UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2006
Commission file number 1-7807
Champion Parts, Inc.
(Exact name of registrant as specified in its charter)
Illinois
36-2088911
(State or other jurisdiction of
I.R.S. Employer Identification No.
incorporation or organization)
2005 West Avenue B, Hope, Arkansas 71801
(Address of principal executive offices)
870-777-8821
(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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes [ ]
No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class Outstanding as of April 2, 2006
Common Shares - $0.10 Par Value 3,655,266
Champion Parts, Inc.
Form 10-Q
Cross Reference Index
PART I | FINANCIAL INFORMATION | PAGE |
| | | |
ITEM 1. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | |
| | Balance Sheets – Assets | 3 |
| | Balance Sheets - Liabilities & Stockholders' Equity | 4 |
| | Statements of Income | 5 |
| | Statement of Stockholders' Equity | 6 |
| | Statements of Comprehensive Income | 7 |
| | Statements of Cash Flows | 8 |
| | Notes to Financial Statements | 9-10 |
| | | |
ITEM 2. | MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL | |
| | CONDITION AND RESULTS OF OPERATIONS | |
| | Management Overview | 11 |
| | Results of Operations | |
| | Three Months Ended April 2, 2006 | 11-12 |
| | Critical Accounting Policies and Estimates | 12 |
| | Recent Accounting Pronouncements | 13 |
| | Liquidity and Capital Resources | |
| | Liquidity Overview | 13 |
| | Working Capital | 14 |
| | Debt | 14-15 |
| | Seasonality | 15 |
| | Future Outlook | 15 |
| | Factors Which May Affect Future Results | 16 |
| Off-Balance Sheet Arrangements | 16 |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 17 |
| | | |
ITEM 4. | CONTROLS AND PROCEDURES | 17 |
PART II | OTHER INFORMATION | |
| | | |
ITEM 1. | LEGAL PROCEEDINGS | 18 |
| | | |
ITEM 1A. | RISK FACTORS | 18 |
| | | |
ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K | 18 |
| | | |
| | SIGNATURE PAGE | 19 |
| | | |
EXHIBITS | | |
31.1 | Rule 13a-14(a) / 15d-14(a) CERTIFICATION | 20 |
32.1 | SECTION 906 CERTIFICATION | 21 |
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| April 2, 2006 | December 31, 2005 |
ASSETS | | |
| | | |
CURRENT ASSETS: | | |
Cash | $ 285,000 | $ 276,000 |
Accounts receivable trade, less allowance for uncollectibles | | |
of $1,261,000 and $1,205,000 in 2006 and 2005, respectively | 10,082,000 | 8,462,000 |
| | | |
Miscellaneous receivables | 107,000 | 120,000 |
| | | |
Inventories, net of reserves | 11,209,000 | 11,820,000 |
| | | |
Prepaid expenses and other assets | 427,000 | 443,000 |
Total current assets | 22,110,000 | 21,121,000 |
| | | |
PROPERTY, PLANT AND EQUIPMENT: | | |
Land | 70,000 | 70,000 |
Buildings | 4,461,000 | 4,461,000 |
Machinery and equipment | 14,535,000 | 14,514,000 |
Gross property, plant & equipment | 19,066,000 | 19,045,000 |
Less: Accumulated depreciation | 17,153,000 | 17,072,000 |
Net property, plant & equipment | 1,913,000 | 1,973,000 |
| | | |
Total other assets | 389,000 | 393,000 |
| | | |
Total assets | $24,412,000 | $23,487,000 |
The accompanying notes are an integral part of these statements.
3
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | April 2, 2006 | December 31, 2005 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| | | |
CURRENT LIABILITIES: | | |
Accounts payable | $7,947,000 | $7,803,000 |
Accrued expenses: | | |
Salaries, wages and employee benefits | 447,000 | 378,000 |
Other accrued expenses | 6,050,000 | 5,853,000 |
Taxes other than income | 161,000 | 53,000 |
Current maturities – mortgage note | 109,000 | 109,000 |
| | | |
Total current liabilities | 14,714,000 | 14,196,000 |
| | | |
| | | |
LONG-TERM DEBT: | | |
Long-term notes payable – revolver | 6,396,000 | 6,193,000 |
Long-term notes payable – mortgage note | 618,000 | 653,000 |
Long-term notes payable – subordinated debt | 1,793,000 | 1,793,000 |
Long-term notes payable – asset purchase note | 130,000 | 130,000 |
Total long-term debt | 8,937,000 | 8,769,000 |
| | | |
STOCKHOLDERS' EQUITY: | | |
| | | |
Preferred stock - No par value; authorized, 10,000,000 | | |
shares; issued and outstanding, none | -0- | -0- |
Common stock - $.10 par value; authorized, 50,000,000 shares, | | |
issued and outstanding, 3,655,266 shares | 366,000 | 366,000 |
Additional paid-in capital | 15,578,000 | 15,578,000 |
Accumulated (deficit) | (12,696,000) | (12,935,000) |
Accumulated other comprehensive (loss) | (2,487,000) | (2,487,000) |
Total stockholders’ equity | 761,000 | 522,000 |
| | | |
Total liabilities and stockholders’ equity | $24,412,000 | $23,487,000 |
The accompanying notes are an integral part of these statements.
4
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONDENSED)
FOR THE PERIODS ENDED
(Unaudited)
| | Three Months April 2, 2006 | Three Months April 3, 2005 |
Net Sales | $6,137,000 | $5,813,000 |
Costs and Expenses: | | |
Cost of products sold | 5,107,000 | 4,937,000 |
Selling, distribution & administrative | 626,000 | 571,000 |
Total costs and expenses | 5,733,000 | 5,508,000 |
| | | |
Operating income | 404,000 | 305,000 |
| | | |
Non-operating expense/(income): | | |
Interest expense, net | 147,000 | 170,000 |
Other non-operating (income) | (3,000) | (43,000) |
Total non-operating expense/(income) | 144,000 | 127,000 |
| | | |
Net income before income taxes | 260,000 | 178,000 |
| | | |
Income taxes | 21,000 | 18,000 |
| | | |
Net income | $ 239,000 | $ 160,000 |
| | | |
Weighted Average Common Shares Outstanding at April 3, 2005: | | |
Basic | 3,655,266 | 3,655,266 |
Diluted | 3,703,795 | 3,753,371 |
| | | |
Earnings Per Common Share - Basic: | | |
Net income per common share - basic | $ 0.07 | $ 0.04 |
| | | |
Earnings Per Common Share - Diluted: | | |
Net income per common share - diluted | $ 0.06 | $ 0.04 |
The accompanying notes are an integral part of these statements
5
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
| |
Common Shares | Common Stock Amount | Additional Paid-in Capital |
Accumulated (Deficit) | Accumulated Comprehensive (Loss) |
| | | | | | |
BALANCE – December 31, 2005 | 3,655,266 | $ 366,000 | $ 15,578,000 | $(12,935,000) | $ (2,487,000) |
| | | | | | |
Net Income | -0- | -0- | -0- | 239,000 | -0- |
| | | | | | |
BALANCE – April 2, 2006 | 3,655,266 | $ 366,000 | $ 15,578,000 | $(12,696,000) | $ (2,487,000) |
The accompanying notes are an integral part of these statements
6
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three Months April 2, 2006 | Three Months April 3, 2005 |
| | | |
Net income and other comprehensive income | $ 239,000 | $ 160,000 |
The accompanying notes are an integral part of these statements.
7
CHAMPION PARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Three Months April 2, 2006 | Three Months April 3, 2005 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | |
| | | |
Net income | $ 239,000 | $ 160,000 |
| | | |
Adjustments to reconcile net income to net cash provided by/(used in) operating activities: |
|
|
Depreciation and amortization | 84,000 | 116,000 |
Provision for inventory write-offs | 156,000 | 170,000 |
Provision for doubtful accounts | 56,000 | 81,000 |
Changes in assets and liabilities: | | |
Accounts receivable – gross | (1,675,000) | (255,000) |
Other accounts receivable | 13,000 | 3,000 |
Inventories – gross | 456,000 | 250,000 |
Prepaid expenses | 16,000 | 4,000 |
Accounts payable | 144,000 | 146,000 |
Accrued liabilities and other | 373,000 | 151,000 |
NET CASH PROVIDED BY OPERATING ACTIVITIES | (138,000) | 826,000 |
| | | |
CASH FLOW FROM INVESTING ACTIVITIES: | | |
Capital expenditures | (21,000) | (48,000) |
NET CASH USED IN INVESTING ACTIVITIES | (21,000) | (48,000) |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | |
Net borrowing under revolving loan agreement | 203,000 | (820,000) |
(Payments) on mortgage note obligation | (35,000) | (25,000) |
(Payments) on term note obligations | -0- | -0- |
(Payments) under long-term subordinate debt obligations | -0- | (6,000) |
NET CASH (USED IN) FINANCING ACTIVITIES | 168,000 | (851,000) |
NET (DECREASE)/ INCREASE IN CASH AND CASH EQUIVALENTS |
9,000 |
(73,000) |
| | | |
CASH AND CASH EQUIVALENTS - Beginning of period | 276,000 | 358,000 |
| | | |
CASH AND CASH EQUIVALENTS - End of period | $ 285,000 | $ 285,000 |
| | | |
Supplemental disclosures of cash flow information | | |
Cash paid during the quarter: | | |
Income taxes | $ 97,600 | $ 1,000 |
Interest | 142,000 | 163,000 |
The accompanying notes are an integral part of these statements.
8
CHAMPION PARTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
_________________________________________________________________
Note 1.
The accompanying financial statements for the three months ending April 2, 2006 and April 3, 2005 have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements and these notes should be read in conjunction with the consolidated financial statements and footnotes of the Company included in the Company's Annual Report submitted on Form 10-K for the year ended December 31, 2005.
The consolidated balance sheet at December 31, 2005 has been derived from the audited financial statements at that date.
The Company previously adopted Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information” and management views the Company as one business segment, the remanufacturing of auto parts.
Note2.
The information furnished herein reflects all adjustments (consisting only of normal recurring accruals), which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim period. Results of operations for the three months ending April 2, 2006 are not necessarily indicative of results to be expected for the entire year.
Note 3.
Inventories are valued at the lower of cost (first-in, first-out method) or market. A summary of the gross inventories and reserves follows:
| | April 2, 2006 | December 31, 2005 |
Gross Inventories: | | |
Raw cores | $ 6,718,000 | $ 7,033,000 |
Parts | 2,783,000 | 2,802,000 |
Sub-total raw materials | 9,501,000 | 9,835,000 |
Work-in-process | 3,096,000 | 3,016,000 |
Finished goods | 6,071,000 | 6,273,000 |
| | | |
Total gross inventories | $ 18,668,000 | $ 19,124,000 |
| | | |
Inventory Reserves: | | |
Core devaluation | $ (3,781,000) | $ (3,699,000) |
Obsolescence | (3,308,000) | (3,273,000) |
Valuation reserves | (370,000) | (332,000) |
Total inventory reserves | $ (7,459,000) | $ (7,304,000) |
| | | |
Total net inventories | $ 11,209,000 | $ 11,820,000 |
9
Note 4.
For reporting purposes, product and core returns are offset against gross sales in arriving at net sales. Total returns for the three months ended April 2, 2006 were $1,827,000 compared to $1,947,000 at April 3, 2005.
Note 5.
In the first quarter of 2006, net sales to the Company's four largest customers were approximately 81% of total net sales. In comparison, net sales to the Company's four largest customers in the first quarter of 2005, were approximately 72% of total net sales.
A reduction in the level of sales to or the loss of one or more of these customers would have a material adverse effect on the Company’s financial condition and results of operations.
Note 6.
Long-lived Assets -The Company reviews the carrying values of its long-lived assets and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair value less cost to sell. As of April 2, 2006 there has been no impairment of long lived-assets.
Note 7.
The income tax expense attributable to operations for the three months ended April 2, 2006 and April 3, 2005, differed from the amounts computed by applying the federal income tax rate of 34% principally as a result of tax benefits recognized related to the carry forward of net operating losses.
Note 8.
Debt - On August 10, 2004, the Company entered into a three-year secured revolving credit facility with PNC Bank, National Association, replacing the Congress Financial Corporation credit facility. Maximum credit available under the new PNC facility is $14,000,000, including available letter of credit accommodations of $1,000,000. The interest rate on the revolving debt facility is lender prime plus 1/4 % or LIBOR plus 2%, and for letters of credit, the rate is 3.25% per annum on the daily outstanding balance.
Also, on August 10, 2004, the Company entered into a commercial property loan on its Hope, Arkansas properties with Elk Horn Bank and Trust Company acting as lead bank for a group of five lending institutions. The loan with Elk Horn is for $900,000, with seven-year amortization and an interest rate of New York prime plus 2% adjusted quarterly.
On March 18, 2005, the Company entered into an amendment to the Credit, Loan and Security Agreement dated August 10, 2004 with PNC Bank, National Association. Amendment No. 1 set forth the terms for temporary modification of the revolving interest rate from 0.25% to 1.25% above bank prime through April 12, 2005; the terms for temporary over-formula advances resulting from a change in the Lender’s interpreting the formula for calculating Eligible Receivables; the definition of collateral monitoring fees; and the redefinition of the fixed charge coverage ratio covenant from a quarterly basis to a rolling twelve month basis.
10
At April 2, 2006, the balance outstanding on the Company’s revolver loan facility with PNC Bank, National Association was $6,396,000 and letter of credit accommodations were $40,000. Also at April 2, 2006, the balance outstanding on the Company’s commercial mortgage loan with Elk Horn Bank was $727,000. The total of the loan balances was $7,123,000, which compares to total loan balances at December 31, 2005 of $6,955,000 and letter of credit accommodations of $40,000.
At April 2, 2006, the Company was in compliance with the amended fixed charge coverage ratio covenant.
11
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management Overview
First quarter 2006 net sales of $6,137,000 were $324,000, or 5.6%, higher than the same period in 2005 primarily reflecting stronger air conditioning products sales and higher than anticipated net sales of carburetor products. Cost of products sold for the quarter was higher than 2005 by $170,000, or 3.4%, principally as a result of higher sales revenues. Selling, distribution and administrative expenses for the quarter were higher than first quarter 2005 by $55,000, or 9.6%, primarily due to higher pension costs and professional fees. Operating income for the quarter was $404,000 versus $305,000 in first quarter 2005, an increase of $99,000, or 32.0%.
Interest cost for the quarter was down $23,000 over 2005, reflecting a lower revolver balance this year. Also in 2005, the Company incurred higher interest rates in the first quarter as a result of an amendment to the Credit, Loan and Security Agreement with PNC. The amendment resulted in a temporary modification of the revolving interest rate from 0.25% to 1.25% above bank prime through April 12, 2005.
Non-operating income for the quarter was $3,000 versus $43,000 in the same period of 2005, a $40,000 decrease. At the end of the first quarter of 2005, the Company met job expansion incentives which accounts for the significant decline in non-operating income from last year. Net income for the first quarter was $239,000 versus $160,000 in 2005. The $79,000 increase in net income primarily reflects lower costs of products sold in comparison to net sales revenue for the quarter.
RESULTS OF OPERATIONS
Three months ended April 2, 2006 compared to three months ended April 3, 2005
Net sales for the quarter ending April 2, 2006 were $6,137,000 versus net sales of $5,813,000 for the same fiscal quarter in 2005. The $324,000, or 5.6%, increase in net sales compared to 2005 reflected stronger net sales of air conditioning products and higher than anticipated net sales of carburetors. Net sales of constant velocity axle, heavy duty and agricultural product lines were lower than last year. Total product and core returns, which are accounted for as reductions to gross sales, were 22.5% and 24.7% of gross sales for the first quarter of 2006 and 2005, respectively. Product and core returns are accounted for on an accrual basis driven by gross sales, consequently the lower percentage in the first quarter of 2006 reflects the impact of increased sales of air conditioning products for which returns are typically lower.
Carburetor net sales were 46.5% and 47.1% of total net sales, respectively, for the first quarter of 2006 and 2005. Even though new vehicles sold are no longer equipped with carburetors in the United States and Canada, the Company continues to sell replacement units for older vehicles, which predominantly use carburetors. The Company expects that the trend in carburetor sales will decline in future periods. In addition, carburetor margins may be negatively impacted in the future as customers accelerate product returns during periods of declining demand.
12
Cost of products sold were $5,107,000, or 83.2%, of net sales for 2006 as compared to $4,937,000, or 84.9%, for the first quarter of 2005. The $170,000, or 3.4% increase versus 2005 is primarily due to higher sales revenues. Increased costs were partially offset by higher average product selling prices in 2006.
Selling, distribution and administrative expenses for the first quarter 2006 were $626,000 compared to $571,000 in the first quarter of 2005. The spending increase of $55,000 primarily reflects higher costs of pension plans and professional services. These increases were partially mitigated by lower distribution, selling and administrative payroll expenses.
Operating income for the quarter was $404,000, compared to $305,000 for the first quarter of 2005. The operating income increase versus 2005 is attributed primarily to the higher net sales.
Interest expense of $147,000 for the quarter was down $23,000 over 2005, reflecting a lower revolver balance this year. Also, in 2005 the Company was required to pay a temporary higher interest rate associated with the Amendment to the PNC Bank loan facility. On March 18, 2005, the Company entered into an amendment to the Credit, Loan and Security Agreement, setting forth the terms for temporary modification of the revolving interest rate from 0.25% to 1.25% above bank prime through April 12, 2005.
Non-operating income for the quarter was $3,000 versus $43,000 in the same period of 2005, a $40,000 decrease. At the end of the first quarter of 2005, the Company met job expansion incentives in Arkansas. This accounts for the significant decline in non-operating income from last year.
Net income was $239,000 for the first quarter versus $160,000 for 2005. The $79,000, or 49.4%, increase primarily reflects lower costs and the stronger net sales performance.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's financial statements reflect the selection and application of accounting policies that require management to make significant estimates and assumptions. Management believes that the following points are some of the more critical judgment areas in the application of accounting policies that currently affect the Company's financial condition and results of operations. Preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues, and expenses and related contingent liabilities. On an on-going basis, the Company evaluates its estimates for propriety, including those related to revenues, accounts receivable and inventory reserves, income taxes, and contingencies and litigation. The Company bases its reserve estimates on historical experience, current market and operating trends, and on various assumptions that are believed to be reasonable under current operating circumstances. Actual results may differ from these estimates under different assumptions or conditions.
13
The Company recognizes sales when products are shipped. Net sales reflect deductions for cores returned for credit and other customary returns and allowances. Such deductions and returns and allowances are recorded currently based upon continuing customer relationships and other criteria. The Company's customers are encouraged to trade-in rebuildable cores for products that are included in the Company's current product line.
Deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. At April 2 2006, the Company’s deferred tax asset consisted principally of net inventory reserves and net operating loss carryforwards. The Company’s deferred tax asset has been reduced by a valuation allowance to the extent such benefits are not expected to be fully utilized.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS No. 123, as revised, requires recognition of the cost of employee services provided in exchange for stock options and similar equity instruments based on the fair value of the instrument at the date of grant. Statement 123, as originally issued, is effective until the provisions of Statement 123(R) are fully adopted. Statement 123(R) is effective beginning in the first quarter of its fiscal year 2006. The Company adopted this guidance as of January 1, 2006 and will begin recognizing compensation expense related to stock options should any be issued.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs (“SFAS No. 151”). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The Company adopted this statement beginning in the first quarter 2006. It did not have a material effect on its financial statements, which is effective with fiscal years beginning after June 15, 2005.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Overview
On August 10, 2004, the Company entered into a three-year credit facility with PNC Bank, National Association, replacing the Congress Financial Corporation credit facility. Maximum credit available under the new PNC facility is $14,000,000, including available letter of credit accommodations of $1,000,000. The interest rate on the revolving debt facility was lender prime plus 1/4 % or LIBOR plus 2%, and for letters of credit, the rate is 3.25% per annum on the daily outstanding balance. On March 18, 2005, the Company entered into an amendment to the Credit, Loan and Security Agreement. The amendment set forth the terms for temporary modification of the revolving interest rate to 1.25% above bank prime through April 12, 2005; the terms for temporary over-formula advances resulting from a change in the Lender’s interpretation of the formula for calculating eligible receivable s; added a definition of collateral monitoring fees; and redefined the fixed charge coverage ratio covenant from a quarterly basis to a rolling twelve month basis.
Also on August 10, 2004, the Company entered into a commercial property loan on the Hope, Arkansas property with Elk Horn Bank and Trust Company acting as lead bank for a group of five lending institutions. The loan with Elk Horn is for $900,000, with seven-year amortization and an interest rate of New York prime plus 2% adjusted quarterly.
At April 3, 2005, the Company was in compliance with the amended fixed charge coverage ratio covenant.
Management believes that the Company will be able to finance its working capital needs in the current year and the foreseeable future through the use of borrowings and cash flows generated from operations.
14
Working Capital
Net working capital at April 2, 2006 was $7,469,000 compared to $6,925,000 at December 31, 2005, an increase of $544,000 primarily reflecting higher accounts receivable.
The April 2, 2006 net working capital balance was $2,905,000 lower on a comparable basis with the April 3, 2005 net working capital of $10,374,000. The lower first quarter 2006 balance reflects significantly lower inventories and lower trade accounts receivables versus the first quarter of 2005.
Net trade accounts receivable at April 2, 2006 were $10,082,000, an increase of $1,620,000 versus the year-end 2005 balance of $8,462,000. The increase in the Company's accounts receivable balances at quarter-end versus the year-end primarily reflects the significant increase in net sales for the first quarter of 2006.
When compared to the April 3, 2005 trade receivables balance of $10,584,000, the quarter-end balance is $502,000 lower reflecting improved collections in 2006.
Net inventories of $11,209,000 at April 2, 2006 were $611,000 lower as compared to the year-end 2005 balance of $11,820,000. The decrease in net inventory reflects a $316,000 decrease in raw cores and $202,000 decrease in finished goods. Work-in-process was up slightly and parts inventory balances were down slightly for the quarter. The inventory decreases are due to concerted efforts to reduce on-hand balances.
Compared to the April 3, 2005 balance of $12,380,000, the inventory decrease of $1,171,000 reflects the efforts to reduce inventory balances throughout 2005.
Accounts payable at April 2, 2006 were $7,947,000 compared to a balance at year-end 2005 of $7,803,000. The $144,000 increase in accounts payable is due to the higher net trade accounts payable which have resulted from increased raw materials spending in the past three months compared to year-end.
Compared to the April 3, 2005 balance of $8,147,000, accounts payable have decreased $200,000. Trade payables in the first quarter of 2006 decreased slightly reflecting lower expenditures for materials compared to the first quarter 2005.
Accrued expenses of $6,658,000 were up $374,000 from the fiscal year-end 2005 balance of $6,284,000, principally reflecting increases for stock adjustments, pension plans and taxes during the quarter.
Compared to the April 3, 2005 balance of $5,518,000, accrued expenses are higher by $1,140,000 principally reflecting differences in accruals for pension plans, stock adjustments and professional services.
Debt
On March 18, 2005, the Company entered into an amendment to the Credit, Loan and Security Agreement. The amendment set forth the terms for temporary modification of the revolving interest rate to 1.25% above bank prime through April 12, 2005; the terms for temporary over-formula advances resulting from a change in the Lender’s interpretation of the formula for calculating eligible receivables; added a definition of collateral monitoring fees; and redefined the fixed charge coverage ratio covenant from a quarterly basis to a rolling twelve month basis.
At April 2, 2006, the balance outstanding on the Company’s revolver loan facility with PNC Bank, National Association was $6,396,000 and letter of credit accommodations were $40,000. Also at April 2, 2005, the balance outstanding on the Company’s commercial mortgage loan with Elk Horn Bank was $727,000. The total of the loan balances was $7,123,000, which compares to total loan balances at December 31, 2005 of $6,955,000 and letter of credit accommodations of $40,000.
At April 2, 2006, the Company was in compliance with the amended fixed charge coverage ratio covenant.
SEASONALITY
The Company's business is slightly seasonal in nature, primarily as a result of the impact of weather conditions and the agricultural cycle on the demand for certain automotive and agricultural replacement parts. Historically, the Company's sales and profits are generally the highest in the first half of the year trending down through the summer months.
FUTURE OUTLOOK
The additional revenue from the sales of air conditioning products has partially mitigated the declining carburetor product line sales during the past three years. Management is pursuing other new products and new markets for existing products. This includes internal new product development as well as acquisition opportunities.
Management believes that the Company will be able to finance its working capital needs in the current year and the foreseeable future through the use of borrowings and cash flows generated from operations.
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FACTORS WHICH MAY AFFECT FUTURE RESULTS
This quarterly report contains forward-looking statements that are subject to risks and uncertainties, including but not limited to the statements under "Future Outlook" and to the following:
The competitive environment has caused and is continuing to cause changes in the distribution channels between volume retailers and traditional warehouse/distributors. The Company has diversified its customer base and currently serves all major aftermarket segments, including large volume automotive retailers, original equipment manufacturers of automotive equipment and automotive warehouse distributors. The decline in carburetor product sales over the longer term could impact future results. The Company expects growth in air conditioning product sales to partially offset this impact. There is no assurance that sales of air conditioning products will increase, or, if they do, that any increase will exceed the decreases in carburetor sales or the contribution of carburetor sales to net income.
The Company’s six largest customers accounted for a total of 89% of the Company’s net sales in the quarter ending April 2, 2006, with the four largest customers aggregating 81% of the total. For the same period in 2005, the Company’s six largest customers accounted for a total of 83% of the Company’s net sales, with the four largest customers comprising 72% of the total. A significant reduction in the level of net sales or the loss of a large customer could have a materially adverse impact on the Company’s financial condition and results of operations.
While the Company has established reserves for potential environmental liabilities that it believes to be adequate, there can be no assurance that the reserves will be adequate to cover actual costs incurred or that the Company will not incur additional environmental liabilities in the future.
Accordingly, actual results may differ materially from those set forth in forward-looking statements.
OFF-BALANCE SHEET ARRANGEMENTS
The company does not have any off-balance sheet arrangements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has credit facilities that bear interest at various rates based on the bank prime rate. Interest on $7,123,000, or 78.7%, of the Company's debt was variable based on the lender’s prime rate. Consequently, a general increase of 1% in the lender’s prime rate would result in additional interest cost of approximately $71,230 if the same debt level and structure were to be maintained.
ITEM 4. CONTROLS AND PROCEDURES
The Company has carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, who is presently the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures provide reasonable assurance that such disclosure controls and procedures are effective in timely providing them with material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Securities and Exchange Commission filings. There have been no si gnificant changes in the Company’s internal controls over financial reporting during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, such internal controls.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Registrant’s Annual Report on Form 10-K, December 31, 2005, Environmental Section, pages 11 through 13, for the current background on these proceedings.
ITEM 1A. RISK FACTORS
See Registrant’s Annual Report on Form 10-K, December 31, 2005, Risk Factors Section, pages 6 through 9, for the current information.
ITEM 6. EXHIBITS
Exhibits
3(i)
Articles of Incorporation (incorporated by reference to Registrant's Quarterly Report on Form 10-Q "File No. 1-07807", for the quarter ended June 30, 1998).
3(ii)
By Laws (incorporated by reference to Registrant’s current report on Form 8-K, File No. 1-07807, filed June 5, 1997).
31
Rule 13a-14(a)/15(d)-14(a) Certification
32
Section 1350 Certification
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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.
CHAMPION PARTS, INC.
(Registrant)
Date: May 17, 2006 By: /s/ Jerry A. Bragiel
Jerry A. Bragiel
President, Chief Executive Officer and Acting Chief &nbs p; Financial Officer
A signed original of this written statement required by Section 906 has been provided to Champion Parts, Inc. and will be retained by Champion Parts, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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Exhibit 31.1
Rule 13a-14(a) / 15d-14(a) CERTIFICATION
I, Jerry A. Bragiel, President, Chief Executive Officer and Acting Chief Financial Officer, certify that: |
1. | | I have reviewed this quarterly report on Form 10-Q of Champion Parts, Inc.; |
2. | | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and I have: |
| a) | | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; |
| b) | | Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| c) | | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | | I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: May 17, 2006 | | /s/ Jerry A. Bragiel | | |
| | | | Jerry A. Bragiel President, Chief Executive Officer and Acting Chief Financial Officer | | |
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PERSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003
In connection with the Quarterly Report of Champion Parts, Inc., (the “Company”) on Form 10-Q for the quarter ended April 2, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jerry A. Bragiel, President, Chief Executive Officer and Acting Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
May 17, 2006 | /s/ Jerry A. Bragiel Jerry A. Bragiel President, Chief Executive Officer and Acting Chief Financial Officer |
A signed original of this written statement required by Section 906 has been provided to Champion Parts, Inc. and will be retained by Champion Parts, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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