Back to GetFilings.com
===============================================================================
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 September 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 November 9, 2004 was 7,106,023.
Exhibit Index is on page 18 of this report.
Page 1 of 23
================================================================================
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September
30, 2004 and 2003 3
Condensed Consolidated Balance Sheets at
September 30, 2004 and December 31, 2003 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 6. Exhibits 18
Signatures 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSPRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three Months Nine Months
(In thousands, except per share amounts) Ended September 30, Ended September 30,
------------- ----------- ------------ ------------
2004 2003 2004 2003
------------- ----------- ------------ ------------
Net sales $72,012 $ 65,629 $204,128 $176,631
Cost of sales 56,855 52,415 166,030 147,228
------------- ----------- ------------ ------------
Gross margin 15,157 13,214 38,098 29,403
Selling, general and administrative expenses 10,848 9,071 31,898 29,413
Restructuring and other special charges -- 302 -- 1,260
------------- ----------- ------------ ------------
Operating income (loss) 4,309 3,841 6,200 (1,270)
Interest expense 1,392 942 3,111 2,854
------------- ----------- ------------ ------------
Income (loss) before taxes 2,917 2,899 3,089 (4,124)
Income tax provision (benefit) 259 938 271 (1,143)
------------- ----------- ------------ ------------
Net income (loss) $2,658 $ 1,961 $ 2,818 $(2,981)
============= =========== ============ ============
Net income (loss) per common share -- basic $ 0.37 $ 0.27 $ 0.39 $ (0.43)
============= =========== ============= ===========
-- diluted $ 0.36 $ 0.27 $ 0.38 $ (0.43)
============= =========== ============= ===========
Weighed average common shares -- basic 7,106 7,106 7,106 7,106
============= =========== ============ ============
-- diluted 7,367 7,185 7,343 7,106
============= =========== ============ ============
The accompanying notes are an integral part of these statements.
3
TRANSPRO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) September 30, December 31,
ASSETS 2004 2003
--------------- --------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 474 $ 189
Accounts receivable (less allowances of $2,501 and $2,746) 48,473 46,056
Inventories:
Raw material and component parts 19,099 15,704
Work in process 1,272 1,082
Finished goods 55,638 54,641
------------ ------------
Total inventories 76,009 71,427
------------ ------------
Other current assets 4,781 5,944
------------ ------------
Total current assets 129,737 123,616
------------ ------------
Property, plant and equipment 69,794 68,594
Accumulated depreciation and amortization (46,721) (44,440)
------------ ------------
Net property, plant and equipment 23,073 24,154
------------ ------------
Other assets 8,708 9,408
------------ ------------
Total assets $161,518 $157,178
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit debt and current portion of long-term debt $43,278 $49,638
Accounts payable 39,372 32,816
Accrued liabilities 21,277 18,134
------------ ------------
Total current liabilities 103,927 100,588
------------ ------------
Long-term liabilities:
Long-term debt 746 1,306
Other long-term liabilities 10,455 11,664
------------ ------------
Total long-term liabilities 11,201 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
September 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 September 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 September 30, 2004 and December 31, 2003; 7,106,023
shares outstanding at September 30, 2004 and December 31, 2003 71 71
Paid-in capital 55,041 55,041
Accumulated deficit (4,197) (6,967)
Accumulated other comprehensive loss (4,510) (4,510)
Treasury stock, at cost, 41,936 shares at September 30, 2004 and December 31, 2003 (15) (15)
------------ ------------
Total stockholders' equity 46,390 43,620
------------ ------------
Total liabilities and stockholders' equity $161,518 $157,178
============ ============
The accompanying notes are an integral part of these statements.
4
TRANSPRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Nine Months
(Amounts in thousands) Ended September 30,
--------------------------
2004 2003
------------- ----------
Cash flows from operating activities:
Net income (loss) $ 2,818 $ (2,981)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 4,484 4,526
Provision for uncollectible accounts receivable 414 601
Non-cash restructuring charges -- 68
Gain on sale of building (207) (113)
Changes in operating assets and liabilities:
Accounts receivable (2,831) 4,189
Inventories (5,220) (7,335)
Accounts payable 8,110 7,676
Accrued expenses 3,207 (2,090)
Other 487 (138)
------------ -----------
Net cash provided by operating activities 11,262 4,403
------------ -----------
Cash flows from investing activities:
Capital expenditures, net of sales and retirements (3,705) (3,234)
Net proceeds from sale of building -- 5,178
------------ -----------
Net cash (used for) provided by investing activities (3,705) 1,944
------------ -----------
Cash flows from financing activities:
Dividends paid (64) (48)
Net repayments under revolving credit facility (6,316) (280)
Repayment of Industrial Revenue Bond -- (5,000)
Repayments of term loan and capitalized lease obligations (892) (698)
Deferred debt issuance costs -- (67)
------------ -----------
Net cash used in financing activities (7,272) (6,093)
------------ ------------
Increase in cash and cash equivalents 285 254
Cash and cash equivalents at beginning of period 189 155
------------ -----------
Cash and cash equivalents at end of period $ 474 $ 409
============ ===========
Non-cash investing and financing activity:
Entered capital lease obligation $ 288 $ --
============ ===========
Sale of inventory and fixed assets to reduce accounts payable $ 1,554 $ --
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest paid $ 2,571 $ 2,546
============ ===========
Income taxes paid (refunded) $ 241 $ (1,127)
============ ===========
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 fiscal 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. Results for
the quarter ended September 30, 2004 are not necessarily indicative of results
for the full year.
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 income (loss) and income (loss) per share would have been as
follows:
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------- ------------ -------------
(in thousands, except per share amounts)
Net income (loss):
As reported $2,658 $1,961 $2,818 $(2,981)
Stock-based compensation costs, net of tax (49) (77) (153) (179)
------------ ------------- -------------- -----------
Pro forma $2,609 $1,884 $2,665 $(3,160)
============ ============= ============== ===========
Basic net income (loss) per common share:
As reported $0.37 $0.27 $0.39 $(0.43)
Pro forma $0.37 $0.26 $0.38 $(0.45)
Diluted net income (loss) per common share:
As reported $0.36 $0.27 $0.38 $(0.43)
Pro forma $0.35 $0.26 $0.36 $(0.45)
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
For the three and nine months ended September 30, 2004 and 2003, other
comprehensive income (loss) was comprised of the reported net income (loss) for
the period of $2.7 million and $2.8 million in 2004 and $2.0 million and $(3.0)
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 (acquired at the end of 2002) to Mexico and salaried headcount
reductions made in order to lower overall operating costs.
The remaining reserve balance at September 30, 2004 and December 31, 2003
is classified in other accrued liabilities. A summary of the reserve activity is
as follows:
Workforce Facility
Related Consolidations Total
--------------------------------------------
(in thousands)
Balance at December 31, 2003 $199 $23 $222
Charge to Operations -- -- --
Cash Payments (194) (23) (217)
-------------- -------------- ------------
Balance at September 30, 2004 $ 5 $ 0 $ 5
============== ============== ===========
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 Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------ -------------- -----------
(in thousands, except per share data)
Numerator:
Net income (loss) $2,658 $1,961 $2,818 $(2,981)
Deduct preferred stock dividend (16) (16) (48) (48)
------------- ------------ -------------- -----------
Net income (loss) attributable to common stockholders -
basic $2,642 $1,945 $2,770 $(3,029)
Add back preferred stock dividend 16 16 48 --
------------- ------------ -------------- -----------
Net income (loss) attributable to common stockholders -
diluted $2,658 $1,961 $2,818 $(3,029)
============= ============ ============== ===========
Denominator:
Weighted average common shares - basic 7,106 7,106 7,106 7,106
Dilutive effect of Series B preferred stock 100 40 139 --
Dilutive effect of stock options 161 39 98 --
------------- ------------ -------------- -----------
Adjusted weighted average common shares and
equivalents - diluted 7,367 7,185 7,343 7,106
============= ============ ============== ===========
Net income (loss) per common share: - basic $0.37 $0.27 $ 0.39 $(0.43)
============= ============ ============== ===========
- diluted $0.36 $0.27 $ 0.38 $(0.43)
============= ============ ============== ===========
The weighted average basic common shares outstanding were used in the
calculation of the diluted loss per common share for the nine months ended
September 30, 2003 as the use of weighted average diluted common shares
outstanding would have an anti-dilutive effect on loss per share for the period.
Certain options to purchase common stock were outstanding during the three
and nine months ended September 30, 2004 and 2003, but were not included in the
computation of diluted income (loss) per share because their exercise prices
were greater than the average market price of common shares for the periods. The
anti-dilutive options outstanding and their exercise prices are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------------- -------------------------------------------
2004 2003 2004 2003
------------------- -------------------- -------------------- -------------------
Options outstanding 58,900 301,000 58,900 301,000
Range of exercise prices $5.88 - $11.75 $4.72 - $11.75 $5.88 - $11.75 $4.72 - $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 Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- -------------- --------------- -------------
(in thousands)
Trade sales:
Automotive and Light Truck $48,790 $48,906 $142,153 $131,224
Heavy Duty 23,222 16,723 61,975 45,407
Intersegment transfers:
Automotive and Light Truck 1,890 993 5,242 2,713
Heavy Duty -- -- -- --
Eliminations (1,890) (993) (5,242) (2,713)
-------------- -------------- --------------- -------------
Total net sales $72,012 $65,629 $204,128 $176,631
============== ============== =============== =============
Operating income (loss):
Automotive and Light Truck $4,456 $4,435 $ 8,442 $ 4,228
Restructuring and other special charges -- (302) -- (688)
-------------- -------------- --------------- -------------
Automotive and Light Truck total 4,456 4,133 8,442 3,540
-------------- -------------- --------------- -------------
Heavy Duty 1,454 625 2,496 (733)
Restructuring and other special charges -- -- -- (572)
-------------- -------------- --------------- -------------
Heavy Duty total 1,454 625 2,496 (1,305)
-------------- -------------- --------------- -------------
Corporate expenses (1,601) (917) (4,738) (3,505)
-------------- -------------- --------------- -------------
Total operating income (loss) $4,309 $3,841 $ 6,200 $ (1,270)
============== ============== =============== =============
9
NOTE 8 - RETIREMENT AND POST-RETIREMENT PLANS
The components of net periodic benefit costs for the three and nine months
ended September 30, 2004 and 2003 are as follows:
THREE MONTHS ENDED SEPTEMBER 30
-------------------------------------------------------
RETIREMENT PLANS POSTRETIREMENT PLANS
----------------------- ----------------------------
2004 2003 2004 2003
---------- ----------- ------------- ------------
(in thousands)
Service cost $ 181 $ 24 $2 $2
Interest cost 458 72 9 9
Expected return on plan assets (448) (132) -- --
Amortization of net loss 103 4 1 1
---------- ----------- ------------- ------------
Net periodic benefit cost $ 294 $ (32) $12 $12
========== =========== ============= ============
NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------------------------
RETIREMENT PLANS POSTRETIREMENT PLANS
----------------------- ----------------------------
2004 2003 2004 2003
---------- ----------- ------------- ------------
(in thousands)
Service cost $ 609 $ 620 $4 $4
Interest cost 1,370 1,411 29 29
Expected return on plan assets (1,567) (1,621) -- --
Amortization of net loss 221 109 3 3
---------- ----------- ------------- ------------
Net periodic benefit cost $ 633 $ 519 $36 $36
========== =========== ============= ============
Improved portfolio performance has resulted in a reduction of estimated
2004 pension contributions from $3.6 million as reported in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003 to $2.6 million.
NOTE 9 - SUBSEQUENT EVENT
On October 29, 2004, the Company announced that it had signed a letter of
intent with Modine Manufacturing Company ("Modine") to merge Modine's
aftermarket business, on a debt-free basis, into Transpro in an all-stock
transaction. As part of the transaction, Modine will acquire Transpro's heavy
duty OEM business unit for a cash price of $17 million, which proceeds will be
used to reduce debt. Under the terms of the letter of intent, Modine's
shareholders would hold 54% of the Company and current Transpro shareholders
would own 46%. The closing is subject to the negotiation of definitive
agreements, which is expected to occur during the fourth quarter of 2004,
shareholder and regulatory approvals, and customary conditions. The transaction
is expected to close during the first quarter of 2005. The Company has incurred
costs associated with this pending transaction, including payments for legal and
other advisory services, of approximately $0.7 million through September 30,
2004, which have been recorded on the balance sheet as Other Assets. When the
transaction is finalized, these costs will be included in the purchase price;
however,
10
were the transaction not to occur, these costs would be charged to operations
during the period in which that determination was made.
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, the Company restated its results for the three-month period ended March
31, 2004 and filed an amended Form 10-Q for the period. There is no impact on
the financial results for the three-month or nine-month periods ended September
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, the Company also
utilizes 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
11
demand for replacement radiator and air conditioning components in the
Automotive and 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 Company also added approximately $0.9 million of
restructuring programs in 2003 to include the relocation of Fedco's inventory
and machinery (acquired at the end of 2002) 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.
On October 29, 2004, the Company announced that it had signed a letter of
intent with Modine Manufacturing Company ("Modine") to merge Modine's
aftermarket business, on a debt-free basis, into Transpro in an all-stock
transaction. As part of the transaction, Modine will acquire Transpro's heavy
duty OEM business unit for a cash price of $17 million, which proceeds will be
used to reduce debt. Under the terms of the letter of intent, Modine's
shareholders would hold 54% of the Company and current Transpro shareholders
would own 46%. The closing is subject to the negotiation of definitive
agreements, which is expected to occur during the fourth quarter of 2004,
shareholder and regulatory approvals, and customary conditions. The transaction
is expected to close during the first quarter of 2005.
OPERATING RESULTS
QUARTER ENDED SEPTEMBER 30, 2004 VERSUS QUARTER ENDED SEPTEMBER 30, 2003
Sales for the third quarter of 2004 of $72.0 million were $6.4 million or
9.7% above the third quarter of 2003. The Automotive and Light Truck segment had
sales of $48.8 million, which were flat with the $48.9 million reported in the
third quarter of 2003. Heat exchange product sales increased 0.9%, while
temperature control product sales were 9.3% below the prior year period. While
new customer agreements added to revenues in this segment in the quarter, this
was offset by continued softness in the temperature control market, as well as
the continued inventory rebalancing within our customer base. In addition, we
believe that sales were also impacted by rising fuel costs, which affect
consumers' decisions regarding discretionary automotive spending, and
competitive pricing pressure. Unfavorable weather conditions also impacted
temperature control sales during the period. Heavy Duty segment sales in the
third quarter of 2004 were $23.2 million, $6.5 million or 38.9% above the prior
year period. Sales in the Heavy Duty OEM Unit were up 75.3% reflecting increased
product demand from our OEM customers due to rising Class 7 and 8 truck sales,
and incremental revenues from new business announced subsequent to the third
quarter of 2003. Heavy Duty Aftermarket Unit sales were 5.5% above the third
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 in the markets served by this business
unit.
Gross margin, as a percentage of net sales, was 21.0% versus 20.1% in the
third quarter of 2003. The improvement reflects higher sales, higher levels of
productivity, and the benefits of cost savings initiatives executed by the
Company over the past three years. These favorable items more than offset the
impacts of rising commodity costs impacting all segments and increased
competitive pricing pressures impacting the Automotive and Light Truck segment.
Selling, general and administrative expenses increased as a percentage of
net sales to 15.1% from 13.8% in the third quarter of 2003. The increase in
expenses primarily reflects the level of costs necessary to
12
support the current quarter's higher sales levels, as well as increased freight
costs and higher accruals for incentive-related expenses than in the year ago
period. These costs offset the impacts of the Company's cost reduction programs.
During the third quarter of 2003, the Company lowered incentive and other
accruals to reflect business conditions at that time.
Restructuring costs in the third quarter of 2003 of $0.3 million were
associated with 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 was $0.5 million above last year's levels as the impact of
lower average debt levels was offset by rising interest rates and discounting
charges associated with the Company's participation in several customer
sponsored vendor payment programs which are administered by financial
institutions. Average rates on our revolving credit facility were 4.33% for the
third quarter of 2004 versus 4.0% for the same period in 2003, while average
borrowing levels for the quarter were $52.7 million in 2004 compared with $56.8
million a year ago.
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 third quarter of 2003, the Company recorded an additional $0.6
million of refundable income taxes as a result of filing its 2002 Federal Income
Tax Return.
The net income for the third quarter was $2.7 million or $0.37 per basic
and $0.36 per diluted share in 2004 versus net income of $2.0 million or $0.27
per basic and diluted share in 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2004 VERSUS SEPTEMBER 30, 2003
For the nine months ended September 30, 2004, net sales of $204.1 million
were 15.6% above a year ago. Automotive and Light Truck Group sales were up 8.3%
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 growing competitive pricing pressure and
lower temperature control unit sales caused by 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 September of last year. Heavy
Duty Group sales were 36.5% 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 nine months of
2004 were 18.7% compared with 16.6% 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 affecting all segments and
competitive pricing pressures impacting the Automotive and Light Truck segment.
In the first nine months 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, which
did not reoccur in 2004, offset the favorable impacts of the Company's cost
savings initiative programs.
13
Selling, general and administrative expenses for the nine months ended
September 30, 2004 increased by $2.5 million to 15.6% of sales compared to 16.7%
of sales a year ago. The dollar increase reflects higher expense levels
attributable to increased sales for the period as well as increased incentive
compensation accruals reflecting the year over year improvement in operating
results. The reduction as a percentage of sales reflects the Company's cost
reduction activities over the past three years.
Restructuring and other special charges of $1.3 million for the first nine
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 $0.3 million above last year for the first nine months
of 2004, as the impact of lower average debt levels was more than offset by
increased discounting charges from the Company's expanded participation in
vendor sponsored payment programs. Average interest rates on our revolving
credit facility were 4.11% for the first nine months of 2004 compared to 4.17%
in 2003, while average debt levels were $51.6 million vs. $58.6 million in 2003.
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 benefit of
$1.3 million for refundable income taxes recorded in the second and third
quarters, as a result of filing the Company's 2002 Federal Income Tax return.
Net income for the first nine months of 2004 was $2.8 million or $0.39 per
basic and $0.38 per diluted share, while the net loss for the first nine months
of 2003 was $3.0 million or $0.43 per basic and diluted share.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $11.3 million in the first nine
months of 2004. Accounts receivable levels increased by $2.8 million reflecting
the impact of higher sales levels. This increase was offset in part as the
Company continued to accelerate the collection of customer receivables utilizing
cost effective customer-sponsored vendor programs administered by financial
institutions. This accelerated collection method is being utilized in an effort
to offset the continuing trend towards longer customer dating terms by "blue
chip" customers. Inventory levels grew $5.2 million reflecting the start-up of
new customer programs and increases related to our higher sales levels. 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 $8.1 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 nine months of
2003, operations generated $4.4 million of cash. Accounts receivable in 2003
declined by $4.2 million as the Company commenced its participation in a
customer-sponsored vendor payment program designed to accelerate the collection
of receivables. Inventories rose by $7.3 million in 2003 due to soft market
conditions, which included a shorter than normal peak selling season for heat
exchange and air conditioning products. Accounts payable rose by $7.7 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.
14
The $3.7 million of capital spending during the first nine months of 2004
was primarily in the Automotive and Light Truck Heat Exchange and Heavy Duty OEM
business units. This reflected expenditures for new product introductions, cost
reductions and computer upgrades. The Company expects that capital expenditures
for the year will be between $5.5 million and $6.5 million.
During the third quarter of 2004, in a non-cash transaction, the Company
sold $1.6 million of inventory and fixed assets, associated with its condenser
product line, at its net book value, to a vendor in return for a reduction in
the Company's accounts payable to that vendor and a 24-month supply agreement
commencing on January 1, 2005.
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 September 30, 2004 was $44.0 million, compared to $50.9
million at the end of 2003 and $53.6 million at September 30, 2003. The
reduction from year-end reflects the utilization of cash generated by operating
activities. At September 30, 2004 the Company had $10.9 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 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.
15
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.
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.
16
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 September 30, 2004. Based on the foregoing, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective.
Subsequent to the end of the second quarter of 2004 in conjunction with the
preparation of the financial statements for that period, the Company implemented
process and control improvements to insure that revenue is recognized in the
proper periods. Specifically, these procedures included a review of all customer
contracts in place and the implementation of a policy requiring sign-off by a
senior financial officer if any new customer contract is entered into or
existing customer contract is revised to contain shipping terms other than "FOB
Shipping Point." There have been no other changes in the Company's internal
control over financial reporting during the quarter ended September 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 6. EXHIBITS
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.
18
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: November 11, 2004 By: /s/ Charles E. Johnson
-------------------------------------------
Charles E. Johnson
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 11, 2004 By: /s/ Richard A. Wisot
-------------------------------------------
Richard A. Wisot
Vice President, Treasurer, Secretary,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
19