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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 September 30, 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
PROLIANCE INTERNATIONAL, 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]
Indicate by check mark whether the Registrant is a shell company (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 11, 2005 was 15,255,818.
Exhibit Index is on page 27 of this report.
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Page 1 of 32
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2005 and 2004 3
Condensed Consolidated Balance Sheets at September 30, 2005 and
December 31, 2004 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 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 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 27
Item 6. Exhibits 27
Signatures 28
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROLIANCE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three Months Nine Months
(in thousands, except per share amounts) Ended September 30, Ended September 30,
------------------- -------------------
2005 2004 2005 2004
-------- ------- -------- --------
Net sales $101,953 $58,004 $209,223 $167,839
Cost of sales 86,893 44,998 173,771 135,077
-------- ------- -------- --------
Gross margin 15,060 13,006 35,452 32,762
Selling, general and administrative expenses 21,043 10,012 42,496 29,623
Restructuring charges 1,507 -- 2,874 --
-------- ------- -------- --------
Operating (loss) income from continuing operations (7,490) 2,994 (9,918) 3,139
Interest expense 2,171 1,392 5,520 3,111
-------- ------- -------- --------
(Loss) income from continuing operations before taxes (9,661) 1,602 (15,438) 28
Income tax provision (benefit) 208 214 (1,206) 185
-------- ------- -------- --------
(Loss) income from continuing operations (9,869) 1,388 (14,232) (157)
Income from discontinued operation, net of tax of $0, $45,
$506, and $86 respectively -- 1,270 848 2,975
Gain on sale of discontinued operation, net of income tax
of $2,331 -- -- 3,899 --
Extraordinary income - write-off of negative goodwill 13,207 -- 13,207 --
-------- ------- -------- --------
Net income $ 3,338 $ 2,658 $ 3,722 $ 2,818
======== ======= ======== ========
Basic income (loss) per common share:
From continuing operations $ (0.75) $ 0.19 $ (1.55) $ (0.03)
From discontinued operation -- 0.18 0.09 0.42
From gain on sale of discontinued operation -- -- 0.42 --
From extraordinary income - write-off of negative
goodwill 1.00 -- 1.44 --
-------- ------- -------- --------
Net income $ 0.25 $ 0.37 $ 0.40 $ 0.39
======== ======= ======== ========
Diluted income (loss) per common share:
From continuing operations $ (0.75) $ 0.19 $ (1.55) $ (0.03)
From discontinued operation -- 0.17 0.09 0.42
From gain on sale of discontinued operation -- -- 0.42 --
From extraordinary income - write-off of negative
goodwill 1.00 -- 1.44 --
-------- ------- -------- --------
Net income $ 0.25 $ 0.36 $ 0.40 $ 0.39
======== ======= ======== ========
Weighed average common shares- Basic 13,241 7,106 9,189 7,106
======== ======= ======== ========
- Diluted 13,241 7,367 9,189 7,106
======== ======= ======== ========
The accompanying notes are an integral part of these statements.
3
PROLIANCE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2005 2004
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,190 $ 297
Accounts receivable (less allowances of $4,358 and $2,746) 79,856 34,429
Inventories:
Raw material and component parts 21,076 16,437
Work in process 3,069 3
Finished goods 102,042 54,771
-------- --------
Total inventories 126,187 71,211
-------- --------
Other current assets 6,160 4,198
Current assets of discontinued operation -- 11,403
-------- --------
Total current assets 217,393 121,538
-------- --------
Property, plant and equipment 53,341 48,290
Accumulated depreciation and amortization (34,020) (32,155)
-------- --------
Net property, plant and equipment 19,321 16,135
-------- --------
Other assets 8,696 5,621
-------- --------
Other assets of discontinued operation -- 6,565
-------- --------
Total assets $245,410 $149,859
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit debt and current portion of long-term debt $ 47,934 $ 43,904
Accounts payable 51,815 26,647
Accrued liabilities 32,017 17,453
Current liabilities of discontinued operation -- 8,176
-------- --------
Total current liabilities 131,766 96,180
-------- --------
Long-term liabilities:
Long-term debt 2,425 120
Other long-term liabilities 9,336 6,724
-------- --------
Total long-term liabilities 11,761 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 none and 200,000 shares at September 30, 2005
and December 31, 2004; issued and outstanding none at
September 30, 2005 and December 31, 2004 -- --
Series B convertible preferred stock, $.01 par value:
Authorized 30,000 shares; issued and outstanding 12,781
shares at September 30, 2005 and December 31, 2004
(liquidation preference $1,278) -- --
Common Stock, $.01 par value: Authorized 47,500,000 and 17,500,000
shares; issued 15,297,754 and 7,147,959 shares; outstanding
15,255,818 and 7,106,023 shares at September 30, 2005 and
December 31, 2004, respectively 152 71
Paid-in capital 105,642 55,041
Retained earnings (deficit) 1,821 (1,853)
Accumulated other comprehensive loss (6,409) (6,409)
Accumulated foreign currency translation adjustment 692 --
Treasury stock, at cost, 41,936 shares at September 30, 2005 and
December 31, 2004 (15) (15)
-------- --------
Total stockholders' equity 101,883 46,835
-------- --------
Total liabilities and stockholders' equity $245,410 $149,859
======== ========
The accompanying notes are an integral part of these statements.
4
PROLIANCE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Nine Months
(Amounts in thousands) Ended September 30,
-------------------
2005 2004
-------- -------
Cash flows from operating activities:
Net income $ 3,722 $ 2,818
Adjustments to reconcile net income to net cash (used
in) provided by operating activities from
continuing operations:
Income from discontinued operation (1,354) (2,975)
Gain on sale of discontinued operation (6,230) --
Depreciation and amortization 3,411 3,582
Deferred income taxes 1,376 --
Provision for uncollectible accounts receivable 1,254 422
Non-cash restructuring charges 2,517 --
Gain on sale of building (207) (207)
Extraordinary income - write-off negative goodwill (13,207) --
Changes in operating assets and liabilities, net of
acquisition's opening balance sheet:
Accounts receivable (13,199) 76
Inventories 3,065 (2,851)
Accounts payable 10,690 4,223
Accrued expenses (152) 2,378
Other (1,183) 1,480
-------- -------
Net cash (used in) provided by operating activities of
continuing operations (9,497) 8,946
Net cash provided by operating activities of
discontinued operation 852 2,317
-------- -------
Net cash (used in) provided by operating activities (8,645) 11,263
-------- -------
Cash flows from investing activities:
Capital expenditures, net of normal sales and
retirements (5,968) (2,516)
Capital expenditures by discontinued operation -- (1,189)
Cash on Modine Aftermarket acquisition balance sheet 3,726 --
Cash expenditures for merger transaction costs (6,226) --
Proceeds from sale of discontinued operation 17,000 --
-------- -------
Net cash provided by (used in) investing activities 8,532 (3,705)
-------- -------
Cash flows from financing activities:
Dividends paid (64) (64)
Net borrowings (repayments) under revolving credit
facility 5,723 (6,316)
Repayments of term loan and capital lease obligations (1,061) (892)
Deferred debt issue costs (299) --
Proceeds from stock option exercises 15 --
-------- -------
Net cash provided by (used in) financing activities 4,314 (7,272)
-------- -------
Effect of exchange rate changes 692 --
-------- -------
Increase in cash and cash equivalents 4,893 286
Cash and cash equivalents at beginning of period 297 171
-------- -------
Cash and cash equivalents at end of period $ 5,190 $ 457
======== =======
The accompanying notes are an integral part of these statements.
5
PROLIANCE INTERNATIONAL, 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, 2004 including the audited financial statements and notes
thereto included therein and the Form 8-K containing financial statements
reflecting the Heavy Duty OEM business as a discontinued operation.
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, results of
operations and 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 periods ended September 30, 2005 are
not necessarily indicative of results for the full year.
As a result of the merger with the Modine Aftermarket business on July 22,
2005 (see Note 3), the reported results include a subsidiary located in Europe.
The operating results of this business are included in the Consolidated
Statements of Operations on a one-month lag.
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 ("Modine") 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 credit
facility.
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
three and nine months ended September 30, 2004 were $14.0 million and $36.3
million, respectively. 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 $1.3 million and $3.0 million for the
three and nine months ended September 30, 2004, which is net of $0.1 million of
tax in both periods.
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 included $6.5 million of accounts payable and $1.7 million of
accrued expenses.
6
NOTE 3 - MERGER WITH MODINE AFTERMARKET BUSINESS
On July 22, 2005, following receipt of approval of the Company's
stockholders, the Company completed its merger transaction pursuant to which
Modine Aftermarket Holdings, Inc. ("Modine Aftermarket") merged into the
Company. Modine Aftermarket was spun off from Modine immediately prior to the
merger and held Modine's aftermarket business. Upon effectiveness of the merger,
the Company changed its name to "Proliance International, Inc." ("Proliance").
In connection with the merger, the Company has issued a total of 8,145,795
shares of its common stock to Modine shareholders, or 0.235681 shares for each
outstanding Modine common share. Immediately after the effectiveness of the
merger, prior Transpro, Inc. shareholders owned 48% of the combined company on a
fully diluted basis, while Modine shareholders owned the remaining 52%. For
accounting purposes, Transpro is the acquirer. As a result of the merger, the
Company is focused solely on supplying heating and cooling components and
systems to the automotive and heavy duty aftermarkets in North and Central
America and Europe.
The acquisition was accounted for as a purchase transaction, and
accordingly, the assets and liabilities acquired were recorded at their
estimated fair value on the date of the acquisition. The Statements of
Operations includes the results of the acquired business for the period
subsequent to the acquisition date.
The aggregate consideration paid for the transaction was as follows (in
thousands):
Value of common stock issued
Common stock $ 81
Paid in capital 50,586
-------
50,667
Proliance transaction costs 4,446
Modine transaction costs reimbursed by Proliance 4,200
-------
Total consideration $59,313
=======
The shares of stock issued were valued at $6.22 per share, which
represented the average closing price of Proliance common stock for the two days
before and after the merger agreement was announced.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at July 22, 2005. These amounts are based upon
a preliminary opening balance sheet, which is still subject to review and
adjustments. The initial purchase price allocations may be adjusted for changes
in the estimates of the fair value of the assets acquired and liabilities
assumed.
(in thousands)
Current assets $100,870
Property, plant and equipment 20,214
Other assets 4,976
--------
Assets acquired 126,060
--------
Current liabilities 30,593
Other liabilities 2,688
--------
Liabilities assumed 33,281
--------
Net assets acquired $ 92,779
========
The excess ($33.5 million) of the net assets acquired over the total
consideration was first utilized to write-down to zero the acquired property,
plant and equipment and intangible assets of the Modine Aftermarket business
($20.3 million). The remaining amount, $13.2 million, was included as
extraordinary
7
income - write-off of negative goodwill, in the determination of net income in
the attached Consolidated Statements of Operations.
The following table summarizes unaudited pro forma financial information
for the three and nine months ended September 30, 2005 and 2004 assuming the
Modine Aftermarket merger had occurred on January 1, 2004. The Modine
Aftermarket year end was March 31. The unaudited pro forma financial information
uses data corresponding to Proliance's reporting period. This unaudited pro
forma information does not represent what would have occurred if the transaction
had taken place on January 1, 2004 and does not reflect our future consolidated
results of operations or financial position. The unaudited pro forma combined
financial statements do not include any adjustments to reflect any of the
restructuring costs expected to be incurred in order to combine the operations
of Proliance and the Modine Aftermarket business or the anticipated benefits
from these synergy actions. These restructuring costs will result from actions
taken with respect to both Proliance and Modine Aftermarket business operations,
facilities and associates. The charges will be recorded based upon the nature
and timing of these integration actions.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
(in thousands)
Sales $124,604 $116,751 $333,001 $334,826
Net income $ 3,481 $ 1,943 $ 1,463 $ 3,839
Net income per share
- basic $ 0.26 $ 0.27 $ 0.15 $ 0.53
- diluted $ 0.26 $ 0.26 $ 0.15 $ 0.53
During the month of September 2005, the Company sold to Modine, surplus
fixed assets, acquired in the merger, which had been written down to zero
through the purchase accounting entry. As a result, the $0.5 million of proceeds
were recorded as a gain on disposal of fixed assets and included as a reduction
of selling, general and administrative expenses in the attached Statements of
Operations.
NOTE 4 - 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 and income per share would have been as follows:
8
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2005 2004 2005 2004
------ ------ ------ ------
(in thousands, except per share amounts)
Net income:
As reported $3,338 $2,658 $3,722 $2,818
Stock-based compensation costs (363) (49) (491) (153)
------ ------ ------ ------
Pro forma $2,975 $2,609 $3,231 $2,665
====== ====== ====== ======
Basic net income per common share:
As reported $ 0.25 $ 0.37 $ 0.40 $ 0.39
Pro forma $ 0.22 $ 0.37 $ 0.35 $ 0.38
Diluted net income per common share:
As reported $ 0.25 $ 0.36 $ 0.40 $ 0.39
Pro forma $ 0.22 $ 0.35 $ 0.35 $ 0.38
As a result of the merger with Modine Aftermarket, all outstanding unvested
employee stock options became fully vested, thus the remaining unrecorded
stock-based compensation costs were recorded in the three months ended September
30, 2005.
NOTE 5 - COMPREHENSIVE INCOME
For the three and nine months ended September 30, 2005, other comprehensive
income was comprised of the reported net income for the period of $3.3 million
and $3.7 million, respectively plus the accumulated foreign currency translation
adjustment of $0.7 million for both periods. For the three and nine months ended
September 30, 2004, other comprehensive income was comprised of the reported net
income for the period of $2.7 million and $2.8 million, respectively.
NOTE 6 - RESTRUCTURING 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 took these actions in order to streamline its
distribution network and enhance its commitment to customer service. The closing
and relocation activities were completed by June 30, 2005 and resulted in the
Company incurring $0.5 million of restructuring costs.
On April 8, 2005 the Company announced that it would close its aluminum
heater manufacturing facility in Buffalo, New York and move all its aluminum
heater production to its Nuevo Laredo, Mexico facility. The Company took these
actions in order to improve its product cost position. The closing and
relocation activities were completed by September 30, 2005 and resulted in the
Company incurring $1.0 million of restructuring costs. This closure resulted in
the termination of 54 employees.
In conjunction with the merger with Modine Aftermarket, the Company
commenced a 12 to 18 month restructuring program expected to result in one-time
charges of $10 million to $14 million. These actions are designed to lower costs
and increase manufacturing and operating efficiencies and include activities
impacting existing Proliance locations, which will result in charges to the
income statement, and
9
activities impacting locations acquired in the Modine Aftermarket merger, which
costs will be accrued on the opening balance sheet as a purchase accounting
entry.
On July 25, 2005 the Company announced that it would close its Emporia,
Kansas manufacturing facility and move its radiator and oil cooler production to
two existing facilities in Mexico. In addition, two heavy duty regional plants
and branch distribution centers in Denver, Colorado and Seattle, Washington were
also closed and consolidated into existing facilities. The Company is taking
these actions in order to lower its product costs and streamline its
manufacturing capabilities. The closing and relocation actions related to the
Emporia, Kansas facility are expected to be completed by the end of 2005. The
closure and relocation of the regional plant facilities were completed by
September 30, 2005. Combined, these actions will result in the Company incurring
approximately $3.5 million to $4.5 million of restructuring costs. Costs
associated with Modine facilities were accrued on the opening balance sheet as a
purchase accounting entry while costs associated with Proliance facilities are
or will be included in the Statements of Operations as restructuring expense.
On July 29, 2005 the Company announced that it would be closing twenty-two
branch locations throughout the United States as another phase of its merger
restructuring program. These facilities are being combined into other existing
Company branch locations. These actions are being taken in order to eliminate
duplicate facilities and lower distribution costs. The closure and consolidation
actions are expected to be completed by the end of 2005. They are expected to
result in between $700,000 and $1.0 million of restructuring costs associated
with moving inventory and fixed assets and for facility exit costs and one-time
personnel related termination expenses. It is expected that all costs will
result in future cash expenditures. Costs associated with Modine facilities were
accrued on the opening balance sheet as a purchase accounting entry while costs
associated with Proliance facilities are or will be included in the Statements
of Operations as restructuring expense.
On September 23, 2005, the Company announced the closing of its
copper/brass tube mill operation located in New Haven, Connecticut, as another
phase of its previously announced restructuring program. The Company took this
action in order to lower ongoing costs. The closing activities are expected to
be completed during the fourth quarter of 2005 and will result in the Company
incurring approximately $100,000 to $200,000 of restructuring costs. These costs
which are associated with relocating inventory and machinery and one-time
personnel related expenses associated with the elimination of nine full-time
positions are or will be included in the Statements of Operations as
restructuring expense. All of the aforementioned costs will result in future
cash expenditures.
On October 7, 2005, the Company announced its decision to (i) close its
distribution centers in Orlando, Florida and Kansas City, Missouri and
consolidate these activities into two existing facilities in Arlington, Texas
and Southaven, Mississippi and (ii) consolidate the portion of its copper/brass
radiator production, currently performed at its Nuevo Laredo, Mexico plant, into
its Mexico City plant location.
The Company expects the distribution center closings in Kansas City and
Orlando and the associated relocation actions to be completed by the end of
2005. In conjunction with these actions, the Company expects to incur between
$600,000 and $800,000 in one-time cash restructuring costs related to the
relocation of inventory, facility exit costs and personnel-related expenses
associated with the elimination of 36 employment positions. The majority of
these costs will be accrued on the opening acquisition balance sheet,
10
resulting in reduction of the negative goodwill generated by the transaction, as
they related to the closure of acquired facilities.
The relocation of the Nuevo Laredo copper/brass radiator production to
Mexico City is expected to be completed during the first calendar quarter of
2006. When this action is completed, the Company will have centralized its
copper/brass radiator production in Mexico City and its aluminum radiator
production in Nuevo Laredo. Costs associated with this relocation, which are
expected to be between $3.0 million and $3.5 million, will be recorded in the
Statements of Operations as restructuring expenses. These include cash
expenditures to relocate equipment and employee-related costs associated with
the elimination of 194 positions, along with the non-cash write-off of certain
inventory and the non-cash write-down of fixed assets, no longer required, to
net realizable value. With the relocation of production to Mexico City, the
Company expects to add 42 associates.
The restructuring reserve balance at September 30, 2005 is classified in
other accrued liabilities. A summary of the reserve activity is as follows:
Modine
Balance at Aftermarket Balance at
December 31, Charge to Acquisition Cash Non-Cash September 30,
2004 Operations Balance Sheet Payments Write-off 2005
------------ ---------- ------------- -------- --------- -------------
(in thousands)
Workforce related $-- $ 817 $2,086 $(2,008) $ -- $ 895
Facility consolidations -- 633 2,614 (1,067) -- 2,180
Asset write-down -- 1,924 593 -- (2,517) --
--- ------ ------ ------- ------- ------
Total -- $3,374 $5,293 $(3,075) $(2,517) $3,075
=== ====== ====== ======= ======= ======
Of the $3.4 million of restructuring charges included in the Statements of
Operations, $0.5 million is included in cost of sales as it represents the write
down of inventory to net realizable value.
NOTE 7 - RETIREMENT AND POST-RETIREMENT PLANS
The components of net periodic benefit costs for the three and nine months
ended September 30, 2005 and 2004 are as follows:
THREE MONTHS ENDED SEPTEMBER 30
---------------------------------------
RETIREMENT PLANS POSTRETIREMENT PLANS
---------------- --------------------
2005 2004 2005 2004
----- ----- ---- ----
(in thousands)
Service cost $ 289 $ 181 $ 1 $ 2
Interest cost 484 458 10 9
Expected return on plan assets (552) (448) -- --
Amortization of net loss 111 103 1 1
----- ----- --- ---
Net periodic benefit cost 332 294 12 12
Allocated to discontinued operation -- 73 -- --
----- ----- --- ---
Allocated to continuing operations $ 332 $ 221 $12 $12
===== ===== === ===
11
NINE MONTHS ENDED SEPTEMBER 30
----------------------------------------
RETIREMENT PLANS POSTRETIREMENT PLANS
----------------- --------------------
2005 2004 2005 2004
------- ------- ---- ----
(in thousands)
Service cost $ 672 $ 609 $ 2 $ 4
Interest cost 1,432 1,370 30 29
Expected return on plan assets (1,707) (1,567) -- --
Amortization of net loss 351 221 4 3
------- ------- --- ---
Net periodic benefit cost 748 633 36 36
Allocated to discontinued operation 66 230 -- --
------- ------- --- ---
Allocated to continuing operation $ 682 $ 403 $36 $36
======= ======= === ===
As a result of the merger with Modine Aftermarket, the Company participates
in foreign multi-employer pension plans. For the three and nine months ended
September 30, 2005, pension expense for these plans was $88 thousand.
12
NOTE 8 - 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,
------------------- -------------------
2005 2004 2005 2004
------- ------ -------- ------
(in thousands, except per share data)
Numerator:
(Loss) income from continuing operations $(9,869) $1,388 $(14,232) $ (157)
Deduct preferred stock dividend (16) (16) (48) (48)
------- ------ -------- ------
(Loss) income from continuing operations attributable to
common stockholders $(9,885) $1,372 $(14,280) $ (205)
Income from discontinued operation, net of tax -- 1,270 848 2,975
Gain on sale of discontinued operation, net of tax -- -- 3,899 --
Extraordinary income - write-off of negative goodwill 13,207 -- 13,207 --
------- ------ -------- ------
Net income attributable to common stockholders - basic 3,322 2,642 3,674 2,770
Add back: preferred stock dividend -- 16 -- --
------- ------ -------- ------
Net income attributable to common stockholders - diluted $ 3,322 $2,658 $ 3,674 $2,770
======= ====== ======== ======
Denominator:
Weighted average common shares - basic 13,241 7,106 9,189 7,106
Dilutive effect of stock options -- 161 -- --
Dilutive effect of Series B Preferred Stock -- 100 -- --
------- ------ -------- ------
Weighted average common shares - diluted 13,241 7,367 9,189 7,106
======= ====== ======== ======
Basic income (loss) per common share:
From continuing operations $ (0.75) $ 0.19 $ (1.55) $(0.03)
From discontinued operation -- 0.18 0.09 0.42
From gain on sale of discontinued operation -- -- 0.42 --
From extraordinary income - write-off of negative goodwill 1.00 -- 1.44 --
------- ------ -------- ------
Net income $ 0.25 $ 0.37 $ 0.40 $ 0.39
======= ====== ======== ======
Diluted income (loss) per common share:
From continuing operations $ (0.75) $ 0.19 $ (1.55) $(0.03)
From discontinued operation -- 0.17 0.09 0.42
From gain on sale of discontinued operation -- -- 0.42 --
From extraordinary income - write-off of negative goodwill 1.00 -- 1.44 --
------- ------ -------- ------
Net income $ 0.25 $ 0.36 $ 0.40 $ 0.39
======= ====== ======== ======
The weighted average basic common shares outstanding were used in the
calculation of the diluted loss per common share for the three and nine months
ended September 30, 2005 and the nine months ended September 30, 2004 as the use
of weighted average diluted common shares outstanding would have an
anti-dilutive effect on loss per share for the periods.
Certain options to purchase common stock were outstanding during the three
and nine months ended September 30, 2005 and 2004, but were not included in the
computation of diluted (loss) income 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:
13
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Options outstanding 56,400 58,900 56,400 58,900
Range of exercise prices $7.75 - $11.75 $5.88 - $11.75 $7.75 - $11.75 $5.88 - $11.75
NOTE 9 - AUTHORIZED COMMON STOCK
At the Company's Annual Shareholders' meeting, held on July 22, 2005,
shareholders approved an increase in the Company's authorized common stock from
17.5 million shares to 47.5 million shares.
NOTE 10 - AMENDMENT TO DEBT AGREEMENT
On July 22, 2005, in connection with the merger of the Company with the
aftermarket business of Modine, the Company amended its $80.0 million credit
facility with Wachovia Capital Financial Corporation (New England), formerly
known as Congress Financial Corporation (New England) effective July 21, 2005.
The amended credit facility consists of a revolving credit line with maximum
borrowings of $78.3 million and a $1.7 million term loan, each of which was
amended to expire on July 21, 2009 (subject to renewal on an annual basis
thereafter). Under the amended credit facility, the interest rate is 2% over a
Eurodollar-based rate through April 21, 2006 and ranges from 1.75% to 2.25% over
such rate thereafter. The amended credit facility also provides that the Company
may pay dividends or repurchase capital stock of up to $3.0 million annually, so
long as excess availability is at least $18.0 million for the 30 consecutive
days both prior to and following the payment date. The amended credit facility
also amends the borrowing base calculation such that (i) up to $55.0 million in
respect of eligible inventory may be counted and (ii) availability reserves may
be revised for dilution in respect of the Company's accounts. The amended
facility adds financial covenants for (i) minimum EBITDA (tested quarterly
commencing September 30, 2005 and not required if excess availability exceeds
$15.0 million), (ii) minimum excess availability ($5.0 million at all times
through June 30, 2006 and $13.0 million immediately after giving effect to the
merger), and (iii) capital expenditures (not to exceed $12.0 million in any
calendar year, if financed under the credit facility). The Company was required
to, and did, satisfy customary conditions to the amendment of the credit
facility and obtained Wachovia's consent to the merger.
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
Nine Months Ended
September 30,
-----------------
2005 2004
------ ------
(in thousands)
Non-cash investing and financing activity:
Entered into capital lease obligation $ 1,673 $ 288
======= ======
Common stock issued for net assets of Modine
Aftermarket business $50,667 $ --
======= ======
Accrued expense for unpaid merger transaction costs $ 1,052 $ --
======= ======
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 $ 4,823 $2,468
======= ======
Income taxes $ 722 $ 253
======= ======
14
NOTE 12 - 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.
NOTE 13 - BUSINESS SEGMENT DATA
Subsequent to the merger with Modine Aftermarket and the sale of the Heavy
Duty OEM business, the Company has been reorganized into two segments, based
upon the geographic area served - Domestic and International. The Domestic
marketplace supplies heat exchange and air conditioning products to the
automotive and light truck aftermarket and heat exchange products to the heavy
duty aftermarket in the United States and Canada. The International segment
includes heat exchange and air conditioning products for the automotive and
light truck aftermarket and heat exchange products for the heavy duty
aftermarket in Mexico, Europe and Central America.
The table below sets forth information about the reported segments.
Previous years' data has been restated based upon the new segments.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2005 2004 2005 2004
-------- ------- -------- --------
(in thousands)
Net sales:
Domestic $ 91,355 $58,004 $198,625 $167,839
International 10,598 -- 10,598 --
-------- ------- -------- --------
Total net sales $101,953 $58,004 $209,223 $167,839
======== ======= ======== ========
Operating (loss) income from continuing operations:
Domestic $ (3,279) $ 4,879 $ 368 $ 8,192
Restructuring and other special charges (1,414) -- (2,781) --
-------- ------- -------- --------
Domestic total (4,693) 4,879 (2,413) 8,192
-------- ------- -------- --------
International 420 -- 420 --
Restructuring and other special charges (93) -- (93) --
-------- ------- -------- --------
International total 327 -- 327 --
-------- ------- -------- --------
Corporate expenses (3,124) (1,885) (7,832) (5,053)
-------- ------- -------- --------
Total operating (loss) income from continuing
Operations $ (7,490) $ 2,994 $ (9,918) $ 3,139
======== ======= ======== ========
15
An analysis of total net sales by product line is as follows:
For the Nine Months
Ended September 30,
--------------------
2005 2004
-------- --------
(in thousands)
Automotive and light truck heat exchange $137,301 $123,623
Automotive and light truck air conditioning 37,772 18,530
Heavy duty heat exchange 34,150 25,686
-------- --------
Total net sales $209,223 $167,839
======== ========
NOTE 14 - SUBSEQUENT EVENT - AMENDMENT TO DEBT AGREEMENT
On October 20, 2005, the Company amended its Loan and Security Agreement
(the "Loan Agreement") with Wachovia Capital Finance Corporation (New England),
pursuant to a Thirteenth Amendment to Loan and Security Agreement. Under the
amended Loan Agreement, the Unused Line Fee was reduced through June 30, 2006.
The amended Loan Agreement changes financial covenants for (i) minimum EBITDA
(tested quarterly commencing September 30, 2005 and not required if Excess
Availability exceeds $15.0 million) such that minimum EBITDA for the September
30, 2005 and December 31, 2005 test dates is a higher negative amount, and (ii)
minimum Excess Availability ($5.0 million at all times through June 30, 2006) so
as to give no effect to the limitations on Excess Availability imposed by the
Maximum Credit under the amended Loan Agreement of $80.0 million or the
Revolving Loan Ceiling.
The amended Loan Agreement also adds a financial covenant requiring that
consolidated inventory, excluding the Company's NRF and Mexpar subsidiaries, as
of December 31, 2005 will not exceed $122.0 million. The Company was required
to, and did, satisfy customary conditions to the amendment of the Loan
Agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company designs, manufactures and markets heat transfer products
(consisting of radiators, radiator cores, heater cores and condensers) and
temperature control (air conditioning) products (including compressors,
accumulators and evaporators) 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, as described in Note 2 of the attached Notes to Condensed
Consolidated Financial Statements, 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.
As a result of the merger with the aftermarket business of Modine on July
22, 2005, the Company is organized into two segments based upon the geographic
area served-Domestic and International. The domestic segment includes sales to
customers located in the United States and Canada, while International includes
sales to customers located in Mexico, Europe and Central America. 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.
16
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. With respect to heavy duty products, we also
utilize Class 7 and 8 truck production data and industrial and off-highway
equipment production data.
Management looks to grow the business through a combination of internal
growth, including the addition of new customers and new products, and strategic
acquisitions. 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 the Company and Modine's acquisition of the Company's Heavy Duty OEM
business unit. Note 3 of the Notes to Condensed Consolidated Financial
Statements contained in this Form 10-Q, describes the merger with the
Aftermarket business of Modine which occurred on July 22, 2005. The transaction
will likely increase the Company's consolidated annual sales to over $400
million and add manufacturing and distribution locations in the U.S., Europe,
Mexico and Central America. In addition, the Company will now 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. As a result of
this transaction, the Company has a stronger balance sheet and is better
positioned to face the market challenges of the future. In conjunction with the
merger, the Company's name was changed from Transpro, Inc. to Proliance
International, Inc. The Company has also announced that in conjunction with the
merger, it was undertaking a restructuring program, which is expected to total
$10 million to $14 million over the next 12 to 18 months and will generate
savings in excess of $30 million on an annualized basis, when completed.
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
$17.0 million in cash. The gain from the sale of the business of $6.2 million
before taxes of $2.3 million has been included in the operating results for the
nine months ended September 30, 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.
In 2005, prior to the closing of the Modine Aftermarket merger, 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, and the
closure of an aluminum heater manufacturing plant in Buffalo, New York, and the
relocation of this production to an existing facility in Mexico. Restructuring
expenses associated with these relocations are estimated to be $1.3 million to
$1.7 million, while the benefits to be realized are expected to exceed these
costs on an annualized basis.
Operating performance in any given quarter is not necessarily indicative of
performance for the full year as the Company's business is subject to seasonal
fluctuations. Sales peak during the second and third quarters due to increased
demand for radiator and air conditioning components during the warmer summer
months.
17
OPERATING RESULTS
QUARTER ENDED SEPTEMBER 30, 2005 VERSUS QUARTER ENDED SEPTEMBER 30, 2004
Net sales from continuing operations for the third quarter of 2005 of
$102.0 million were $44.0 million or 75.8% above the third quarter of 2004. The
third quarter of 2005 included $34.6 million of sales by businesses acquired
from Modine for the period July 22, 2005 through the end of the quarter and
$67.4 million of sales by historical Proliance business units. Domestic heat
exchange product sales during the third quarter of 2005 were $58.7 million,
including $14.5 million resulting from the business acquired in the Modine
Aftermarket merger, compared to $43.9 million in the comparable period of 2004.
While unit volumes returned to more normal levels during the quarter due to the
increased demand for radiators, this impact was offset by continuing competitive
pricing pressure. Domestic temperature control product sales during the third
quarter of 2005 were $21.0 million, including $9.2 million resulting from the
business acquired in the Modine Aftermarket merger, compared to $4.9 million in
the comparable period of 2004. This significant volume improvement reflects
sales to an expanded number of new store locations with an existing customer and
warmer weather conditions across most of the country throughout most of the
quarter. Domestic Heavy Duty product sales during the third quarter of 2005 were
$11.7 million including $0.4 million resulting from the Modine Aftermarket
merger, compared to $9.2 million in the comparable period of 2004. 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 accounts for the year-over-year improvement. International sales in 2005
resulted entirely from the business acquired in the Modine Aftermarket merger.
Gross margin, as a percentage of net sales, was 14.8% in the third quarter
of 2005 versus 22.4% in the third quarter of 2004. This reduction reflects
actions taken at our Nuevo Laredo facility to lower production levels in order
to reduce inventory levels and generate cash flow. As a result, there was a $2.6
million increase in unabsorbed overhead which lowered gross margin during the
period. These production cutbacks are expected to continue into the fourth
quarter of 2005, as the Company plans to lower inventory levels further. In
addition, the Company continues to experience the impact of rising commodity
prices. Copper prices during the quarter were approximately 33% above a year ago
and were at their highest point at the end of the quarter. Within the Automotive
and Light Truck heat exchange product lines, the Company has been unable to
recover these costs by market action; however, in the Heavy Duty heat exchange
product lines, it has had some success. In addition, gross margin has been
impacted by the increasing pricing pressure being experienced within the
Automotive and Light Truck heat exchange product lines. While the Company will
continue to be focused on cost reduction actions in order to offset the impacts
of these rising costs, there can be no assurance that it will be able to do so
in the future. Margin for the quarter was also impacted by the $1.1 million
write-off of a portion of the fair market value adjustment of inventory which
was recorded as part of the purchase accounting entry, with respect to the
Modine Aftermarket merger. This adjustment is being written off based on
inventory turnover and will be fully written off by year end. Gross margin for
the quarter was also reduced by $0.5 million as a result of restructuring costs
associated with the write down of inventory to net realizable value.
Selling, general and administrative expenses increased as a percentage of
net sales to 20.6% in the third quarter of 2005 from 17.3% in the third quarter
of 2004. While spending increased $11.0 million or 110.2%, this was largely due
to the impact of the merger. In addition the Company incurred costs associated
with the integration of IT, communications and financial information of the two
businesses as well as costs associated with the Company's name change from
Transpro, Inc. to Proliance International, Inc. In addition, the year-over-year
increase reflects costs attributable to the Sarbanes-Oxley compliance activities
initiated during the year and higher freight costs caused by the rising price of
gasoline. Expense levels were lowered
18
by a $0.5 million gain recorded during the quarter due to the sale of surplus
machinery and equipment, acquired in the merger. These assets had been written
down to a zero net book value in the purchase accounting entry.
Restructuring costs in the third quarter of 2005 of $1.5 million were
associated with the closure of the Company's aluminum heater manufacturing
facility in Buffalo, New York and the relocation of these activities to an
existing facility in Nuevo Laredo, Mexico, which was announced in the second
quarter of 2005. In addition the Company incurred costs associated with
activities impacting existing Proliance facilities, which were part of the $10
million to $14 million restructuring program announced at the time of the
merger. These included costs associated with the closure of branch and plant
locations and their consolidation into existing Modine aftermarket facilities,
the closure of the Company's New Haven tube mill and the relocation of
copper/brass radiator production from the Company's Nuevo Laredo manufacturing
facility to the Mexico City facility. Restructuring costs are associated with
the movement of inventory and fixed assets, one-time personnel-related costs and
the write down of fixed assets, with no future use, to net realizable value.
These activities are expected to be completed by the first quarter of 2006.
Interest expense was $0.8 million above levels incurred a year ago due to
the impact of higher discounting charges from the Company's participation in
customer-sponsored vendor payment programs and higher average interest rates.
Discounting expense was $1.1 million in the third quarter compared to $0.5
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 LIBOR interest rate. Average interest
rates on the Company's revolving credit and term loan borrowings were 5.96% in
the third quarter of 2005 compared with 4.33% last year. Average debt levels
were $52.9 million in the 2005 third quarter compared to $52.7 million in the
same period in 2004. Year-over-year interest expense 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 Company is attempting to offset this impact somewhat by lowering
average debt levels through inventory reductions and other working capital
management activities.
The effective tax rates in 2005 and 2004 reflect only foreign and state
provisions. A federal tax benefit on the full amount of losses from continuing
operations was not recorded due to the uncertainty of the recoverability of such
amounts.
The loss from continuing operations for the third quarter of 2005 was $9.9
million, or $0.75 per basic and diluted share, compared to income of $1.4
million, or $0.19 per basic and diluted share for the third quarter of 2004.
As described in Note 2 of the accompanying Notes to Condensed Consolidated
Financial Statements, on March 1, 2005, the Company sold its Heavy Duty OEM
business. The results for periods prior to the sale are shown as results of
discontinued operation. During the third quarter of 2004, the discontinued
operation generated income of $1.3 million or $0.18 per basic and $0.17 per
diluted share.
As a result of the merger with the Aftermarket business of Modine on July
22, 2005, as described in Note 3 of the attached Notes to Condensed Consolidated
Financial Statements, there was an excess of net assets acquired ($92.8 million)
over total consideration paid ($59.3 million). This excess was first utilized to
write down to zero the acquired fixed and intangible assets ($20.3 million)
while the remaining $13.2 million was recorded as negative goodwill and the
write off was included as extraordinary income in the determination of net
income in the attached Statements of Operations. The earnings per share impact
of the negative goodwill write-off was $1.00 per basic and diluted share for the
third quarter of 2005. The amount of negative goodwill recorded in the third
quarter was lower than previous estimates due to changes in the amount of net
assets acquired, an increased amount of transaction costs and changes in the
purchase accounting adjustments. These purchase accounting adjustment changes
included the establishment of a tax valuation reserve of $4.5 million on the
deferred tax assets acquired. The Company will receive a benefit in future
periods from this valuation reserve, to the extent it generates U.S. pre-tax
income. The calculation of negative goodwill is preliminary and may change in
the future since it is based upon estimates at this time of the fair value of
the assets acquired and liabilities assumed.
19
Net income for the three months ended September 30, 2005 was $3.3 million
or $0.25 per basic and diluted share, compared to a net income of $2.7 million,
or $0.37 per basic and $0.36 per diluted share for the same period a year ago.
The decline in earnings per share for the quarter is attributable to the
increase in average common shares outstanding as a result of the Modine
Aftermarket merger which occurred on July 22, 2005.
NINE MONTHS ENDED SEPTEMBER 30, 2005 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2004
For the nine months ended September 30, 2005, net sales from continuing
operations of $209.2 million were $41.4 million or 24.7% above the same period
in 2004. Included in sales for the nine months ended September 30, 2005 was
$34.6 million from the businesses added by the Modine Aftermarket merger and
$174.6 from historical Proliance operations. Domestic heat exchange sales were
$131.8 million during the first nine months of 2005, compared to $123.6 million
in the comparable period of 2004. This increase reflects $14.5 million from the
businesses acquired in the Modine Aftermarket merger offset by the impact of
competitive pricing pressures. Volume declines experienced during the first half
of the year caused by changes in customer buying habits and a slow start to the
normal selling seasons were offset by the improvements experienced in the third
quarter due to warmer weather conditions. In the domestic temperature control
product lines sales are $36.8 million during the first nine months of 2005
compared to $18.5 million in the comparable period of 2004 reflecting $9.2
million from the businesses acquired in the Modine Aftermarket merger combined
with increased sales to an expanded number of store locations associated with an
existing customer. Domestic heavy duty product sales were $30.0 million during
the first nine months of 2005 compared to $25.7 million in the comparable period
of last year due to $0.4 million from the business acquired in the Modine
Aftermarket merger, new product introductions, pricing actions and the impacts
of a stronger economy on the marketplaces served by this business unit.
International sales for the first nine months of 2005 reflect sales generated
from the businesses acquired in the Modine Aftermarket merger.
Gross margins, as a percentage of net sales for the first nine months of
2005 were 16.9% compared to 19.5% a year ago. Margins have been adversely
impacted by unabsorbed overhead generated by the production cutbacks initiated
in the third quarter at our facility in Nuevo Laredo, Mexico in order to reduce
inventory levels, ongoing pricing pressure impacting the domestic heat exchange
product lines, continued rising commodity costs and the write-off of $1.1
million of the purchase accounting adjustment to reflect acquisition inventory
at fair market value. It is expected that margins in the fourth quarter will
continue to be adversely impacted by these factors. In addition, margins were
lowered by $0.5 million of restructuring costs which occurred in the third
quarter. While the Company has accelerated its cost reduction activities
associated with the merger, the impacts of these actions will not generally be
seen in operating results until 2006.
Selling, general and administrative expenses for the nine months increased
by $12.9 million to 20.3% of sales compared to 17.6% of sales a year ago. This
increase is primarily attributable to IT, communication and other costs
associated with the integration of the two businesses as a result of the merger.
In addition, there were costs associated with the Company's name change and the
initiation of Sarbanes-Oxley compliance activities, increased freight costs
reflecting the higher price of gasoline and higher employee health care costs
incurred in the first quarter of 2005, offset in part by a gain on the sale of
surplus assets acquired in the merger.
Restructuring charges of $2.9 million for the first nine months of 2005
represent costs associated with the closure of two warehousing locations and a
return goods facility in Memphis, Tennessee, in conjunction with the opening of
a new distribution facility in Southaven, Mississippi, which was announced in
the first
20
quarter of 2005, along with the closure of the Company's aluminum heater
manufacturing facility in Buffalo, New York and the relocation of these
activities to an existing facility in Nuevo Laredo, Mexico, which was announced
in the second quarter of 2005. In addition, it reflects actions under the
restructuring program initiated in conjunction with the merger, which are
associated with existing Proliance facilities. This includes the closure of
plant and branch locations, the closure of a tube mill operation in New Haven,
Connecticut and the relocation of copper/brass production from our Nuevo Laredo
facility to our Mexico City facility. No restructuring costs were recorded in
2004.
Interest costs were $2.4 million above last year for the first nine months
of 2005, due to higher discounting fees associated with participating in
customer sponsored vendor payment programs, and higher average interest rates
which were offset partially by the impact of lower average debt levels.
Discounting fees for the first nine months of 2005 were $2.7 million compared to
$0.7 million in 2004. This reflects increased participation in the programs
offered by our customers and rising interest rates. Average interest rates on
our revolving credit facility were 5.68% in 2005 compared to 4.29% in 2004,
while average debt levels were $47.4 million in 2005 vs. $51.6 million in 2004.
The effective tax rate in 2005 reflects the realization of a deferred tax
asset established in 2004 and foreign and state tax provisions. A federal tax
benefit on the entire loss from continuing operations was not recorded in 2005
due to the existence of the Company's tax valuation reserve. In 2004, the
effective tax rate included only a state and foreign provision, as no federal
benefit was recorded due to the uncertainty of the recoverability of such
amounts.
The loss from continuing operations for the first nine months of 2005 was
$14.2 million, or $1.55 per basic and diluted share, compared to a loss of $0.2
million, or $0.03 per basic and diluted share for the first nine months 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 operation
reported income after taxes of $0.8 million or $0.09 per basic and diluted
share, compared to income after taxes of $3.0 million, or $0.42 per basic and
diluted share, for the nine months ended September 30, 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 $0.42
per basic and diluted share in 2005.
As a result of recording the merger with Modine Aftermarket during the
third quarter of 2005, there was an excess of net assets acquired over
consideration paid, which generated negative goodwill of $13.2 million or $1.44
per basic and diluted share, which was written off as extraordinary income when
the opening balance sheet was recorded.
Net income for the nine months ended September 30, 2005 was $3.7 million or
$0.40 per basic and diluted share, compared to a net income of $2.8 million, or
$0.39 per basic and diluted share for the same period a year ago.
21
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $8.6 million in the first nine months
of 2005. This was comprised of $9.5 million utilized by continuing operations
and $0.9 million generated by the discontinued Heavy Duty OEM business prior to
its sale. Continuing operations accounts receivable levels increased by $13.2
million from the beginning of the year due to the seasonal increase in
receivable balances over year end levels and increased sales levels. This impact
was partially offset as the Company continued to accelerate the collection of
customer receivables utilizing cost effective customer-sponsored vendor programs
administered by a financial institution and by working directly with other
customers. This accelerated collection was done in an effort to offset the
continuing trend towards longer customer dating terms by "blue chip" customers.
Inventory levels declined $3.1 million during the first nine months of 2005
reflecting production cutbacks during the third quarter, which more than offset
inventory increases experienced during the first six months of the year. The
Company continues to believe that inventories are higher than necessary and
will remain focused on managing inventory levels to better align inventory with
changes in customer demand and to reflect the impact of the merged Modine
Aftermarket business throughout the remainder of 2005. Production cutbacks
associated with these efforts during the third quarter resulted in a $16.6
million reduction in inventory levels. This represents the difference between
inventory levels at June 30, 2005 plus inventory added by the Modine Aftermarket
merger less inventory balances at September 30, 2005. Accounts payable rose by
$10.7 million during the first nine months of 2005 as a result of our efforts to
balance payables with the ongoing shift in customer receivables mix toward
longer payment cycles. During the first nine months of 2004, operations
generated $11.3 million of cash. Continuing operations generated $9.0 million
while the discontinued HD-OEM business generated $2.3 million. Inventories rose
by $2.9 million in 2004 due to the start-up of new customer programs and
increases related to typical seasonal buying patterns. Accounts payable rose by
$4.2 million in 2004, 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 $6.0 million of capital spending during the first nine 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.
As further disclosed in Note 3 of the Notes to Condensed Consolidated
Financial Statements, on July 22, 2005, the Company completed its merger with
Modine Aftermarket. Transaction costs approximated $8.6 million, of which $6.2
million has been paid during the first nine months of 2005, $1.1 million was
payable at September 30, 2005 and $1.3 million was paid during 2004.
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 September 30, 2005 was $50.4 million, compared to $44.0
million at the end of 2004 and at September 30, 2004. The increase in debt
levels 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. During the third quarter of 2005, the
Company utilized funds generated by reductions in inventory to finance merger
transaction costs and costs associated with the merger
22
restructuring activities. Debt levels at September 30, 2005 were $0.4 million
lower than at June 30, 2005. At September 30, 2005 the Company had $25.4 million
available for future borrowings under its Loan Agreement.
On July 22, 2005, in connection with the merger of the Company with the
aftermarket business of Modine, the Company amended its $80.0 million credit
facility (the "Loan Agreement") with Wachovia Capital Financial Corporation (New
England), formerly known as Congress Financial Corporation (New England)
effective July 21, 2005. The amended credit facility consists of a revolving
credit line with maximum borrowings of $78.3 million and a $1.7 million term
loan, each of which was amended to expire on July 21, 2009 (subject to renewal
on an annual basis thereafter). Under the amended credit facility, the interest
rate is 2% over a Eurodollar-based rate through April 21, 2006 and ranges from
1.75% to 2.25% over such rate thereafter. The amended credit facility also
provides that the Company may pay dividends or repurchase capital stock of up to
$3.0 million annually, so long as excess availability is at least $18.0 million
for the 30 consecutive days both prior to and following the payment date. The
amended credit facility also amends the borrowing base calculation such that (i)
up to $55.0 million in respect of eligible inventory may be counted and (ii)
availability reserves may be revised for dilution in respect of the Company's
accounts. The amended facility adds financial covenants for (i) minimum EBITDA
(tested quarterly commencing September 30, 2005 and not required if excess
availability exceeds $15.0 million), (ii) minimum excess availability ($5.0
million at all times through June 30, 2006 and $13.0 million immediately after
giving effect to the Modine merger), and (iii) capital expenditures (not to
exceed $12.0 million in any calendar year end, if financed under the credit
facility). The Company was required to, and did, satisfy customary conditions to
the amendment of the credit facility and obtained Wachovia's consent to the
merger.
On October 20, 2005, the Company amended its Loan and Security Agreement,
pursuant to a Thirteenth Amendment to Loan Agreement. Under the amended Loan
Agreement, the Unused Line Fee was reduced through June 30, 2006. The amended
Loan Agreement changes financial covenants for (i) minimum EBITDA (tested
quarterly commencing September 30, 2005 and not required if Excess Availability
exceeds $15.0 million) such that minimum EBITDA for the September 30, 2005 and
December 31, 2005 test dates is a higher negative amount, and (ii) minimum
Excess Availability ($5.0 million at all times through June 30, 2006) so as to
give no effect to the limitations on Excess Availability imposed by the Maximum
Credit under the amended Loan Agreement of $80.0 million or the Revolving Loan
Ceiling.
The amended Loan Agreement also adds a financial covenant requiring that
consolidated inventory, excluding the Company's NRF and Mexpar subsidiaries, as
of December 31, 2005 will not exceed $122.0 million. The Company was required
to, and did, satisfy customary conditions to the amendment of the 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 product lines. In addition, the
Company's future cash flow may be impacted by continued competitive pricing
pressures and 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 customer payment 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
23
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.
As a result of the merger with the aftermarket business of Modine, the
Company's liquidity is expected to improve as the assets acquired were debt free
and the acquired businesses provided $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.
The fair values of the assets acquired and liabilities assumed in the
Modine Aftermarket merger are based upon a preliminary opening balance sheet,
which is still subject to review and adjustments. The initial purchase price
allocations, and resulting negative goodwill, may be adjusted in the future for
changes in the estimates of the fair value of the assets acquired and
liabilities assumed.
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 this filing, 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 Proliance management and are subject to
significant risks and uncertainties. Actual results may differ
24
from those set forth in the forward-looking statements. When used in this filing
the terms "anticipate," "believe," "estimate," "expect," "may," "objective,"
"plan," "possible," "potential," "project," "will" and similar expressions
identify forward-looking statements.
In addition, the following factors relating to the merger with the Modine
Manufacturing Company aftermarket business, among others, could cause actual
results to differ from those set forth in the forward-looking statements: (1)
the risk that the businesses will not be integrated successfully; (2) the risk
that the cost savings and any revenue synergies from the transaction may not be
fully realized or may take longer to realize than expected; (3) disruption from
the transaction making it more difficult to maintain relationships with clients,
employees or suppliers; (4) the transaction may involve unexpected costs; (5)
increased competition and its effect on pricing, spending, third-party
relationships and revenues; (6) the risk of new and changing regulation in the
U.S. and internationally; (7) the possibility that Proliance's historical
businesses may suffer as a result of the transaction and (8) other uncertainties
and risks beyond the control of Proliance. Additional factors that could cause
Proliance's results to differ materially from those described in the
forward-looking statements can be found in the Company's Annual Report on Form
10-K. The forward-looking statements contained herein 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 changes in the price of
commodities used in our manufacturing process. As a result of the merger with
Modine Aftermarket, the Company has operations in Europe and Central America,
which increases the Company's exposure to changes in foreign currency exchange
rates. Excluding this, there have been no other 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 September 30, 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 September 30, 2005.
On July 22, 2005, the Company completed its merger with the aftermarket
business of Modine Manufacturing Company. This acquired business contained over
100 facilities located in North America,
25
Central America and Europe and involved the addition of 1,400 employees. As part
of the post-closing integration of the merged entity, the Company is engaged in
a process of refining and harmonizing the internal controls and processes of the
acquired business with those of the Company's historical operations in addition
to closing and consolidating facilities. This process was ongoing during the
quarter ended September 30, 2005, and the Company believes that it will be
completed in 2006.
Except as provided in the prior paragraph, there have been no changes in
the Company's internal controls over financial reporting during the quarter
ended September 30, 2005 that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company held on July 22, 2005
six proposals were voted upon and approved by the Company's stockholders. A
brief discussion of each proposal voted upon at the Annual Meeting and the
number of votes cast for, against and withheld, as well as the number of
abstentions to each proposal and broker non-votes are set forth below.
A vote was taken for the election of seven Directors of the Company to hold
office until their respective successors shall have been duly elected. The
aggregate numbers of shares of Common Stock voted in person or by proxy for each
nominee were as follows:
Nominee For Withheld
- ----------------------- --------- --------
Barry R. Banducci 6,089,683 472,989
William J. Abraham, Jr. 5,736,665 826,007
Philip Wm. Colburn 6,090,687 471,985
Charles E. Johnson 6,067,440 495,232
Paul R. Lederer 6,091,212 471,460
Sharon M. Oster 6,090,162 472,510
F. Alan Smith 6,091,742 470,930
A vote was taken on the proposal to ratify the appointment of BDO Seidman,
LLP as Proliance's independent registered public accounting firm for the year
ending December 31, 2005. The aggregate numbers of shares of Common Stock voted
in person or by proxy were as follows:
For Against Abstain Broker Non-Vote
- --------- ------- ------- ---------------
6,551,890 4,159 6,622 0
A vote was taken on the approval of the Company's Equity Incentive Plan.
The aggregate numbers of shares of Common Stock voted in person or by proxy were
as follows:
For Against Abstain Broker Non-Vote
- --------- ------- ------- ---------------
3,885,285 869,851 17,808 1,789,728
A vote was taken on the approval of the merger of the Company with Modine
Aftermarket Holdings, Inc. by adopting the merger agreement. The aggregate
numbers of shares of Common Stock voted in person or by proxy were as follows:
26
For Against Abstain Broker Non-Vote
- --------- ------- ------- ---------------
4,740,501 26,258 6,185 1,789,728
A vote was taken on the approval of an adjournment of the annual meeting to
another time or place to permit further solicitation of proxies if necessary to
obtain additional votes in favor of the merger proposal. The aggregate numbers
of shares of Common Stock voted in person or by proxy were as follows:
For Against Abstain Broker Non-Vote
- --------- ------- ------- ---------------
5,855,611 669,994 37,066 0
A vote was taken on the approval of the increase in the number of
authorized shares of the Company's common stock from 17.5 million to 47.5
million. The aggregate numbers of shares of Common Stock voted in person or by
proxy were as follows:
For Against Abstain Broker Non-Vote
- --------- ------- ------- ---------------
5,972,516 574,245 15,911 0
The foregoing proposals are described more fully in the Company's proxy
statement/prospectus-information statement dated June 21, 2005, filed with the
Securities and Exchange Commission pursuant to Section 14 (a) of the Securities
Act of 1934, as amended, and the rules and regulations promulgated thereunder.
ITEM 5. OTHER INFORMATION
At its meeting on August 11, 2005, the Board of Directors created a new
Nominating and Governance Committee and reconstituted the membership of its
Board Committees as follows:
COMPENSATION COMMITTEE
Vincent L. Martin, Chairman
Barry R. Banducci
William J. Abraham Jr.
James R. Rulseh
NOMINATING AND GOVERNANCE COMMITTEE
William J. Abraham, Jr., Chairman
Paul R. Lederer
Michael T. Yonker
AUDIT COMMITTEE
F. Alan Smith, Chairman
Philip Wm. Colburn
Michael T. Yonker
Bradley C. Richardson
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.
PROLIANCE INTERNATIONAL, INC.
(Registrant)
Date: November 14, 2005 By: /s/ Charles E. Johnson
-------------------------------------------------
Charles E. Johnson
President and Chief Executive Officer (Principal
Executive Officer)
Date: November 14, 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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