Item 1. Business
General
Ladish Co., Inc. (“Ladish” or the “Company”) engineers, produces and markets high-strength, high-technology forged and cast metal components for a wide variety of load-bearing and fatigue-resisting applications in the jet engine, aerospace and industrial markets. Approximately 77% of the Company’s 2008 billings were derived from the sale of jet engine parts, missile components, landing gear, helicopter rotors and other aerospace products. Approximately 31% of the Company’s 2008 billings were derived from sales, directly or through prime contractors, under United States government contracts or under contracts with allies of the United States government, primarily covering defense equipment. Although no comprehensive trade statistics are available, based on its experience and knowledge of the industry, management believes that the Company is the second largest supplier of forged and cast metal components to the domestic aerospace industry, with an estimated 20% market share in the jet engine component field.
Products and Markets
The Company markets its products primarily to manufacturers of jet engines, commercial business and defense aircraft, helicopters, satellites, heavy-duty off-road vehicles and industrial and marine turbines. The principal markets served by the Company are jet engine, commercial aerospace (defined by Ladish as satellite, rocket and aircraft components other than jet engines) and general industrial products. The amount of revenue and the revenue as a percentage of total revenue by market were as follows for the periods indicated:
Manufacturing
Ladish offers one of the most complete range of forging, investment casting and precision machining services in the world. The Company employs all major forging processes, including open and closed-die hammer and press forgings, as well as ring-rolling, and also produces near-net shape aerospace components through isothermal forging and hot-die forging techniques. Closed-die forging involves hammering or pressing heated metal into the required shape and size by utilizing machined impressions in specially prepared dies which exert three-dimensional control on the heated metal. Open-die forging involves the hammering or pressing of metal into the required shape without such three-dimensional control, and ring-rolling involves rotating heated metal rings through presses to produce the desired shape. Investment casting involves the creation of precise wax molds which are dipped, autoclaved and cast to create near-net components for the aerospace industry. The Company’s precision machining services focus on the milling and turning of components for the aerospace industry.
Much of the Company’s business is capital intensive, requiring large and sophisticated forging, casting, machining and heating equipment and extensive facilities for inspection and testing of components after
formation. Ladish believes that it has the largest forging hammer, isothermal press and ring-roll in the world at its plant in Cudahy, Wisconsin. Its largest counterblow forging hammer has a capacity of 125,000 mkg (meter-kilograms), and its ring-rolling equipment can produce single-piece seamless products that weigh up to 350,000 pounds with outside diameters as large as 28 feet and face heights up to 10 feet. Ladish’s 4,500-ton and 10,000-ton isothermal presses can produce forgings, in superalloys as well as titanium, that weigh up to 2,000 pounds. Ladish is in the process of qualifying a new 12,500-ton isothermal press which is expected to be operational in 2009. Much of the domestic forging equipment has been designed and built by Ladish. The Company also maintains such auxiliary facilities as die-sinking, heat-treating and machining equipment and produces most of the precision dies necessary for its forging operations. The Company considers such equipment to be in good operating condition and adequate for the purposes for which it is being used.
Marketing and Sales
The product sales force, consisting primarily of sales engineers, is supported by the Company’s metallurgical staff of engineers and technicians. These technically trained sales engineers, organized along product line and customer groupings, work with customers on an ongoing basis to monitor competitive trends and technological innovations. Additionally, sales engineers consult with customers regarding potential projects and product development opportunities. During the past few years, the Company has refocused its marketing efforts on the jet engine components market and the commercial aerospace industry.
The Company is actively involved with key customers in joint cooperative research and development, engineering, quality control, just-in-time inventory control and computerized process modeling programs. The Company has entered into strategic contracts for a number of sole-sourced products with each of Rolls-Royce, Sikorsky and Snecma for major programs. The Company believes that these contracts are a reflection of the aerospace and industrial markets’ recognition of the Company’s manufacturing and technical expertise.
The research and development of jet engine components is actively supported by the Company’s Advanced Materials and Process Technology Group. The Company’s long-standing commitment to research and development is evidenced by its industry-recognized materials and process advancements. The experienced staff and fully equipped research facilities support Ladish sales through customer-funded projects. Management believes that these research efforts position the Company to participate in future growth in demand for critical advanced jet engine components.
Customers
The Company’s top three customers, Rolls-Royce, United Technologies and General Electric, accounted for approximately 50%, 50% and 47% of the Company’s revenues in 2006, 2007 and 2008, respectively. Net sales to Rolls-Royce were 28%, 28% and 23%, United Technologies 14%, 15% and 15% and General Electric 8%, 7% and 9% of total Company net sales for the respective years. No other customer accounted for ten percent or more of the Company’s net sales.
Caterpillar, Boeing, Techspace Aero and Snecma are also important customers of the Company. Because of the relatively small number of customers for some of the Company’s principal products, the Company’s largest customers exercise significant influence over the Company’s prices and other terms of trade.
U.S. exports accounted for approximately 51%, 49% and 46% of total Company net sales in 2006, 2007 and 2008, respectively. U.S. exports to England constituted approximately 28%, 29% and 25%, respectively in the above years, of total Company net sales.
A substantial portion of the Company’s revenues is derived from long-term, fixed price contracts with major engine and aircraft manufacturers. These contracts are typically “requirements” contracts under which the purchaser commits to purchase a given portion of its requirements of a particular component from the Company, and provide the Company with the ability to adjust prices based on raw material price fluctuation. Actual purchase quantities are typically not determined until shortly before the year in which products are to be delivered. The Company attempts to minimize its risk by entering into fixed-price contracts with its raw material suppliers. Additionally, a portion of the Company’s revenue is directly or indirectly related to government spending, particularly military and space program spending.
Research and Development
The Company maintains a research and development department which is engaged in applied research and development work primarily relating to the Company’s forging operations. The Company works closely with customers, universities and government technical agencies in developing advanced forgings, materials and processes. The Company spent approximately $3.2 million, $2.9 million and $3.1 million on applied research and development work during 2006, 2007 and 2008, respectively. Customers reimbursed the Company for $1.6 million, $1.2 million and $1.3 million of the foregoing research and development expenses in 2006, 2007 and 2008, respectively.
Patents and Trademarks
Although the Company owns patents covering certain of its processes, the Company does not consider these patents to be of material importance to the Company’s business as a whole. The Company considers certain other information that it owns to be trade secrets and the Company takes measures to protect the confidentiality and control the disclosure and use of such information. The Company believes that these safeguards adequately protect its proprietary rights and the Company vigorously defends these rights.
The Company owns or has obtained licenses for various trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, copyright registrations, patent applications, inventions, know-how, trade secrets, confidential information and any other intellectual property that is necessary for the conduct of its business (collectively, “Intellectual Property”). The Company is not aware of any existing or threatened patent infringement claim (or of any facts that would reasonably be expected to result in any such claim) or any other existing or threatened challenge by any third party that would significantly limit the rights of the Company with respect to any such Intellectual Property or to the validity or scope of any such Intellectual Property. The Company has no pending claim against a third party with respect to the infringement by such third party of any such Intellectual Property that, if determined adversely to the Company, would individually or in the aggregate have a material adverse effect on the Company’s financial condition or results of operations. While the Company considers all of its proprietary rights as a whole to be important, the Company does not consider any single right to be essential to its operations as a whole.
Raw Materials
Raw materials used by the Company in its metal components include alloys of titanium, nickel, steel, aluminum, tungsten and other high temperature alloys. The major portion of metal requirements for forged products are purchased from major metal suppliers producing forging quality material as needed to
fill customer orders. The Company has two or more sources of supply for all significant raw materials, with the exception of certain nickel-based powder alloys where the Company is currently dependent upon a single source of supply.
The titanium and nickel-based superalloys used by the Company have a relatively high dollar value. Accordingly, the Company recovers and recycles scrap materials such as machine turnings, forging flash, solids and test pieces (“by-products’). The proceeds from the disposition of by-products are taken as a reduction to the Company’s cost of goods and are not treated as a part of net sales.
The Company’s most significant raw materials consist of nickel and titanium alloys. Its principal suppliers of nickel alloys include Carpenter Technology, Special Metals Corporation and Allegheny Technologies, Inc. (“ATI”). Its principal suppliers of titanium alloys are Titanium Metals Corporation of America (“Timet”), ATI and RTI International. The Company typically has fixed-price contracts with its suppliers.
In addition, the Company, its customers and suppliers have undertaken active programs for supply chain management to reduce overall lead times and the total cost of raw materials. However, with the upturn in demand in the markets served by the Company in 2007 and 2008, raw material lead times have been extended and prices have increased. In 2009, the Company expects raw material prices to decline and lead times to shorten as demand for material eases due to the global economic downturn. The Company attempts to protect against raw material price escalation by passing those price increases directly to the Company’s customers.
Energy
The Company uses a considerable amount of energy in the processing of its forged and cast metal components. The fluctuating prices for energy, both natural gas and electricity, had a significant impact on the Company’s 2007 and 2008 results. With the reduction of natural gas prices, the Company expects energy to have a reduced impact on 2009 results. The Company attempts to ameliorate the impact of these price swings by purchasing directly from producers and pre-ordering supplies for the future, however, the level of price fluctuation and lack of availability are not within the control of the Company.
Backlog
The average amount of time necessary to manufacture the Company’s products is five to six weeks from the receipt of raw material. The timing of the placement and filling of specific orders may significantly affect the Company’s backlog figures, which are subject to cancellation for a variety of reasons. In addition, the Company typically only includes those contracts which will result in shipments within the next 18 months when compiling backlog and does not include the out years of long-term agreements. As a result, the Company’s backlog may not be indicative of actual results or provide meaningful data for period-to-period comparisons. The Company’s backlog was approximately $500 million, $611 million and $629 million as of December 31, 2006, 2007 and 2008, respectively. The Company’s backlog in 2008 also benefited from the acquisition of Aerex LLC (“Aerex”) and Chen-Tech Industries, Inc. (“Chen-Tech”). In 2007, the Company received approximately $534 million in new orders and in 2008 the Company received $408 million in new orders as the backlog and order activity were negatively impacted by a strike at Boeing and the unsettled economic climate.
Competition
The sale of metal components is highly competitive. Certain of the Company’s competitors are larger than the Company and have substantially greater capital resources. Although the Company is the sole
supplier on several sophisticated components required by prime contractors under a number of governmental programs, many of the Company’s products could be replaced with other similar products of its competitors. However, the significant investment in tooling, the time required and the cost of obtaining the status of a “certified supplier” are barriers to entry. Competition is based on quality (including advanced engineering and manufacturing capability), price and the ability to meet delivery requirements.
Website Access to Company Reports
The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on the Company’s website at www.ladishco.com as soon as reasonably practicable after such material is filed electronically with the SEC. The Company’s Form 14 Proxy Statement for the 2009 annual stockholders’ meeting is available on the Company’s website. The Company’s Code of Conduct is available on the Company’s website and in printed form upon request. Also, copies of the Company’s annual report will be made available, free of charge, upon written request.
Environmental, Health and Safety Matters
The Company’s operations are subject to many federal, state and local regulations relating to the protection of the environment and to workplace health and safety. In particular, the Company’s operations are subject to extensive federal, state and local laws and regulations governing waste disposal, air and water emissions, the handling of hazardous substances, environmental protection, remediation, workplace exposure and other matters. Management believes that the Company is presently in substantial compliance with all such laws and does not currently anticipate that the Company will be required to expend any substantial amounts in the foreseeable future in order to meet current environmental, workplace health or safety requirements. However, additional costs and liabilities may be incurred to comply with current and future requirements which could have a material adverse effect on the Company’s results of operations or financial condition.
There are no known pending remedial actions or claims relating to environmental matters that are expected to have a material effect on the Company’s financial position or results of operations. All of the properties owned by the Company, however, are located in industrial areas and have a history of heavy industrial use. These properties may potentially incur environmental liabilities in the future that could have a material adverse effect on the Company’s financial condition or results of operations. The Company was previously named a potentially responsible party at several “Superfund” sites. The Company’s liability with respect to these sites has largely been resolved. Although the Company does not believe that the amount for which it may be held liable for any further administrative or wrap-up expense will exceed the amount it has reserved, no assurance can be given that the amount for which the Company will be held responsible will not be significantly greater than expected. In 2006, the Company agreed to participate in the environmental remediation of a site near Houston, Texas. The Company’s allocated share is relatively small, less than 1%, and its projected exposure for the site is estimated to be $0.16 million. The Company has an accrual of $0.30 million for this site and any other environmental claims which may arise.
With respect to any past or future claim for any environmental, health or safety matter, the Company evaluates every such claim from both a technical and legal perspective, using outside consultants where necessary. The Company establishes a good faith estimate of its prospective risk associated with said claim and, where material, establishes an accrual for the estimated value of such claim.
Forward Looking Statements
Any statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Legislation Reform Act of 1995, and involve risks and uncertainties. These forward-looking statements include expectations, beliefs, plans, objectives, future financial performance, estimates, projections, goals and forecasts. Potential factors which could cause the Company’s actual results of operations to differ materially from those in the forward-looking statements include:
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Market conditions and demand for the Company’s products
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Competition
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Interest rates and capital costs
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Technologies
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Unstable governments and business conditions in emerging economies
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Raw material and energy prices
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Health care costs
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Legal, regulatory and environmental issues
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Taxes
Any forward-looking statement speaks only as of the date on which such statement is made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.
Employees
As of December 31, 2008, domestically, the Company had approximately 1,380 employees, of whom 1,060 were engaged in manufacturing functions, 70 in executive and administrative functions, 200 in technical functions, and 50 in sales and sales support. At such date, approximately 675 employees, principally those engaged in manufacturing, were represented by labor organizations under collective bargaining agreements. Internationally, the Company had approximately 660 employees in Poland as of December 31, 2008, approximately two-thirds of which are represented by trade unions.
Executive Officers of the Company
Item 1A.
Item 1A. Risk Factors
Cyclicality of the Aerospace and Jet Engine Industries
Substantially all of our revenues are derived from the aerospace and jet engine industries, which are cyclical in nature and subject to changes based on general economic conditions, airline profitability, passenger ridership and international relations. The duration and severity of upturns and downturns in these industries are influenced by a variety of factors, including those set forth herein. Accordingly, they cannot be predicted with any certainty. Historically, orders for new commercial aircraft and related commercial aerospace components have been driven by the operating profits or losses of commercial airlines. Purchases by customers in the military aerospace sector are dependent upon defense budgets. Events adversely affecting the airline industry, such as cyclical overcapacity and inability to maintain profitable fare structures, would likely have a material adverse effect on our financial condition and results of operations.
Reduction in Government Spending
Since 2002, approximately one-quarter of our annual revenues have been derived from the government-sponsored aerospace industry, an industry that is dependent upon government budgets and, in particular, the United States government budget. There can be no assurance that U.S. defense and space budgets and the related demand for defense and space equipment will continue or that sales of defense and space equipment to foreign governments will continue at present levels.
Competition
The sale of metal components for the aerospace, jet engine and industrial markets is highly competitive. Many products we manufacture are readily interchangeable with the products manufactured by our competitors. Many of our products are sold under long-term contracts which are bid upon by several suppliers. Our principal competitor, Precision Castparts Corp. (“PCC”), is a substantially larger business and has greater financial resources. In 2006, PCC purchased one of our larger suppliers of nickel-based alloys, Special Metals Corporation. Currently, the Company is dependent upon PCC as its sole source of supply for certain nickel-based powder alloys.
Reliance on Major Customers
Our three largest customers accounted for approximately 50%, 50% and 47% of our revenues in 2006, 2007 and 2008, respectively. Because of the small number of customers for some of our principal products, those customers exercise significant influence over our prices and other terms of trade. The loss
of any of our largest customers could have a material adverse effect on our financial condition and results of operations. The labor strike at Boeing during the second half of 2008 had a negative impact upon the entire commercial aviation industry including the Company.
Dependence on Key Personnel
We have been and continue to be dependent on certain key management personnel. Our ability to maintain our competitive position will depend, in part, upon our ability to retain these key managers and to continue to attract and retain highly qualified managerial, manufacturing and sales and marketing personnel. There can be no assurance that the loss of key personnel would not have a material adverse effect on our results of operations or that we will be able to recruit and retain such personnel.
Product Liability Exposure
We produce many critical engine and structural parts for commercial and military aircraft and for other specialty applications. As a result, we have an inherent risk of exposure to product liability claims. We currently maintain product liability insurance, but there can be no assurance that insurance coverage will continue to be available on terms acceptable to us or that such coverage will be adequate for any liabilities that might be incurred.
Availability and Price of Raw Materials
The largest single component of our cost of goods sold is raw material costs. We manufacture products in a wide variety of specialty metals and alloys, some of which can only be purchased from a limited number of suppliers. We hold limited quantities of raw materials in inventory but, for the principal part of our business, we seek to procure delivery of raw materials in quantities and at times matching customers’ orders. We, along with other entities in the industry, have experienced periods of increased delivery times for nickel-based and titanium alloys and certain stainless steels, which account for a significant portion of our raw materials. Significant scarcity of supply of raw materials used by us could have a material adverse effect on our results of operations by affecting both the timing of delivery and the cost of purchasing such materials. In addition, our largest competitor, PCC, has purchased one of our largest suppliers of nickel-based alloys. Many of our products are sold pursuant to long-term agreements with our customers, which currently provide us the right to pass through material cost increases. Any inability to obtain such rights in future long-term agreements could have a material adverse effect on our results of operations.
Labor Contracts
Approximately 49% of our domestic employees are represented by seven collective bargaining units. Contracts were historically renegotiated every three years with each union. Six of the unions in 2006 and one union in 2007 entered into six-year agreements with the Company. While we do not expect that work stoppages will arise in connection with the renewal of labor agreements expiring in the foreseeable future, no assurance can be given that work stoppages will not occur. An extended or widespread work stoppage could have a material adverse effect on our results of operations.
Pension and Other Postretirement Benefit Obligations
Many of our employees are eligible to participate in various Company-sponsored pension plans. In addition to pension benefits, we provide health care and life insurance benefits to our eligible employees and retirees. The pension benefits have been and will continue to be funded through contributions to pension trusts, while health care and life insurance benefits are paid as incurred.
We have several pension plans, all of which are underfunded. The aggregate actuarially determined liability recorded for these pension plans on the balance sheet at December 31, 2008 was approximately $70.6 million. The decline in the equity market in the United States in 2008 had a negative impact upon the level of assets in the pension trust of the Company.
The actuarially determined liability recorded for postretirement health care and life insurance benefits on the balance sheet at December 31, 2008 was approximately $33.3 million and will be paid as incurred.
Compliance with Environmental and Other Government Regulations
Our operations are subject to extensive environmental, health and safety laws and regulations promulgated by federal, state and local governments. Many of these laws and regulations provide for substantial fines and criminal sanctions for violations. The nature of our business exposes us to risks of liability due to the use and storage of materials that can cause contamination or personal injury if released into the environment. In addition, environmental laws may have a significant effect on the nature, scope and cost of cleanup of contamination at operating facilities. It is difficult to predict the future development of such laws and regulations or their impact on future earnings and operations, but we anticipate that these standards will continue to require continued capital expenditures. There can be no assurance that we will not incur material costs and liabilities in the future relating to environmental matters.
Risks Related to Significant Price Concessions to Our Customers and Increased Pressure to Reduce Our Costs
We are subject to substantial competition in all of the markets we serve, and we expect this competition to continue. As a result, we have made significant price concessions to our customers in the aerospace and industrial markets in recent years and we expect customer pressure for price concessions to continue. Maintenance of our profitability will depend, in part, on our ability to sustain a cost structure that enables us to be cost-competitive. If we are unable to adjust our cost relative to our pricing or if we are unable to continue to compete effectively, our business will suffer.
Our Business is Affected by Federal Rules, Regulations and Orders Applicable to Government Contractors
A number of our products are manufactured and sold under U.S. government contracts or subcontracts. Violation of applicable government rules and regulations could result in civil liability, in cancellation or suspension of existing contracts or in ineligibility for future contracts or subcontracts funded in whole or in part with federal funds.
Risks Associated with International Operations
We purchase products from and supply products to businesses located outside of the United States. In fiscal 2008, approximately 59% of our total sales were attributable to non-U.S. customers. A number of risks inherent in international business could have a material adverse effect on our future results of operations, including:
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currency fluctuations;
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general economic and political uncertainties and potential for social unrest in international markets;
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limitations on our ability to enforce legal rights and remedies;
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changes in trade policies;
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tariff regulations;
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difficulties in obtaining export and import licenses; and
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the risk of government financed competition.
Our Business Involves Risks Associated with Complex Manufacturing Processes
Our manufacturing processes depend on certain sophisticated and high-value equipment, such as some of our forging presses for which there may be only limited or no production alternative. Unexpected failures of this equipment may result in production delays, revenue loss and significant repair costs. In addition, equipment failures could result in injuries to our employees. Moreover, the competitive nature of our business requires that we continuously implement process changes intended to achieve product improvements and manufacturing efficiencies. These process changes may at times result in production delays, quality concerns and increased costs. Any disruption of operations at our facilities due to equipment failures or process interruptions could have a material adverse effect on our business.
Acquisitions
We expect that we will continue to make acquisitions of, investments in, and strategic alliances with complementary businesses, products and technologies to enable us to add products and services for our core customer base and for related markets, and to expand our business geographically. The success of this acquisition strategy will depend on our ability to: identify suitable businesses to buy; negotiate the purchase of those businesses on terms acceptable to us; complete the acquisitions within our expected time frame; improve the results of operations of the businesses that we buy and successfully integrate their operations into our own; and avoid or overcome any concerns expressed by regulators.
We may fail to properly complete any or all of these steps. We may not be able to find appropriate acquisition candidates, acquire those candidates that we do find, obtain necessary permits or integrate acquired businesses effectively and profitably.
Some of our competitors are also seeking to acquire similar businesses, including competitors that have greater financial resources than we do. Increased competition may reduce the number of acquisition targets available to us and may lead to less favorable terms as part of any acquisition, including higher purchase prices. If acquisition candidates are unavailable or too costly, we may need to change our business strategy.
We also cannot be certain that we will have enough capital or be able to raise enough capital on reasonable terms, if at all, to complete the purchases of the businesses that we want to buy. Our credit facility limits our ability to make acquisitions. Our lender may object to certain purchases or place conditions on them that would limit their benefit to us.
If we are unsuccessful in implementing our acquisition strategy for the reasons discussed above or otherwise, our financial condition and results of operations could be materially adversely affected.
Item 1B.
Item 1B. Unresolved Staff Comments
The Company has no unresolved comments from the Commission staff.
Item 2.
Item 2. Properties
The following table sets forth the location and size of the Company’s seven facilities:
The above facilities, except for Chen-Tech and Aerex, are owned by the Company.
The Company believes that its facilities are well maintained, are suitable to support the Company’s business and are adequate for the Company’s present and anticipated needs. While the rate of utilization of the Company’s manufacturing equipment is not uniform, the Company estimates that its facilities overall are currently operating at approximately 70% of capacity.
The principal executive offices of the Company are located at 5481 South Packard Avenue, Cudahy, Wisconsin 53110. Its telephone number at such address is (414) 747-2611.
Item 3.
Item 3. Legal Proceedings
From time to time the Company is involved in legal proceedings relating to claims arising out of its operations in the normal course of business. Although the Company believes that there are no material legal proceedings pending or threatened against the Company or any of its properties, the Company has been named as a defendant in a number of asbestos cases in Mississippi, Illinois, Wisconsin and California. As of December 31, 2008, the Company has been dismissed from the case in California and the majority of the claims in Mississippi, and had two claims remaining in Illinois and one in Wisconsin. The Company has never manufactured or processed asbestos. The Company’s only exposure to asbestos involves products the Company purchased from third parties. The Company has notified its insurance carriers of these claims and is vigorously defending these actions. The Company has not made any provision in its financial statements for the asbestos litigation.
The Company is participating in an investigation initiated by U.S. Customs & Border Protection (“Customs”) into duty drawback claims filed on behalf of the Company by its former export agent. The Company is cooperating with Customs in this investigation and has voluntarily suspended its duty drawback claims. Based upon its internal investigation, the Company believes any errors or omissions with respect to its filings were solely attributable to its former export agent. The Company intends to continue to cooperate with Customs in resolving this matter. The Company has not made any provision in its financial statements for the Customs investigation.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth quarter of 2008.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The common stock of the Company, par value $0.01 per share, trades on the Nasdaq National Market under the symbol “LDSH”.
The following table sets forth, for the fiscal periods indicated, the high and low closing prices for each quarter of the years 2006, 2007 and 2008. At December 31, 2008 there were an estimated 2,500 beneficial holders of the Company’s common stock.
The Company has not paid cash dividends and currently intends to retain all its earnings to reduce debt and to finance its operations, its stock repurchase program and future growth. The Company does not expect to pay dividends for the foreseeable future.
TOTAL SHAREHOLDER RETURN
The following graph compares the period percentage change in Ladish’s cumulative total shareholder return on its common stock, assuming dividend reinvestment, with the cumulative total return of (i) the Russell 2000 Small Cap Index, and (ii) a peer group from the Company’s industry, for the period of December 31, 2002 to December 31, 2008. The Company’s peer group is comprised of PCC, ATI, Timet and SIFCO Industries, Inc.
Item 6.
Item 6. Selected Financial Data
The selected financial data of the Company for each of the last five fiscal years are set forth below.
The data below should be read in conjunction with the Financial Statements and the Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this filing.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
2008 was a significant year in the 103-year history of Ladish. The Company made meaningful progress in positioning itself for long-term growth by the actions it took, both internally and externally, during the course of 2008. To support organic expansion, Ladish spent a record $49.8 million on capital expenditures in the year. This capital was directed mainly toward completing the new 12,500-ton isothermal forging press at Forging, installing a new melting furnace and facility expansion at PCT and added machining and inspection facilities at ZKM and Valley. Externally, Ladish made two key strategic acquisitions with the purchases of Aerex and Chen-Tech. The acquisition of Aerex, with its finishing machining expertise, solidifies Ladish’s position in the supply chain for helicopter components. Chen-Tech brings additional hot-die forging expertise and increased market share for jet engine components on single-aisle and regional aircraft. Collectively, the capital expenditures and acquisitions have provided Ladish with at least $125 million of new capacity for growth in some of the Company’s most profitable market niches.
While Ladish was positioning itself for market growth and capacity expansion in 2008, Ladish was not immune from two major, negative external events in the aerospace industry. The global economic financial downturn and resultant credit crisis have not impacted the aerospace industry as much as others, but there has been an effect and Ladish has felt it. Also, the prolonged labor strike at Boeing in the second half of 2008 had a negative result for suppliers such as Ladish as shipments were deferred and production schedules were adjusted on numerous occasions.
In the face of the foregoing challenges, Ladish did manage to ship $469.5 million of product in 2008. In spite of an 11% increase in net sales in 2008, earnings declined for a number of reasons. Largely due to the credit crisis and the Boeing strike, the product mix at Ladish shifted unfavorably at Ladish as jet engine components went from 56% of sales to 51% and correspondingly, industrial components increased from 20% to 23% of sales. This shift in product mix toward components with lower profit margins was an impediment to earnings in 2008. Ladish believes this trend will stabilize in 2009 and improve in 2010 and beyond as Boeing and Airbus bring new aircraft to the market and Ladish is able to utilize its expanded capacity for incremental sales.
Raw material remained a challenge for Ladish in 2008. Although performance of suppliers improved from 2007 levels, fluctuating market prices and price guarantees implemented by the Company’s customers disrupted the supply chain and negatively affected the Company’s cost of goods. The by-product market for the material Ladish recycles was severely depressed in 2008 and as a result Ladish did not receive a sufficient level of proceeds to offset its cost of goods, and raw material increased from 46% to 49% of Ladish’s costs.
The Company benefited in 2008 from a combined tax rate of 15.4%. This lower tax rate was the result of Ladish recognizing a $5.5 million research and development tax credit in the third quarter of the year, a significant state tax savings from apportionment and a $1.9 million foreign economic zone credit from ZKM for prior investments in that operation.
Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Net sales in 2008 were $469.5 million, a 10.6% increase over the $424.6 million of net sales in 2007. The sales growth in 2008 was due to the continued strength of Ladish’s markets and the acquisitions of Aerex and Chen-Tech in the third quarter of 2008. In 2008, cost of sales for the Company was 87% of net sales in comparison to 84% of net sales in 2007.
The Company’s SG&A expense in 2008 was $19.8 million, or 4.2% of net sales. In 2007, SG&A expense was 3.9% of net sales. The percentage increase in SG&A expense is attributed to growth in employment to support capacity expansion and higher professional fees associated with tax planning.
In 2008, the Company’s interest expense was $2.0 million in comparison to $2.5 million in 2007. The decrease in interest expense in 2008 was the result of a larger amount of interest capitalized associated with the capacity expansion programs at the Company. Total interest increased in 2008 as the Company incurred additional debt to support the acquisition of Aerex and Chen-Tech. The following table reflects the Company’s treatment of interest for the years 2007 and 2008:
Pretax income in 2008 was $38.3 million, an $11.9 million reduction from the 2007 pretax income level. The decline in pretax income was due to product mix and under-absorbed fixed costs.
Tax expense for 2008 was $5.9 million, which equated to an effective tax rate of 15.4%. In 2007, the Company experienced an effective tax rate of 35.5%. The reduction in tax rate is mainly attributed to the
Company recognizing a significant tax savings from the recognition of a $5.5 million research and development tax credit in the third quarter of 2008 and a $1.9 million foreign economic zone credit.
Net income in 2008 was $32.2 million, which equates to $2.15 per share on a fully-diluted basis. Net income was similar to 2007 levels but declined as a percentage of sales due to higher raw material and energy costs, a less profitable mix of products sold and inefficiencies associated with expanding manufacturing capacity, offset by the aforementioned tax savings and the capitalization of interest expense to capital projects.
The Company booked $408 million of new orders in 2008 in comparison to $534 million of new orders in 2007. The decline in orders was associated with the Boeing labor stoppage in the third quarter of 2008 and general, global economic conditions.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Net sales for 2007 were $424.6 million in comparison to $369.3 million of net sales in fiscal 2006. The 15% year-over-year increase in net sales was attributable to a 3% sales increase in jet engine components, a 48% sales increase in aerospace components and a 23% sales increase in industrial components. For 2007, all of the markets served by the Company showed continued strength and high demand for the products manufactured by the Company. Cost of sales was 84% of net sales in 2007 in contrast to 82% of net sales in 2006. The higher cost of sales in 2007 is attributed to higher raw material costs in 2007.
SG&A expense for fiscal 2007 was $16.7 million, or 3.9% of net sales. In 2006, SG&A expense was $18.2 million, or 4.9% of net sales. The reduction in SG&A expense, both in total dollars and as a percentage of net sales, is due to the Company using internal staffing for international sales, a reduction in professional fees and a continued cost reduction effort.
Interest expense in 2007 was $2.5 million in comparison to $3.5 million in 2006. The reduction in interest expense in 2007 was due to lower debt levels and the capitalization of that portion of interest associated with capital projects at the Company. The following table reflects the Company’s treatment of interest for the years 2006 and 2007:
For 2007, the Company had $50.2 million of pretax income, a 12% increase over the $44.7 million of pretax income earned by the Company in 2006. The rise in pretax income is attributable to the increased volume of net sales in 2007, operating efficiencies and a more profitable mix of product in 2007.
The Company recognized a tax expense of $17.8 million in 2007 for federal, state and foreign taxes. The 35.5% effective tax rate in 2007 is a decrease from the 35.9% effective tax rate used for 2006. The rate decrease in 2007 was a reflection of the Company reversing a valuation allowance at ZKM and recognizing a tax asset in 2007.
Net income for 2007 was $32.3 million, or $2.22 per share on a fully-diluted basis, in comparison to $28.5 million, or $2.00 per share on a fully-diluted basis, of net income in 2006. The growth of net income comes from higher net sales, operating efficiencies and product mix along with a slightly lower effective tax rate in 2007.
New orders of $534 million were booked by the Company in 2007 in comparison to $415 million of new orders in 2006. This resulted in the Company ending 2007 with $611 million of contract backlog in comparison to $500 million of contract backlog at the end of 2006. The increase in orders and resulting contract backlog in 2007 is a reflection of the overall strength in all three of the primary markets served by the Company.
Liquidity and Capital Resources
The Company’s cash position as of December 31, 2008 is $1 million less than its position at December 31, 2007. The 2008 decrease in cash is due to $49.8 million in capital expenditures, pension contributions and decreased payables partially offset by decreases in inventory and receivables. Cash flow from operations in 2008 was $11.1 million less than cash flow from operations in 2007 primarily due to $7.4 million of increased cash pension contributions.
On July 20, 2001, the Company sold $30 million of Series A Notes in a private placement to certain institutional investors. The Series A Notes are unsecured and bear interest at a rate of 7.19% per annum with the interest being paid semiannually. The Series A Notes have a seven-year duration with the principal amortizing equally over the duration after the third year. Amortization payments of $6 million annually were made on July 20, 2004 through 2008, at which time the Series A Notes were retired.
On May 16, 2006, the Company sold $40 million of Series B Notes in a private placement to certain institutional investors. The Series B Notes are unsecured and bear interest at a rate of 6.14% per annum with interest being paid semiannually. The Series B Notes have a ten-year duration with the principal amortizing equally over the duration after the fourth year.
On September 2, 2008, the Company sold $50 million of Series C Notes in a private placement to certain institutional investors. The Series C Notes are unsecured and bear interest at a rate of 6.41% per annum with interest being paid semiannually. The Series C Notes have a seven-year duration with the principal amortizing equally over the duration after the third year.
In addition, the Company and a syndicate of lenders have entered into a $35 million revolving line of credit (the “Facility”) which was most recently renewed on April 25, 2008. The Facility bears interest at a rate of LIBOR plus 1.25% or at a base rate. At December 31, 2008, there were $28.9 million of borrowings under the Facility and $6.1 million of credit was available pursuant to the terms of the Facility. The Facility has a maturity date of April 24, 2009. The Company expects to renew the Facility on similar terms, as it has for each of the past nine years.
During 2008, the Company applied $49.8 million of cash for capital expenditures and $40.3 million of cash for acquisitions. These expenditures were funded by $28.7 million of cash from operations and borrowings under the Facility and the Series C Notes.
In 2008, the Company issued 1,301,961 shares of common stock in connection with the acquisitions of Aerex and Chen-Tech.
During the years ending December 31, 2007 and 2008, the Company received $0.289 million and $0.215 million, respectively, from the exercise of employee stock options.
Given the Company’s ability to pass along raw material price increases to its customers, inflation has not had a material effect upon the Company during the period covered by this report. Given the rising demand for the products manufactured by the Company, and the prospects for increases in raw material costs and possible energy cost escalation, the Company cannot determine at this time if there will be any significant impact from inflation in the foreseeable future.
Contractual Obligations Table
(Dollars in Millions)
(1)
The Company expects to fund the payment of long-term debt through the use of cash on hand, cash generated from operations, the reduction of working capital and, if necessary, through access to the Facility.
(2)
The purchase obligations relate primarily to raw material purchase orders necessary to fulfill the Company’s production backlog for the Company’s products along with commitments for energy supplies also necessary to fulfill the Company’s production backlog. There are no net settlement provisions under any of these purchase orders nor is there any market for the underlying materials.
(3)
The Company’s estimated cash pension contribution is based upon the calculation of the Company’s independent actuary for 2009. There are no estimates beyond 2011.
(4)
The Company’s cash expenditures for Postretirement Benefits have only been projected out through the year 2018.
Critical Accounting Policies
Deferred Income Taxes
The Company started 2008 with $2.1 million of domestic net operating loss (“NOL”) carryforwards that were generated prior to its reorganization completed on April 30, 1993. These NOLs were utilized by the Company to reduce taxable income in 2008.
Pensions
The Company has noncontributory defined benefit pension plans (“Plans”) covering a number of its employees. The Company contributed $11.797 million and $8.955 million, respectively, to the Plans in 2007 and 2008. The Company intends to contribute $8.3 million, $10 million and $10 million to the Plans in 2009, 2010 and 2011, respectively. The Company plans on funding those contributions from cash on hand, cash generated from operations, working capital reductions, treasury stock contributions and, if necessary, from the Facility. No estimates have been made for payments into the Plans beyond 2011.
The Plans’ assets are held in a trust and are primarily invested in U.S. Government securities, investment grade corporate bonds and marketable common stocks. The key assumptions the Company considers with respect to the assets in the Plans and funding the liabilities associated with the Plans are the discount rate, the long-term rate of return on Plans’ assets, the projected rate of increase in compensation levels and the actuarial estimate of mortality of participants in the Plans. The most sensitive assumption is the discount rate. For funding purposes, the Company’s independent actuaries assumed an annual long-term rate of return on Plan assets of 8.9% and 7.95% for 2007 and 2008, respectively. For the ten-year period ending December 31, 2008, the Company experienced an annual rate of return on Plan assets of 2.68%.
The Company used a rate of 6.05% for its discount rate assumption for 2008, a decrease from the 6.11% rate used for 2007. An increase in the discount rate results in a decrease in the accumulated benefit
obligation at the measurement date which may also result in a decrease in the additional minimum pension liability included as a credit to accumulated other comprehensive income. Such an increase also results in an actuarial gain which is amortized to pension expense in accordance with FASB Statement No. 87. A decrease in the discount rate will have the opposite effect in the pension liability and pension expense. The Company bases its discount rate on long maturity AA rated corporate debt securities. The Company cannot predict whether these interest rates will increase or decrease in future years.
The Company cannot predict the level of interest rates in the future and correspondingly cannot predict the future discount rate which will be applied to determine the Company’s projected benefit obligation. As demonstrated in the chart below, relatively small movements in the discount rate, up or down, can have a significant impact on the Company’s projected benefit obligation under the Plans.
Nor can the Company predict with any certainty what the actual rate of return will be for the Plans’ assets. As demonstrated in the chart below, a modest change in the presumed rate of return on the Plans’ assets will have a material impact upon the actual net periodic cost for the Plans.
Goodwill and Other Intangible Assets
Goodwill represents the cost of acquired net assets in excess of their fair market values. Goodwill and other intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually in accordance with the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). Intangible assets with estimable useful lives are amortized over their respective estimated useful lives and also reviewed at least annually for impairment.
In accordance with SFAS No. 142, a two-step impairment test is required to identify potential goodwill impairment and measure the amount of the goodwill impairment loss to be recognized. In the first step, the fair value of each reporting unit is compared to its carrying value to determine if the goodwill is impaired. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, then goodwill is not impaired and the second step is not required. If the carrying value of the net assets assigned to the reporting unit exceeds its fair value, then the second step is performed in order to determine the implied fair value of the reporting unit’s goodwill and an impairment loss is recorded for an amount equal to the difference between the implied fair value and the carrying value of the goodwill.
For the purpose of goodwill analysis, the Company has only one reporting segment, as defined by SFAS No. 142. Goodwill of $37.1 million represents the excess of the purchase price over the fair value of identifiable tangible and intangible net assets relating to business acquisitions. Goodwill increased significantly in 2008 due to the acquisitions of Aerex and Chen-Tech. It is an asset with an indefinite life and therefore is not amortized to expense, but is subject to annual impairment testing. The Company tests the goodwill for impairment at least annually by fair value impairment testing. The Company’s assessment of fair value used in the annual impairment testing takes into account a number of factors
including EBITDA multiples of transactions in the Company’s industry as well as fair market value multiples of transactions of similarly situated enterprises. No impairments were recognized in 2007 or 2008. Should goodwill become impaired in the future, the amount of impairment will be charged to SG&A expense. The Company has $20.0 million of amortizable customer relationships included in other intangible assets that will be amortized over 50 years with annual amortization of $0.4 million.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 establishes a framework for measuring fair value in accordance with generally accepted accounting principles, clarifies the definition of fair value within that framework and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, except for the measurement of share based payments. SFAS No. 157 does not expand the use of fair value in any new circumstances. For certain types of financial instruments, SFAS No. 157 requires a limited form of retrospective transition, whereby the cumulative impact of the change in principle is recognized in the opening balance in retained earnings in the fiscal year of adoption. All other provisions of SFAS No. 157 will be applied prospectively. On February 12, 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 defers the implementation of SFAS No. 157 for certain nonfinancial assets and nonfinancial liabilities. The remainder of SFAS No. 157 is effective for the Company beginning in the first quarter of fiscal year 2009. The aspects that have been deferred by FSP FAS 157-2 will be effective for the Company beginning in the first quarter of fiscal year 2010. The fiscal year 2009 adoption is not expected to have a material impact on the consolidated financial statements. The Company is currently evaluating the impact that FSP FAS 157-2 may have on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. The fair value option permits a company to choose to measure eligible items at fair value at specified election dates. A company will report unrealized gains and losses on items for which the fair value option has been elected in earnings after adoption. SFAS No. 159 was effective for the Company on January 1, 2008. The Company elected not to adopt the fair value option for any other financial assets and liabilities as permitted by SFAS No. 159.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS No. 141(R)”). The objective of SFAS No. 141(R) is to improve the information provided in financial reports about a business combination and its effects. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS No. 141(R) also requires the acquirer to recognize and measure the goodwill acquired in a business combination or a gain from a bargain purchase. SFAS No. 141(R) will be applied on a prospective basis for business combinations where the acquisition date is on or after the beginning of the Company’s 2009 fiscal year. SFAS No. 141(R) did not apply to the acquisitions of Aerex and Chen-Tech.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (“SFAS No. 160”). The objective of SFAS No. 160 is to improve the financial information provided in consolidated financial statements. SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 also changes the way the consolidated income statement is presented, establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation, requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated, and expands disclosures in the consolidated financial statements in order to clearly identify and distinguish between the interests of the parent’s owners and the interest of the noncontrolling owners of a subsidiary. SFAS No. 160 is effective for the Company’s 2009 fiscal year. The Company does not anticipate that SFAS No. 160 will have any material impact on the Company’s consolidated financial statements. However, SFAS No. 160 will modify the manner in which the Company reports on the minority interest in ZKM as the minority interest will be reclassified as a component of stockholders’ equity.
On December 30, 2008, the FASB issued FASB Staff Position (FSP) FAS 132R-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” which significantly expands the disclosures required by employers for postretirement plan assets. The FSP requires plan sponsors to provide extensive new disclosures about assets in defined benefit postretirement benefit plans as well as any concentrations of associated risks. In addition, the FSP requires new disclosures similar to those in FASB Statement 157, Fair Value Measurements, in terms of the three-level fair value hierarchy, including a reconciliation of the beginning and ending balances of plan assets that fall within Level 3 of the hierarchy. FSP FAS 132R-1 also includes a technical amendment to FASB Statement 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, to restore a provision that was inadvertently deleted by FASB Statement 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. FSP FAS 132R-1 is effective for periods ending after December 15, 2009. The disclosure requirements are annual and do not apply to interim financial statements. The technical amendment to Statement 132R was effective as of December 30, 2008.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company believes that its exposure to market risk related to changes in foreign currency exchange rates and trade accounts receivable is immaterial.
Item 8.
Item 8. Financial Statements and Supplementary Data
The response to Item 8. Financial Statements and Supplementary Data incorporates by reference the information listed in the consolidated financial statements and accompanying schedules beginning on page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Grant Thornton LLP have been the auditors of the financial statements of the Company for the fiscal years ended December 31, 2007 and 2008. It is anticipated that representatives of Grant Thornton LLP will be present at the 2009 Annual Meeting, will have the opportunity to make a statement if they so desire and will be available to respond to appropriate questions raised at the 2009 Annual Meeting or submitted to them in writing before the 2009 Annual Meeting.
KPMG LLP were the auditors of the financial statements of the Company for the fiscal year ended December 31, 2006.
Grant Thornton LLP has informed the Company that it does not have any direct financial interest in the Company and that it has not had any direct connection with the Company in the capacity of promoter, underwriter, director, officer or employee.
As is customary, auditors for the fiscal year ending December 31, 2009 will be appointed by the Audit Committee and ratified by the stockholders and by the Board of Directors at their meeting immediately following the 2009 Annual Meeting.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The disclosure controls and procedures of the Company are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers to allow timely decisions regarding disclosure.
Under the direction of the principal executive officer and the principal financial officer, the Company has evaluated the effectiveness of its disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2008. Based on that evaluation, the Company has concluded that its disclosure controls and procedures were effective in providing reasonable assurance that material information required to be disclosed is included on a timely basis in the reports filed with the Securities and Exchange Commission.
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of management’s evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Aerex and Chen-Tech were excluded from the Company’s assessment of controls and procedures due to the timing of the acquisitions.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal controls over the financial reporting of the Company. The Company’s management, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s internal controls over financial reporting based upon the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, as of December 31, 2008, management believes that the Company’s internal controls over financial reporting are operating effectively.
Item 9B.
Item 9B. Other Information
ZKM was notified in February of 2009 that one of its major customers in Poland has filed for reorganization. At this time, ZKM is unable to determine the actual risk, if any, associated with that reorganization and ZKM has received a guaranty from a third party for at least 50% of the outstanding receivables due ZKM from the reorganized company. The Company has not made any additional provision to its financial statements regarding this event.
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Ladish Co., Inc.
We have audited Ladish Co., Inc.’s (a Wisconsin Corporation) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Ladish Co., Inc.’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 Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Ladish Co., Inc.’s internal control over financial reporting based on our audit.
Our audit of, and opinion on, Ladish Co., Inc.’s internal control over financial reporting does not include internal control over financial reporting of Chen-Tech Industries, Inc. and Aerex Manufacturing, Inc., wholly owned subsidiaries, whose financial statements reflect total assets constituting 14 and 5 percent, respectively, and total revenues constituting 3 and 2 percent respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2008. As discussed in Item 9A., Evaluation of Disclosure Controls and Procedures, Chen-Tech Industries, Inc. and Aerex Manufacturing Inc. were acquired during 2008 and therefore, management’s assertion on the effectiveness of Ladish Co., Inc.’s internal control over financial reporting excluded internal control over financial reporting of Chen-Tech Industries, Inc. and Aerex Manufacturing Inc.
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, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. 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.
In our opinion, Ladish Co., Inc., except for excluded subsidiaries outlined above, maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Ladish Co., Inc. and subsidiaries as of December 31, 2008 and 2007, and the related statements of income, stockholders’ equity, and cash flows for the two years then ended and our report dated March 3, 2009 expressed an unqualified opinion.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
Milwaukee, Wisconsin
March 3, 2009
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Certain information called for by this Item is incorporated herein by reference to the sections entitled “Section 16(a) Beneficial Ownership Reporting Compliance,” “Audit Committee” and “Independent/Nominating Committee” in the Proxy Statement for the 2009 Annual Meeting of Stockholders.
The list of Executive Officers in Part I, Item 1. Business, paragraph captioned “Executive Officers of the Registrant” is incorporated by reference. The list of Directors of the Company is as follows:
Other information required by Item 401 of Regulation S-K is as follows:
Lawrence W. Bianchi, 67. Director since 1998. Mr. Bianchi in 1993 retired as the Managing Partner of the Milwaukee, Wisconsin office of KPMG LLP. From 1994 to 1998, Mr. Bianchi served as CFO of the law firm of Foley & Lardner LLP. Mr. Bianchi’s principal occupation is investments.
Lawrence C. Hammond, 61. Mr. Hammond has served as Vice President, Human Resources since January 1994. Prior to that time he had served as Director of Industrial Relations at the Company and he had been Labor Counsel at the Company. Mr. Hammond has been with the Company since 1980. He has a B.A. and a Masters in Industrial Relations from Michigan State University and a J.D. from the Detroit College of Law.
James C. Hill, 60. Director since 2003. Mr. Hill was Chairman and Chief Executive Officer of Vision Metals, Inc., a steel tubing producer, from 1997 to 2001. Prior to that period he was Corporate Vice President of Quanex Corporation, a NYSE public company and President of its Tube Group from 1983 to 1997.
Leon A. Kranz, 69. Director since 2001. Mr. Kranz was formerly President and Chief Executive Officer of Weber Metals, Inc., a Paramount, California based metals processor, a position he held for more than ten years.
Wayne E. Larsen, 54. Since 1995 Mr. Larsen has been Vice President Law/Finance and Secretary of the Company. He served as General Counsel and Secretary since 1989 after joining the Company as corporate counsel in 1981. Mr. Larsen is a Trustee of the Ladish Co. Foundation and a Director of the Wisconsin Foundation for Independent Colleges, the South Shore YMCA of Milwaukee and serves on the Advisory Board of U.S. Bank-Wisconsin. Mr. Larsen has a B.A. from Marquette University and a J.D. from Marquette Law School.
J. Robert Peart, 46. Director since 2003. Mr. Peart is Managing Director for Guggenheim Aviation Partners, LLC, a private investment concern since 2004. Prior to that period, he was Managing Director of Residco, a transportation investment banking concern.
John W. Splude, 63. Director since 2004. Mr. Splude is Executive Chairman of HK Systems, Inc., an automated material handling and logistics software provider, a position he has held for over ten years. He is also a Director of Superior Die Cast, a regent of Milwaukee School of Engineering, serves on the Advisory Board of U.S. Bank-Wisconsin and is a director of Ministry Health Care.
Randy B. Turner, 59. Mr. Turner has served as President of PCT since it was acquired by the Company in January 2000. Prior to joining the Company, Mr. Turner served as President of the corporate predecessor to PCT. He has a B.S. in Business Management from Lewis and Clark College.
Gary J. Vroman, 49. Mr. Vroman has served as President of Forging since January 1, 2008. Prior to that time, he was Vice President, Sales and Marketing of Forging since December 1995. From January 1994 to December 1995 he was General Manager of Sales. Prior to that period he had been the Product Manager for jet engine components. Mr. Vroman has been with the Company since 1982. He has a B.S. in Engineering from the University of Illinois and a M.S. in Engineering Management from the Milwaukee School of Engineering.
Kerry L. Woody, 57. Director since 1997. Mr. Woody has been President since 1995 and was appointed Chief Executive Officer of the Company in 1998. Prior to that time he was Vice President-Operations, Vice President-Manufacturing Services and Production Manager. He joined the Company in 1975. In addition, Mr. Woody serves as a regent of the Milwaukee School of Engineering and as a Trustee of the Ladish Co. Foundation. Mr. Woody has a B.S. in Engineering from Milliken University.
The Company’s ethics code is reflected in its policies addressing i) conflict of interest, ii) compliance with antitrust laws, iii) improper payments, iv) falsification of records, and v) insider trading. These policies apply to all Company employees including the principal executive officer, the principal financial officer, controller and members of the Board of Directors. On an annual basis, the Company requires its key management personnel to certify their review and compliance with these policies. A copy of the policies was filed as an exhibit to the Form 10-K on March 25, 2003. The policies can also be found on the Company’s website, www.ladishco.com.
Item 11.
Item 11. Executive Compensation
The information called for by this Item is incorporated herein by reference to the sections entitled “Executive Compensation and Other Matters,” “The Stock Option Plan,” “Pension Benefits,” “Compensation of Directors,” “Employment Agreements,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation and Stock Option Committee Report” of the Proxy Statement for the 2009 Annual Meeting of Stockholders.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by this Item is incorporated herein by reference to the sections entitled “Voting Securities and Stockholders” and “The Stock Option Plan” of the Proxy Statement for the 2009 Annual Meeting of Stockholders.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information called for by this Item is incorporated herein by reference to the section entitled “Certain Relationships” of the Proxy Statement for the 2009 Annual Meeting of Stockholders.
Item 14.
Item 14. Principal Accountant Fees and Services
The information called for by this Item is incorporated by reference to the section entitled “Audit Committee” of the Proxy Statement for the 2009 Annual Meeting of Stockholders.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
Exhibits. See the accompanying index to exhibits on page X-1 which is part of this report.
Financial Statements. See the accompanying index to financial statements and schedules on page which is a part of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Report of Independent Registered Public Accounting Firm for 2007 and 2008
Report of Independent Registered Public Accounting Firm for 2006
Consolidated Balance Sheets as of December 31, 2007 and 2008
Consolidated Statements of Operations for the years ended December 31, 2006, 2007 and 2008
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2006, 2007 and 2008
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2007 and 2008
Notes to Consolidated Financial Statements
THIS PAGE INTENTIONALLY LEFT BLANK
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Ladish Co., Inc.
We have audited the accompanying consolidated balance sheets of Ladish Co., Inc. (a Wisconsin Corporation) and subsidiaries, collectively the “Company”, as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2008. 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 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 Ladish Co., Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Ladish Co., Inc.’s internal control over financial reporting as of December 31, 2008, except for excluded subsidiaries acquired during the year, 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 3, 2009 expressed an unqualified opinion on the effectiveness of internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Ladish Co., Inc.:
We have audited the accompanying consolidated statements of operations, stockholders’ equity, and cash flows of Ladish Co., Inc. and subsidiaries (the Company) for the year ended December 31, 2006. 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 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 consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of Ladish Co., Inc. and subsidiaries for the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
Ladish Co., Inc.
Consolidated Balance Sheets
December 31, 2007 and 2008
(Dollars in Thousands Except Per Share Data)
See accompanying notes to consolidated financial statements.
Ladish Co., Inc.
Consolidated Balance Sheets
December 31, 2007 and 2008
(Dollars in Thousands Except Per Share Data)
See accompanying notes to consolidated financial statements.
Ladish Co., Inc.
Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Data)
See accompanying notes to consolidated financial statements.
Ladish Co., Inc.
Consolidated Statements of Stockholders’ Equity
(Dollars in Thousands Except Share Data)
See accompanying notes to consolidated financial statements.
Ladish Co., Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
See accompanying notes to consolidated financial statements.
Ladish Co., Inc.
Notes to Consolidated Financial Statements
(Dollars in Thousands Except Share and Per Share Data)
(a)
Consolidation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries, including the results of operations of Aerex and Chen-Tech from their respective acquisition dates. All significant intercompany accounts and transactions have been eliminated in consolidation.
The assets and liabilities of the Company’s foreign subsidiary are translated at year-end exchange rates and the related statements of earnings are translated at the average exchange rates for the respective years. Gains or losses resulting from translating foreign currencies are recorded as accumulated other comprehensive income or loss, a separate component of stockholders’ equity.
Gains or losses resulting from foreign currency transactions (transactions denominated in a currency other than the Company’s local currency) are included in net earnings, but are not significant in the years presented.
(b)
Cash and Cash Equivalents
The Company considers marketable securities with maturities of less than three months to be cash equivalents and are shown as a component of cash and cash equivalents on the balance sheets.
(c)
Outstanding Checks
Outstanding payroll and accounts payable checks related to certain bank accounts are recorded as accounts payable on the balance sheets. These checks amounted to $1,775 and $4,933 as of December 31, 2007 and 2008, respectively.
(d)
Inventories
Inventories are stated at the lower of cost, first-in, first-out (FIFO) basis, or market. Inventory values include material and conversion costs.
Inventories for the years ended December 31, 2007 and 2008 consist of the following:
(e)
Property, Plant and Equipment
Additions to property, plant, and equipment are recorded at cost. Tooling costs, along with normal repairs and maintenance, are expensed as incurred. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, as follows:
Land Improvements
39 years
Buildings and Improvements
39 years
Machinery and Equipment
5 to 20 years
Interest is capitalized in connection with construction of plant and equipment. Interest capitalization ceases when the construction of the asset is complete and the asset is available for use. Interest capitalization was $91, $795 and $2,418 in 2006, 2007 and 2008, respectively.
(f)
Goodwill and Other Intangible Assets
Goodwill represents the cost of acquired net assets in excess of their fair market values. Goodwill and other intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually in accordance with the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). Intangible assets with estimable useful lives are amortized over their respective estimated useful lives and also reviewed at least annually for impairment.
In accordance with SFAS No. 142, a two-step impairment test is required to identify potential goodwill impairment and measure the amount of the goodwill impairment loss to be recognized. In the first step, the fair value of each reporting unit is compared to its carrying value to determine if the goodwill is impaired. If the fair value of the reporting unit exceeds the carrying
value of the net assets assigned to that unit, then goodwill is not impaired and the second step is not required. If the carrying value of the net assets assigned to the reporting unit exceeds its fair value, then the second step is performed in order to determine the implied fair value of the reporting unit’s goodwill and an impairment loss is recorded for an amount equal to the difference between the implied fair value and the carrying value of the goodwill.
For the purpose of goodwill analysis, the Company has only one reporting segment, as defined by SFAS No. 142. Goodwill amounted to $8,931 and $37,113 at December 31, 2007 and 2008, respectively. The significant increase in goodwill in 2008 was due to the acquisitions of Aerex and Chen-Tech. Goodwill has been subjected to fair value impairment tests in 2006, 2007 and 2008 and no impairments were recognized.
The Company has $20,011 of amortizable customer relationships included in other intangible assets that will be amortized over 50 years with annual amortization of $400.
The Company conducted its annual impairment analysis in the third quarter of 2008. The fair value of the Company as measured by the Company market capitalization plus a control premium exceeded its carrying value. The Company reviewed that analysis at year-end and concluded it remained accurate.
The control premium that a third party would be willing to pay to obtain a controlling interest in the Company was considered when determining fair value. Management considered recent transactions with comparable companies in the industry, and possible synergies to a market participant. In addition, factors such as the capital structure and performance of competitors, which were believed to contribute to the decline in the Company’s stock price and recent volatility in the Company’s trading price prior to December 31, 2008, were also considered. Management concluded there was a reasonable basis for the excess of estimated fair value of the Company over its market capitalization.
The estimated fair value requires judgment and the use of estimates by management. Potential factors requiring assessment include a further or sustained decline in the Company’s stock price and variance in results of operations from projections. Any of these potential factors may cause the Company to re-evaluate goodwill during any quarter throughout the year. If an impairment charge were to be taken for goodwill it would be a non-cash charge and would not impact the Company’s cash position or cash flows, however, such a charge could have a material impact to equity and the statement of operations.
(g)
Fair Values of Financial Instruments
The Company considers the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable to approximate fair value because of the short maturities of these financial instruments. The fair values of the Senior Notes and the Senior Bank Debt do not materially differ from their carrying values.
(h)
Revenue Recognition
Sales revenue is recognized when the title and risk of loss have passed to the customer, there is pervasive evidence of an arrangement, delivery has occurred or the service has been provided, the sale price is determinable and collectibility is reasonably assured. This generally occurs at the time of shipment. Net sales include freight out as well as reductions for returns and allowances, and sales discounts. Progress payments on contracts are generally recognized as reductions of the related inventory costs. Progress payments in excess of inventory costs are reflected as a liability. The Company has reviewed SEC Staff Accounting Bulletin No. 104 and believes its revenue recognition policy to be in compliance with SAB 104.
(i)
Income Taxes
Deferred income taxes are accounted for under the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates. Deferred income tax provisions or benefits are based on the change in the deferred tax assets and liabilities from period to period.
(j)
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results will likely differ from those estimates, but management believes such differences are not material.
(k)
Reclassification
Certain reclassifications have been made to the 2007 financial statements to conform with the 2008 presentation.
(l)
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 establishes a framework for measuring fair value in accordance with generally accepted accounting principles, clarifies the definition of fair value within that framework and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, except for the measurement of share based payments. SFAS No. 157 does not expand the use of fair value in any new circumstances. For certain types of financial instruments, SFAS No. 157 requires a limited form of retrospective transition, whereby the cumulative impact of the change in principle is recognized in the opening balance in retained earnings in the fiscal year of adoption. All other provisions of SFAS No. 157 will be applied prospectively. On February 12, 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 defers the implementation of SFAS No. 157 for certain nonfinancial assets and nonfinancial liabilities. The remainder of SFAS No. 157 is effective for the Company beginning in the first quarter of fiscal year 2009. The aspects that have been deferred by FSP FAS 157-2 will be effective for the Company beginning in the first quarter of fiscal year 2010. The fiscal year 2009 adoption is not expected to have a material impact on the Company’s consolidated financial statements. The Company is currently evaluating the impact that FSP FAS 157-2 may have on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. The fair value option permits a company to choose to measure eligible items at fair value at specified election dates. A company will report unrealized gains and losses on items for which the fair value option has been elected in earnings after adoption. SFAS No. 159 was effective for the Company on January 1, 2008. The Company elected not to
adopt the fair value option for any other financial assets and liabilities as permitted by SFAS No. 159.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS No. 141(R)”). The objective of SFAS No. 141(R) is to improve the information provided in financial reports about a business combination and its effects. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS No. 141(R) also requires the acquirer to recognize and measure the goodwill acquired in a business combination or a gain from a bargain purchase. SFAS No. 141(R) will be applied on a prospective basis for business combinations where the acquisition date is on or after the beginning of the Company’s 2009 fiscal year. SFAS No. 141(R) did not apply to the acquisitions of Aerex and Chen-Tech.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (“SFAS No. 160”). The objective of SFAS No. 160 is to improve the financial information provided in consolidated financial statements. SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 also changes the way the consolidated income statement is presented, establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation, requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated, and expands disclosures in the consolidated financial statements in order to clearly identify and distinguish between the interests of the parent’s owners and the interest of the noncontrolling owners of a subsidiary. SFAS No. 160 is effective for the Company’s 2009 fiscal year. However, SFAS No. 160 will modify the manner in which the Company reports on the minority interest in ZKM as the minority interest will be reclassified as a component of stockholders’ equity.
On December 30, 2008, the FASB issued FASB Staff Position (FSP) FAS 132R-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” which significantly expands the disclosures required by employers for postretirement plan assets. The FSP requires plan sponsors to provide extensive new disclosures about assets in defined benefit postretirement benefit plans as well as any concentrations of associated risks. In addition, the FSP requires new disclosures similar to those in FASB Statement 157, Fair Value Measurements, in terms of the three-level fair value hierarchy, including a reconciliation of the beginning and ending balances of plan assets that fall within Level 3 of the hierarchy. FSP FAS 132R-1 also includes a technical amendment to FASB Statement 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, to restore a provision that was inadvertently deleted by FASB Statement 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. FSP FAS 132R-1 is effective for periods ending after December 15, 2009. The disclosure requirements are annual and do not apply to interim financial statements. The technical amendment to Statement 132R was effective as of December 30, 2008.
(m)
Investments
Investments in marketable securities are stated at fair value. Investments with no readily determinable fair value are carried at cost. Fair value is determined using quoted market prices at the end of the reporting period and, when appropriate, exchange rates at that date. Unrealized gains and losses on marketable securities classified as available-for-sale are recorded in accumulated other comprehensive income, net of tax. If the decline in fair value is judged to be other-than-temporary, the cost basis of the security is written down to fair value and the amount of the write-down is included in the consolidated statements of operations.
Investment securities are exposed to various risks including, but not limited to, interest rate and market and credit risks. Due to the level of risks associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term.
The Company regularly reviews its investments to determine whether a decline in fair value below the cost basis is other-than-temporary. To determine whether a decline in value is other-than-temporary, the Company evaluates several factors, including current economic environment, market conditions, operational and financial performance of the investee, and other specific factors relating to the business underlying the investment, including business outlook of the investee, future trends in the investee’s industry and the Company’s intent to carry the investment for a sufficient period of time for any recovery in fair value. If a decline in value is deemed as other-than-temporary, the Company records reductions in carrying values to estimated fair values, which are determined based on quoted market prices if available or on one or more of the valuation methods such as pricing models using historical and projected financial information, liquidation values, and values of other comparable public companies.
Investments, all of which are classified as available-for-sale, are stated at fair value based on market quotes, when available. Unrealized gains and losses, net of deferred taxes, are recorded as a component of other comprehensive income.
Long Term Debt Repayment Schedule
(4)
Stockholders’ Equity
The treasury shares represent shares of common stock of the Company which the Company repurchased on the open market. The value reflects the purchase price for those shares.
The Company has a Long-Term Incentive Plan (the “Stock Option Program”) that covers certain employees. Under the Stock Option Program, incentive stock options for up to 983,333 shares may be granted to employees of the Company of which 943,833 options have been granted. These options expire ten years from the grant date. For the years 2007 and 2008, no options were granted under the Stock Option Program. As of December 31, 2008, 6,336 options granted under the Stock Option Program are fully vested and remain outstanding.
During 2006, 2007 and 2008, 187,914, 33,500 and 26,000 shares of common stock, respectively, were issued from treasury stock for the exercise of stock options. The shares had a cost of $7.32 per share. In 2006, 2007 and 2008, the difference of $331, $44 and $24, respectively, between the cost of the shares released from treasury stock and the cash proceeds from the exercise of stock options was credited to additional paid-in capital, a component of stockholders’ equity. During the years ending December 31, 2006, 2007 and 2008, the Company received $1,707, $289 and $215, respectively, from the exercise of employee stock options.
The options outstanding were all granted and fully vested prior to the effective date of SFAS No. 123, Accounting for Stock-Based Compensation, amended by SFAS No. 123(R), Share Based Payments, and were accounted for under the provisions of APB No. 25 “Accounting for Stock Issued to Employees.” As such, there is no stock compensation expense for the remaining options.
A summary of options for 2006, 2007 and 2008 is as follows:
The options outstanding and exercisable as of December 31, 2008 consist of the following:
(c)
Comprehensive Income
Comprehensive income is defined as the sum of net income and all other non-owner charges in equity. The components of the non-owner charges in equity, or accumulated other comprehensive income (loss) were as follows (net of tax):
(d)
Additional Paid-In Capital
In 2008, the Company recognized a deferred tax liability of $5,498 which related to an IRS audit adjustment for 1987. As the adjustment related to a time period prior to the Company’s reorganization in 1993, under fresh-start accounting, the adjustment is charged to paid-in capital instead of the current tax provision.
(5)
Research and Development
Research and development expenses were $3,191, $2,907 and $3,061 in 2006, 2007 and 2008, respectively. Customers reimbursed the Company for $1,614, $1,175 and $1,282 of research and development expenses in 2006, 2007 and 2008, respectively. The expenses and related reimbursement are included in cost of sales on the statements of operations.
Certain office and warehouse facilities and equipment are leased under noncancelable operating leases expiring on various dates through the year 2018. Rental expense was $342, $370 and $630 in 2006, 2007 and 2008, respectively.
Minimum lease obligations under noncancelable operating leases are as follows:
Certain equipment are leased under noncancelable capital leases maturing on various dates through the year 2013. These leases were a part of the Chen-Tech acquisition in 2008. Interest rates range from 5.64% to 7.4%. As of December 31, 2008, the current and long-term obligations are $423 and $1,237, respectively. The current obligations are included in other accrued liabilities and the long-term obligations are included in other noncurrent liabilities on the balance sheets.
Minimum lease obligations under noncancelable capital leases are as follows:
The Company utilized the remaining $2,142 of domestic net operating loss (“NOL”) carryforwards to reduce taxable income in 2008. Pursuant to FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes,” the Company recorded a deferred tax liability and an accompanying charge to income tax expense for $546 in connection with research and development tax credits recognized during 2008. The Company has not recognized any charge for interest or penalties with regard to the foregoing deferred tax liability. In addition, the Company recognized a fixed asset tax basis adjustment that occurred prior to its reorganization resulting in a tax effected deferred tax liability of $5,498 in 2008 with a corresponding reduction in paid-in capital. The Company has total net deferred income tax assets of $21,312 and $26,660 as of December 31, 2007 and 2008, respectively.
As of December 31, 2008, ZKM has net deferred Polish income tax assets totaling $2,060 which include $1,799 of foreign economic zone credits and the net realizable value of $92 of NOL carryforwards that existed prior to Ladish’s acquisition of ZKM. The foreign economic zone credits expire in 2017 and the NOLs expire in 2009. Prior to 2007, the Company had determined that it was not more likely than not that the ZKM NOLs would be utilized, therefore, a valuation allowance was provided to reduce the benefit of the ZKM net deferred income tax assets to zero. In 2007, in consideration of its recent earnings history and expectations of future profitability, all of the valuation allowance against the net deferred tax assets was reversed resulting in an $875 reduction in income tax expense.
Realization of the domestic net deferred tax assets over time is dependent upon the Company generating sufficient taxable income in future periods. In determining that realization of the net deferred tax assets was more likely than not, the Company gave consideration to a number of factors including its recent earnings history, expectations for earnings in the future, the timing of reversal of temporary differences, tax planning strategies available to the Company and the expiration dates associated with NOL carryforwards. If, in the future, the Company determines that it is no longer more likely than not that the domestic net deferred tax assets will be realized, a valuation allowance will be established against all or part of the net deferred tax assets through a charge to the income tax provision.
Certain deferred tax liabilities associated with the acquisitions of Aerex and Chen-Tech will be recorded against goodwill, in lieu of income taxes, when recognized.
The components of net deferred income tax assets for the years ended December 31, 2007 and 2008 are as follows:
A reconciliation of the Federal statutory tax rate to the Company’s effective tax rate for the years ended December 31, 2006, 2007 and 2008 is as follows:
The Extra-Territorial Income Exclusion is a statutory deduction related to the Company’s export sales from the United States.
The Domestic Production Activities Deduction is a statutory deduction limited to income arising from qualified production activities based in the United States
The components of income tax expense (benefits) for the years ended December 31, 2006, 2007 and 2008 are as follows:
The Company has not provided additional U.S. income taxes on $8,687 of undistributed earnings of its Polish subsidiary, ZKM, included in stockholders’ equity. Such earnings could become taxable upon the sale or liquidation of ZKM or upon dividend repatriation. The Company’s intent is for such earnings to be reinvested by ZKM or to be repatriated only when it would be tax effective through the utilization of foreign tax credits.
The Company has not been notified of any audit of its U.S. or state tax returns. Returns for the years 2004-2008 are still open. The Company has not made any provision on its financial statements for interest or penalties for tax years still open.
(8)
Pensions and Postretirement Benefits
The Company has noncontributory defined benefit pension plans (“Plans”) covering a number of its employees. Plans covering salaried and management employees provide pension benefits that are based on the highest five consecutive years of an employee’s compensation during the last ten years prior to retirement. Plans covering hourly employees and union members generally provide benefits of stated amounts for each year of service. The Company’s funding policy is to contribute annually an amount equal to or greater than the minimum amount required under the Employee Retirement Income Security Act of 1974. The Company contributed $11,797 and $8,955 to the Plans in 2007 and 2008, respectively, and the Company expects to contribute $8,309, $10,000 and $10,000 in 2009, 2010 and 2011, respectively, to the Plans. The Plans’ assets are primarily invested in U.S. Government securities, investment grade corporate bonds and marketable common stocks. The Plans may hold shares of the Company’s common stock, which comprise less than ten percent of any individual plan’s total assets. The market value of Company shares held in all Plans as of December 31, 2007 and 2008 total $12,957 and $4,692, respectively. On January 3, 2007, the Company contributed 300,000 shares of common stock of the Company with a market value of $11,124 to the Plans. On September 10, 2008, the Company contributed 38,788 shares of the Company with a market value of $915 to the Plans.
A summary of the Plans’ asset allocation at December 31, 2007 and 2008 is as follows:
The Plans’ target asset allocation percentages are fixed income 50% and equities 50%. The variance from the target in 2008 was due to the decline in the U.S. equity market in 2008.
In addition to pension benefits, a number of the Company’s employees are provided certain postretirement healthcare and life insurance benefits. The employees may become eligible for these benefits when they retire. The Company accrues, as current costs, the future lifetime retirement benefits for both active and retired employees and their dependents. Steps have been taken by the Company to reduce the amount of the future obligation for pensions and postretirement healthcare benefits of future retirees by capping the amount of funds payable on behalf of the retirees.
The benefits estimated to be paid in the next five years for the pension plans range between $15,900 and $16,400 per year and for years six through ten in aggregate total $75,800. For postretirement healthcare and life insurance benefits, the estimated benefit payments over the next five years approximate $3,400 per year and $13,800 in aggregate for years six through ten.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was enacted. In May 2004, the FASB issued FASB Staff Position No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of in response to the new law which may provide a federal subsidy to sponsors of retiree healthcare benefit plans. The Company has concluded that certain benefits provided by its postretirement benefit plan are actuarially equivalent to Medicare Part D under the Act and has filed a refund request with the Claims Management Services, a division of the Health and Human Services Department. Refunds of $172 and $169 have been received in 2007 and 2008, respectively.
Certain officers have deferred compensation agreements (the “Officers Plan”) which, upon retirement, provide them with, among other things, supplemental pension and other postretirement benefits. An accumulated unfunded liability of $5,968 and $6,823 as of December 31, 2007 and 2008, respectively, has been recorded under these agreements as actuarially determined. The expense was $427, $440 and $552 in 2006, 2007 and 2008, respectively.
The Company has established a Rabbi Trust for the beneficiaries of the Officers Plan to fund a portion of the benefits earned under the Officers Plan. The Rabbi Trust does not hold any Company stock and is considered in the calculations determined by the actuary. The Rabbi Trust had assets of $382 and $217 as of December 31, 2007 and 2008, respectively, and are included in other assets on the balance sheets. The investments are held on the balance sheet and are considered available for sale securities. The unrealized gain or loss on these investments is recognized as a component of other comprehensive income.
Upon the early adoption of FASB No. 158, as of December 31, 2006, the Company changed the measurement date to December 31 for all pension and postretirement benefit plans.
The following is a reconciliation of the change in benefit obligation and Plans assets for the years ended December 31, 2007 and 2008:
The total accumulated pension benefit obligation for the Plans is $201,030 and $197,930 at December 31, 2007 and 2008, respectively. All of the individual Plans and the Officers Plan have accumulated benefit obligations exceeding the fair value of the Plans assets at December 31, 2008.
The amounts in accumulated other comprehensive loss that have not yet been recognized as components of net periodic benefit cost at December 31, 2008 are as follows:
The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost during 2009 are as follows:
The components of the net periodic benefit costs (income) for the years ended December 31, 2006, 2007 and 2008 are:
Assumptions used in the determination of net periodic benefit costs for these years are:
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the postretirement healthcare plans. The Company assumes annual increases of 0% on life insurance, 7% on pre-65 healthcare and 5% on post-65 healthcare. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects:
As a result of union labor renegotiations finalized during 2000, the benefits in certain Company sponsored pension plans were frozen and replaced with comparable benefits in national multi-employer plans not administered by the Company. The Company contributed $2,136 and $2,582 to these plans during 2007 and 2008, respectively. Should the Company cease to participate in these plans it could be subject to a withdrawal liability.
ZKM sponsors an unfunded retirement plan and the Company has estimated ZKM’s liability for this plan to be approximately $3,589 and $3,044 at December 31, 2007 and 2008, respectively. The Company has included ZKM’s estimated liability in the pension liability in the consolidated balance sheets.
(9)
Deferred Compensation
As a part of the total compensation program at the Company, a number of nonqualified plans have been adopted which entail a portion of deferred compensation. For the individuals participating in these deferred compensation programs, the deferred portion of their salary and/or incentive pay has been placed into a Rabbi Trust for the benefit of those individuals until such time as the assets are payable pursuant to the terms of the deferred compensation programs. In the event of a liquidation of the assets of the Company, the assets placed in the Rabbi Trusts are subject to the general claims of creditors of the Company. The deferred compensation assets held in the Rabbi Trusts amounted to $2,270 and $2,461 as of December 31, 2007 and 2008, respectively, and are included as a part of other assets on the consolidated balance sheets of the Company. The obligation to release these assets to participating
individuals is reflected as a part of other noncurrent liabilities on the consolidated balance sheets of the Company. The investments are held on the balance sheet and are considered available for sale securities. The unrealized loss/gain on the Rabbi Trust assets amounted to $788 in 2008 and is recorded net of tax as other comprehensive income on the balance sheets.
Forging has a profit sharing program in which substantially all of the employees are eligible to participate. The profit sharing payout is derived from a formula based on net income and is payable no later than February 15th of the subsequent year. The expense was $2,456, $2,759, and $1,517 in 2006, 2007 and 2008, respectively. PCT has a profit sharing program in which all employees are eligible to participate. The profit sharing pool is calculated based on various internal operating measurements. The expense was $413, $553 and $368 in 2006, 2007 and 2008, respectively. For Stowe, a profit sharing program for all employees had an expense of $135, $158 and $64 in 2006, 2007 and 2008, respectively. Profit sharing at Aerex and Chen-Tech for 2008 was provided by the former owners of each business.
(a)
The Company is involved in various stages of investigation relative to environmental protection matters relating to various waste disposal sites. The potential costs related to such matters and the possible impact thereof on future operations are uncertain due in part to uncertainty as to the extent of the pollution, the complexity of laws and regulations and their interpretations, the varying costs and effectiveness of alternative cleanup technologies and methods, and the questionable level of the Company’s involvement. The Company has an accrual of $300 at December 31, 2008, included in other noncurrent liabilities on the consolidated balance sheets of the Company, for potential losses related to these matters. The Company does not anticipate such losses will have a material impact on the financial statements beyond the aforementioned provisions.
(b)
The Company has been named as a defendant in a number of asbestos cases in Mississippi, six cases in Illinois, one case in Wisconsin and one case in California. As of December 31, 2008, the Company has been dismissed from the case in California and a majority of the claims in Mississippi, and has two claims remaining in Illinois and one in Wisconsin. The Company has notified its insurance carriers of these claims and is vigorously defending these actions. The Company has never manufactured or processed asbestos. The Company’s only exposure to asbestos involves products the Company purchased from third parties. The Company has not made any provision in its financial statements for the asbestos litigation.
(c)
The Company is participating in an investigation initiated by U.S. Customs & Border Protection (“Customs”) into duty drawback claims filed on behalf of the Company by its former export agent. The Company is cooperating with Customs in this investigation and has voluntarily suspended its duty drawback claims. Based upon its internal investigation, the Company believes any errors or omissions with respect to its filings were solely attributable to its former export agent. The Company intends to continue to cooperate with Customs in resolving this matter. The Company has not made any provision in its financial statements for the Customs investigation.
(d)
The Company has unconditional fixed price purchase obligations (take-or-pay contracts) of approximately $47,048 comprising of commitments to purchase natural gas of approximately $22,768 and raw material of approximately $24,280. These obligations are for purchases necessary to fulfill the Company’s production backlog. None of these obligations may be net settled. The Company’s future commitments approximate $35,069 in 2009, $7,986 in 2010 through 2011, and $3,993 in 2012 and beyond. During 2006, 2007 and 2008, the Company fulfilled its minimum contractual purchase obligations for those periods.
(e)
ZKM was notified in February of 2009 that one of its major customers in Poland has filed for reorganization. At this time, ZKM is unable to determine the actual risk, if any, associated with that reorganization and ZKM has received a guaranty from a third party for at least 50% of the outstanding receivables due ZKM from the reorganized company. The Company has not made any additional provision to its financial statements regarding this event.
Various other lawsuits and claims arising in the normal course of business are pending against the Company and losses that might result from such actions are not expected to be material to the financial statements.
Since 1995, the Company has participated in a joint venture with Weber Metals, Inc. (“Weber”). The joint venture is directed toward serving the jet engine market by combining the Company’s technology and market presence with Weber’s unique equipment. A director of the Company is the former chief executive officer of Weber. The Company’s payments to Weber under the joint venture were $967, $643 and $367 in 2006, 2007 and 2008, respectively. The joint venture has no assets or liabilities.
The Company has entered into a long-term lease for the Irvine, California facilities occupied by Chen-Tech from the former owners of Chen-Tech for an annual rental of $504. One of the former owners of Chen-Tech is continuing to serve as President of Chen-Tech.
Basic earnings per share of common stock are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share of common stock are computed by dividing net income by the weighted average number of common shares and common share equivalents related to the assumed exercise of stock options and warrants, using the treasury stock method.
The following shares were used to calculate basic and diluted earnings per share for the years ended December 31, 2006, 2007 and 2008:
Goodwill and amortizable intangibles for both acquisitions are not deductible for income tax purposes.
The amortizable intangibles for both acquisitions are composed of customer relationships which will be amortized over 50 years.
For both of the acquisitions, the number of shares was determined by the average thirty-day closing price prior to the acquisition closing dates.
It is contemplated that any final purchase price allocations, for each of the acquisitions, that have not been finalized, will be inconsequential in amount.
(15)
Quarterly Results of Operations (Unaudited)
The following table sets forth unaudited consolidated income statement data for each quarter of the Company’s last two fiscal years. The unaudited quarterly financial information has been prepared on the same basis as the annual information presented in the financial statements and, in management’s opinion, reflects all adjustments (consisting of normal recurring entries) necessary for a fair presentation of the information provided. The operating results for any quarter are not necessarily indicative of results for any future period.
Per share amounts for the quarters and the full years have each been calculated separately. Accordingly, quarterly amounts may not add to the annual amounts because of differences in the average shares outstanding in each period.
(16)
Valuation and Qualifying Accounts
INDEX TO EXHIBITS
X-1
X-2