UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

 

 

Commission file number 001-13023

Thermadyne Holdings Corporation

(Exact name of Registrant as Specified in its Charter)

 

 

Registrant’s telephone number, including area code:

(636) 728-3000

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company) 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: approximately $13,513,918 based on the closing sales price of the Common Stock on June 30, 2009.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 13,543,068 shares of common stock, outstanding at March 3, 2010.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain portions of the registrant’s Proxy Statement for the 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

The statements in this Annual Report on Form 10-K that relate to future plans, events or performance are forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, including statements regarding our future prospects. These statements may be identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions and relate to future events and occurrences. Actual results could differ materially due to a variety of factors and the other risks described in this Annual Report and the other documents we file from time to time with the Securities and Exchange Commission. Factors that could cause actual results to differ materially from those expressed or implied in such statements include, but are not limited to, the following and those discussed under the “Risk Factors” section of this annual report on Form 10-K:

 

a) the impact of uncertain global economic conditions on our business and those of our customers,

 

b) the cost and availability of raw materials,

 

c) operational and financial developments and restrictions affecting our international sales and operations,

 

d) the impact of currency fluctuations, exchange controls, and devaluations,

 

e) the impact of a change of control under our debt instruments and potential limits on our ability to use net operating loss carryforwards,

 

f) consolidation within our customer base and the resulting increased concentration of our sales,

 

g) actions taken by our competitors that affect our ability to retain our customers,

 

h) the effectiveness of our cost reduction initiatives in our continuous improvement program,

 

i) our ability to meet customer needs by introducing new and enhanced products,

 

j) our ability to adequately enforce or protect our intellectual property rights,

 

k) the detrimental cash flow impact of increasing interest rates and our ability to comply with financial covenants in our debt instruments,

 

l) disruptions in the credit markets,

 

m) the impact of the sale of a large number of shares of our common stock on the market price of our stock,

 

n) our relationships with our employees and our ability to retain and attract qualified personnel,

 

o) liabilities arising from litigation, including product liability risks, and

 

p) the costs of compliance with and liabilities arising under environmental laws and regulations.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are not guarantees of performance or results. There can be no assurance that forward looking statements will prove to be accurate. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or that reflect the occurrence of unanticipated events.

 

 

TABLE OF CONTENTS

 

 

 

Introduction

 

We are a leading global designer and manufacturer of gas and arc cutting and welding products, including equipment, accessories and consumables. Our products are used by manufacturing, construction, fabrication and foundry operations to cut, join and reinforce steel, aluminum and other metals. Common applications for our products include shipbuilding, manufacturing of transportation, mining and agricultural equipment, many types of construction such as offshore oil and gas rigs, fabrication of metal structures, and repair and maintenance of processing and manufacturing equipment and facilities as well as demolition. Welding and cutting products are critical to the operations of most businesses that fabricate metal. We have very well established and widely recognized brands. We were incorporated in Delaware in 1987. Our shares are currently quoted on the NASDAQ Capital Market, and as of March 3, 2010, we had an equity market capitalization of approximately $105.6 million (based on a closing sale price of $7.80 and 13.5 million shares outstanding).

 

As used in this Annual Report on Form 10-K, the terms “Thermadyne Holdings Corporation,” “Thermadyne,” “the Company,” “we,” “our,” or “us,” mean Thermadyne Holdings Corporation and its subsidiaries.

 

Principal Products

 

Although we operate our business in one reportable segment, we have organized our business into five major product categories within the cutting and welding industry: (1) gas equipment; (2) arc accessories, including torches, guns, related consumable parts and accessories; (3) plasma power supplies, torches and related consumable parts; (4) welding equipment; and (5) filler materials, including hardfacing. The following shows the percent of total sales for each of the major product categories for each of the previous three years:

 

 

Gas Equipment

 

Our gas equipment products include oxy-fuel torches, air fuel torches, consumables (tips and nozzles), regulators, flow meters and safety accessories that are used for cutting, heating and welding applications. We also have gas flow and pressure regulation equipment and manifold capabilities used for a variety of gas management applications across an extensive range of industries. These products are primarily sold under the Victor^®, Cigweld^® and TurboTorch^® brands and typically range in price from $100 to more than $1,000 for more complex gas management systems. Oxy-fuel torches use a mixture of oxygen and fuel gas (predominantly acetylene) to produce a high-temperature flame that is used to cut, heat or weld steel. Gas torches are typically used in all the applications noted above, as well as for welding, heating, brazing and cutting in connection with maintenance of machinery, equipment and facilities. Air fuel torches are used by the plumbing, refrigeration and heating, ventilation and air conditioning industries using similar principles with MAP//Pro^® or propane as the fuel gas. Gas flow and pressure regulation equipment is used to control the pressure and flow of most industrial, medical and specialty gases, including gases used in many industrial process control applications as well as the analytical laboratory and electronic industries. We believe we are among the largest suppliers of gas equipment products in the world, based on annual sales.

 

Filler Metals

 

Filler metals, including hardfacing metals, are consumed in the welding process as the material that is melted to join the materials to be welded together and are sold under our Stoody, Cigweld and Firepower brands.

Hardfacing metals are sold under the Stoody^® brand, as well as other brands, and are used to overlay equipment with abrasion-resistant alloys by the welding process. There are three basic types of filler metals used: stick electrodes, solid wire and flux cored wire. Stick electrodes are fixed length metal wires coated with a flux to enhance weld properties. This is used in conjunction with a power source and an electrode holder to weld the base material. The main advantage of this process is simplicity, portability and ease of use as it can be used to access most areas and no gas is required. Solid wire is sold on spools or in drums and is used in the semi-automated process with a MIG welding gun, power source and shielding gas. The main advantage of this process is ease of use and very high deposition rates making for higher productivity. Flux cored wires are similar to solid wires; however, they are tubular wires that allow the use of flux and other alloys to improve deposition rates and weld quality.

 

Arc Accessories

 

Our arc accessories include automatic and semiautomatic welding guns and related consumable parts, ground clamps, electrode holders, cable connectors and assemblies all sold under our Tweco^® brand. We also have a line of carbon arc gouging and exothermic cutting products. These products include torches and consumable rods that are sold under our Arcair^® brand. Our arc welding accessory products are designed to be used with our arc welding power supplies, as well as those of our competitors. Our arc welding metal inert gas (“MIG”) guns typically range in price from $90 to $600. Arc welding MIG guns are used to apply a current to the filler metal used in welding. MIG guns are typically handheld and require regular replacement of consumable parts as a result of wear and tear, as well as their proximity to intense heat. Our connectors, clamps and electrode holders attach to the welding cable to connect the power source to the metal to be welded. Our gouging products are used to cut or gouge material to remove unwanted base or welded material as well as in demolition. We believe we are among the largest manufacturers of arc welding accessory products in the United States based on our annual sales.

 

Plasma Cutting Equipment

 

Our plasma power supplies, torches and consumable parts are sold under the Thermal Dynamics^® brand. Manual plasma systems typically range in price from $900 to $5,000 with manual torch prices ranging from $300 to $800. Our automated cutting systems range in price from $2,500 to $50,000 with torches ranging in price from $1,000 to $2,500. Both manual and automated plasma systems use front end torch parts that are consumed during the cutting process and range in price from $5 to $50. Plasma cutting uses electricity and gases (typically air or oxygen) to create a high-temperature plasma arc capable of cutting any type of metal. Electricity is converted by a power supply and supplied to a torch where the gas and electricity form a plasma arc. The plasma arc is then applied to the metal being cut. Plasma cutting is a growing technology for cutting metal. Advantages of the plasma cutting process over other methods include faster cutting speeds, cleaner cuts and the ability to cut ferrous and nonferrous alloys with minimum heat distortion to the metal being cut. Plasma cutting systems are used in the construction, fabrication and repair of both steel and nonferrous metal products, including automobiles and related assemblies, appliances, ships, railcars and heating, ventilation and air-conditioning products, as well as for general maintenance. We believe we are among the largest suppliers of plasma power supplies, torches and consumable parts in the United States and worldwide, based on our annual sales.

 

Welding Equipment

 

Our welding equipment line includes inverter and transformer-based power sources used for all the main welding processes as well as plasma welding power sources. These products are primarily sold under the Thermal Arc^®, Firepower^® and Cigweld^® brands. These products typically range in price from $200 to $12,000. Arc welding uses an electric current to melt together either wire or electrodes (referred to as filler metals) and the base materials. The power source converts the electrical line power into the appropriate voltage to weld. This electricity is applied to the filler metal using an arc welding accessory, such as a welding gun for wire welding or an electrode holder for stick electrode welding. Arc welding is the most common method of welding and is used for a wide variety of manufacturing and construction applications, including the production of ships, railcars, farm and mining equipment and offshore oil and gas rigs.

Customers

 

We sell most of our products through a network of national and multinational industrial gas distributors including Airgas, Inc. and Praxair, Inc., as well as a large number of other independent cutting and welding distributors, wholesalers and dealers. In 2009, our sales to customers in the U.S. represented 56% of our sales. In 2009 and 2008, we had one customer that comprised 11% and 11%, respectively, of our global net sales. Furthermore, our top five distributors comprised 27% of our global net sales in 2009 and 2008.

 

We manage our operations by geographic location and by product category. See Note 18 — Segment Information to the consolidated financial statements for geographic and product line information.

 

Our distributors carry one or more of our product lines from approximately 2,400 locations. We maintain relationships with these distributors through our sales force. We distribute our products internationally through our sales force, independent distributors and wholesalers.

 

International Business

 

We had international sales of $154.2 million, $231.7 million, and $201.4 million for the years ended December 31, 2009, 2008, and 2007, respectively, or approximately 44%, 45%, and 41%, respectively, of our net sales in each such period. Our international sales are influenced by fluctuations in exchange rates of foreign currencies, foreign economic conditions and other risks associated with foreign trade. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk.” Our international sales consist of approximately 50% from export sales of our products manufactured at U.S. manufacturing facilities and, to a limited extent, products manufactured by third parties, sold through our overseas field representatives, and approximately 50% from sales of our products manufactured at our international manufacturing facilities and sold by our foreign subsidiaries.

 

Sales and Marketing

 

The sales and marketing organization oversees all sales and marketing activities, including strategic product pricing, promotion, and marketing communications. It is the responsibility of sales and marketing to profitably grow the Company’s sales, market share, and margins in each region. The organization pursues these objectives through new product introductions, programs and promotions, price management, and the implementation of distribution strategies to penetrate new markets.

 

Sales and marketing is organized into three regions: Americas, Asia Pacific, and Europe including other regions. The Americas is comprised of the U.S., Canada, Mexico, and Latin and South America; Asia Pacific includes South Pacific (Australia and New Zealand) and South and North Asia. Our third region is comprised of the U.K., Europe, Middle East, and the remaining countries not included in the other two regions. In 2009, the Americas contributed approximately 68% of the Company’s revenues; Asia Pacific contributed approximately 25%; and Europe and the remaining countries contributed approximately 7%. All product lines are sold throughout these regions, although there is some variance in the mix among the regions.

 

The sales and marketing organization consists of sales, marketing, technical support, and customer care in each region. Sales and marketing manages the Company’s relationship with our customers and channel partners who include distributors, wholesalers and retail customers. They provide feedback from the customers on product and service needs of the end-user customers, take our product lines to market, and provide technical and after sales service support. A national accounts team manages our largest accounts globally.

 

Raw Materials

 

Our principal raw materials, which include copper, brass, steel and plastic, are widely available and need not be specially manufactured for our use. Certain of the raw materials used in the hardfacing products of our filler metals product line, such as cobalt and chromium, are available primarily from sources outside the United States, some of which are located in countries that may be subject to economic and political conditions that could affect pricing and disrupt supply. Although we have historically been able to obtain adequate supplies of these materials at acceptable prices, restrictions in supply or significant increases in the prices of copper and other raw materials could adversely

affect our business. During 2008 and 2007, we experienced significantly higher than historical average inflation on materials such as copper, steel, and brass which detrimentally impacted our gross margins. For 2009, the cost of these materials fluctuated significantly in the marketplace with minimal impact on our gross margins, as the cost of previously purchased amounts and purchase commitments were reflected in the cost of goods sold.

 

We also purchase certain manufactured products that we either use in our manufacturing processes or resell. These products include electronic components, circuit boards, semiconductors, motors, engines, pressure gauges, springs, switches, lenses, forgings, filler metals and chemicals. Some of these products are purchased from international sources and thus our cost can be affected by foreign currency fluctuations. We believe our sources of such products are adequate to meet foreseeable demand at acceptable prices.

 

Research, Development and Technical Support

 

We have development and sustaining engineering groups for each of our product lines. The development engineering group primarily performs process and product development work to develop new products to meet our customer needs. The sustaining engineering group provides technical support to the operations and sales groups, and the quality department supports established products. As of December 31, 2009, we employed approximately 100 people in our development and sustaining engineering groups, split among engineers, designers, technicians and graphic service support. Our engineering costs consist primarily of salaries, benefits for engineering personnel and project expenses with approximately $3 million related to research for new product development.

 

Competition

 

We view the market as split into three types of competitors: (1) three full-line welding equipment and filler metal manufacturers (Lincoln Electric Company, ESAB, a subsidiary of Charter PLC, and several divisions of Illinois Tool Works, Inc., including the ITW Miller and ITW Hobart Brothers divisions); (2) many single-line brand-specific competitors; and (3) a number of low-priced small niche competitors. Our large competitors offer a wide portfolio of product lines with an emphasis on filler metals and welding power supplies and lines of niche products. Their position as full-line suppliers and their ability to offer complete product solutions, filler metal volume, sales force relationships and fast delivery are their primary competitive strengths. Our single-line, brand-specific competitors emphasize product expertise, a specialized focused sales force, quick customer response time and flexibility to special needs as their primary competitive strengths. The low-priced manufacturers primarily use low overhead, low market prices and direct selling to capture a portion of price-sensitive customers’ discretionary purchases. International competitors have been less effective in penetrating the U.S. domestic markets due to product specifications, lack of brand recognition and their relative inability to access the welding distribution market channel.

 

We expect to continue to see price pressure in the segments of the market where little product differentiation exists. The trends of improved performance at lower prices in the power source market and further penetration of the automated market are also expected to continue. Internationally, the competitive profile is similar, with overall lower market prices, more fragmented competition and a weaker presence of larger U.S. manufacturers.

 

We compete on the performance, functionality, price, brand recognition, customer service and support and availability of our products. We believe we compete successfully through the strength of our brands, by focusing on technology development and offering innovative industry-leading products in our niche product areas.

 

Employees

 

As of December 31, 2009, we employed approximately 1,800 people, 500 of whom were engaged in sales, marketing and administrative activities, and 1,300 of whom were engaged in manufacturing or other operating activities. During 2009, we reduced our workforce in response to the decline in global economic conditions. By contrast, at December 31, 2008 our workforce was approximately 2,600 people, 600 of whom were engaged in sales, marketing and administrative activities, and 2,000 of whom were engaged in manufacturing or other operating activities. None of our U.S. workforce is represented by labor unions, while most of the manufacturing employees in our foreign operations are represented by labor unions. We believe that our employee relations are satisfactory. We have not experienced any significant work stoppages.

Patents, Licenses and Trademarks

 

Our products are sold under a variety of trademarks and trade names. We own trademark registrations or have filed trademark applications for of all our trade names that we believe are material to the operation of our businesses. We also own various patents and from time to time acquire licenses from owners of patents to apply such patents to our operations. We do not believe any single patent or license is material to the operation of our businesses taken as a whole.

 

Recent Developments

 

On February 23, 2010, Thermadyne Holdings Corporation (the “Company”), its domestic subsidiaries and certain of its foreign subsidiaries amended its working capital facility and second lien facility credit agreements. The amendments are intended to facilitate the purchase of equipment and building improvements in existing manufacturing facilities during 2010 through the use of existing funds and financing arrangements. In addition, the amendments provide added flexibility for the repatriation of funds from foreign subsidiaries and the reinvestment of funds in foreign locations.

 

On February 23, 2010, the Company, Thermadyne Industries, Inc., their domestic subsidiaries and certain of their foreign subsidiaries (together with the Company, the “Thermadyne Parties”) entered into the Third Amendment to Third Amended and Restated Credit Agreement with General Electric Capital Corporation as agent and lender (the “Third Amendment”) to, among other things: (i) increase the permitted amount of foreign investments from $5,000,000 to $10,000,000, subject to certain restrictions, including a $3,000,000 limitation on investment in non-affiliated foreign persons; and (ii) adjust the minimum quarterly Fixed Charge Coverage Ratio requirements so as to compute the Ratio as of December 31, 2009 and March 31, 2010 and June 30, 2010 based on the results for the three months, six months, and nine months then ended. For September 30, 2010 and for each calendar quarter thereafter, the computation is based on the twelve month period then ending. The minimum Fixed Charge Coverage Ratio required for December 31, 2009 is 1.00 and for all calendar quarters thereafter is 1.10.

 

Also on February 23, 2010 the Thermadyne Parties entered into Amendment Number One to 2009 Amended and Restated Second Lien Credit Agreement with Regions Bank, as administrative agent, collateral agent and funding agent, and the lenders party thereto (the “Second Lien Facility Amendment”) to, among other things, increase the permitted amount of foreign investments from $5,000,000 to $10,000,000, subject to certain restrictions, including a $3,000,000 limitation on investment in non-affiliated foreign persons.

 

Executive Officers of the Registrant

 

Set forth below is the name, age, position and a brief account of the business experience of each of our executive officers.

 

 

 

Internet Information

 

Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our web site (www.thermadyne.com) as soon as reasonably practicable after we electronically file the materials with or furnish them to the Securities and Exchange Commission.

 

 

The statements in this Annual Report on Form 10-K that relate to future plans, events or performance are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995, including statements regarding our future prospects. These statements may be identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions and relate to future events and occurrences. Actual results could differ materially due to a variety of factors and the other risks described in this Annual Report and the other documents we file from time to time with the Securities and Exchange Commission. Factors that could cause actual results to differ materially from those expressed or implied in such statements include, but are not limited to, the following items discussed below. We undertake no duty to revise or update the items discussed below.

 

You should carefully consider each of the risks and uncertainties we describe below and all of the other information in this report. The risks and uncertainties we describe below are not the only ones we face. Additional risks and uncertainties of which we are currently unaware or that we currently believe to be immaterial may also adversely affect our business.

 

Our business is cyclical and is affected by global economic conditions, particularly those affecting steel construction and fabrication-related activities, as well as other factors that are outside of our control, any of which may have a material adverse effect on our business, results of operations and financial condition.

 

The success of our business is directly affected by general economic conditions and other factors beyond our control. In the fourth quarter of 2008, global economic conditions, including steel production, began to deteriorate and severely deteriorated throughout much of 2009, with global steel production declining 50% to 60% during 2009 from the 2008 levels. Our business has been and continues to be adversely impacted by such conditions.

 

The end users of our products are engaged in commercial construction, steel shipbuilding, oil and gas industry related construction and maintenance, and general manufacturing. The demand for our products, and therefore the results of our operations, are related to the level of production in these end-user industries. Specifically, our sales

volumes are closely tied to the levels of steel related construction and fabrication activities. Global steel production and shipments declined precipitously in late 2008 and in 2009, which caused the Company to suffer dramatic decreases in sales volumes in late 2008 and throughout 2009. The duration and extent of this reduced demand, along with further potential declines in demand for our products is uncertain.

 

We believe the volatility in these global economic factors could have further adverse impacts on our operating results and financial condition.

 

Our future operating results may be adversely affected by fluctuations in the prices and availability of raw materials.

 

We purchase a large amount of commodity raw materials, particularly copper, brass and steel. At times, pricing and supply can be volatile due to a number of factors beyond our control, including global demand, general economic and political conditions, mine closures and labor unrest in various countries, activities in the financial commodity markets, labor costs, competition, import duties and tariffs and currency exchange rates. This volatility can significantly affect our raw material costs. For example, as of July 2008, the cost of copper and steel was $4.25 per pound and $0.40 per pound, respectively, declined to $1.35 per pound and $0.24 per pound, respectively, in December 2008, and increased to $3.15 per pound and $0.30 per pound, respectively, by December 2009. An environment of volatile raw material prices, competitive conditions and declining economic conditions can adversely affect our profitability if we fail to adjust our sales prices appropriately to recover the change in the costs of materials.

 

The timing of and the extent to which we will realize changes in material costs and the impact on our profits are uncertain. Fixed price purchase commitments typically exist with respect to a portion of our material purchases for purchase volumes of three to six months. To the extent that our arrangements to lock in supplier costs do not adequately keep in check cost increases and we are unable to pass on any price increases to our customers, our profitability could be adversely affected. Certain of the raw materials used in our hardfacing products within our filler metal product line, such as cobalt and chromium, are available primarily from sources outside the United States. Restrictions in the supply of cobalt, chromium and other raw materials could adversely affect our operating results. In addition, certain of our customers rely heavily on raw materials, and fluctuations in prices of raw materials for these customers could negatively affect their operations and orders for our products and, as a result, our financial performance. Further dramatic declines in global economic conditions may also create hardships for our suppliers and potentially disrupt their supply of raw materials to us.

 

Our international sales and operations face special risks and are subject to various operational and financial developments and restrictions that may adversely impact our sales and earnings.

 

Approximately one-half of our consolidated net sales are derived from exports from the U.S. and from our international operations located in Australia, Canada, China, England, Italy, Malaysia and Mexico. International operations are subject to a number of special risks including:

 

 

 

Our products are used primarily in metal fabrication operations to cut and join metal parts. Certain metal fabrication operations, as well as manufacturing operations generally, are moving from the United States to international locations where labor costs are lower. Selling products into international markets and maintaining and expanding international operations require significant coordination, capital and resources. If we fail to address these developments, we may be unable to grow or maintain our sales and profitability.

 

Also, in some foreign jurisdictions, we may be subject to laws that limit the right and ability of entities organized or operating in those jurisdictions to pay dividends or remit earnings to affiliated companies unless specified conditions are met. These factors may adversely affect our financial condition.

 

The Company has initiated a comprehensive review of its compliance with foreign and U.S. duties requirements in light of the assessments by a foreign jurisdiction in the third quarter of 2009. It is premature to assess the findings of this review but management believes the ultimate resolution of the compliance review will not have a material effect on the Company’s business or financial condition.

 

We are subject to currency fluctuations and face risks arising from the imposition of exchange controls and currency devaluations.

 

We sell our products to distributors located in approximately 100 countries. During both years ended December 31, 2008 and 2009, approximately 44% of our consolidated sales were derived from markets outside the U.S. Approximately one-half of these sales are U.S. dollar denominated sales of products manufactured in the U.S. and exported to foreign customers. Strengthening of the U.S. dollar exchange rate serves to increase the cost for foreign purchasers and may adversely affect our sales.

 

For our operations conducted in foreign countries, transactions are typically denominated in various foreign currencies. The Australian dollar represents approximately 20% of our international sales. The costs of our operations in these foreign locations are also denominated in those local currencies. Because our financial statements are stated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our reported financial results. In addition, some sale transactions pose foreign currency exchange settlement risks. Our Australian operations currently maintain 60 to 90 day forward purchase commitments for U.S. dollars in place to reduce the risk of an adverse currency exchange movement in connection with U.S. denominated materials purchases. Currency fluctuations have affected our reported financial performance in the past and will affect our reported financial performance in the future.

 

We also face risks arising from the imposition of currency exchange controls and currency devaluations. Exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or operations located or doing business in a country imposing controls. Currency devaluations result in a diminished value of funds denominated in the currency of the country instituting the devaluation. Actions of this nature, if they occur or continue for significant periods of time, could have an adverse effect on our financial condition.

 

Sales of our common stock may result in a “change of control” under the Indenture, in which case, we may be required to repurchase the Senior Subordinated Notes, which would have a material adverse effect on the Company.

 

Upon a change of control, as defined in the Indenture for the Senior Subordinated Notes, each holder of our Senior Subordinated Notes has the right to require us to purchase the Senior Subordinated Notes at a purchase price in cash equal to 101% of the principal, plus accrued and unpaid interest. Under the Indenture, a “change of control” occurs if:

 

 

 

The Indenture defines “beneficial ownership” to include all shares that a person has the right to acquire either immediately or with the passage of time.

 

As of December 31, 2009, Angelo, Gordon & Co., L.P. beneficially owned 33.2% of our common stock, which it holds for the account of its investment advisory clients. If some or all of the shares owned by our principal stockholder are sold to one of our existing stockholders, it is possible that, following the sale, the purchaser would own more than 35% of our common stock. If any of the holders of our Senior Subordinated Notes exercises its redemption rights, we may have insufficient working capital for operations or capital expenditures. In addition, we may not have sufficient financial resources to purchase all of the Senior Subordinated Notes. If we are unable to satisfy our payment obligations under the Senior Subordinated Notes, we may be in default under our Indenture, which, if not waived, would result in the acceleration of our debt obligations and the exercise of remedies under the Working Capital Facility and the Second Lien Facility, which would have a material adverse impact on our ability to operate our business and to make payments under our debt instruments.

 

Sales of our common stock may result in a “change of control” under our credit facility agreements, which constitutes an event of default under the agreements, could result in the acceleration of our debt obligations under those agreements and, absent a waiver of this default, would have a material adverse effect on the Company.

 

Under the terms of our credit facility agreements, any of the following events is a “change of control”:

 

 

If some or all of the shares beneficially owned by Angelo Gordon & Co., L.P. are sold to one or more of our existing or new stockholders, it is possible that, following the sale, the purchaser would own more than 30% of our common stock. This would constitute an event of default under our credit facility agreements, which, if not waived, would result in the exercise of remedies under these facilities, including the acceleration of our debt obligations. This acceleration, in turn, would also constitute an event of default under the Indenture for the Senior Subordinated

Notes. An event of default under our credit facility agreements, if not waived, would have a material adverse impact on our ability to operate our business and to make payments under our debt instruments.

 

The sale of shares by our principal stockholder or a combination of other stockholders may limit our ability to use net operating loss carryforwards to offset future taxable income for federal and state income tax purposes, which could have a material adverse effect on our cash flow and results of operations.

 

As of December 31, 2009, we had net operating loss carryforwards of approximately $152 million from the years 1998 through 2009 available to offset future federal and state taxable income. Our net operating loss carryforwards will expire between the years 2018 and 2029. Under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its net operating losses to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of holders of five percent or more of the corporation’s stock increases by more than fifty (50) percentage points over an applicable three-year period. The amount of the annual limitation generally is equal to the value of the stock of the corporation immediately prior to the ownership change multiplied by the adjusted federal long-term tax-exempt rate. Our net operating loss carryforwards are not currently limited under Section 382.

 

We expect that sales of our common stock by our principal stockholder will result in an ownership change or will significantly increase the likelihood that an ownership change will occur that will limit our ability to use net operating loss carryforwards under Section 382. It is also possible that an ownership change may result from sales of our common stock by other owners of five percent or more of the shares of our common stock, or the acquisition of five percent or more of the shares of our common stock by other persons (or groups of persons).

 

We have no control over our stockholders’ ability to buy or sell their shares and therefore cannot prevent an ownership change from occurring. We also cannot predict the extent to which our net operating loss carryforwards will be limited or the ultimate impact of these limitations, which will depend on, among other things: the identity of any stockholders who buy or sell our common stock, the timing of these transactions, the number of shares they buy or sell, and our future taxable income.

 

Limitations on our ability to use net operating loss carryforwards to offset future taxable income under Section 382 could reduce the benefit of our net operating loss carryforwards by requiring us to pay federal and state income taxes earlier than we otherwise would have had such a change not occurred, and causing part of our net operating loss carryforwards to expire without our having fully utilized them. Limitations under Section 382 could also limit our use of other credits, such as foreign tax credits, in future years. Limitations resulting from an ownership change under Section 382 could have a material adverse effect on our cash flow and results of operations.

 

We rely in large part on independent distributors for sales of our products and the continued consolidation of distributors and loss of key distributors could materially harm our business.

 

We depend on more than 2,000 independent distributors to sell our products and provide service and after-market support to our ultimate customers. Distributors play a significant role in determining which of our products are stocked at their branch locations and the prices at which they are sold, which impacts how accessible our products are to end users of our products. Almost all of the distributors with whom we do business offer competing products and services to end users. There is a trend toward consolidation of these distributors, which has been escalating in recent years. In 2009, one distributor represented 11% of our 2009 sales and our top five distributors comprised 27% of our global net sales in 2009 and 2008. Recent economic events could undermine the economic viability of some of our customers. These events could also cause our competitors to introduce new economic inducements and pricing arrangements that may cause our distributors to increase purchases from our competitors and reduce purchases from us. The continued consolidation of these distributors, the loss of certain key distributors, or an increase in the distributors’ sales of our competitors’ products to end users could materially reduce our sales and earnings.

Our business is highly competitive, and increased competition could reduce our sales, earnings and profitability.

 

We offer products in highly competitive markets. We compete on the performance, functionality, price, brand recognition, customer service, and support and availability of our products. We compete with companies of various sizes, some of which have greater financial and other resources than we do. Increased competition could force us to lower our prices or to offer additional product features or services at a higher cost to us, which could reduce our sales and net earnings.

 

The greater financial resources of certain of our competitors may enable them to commit larger amounts of capital in response to changing market conditions. Certain competitors may also have the ability to develop product innovations that could put us at a disadvantage. In addition, some of our competitors have achieved substantially more market penetration in certain segments of those markets in which we operate. If we are unable to compete successfully against other manufacturers in our marketplace, we could lose customers, and our sales may decline. There can also be no assurance that customers will continue to regard our products favorably, that we will be able to develop new products that appeal to customers, that we will be able to improve or maintain our profit margins or that we will be able to continue to compete successfully in maintaining or increasing our market share.

 

We may not be able to successfully implement our cost-reduction initiatives, which may limit our competitiveness and profitability.

 

We have undertaken and will continue to undertake cost-reduction initiatives in response to global competitive conditions. These include our ongoing continuous improvement initiatives, redesigning products and manufacturing processes, re-evaluating the location of certain manufacturing operations and the sourcing of vendor purchased components. There can be no assurance that these initiatives will be beneficial to us in providing the anticipated cost savings from such activities. The failure of our cost-reduction efforts to yield sufficient cost reductions may have a material adverse effect on our business.

 

Failure to enhance existing products and develop new products may adversely impact our financial results.

 

Our financial and strategic performance depends partially on providing new and enhanced products to the global marketplace. We may not be able to develop or acquire innovative products or otherwise obtain intellectual property in a timely and effective manner in order to maintain and grow our position in global markets. Furthermore, we cannot be sure that new products or product improvements will be met with customer acceptance or contribute positively to our financial results. We may not be able to continue to support the levels of research and development activities and expenditures necessary to improve and expand our products. Competitors may be able to direct more capital and other resources to new or emerging technologies to respond to changes in customer requirements.

 

If we cannot adequately enforce or protect our intellectual property rights, our competitive position will suffer and we may incur significant additional costs.

 

We own a number of patents, trademarks and licenses related to our products and rights under patents owned by others. While no single patent, trademark or license is material to the operation of our business as a whole, our ability to enforce our intellectual property rights in the U.S. and in foreign countries is critical to our competitive position and our ability to continue to bring new and enhanced products to the marketplace. We rely upon patent, trademark and trade secret laws in the United States and similar laws in foreign countries, as well as agreements with our employees, customers, suppliers and other third parties, to establish and maintain our intellectual property rights. Third parties may challenge, infringe upon or otherwise circumvent our intellectual property rights, which could adversely impact our competitive position. Further, the enforceability of our intellectual property rights in various foreign countries is uncertain. Accordingly, in certain countries, we may be unable to protect our intellectual property rights against unauthorized third-party copying or use, which could harm our competitive position.

 

Third parties also may claim that we or our customers are infringing upon their intellectual property rights. Defending those claims and contesting the validity of third parties’ asserted intellectual property rights can be time-consuming and costly. Claims of intellectual property infringement also might require us to redesign affected

products, enter into costly settlement or license agreements or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from manufacturing, marketing or selling certain of our products.

 

If our consolidated indebtedness increases or EBITDA decreases, our interest cost under our Senior Subordinated Notes may increase, which would negatively impact our results.

 

The interest cost for our Senior Subordinated Notes is subject to change quarterly based upon our consolidated leverage ratio determined on the relationship of debt to the trailing four quarters EBITDA, as defined. Under the terms of the Indenture for the Senior Subordinated Notes, we are required to pay additional Special Interest. The rate of Special Interest increases to a maximum of 2.75% if our consolidated leverage ratio increases to 7.0. The rate of Special Interest declines incrementally to 0% if our consolidated leverage ratio is less than 3.0. The rate of Special Interest increases to 2.25% effective beginning January 1, 2010, based on our consolidated leverage ratio that is above 6.5 as of September 30, 2009. The rate will continue at this level through June 30, 2010 based on the consolidated leverage ratio as of December 31, 2009. We can give no assurance that rate of special interest will not increase after June 30, 2010.

 

We are subject to risks caused by changes in interest rates.

 

Changes in benchmark interest rates (i.e. LIBOR) will impact the interest cost associated with our variable interest rate debt. Our variable rate debt includes the borrowings under our Working Capital Facility and our Second Lien Facility. Changes in interest rates would affect our cost of future borrowings. Significant increases in interest rates would adversely affect our financial condition and results of operations.

 

If we fail to comply with the financial covenants in our debt instruments, our ability to obtain financing and make payments under our debt instruments may be adversely impacted.

 

Our credit facility agreements require compliance with certain financial covenants. These financial covenants have been amended on several occasions and most recently in February 2010. While we believe that we will be able to comply with our financial covenants in future periods, failure to do so would, unless the covenants were further amended or waived, result in defaults under our credit agreements. An event of default under our credit agreements, if not waived, could result in the acceleration of these debt obligations and, consequently, our debt obligations under our Senior Subordinated Notes. Such acceleration could result in exercise of remedies by our creditors, which could have a material adverse impact on our ability to operate our business and to make payments under our debt instruments. In addition, an event of default under the credit facilities, such as the failure to maintain the applicable required financial ratios, would prevent additional borrowing under our credit agreements, which could have a material adverse effect on our ability to operate our business and to make payments under our debt instruments.

 

The Company is subject to risks caused by disruptions in the credit markets.

 

Our Working Capital Facility is provided under an agreement with G.E. Capital Corporation, which matures in June 2012. Our operations are funded through daily borrowings and repayments from and to our lender under the Working Capital Facility. The temporary or permanent loss of the use of the Working Capital Facility or the inability to replace this facility when it expires would have a material adverse effect on our business and results of operations.

 

Credit availability for our suppliers and customers has been reduced due to the disruptions in the credit markets. This decreased availability for our customers and suppliers may have an adverse effect on the demand for our products, the collection of our accounts receivable and our ability to timely fulfill our commitments.

 

The actual or anticipated sale of shares of our common stock may cause the market price of our common stock to decline. During 2008, the Company registered 4,496,555 shares of our common stock on behalf of our principal stockholder, and 1,500,000 shares of our common stock for future offer and sale by the Company.

 

During 2008, the Securities and Exchange Commission declared effective the Company’s shelf registration statement covering 5,996,555 shares of our common stock. Of the 5,996,555 shares, 4,496,555 were registered by the Company on behalf of Angelo, Gordon & Co., L.P., and 1,500,000 shares were registered for future offer and

sale by the Company. As of December 31, 2009, Angelo, Gordon & Co., L.P. beneficially owned 33.2% of our common stock, which it holds for the account of investment advisory clients of Angelo, Gordon & Co., L.P. Other investment advisory clients of Angelo, Gordon & Co., L.P. are the sole lenders under our Second Lien Facility, and also own a total of $24.2 million principal amount of our Senior Subordinated Notes. The Company and Angelo, Gordon & Co., L.P. may offer for sale any or all of their respective registered shares from time to time prior to the expiration of the shelf registration statement.

 

The sale of these or other shares of our common stock through open market transactions or other means may, depending upon the timing of the sales, depress the market price of our common stock. Moreover, actual or anticipated downward pressure on the market price of our common stock due to actual or anticipated sales of our common stock could cause some institutions or individuals to engage in short sales of our common stock, which may itself cause the market price of our common stock to decline.

 

If our relationships with our employees were to deteriorate, we could be adversely affected.

 

Currently, in our U.S. operations (where none of our employees is represented by a labor union) and in our foreign operations (where the majority of our employees are represented by labor unions), we have maintained a positive working environment. Although we focus on maintaining a productive relationship with our employees, we cannot ensure that unions, particularly in the United States, will not attempt to organize our employees or that we will not be subject to work stoppages, strikes or other types of conflicts with our employees or organized labor in the future. Any such event could have a material adverse effect on our ability to operate our business and serve our customers and could materially impair our relationships with key customers and suppliers, which could damage our business, results of operations and financial condition.

 

If we are unable to retain and hire key employees, we could be adversely affected.

 

Our ability to provide high-quality products and services for our customers and to manage the complexity of our business is dependent on our ability to retain and to attract skilled personnel in the areas of product engineering, manufacturing, sales and finance. Our businesses rely heavily on key personnel in the engineering, design, formulation and manufacturing of our products. Our success is also dependent on the management and leadership skills of our senior management team. As with all of our employees, we focus on maintaining a productive relationship with our key personnel. However, we cannot ensure that our employees will remain with us indefinitely. The loss of a key employee and the inability to find an adequate replacement could materially impair our relationship with key customers and suppliers, which could damage our business, results of operations and financial condition.

 

Liabilities relating to litigation alleging manganese induced illness could reduce our profitability and impair our financial condition.

 

We are a defendant in many cases alleging manganese induced illness. Manganese is an essential element of steel and contained in all welding filler metals. We are one of a large number of defendants in lawsuits filed in the U.S. The claimants allege that exposure to manganese contained in the welding filler metals caused them to develop adverse neurological conditions, including a condition known as manganism.

 

The aggregate long-term impact of the manganese loss contingencies on operating cash flows and financial condition is difficult to assess, particularly because claims are in many different stages of development. While we have contested and intend to continue to contest these lawsuits vigorously, there are several risks and uncertainties that may affect our liability for personal claims relating to exposure to manganese, including the possibility that our litigation experience changes overall. An adverse change from our litigation experience to date could materially diminish our profitability and impair our financial condition.

 

Our products involve risks of personal injury and property damage, which expose us to potential liability.

 

Our business exposes us to possible claims for personal injury or death and property damage resulting from the products that we sell. We maintain insurance for loss (excluding attorneys’ fees and expenses) through a combination of self-insurance retentions and excess insurance coverage. We are not insured against punitive

damage awards and we are not currently insured for liability from manganese-induced illness. We monitor claims and potential claims of which we become aware and establish reserves for the self- insurance amounts based on our liability estimates for such claims. We cannot give any assurance that existing or future claims will not exceed our estimates for self-insurance or the amount of our excess insurance coverage. In addition, we cannot give any assurance that insurance will continue to be available to us on economically reasonable terms or that our insurers would not require us to increase our self-insurance amounts. Claims brought against us that are not covered by insurance or that result in recoveries in excess of insurance coverage could have a material adverse effect on our results of operations and financial condition. Moreover, despite any insurance coverage, any accident or incident involving our products could negatively affect our reputation among customers, suppliers, lenders, investors and the public. This may make it more difficult for us to operate our business and compete effectively.

 

We are subject to various environmental laws and regulations and may incur costs that have a material adverse effect on our financial condition as a result of violations of or liabilities under environmental laws and regulations.

 

Our operations are subject to federal, state, local and foreign laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the use, management and disposal of hazardous materials resulting from the manufacturing process, and employee health and safety. As an owner and operator of real property and a generator of hazardous waste, we may also be subject to liability for the remediation of contaminated sites. While we are not currently aware of any outstanding material claims or obligations, we could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, and third-party property damage or personal injury claims, as a result of violations of or liabilities under environmental laws or noncompliance with environmental permits required at our facilities.

 

Contaminants have been detected at some of our present and former sites. In addition, we have been named as a potentially responsible party at certain Superfund sites. While we are not currently aware of any contaminated or Superfund sites as to which material outstanding claims or obligations exist, the discovery of additional contaminants or the imposition of additional cleanup obligations at these or other sites could result in significant liability. In addition, the ultimate costs under environmental laws and the timing of these costs are difficult to predict. Liability under some environmental laws relating to contaminated sites, including the Comprehensive Environmental Response, Compensation, and Liability Act and analogous state laws, can be imposed retroactively and without regard to fault. Further, one responsible party could be held liable for all costs at a site. Thus, we may incur material liabilities under existing environmental laws and regulations or environmental laws and regulations that may be adopted in the future.

 

 

None.

 

 

We operate manufacturing facilities in the United States, Italy, Malaysia, Australia, the People’s Republic of China and Mexico and lease distribution facilities in the U.S., England, and Canada. All U.S facilities, leases and leasehold interests are encumbered by first priority liens securing our obligations under our Working Capital Facility and Second Lien Facility. We consider our plants and equipment to be modern and well maintained and believe our plants have sufficient capacity to meet future anticipated expansion needs.

 

We lease a 19,500 square-foot facility located in St. Louis, Missouri, that houses our executive offices, as well as some of our centralized services.

The following table describes the location and general character of our principal properties of our continuing operations as of December 31, 2009:

 

 

All of the above facilities are leased, except for the manufacturing facilities located in Australia, which facilities are owned. We also have additional assembly and warehouse facilities in the United Kingdom and Australia.

 

 

Our operations are subject to federal, state, local and foreign laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the use, management and disposal of hazardous materials and employee health and safety. We are currently not aware of any citations or claims filed against us by any local, state, federal and foreign governmental agencies, which, if successful, would have a material adverse effect on our financial condition or results of operations.

 

As an owner or operator of real property, we may be required to incur costs relating to remediation of properties, including properties at which we dispose waste, and environmental conditions could lead to claims for personal injury, property damage or damages to natural resources. We are aware of environmental conditions at certain properties which we now own or lease or previously owned or leased, which are undergoing remediation. We do not believe the cost of such remediation will have a material adverse effect on our business, financial condition or results of operations.

 

Certain environmental laws, including, but not limited to, the Comprehensive Environmental Response, Compensation, and Liability Act and analogous state laws, provide for liability without regard to fault for investigation and remediation of spills or other releases of hazardous materials. Under such laws, liability for the entire cleanup can be imposed upon any of a number of responsible parties. Such laws may apply to conditions at properties presently or formerly owned or operated by us or our subsidiaries or by their predecessors or previously owned or operated by unaffiliated business entities. We have in the past and may in the future be named a potentially responsible party at off-site disposal sites to which we have sent waste. We do not believe the ultimate cost relating to such properties or sites will have a material adverse effect on our financial condition or results of operations.

 

At December 31, 2009, we were a co-defendant in 347 cases alleging manganese induced illness. Manganese is an essential element of steel and contained in all welding filler metals. We are one of a large number of defendants. The claimants allege that exposure to manganese contained in the welding filler metals caused the plaintiffs to

develop adverse neurological conditions, including a condition known as manganism. As of December 31, 2009, 144 of these cases had been filed in, or transferred to, federal court where the Judicial Panel on Multidistrict Litigation has consolidated these cases for pretrial proceedings in the Northern District of Ohio. Between June 1, 2003 and December 31, 2009, we were dismissed from 1,135 other cases with similar allegations. While there is uncertainty relating to any litigation, management is of the opinion that the outcome of such litigation will not have a material adverse effect on the Company’s financial condition or results of operations.

 

All other legal proceedings and actions involving us are of an ordinary and routine nature and are incidental to the operations of the Company. Management believes that such proceedings should not, individually or in the aggregate, have a material adverse effect on the Company’s business or financial condition or on the results of operations.

 

 

 

The Company’s common stock is listed on The NASDAQ Capital Market under the symbol “THMD.” The following table shows, for the periods indicated, the high and low sales or bid prices, as the case may be, of a share of Common Stock for 2008 and 2009, as reported by published financial sources. For each quarter in 2008 and 2009, the prices shown below reflect the high and low sales prices.

 

 

On March 3, 2010, the last reported sale price for our Common Stock as quoted on NASDAQ was $7.80 per share. As of March 3, 2010 there were approximately 520 beneficial owners of our Common Stock including the number of individual participants in security position listings.

 

We have historically not paid any cash dividends on our Common Stock, and we do not have any present intention to commence payment of any cash dividends. We intend to retain earnings to provide funds for the operation and expansion of our business and to repay outstanding indebtedness. Our debt agreements contain certain covenants restricting the payment of dividends on or repurchases of Common Stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Performance Graph

 

The following graph shows a comparison of our cumulative total returns, the Russell 2000 Stock Index (the “Russell 2000”) and the Standard & Poor’s Composite 500 Stock Index (the “S&P 500”) for the period from December 31, 2004 to December 31, 2009. A compatible peer-group index for the welding industry, in general, was not readily available since the industry is comprised of a relatively few competitors. The Russell 2000 represents an index based on a concentration of companies having relatively small market capitalization, similar to the Company. The comparison assumes $100 was invested on December 31, 2004 in each of our common stock, the Russell 2000, and the S&P 500, and assumes compounded daily returns with reinvestment of dividends.

 

 

Value of $100 Invested

 

 

The selected financial data for the years ended December 31, 2009, 2008, 2007, 2006 and 2005, set forth below has been derived from our audited consolidated financial statements for such years. The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto, in each case included elsewhere herein. Previously reported amounts have been reclassified as a result of the discontinued operations.

 

 

Overview

 

We are a leading global designer and manufacturer of gas and arc cutting and welding products, including equipment, accessories and consumables. Our products are used by manufacturing, construction, fabrication and foundry operations to cut, join and reinforce steel, aluminum and other metals. We design, manufacture and sell products in five principal categories: (1) gas equipment; (2) plasma power supplies, torches and consumable parts; (3) welding equipment; (4) arc accessories, including torches, guns, consumable parts and accessories; and (5) filler metals. We operate our business in one reportable segment.

 

Demand for our products is highly cyclical because many of the end users of our products are themselves in highly cyclical industries, such as commercial construction, steel shipbuilding, petrochemical construction and general manufacturing. The demand for our products and, therefore, our results of operations are directly related to the level of production in these end-user industries. During the fourth quarter of 2008 and throughout much of 2009, we experienced declining demand from our customers as global economic conditions slowed and steel production, in particular, declined substantially. We have entered into a recessionary period within our sector of the economy that is of an indeterminate depth and duration.

 

The availability and the cost of the components of our manufacturing processes, and particularly raw materials, are key determinants in achieving future success in the marketplace and in achieving profitability. Principal raw materials used are copper, brass, steel and plastic, which are widely available and need not be specifically manufactured for use by us. Certain other raw materials used in our hardfacing products, such as cobalt and chromium, are available primarily from sources outside the United States. Historically, we have been able to obtain adequate supplies of raw materials at acceptable prices. During 2008 and 2007, we experienced higher than historical average inflation on materials such as copper, steel and brass, which negatively affected margins. In 2009 most commodity costs declined dramatically in the global marketplace during the first six months, while in the second half of 2009, many commodity costs increased but not to the levels seen prior to 2009. We have reduced and continue to reduce our overhead and labor costs by improving our operational efficiency, relocating jobs, consolidating our manufacturing operations and outsourcing production of certain components and products.

 

Our operating profit is affected by the mix of the products we sell, as margins are generally higher on torches and guns and their replacement parts, as compared to power supplies and filler metals.

 

We sell our products domestically primarily through industrial welding distributors, retailers and wholesalers. Internationally, we sell our products through our sales force, independent distributors and wholesalers.

 

For the year ended December 31, 2009, approximately 56% of our sales were made to customers in the U.S. Approximately one-half of our international sales are U.S. export sales and are denominated in U.S. dollars. The U.S. dollar exchange rate has been volatile but generally weakened relative to foreign currencies during 2009. The weakening of the U.S. dollar increases our international sales amounts as translated into U.S. dollars and also may serve to increase our export sales. This weakening of the U.S. dollar may also decrease our cost of manufacturing materials in certain of our foreign locations. Similarly, the strengthening of the U.S. dollar against other currencies may have the opposite effects on our international and export sales and the cost of certain of our manufacturing materials.

 

Key Indicators

 

Key economic measures relevant to our business include steel consumption, industrial production trends and purchasing manager indices. Industries that we believe provide a reasonable indication of demand for our products include construction and transportation, railcar manufacturing, oil and gas exploration, metal fabrication and farm machinery, shipbuilding, and railcar manufacturing. The trends in these industries provide important data to us in forecasting our business. Indicators with a more direct relationship to our business that might provide a forward-looking view of market conditions and demand for our products are not available.

Key performance measurements we use to manage the business include orders, sales, commodity cost trends, operating expenses and efficiencies, inventory levels and fill-rates. The timing of these measurements varies but may be daily, weekly and monthly depending on the need for management information and the availability of data.

 

Key financial measurements we use to evaluate the results of our business as well as the operations of our individual units include customer order levels and mix, sales order profitability, production volumes and variances, selling, general and administrative expenses, earnings before interest, taxes, depreciation and amortization, operating cash flows, capital expenditures and controllable working capital. We define controllable working capital as accounts receivable, inventory, and accounts payable. We review these measurements monthly, quarterly and annually and compare them over historical periods, as well as with objectives that are established by management and approved by our Board of Directors.

 

Discontinued Operations

 

In the years 2005 through 2007, the Company committed to plans to dispose of its non-core businesses which included C&G Systems (“C&G”), its Brazilian manufacturing operations, its South African operations, Soldaduras Soltec Limitada (“Soltec”) and Comercializadora Metalservice Limitada (“Metalservice”), and GenSet S.P.A. The dispositions were completed during the period of 2005 through 2009. During 2009, the building and land associated with our former Brazilian operations were sold and the liability amounts recorded for tax matters, employee severance obligations and other estimated liabilities were increased. A gain, net of tax, of $1.1 million was recorded related to Brazil during 2009 including a gain of $2.9 million on the sale of the facilities, a charge of $1.1 million to revise the estimates of the remaining liabilities, and income tax expense of $0.7 million. As of December 31, 2009 the Brazilian operations show remaining liabilities, primarily associated with tax matters, of $2.2 million for which the timing of resolution is uncertain. The remaining liabilities have classified within Accrued and Other Liabilities as of December 31, 2009. Also in 2009, the note received in the sale of our South African operations was settled and the Company recorded a gain of $1.9 million in discontinued operations and $0.5 million of interest income was recorded in continuing operations related to this transaction. Further details of the discontinued operations are provided in Note 3 — Discontinued Operations.

 

Results of Operations

 

The results of operations set forth in the Income Statement on page F-5 have been adjusted to reflect the impact of discontinued operations. See Note 3 — Discontinued Operations in our consolidated financial statements.

 

The following description of results of operations is presented for the years ended December 31, 2009, 2008, and 2007.

 

2009 Compared to 2008

 

Net sales from continuing operations for the year ended December 31, 2009 were $347.7 million, which was a 32.7% decrease from net sales of $516.9 million in 2008. U.S. sales were $193.4 million for 2009, compared to $285.2 million for 2008, which is a decrease of 32.2%. International sales were $154.2 million for 2009, compared to $231.7 million for 2008, or a decrease of 33.5%. The decrease in net sales for the year ended December 31, 2009 resulted from approximately $170 million in volume declines and $10 million in foreign currency translation, offset by an approximately $11 million increase due to price increases.

 

Gross margin from continuing operations for the twelve months ended December 31, 2009 was $103.8 million, or 29.9% of net sales, compared to $159.1 million, or 30.8% of net sales, for the same period in 2008. In 2009, the Company experienced declines in raw material costs. Under its use of the LIFO inventory accounting method, the Company recorded a $4.3 million credit to cost of sales in the twelve months ended December 31, 2009. During 2008, the Company experienced increases in raw material costs and recorded a $4.1 million charge to cost of sales under its use of the LIFO inventory accounting method. In 2009, the Company reduced inventories in 2009 resulting in a liquidation of LIFO inventory costs, which reduced cost of sales by approximately $1.0 million. Excluding the effects of LIFO, gross margin for the twelve months ended December 31, 2009 was $99.5 million, or 28.6% of net sales, decreasing from $163.1 million, or 31.6%, for the same period in 2008. The decrease in the 2009 gross margin percentage as compared to 2008, excluding LIFO effects, reflects the manufacturing cost inefficiencies arising from

reduced production volumes throughout the year and the high raw material costs, particularly during the first three months of 2009. During 2009, these cost increases were offset in part by cost savings from productivity initiatives of an estimated $12 million under the Company’s Total Cost Productivity (TCP) initiative.

 

Selling, general and administrative expenses (“SG&A”) were $81.5 million, or 23.4% of net sales, for the twelve months ended December 31, 2009, as compared to $112.1 million, or 21.7% of net sales, for the twelve months ended December 31, 2008. SG&A expenses in 2009 include restructuring charges for severance expenses of $3.8 million, payable to employees who elected to participate in an early retirement program and amounts payable to manufacturing personnel placed on permanent lay-off status and to salaried employees whose positions eliminated in connection with further organizational restructurings. The 2008 SG&A expenses reflect organizational restructuring charges for severance expenses of $3.6 million payable to employees whose positions were eliminated in connection with cost reduction efforts in response to economic and market uncertainties. SG&A expenses in 2009 also include a $1.1 million charge from the write off of a Venezuelan-based customer receivable judged uncollectible and a $1.0 million charge for customs duties assessed by a foreign jurisdiction relative to prior years.

 

Interest expense for the twelve months ended December 31, 2009 was $20.9 million, which compares to $20.3 million for the twelve months ended December 31, 2008. The interest rate increased 80 basis points to an average effective interest rate of 10% for 2009 compared to 2008, due to the higher interest rate under the Second Lien Facility and the increase in the Special Interest adjustment to the Senior Subordinated Notes. The increased average interest rate was partially offset by the lower average debt in 2009 of $210 million as compared to $220 million for 2008.

 

Other income for 2009 includes $5.9 million as a result of a settlement gain relating to the termination of a majority of the Company’s health care plans for retired employees effective July 31, 2009.

 

An income tax provision of $2.7 million was recorded on pretax income from continuing operations of $3.8 million for the twelve months ended December 31, 2009 versus an income tax provision of $12.1 million on pretax income from continuing operations of $22.6 million for 2008. For 2009, the effective income tax rate was 70% versus 53% in 2008. For 2009 and 2008, the incremental effective tax rate arises from the effect of deferred U.S. income tax expenses recorded on certain foreign earnings in addition to the foreign taxes payable currently on those earnings. The currently payable income tax provision for 2009 and 2008 relates primarily to earnings in foreign countries. Operating loss carryovers offset substantially all U.S. currently payable income taxes.

 

Discontinued operations reported net income of $3.1 million for the twelve months ended December 31, 2009 compared to net income of $0.2 million for the twelve months ended December 31, 2008. The change in results for discontinued operations primarily relates to the gain recorded for Brazil on the sale of building and land, net of charges to adjust the remaining liabilities, and collection of a note receivable associated with the sale of the South African business. The South African sale closed on May 25, 2007 with $13.8 million net cash received at closing along with a note due in May 2010 in the amount of 30 million South African Rand and bearing 14% interest payable. In April 2009, the note was settled and the Company recorded a gain of $1.9 million. The Company also recorded $0.5 million of interest income in continuing operations related to this transaction.

 

2008 Compared to 2007

 

Net sales from continuing operations for the year ended December 31, 2008 were $516.9 million, which was a 4.6% increase over net sales of $494.0 million for the same twelve months in 2007. U.S. sales were $285.2 million for 2008, compared to $292.6 million for 2007, which is a decrease of 2.5%. International sales were $231.7 million for the twelve months ended December 31, 2008 compared to $201.4 million for the same period of 2007, or an increase of 15.0%. Net sales for the twelve months ended December 31, 2008 increased approximately $23 million with approximately $20 million from price increases, $2 million due to foreign currency translation and $1 million from volume. In the fourth quarter of 2008, the Company’s sales declined substantially from the trends in the first three quarters as global economic conditions, particularly in steel production, deteriorated. The fourth quarter 2008 sales were 16% less than the comparable 2007 quarter with a $21 million sales decline of which approximately $20 million was from volume.

Gross margin from continuing operations for the twelve months ended December 31, 2008 was $159.1 million, or 30.8% of net sales, compared to $154.4 million, or 31.2% of net sales, for the same period in 2007. The gross margin decline is due to increases in the costs of materials such as copper, brass and steel partially offset by manufacturing cost savings and improved pricing administration consisting of sales price increases. The impact of increases in materials and production supply cost reduced gross margin by an estimated $26 million. These material cost increases were offset in part by cost savings from productivity initiatives of an estimated $18 million under the Company’s Total Cost Productivity (TCP) initiative.

 

Selling, general and administrative expenses (“SG&A”) were $112.1 million, or 21.7% of net sales, for the twelve months ended December 31, 2008 as compared to $106.0 million, or 21.5% of net sales, for the twelve months ended December 31, 2007. The increase in SG&A includes severance cost charges of $3.6 million arising from the fourth quarter 2008 decision to reduce salaried personnel due to the decline in economic conditions. Foreign currency transactional gains and losses reflected in SG&A for the twelve months ended December 31, 2008 and 2007 were losses of $0.7 million and gains of $0.4 million, respectively. The remaining increase in SG&A expenses in 2008 compared to 2007 reflect increases of $1.4 million for general cost increases including increases in new product development activities and the addition of sales and operations personnel throughout the Company’s worldwide facilities.

 

Interest expense for the twelve months ended December 31, 2008 was $20.3 million, which compares to $26.8 million for the twelve months ended December 31, 2007. The average indebtedness during 2008 was approximately 10% less than in the prior year. In addition, the average effective interest rate declined approximately 170 basis points during 2008. This decline in the effective interest rate reflects the combined benefit of the lower LIBOR rates and the reduced interest rate for the Working Capital and the Second Lien Facilities, as a result of the amendments to the agreements in June 2007. During 2008, approximately 40% of the Company’s indebtedness was variable with changes in LIBOR. The reduction of the Special Interest Adjustment on the Senior Subordinated Notes also resulted in a reduction in interest rate in 2008.

 

An income tax provision of $12.1 million from continuing operations was recorded on pretax income of $22.6 million for the year ended December 31, 2008. For 2008, the effective income tax rate was 53% versus 34% in the comparable prior year period. In its income tax expense, the Company includes in U.S. taxable income a portion of the Company’s foreign earnings without the recognition of the related benefit of foreign tax credits, which are carried forward. In both years, certain collateral pledges pursuant to the Working Capital Facility required inclusion of a portion of the foreign earnings in U.S. taxable income. For the year ended December 31, 2007, an income tax provision of $5.5 million was recorded on a pretax income of $16.2 million from continuing operations. An income tax benefit of $4.0 million was recognized in 2007 due to the reduction of previously recorded state income tax contingencies.

 

Discontinued operations reported net income of $0.2 million for the twelve months ended December 31, 2008 compared to a net loss of $2.0 million for the twelve months ended December 31, 2007. During 2008, operational activities in Brazil ceased early in the year and a contract for sale of the Brazilian land and buildings was signed in late 2008. The Company closed the sale in September 2009. The year 2007 loss results primarily from operational activities of the discontinued units. See Note 3 — Discontinued Operations to the consolidated financial statements.

 

Restructuring and Other Charges

 

As of December 31, 2008, the company accrued restructuring charges of $3.6 million for severance related expenses payable to approximately 110 salaried employees whose positions were eliminated in connection with cost reduction efforts in response to economic and market uncertainties. At that time, this initiative reduced the salaried work force approximately 13%. As a result, the Company reduced its annual compensation and benefit costs by approximately $7.5 million. The majority of the severance costs were paid in the first and second quarters of 2009.

 

In the first quarter of 2009, the Company offered a voluntary retirement program and accrued restructuring charges for $1.3 million in separation pay and COBRA benefits payable under the program. Approximately

50 employees elected to participate. As a result, the Company reduced its annual compensation and benefit costs by approximately $3.1 million. The amounts were substantially paid through August 2009.

 

Subsequent to the first quarter of 2009, the Company recorded additional restructuring charges of $2.4 million for severance expenses. The charges relate to manufacturing personnel placed on permanent lay-off status, salaried positions eliminated in connection with further organizational restructurings and additional personnel electing to participate in the voluntary retirement program initiated in the first quarter. These actions affected approximately 237 employees, 225 of whom were placed on permanent lay-off or had their positions eliminated and 12 of whom participated in the early retirement program. As a result, the Company reduced its annual compensation and benefit costs by approximately $5.5 million.

 

Liquidity and Capital Resources

 

Liquidity.  Our principal uses of cash are capital expenditures, working capital and debt repayment obligations, including repayment of debt pursuant to the “Excess Cash Flow” provision of our Senior Subordinated Notes Indenture. We expect to fund ongoing requirements for working capital from operating cash flow and borrowings under the Working Capital Facility. This Facility was amended in June 2009 and February 2010 and matures in June 2012, as discussed below.

 

In 2009, we generated $3.0 million net cash in conducting continuing operations. Net debt repayments were $16.3 million, which consisted of $22.9 million in repayment of the Working Capital Facility and $2.6 million of purchases of our Senior Subordinated Notes, offset by increased borrowings under the Second Lien Facility of $9.2 million.

 

In 2010, we anticipate capital expenditures will be $15 million to $18 million including $10 million to $12 million to expand existing manufacturing facilities. Our existing debt service obligations in 2010 excluding interest expense and repayments on the Working Capital Facility, will be approximately $9 million. This includes $6 million in repayments of borrowings under our Second Lien Facility and $2 million related to our capital lease obligations. We expect our operating cash flows and available borrowings under the Working Capital Facility will be sufficient to meet our anticipated capital expenditures and debt service requirements. Additional debt repayments required, if any, by the Excess Cash Flow provision of the Senior Subordinated Notes Indenture, which would be payable by April 2011, and our other long-term obligations for 2010 would also be funded through operating cash flows and the Working Capital Facility.

 

At December 31, 2009, the Company was in compliance with its financial covenants. The Company has sufficient funding to fulfill its current debt repayment obligations. The Company has funding for capital expenditure commitments and will not proceed with other planned capital expenditures unless it is in compliance with the fixed charge coverage covenant of the Working Capital Facility. To reduce expenses, actions were implemented early in 2009 which included layoffs of production personnel, reduction of the global salaried work force, deferral of salary increases, and broad based efforts to reduce discretionary spending. The Company anticipates it will maintain a level of expenses aligned with the current reduced sales volumes.

 

Failure to comply with our financial covenants in future periods would result in defaults under our credit agreements unless covenants are amended or waived. We believe the most restrictive financial covenant under our Working Capital Facility is the “fixed charge coverage” covenant, which was amended on February 23, 2010 in connection with an amendment to the Credit Agreement. This covenant requires EBITDA (as defined in the Amended Credit Agreement) to be at least 1.10 of Fixed Charges (as defined in the Credit Agreement) on a trailing twelve months basis except during 2009 and the first two quarters of 2010, as described below. Under the Second Lien Facility, we believe that the most restrictive financial covenant is the “senior leverage ratio” covenant, which requires that debt, including total debt less the Senior Subordinated Notes and cash, not exceed 2.75 times EBITDA (as defined in the Amended Second Lien Agreement). Compliance is measured quarterly based on the trailing four quarters. A default of the financial covenants under the Working Capital Facility or Second Lien Facility would constitute a default under the Senior Subordinated Notes. An event of default under our credit agreements, if not waived, could result in the acceleration of these debt obligations and, consequently, our debt obligations under our Senior Subordinated Notes.

Our debt structure, terms, covenants, and a history of these instruments are described below.

 

Working Capital Facility.  Certain subsidiaries of the Company are borrowers under the Third Amended and Restated Credit Agreement, dated June 29, 2007 as amended (the “Credit Agreement”), with General Electric Capital Corporation as agent and lender. The Credit Agreement: (i) matures on June 29, 2012; (ii) provides a revolving credit commitment of up to $70 million (the “Working Capital Facility”), which includes (a) an asset based facility and (b) an amortizing $10 million property, plant and equipment facility; (iii) provides for interest rate percentages applicable to the asset base; (iv) limits the senior leverage ratio to 2.75; (v) provides for an interest rate of 90-day LIBOR plus 4.00%; (vi) includes a prepayment fee of 2% if the Facility is terminated prior to June 27, 2010 or 1% prior to June 27, 2011; and (vii) includes a minimum fixed charge coverage ratio for the twelve-months ended June 30, 2009 and September 30, 2009 of 0.95 and 0.825, respectively, 1.00 for the quarter ended December 31, 2009 and 1.10 thereafter. With respect to the quarters ending December 31, 2009, March 31, 2010 and June 30, 2010, the calculation is based on the results for the three months, six months, and nine months periods ending on such dates, respectively. The calculation for quarters ending September 30, 2010 and thereafter is based on the twelve month periods then ending. Borrowings under the Working Capital Facility may not exceed 85% of eligible receivables plus the lesser of (i) 85% of the net orderly liquidation value of eligible inventories or (ii) 65% of the book value of eligible inventories less customary reserves, plus machinery at appraised value not to exceed $10 million.

 

At December 31, 2009, $3.9 million of letters of credit were outstanding under the Credit Agreement. Unused availability was $35.9 million as of December 31, 2009. The Working Capital Facility includes a lockbox agreement that requires all receipts to be swept daily to reduce borrowings outstanding under the revolving line of credit.

 

Second Lien Facility.  On August 14, 2009, the Company entered into the 2009 Amended and Restated Second Lien Credit Agreement with the agent and the lenders party thereto (the “Amended Second Lien Agreement”). The Amended Second Lien Agreement refinanced the loans outstanding under the Second Lien Credit Agreement dated July 29, 2004. Under the Amended Second Lien Agreement, the Company issued a new $25 million Second Lien Facility at 92.346% of the face amount, repaid the $14 million balance of the Second Lien Facility and realized $9 million of net proceeds. The maturity date was extended from November 7, 2010 to November 30, 2012,and certain assets of the Company’s Australian subsidiaries were added as collateral for the loans. The Amended Second Lien Agreement permits a single prepayment of as much as $14 million beginning April 1, 2010 through August 30, 2010 in lieu of repurchasing outstanding Senior Subordinated Notes with excess cash flow, and prepayment of the balance beginning August 30, 2010. The applicable interest rate was changed to, at the Company’s option, (a) the greater of LIBOR or 6%, plus 6% or (b) the greater of the prime rate, the federal funds rate plus one half of 1.00% or 6%, plus 6%. At issuance and through December 31, 2009, the interest rate payable is 12%, and the effective interest rate, including amortization of the issuance discount, is 15%. The lenders under the previous Second Lien Credit Agreement and additional entities each became lenders under the Amended Second Lien Agreement.

 

Senior Subordinated Notes.  The Senior Subordinated Notes (the “Notes”) accrue interest at 9.25% per annum, which is payable semiannually in cash. The Notes are guaranteed by our domestic subsidiaries, which are also borrowers or guarantors under the Working Capital Facility and the Second Lien Facility, and certain of our foreign subsidiaries. The Notes contain customary covenants and events of default, including covenants that limit our ability and our subsidiaries’ abilities to incur debt, pay dividends and make certain investments. Subject to certain conditions, we must annually use our Excess Cash Flow (as defined in the Indenture) either to make permanent repayments of our senior debt or to extend a repurchase offer to the holders of the Notes pursuant to which we will offer to repurchase outstanding Notes at a purchase price of 101% of their principal amount. The “Excess Cash Flow” amount for 2009 was $6.0 million, and we will repay this amount of Second Lien borrowings on or before April 15, 2010 in satisfaction of this obligation under the Indenture. The Indenture provides for the payment of additional Special Interest on the Senior Subordinated Notes, initially at a rate of 1.25% per annum. The Special Interest is subject to adjustment increasing to 1.75% if the consolidated leverage ratio exceeds 6.00 with incremental interest increases to a maximum of 2.75% if the consolidated leverage ratio increases to 7.0. The Special Interest declines to 0.75% if the consolidated leverage ratio declines below 4.0 and declines incrementally to 0% when the consolidated leverage ratio is less than 3.0.

Shelf Registration of Common Stock.  During 2008, the Securities and Exchange Commission declared effective the Company’s shelf registration statement covering 5,996,555 shares of our common stock. Of the 5,996,555 shares, 4,496,555 were registered by the Company on behalf of Angelo, Gordon & Co., L.P. (which exercises voting and dispositive powers over certain shares of Company common stock held by Angelo, Gordon & Co., L.P. affiliates and clients), and 1,500,000 shares were registered for future offer and sale by the Company. The Company and Angelo, Gordon & Co., L.P. may offer for sale any or all of their respective registered shares from time to time prior to the expiration of the shelf registration statement. The Company’s ability and willingness to issue securities under the aforementioned registration statement will depend on market conditions at the time of any desired offering.

 

Working Capital and Cash Flows.  The operating activities of our continuing operations provided $22.1 million of cash during the year ended December 31, 2009, compared to cash provided of $17.6 million during the year ended December 31, 2008. This includes the changes in operating assets and liabilities, which provided $15.0 million of cash for the year ended December 31, 2009, compared to $10.4 million of cash used in the year ended December 31, 2008 and consisted of:

 

 

Cash used for capital expenditures was $7.7 million during the year ended December 31, 2009, compared to $13.4 million used for capital expenditures in the year ended December 31, 2008.

 

Financing activities used $12.8 million of cash during 2009 and used $3.2 million during 2008. Net debt repayments were $16.3 million in 2009 and $2.9 million during 2008. In 2009, financing activities include a $0.5 million use of cash associated with the reversal of prior year stock compensation and $3.3 million of cash provided in 2008 for stock options exercised and non-cash stock compensation charges. The Company received a $2.5 million payment in 2009 upon terminating an interest rate hedge agreement.

 

The purchase of the minority interest in our Italian manufacturing operations and the purchase of our partner’s interest in our Chinese manufacturing venture required an aggregate use of $3.9 million of cash in 2008.

Contractual Obligations and Commercial Commitments

 

In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. The table below sets forth our significant future obligations by time period.

 

 

The amounts shown for capital leases exclude the effective interest expense component. At December 31, 2009, we had issued letters of credit totaling $3.9 million under the Working Capital Facility. See Note 17 to the consolidated financial statements for the Company’s obligation with respect to its pension and post-retirement benefit plans.

 

Market Risk and Risk Management Policies

 

Our earnings and cash flows are subject to exposure to changes in the prices of certain commodities, particularly copper, brass and steel. Our earnings and cash flows are also impacted by fluctuations in foreign currency exchange rates as well as changes in the interest rates on our debt arrangements. Our Working Capital Facility and Second Lien Facility related interest costs are subject to change with changes in LIBOR, and the interest rate on the Senior Subordinated Notes is subject to change based on our debt to EBITDA leverage ratio. See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk,” for a further discussion.

 

Effect of Inflation and Deflation; Seasonality

 

In an environment of decreasing raw material prices and recessionary economic pressures, competitive conditions can cause sales price discounting before we can recover the higher costs of previously purchased materials. Conversely, in an environment of increasing raw material costs wherein we are increasing prices, we may not be able to increase prices quickly enough. Our agreements with customers require 60 to 90 days notice and various administrative procedures are necessary to implement the changes. To the extent we are unable to maintain our sales prices to our customers, or to react as quickly as the market may change, our profitability could be adversely affected.

 

In an environment of increasing raw material prices, competitive conditions can affect how much of the price increases we can recover in the form of higher unit sales prices. To the extent we are unable to pass on any price increases to our customers; our profitability could be adversely affected. Furthermore, restrictions in the supply of cobalt, chromium and other raw materials could adversely affect our operating results. In addition, certain of our customers rely heavily on raw materials, and to the extent there are fluctuations in prices, it could affect orders for our products and our financial performance. Our general operating expenses, such as salaries, employee benefits and facilities costs, are subject to normal inflationary pressures. Our operations are generally subject to mild seasonal increases in the second and third calendar quarters.

 

Critical Accounting Policies

 

Our consolidated financial statements are based on the selection and application of significant accounting policies, some of which require management to make estimates and assumptions. We review these estimates and assumptions periodically to assess their reasonableness. If necessary, these estimates and assumptions may be changed and updated. No material adjustments to our accounting policies have been made in 2009. We believe the following are the more critical judgmental areas in the application of our accounting policies that affect our financial condition and results of operations.

Inventories

 

Inventories are a significant asset, representing 16% of total assets at December 31, 2009. They are valued at the lower of cost or market, with our U.S. subsidiaries using the last in, first-out (LIFO) method, which represents 70% of consolidated inventories, and our foreign subsidiaries using the first-in, first-out (FIFO) method, which represents 30% of consolidated inventories.

 

We continually apply judgment in valuing our inventories by assessing the net realizable value of our inventories based on current expected selling prices, as well as factors such as obsolescence and excess stock. We provide reserves as judged necessary. If we do not achieve our expectations of the net realizable value of our inventory, future losses may occur.

 

Accounts Receivable and Allowances

 

We maintain an allowance for doubtful accounts for estimated losses from the failure of our customers to make required payments for amounts owed. We estimate this allowance based on knowledge and review of historical receivables, write-off trends and reserve trends, the financial condition of our customers and other pertinent information. If the financial condition of our customers deteriorates or an unfavorable trend in receivable collections is experienced in the future, additional allowances may be required.

 

Property, Plant and Equipment

 

Property, plant and equipment are carried at cost and are depreciated using the straight-line method. The average estimated lives utilized in calculating depreciation are as follows: buildings — 25 years and machinery and equipment — three to ten years. Property, plant and equipment recorded under capital leases are depreciated based on the lesser of the lease term or the underlying asset’s useful life. Impairment losses are recorded on long-lived assets when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. During the fourth quarter of 2007, the Company recorded an impairment loss related to the decision to dispose of its cutting table business. During the fourth quarter of 2006, the Company recorded an impairment loss related to the decision to dispose of the South Africa and Brazil businesses. These impairment losses were recorded as the fair value of the businesses was determined to be below the carrying value of the net assets. See Note 3 — Discontinued Operations. No such losses were incurred as of December 31, 2008 or 2009.

 

Intangible Assets

 

Patents and customer relationships are amortized on a straight-line basis over their estimated useful lives, which generally range from 10 to 20 years. We account for these intangible assets in accordance with generally accepted accounting principles, which require us to assess the recoverability of these assets when events or changes in circumstances indicate that the carrying amount of the long-lived asset group might not be recoverable. If impairment indicators exist, we determine whether the projected undiscounted cash flows will be sufficient to recover the carrying value of such assets. This requires us to make significant judgments about the expected future cash flows of the asset group. The future cash flows are dependent on general and economic conditions and are subject to change.

 

Goodwill and trademarks are tested for impairment annually, as of October 1st, or more frequently if events occur or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. The impairment analysis is performed on a consolidated enterprise level based on one reporting unit. The impairment test involves the comparison of our updated estimate of the enterprise fair value to the carrying amount. An impairment would be recorded if the carrying amount exceeded the estimated enterprise fair value. To estimate enterprise fair value, management relies primarily on its determination of the present value of expected future cash flows. Significant judgments and estimates about current and future conditions are used to estimate the fair value. In estimating future cash flows, management estimates future sales volumes, sales prices, changes in commodity costs and the weighted cost of capital. Management also considers market value comparables and the current market capitalization of the Company in determining whether an impairment exists. Due to the deterioration of global economic conditions during 2009, we performed impairment testing quarterly in 2009. An impairment

analysis was completed in the fourth quarter, and no adjustment to the carrying value of goodwill was deemed necessary during 2009 based on estimates of future cash flows. Unforeseen events and changes in circumstances and market conditions, including general economic and competitive conditions could cause actual results to vary significantly from the estimates. See Note 7 — Intangible Assets.

 

Trademarks are generally associated with the Company’s product brands, and cash flows associated with these products are expected to continue indefinitely. The Company has placed no limit on the end of the Company’s trademarks’ useful lives. As of December 31, 2009, there was no impairment of trademarks.

 

Revenue Recognition

 

The Company sells a majority of its products through distributors with standard terms of sale of FOB shipping point or FOB destination. Under all circumstances, revenue is recognized when persuasive evidence of an arrangement exists, the seller’s price is fixed and determinable, and collectibility is reasonably assured.

 

The Company sponsors a number of annual incentive programs to augment distributor sales efforts including certain rebate programs and sales and market share growth incentive programs. Rebate programs established by the Company are communicated to distributors at the beginning of the year and are earned by qualifying distributors based on increases in purchases of identified product categories and based on relative market share of the Company’s products in the distributor’s service area. We accrue the estimated costs throughout the year and the costs associated with these sales programs are recorded as a reduction of revenue. Rebates are paid periodically during the year.

 

Terms of sale to generally include 30-day payment terms, return provisions and standard warranties for which reserves, based upon estimated warranty liabilities from historical experience, have been recorded. For a product that is returned due to issues outside the scope of the Company’s warranty agreements, restocking charges will generally be assessed.

 

Research and Development Costs

 

Research and development is conducted in connection with new product development with costs of approximately $2.7 million and $4.3 million in 2009 and 2008, respectively. The costs relate to materials used in the development process and allocated engineering personnel costs and are reflected in “Selling, general & administrative expenses” as incurred.

 

Income Taxes

 

We establish provisions for taxes to take into account the effects of timing differences between financial and tax reporting. These differences relate primarily to the excess of the fresh-start accounting valuation over the tax basis of our primary operating subsidiary, net operating loss carryforwards, fixed assets, intangible assets and post-employment benefits.

 

We record a valuation allowance when, in our assessment, it is more likely than not that a portion or all of our deferred tax assets will not be realized. In making this assessment we consider the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income. At December 31, 2009, a valuation allowance has been recorded against our deferred tax assets which consist primarily of U.S. net operating loss carryovers. The amount of the deferred tax assets considered realizable could change in the future if our assessment of future taxable income or tax planning strategies changes.

 

A substantial portion of the earnings of our foreign subsidiaries are included in our U.S. income tax return under I.R.C. Section 956. This requires the earnings of a foreign subsidiary which guarantees the borrowings of its U.S. parent to be included in U.S. income. Upon actual distribution of those earnings previously taxed under I.R.C. Section 956, we are not subject to U.S. income taxes but may be subject to withholding taxes payable in the foreign jurisdiction. See Note 13 — Income Taxes to the consolidated financial statements.

 

For the undistributed earnings of non-U.S. subsidiaries not subject to I.R.C. Section 956, no provision is made for U.S. income taxes. These earnings are permanently invested or otherwise indefinitely retained for continuing

international operations. Determination of the amount of taxes that might be paid on these undistributed earnings is not practicable.

 

We are periodically audited by U.S. and foreign tax authorities regarding the amount of taxes due. In evaluating issues raised in such audits, reserves are provided for exposures as appropriate. To the extent we were to prevail in matters for which accruals have been established or be required to pay amounts in excess of reserves, the effective tax rate in a given financial statement period may be impacted.

 

As a result of the 2003 bankruptcy restructuring, the Company recognized cancellation of indebtedness income. Under Internal Revenue Code Section 108, this cancellation of indebtedness income is not recognized for income tax purposes, but reduced various tax attributes, primarily the tax basis in the stock of a subsidiary, for which a deferred tax liability was recorded. The final determination of the reduction in the tax attributes was made following the bankruptcy restructuring with the filing of the Company’s federal tax return.

 

Factors That May Affect Future Results

 

For a discussion of factors that may affect future results see “Risk Factors.”

 

Recently Issued Accounting Standards

 

Business Combinations.  The Company adopted Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations,” effective January 1, 2009. This establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. After adoption of this pronouncement, the benefit of net operating loss carryovers reduces income tax expense as the carryovers are utilized.

 

Subsequent Events.  The Company adopted ASC Subtopic 855-10, “Subsequent Events” effective June 15, 2009. This 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 adoption of this statement did not have a material effect on the Company’s financial statements.

 

The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial position, results of operations and cash flows, or do not apply to its operations.

 

 

Our primary financial market risks relate to fluctuations in commodity prices, currency exchange rates and interest rates.

 

Copper, brass and steel constitute a significant portion of our raw material costs. These commodities are subject to price fluctuations which we may not be able to recover and maintain historical margins depending upon competitive pricing conditions at the time. When feasible, we attempt to establish fixed price purchase commitments with suppliers to provide stability in our materials component costs for periods of three to six months. We have not experienced and do not anticipate constraints on the availability of these commodities.

 

Approximately one-half of our international sales are export sales from the United States which are primarily denominated in U.S. dollars. The balance of the international sales arises from sales conducted primarily in Australia/Asia, Canada and Europe. Our exposure to foreign currency transactions is partially mitigated through our manufacturing locations in Australia, China, Italy, Malaysia, and Mexico. Our Australian operations execute 60 and 90 day forward purchase commitments for U.S. dollars to help provide stability in the cost of purchased materials and components. However, our financial results could be significantly affected by changes in foreign currency exchange rates in the foreign markets. We are most susceptible to a strengthening U.S. dollar, which would have a negative effect on our export sales and a negative effect on the translation of local currency financial statements into U.S. dollars, our reporting currency. We may also incur transaction gains or losses resulting from changes in foreign currency exchange rates primarily between our U.K. distribution operations and continental Europe, but we do not expect these to be material to our financial results.

We are exposed to changes in interest rates through our Working Capital Facility which has LIBOR-based variable interest rates. At December 31, 2009, borrowings under this agreement were $9.6 million. With this amount of variable rate debt, a hypothetical 100 basis point change in LIBOR would result in a change in interest expense of approximately $100 thousand annually. On February 1, 2009, the counterparty terminated the $50 million notational fixed-to-variable swap agreement related to our Senior Subordinated Notes. Our Second Lien Credit Agreement interest rate is also variable with LIBOR but includes a 6% floor and we do not anticipate changes in this rate resulting from changes in LIBOR for the foreseeable future.

 

 

The financial statements that are filed as part of this Annual Report on Form 10-K are set forth in the Index to Consolidated Financial Statements at page F-1 hereof.

 

 

None

 

 

 

The Company’s management maintains disclosure controls and procedures that are designed to provide reasonable assurances that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. These controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating disclosure controls and procedures, we have recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. Management is required to apply judgment in evaluating its controls and procedures.

 

Under the supervision of and with the participation of management, including the President and the Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of December 31, 2009. Based on this evaluation, the President and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2009.

 

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of the Company’s management, including the President and the Chief Financial Officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting as of December 31, 2009 based on the framework in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the Company’s evaluation under such framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2009.

 

The Company’s auditors KPMG LLP, an independent registered public accounting firm, have issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009, which is included below.

 

 

There have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2009 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders

Thermadyne Holdings Corporation:

 

We have audited Thermadyne Holdings Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Thermadyne Holdings Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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, Thermadyne Holdings Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Thermadyne Holdings Corporation as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009, and our report dated March 8, 2010 expressed an unqualified opinion on those consolidated financial statements.

 

 

St. Louis, Missouri

March 8, 2010

 

None

 

 

The Company plans to file the 2010 Proxy Statement pursuant to Regulation 14A of the Exchange Act prior to April 30, 2010. Except for the information set forth in this Item 10 and the information concerning our executive officers set forth in Part I, Item 1, Business — Executive Officers of the Registrant, of this annual report on Form 10-K for the fiscal year ended December 31, 2009, which information is incorporated herein by reference, the information required by this item is incorporated by reference from the 2010 Proxy Statement.

 

The Company has adopted a code of ethics applicable to certain members of Company management, including its principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions. The code of ethics is available on the Company’s website at www.thermadyne.com. The Company will provide to any person without charge, upon request, a copy of the code of ethics. A request for the code of ethics should be made by writing to the Company’s Secretary, c/o Thermadyne Holdings Corporation, 16052 Swingley Ridge Road, Suite 300, Chesterfield, Missouri 63017. The Company intends to satisfy the disclosure requirement under Item 10 (now item 5.05(c)) of Form 8-K regarding the amendment to, or a waiver from, a provision of this code of ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K by posting such information on its website at www.thermadyne.com.

 

There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s board of directors since the filing of the Company’s quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2009.

 

The board of directors has determined that Ms. Gordon is (i) an audit committee financial expert, as such term is defined in Item 407(d)(5)(ii) of Regulation S-K, and (ii) “independent,” as such term is defined in the listing standards of the NASDAQ Stock Market.

 

 

Information required by this item is set forth under the captions “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Compensation of Directors,” “2009 Summary Compensation Table,” “2009 Grants of Plan-Based Awards,” “Outstanding Equity Awards at 2009 Fiscal Year-End,” “Employment Agreements,” “Potential Payments upon Termination or Change in Control” and “Compensation Committee Interlocks and Insider Participation” in the 2010 Proxy Statement and is incorporated herein by reference.

 

 

Certain information required by this item is set forth under the caption “Information about Stock Ownership” in the 2010 Proxy Statement and is incorporated herein by reference.

Information concerning securities authorized for issuance under the Company’s equity compensation plans is set forth in the table below:

 

 

 

The information required by this item is set forth under the captions “Certain Relationships and Related Transactions” and “Board and Committee Meetings-Independent Directors” in the 2010 Proxy Statement and is incorporated herein by reference.

 

 

The information required by this item is set forth under the caption “Independent Registered Public Accountant Fees and Other Matters” in the 2010 Proxy Statement and is incorporated herein by reference.

 

 

Financial Statements and Schedules

 

The following documents are filed as part of this report:

 

 

All schedules for which provision is made in the applicable accounting regulation of the Commission are not required under the related instructions, are included in the financial statements or are inapplicable and therefore have been omitted.

 

Exhibits

 

See “Exhibit Index” immediately following “Signatures,” below, which is hereby incorporated by reference thereto.

THERMADYNE HOLDINGS CORPORATION

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

The Board of Directors and Stockholders

Thermadyne Holdings Corporation:

 

We have audited the accompanying consolidated balance sheets of Thermadyne Holdings Corporation (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Thermadyne Holdings Corporation as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, 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 8, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

As discussed in note 2 to the consolidated financial statements, effective as of January 1, 2009 the Company adopted Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations”.

 

 

St. Louis, Missouri

March 8, 2010

THERMADYNE HOLDINGS CORPORATION

 

CONSOLIDATED BALANCE SHEETS

 

 

See accompanying notes to consolidated financial statements.

THERMADYNE HOLDINGS CORPORATION

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

See accompanying notes to consolidated financial statements.

THERMADYNE HOLDINGS CORPORATION

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

 

See accompanying notes to consolidated financial statements.

THERMADYNE HOLDINGS CORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

See accompanying notes to consolidated financial statements.

 

THERMADYNE HOLDINGS CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

 

 

Thermadyne Holdings Corporation (“Thermadyne” or the “Company”), a Delaware corporation, is a global designer and manufacturer of gas and arc cutting and welding products, including equipment, accessories and consumables. Our products are used by manufacturing, construction, fabrication and foundry operations to cut, join and reinforce steel, aluminum and other metals. Common applications for the Company’s products include shipbuilding, railcar manufacturing, offshore oil and gas rig construction, fabrication and the repair and maintenance of manufacturing equipment and facilities. Welding and cutting products are critical to the operations of most businesses that fabricate metal, and the Company has well established and widely recognized brands.

 

 

Principles of consolidation.  The consolidated financial statements include the Company’s accounts and those of the majority-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Unconsolidated subsidiaries and investments are accounted for under the equity method.

 

Estimates.  Preparation of financial statements in conformity with U.S. generally accepted accounting principles requires certain estimates and assumptions to be made that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Any significant unanticipated changes in business or market conditions that vary from current expectations could have an impact on the fair market value of assets and result in a potential impairment loss.

 

Inventories.  Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method for domestic subsidiaries and the first-in, first-out (“FIFO”) method for the Company’s foreign subsidiaries.

 

Property, Plant and Equipment.  Property, plant and equipment are carried at cost and are depreciated using the straight-line method. The average estimated lives utilized in calculating depreciation are as follows: buildings — 25 years and machinery and equipment — three to ten years. Property, plant and equipment recorded under capital leases are depreciated based on the lesser of the lease term or the underlying asset’s useful life. Impairment losses are recorded on long-lived assets when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts.

 

Deferred Financing Costs.  Loan origination fees and other costs incurred arranging long-term financing are capitalized as deferred financing costs and amortized on a straight-line basis over the term of the credit agreement. Deferred financing costs totaled $11,342 and $10,501, less related accumulated amortization of $7,864 and $6,890, at December 31, 2009 and 2008, respectively, and are classified as other assets in the accompanying consolidated balance sheets.

 

Intangibles.  Goodwill and trademarks have indefinite lives. Patents and customer relationships are amortized on a straight-line basis over their estimated useful lives, which generally range from 10 to 20 years.

 

Goodwill and trademarks are tested for impairment annually, as of October 1st, or more frequently if events occur or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. The impairment analysis is performed on a consolidated enterprise level based on one reporting unit. The impairment test involves the comparison of our updated estimate of the enterprise fair value to the carrying amount. An impairment would be recorded if the carrying amount exceeded the estimated enterprise fair value. To estimate enterprise fair value, management relies primarily on its determination of the present value of expected future cash flows. Significant judgments and estimates about current and future conditions are used to estimate the fair value. In estimating future cash flows, management estimates future sales volumes, sales prices, changes in

 

THERMADYNE HOLDINGS CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

commodity costs and the weighted cost of capital. Management also considers market value comparables and the current market capitalization of the Company in determining whether an impairment exists. The annual impairment analysis was completed in the fourth quarter, and no adjustment to the carrying value of goodwill was deemed necessary based on estimates of future cash flows. Unforeseen events and changes in circumstances and market conditions, including general economic and competitive conditions could cause actual results to vary significantly from the estimates.

 

Trademarks are generally associated with the Company’s product brands, and cash flows associated with these products are expected to continue indefinitely. The Company has placed no limit on the end of the Company’s trademarks’ useful lives. As of December 31, 2009, there was no impairment of trademarks. Se Note 7 — Intangible Assets.

 

Product Warranty Programs.  Various products are sold with product warranty programs. Provisions for warranty programs are made as the products are sold and adjusted periodically based on current estimates of anticipated warranty costs. The following table provides the activity in the warranty accrual:

 

 

Derivative Instruments.  The Company records derivatives and hedging activities on the balance sheet at their respective fair values. The Company does not use derivative instruments for trading or speculative purposes. The Company designates and documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. The Company also assesses, both at the inception of the hedge and on an on-going basis, whether the hedge is effective.

 

Income Taxes.  Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the carrying value of assets and liabilities for financial reporting purposes and their tax basis. The measurement of current and deferred tax assets and liabilities is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. Based on available evidence, the measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that are not expected to be realized. The Company’s effective tax rate includes the impact of certain of the undistributed foreign earnings for which U.S. taxes have been provided because of the applicability of I.R.C. Section 956 for earnings of foreign entities which guarantee the indebtedness of a U.S. parent. See Note 12 — Income Tax to the consolidated financial statements.

 

Stock Option Accounting.  All share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The Company utilizes the modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements for all share-based payments granted after the effective date and (b) based on the requirements for all awards granted to employees prior to the effective date that remain unvested on the effective date. See Note 14 — Stock Options and Stock-Based Compensation to the consolidated financial statements.

 

Revenue Recognition.  The Company sells a majority of its products through distributors with standard terms of sale of FOB shipping point or FOB destination. Under all circumstances, revenue is recognized when persuasive evidence of an arrangement exists, the seller’s price is fixed and determinable, and collectibility is reasonably assured.

 

THERMADYNE HOLDINGS CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company sponsors a number of annual incentive programs to augment distributor sales efforts including certain rebate programs and sales and market share growth incentive programs. Rebate programs established by the Company are communicated to distributors at the beginning of the year and are earned by qualifying distributors based on increases in purchases of identified product categories and based on relative market share of the Company’s products in the distributor’s service area. We accrue the estimated costs throughout the year and the costs associated with these sales programs are recorded as a reduction of revenue. Rebates are paid periodically during the year.

 

In both 2009 and 2008, the Company had one customer that comprised 11% of the Company’s global net sales. Our top five distributors comprised 27% of our global net sales in 2009 and 2008

 

Terms of sale generally include 30-day payment terms, return provisions and standard warranties for which reserves, based upon estimated warranty liabilities from historical experience, have been recorded. For a product that is returned due to issues outside the scope of the Company’s warranty agreements, restocking charges will generally be assessed.