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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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 30, 2004
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 1-13894
TRANSPRO, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1807383
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 Gando Drive, New Haven, Connecticut 06513
(Address of principal executive offices, including zip code)
(203) 401-6450
(Registrant's telephone number, including area code)
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]
The number of shares of common stock, $.01 par value, outstanding as of August
13, 2004 was 7,106,023.
Exhibit Index is on page 19 of this report.
Page 1 of 24
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INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three and Six 3
Months Ended June 30, 2004 and 2003
Condensed Consolidated Balance Sheets at June 30, 2004 and December 4
31, 2003
Condensed Consolidated Statements of Cash Flows for the Six Months 5
Ended June 30, 2004 and 2003
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results 12
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSPRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three Months Six Months
(in thousands, except per share amounts) Ended June 30, Ended June 30,
--------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net sales $ 72,221 $ 58,302 $ 132,116 $ 111,002
Cost of sales 59,539 49,304 109,175 94,813
--------- --------- --------- ---------
Gross margin 12,682 8,998 22,941 16,189
Selling, general and administrative expenses 10,934 9,680 21,050 20,342
Restructuring and other special charges -- 540 -- 958
--------- --------- --------- ---------
Operating income (loss) 1,748 (1,222) 1,891 (5,111)
Interest expense 880 1,063 1,719 1,912
--------- --------- --------- ---------
Income (loss) before taxes 868 (2,285) 172 (7,023)
Income tax provision (benefit) 65 (1,678) 12 (2,081)
--------- --------- --------- ---------
Net income (loss) $ 803 $ (607) $ 160 $ (4,942)
========= ========= ========= =========
Net income (loss) per common share - basic $ 0.11 $ (0.09) $ 0.02 $ (0.70)
========= ========= ========= =========
- diluted $ 0.11 $ (0.09) $ 0.02 $ (0.70)
========= ========= ========= =========
Weighted average common shares - basic 7,106 7,106 7,106 7,106
========= ========= ========= =========
- diluted 7,313 7,106 7,281 7,106
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
3
TRANSPRO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data) June 30, December 31,
ASSETS 2004 2003
--------- ------------
Current assets:
Cash and cash equivalents $ 251 $ 189
Accounts receivable (less allowances of $2,695 and $2,746) 54,780 46,056
Inventories:
Raw material and component parts 19,848 15,704
Work in process 1,051 1,082
Finished goods 53,715 54,641
--------- ---------
Total inventories 74,614 71,427
--------- ---------
Other current assets 4,945 5,944
--------- ---------
Total current assets 134,590 123,616
--------- ---------
Property, plant and equipment 70,505 68,594
Accumulated depreciation and amortization (46,298) (44,440)
--------- ---------
Net property, plant and equipment 24,207 24,154
--------- ---------
Other assets 8,537 9,408
--------- ---------
Total assets $ 167,334 $ 157,178
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit debt and current portion of long-term debt $ 49,721 $ 49,638
Accounts payable 41,348 32,816
Accrued liabilities 20,118 18,134
--------- ---------
Total current liabilities 111,187 100,588
--------- ---------
Long-term liabilities:
Long-term debt 996 1,306
Other long-term liabilities 11,403 11,664
--------- ---------
Total long-term liabilities 12,399 12,970
--------- ---------
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $.01 par value: Authorized 2,500,000 shares; issued and
outstanding as follows:
Series A junior participating preferred stock, $.01 par value:
Authorized 200,000 shares; issued and outstanding -- none at
June 30, 2004 and December 31, 2003 -- --
Series B convertible preferred stock, $.01 par value:
Authorized 30,000 shares; issued and outstanding; -- 12,781 shares
at June 30, 2004 and December 31, 2003 (liquidation preference $1,278) -- --
Common Stock, $.01 par value: Authorized 17,500,000 shares; 7,147,959
shares issued at June 30, 2004 and December 31, 2003; 7,106,023 shares
outstanding at June 30, 2004 and December 31, 2003 71 71
Paid-in capital 55,041 55,041
Accumulated deficit (6,839) (6,967)
Accumulated other comprehensive loss (4,510) (4,510)
Treasury stock, at cost, 41,936 shares at June 30, 2004 and December 31, 2003 (15) (15)
--------- ---------
Total stockholders' equity 43,748 43,620
--------- ---------
Total liabilities and stockholders' equity $ 167,334 $ 157,178
========= =========
The accompanying notes are an integral part of these statements.
4
TRANSPRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Six Months
(Amounts in thousands) Ended June 30,
--------------------
2004 2003
-------- --------
Cash flows from operating activities:
Net income (loss) $ 160 $ (4,942)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 2,979 3,000
Provision for uncollectible accounts receivable 258 787
Non-cash restructuring charges -- 68
Gain on sale of building (138) (45)
Changes in operating assets and liabilities:
Accounts receivable (8,982) 5,744
Inventories (3,187) (12,002)
Accounts payable 8,532 11,892
Accrued expenses 2,032 (3,029)
Other 1,504 410
-------- --------
Net cash provided by operating activities 3,158 1,883
-------- --------
Cash flows from investing activities:
Capital expenditures, net of sales and retirements (2,533) (1,548)
Net proceeds from sale of building -- 5,178
-------- --------
Net cash (used for) provided by investing activities (2,533) 3,630
-------- --------
Cash flows from financing activities:
Dividends paid (48) (32)
Net borrowings under revolving credit facility 131 66
Repayment of Industrial Revenue Bond -- (5,000)
Repayments of term loan and capital lease obligations (646) (439)
Deferred debt issuance costs -- (33)
-------- --------
Net cash used in financing activities (563) (5,438)
-------- --------
Increase in cash and cash equivalents 62 75
Cash and cash equivalents at beginning of period 189 155
-------- --------
Cash and cash equivalents at end of period $ 251 $ 230
======== ========
Non-cash investing and financing activity:
Entered capital lease obligation $ 288 $ --
======== ========
The accompanying notes are an integral part of these statements.
5
TRANSPRO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial information should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 2003 including the audited financial statements and notes thereto
included therein.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation of consolidated financial position,
consolidated results of operations and consolidated cash flows have been
included in the accompanying unaudited condensed consolidated financial
statements. All such adjustments are of a normal recurring nature.
NOTE 2 - STOCK COMPENSATION COSTS
The Company applies APB Opinion No. 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock option plans.
Accordingly, no compensation cost has been recognized in the financial
statements with respect to stock options. Had compensation cost for the
Company's plans been determined based on the fair value at the grant dates for
awards under the plans, consistent with Statement of Financial Accounting
Standards No. 123 "Accounting for Stock Based Compensation," as amended by SFAS
No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure", the
pro forma net loss and loss per share would have been as follows:
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
(in thousands, except per share amounts)
Net income (loss):
As reported $ 803 $ (607) $ 160 $ (4,942)
Stock-based compensation costs, net of tax (52) (38) (104) (102)
--------- --------- --------- ---------
Pro forma $ 751 $ (645) $ 56 $ (5,044)
========= ========= ========= =========
Basic net income (loss) per common share:
As reported $ 0.11 $ (0.09) $ 0.02 $ (0.70)
Pro forma $ 0.10 $ (0.09) $ -- $ (0.71)
Diluted net income (loss) per common share:
As reported $ 0.11 $ (0.09) $ 0.02 $ (0.70)
Pro forma $ 0.10 $ (0.09) $ 0.01 $ (0.71)
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
For the three and six months ended June 30, 2004 and 2003, "Accumulated
other comprehensive income (loss)" was comprised of the reported net income
(loss) for the period of $0.8 million and $0.2 million in 2004 and $(0.6)
million and $(4.9) million in 2003, respectively.
6
NOTE 4 - RESTRUCTURING AND OTHER SPECIAL CHARGES
During 2003, the Company completed the $7.0 million restructuring program
that it had commenced during the third quarter of 2001. The program was designed
around business initiatives to improve the Company's operating performance,
including the redesign of our distribution system, headcount reductions, the
transfer of production between manufacturing facilities and a reevaluation of
our product offerings. The Company also added approximately $0.9 million of new
relocation programs in 2003 to include the relocation of Fedco's inventory and
machinery to Mexico and salaried headcount reductions made in order to lower
overall operating costs.
The remaining reserve balance at June 30, 2004 and December 31, 2003 is
classified in other accrued liabilities. A summary of the reserve activity is as
follows:
(in thousands) Workforce Facility
Related Consolidations Total
------- -------------- -----
Balance at December 31, 2003 $ 199 $ 23 $ 222
Charge to Operations -- -- --
Cash Payments (156) (23) (179)
----- ----- -----
Balance at June 30, 2004 $ 43 $ 0 $ 43
===== ===== =====
Cash payments for severance programs are expected to continue through the
end of 2004.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued Statement No. 132 (Revised 2003)
"Employers' Disclosures about Pensions and Other Postretirement Benefits" which
replaces the original SFAS 132 and revises employers' financial statement
disclosures about pension plans and other postretirement plans. The Company has
adopted the applicable provisions of this Statement in its reporting of the
financial results for the year ended December 31, 2003 and has implemented the
interim reporting requirements in the financial statements included with this
filing (see Note 8).
7
NOTE 6 - INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income
(loss) per share:
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands, except per share data)
Numerator:
Net income (loss) $ 803 $ (607) $ 160 $(4,942)
Deduct preferred stock dividend (16) (16) (32) (32)
------- ------- ------- -------
Net income (loss) attributable to common stockholders - basic $ 787 $ (623) $ 128 $(4,974)
Add back preferred stock dividend 16 -- 32 --
------- ------- ------- -------
Net income (loss) attributable to common stockholders - diluted $ 803 $ (623) $ 160 $(4,974)
======= ======= ======= =======
Denominator:
Weighted average common shares-- basic 7,106 7,106 7,106 7,106
Dilutive effect of Series B preferred stock 49 -- 47 --
Dilutive effect of stock options 158 -- 128 --
------- ------- ------- -------
Adjusted weighted average common shares and equivalents
- diluted 7,313 7,106 7,281 7,106
======= ======= ======= =======
Net income (loss) per common share: - basic $ 0.11 $ (0.09) $ 0.02 $ (0.70)
======= ======= ======= =======
- diluted $ 0.11 $ (0.09) $ 0.02 $ (0.70)
======= ======= ======= =======
The weighted average basic common shares outstanding were used in the
calculation of the diluted loss per common share for the three and six months
ended June 30, 2003 as the use of weighted average diluted common shares
outstanding would have an anti-dilutive effect on loss per share for the
periods.
Certain options to purchase common stock were outstanding during the three
and six months ended June 30, 2004 and 2003, but were not included in the
computation of diluted loss per share because their exercise prices were greater
than the average market price of common shares for the period. The anti-dilutive
options outstanding and their exercise prices are as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
--------------- -------------- -------------- --------------
Options outstanding 58,900 301,000 87,300 80,300
Range of exercise prices $5.88 - $11.75 $4.72 - $11.75 $5.25 - $11.75 $5.50 - $11.75
8
NOTE 7 - BUSINESS SEGMENT DATA
The Company is organized into two segments, also referred to herein as
strategic business groups ("SBG") based on the type of customer served --
Automotive and Light Truck, and Heavy Duty. The Automotive and Light Truck SBG
is comprised of a Heat Exchange Unit and a Temperature Control Products Unit,
both serving the aftermarket. The Heavy Duty SBG consists of an OEM and
Aftermarket unit, both serving the heavy-duty marketplace. The table below sets
forth information about the reported segments:
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
(in thousands)
Trade sales:
Automotive and Light Truck $ 51,284 $ 43,222 $ 93,363 $ 82,318
Heavy Duty 20,937 15,080 38,753 28,684
Intersegment transfers:
Automotive and Light Truck 1,636 865 3,352 1,720
Heavy Duty -- -- -- --
Eliminations (1,636) (865) (3,352) (1,720)
--------- --------- --------- ---------
Total net sales $ 72,221 $ 58,302 $ 132,116 $ 111,002
========= ========= ========= =========
Operating income (loss):
Automotive and Light Truck $ 2,169 $ 425 $ 3,986 $ (207)
Restructuring and other special charges -- (326) -- (386)
--------- --------- --------- ---------
Automotive and Light Truck total 2,169 99 3,986 (593)
--------- --------- --------- ---------
Heavy Duty 1,069 (8) 1,042 (1,358)
Restructuring and other special charges -- (214) -- (572)
--------- --------- --------- ---------
Heavy Duty total 1,069 (222) 1,042 (1,930)
--------- --------- --------- ---------
Corporate expenses (1,490) (1,099) (3,137) (2,588)
--------- --------- --------- ---------
Total operating income (loss) $ 1,748 $ (1,222) $ 1,891 $ (5,111)
========= ========= ========= =========
9
NOTE 8 - RETIREMENT AND POST-RETIREMENT PLANS
The components of net periodic benefit costs for the three and six
months ended June 30, 2004 and 2003 are as follows:
THREE MONTHS ENDED JUNE 30
---------------------------------------
RETIREMENT PLANS POSTRETIREMENT PLANS
---------------------------------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands)
Service cost $ 214 $ 319 $ 1 $ 1
Interest cost 456 717 10 10
Expected return on plan assets (559) (797) -- --
Amortization of net loss 59 56 1 1
------- ------- ------- -------
Net periodic benefit cost $ 170 $ 295 $ 12 $ 12
======= ======= ======= =======
SIX MONTHS ENDED JUNE 30
---------------------------------------
RETIREMENT PLANS POSTRETIREMENT PLANS
---------------------------------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands)
Service cost $ 428 $ 596 $ 2 $ 2
Interest cost 912 1,339 20 20
Expected return on plan assets (1,119) (1,489) -- --
Amortization of net loss 118 105 2 2
------- ------- ------- -------
Net periodic benefit cost $ 339 $ 551 $ 24 $ 24
======= ======= ======= =======
Improved portfolio performance has resulted in a reduction of estimated
2004 pension contributions from $3.6 million to $3.1 million.
NOTE 9 - RESTATEMENT OF PRIOR INFORMATION
In a press release dated, July 27, 2004, the Company indicated that it had
undertaken a review of the accounting associated with the revenue recognition
impact of shipping terms to certain customers near quarter's end. The issue
relates to the recognition of revenue at the time products were shipped to
certain customers, who have shipping terms that require revenue to have been
reported when product was received by these customers. This review has been
completed and resulted in the reversal of $1.3 million in previously reported
first quarter 2004 sales and $0.2 million of corresponding pretax profit, into
the second quarter of 2004. As a result, the Company has restated its results
for the three-month period ended March 31, 2004 and is filing an amended Form
10-Q for the period. The Company has determined that the impact of this issue on
other prior periods was not material and that no changes are required with
respect to the financial statements for other prior periods.
10
A comparison of the originally reported and restated amounts for the first
quarter of 2004 is as follows:
Originally
Reported Restated
-------- --------
(in thousands)
Net sales $61,208 $ 59,895
======= ========
Gross margin $10,555 $ 10,259
======= ========
Selling, general and administrative expenses $10,163 $ 10,116
======= ========
Net loss $ (413) $ (643)
======= ========
Loss per common share - basic $ (0.06) $ (0.09)
======= ========
- diluted $ (0.06) $ (0.09)
======= ========
Accounts receivable $44,823 $ 43,510
======= ========
Total inventories $72,662 $ 73,679
======= ========
Accrued liabilities $19,156 $ 19,090
======= ========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In a press release dated, July 27, 2004, the Company indicated that it had
undertaken a review of the accounting associated with the revenue recognition
impact of shipping terms to certain customers near quarters' end. The issue
relates to the recognition of revenue at the time products were shipped to
certain customers, who have shipping terms that require revenue to have been
reported when product was received by these customers. The completed review
identified $1.3 million of net sales and $0.2 million of corresponding profit
that had been previously recognized when shipped in the first quarter of 2004
rather than when received by the customer in the second quarter of 2004. As a
result, although the Company intends to restate its results for the three-month
period ended March 31, 2004 and file an amended Form 10-Q for the period, there
is no impact on the financial results for the six-month period ended June 30,
2004. The Company has determined that the impact of this issue on other prior
periods was not material and that no changes are required with respect to the
financial statements for other prior periods.
INTRODUCTION
The Company designs, manufactures and markets radiators, radiator cores,
heater cores, air conditioning parts (including condensers, compressors,
accumulators and evaporators) and other heat transfer products for the
automotive and light truck aftermarket. In addition, the Company designs,
manufactures and distributes radiators, radiator cores, charge air coolers, oil
coolers and other specialty heat exchangers for original equipment manufacturers
("OEMs") of heavy trucks and industrial and off-highway equipment and the heavy
duty heat exchanger aftermarket.
The Company is organized into two strategic business groups based upon the
type of customer served - Automotive and Light Truck and Heavy Duty. Management
evaluates the performance of its reportable segments based upon operating income
(loss) before taxes, as well as cash flow from operations, which reflects
operating results and asset management.
In order to evaluate market trends and changes, management utilizes a
variety of economic and industry data including miles driven by vehicles,
average age of vehicles, gasoline usage and pricing and automotive and light
truck vehicle population data. In the heavy duty segment, we also utilize Class
7 and 8 truck production data and industrial and off-highway equipment
production.
Management looks to grow the business through a combination of internal
growth, including the addition of new customers and new products, and strategic
acquisitions. At the end of 2002, the Company acquired certain assets of Fedco
Automotive Components Company. This acquisition strengthened our position in the
heater core market, provided the Company with a new major customer, provided the
capability for in-house production of aluminum heaters and allowed us to
maximize the benefits generated by the in-house production of copper/brass
heaters at our Mexican plant.
Operating performance in any given quarter is not necessarily indicative of
performance for the full year as the Company's business is seasonal. Sales peak
during the second and third quarters due to increased demand for replacement
radiator and air conditioning components in the Auto & Light Truck segment.
During 2003, the Company completed the $7.0 million restructuring program
that it had commenced during the third quarter of 2001. The program was designed
around business initiatives to improve the Company's operating performance,
including the redesign of our distribution system, headcount reductions, the
transfer of production between manufacturing facilities and a reevaluation of
our product offerings. The
12
Company also added approximately $0.9 million of restructuring programs in 2003
to include the relocation of Fedco's inventory and machinery to Mexico and
salaried headcount reductions made in order to lower overall operating costs.
Management believes that benefits from these initiatives are serving as a
foundation for improvements in 2004.
OPERATING RESULTS
QUARTER ENDED JUNE 30, 2004 VERSUS QUARTER ENDED JUNE 30, 2003
Sales for the second quarter of 2004 of $72.2 million were $13.9 million or
23.8% above the second quarter of 2003. The Automotive and Light Truck segment
had sales of $51.3 million, which were $8.1 million or 18.7% above the second
quarter of 2003. Heat exchange product sales increased 19.7%, while temperature
control product sales were 13.7% above the prior year period. Heat exchange
product sales benefited from increased demand for the Company's products, driven
by seasonal restocking by some of our major customers. The temperature control
products increase reflects the impact of new business added since the second
quarter of last year offset in part by lower marketplace demand for temperature
control products. Customers have changed their buying patterns such that they no
longer rely heavily on large preseason orders; rather they purchase products in
closer proximity to the summer season. In addition, in most parts of the country
cool weather conditions have delayed the start of the summer selling season.
Heavy Duty segment sales in the second quarter of 2004 were $20.9 million, $5.9
million or 38.8% above the prior year period. Sales in the Heavy Duty OEM Unit
were up 76.9% reflecting increased product demand from our OEM customers due to
rising Class 7 and 8 truck sales, incremental revenues from new business
announced subsequent to the second quarter of 2003 and the depressed sales
levels from the year before. Heavy Duty Aftermarket Unit sales were 8.6% above
the second quarter of 2003 due to the impact of new product lines recently
introduced into the marketplace, pricing actions and an increase in unit volume
caused by the positive effects of an improving economy.
Gross margin, as a percentage of net sales, was 17.6% versus 15.4% in the
second quarter of 2003. The improvement reflects higher sales, higher levels of
productivity, the benefits of cost savings initiatives executed by the Company
over the past three years as well as the full integration of the Fedco
acquisition. Gross margin also benefited by 0.2% from the reversal of a Heavy
Duty OEM warranty reserve which was no longer required. These favorable items
more than offset the impacts of rising commodity costs. The Company is taking
pricing actions in an effort to offset some or all of these additional raw
material costs. However, the Company's markets remain highly competitive and
full recovery of these costs is not expected.
Selling, general and administrative expenses decreased as a percentage of
net sales to 15.1% from 16.6% in the second quarter of 2003. The decrease in
expenses primarily reflects the Company's cost reduction programs over the past
several years, offset in part by higher expenses due to the sales increase.
Restructuring costs in the second quarter of 2003 of $0.5 million were
associated with the closure of a Heavy Duty plant in Phoenix, Arizona, branch
closure activities, accrued severance due to headcount reductions taken during
the quarter and costs related to the integration of the Fedco copper/brass
heater core production into our existing Mexico facility. The Company's
restructuring program was completed during 2003, and only cash flow impacts are
being incurred in 2004.
Interest expense was17.2% below last year's levels due to the impact of
lower interest rates and lower average debt levels. Average rates on our
revolving credit facility were 4.0% for the second quarter of 2004 versus 4.25%
for the same period in 2003, while average borrowings for the quarter were $49.1
million in 2004 compared with $57.5 million a year ago. Discounting charges
associated with the sale of certain
13
receivables pursuant to a customer-sponsored vendor program administered by a
financial institution are also included in interest expense.
The effective tax rates in 2004 and 2003 primarily reflect only a foreign
provision, as the reversal of the Company's deferred tax valuation allowances
will offset a majority of the state and any federal income tax provisions.
During the second quarter of 2003, the Company recorded an additional $0.7
million of refundable income taxes as a result of tax method changes included in
its 2002 Federal Income Tax Return.
The net income for the second quarter was $0.8 million, or $0.11 per basic
and diluted share in 2004 versus a net loss of $0.6 million or $0.09 per basic
and diluted share in 2003.
SIX MONTHS ENDED JUNE 30, 2004 VERSUS JUNE 30, 2003
For the six months ended June 30, 2004, net sales of $132.1 million were
19.0% above a year ago. Automotive and Light Truck Group sales were up 13.4% as
the gains in the heat exchange unit resulting from product line expansions by
several major retail customers, the full integration of the Fedco acquisition
and increased customer demand offset lower temperature control unit sales
reflecting changes in customer buying habits, higher levels of customer
inventories going into the year and wet and cool weather conditions. These
temperature control volume declines more than offset the impact of new customers
added since the first half of last year. Heavy Duty Group sales were 35.1% above
2003 reflecting Heavy Duty OEM customer additions, and increased sales of class
7 and 8 trucks. In addition, Heavy Duty Aftermarket sales have benefited from
new product programs, pricing actions and improved economic conditions resulting
in stable product demand as compared to marketplace declines experienced during
the past several years.
Gross margins, as a percentage of net sales, for the first six months of
2004 were 17.4% compared with 14.6% a year ago. The improvement in 2004 reflects
lower product costs due to higher production levels, improved efficiency and the
impact of cost reduction programs implemented during the past three years. These
offset the impacts of rising commodity costs. In the first half of 2003, margins
were adversely impacted by production cutbacks instituted in the Automotive and
Light Truck Group in the fourth quarter of 2002. These cutbacks resulted in
higher actual inventory costs at the end of 2002, which translated into lower
gross margins in 2003 as the product was sold. Margins last year were also
adversely impacted by start-up problems with our aluminum tube mill and other
manufacturing issues. These items offset the favorable impacts of the Company's
cost savings initiative programs.
Selling, general and administrative expenses for the six months increased
by $0.7 million to 15.9% of sales versus 18.3% of sales a year ago. The dollar
increase reflects higher expense levels attributable to increased sales for the
period, while the reduction as a percentage of sales reflects the results of the
Company's overall improvement inefficiency.
Restructuring and other special charges of $1.0 million for the first six
months of 2003 represent costs associated with the closure of two regional Heavy
Duty Aftermarket plants in North Kansas City, Missouri and Phoenix, Arizona and
the closure of the Charlotte, North Carolina branch, the movement of Fedco
copper/brass inventory and machinery to Mexico and a cost reduction program of
salaried headcount reductions. No restructuring costs were recorded in 2004.
Interest costs were $0.2 million below last year for the first six months
of 2004, due to lower average debt levels and lower average interest rates.
Average interest rates on our revolving credit facility were 4.0% in 2004
compared to 4.25% in 2003, while average debt levels were $51.0 million vs.
$59.0 million in 2003.
14
The effective tax rate in both 2004 and 2003 reflects only a state and
foreign provision, as the reversal of the deferred tax valuation allowance will
offset any federal tax provision. The 2003 provision also includes a $0.7
million of refundable income taxes recorded in the second quarter.
Net income for the first six months of 2004 was $0.2 million or $0.02 per
basic and diluted share, while the net loss for the first six months of 2003 was
$4.9 million or $0.70 per basic and diluted share.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $3.2 million in the first six
months of 2004. Accounts receivable levels increased by $9.0 million due to the
higher sales levels. This impact was partially offset as the Company continued
to accelerate the collection of customer receivables utilizing a cost effective
customer-sponsored vendor program administered by a financial institution and by
working directly with other customers. This accelerated collection was done in
an effort to offset the continuing trend towards longer customer dating terms by
"blue chip" customers. Inventory levels grew $3.2 million reflecting the
start-up of new customer programs and increases related to typical seasonal
buying patterns. The Company will remain focused on managing inventory levels to
match marketplace demand throughout the remainder of 2004 particularly in our
Automotive and Light Truck Temperature Control product lines. Accounts payable
rose by $8.5 million as a result of the growth in inventory levels as well as
our efforts to balance payables with the ongoing shift in customer receivables
mix toward longer payment cycles. Accrued liabilities have risen as a result of
the increase in sales and the improved operating profitability. During the first
six months of 2003, operations generated $1.9 million of cash. Accounts
receivable in 2003 declined by $5.7 million as the Company commenced its
participation in a customer-sponsored vendor payment program designed to
accelerate the collection of receivables. Inventories rose by $12.0 million in
2003 due to soft market conditions, as well as a build-up in Automotive and
Light Truck inventory in advance of expected typical seasonal demand increases
in the second and third quarters and new business additions. Accounts payable
rose by $11.9 million in 2003, as a result of the growth in inventory levels, as
well as our efforts to balance payables with the ongoing shift in customer
receivable mix towards longer payment cycles.
The $2.5 million of capital spending during the first six months of 2004
was primarily in the Automotive and Light Truck segment. This reflected
expenditures for new product introduction, cost reductions and computer
upgrades. The Company expects that capital expenditures for the year will be
between $5.5 million and $6.5 million.
In May 2003, the Company completed the sale of its Gando Drive facility in
New Haven, Connecticut and entered into a lease of its currently occupied space.
As a result, the Company repaid the $5.0 million Industrial Revenue Bond on the
facility, created greater availability of funds under its credit agreement and
eliminated an underutilized asset.
Total debt at June 30, 2004 was $50.7 million, compared to $50.9 million at
the end of 2003 and $54.2 million at June 30, 2003. The reduction from year-end
reflects the utilization of cash generated by operating activities. At June 30,
2004 the Company had $10.2 million available for future borrowings under its
Loan Agreement.
The future liquidity and ordinary capital needs of the Company in the short
term are expected to be met from a combination of cash flows from operations and
borrowings under the existing Loan Agreement. The Company's working capital
requirements peak during the second and third quarters, reflecting the normal
seasonality in the Automotive and Light Truck segment. In addition, the
Company's future cash flow may be impacted by industry trends lengthening
customer payment terms or the discontinuance of currently
15
utilized customer sponsored payment programs. The loss of one or more of the
Company's significant customers or changes in payment terms to one or more major
suppliers could also have a material adverse effect on the Company's results of
operations and future liquidity. During 2003, the Company began utilizing a
customer-sponsored program administered by a financial institution to sell
certain receivables in order to accelerate the collection of funds and offset
the impact of lengthening customer payment terms. The Company intends to
continue utilizing this program or similar programs as long as it is a cost
effective tool to accelerate cash flow and will expand its usage as other
customers make it available. The Company believes that its cash flow from
operations, together with borrowings under its Loan Agreement, will be adequate
to meet its near-term anticipated ordinary capital expenditures and working
capital requirements. However, the Company believes that the amount of
borrowings available under the Loan Agreement would not be sufficient to meet
the capital needs for major growth initiatives, such as significant
acquisitions. If the Company were to implement major new growth initiatives, it
would have to seek additional sources of capital. However, no assurance can be
given that the Company would be successful in securing such additional sources
of capital.
CRITICAL ACCOUNTING ESTIMATES
For interim reporting purposes, the Company calculates its effective income
tax rate based upon the current estimate of pre-tax income for the year. The
critical accounting estimates utilized by the Company remain unchanged from
those disclosed in its Annual Report on Form 10-K for the year ended December
31, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued Statement No. 132 (Revised 2003)
"Employers' Disclosures about Pensions and Other Postretirement Benefits" which
replaces the original SFAS 132 and revises employers' financial statement
disclosures about pension plans and other postretirement plans. The Company
adopted the applicable provisions of this Statement in its reporting of the
financial results for the year ended December 31, 2003 and has implemented the
interim reporting requirements in the financial statements included with this
filing.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations, which are not historical in nature, are
forward-looking statements. Such forward-looking statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The Company's Annual Report on Form 10-K contains certain detailed factors
that could cause the Company's actual results to materially differ from the
forward-looking statements made by the Company. In particular, statements
relating to the future financial performance of the Company are subject to
business conditions and growth in the general economy and automotive and truck
business, the impact of competitive products and pricing, changes in customer
and product mix, failure to obtain new customers or retain old customers or
changes in the financial stability of customers, changes in the cost of raw
materials, components or finished products and changes in interest rates and
continued availability under the Company's Loan Agreement. The forward-looking
statements contained in this filing are made as of the date hereof, and the
Company does not undertake any obligation to update any forward-looking
statements, whether as a result of future events, new information or otherwise.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has certain exposures to market risk related to changes in
interest rates, foreign currency exchange rates and the price of commodities
used in our manufacturing process. There have been no material changes in market
risk since the filing of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 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 based on the definition of "disclosure
controls and procedures" in Rule 13a-15(e). In designing and evaluating the
disclosure controls and procedures, management recognizes 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 is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
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 as of June 30, 2004. In conjunction with this evaluation the
Company detected a material internal control weakness associated with
determining the revenue recognition impact of shipping terms to certain
customers near quarters' end. It was determined that $1.3 million of net sales
and $0.2 million of net income associated with shipments having terms of FOB
Destination had been recorded in the quarter ended March 31, 2004 instead of in
the quarter ended June 30, 2004. The Company plans to restate the results for
the quarter ended March 31, 2004 and promptly file an amended Form 10-Q. The
Company has determined that the impact of this issue on other prior periods was
not material and that no changes are required with respect to the financial
statements for other prior periods.
The Company has implemented process and control improvements to insure that
revenue is recognized in the proper periods in the future. In addition, the
Company has begun mapping its processes in anticipation of complying with the
requirements of Section 404 of the Sarbanes-Oxley Act. There have been no other
changes in the Company's internal control over financial reporting during the
quarter ended June 30, 2004 that have materially affected, or are reasonably
likely to materially affect the Company's internal control over financial
reporting.
17
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES
OF EQUITY SECURITIES
On April 29, 2004, the Company announced that its Board of Directors
approved the amendment of the Company's Shareholders' Rights Agreement to
accelerate its expiration date from September 29, 2005 to September 30, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company held on May 6, 2004,
two proposals were voted upon by the Company's stockholders. A brief discussion
of each proposal voted upon at the Annual Meeting and the number of votes cast
for, against and withheld, as well as the number of abstentions to each proposal
are set forth below. There were no broker non-votes with respect to these
proposals.
A vote was taken for the election of seven Directors of the Company to hold
office until the next Annual Meeting of Stockholders of the Company and until
their respective successors shall have been duly elected. The aggregate numbers
of shares of Common Stock voted in person or by proxy for each nominee were as
follows:
Nominee For Withheld
----------------------- --------- --------
Barry R. Banducci 6,171,614 33,328
William J. Abraham, Jr 5,539,668 665,274
Philip Wm. Colburn 6,170,814 34,128
Charles E. Johnson 6,171,614 33,328
Paul R. Lederer 6,192,614 12,328
Sharon M. Oster 5,549,431 655,511
F. Alan Smith 6,168,954 35,988
A vote was taken on the proposal to ratify the appointment of
PricewaterhouseCoopers LLP as auditors for the Company for the fiscal year
ending December 31, 2004. The aggregate numbers of shares of Common Stock voted
in person or by proxy were as follows:
For Against Abstain
--------- -------- --------
6,150,547 16,294 38,101
The foregoing proposals are described more fully in the Company's
definitive proxy statement dated March 29, 2004, filed with the Securities and
Exchange Commission pursuant to Section 14 (a) of the Securities Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
31.1 Certification of CEO in accordance with Section 302 of
the Sarbanes-Oxley Act.
31.2 Certification of CFO in accordance with Section 302 of
the Sarbanes-Oxley Act.
32.1 Certification of CEO in accordance with Section 906 of
the Sarbanes-Oxley Act.
32.2 Certification of CFO in accordance with Section 906 of
the Sarbanes-Oxley Act.
b) Reports on Form 8-K
The following reports on Form 8-K were filed during the second quarter of
2004:
-- On April 29, 2004, a Form 8-K was filed containing as an exhibit a
press release announcing the results of operations and financial
condition for the first quarter ended March 31, 2004 and the
acceleration of the expiration of the Company's Shareholder Rights
Agreement.
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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.
TRANSPRO, INC.
(Registrant)
Date: August 16, 2004 By: /s/ Charles E. Johnson
-------------------------------------
Charles E. Johnson
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 16, 2004 By: /s/ Richard A. Wisot
-------------------------------------
Richard A. Wisot
Vice President, Treasurer, Secretary,
and Chief Financial Officer (Principal
Financial and Accounting Officer)
20