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Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by Carlisle Companies Incorporated (the Company or Carlisle) in accordance and consistent with the accounting policies stated in the Companys 2009 Annual Report on Form 10-K and should be read in conjunction with the consolidated financial statements in Part II, Item 8 of the Companys 2009 Annual Report on Form 10-K. The unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States and, of necessity, include normal recurring adjustments and some amounts that are based upon management estimates and judgments. Actual results could differ from current estimates. The unaudited consolidated financial statements include assets, liabilities, revenues, and expenses of all majority-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation. |
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Note 2 Reclassifications and Revisions
Certain reclassifications and revisions have been made to prior period information either to conform to the current year presentation or to reflect a change in presentation as follows:
· The Unaudited Consolidated Statement of Cash flows for the first nine months of 2009 has been revised to reflect the classification as an investing cash inflow of $30 million of proceeds received from the Companys insurance carriers related to destroyed property, plant and equipment as a result of the fire that occurred at the Companys tire and wheel plant in Bowdon, GA that was previously classified in net cash provided by operating activities. The amounts previously presented for cash provided by operating activities for first nine months of 2009 was $363.4 million and cash used in investing cash flows was $61.0 million. The revised amount for net cash provided by operating activities is $333.4 million and the revised amount for cash used in investing activities is $31.0 million. See Note 4 for further discussion of the Bowdon, GA plant fire.
· The Unaudited Consolidated Statements of Earnings for the third quarter and first nine months of 2009 have been revised to reflect the presentation of Earnings before interest and income taxes (EBIT).
· The Unaudited Consolidated Statements of Earnings for the third quarter and first nine months of 2009 have been revised to reflect the reclassification of the power transmission product line from discontinued operations to continuing operations and to reflect the classification of the refrigerated truck bodies business and specialty trailer businesses as discontinued operations. The Consolidated Balance Sheet as of December 31, 2009 reflects the classification of the assets and associated liabilities of the specialty trailer business as held for sale consistent with the presentation at September 30, 2010. See Note 9 for additional information regarding discontinued operations and assets held for sale.
· The segment disclosures for the third quarter and first nine months of 2009 in Note 15 have been revised to reflect the formation in the fourth quarter of 2009 of the Engineered Transportation Solutions segment that combined the previous tire and wheel, industrial brake and friction and the power transmission product lines; the classification of the power transmission product line as a continuing operation and its associated assets as held and used; the classification of the refrigerated truck bodies business and specialty trailer businesses as discontinued operations; and the use of EBIT as the measure of segment profitability. |
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Note 3 New Accounting Pronouncements
New accounting standards adopted
There were no new accounting standards adopted in the first nine months of 2010 and 2009.
New accounting standards issued but not yet adopted
There are currently no accounting standards that have been issued that are expected to have a significant impact on the Companys financial position, results of operations and cash flows upon adoption. |
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Note 4 - Fire Gain
On November 16, 2008, a fire occurred at the tire and wheel plant in Bowdon, GA, and as a result the building and the majority of the machinery, equipment, records and other assets were destroyed. In order to service customers, partial operations were initiated at a facility in Heflin, AL, and some production was transferred to other tire and wheel plants or outsourced to third parties.
In the fourth quarter of 2008, while the Company was negotiating its claim, a pretax loss was recorded representing the deductible of $0.1 million. The net result of fire-related transactions in the first quarter of 2009 was a $2.5 million pretax gain, which included a $2.6 million pretax gain on the settlement of the inventory claim which was the difference between $8.9 million, representing the loss on inventory recorded in the fourth quarter of 2008 for which a receivable was recorded at December 31, 2008, and $11.5 million of cash proceeds received from the insurance carriers to settle the inventory claim in the first quarter of 2009. Total payments of $13.5 million were received from the insurance carriers in the first quarter of 2009.
The net result of fire-related transactions in the second quarter of 2009 was a $24.5 million pretax gain on the settlement of all other claims and that amount was reported as Gain related to fire settlement. This gain was the difference between the $41.0 million of cash proceeds received from the insurance carriers in settlement of all outstanding claims and the $11.2 million insurance claims receivable balance at March 31, 2009 included in Prepaid expenses and other current assets for a portion of the expected insurance reimbursements plus $5.3 million, representing fire-related cost in the second quarter of 2009.
From January 1, 2009 through June 30, 2009 cash proceeds of $54.5 million were received from the insurance carriers. Losses and cost incurred from November 16, 2008 through June 30, 2009 of $27.6 million included $8.9 million of inventory; $5.7 million of building, machinery, equipment and other assets; and $13.0 million of fire-related cost. The $26.9 million pretax gain from November 16, 2008 through June 30, 2009 was the difference between cash proceeds of $54.5 million and the losses of $27.6 million. On a quarterly basis, a loss of $0.1 million was recorded in the fourth quarter of 2008, a gain of $2.5 million was recorded in the first quarter of 2009, and a gain of $24.5 million was recorded in the second quarter of 2009.
A minimal amount of fire-related scrap was sold in the third quarter of 2009. Since all insurance claims due to this fire were settled with the carriers no additional insurance proceeds are anticipated. |
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Note 5 - Borrowings
At September 30, 2010, the fair value of the Companys par value $150 million, 6.125% senior notes due 2016, using Level 2 inputs, is approximately $173 million. The fair value of the Companys senior notes is based on current market interest rates and the Companys estimated credit spread available for financings with similar terms and maturities. |
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Note 6 -Fair Value Measurements
Recurring Fair Value Measurements
The fair value of the Companys assets and liabilities measured at fair value on a recurring basis were as follows:
Nonrecurring Fair Value Measurements
For the third quarter and first nine months of 2010 there were no nonrecurring fair value measurements.
For the third quarter and first nine months of 2009, the Company measured certain non-financial assets at fair value on a nonrecurring basis. These measurements were primarily the result of managements decision to consolidate certain manufacturing facilities within the Engineered Transportation Solutions, Specialty Products and Interconnect Technologies segments. Refer to Note 19 for further information regarding exit and disposal activity. The following table depicts the non-recurring fair value measurements discussed below by asset category and the level within the fair value hierarchy in which the related assumptions were derived.
In the third quarter of 2009, the Company measured certain non-financial assets at fair value on a nonrecurring basis within the Construction Materials segment, resulting in a total impairment charge of $1.6 million, which was included in other (income) expense, net. These measurements were based on fair value determination of certain long-lived assets within a specialized segment of its commercial roofing operations using Level 3 inputs. Intangible assets consisting of a licensing agreement with a carrying amount of $0.4 million were written down to a fair value of zero, resulting in an impairment charge of $0.4 million, based on managements determination of the usefulness of the technology underlying the license agreement in the current market. In addition, certain property, plant and equipment with a carrying value of $2.3 million were written down to a fair value of $1.1 million, resulting in an impairment charge of $1.2 million. The determination was based upon managements evaluation of future cash flows from this production equipment and net realizable value.
For the first nine months of 2009, the Company measured other non-financial assets at fair value on a nonrecurring basis as follows:
· Within the tire and wheel product line of the Engineered Transportation Solutions segment, property, plant and equipment relating to facilities in Carlisle, PA, Heflin, AL and Buji, China with a carrying amount of $2.8 million were written down to a fair value of zero, resulting in an impairment charge of $2.8 million, which was included in other (income) expense, net for the first nine months of 2009. This fair value measurement of the impaired assets was based on Level 3 inputs. The Level 3 inputs reflected managements determination that impaired leasehold improvements assets could not be transferred upon consolidation of operations into the new facility in Jackson, TN. In addition, it was managements determination that machinery and equipment subject to the impairment charge was estimated to have zero net realizable value based on current utility. Also, during the first nine months of 2009, within the tire and wheel product line of the Engineered Transportation Solutions segment, property, plant and equipment with a carrying amount of $2.9 million were written down to a fair value of zero, resulting in an impairment charge of $2.9 million, which was included in other (income) expense, net. The fair value determination was based upon Level 3 inputs reflecting managements determination of the net realizable value of the assets. Such assets primarily reflected leasehold improvements in its Buji, China operations that could not be transferred upon consolidation of production into Meizhou, China.
· Within discontinued operations related to the Companys specialty trailer business, property, plant and equipment relating to the closure of its facility in Brookville, PA classified as held for sale as of September 30, 2009 with a carrying amount of $5.6 million were written down to a fair value of $1.8 million, resulting in a pre-tax impairment charge of $3.8 million, which has been included in discontinued operations, net of tax for the first nine months of 2009. A fair value measurement of $1.6 million for land, building and leasehold improvements, which resulted in a pre-tax impairment charge of $3.3 million, was based on Level 2 inputs. The land and building were subsequently sold in the first half of 2010 for $2.7 million resulting in a pre-tax gain of $1.1 million that is included in discontinued operations, net of tax for first nine months of 2010. A fair value measurement of $0.2 million for machinery and equipment, which resulted in a $0.5 million pre-tax impairment charge that is included in discontinued operations, net of tax, was based on Level 3 inputs reflecting managements determination of the net realizable value of the assets.
· Within the Interconnect Technologies segment, property consisting of leasehold improvements with a carrying amount of $0.3 million was written down to a fair value of zero, resulting in an impairment charge of $0.3 million which was included in other operating expense for the third quarter of 2009. The fair value measurement was based upon Level 3 inputs which reflected managements determination that the leasehold improvements in the Companys Kent, WA facility would not have any transferrable value upon consolidation of operating activities into another Company facility in Tukwila, WA. |
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Note 7 Stock-Based Compensation
During the third quarter and first nine months of 2010 and 2009, the Company expensed stock-based compensation awards under the 2004 Executive Incentive Program and the 2005 Nonemployee Director Equity Plan. A detailed description of the awards under these plans is included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
Stock-Based Compensation Expense
Compensation expense recorded for all of the Companys share-based compensation plans during the third quarter and first nine months of 2010 and 2009 was as follows:
Grants
In the first quarter of 2010 the Company awarded 590,020 stock options, 101,785 restricted stock awards and 101,785 performance share awards with an aggregate fair value of approximately $14.3 million to be expensed over the requisite service period for each award which generally equals the stated vesting period.
The grant date fair value of the 2010 stock options with a three-year graded vesting condition was estimated under the Black-Scholes-Merton formula using the following weighted-average assumptions:
The Company initially granted performance shares in the first quarter of 2010. The performance shares vest based on the employee rendering three years of service to the Company, and the attainment of a market condition over the performance period, which is based on the Companys relative total shareholder return versus the S&P Midcap 400 Index® over a pre-determined time period as determined by the Compensation Committee of the Board of Directors. The grant date fair value of the 2010 performance shares was estimated using a Monte-Carlo simulation approach. Such approach entails the use of assumptions regarding the future performance of the Companys stock and those of the peer group of companies. Those assumptions include expected volatility, risk-free interest rates, correlation coefficients and dividend reinvestment. Dividends accrue on the performance shares during the performance period and are to be paid in cash based upon the number of awards ultimately earned.
There were no significant grants of stock-based compensation awarded in the second or third quarters of 2010. |
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Note 8Acquisitions
On October 1, 2009, the Company acquired the remaining 51% interest in Japan Power Brake, Inc. (JPB), a leading provider of high performance braking solutions for off-highway equipment, primarily in the mining and construction industries in Japan, for a purchase price of approximately $4.2 million. JPB is located in Atsugi, Japan and is under the management direction of the Engineered Transportation Solutions segment. The purchase price included an allocation of $0.9 million to other intangible assets reflecting a non-compete agreement with a useful life of 10 years. The remaining purchase price was allocated to current assets; property, plant and equipment; and current liabilities.
On October 1, 2009, the Company acquired 100% of the equity of Electronic Cable Specialists (ECS), a leading provider of electrical and structural products and services for the aviation, medical and industrial markets, for a purchase price of approximately $42.4 million. The acquisition of ECS expands Carlisles product and system reach into additional avionics applications and strengthens Carlisles engineering and design capabilities. ECS is located in Franklin, WI and is under the management direction of the Interconnect Technologies segment. The purchase price allocation resulted in current assets of $15.1 million; property, plant and equipment of $1.9 million; goodwill of $13.5 million; identified intangible assets of $14.5 million; and non-interest bearing current liabilities of $2.6 million. Of the $14.5 million of acquired intangible assets, $2.6 million was assigned to trade names that are not subject to amortization, $4.5 million was assigned to customer relationships with a determinable useful life of 17 years, and the remaining $7.4 million was assigned to other intangible assets with a weighted average useful life of 14.7 years. The goodwill from this acquisition is deductible for tax purposes.
On September 18, 2009, the Company acquired the assets of Jerrik, Inc. (Jerrik), a recognized leader in the design and manufacture of highly engineered military and aerospace filtered connectors, for approximately $33 million. The acquisition expands the Companys range of products serving the defense and aerospace markets. Jerrik is located in Tempe, AZ and is under the management direction of the Interconnect Technologies segment. The purchase price allocation resulted in current assets of $7.9 million; property, plant and equipment of $1.8 million; goodwill of $13.7 million; identified intangible assets of $10.8 million; and current liabilities of $1.2 million. Of the $10.8 million of acquired intangible assets, $0.2 million was assigned to trade names with determinable useful life of 2 years, $7.1 million was assigned to customer relationships with a determinable useful life of 18 years, and the remaining $3.5 million was assigned to other intangible assets with a weighted average useful life of 18.1 years. The goodwill from this acquisition is deductible for tax purposes.
The revenues and earnings for the third quarter and first nine months of 2009 of the above acquisitions when combined with those of the Company were not materially different than the reported results of each respective prior period. |
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Note 9Discontinued Operations and Assets Held for Sale
On October 4, 2010, as part of its commitment to concentrate on its core businesses, the Company sold its specialty trailer business for cash proceeds of $35 million. The final purchase price is subject to a working capital adjustment and the potential to receive an additional $5 million in proceeds based on future earnings. The Company expects to record a gain on sale of $6.3 million in the fourth quarter of 2010. Additional gains or losses on sale may be recorded in future periods based upon proceeds received from the Companys share of any future earnings and the result of the final working capital adjustment. The assets and associated liabilities of this business met the criteria for classification as held for sale as of September 30, 2010 and as a result the related results of operations have been classified as discontinued for all periods presented in the Unaudited Consolidated Statements of Earnings. See Note 2 for further information regarding reclassifications and revisions.
On February 2, 2010, the Company sold all of the interest in its refrigerated truck bodies business for $20.3 million. In July, 2010, additional proceeds of $0.3 million were received representing a working capital adjustment. Including the working capital adjustment, the sale resulted in a gain of $1.9 million, which is reported in discontinued operations. The final purchase price is subject to certain indemnifications made to the buyer, which could reduce the gain in subsequent periods. The Company does not believe any such adjustments will result in a material change to the purchase price.
In the second quarter of 2008, the Company announced its decision to pursue disposition of its on-highway friction and brake shoe business. During the first quarter of 2009, the Company made the decision to exit, rather than sell, the on-highway friction and brake shoe business and dispose of the assets as part of a planned dissolution.
In the second quarter of 2007, the Company announced plans to exit the custom thermoset products molding operation (thermoset molding operation). The disposition of the thermoset molding operation was completed in 2008.
Total assets held for sale were as follows:
The assets held for sale by the tire and wheel business relate to land and building from its Long Beach, California facility, the operations of which were consolidated into its Ontario, California facility in 2009.
At September 30, 2010, the remaining assets of the on-highway friction and brake shoe business and those of the thermoset molding operation consisted of the land and building formerly occupied by the operation.
The major classes of assets and liabilities held for sale included in the Companys Consolidated Balance Sheets were as follows:
Net sales and income (loss) before income taxes from discontinued operations were as follows:
Results of the on-highway friction and brake shoe business for the nine months ended September 30, 2010 included a $2.1 million pretax gain on the sale of property.
Results for the first nine months of 2009 included $6.8 million of pre-tax expenses related to the planned dissolution of the on-highway friction and brake shoe business, including an inventory write-down of $3.4 million, property, plant and equipment impairment costs of $0.8 million, severance costs of $1.8 million and $0.8 million of contract termination costs. |
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Note 10 Inventories
The Company is a diversified manufacturer comprised of multiple domestic and foreign operations manufacturing different products. The First-in, First-out (FIFO) method is used to value inventories.
The components of inventories as of September 30, 2010 and December 31, 2009 were as follows:
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Note 11 Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill as of September 30, 2010 were as follows:
* January 1, 2010 figures have been restated to reflect the reclassification of the refrigerated truck bodies business and the specialty trailer business to discontinued operations.
The Companys other intangible assets at September 30, 2010 were as follows:
Estimated amortization expense for the remainder of 2010 and the next four years is as follows: $2.9 million remaining in 2010, $11.6 million in 2011, $10.4 million in 2012, $9.4 million in 2013 and $9.1 million in 2014.
The net book value of the Companys other intangible assets by reportable segment are as follows:
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Note 12Retirement Plans and Other Post-retirement Benefits
Components of net periodic benefit cost were as follows:
The Company made contributions of $1.0 million to the pension plans during the third quarter of 2010. The Company expects to contribute approximately $4.0 million to the pension plans in 2010.
The Company maintains defined contribution plans to which it has contributed $7.0 million during the first nine months of 2010. Full year contributions are expected to approximate $9.4 million. |
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Note 13Other Long-Term Liabilities
The components of other long-term liabilities were as follows:
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Note 14Commitments and Contingencies
Extended Product Warranties
The Company offers various warranty programs on its installed roofing systems, braking products, aerospace cables and assemblies, truck trailers and foodservice equipment. The change in the Companys aggregate product warranty liabilities were as follows:
The amount of extended product warranty revenues recognized was $4.2 million for the third quarter of both 2010 and 2009 and $12.0 million and $11.8 million for the first nine months of 2010 and 2009, respectively.
ETS U.S. Customs Matter
The Company received written correspondence from the U. S. Immigration and Customs Enforcement Office of Investigations (ICE) dated March 11, 2010 indicating that it initiated an investigation relating to the classification of certain rubber tires imported by its tire and wheel operation within the Engineered Transportation Solutions segment since 2004. The Company responded to ICEs inquiry and, on August 19, 2010, ICE informed the Company that it had terminated its investigation. The Company continues to work separately with U. S. Customs and Border Protection to properly classify its products.
At this time, the Company cannot predict or determine the amount of additional duties and/or civil fines or penalties, if any, owed as a result of this classification effort. In the opinion of management, the ultimate outcome of such actions will not have a material adverse effect on the consolidated financial position of the Company. |
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Note 15 - Segment Information
The Company manages and reports its results under the following segments:
· Construction Materials: the construction materials business; · Engineered Transportation Solutions: the tire and wheel, industrial brake and friction, and power transmission belt product lines; · Interconnect Technologies: the interconnect technologies business; · Foodservice Products: the foodservice products business; and
Sales, EBIT, and assets of continuing operations by reportable segment are included in the following summary:
Third Quarter
First Nine Months
(1) Excludes intersegment sales (2) Prior year information has been revised as discussed in Note 2 to the Unaudited Consolidated Financial Statements
A reconciliation of assets reported above to total assets as presented on the Companys Consolidated Balance Sheets is as follows:
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Note 16 - Income Taxes
The effective income tax rate on continuing operations for the third quarter of 2010 was 28.1% compared to an effective income tax rate of 34.6% for the third quarter of 2009. The effective tax rate was lower during the third quarter of 2010 primarily as a result of recognition of discrete items including adjustments to a prior year return and lower taxes on certain foreign jurisdictions.
The effective income tax rate on continuing operations for the first nine months of 2010 was 33.8% compared to an effective income tax rate of 32.8% for first nine months of 2009. The variation in the effective income tax rate during the nine months is attributable to an increase in the tax rate imposed on offshore earnings and sunset of favorable US tax provisions.
The total gross liability for uncertain tax positions at September 30, 2010, was $14.6 million, down from $17.8 million at December 31, 2009. The $3.2 million decrease in the accrual was primarily due to a resolution of an audit issue. The Company classifies and reports interest and penalties associated with uncertain tax positions as Income tax expense on the Consolidated Statements of Earnings, and as other long-term liabilities on the Consolidated Balance Sheets. The total amount of interest and penalties accrued at September 30, 2010, was $3.2 million. The entire balance accrued for uncertain tax positions at September 30, 2010, if recognized, would affect the Companys effective tax rate. |
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Note 18 - Comprehensive Income
Total comprehensive income consisted of the following:
Loss on hedging activities, net of tax included in Other comprehensive income (loss) for the third quarter and first nine months of 2010 represented the amortization of a $5.6 million ($3.5 million, net of tax) gain in Accumulated other comprehensive loss resulting from the termination of treasury lock contracts on August 15, 2006. At September 30, 2010, the Company had a remaining unamortized gain of $3.3 million ($2.1 million, net of tax) which is reflected in Accumulated other comprehensive loss on the Companys Consolidated Balance Sheets. Approximately $0.2 million ($0.1 million, net of tax) is expected to be amortized to reduce Interest expense, net during the remainder of 2010. |
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Note 19 - Exit and Disposal Activities
Results for the third quarter and first nine months of 2009 have been revised to reflect the change in segment disclosures as discussed in Note 2. The following table represents the effect of exit and disposal activities related to continuing operations on the Companys Consolidated Statements of Earnings for the third quarter and first nine months of 2010 and 2009, respectively:
Exit and disposal activities by type of charge were as follows:
Exit and disposal accrual activities for the first nine months of 2010 were as follows:
Exit and disposal activities by segment were as follows:
Engineered Transportation Solutions During the first nine months of 2010, the Company had two consolidation projects underway within the Engineered Transportation Solutions segment in its continuing efforts to reduce costs and streamline its operations. Descriptions of these projects are set forth below:
· In the third quarter of 2009, the Company announced plans to consolidate its tire manufacturing operations in Heflin, AL, Carlisle, PA, and portions of Buji, China into a new facility in Jackson, TN purchased in the third quarter of 2009. The consolidation of the U.S. tire manufacturing operations into Jackson, TN is expected to be substantially completed by the end of 2010 with further consolidation of the Buji, China operations and remaining component production in Carlisle, PA into Jackson, TN to be completed by the first quarter of 2011.
· In the fourth quarter of 2009, the Company announced plans to close its friction product manufacturing facility in Logansport, IN and to consolidate operations into its locations in Hangzhou, China and Bloomington, IN. This consolidation is expected to be completed by the end of 2010.
The Company expects the total cost of these consolidation projects will be approximately $25.7 million, of which $17.7 million has been incurred through September 30, 2010, and $5.9 million is expected to be incurred in the remainder of 2010. An additional $2.1 million is expected to be incurred in the first quarter of 2011 related to final transfer and disposition of operations primarily for the consolidation of tire operations into Jackson, TN as noted above. The Company recorded $9.2 million of expense during the first nine months of 2010 primarily consisting of employee termination costs and other relocation costs. Amounts expected to be incurred in the remainder of 2010 relate to employee termination and other costs associated with the relocation of employees and equipment.
Included in Accrued expenses at September 30, 2010 was $5.4 million related to unpaid severance, moving and relocation and other costs for the above projects as well as other consolidation projects completed in 2009.
During the third quarter and first nine months of 2009, the Company recorded $3.4 million and $11.8 million in exit and disposal costs, respectively, including $5.9 million in fixed asset impairment charges for plant restructurings in the first nine months of 2009.
Interconnect Technologies In the fourth quarter of 2009, in efforts to reduce costs and streamline operations, the Company announced that it would consolidate its Vancouver, WA facility into its facilities in Long Beach, CA, Tukwila, WA, and Dongguan, China and close its Vancouver facility. This consolidation was completed during the third quarter of 2010.
The total cost of this consolidation project was $4.2 million, of which $1.1 million of expense was incurred during the first nine months of 2010 primarily consisting of employee termination costs and other relocation costs.
As of September 30, 2010, the liability for unpaid exit and disposal costs related to the consolidation of the Vancouver, WA facility was not material. |
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Note 20 Subsequent Events
On October 15, 2010, the Company announced the signing of a definitive agreement to acquire Hawk Corporation, a leading worldwide supplier of friction materials for brakes, clutches and transmissions, for $50.00 per share in an all-cash transaction. The total cash consideration to be paid for the outstanding shares of Hawk Corporation is expected to be approximately $413 million. The transaction will be funded with cash on hand and the Companys existing revolving credit facility. The Company expects the acquisition to close in the fourth quarter of 2010. |
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