated as of
December 31, 2007 was 0.75%.
The Notes are redeemable at the Company’s option during the
12 month periods beginning on February 1, 2009 at
104.625%, February 1, 2010 at 103.083%, February 1,
2011 at 101.542%, and after February 1, 2012 at 100% of the
principal amount thereof.
Borrowings under the Company’s financing agreements are the
obligations of Thermadyne Industries, Inc.
(“Industries”), the Company’s principal operating
subsidiary and certain of Industries’ subsidiaries. Certain
borrowing agreements contain restrictions on the ability for the
subsidiaries to dividend cash and other assets to the parent
company, Thermadyne Holdings Corporation. At December 31,
2007 and December 31, 2006, the only asset carried on the
parent company books of Thermadyne Holdings Corporation was its
investment in its operating subsidiaries and the only
liabilities were the $175,000 of Senior Subordinated Notes. As a
result of the limited assets and liabilities at the parent
company level, separate financial statements have not been
presented for Thermadyne Holdings Corporation except as shown in
Note 20, Condensed Consolidating Financial Statements.
In February 2004, the Company entered into an interest rate swap
arrangement to convert a portion of the fixed rate exposure on
its Senior Subordinated Notes to variable rates. Under the terms
of the interest rate swap contract, which has a notional amount
of $50,000, the Company receives interest at a fixed rate of
91/4%
and pays interest at a variable rate equal to LIBOR plus a
spread of 442 basis points. The six-month LIBOR rate on
each semi-annual reset date determines the variable portion of
the interest rate swap. The six-month LIBOR rate for each
semi-annual reset date is determined in arrears.
The Company has designated the interest rate swap as a fair
value hedge of its fixed rate debt. The terms of the interest
rate swap contract and hedged item meet the criteria to be
measured using the short-cut method defined in
SFAS No. 133 and therefore perfect effectiveness is
assumed over the term of the swap.
In accordance with SFAS No. 133, the Company records a
fair value adjustment to the portion of its fixed rate long-term
debt that is hedged. A fair value adjustment of $296 at
December 31, 2007 was recorded as an increase to long-term
obligations, with the related value for the interest rate
swap’s non-current portion recorded in other long-
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
term assets. A fair value adjustment of $1,668 at
December 31, 2006 was recorded as a decrease to long-term
obligations, with the related value for the interest rate
swap’s non-current portion recorded in other long-term
liabilities. Interest rate differentials associated with the
interest rate swap are recorded as an adjustment to interest
expense over the life of the interest rate swap. The Company
realized an increase in its interest expense as a result of the
interest rate swap of $115 for the year ended December 31,
2007 and a increase of $360 for the year ended December 31,
2006.
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash and trade accounts receivable.
The Company maintains cash and cash equivalents with various
financial institutions. These financial institutions are located
in different parts of the world, and the Company’s policy
is designed to limit exposure to any one institution. The
Company performs periodic evaluations of the relative credit
standing of these financial institutions. The Company does not
require collateral on these financial instruments.
Concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of entities
comprising the Company’s customer base. The Company does
not require collateral for trade accounts receivable.
The following methods and assumptions were used in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount
reported in the balance sheets for cash and cash equivalents
approximates fair value.
Accounts receivable and accounts payable: The
carrying amounts reported in the balance sheets for accounts
receivable and accounts payable approximate their fair value.
Debt: The carrying values of the obligations,
outstanding under the Working Capital Facility, the Second-Lien
Facility and other long-term obligations, excluding the Senior
Subordinated Notes, approximate fair values since these
obligations are fully secured and have varying interest charges
based on current market rates. The estimated fair value of the
Company’s Senior Subordinated Notes of $162,750 and
$162,750 at December 31, 2007, and 2006, respectively, is
based on available market information.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Future minimum lease payments under leases with initial or
remaining non-cancelable lease terms in excess of one year at
December 31, 2007 are as follows:
Rent expense under operating leases amounted to $8,638, $7,529,
and $5,243 for each of the years ended December 31, 2007,
2006, and 2005, respectively.
Pretax income (loss) from continuing operations was allocated
under the following jurisdictions:
The provision benefit for income taxes for continuing operations
is as follows:
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The composition of deferred tax assets and liabilities at
December 31 is as follows:
Income taxes paid for each of the years ended December 31,
2007, 2006 and 2005 were $4,507, $4,720, and $6,812,
respectively.
The provision for income tax differs from the amount of income
taxes determined by applying the applicable U.S. statutory
federal income tax rate to pretax income excluding the gain on
reorganization and adoption of fresh-start accounting as a
result of the following differences:
As of December 31, 2007, the Company has net operating loss
carryforwards from the years 1998 through 2007 available to
offset future U.S. taxable income of approximately
$122,200. The Company has recorded a related deferred tax asset
with a substantial valuation allowance, given the uncertainties
regarding utilization of these net operating loss carryforwards.
The net operating losses in the U.S. will expire between
the years 2018 and 2026. Assumed tax planning strategies related
to inventories and intangible assets reduce the valuation
allowance $14,500 as of December 31, 2007. The Company
believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize
the Company’s net deferred tax assets.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes”
(“FIN 48”). FIN 48 prescribes the income tax
amounts to be recorded in the financial statements as the amount
most likely to be realized assuming a review by tax authorities
having all relevant information and applying current
conventions. FIN 48 also clarifies the financial statement
classification of potential tax-related penalties and interest
and sets forth new disclosures regarding unrecognized tax
benefits. The Company adopted the Interpretation as of
January 1, 2007.
The Company’s policy is to include both interest and
penalties on underpayments of income taxes in its income tax
provision. This policy was continued after the adoption of
FIN 48. At January 1, 2007, the total interest accrued
was $1,005. At December 31, 2007 the total interest accrued
was $292. No penalties were accrued for either date by the
Company.
The adoption of FIN 48 did not result in a significant
adjustment to the opening balance in the Company’s Reserve
for Uncertain Tax Positions. A reconciliation of the reserve for
2007 is as follows:
Of the $5,711 of reductions listed above for 2007, $3,403
affected the 2007 state income tax provision expense, $508
affected Discontinued Operations, and $1,800 affected Goodwill.
The Company’s U.S. federal income tax returns for tax
years 2004 and beyond remain subject to examination by the
Internal Revenue Service. The Company’s state income tax
returns for 2003 through 2007 remain subject to examination by
various state taxing authorities. The Company’s material
foreign subsidiaries’ local country tax filings remain open
to examination as follows: Australia
(2003-2007),
Canada
(2002-2007),
United Kingdom
(2001-2007)
and Italy
(2000-2007).
No extensions of the various statutes of limitations have
currently been granted.
The Company’s foreign subsidiaries have undistributed
earnings at December 31, 2007 of approximately $34,400. The
Company has recognized the estimated U.S. income tax
liability associated with approximately $27,900 of these foreign
earnings because of the applicability of I.R.C. Section 956
for earnings of foreign entities which guarantee the
indebtedness of a U.S. parent. Upon distribution of those
earnings in the form of dividends or otherwise, the Company may
be subject to withholding taxes payable to the various foreign
countries in the amount of approximately $2,000.
The Company and certain of its wholly-owned subsidiaries are
defendants in various legal actions, primarily related to
product liability. At December 31, 2007, the Company was
co-defendant in 426 cases alleging manganese-induced illness.
Manganese is an essential element of steel and is contained in
all welding filler metals. The Company is one of a large number
of defendants. The claimants allege that exposure to manganese
contained in welding filler metals cause the plaintiffs to
develop adverse neurological conditions, including a condition
known as manganism. As of December 31, 2007, 178 of these
cases had been filed in, or transferred to, federal court where
the Judicial Panel on Multidistrict Litigation has consolidated
these cases for pretrial proceedings in the North District of
Ohio. Between June 1, 2003 and December 31, 2007, the
Company was dismissed from 1,041 similar cases. To date the
Company has made no payments or settlements to plaintiffs for
these allegations. While there is uncertainty relating to any
litigation, management is of the opinion that the outcome of
such litigation will not have a material adverse effect on the
Company’s financial condition or results of operations.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The Company is party to certain environmental matters, although
no claims are currently pending. Any related obligations are not
expected to have a material effect on the Company’s
business or financial condition or results of operations.
All other legal proceedings and actions involving the Company
are of an ordinary and routine nature and are incidental to the
operations of the Company. Management believes that such
proceedings should not, individually or in the aggregate, have a
material adverse effect on the Company’s business or
financial condition or on the results of operations.
The Company adopted SFAS No. 123(R), Share-Based
Payment, on January 1, 2006. SFAS No. 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their fair values. The Company utilizes the
modified prospective method in which compensation cost is
recognized beginning with the effective date, (a) based on
the requirements of SFAS No. 123(R) for all
share-based payments granted after the effective date and
(b) based on the requirements of SFAS No. 123 for
all awards granted to employees prior to the effective date of
SFAS No. 123(R) that remain unvested on the effective
date. As a result of adopting SFAS No. 123(R) in 2006,
the Company’s recorded pre-tax stock-based compensation
expense of $1,586 and $1,053 within selling, general and
administrative expense for the years ended December 31,
2007 and December 31, 2006, respectively. Prior to 2006,
the Company applied the intrinsic value method permitted under
SFAS No. 123, as defined in Accounting Principles
Board (“APB”) Opinion No. 25, “Accounting
for Stock Issued to Employees” and related
interpretations, in accounting for the Company’s stock
option plans. Accordingly, no compensation cost was recognized
in years prior to adoption except as previously described in
Note 2 — Significant Accounting Policies
regarding the acceleration of non-vested options in the
fourth quarter of 2005.
SFAS No. 123, as amended by SFAS No. 148,
requires pro forma disclosure of net income and earnings per
share when applying the fair value method of valuing stock-based
compensation. The following table sets forth the pro forma
disclosure of net income and earnings per share as if
compensation expense had been recognized for the fair value of
options granted prior to January 1, 2006. For purposes of
this pro forma disclosure, the estimated fair value of the
options granted prior to January 1, 2006 was determined
using the Black-Scholes option pricing model and is amortized
ratably over the vesting periods.
As of December 31, 2007, total stock-based compensation
cost related to nonvested awards not yet recognized was
approximately $3,699 and the weighted average period over which
this amount is expected to be recognized was approximately
2.9 years.
No significant modifications to equity awards occurred during
the fiscal year ending December 31, 2007.
The Company has available various equity-based compensation
programs to provide long-term performance incentives for its
global workforce. Currently, these incentives consist
principally of stock options. Additionally, Company awarded
stock options to its outside directors. These awards are
administered through several plans, as described within this
Note. The stock option plans existing at December 31, 2002
and all options issued thereunder were canceled in May 2003 upon
emergence from Chapter 11 bankruptcy.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The 2004 Non-Employee Directors Stock Option Plan (the
“Directors Plan”) was adopted in May 2004 for the
Company’s Board of Directors. Up to 200,000 shares of
the Company’s common stock with a maximum contractual term
of 10 years may be issued pursuant to awards granted by the
Compensation Committee under the Directors Plan.
The 2004 Stock Incentive Plan (the “Stock Incentive
Plan”) was adopted in May 2004 for the Company’s
employees. Up to 1.478 million shares of the Company’s
common stock with a maximum contractual term of 10 years
may be issued pursuant to awards granted by the Compensation
Committee under the Stock Incentive Plan. The Stock Incentive
Plan provides for the grant of (a) incentive stock options
intended to qualify under Section 422 of the Internal
Revenue Code of 1986, (b) non-statutory stock options,
(c) stock appreciation rights (“SARs”),
(d) restricted stock, (e) stock units and
(f) performance awards. Under the grants awarded pursuant
to the Company’s 2004 Stock Incentive Plan, unexercised
options terminate immediately upon the employee’s
resignation or retirement.
In 2007, the Company awarded 277,600 options under the Stock
Incentive Plan, of which 1,300 were canceled at
December 31, 2007. Of the remaining options issued,
2,000 shares vested immediately, 9,000 will vest ratably
over three years and the remaining 265,300 options will vest
within three years of the grant date if certain financial goals
are met.
In 2006, the Company awarded 475,075 options under the Stock
Incentive Plan, of which 11,000 were canceled at
December 31, 2006. Of the remaining options issued, 366,575
will vest ratably over three years and the remaining 97,500
options will vest within three years of the grant date if
certain financial goals are met, but will vest at the end of
seven years regardless of whether these financial targets are
achieved.
As of December 31, 2007, 1,527,830 options to purchase
shares were issued and outstanding under the Directors’
Plan, the Stock Incentive Plan and other specific agreements.
During the periods presented, stock options were granted to
eligible employees under the 2004 Stock Incentive Plan with
exercise prices equal to the fair market value of the
Company’s stock on the grant date. For the years presented,
management estimated the fair value of each annual stock option
award on the date of grant using Black-Scholes stock option
valuation model. Composite assumptions are presented in the
following table. Weighted-average values are disclosed for
certain inputs which incorporate a range of assumptions.
Expected volatilities are based principally on historical
volatility of the Company’s stock and correspond to the
expected term. The Company generally uses historical data to
estimate option exercise and employee termination within the
valuation model. The expected term of options granted represents
the period of time that options granted are expected to be
outstanding; the weighted-average expected term for all employee
groups is presented in the following table. The risk-free rate
for periods within the contractual life of the options is based
on the U.S. Treasury yield curve in effect at the time of
grant. Stock option expense is recognized in the consolidated
condensed statements of operations ratably over the three-year
vesting period based on the number of options that are expected
to ultimately vest.
The following table presents the assumptions used in valuing
options granted during the twelve months ended December 31,
2007, 2006 and 2005:
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
A summary of option activity for the years ended
December 31, 2007 and 2006, is presented in the following
table:
The total intrinsic value of options exercised during the year
ended December 31, 2007 was approximately $279; that
attributable to options exercised during the year ended
December 31, 2006 was $71. The total fair value of stock
options vested during the year ended December 31, 2007 was
$795.
Following is a summary of stock options outstanding as of
December 31, 2007:
Acceleration of Non-Vested Stock Options. On
December 22, 2005, the Company’s Board of Directors
voted to accelerate the vesting of certain stock options
previously awarded to executive officers and other employees
under the Company’s 2004 Stock Incentive Plan. Shares
purchased upon exercise of accelerated options before the
original vesting date may not be sold or transferred until the
original vesting date and, if the holder is not an
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
employee of the Company or an officer of the Company on the
original vesting date for any reason other than death or
disability, may not be sold or otherwise transferred until the
fifth anniversary of the original vesting date. Options to
purchase approximately 494,000 shares of common stock were
accelerated. Exercise prices of the accelerated options range
from $10.95 to $14.45 per share. As a result, the Company
recognized $29 of compensation expense during the fourth quarter
of 2005.
The effects of options and warrants have not been considered in
the determination of earnings (loss) per share for the year
ended December 31, 2005 because the result would be
anti-dilutive. Options and warrants not included in the
calculation for the year ended December 31, 2005 were as
follows:
The calculation of income (loss) per share follows:
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
401(k) Retirement Plan. The 401(k) Retirement
Plan covers the majority of the Company’s domestic
employees. At its discretion, the Company can make a base
contribution of 1% of each employee’s compensation and an
additional contribution equal to as much as 4% of the
employee’s compensation. At the employee’s discretion,
an additional 1% to 15% voluntary employee contribution can be
made. The plan requires the Company to make matching
contributions of 50% for the first 6% of the voluntary employee
contribution. Total expense for this plan was approximately
$1,459, $1,286, and $1,473 for the years ended December 31,
2007, 2006, and 2005, respectively.
Deferred Compensation Plan. Each director,
other than the Company’s Chairman and Chief Executive
Officer, is entitled to receive a $75 annual fee. Forty percent
of this annual fee is deposited into the Company’s Non
Employee Director Deferred Compensation Plan (the “Deferred
Compensation Plan”). Under the Deferred Compensation Plan,
deferral amounts are credited to an account and converted into
an amount of units equal to the amount deferred divided by the
fair market value of our common stock on the deferral date. A
director’s account is distributed pursuant to the terms of
the Deferred Compensation Plan upon his or her termination or a
change in control; otherwise, the account is distributed as soon
as administratively feasible after the date specified by the
director. Directors may elect to receive the units in their
accounts at the then current stock price in either a lump sum or
substantially equal installments over a period not to exceed
five years.
Pension Plans. The Company’s subsidiaries
have had various noncontributory defined benefit pension plans
which covered substantially all U.S. employees. The Company
froze and combined its three noncontributory defined benefit
pension plans through amendments to such plans effective
December 31, 1989, into one plan (the “Retirement
Plan”). All former participants of these plans became
eligible to participate in the 401(k) Retirement Plan effective
January 1, 1990.
The Company’s Australian subsidiary has a Superannuation
Fund (the “Fund”) established by a Trust Deed.
Pension benefits are actuarially determined and are funded
through mandatory participant contributions and the
Company’s actuarially determined contributions. The Company
made contributions of $226, $473 and $588 for the years ended
December 31, 2007, 2006, and 2005, respectively. Prepaid
benefit cost at December 31, 2007 and 2006 was $4,872 and
$4,793, respectively. The prepaid benefit cost is not included
in the table below or in the balance sheet, as the Company has
no legal right to amounts included in this fund. In addition,
upon dissolution of the Fund, any excess funds are required to
be allocated to the participants as determined by the actuary.
Accordingly, the Company accounts for this fund as a defined
contribution plan. The actuarial assumptions used to determine
the Company’s contribution, the funded status, and the
retirement benefits are consistent with previous years.
Other Postretirement Benefits. The Company has
a retirement plan covering certain salaried and non-salaried
retired employees, which provides postretirement health care
benefits (medical and dental) and life insurance benefits. The
postretirement healthcare portion is contributory, with retiree
contributions adjusted annually as determined based on claim
costs. The postretirement life insurance portion is
noncontributory. The Company recognizes the cost of
postretirement benefits on the accrual basis as employees render
service to earn the benefit. The Company continues to fund the
cost of healthcare and life insurance benefits in the year
incurred.
As of January 1, 2006, the Company implemented changes to
the postretirement healthcare plan whereby only retired
participants who had coverage at December 31, 2005 and
active employees who had attained age 62 and completed
15 years of service would continue to have coverage after
2005. As a result of this change, the Company recognized reduced
annual plan expenses in 2006 and going forward and a one-time
curtailment gain of $11.9 million.
Table of Contents
THERMADYNE
HOLDINGS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The measurement date used to determine pension and other
postretirement measurements for the plan assets and benefit
obligations is December 31. The following table provides a
reconciliation of benefit obligations, plan assets and status of
the pension and other post-retirement benefit plans as
recognized in the consolidated balance sheets for the years
ended December 31, 2007 and 2006:
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