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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 March 31, 2005
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
May 11, 2005 was 7,108,523.
Exhibit Index is on page 17 of this report.
Page 1 of 22
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INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2005 and 2004 3
Condensed Consolidated Balance Sheets at March 31, 2005 and December
31, 2004 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 and 2004 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 16
PART II. OTHER INFORMATION
Item 6. Exhibits 17
Signatures 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSPRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three Months
(in thousands, except per share amounts) Ended March 31,
----------------------------
2005 2004
------------ ------------
Net sales $48,308 $49,436
Cost of sales 39,341 40,619
------------ ------------
Gross margin 8,967 8,817
Selling, general and administrative expenses 10,575 9,424
Restructuring and other special charges 262 --
------------ ------------
Operating loss from continuing operations (1,870) (607)
Interest expense 1,457 839
------------ ------------
Loss from continuing operations before taxes (3,327) (1,446)
Income tax benefit (1,055) (62)
------------ ------------
Loss from continuing operations (2,272) (1,384)
Income from discontinued operation, net of $506
and $9 of income tax for 2005 and 2004 848 741
Gain on sale of discontinued operation, net of income tax of $2,331 3,899 --
------------ ------------
Net income (loss) $2,475 $(643)
============ ============
Basic (loss) income per common share:
From continuing operations $(0.32) $(0.19)
From discontinued operation 0.12 0.10
From gain on sale of discontinued operation 0.55 --
------------ ------------
Net income (loss) $ 0.35 $(0.09)
============ ============
Diluted (loss) income per common share:
From continuing operations $(0.32) $(0.19)
From discontinued operation 0.12 0.10
From gain on sale of discontinued operation 0.55 --
------------ ------------
Net income (loss) $ 0.35 $(0.09)
============ ============
Weighed average common shares -- basic 7,107 7,106
============ ============
-- diluted 7,107 7,106
============ ============
The accompanying notes are an integral part of these statements.
3
TRANSPRO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) March 31, December 31,
ASSETS 2005 2004
---------------- ----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 423 $ 297
Accounts receivable (less allowances of $2,525 and $2,746) 38,066 34,429
Inventories:
Raw material and component parts 16,676 16,437
Work in process 33 3 1,212222
Finished goods 61,227 54,771 45,594
------------- ---------------
Total inventories 77,936 71,211
------------- ---------------
Other current assets 2,462 4,198
------------- ---------------
Current assets held for disposition -- 11,403
------------- ---------------
Total current assets 118,887 121,538
------------- ---------------
Property, plant and equipment 51,663 48,290
Accumulated depreciation and amortization (32,945) (32,155)
------------- ---------------
Net property, plant and equipment 18,718 16,135
------------- ---------------
Other assets 6,003 5,621
------------- ---------------
Long-term assets held for disposition -- 6,565
------------- ---------------
Total assets $143,608 $149,859
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit debt and current portion of long-term debt $36,908 $43,904
Accounts payable 33,612 26,647 22,577
Accrued liabilities 16,212 17,453
Current liabilities held for disposition -- 8,176
------------- ---------------
Total current liabilities 86,732 96,180
------------- ---------------
Long-term liabilities:
Long-term debt 1,035 120 7
Other long-term liabilities 6,536 6,724 13
------------- ---------------
Total long-term liabilities 7,571 6,844
------------- ---------------
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
March 31, 2005 and December 31, 2004 -- --
Series B convertible preferred stock, $.01 par value: Authorized 30,000 shares;
issued and outstanding; -- 12,781 shares at March 31, 2005 and December 31,
2004 (liquidation preference $1,278) -- --
Common Stock, $.01 par value: Authorized 17,500,000 shares; 7,150,459 shares issued at
March 31, 2005; 7,147,959 shares issued at December 31, 2004; 7,108,523 shares
outstanding at March 31, 2005; 7,106,023 shares outstanding at December 31, 2004 71 71
Paid-in capital 55,052 55,041
Retained earnings (deficit) 606 (1,853)
Accumulated other comprehensive loss (6,409) (6,409)
Treasury stock, at cost, 41,936 shares at March 31, 2005 and December 31, 2004 (15) (15)
------------- ---------------
Total stockholders' equity 49,305 46,835
------------- ---------------
Total liabilities and stockholders' equity $143,608 $149,859
============= ===============
The accompanying notes are an integral part of these statements.
4
TRANSPRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Three Months Ended
(Amounts in thousands) March 31,
------------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
Net income (loss) $2,475 $(643)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating
activities from continuing operations:
Income from discontinued operation (848) (741)
Gain on sale of discontinued operation (6,230) --
Depreciation and amortization 1,107 1,175
Deferred income taxes 870 --
Provision for (benefit from) uncollectible accounts receivable (169) 39
Non-cash restructuring charges 214 --
Gain on sale of building (69) (69)
Changes in operating assets and liabilities:
Accounts receivable (3,468) 3,800
Inventories (6,725) (1,736)
Accounts payable 6,965 6,206
Accrued expenses (1,323) 1,116
Other (672) (177)
------------- -----------
Net cash (used in) provided by operating activities of continuing operations (7,873) 8,970
Net cash provided by (used in) operating activities of discontinued operation 852 (864)
------------- -----------
Net cash (used in) provided by operating activities (7,021) 8,106
------------- -----------
Cash flows from investing activities:
Capital expenditures, net of normal sales and retirements (2,535) (718)
Proceeds from sale of discontinued operation 17,000 --
------------- -----------
Net cash provided by (used in) investing activities 14,465 (718)
------------- -----------
Cash flows from financing activities:
Dividends paid (16) (16)
Net repayments under revolving credit facility (6,803) (6,714)
Repayments of term loan and capitalized lease obligations (510) (392)
Proceeds from stock option exercise 11 --
------------- -----------
Net cash used in financing activities (7,318) (7,122)
------------- -----------
Increase in cash and cash equivalents 126 266
Cash and cash equivalents at beginning of period 297 171
------------- -----------
Cash and cash equivalents at end of period $ 423 $ 437
============= ===========
Non-cash investing and financing activity:
Entered capital lease obligation $1,232 $ 288
============= ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $1,248 $ 640
============= ===========
Income taxes $ 147 $ 66
============= ===========
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, 2004 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 March 31, 2005 are not necessarily indicative of results for
the full year.
Prior period amounts have been reclassified to conform to current year
classifications.
NOTE 2 - SALE OF HEAVY DUTY OEM BUSINESS UNIT
On March 1, 2005, the Company completed the sale of its Heavy Duty OEM
business to Modine Manufacturing Company for $17 million in cash. The sale was
made pursuant to the OEM acquisition agreement, dated January 31, 2005, as
amended on March 1, 2005. The Company recorded a gain of $3.9 million, which is
net of $2.3 million of tax, which is reported as a gain on sale of discontinued
operation in the Consolidated Statements of Operations. The Heavy Duty OEM
business manufactured and distributed heat exchangers to heavy duty truck and
industrial and off-highway original equipment manufacturers. Net proceeds from
the sale were used to reduce borrowings under the Company's Revolving Credit and
Term Loan Agreements.
Heavy Duty OEM results for all periods are shown in the attached
Consolidated Statements of Operations as results of discontinued operation. Net
sales for the Heavy Duty OEM business were $9.3 million for the period January
1, 2005 through the date of the sale, March 1, 2005, while net sales for the
first quarter ended March 31, 2004 were $10.5 million. Income from discontinued
operation for the period January 1, 2005 through the date of the sale, March 1,
2005, was $0.8 million, which is net of $0.5 million of tax, compared to $0.7
million, for the quarter ended March 31, 2004.
At December 31, 2004, discontinued operation's current assets of $11.4
million included accounts receivable, net of $5.8 million; inventories, net of
$5.2 million; and other current assets of $0.4 million. Discontinued operation's
non-current assets reflect gross property, plant and equipment of $22.5 million,
less $15.9 million of accumulated depreciation. Discontinued operation's current
liabilities include $6.5 million of accounts payable and $1.7 million of accrued
expenses.
NOTE 3 - 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
6
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 for the three months ended March 31, would have been as
follows:
2005 2004
------------ ------------
(in thousands, except per share amounts)
Net income (loss):
As reported $ 2,475 $ (643)
Stock based compensation costs, net of tax (44) (52)
------- -------
Pro forma $ 2,431 $ (695)
======= =======
Basic net income (loss) per common share:
As reported $ 0.35 $ (0.09)
Pro forma $ 0.34 $ (0.10)
Diluted net income (loss) per common share:
As reported $ 0.35 $ (0.09)
Pro forma $ 0.34 $ (0.10)
NOTE 4 - COMPREHENSIVE LOSS
For the three months ended March 31, 2005 and 2004, "Accumulated other
comprehensive loss" was comprised of the reported net income (loss) for the
period of $2.5 million and $(0.6) million, respectively.
NOTE 5 - RESTRUCTURING AND OTHER SPECIAL CHARGES
On March 30, 2005 the Company announced that it would be closing two
warehousing operations and a returns processing facility in Memphis, Tennessee
in connection with the opening of a new distribution facility in Southaven,
Mississippi. The Company is taking these actions in order to streamline its
distribution network and enhance its commitment to customer service. The
relocation and closing activities are expected to be completed by June 30, 2005
and result in the Company incurring approximately $0.4 million to $0.5 million
of restructuring costs. During the quarter ended March 31, 2005, the Company
recorded $0.3 million of restructuring costs representing $0.2 million from the
write-down to net realizable value of fixed assets, which will no longer be
utilized and $0.1 million in relocation costs paid during the period.
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued a revised SFAS No. 123(R),
"Share-Based Payment." SFAS 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services or incurs liabilities in exchange for goods or services that are based
on the fair value of the entity's equity instruments, focusing primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) requires public entities to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award (with limited
exceptions) and recognize the cost over the period during which an employee is
required to provide service in exchange for the award. The Company
7
will be required to adopt SFAS No. 123(R) as of January 1, 2006. The Company is
evaluating the impact of SFAS No. 123(R) and expects that it will record
non-cash stock compensation expenses. The ultimate impact on the results of
operations is not determinable as it is dependent on the number of options
granted after the effective date.
NOTE 7 - INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
income (loss) per share:
Three Months
Ended March 31,
---------------------------------
2005 2004
--------------- ---------------
(in thousands, except per share amounts)
Numerator:
Loss from continuing operations $(2,272) $(1,384)
Deduct preferred stock dividend (16) (16)
--------------- ---------------
Loss from continuing operations attributable to common stockholders - basic
and diluted (2,288) (1,400)
Income from discontinued operation, net of tax 848 741
Gain on sale of discontinued operation, net of tax 3,899 --
--------------- ---------------
Net income (loss) attributable to common stockholders - basic and diluted $2,459 $(659)
=============== ===============
Denominator:
Weighted average common shares -- basic and diluted 7,107 7,106
=============== ===============
Basic (loss) income per common share:
From continuing operations $(0.32) $(0.19)
From discontinued operation 0.12 0.10
From gain on sale of discontinued operation 0.55 --
--------------- ---------------
Net income (loss) $0.35 ($0.09)
=============== ===============
Dilutive (loss) income per common share:
From continuing operations $(0.32) $(0.19)
From discontinued operation 0.12 0.10
From gain on sale of discontinued operation 0.55 --
--------------- ---------------
Net income (loss) $0.35 ($0.09)
=============== ===============
The weighted average basic common shares outstanding was used in the
calculation of the diluted loss per common share for the three months ended
March 31, 2005 and 2004 as the use of weighted average diluted common shares
outstanding would have an anti-dilutive effect on the loss per share.
Certain options to purchase common stock were outstanding during the
three months ended March 31, 2005 and 2004, 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:
8
Three Months Ended March 31,
--------------------------------------
2005 2004
------------------ ---------------
Options outstanding 56,400 80,300
Range of exercise prices $7.75 - $11.75 $5.50 - $11.75
NOTE 8 - 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 only of an Aftermarket
unit after the Heavy Duty OEM business unit sale. The table below sets forth
information about the reported segments after adjustments to reflect the Heavy
Duty OEM business unit results as a discontinued operation:
Three Months
Ended March 31,
-------------------------
2005 2004
-------------------------
(in thousands)
Net sales:
Automotive and Light Truck $40,404 $42,079
Heavy Duty 7,904 7,357
Intersegment transfers:
Automotive and Light Truck -- --
Heavy Duty -- --
Eliminations -- --
------- -------
Total net sales $48,308 $49,436
======= =======
Operating income (loss) from continuing operations:
Automotive and Light Truck $ 978 $1,817
Restructuring and other special charges (262) --
------- -------
Automotive and Light Truck total 716 1,817
------- -------
Heavy Duty (258) (777)
Restructuring and other special charges -- --
------- -------
Heavy Duty total (258) (777)
------- -------
Corporate expenses (2,328) (1,647)
------- -------
Total operating (loss) from continuing operations $(1,870) $ (607)
======= =======
NOTE 9 - RETIREMENT AND POST-RETIREMENT PLANS
The components of net periodic benefit costs for the first quarter of
2005 and 2004 are as follows:
9
RETIREMENT PLANS POSTRETIREMENT PLANS
---------------------- -------------------------
2005 2004 2005 2004
--------- ----------- ------------- ---------
(in thousands)
Service cost $232 $214 $1 $1
Interest cost 576 456 10 10
Expected return on plan assets (701) (560) -- --
Amortization of net loss 145 59 1 1
--------- ----------- ------------- ---------
Net periodic benefit cost $252 $169 $12 $12
========= =========== ============= =========
NOTE 10 - MERGER WITH MODINE AFTERMARKET BUSINESS
On January 31, 2005, the Company entered into a merger agreement and a
contribution agreement providing for the merger of Modine Manufacturing
Company's aftermarket business into Transpro. Pursuant to the terms of the
merger agreement and contribution agreement, Modine will spin off its
aftermarket business on a debt-free basis to its shareholders, and the resulting
company will immediately merge into Transpro. Each step of the transaction is
expected to be tax-free to the shareholders of both companies. Following the
merger, Transpro's current shareholders will own 48% of the new company's
shares, and Modine shareholders will own 52%. For accounting purposes, Transpro
will be the acquirer.
On February 4, 2005, the Company was notified that the Antitrust
Division of the Department of Justice, and the Federal Trade Commission had
granted early termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, applicable to the merger. On May 2, 2005,
the Company filed a registration statement with the Securities and Exchange
Commission with respect to the merger with Modine Manufacturing Company's
aftermarket business. The parties expect to close the merger late in the second
quarter or early in the third quarter of calendar 2005, subject to customary
conditions, including the approval of Transpro's shareholders.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, subsequent to the sale of
the Company's Heavy Duty OEM business on March 1, 2005, the Company designs,
manufactures and distributes radiators, radiator cores, charge air coolers, oil
coolers and other specialty heat exchangers for 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.
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 the Fedco
Automotive Components Company inventory and machinery, which had been 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 have served as a foundation for improvements experienced in 2004 and
the first three months of 2005. In 2005, the Company commenced a new round of
cost reduction activities with the opening of a new distribution facility in
Southaven, Mississippi and the closure of two warehousing locations and a return
goods facility in Memphis, Tennessee. Restructuring expenses associated with
this relocation are expected to be $0.4 million to $0.5 million, while the
benefits, which will begin to be realized late in the second quarter, are
expected to exceed these costs on an annualized basis.
On February 1, 2005, the Company announced that it had signed
definitive agreements, subject to customary closing conditions including
shareholders' approval, providing for the merger of the aftermarket business of
Modine into Transpro and Modine's acquisition of Transpro's Heavy Duty OEM
business unit for $17 million in cash. The transaction is expected to increase
the Company's consolidated annual sales to over $400 million and add
manufacturing and distribution locations in the U.S., Europe and Mexico. In
addition, the Company will be focused solely on supplying heating and cooling
components and systems to the automotive and heavy duty aftermarkets in North
and Central America and Europe. On February 4, 2005, the Antitrust Division of
the Department of Justice and the Federal Trade Commission granted early
termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, applicable to the merger. On May 2, 2005, the Company
filed its Form S-4 registration statement with the Securities and Exchange
Commission containing the preliminary proxy statement/prospectus for the merger.
11
The parties expect to close the merger late in the second quarter or early in
the third quarter of calendar 2005, subject to customary conditions, including
the approval of Transpro's shareholders.
As discussed in Note 2 of the Notes to Condensed Consolidated Financial
Statements contained in this Form 10-Q, the Company completed the sale of its
Heavy Duty OEM Business to Modine Manufacturing Company on March 1, 2005 for $17
million in cash. The gain from the sale of the business of $6.2 million before
taxes of $2.3 has been included in the operating results for the three months
ended March 31, 2005. Operating results of the Heavy Duty OEM business unit for
periods prior to the sale are shown as a discontinued operation in the
Consolidated Statement of Operations included herein. The proceeds from the sale
were utilized to reduce outstanding borrowings under the Company's revolving
credit and term loan agreements.
OPERATING RESULTS
QUARTER ENDED MARCH 31, 2005 VERSUS QUARTER ENDED MARCH 31, 2004
Net sales from continuing operations for the first quarter of 2005 of
$48.3 million were $1.1 million or 2.3% lower than the first quarter of 2004.
The Automotive and Light Truck segment had sales of $40.4 million, which were
$1.7 million or 4.0% below the first quarter of 2004. Heat exchange product
sales decreased 4.2%, reflecting lower demand caused by overall market softness,
and continuing competitive pricing pressure. Temperature control product sales
were 2.2% lower than the prior year period. Despite the impact of new customers
added over the past year, temperature control unit demand was unfavorably
impacted by changed customer buying patterns, customers' desires to lower
inventory levels, a shrinking marketplace due to improved OEM quality and air
conditioning system changes and customer hesitation due to two years of soft
sales. Heavy Duty segment sales in the first quarter of 2005 were $7.9 million,
$0.5 million or 7.4% above the prior year period. This reflects sales of the
Heavy Duty aftermarket business unit, which benefited from the impact of new
product introductions, an increase in unit volume caused by the positive effects
of an improving economy on the marketplaces served by this business along with
an ability to pass along to customers a portion of the impact of rising
commodity costs.
Gross margin from continuing operations, as a percentage of net sales,
was 18.6% versus 17.8% in the first quarter of 2004. The improvement reflects
lower product costs due to the benefits of purchasing and manufacturing cost
savings initiatives executed by the Company over the past several years. The
Company continues to experience the impact of rising commodity prices. Copper
and aluminum costs are approximately 50% and 25%, respectively over their levels
of a year ago, and they are continuing to rise. Within the Automotive and Light
Truck segment, the Company has been unable to pass along the impact of these
increases to its customers; however, in the Heavy Duty segment, it has had some
success. The Company will continue to be focused on cost reduction actions in
order to offset the impacts of these rising costs.
Selling, general and administrative expenses increased as a percentage
of net sales to 21.9% from 19.1% in the first quarter of 2004. The increase is
mainly attributable to the impact of the initiation of Sarbanes-Oxley compliance
activities, higher employee health care costs in the period and new hires and
other costs associated with planning for the pending merger with the aftermarket
business of Modine Manufacturing. The Company is investing now so that it can
accelerate the implementation of merger-related synergy programs. The Company
also experienced rising freight costs attributable to higher fuel prices.
12
Restructuring costs in the first quarter of 2005 of $0.3 million were
associated with the closure of two warehousing locations and a return goods
facility in Memphis, Tennessee, which was done in conjunction with the
previously announced opening of a new distribution facility in Southaven,
Mississippi. The expenses reflect the cost to relocate inventory and the
write-down to net realizable value of certain fixed assets being disposed. When
completed in the second quarter, this relocation is expected to result in $0.4
million to $0.5 million of restructuring costs.
Interest expense of $1.5 million was $0.6 million above last year's
levels due to the impact of higher discounting charges from the Company's
expanded participation in customer-sponsored vendor payment programs and higher
average interest rates, which more than offset the impact of lower average debt
levels. Discounting expense was $0.7 million in the first quarter of 2005,
compared to $0.1 million in the same period last year reflecting higher levels
of customer receivables being collected utilizing these programs and rising
factoring rates, which fluctuate in conjunction with the prime interest rate.
Average interest rates on the Company's revolving credit, and term loan
borrowings were 5.32% in the first quarter of 2005, compared to 4.0% last year.
Average debt levels were $42.5 million in 2005, compared to $51.0 million last
year. Year-over-year interest levels will continue to be higher as a result of
expected future increases in interest rates and the Company's continued
utilization of the customer-sponsored vendor payment programs.
The income tax benefit attributable to continuing operations reflects a
federal income tax benefit on the pretax loss offset in part by a provision for
foreign income taxes. In 2004, the effective tax rate included only a foreign
provision, as the reversal of the Company's deferred tax valuation allowances
offset a majority of the state and any federal income tax provisions.
The loss from continuing operations for the first quarter of 2005 was
$2.3 million, or $0.32 per basic and diluted share, compared to a loss of $1.4
million, or $0.19 per basic and diluted share for the first quarter of 2004.
As a result of the sale of the Heavy Duty OEM business on March 1,
2005, as described in Note 2 of the accompanying Notes to Condensed Consolidated
Financial Statements, the results of this business are treated as a discontinued
operation. For the period prior to the sale in 2005, the discontinued operations
reported income after taxes of $0.8 million or $0.12 per basic and diluted
share, compared to income of $0.7 million, or $0.10 per basic and diluted share,
for the three months ended March 31, 2004.
The difference between the $17.0 million selling price and the net book
value of the Heavy Duty OEM assets, which were sold less transaction costs,
resulted in the recording of a gain on sale after tax of $3.9 million or $0.55
per basic and diluted share.
Net income for the three months ended March 31, 2005 was $2.5 million
or $0.35 per basic and diluted share, compared to a net loss of $0.6 million, or
$0.09 per basic and diluted share for the same period a year ago.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash flow used in operating activities was $7.0 million in the first
quarter of 2005. This was comprised of $7.9 million utilized by continuing
operations and $0.9 million generated by discontinued operations prior to the
sale of the Heavy Duty OEM assets. Accounts receivable levels increased by $3.5
million due to the seasonal nature of the Company's Auto and Light Truck
temperature control sales and the timing of customer payments. The Company
continues to accelerate the collection of customer receivables
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utilizing cost effective customer-sponsored vendor programs administered by
financial institutions in an effort to offset the continuing trend towards
longer customer dating terms by "blue chip" customers. Inventory levels grew
$6.7 million as the impact of increases related to typical seasonal buying
patterns were compounded by softer than anticipated marketplace demand. The
Company believes that inventory levels are higher than necessary and will remain
focused on managing inventory levels to better align them with current market
conditions and the anticipated impact of merging with the aftermarket business
of Modine Manufacturing throughout the remainder of 2005. Accounts payable rose
by $7.0 million as a result of the growth in inventory levels. Accrued expenses
reflected an outflow of $1.3 million due to the payment of 2004 management
incentives. During the first three months of 2004, operations generated $8.1
million of cash. Accounts receivable declined by $3.8 million as the Company
participated in a customer-sponsored vendor payment program designed to
accelerate the collection of receivables. Inventory levels rose $1.7 million due
to the start-up of new customer programs and increases related to typical
seasonal buying patterns. Accounts payable rose by $6.2 million 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 three months of
2005 was primarily associated with the opening of a new distribution center
located in Southaven, Mississippi. In addition, the Company entered into a
long-term capital lease for the purchase of racking to be used in the
distribution center. The Company expects that capital expenditures for the year
will be between $7.0 million and $8.0 million, exclusive of any spending
requirements associated with the merger with Modine's aftermarket business
On March 1, 2005, the Company completed the sale of its Heavy Duty OEM
business for $17 million in cash. These proceeds were utilized to lower
outstanding borrowings under the revolving credit agreement and increase the
amount available for future borrowings.
Total debt at March 31, 2005 was $37.9 million, compared to $44.0
million at the end of 2004 and $44.1 million at March 31, 2004. The reduction
from year-end reflects the utilization of cash generated by the sale of the
Heavy Duty OEM business offset by borrowings to meet the operating requirements
of continuing operations. At March 31, 2005, the Company had $10.4 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. The Company utilizes customer sponsored programs
administered by financial institutions in order to accelerate the collection of
funds and offset the impact of these lengthening terms. The Company intends to
continue utilizing these programs as long as they are a cost effective tool to
accelerate cash flow. 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.
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The existing Loan Agreement expires on December 27, 2005. The Company is
currently negotiating for the extension or replacement of the agreement.
As a result of the merger with the aftermarket business of Modine, the
Company's liquidity is expected to improve as the assets being acquired will be
debt free and the acquired balance sheet will include at least $6.3 million in
cash. We presently estimate that the costs of the business realignment and other
actions necessary to effectively integrate the business will be funded from cash
transferred in the merger, generated by the operations acquired, including cost
savings, or result from borrowings under the Company's Loan Agreement.
CRITICAL ACCOUNTING ESTIMATES
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, 2004.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued a revised SFAS No. 123(R),
"Share-Based Payment." SFAS 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services or incurs liabilities in exchange for goods or services that are based
on the fair value of the entity's equity instruments, focusing primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) requires public entities to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award (with limited
exceptions) and recognize the cost over the period during which an employee is
required to provide service in exchange for the award. The Company will be
required to adopt SFAS No. 123(R) as of January 1, 2006. The Company is
evaluating the impact of SFAS No. 123(R) and expects that it will record
non-cash stock compensation expenses. The ultimate impact on the results of
operations is not determinable as it is dependent on the number of options
granted after the effective date.
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 made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. 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
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. Such statements
are based upon the current beliefs and expectations of Transpro's management and
are subject to significant risks and uncertainties. Actual results may differ
from those set forth in the forward-looking statements. When used herein the
terms "anticipate," "believe," "estimate," "expect," "may," "objective," "plan,"
"possible," "potential," "project," "will" and similar expressions identify
forward-looking statements.
In addition, there can be no assurance that the transaction with Modine
will be completed, or as to its ultimate timing and terms. The following factors
relating to the transaction, among others, could cause actual results to differ
from those set forth in the forward-looking statements: (1) the possibility that
the companies may be unable to obtain required corporate and regulatory
approvals or to satisfy other conditions for the transaction; (2) the risk that
the businesses will not be integrated successfully; (3) the risk that the cost
15
savings and any revenue synergies from the transaction may not be fully realized
or may take longer to realize than expected; (4) disruption from the transaction
making it more difficult to maintain relationships with clients, employees or
suppliers; (5) the transaction may involve unexpected costs; (6) increased
competition and its effect on pricing, spending, third-party relationships and
revenues; (7) the risk of new and changing regulation in the U.S. and
internationally; (8) the possibility that Transpro's businesses may suffer as a
result of the transaction; and (9) other uncertainties and risks beyond the
control of Transpro. Additional factors that could cause Transpro's results to
differ materially from those described in the forward-looking statements can be
found in the Annual Report on Form 10-K of Transpro and Transpro's other filings
with the SEC. The forward-looking statements contained in this filing are made
as of the date hereof, and we do 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 and foreign currency exchange rates, a concentration of credit
risk primarily with trade accounts receivable and the price of commodities used
in our manufacturing processes. 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, 2004.
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 March 31, 2005. Based upon the foregoing, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of March 31, 2005.
There have been no changes in the Company's internal control over
financial reporting during the quarter ended March 31, 2005 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 6. 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.
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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: May 12, 2005 By: /s/ Charles E. Johnson
-------------------------------------------
Charles E. Johnson
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2005 By: /s/ Richard A. Wisot
-------------------------------------------
Richard A. Wisot
Vice President, Treasurer, Secretary, and
Chief Financial Officer (Principal
Financial and Accounting Officer)
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