Item 1. Business.
General
K-Tron International, Inc. is a New Jersey corporation founded in 1964, and our Common Stock trades on the NASDAQ Global Select Market under the symbol KTII. We are engaged in one principal business segment, which is material handling equipment and systems, and our operations are conducted largely through subsidiary companies. We have manufacturing facilities in the United States, Switzerland and the People’s Republic of China (“China”), and our equipment is sold and serviced throughout the world.
We serve the bulk solids material handling markets through two separate business lines (“business lines”). These two business lines focus primarily on feeding and pneumatic conveying equipment (our “Process Group”) and on size reduction equipment, conveying systems and screening equipment (our “Size Reduction Group”). Our material handling equipment is used in a wide variety of manufacturing and other industrial processes, particularly in the plastics, food, chemical, pharmaceutical, power generation, coal and minerals mining, pulp and paper, wood and forest products, and biomass energy generation industries. We design, produce, market and service this equipment, and we sell it both on a stand-alone basis and as part of larger systems that we design and sell. Replacement parts are an important aspect of all of our businesses, and they comprise a majority of the sales of our Size Reduction Group.
Proposed Merger
On January 8, 2010, Hillenbrand, Inc., an Indiana corporation (“Hillenbrand”), Krusher Acquisition Corp., a New Jersey corporation and wholly-owned subsidiary of Hillenbrand (“Merger Sub”), and K-Tron International, Inc., entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which, among other things, Merger Sub will merge with and into K-Tron, the separate corporate existence of Merger Sub shall cease and K-Tron shall be the surviving corporation of the merger (the “Merger”). The closing of the Merger is subject to certain customary closing conditions specified in the Merger Agreement.
Upon the consummation of the Merger, (i) K-Tron will become a wholly-owned subsidiary of Hillenbrand and (ii) each share of our Common Stock will be converted into the right to receive $150.00 in cash (as may be increased in certain limited circumstances as set forth in the Merger Agreement) (the “Merger Consideration”). In addition, options to acquire our Common Stock, Company restricted stock unit awards and shares of our unvested restricted Common Stock, in each case that are outstanding immediately prior to the consummation of the Merger, will be converted into the right to receive cash based on the Merger Consideration and the formulas contained in the Merger Agreement. A proxy statement has been mailed to each of our shareholders on or about March 1, 2010 containing important information regarding K-Tron, Hillenbrand and the proposed Merger.
Available Information
We maintain a website at http://www.ktroninternational.com. We make available free of charge through the Investor Relations section of our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). We include our website address in this annual report on Form 10-K only as an inactive textural reference and do not intend it to be an active link to our website. The material on our website is not part of our annual report on Form 10-K. You may also obtain a free copy of these reports and amendments by contacting Robert E. Wisniewski, Senior Vice President and Chief Financial Officer, at K-Tron International, Inc., Routes 55 and 553, P.O. Box 888, Pitman, New Jersey 08071-0888.
Process Group
Our Process Group designs, produces, markets, sells and services both feeders and pneumatic conveying equipment, and it markets and sells this equipment under two main brands: K-Tron Feeders and K-Tron Premier. We also design, produce, market and sell a separate line of feeders and ancillary equipment for the domestic market in China under the brand name K-Tron Colormax.
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Our feeding equipment, which is sold under the K-Tron Feeders brand, controls the flow of materials into a manufacturing process by weight (known as gravimetric feeding) or by volume (known as volumetric feeding) and is used in many different industries, including the plastics compounding, base resin production, food, chemical and pharmaceutical industries. This feeding equipment is sold throughout the world by 87 independent sales representatives with exclusive territories, by Company-owned sales companies in China, France, Germany, Singapore and the United Kingdom and directly from the factory in other locations which are not covered by either of these distribution channels.
On August 1, 2009, we started operating a Company-owned sales company in Shanghai, China under the name K-Tron (Shanghai) Co., Ltd. (“K-Tron Shanghai”). The K-Tron Shanghai entity allows the Process Group to market and sell K-Tron Feeders and K-Tron Premier brand products to Chinese customers in local currency. K-Tron Shanghai replaced the Representative Office in Shanghai that we had been operating since 1996 and closed with the commencement of the operations of K-Tron Shanghai.
Our Process Group markets and sells both stand-alone feeders and engineered systems where one or more feeders are combined with other complementary material handling equipment.
Our pneumatic conveying equipment, which is sold under the K-Tron Premier brand, addresses a broad range of pneumatic conveying applications that involve the handling of bulk solids. Our K-Tron Premier equipment and systems transport bulk solids from one point to another point with negative pressure (known as vacuum conveying) or with positive pressure (known as pressure conveying) and are used in many industries, including those served by the K-Tron Feeders brand. This pneumatic conveying equipment is sold primarily in North America using the same independent sales representatives that sell our K-Tron Feeders brand feeding equipment. We also sell our K-Tron Premier products outside of North America through many of the same channels used for our K-Tron Feeders brand.
We have contracts with our independent sales representatives which provide for specific commissions or in situations where a representative is acting as a distributor, net transaction prices, depending on the type of product sold. Discounting below our target margin is uncommon, but when it occurs, our representative may be asked to share the cost and our distributor may receive a lower transaction price from us. Revenue is recorded after subtracting what, if any, discount or lower transaction price applies.
Process Equipment: K-Tron Feeders Brand
Feeding Equipment. Our Process Group markets single and twin-screw feeders, belt feeders and vibratory feeders under the K-Tron Feeders brand. We offer these feeder types in a number of different designs, sizes and finishes to meet the requirements of a given material handling application and to assure compliance with applicable industry codes and specifications. In addition, these feeders are available in both a volumetric mode, where the flow of material is controlled by volume, and a gravimetric mode, where the flow of material is controlled either by weight or loss of weight over a defined time period. Gravimetric feeders, which represent the majority of our feeding equipment sales, are typically used in premium applications where short-term accuracy in the feeding of raw materials is essential to produce a high-quality end product.
Our Process Group also offers a unique type of feeder, which we refer to as the BSP or Bulk Solids Pump. The BSP is based on technology which we have licensed from a third party on a worldwide basis in the fields of use relevant to our process business. The BSP feeder does not utilize the usual screws, belts or vibratory trays to convey material but instead relies upon positive displacement action to accurately feed free-flowing materials, offering uniform discharge, consistent volume and gentle handling.
In addition to feeders, we also produce mass flow meters which measure and control the flow of material from a storage vessel. Our flow meters have no moving parts and therefore require little maintenance, and they do not need to be calibrated to a specific mass flow range.
All of our K-Tron Feeders brand equipment models have been developed by our own internal research and development group.
Weight Sensors and Controls. The performance of gravimetric feeders depends to a great extent on the weighing and control systems being used. Our proprietary weight sensors, known as Smart Force Transducers, are based on a vibrating wire technology. These load cells have evolved over many years into today’s rugged and drift-free weighing systems. When combined with our proprietary control system, known as SmartConnex, they constitute what we believe to be one of the most accurate systems generally available for gravimetric feeding.
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Manufacturing. Our Process Group produces a number of feeder designs which are then adapted to meet a customer’s particular specifications. Customization generally is limited to combining standard mechanical and electrical modules to meet the process and regulatory requirements of the customer. Our primary manufacturing activities consist of the assembly and final testing of feeders and related equipment. We assemble a number of components used in our feeder products that are manufactured by others to our specifications. These outsourced components include sheet metal parts, feeder screws, castings, electric motors and electronic assemblies. We also manufacture the vibrating wire load cells that are used in our gravimetric feeders. Our K-Tron Feeders brand feeding equipment and systems are assembled and tested at our facilities in Pitman, New Jersey and Niederlenz, Switzerland.
Competition. Based in part on independent market studies, we believe that our Process Group is the leading worldwide producer of feeders and related equipment for the handling of bulk solids in manufacturing processes, and we believe that we have reached this position primarily because of our use of digital control technology and digital weighing technology, our development of mechanical design improvements to our products and our extensive knowledge of material handling applications. We also rely on our global service network, our quality reputation and our many years of experience in serving the needs of our large customer base to maintain a competitive advantage. Strong competition exists in nearly every major geographic and industrial market that we serve. Competitors range in size from a significant, privately-held corporation with a broad line of products to smaller companies with a global presence and regional firms that often specialize in a limited range of products.
Process Equipment: K-Tron Premier Brand
Conveying Equipment. Our Process Group markets a full line of pneumatic conveying equipment, including loaders, blower packages, diverter valves, rotary valves, in-line filters and other ancillary equipment. These products, which are marketed under the K-Tron Premier brand, are offered in a number of different designs, sizes and finishes to meet the requirements of a given material handling application and to assure compliance with applicable industry codes and specifications. Products are sold stand-alone to customers and resellers who then install them in one of their systems, or as part of customer and application-specific engineered systems that we design. Our pneumatic conveying systems convey material by positive pressure where the material is blown to a storage vessel, or by negative pressure where the material is transferred by vacuum to a storage vessel. Among the applications for engineered systems are railcar and truck unloading systems, where high volumes of bulk solids are typically moved by positive pressure from railcars or trucks to intermediate storage containers, and intermediate storage-to-production line transfer systems, where bulk solids are typically transported by vacuum at lower volumes to the production line.
Our Process Group markets pneumatic conveying systems under the K-Tron Premier brand to a number of different markets and industries, including many of the ones that we serve with our feeding equipment.
Manufacturing. Our pneumatic conveying equipment manufacturing activities consist of machining and welding raw materials and castings into machined parts, and assembling these parts together with components purchased from outside suppliers into loaders, rotary valves, diverter valves and other related equipment. We produce a number of standard pneumatic conveying and related products that are then adapted to meet a customer’s particular specifications. Customization generally is limited to combining standard mechanical and electrical modules to meet the process and regulatory requirements of the customer. Our pneumatic conveying equipment and systems are assembled and tested at our facilities in Salina, Kansas, Pitman, New Jersey and Niederlenz, Switzerland.
Competition. Strong competition with respect to pneumatic conveying equipment exists in every major geographic and industrial market that we serve. Competitors range in size from larger companies with national or international markets and a broad line of products to smaller companies serving a regional market or specializing in a limited range of products or applications. Many of our competitors are privately held. We believe that we are one of the leading suppliers of pneumatic conveying equipment and systems to the plastics industry in the United States and to the food and pharmaceutical industries in the United Kingdom.
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Process Equipment: Service and Parts
Our Process Group has a global service network that enables us to respond to customer calls with respect to our K-Tron Feeders brand and K-Tron Premier brand feeding and pneumatic conveying equipment within 24 hours almost anywhere in the world. We also sell parts to our customers, and our service and parts business associated with our sales of feeding and pneumatic conveying equipment is an important source of revenue for us. In addition to equipment, service and parts, we offer training to our customers, sales representatives and employees with respect to our K-Tron Feeders brand and K-Tron Premier brand feeding and pneumatic conveying equipment at our K-Tron Institute, which is based at our facilities in Pitman, New Jersey and Niederlenz, Switzerland, and through courses offered by the Institute in other locations, including at customer sites.
Process Equipment: K-Tron Colormax Brand
Our Process Group serves the domestic plastics compounding and injection molding markets in China through our Wuxi K-Tron Colormax Machinery Co., Ltd. (“Wuxi K-Tron Colormax”) subsidiary. Following the formation of Wuxi K-Tron Colormax in 2007 and the purchase by it of certain assets from a privately-owned Chinese company, we created the brand name K-Tron Colormax to market a line of volumetric and gravimetric feeders, pelletizers, screen changers and other equipment specifically targeted at domestic Chinese compounding and injection molding manufacturers. In 2008, we expanded the K-Tron Colormax product line by adding the pneumatic conveying equipment product line from our discontinued Colormax Limited operations in the United Kingdom.
Most of the products sold under the K-Tron Colormax brand are designed and manufactured by Wuxi K-Tron Colormax, which has a manufacturing facility in Wuxi, China. K-Tron Colormax brand products are marketed to end users and resellers in China by salespeople employed by Wuxi K-Tron Colormax. Feeders produced under our K-Tron Colormax brand, unlike those of our K-Tron Feeders brand, use third-party strain gauge load cells for weighing. They also use a lower-cost controller specifically developed by our Process Group’s research and development group for gravimetric feeding in the China domestic market. We believe that feeders produced using this more economical construction of weighing and control technologies meet the accuracy requirements of this market. To the extent that greater accuracy is required, we sell our K-Tron Feeders brand equipment in China through resellers, such as engineering firms that are based in Europe and the United States, through independent sales representatives in China, none of whom represent the K-Tron Colormax brand, and through our new K-Tron Shanghai sales company, which also does not represent the K-Tron Colormax brand.
In June 2009, we signed an agreement with an independent representative in India to sell K-Tron Colormax products in India.
K-Tron Electronics
K-Tron Electronics, which is part of our Process Group, designs, produces and tests electronic assemblies for use by us in our Process Group manufacturing facilities and also to sell to third parties, generally focusing on small production runs for customers in New Jersey, eastern Pennsylvania and Delaware. Its facilities, which are located in Pitman, New Jersey, provide both automated surface mount and through-hole assembly capabilities, as well as testing equipment. The regional market for electronic assemblies is large, and K-Tron Electronics is one of many suppliers to this market.
Size Reduction Group
Our Size Reduction Group consists of our U.S.-based subsidiaries Pennsylvania Crusher Corporation (“Penn Crusher”), Gundlach Equipment Corporation (“Gundlach”) and Jeffrey Rader Corporation (“Jeffrey Rader”). Jeffrey Rader also has two sales subsidiaries in Canada and Sweden. On January 1, 2009, our subsidiary, Rader Companies, Inc. (“Rader”), was merged with and into our subsidiary, Jeffrey Specialty Equipment Corporation (“Jeffrey”), and Jeffrey changed its name to Jeffrey Rader Corporation in connection with the merger. Our former Jeffrey and Rader brands of equipment are now marketed as Jeffrey Rader brand equipment.
All of our Size Reduction Group companies design, manufacture, market and sell size reduction equipment, such as hammermills, wood hogs and double roll crushers. This equipment is used to resize various materials to a given smaller size, and the principal industries served are the power generation, coal and minerals mining, pulp and paper and wood and forest products industries. Jeffrey Rader also provides the pulp and paper and biomass energy generation industries with screening equipment, conveying systems and other products, and it sells a feeder/delumper used by petrochemical companies in the production of polyethylene and polypropylene.
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Penn Crusher Equipment. Penn Crusher manufactures size reduction and related equipment for the power generation industry to crush coal before it is used as fuel in the steam furnaces of coal-fired power plants, and it also serves other industries such as mining, quarrying and glass making. Penn Crusher sells its equipment worldwide through 38 independent sales representatives, with a primary focus on the United States and China. We have contracts with our independent sales representatives which provide for specific commission rates to be paid to the representative based on the type of product sold. Discounting below our target margin is uncommon, but when it occurs, our representative may be asked to share the cost. Revenue is recorded after subtracting what, if any, discount applies.
The crushers most commonly sold by Penn Crusher are hammermills, in which the material is broken by impact from hammers and then scrubbed against a screen for desired size. Penn Crusher manufactures a number of different hammermill designs, such as granulators, that use rows of ring hammers to crush with a slow, positive rolling action, and other crushers such as Bradford breakers, in which the material is crushed by gravity impact only. Penn Crusher also manufactures its MountaineerÔ Sizer which is used for primary or secondary crushing of coal and other non-metallic materials in mining operations. Crushers come in a wide variety of sizes and configurations, and each machine is built-to-order to meet the customer’s specifications.
Penn Crusher also manufactures and markets a positive displacement action feeder using the same licensed technology that is the basis of our Process Group’s Bulk Solids Pump. Penn Crusher owns the exclusive rights to utilize this technology in feeders of 24-inch diameter and larger in low-pressure applications for markets in the United States, Canada and Mexico. These feeders are used primarily to feed coal into pulverizers in coal-fired power plants, and they also feed limestone into raw mills in the cement industry.
Gundlach Equipment. Gundlach manufactures size reduction equipment for the coal mining industry, and its equipment is also used to crush coal and other minerals in coal-fired power stations, salt processing plants, fertilizer manufacturing facilities and other industrial applications. Gundlach sells its equipment worldwide through 16 independent sales representatives, with a focus on the U.S. and South American markets. We have contracts with our independent sales representatives which provide for specific commission rates to be paid to the representative based on the type of product sold. Discounting below our target margin is uncommon, but when it occurs, our representative may be asked to share the cost. Revenue is recorded after subtracting what, if any, discount applies.
The crushers most commonly sold by Gundlach are double roll crushers, in which the material is broken by compression resulting in minimal fines. Gundlach manufactures a large variety of double roll single-stage and two-stage crushers, the latter including a pre-crusher. Crusher rolls are designed with varying surface configurations tailored to the material and sizing requirements of each specific application. Another product sold by Gundlach is the Cage Paktor, in which the material is crushed by impact between one cage and shear plates or two counter-rotating cages and shear plates. Gundlach’s crushers come in a wide variety of sizes and configurations, and each machine is built-to-order to the customer’s specifications.
Gundlach also sells specialty crushers and other equipment such as the Accu-Grind, a small crusher designed for sampling applications, the Nanosiz-R, which provides fine grinding for the mineral industry, and the Ro-Pro Separator, which is used in coal washing applications to separate fine particles from coarse particles.
Jeffrey Rader Equipment. Jeffrey Rader produces wood and bark hogs, chip sizers, screening equipment, pneumatic and mechanical conveying systems, storage/reclaim systems and other size reduction equipment and related products for use primarily in the pulp and paper, wood and forest products and biomass energy generation industries. Wood and bark hogs are used in the pulp and paper and wood and forest products industries to produce mulch, boiler fuel, chips for composite wood products and compost. Chip sizers are used in the pulp and paper industry to resize chips too large for efficient use in a pulp digester. Screening equipment, pneumatic and mechanical conveying systems, truck dumping equipment and storage/reclaim systems are used to classify and handle biomass, wood chips and waste wood products such as tree bark primarily in the pulp and paper and biomass energy generation industries.
Jeffrey Rader also sells hammermills to the mining industry to resize chunks of coal, which come directly from the mine, into smaller pieces, as well as a line of electromechanical and electromagnetic vibratory feeders designed to feed bulk solid materials into processes that is marketed primarily to the aggregates, coal, mineral and chemical industries. In addition, Jeffrey Rader manufactures a feeder/delumper used by petrochemical companies in the production of polyethylene and polypropylene.
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In the United States, Jeffrey Rader sells its equipment through a direct sales group and through a combination of 24 independent sales representatives and distributors, depending on the type of equipment sold, the industry to which the equipment is sold, the application for which the equipment will be used and the customer’s location. Internationally, Jeffrey Rader markets its equipment through wholly-owned subsidiaries in Canada and Sweden, through a licensee in Japan and through 11 independent sales representatives and distributors in other countries. We have contracts with our independent sales representatives and distributors which provide for specific commissions or net transaction prices depending on the type of product sold. Discounting below our target margin is uncommon, but when it occurs, our representative may be asked to share the cost and our distributor may receive a lower transaction price from us. Revenue is recorded after subtracting what, if any, discount or lower transaction price applies.
Replacement Parts. A majority of our Size Reduction Group’s revenues are derived from the sale of replacement parts. Each company within our Size Reduction Group has a large installed base of long-lived equipment, and every machine and part sold, including specifications and drawings, is registered in a digital database to provide customers with fast and efficient support.
Manufacturing. The manufacturing activities of our Size Reduction Group consist of machining and welding raw materials and castings into machined parts, and assembling those parts together with components purchased from outside suppliers into size reduction and other equipment. The equipment is then tested at one of our plants before being shipped to a customer’s site. Machine parts, such as frames, rotors and rolls, are built individually to order, with no such parts being stocked in inventory except in the case of Penn Crusher for some blanket purchase orders from customers for parts that will be used within an 18-month period. Certain higher volume parts, such as bearings, which are also marketed as replacement parts, are purchased in volume from outside suppliers and are also held in inventory.
Competition. We believe that Penn Crusher is the leading U.S. producer of hammermills and related equipment for the size reduction of steam coal by electric utility companies, that Gundlach is one of the leading U.S. manufacturers of double roll crushers and related equipment for the U.S. coal mining and North American fertilizer industries and that Jeffrey Rader is one of the leading U.S. suppliers of chip sizers for the resizing of wood chips, of screening equipment, conveying systems and storage/reclaim systems for pulp and paper mills in North America, and of truck dumping, conveying and other material handling equipment for the biomass energy generation industry in North America and Europe. Penn Crusher, Gundlach and Jeffrey Rader have reached these positions primarily because of superior machine design and quality and also because of their reputation and many years of experience in serving the needs of their customers. Competition exists in every major market that Penn Crusher, Gundlach and Jeffrey Rader serve. While some of their competitors are larger companies, most are generally smaller companies with more limited product lines competing in specific geographic markets and applications.
Customers
We sell our material handling equipment and systems throughout the world to a wide variety of customers in the various industrial markets which we serve, ranging from large, global companies to regional and local businesses. No single customer accounted for more than 10% of our total revenues in fiscal 2009.
Suppliers
Although certain components of our products are currently purchased from sole sources, we believe that comparable components can be obtained from alternative suppliers at prices competitive with those of our current suppliers. We have never experienced a significant production delay that was primarily attributable to an outside supplier.
Patents
Certain technologies used by our Process Group and by Jeffrey Rader are protected by patents in the United States and in other major countries that offer patent protection. Certain of our patents have expired and others will expire at various future dates. The loss of such patent protection is not expected to have a significant adverse effect on our business.
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Research and Development
We invest in research and development (“R&D”) to maintain a technological leadership position in our process equipment business. R&D in our Process Group focuses on new products as well as improvements to existing products, with particular emphasis on the application of weighing and control technologies and on mechanical design improvements. Current efforts are aimed at developing new products, shortening the time spent in the development of such products, modifying existing product designs to provide lower cost or higher performance products and analyzing the price/performance relationship for both new and existing products. We spend a minor amount on development work in our size reduction equipment business, either at a customer’s request or to produce an improved product to better fit a customer’s needs. The cost of such work is not categorized as R&D expense nor is it capitalized, but rather it is charged as an engineering expense within cost of revenues. Our research and development expenses were $1,871,000, $2,486,000 and $2,389,000 in fiscal 2009, 2008 and 2007.
Backlog
At the end of fiscal 2009, our backlog of unfilled orders was approximately $51,149,000 compared to a backlog of approximately $68,108,000 at the end of fiscal 2008, a decrease of 24.9%. This year-over-year decrease was primarily in our Size Reduction Group. If we use year-end 2009 foreign exchange rates to value our 2008 year-end backlog, the decrease would be 26.3% ($51,149,000 at the end of fiscal 2009 versus $69,372,000 at the end of fiscal 2008). Approximately $2,368,000 of our Size Reduction Group’s backlog at the end of fiscal 2009 was for blanket orders that can be released by the customer at any time over an 18-month period compared to approximately $2,902,000 of such blanket orders at the end of fiscal 2008.
Employees
At the end of fiscal 2009, we had 639 employees, of which 434 were located in the United States, 139 in Europe, 51 in China, 8 in Canada, 6 in Singapore and 1 in Mexico. None of our employees are represented by labor unions, and we consider relations with our employees to be good.
Item 1A.
Item 1A. Risk Factors.
Risk Factors Related to our Business
Our businesses and operations are subject to a number of risks and uncertainties that are described below, but these risks and uncertainties are not the only ones we face. Additional risks and uncertainties of which we are unaware, or that we may currently deem immaterial, may become important factors that could harm our business, financial condition or results of operations. Our business, financial condition or results of operations could suffer as a consequence of any of these risks and uncertainties.
The effects of the global economic crisis may continue to impact our business, operating results or financial condition.
The global economic crisis has caused a general tightening of the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and extreme volatility in credit, equity and fixed income markets. These macroeconomic developments have negatively affected, and could continue to negatively affect, our business, operating results or financial condition in a number of ways. For example, current or potential customers may be unable or unwilling to fund equipment purchases, which could cause them to delay, decrease or cancel purchases of our products and services or to not pay us or to delay paying us for previously purchased products and services.
The deterioration of the credit and capital markets may adversely impact our ability to obtain financing on acceptable terms, which may hinder or prevent us from completing acquisitions or otherwise meeting our future capital needs.
Global financial markets have experienced extreme volatility and disruption during the past 18 months, and the debt and equity capital markets were exceedingly distressed and difficult to access during much of this period. These issues have made, and will likely continue to make, it more difficult to obtain financing than has historically been the case. If future funding is not available when needed or to the extent required, or if it is available only on unfavorable terms, this might adversely affect our ability to complete acquisitions or otherwise meet our future capital needs.
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Competition could adversely affect our business and results of operations.
Many of our products are sold in highly competitive markets in the Americas, Europe, the Middle East and Asia, and some of our competitors may have financial and other resources that are substantially greater than ours. We believe that over the past several years we have experienced increased price competition in many of our markets, and this price competition is especially severe in the current economic climate. Competitive pressures could cause our products to lose market share or result in significant price erosion which would have an adverse effect on our business and results of operations.
Our substantial sales abroad subject us to the risk of adverse foreign currency fluctuations which could negatively impact our results of operations.
We are an international company, and we derived approximately 30%, 38% and 36% of our 2009, 2008 and 2007 revenues from products manufactured in, and sales made and services performed from, our facilities located outside the United States, primarily in Europe. We expect that our international sales will continue to be significant in future periods. International sales are subject to fluctuations in exchange rates, which may have an adverse effect on our business and operating results. Also, since the results of operations of our foreign subsidiaries are translated into U.S. dollars, fluctuations in the exchange rate of the U.S. dollar versus each of the Swiss franc, the euro, the British pound sterling, the Canadian dollar and the Swedish krona will affect the U.S. dollar amount of these results. Finally, we are exposed to foreign currency transactional gains and losses caused by the marking to market of balance sheet items of our foreign subsidiaries which are measured in other currencies, particularly of non-Swiss franc values, including the euro and the British pound sterling, on the balance sheet of our Swiss subsidiary.
We operate in cyclical industries.
As an industrial capital goods supplier, many of the markets for our products are cyclical. During periods of economic expansion, when capital spending normally increases, we generally benefit from greater demand for our products. During periods of economic contraction, when capital spending normally decreases, we generally are adversely affected by declining demand for our products, and we may be subject to uncollectible receivables from customers who become insolvent. Also, even when there is economic expansion or increased demand for our equipment, there can be no assurance that this economic expansion or increased demand will be sustained in the markets in which we sell our products.
The loss or bankruptcy of a large customer could have an adverse effect on our operating results.
In 2009, our top five customers accounted for approximately 11.2% of our total revenues. The loss or bankruptcy of, or significant curtailment of purchases by, one or more of our large customers could have an adverse effect on our operating results.
We are dependent on our key personnel.
We are dependent upon the continued services of certain key officers and management and operating personnel. The loss of key personnel could have an adverse effect on us. We do not maintain “key man” insurance on any of our officers. Our continued success also depends on our ability to attract and retain a skilled labor force. There can be no assurance that we will be successful in attracting and retaining the personnel we require either to maintain our business or expand our operations.
We are dependent on some of our suppliers.
Each product produced by us or for us requires the supply of various components, some of which may be specially engineered to meet our requirements. The supply of these components can be affected by numerous factors beyond our control. While certain of these components are obtained from a limited number of sources, we have potential alternate suppliers for most of the specialty components used in our manufacturing and assembly operations. There can be no assurance, however, that we will not experience shortages or be forced to seek alternative sources of supply which may increase costs or adversely affect our ability to fulfill orders in a timely fashion.
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We engage in acquisitions, and we may encounter difficulties in integrating these businesses and, therefore, may not realize the anticipated benefits of the acquisitions.
We are a company that, from time to time, seeks to grow through strategic acquisitions. In the past, we have made acquisitions intended to complement or expand our business, and we may do so again in the future. The success of these transactions may depend on our ability to integrate assets and personnel acquired in these transactions without substantial costs, delays or other operational or financial problems. We may encounter difficulties in integrating acquisitions with our operations or in separately managing a new business. Furthermore, we may not realize the degree or timing of benefits that we anticipate when we first enter into a transaction. Any of the foregoing could adversely affect our business and results of operations.
Our business and operating results depend in part on continued successful research, development and marketing of new or improved products, and there can be no assurance that we will continue successfully to introduce new or improved products on a timely and cost-effective basis.
The success of new and improved products depends on their initial and continued acceptance by our customers. Our businesses are affected by varying degrees of technological change and corresponding shifts in customer demand, which may result in product transitions, shortened life cycles and an increased importance of being first to market with new products. We may experience difficulties or delays in the research, development, production or marketing of new products, and this may negatively impact our business and operating results and prevent us from recouping or realizing a return on the investments required to bring new products to market on a timely and cost-effective basis.
Protection and validity of our patents and intellectual property rights, or the efforts of third parties to enforce their intellectual property rights against us, may in the future result in costly and time-consuming litigation.
We may be required to initiate litigation in order to enforce any patents issued to or licensed by us, or to determine the scope and validity of a third party’s patents or other proprietary rights. In addition, we may be subject to lawsuits by third parties seeking to enforce their own intellectual property rights. Any such litigation, regardless of outcome, could be expensive and time consuming, and could subject us to significant liabilities or require us to re-engineer our products or obtain expensive licenses from third parties.
We may be subject to other costly litigation and governmental proceedings which could adversely affect our business or results of operations.
From time to time, we may be subject to various claims and lawsuits by governmental agencies, competitors, customers, employees or other persons. Such matters can be time consuming, divert management’s attention and resources, and cause us to incur significant expenses. Furthermore, there can be no assurance that the results of any of these actions will not have an adverse effect on our business or operating results.
Our indebtedness may affect our business and may restrict our operating flexibility.
As of January 2, 2010, we had $8,000,000 of outstanding indebtedness (now $7,000,000). Our level of indebtedness and the debt servicing costs associated with that indebtedness could have important effects on our operations and business strategy. For example, our indebtedness could:
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limit our flexibility in planning for, or reacting to, changes in our business or in the markets in which we compete;
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place us at a competitive disadvantage relative to our competitors, some of which may have lower debt service obligations or greater financial resources than we do;
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limit our ability to borrow additional funds;
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limit our ability to make acquisitions;
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limit our ability to make capital expenditures;
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limit our ability to conduct research and development; and
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increase our vulnerability to adverse economic, financial market and industry conditions, including recessions and higher interest rates.
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Our ability to make scheduled payments of principal of, to pay interest on, or to refinance our indebtedness and to satisfy our other obligations will depend on our future operating performance, which may be affected by factors beyond our control. In addition, there can be no assurance that future borrowings or equity financings will be available to us on favorable terms for the payment or refinancing of our indebtedness. If we are unable to service our indebtedness, our business, financial condition and results of operations could be materially adversely affected.
Political and economic instability and health issues in the United States or abroad may have an adverse effect on our operating results.
Political and economic events and health issues in the United States or abroad may subject us to numerous risks which could have an adverse effect on our business and operating results, including restrictive trade policies, unfavorable economic conditions in particular markets, health and epidemic concerns, inconsistent product regulation or other changes in regulatory and other legal requirements, the imposition of product tariffs and the burdens of complying with a wide variety of international and U.S. export laws and differing regulatory requirements.
Terrorist attacks and threats may disrupt our operations and negatively impact our business, revenues, costs and stock price.
The terrorist attacks in September 2001 in the United States, the U.S. response to those attacks and the resulting decline in consumer confidence had a substantial adverse impact on the U.S. economy. Any similar future events may disrupt our operations or those of our customers or suppliers. In addition, these events had, and any such future events could have, an adverse impact on the U.S. and world economies in general and consumer confidence and spending in particular, which could harm our sales. Any new terrorist events or threats could have a negative impact in the U.S. and world financial markets, which could reduce the price of our Common Stock and limit the capital resources available to us and our customers and suppliers.
Extensive environmental laws and regulations affecting the production of electric power could result in electric power generators shifting from coal to natural gas-fired power plants, which would adversely affect our size reduction business.
Federal, state and local laws and regulations extensively regulate the amount of sulfur dioxide, particulate matter, nitrogen oxides, mercury and other compounds emitted into the air from electric power plants, whose owners are principal customers of our size reduction business. These laws and regulations can require significant emission control expenditures for many coal-fired power plants, and various new and proposed laws and regulations may require further emission reductions and associated emission control expenditures. There is also continuing pressure on state and federal regulators to impose limits on carbon dioxide emissions from coal-fired power plants. As a result of these current and proposed laws, regulations and trends, electricity generators may elect to switch to other fuels such as natural gas that generate less of these emissions, which would reduce the demand for our size reduction equipment.
We are subject to special risks related to doing business in China.
Our Wuxi K-Tron Colormax operations in China are subject to significant political, economic and legal uncertainties. Changes in laws and regulations or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports or sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on the operations of Wuxi K-Tron Colormax. Under its current leadership, the Chinese government has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. However, there can be no assurance that the government will continue to pursue these policies, especially in the event of a change in leadership, social or political disruption or other circumstances affecting China’s political and economic environment.
Although not permitted under Chinese law, corruption, extortion, bribery, payoffs and other fraudulent practices occur from time to time in China. We must comply with U.S. laws prohibiting corrupt business practices outside the United States. If our competitors in China engage in these practices, we may be at a competitive disadvantage. We seek to prevent, deter and detect violations of law in the conduct of our business throughout the world. In the event an employee violates applicable Chinese laws pertaining to sales practices, accounting standards, facility operations or other business or operational requirements, we may face substantial penalties, and our business in China could be adversely affected.
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Risk Factors Related to the Proposed Merger and Acquisition by Hillenbrand
The announcement and pendency of our agreement to be acquired by Hillenbrand could adversely affect our business.
On January 8, 2010, we entered into the Merger Agreement pursuant to which Hillenbrand is to acquire K-Tron through the proposed Merger. The announcement and pendency of the Merger could cause disruptions in our business, and may affect our relationships with our customers, vendors and employees. If these disruptions occur, they could have an adverse effect on our business, financial results and operations.
The failure to complete the Merger could adversely affect our business.
There is no assurance that the Merger will occur. If the proposed Merger or a similar transaction is not completed, the share price of our Common Stock may change to the extent that the current market price of our Common Stock reflects an assumption that the proposed Merger will be completed. In addition, under specific circumstances defined in the Merger Agreement, we may be required to pay a $12 million termination fee to Hillenbrand. Also, if the failure to complete the Merger is a result of a willful failure of K-Tron, we may be required to pay Hillenbrand costs related to the Merger, such as legal, accounting and financial advisory fees, in addition to our own similar expenses. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community.
If the Merger is not approved by our shareholders at a special meeting, K-Tron and Merger Sub will not be permitted under New Jersey law to complete the Merger, and each of K-Tron and Merger Sub will have the right to terminate the Merger Agreement. Upon such termination, K-Tron may be required to pay Hillenbrand the termination fee under certain circumstances in the event of a subsequent sale transaction. Further, if the Merger Agreement is terminated and our Board of Directors seeks another merger or business combination, shareholders cannot be certain that we will be able to find a party willing to pay an equivalent or better price than the price to be paid in the proposed Merger.
Uncertainties associated with the Merger may cause K-Tron to lose key personnel and affect employee morale.
Our current and prospective employees may be uncertain about their future roles and relationships with K-Tron following the completion of the Merger. This uncertainty may adversely affect our ability to attract and retain key management and personnel, and may negatively affect the morale of our workforce.
Unless the Merger Agreement is terminated, K-Tron will not be able to enter into a merger or business combination with another party at a favorable price because of restrictions in the Merger Agreement.
Unless and until the Merger Agreement is terminated, subject to specified exceptions, we are restricted from initiating, soliciting or taking any action to facilitate or encourage the submission of any offer or proposal relating to an alternative transaction with any person or entity other than Hillenbrand. In addition, we will not be able to enter into an alternative transaction on more favorable terms, unless and until the Merger Agreement is terminated, which if terminated for this purpose would result in our paying a $12 million termination fee to Hillenbrand.
Item 1B.
Item 1B. Unresolved Staff Comments.
Not applicable.
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Item 2.
Item 2. Properties.
We own a 92,000 square foot building in Pitman, New Jersey where our Process Group conducts manufacturing operations and also has sales, service, research and development and administrative offices, a technical center for product demonstrations and training facilities for our customers, sales representatives and employees. Our worldwide corporate headquarters are also located at this site as is our K-Tron Electronics business. Approximately 10,000 square feet of our Pitman facility is leased to an unrelated sheet metal business that is an important supplier to us.
Our Process Group also conducts operations in Salina, Kansas in several owned buildings consisting of approximately 134,000 square feet of manufacturing, office and test lab space.
In Niederlenz, Switzerland, we own a 65,000 square foot building where our Process Group has manufacturing facilities and a technical center for product demonstrations, and there is an adjacent five-floor, 40,000 square foot office building which we also own. These buildings also house sales, service, research and development and other administrative functions, as well as training facilities. Approximately 4,000 square feet in the office building is leased to an unrelated third party.
Certain Process Group sales and service activities are conducted in leased office space in China, France, Germany, Singapore and the United Kingdom.
Wuxi K-Tron Colormax has offices and conducts manufacturing operations in a 30,000 square foot facility in Wuxi, China that is leased from a company that is owned by Wuxi K-Tron Colormax’s sales manager, who was its former general manager and an owner of a privately-held company whose assets were acquired by Wuxi K-Tron Colormax.
Penn Crusher has offices and a test lab in a 24,000 square foot leased facility in Broomall, Pennsylvania and conducts manufacturing operations in a 70,000 square foot leased building in Cuyahoga Falls, Ohio.
Gundlach conducts operations in Belleville, Illinois in a 54,000 square foot owned manufacturing and office facility. Two small adjacent houses on the property provide additional office space while a third house is rented for use as a residence.
Jeffrey Rader has offices and conducts manufacturing operations from an owned 149,000 square foot facility located in Woodruff, South Carolina. One adjacent building provides an additional 5,000 square feet of test lab space, and a second adjacent building provides an additional 6,000 square feet of storage space.
Jeffrey Rader also has offices in a 9,100 square foot leased facility in Montreal, Canada and in a 2,350 square foot leased facility in Vancouver, Canada, as well as 5,300 square feet of leased office and storage space in Stockholm, Sweden.
We believe that our current facilities will be sufficient to meet our needs for the foreseeable future.
Item 3.
Item 3. Legal Proceedings.
We are involved in various legal proceedings arising in the ordinary course of business. While the ultimate results of these cases cannot be predicted with certainty, management believes that these matters will not have a material adverse effect on our financial position, liquidity or operations.
Item 4.
Item 4. Reserved.
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PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our Common Stock trades on the NASDAQ Global Select Market under the symbol KTII. Our Common Stock began trading on that market at the beginning of 2008. The following table sets forth the high and low sales prices per share for each quarter in fiscal 2008 and 2009 as quoted on the NASDAQ Global Select Market.
On March 1, 2010, the closing price of a share of K-Tron Common Stock as quoted on the NASDAQ Global Select Market was $149.55.
Equity Holders
On March 1, 2010, there were 142 record holders and an estimated 3,379 beneficial owners (held in street name) of our Common Stock.
Dividend Policy
We have never paid a cash dividend on our Common Stock, and we currently intend to retain all future earnings for use in our business. The declaration and payment of dividends in the future will be determined by our Board of Directors in light of conditions then existing, including our earnings, financial condition, capital requirements and other factors.
Under the Merger Agreement, we are prohibited from declaring, authorizing, setting aside or paying any dividend with respect to any of our securities. This restriction, however, does not apply to dividends or distributions by any of our wholly-owned subsidiaries to either the Company or another wholly-owned subsidiary.
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Performance Graph
The following line graph and table compare the cumulative total shareholder return on our Common Stock for our past five fiscal years (the dates refer to the last trading day of each fiscal year) with the cumulative total return of the Standard & Poor’s 500 Stock Index (the “S&P 500”) and the Dow Jones Wilshire U.S. Industrial Machinery Index (the “Dow Jones Wilshire”) for the same periods. The Dow Jones Wilshire is a “published industry or line-of-business index” as that term is defined by Securities and Exchange Commission regulations. The graph and table below assume that $100 was invested at the end of fiscal 2004 in our Common Stock, the S&P 500 and the Dow Jones Wilshire. Dividend reinvestment has been assumed and, with respect to companies in the Dow Jones Wilshire, the returns of such companies have been weighted at each measurement point to reflect relative stock market capitalization.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG
K-TRON INTERNATIONAL, INC., STANDARD & POOR’S 500 STOCK INDEX AND DOW JONES
WILSHIRE U.S. INDUSTRIAL MACHINERY INDEX
ASSUMES $100 INVESTED ON JANUARY 1, 2005
ASSUMES DIVIDEND REINVESTED
THROUGH FISCAL YEAR ENDING JANUARY 2, 2010
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Item 6.
Item 6. Selected Financial Data.
The selected consolidated financial data presented below for, and as of the end of, each of our last five fiscal years was derived from and is qualified by reference to our consolidated financial statements for those years.
This selected financial data should be read in conjunction with our consolidated financial statements and the related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included as Item 7
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview of Business
We are engaged in one principal business segment - material handling equipment and systems. We operate in two primary geographic locations - North and South America (the “Americas”) and Europe, the Middle East, Africa and Asia (“EMEA/Asia”). Within the material handling equipment and systems segment, we have two main business lines (“business lines”), which are our process and size reduction business lines.
We are an industrial capital goods supplier, and many of the markets for our products are cyclical. During periods of economic expansion, when capital spending normally increases, we generally benefit from greater demand for our products. During periods of economic contraction, when capital spending normally decreases, we generally are adversely affected by declining demand for our products, and the credit worthiness of our customers is a greater concern.
Our process business line designs, produces, markets, sells and services both feeding and pneumatic conveying equipment. Markets served include the plastics compounding, base resin production, food, chemical and pharmaceutical industries. The plastics compounding and base resin production markets represent the largest markets for our process business line, and they are generally sensitive to changes in U.S. and global economic conditions, especially as they relate to the use of plastics in housing and automotive products. The food and pharmaceutical markets for our process business line tend to be less cyclical than the plastics compounding and base resin production markets. The majority of the revenues and profits of our process business line is generated by equipment and systems sales, with a lesser amount attributable to service, parts and repairs.
We believe, based in part on independent market studies, that we are the global leader in the design, production, marketing and servicing of high-quality industrial feeders for the handling of bulk solids in manufacturing processes. Feeding equipment is sold under the K-Tron Feeders brand, both domestically and in other countries around the world.
Our pneumatic conveying equipment, which is sold under the K-Tron Premier brand, addresses a broad range of pneumatic conveying applications that involve the handling of bulk solids. Our pneumatic conveying equipment is sold primarily in North America, but we also sell this equipment elsewhere in the world using many of the same channels used for our K-Tron Feeders brand.
On March 27, 2007, we purchased certain assets of Wuxi Chenghao Machinery Co., Ltd. (“Wuxi Chenghao”), a privately-owned company in the People’s Republic of China (“China”). The purchased assets were transferred from the seller to a newly-created Wholly Foreign-Owned Enterprise which we established in connection with this transaction that conducts its business under the name Wuxi K-Tron Colormax Machinery Co., Ltd. (“Wuxi K-Tron Colormax”). Following this acquisition, we established a third brand within our process business line, the K-Tron Colormax brand, which is targeted at the domestic plastics compounding and injection molding markets in China.
Management looks at trends in what it believes to be relevant indicators, such as the Purchasing Managers’ Index (“PMI”) for U.S. manufacturing published by the Institute of Supply Management and similar foreign indices, to help it better understand the prospects for capital equipment spending as it may affect our process business line. A PMI reading above 50 indicates that manufacturing is expanding and below 50 indicates that manufacturing is contracting. In January 2009, the PMI was at 35.6, its lowest point for fiscal year 2009. The PMI increased each month in fiscal year 2009 and, since August 2009, the PMI has been above 50, indicating an expansion of manufacturing. Historically, increases and decreases in our feeding equipment sales generally have lagged movements in these indicators, in some cases by as much as six to twelve months.
Our size reduction business line was established with the purchase of Pennsylvania Crusher Corporation (“Penn Crusher”) and its wholly-owned subsidiary, Jeffrey Specialty Equipment Corporation (“Jeffrey”), on January 2, 2003. Our acquisition of J.M.J. Industries, Inc., now Gundlach Equipment Corporation (“Gundlach”), on March 3, 2006 expanded our size reduction business by including a leading provider of size reduction equipment to the coal mining industry. Penn Crusher, Jeffrey and Gundlach sell equipment primarily into the U.S. market, with some sales into foreign countries, particularly in South America and China. The main industries served are the power generation, coal and minerals mining, pulp and paper, wood and forest products and biomass energy generation industries, and a majority of the revenues and profits are generated from replacement part sales instead of from the sale of new equipment.
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On September 14, 2007, we expanded the scope of our size reduction business line with the acquisition of Rader Companies, Inc. (“Rader”), which manufactures screening equipment, pneumatic and mechanical conveying systems, storage/reclaim systems and size reduction equipment for the handling of biomass, wood chips and waste wood products such as tree bark. Rader’s equipment is used primarily in the pulp and paper and biomass energy generation industries in North America and Europe. Rader also manufactures a feeder/delumper used by manufacturers of polyethylene and polypropylene.
On January 1, 2009, Rader was merged with and into Jeffrey, and Jeffrey changed its name to Jeffrey Rader Corporation (“Jeffrey Rader”) in connection with the merger. This merger followed the previous integration of the U.S. operations of Jeffrey and Rader at Jeffrey’s office and manufacturing facility in Woodruff, South Carolina during 2008. Penn Crusher, Gundlach and Jeffrey Rader have developed and currently maintain an extensive digital database of previously sold equipment, including equipment specifications and drawings, that enables them to respond quickly and efficiently to fill customers’ spare parts orders.
Significant indicators that management uses to judge prospects for our size reduction business line in the United States include the level of electricity consumption, the financial health of the electric utility industry, and the demand for coal, paper, forest products and biomass energy generation. Historically, the markets for our size reduction business line related to power generation and coal mining have been less cyclical than have the pulp and paper and wood and forest products markets. Our size reduction business line’s exposure to economic swings is moderated by the fact that a majority of its sales is for replacement parts needed by customers to keep their machines operating.
The following provides information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with our consolidated financial statements and accompanying notes. All references to 2009, 2008 and 2007 mean the fiscal years ended January 2, 2010, January 3, 2009 and December 29, 2007.
Critical Accounting Assumptions and Estimates
This discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States and follow our significant accounting policies as described in the notes to our consolidated financial statements. The preparation of these financial statements requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods covered thereby. Actual results could differ from those estimates.
Judgments and estimates of uncertainties are required in applying our accounting policies in certain areas. Areas that require significant judgments and estimates to be made include determinations of the useful lives of assets, estimates of allowances for doubtful accounts, cash flow and valuation assumptions in performing asset impairment tests of long-lived assets, estimates of the realizability of deferred tax assets, determinations of the adequacy of reserves for inventory obsolescence and warranty costs, and legal contingencies.
There are a number of critical assumptions that may influence accounting estimates in these and other areas. We base our critical assumptions on historical experience, third-party data and other factors we believe to be reasonable under the circumstances. We believe that the most critical assumptions made in arriving at our accounting estimates are the following:
Depreciable Lives of Plant and Equipment
Each asset included in plant and equipment is recorded at cost and depreciated using the straight-line method, which deducts equal amounts of the cost of such asset from earnings every year over such asset’s estimated economic useful life. As a result of these estimates of economic useful lives, net plant and equipment at year-end 2009 totaled $23,926,000, which represented 11.7% of total assets. Depreciation expense during 2009 totaled $4,920,000, which represented 3.1% of total expenses. Given the significance of plant and equipment and associated depreciation to our financial statements, the determination of an asset’s economic useful life is considered to be a critical accounting estimate.
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Economic useful life is the duration of time an asset is expected to be productively employed by us, which may be less than its physical life. Management’s assumptions regarding the following factors, among others, affect the determination of estimated economic useful life: changes in technology, wear and tear and changes in market demand.
The estimated economic useful life of an asset is monitored to determine its continued appropriateness, especially in light of changed business circumstances. For example, technological advances, excessive wear and tear or reduced estimates of future demand for a product may result in a shorter estimated useful life for an asset than originally anticipated. In such a case, we would depreciate the remaining net book value of the asset over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. Over the past three years, changes in economic useful life assumptions have not had a material impact on our reported results.
Allowance for Doubtful Accounts
We encounter risks in connection with sales and the collection of the associated accounts receivable. We record a provision for accounts receivable that are considered to be uncollectible, including those associated with customers that have become insolvent. In order to estimate the appropriate provision, management analyzes the credit worthiness of specific customers and the aging of customer balances. Management also considers contractual rights and obligations and general and industry specific economic conditions.
Since we cannot predict with certainty future changes in the financial condition of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, a larger allowance may be required. In the event we determine that a smaller or larger allowance is appropriate, we would record a credit or a charge to selling, general and administrative expense in the period in which we made such a determination.
Management believes that the accounting estimate related to the allowance for doubtful accounts is a critical accounting estimate because the underlying critical assumptions used to establish the allowance can change from time to time, and uncollectible accounts could potentially have a material impact on our results of operations.
Asset Impairment Determinations
In April 2008, the Financial Accounting Standards Board issued revised guidance on determining the useful lines of intangible assets. The new guidance, which is now part of Accounting Standards Codification (“ASC”) 350 “Intangibles - Goodwill and Other”, requires that goodwill be tested for impairment at a reporting unit level. We have determined that our reporting units are our two main business lines based on our organizational structure and the financial information that is provided to and reviewed by management. Goodwill is tested for impairment by comparing the estimated fair value of each of our two reporting units to the respective carrying value of the net assets assigned to each of those reporting units. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to the reporting unit, goodwill is not considered impaired. If the fair value of a reporting unit is less than its carrying value, then goodwill is considered impaired and further testing is required to determine the amount of the goodwill reduction. To derive the fair value of a reporting unit, an income approach is used. Under the income approach, the fair value of a reporting unit is determined based on estimated future cash flows discounted by an estimated weighted-average cost of capital which reflects the overall level of inherent risk of the reporting unit. Estimated future cash flows are based on our internal projection model.
Our annual impairment test, which was completed during the fourth quarter of 2009, indicated that the fair values of our two reporting units exceeded their carrying values and, therefore, the goodwill amounts were not impaired for either of our two reporting units.
Our analysis uses significant assumptions by reporting unit, including: expected future revenue and expense growth rates, profit margins, cost of capital, discount rate and forecasted capital expenditures. Assumptions and estimates about future cash flows and discount rates are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could result in an impairment charge which could materially impact our reported financial results by decreasing operating income and lowering asset values on our consolidated balance sheet. We test for goodwill impairment annually or when circumstances suggest, as for example when our market capitalization significantly declines for a sustained period, which could cause us to do interim impairment testing that might result in an impairment to goodwill.
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With respect to our other long-lived assets, we are required to test for asset impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. We apply ASC 350 and ASC 360 “Property Plant and Equipment”, in order to determine whether or not an asset has been impaired. This standard requires an impairment analysis when indicators of impairment are present. If such indicators are present, the standard indicates that if the sum of the future expected cash flows from the asset, undiscounted and without interest charges, is less than its carrying value, an asset impairment must be recognized in the financial statements. The amount of the impairment charge recorded is the difference between the fair value of the asset and the carrying value of the asset. No indicators of impairment with respect to our other long-lived assets were present in 2009.
In analyzing the future cash flows of various assets, the critical assumptions we make include the following:
•
The intended use of assets and the expected cash flows resulting directly from such use;
•
Industry specific economic conditions;
•
Customer preferences and behavior patterns; and
•
The impact of applicable regulatory initiatives, if any.
We believe that accounting estimates relating to goodwill and other long-lived asset impairments are critical accounting estimates because the assumptions underlying future cash flow estimates are subject to change from time to time and the recognition of an impairment could have a significant impact on our consolidated financial statements. We will continue to monitor current economic trends that might affect asset impairments in the future. Over the past three years, we have not recognized any asset impairments.
Income Taxes
We use the liability method to account for income taxes. Under this method, deferred tax liabilities and assets are recognized for the tax effects of temporary differences between the financial reporting and tax bases of liabilities and assets measured using the enacted tax rate. Our income tax expense for 2009 was $10,361,000 with a 32.5% effective tax rate. A one percentage point increase in our effective tax rate for 2009 from 32.5% to 33.5% would have decreased reported net income by approximately $331,000.
Significant management judgment is required in determining income tax expense and the related balance sheet amounts. Assumptions are required concerning the ultimate outcome of tax positions and the realization of deferred tax assets. We have accrued our estimate of potential tax liability in accordance with ASC 740 “Income Taxes”.
Actual income taxes paid by us may vary from estimates depending upon changes in income tax laws, actual results of operations and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. We believe that our recorded tax liabilities adequately provide for the probable outcome of these assessments. Deferred tax assets are recorded for deductible temporary differences, operating losses and tax credit carryforwards. However, when there may be insufficient sources of future taxable income to realize the benefit of these items, these deferred tax assets are reduced by a valuation allowance. A valuation allowance is recognized if, based on the weight of available evidence, it is considered more likely than not that some portion or all of a deferred tax asset will not be realized. The factors used to assess the likelihood of realization include forecasted future taxable income and available tax planning strategies that could be implemented to realize or renew net deferred tax assets in order to avoid the potential loss of future tax benefits. The effect of a change in the valuation allowance is reported in the current period tax expense.
The Company is subject to income taxes in the U.S. federal jurisdiction and also in various state, local and foreign jurisdictions. Tax laws and regulations within each jurisdiction are subject to interpretation and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state or local or non-U.S. income tax examinations by tax authorities for years before 2006. The Company recognizes interest accrued related to uncertain tax liabilities in interest expense and recognizes penalties in operating expenses.
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Inventory Reserve
We record an inventory reserve for obsolete, excess and slow-moving inventory. In calculating our inventory reserve, management analyzes historical data regarding customer demand, product changes, market conditions and assumptions about future product demand. We will continue to monitor current economic trends that might adversely affect inventory reserves in the future. Management believes that its accounting estimate related to inventory obsolescence is a critical accounting estimate because customer demand can be variable and changes in our reserve for inventory obsolescence could materially affect our financial results.
Warranty Reserve
We provide for the estimated warranty cost of a product at the time revenue is recognized. Warranty expense is normally accrued as a percentage of sales based upon historical information on a monthly basis, and this provision is included in accrued expenses and other liabilities. There is an exception to this accrual method for certain products within the size reduction business line for which we use a combination of historical information and management judgment. We offer a one-year warranty on a majority of our products, and we engage in extensive product quality programs and processes, including the active monitoring and evaluation of the quality of our component suppliers, in an effort to minimize warranty obligations. These warranty obligations are affected by actual product failures and by material usage and service costs incurred in correcting these product failures. Our warranty provision takes into account our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. While we believe that our warranty provisions are adequate and that the judgments applied are appropriate, the ultimate cost of product warranty could differ materially from our estimates. When our actual cost of product warranty is lower than we originally anticipated, we adjust downward the recorded reserve, and if the cost of warranty repairs and service is higher than anticipated, we increase the reserve.
Legal Contingencies
We are currently involved in certain legal proceedings. We have accrued an estimate of the probable costs for the resolution of these claims in accordance with ASC 450 “Contingencies”. This estimate has been developed by management and may be made in consultation with outside counsel handling our defense in these matters and also with our insurance broker, and it is based upon an analysis of potential results, including litigation and settlement strategies. We do not believe that these proceedings will have a material adverse effect on our consolidated financial position. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by litigation outcomes that are significantly different than our assumptions and estimates.
Results of Operations
Overview
2009 and 2007 were 52-week years and 2008 was a 53-week year. In 2009, 2008 and 2007, we reported revenues of $190,774,000, $243,018,000 and $201,677,000 and net income of $21,555,000, $25,773,000 and $21,321,000.
The decreases in our revenues and net income in 2009 compared to 2008 were primarily the result of significantly lower sales to customers of our process business line, especially in EMEA/Asia, and the negative effect of a stronger U.S. dollar in 2009 versus 2008 on the translation of the revenues of our foreign operations into U.S. dollars. Our 2009 effective tax rate was 32.5%, up from 30.3% in 2008 primarily due to a higher proportion of our earnings coming from the United States where they are taxed at an overall higher rate than are our earnings in EMEA/Asia.
The increase in our revenues in 2008 compared to 2007 was primarily the result of a full year of contributions from Rader in 2008 compared to 15 weeks in 2007, increased spending by our process business line customers in EMEA/Asia, increased spending by customers in our size reduction business line in addition to Rader, and the positive effect of a generally weaker U.S. dollar in 2008 versus 2007 on the translation of the revenues of our foreign operations into U.S. dollars. The increase in our net income in 2008 compared to 2007 was primarily due to the full year contribution from Rader, increased spending by our customers in the rest of our size reduction business line, and the positive effect of a generally weaker U.S. dollar in 2008 versus 2007 on the translation of the earnings of our foreign operations into U.S. dollars. Our 2008 effective tax rate was 30.3%, up from 29.3% in 2007 primarily due to a higher proportion of our earnings coming from the United States where they are taxed at an overall higher rate than are our earnings in EMEA/Asia.
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Acquisitions and Divestments
On March 27, 2007, we purchased certain assets of Wuxi Chenghao. The purchased assets were transferred from the seller to Wuxi K-Tron Colormax. The total cost of the transaction over a five-year period, including the $1,000,000 purchase price and payments under related employment and other arrangements with one of Wuxi Chenghao’s owners, could be as much as approximately $3,500,000. Wuxi K-Tron Colormax is part of our process business line.
On September 14, 2007, we purchased all of the outstanding stock of Rader. The preliminary purchase price was $15,945,000, all of which was paid in cash, including $2,300,000 held in escrow to satisfy any potential indemnification claims made by us. We borrowed the full amount of the purchase price under a five-year, $50,000,000 unsecured credit facility (the “Citizens Credit Facility”) entered into on September 29, 2006 between Citizens Bank of Pennsylvania (“Citizens”) and us and our U.S. subsidiaries. The final purchase price of $17,632,000 included a $1,687,000 adjustment based upon Rader’s increase in net working capital between January 1, 2007 and the September 14, 2007 closing date, which adjustment was paid to the sellers on February 5, 2008. At the sellers’ direction, $3,798,000 of the purchase price was delivered to Rader on the closing date to satisfy indebtedness owed to Rader by two other unrelated companies also owned by the sellers. This cash, together with other available cash of Rader, was then used to pay off all of Rader’s bank debt at the closing of the acquisition, which amounted to approximately $3,832,000. Rader became part of our size reduction business line.
In 2008, we completed the valuation of the Rader assets and liabilities as of the September 14, 2007 acquisition date. On September 12, 2008, we filed an indemnification claim against the sellers related to the valuation of Rader’s inventory on the closing date, which was settled on October 9, 2008. As part of the settlement, the sellers agreed to reduce the purchase price by approximately $257,000, with payments being made to us from the escrow fund of approximately $117,000 on September 26, 2008 and $140,000 on October 10, 2008. Due to these payments to us of $257,000 and the release of $1,743,000 from the escrow fund to the sellers pursuant to the terms of the escrow agreement, the escrow fund now has a current balance of $300,000 plus accrued interest. The final purchase price of $17,632,000, after being reduced by the $257,000 payment received as part of the final inventory valuation settlement, became an adjusted purchase price of $17,375,000, including the $300,000 still held in escrow.
On September 14, 2009, we sold our 19.9% investment in Hasler International SA (“Hasler”) for euro 2,425,000 ($3,544,000). We previously recorded this investment as an other asset in our consolidated balance sheet and recognized a gain of $2,972,000 on the sale. We received a note from the buyer for the entire sale price, which was paid in full in October 2009.
Foreign Exchange Rates
We are an international company, and we derived approximately 30%, 38% and 36% of our 2009, 2008 and 2007 revenues from products manufactured in, and sales made and services performed from, our facilities located outside the United States, primarily in Europe and Canada. With our global operations, we are sensitive to changes in foreign currency exchange rates (“foreign exchange rates”), which can affect both the translation of financial statement items into U.S. dollars as well as transactions where the revenues and related expenses may initially be accounted for in different currencies, such as sales made from our Swiss manufacturing facility in currencies other than the Swiss franc. We are also exposed to foreign currency transactional gains and losses caused by the marking to market of certain balance sheet items of our foreign subsidiaries which are measured in other currencies, particularly of non-Swiss franc values, including the euro and the British pound sterling, on the balance sheet of our Swiss subsidiary.
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Since we receive substantial revenues from activities in foreign jurisdictions, our results can be significantly affected by changes in foreign exchange rates, particularly in U.S. dollar exchange rates with respect to the Swiss franc, euro, British pound sterling, Canadian dollar and Swedish krona and, to a lesser degree, other currencies. When the U.S. dollar weakens against these currencies, the U.S. dollar value of non-U.S. dollar-based sales increases. When the U.S. dollar strengthens against these currencies, the U.S. dollar value of non-U.S. dollar-based sales decreases. Correspondingly, the U.S. dollar value of non-U.S. dollar-based costs increases when the U.S. dollar weakens and decreases when the U.S. dollar strengthens. Overall, our revenues in U.S. dollars generally benefit from a weaker dollar and are adversely affected by a stronger dollar relative to major currencies worldwide, especially those identified above. In particular, a general weakening of the U.S. dollar against other currencies would positively affect our revenues, gross profit and operating income as expressed in U.S. dollars (provided that the gross profit and operating income numbers from foreign operations are not losses, since in the case of a loss, the effect would be to increase the loss), whereas a general strengthening of the U.S. dollar against such currencies would have the opposite effect. In addition, our revenues and income with respect to sales transactions may be affected by changes in foreign exchange rates where the sale is made in a currency other than the functional currency of the facility manufacturing the product subject to the sale.
For 2009, 2008 and 2007, the changes in certain key foreign exchange rates affecting us were as follows:
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Presentation of Results and Analysis
The following table sets forth our results of operations, expressed as a percentage of total revenues for the years indicated, as well as our year-end backlogs:
Total revenues decreased by $52,244,000 or 21.5% to $190,774,000 in 2009 compared to $243,018,000 in 2008. We believe that this decrease was primarily the result of significantly lower sales to customers of our process business line, especially in EMEA/Asia and the negative effect of a stronger U.S. dollar in 2009 versus 2008 on the translation of the revenues of our foreign operations into U.S. dollars.
Total revenues increased by $41,341,000 or 20.5% to $243,018,000 in 2008 compared to $201,677,000 in 2007. This increase in revenues was primarily the result of a full year of contributions from Rader in 2008 compared to 15 weeks in 2007, increased spending by our process business line customers in EMEA/Asia, increased spending by our customers in our size reduction business line in addition to Rader, and the positive effect of a generally weaker U.S. dollar in 2008 versus 2007 on the translation of the revenues of our foreign operations into U.S. dollars.
Gross profit as a percentage of total revenues increased to 42.6% in 2009 from 41.7% in 2008 and decreased in both 2009 and 2008 from 42.8% in 2007. We believe that these changes primarily reflected changes in the sales mix of the products and services that we sold within our two business lines. Sales mix refers to the relative amounts of different products sold and services provided. Gross margin levels vary with the products sold or the services provided. For example, sales of replacement parts in our size reduction business line generally carry a higher gross margin than do sales of equipment within that line.
Selling, general and administrative (“SG&A”) expense decreased by $11,415,000 or 18.7% in 2009 compared to 2008. We believe that this decrease was primarily the result of decreased commissions and selling expenses related to decreased revenues, lower compensation and related costs associated with reduced staffing and adjusted work schedules, reduced discretionary spending resulting from cost reduction programs, a lower employee bonus accrual, the favorable effects of foreign exchange on transaction exposure caused by the marking to market of non-Swiss franc balances to Swiss franc values on the balance sheet of our Swiss subsidiary, and the favorable effect of a stronger U.S. dollar on the translation of foreign costs into U.S. dollars.
SG&A expense increased by $8,975,000 or 17.3% in 2008 compared to 2007. We believe that this increase was primarily the result of the inclusion of a full year of operations of Rader in 2008, increased commissions related to increased revenues, foreign exchange losses on transaction exposures caused by the marking to market of non-Swiss franc balances to Swiss franc values on the balance sheet of our Swiss subsidiary and the unfavorable effect of a generally weaker U.S. dollar on the translation of foreign costs into U.S. dollars, partially offset by a lower employee bonus accrual.
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SG&A expense as a percent of total revenues increased to 26.0% in 2009 from 25.1% in 2008 and 25.8% in 2007.
Research and development (“R&D”) expense decreased by $615,000 or 24.7% in 2009 compared to 2008, primarily due to reduced spending. R&D expense increased by $97,000 or 4.1% in 2008 compared to 2007, primarily due to the unfavorable effect of a weaker U.S. dollar on the translation of Swiss franc costs into U.S. dollars. R&D expense as a percent of total revenues was 1.0% in 2009, 1.0% in 2008 and 1.2% in 2007. There was no significant R&D expense in 2009, 2008 and 2007 associated with our size reduction business line.
Interest expense, net of interest income, decreased by $57,000 or 5.7% in 2009 compared to 2008 and decreased by $743,000 or 42.8% in 2008 compared to 2007. The decrease in 2009 compared to 2008 was primarily due to lower debt levels, partially offset by lower interest income earned on cash deposits. The decrease in 2008 compared to 2007 was primarily due to lower debt levels, excluding borrowings related to the Rader acquisition, lower interest rates and higher interest income, partially offset by interest expense on borrowings related to the Rader acquisition.
Gain on sale of investment of $2,972,000 in 2009 reflected the sale of the Company’s interest in Hasler.
Income before income taxes was $31,916,000 in 2009, $36,988,000 in 2008 and $30,142,000 in 2007. The $5,072,000 decrease in 2009 income before income taxes compared to 2008 was primarily the result of significantly lower sales to customers of our process business line, especially in EMEA/Asia, partially offset by a higher gross profit percentage. The $6,846,000 increase in 2008 income before income taxes compared to 2007 was primarily due to a full year of contributions from Rader in 2008 compared with 15 weeks in 2007, increased spending by our process business line customers in EMEA/Asia, increased spending by customers in our size reduction business line in addition to Rader, and the positive effect of a generally weaker U.S. dollar versus the same period in 2007 on the translation of the earnings of our foreign operations into U.S. dollars, partially offset by losses on transaction exposure caused by the marking to market of non-Swiss franc balances to Swiss franc values on the balance sheet of our Swiss subsidiary and a lower gross profit percentage.
The 2009, 2008 and 2007 provisions for income tax were $10,361,000, $11,215,000 and $8,821,000, and the overall effective tax rates were 32.5% in 2009, 30.3% in 2008 and 29.3% in 2007. The higher effective tax rates in 2009 compared with 2008 and in 2008 compared with 2007 were primarily due to a higher proportion of our earnings coming from the United States where these earnings are taxed at an overall higher rate than are our earnings in EMEA/Asia. We have foreign and U.S. state tax loss carryforwards of $601,000 and $4,145,000 which, if realized, would have an estimated future net income benefit of approximately $276,000.
We do not believe that inflation has had a material impact on our results of operations during the last three years.
Our order backlog at constant foreign exchange rates decreased by $18,223,000 or 26.3% at the end of 2009 compared with year-end 2008, from $69,372,000 to $51,149,000. Our order backlog at constant foreign exchange rates decreased by $3,098,000 or 4.3% at the end of 2008 compared with year-end 2007, from $72,470,000 to $69,372,000. The decrease in our order backlog in 2009 versus 2008 was primarily the result of the severe global economic slowdown of 2009, which resulted in sharply reduced demand for our equipment from many customers, most notably in the plastics compounding, base resin production, pulp and paper and wood and forest products industries. The decrease in our order backlog in 2008 versus 2007 was primarily the result of a decrease in demand for equipment in our process business line, partially offset by an increase in demand for equipment in our size reduction business line. Approximately $2,368,000 of our size reduction business line’s backlog at the end of 2009 was for blanket orders that can be released by the customer at any time over an 18-month period compared to approximately $2,902,000 of such blanket orders at the end of 2008.
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Liquidity and Capital Resources
Revolving Credit Debt
We, along with our U.S. subsidiaries (the “Borrowers”), are parties to a Loan Agreement (the “Citizens Loan Agreement”) with Citizens. The Citizens Loan Agreement provides the Borrowers with a five-year, $50,000,000 unsecured revolving line of credit facility (previously defined as the “Citizens Credit Facility”), which may be used for working capital requirements, other general corporate purposes and, subject to certain limitations, to fund acquisitions. Up to an aggregate of $10,000,000 of the Citizens Loan Facility may be used for letters of credit.
The interest rate on revolving loans under the Citizens Credit Facility can be based on either the prime rate or 1, 2, 3 or 6-month LIBOR, as selected by us. Prime rate loans bear interest at a fluctuating rate per annum equal to the prime rate of interest announced by Citizens from time to time less a percentage ranging from 0.25% to 1.00%, depending on the ratio of our funded debt to our adjusted earnings before interest expense, tax expense, and depreciation and amortization expenses for the most recent measurement period (the “Debt Ratio”). LIBOR loans bear interest at a fluctuating rate per annum equal to LIBOR for the selected interest rate period plus a percentage ranging from 0.875% to 1.625%, depending on the Debt Ratio.
The Borrowers are obligated to pay a fee for any unused borrowings under the Citizens Credit Facility equal to (i) a percentage ranging from 0.125% to 0.20% per annum, depending on the Debt Ratio, times (ii) the average unused portion of the Citizens Credit Facility.
The Citizens Credit Facility is unsecured, except that the lenders have been given a pledge of 65% of the equity interests of the following foreign subsidiaries of the Company which are not Borrowers: K-Tron (Schweiz) AG, K-Tron Colormax Limited, K-Tron PCS Limited, Jeffrey Rader Canada Company and Jeffrey Rader AB. The Citizens Loan Agreement contains financial and other covenants, including a minimum fixed charge coverage ratio, a minimum net worth and a maximum Debt Ratio, and includes limitations on, among other things, liens, acquisitions, consolidations, sales of assets, incurrences of debt and capital expenditures. As of January 2, 2010, the Borrowers were in compliance with these covenants. If an event of default, such as non-payment or failure to comply with a covenant, were to occur under the Citizens Loan Agreement, and subject to any applicable grace period, the lenders would be entitled to declare all amounts outstanding under the Citizens Credit Facility to be immediately due and payable.
All amounts borrowed under the Citizens Credit Facility are due on September 29, 2011. As of January 2, 2010, interest on the $7,000,000 borrowed under the Citizens Credit Facility was payable at the following rates on the following principal amounts for the periods ending on the dates indicated:
Gundlach Acquisition Debt
In connection with our March 3, 2006 acquisition of Gundlach, we issued as part of the purchase price a $3,000,000 unsecured, promissory note bearing interest payable quarterly at 5% per annum and with the principal payable in three equal installments of $1,000,000 on March 3 in each of 2008, 2009 and 2010. The final installment of $1,000,000 was paid on March 3, 2010.
Other Bank Debt
At January 2, 2010, our Swiss subsidiary had separate credit facilities totaling 18,400,000 Swiss francs (approximately $17,763,000) with four Swiss banks. This subsidiary’s real property in Switzerland, with a book value of 5,967,000 Swiss francs (approximately $5,760,000) as of January 2, 2010, is pledged as collateral under these credit facilities. As of January 2, 2010, there were no borrowings under any of these credit facilities, although 6,897,000 Swiss francs (approximately $6,658,000) of availability was being utilized for bank guarantees on our Swiss subsidiary’s behalf related to customer orders.
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In July 2009 we entered into a $3,000,000 letter of credit facility with a U.S. bank of which $548,000 was being utilized as of January 2, 2010 for bank guarantees related to customer orders.
Limitations on Debt
Our ability to incur new indebtedness is restricted under the Agreement and Plan of Merger (the “Merger Agreement”), dated as of January 8, 2010, by and between Hillenbrand, Inc., an Indiana corporation (“Hillenbrand”), Krusher Acquisition Corp., a New Jersey corporation and wholly-owned subsidiary of Hillenbrand (“Merger Sub”) and K-Tron International, Inc.
Under the Merger Agreement, we may not incur, prepay or cancel any Indebtedness for borrowed money. This restriction does not apply to any new Indebtedness (i) between K-Tron and any of our subsidiaries or (ii) incurred under the Citizen’s Credit Facility to repay obligations existing as of January 8, 2010 or for permitted capital expenditures in an amount for both items not to exceed $8,000,000. The Merger Agreement also prohibits us from guaranteeing or otherwise becoming liable for any Indebtedness or other obligations of another person other than obligations of one of our subsidiaries that (x) exceed $100,000 individually or $500,000 in the aggregate or (y) are outside the ordinary course of business consistent with our past practice.
Future Payments Under Contractual Obligations
We are obligated to make future payments under various contracts such as debt, lease and purchase agreements and commitments. The table below summarizes our significant contractual cash obligations as of January 2, 2010 for the items indicated:
In addition to these obligations, as of January 2, 2010, the Company had employment contracts with certain key executives. Under these contracts, each individual is guaranteed minimum compensation over the contract period. The Company may terminate these contracts upon thirty days advance written notice. The estimated future obligation under these contracts, if all of them were to be terminated as of January 2, 2010, was $2,139,000 payable within thirty days after the termination date.
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Capitalization
Our capitalization at the end of 2009, 2008 and 2007 is summarized below:
The weighted average annual interest rate on total debt at January 2, 2010 was 5.85%.
Total debt decreased by $15,662,000 in 2009 and $14,452,000 in 2008 as a result of principal payments.
Other Items
At the end of 2009 and 2008, our working capital was $81,469,000 and $67,694,000, and the ratio of our current assets to our current liabilities was 3.03 and 2.45. The increase in working capital at the end of 2009 was primarily due to a $21,000,000 increase in cash and cash equivalents. In 2009 and 2008, we utilized internally generated funds to meet our working capital needs.
Net cash provided by operating activities was $31,585,000 in 2009, $26,658,000 in 2008 and $27,048,000 in 2007. The increase in operating cash flow in 2009 compared to 2008 was primarily due to reductions in accounts receivable and inventory partially offset by lower net income and decreases in accrued expenses and accounts payable. Net income, depreciation and amortization and reduction of accounts receivable were the principal components of cash provided by operating activities in 2009. The slight decrease in operating cash flow in 2008 compared to 2007 was primarily due to an increase in accounts receivable, a decrease in accrued expenses and other current liabilities and an increase in prepaid expenses and other current assets, partially offset by higher net income and an increase in accounts payable. Net income and depreciation and amortization expenses were the principal components of cash provided by operating activities in 2008 and 2007.
The average number of days to convert accounts receivable to cash increased to 60 days in 2009 compared to 51 days in 2008 and 45 days in 2007 due to lower sales in 2009 compared to 2008 and 2007. The average number of days to convert inventory into cost of sales increased to 92 days in 2009 compared to 76 days in each of 2008 and 2007 due to lower cost of revenues in 2009 compared to 2008 and 2007.
Net cash provided by investing activities was $1,876,000 in 2009 and used in investing activities was $3,503,000 and $18,969,000 in 2008 and 2007. The cost of businesses acquired, net of cash received, was $0 in 2009; $400,000 in 2008 for an installment payment related to the purchase of certain assets of Wuxi Chenghao; and $16,339,000 in 2007, with $14,275,000 for the Rader acquisition, $1,414,000 paid to the seller of a business we acquired in 2006 (Premier Pneumatics, Inc.) in connection with an Internal Revenue Code section 338(h)(10) election and $650,000 for the purchase of certain assets of Wuxi Chenghao. Capital expenditures were $1,820,000, $3,686,000 and $2,265,000 in 2009, 2008 and 2007. In the third quarter of 2009, we sold our 19.9% investment in Hasler for euro 2,425,000 ($3,544,000) and received the cash proceeds in the fourth quarter of 2009. We previously recorded this investment as an other asset in our consolidated balance sheet and recognized a gain of $2,972,000 on the sale. In the second quarter of 2007, we sold to a related party a building that we were leasing to that related party and received $428,000 in cash.
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Net cash used in financing activities in 2009 was primarily for principal payments on debt and the purchase of 20,105 shares of our Common Stock, partially offset by the proceeds from stock option exercises and the tax benefits associated both therewith and also with the vesting of several restricted stock grants. Net cash used in financing activities in 2008 was primarily for principal payments on debt and for the purchase of 5,618 shares of our Common Stock, partially offset by the proceeds of stock option exercises and the tax benefits associated both therewith and also with the vesting of several restricted stock grants. Net cash provided by financing activities in 2007 was primarily from the $15,945,000 borrowed to finance the Rader acquisition and from the exercise of stock options and the tax benefit associated therewith, partially offset by principal payments on the Company’s debt.
Shareholders’ equity increased $27,260,000 in 2009 to $153,312,000, of which $21,555,000 was from net income, $1,875,000 was from the issuance of Common Stock in connection with the exercise of stock options and granting of restricted stock units, $1,562,000 was from the tax benefits associated with the vesting of restricted stock grants and the exercise of such stock options, $382,000 was from an unrealized gain, net of taxes, attributable to two interest rate swaps, $2,539,000 was from changes in foreign exchange rates, primarily the translation of Swiss francs into U.S. dollars, and $1,139,000 was from the increase in the excess of the Swiss pension plan assets over the pension obligation during 2009, net of taxes, partially offset by $1,792,000 used to purchase 20,105 shares of the Company’s Common Stock in connection with the exercise of stock options and granting of restricted stock. Shareholders’ equity increased $32,099,000 in 2008 to $126,052,000, of which $25,773,000 was from net income, $2,269,000 was from the issuance of Common Stock in connection with stock option exercises and the granting of restricted stock, $1,619,000 was from the tax benefits associated with the vesting of restricted stock grants and the exercise of such stock options, $1,200,000 was from changes in foreign exchange rates, primarily the translation of Swiss francs into U.S. dollars, and $2,261,000 was from a transition adjustment for our Swiss pension plan, partially offset by $769,000 used to purchase 5,618 shares of our Common Stock connection with the exercise of stock options and the vesting of restricted stock grants and $254,000 from an unrealized loss, net of taxes, attributable to several interest rate swaps.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for forward-looking statements made by us or on our behalf. We and our representatives may from time to time make written or oral statements that are “forward-looking”, including statements contained in this annual report on Form 10-K and other filings with the Securities and Exchange Commission (the “SEC”), reports to our shareholders and news releases. All statements that express expectations, estimates, forecasts or projections are forward-looking statements within the meaning of the Act. In addition, other written or oral statements which constitute forward-looking statements may be made by us or on our behalf. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “projects”, “forecasts”, “may”, “should”, variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and contingencies which are difficult to predict. These risks and uncertainties include, but are not limited to, the risks set forth in Item 1A above under the heading “Risk Factors”. Many of the factors that will determine our future results are beyond our ability to control or predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by any forward-looking statements that we may make. The forward-looking statements contained in this report include, but are not limited to, statements with respect to the proposed Merger and acquisition by Hillenbrand, statements regarding our ability to find alternative suppliers for certain components, the effect of the expiration of our patents on our business, the development and expected time for the introduction of new products, the sufficiency of our facilities, the retention of all of our future earnings for use in our business, our ability to project business conditions based on trend indicators used by management, the effect of changes in foreign exchange rates on our business, estimates of the realizability of deferred tax assets, determinations of the adequacy of reserves for inventory obsolescence and warranty costs and the effect on our business of legal proceedings in which we are involved. We undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are currently exposed to certain market risks related to fluctuations in foreign exchange rates and interest rate changes.
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Foreign Exchange Rate Risk
The primary currencies for which we have exchange rate exposure are (i) the U.S. dollar versus each of the Swiss franc, the euro, the British pound sterling, the Canadian dollar and the Swedish krona and (ii) the Swiss franc versus the euro and the British pound sterling. We do not, as a routine matter, use hedging vehicles to manage foreign exchange exposures. Foreign cash balances in currencies other than the Swiss franc are limited in order to manage the transaction exposure caused by the marking to market of non-Swiss franc balances to Swiss franc values on the balance sheet of our Swiss subsidiary.
As of January 2, 2010, a 10% unfavorable change in the foreign exchange rates affecting balance sheet transactional exposures would have resulted in a reduction in pre-tax earnings of approximately $970,000. This hypothetical reduction on transactional exposures is based on the difference between the January 2, 2010 actual foreign exchange rates and hypothetical rates assuming a 10% unfavorable change in foreign exchange rates on that date.
The translation of the balance sheets of our non-U.S. operations from local currencies into U.S. dollars is also sensitive to changes in foreign exchange rates. These translation gains or losses are recorded as translation adjustments (“TA”) within shareholders’ equity on our balance sheet. Using the example above, the hypothetical change in TA would be calculated by multiplying the net assets of our non-U.S. operations by a 10% unfavorable change in the applicable foreign exchange rates. The result of this calculation would be to reduce shareholders’ equity by approximately $6,685,000, or 4.4% of our January 2, 2010 shareholders’ equity of $153,312,000.
Interest Rate Risk
We have credit facilities or loans that require us to pay interest at rates that may change periodically. These variable rate obligations expose us to the risk of increased interest expense if short-term interest rates rise. We limit our exposure to increased interest expense from rising short-term interest rates by including in our debt portfolio various amounts of fixed rate debt as well as by the use of interest rate swaps. As of January 2, 2010, we had total debt of $8,000,000, $1,000,000 of which was subject to a fixed interest rate of 5.0% and $7,000,000 of which was variable rate debt subject to two interest rate swaps with fixed interest rates of 5.665% and 6.095%, subject in the case of our variable rate debt and interest rate swaps to increases in the event our Debt Ratio exceeds certain specified levels at the end of any relevant measurement period, as described in the Citizens Loan Agreement.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company and its subsidiaries and supplementary data required by this item are attached to this annual report on Form 10-K beginning on page.
Item 9.
Item 9.
Change In and Disagreements with Accountants on Accounting and Financial Disclosures.
None.
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report was carried out by us under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system will be met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
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Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is 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 in the United States of America.
Because of the inherent limitations of internal control over financial reporting, including the possibility of human error and the circumvention or overriding of controls, material misstatements may not be prevented or detected on a timely basis. Accordingly, even internal controls determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Furthermore, projections of any evaluation of the effectiveness of internal controls to future periods are subject to the risk that such controls may become inadequate due to changes in conditions, or that the degree of compliance with the internal control policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of January 2, 2010 based upon the criteria set forth in a report entitled Internal Control - Integrated Framework issued by the Commission of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management has concluded that, as of January 2, 2010, our internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of the fiscal year-end has been audited by Grant Thornton LLP, an independent registered public accounting firm and auditors of the consolidated financial statements of the Company, as stated in their report, which can be found in this Item 9A of our annual report on Form 10-K.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
K-Tron International, Inc.
We have audited K-Tron International, Inc. (a New Jersey corporation) and Subsidiaries’ internal control over financial reporting as of January 2, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). K-Tron International, Inc. and Subsidiaries’ 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 Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on K-Tron International, Inc. and Subsidiaries’ internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, 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, K-Tron International, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of January 2, 2010, 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 K-Tron International, Inc. (a New Jersey corporation) and Subsidiaries as of January 2, 2010 and January 3, 2009, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three fiscal years ended January 2, 2010, January 3, 2009, and December 29, 2007 and our report dated March 15, 2010 expressed an unqualified opinion.
GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 15, 2010
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Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers of K-Tron
Directors of K-Tron
Our Board of Directors currently consists of five directors and is classified with respect to terms of office into four classes. The current members of our Board of Directors are:
Set forth below is certain information regarding the current members of our Board, which has been provided by each director at our request:
Class I - Director with Term Continuing until 2010
Edward T. Hurd. Mr. Hurd has been a director since January 2002 and was most recently reelected at the 2006 annual meeting of shareholders. He is the principal partner in Hurd Consulting, focusing on high technology business management (1996 to present). From 2001 to 2007, Mr. Hurd was also a partner in Curry & Hurd, specializing in acquisitions and divestitures and the management of distressed businesses, and from 2000 to 2007 he was also a partner in Customer Valunomics, which evaluated customer relationships and loyalty. From 1996 to January 2000, Mr. Hurd was a consultant to and Chairman of the Board of Moore Products Company. From 1990 to 1996, he served as President of Honeywell Industrial, a division of Honeywell Incorporated that specialized in turnkey systems for process automation applications and distributed computer automation systems. Mr. Hurd is 71 years of age.
Mr. Hurd has spent most of his career as a director, officer or employee of companies involved in the process automation and process equipment industries. In his various positions, he has provided these companies with strategic and operational oversight and leadership. These past experiences have enabled him to advise our Board on a wide range of strategic, operational and research and development matters, which we believe makes him an asset to our Board.
Class II - Director with Term Continuing until 2011
Robert A. Engel. Mr. Engel has been a director since May 1999 and was most recently reelected at the 2007 annual meeting of shareholders. In January 2009, he was named Co-Head of Investment Banking and Capital Markets of Wells Fargo Securities LLC, a Wells Fargo Company (f/k/a Wachovia Capital Markets LLC). From June 2008 to January 2009, Mr. Engel was Co-Head of Investment Banking and Capital Markets of Wachovia Securities, which was the trade name for the corporate, investment banking and capital markets businesses of Wachovia Corporation and certain of its subsidiaries and affiliates. From June 2005 to June 2008, he was a Managing Director and Head of Mergers and Acquisitions of Wachovia Securities. From 1999 to June 2005, Mr. Engel was a Managing Director and Partner of Gleacher Partners LLC, a financial advisory and investment banking firm, and from 1995 to 1999, he was the Managing Director-Head of Mergers and Acquisitions of Gleacher NatWest Inc., a predecessor firm. From 1986 to 1995, Mr. Engel worked in various capacities at the investment banking firms of Gleacher & Co., Inc., C. J. Lawrence, Morgan Grenfell, Inc. and Morgan Grenfell & Co. Ltd. Mr. Engel is 46 years of age.
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Mr. Engel has an extensive background in investment banking, including both capital markets and mergers and acquisitions experience, and he also has managed investment banking businesses. He uses this experience to advise our Board in evaluating potential acquisitions as well as financial and other transactions, which we believe makes him a valuable member of our Board.
Class III - Directors with Terms Continuing until 2012
Norman Cohen. Mr. Cohen has been a director since 1974 and was most recently reelected at the 2008 annual meeting of shareholders. From 1993 to June 1999, he was Chairman and Chief Executive Officer of Creative Contracting Associates, Inc., a clothing manufacturer, and he was a consultant to Maggy London International, a clothing company, from 1999 until his retirement in June 2000. Mr. Cohen is 83 years of age.
Mr. Cohen has served as a director since 1974, six years before we became a public company. His long tenure with the Company gives him the understanding of our business to help guide our Board in making decisions about our Company’s future direction. Mr. Cohen has been retired for almost ten years, but before that he owned and managed companies in the apparel industry, and he uses this past experience to advise our Board regarding operational issues. This experience has given him a broad perspective on our operations, and, coupled with his operations background, has made him a valuable member of our Board.
Richard J. Pinola. Mr. Pinola has been a director since January 1994 and was most recently reelected at the 2008 annual meeting of shareholders. Since July 1, 2008, he has been a Principal of GPS Investment Group LLC, a private investment firm. From January 2005 to June 2008, Mr. Pinola was a Principal of Eric M. Godshalk & Co., a private investment firm. From June 1992 to December 2004, Mr. Pinola was Chief Executive Officer of Right Management Consultants, Inc. (“Right”), a publicly-held global consulting firm specializing in career transition and organizational consulting services that was acquired by Manpower Inc. in January 2004, and he also was Chairman of the Board of Right from January 1994 to January 2004. Prior to joining Right, he was President and Chief Operating Officer of Penn Mutual Life Insurance Company from March 1988 through September 1991 and a consultant from September 1991 until June 1992. Mr. Pinola is 64 years of age.
Mr. Pinola is currently a director of Corporate Property Associates 14 Incorporated, Corporate Property Associates 15 Incorporated, Corporate Property Associates 16 - Global Incorporated, Kenexa Corporation and Nobel Learning Communities, Inc. In the last five years, Mr. Pinola has also served on the boards of directors of BankRate, Inc. and Corporate Property Associates 17 Incorporated.
Mr. Pinola’s former role as Chief Executive Officer of Right, a NYSE-listed company, has enabled him to provide our Board with valuable insights regarding corporate governance and operations. In addition, his employment as a certified public accountant at Price Waterhouse & Co. early in his career and his extensive involvement in human resources and financial matters and his multiple public company directorships give him considerable expertise in financial, corporate governance and executive compensation matters, which he uses to advise our Board. We believe these skills uniquely qualify Mr. Pinola to serve as a member of our Board.
Class IV - Director with Term Continuing until 2013
Edward B. Cloues, II. Mr. Cloues has been a director since July 1985 and was most recently reelected at the 2009 annual meeting of shareholders. He became Chairman of the Board and Chief Executive Officer of K-Tron on January 5, 1998. Prior to joining K-Tron in 1998, Mr. Cloues was a partner in the law firm of Morgan, Lewis & Bockius LLP. Mr. Cloues is 62 years of age.
Mr. Cloues currently is a director and non-executive Chairman of the Board of AMREP Corporation and a director of Penn Virginia Corporation and of Penn Virginia Resource GP, LLC, the general partner of Penn Virginia Resource Partners, L.P.
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Mr. Cloues has served as our Chairman and Chief Executive Officer for more than 12 years, during which time we have grown from a relatively small public company in the industrial feeder business to a much larger public company with a more diverse business in material handling equipment and systems. This growth has been achieved both organically and through several major acquisitions. Mr. Cloues’ broad experience as both a business lawyer in a major law firm and a Chief Executive Officer has equipped him to lead our Company’s growth and to provide critical support to our Board’s decision-making process. We believe the breadth of Mr. Cloues’ experience as our Chief Executive Officer, as well as his current public board positions, make him a valuable asset to our Board. Furthermore, Mr. Cloues’ leadership abilities and communication skills make him particularly well qualified to be our Chairman.
Executive Officers of K-Tron
Our current executive officers are:
Set forth below is certain information regarding our current executive officers, with the exception of Mr. Cloues whose information was provided earlier in this Item 10 under the subsection “Directors of K-Tron”. This information has been provided by each executive officer at our request:
Kevin C. Bowen. Mr. Bowen has been Senior Vice President, Process Group of the Company since July 2005 and President and Chief Executive Officer of K-Tron America, Inc. since March 1995. From June 2000 to July 2005, he was also Senior Vice President, Feeder Group of the Company. From March 1994 to March 1995, Mr. Bowen was President of K-Tron North America, the North American sales division of K-Tron America. Mr. Bowen served as President of K-Tron America from May 1990 to March 1994 and has been with the Company in various other capacities since 1979.
Lukas Guenthardt. Mr. Guenthardt has been Senior Vice President, Corporate Development of the Company since July 2005. Prior to that, he was Senior Vice President, Pneumatic Conveying Group and Chief Strategy Officer of the Company from February 2002 to July 2005, Senior Vice President, New Businesses and Chief Strategy Officer from June 2000 to February 2002 and Senior Vice President - Strategic Planning, Product Development and Marketing from June 1998 to June 2000. Mr. Guenthardt was Managing Director of K-Tron (Schweiz) AG (“K-Tron Switzerland”) from July 1995 to June 1998, Managing Director of the Soder Division of K-Tron Switzerland from March 1994 to July 1995, and Director of International Research and Development of the Company from July 1992, when he joined K-Tron, until March 1994.
Donald W. Melchiorre. Mr. Melchiorre has been Senior Vice President, Size Reduction Group of the Company since May 2006 and President and Chief Executive Officer of Penn Crusher since October 2004. He was also President and Chief Executive Officer of Jeffrey from October 2004 until November 2007. From December 1996 until October 2004, he was President and Chief Operating Officer of Penn Crusher, and from August 2002 to October 2004 he held the same position at Jeffrey. From 1982 to 1987, Mr. Melchiorre worked at Penn Crusher as a Regional Sales Manager and left the company in 1987 to become a Regional Sales Manager, and subsequently North American Sales and Marketing Manager and then Director for Sales and Marketing-European Operations, for K-Tron’s U.S. and Swiss manufacturing subsidiaries. In 1992, he left K-Tron to establish EPI Technical Sales, Inc., an independent sales representative organization selling bulk material handling equipment, including both the K-Tron Soder and Penn Crusher lines of equipment. He returned to Penn Crusher in 1996.
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Robert E. Wisniewski. Mr. Wisniewski has been Senior Vice President, Chief Financial Officer and Treasurer of the Company since May 30, 2009. From February 23, 2008 until May 30, 2009, he served as Vice President, Finance of K-Tron America, Inc. and Chief Financial Officer of the K-Tron Process Group. Prior to joining K-Tron America, Mr. Wisniewski was a Managing Director of ELB Capital Management LLC and FB Capital Partners, LP, two private equity/income partnerships, from June 2005 until February 2008. He worked as an independent financial and management consultant from September 2003 to May 2005 and served as Executive Vice President and Chief Financial Officer of Safeguard Business Systems, Inc. from June 2002 to August 2003 and held the same position at Hospitality Solutions International, Inc. from September 2000 to April 2002. From 1986 to 2000, Mr. Wisniewski served in various financial capacities at Moore Products Company, including as Chief Financial Officer, Treasurer and Controller. He is a certified public accountant and worked at Ernst & Young and predecessor accounting firms from 1975 to 1986.
The executive officers are elected or appointed by our Board of Directors or by an appropriate subsidiary board of directors to serve until the election or appointment of their successors or their earlier death, resignation or removal. They may also hold positions in other subsidiaries of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, requires our directors, certain of our officers and certain other persons who own more than ten percent of our Common Stock to file reports of ownership of our securities and changes in ownership of our securities with the SEC. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations from our directors and officers that no other reports were required with respect to them, all filings required to be made by our Section 16(a) reporting persons during fiscal year 2009 were made on a timely basis.
Statement of Corporate Ethics and Code of Business Conduct
Our Board has adopted a Statement of Corporate Ethics and Code of Business Conduct applicable to all of our directors, officers and employees. Violations of the Statement of Corporate Ethics and Code of Business Conduct may be reported to our Corporate Ethics Officer or, in cases involving accounting, internal accounting controls or auditing matters, to the Chairperson of the Audit Committee or our Chief Executive Officer. A copy of our Statement of Corporate Ethics and Code of Business Conduct can be obtained without charge by visiting our website at http://www.ktroninternational.com and following the links to “Corporate Governance” and “Statement of Corporate Ethics and Code of Business Conduct”.
Audit Committee of Our Board of Directors
Our Board has an Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The primary purposes of the Audit Committee are to:
•
assist our Board in its oversight of our (i) accounting and financial reporting processes and the audit of our financial statements and (ii) compliance with legal and regulatory requirements and the Company’s Statement of Corporate Ethics and Code of Business Conduct;
•
interact directly with, and evaluate the performance of, our independent registered public accounting firm, including determining whether to engage or dismiss such firm and on what terms and monitoring its qualifications and independence; and
•
prepare the report required by the rules and regulations of the SEC to be included in our annual proxy statement.
The current members of the Audit Committee are Messrs. Pinola (Chairman), Engel and Hurd, each of whom our Board has determined (i) is an “independent director” as such term is defined in Nasdaq Marketplace Rule 4200(a)(15) and (ii) with respect to their positions on the Audit Committee, meets the independence requirements applicable to that committee as prescribed by The Nasdaq Stock Market LLC (the “Nasdaq”), the SEC, the Internal Revenue Service and the Audit Committee charter. Our Board has further determined that two of the three members of the Audit Committee, Messrs. Pinola and Engel, are each an “audit committee financial expert” as such term is defined in Item 407(d)(5)(ii) of Regulation S-K promulgated by the SEC. Certain information regarding the relevant experience of each individual who is an “audit committee financial expert” has been set forth under the subsection “Directors of K-Tron” in Item 10 of our annual report on Form 10-K.
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Item 11.
Item 11. Executive Compensation.
Compensation Discussion and Analysis
In this Compensation Discussion and Analysis, we address the compensation paid or awarded to our executive officers named in the Summary Compensation Table that appears later in this Item 11 of our annual report on Form 10-K. We sometimes refer to these executive officers as our “named executive officers”, and all references herein to the “Committee” mean the Compensation and Human Resources Committee of our Board of Directors.
Objectives of Our Compensation Program
Our compensation program is based on the following primary objectives:
•
Executive compensation should be industry and geographically competitive so that we can attract, retain and motivate talented executives with appropriate backgrounds and skill sets;
•
Executives should be accountable for our performance as well as for their own individual performances, so that their compensation should be tied to both corporate financial measures and individual performance measures; and
•
Executive compensation packages should include some equity-based compensation in order to better align the interests of our executives with those of our shareholders.
Role of Executive Officers in Compensation Decisions
Our Chief Executive Officer annually reviews the performance of each of our named executive officers (other than our Chief Executive Officer, whose performance is reviewed solely by the Committee). The conclusions reached by our Chief Executive Officer and his recommendations based on these reviews, including proposed salary adjustments and annual incentive compensation awards, are then presented to the Committee. The Committee can exercise its discretion in modifying any recommended salary adjustments or bonus awards to our named executive officers. Decisions with respect to equity grants are also made by the Committee, upon the recommendation of our Chief Executive Officer, but these decisions are made later in the year than the annual performance reviews.
2009 Executive Compensation Components
For the fiscal year ended January 2, 2010, the principal components of compensation for our named executive officers were:
•
Cash incentive (or bonus) compensation;
•
Equity incentive compensation; and
•
Retirement, perquisites and other personal benefits.
Base Salary
We provide our named executive officers with base salaries to compensate them for services rendered during the year. The decisions of the Committee with respect to base salaries are subjective and not based on any list of specific criteria, but they take into account each executive officer’s position and level of responsibility, his compensation relative to other officers of the Company and his individual performance.
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Salary levels are typically considered annually as part of the Company’s performance review process as well as upon a promotion or other significant change in job responsibility. In recent years, except where there has been a significant change in job responsibility, most salary increases for our named executive officers have been cost-of-living increases, and they generally have taken effect at the beginning of our second fiscal quarter, which is on or about April 1 of each year. On February 9, 2009, we determined that, due to the global economic crisis and the anticipated slowdown in our business, none of our employees, including our named executive officers, would receive base salary increases until at least the end of the third quarter 2009. On June 26, 2009, we extended this freeze on base salaries of all of our employees, including our named executive officers, through March 2010. At the same time, our named executive officers voluntarily agreed to an 8% reduction in their base salaries for 13 two-week pay periods starting July 6, 2009 and ending December 31, 2009. Since January 1, 2010, our named executive officers have been receiving their regular base salaries.
Cash Incentive Compensation
Annual cash incentive awards, also referred to as cash bonuses, are a key part of each named executive officer’s compensation package. For fiscal years 2002 through 2008, annual cash incentive awards were paid to our named executive officers and our other employees early in the following year pursuant to bonus guidelines used in preparing our budget for the year for which the bonuses were paid. These guidelines created a bonus pool for the entire Company if the budgeted diluted earnings per share (“EPS”) were achieved. Although the budget in each of those years was approved by our Board, including the members of the Committee, the Committee retained full discretion to make such specific cash incentive awards, if any, as it deemed appropriate, after the end of the year. The awards were made based on the Company’s achievement of its EPS target for the year, the amount of pre-tax, pre-bonus income generated by the Company in excess of what was necessary to achieve that EPS target and the assessed contribution of each named executive officer to the Company’s success.
In fiscal year 2009, the Committee intended to re-examine the Company’s bonus methodology since the logic behind the EPS-based calculation of the bonus pool (described above) used in 2002 when EPS was $1.33, did not seem as relevant in 2008 when EPS was a much stronger $9.03. This re-examination was delayed, however, by the challenges presented by global economic slowdown and credit crisis that reached its peak in the first quarter of 2009 and then by the discussions and negotiations with Hillenbrand in the fall of 2009 that led to the signing of the Merger Agreement, dated as of January 8, 2010, by and between Hillenbrand, Merger Sub and K-Tron International, Inc.
As a result of these factors, cash bonuses for 2009 for the named executive officers have been determined by the Chief Executive Officer and the Committee on a subjective basis and not using the bonus guidelines applied in past years. The key factor in the decision to pay bonuses was the Company’s relatively strong earnings performance in 2009 in a very difficult and challenging economic and business environment.
Our named executive officers received the following incentive compensation payments in March 2010 for fiscal year 2009 performance:
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In determining Mr. Cloues’ 2009 bonus award, the Committee noted in particular (i) his leadership of the Company through very turbulent times in 2009, (ii) the Company’s achievement of 2009 net income, EPS and EBITDA that were strong numbers in the Committee’s view, given the very difficult economic climate for industrial companies in 2009, (iii) the Company’s success in cutting costs and controlling expenses in 2009 and implementing such measures early in the 2009 fiscal year and (iv) the successful negotiation of the proposed Merger, which was managed by Mr. Cloues. The 2009 bonus awards made by the Committee to our other named executive officers were recommended by Mr. Cloues and were based on his subjective assessment of their contributions to the Company in 2009.
In light of the proposed Merger with Merger Sub which will result in K-Tron ceasing to be a public company, no decision has yet been made concerning what cash bonus plan might be used by the Company for fiscal year 2010.
Equity Incentive Compensation
The Committee administers the Company’s 2006 Equity Compensation Plan as amended (the “Plan”), under which grants of stock options, stock awards, stock units, stock appreciation rights and other stock-based awards may be made. The purpose of such grants is to provide an additional, longer-term incentive to key employees to work to maximize shareholder value, and they also serve as a retention device to encourage such employees to remain with us. Such grants are entirely at the discretion of the Committee, including their timing, the recipients thereof and the number of shares underlying any particular grant. On May 14, 2009, the Committee issued grants under the Plan of 2,000 restricted stock units (“RSUs”) to Mr. Cloues and 1,000 RSUs to each of Messrs. Melchiorre, Bowen, Wisniewski and Guenthardt. Each of these grants will vest on May 14, 2013 if the recipient remains employed by the Company or a subsidiary until that date, and they are subject to acceleration in the event of a change of control of the Company prior to that date as defined in the Plan.
These RSUs granted to our named executive officers, including our Chief Executive Officer, are intended to provide them with a long-term incentive and to more closely align their interests with those of the Company’s shareholders. During fiscal year 2009, we chose to issue equity incentive compensation to our named executive officers in the form of RSUs instead of as restricted stock grants as we had done in fiscal years 2004 through 2008. Our decision to use RSUs instead of restricted stock grants was based on, among other things: (i) the reduction in administration procedures and costs associated with RSUs; (ii) the streamlined forfeiture procedures for RSUs; (iii) the increased flexibility RSUs offer to K-Tron and our named executive officers with respect to tax planning; and (iv) the uniform treatment of RSUs in foreign jurisdictions, which makes RSUs a better equity compensation vehicle for our employees based outside of the United States.
Retirement, Perquisites and Other Personal Benefits
Each of our named executive officers participates in one of two 401(k) plans maintained by the Company and its subsidiaries for our two business lines. Our named executive officers are also provided with perquisites and other personal benefits, including a car allowance, supplemental health insurance, additional life insurance and, in the case of our Chief Executive Officer, additional life and disability insurance, that we and the Committee believe are reasonable and consistent with our overall compensation program to better enable us to attract and retain superior employees for key positions. The Committee periodically reviews the levels of perquisites and other personal benefits provided to our named executive officers.
Deductibility of Executive Compensation
As part of its role, the Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that the Company may not deduct compensation of more than $1,000,000 that is paid to certain covered officers except in certain circumstances. Covered officers include each of our named executive officers except for our Chief Financial Officer, Mr. Wisniewski. While the Committee considers this limitation in structuring our compensation program, it may approve compensation that does not meet these requirements in order to ensure competitive levels of total compensation for our named executive officers. In this regard, all of our Chief Executive Officer’s compensation in 2009 is expected to be deductible for federal income tax purposes.
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Compensation Related to the Proposed Merger
The Company has established a transaction bonus plan (the “Transaction Bonus Plan”) whereby the our Chief Executive Officer, with the approval of the Committee, can direct that certain bonuses be paid by the Company to those of its employees, including our named executive officers, who have provided special assistance in connection with the transactions contemplated by the Merger Agreement. The aggregate amount of bonuses payable under the Transaction Bonus Plan will not exceed $500,000. Payment to a named executive officer from the transaction bonus plan, if any, will be determined by Mr. Cloues with the approval of the Committee and will be paid not later than six (6) months after the closing date of the Merger. However, as of February 24, 2010, our Chief Executive Officer had not selected the employees, or determined the amounts of the awards to be paid to them, pursuant to the Transaction Bonus Plan.
Consummation of the proposed Merger will constitute a change of control of the Company under our employment agreement with Mr. Cloues. Set forth below in the section entitled “Employment Agreements and Potential Payments Upon Termination or Change of Control” is a description of the severance payments Mr. Cloues would be entitled to receive under his employment agreement in the event of the termination of his employment in connection with the proposed Merger.
Compensation and Human Resources Committee Report
The Compensation and Human Resources Committee establishes and oversees the design and functioning of K-Tron’s executive compensation program. We have reviewed and discussed the foregoing Compensation Discussion and Analysis with the management of the Company. Based on this review and discussion, we recommended to the Board of Directors that the Compensation Discussion and Analysis be included in K-Tron’s annual report on Form 10-K for fiscal year 2009.
Norman Cohen, Chairperson
Richard J. Pinola
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Summary Compensation Table
The following table and footnotes set forth certain information with respect to compensation earned during fiscal years 2009, 2008 and 2007 by (i) our principal executive officer, (ii) our current principal financial officer, (iii) our former principal financial officer who resigned effective May 29, 2009, and (iii) our three other most highly paid executive officers.
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Grants of Plan-Based Awards
The following table sets forth certain information regarding grants of plan-based awards during fiscal year 2009 to our named executive officers.
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Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information regarding outstanding equity awards as of January 2, 2010 held by our named executive officers.
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Option Exercises and Vested Stock Awards
The following table sets forth certain information regarding stock option exercises by our named executive officers and the vesting of stock awards held by our named executive officers during fiscal year 2009. All monetary amounts in this table, including the footnotes, have been rounded to the nearest dollar.
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Employment Agreements and Potential Payments Upon Termination or Change of Control
Mr. Cloues
Mr. Cloues was employed by us during fiscal year 2009 under an employment agreement pursuant to which he served as our Chairman of the Board and Chief Executive Officer. Effective March 31, 2008, the Compensation and Human Resources Committee (the “Committee”) of our Board of Directors approved a 3.5% base salary increase for Mr. Cloues, raising his annual base salary to $530,700. On February 9, 2009, we determined that due to the global economic crisis and anticipated slowdown in business, none of our employees, including Mr. Cloues, would receive base salary increases until at least the end of the third quarter 2009. On June 26, 2009, we extended this freeze on base salaries of all of our employees, including our named executive officers, through March 2010. Further, in June 2009, Mr. Cloues, along with our other named executive officers, voluntarily agreed to an 8% reduction in his base salary for 13 two-week pay periods starting July 6, 2009 and ending December 31, 2009. Since January 1, 2010, Mr. Cloues and all of our other named executive officers have been receiving their regular base salaries.
Under the amended and restated employment agreement with Mr. Cloues, dated as of November 11, 2008, which superseded his prior employment agreement, Mr. Cloues is entitled to an annual base salary of not less than his current annual base salary, bonuses as determined by the Committee, a car allowance of not less than $12,000 annually, an annual physical examination, vacation of six weeks per year and participation in employee benefits of the Company on the same basis as other senior level executives. Mr. Cloues also receives reimbursement on an after-tax basis of the premiums he pays for certain specified term life and disability insurance coverages.
Mr. Cloues’ employment agreement provides that he can terminate his employment, with or without good reason, upon not less than 90 days’ prior written notice. For purposes of Mr. Cloues’ employment agreement, the term “good reason” means the failure by us to observe or perform any of the material terms or provisions set forth in Mr. Cloues’ employment agreement. We may terminate his employment without cause (as defined in his employment agreement) upon not less than 30 days’ prior written notice to Mr. Cloues. In the absence of a change of control, if we terminate his employment without cause or Mr. Cloues terminates his employment for good reason, Mr. Cloues will be entitled to a lump sum payment equal to 200% of his then-annual base salary and car allowance. In addition, Mr. Cloues will receive a lump sum payment equal to the cost that would be incurred under our plans to provide health care benefits for the two-year period following his termination date comparable to the coverage existing at the time of termination, less the cost paid by active Company employees for comparable coverage, with the difference being grossed up to cover the estimated federal, state and local income and FICA taxes on such amount. If Mr. Cloues’ employment had been terminated by us without cause or had he resigned for good reason, in either case effective as of January 2, 2010, in the absence of a change of control, he would have been entitled to receive an aggregate lump sum payment equal to approximately $1,115,943. In addition, he would be entitled to receive a payment for the value of supplemental health insurance provided to him and his dependents for certain health care costs not otherwise covered by his existing health insurance for a two-year period, which value is difficult to quantify since the program is effectively self-insured by the Company up to $100,000 per calendar year for the insured employee and his dependents.
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In the event Mr. Cloues’ employment is terminated on account of disability, he will be entitled to receive two years of his then-annual base salary and car allowance, less the present value of any payments that are expected to be made to him during the two-year period following his termination date under any disability benefit programs. In addition, Mr. Cloues will receive a lump sum payment equal to the cost that would be incurred under the Company’s plans to provide health care benefits for the two-year period following his termination date comparable to the coverage existing at the time of termination, less the cost paid by active Company employees for comparable coverage, with the difference being grossed up to cover the estimated federal, state and local income and FICA taxes on such amount. If Mr. Cloues’ employment had been terminated on account of disability, effective as of January 2, 2010, he would have been entitled to receive an aggregate lump sum payment equal to approximately $1,115,943, assuming no payments would be made to him under any disability benefit programs. In addition, he would be entitled to receive a payment for the value of supplemental health insurance provided to him and his dependents for certain health care costs not otherwise covered by his existing health insurance for a two-year period, which value is difficult to quantify since the program is effectively self-insured by the Company up to $100,000 per calendar year for the insured employee and his dependents.
In the event of Mr. Cloues’ death, we will pay to his personal representative an amount equal to his base salary for the month in which he dies and for three months thereafter. If Mr. Cloues’ employment had been terminated on account of his death, effective as of January 2, 2010, we would have paid his personal representative a lump sum payment equal to $176,900.
Mr. Cloues’ employment is subject to termination by our Board of Directors at any time for “cause”, in which case Mr. Cloues would not be entitled to receive any severance payments.
Mr. Cloues’ employment agreement includes provisions relating to a termination of employment that occurs during the period beginning on the date of a change of control (as defined in his employment agreement) and ending on the first to occur of (i) the date that is one year after the change of control or (ii) March 1 following the end of the calendar year in which the change of control occurs. If, during this period, Mr. Cloues’ employment is terminated by us or any successor for any reason other than death, disability or cause or Mr. Cloues resigns for any reason, we will pay him (i) an amount equal to three times his annual base salary and car allowance in effect either immediately prior to his termination of employment or immediately prior to the change of control, whichever is higher; (ii) an amount equal to the cost that would be incurred by Mr. Cloues for medical and other health care benefits that were provided to Mr. Cloues immediately prior to the termination of his employment or immediately prior to the change of control, whichever is higher, for the two-year period following his termination date comparable to the coverage existing at the time of termination, less the cost paid by active Company employees for comparable coverage, with the difference being grossed up to cover the estimated federal, state and local income and FICA taxes on such amount; (iii) an amount equal to the after-tax cost that Mr. Cloues would incur to continue certain specified life and disability insurance coverages for the two-year period following his termination date; and (iv) an amount equal to the spread on any stock options held by him, whether or not such stock options were exercisable at the date of his termination.
In the event that Mr. Cloues’ employment had been terminated upon a change of control of the Company, effective as of January 2, 2010, he would have been entitled to receive an aggregate lump sum payment equal to approximately (a) $1,628,100, which represents three times his annual base salary and car allowance in effect on January 2, 2010, plus (b) $965,500, which represents an amount equal to the spread (the excess of market value (which was $108.75 per share as of January 2, 2010) over the exercise price) on all stock options held by him as of January 2, 2010, plus (c) $30,543, which represents the approximate after-tax cost of continuing his health care benefits for the two-year period following January 2, 2010, as described above plus (d) $57,038, which represents the after-tax cost of continuing his life and disability insurance coverages for the two-year period following January 2, 2010. In addition, he would be entitled to receive a payment for the value of supplemental health insurance provided to him and his dependents for certain health care costs not otherwise covered by his existing health insurance for a two-year period, which value is difficult to quantify since the program is effectively self-insured by the Company up to $100,000 per calendar year for the insured employee and his dependents. Mr. Cloues held options to purchase 10,000 shares of our Common Stock as of January 2, 2010, with an exercise price of $12.20 per share.
Mr. Cloues also held 2,000 RSUs and restricted stock grants for 9,000 shares of our Common Stock as of January 2, 2010. Pursuant to the terms of the applicable equity compensation plans, these RSUs and restricted stock grants become fully vested upon a “change of control” (as defined in the applicable equity compensation plans). If there had been a “change of control” of the Company on January 2, 2010, the restrictions and conditions on all 2,000 RSUs and 9,000 shares of unvested restricted stock of the Company held by Mr. Cloues would have immediately lapsed.
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The employment agreement provides that if any payments to be made or benefits to be provided to Mr. Cloues under his employment agreement or otherwise would result in his being subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, we will pay Mr. Cloues an additional gross-up amount to cover the excise taxes imposed by Section 4999 of the Internal Revenue Code and taxes resulting from such gross-up payment. If a “change of control” had occurred on January 2, 2010, no amount would have been payable to Mr. Cloues as an excise tax gross-up payment.
Mr. Cloues’ employment agreement provides that during the term of his employment and for two years thereafter in the event his employment is terminated by us by reason of his disability or for “cause”, Mr. Cloues may not compete with us and may not solicit any of our customers or employees. The non-competition and non-solicitation restriction period is one year if Mr. Cloues resigns for any reason (except after a “change of control”, in which case there is no non-competition or non-solicitation period) or is terminated by us without “cause”.
Messrs. Bowen, Guenthardt and Wisniewski
Messrs. Bowen, Guenthardt and Wisniewski (the “executives”) were employed by us or one of our subsidiaries during fiscal year 2009 under employment agreements with us. Effective March 31, 2008, the Committee approved a 3.5% base salary increase for each of Messrs. Bowen and Guenthardt, raising their annual base salaries to $255,230, and $225,630, respectively. Mr. Wisniewski became an employee of a Company subsidiary on February 23, 2008 at an annual salary of $190,000 and with a signing bonus of $12,500 per quarter for four quarters (subsequently extended for another quarter until he replaced Mr. Remick as the Company’s Chief Financial Officer), which signing bonus was viewed by both parties as additional salary. On February 9, 2009, we determined that, due to the global economic crisis and anticipated slowdown in business, none of our employees, including the executives, would receive base salary increases until at least the end of the third quarter 2009. On June 26, 2009, we extended this freeze on base salaries of all of our employees, including the executives, through March 2010. Although the Committee determined that Mr. Wisniewski would not receive a base salary increase, under the terms of his employment agreement, which was amended and restated on March 26, 2009 to reflect his anticipated election to the positions of Chief Financial Officer, Senior Vice President and Treasurer of K-Tron, Mr. Wisniewski’s annual base salary was increased to $240,000, effective May 30, 2009, but his quarterly signing bonus was ended, netting out to no effective change in his salary. Further, each of Messrs. Bowen, Guenthardt and Wisniewski voluntarily agreed to an 8% reduction in his base salary for 13 two-week pay periods starting July 6, 2009 and ending December 31, 2009. Since January 1, 2010, the executives have been receiving their regular base salaries.
The amended and restated employment agreements with each of Mr. Bowen and Mr. Guenthardt, dated as of November 11, 2008, and the amended and restated employment agreement with Mr. Wisniewski, dated as of March 26, 2009, each supersedes such executive’s prior employment agreement with us (such agreements collectively, the “Amended Agreements”). Under the Amended Agreements, the executives are entitled to an annual base salary of not less than their current base salaries, bonuses as determined by the Committee, a car allowance of not less than $12,000 annually, vacation of five weeks per year and participation in employee benefits of the Company on the same basis as other senior level executives. We may reduce the executives’ annual base salaries in the event reductions are generally being made for other officers of K-Tron or of our subsidiaries holding comparable positions.
The Amended Agreements provide that an executive may terminate employment upon not less than 90 days’ prior written notice. Employment is also subject to termination by reason of an executive’s disability or by our Board of Directors at any time for “cause” (as defined in the Amended Agreements). In any of these cases, the executive would not be entitled to receive any severance payments.
Under each of Messrs. Bowen’s, Guenthardt’s and Wisniewski’s employment agreement, we have the right to terminate the employment of the executive at any time without cause upon 30 days’ prior written notice and the executive may resign for good reason upon 90 days’ prior written notice. For purposes of the employment agreements with Messrs. Bowen, Guenthardt and Wisniewski, before the occurrence of a change of control, “good reason” means any action or inaction that constitutes a material breach of the employment agreement by us or our subsidiaries, including failure to obtain from our successors the express assumption required by the employment agreement. On or after a change of control, the term “good reason” means: (i) a material diminution of the executive’s base salary; (ii) a material change in the geographic location at which the executive must perform services, which means the relocation of the executive’s principal location of work to any location that is in excess of 50 miles from the location immediately prior to such relocation; (iii) a material diminution in the executive’s authority, duties or responsibilities; or (iv) any action or inaction that constitutes a material breach of the employment agreement by us or our subsidiaries, including failure to obtain from our successors the express assumption required under the employment agreement.
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If we terminate the executive’s employment without cause or the executive resigns for good reason, and he executes a written release, we will pay him a lump sum amount equal to 100% of his then-annual base salary and car allowance. In addition, he will receive a lump sum payment equal to the cost that would be incurred under our plans to continue health care benefits for the one-year period following his termination date, less the cost paid by active Company employees for comparable coverage, with the difference being grossed up to cover the estimated federal, state and local income and FICA taxes on such amount. If the employment of Messrs. Bowen, Guenthardt and Wisniewski were terminated without cause or such executive resigned for good reason, in either case effective as of January 2, 2010, such executive would have been entitled to receive an aggregate lump sum payment of approximately $291,103, $258,471 and $252,000, respectively. In addition, Messrs. Bowen, Guenthardt and Wisniewski would be entitled to receive a payment for the value of supplemental health insurance provided to each of them and their dependents for certain health care costs not otherwise covered by their existing health insurance for a one-year period, which value is difficult to quantify since the program is effectively self-insured by the Company up to $100,000 per calendar year for the insured employee and his dependents.
In the event of the death of any of the executives, we will pay to the executive’s personal representative an amount equal to the executive’s base salary for the month in which he dies and for three months thereafter. Had any of Messrs. Bowen, Guenthardt or Wisniewski died on January 2, 2010, we would have paid the personal representative of each such executive an amount equal to $85,077, $75,210 and $80,000, respectively.
As of January 2, 2010, Messrs. Bowen and Guenthardt each held restricted stock grants for 4,500 shares of our Common Stock, Mr. Wisniewski held a restricted stock grant for 2,500 shares of our Common Stock and Messrs. Bowen, Guenthardt and Wisniewski each held 1,000 RSUs. Pursuant to the terms of the applicable equity compensation plans, these restricted stock grants and RSUs become fully vested upon a “change of control” (as defined in the applicable equity compensation plans). If there had been a “change of control” of the Company on January 2, 2010, the restrictions and conditions on all shares of unvested restricted stock and RSUs of the Company held by each of them would have immediately lapsed.
The Amended Agreements provide that during the term of each executive’s employment and for one year thereafter in the event his employment is terminated by us by reason of his disability or for “cause”, or in the event the executive voluntarily terminates his employment, the executive may not compete with us and may not solicit any of our customers or employees.
Mr. Remick
Mr. Remick was employed as our Senior Vice President, Chief Financial Officer and Treasurer under an employment agreement with K-Tron until his resignation, effective May 29, 2009. Under his employment agreement, he was entitled to receive an annual base salary, which could be increased from time to time, and such additional compensation, including bonus payments, as may be awarded to him. Upon his resignation, Mr. Remick was paid $9,853 for accrued vacation time, and he forfeited 4,500 shares of unvested restricted stock of the Company.
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Director Compensation
The following table sets forth certain information regarding director compensation during the fiscal year ended January 2, 2010.
(1)
Amounts in this column reflect amounts paid in cash in fiscal year 2009 to directors who are not employees of the Company for their membership on our Board of Directors and committees of our Board of Directors. Mr. Cloues, who is our Chairman of the Board and Chief Executive Officer, did not receive any separate payments for his service as a director.
Directors who are not employees of K-Tron receive an annual retainer of $40,000, a $5,000 annual retainer for membership on the Audit Committee, a $2,500 annual retainer for membership on the Compensation and Human Resources Committee, a $1,000 annual retainer for membership on the Executive Committee and $1,000 for each Board meeting attended. Also, the Chairperson of the Audit Committee is paid an additional $5,000 annual retainer for his service in such capacity, and the Chairperson of the Compensation and Human Resources Committee is paid an additional $2,500 annual retainer for his service in such capacity. All retainers are paid on a prorated quarterly basis. Directors do not normally receive compensation for their participation in telephone meetings or for their attendance at committee meetings.
Compensation and Human Resources Committee Interlocks and Insider Participation
The current members of our Compensation and Human Resources Committee, both of whom were members of the Compensation and Human Resources Committee throughout fiscal year 2009, are Norman Cohen and Richard J. Pinola. Neither member of this Committee was an officer or employee of K-Tron or any of its subsidiaries during fiscal year 2009, was formerly an officer of K-Tron or any of its subsidiaries, or had any relationship with K-Tron since the beginning of fiscal year 2009 which requires disclosure under applicable SEC regulations. In fiscal year 2009, none of our executive officers served as a member of the board of directors or compensation committee of any entity that had or has one or more executive officers serving on our Board of Directors or our Compensation and Human Resources Committee.
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Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of March 1, 2010 (or as of such other dates as are indicated in footnotes 5 through 8 to such table) with respect to shares of our Common Stock beneficially owned by each of our directors, named executive officers, all of our directors and executive officers as a group and each person we believe to be the beneficial owner of more than 5% of the outstanding shares of our Common Stock. Except as indicated below, the shareholders who are directors and named executive officers share voting and investment power, with respect to shares owned by each of them, with Hillenbrand, pursuant to a Voting Agreement, dated as of January 8, 2010 (the “Voting Agreement”), by and between Hillenbrand, Merger Sub and such directors and named executive officers (collectively, the “Voting Agreement Shareholders”). Except as indicated in, and based on the information provided in, footnotes 5 though 8 to the table below, we understand that the “Other 5% Shareholders” listed in the table have sole voting and investment power with respect to the shares owned by them. The number of shares in the table below includes shares issuable upon the exercise of outstanding stock options to the extent that such options are exercisable by the director, executive officer or shareholder on or within 60 days after March 1, 2010. In the case of our directors and executive officers, the information below has been provided by such persons at our request.
*
Less than 1%
(1)
Includes with respect to Mr. Cloues 10,000 shares, Mr. Guenthardt 19,000 shares, Mr. Bowen 10,000 shares, Mr. Pinola 6,000 shares, Mr. Engel 6,000 shares and Mr. Cohen 2,000 shares, all of which shares underlie options that are currently exercisable or will be exercisable within 60 days after March 10, 2010. All such shares, to the extent the related options are not exercised prior to the closing of the Merger, are not subject to the Voting Agreement, and; with respect to these shares, sole voting and investment power is not shared with Hillenbrand (but if any of the options were exercised, the shares covered thereby would be subject to the Voting Agreement).
(2)
Includes 22,000 shares as to which Mr. Cloues shares voting and investment power with Mrs. Jan Beebe, the beneficial owner, by power of attorney, and 1,200 shares as to which Mr. Cloues shares voting and investment power with his mother, Mrs. Jeannette C. Cloues, also by power of attorney. All such shares are not subject to the Voting Agreement, and with respect to these shares, voting and investment power is not shared with Hillenbrand. Mr. Cloues does not have an economic interest in Mrs. Beebe’s or Mrs. Cloues’ shares and disclaims beneficial ownership of such shares. Mr. Cloues is not related to Mrs. Beebe. The business address of Mr. Cloues is c/o K-Tron International, Inc., Routes 55 and 553, P.O. Box 888, Pitman, New Jersey 08071.
Also includes 100 shares of Common Stock held by Mr. Cloues that are not subject to the Voting Agreement and over which he has sole voting and investment power.
(3)
Includes 11,797 shares as to which Mr. Guenthardt shares voting and investment power with his wife.
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Changes of Control
Under the Voting Agreement, which was entered into in connection with the Merger Agreement, the Voting Agreement Shareholders have agreed, in their capacity as shareholders, and subject to certain conditions therein, to vote or cause to be voted 281,420 shares of our Common Stock (the “Subject Shares”) held in the aggregate by the Voting Agreement Shareholders in favor of the approval of the Merger Agreement and the Merger contemplated thereby. The Subject Shares constituted 9.9% of the outstanding shares of our Common Stock as of March 10, 2010. The consummation of the Merger will effect a change of control of the Company, which will become a wholly-owned subsidiary of Hillenbrand.
Under the terms of the Voting Agreement, each Voting Agreement Shareholder has agreed to certain restrictions on the transferability of his shares of Common Stock and the transferability of certain voting rights and has granted Hillenbrand an irrevocable proxy with respect to the Subject Shares. The irrevocable proxy permits Hillenbrand, whose principal office is located at One Batesville Boulevard, Batesville, Indiana 47006, to vote the Subject Shares in the manner set forth in the preceding paragraph. The Voting Agreement terminates upon the earlier of (a) termination of the Merger Agreement or (b) the effective time of the Merger.
Related Shareholder Matters
The following table sets forth certain information as of January 2, 2010, our fiscal year-end, with respect to our compensation plans under which equity securities are authorized for issuance.
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Equity Compensation Plan Information
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Certain Relationships and Related Transactions
During fiscal year 2009, we were not a party to any transaction involving an amount in excess of $120,000 in which any related person (as such term is defined in Item 404 of Regulation S-K promulgated by the SEC) had a direct or indirect material interest.
Affirmative Determination Regarding Director Independence and Other Corporate Governance Matters
We operate within a comprehensive plan of corporate governance for the purpose of defining director independence, assigning Board responsibilities, setting high standards of professional and personal conduct for directors, officers and employees and assuring compliance with such responsibilities and standards. We regularly monitor developments in the area of corporate governance.
Our Board has determined that the following directors, constituting four of our five directors and thus a majority of our Board, are each an “independent director” as such term is defined in Nasdaq Marketplace Rule 4200(a)(15): Norman Cohen, Robert A. Engel, Edward T. Hurd and Richard J. Pinola. Our Board also has determined that each member of the Audit Committee and of the Compensation and Human Resources Committee meets the independence requirements applicable to those committees as prescribed by the Nasdaq, the SEC, the Internal Revenue Service and applicable committee charters.
Item 14.
Item 14. Principal Accounting Fees and Services.
Grant Thornton LLP audited our financial statements for fiscal years 2009, 2008 and 2007.
There have been no disagreements with Grant Thornton on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to that firm’s satisfaction, would have caused it to make reference to the subject matter of the disagreements in connection with its report on our financial statements for any of fiscal years 2009, 2008 and 2007.
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Audit and Tax Fees
K-Tron was billed approximately the following fees by Grant Thornton LLP for services in fiscal years 2009 and 2008:
Audit Fees in both years consisted of fees for the audits of K-Tron’s consolidated annual financial statements and its internal control over financial reporting, the review of K-Tron’s consolidated interim financial statements contained in our quarterly reports on Form 10-Q and the performance of audits of certain of our foreign subsidiaries in accordance with statutory requirements.
Tax Fees in 2009 were for tax consulting with respect to a state tax appeal. Other Fees in 2009 were for services related to the Merger.
Audit-Related Fees
There were no fees billed in fiscal year 2009 or 2008 for professional services rendered by Grant Thornton LLP for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and not included in the audit fees for those years.
All Other Fees
There were no fees billed in fiscal year 2009 or 2008 for professional services rendered by Grant Thornton LLP for products or services that are not disclosed above.
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accountants
The Audit Committee pre-approves all audit and permissible non-audit services provided by our independent registered public accountants, including audit services, audit-related services, tax services and other services. The Audit Committee has not adopted a policy for the pre-approval of any services provided by our independent registered public accountants.
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PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
(a) 1. Financial Statements. The following consolidated financial statements are filed as part of this annual report on Form 10-K:
2. Financial Statement Schedule. The following consolidated financial statement schedule is filed as part of this annual report on Form 10-K:
3. Exhibits. The following is a list of exhibits filed as part of this annual report on Form 10-K. Where so indicated, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses.
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- 56 -
*
Filed herewith
**
Management contract or compensatory plan or arrangement required to be filed or incorporated as an exhibit
(b) Exhibits. See Item 15(a) 3 above.
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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.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Financial Statements
For the Fiscal Years Ended
January 2, 2010, January 3, 2009 and December 29, 2007
(With Report of Independent Registered Public Accounting Firm)
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Financial Statement Schedule
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
K-Tron International, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of K-Tron International, Inc. (a New Jersey corporation) and Subsidiaries as of January 2, 2010 and January 3, 2009, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three fiscal years ended January 2, 2010, January 3, 2009, and December 29, 2007. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing on page S-1. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of K-Tron International, Inc. and Subsidiaries as of January 2, 2010 and January 3, 2009, and the consolidated results of their operations and their cash flows for the fiscal years ended January 2, 2010, January 3, 2009, and December 29, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), K-Tron International, Inc. and Subsidiaries’ internal control over financial reporting as of January 2, 2010, 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 15, 2010 expressed an unqualified opinion.
GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 15, 2010
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
See accompanying notes to consolidated financial statements.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
Fiscal Years ended January 2, 2010, January 3, 2009 and December 29, 2007
See accompanying notes to consolidated financial statements.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 2, 2010, January 3, 2009 and December 29, 2007
(1) Nature of Operations and Proposed Merger
(a) Nature of Operations
K-Tron International, Inc. and its subsidiaries (“K-Tron” or the “Company”) design, produce, market and service material handling equipment and systems for a wide variety of industrial markets. The Company has manufacturing facilities in the United States, Switzerland and the People’s Republic of China (“China”), and its equipment is sold throughout the world.
(b) Proposed Merger
On January 8, 2010, Hillenbrand, Inc., an Indiana corporation (“Hillenbrand”), Krusher Acquisition Corp., a New Jersey corporation and wholly-owned subsidiary of Hillenbrand (“Merger Sub”) and K-Tron International, Inc. entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which, among other things, Merger Sub will merge with and into K-Tron, the separate corporate existence of Merger Sub shall cease and K-Tron shall be the surviving corporation of the merger (the “Merger”). The closing of the Merger is subject to certain customary closing conditions specified in the Merger Agreement.
Upon the consummation of the Merger, (i) K-Tron will become a wholly-owned subsidiary of Hillenbrand and (ii) each share of K-Tron Common Stock will be converted into the right to receive $150.00 in cash (as may be increased in certain limited circumstances, as set forth in the Merger Agreement) (the “Merger Consideration”). In addition, options to acquire K-Tron Common Stock, restricted stock unit awards and shares of unvested restricted stock, in each case that are outstanding immediately prior to the consummation of the Merger, will be converted into the right to receive cash based on the Merger Consideration and the formulas contained in the Merger Agreement.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All material intercompany accounts and transactions have been eliminated.
(b) Fiscal Year
The Company’s fiscal year is reported on a fifty-two/fifty-three week period. Each of the fiscal years ended December 29, 2007 (referred to herein as 2007) and January 2, 2010 (referred to herein as 2009) was a fifty-two week period. The fiscal year ended January 3, 2009 (referred to herein as 2008) was a fifty-three week period.
(c) Cash and Cash Equivalents and Restricted Cash
All cash equivalents represent highly liquid, interest-bearing investments purchased with original maturities of three months or less. Restricted cash represents cash reserves that secure outstanding letters of credit. The Company had $47,989,000 and $35,568,000 of unrestricted cash and cash equivalents in foreign bank accounts as of January 2, 2010 and January 3, 2009.
The Company maintain cash balances at financial institutions throughout the world. Accounts are generally insured by various governmental organizations in varying amounts up to $250,000. The Company customarily maintain cash balances in excess of these insurance limits.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(d) Inventories
Inventories are stated at the lower of cost or market and are accounted for using the first-in, first-out method. The Company monitors inventory values and writes down its inventories for estimated obsolescence based upon analysis of historical data, product changes, market conditions and assumptions about future product demand.
(e) Property, Plant and Equipment
Property, plant and equipment are carried at cost and are depreciated on a straight-line basis over the following estimated useful lives: buildings and improvements, 7 to 50 years; automotive equipment, 3 years; machinery and equipment, 3 to 12 years; and furniture and equipment, including computer equipment and software, 3 to 7 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining terms of the applicable leases.
(f) Patents
Patents are stated at cost less accumulated amortization. The costs of patents are amortized on a straight-line basis over their remaining economic lives, but in no event longer than their 17 year maximum legal lives.
(g) Goodwill and Other Intangible Assets
When a company is acquired, the excess of the purchase price over the fair value of its net assets, including identifiable intangibles, is goodwill. Goodwill is recorded as an asset on the balance sheet.
Goodwill and other intangible assets are accounted for in accordance with Accounting Standards Codification (“ASC”) 350, “Intangibles - Goodwill and Other”. This statement provides that goodwill and intangible assets with indefinite lives are no longer amortized on a recurring basis, but instead are subject to impairment testing at least annually. The Company does not amortize goodwill, and it amortizes the cost of other intangibles over their estimated useful lives unless such lives are deemed indefinite. Intangible assets which do not have indefinite lives are amortized on a straight-line basis over the expected periods of benefit, which range from 10 to 50 years. In accordance with the provisions of ASC 350, the Company performed impairment tests on goodwill and other intangible assets with indefinite lives, which indicated no impairment in all periods presented.
(h) Income Taxes
Income taxes are accounted for in accordance with ASC 740, “Income Taxes”. Deferred income taxes are provided for differences between amounts shown for financial reporting purposes and those included with tax return filings that will reverse in future periods. Additionally, the effects of income taxes are measured based upon enacted tax laws and rates.
(i) Revenue Recognition and Allowance for Doubtful Accounts
The Company generally recognizes revenue when all of the following criteria are met:
•
Persuasive evidence of an arrangement exists;
•
Shipment has occurred or services have been rendered;
•
The seller’s price to the buyer is fixed or determinable; and
•
Collectibility is reasonably assured.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
Equipment sales generally start with selection by a customer from a series of standard products which are then either slightly modified or combined with other standard or slightly modified products in order to meet the customer’s specific needs. Sales orders may include post-shipment start-up assistance or training, which is not recorded as revenue in accordance with ASC 605, “Revenue Recognition” until the service is performed. Revenue from equipment and parts sales is generally recognized upon shipment and at the point where risk of ownership and title to the product transfer to the customer except in those few cases where customer inspection is still required. In those cases, revenue is not recorded until acceptance is obtained. Cost of revenues is recorded in the period in which the related revenue is recognized. There are certain transactions (“bill and hold”) where revenue is recognized prior to shipment in accordance with ASC 605. Revenue for bill and hold transactions is recorded prior to shipment only when all of the following conditions are met:
•
Risk of ownership has passed to the buyer;
•
The buyer has made a fixed commitment to purchase the goods in writing;
•
The buyer requested the transaction to be on a bill and hold basis;
•
There is a fixed and reasonable delivery date;
•
No specific performance obligations by the seller remain;
•
The goods are segregated from other inventory and not available to others; and
•
The product is complete and ready for shipment.
In addition, the Company also considers the following factors:
•
The date by which the Company expects payment and whether the Company has modified its normal billing and credit terms to the buyer;
•
The Company’s history with bill and hold transactions;
•
The buyer must bear risk of loss;
•
The Company’s custodial function is insurable and insured; and
•
The business reasons for the bill and hold arrangement have not introduced a contingency to the buyer’s fixed commitment to purchase the goods.
Prior to the September 14, 2007 acquisition of Rader detailed in Note 3, Acquisitions, Rader used the proportional performance method of accounting for most of its fixed priced sales contracts. This accounting treatment bases performance on the ratio of costs incurred to total estimated costs where the costs incurred represent a reasonable surrogate for output measures of contract performance. Progress on a contract is matched against project costs and costs to complete on a periodic basis. Provisions for estimated losses, if any, are made in the period such losses are determined. Revenues recognized in excess of amounts billed are classified as current assets under “costs and estimated earnings in excess of billings”. Amounts billed to customers in excess of revenues recognized to date are classified as current liabilities under “billings in excess of costs and estimated earnings”. All contracts using the proportional method of accounting were completed during 2008. Contracts entered into after the September 14, 2007 closing of the Rader acquisition are accounted for on the completed contract method instead of the proportional performance method of accounting. The completed contract method is consistently used in all of the Company’s businesses.
The allowance for doubtful accounts is maintained at an adequate level to absorb losses in the Company’s accounts receivable. Company management continually monitors the accounts receivable for collectibility issues. An allowance for doubtful accounts is established based on review of individual customer accounts, recent loss experience, current economic conditions and other pertinent factors. Accounts deemed uncollectible are charged to the allowance. Provisions for doubtful accounts are added to the allowance.
(j) Research and Development
Expenditures for research, development and engineering of products are expensed as incurred.
(k) Foreign Currency
Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at current rates of exchange at year-end, with translation gains and losses being recorded as a separate component of shareholders’ equity. Revenues and expenses are translated at average rates prevailing during the year.
The Company recognized foreign currency transaction net losses of approximately $217,000, $1,010,000 and $51,000 in 2009, 2008 and 2007. These transaction net losses are recorded within selling, general and administrative expense in the consolidated statements of income.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(l) Share-Based Compensation
The Company adopted the share-based payment provisions of ASC 718, “Compensation - Stock Compensation”, effective January 1, 2006, which require the Company to recognize expense related to the fair value of share-based compensation awards, including stock grants and options.
Prior to the adoption of these share-based payment provisions, the Company did not recognize compensation expense in its income statement for options granted that had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The Company did, however, record compensation expense related to restricted stock grants based on the market value of its common stock at the date of grant and the vesting period of the grant.
The Company applies the share-based payment provisions to new awards and to awards modified, repurchased or cancelled after December 31, 2005. Additionally, for unvested awards that existed on the effective date of the Company’s adoption of share-based payment provisions and that were not fully expensed in prior years, either in the Company’s income statement or in pro forma disclosures in the notes thereto, the Company recognizes compensation expense in the same manner as was used in its income statement or for pro forma disclosures prior to the effective date of its adoption of share-based payment provisions.
For 2009, 2008 and 2007, the Company did not have any cost of stock option compensation to be expensed. There were no stock options granted in 2009, 2008 or 2007.
The Company issued 11,550 restricted stock units in May 2009 which vest on the four-year anniversary of the date of grant. Compensation expense related to these restricted stock units is recognized ratably over the four-year period based on the fair value of the underlying shares at the date of grant, which was $70.81 per share.
The Company issued 2,500 shares of restricted common stock in February 2008 and 9,000 shares of restricted common stock in July 2008, with each grant vesting on the four-year anniversary of the date of grant. Compensation expense related to this restricted stock is recognized ratably over the four-year period based on the fair value of the shares at the grant dates, which was $117.00 per share in February 2008 and $130.66 per share in July 2008.
The Company issued 9,000 shares of restricted common stock in May 2007, with the grant vesting on the four-year anniversary of the date of grant. Compensation expense related to this restricted stock is recognized ratably over the four-year period based on the fair value of the shares at the grant date, which was $93.50 per share.
(m) Fair Value of Financial Instruments
The carrying value of financial instruments such as cash, accounts receivable and payable, and other current assets and liabilities approximates their fair values, which are based on the short-term nature of these instruments. The carrying amounts of the Company’s long-term debt and notes payable approximates their fair values, which are estimated based on the current rates offered to the Company for debt and notes payable of the same remaining maturities.
(n) Derivative Instruments
The Company has entered into certain variable-to-fixed interest rate swap contracts to fix the interest rates on a portion of its variable interest rate debt. Accordingly, these derivatives are marked to market and the resulting gains or losses are recorded in other comprehensive income as an offset to the related hedged asset or liability. The actual interest expense incurred, inclusive of the effect of the hedge in the relevant period, is recorded in the consolidated statements of income.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(o) Employee Defined Benefit Plan
The Company has a pension plan covering employees of its Swiss subsidiary and certain employees of its German subsidiary (the “Swiss Plan”) which has historically been classified and accounted for as a defined contribution plan. Due to recent changes in the Swiss regulatory environment and subsequent interpretations of the impact of these changes on the pension accounting for employee retirement benefit plans of Swiss companies and by implication, Swiss subsidiaries of U.S. companies, the Company concluded, as of the end of 2008, that there were enough defined benefit features of the Swiss Plan to warrant its treatment as a defined benefit plan for accounting purposes. As a result, the Company adopted the recognition and disclosure requirements of ASC 715, “Compensation - Retirement Benefits”.
ASC 715 requires recognition of the funded status, or difference between the fair value of plan assets and the projected benefit obligations of the pension plan, on the consolidated balance sheets as of January 2, 2010 and January 3, 2009, with a corresponding adjustment to accumulated other comprehensive income. If the projected benefit obligation exceeds the fair value of plan assets, then that difference or unfunded status represents the pension liability. If the fair value of the plan assets exceeds the projected benefit obligation, then that difference or funded status represents the pension asset (See Note 9 - Employee Benefit Plans).
The pension asset or liability and annual income or expense of the Swiss Plan is determined using methodologies that involve several actuarial assumptions, the most significant of which are the discount rate, salary increase rate and expected rate of asset return. The fair values of plan assets are determined based on prevailing market prices.
(p) Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods covered thereby. Actual results could differ from these estimates. Judgments and estimates of uncertainties are required in applying the Company’s accounting policies in certain areas. The following are some of the areas requiring significant judgments and estimates: determinations of the useful lives of assets, estimates of allowances for doubtful accounts, cash flow and valuation assumptions in performing asset impairment tests of long-lived assets, estimates of the realizability of deferred tax assets, inventory reserves, warranty reserves and legal contingencies.
(q) New Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (the “FASB”) issued a new guidance on the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. The new guidance which is now part of ASC 605 “Revenue Recognition” establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This standard also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this standard significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We are currently evaluating the potential impact of this standard on our consolidated financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162”. SFAS No. 168 replaces SFAS No. 162, and establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”). The Codification supersedes all existing U.S. accounting standards; all other accounting literature not included in the Codification (other than Securities and Exchange Commission guidance for publicly-traded companies) is considered non-authoritative. The Codification, which modifies structure hierarchy and referencing of financial standards, was effective on a prospective basis for interim and annual financial periods ending after September 15, 2009. The Codification is not intended to change or alter existing U.S. GAAP, and did not have a material impact on the Company’s consolidated financial statements other than to change references to accounting standards.
In May 2009, the FASB issued new guidance for accounting for subsequent events. The new guidance, which is now part of ASC 855 “Subsequent Events”, establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of the guidance did not have an impact on the Company’s consolidated financial statement disclosures.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
In December 2008, the FASB issued new guidance on employers’ disclosures about the plan assets of defined benefit plans, pensions or other postretirement plans. The new guidance which is now part of ASC 715 “Compensation” requires expanded disclosures of how investment allocation decisions are made, major categories of plan assets, valuation techniques used to measure fair value of plan assets, the impact of measurements using significant unobservable inputs, and concentrations of risks within plan assets. The disclosures required by this standard are effective for fiscal years ending after December 15, 2009, with earlier application permitted. The adoption of the revised guidance by the Company did not have a material impact on the Company’s consolidated financial statement disclosures.
In April 2008, the FASB issued revised guidance on determining the useful lives of intangible assets. The revised guidance, which is now part of ASC 350 “Intangibles- Goodwill and Other”, requires that companies estimating the useful life of a recognized intangible asset consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market participants would use about renewal or extension. The revised guidance is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008, and must be applied prospectively to intangible assets acquired after the effective date. The Company adopted the revised guidance as required effective January 3, 2009. The Company did not acquire any intangible assets during fiscal year 2009 nor did it have intangible assets with implicit or explicit renewal or extension terms, and thus the adoption of this guidance did not have a material impact on the Company’s financial statements.
In March 2008, the FASB issued new guidance on the disclosure of derivative instruments and hedging activities. The new guidance, which is now part of ASC 815 “Derivatives and Hedging Activities”, is intended to improve financial reporting with respect to derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand the effects of these instruments and activities on an entity’s financial position, financial performance and cash flows. The revised guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company has interest rate swaps that are derivative instruments to which the revised guidance applies. The adoption of the revised guidance by the Company effective January 4, 2009 did not have a material impact on the Company’s consolidated financial statement disclosures.
In December 2007, the FASB issued revised guidance for the accounting for business combinations. The revised guidance, which is now part of ASC 805 “Business Combinations”, requires the acquiring entity in a business combination to recognize, at full fair value, all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquiring entity to disclose information needed to evaluate and understand the nature and financial effect of the business combination. The revised guidance also changes the accounting for contingent consideration, in process research and development, and restructuring costs. In addition, changes in uncertain tax positions or valuation allowances for deferred tax assets acquired in a business combination are recognized as adjustments to income tax expense or contributed capital, as appropriate. The revised guidance is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively. The Company will prospectively apply the revised guidance to all business combinations occurring after January 3, 2009. The Company did not enter into any business combinations during 2009.
(3) Acquisitions and Divestments
On March 27, 2007, the Company purchased certain assets of Wuxi Chenghao Machinery Co., Ltd. (“Wuxi Chenghao”), a privately-owned company in China. The purchased assets were transferred from the seller to Wuxi K-Tron Colormax Machinery Co., Ltd. (“Wuxi K-Tron Colormax”), a newly-created Wholly Foreign-Owned Enterprise which the Company established in connection with this transaction, and the financial results of Wuxi K-Tron Colormax have been included in the Company’s consolidated financial statements since that date. The total cost of the transaction over a five-year period, including the $1,000,000 purchase price and payments under related employment and other arrangements with one of Wuxi Chenghao’s owners, could be as much as approximately $3,500,000. As of year-end 2009, the Company had recorded $1,726,000 of goodwill as part of acquiring the Wuxi Chenghao assets.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
On September 14, 2007, the Company purchased all of the outstanding stock of Rader Companies, Inc. (“Rader”), and the financial results of Rader have been included in the Company’s consolidated financial statements since that date. The preliminary purchase price was $15,945,000, all of which was paid in cash, including $2,300,000 held in escrow. The Company borrowed the full amount of the purchase price under its existing U.S. revolving credit facility (see Note 8 - Notes Payable to Banks and Other Long-Term Debt). At the sellers’ direction, $3,798,000 of the purchase price was delivered to Rader on the closing date to satisfy indebtedness owed to Rader by two other unrelated companies also owned by the sellers. This cash, together with other cash of Rader, was then used to pay off all of Rader’s bank debt, which amounted to approximately $3,832,000. The final purchase price of $17,632,000 included a $1,687,000 adjustment based upon Rader’s increase in net working capital between January 1, 2007 and the September 14, 2007 closing date, which adjustment was paid to the sellers on February 5, 2008.
In 2008, the Company completed the valuation of the assets and liabilities of Rader as of the September 14, 2007 acquisition date. On September 12, 2008, the Company filed an indemnification claim against the sellers related to the valuation of Rader’s inventory on the closing date, and the claim was settled on October 9, 2008. As part of the settlement, the sellers agreed to a reduction in the purchase price of approximately $257,000, with payments being made to the Company from the escrow fund in the amount of approximately $117,000 on September 26, 2008 and $140,000 on October 10, 2008. With these payments of $257,000 from the escrow fund followed by the release of $743,000 from the escrow fund to the sellers pursuant to the terms of the escrow agreement, the escrow fund was reduced to $1,300,000 plus accrued interest.
The purchase price of $17,632,000, after being reduced by the $257,000 payment received as part of the inventory valuation settlement, became an adjusted purchase price of $17,375,000, including the $1,300,000 held in escrow. Of this $1,300,000, an additional $1,000,000 was released to the sellers in July 2009, leaving an escrow balance of $300,000.
The purchase price allocation below has been updated from year-end 2007 to record this settlement as well as the final inventory valuation and related deferred taxes as of the date of the acquisition, resulting in a net increase in goodwill of $1,320,000 in 2008 and $1,000,000 in 2009.
The excess of the purchase price, including the effect of those items discussed above occurring prior to the end of 2009, over the carrying value of the identifiable net assets acquired was $10,101,000, which was allocated as follows:
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
The purchase price of $15,945,000, after being reduced by the $300,000 escrow, reduced by the $257,000 cash received as part of the inventory valuation settlement and increased by the $1,687,000 working capital adjustment, for an adjusted purchase price of $17,075,000, was allocated as follows:
Customer relationships, drawings and tradenames are included in other intangibles in the consolidated balance sheets.
Pro forma revenues, net income and diluted earnings per share as if the acquisitions of Rader and Wuxi had occurred at the beginning of 2007 is not presented, since the information is not material to the consolidated financial statements.
On September 14, 2009, the Company sold its 19.9% investment in Hasler International SA (“Hasler”) for euro 2,425,000 ($3,544,000). The Company previously recorded this investment as an other asset in the consolidated balance sheet and recognized a gain of $2,972,000 on the sale. The Company received a note from the buyer for the entire sale price, which was paid in full in October 2009.
(4) Inventories
Inventories consist of the following:
Fixed production overheads are allocated to inventory based on normal capacity of the production facility. Unallocated overheads are recognized as an expense in the period incurred.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(5) Property, Plant and Equipment
Property, plant and equipment consist of the following:
Depreciation of property, plant and equipment for 2009, 2008 and 2007 was $4,920,000, $4,813,000 and $4,680,000.
(6) Intangible Assets
Intangible assets consist of the following:
The amortized intangible assets are being amortized on the straight-line basis (half-year expense in the year of the issuance of a patent) over the expected periods of benefit, which range from 10 to 50 years. The weighted average life of the amortizable intangible assets is 27 years (15 years for patents, 25 years for drawings and 30 years for customer relationships). The amortization expense of intangible assets was $1,103,000 for 2009, $1,115,000 for 2008 and $893,000 for 2007.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
Future annual amortization of intangible assets is as follows:
The Company offers a one-year product warranty on a majority of its products. Warranty is accrued as a percentage of sales, based upon historical experience, on a monthly basis and is included in accrued expenses and other current liabilities. The following is an analysis of accrued warranty for 2009 and 2008:
(8)
Notes Payable to Banks and Other Long-Term Debt
The Company and its U.S. subsidiaries (the “Borrowers”) are parties to a Loan Agreement dated September 29, 2006 (the “Citizens Loan Agreement”) with Citizens Bank of Pennsylvania (“Citizens”). The Citizens Loan Agreement provides the Borrowers with a five-year, $50,000,000 unsecured revolving line of credit facility (the “Citizens Credit Facility”), of which up to an aggregate of $10,000,000 may be used for letters of credit. The Citizens Credit Facility terminates on September 29, 2011. The Borrowers entered into the Citizens Loan Agreement to (i) refinance certain indebtedness of the Borrowers, (ii) provide for future working capital requirements and other general corporate purposes and (iii) fund permitted acquisitions.
The interest rate on loans under the Citizens Credit Facility can be based on either the prime rate or 1, 2, 3 or 6-month LIBOR, as selected by the Borrowers. Prime rate loans bear interest at a fluctuating rate per annum equal to the prime rate of interest announced by Citizens from time to time less a percentage ranging from 0.25% to 1.00%, depending on the ratio of the Company’s funded debt to its adjusted earnings before interest expense, tax expense, and depreciation and amortization expenses for the most recent measurement period (the “Debt Ratio”). LIBOR loans bear interest at a fluctuating rate per annum equal to LIBOR for the selected interest rate period plus a percentage ranging from 0.875% to 1.625%, depending on the Debt Ratio.
The Borrowers are obligated to pay a fee for any unused borrowings under the Citizens Credit Facility equal to (i) a percentage ranging from 0.125% to 0.200% per annum, depending on the Debt Ratio, times (ii) the average unused portion of the Citizens Credit Facility.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
The Citizens Credit Facility is unsecured, except that the lenders have been given a pledge of 65% of the equity interests of the following foreign subsidiaries of the Company: K-Tron (Schweiz) AG, K-Tron Colormax Limited, K-Tron PCS Limited, Jeffrey Rader Canada Company and Jeffrey Rader AB. The Citizens Loan Agreement contains financial covenants, including a minimum fixed charge coverage ratio, a minimum net worth and a maximum Debt Ratio. As of January 2, 2010, the Borrowers were in compliance with these covenants. If an event of default, such as non-payment or failure to comply with a covenant, were to occur under the Citizens Loan Agreement, and subject to any applicable grace period, the lenders would be entitled to declare all amounts outstanding under the Citizens Credit Facility to be immediately due and payable.
All amounts borrowed under the Citizens Credit Facility are due on September 29, 2011. As of January 2, 2010, the total borrowing under the Citizens Credit Facility was $7,000,000, with interest payable at the following rates on the following principal amounts for the periods ending on the dates indicated:
The two interest rate swaps in the table above fix the interest rates for the swap periods on all $7,000,000 of loans, with fixed rates of 5.665% and 6.095% (subject to any change in such rates required by a change in the Debt Ratio at the end of any relevant measurement period). The swaps expire on September 24, 2010 and October 13, 2010. The Company entered into the swaps in order to minimize its risk of exposure to interest rate increases. As of January 2, 2010, a swap liability of $255,000 is included in other non-current liabilities on the balance sheet. The unrealized loss, net of tax, on the interest rate swaps, was $153,000 at January 2, 2010 and is reflected in accumulated other comprehensive income.
As of January 3, 2009, a swap liability of $892,000 relating to seven interest rate swaps is included in other non-current liabilities on the balance sheet. The unrealized loss, net of tax, on the interest rate swaps was $535,000 at January 3, 2009 and is reflected in accumulated other comprehensive income.
In connection with an acquisition made in March 3, 2006, the Company issued as part of the purchase price a $3,000,000 unsecured, promissory note bearing interest payable quarterly at 5% per annum and with the principal payable in three equal installments of $1,000,000 on March 3 in each of 2008, 2009 and 2010. The first two installments of $1,000,000 each were paid on March 3, 2008 and March 3, 2009, and the final installment of $1,000,000 was paid on March 3, 2010.
At January 2, 2010, the Company’s Swiss subsidiary had separate credit facilities totaling 18,400,000 Swiss francs (approximately $17,763,000) with four Swiss banks. This Swiss subsidiary’s real property in Switzerland, with a book value of 5,967,000 Swiss francs (approximately $5,760,000) as of January 2, 2010, is pledged as collateral. As of January 2, 2010, there were no borrowings under any of these credit facilities, although 6,897,000 Swiss francs (approximately $6,658,000) of availability was being utilized for bank guarantees on behalf of the Swiss subsidiary related to customer orders.
In July 2009, the Company entered into a $3,000,000 letter of credit facility with a U.S. bank, of which $548,000 is being utilized as of January 2, 2010 for bank guarantees related to customer orders.
As of January 3, 2009, one of the Company’s U.S. subsidiaries had a mortgage loan with an outstanding balance of $662,000. Annual interest was 6.45%, and the loan was payable in equal monthly principal and interest installments of $23,784, with a final balloon payment due on August 1, 2009. Fixed assets with a book value of $1,313,000 as of January 3, 2009 were pledged as collateral for this loan. This loan was paid in full in August 2009.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
Long-term debt consists of the following:
Future annual principal payments required on long-term debt are as follows:
(9) Employee Benefit Plans
The Company sponsored several thrift plans for various groups of U.S. employees during 2009, 2008 and 2007. The Company made matching contributions to employee accounts in these thrift plans equal to 100% of each employee participant’s contributions up to a maximum of 3% to 6% of such employee’s compensation for each of 2009, 2008 and 2007, depending on the plan and subject to any applicable legal maximums, with Company contributions being vested when made, except that the Premier Pneumatics, Inc. (“Premier”) and Rader thrift plans did not have a Company match. The Premier plan was also a profit-sharing plan, and there were company contributions under that part of the plan. The Company expense associated with the thrift and profit sharing plans for U.S. employees for 2009, 2008 and 2007 was $1,087,000, $1,081,000 and $1,177,000.
As of December 31, 2007, the Premier profit sharing and thrift plan was terminated, and all the employees became fully vested in their fund balances which were transferred to one of two K-Tron thrift plans. As of December 31, 2008, the Rader thrift plan was terminated, and all the employees became fully vested in their fund balances which were transferred to one of two K-Tron thrift plans.
The Company has a pension plan covering employees of its Swiss subsidiary and certain employees of its German subsidiary which has historically been classified and accounted for as a defined contribution plan. Due to 2008 changes in the Swiss regulatory environment and subsequent interpretations of the impact of these changes on the pension accounting for employee retirement benefit plans of Swiss companies and by implication, Swiss subsidiaries of U.S. companies, the Company concluded, as of the end of 2008, that there were enough defined benefit features of the Swiss Plan to warrant its treatment as a defined benefit plan for accounting purposes. As a result, the Company adopted the recognition and disclosure requirements of ASC 715.
Employer and employee contributions are made to the Swiss Plan based on percentages of salary and wages that vary according to employee age and other factors. Employer contributions to the Swiss Plan in 2009, 2008 and 2007 were $890,000, $952,000 and $819,000. These employer contributions were recorded as defined contribution plan expense in 2008 and 2007 because the conversion of the accounting for the Swiss Plan to a defined benefit plan did not occur until January 3, 2009, the end of the Company’s 2008 fiscal year.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
The incremental transition effect of applying ASC 715 as of January 3, 2009 was to increase total assets by $2,899,000, increase total liabilities by $638,000 and increase total shareholders’ equity by $2,261,000. These changes were the result of increasing other long term assets by $2,899,000, increasing long term deferred income tax liabilities by $638,000 and increasing accumulated other comprehensive income by $2,261,000. None of the $2,261,000 transition adjustment to accumulated comprehensive income was amortized in net periodic benefit income in 2009.
The 2009 changes in the projected pension obligation, plan assets and funded status, along with amounts recognized in the consolidated balance sheet were as follows:
The Swiss Plan’s asset allocation at year end was as follows:
The investment strategy of the Swiss Plan’s Pension Committee is to achieve a consistent long-term return which will provide sufficient funding for future pension obligations while limiting risk. The investment strategy is reviewed regularly. The projected and accumulated pension obligations for the Swiss Plan were calculated as of January 2, 2010 using the following assumptions:
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
The discount rate is based on assumed pension benefit maturity and estimates developed using the rate of return and yield curves for high quality Swiss corporate and government bonds. The salary increase rate is based on the Company’s best assessment for on-going increases over time. The expected long term rate of return on plan assets is based on the expected asset allocation, taking into consideration historical long-term rates of return for the relevant asset categories.
Employer contributions to the Swiss Plan in 2010 are estimated to be approximately $845,000.
Estimated future benefit payments from the Swiss Plan are as follows:
Substantially all other foreign employees not participating in the Swiss Plan participated in defined contribution group pension plans in 2009, 2008 and 2007. Contributions were paid by the employee and employer at percentages that varied according to age and other factors. The foreign pension expense for these other foreign employees not participating in the Swiss Plan for 2009, 2008 and 2007 was $117,000, $162,000 and $184,000.
(10) Shareholders’ Equity and Share Compensation Plans
In 2001, the board of directors determined the rights on 50,000 shares of the authorized preferred stock as the Series B Junior Participating Preferred Shares (the “Series B Preferred Shares”). Each one one-hundredth of a share of the Series B Preferred Shares carries voting and dividend rights that are equivalent to one share of the common stock. These voting and dividend rights are subject to adjustment in the event of a dividend on the common stock that is payable in common stock or upon the occurrence of any subdivision or combination with respect to the outstanding shares of the common stock. The board of directors had not determined the rights on the remaining 950,000 shares of the authorized preferred stock as of January 2, 2010.
The Company’s 1996 Equity Compensation Plan, as amended (the “1996 plan”), expired on May 9, 2006. As of January 2, 2010, three employees and three nonemployee directors held outstanding options under the 1996 plan, all of which were exercisable, for an aggregate of 53,000 shares of common stock at exercise prices per share ranging from $12.20 to $30.34 and with a weighted average exercise price per share of $14.15. These options, all of which are nonqualified stock options, expire at various times through 2015. All stock options under the 1996 plan were issued with an exercise price per share equal to the fair market value of a share of common stock on the date that the option was granted.
During 2006, the Company issued 9,000 shares of restricted common stock under the 1996 plan. This restricted stock vests on the four-year anniversary of the date of grant. Compensation expense related to this restricted stock is recognized ratably over the four years based on the fair value of the shares at the date of grant, which was $51.50 per share.
The Compensation and Human Resources Committee of the Company’s board of directors serves as the committee that administers the 1996 plan. That committee determined the recipient and term of each option and restricted stock grant awarded under the 1996 plan as well as the exercise price of all options.
On May 12, 2006, the shareholders of the Company approved a new 2006 Equity Compensation Plan (as amended, the “2006 plan”). The 2006 plan provides that grants may be made in any of the following forms: (i) incentive stock options, (ii) nonqualified stock options, (iii) stock awards, (iv) stock units, (v) stock appreciation rights (“SARs”), (vi) dividend equivalents and (vii) other stock-based awards. The 2006 plan authorizes up to 200,000 shares of common stock for issuance, subject to adjustment in certain circumstances. If and to the extent options and SARs granted under the 2006 plan terminate, expire or are cancelled, forfeited, exchanged or surrendered without being exercised or if any stock awards, stock units or other stock-based awards are forfeited or terminated, the shares subject to such grants will become available again for purposes of the plan. The 2006 plan is administered by the Compensation and Human Resources Committee of the Company’s board of directors, but the full board will approve and administer all grants, if any, made to non-employee directors. The committee has the authority to (i) determine the individuals to whom grants will be made under the 2006 plan, (ii) determine the type, size, terms and conditions of the grants, (iii) determine when grants will be made and the duration of any applicable exercise or restriction period, including the criteria for exercisability and the acceleration of exercisability, (iv) amend the terms and conditions of any previously issued grant, subject to certain limitations and (v) deal with any other matters arising under the plan. All employees of the Company and its subsidiaries and all non-employee directors of the Company are eligible to receive grants under the 2006 plan.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
During 2009, the Company issued 11,550 restricted stock units under the 2006 plan. Each of these restricted stock unit grants vests on the four-year anniversary of the date of grant. Compensation expense related to these restricted stock units is recognized ratably over the four-year period based on the fair value of the underlying shares at date of grant, which was $70.81 per share.
During 2008, the Company issued 11,500 shares of restricted common stock under the 2006 plan, 2,500 shares in February 2008 and 9,000 shares in July 2008. Each of these restricted stock grants vests on the four-year anniversary of the date of grant. Compensation expense related to this restricted stock is recognized ratably over the four-year period based on the fair value of the shares at the date of grant, which was $117.00 per share with respect to the February 2008 grant and $130.66 per share with respect to the July 2008 grants.
During 2007, the Company issued 9,000 shares of restricted common stock under the 2006 plan. Each of these restricted stock grants vests on the four-year anniversary of the date of grant. Compensation expense related to this restricted stock is recognized ratably over the four-year period based on the fair value of the shares at the date of grant, which was $93.50 per share.
A summary of the Company’s stock option activity for the 1996 plan for 2007, 2008 and 2009 is as follows:
The aggregate intrinsic value at January 2, 2010 represents (i) the difference between the Company’s closing stock price of $108.75 at January 2, 2010 and the weighted average option exercise price per share on that date of $14.15 multiplied by (ii) the number of shares under outstanding options on that date.
There were no stock options granted in 2009, 2008 or 2007.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(11) Shareholder Rights Plan
The Company has a Shareholder Rights Plan (the “Rights Plan”) with American Stock Transfer & Trust Company, as Rights Agent (the “Rights Agent”), that was adopted by the board of directors on October 16, 2001 and amended on January 8, 2010. Under the Rights Plan, there was a distribution as a dividend of one preferred stock purchase right (“a Right”) on each share of the Company’s common stock outstanding as of the close of business on October 29, 2001, and each share of the Company’s common stock issued and outstanding thereafter will have a Right associated with it. The Rights expire on October 29, 2011, and each Right entitles a shareholder to purchase one one-hundredth of a share of Series B Junior Participating Preferred Stock upon the terms specified in the Rights Plan. The Rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company’s common stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 15% or more of the Company’s common stock, in each case without the approval of the Company’s board of directors.
On January 8, 2010, the Company and the Rights Agent amended the Rights Plan in connection with the Merger. The amendment, among other things, permits the execution of the Merger Agreement and the performance and consummation of the transactions contemplated by the Merger Agreement, including the Merger, without triggering the provisions of the Rights Plan.
(12) Income Taxes
Following are the domestic and foreign components of income before income taxes:
The income tax provision (benefit) consists of the following:
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
Significant components of the deferred tax assets and liabilities at January 2, 2010 and January 3, 2009 were as follows:
The Company is subject to income taxes in the U.S. federal jurisdiction and also in various state, local and foreign jurisdictions. Tax laws and regulations within each jurisdiction are subject to interpretation and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state or local or non-U.S. income tax examinations by tax authorities for years before 2006. The Company recognizes interest accrued related to uncertain tax liabilities in interest expense and recognizes penalties in operating expenses.
Foreign and U.S. state operating loss carryforwards as of January 2, 2010 were $601,000 and $4,145,000. Foreign operating losses have an unlimited carryforward period. U.S. state operating losses expire at various times through 2029.
A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company has established valuation allowances for its United Kingdom, Singapore and state net operating loss carryforwards and certain other deferred tax assets for which realization is dependent on future taxable earnings.
A reconciliation of the provision for income taxes and the amounts that would be computed using the statutory federal income tax rates is set forth below:
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
On September 14, 2009, the Company sold its 19.9% investment in Hasler International SA (“Hasler”) for euro 2,425,000 ($3,544,000). The Company previously recorded this investment as an other asset in the consolidated balance sheet and recognized a gain of $2,972,000 on the sale. The Company received a note from the buyer for the entire sale price, which was paid in full in October 2009.
During 2009, 2008 and 2007, the Company sold equipment to two entities in which it had or has a cost method investment, one of which was Hasler. Sales to these two entities during 2009 (in the case of Hasler, until September 14, 2009), 2008 and 2007 were $692,000, $1,647,000 and $2,898,000, with balances with respect to such sales of $2,000, $245,000 and $945,000 in accounts receivable from these entities with respect to these sales at January 2, 2010, January 3, 2009 and December 29, 2007. The Company leases a facility in China from a company that is owned by Wuxi K-Tron Colormax’s sales manager. The rent is RMB 46,000 per month (approximately $7,000) and payable through March 2012.
(14) Earnings Per Share
The Company reports basic and diluted earnings per share. Basic earnings per share represents net income less preferred dividends divided by the weighted average number of common shares outstanding. Diluted earnings per share is calculated similarly, except that the denominator includes the weighted average number of common shares outstanding plus the dilutive effect of options, restricted stock units, warrants, convertible securities and other instruments with dilutive effects if exercised.
The Company’s basic and diluted earnings per share are calculated as follows:
Diluted earnings per common share are based on the weighted average number of common and common equivalent shares outstanding during each year.
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(15) Commitments and Contingencies
The Company leases certain office and plant facilities and equipment under noncancellable leases. These leases expire in periods ranging from one to five years and, in certain instances, provide for purchase options.
As of January 2, 2010, future minimum payments under operating leases having noncancellable terms in excess of one year are summarized below:
Rent expense for 2009, 2008 and 2007 was $1,379,000, $1,691,000 and $1,458,000.
As of January 2, 2010, the Company had purchase commitments of $15,311,000 for inventory and other costs all in the normal course of business.
At January 2, 2010, the Company had employment contracts with certain key executives. Under these contracts, each individual is guaranteed minimum compensation over the contract period. The Company may terminate these contracts upon thirty days’ advance written notice. As of January 2, 2010, the estimated future obligation under these contracts, if all of them were to be terminated on that date, was $2,139,000, payable within thirty days after the termination date.
The Company in the normal course of business has commitments, lawsuits, contingent liabilities and claims. The Company does not expect that any sum it may have to pay in connection with these matters will have a material adverse effect on its consolidated financial position or results of operations.
(16) Management Geographic Information
The Company is engaged in one business segment - material handling equipment and systems. The Company operates in two primary geographic locations - North and South America (the “Americas”) and Europe, the Middle East, Africa and Asia (“EMEA/Asia”).
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
For 2009, 2008 and 2007, the following table sets forth the Company’s geographic information:
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
For 2009, 2008 and 2007, the following table sets forth revenues from external customers:
(17)
Quarterly Financial Information (Unaudited)
The following table summarizes unaudited quarterly financial data for 2009 and 2008 (in thousands, except per share data):
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Financial Statement Schedule
Schedule II
K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended January 2, 2010, January 3, 2009 and December 29, 2007
See accompanying reports of independent registered public accounting firm.
S-1
EXHIBIT INDEX
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Filed herewith
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Management contract or compensatory plan or arrangement required to be filed or incorporated as an exhibit