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FORM 10-Q
--------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-7872
-------------------------
TRANSTECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-4062211
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
700 Liberty Avenue 07938
Union, New Jersey 07083-8198 (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (908) 688-2440
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 [X] No [ ]
As of November 5, 2002, the total number of outstanding shares of
registrant's one class of common stock was 6,198,512.
TRANSTECHNOLOGY CORPORATION
INDEX
PART I. Financial Information Page No.
--------
Item 1. Financial Statements................................................. 2
Statements of Consolidated Operations--
Three and Six Month Periods Ended September 29, 2002
and September 30, 2001............................................... 3
Consolidated Balance Sheets--
September 29, 2002 and March 31, 2002................................ 4
Statements of Consolidated Cash Flows--
Six Month Periods Ended September 29, 2002 and
September 30, 2001................................................... 5
Notes to Consolidated Financial Statements........................... 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................14-25
Item 3. Quantitative and Qualitative Disclosures about Market Risk........... 25
Item 4. Controls and Procedures.............................................. 25
PART II. Other Information
Item 1. Legal Proceedings.................................................... 26
Item 6. Exhibits and Reports on Form 8-K..................................... 26
SIGNATURES...................................................................... 27
CERTIFICATIONS..................................................................28-29
EXHIBIT 99.1.................................................................... 30
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Statements of Consolidated Operations, Consolidated
Balance Sheets, and Consolidated Cash Flows are of TransTechnology Corporation
and its consolidated subsidiaries (collectively, the "Company"). These reports
reflect all adjustments of a normal recurring nature, which are, in the opinion
of management, necessary for a fair presentation of the results of operations
for the interim periods reflected therein. The results reflected in the
unaudited Statement of Consolidated Operations for the period ended September
29, 2002, are not necessarily indicative of the results to be expected for the
entire year. The following unaudited Consolidated Financial Statements should be
read in conjunction with the notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations set forth in Item 2 of
Part I of this report, as well as the audited financial statements and related
notes thereto contained in the Company's Annual Report on Form 10-K filed for
the fiscal year ended March 31, 2002.
Information provided herein for the three and six month periods ended September
30, 2001 has been restated to give effect to the reporting of the Company's
specialty fasteners business segment as discontinued operations as discussed in
Note 4 to the Financial Statements.
[THIS PAGE INTENTIONALLY LEFT BLANK]
2
STATEMENTS OF CONSOLIDATED OPERATIONS
UNAUDITED
(In Thousands of Dollars, Except Share Data)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------- --------------------------------------
September 29, 2002 September 30, 2001 September 29, 2002 September 30, 2001
------------------ ------------------ ------------------ ------------------
Net sales $ 17,334 $ 16,293 $ 37,201 $ 34,895
Cost of sales 9,020 9,758 19,942 20,914
----------- ----------- ----------- -----------
Gross profit 8,314 6,535 17,259 13,981
----------- ----------- ----------- -----------
General, administrative
and selling expenses 4,990 4,642 9,422 9,584
Interest expense 3,397 2,067 6,475 3,500
Interest income (9) (17) (20) (45)
Other income - net 6 (46) (7) (50)
Unrealized loss on warrants 1,219 -- 1,219 --
Forbearance fees -- 1,103 764 2,162
Corporate office restructuring charge -- 1,229 -- 1,229
----------- ----------- ----------- -----------
Loss from continuing operations
before income taxes (1,289) (2,443) (594) (2,399)
Provision for income taxes (benefit) (26) (1,175) 244 (1,158)
----------- ----------- ----------- -----------
Net loss from continuing operations (1,263) (1,268) (838) (1,241)
Discontinued operations:
Income from sale of businesses and income
from operations of discontinued businesses
(less applicable income taxes (benefits)
of $7,899 and $8,447 for the three and
six month periods ended September 30,
2001, respectively) -- 14,842 -- 15,621
Loss on disposal of discontinued businesses
(less applicable income tax benefits of
$1,875 and $2,625 for the three and six
month periods ended September 29, 2002
and $36,787 for the three and six month
period ended September 30, 2001,
respectively) (3,972) (68,180) (5,145) (68,180)
----------- ----------- ----------- -----------
Net loss $ (5,235) $ (54,606) $ (5,983) $ (53,800)
=========== =========== =========== ===========
Basic loss per share:
Loss from continuing operations $ (0.20) $ (0.21) $ (0.14) $ (0.20)
Loss from discontinued operations (0.64) (8.63) (0.83) (8.51)
----------- ----------- ----------- -----------
Net loss $ (0.84) $ (8.84) $ (0.97) $ (8.71)
=========== =========== =========== ===========
Diluted loss per share:
Loss from continuing operations $ (0.20) $ (0.21) $ (0.14) $ (0.20)
Loss from discontinued operations (0.64) (8.63) (0.83) (8.51)
----------- ----------- ----------- -----------
Net loss $ (0.84) $ (8.84) $ (0.97) $ (8.71)
=========== =========== =========== ===========
Numbers of shares used in computation
of per share information: (Note 1)
Basic 6,197,000 6,178,000 6,194,000 6,177,000
Diluted 6,197,000 6,178,000 6,194,000 6,177,000
See accompanying notes to unaudited consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Data)
(UNAUDITED)
SEPTEMBER 29, 2002 MARCH 31, 2002
------------------ --------------
Assets
Current assets:
Cash and cash equivalents $ 1,224 $ 97
Accounts receivable (net of allowance for
doubtful accounts of $193 at September 29,
2002 and $391 at March 31, 2002) 11,591 11,654
Inventories 23,477 23,695
Prepaid expenses and other current assets 1,863 1,111
Income tax receivable 207 7,600
Deferred income taxes 1,106 1,538
Assets held for sale 17,521 38,486
--------- ---------
Total current assets 56,989 84,181
--------- ---------
Property, plant and equipment 19,705 19,382
Less accumulated depreciation and amortization 11,811 11,572
--------- ---------
Property, plant and equipment - net 7,894 7,810
--------- ---------
Other assets:
Costs in excess of net assets of acquired
businesses (net of $1,171 accumulated
amortization) 10,584 10,584
Deferred income taxes 30,097 29,266
Other 13,963 10,301
--------- ---------
Total other assets 54,644 50,151
--------- ---------
Total $ 119,527 $ 142,142
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 5,650 $ --
Accounts payable--trade 5,230 6,433
Accrued compensation 2,184 2,989
Accrued income taxes -- 449
Liabilities of discontinued operations 2,827 18,011
Other current liabilities 13,675 14,539
--------- ---------
Total current liabilities 29,566 42,421
--------- ---------
Long-term debt payable to banks and others 99,573 107,564
--------- ---------
Deferred income taxes 633 1,188
--------- ---------
Other long-term liabilities 13,213 7,176
--------- ---------
Stockholders' deficit:
Preferred stock--authorized, 300,000 shares;
none issued -- --
Common stock--authorized, 14,700,000 shares
of $.01 par value; issued 6,748,338 at
September 29, 2002, and 6,739,264 at
March 31, 2002 67 67
Additional paid-in capital 73,830 78,286
Notes receivable from officers (103) (123)
Accumulated deficit (87,878) (82,227)
Accumulated other comprehensive loss -- (2,888)
Unearned compensation (271) (236)
--------- ---------
(14,355) (7,121)
Less treasury stock, at cost - (549,826 shares
at September 29, 2002 and 548,186 at
March 31, 2002) (9,103) (9,086)
--------- ---------
Total stockholders' deficit (23,458) (16,207)
--------- ---------
Total $ 119,527 $ 142,142
========= =========
See accompanying notes to unaudited consolidated financial statements.
4
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(In Thousands of Dollars)
SIX MONTHS ENDED
----------------------------------------
September 29, 2002 September 30, 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,983) $(53,800)
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Loss on divestiture of discontinued businesses,
net of tax 5,145 69,109
Gain on sale of discontinued businesses, net of
tax -- (16,550)
Depreciation and amortization 1,084 1,938
(Increase) decrease in net assets of discontinued
companies (928) 26,774
Warrant mark to market adjustment 1,219 --
Noncash interest expense 1,358 1,256
(Reduction of) provision for losses on accounts
and notes receivable (177) 28
Changes in assets and liabilities - excluding
the effects of acquisitions and dispositions:
Decrease in accounts receivable and other
receivables 7,880 6,265
Decrease in inventories 218 847
Increase in deferred taxes, net (2,509) (28,553)
(Increase) decrease in other assets (4,167) 1,260
Decrease in accounts payable (1,203) (1,563)
Decrease in accrued compensation (805) (1,632)
Decrease in income taxes payable (449) (2,810)
(Decrease) increase in other liabilities (697) 1,663
-------- --------
Net cash (used in) provided by operating activities (14) 4,232
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (552) (135)
Proceeds from sales of businesses 6,425 46,200
(Decrease) increase in notes and other receivables (223) 212
-------- --------
Net cash provided by investing activities 5,650 46,277
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) term loan 20,500 (38,750)
Repayments of other debt, net (25,240) (11,900)
Effect of exchange rate changes on debt 326 (237)
Exercise of stock options and other (95) 8
-------- --------
Net cash used in financing activities (4,509) (50,879)
Increase (decrease) in cash and cash equivalents 1,127 (370)
Cash and cash equivalents at beginning of period 97 2,337
-------- --------
Cash and cash equivalents at end of period $ 1,224 $ 1,967
======== ========
Supplemental information:
Interest payments $ 10,283 $ 13,372
Income tax payments $ 188 $ 532
Increase in senior subordinated note for
paid-in-kind interest expense $ 1,263 $ 1,149
Non-cash charge to equity from classification of
warrants as financial derivatives $ 4,550 $ --
See accompanying notes to unaudited consolidated financial statements.
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
NOTE 1. Earnings (Loss) Per Share
Basic earnings (loss) per share are computed by dividing net loss by the
weighted-average number of shares outstanding. Diluted earnings per share is
computed by dividing net income by the sum of the weighted-average number of
shares outstanding plus the dilutive effect of shares issuable through the
exercise of stock options.
The components of the denominator for basic loss per common share and diluted
loss per common share are reconciled as follows:
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- ------------- ----------------
Basic Earnings (Loss)
per Common Share:
Weighted-average
common stock out-
standing for basic loss
per share calculation 6,197 6,178 6,194 6,177
===== ===== ===== =====
Diluted Earnings (Loss)
per Common Share:
Weighted-average
common shares
outstanding 6,197 6,178 6,194 6,177
Stock options and
warrants* -- -- -- --
----- ----- ----- -----
Weighted-average com-
mon stock outstanding
for diluted loss per
share calculation 6,197 6,178 6,194 6,177
===== ===== ===== =====
- ----------
* Not including anti-dilutive stock options totaling 53 and 135 for the
three and six month periods ended September 29, 2002, respectively, and
330 and 447 for the three and six month periods ended September 30, 2001,
respectively. Also excluding warrants totaling 428 for the three and six
month periods ended September 29, 2002 and September 30, 2001.
6
NOTE 2. Comprehensive Income (Loss)
Comprehensive income (loss) for the three and six month periods ended September
29, 2002 and September 30, 2001 is summarized below.
Three Months Ended Six Months Ended
------------------------------------ ------------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net loss $ (5,235) $(54,606) $ (5,983) $(53,800)
Other comprehensive
income (loss), net
of tax:
Foreign currency
translation adjust-
ment arising during
period 77 (1,451) (86) (960)
Reclassification ad-
justment for sale of
investment in
foreign entity 3,306 1,284 3,306 1,284
Fair value of financial
instruments -- 2,041 -- --
-------- -------- -------- --------
Total comprehensive
loss $ (1,852) $(52,732) $ (2,763) $(53,476)
======== ======== ======== ========
NOTE 3. Inventories
Inventories are summarized as follows:
September 29, 2002 March 31, 2002
------------------ --------------
Finished goods $ 46 $ 209
Work in process 6,120 5,034
Purchased and
manufactured parts 17,311 18,452
------- -------
Total $23,477 $23,695
======= =======
7
NOTE 4. Discontinued Operations/Restructuring Activities
At the end of fiscal 2001, the Company implemented a plan of restructuring to
focus its resources and capital on its aerospace products business and exit the
specialty fastener segment. On January 19, 2001, the Company announced its
intention to restructure and divest its cold-headed products (TCR Corporation),
retaining ring (Seeger-Orbis, TransTechnology (GB), TT Brasil, and
TransTechnology Engineered Rings USA), hose clamp (Breeze Industrial Products
and Pebra) and aerospace rivet (Aerospace Rivet Manufacturers Corp.) operations.
In addition, on April 12, 2001, the Company announced that it would divest
TransTechnology Engineered Components (TTEC), a manufacturer of spring steel
engineered fasteners and headlight adjusters. For business segment reporting
purposes, these above-mentioned business units had previously been classified as
the "Specialty Fasteners" segment. Upon announcing its intentions to divest this
segment the Company reclassified these business units as discontinued
operations.
Breeze Industrial Products and Pebra were sold in July 2001; TTEC was sold in
December 2001; Seeger-Orbis was sold in February 2002; Aerospace Rivet
Manufacturers Corp. was sold in April 2002; TransTechnology Engineered Rings USA
was sold in May 2002; an 81% controlling interest in TransTechnology (GB) was
sold in July 2002; and TT Brasil was sold in August 2002. As a result of these
divestitures, of the operations included in fiscal 2002's discontinued
operations, only TransTechnology Engineered Rings USA, TransTechnology (GB), TT
Brasil, Aerospace Rivet Manufacturers Corp. and TCR Corporation were carried
into fiscal 2003. As of September 29, 2002, only TCR Corporation remains to be
divested under the restructuring plan, and the Company expects that it will be
divested by the end of fiscal 2003.
The accompanying financial statements have been restated to conform to
discontinued operations treatment for all periods presented. A portion of the
Company's interest expense has been allocated to discontinued operations based
upon the net asset balances attributable to those operations. Interest expense
allocated to discontinued operations was $0.5 million and $1.3 million for the
three and six month periods ended September 29, 2002, and $4.9 million and $11.6
million for the three and six month periods ended September 30, 2001. Income
taxes have been allocated to discontinued operations based on the estimated tax
attributes of the income, assets and liabilities of the underlying discontinued
businesses.
Net sales and losses from the discontinued operations were as follows:
Three Months Ended Six Months Ended
------------------------------------- -------------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales $ 6,396 $ 46,011 $ 20,022 $ 106,414
========= ========= ========= =========
Pre-tax loss from
discontinued operations (5,847) (104,967) (7,770) (104,967)
Pre-tax gain on disposal
of Breeze Industrial/Pebra -- 22,741 -- 24,068
Income tax benefit 1,875 28,888 2,625 28,340
--------- --------- --------- ---------
Net loss from discontinued
operations $ (3,972) $ (53,338) $ (5,145) $ (52,559)
========= ========= ========= =========
8
The Company reported that the $4.0 million loss from discontinued operations in
the current quarter included operating income from discontinued businesses of
$0.4 million; allocated interest expense of $0.5 million, a $0.9 million
non-cash charge to recognize additional charges to reflect the amounts
ultimately expected to be received from sales and a non-cash charge of $4.9
million for the recognition of accumulated currency translations losses
associated with the sale of the Company's Brazilian operation, which were offset
by a tax benefit of $1.9 million.
Pre-tax losses for the three and six month periods ended September 29, 2002 and
September 30, 2001, include operating income/losses and allocated interest
expense related to these periods.
Assets and liabilities of the discontinued businesses were as follows:
September 29, 2002 March 31, 2002
------------------ --------------
Current assets $ 4,701 $23,458
Property, plant and equipment 5,371 6,904
Other assets 7,449 8,124
------- -------
Assets held for sale $17,521 $38,486
======= =======
Current liabilities 2,827 16,752
Long-term liabilities -- 1,259
------- -------
Liabilities of discontinued operations $ 2,827 $18,011
======= =======
NOTE 5. Long-term Debt Payable to Banks and Others
Long-term debt payable to banks and others, including current maturities,
consisted of the following:
September 29, 2002 March 31, 2002
------------------ --------------
Old credit agreement - 7.25% -- $ 17,000
New Revolver - 5.75% $ 4,142 --
Term Loan A - 6.25% 6,500 --
Old credit agreement - 8.00% -- 9,562
Term Loan B - 9.75% 14,068 --
Old credit agreement - 25.00% -- 2,500
Senior Subordinated Notes - 16.00% 80,638 78,648
-------- --------
105,348 107,710
Less current maturities 5,650 --
Less unamortized discount 125 146
-------- --------
Total long-term debt $ 99,573 $107,564
======== ========
9
CREDIT FACILITIES - On August 7, 2002, the Company entered into a $34.0 million
senior credit facility, consisting of a $13.5 million, asset based, revolving
credit facility (the "New Revolver"), a $6.5 million Term Loan A from The
CIT/Business Credit Group, Inc., and a $14.1 million Term Loan B from Ableco
Finance LLC (collectively, the "New Senior Credit Facility"). The New Senior
Credit Facility, which has a three-year term, is secured by all of the Company's
assets, carries a weighted average interest rate on its full commitment of 9.76%
and contains customary financial covenants and events of default. Borrowings
under the New Senior Credit Facility were initially used by the Company to
refinance its prior senior credit agreement. As of the date of this report, the
Company is not in default on any of the provisions of the New Senior Credit
Facility. Subject to limitations relating to levels of certain assets and
reserves for future interest payments, as of September 29, 2002, the Company has
unused borrowing capacity on the New Revolver of $9.4 million.
SENIOR SUBORDINATED NOTES - On August 30, 2000, the Company completed a private
placement of $75 million of senior subordinated notes (the "Notes") and warrants
to purchase shares of the Company's common stock (the "Warrants") to a group of
institutional investors (collectively, the "Purchasers"). The Company used the
proceeds of the private placement to retire, in full, a $75 million bridge loan
held by a group of lenders led by Fleet National Bank. The Notes are due on
August 29, 2005 and bear interest at a rate of 16% per annum, consisting of 13%
cash interest on principal, payable quarterly, and 3% interest on principal,
payable quarterly in "payment-in-kind" ("PIK") promissory notes. The Company may
prepay the Notes after August 29, 2001, at a premium initially of 9%, declining
to 5%, 3%, and 1% on each of the next succeeding anniversaries of that date. The
Notes contain customary financial covenants and events of default, including a
cross-default provision to the Company's senior debt obligations. At September
29, 2002, the principal balance outstanding on the notes amounted to $80.6
million, which included the original principal amount plus the "payment-in-kind"
Notes. As of the date of this report, the Company is not in default of any of
the provisions of the Notes.
At issuance, the Warrants entitled the Purchasers to acquire, in the aggregate,
427,602 shares, or approximately 7%, of the common stock of the Company at an
exercise price of $9.93 a share. This exercise price represents the average
daily closing price of the Company's common stock on the New York Stock Exchange
for the thirty (30) days preceding the completion of the private placement. The
Warrants must be exercised by August 29, 2010.
Effective with the refinancing of the Company's prior senior credit agreement
with the New Senior Credit Facility on August 7, 2002, the Purchasers agreed to
amend the Notes. Under the amended Notes, the Company paid an amendment fee
equal to 1% of the outstanding balance of the Notes by issuing additional Notes
and agreed to increase the PIK interest rate on the Notes by 2% effective
January 1, 2003, with such rate increasing 0.25% each quarter until the Company
retires the Notes. Additionally, the Company amended the terms of the Warrants
to reduce the exercise price of each Warrant to provide the holders with a
minimum profit on the exercise of the Warrants equal to $5.00 per underlying
share if the Warrants are exercised and sold prior to December 31, 2002. This
could result in a reduction of the Company's proceeds from the exercise of the
warrants by up to $2.1 million. If the Warrants remain outstanding after
December 31, 2002, their exercise price will be reduced to $0.01 per share. In
addition, the amended Warrants contain a "put" right that allows the holders to
cause the Company to purchase the warrants at a price of $5.00 per underlying
share upon the occurrence of certain "liquidity events."
Since, under generally accepted accounting principles, the Warrants are now
considered derivative financial instruments because of the put rights, during
the quarter ended September 29, 2002, the Company recorded the value of the
Warrants as a charge to shareholders' equity of $4.55 million with a
corresponding credit to a long-term liability. The amount of the charge was
determined by measuring the difference between the $0.01 per share potential
exercise price and the market value of a share of common stock on August 7, 2002
of $10.64. By September 29, 2002, the share price of the
10
Company's common stock had risen to $13.46, compared to $10.64 on August 7,
which resulted in a mark-to-market charge to operating results of $1.2 million.
Until the provisions of the amended Warrants that enable their holders to "put"
the Warrants to the Company for $5.00 per share are extinguished, the Company
will mark the Warrants to market and will recognize the corresponding income or
loss in its Statement of Consolidated Operations. Upon the termination of the
put rights, the original amount of the liability and the adjustment to paid in
capital, as increased or decreased by the amounts of any income or expense
recognized from the mark-to-market adjustments, will be reversed out of the
liability and will be credited to paid in capital.
If the Company does not retire the Notes and redeem the Warrants by December 31,
2002, the Company may, thereafter, have 427,602 additional shares outstanding in
computing earnings per share, a dilution factor of approximately 7%. The maximum
cash exposure of the Company related to these Warrants and their put rights, if
any, is the $2.1 million that would be required to redeem the Warrants or the
underlying shares if there were a sale of the entire Company or either of its
aerospace units.
NOTE 6. Change in Accounting for Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 2000, the FASB issued SFAS No. 138,
which amends certain provisions of SFAS No. 133. The Company adopted SFAS No.
133 and the corresponding amendments under SFAS No. 138 on April 1, 2001. During
the six-month period ended September 29, 2002, the Company reported within
Discontinued Operations a pre-tax charge of $0.2 million associated with the
termination of interest rate swap agreements that were no longer required when
the Company repaid its floating rate debt under its prior senior credit
agreement on August 7, 2002. In conjunction with this, as described in Note 5,
the warrants issued with the Notes were modified, as described in Note 5, so
that the warrants are now considered to be derivative financial instructions and
are being accounted for accordingly.
NOTE 7. Goodwill and Other Intangible Assets - Adoption of Statement of
Financial Accounting Standards No. 142
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 142, "Accounting for Goodwill and Other Intangible
Assets" (SFAS No. 142), in June 2001. This statement provides guidance on how to
account for existing goodwill and intangible assets from completed acquisitions.
The Company adopted SFAS No. 142 in the first quarter of fiscal 2003. Upon
adoption, there was no impairment of goodwill.
11
Had the provisions of SFAS 142 been in effect during fiscal 2002, goodwill
amortization would have been eliminated, decreasing net loss and loss per share
as follows:
Three Months Ended Six Months Ended
------------------------------------ -------------------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Loss from continuing
operations $ (1,263) $ (1,268) $ (838) $ (1,241)
Add back goodwill
amortization -- 64 -- 136
--------- -------- --------- --------
Adjusted loss from
continuing operations (1,263) (1,204) (838) (1,105)
Income from discontinued
businesses -- 14,842 -- 15,621
Loss on disposal of
discontinued businesses (3,972) (68,180) (5,145) (68,180)
Add back goodwill
amortization -- 1,001 -- 1,451
--------- -------- --------- --------
Net loss $ (5,235) $(53,541) $ (5,983) $(52,213)
========= ======== ========= ========
Basic loss per share:
Loss from continuing
operations $ (0.20) $ (0.19) $ (0.14) $ (0.18)
Loss from discontinued
operations (0.64) (8.47) (0.83) (8.27)
--------- -------- --------- --------
Net loss $ (0.84) $ (8.66) $ (0.97) $ (8.45)
========= ======== ========= ========
Diluted loss per share:
Loss from continuing
operations $ (0.20) $ (0.19) $ (0.14) $ (0.18)
Loss from discontinued
operations (0.64) (8.47) (0.83) (8.27)
--------- -------- --------- --------
Net loss $ (0.84) $ (8.66) $ (0.97) $ (8.45)
========= ======== ========= ========
12
NOTE 8. New Accounting Standards
In July 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations", which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred and
the associated asset retirement to be capitalized as part of the carrying amount
of the long-lived asset. SFAS 143 is effective for years beginning after June
15, 2002. The Company is currently evaluating the effect, if any, that the
adoption of SFAS 143 will have on the Company's consolidated financial position,
results of operations and cash flows.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). The Company is in the
process of evaluating the effect that adopting SFAS 145 will have on its
financial statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will be
effective for disposal activities the Company initiates after December 31, 2002.
The Company is in the process of evaluating the effect that adopting SFAS 146
will have on its financial statements.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We are the world's largest manufacturer of performance-critical rescue hoists
and cargo hooks used primarily for helicopter rescue and transport applications,
weapons system lifting devices, and hold-open rods used on aircraft engine
nacelles.
We also manufacture fixed-wing aircraft cargo winches, weapons handling systems
for ground defense platforms and tie-down equipment.
Our wholly owned subsidiary, Norco, Inc., is a designer and manufacturer of
telescoping rods used to hold open the engine nacelles of large commercial and
military aircraft. Norco also manufactures and designs electro-mechanical
actuators, support struts, and specialty locking devices for use in the
aerospace and defense industries as well as power transmission products used in
the industrial and medical industries, including ball-reversers, ball
oscillators, and lead screws.
Beginning in fiscal 2001, we implemented a plan of restructuring to focus our
resources and capital on our aerospace products business and exit the specialty
fastener segment. As a result, our discontinued operations include all of the
operations related to our specialty fastener segment, including TransTechnology
Engineered Components LLC, the Breeze Industrial Products and Pebra hose clamp
businesses, TransTechnology Engineered Rings, Aerospace Rivet Manufacturers
Corp., and TCR Corporation. With the exception of TCR Corporation, all of the
foregoing businesses had been divested by the date of this report. Of the
operations included in fiscal 2002's discontinued operations, only
TransTechnology Engineered Rings USA, TransTechnology (GB), TT Brasil, Aerospace
Rivet Manufacturers Corp. and TCR were carried into fiscal 2003. Only TCR
remains to be divested under the restructuring plan, and we expect that it will
be divested by the end of fiscal 2003.
All discussions related to our ongoing operations, or to TransTechnology
Corporation, refer only to continuing operations, which consist of our
Breeze-Eastern division and Norco. Discontinued operations are discussed
separately under the heading "-- Divestitures and Discontinued Operations."
All references to three and six month periods in this Management's Discussion
refer to the three and six month periods ended September 29, 2002 for fiscal
year 2003 and the three and six month periods ended September 30, 2001 for
fiscal year 2002. Also, when referred to in this report, operating profit means
net sales less operating expenses, without deduction for interest and income
taxes.
DIVESTITURES AND DISCONTINUED OPERATIONS
During fiscal 2001, we implemented a plan of restructuring to focus our
resources and capital on our aerospace products business and exit the specialty
fastener segment. As a result, our discontinued operations includes all of the
operations related to our specialty fastener segment, which includes all of the
divested operations described below and TCR Corporation, which we expect to
divest by the end of fiscal 2003.
On July 10, 2001, we sold our Breeze Industrial and Pebra hose clamp businesses
to Industrial Growth Partners and members of Breeze Industrial's management for
$46.2 million in cash. In a related transaction, we sold the real estate
occupied by Breeze Industrial to a quasi-governmental organization for $2.0
million. We used the proceeds from the sales to repay borrowings outstanding
under our prior senior credit agreement.
On December 5, 2001, we sold TransTechnology Engineered Components to a company
formed by affiliates of Kohlberg & Company, L.L.C. for $98.5 million, of which
$96.0 million was cash and the balance the
14
assumption of certain liabilities related to the purchased businesses. We used
the cash proceeds of the sale to repay borrowings outstanding under our prior
senior credit agreement. In the fiscal quarter ended September 30, 2001, as part
of our restructuring program, we reported a pre-tax asset impairment charge for
TransTechnology Engineered Components, Inc. in the amount of $85.8 million to
reduce the carrying value of these businesses to estimated fair market value.
This non-cash charge was specifically related to the write-down of goodwill. The
sale proceeds of TransTechnology Engineered Components approximated our adjusted
carrying value.
On February 21, 2002, we sold Seeger-Orbis to Barnes Group Inc. for $20.0
million cash. We used the net proceeds of the sale to repay borrowings
outstanding under our prior senior credit agreement. Our balance sheet contains
a non-current asset and a non-current liability in the amount of $3.1 million
relating to the pension plan of Seeger-Orbis. These amounts represent our legal
liability under German law and the indemnification we received from the buyer of
the business for that liability.
On April 16, 2002, we sold Aerospace Rivet Manufacturers Corp. to Allfast
Fastening Systems, Inc. for $3.2 million cash. We used the net proceeds of the
sale to repay borrowings outstanding under our prior senior credit agreement.
On May 30, 2002, we completed the sale of substantially all of the net assets of
TransTechnology Engineered Rings (USA) to a newly formed affiliate of Sea View
Capital LLC for $2.9 million cash, a promissory note of $0.8 million and
warrants for 5% of the equity of the purchaser. We used the net proceeds of the
sale to repay borrowings outstanding under our prior senior credit agreement.
On July 16, 2002, we completed the recapitalization of our TransTechnology (GB)
Ltd. subsidiary, now known as Cirteq, Ltd., by selling 81% of its shares to a
new entity controlled by local management for $121 (one hundred twenty-one
dollars). We also converted $2.0 million of unsecured inter-company debt into a
$2.0 million loan secured by a first lien on Cirteq's real property in Glusburn,
England.
On August 6, 2002, we completed the sale of all of the shares of TransTechnology
Brasil, Ltda. for $742,000, of which $325,000 was paid in cash and the balance
in installment payments. We also will be paid $258,000 of debt due from the
Brazilian unit. We used the net proceeds of the sale to repay borrowings
outstanding under our prior senior credit agreement.
The $5.1 million loss from discontinued operations in the first six months of
fiscal 2003 included:
- - operating income from discontinued operations of $0.5 million;
- - allocated interest expense of $1.3 million;
- - a $1.9 million non-cash charge to reflect the amounts ultimately expected
to be realized from sales;
- - a cash charge of $0.2 million from the final settlement of our interest
rate swap contracts;
- - a non-cash charge of $4.9 million associated with the recognition of
accumulated currency translation losses from the sale of our Brazilian
operation; and
- - a tax benefit of $2.7 million.
In the first half of fiscal 2002, the $68.2 million loss from discontinued
operations, which was offset by a $15.6 million after tax gain from the sale of
and operations of our Breeze/Pebra hose clamp business, included:
15
- - a $70.1 million anticipated loss on the sale of the engineered components
business (which was pending at the end of the second quarter of fiscal
2002 but closed in the third quarter);
- - increases in the losses anticipated upon the sale of our various retaining
ring businesses (the last of which was sold in the second quarter of
fiscal 2003);
- - the forecasted operating income and interest expense associated with the
specialty fastener segment through the anticipated closing dates of the
divestitures of those units; and
- - a tax benefit of $36.8 million associated with the above items.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION. We recognize revenue at the later of (1) when products are
shipped to customers and (2) when title passes to customers.
INVENTORY. We purchase materials for the manufacture of components for use in
our products and for use by our engineering, repair and overhaul businesses. The
decision to purchase a set quantity of a particular item is influenced by
several factors including:
- - current and projected cost;
- - future estimated availability;
- - lead time for production of the materials;
- - existing and projected contracts to produce certain items; and
- - the estimated needs for its repair and overhaul business.
We value our inventories using the lower of cost or market on a first-in
first-out (FIFO) basis and establish reserves as necessary to reduce the
carrying amount of these inventories to net realizable value.
ENVIRONMENTAL RESERVES. We provide for environmental reserves when, after
consultation with our internal and external counsel, we determine that a
liability is both probable and estimable. In many cases, we do not fix or cap
the liability for a particular site when we first record it. Factors that affect
the recorded amount of the liability in future years include:
- - our participation percentage due to a settlement by or bankruptcy of other
potentially responsible parties;
- - a change in the environmental laws requiring more stringent requirements;
16
- - a change in the estimate of future costs that will be incurred to
remediate the site; and
- - changes in technology related to environmental remediation.
Current estimated exposure to environmental claims is discussed below under the
caption "-- Liquidity and Capital Resources."
GOODWILL AND OTHER INTANGIBLE ASSETS. At September 29, 2002, we had recorded
$10.7 million in net goodwill and other intangible assets related to
acquisitions made in prior years. The recoverability of these assets is subject
to an impairment test based on the estimated fair value of the underlying
businesses. Factors affecting these fair values include:
- - the continued market acceptance of the products and services offered by
the businesses;
- - the development of new products and services by the businesses and the
underlying cost of development;
- - the future cost structure of the businesses; and
- - future technological changes.
Effective April 1, 2002, we implemented SFAS 142 relative to the non-recognition
of goodwill amortization and no longer reflect these charges in our results of
operations from and including that effective date.
FINANCIAL DERIVATIVES. As noted previously, until July 5, 2002, we had
outstanding interest rate swaps in association with our prior senior credit
agreement. We valued these swaps using estimates based on then-prevailing
interest rates, and the amount we were required to pay was impacted
significantly by changes in interest rates. Additionally, we are required to
treat our outstanding warrants as financial derivatives and mark these
securities to market at the end of each accounting period, resulting in the
recognition of gain or loss in each period. The amount of this gain or loss is
determined by measuring the difference in the market value of a share of our
common stock over a given period. A $1.00 change in our share price will result
in a gain or loss of $0.4 million during the period in which the price change is
realized.
VALUATION OF ASSETS HELD FOR SALE. We reflect Assets Held for Sale and
Liabilities of Discontinued Businesses on our balance sheet. In the event the
net realizable values of the businesses being divested is less than that
estimated, or the length of time required to complete the divestiture is longer
than estimated, the amounts realized from these accounts may be impacted. See
"-- Divestitures and Discontinued Operations."
DEFERRED TAX ASSETS. This asset represents income tax benefits expected to be
realized in the future, primarily as a result of the use of net operating loss
carry-forwards. In the event we do not generate adequate amounts of taxable
income prior to the expiration of the tax loss carry-forwards, the amount of
this asset may not be realized. Additionally, changes to the federal and state
income tax laws could also impact our ability to use them. The state of New
Jersey, in response to a budget crisis, has suspended for two years the ability
of a corporation to use a net operating loss carryforward against taxable income
earned in the state. As a result, we will be required to pay New Jersey income
taxes for fiscal years 2003 and 2004 in spite of losses being carried forward.
17
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 29, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Our sales increased to $17.3 million for the second quarter of fiscal 2003, a 6%
increase over second quarter fiscal 2002 sales of $16.3 million. Norco saw an
11% drop in sales, primarily due to lower shipments of products to airframe
manufacturers as a result of an expected reduction in the build rate of large
commercial airliners in fiscal 2003. The ongoing decline in aircraft build rates
was accelerated and exacerbated by the impact of the events of September 11. Due
to lower utilization rates of the existing commercial airline fleet resulting
from the slowing economy and the post-September 11 reduction in travel, Norco
has experienced lower order rates and sales of hold-open rod spare parts and
replacement parts that are sold directly to the airlines as maintenance items.
This decline was offset by increased sales of Norco's developing product line of
motion control products for use in medical testing equipment and increased sales
of new equipment and spare parts to military agencies. Breeze Eastern realized a
17% increase in sales from the prior year's period as a result of higher
shipments of rescue hoists and cargo hooks for military and civil rescue
agencies, as well as increases in sales of spare parts, repair and overhaul of
equipment already in the field.
Generally, repair and overhaul services and spare parts sales have higher gross
margins than sales of new equipment or engineering services. In addition, sales
of Norco products to military original equipment manufacturers, or OEMs, carry
higher gross margins than do sales of similar products to commercial OEMs. As a
result of a sales mix that was more heavily weighted in favor of aftermarket and
military sales, both Breeze Eastern and Norco recorded higher gross margins for
the second quarter of fiscal 2003. These improvements in product mix, combined
with fixed cost absorption on a generally higher sales volume, and a mid-year
adjustment of accumulated manufacturing costs, led to an increase in gross
margin to an unusually high 48.0% in the second quarter of fiscal 2003 from
40.1% in the comparable fiscal 2002 period.
Selling, general and administrative expenses increased 7.5% to $5.0 million in
the second quarter of fiscal 2003 from $4.6 million in the second quarter of
fiscal 2002. This increase was primarily due to higher selling, general and
administrative expenses at Breeze Eastern due to its higher sales volume, offset
by a 6.3% decrease in corporate office expenses to $1.9 million in the second
quarter of fiscal 2003 from $2.0 million in the second quarter of fiscal 2002.
The decrease in corporate office expenses was primarily due to the restructuring
and reduction in personnel at the corporate office during calendar year 2001 and
2002.
Operating income increased 76% to $3.3 million in the second quarter of fiscal
2003 from $1.9 million in the second quarter of fiscal 2002. This increase was
mainly due to a more favorable mix of repair, overhaul and spare parts business,
the benefit of spreading fixed costs over a larger sales volume, and a higher
sales volume, generally. Operating income also increased as a result of the
elimination of goodwill amortization expense resulting from our adoption of SFAS
142, which changed our accounting method relative to the recognition of goodwill
amortization expense. In the second quarter of fiscal 2003, we recognized no
goodwill amortization expense, while in the second quarter of fiscal 2002, we
recorded a goodwill amortization expense of $0.1 million.
EBITDA, or earnings before interest, taxes, depreciation and amortization,
increased 39% to $3.9 million in the second quarter of fiscal 2003 from $2.8
million in the second quarter of fiscal 2002.
Interest expense for the second quarter of fiscal 2003 increased $1.3 million
from the prior year period as a result of the allocation formula we use to
apportion interest expense between continuing and discontinued operations. This
formula is based upon the net asset balances attributable to continuing and
discontinued operations. Total interest expense for the second quarter of fiscal
2003 decreased $3.0 million due to the retirement of debt with the proceeds from
divestitures and other internally generated sources of cash. Assets held for
sale were also substantially reduced, however, causing a higher percentage of
assets to be allocated to
18
continuing operations in the second quarter of fiscal 2003 compared to the
second quarter of fiscal 2002, which resulted in an increased allocation of
interest expense to the 2003 quarter.
As noted in Footnote 5 to the financial statements included in this report, the
warrants associated with our senior subordinated notes due in 2005 are now
deemed to be derivative financial instruments for purposes of generally accepted
accounting principles. As required by those principles, changes in the value of
our share price between August 7, 2002 and the end of the quarter resulted in
our recognizing a non-cash, non-tax deductible loss of $1.2 million during the
second quarter of fiscal 2003. There was no similar gain or loss recognized in
the second quarter of the prior fiscal year. If the warrants are not exercised
or otherwise retired, we may continue to experience similar losses, or gains, in
the future.
During the second quarter of fiscal 2002, we incurred $1.1 million of costs
related to forbearance fees we paid to our lenders under our prior senior credit
agreement in association with their agreement not to pursue any actions against
us for violating certain financial covenants. In the second quarter of fiscal
2003, we did not pay any such forbearance fees.
In the second quarter of fiscal 2002, we recognized a $1.2 million charge
associated with the restructuring of our corporate office. This charge related
primarily to severance costs resulting from the elimination of several
positions. There were no such charges recognized in the second quarter of fiscal
2003.
New orders received in the second quarter of fiscal 2003 totaled $17.3 million,
which represents a 16% increase from new orders of $14.9 million in the second
quarter of fiscal 2002. Backlog at September 29, 2002 was $46.9 million,
compared to $43.7 million at March 31, 2002 and $49.9 million at September 30,
2001. New orders received in the second quarter decreased at Norco primarily
because lower activity by commercial airframe OEMs resulted in less orders for
hold-open rods and less airline spare parts orders, generally. Breeze-Eastern
experienced an increase in new orders primarily as the result of the timing of
its receipt of domestic and foreign military and spare parts orders. Second
quarter fiscal 2003 order intake is at 22% of the full year target, while second
quarter fiscal 2002 new orders were at 20% of the full year's order intake. A
significant portion of second quarter fiscal 2003 sales is derived from
long-term contracts. Generally, new equipment sales are the subject of
high-value, long-term contracts, while repair, overhaul and spare parts sales
have much shorter lead times and a less predictable order pattern.
SIX MONTHS ENDED SEPTEMBER 29, 2002 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2001
Our sales increased to $37.2 million for the first half of fiscal 2003, a 7%
increase over first half fiscal 2002 sales of $34.9 million. Norco saw a 10%
drop in sales during the first half of fiscal 2003, primarily due to lower
shipments of products to airframe manufacturers as a result of an expected
reduction in the build rate of large commercial airliners in fiscal 2003. The
ongoing decline in aircraft build rates was accelerated and exacerbated by the
impact of the events of September 11. Due to lower utilization rates of the
existing commercial airline fleet resulting from the slowing economy and the
post-September 11 reduction in travel, Norco has experienced lower order rates
and sales of hold-open rod spare parts and replacement parts that are sold
directly to the airlines as maintenance items. This decline was offset by
increased sales of Norco's developing product line of motion control products
for use in medical testing equipment and increased sales of new equipment and
spare parts to military agencies. Breeze Eastern realized a 13% increase in
sales from the prior year's period as a result of higher shipments of rescue
hoists and cargo hooks for military and civil rescue agencies, as well as
increases in sales of spare parts, repair and overhaul of equipment already in
the field.
Generally, repair and overhaul services and spare parts sales have higher gross
margins than sales of new equipment or engineering services. In addition, sales
of Norco products to military OEMs carry higher gross margins than do sales of
similar products to commercial OEMs. As a result of a sales mix that was more
heavily weighted in favor of aftermarket and military sales, both Breeze Eastern
and Norco recorded higher
19
gross margins for the first half of fiscal 2003. These improvements in product
mix, combined with fixed cost absorption on a generally higher sales volume, and
a mid-year adjustment to accumulated manufacturing costs, led to an increase in
gross margin to an unusually high 46.4% in the first half of fiscal 2003 from
40.0% in the comparable fiscal 2002 period.
Selling, general and administrative expenses decreased 1.7% to $9.4 million in
the first half of fiscal 2003 from $9.6 million the first half of fiscal 2002.
This decrease was primarily due to a 17% decrease in corporate office expenses
to $4.0 million in the first half of fiscal 2003 from $4.4 million of in the
first half of fiscal 2002, which was offset by higher selling, general and
administrative expenses at Breeze Eastern due to its higher sales volume. The
decrease in corporate office expenses during the first half of fiscal 2003 was
primarily due to the restructuring of the corporate office during fiscal 2002.
Operating income increased 78% to $7.8 million in the first half of fiscal 2003
from $4.4 million in the first half of fiscal 2002. This increase was mainly due
to a more favorable mix of repair, overhaul and spare parts business, the
benefit of spreading fixed costs over a larger sales volume, and a higher sales
volume. Operating income also increased as a result of the elimination of
goodwill amortization expense resulting from our adoption of SFAS 142, which
changed our accounting method relative to the recognition of goodwill
amortization expense. In the first half of fiscal 2003, we recognized no
goodwill amortization expense, while in the first half of fiscal 2002, we
recorded a goodwill amortization expense of $0.1 million.
EBITDA, or earnings before interest, taxes, depreciation and amortization,
increased 41% to $ 8.9 million in the first half of fiscal 2003 from $6.3
million in the first half of fiscal 2002.
Interest expense for the first half of fiscal 2003 increased $3.0 million from
the prior year period as a result of the allocation formula we use to apportion
interest expense between continuing and discontinued operations. This formula is
based upon the net asset balances attributable to continuing and discontinued
operations. Total interest expense for the first half of fiscal 2003 decreased
$7.3 million due to the retirement of debt with the proceeds from divestitures
and other internally generated sources of cash. Assets held for sale were also
substantially reduced, however, causing a higher percentage of assets to be
allocated to continuing operations in the first half of fiscal 2003 compared to
the first half of fiscal 2002, which resulted in an increased allocation of
interest expense to the first half of fiscal 2003.
As noted in Footnote 5 to the financial statements included in this report, the
warrants associated with our senior subordinated notes due in 2005 are now
deemed to be derivative financial instruments for purposes of generally accepted
accounting principles. As required by those principles, changes in the value of
our share price between August 7, 2002 and the end of the first half of fiscal
2003 resulted in our recognizing a non-cash, non-tax deductible loss of $1.2
million during the first half of fiscal 2003. There was no similar gain or loss
recognized in the first half of the prior fiscal year. If the warrants are not
exercised or otherwise retired, we may continue to experience similar losses, or
gains, in the future.
During the first half of fiscal 2003, we incurred $0.8 million of costs related
to forbearance fees we paid to our lenders under our prior senior credit
agreement in association with their agreement not to pursue any actions against
us for violating certain financial covenants. In the first half of the prior
fiscal year, we incurred $2.2 million of such costs. The reduction in these
costs was the result of lower overall levels of debt during the current fiscal
year and the refinancing of our prior senior credit agreement in August 2002,
which cured all defaults and ended the forbearance agreements.
In the first half of the prior fiscal year, we recognized a $1.2 million charge
associated with the restructuring of our corporate office. This charge related
primarily to severance costs following the elimination of several positions.
There were no such charges recognized in the first half of fiscal 2003.
20
New orders received in the first half of fiscal 2003 totaled $38.6 million,
which represents a 14% decrease from new orders of $44.7 million in the first
half of fiscal 2002. Both Breeze-Eastern and Norco experienced decreases in new
orders and backlog in the first half of fiscal 2003 compared to fiscal 2002. New
orders decreased at Norco primarily because lower activity by commercial
airframe OEMs resulted in less orders for hold-open rods and less airline spare
parts orders, generally. Breeze-Eastern experienced a reduction in new orders
primarily as the result of the timing of the receipt of domestic and foreign
military and spare parts orders. First half fiscal 2002 new orders were
unusually high at 61% of the full year's order intake, while first half fiscal
2003 order intake is at 50% of the full year target. A significant portion of
first half fiscal 2003 sales was derived from long-term contracts. Generally,
new equipment sales are the subject of high-value, long-term contracts, while
repair, overhaul and spare parts sales have much shorter lead times and a less
predictable order pattern.
LIQUIDITY AND CAPITAL RESOURCES
Our restructuring and divestiture program has had a substantial impact upon our
financial condition through September 29, 2002 as we reduced debt with the
proceeds of the divestitures and lowered costs as a result of the corporate
office restructuring. During the second quarter of fiscal 2003, we sold our
Brazilian retaining ring operation for aggregate cash proceeds of $0.3 million
and recapitalized our U.K. retaining ring operation receiving $121 (one hundred
twenty-one dollars) in cash, retaining 19% of its equity, and converting $2.0
million of unsecured intercompany indebtedness into a mortgage on the unit's
U.K. real estate. All of these proceeds, after payment of transaction fees and
expenses, were used to reduce our prior senior credit agreement. At September
29, 2002, indebtedness outstanding under our new senior credit facility was
$24.6 million, compared to $21.8 million of indebtedness outstanding under our
prior senior credit agreement at the end of the first quarter of fiscal 2003 and
$29.1 million at the beginning of fiscal 2003.
We are in the process of divesting our subsidiary, TCR Corporation. We expect to
complete this transaction during the second half of fiscal 2003, and we
anticipate applying all of the proceeds to the repayment of our outstanding
debt. The assets and liabilities of this business unit are presented in Assets
Held for Sale and Liabilities of Discontinued Businesses on the September 29,
2002 balance sheet at their estimated net realizable values.
WORKING CAPITAL. Our working capital at September 29, 2002 was $27.7 million,
compared to $33.3 million at the end of the first quarter of fiscal 2003 and
$41.8 million at the beginning of fiscal 2003. Excluding the impact of assets
and liabilities of businesses held for sale, working capital at September 29,
2002 was $13.8 million, compared to $18.3 million at the end of the first
quarter of fiscal 2003 and $21.3 million at the beginning of fiscal 2003. The
ratio of current assets to current liabilities was 1.9 to 1.0 at September 29,
2002, unchanged from the end of the first quarter of fiscal 2003 and compared to
2.0 to 1.0 at the beginning of fiscal 2003.
Working capital changes during the second quarter of fiscal 2003, exclusive of
assets held for sale, resulted from increases in accounts receivable of $1.5
million and inventories of $0.7 million. The increase in accounts receivable was
due to higher shipments in the last month of the second quarter compared to the
last month of the first quarter of fiscal 2003. The increase in inventory was
largely due to the purchase of long lead time materials and the manufacture of
work in process needed to fulfill customers' long-term purchase orders. The
number of days that sales were outstanding in accounts receivable increased to
56 days at September 29, 2002 from 46 days at June 30, 2002, while inventory
turnover remained unchanged at 1.9 turns over the same time period. Current
liabilities decreased $6.1 million, primarily due to decreases in accounts
payable, other accrued expenses, and liabilities of discontinued operations
which were offset by an increase in the current portion of long-term debt as a
result of the refinancing of our prior senior credit agreement, which is
discussed below.
21
Working capital changes during the first six months of fiscal 2003, exclusive of
assets held for sale, resulted from a decrease in accounts receivable of $0.1
million, a decrease in inventories of $0.2 million, the receipt of $7.4 million
of federal income tax refunds, and an increase in prepaid expenses of $0.8
million. The decrease in accounts receivable was due to a faster collection
cycle during the first quarter and higher sales in the first half of fiscal 2003
from the first half of fiscal 2002, and lower sales in the second quarter of
fiscal 2003 than in the first quarter. The decrease in inventory was largely due
to the use of long lead time materials previously purchased and needed to
fulfill customers' long-term purchase orders. The number of days that sales were
outstanding in accounts receivable increased to 56 days at September 29, 2002
from 55 days at March 31, 2002, while inventory turnover remained unchanged at
1.9 turns over the same time period. Current liabilities decreased $12.9
million, primarily due to decreases in accounts payable, other accrued expenses,
accrued income taxes, and liabilities of discontinued operations which were
offset by an increase in the current portion of long-term debt as a result of
the refinancing of our prior senior credit agreement, which is discussed below.
CREDIT FACILITY. On August 7, 2002, we entered into a $34.0 million senior
credit facility, consisting of a $13.5 million, asset based, revolving credit
facility and a $6.5 million Term Loan A from The CIT/Business Credit Group,
Inc., and a $14.1 million Term Loan B from Ableco Finance LLC. At September 29,
2002, we had the full amount of each of the term loans outstanding and $4.1
million outstanding under the revolving credit facility. This new senior credit
facility, which has a three-year term, is secured by all of our assets, carries
a weighted average interest rate on its full commitment of 9.76% and contains
customary financial covenants and events of default. Initial borrowings under
the new senior credit facility were used to refinance our prior senior credit
agreement. As of the date of this report, we are not in default on any of the
provisions of the new senior credit facility. Subject to limitations relating to
levels of certain assets and reserves for future interest payments, as of
September 29, 2002 we had unused borrowing capacity on the revolving credit
facility of $9.4 million.
SENIOR SUBORDINATED NOTES. On August 30, 2000, we completed a private placement
of $75 million of senior subordinated notes and warrants to purchase shares of
our common stock to a group of institutional investors. We used the proceeds of
the private placement to retire, in full, a $75 million bridge loan held by a
group of lenders led by Fleet National Bank. The senior subordinated notes are
due on August 29, 2005 and bear interest at a rate of 16% per annum, consisting
of 13% cash interest on principal, payable quarterly, and 3% interest on
principal, payable quarterly in "payment-in-kind" ("PIK") promissory notes. We
may prepay the senior subordinated notes after August 29, 2001 at a premium
initially of 9%, declining to 5%, 3%, and 1% on each of the next succeeding
anniversaries of that date. The senior subordinated notes contain customary
financial covenants and events of default, including a cross-default provision
to the Company's senior debt obligations. At September 29, 2002 the principal
balance outstanding on the notes amounted to $80.6 million, which included the
original principal amount plus the "payment-in-kind" notes.
At issuance, the warrants entitled their holders to acquire, in the aggregate,
427,602 shares, or approximately 7%, of our common stock at an exercise price of
$9.93 a share. This exercise price represents the average daily closing price of
our common stock on the New York Stock Exchange for the thirty- (30) days
preceding the completion of the private placement. The warrants must be
exercised by August 29, 2010.
Effective with the refinancing of our prior senior credit agreement with our new
senior credit facility on August 7, 2002, the holders of our senior subordinated
notes agreed to amend the notes. Under the amended senior subordinated notes, we
paid an amendment fee equal to 1% of the outstanding balance of the notes by
issuing additional notes and agreed to increase the PIK interest rate on the
notes by 2% effective January 1, 2003, with such rate increasing 0.25% each
quarter until we retire the notes. Additionally, we amended the terms of the
warrants to reduce the exercise price of each warrant to provide the holders
with a minimum profit on the exercise of the warrants equal to $5.00 per share
if the warrants are exercised and sold prior to December 31, 2002. This could
result in a reduction of our proceeds from the exercise of the warrants by up
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to $2.1 million. If the warrants remain outstanding after December 31, 2002,
their exercise price will be reduced to $0.01 per share. In addition, the
amended warrants contain a "put" right that allows the holders to cause us to
purchase the warrants at a price of $5.00 per underlying share upon the
occurrence of certain "liquidity events," including the sale of our company or
either of our aerospace units.
Since the warrants are now considered derivative financial instruments for
purposes of generally accepted accounting principles, during the quarter ended
September 29, 2002, we recorded the value of the warrants as a charge to
shareholders' equity of $4.55 million with a corresponding credit to a long-term
liability. The amount of the charge was determined by measuring the difference
between the $0.01 per share potential exercise price and the market value of a
share of common stock on August 7, 2002. By September 29, 2002, the share price
of our common stock had risen to $13.46, compared to $10.64 on August 7, which
resulted in a mark-to-market charge to operating results of $1.2 million. Until
the provisions of the amended warrants that enable their holders to "put" the
warrants to us for $5.00 per share are extinguished, we will mark the warrants
to market and will recognize the corresponding income or loss in our Statement
of Consolidated Operations. Upon the termination of the put rights, the original
amount of the liability and the adjustment to paid in capital, as increased or
decreased by the amounts of any income or expense recognized from the
mark-to-market adjustments, will be reversed out of the liability and will be
credited to paid in capital.
If we do not retire our senior subordinated notes and repurchase the warrants by
December 31, 2002, we may thereafter have 427,602 additional shares outstanding
in computing earnings per share, a dilution factor of approximately 7%. Our
maximum cash exposure related to these warrants and their put rights, if any, is
the $2.1 million that would be required to redeem the warrants or the underlying
shares if there were a sale of our entire company or either of our aerospace
units.
CAPITAL EXPENDITURES. Our capital expenditures were $0.3 million in the second
quarter of fiscal 2003, compared to $0.1 million spent in the same period last
year. For the first six months of fiscal 2003, capital spending was $0.6
million, compared to $0.1 million in first half of the prior fiscal year. In
fiscal 2003, we expect total capital expenditures to be less than $1.0 million.
Projects budgeted in fiscal 2003 include refurbishment of the Breeze Eastern
offices, the purchase of new production machinery at the Norco facility, and the
initial phase of installing a new ERP system at Breeze Eastern.
We have divested or plan to divest nine businesses since March 31, 2001. Under
the terms of the agreements associated with the sales of those businesses, we
have agreed to indemnify the purchasers for certain damages that might arise in
the event that a representation we made with respect to the divested business is
found to have contained a material misstatement, subject in each case to a
customary cap on the indemnification amount and customary limitations on the
survivability of the representations made. As of the date of this report, we
have no unresolved claims for indemnification with respect to any of these
divested businesses that aggregate more than $0.1 million. Additionally, the
terms of such divestiture agreements generally require the calculation of
purchase price adjustments based upon the amount of working capital or net
assets transferred at the closing date. In the case of each divestiture
completed as of the filing date, all purchase price adjustments have been agreed
and paid.
INFLATION. While neither inflation nor deflation has had, and we do not expect
it to have, a material impact upon operating results, we cannot assure you that
our business will not be affected by inflation or deflation in the future.
ENVIRONMENTAL MATTERS. During the fourth quarter of fiscal 2000, we presented an
environmental cleanup plan for a portion of a site in Pennsylvania, which we
continue to own, although the related business has been sold. We submitted this
plan pursuant to the Consent Order and Agreement with the Pennsylvania
Department of Environmental Protection, or PaDEP, concluded in fiscal 1999.
Pursuant to the execution of the Consent Order, we paid $0.2 million for past
costs, future oversight expenses and in full settlement of
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claims made by PaDEP related to the environmental remediation of the site with
an additional $0.2 million paid in fiscal 2001. A second Consent Order was
concluded with PaDEP in the third quarter of fiscal 2001 for another portion of
the site, and a third Consent Order for the remainder of the site is
contemplated by December 31, 2002. We are also administering an agreed
settlement with the Federal government under which the government pays 50% of
the environmental response costs associated with a portion of the site. We have
also reached an agreement in principle with the Federal government and are in
the process of finalizing the necessary documentation under which the Federal
government will pay 45% of the environmental response costs associated with
another portion of the site. At September 29, 2002, our cleanup reserve was $1.8
million based on the net present value of future expected cleanup costs. We
expect that remediation at the Pennsylvania site will not be completed for
several years.
We also continue to participate in environmental assessments and remediation
work at nine other locations, which include operating facilities, facilities for
sale, and previously owned facilities. We estimate that our potential costs for
implementing corrective action at these sites will not exceed $0.4 million
payable over the next several years, and have provided for the estimated costs
in the accrual for environmental liabilities.
In addition, we have been named as a potentially responsible party in eight
environmental proceedings pending in several other states. Each of these
proceedings alleges that we were a generator of waste that was sent to landfills
and other treatment facilities and, as to several sites, it is alleged we were
an owner or operator. These properties generally relate to businesses that have
been sold or discontinued. We estimate that our future costs and our
proportional share of remedial work to be performed associated with these
proceedings will not exceed $0.1 million and have provided for these estimated
costs as an accrual for environmental liabilities.
LITIGATION. We are also engaged in various other legal proceedings incidental to
our business. It is the opinion of management that, after taking into
consideration information furnished by our counsel, the above matters will have
no material effect on our consolidated financial position or the results of our
operations in future periods.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred and
the associated asset retirement to be capitalized as part of the carrying amount
of the long-lived asset. SFAS 143 is effective for years beginning after June
15, 2002. We are currently evaluating the effect, if any, that the adoption of
SFAS 143 will have on our consolidated financial position, results of operations
and cash flows.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). We are in the process
of evaluating the effect that adopting SFAS 145 will have on our financial
statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will be
effective for disposal activities we initiate after December 31, 2002. We are in
the process of evaluating the effect that adopting SFAS 146 will have on our
financial statements.
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SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of our contractual cash obligations for
the next several years:
2008 AND
(DOLLARS IN MILLIONS) 2003 2004 2005 2006 2007 THEREAFTER TOTAL
------ ------ ------ ------ ------ ---------- ------
Long-Term Debt -- 10,050 8,800 84,080 -- -- 102,930
Operating Leases 911 415 108 63 37 2 1,536
Other Long-Term Contracts -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total 911 10,465 8,908 84,143 37 2 104,466
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are exposed to various market risks, primarily changes in interest rates.
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency exchange rates and interest rates.
Because the warrants we issued in conjunction with our senior subordinated notes
are now considered, for purposes of generally accepted accounting principles, to
be financial derivatives, we are exposed to changes in our share price. While
this exposure has no cash consideration or exposure associated with it, changes
in our share price may result in material mark-to-market losses or gains in our
consolidated results of operations and balance sheet accounts.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Also, the Company has investments in certain
unconsolidated entities. As the Company does not control or manage these
entities, its disclosure controls and procedures with respect to such entities
are necessarily substantially more limited than those it maintains with respect
to its consolidated subsidiaries.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company`s
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the forgoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are engaged in various legal proceedings incidental to our business. It is
the opinion of management that, after taking into consideration information
furnished by our counsel, these matters will not have a material effect on our
consolidated financial position or the results of our operations in future
periods.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our annual stockholders' meeting, held on July 18, 2002, all seven of our
directors nominated for reelection were reelected for a term of one year.
The results of the voting on the election of directors were as follows:
VOTES
FOR ABSTENTIONS
--------- -----------
Daniel Abramowitz 5,231,286 51,972
Gideon Argov 5,228,786 54,472
Michael J. Berthelot 5,084,294 198,964
Thomas V. Chema 5,158,236 125,022
Jan Naylor Cope 5,157,336 125,922
John Dalton 5,161,736 121,522
William Recker 5,229,532 53,726
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) A report on Form 8-K was filed on August 22, 2002 to report the completion
of the refinancing of the Company's Senior Debt with The CIT/Business
Credit Group, Inc. and Ableco Finance LLC.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSTECHNOLOGY CORPORATION
(Registrant)
Dated: November 12, 2002 By: /s/Joseph F. Spanier
-------------------------------------
JOSEPH F. SPANIER, Vice President
Treasurer and Chief Financial Officer*
* On behalf of the Registrant and as Principal Financial and Accounting
Officer.
27
CERTIFICATION
I, Michael J. Berthelot, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TransTechnology
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Michael J. Berthelot
--------------------------------
Michael J. Berthelot
Chairman of the Board, President
and Chief Executive Officer
28
CERTIFICATION
I, Joseph F. Spanier, certify that:
1. I have reviewed this quarterly report on Form 10-Q of TransTechnology
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ Joseph F. Spanier
--------------------------------
Joseph F. Spanier
Chief Financial Officer
29