Back to GetFilings.com
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 June 29, 2003
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
Union, New Jersey 07083
(Address of principal executive offices) (Zip Code)
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
As of August 8, 2003, the total number of outstanding shares of
registrant's one class of common stock was 6,490,473.
TRANSTECHNOLOGY CORPORATION
INDEX
PART I. Financial Information Page No.
--------
Item 1. Financial Statements........................................ 2
Statements of Consolidated Operations--
Three Month Periods Ended June 29, 2003
and June 30, 2002........................................... 3
Consolidated Balance Sheets--
June 29, 2003 and March 31, 2003............................ 4
Statements of Consolidated Cash Flows--
Three Month Periods Ended June 29, 2003 and
June 30, 2002............................................... 5
Notes to Consolidated Financial Statements.................. 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 12-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 20
Item 4. Controls and Procedures..................................... 20
PART II. Other Information
Item 1. Legal Proceedings........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 21
SIGNATURES........................................................... 21
EXHIBIT 31.1.......................................................... 22
EXHIBIT 31.2.......................................................... 23
EXHIBIT 32............................................................ 24
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Statements of Consolidated Operations, Consolidated
Balance Sheets, and Statements of 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 June
29, 2003, 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, 2003.
Information provided herein for the three month period June 30, 2002, has been
reclassified to give effect to the reporting of the Company's former wholly
owned subsidiary, Norco, Inc., as discontinued operations as discussed in Note 5
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
---------------------------------
JUNE 29, 2003 JUNE 30, 2002
------------- -------------
Net sales $ 16,119 $ 13,887
Cost of sales 8,772 7,676
----------- -----------
Gross profit 7,347 6,211
General, administrative
and selling expenses 3,771 3,602
Interest expense 2,503 2,116
Interest and other income - net (47) (37)
Forbearance fees -- 764
----------- -----------
Income (loss) from continuing operations
before income taxes 1,120 (234)
Provision for income taxes (benefit) 426 (91)
----------- -----------
Income (loss) from continuing operations 694 (143)
Discontinued operations:
Loss on disposal of discontinued businesses
(less applicable income tax benefit of $388
for the three month period
ended June 30, 2002) -- (607)
----------- -----------
Net income (loss) $ 694 $ (750)
=========== ===========
Basic earnings (loss) per share:
Income (loss) from continuing operations $ 0.10 $ (0.02)
Loss from discontinued operations -- (0.10)
----------- -----------
Net income (loss) $ 0.10 $ (0.12)
=========== ===========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.10 $ (0.02)
Loss from discontinued operations -- (0.10)
----------- -----------
Net income (loss) $ 0.10 $ (0.12)
=========== ===========
Number of shares used in computation
of per share information: (Note 1)
Basic 6,631,000 6,192,000
Diluted 6,631,000 6,192,000
See accompanying notes to unaudited consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Data)
(UNAUDITED)
JUNE 29, 2003 MARCH 31, 2003
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,058 $ 7,104
Accounts receivable (net of allowance for doubtful accounts
of $68 at June 29, 2003 and $65 at March 31, 2003) 8,139 6,701
Inventories 19,444 19,683
Prepaid expenses and other current assets 710 1,364
Income tax receivable 330 363
Deferred income taxes 1,289 1,289
-------- --------
Total current assets 33,970 36,504
-------- --------
Property, plant and equipment 12,764 12,721
Less accumulated depreciation 10,481 10,372
-------- --------
Property, plant and equipment - net 2,283 2,349
-------- --------
Other assets:
Deferred income taxes 30,342 30,712
Other 15,243 15,558
-------- --------
Total other assets 45,585 46,270
-------- --------
Total $ 81,838 $ 85,123
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt $ 79 $ 79
Accounts payable - trade 3,830 4,954
Accrued compensation 1,828 2,847
Accrued income taxes 1,221 2,460
Other current liabilities 13,748 15,003
-------- --------
Total current liabilities 20,706 25,343
-------- --------
Long-term debt payable to banks and others 54,187 53,487
-------- --------
Deferred income taxes 1,598 1,332
-------- --------
Other long-term liabilities 10,602 11,601
-------- --------
Redeemable common stock -- 1,283
-------- --------
Stockholders' deficit:
Preferred stock - authorized, 300,000 shares; none issued -- --
Common stock - authorized, 14,700,000 shares of $.01 par value;
issued 7,026,393 at June 29, 2003, and 7,018,299 at March 31, 2003 70 70
Additional paid-in capital 76,280 74,283
Accumulated deficit (72,293) (72,993)
Unearned compensation (72) (43)
-------- --------
3,985 1,317
Less treasury stock, at cost - (560,964 shares at June 29, 2003
and March 31, 2003) (9,240) (9,240)
-------- --------
Total stockholders' deficit (5,255) (7,923)
-------- --------
Total $ 81,838 $ 85,123
======== ========
See accompanying notes to unaudited consolidated financial statements.
4
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(In Thousands of Dollars)
THREE MONTHS ENDED
-----------------------------
JUNE 29, 2003 JUNE 30, 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 694 $ (750)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Loss from discontinued operations -- 607
Depreciation and amortization 412 421
Net change in assets of discontinued companies -- (1,462)
Noncash interest expense 749 636
Increase (decrease) in provision for bad debt 3 (201)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable and other receivables (1,408) 6,569
Decrease in inventories 239 424
Decrease (increase) in deferred taxes net 370 (14)
Decrease in other assets 686 1,779
Decrease in accounts payable (1,124) (1,293)
Decrease in accrued compensation (1,019) (386)
Decrease in income taxes payable (973) (398)
Decrease in other liabilities (1,633) (4,661)
------- -------
Net cash (used in) provided by operating activities (3,004) 1,271
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (43) --
Proceeds from sales of businesses -- 6,100
------- -------
Net cash (used in) provided by investing activities (43) 6,100
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on debt, net -- (7,130)
Exercise of stock options and other 1 (15)
------- -------
Net cash provided by (used in) financing activities 1 (7,145)
------- -------
(Decrease) increase in cash and cash equivalents (3,046) 226
Cash and cash equivalents at beginning of period 7,104 97
------- -------
Cash and cash equivalents at end of period $ 4,058 $ 323
======= =======
Supplemental information:
Interest payments $ 1,727 $ 4,621
Income tax payments $ 1,029 $ 185
Increase in senior subordinated note for paid-in-kind
interest expense $ 700 $ 590
Increase in additional paid in capital from warrant put expiration $ 1,954 --
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 income (loss)
by the weighted-average number of shares outstanding. Diluted earnings
(loss) per share is computed by dividing net income (loss) by the sum of
the weighted-average number of shares outstanding plus the dilutive effect
of shares issuable through the exercise of stock options and warrants.
The components of the denominator for basic earnings (loss) per common
share and diluted earnings (loss) per common share are reconciled as
follows:
Three Months Ended
----------------------------
June 29, June 30,
2003 2002
-------- --------
Basic Earnings (Loss) per
Common Share:
Weighted-average
common stock outstanding
for basic earnings
(loss) per share calculation 6,631 6,192
======== ========
Diluted Earnings (Loss) per
Common Share:
Weighted-average
common shares
outstanding 6,631 6,192
Stock options and
warrants* -- --
-------- --------
Weighted-average common
stock outstanding for
diluted earnings (loss) per
share calculation 6,631 6,192
======== ========
6
* Not including anti-dilutive stock options totaling 415 for the three month
period ended June 29, 2003, and 265 for the three month period ended June
30, 2002, respectively. Also excluding anti-dilutive warrants totaling 428
for the three month period ended June 30, 2002.
NOTE 2. Comprehensive Income (Loss)
Comprehensive income (loss) for the three month periods ended June 29,
2003 and June 30, 2002 is summarized below.
Three Months Ended
-----------------------------------
June 29, 2003 June 30, 2002
------------- -------------
Net income (loss) $694 $(750)
Other comprehensive
loss, net
of tax:
Foreign currency
translation -- (163)
------- --------
Total comprehensive
income (loss) $694 $(913)
======== ========
NOTE 3. Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations. Accordingly, the Company
records expense in an amount equal to the excess, if any, of the quoted market
price on the grant date over the option price.
The following table includes as reported and proforma information required by
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure ("SFAS No. 148"). Proforma information is
based on the fair value method under SFAS No. 123.
7
Three Months Ended
-----------------------------
June 29, 2003 June 30, 2002
------------- -------------
Net income (loss) as reported $ 694 $ (750)
Deduct: Total stock-based
compensation expense
determined under fair value
based method, net of taxes (39) (56)
------- -------
Proforma net income (loss) $ 655 $ (806)
======= =======
Basic earnings (loss) per share:
As reported $ 0.10 $ (0.12)
Proforma $ 0.10 $ (0.13)
Diluted earnings (loss) per share:
As reported $ 0.10 $ (0.12)
Proforma $ 0.10 $ (0.13)
NOTE 4. Inventories
Inventories are summarized as follows:
June 29, 2003 March 31, 2003
------------- --------------
Finished goods $ 2 $ 2
Work in process 5,789 6,105
Purchased and
manufactured parts 13,653 13,576
------- -------
Total $19,444 $19,683
======= =======
8
NOTE 5. Discontinued Operations
During fiscal 2001, the Company implemented a restructuring plan to focus its
resources and capital on the aerospace and defense products business and exit
the specialty fastener segment. As a result, discontinued operations includes
all of the remaining operations related to its specialty fastener segment and
Norco, Inc., the net assets of which were sold on February 24, 2003.
Net sales and losses from the discontinued operations were as follows:
Three Months Ended
June 30, 2002
------------------
Net sales $ 19,606
========
Loss from
discontinued operations before
income taxes $ (995)
Income tax benefit 388
--------
Loss from discontinued
operations $ (607)
========
The reported $0.6 million loss from discontinued operations for the three
month period ended June 30, 2002 included operating income from
discontinued businesses of $2.0 million; allocated interest expense of
$1.7 million, a $1.1 million noncash charge to recognize additional
charges to reflect the amounts ultimately expected to be received from
sales and a non-cash charge of $0.2 million from the final settlement of
interest rate swap contracts, which were offset by a tax benefit of $0.4
million.
NOTE 6. Long-term Debt Payable to Banks and Others
Long-term debt payable to banks and others, including current maturities,
consisted of the following:
June 29, 2003 March 31, 2003
------------- --------------
Senior Subordinated Notes 18.25% $54,029 $53,329
Other 237 237
------- -------
54,266 53,566
Less current maturities 79 79
------- -------
Total long-term debt $54,187 $53,487
======= =======
9
CREDIT FACILITIES - At June 29, 2003, the Company had a senior credit facility
consisting of a $13.5 million asset based revolving credit facility, which was
established in August 2002 (the "New Senior Credit Facility") to refinance all
remaining obligations outstanding under the prior senior credit facility. An
amendment to the New Senior Credit Facility on August 5, 2003, reduced the
amount of the facility to $8.0 million, reset the covenants and events of
default to reflect the divestitures which had taken place since the original
establishment of the facility in August 2002, reset the maturity date to January
31, 2004, and established a current interest rate of approximately 5.0%. The New
Senior Credit Facility is secured by all of the Company's assets. The Company is
in compliance with the provisions of the facility. There were no borrowings
outstanding under the facility at June 29, 2003.
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, as amended in
August 2002, are due on August 29, 2005 and bear interest at a rate of 18% per
annum consisting of 13% cash interest on principal, payable quarterly, and 5%
interest on principal, payable quarterly in "payment-in-kind" ("PIK") promissory
notes. The PIK portion of the interest rate increases 0.25% each quarter until
the Company retires the 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 our senior debt obligations. At June 29, 2003, the principal balance
outstanding on the notes amounted to $54.0 million, which included the original
principal amount plus the PIK notes. At March 31, 2003 the Company reported
redeemable common stock in the amount of $1.3 million representing the per share
put right (257,000 shares at $5.00 per share) held by certain Purchasers who had
exercised their warrants. The put right on approximately 211,000 shares expired
on June 24, 2003 and, accordingly, the Company reclassified $1.1 million from
redeemable common stock to additional paid-in capital with the remainder of the
redeemable common stock being reclassified to long term debt to reflect the
exercise of the put by a Purchaser. Subsequent to the end of the quarter, the
Purchaser revoked the put exercise and that portion will be reclassified to paid
in capital in the second quarter. In addition, the put right on 171,041 warrants
expired and, accordingly, $0.9 million representing the cash value of the put
right on these warrants was reclassified from a liability account to additional
paid-in capital. At June 29, 2003, there were 171,041 Warrants outstanding which
are each convertible into common stock at the price $.01 per warrant. All of the
Warrants were considered to be common stock equivalents for the purpose of
calculating earnings per share at June 29, 2003.
The Company has long-term debt maturities of $0.1 million, $54.1 million, and
$0.1 million in 2004, 2005 and 2006, respectively.
NOTE 7. New Accounting Standards
In May 2003 FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," that improves
the accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. SFAS 150 requires that those instruments be
classified as liabilities in the balance sheet. This statement is effective for
the Company's fiscal quarter beginning June 30, 2003. The Company does not
believe adoption of this standard will have a material impact on its financial
position or results of operations.
10
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" that amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Statement 133.
With certain exceptions, SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designed after June
30, 2003. The Company does not believe adoption of this standard will have a
material impact on its financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. As the Company does not have this type of
entity, the adoption of this statement is not expected to have a material effect
on the Company's financial position or results of operations.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure"
("SFAS 148") which amends SFAS No. 123. This statement provides alternative
methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS No. 123. The transition guidance and disclosure
requirements are effective for fiscal years ending after December 15, 2002. The
Company has adopted the disclosure requirements and expects that the adoption of
this statement will not have a material effect on the Company's financial
position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". This interpretation requires a guarantor to recognize,
at the inception of the guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. It also enhances guarantor's
disclosure requirements to be made in its interim and annual financial
statements about its obligations under certain guarantees it has issued. The
initial recognition and initial measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. In the
normal course of business, the Company does not issue guarantees to third
parties; accordingly, this interpretation will not have an effect on its
financial position or results of operations.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We design, develop, and manufacture sophisticated lifting equipment for
specialty aerospace and defense applications. With over 50% of the global
market, we have long been recognized as the world's largest designer and leading
supplier of performance-critical rescue hoists and cargo-hook systems. We also
manufacture weapons-handling systems, cargo winches, tie-down equipment, and
tow-hook assemblies. Marketed under the trade name "Breeze-Eastern", our
products are designed to be efficient and reliable in extreme operating
conditions. Our equipment is used to complete rescue operations and military
insertion/extraction operations, move and transport cargo, and load weapons onto
aircraft and ground-based launching systems.
Beginning in fiscal 2001, we implemented a restructuring plan to focus our
resources and capital on our specialty aerospace and defense products business
and exit the specialty fastener segment. On February 24, 2003, we completed the
sale of the business and substantially all of the assets of our subsidiary,
Norco, Inc., to Marathon Power Technologies Company, a division of TransDigm
Inc., for cash consideration of $51.0 million, subject to post-closing
adjustments. This transaction completed our divestiture program. As a result,
our discontinued operations for the three months ended June 30, 2002 includes
Norco and all of the operations related to our Specialty Fastener segment
including the TransTechnology Engineered Rings retaining rings businesses,
Aerospace Rivet Manufacturers Corp. and TCR Corporation. Of the operations
included in discontinued operations prior to fiscal 2003, only TransTechnology
Engineered Rings USA, TransTechnology (GB), TransTechnology Brasil, Aerospace
Rivet Manufacturers Corp., TCR Corporation and Norco, Inc. were carried into
fiscal 2003.
All discussions related to our ongoing operations, or to TransTechnology
Corporation, which include our results of operations, refer only to continuing
operations, which consists of our Breeze-Eastern division. We discuss our
discontinued operations separately under the heading " -- Divestitures and
Discontinued Operations."
All references to fiscal 2004 in this Management's Discussion and Analysis of
Financial Condition and Results of Operations refer to the fiscal year ending
March 31, 2004, and all references to fiscal 2003, 2002, and 2001 refer to the
fiscal years ended March 31.
DIVESTITURES AND DISCONTINUED OPERATIONS
During fiscal 2001, we implemented a restructuring plan to focus our resources
and capital on our aerospace and defense 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. Our discontinued
operations also include Norco, Inc., which we previously included in our
aerospace and defense products segment.
On April 16, 2002, we sold Aerospace Rivet Manufacturers Corporation to Allfast
Fastening Systems, Inc. for $3.2 million in cash. We used the net proceeds of
the sale to repay borrowings outstanding under our prior senior credit
agreement.
12
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 in 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 intercompany 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 intracompany debt due
from the Brazilian unit. We used the net proceeds of the sale to repay
borrowings outstanding under our prior senior credit agreement.
On January 3, 2003, we completed the sale of the business and substantially all
of the assets of our wholly owned subsidiary, TCR Corporation, to a newly formed
affiliate of Mid-Mark Capital LLC for $10.0 million in cash. We used the net
proceeds of the sale to repay borrowings outstanding under our new senior credit
facility.
On February 24, 2003, the Company sold Norco Inc. for $51.0 million cash and a
$1.0 million reimbursement for certain income taxes payable as a result of the
transaction to a wholly owned subsidiary of TransDigm Inc. The net cash proceeds
were used to retire senior debt under the new senior credit facility and
partially repay subordinated debt.
For the first quarter of fiscal 2003 the $0.6 million loss from discontinued
operations included actual operating income of $2.0 million from discontinued
operations, allocated interest expense of $1.7 million, a $1.1 million charge to
reflect the amounts ultimately realized from sales of discontinued business
units, a cash charge of $0.2 million from the final settlement of our interest
rate swap contracts, and a tax benefit of $0.4 million.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 29, 2003 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2002
Net sales. Our sales increased to $16.1 million for the first quarter of fiscal
2004, a 16% increase over sales of $13.9 million for the first quarter of fiscal
2003. This increase in sales is the result of higher shipments of hoists and
weapons handling equipment for military agencies.
Gross profit. Gross profit increased 18% to $7.3 million for the first quarter
of fiscal 2004 from $6.2 million for the first quarter of fiscal 2003.
Generally, repair and overhaul services and spare parts sales have higher gross
margins than sales of new equipment or engineering services. As a result of a
sales mix that was more heavily weighted in favor of aftermarket sales due to
the timing of shipments to meet customer demands, we recorded slightly higher
gross margins for the first quarter of fiscal 2004. This margin improvement from
product mix, however, was partially offset by lower than normal gross margins on
the HLU-196 Bomb Hoist, a product that was shipped for the first time during the
third quarter of fiscal 2003. While the gross margins recognized on the initial
shipments of the HLU-196 were lower than historical gross margins, they were
higher than the budgeted gross margins due to the realization of manufacturing
efficiencies not originally expected in the initial production lots. As a result
of the lower gross margins experienced on the HLU-196,
13
we expect future gross margins to be lower than those historically reported.
Generally, we cannot predict changes in our product mix between aftermarket
sales and new equipment sales for any given period because the changes result
primarily from the timing of our customers' orders, over which we have little
control.
General, administrative and selling expenses. General, administrative and
selling expenses increased 5% to $3.8 million in the first quarter of fiscal
2004 from $3.6 million in the first quarter of fiscal 2003. This increase was
primarily due to increased engineering spending and a $0.4 million charge
associated with the resolution of a claim from the sale of a business unit
several years ago offset by a decrease in corporate office expenses during
fiscal 2004 which was primarily due to the restructuring of the corporate office
that began in the fourth quarter of fiscal 2001.
Operating income. Operating income (gross profit less general, administrative
and selling expenses) increased 37% to $3.6 million in the first quarter of
fiscal 2004 from $2.6 million in the first quarter of fiscal 2003. This increase
mainly was due to a more favorable mix of repair, overhaul and spare parts
business, a higher sales volume, the benefit of spreading fixed costs over a
larger sales volume, and the reduction in corporate office expenses.
Interest expense. Interest expense increased $0.4 million to $2.5 million in the
first quarter of fiscal 2004 from $2.1 million in the first quarter of fiscal
2003, as a result of the allocation formula we are required to use under GAAP to
apportion interest expense between continuing and discontinued operations. We
base this allocation formula upon the net asset balances attributable to
continuing and discontinued operations. Total interest expense for the first
quarter of fiscal 2004 decreased $1.4 million to $2.5 million from $3.9 million
for the first quarter of fiscal 2003 due to the retirement of debt with the
proceeds from divestitures and other internally generated sources of cash.
Forbearance fees. During the first quarter of fiscal 2003, we incurred an
expense of $0.8 million for forbearance fees we paid to our lenders under our
prior senior credit agreement in exchange for their agreement not to pursue any
actions against us for violating certain financial covenants. No such fees were
incurred in fiscal 2004.
Net income. We earned net income of $0.7 million in the first quarter of fiscal
2004, versus a loss of $0.8 million in the first quarter of fiscal 2003, which
primarily resulted from the reasons discussed above.
New orders. New orders received in the first quarter of fiscal 2004 totaled
$21.7 million, which represents a 25% increase from new orders of $17.3 million
in the first quarter of fiscal 2003. New orders for hoists, cargo hooks and
weapons handling equipment were particularly strong in the first quarter of
fiscal 2004.
Backlog. Backlog at June 29, 2003 was $51.8 million, up $5.6 million from $46.2
million at March 31, 2003. We measure backlog by the amount of products or
services that our customers have committed by contract to purchase from us as of
a given date. Our book to bill ratio for the first quarter of fiscal 2004 was
1.35, compared to 1.25 for the first quarter of fiscal 2003. Cancellations of
purchase orders or reductions of product quantities in existing contracts,
although seldom occurring, could substantially and materially reduce our
backlog. Therefore, our backlog may not represent the actual amount of shipments
or sales for any future period.
14
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements depend on a number of factors, many of which are
beyond our control, including the timing of production under our long-term
contracts with the U.S. Government. Although we have infrequently received
payments on these government contracts based on performance milestones as is the
case with our contract with the U.S. Navy for the HLU-196 Bomb Hoist, our
working capital needs fluctuate between periods as a result of changes in
program status and the timing of payments by program. Additionally, as our sales
are generally made on the basis of individual purchase orders, our liquidity
requirements vary based on the timing and volume of these orders.
Our restructuring and divestiture program has had a substantial impact upon our
financial condition through June 29, 2003, as we reduced debt with the proceeds
of the divestitures and lowered costs as a result of the corporate office
restructuring. At June 29, 2003, there was no indebtedness outstanding under our
New Senior Credit Facility.
As previously reported, the New York Stock Exchange (NYSE) notified us that the
company had fallen below the NYSE continued listing standards requiring total
market capitalization of not less than $50 million over a 30-day trading period
and total stockholders' equity of not less than $50 million. We submitted to the
NYSE a plan to comply with the listing standards, and announced on July 7, 2003
that the NYSE has accepted the company's proposed plan.
WORKING CAPITAL
Our working capital at June 29, 2003, was $13.3 million, compared to $11.2
million at March 31, 2003. The ratio of current assets to current liabilities
was 1.6 to 1.0 at June 29, 2003, compared to 1.4 to 1.0 at March 31, 2003.
Working capital changes during the first quarter of fiscal 2004, resulted from
an increase in accounts receivable of $1.4 million, a decrease in inventories of
$0.2 million and a decrease in prepaid expenses and other current assets of $0.7
million. The increase in accounts receivable was due to strong sales in the
first quarter fiscal 2004. The decrease in inventory was largely due to
increased sales. The decrease in prepaid expenses was due primarily to receipt
of a cash payment related to a divestiture. The number of days that sales were
outstanding in accounts receivable increased to 33.0 days at June 29, 2003, from
31.8 days at March 31, 2003. Inventory turnover increased to 1.80 turns from
1.55 turns for fiscal 2003. Current liabilities decreased $4.3 million,
primarily due to the payment of state income taxes relating to the sale of
Norco, Inc., and payments for incentive and retirement plans.
CAPITAL EXPENDITURES
Our capital expenditures were $43 thousand for the first quarter of fiscal 2004,
compared to zero for the first quarter of fiscal 2003. Projects budgeted in
fiscal 2004 include refurbishment of the offices and the initial phase of
installing a new ERP system.
In fiscal 2004, capital expenditures are expected to be in a range of $1.1 - 1.4
million.
15
SENIOR CREDIT FACILITY
At June 29, 2003, we had a senior credit facility consisting of a $13.5 million
asset based revolving credit facility which was established in August 2002 (the
"New Senior Credit Facility") to refinance all remaining obligations outstanding
under our prior senior credit facility. An amendment to the New Senior Credit
Facility on August 5, 2003, reduced the amount of the facility to $8.0 million,
reset the covenants and events of default to reflect the divestitures which had
taken place since the original establishment of the facility in August 2002,
reset the maturity date to January 31, 2004, and established a current interest
rate of approximately 5.0%. The New Senior Credit Facility is secured by all of
our assets. We are in compliance with the provisions of the facility. There were
no borrowings outstanding under the facility at June 29, 2003.
SENIOR SUBORDINATED NOTES
On August 30, 2000, we completed a private placement of $75 million of senior
subordinated notes (the "Notes") and warrants to purchase shares of our common
stock (the "Warrants") to a group of institutional investors (collectively, the
"Purchasers"). 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 Notes, as amended in August 2002, are due on August 29, 2005 and bear
interest at a rate of 18% per annum consisting of 13% cash interest on
principal, payable quarterly, and 5% interest on principal, payable quarterly in
"payment-in-kind" ("PIK") promissory notes. The PIK portion of the interest rate
increases 0.25% each quarter until we retire the notes. We 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 our senior debt obligations. At June 29, 2003, the principal
balance outstanding on the notes amounted to $54.0 million, which included the
original principal amount plus the PIK notes. At March 31, 2003 we reported
redeemable common stock in the amount of $1.3 million representing the per share
put right (257,000 shares at $5.00 per share) held by certain Purchasers who had
exercised their warrants. The put right on approximately 211,000 shares expired
on June 24, 2003 and, accordingly, we reclassified $1.1 million from redeemable
common stock to additional paid-in capital with the remainder of the redeemable
common stock being reclassified to long term debt to reflect the exercise of the
put by a Purchaser. Subsequent to the end of the quarter, the Purchaser revoked
the put exercise and that portion will be reclassified to paid in capital in the
second quarter. In addition, the put right on 171,041 warrants expired and,
accordingly, $0.9 million representing the cash value of the put right on these
warrants was reclassified from a liability account to additional paid-in
capital. At June 29, 2003, there were 171,041 Warrants outstanding which are
each convertible into common stock at the price $.01 per warrant. All of the
Warrants were considered to be common stock equivalents for the purpose of
calculating earnings per share at June 29, 2003.
We have long-term debt maturities of $0.1 million, $54.1 million and $0.1
million in 2004, 2005 and 2006, respectively.
Our operations require significant amounts of cash, and we may be required to
seek additional capital, whether from selling equity or borrowing money, for the
future growth and development of our business or to fund our operations and
inventory, particularly in the event of a market downturn. Although currently we
have the ability to borrow additional sums under the revolving portion of our
senior credit facility, this facility contains a borrowing base provision and
financial covenants which may limit the amount we can borrow under our senior
credit facility or from other sources. Also, we
16
may not be able to replace or renew our senior credit facility upon its
expiration on terms that are favorable to us. In addition, a number of factors
could affect our ability to access debt or equity financing, including our
financial strength and credit rating, the financial market's confidence in our
management team and financial reporting, general economic conditions, the
conditions in the defense and aerospace industries and overall capital market
conditions.
Even if available, additional financing could be costly or have adverse
consequences. If we raise additional funds by issuing stock, dilution to
stockholders may result. If we raise additional funds by incurring debt, we will
incur increased debt servicing costs and may become subject to additional
restrictive financial and other covenants. We can give no assurance as to the
terms or availability of additional capital. If we were not successful in
obtaining sufficient capital, it could reduce our sales and earnings and
adversely impact our financial position and we may not be able to expand or
operate our business as planned.
TAX BENEFITS FROM NET OPERATING LOSSES
At June 29, 2003, we had federal and state net operating loss carryforwards, or
NOLs, of approximately $51.2 million and $73.9 million, respectively, which are
due to expire in 2004 through 2023. These NOLs may be used to offset future
taxable income through their respective expiration dates and thereby reduce or
eliminate our federal and state income taxes otherwise payable. The Internal
Revenue Code of 1986, as amended (the "Code") imposes significant limitations on
the utilization of NOLs in the event of an "ownership change" as defined under
section 382 of the Code (the "Section 382 Limitation"). The Section 382
Limitation is an annual limitation on the amount of pre-ownership NOLs that a
corporation may use to offset its post-ownership change income. The Section 382
Limitation is calculated by multiplying the value of a corporation's stock
immediately before an ownership change by the long-term tax-exempt rate (as
published by the Internal Revenue Service). Generally, an ownership change
occurs with respect to a corporation if the aggregate increase in the percentage
of stock ownership by value of that corporation by one or more 5% shareholders
(including specified groups of shareholders who in the aggregate own at least 5%
of that corporation's stock) exceeds 50 percentage points over a three-year
testing period. We believe that we have not gone through an ownership change
that would cause our NOLs to be subject to the Section 382 Limitation.
SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of our contractual cash obligations for
the next several years:
(DOLLARS IN THOUSANDS) 2008 AND
2004 2005 2006 2007 THEREAFTER TOTAL
------- ------- ------- ------- ---------- -------
Long-Term Debt $ 79 $54,108 $ 79 $ -- $ -- $54,266
Operating Leases 231 116 115 61 22 545
------- ------- ------- ------- ------- -------
Total $ 310 $54,224 $ 194 $ 61 $ 22 $54,811
======= ======= ======= ======= ======= =======
In addition, we have divested ten 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 unresolved claims
17
for indemnification with respect to these divested businesses that aggregate
less than $0.5 million. Additionally, the terms of these 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 the
Corporation continues to own although the related business has been sold. This
plan was submitted pursuant to the Consent Order and Agreement with the
Pennsylvania Department of Environmental Protection ("PaDEP") concluded in
fiscal 1999. Pursuant to the Consent Order, upon its execution we paid $0.2
million for past costs, future oversight expenses and in full settlement of
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 was concluded
in the third quarter of fiscal 2003. 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 June 29, 2003, our cleanup reserve was $2.0
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, including former facilities of the company. We
estimate that the potential cost for implementing corrective action at these
sites will not exceed $0.5 million payable over the next several years, and have
provided for the estimated costs in our accrual for environmental liabilities.
In addition, in the first quarter of fiscal 2003, we entered into a consent
order for a former facility in New York pursuant to which we are developing a
remediation plan for review and approval by the New York Department of
Environmental Conservation. We have established a reserve of $2.5 million for
this site which we believe is adequate.
In addition, we have been named as a potentially responsible party in eight
environmental proceedings pending in several other states in which it is alleged
that we were a generator of waste that was sent to landfills and other treatment
facilities and, as to several sites, it is alleged that we were an owner or
operator. Such properties generally relate to businesses which have been sold or
discontinued. We estimate that the expected future costs, and our estimated
proportional share of remedial work to be performed, associated with these
proceedings will not exceed $0.2 million and we have provided for these
estimated costs in our accrual for environmental liabilities.
LITIGATION - We are also engaged in various other legal proceedings incidental
to our business. It is our opinion 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.
18
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003 FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," that improves
the accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. SFAS 150 requires that those instruments be
classified as liabilities in the balance sheet. This statement is effective for
the Company's fiscal quarter beginning June 30, 2003. We do not believe adoption
of this standard will have a material impact on our financial position or
results of operations.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" that amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under Statement 133.
With certain exceptions, SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designed after June
30, 2003. We do not believe adoption of this standard will have a material
impact on our financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. As we do not have this type of entity, the
adoption of this statement is not expected to have a material effect on our
financial position or results of operations.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure"
("SFAS 148") which amends SFAS No. 123. This statement provides alternative
methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS No. 123. The transition guidance and disclosure
requirements are effective for fiscal years ending after December 15, 2002. Our
company has adopted the disclosure requirements and expects that the adoption of
this statement will not have a material effect on our Company's financial
position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". This interpretation requires a guarantor to recognize,
at the inception of the guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. It also enhances guarantor's
disclosure requirements to be made in its interim and annual financial
statements about its obligations under certain guarantees it has issued. The
initial recognition and initial measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. In the
normal course of business, we do not issue guarantees to third parties;
accordingly, this interpretation will not have an effect on our financial
position or results of operations.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, primarily changes in interest rates
associated with the New Senior Credit Facility under which there are no
borrowings at June 29, 2003.
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.
20
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Form 8-K
On May 7, 2003 the Registrant filed an 8-K which furnished the May 5, 2003
press release announcing its financial results for the fiscal year ended
March 31, 2003.
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: August 12, 2003 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.
21