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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, 2000
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: 1-14181
TRANSPORTATION COMPONENTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0562800
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
THREE RIVERWAY
SUITE 200
HOUSTON, TEXAS 77056
(Address of Principal Executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 332-2500
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 [ ]
The number of shares outstanding of the registrant's common stock, as of
November 13, 2000, was 17,973,585.
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TRANSPORTATION COMPONENTS, INC.
INDEX
PART I. - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets of Transportation Components, Inc.
at September 30, 2000 (unaudited) and December 31, 1999................ 3
Unaudited Consolidated Statements of Operations of Transportation
Components, Inc. for the three months and nine months ended
September 30, 2000 and 1999............................................ 4
Unaudited Consolidated Statements of Cash Flows of Transportation
Components, Inc. for the nine months ended September 30, 2000 and 1999. 5
Notes to Unaudited Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 17
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 18
Signature................................................................ 19
-2-
TRANSPORTATION COMPONENTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2000 1999
ASSETS --------- ---------
(UNAUDITED) (NOTE 1)
Current assets:
Cash and cash equivalents ................................................... $ 4,994 $ 2,859
Accounts receivable, net of allowance for bad debts of $1,683 and $1,586 .... 39,755 40,029
Receivables from related parties ............................................ 560 508
Notes receivable, current ................................................... 567 732
Inventories ................................................................. 67,414 67,203
Prepaid expenses and other .................................................. 3,465 2,941
Deferred tax asset .......................................................... 5,113 5,447
--------- ---------
Total current assets ..................................................... 121,868 119,719
Property and equipment, net ................................................... 13,094 14,532
Notes receivable, net ......................................................... 709 752
Notes receivable from related parties ......................................... 427 858
Goodwill, net ................................................................. 85,796 87,358
Other assets .................................................................. 1,324 1,351
--------- ---------
Total assets ............................................................. $ 223,218 $ 224,570
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ....................................... $ 35,582 $ 42,459
Subordinated debt and other payables to related parties ..................... 4,316 1,762
Current portion of long-term debt ........................................... 500 743
Other current liablities .................................................... 838 1,004
--------- ---------
Total current liablities ................................................. 41,236 45,968
Long-term debt, less current portion .......................................... 69,825 61,173
Deferred tax liability ........................................................ 2,318 2,962
Subordinated debt and other payables to related parties, less current ......... 9,790 12,488
--------- ---------
Total liablities ......................................................... 123,169 122,591
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par, 5,000,000 shares authorized, none issued ........ -- --
Common stock, $0.01 par, 102,000,000 shares authorized,
17,886,015 shares issued .................................................. 178 178
Additional paid-in capital .................................................. 102,660 102,522
Treasury stock, at cost - none and 121,411 shares, respectively ............. -- (304)
Cumulative translation adjustments .......................................... 100 134
Retained deficit ............................................................ (2,889) (551)
--------- ---------
Total stockholders' equity ............................................... 100,049 101,979
--------- ---------
Total liabilities and stockholders' equity ............................... $ 223,218 $ 224,570
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
-3-
TRANSPORTATION COMPONENTS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenues ............................................... $ 72,790 $ 78,189 $ 225,692 $ 237,539
Cost of sales .......................................... 51,063 54,438 158,456 164,683
------------ ------------ ------------ ------------
Gross profit ......................................... 21,727 23,751 67,236 72,856
Selling, general and administrative expenses ........... 20,249 20,322 62,209 59,551
Amortization of goodwill ............................... 565 577 1,695 1,687
------------ ------------ ------------ ------------
Income from operations ................................. 913 2,852 3,332 11,618
Other income (expense):
Interest expense ..................................... (2,197) (1,299) (5,943) (3,921)
Other income, net .................................... 345 274 114 804
------------ ------------ ------------ ------------
Income (loss) before income taxes ...................... (939) 1,827 (2,497) 8,501
Provision (benefit) for income taxes ................... (56) 962 (167) 4,053
------------ ------------ ------------ ------------
Net (loss) income ...................................... $ (883) $ 865 $ (2,330) $ 4,448
============ ============ ============ ============
(Loss) income per share - Basic ........................ $ (.05) $ .05 $ (.13) $ .25
============ ============ ============ ============
(Loss) income per share - Diluted ...................... $ (.05) $ .05 $ (.13) $ .25
============ ============ ============ ============
Number of shares used in the per share calculations:
Basic ................................................ 17,829,595 17,732,726 17,749,770 17,729,452
============ ============ ============ ============
Diluted .............................................. 17,829,595 17,737,078 17,749,770 19,334,959
============ ============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
TRANSPORTATION COMPONENTS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------
2000 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ........................................................... $(2,330) $ 4,448
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................. 4,001 3,789
Provision for bad debts ................................................... 728 368
(Gain) Loss on sale of assets ............................................. 116 (48)
Deferred tax (benefit) provision .......................................... (313) 463
Compensation expense related to issuance of common stock to associate
benefit plans ........................................................... 442 --
Changes in operating assets and liabilities, net of assets acquired
Accounts receivable and notes receivable .................................. 99 (4,525)
Inventories ............................................................... (303) (846)
Other assets .............................................................. (645) 623
Accounts payable and accrued expenses ..................................... (7,088) 625
------- -------
Net cash provided by (used in) operating activities ..................... (5,293) 4,897
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ....................................... (1,304) (3,968)
Cash paid for acquisitions ................................................ -- (1,041)
Other ..................................................................... 460 272
------- -------
Net cash used in investing activities ................................... (844) (4,737)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of long term debt .......................................... 8,292 841
------- -------
Net cash provided by financing activities ............................... 8,292 841
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ..................................... (20) 21
------- -------
Net increase in cash and cash equivalents ................................... 2,135 1,022
Cash and cash equivalents, beginning of period .............................. 2,859 4,090
------- -------
Cash and cash equivalents, end of period .................................... $ 4,994 $ 5,112
======= =======
The accompanying notes are an integral part of
these consolidated financial statements.
-5-
TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Transportation Components, Inc., a Delaware corporation also known as
TransCom USA ("TransCom", and collectively with its subsidiaries, the
"Company"), was founded in October 1997 to become a national distributor of
replacement parts and supplies for commercial trucks, trailers and other
heavy-duty vehicles and equipment. Prior to its initial public offering (the
"IPO"), TransCom had not conducted any operations. Concurrent with the
consummation of its IPO on June 24, 1998, TransCom acquired nine companies in
separate merger transactions. During the third and fourth quarters of 1998,
TransCom acquired an additional nine companies.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and 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 generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presenation have
been included. All significant intercompany transactions and balances have been
eliminated. Operating results for the three months and nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements
and related footnotes included in the Company's annual report on Form 10-K for
the year ended December 31, 1999.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect (i) the reported amounts of assets and liabilities, (ii)
the disclosure of contingent assets and liabilities known to exist as of the
date the financial statements are published, and (iii) the reported amount of
revenues and expenses recognized during the periods presented. Uncertainties
with respect to estimates and assumptions are inherent in the preparation of
financial statements. The Company regularly reviews all significant estimates
affecting its consolidated financial statements. Adjustments made with respect
to estimates often relate to improved information not previously available.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 requires a company to recognize all derivative instruments
(including certain derivative instruments embedded in other contracts) as assets
or liabilities in its balance sheet and measure them at fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. In June
1999, SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133",
was issued and defers the adoption date to the beginning of an entity's fiscal
year-end beginning after June 15, 2000.
-6-
TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Management does not believe that the adoption of this statement will have a
material impact on the financial position or results of operations of the
Company.
In December 1999, the SEC released Staff Accounting Bulletin No. 101,
"Revenue Recognition" ("SAB No. 101"). SAB No.101 provides registrants guidance
on the recognition, presentation and disclosure of revenue in financial
statements, and it is required to be adopted by the Company in the fourth
quarter of 2000. Management does not expect that the adoption of SAB No. 101
will have a material effect on its consolidated financial statements.
2. (LOSS) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted (loss)
earnings per share for the periods indicated (in thousands, except for share and
per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
NET (LOSS) INCOME
Net (loss) income ........................ $ (883) $ 865 $ (2,330) $ 4,448
Add interest on 5% convertible notes
(assumed converted), net of
federal income tax effect .............. -0- -0- -0- 319
------------ ------------ ------------ ------------
Adjusted net (loss) income ........... $ (883) $ 865 (2,330) 4,767
============ ============ ============ ============
BASIC
Basic weighted average shares .......... 17,829,595 17,732,726 17,749,770 17,729,452
============ ============ ============ ============
DILUTED
Basic weighted average shares .......... 17,829,595 17,732,726 17,749,770 17,729,452
Effect of dilutive securities
Options .............................. -0- 4,352 -0- 5,869
Warrants ............................. -0- -0- -0- -0-
Convertible subordinated notes ....... -0- -0- -0- 1,599,638
------------ ------------ ------------ ------------
Diluted weighted average shares ........ 17,829,595 17,737,078 17,749,770 19,334,959
============ ============ ============ ============
NET (LOSS) INCOME PER SHARE
Basic .................................. $ (.05) $ .05 $ (.13) $ .25
Diluted ................................ $ (.05) $ .05 $ (.13) $ .25
The computation of diluted weighted shares for three and nine months ended
September 30, 2000 did not include shares potentially issuable from the exercise
of stock options or warrants or from conversion of the convertible subordinated
notes because their inclusion would have been antidilutive. The computation for
1999 did not include the effect of shares potentially issuable for warrants
because their inclusion would have been antidilutive.
-7-
TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- --------
Long-term Debt
Revolving credit facility .................. $ 69,000 $ 60,100
Notes payable to a financial institution ... 852 1,355
Other ...................................... 473 461
-------- --------
Total long-term debt ....................... 70,325 61,916
Less: current portion ..................... (500) (743)
-------- --------
$ 69,825 $ 61,173
======== ========
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- --------
Subordinated Debt and Other Payables to
Related Parties
Subordinated convertible debt .............. $ 13,607 $ 13,635
Other long-term payables to related
parties .................................. 499 615
-------- --------
Total long-term subordinated debt and
other payables to related parties ........ 14,106 14,250
Less: current portion ..................... (4,316) (1,762)
-------- --------
$ 9,790 $ 12,488
======== ========
Effective September 30, 2000, our $75 million credit facility with a group
of banks, formerly scheduled to expire on June 30, 2001, was restructured, based
on a commitment from the bank group to reduce to about $50 million the maximum
amount we can borrow on a revolving basis, and to convert to a term loan about
$25 million that was previously outstanding under the earlier revolving
facility. Loans under the new, reduced revolving facility bear interest at the
agent bank's prime rate plus 1%. The term loan bears interest at the agent
bank's prime rate plus 2%. The term loan requires monthly principal payments of
$0.25 million until what is now the October 31, 2001 maturity date of both the
term loan and the modified revolving credit facility. Sixty percent of any
excess cash flow (as defined) must be applied to repayment of the term loan.
Both the Company and its bank group view the restructured facility as a
temporary arrangement designed to allow the Company time to seek alternative
financing, since the short-term maturity of the facility will require it to be
classified as a current liability on our year-end balance sheet if it is not
extended or replaced as of December 31, 2000. Also, certain terms of the
restructured facility are designed to motivate the Company to move the credit
before its scheduled maturity. For example, a restructuring fee to the agent
bank will be reduced by two-thirds if all amounts outstanding under the facility
are repaid by March 31, 2001, and by one-third if they are repaid by May 31,
2001. Also, if repayment is not accomplished by September 30, 2001, the lender
banks are to receive warrants for common shares representing 3% of our total
outstanding common shares at that date, at a price based on the then current
market value of our common stock.
As a requirement of the restructured credit facility, we have had to
suspend principal payments on $13.6 million of our 5% convertible subordinated
notes. Those holders of subordinated notes otherwise entitled to receive
principal payments before March 31, 2001, have agreed to extend their payment
dates until then. However, subordinated notes totaling $4.3 million in principal
amount and calling for $3.6 million of principal payments before September 30,
2001, have been classified as current at September 30, 2000, on the assumption
that further waivers or extensions will not be obtained and the notes will thus
become due by reason of default. After a payment default, a noteholder must wait
180 days to begin collection proceedings.
The circumstances attendant to our newly modified credit facility and our
subordinate notes make it imperative that we either restructure and extend both
classes of debt, or obtain alternative financing, however there are no
assurances that we will be able to do so. We presently intend to replace our
current credit facility with a longer-term, asset-based facility, arrange for
the placement of additional mezzanine or equity financing to bridge what the
Company expects will be a gap between the amount required to retire our present
facility and the amount of asset-based debt that our asset levels will support,
and restructure our subordinated debt to significantly extend its maturity.
Whether we will be able to accomplish our refinancing goals will depend on
a number of factors, some of which are not within our control. These include:
o Conditions in our industry generally,
o Credit and capital market conditions generally,
o Our near-term financial performance and asset levels, and
o The cooperation of our subordinated noteholders.
Assuming we are able to obtain the sought after refinancing, we expect its
terms will result in higher interest costs, tight limits on borrowing capacity,
more restrictive conditions, and equity dilution for our stockholders.
-8-
TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. COMMITMENTS AND CONTINGENCIES
Effective June 19, 2000, the Company switched from a guaranteed cost plan
to a self-insured plan on three of its insurance coverages. The Company
maintains a self-insurance program covering portions of workers' compensation,
general liability and automobile liability costs. The amounts in excess of the
self-insured levels are fully insured. Self-insurance accruals are based on
claims filed and an estimate for significant claims insured but not reported.
5. COMPREHENSIVE (LOSS) INCOME
In 1998, the Company adopted Statement of Financial Accounting Standard
(SFAS) No. 130, "Reporting Comprehensive Income", which requires companies to
display comprehensive income and its components in the financial statements.
Comprehensive income, which encompasses net (loss) income and currency
translation adjustments, is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
Net (loss) income .................... $ (883) $ 865 $(2,330) $ 4,448
Currency translation adjustments ..... 11 37 (34) 109
------- ------- ------- -------
Comprehensive (loss) income .......... $ (872) $ 902 $(2,364) $ 4,557
======= ======= ======= =======
6. SEGMENT INFORMATION
TransCom classifies its business into two reportable segments based on
geographic areas: "Domestic" (revenues generated from customers for use within
the United States) and "International" (revenues generated from customers for
use outside the United States - Canada, Mexico, South America, Central America,
Australia, New Zealand, Europe and Asia). All international operations have been
aggregated into one reportable segment because their operations are similar in
the nature of the product and production process, type of customer, and
distribution method. Operating income by segment is calculated using direct cost
of goods and services, direct selling, general and administration expenses, and
allocating general office expenses based on segment revenues.
Information as to the operations of TransCom's reportable segments is as
follows (in thousands):
DOMESTIC INTERNATIONAL INTERSEGMENT TOTAL
-------- ------------- ------------ -------
THREE MONTHS ENDED SEPTEMBER 30, 2000
Revenues ................................ $62,116 $10,692 $(18) $72,790
======= ======= ==== =======
Operating income ........................ 85 834 (6) 913
Depreciation and amortization expense ... 905 158 -0- 1,063
Capital expenditures .................... 428 -0- -0- 428
-9-
TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues ................................ $194,602 $ 31,222 $(132) $225,692
======== ======== ===== ========
Operating income ........................ 1,101 2,268 (37) 3,332
Depreciation and amortization expense ... 3,527 474 -0- 4,001
Capital expenditures .................... 1,239 65 -0- 1,304
Identifiable assets ..................... 189,929 32,470 -0- 222,399
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues ................................ $ 68,105 $ 10,194 $(110) $ 78,189
======== ======== ===== ========
Operating income ........................ 1,966 918 (32) 2,852
Depreciation and amortization expense ... 1,157 153 -0- 1,310
Capital expenditures .................... 2,072 61 -0- 2,133
DOMESTIC INTERNATIONAL INTERSEGMENT TOTAL
-------- ------------- ------------ -------
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues ................................ $209,279 $ 28,462 $(202) $237,539
======== ======== ===== ========
Operating income ........................ 9,022 2,656 (60) 11,618
Depreciation and amortization expense ... 3,338 451 -0- 3,789
Capital expenditures .................... 3,746 222 -0- 3,968
Identifiable assets ..................... 194,320 31,883 -0- 226,203
-10-
TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Information as to TransCom's operations in different geographical areas is
as follows (in thousands):
ALL OTHER
UNITED STATES MEXICO CANADA INTERNATIONAL(1) TOTAL
------------- -------- -------- -------------- --------
THREE MONTHS ENDED SEPTEMBER 30, 2000
Revenues ............................... $ 62,116 $ 6,289 $ 2,828 $1,557 $ 72,790
======== ======== ======== ====== ========
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues ............................... $194,602 $ 18,042 $ 8,418 $4,630 $225,692
======== ======== ======== ====== ========
Long-lived assets ...................... 85,402 10,761 5,299 -0- 101,462
THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues ............................... $ 68,105 $ 5,899 $ 2,854 $1,331 $ 78,189
======== ======== ======== ====== ========
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues ............................... $209,279 $ 15,887 $ 9,332 $3,041 $237,539
======== ======== ======== ====== ========
Long-lived assets ...................... 87,750 11,569 5,514 -0- 104,833
- -----------------------
(1)Includes South America, Central America, Australia, Europe and Asia.
-11-
TRANSPORTATION COMPONENTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS" THAT GIVE
THE COMPANY'S CURRENT EXPECTATIONS OR FORECASTS OF FUTURE EVENTS. SUCH
STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMS SUCH AS
"BELIEVES," "EXPECTS," "MAY," "ESTIMATES," "WILL," "SHOULD," "PLANS" OR
"ANTICIPATES" OR OTHER SIMILAR WORDS IN ANY DISCUSSION OF FUTURE OPERATING OR
FINANCIAL PERFORMANCE. SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND INVOLVE SIGNIFICANT RISKS AND UNCERTAINTIES, AND ACTUAL
RESULTS MAY VARY MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF ANY NUMBER OF FACTORS, MOST OF WHICH ARE BEYOND THE CONTROL OF
MANAGEMENT. IN PARTICULAR, THE COMPANY HAS IDENTIFIED SPECIFIC RISKS AND
UNCERTAINTIES RELATED TO THE COMPANY'S BUSINESS UNDER "ITEM 1. BUSINESS - RISK
FACTORS" ON PAGE 9 OF THE COMPANY'S ANNUAL REPORT OR FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1999. OTHER FACTORS COULD CAUSE ACTUAL RESULTS TO VARY
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. THIS DISCUSSION IS PROVIDED AS
PERMITTED BY THE PRIVATE LITIGATION SECURITIES LITIGATION REFORM ACT OF 1995.
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and their related notes in this
Report, and the Company's audited consolidated financial statements contained in
its Form 10-K for the year ended December 31, 1999.
OVERVIEW
Since early 1999, we have focused on integrating our operations. We have
completed the installation of common operating and financial systems and a wide
area network in the majority of our branch locations. We have centralized
payroll and standardized employee benefits such as health insurance, flexible
benefit plans and the 401(k) program for all domestic associates. We have also
(1) transferred the accounts payable function from several branches to the
general office in Houston, (2) centralized invoice payments for approximately 25
of our larger vendors and (3) transferred the purchasing and inventory
replenishment functions for many of our branches to the general office. During
the first nine months of 2000, we continued to focus on processes related to our
recently installed systems. We estimate that the accounts payable and purchasing
functions for most of our remaining domestic branches will be centralized before
this year-end.
We have not yet realized significant cost savings from centralizing our
administrative functions in our general office due to the related staffing and
training costs. It is necessary to build the infrastructure in the general
office to centralize the branch administrative functions before significant
costs can be reduced at the branches. Additionally, we incurred costs to train
our associates on the recently installed common operating and financial systems
for the first three quarters of 2000, we recorded approximately $0.7 million of
charges for severance costs associated with our centralization of administration
and other headcount reductions. For the fourth quarter of 1999, approximately
$0.9 million was recorded for that purpose.
We believe the business level of the heavy-duty truck parts industry
slowed during 1999 from the record levels experienced in 1997 and early 1998,
and has continued to decline in the first nine months of 2000. Our revenue in
1999 declined slightly from 1998. Revenues for the first nine months of 2000
were 5.0% below revenues for the same period of 1999. For the third quarter of
2000, revenue was down 6.9% from the third quarter of 1999.
Through the first nine months of 2000, pre-tax income was reduced by $1.3
million of nonrecurring special charges consisting of $0.7 million of severance
charges for headcount reductions and $0.6 million of reserves for non-cash
reductions in the value of notes receivable recorded in connection with an
acquisition and the recording of a reserve for the anticipated liquidation costs
of equipment being sold.
-12-
TRANSPORTATION COMPONENTS, INC.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30
-----------------------------------------------
2000 % 1999 %
-------- ----- -------- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues ................................... $ 72,790 100.0 $ 78,189 100.0
Cost of sales .............................. 51,063 70.1 54,438 69.6
-------- ----- -------- -----
Gross profit ............................. 21,727 29.9 23,751 30.4
Selling, general and administrative expenses 20,814 28.6 20,899 26.7
Income from operations ................... 913 1.3 2,852 3.7
Interest expense ........................... (2,197) (3.1) (1,299) (1.7)
Other income, net .......................... 345 .5 274 .3
-------- ----- -------- -----
(Loss) income before income taxes ........ $ (939) (1.3) $ 1,827 2.3
======== ===== ======== =====
RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1999
REVENUES. Revenues of $72.8 million for the three months ended September
30, 2000 declined $5.4 million, or 6.9%, from $78.2 million of revenues for the
three months ended September 30, 1999. Revenues declined in connection with what
we believe is a general softening in the domestic industry. Of the $5.4 million
decline, $1.7 million was applicable to a decline in our sales of new trucks.
This decline is primarily the result of a nationwide decline in demand for new
heavy-duty trucks. The softening in the domestic industry was partially offset
by increased revenues in Mexico and heavy-duty equipment, primarily oilfield
equipment, which increased approximately 9% and 69%, respectively. In the third
quarter of this year, we signed a contract with a leading common courier to
provide replacement parts for its fleet nationwide. We expect the new contract
to begin favorably impacting our revenues before the end of this year.
GROSS PROFIT. Total gross profit of $21.7 million for the three months
ended September 30, 2000 declined by $2.0 million, or 8.5%, from $23.8 million
of gross profit for the three months ended September 30, 1999. As a percentage
of revenues, gross profit of 29.9% for the third quarter of 2000 declined 0.5%
from gross profit of 30.4% for the third quarter of 1999. This decline was
partially the result of vendor price increases, which we did not immediately
pass through to our customers, and changes in product mix.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased $0.1 million, or 0.4%, to $20.8 million for the three months
ended September 30, 2000 from $20.9 million for the three months ended September
30, 1999. Selling, general and administrative expenses as a percentage of
revenues increased from 26.7% for the third quarter of 1999 to 28.6% for the
third quarter of 2000. Severance expenses of $0.2 million, or 0.2% of revenues,
were recorded for announced headcount reductions. We continue to experience
additional increases in costs as a result of building infrastructure, including
staffing and training of our general office, enabling us to centralize the
branch administrative functions. We expect that significant administrative costs
at our branch locations can be eliminated or reduced during the fourth quarter
of 2000.
OTHER INCOME. Other income for the three months ended September 30, 2000
was income of $0.3 million compared to income of $0.3 million for the three
months ended September 30, 1999.
INTEREST EXPENSE. Interest expense for the three months ended September
30, 2000 increased $0.9 million, or 69.1%, to $2.2 million compared to $1.3
million of interest expense for the three months ended September 30, 1999. The
increase in interest expense resulted from an approximate $5.1 million increase
in the average amount of debt outstanding between the two periods and an
approximate 4% increase in the average interest rate between the two quarters.
We also paid fees for amendments to our revolving credit facility, which have
been recorded as interest expense. LIBOR was approximately 120 basis points
higher at the end of the third quarter of 2000 compared to the end of the third
quarter of 1999. The margin we paid above LIBOR increased by 225 basis points
from the end of the third quarter of 1999 to the end of the third quarter of
2000. The margin above the LIBOR increased because of an increase in our ratio
of debt to earnings before interest, taxes,
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TRANSPORTATION COMPONENTS, INC.
depreciation and amortization. The increase in the average debt outstanding was
primarily from the increased working capital invested in inventory.
NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------------------
2000 % 1999 %
--------- ----- --------- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues ................................... $ 225,692 100.0 $ 237,539 100.0
Cost of sales .............................. 158,456 70.2 164,683 69.3
--------- ----- --------- -----
Gross profit ............................. 67,236 29.8 72,856 30.7
Selling, general and administrative expenses 63,904 28.3 61,238 25.8
Income from operations ................... 3,332 1.5 11,618 4.9
Interest expense ........................... (5,943) (2.6) (3,921) (1.6)
Other income, net .......................... 114 .0 804 .3
--------- ----- --------- -----
(Loss) income before income taxes ........ $ (2,497) (1.1) $ 8,501 3.6
========= ===== ========= =====
RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1999
REVENUES. Revenues of $225.7 million for the first nine months ended
September 30, 2000 represented a decline of $11.8 million, or 5.0%, from $237.5
million of revenues for the nine months ended September 30, 1999. We attribute
the decline to what we believe is a general softening in our industry
domestically. Our new truck sales dropped by $3.1 million as a result of a
nationwide decline in demand for new heavy-duty trucks. The softening in the
domestic industry was partially offset by increased revenues in Mexico of
approximately 16% and revenues in the heavy-duty equipment, primarily oilfield,
which increased approximately 10%.
GROSS PROFIT. Total gross profit of $67.2 million for the nine months
ended September 30, 2000 declined by $5.6 million, or 7.7%, from $72.9 million
of gross profit for the nine months ended September 30, 1999. As a percentage of
revenues, gross profit of 29.8% for the first nine months of 2000 declined 0.9%
from a gross profit of 30.7% for the first nine months of 1999. This decline was
partially due to vendor price increases, which we did not immediately pass
through to our customers, and changes in product mix.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $2.7 million, or 4.4%, to $63.9 million for the nine months
ended September 30, 2000 from $61.2 million for the nine months ended September
30, 1999. Selling, general and administrative expenses as a percentage of
revenues increased from 25.8% for the first nine months of 1999 to 28.3% for the
first nine months of 2000. Severance expense of $0.7 million, or 0.37% of
revenues, was recorded for announced headcount reductions. The additional
increases were the result of costs to build our infrastructure, including
staffing and training of our general office, enabling us to centralize the
branch administrative functions. We expect that significant administrative costs
at our branch locations can be eliminated or reduced during the fourth quarter
of 2000.
OTHER INCOME. Other income for the nine months ended September 30, 2000
was $0.1 million compared to income of $0.8 million for the nine months ended
September 30, 1999. The decline was attributed to the recording of approximately
$0.6 million of reserves to recognize nonrecurring, non-cash reductions in the
value of notes receivable from former business owners originally recorded in an
acquisition completed in June 1998 and the recording of a reserve for the
anticipated liquidation costs of equipment in the process of being sold.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
2000 increased $2.0 million, or 51.5%, to $5.9 million compared to $3.9 million
of interest expense for the nine months ended September 30, 1999. The increase
in interest expense was due to an approximate $5.9 million increase in the
average amount of debt outstanding between the two periods and an approximate
280 basis point increase in the average interest rate between the two periods.
We also paid fees for amendments to our revolving credit facility, which have
been recorded as interest expense. LIBOR was approximately 120 basis points
higher at the end of the first nine months of 2000 compared to the end of the
first nine months of 1999. The margin we paid above LIBOR increased by 225 basis
points from September 30, 1999 to September 30, 2000. The margin above the LIBOR
increased because of an increase in our ratio of debt to earnings before
interest, taxes, depreciation and
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TRANSPORTATION COMPONENTS, INC.
amortization. The increase in the average debt outstanding was primarily from
the increased working capital invested in inventory.
LIQUIDITY AND CAPITAL RESOURCES
As a distributor of heavy-duty truck parts, we require significant
amounts of working capital to fund inventories and accounts receivable.
Additional cash is required for capital items such as delivery vehicles,
information technology and warehouse equipment. We also require cash to pay our
lease obligations and to service our debt.
We used $5.3 million cash in operating activities during the nine
months ended September 30, 2000, primarily to reduce accounts payable to our
vendors. Net cash used for investing activities (capital expenditures) was $0.8
million for the nine months ended September 30, 2000, primarily relating to the
purchase of information technology systems. At September 30, 2000, we had cash
of $5.0 million, working capital of $80.6 million and total debt of $84.4
million compared to $2.9 million of cash, $73.8 million of working capital and
$76.2 million of total debt at December 31,1999.
The noted downturn in the heavy duty truck parts industry and the
associated decline in our revenues have adversely affected our liquidity and
limited our available capital. Since the industry softening began in 1999, we
have had to several times seek financial covenant relief and other waivers from
our senior lenders. Effective September 30, 2000, our $75 million credit
facility with a group of banks, formerly scheduled to expire on June 30, 2001,
was restructured, based on a commitment from the bank group to reduce to about
$50 million the maximum amount we can borrow on a revolving basis, and to
convert to a term loan about $25 million that was previously outstanding under
the earlier revolving facility. Loans under the new, reduced revolving facility
bear interest at the agent bank's prime rate plus 1%. The term loan bears
interest at the agent bank's prime rate plus 2%. The term loan requires monthly
principal payments of $0.25 million until what is now the October 31, 2001
maturity date of both the term loan and the modified revolving credit facility.
Sixty percent of any excess cash flow (as defined) must be applied to repayment
of the term loan.
Both the Company and its bank group view the restructured facility as a
temporary arrangement designed to allow the Company time to seek alternative
financing, since the short-term maturity of the facility will require it to be
classified as a current liability on our year-end balance sheet if it is not
extended or replaced as of December 31, 2000. Also, certain terms of the
restructured facility are designed to motivate the Company to move the credit
before its scheduled maturity. For example, a restructuring fee to the agent
bank will be reduced by two-thirds if all amounts outstanding under the facility
are repaid by March 31, 2001, and by one-third if they are repaid by May 31,
2001. Also, if repayment is not accomplished by September 30, 2001, the lender
banks are to receive warrants for common shares representing 3% of our total
outstanding common shares at that date, at a price based on the then current
market value of our common stock.
As a requirement of the restructured credit facility, we have had to
suspend principal payments on $13.6 million of our 5% convertible subordinated
notes. Those holders of subordinated notes otherwise entitled to receive
principal payments before March 31, 2001, have agreed to extend their payment
dates until then. However, subordinated notes totaling $4.3 million in principal
amount and calling for $3.6 million of principal payments before September 30,
2001, have been classified as current at September 30, 2000, on the assumption
that further waivers or extensions will not be obtained and the notes will thus
become due by reason of default. After a payment default, a noteholder must wait
180 days to begin collection proceedings.
The circumstances attendant to our newly modified credit facility and our
subordinate notes make it imperative that we either restructure and extend both
classes of debt, or obtain alternative financing, however there are no
assurances that we will be able to do so. We presently intend to replace our
current credit facility with a longer-term, asset-based facility, arrange for
the placement of additional mezzanine or equity financing to bridge what the
Company expects will be a gap between the amount required to retire our present
facility and the amount of asset-based debt that our asset levels will support,
and restructure our subordinated debt to significantly extend its maturity.
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TRANSPORTATION COMPONENTS, INC.
Whether we will be able to accomplish our refinancing goals will depend on
a number of factors, some of which are not within our control. These include:
o Conditions in our industry generally,
o Credit and capital market conditions generally,
o Our near-term financial performance and asset levels, and
o The cooperation of our subordinated noteholders.
Assuming we are able to obtain the sought after refinancing, we expect its
terms will result in higher interest costs, tight limits on borrowing capacity,
more restrictive conditions, and equity dilution for our stockholders.
Pending any refinancing, we expect our cash flow from operations, combined
with our borrowing capacity under our current credit facility, will be
sufficient to meet our normal working capital needs, fund our planned capital
expenditures of about $750,000 for the remainder of 2000 and about $2.0 million
for 2001, and amortize the recently converted term portion of our current credit
facility. Our internal cash flow projections also indicate we will be able to
remain in compliance with the financial covenants imposed by our restructured
credit facility. However, with respect to both our cash requirements and
covenant compliance, the margins for error, while not perilously thin, are less
than fully comfortable, and both could be adversely impacted by, for example,
any further softening in industry conditions or any unexpected decline in our
financial performance.
At September 30, 2000, approximately $191,000 of deferred unamortized
costs associated with our credit facility are included on the balance sheet. If
we are successful in replacing the credit facility, these costs will be
expensed.
FOREIGN CURRENCY FLUCTUATIONS
Some of our revenues are billed and collected in Mexican pesos and
Canadian dollars. Additionally, substantially all of the operating expenses
related to foreign locations are incurred in a foreign currency. Consequently,
our reported financial results are affected by fluctuation of foreign currencies
against the U.S. dollar. We periodically perform foreign currency hedging to
reduce its foreign currency transaction exposures.
SEASONALITY
Weather extremes cause increased parts wear and breakdowns of trucks and
trailers; however, extreme weather, particularly during winter months, could
inhibit general business activity. These seasonal trends may cause fluctuations
in our earnings. Additionally, quarterly results may be materially affected by
the timing of acquisitions, variations in the margins of products sold and
services performed during any particular quarter, the timing and magnitude of
acquisition assimilation projects and regional economic conditions. Accordingly,
our operating results in any particular quarter may not be indicative of the
results that can be expected for any other quarter or for the entire year.
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TRANSPORTATION COMPONENTS, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk primarily from interest rates and foreign
currency exchange rates. We actively monitor our exposure to market risks and
continue to develop and use appropriate risk management techniques. Accordingly,
we may enter into certain derivative financial instruments such as interest rate
caps or swaps and foreign currency futures contracts or obligations. We do not
use derivative financial instruments for trading or to speculate on changes in
interest rates or foreign currency exchange rates.
The sensitivity analyses below, which hypothetically illustrate our
potential market risk exposure, estimate the effects of hypothetical sudden and
sustained changes in the applicable market conditions on 2000 earnings. The
sensitivity analyses presented do not consider any additional actions we might
take to mitigate our exposure to such changes. The market changes, assumed to
occur as of January 1, 2000, include a 100 basis point increase in market
interest rates and a 10% weakening of all other currencies relative to the U.S.
dollar. The hypothetical changes and assumptions may be different from what
actually occurs in the future.
INTEREST RATES. At September 30, 2000, we had no derivative financial
instruments to manage interest rate risk. Accordingly, we are exposed to
earnings and fair value risk due to changes in interest rates with respect to
our long-term obligations. As of September 30, 2000, approximately 98% of our
long-term obligations were floating rate obligations. The hypothetical 100 basis
point increase in interest rates described above would increase pre-tax loss for
the nine months ended September 30, 2000 by approximately $0.7 million and
reduce pre-tax income by $0.6 million for the nine months ended September 30,
1999. This effect is primarily due to the floating rate borrowings under our
revolving credit facility.
FOREIGN CURRENCY EXCHANGE RATES. Our earnings and cash flows are subject
to fluctuations due to changes in foreign currency exchange rates. We manage our
exposure to changes in exchange rates by buying or selling currency futures
contracts and options. Our risk management objective is to reduce our exposure
on a monthly basis to the effects of changes in exchange rates on the value of
our accounts receivable denominated in foreign currency. To a certain extent,
foreign exchange rate changes may affect business practices and/or pricing
strategies of non-U.S. based competitors. Our foreign currency risk policies
entail entering into foreign currency futures contracts only to manage risk -
not for speculative investments.
A hypothetical 10% weakening of the average exchange rate of all other
currencies relative to the U.S. dollar would have reduced our sales by $3.0
million and our operating income by $0.2 million for the nine months ended
September 30, 2000, and by $2.8 million and $0.3 million, respectively, for the
nine months ended September 30, 1999. The hypothetical change in exchange rates
ignores the effect this movement may have on other variables, including
competitive risk. If it were possible to quantify this competitive impact, the
results could well be different than the effects of the sensitivity analysis
shown above.
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TRANSPORTATION COMPONENTS, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
3.1 Amended and Restated Certificate of Incorporation of
Transportation Components, Inc. (incorporated herein by
reference from the Company's Form S-1, file number 333-50447)
3.2 Bylaws of Transportation Components, Inc. as amended
(incorporated herein by reference from the Company's Form
S-1, file number 333-50447)
27.1 Financial Data Schedule
B. REPORTS ON FORM 8-K:
None
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SIGNATURE
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, who has signed this report on behalf of
the Registrant and as the principal financial officer of the Registrant.
TRANSPORTATION COMPONENTS, INC.
Date: November 14, 2000 By: /s/ DAVID PHELPS
David Phelps, Senior Vice President
and Chief Financial Officer
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