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, 1998
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
THREE RIVERWAY, SUITE 630, HOUSTON, TEXAS 77056
(Former name, former address and
former fiscal year, if changed since last report)
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 12, 1998, was 17,727,815.
TRANSPORTATION COMPONENTS, INC.
INDEX
PART I. - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets of Transportation Components, Inc. at
September 30, 1998 (Unaudited) and December 31, 1997 ............... 3
Unaudited Pro Forma Combined Statements of Operations for the three
and nine months ended September 30, 1998 and 1997 .................. 4
Unaudited Consolidated Statements of Operations of Transportation
Components, Inc. for the three and nine months ended
September 30, 1998 ................................................. 5
Unaudited Consolidated Statements of Cash Flows of Transportation
Components, Inc. for the three and nine months ended
September 30, 1998 ................................................. 6
Notes to Unaudited Consolidated Financial Statements ................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 12
PART II. - OTHER INFORMATION
Item 1.Legal Proceedings ............................................... 19
Item 6.Exhibits and Reports on Form 8-K ................................ 19
Signature .............................................................. 20
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TRANSPORTATION COMPONENTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- -------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 3,431 $ 5
Accounts receivable, net of allowance for bad debts
of $1,507 ....................................... 29,747 --
Receivables from related parties .................. 308 --
Inventories ....................................... 60,104 --
Notes receivable, current ......................... 925 --
Deferred taxes, current ........................... 991 --
Prepaid expenses and other ........................ 1,580 337
--------- -------
Total current assets ............................ 97,086 342
Property and equipment, net ......................... 9,060 --
Notes receivable, less current portion .............. 2,206 --
Notes receivables from related parties .............. 1,021 --
Goodwill, net ....................................... 54,374
Deferred taxes ...................................... 306 --
Other assets ........................................ 1,969 --
--------- -------
Total assets .................................. $ 166,022 $ 342
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............. $ 29,926 $ 316
Payables to related parties ....................... 144 --
Current portion of long-term debt ................. 2,664 --
Deferred taxes, current ......................... 2,038 --
Other current liabilities ......................... 139 --
--------- -------
Total current liabilities ....................... 34,911 316
Long-term debt, less current portion ................ 36,735 --
Deferred tax liability .............................. 1,738 --
Other long-term liabilities to related parties ...... 709 --
--------- -------
Total liabilities ............................. 74,093 316
--------- -------
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, 16,512,611 and 2,594,717 shares
outstanding, respectively ....................... 165 26
Additional paid-in capital ........................ 97,897 3,108
Retained earnings (deficit) ....................... (6,133) (3,108)
--------- -------
Total stockholders' equity ...................... 91,929 26
--------- -------
Total liabilities and stockholders' equity .... $ 166,022 $ 342
========= =======
The accompanying notes are an integral part of these
consolidated financial statements.
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TRANSPORTATION COMPONENTS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues .......................... $ 58,423 $ 52,819 $ 176,851 $ 153,389
Cost of sales ..................... 41,189 37,631 124,873 108,531
------------ ------------ ------------ ------------
Gross profit .................. 17,234 15,188 51,978 44,858
Selling, general and administrative
expenses ........................ 13,674 11,756 39,999 34,554
------------ ------------ ------------ ------------
Income from operations ........ 3,560 3,432 11,979 10,304
Other Income (Expense):
Interest expense .............. (651) (342) (1,287) (1,053)
Other income, net ............. 297 146 112 320
------------ ------------ ------------ ------------
Income before income taxes ........ 3,206 3,236 10,804 9,571
Provision for income taxes ........ 1,405 1,398 4,645 4,135
------------ ------------ ------------ ------------
Net income ........................ $ 1,801 $ 1,838 $ 6,159 $ 5,436
============ ============ ============ ============
Earnings per share - Basic ........ $ 0.11 $ 0.11 $ 0.37 $ 0.33
============ ============ ============ ============
Earnings per share - Diluted ...... $ 0.11 $ 0.11 $ 0.37 $ 0.32
============ ============ ============ ============
Number of shares used in the per
share calculations:
Basic ........................... 16,512,611 16,512,611 16,512,611 16,512,611
============ ============ ============ ============
Diluted ......................... 16,928,099 16,723,150 16,799,874 16,723,150
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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TRANSPORTATION COMPONENTS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
------------ -----------
Revenues ........................................... $ 58,423 $ 62,209
Cost of sales ...................................... 41,189 43,853
------------ -----------
Gross profit ................................... 17,234 18,356
Selling, general and administrative expenses ....... 13,674 19,551
------------ -----------
Income (loss) from operations .................. 3,560 (1,195)
Other Income (Expense):
Interest expense ............................... (651) (680)
Other income, net ............................. 297 285
------------ -----------
Income (loss) before income taxes .................. 3,206 (1,590)
Provision for income taxes ......................... 1,405 1,435
------------ -----------
Net income (loss) .................................. $ 1,801 $ (3,025)
============ ===========
Income (loss) per share - Basic .................... $ 0.11 $ (0.38)
============ ===========
Income (loss) per share - Diluted .................. $ 0.11 $ (0.38)
============ ===========
Number of shares used in the per share calculations:
Basic ......................................... 16,512,611 7,944,431
============ ===========
Diluted ....................................... 16,928,099 7,944,431
============ ===========
The accompanying notes are an integral part of these
consolidated financial statements.
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TRANSPORTATION COMPONENTS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPT. 30, SEPT. 30,
1998 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................. $ 1,801 $ (3,025)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for bad debts ........................................ 88 106
Loss on sale of assets and investments .......................... 27 27
Cancellation of deferred compensation agreement ................ (317) (317)
Depreciation and amortization ................................... 740 801
Compensation expense related to issuance of management shares .. -- 4,850
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable and notes receivable ..................... (223) (223)
Inventory .................................................... (2,426) (2,426)
Other assets ................................................. (1,044) (1,810)
Accounts payable and accrued expenses ........................ (6,312) 944
-------- --------
Net cash used in operating activities ..................... (7,666) (1,073)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................ (1,325) (1,373)
Purchases of investments ........................................... (40) (40)
Sales of property and equipment ................................... 1,633 1,633
Sales of investments ............................................... 32 32
Cash payments for acquisitions, net of cash acquired ............... (3,693) (19,415)
-------- --------
Net cash used in investing activities ..................... (3,393) (19,163)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock net of underwriting and offering costs ........... -- 35,650
Principal payments on notes payable ................................ (3,390) (45,301)
Borrowings on revolving credit facility ............................ 9,700 30,700
Proceeds from long-term debt ....................................... 2,613 2,613
-------- --------
Net cash provided by financing activities ............. 8,923 23,662
-------- --------
Net increase (decrease) in cash and cash equivalents ................... (2,136) 3,426
Cash and cash equivalents, beginning of period ......................... 5,567 5
-------- --------
Cash and cash equivalents, end of period ............................... $ 3,431 $ 3,431
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
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TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Transportation Components, Inc., a Delaware corporation also known as
TransCom USA ("TransCom USA"), was founded in October 1997 to become a leading
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 USA had not conducted any operations.
Concurrent with the consummation of the IPO on June 24, 1998, TransCom USA
acquired, in separate merger transactions, nine companies (the "Founding
Companies"). TransCom USA, together with its wholly-owned subsidiaries, is
referred to as the "Company".
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of
an Enterprise and Related Information". This statement requires disclosure
related to each segment of an enterprise's operations similar to that required
under current standards with the addition of quarterly disclosure requirements
and a finer partitioning of geographic disclosures. The Company is required to
adopt SFAS No. 131 for the fiscal year ending December 31, 1998.
In April 1998, Statement of Position (SOP) 98-5, "Reporting on the Costs
of Start-Up Activities", was issued by the American Institute of Certified
Public Accountants. SOP 98-5 requires that entities expense costs of start-up
activities as those costs are incurred. The Company is required to adopt SOP
98-5 as of January 1, 1999. The Company does not expect the adoption of SOP 98-5
to have a material effect on its financial position or results of operations.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest during the three and nine month periods ended
September 30, 1998 was approximately $267,709. Cash paid for income taxes during
the three and nine month periods ended September 30, 1998 was approximately
$383,608.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The unaudited pro forma combined statements of operations give effect to
the acquisition of the Founding Companies and the IPO as if they had occurred on
January 1, 1997.
To the extent the former owners of the Founding Companies agreed
prospectively to reductions in salary, bonuses and benefits, these reductions
have been reflected in the pro forma combined statements of operations. On June
24, 1998, the Company entered into a three-year revolving credit facility which
provides for a line of credit of up to $75 million (the "Credit Facility") with
the First National Bank of Chicago, as agent. Based on the terms of the Credit
Facility, a reduction in interest expense has been reflected in the pro forma
combined statements of operations. While the Company cannot quantify the other
potential cost savings, it is anticipated that a portion of such savings will be
offset by the additional overhead costs attributable to the Company's corporate
staff and by the costs associated with being a public company. Since these
savings cannot be accurately quantified, they have not been included in the pro
forma combined financial information of the Company.
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TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The pro forma adjustments are based on estimates, available information
and certain assumptions, which may be revised as additional information becomes
available. Pro forma adjustments include the amortization of goodwill as a
result of the purchase of the Founding Companies. The pro forma combined
statements of operations do not purport to represent what the Company's
consolidated results of operations would actually have been if such transactions
had in fact occurred on those dates and are not necessarily representative of
the Company's results of operations for any future period. Since the Founding
Companies were not under common control or management, historical consolidated
results may not be comparable to, or indicative of, future performance.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements included herein are
unaudited; however, they include all adjustments of a normal recurring nature
which, in the opinion of management, are necessary to present fairly the pro
forma combined and interim consolidated financial information presented herein
as of and for the periods indicated. All intercompany transactions and balances
have been eliminated. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year-end. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the entire year.
The information contained in the following notes to the accompanying
interim consolidated financial statements is condensed from that which would
appear in the annual audited financial statements; accordingly, the financial
statements included herein should be reviewed in conjunction with the Company's
audited consolidated financial statements and related notes thereto contained in
the Prospectus in the Registration Statement on Form S-1 ("the Prospectus")
filed with the Securities and Exchange Commission on June 19, 1998. Certain
capitalized terms used herein have the same meaning given to them in the
Prospectus.
COMPENSATION CHARGE
During the three months ended March 31, 1998, the Company sold an
aggregate of 674,500 shares of common stock for $0.01 per share to management
and consultants of the Company. As a result, the Company recorded a
non-recurring, non-cash compensation charge of $4.9 million representing the
difference between the amount paid for the shares and the estimated fair value
of the shares on the date of sale.
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 of the financial statements are published and (iii) the reported amount of
revenues and expenses recognized during the periods presented. The Company
reviews all significant estimates affecting its consolidated financial
statements on a recurring basis and records the effect of any necessary
adjustments prior to their publication. Adjustments made with respect to the use
of estimates often relate to improved information not previously available.
Uncertainties with respect to such estimates and assumptions are inherent in the
preparation of financial statements. The accompanying consolidated balance
sheets include preliminary allocations of the respective purchase price paid for
the companies acquired using the "purchase" method of accounting and,
accordingly, is subject to final adjustment.
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TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which established new standards for computing and presenting earnings
per share. The provisions of the statement are effective for fiscal years ending
after December 15, 1997, and accordingly have been adopted in the accompanying
financial statements.
The computation of pro forma net income per share for the three months and
nine months ended September 30, 1997 and 1998 is based on 16,512,611 shares of
Common Stock outstanding, which is calculated as follows:
Shares issued to acquire the Founding Companies .......... 7,493,394
Shares sold to public pursuant to the IPO ................ 5,750,000
Shares held by Notre Capital Ventures, II, L.L.C.,
management and consultants ............................. 3,269,217
----------
Total ............................................... 16,512,611
==========
Basic and diluted pro forma net income per share is computed based on the
following information:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(in thousands except share and per share information)
NET INCOME .......................... $ 1,801 $ 1,838 $ 6,159 $ 5,436
Interest on convertible debt .. 9 -- 9 --
----------- ----------- ----------- -----------
Adjusted net income ....... $ 1,810 $ 1,838 $ 6,168 $ 5,436
=========== =========== =========== ===========
BASIC
Basic weighted average shares . 16,512,611 16,512,611 16,512,611 16,512,611
DILUTED
Basic weighted average shares . 16,512,611 16,512,611 16,512,611 16,512,611
Dilutive securities
Options ................... 151,431 -- 55,522 --
Warrants .................. 201,142 210,539 210,539 210,539
Convertible debt .......... 62,915 -- 21,202 --
Diluted weighted average Shares 16,928,099 16,723,150 16,799,874 16,723,150
NET INCOME PER SHARE
Basic ......................... $ 0.11 $ 0.11 $ 0.37 $ 0.33
Diluted ....................... $ 0.11 $ 0.11 $ 0.37 $ 0.32
-9-
TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Basic and diluted historical net income (loss) per share is computed based
on the following information:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
----------- -----------
NET INCOME (LOSS) ........................... $ 1,801 $ (3,025)
Interest on convertible debt .......... 9 9
----------- -----------
Adjusted net income ............... $ 1,810 $ (3,016)
=========== ===========
BASIC
Basic weighted average shares ......... 16,512,611 7,944,431
DILUTED
Basic weighted average shares ......... 16,512,611 7,944,431
Dilutive securities
Options ........................... 151,431 --
Warrants .......................... 201,142 --
Convertible debt .................. 62,915 --
Diluted weighted average shares ....... 16,928,099 7,944,431
NET INCOME (LOSS) PER SHARE
Basic ................................. $ 0.11 $ (0.38)
Diluted ............................... $ 0.11 $ (0.38)
3. LONG-TERM DEBT
On June 24, 1998 the Company entered into a three-year revolving credit
facility which provides for a line of credit up to $75 million (the "Credit
Facility") with the First National Bank of Chicago, as agent. The Credit
Facility matures on June 24, 2001, bears interest at the bank's prime rate or
LIBOR, at the Company's option, plus an applicable margin based on the ratio of
funded debt to cash flows (as defined). An annual commitment fee of up to 1/4%
is payable on any unused portion of the Credit Facility. At September 30, 1998,
$44.3 million was available to the Company under the Credit Facility. The Credit
Facility is to be used to fund acquisitions, capital expenditures and working
capital requirements. Under the terms of the Credit Facility, the Company is
required to comply with various affirmative and negative covenants including:
(i) the maintenance of certain financial ratios, (ii) restrictions on additional
indebtedness, (iii) restrictions on liens, guarantees and dividends, (iv)
obtaining the lenders' consent with respect to certain individual acquisitions,
(v) the maintenance of a specified level of consolidated net worth and (vi) a
restriction that total debt may not exceed a specified multiple of the Company's
earnings before interest, taxes and depreciation. In addition, the Credit
Facility includes restrictions on the ability of the Company to pay dividends.
Borrowings under the Credit Facility are secured by the pledge of all of the
capital stock of each of the Company's material subsidiaries (as defined). The
outstanding balance on the Credit Facility as of September 30, 1998 was $30.7
million.
On September 15, 1998, the Company issued $4.2 million in convertible
subordinated notes (the "Notes") to former owners of Parts Pacific as partial
consideration of the acquisition purchase price. The Notes bear interest,
payable quarterly at an interest rate of 5.0% and are convertible by the holder
into shares of the Company's Common Stock at $10.80 per share at any time after
the first anniversary date. The terms of the
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TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Notes require principal payments of $1.0 million on the first anniversary date
in 1999, $1.0 million on the second anniversary date in 2000, and $2.2 million
on the third anniversary date in 2001.
4. CAPITAL STOCK
On June 24, 1998, the Company sold 5,000,000 shares of Common Stock to the
public at $8.00 per share (the "Offering"). The net proceeds to the Company from
the Offering (after deducting underwriting commissions and Offering costs) were
$35.7 million. Of this amount, $15.7 million was used to pay the cash portion of
the purchase prices to the Founding Companies.
In connection with the Offering, the Company granted its underwriters an
option to sell an additional 750,000 shares at $8.00 per share. On June 30,
1998, the underwriters exercised this option. Net proceeds to the Company from
this sale of shares were $5.6 million after deducting underwriting commissions.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION
At certain times, the Company is involved in legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including
business auto liability, general liability, workers' compensation, excess
liability, commercial property and an umbrella policy. The Company has not
incurred significant claims or losses on any of these insurance policies.
6. ACQUISITION
On September 15, 1998, the Company completed the acquisition of Parts
Pacific, headquartered in the Los Angeles, California area, which has annualized
revenues of approximately $8 million. This acquisition was accounted for as a
purchase. The accompanying balance sheet as of September 30, 1998 includes a
preliminary allocation of the purchase price and is subject to final
adjustments. The preliminary allocation resulted in $6.5 million of goodwill
that is being amortized over 40 years. The pro forma effect of this acquisition
on the Company's results of operations for the year ended December 31, 1997 and
the nine months ended September 30, 1998 is not material.
7. SUBSEQUENT EVENTS
Subsequent to September 30, 1998 and through November 6, 1998, the
Company completed eight acquisitions for approximately $30 million in cash
(including the payoff of acquired debt), 1.2 million shares of common stock and
$11 million in subordinated convertible notes. These acquisitions have
approximately $79 million of combined annualized revenues. All of these
acquisitions will be accounted for as purchase transactions.
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TRANSPORTATION COMPONENTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT ON FORM 10-Q CONTAINS STATEMENTS WHICH CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMS SUCH AS "BELIEVES," "EXPECTS," "MAY," "ESTIMATES," "WILL,"
"SHOULD," "PLANS" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS
THEREON OR COMPARABLE TERMS, OR BY DISCUSSIONS OF STRATEGY. READERS ARE
CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND INVOLVE SIGNIFICANT RISKS AND UNCERTAINTIES, AND THAT 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. THESE FACTORS INCLUDE GENERAL ECONOMIC AND INDUSTRY CONDITIONS,
CHANGES IN REGULATORY REQUIREMENTS, CHANGING PRICES AND MARKET CONDITIONS, THE
EFFECTIVENESS OF MANAGEMENT'S STRATEGIES AND DECISIONS, AND THE "RISK FACTORS"
SPECIFIED IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 FILED ON JUNE 19,
1998 IN CONNECTION WITH THE COMPANY'S INITIAL PUBLIC OFFERING. NO ASSURANCE CAN
BE GIVEN THAT THESE ARE ALL OF THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
VARY MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS.
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes thereto.
OVERVIEW AND SIGNIFICANT DEVELOPMENTS
RESULTS OF OPERATIONS. During the third quarter ended September 30, 1998,
the Company had pro forma net income of $1.8 million, or $0.11 per share,
compared to $1.8 million, or $0.11 per share, for the third quarter of 1997.
Total revenues for the third quarter of 1998 increased to $58.4 million from
$52.8 million for the same period last year.
As discussed in more detail below, the Company completed one acquisition
late in the third quarter of 1998, and subsequently completed eight more
acquisitions in October and early November 1998. Accordingly, the third quarter
of 1998 did not include any meaningful contributions from acquisitions.
Gross margin as a percentage of sales increased to 29.5% for the third
quarter of 1998 from 28.8% in the third quarter of 1997. Selling, general and
administrative expenses as a percentage of sales, however, increased to 23.4% in
the third quarter of 1998 from 22.3% in the same period of 1997. This increase
is primarily due to the cost of the Company's corporate staff and the expenses
of being a public company.
RECENT ACQUISITIONS. Since going public in June 1998, the Company has
acquired nine additional companies with combined annualized revenues of
approximately $87 million. These acquisitions increase the Company's annualized
run rate to approximately $320 million. These companies were acquired for a
combination of cash, convertible notes and shares of the Company's common stock.
The nine acquired companies added 26 locations in six states and three
provinces in Canada which will add to the nationwide distribution network of the
original nine companies acquired in the Company's initial public offering.
TransCom USA now has over 90 locations. In particular, these acquisitions will
increase the Company's market share in California where the Company now has
eleven locations, and Florida where the Company now has nineteen locations. The
acquisitions also will create new platforms for the Company in the Midwest
United States and in Canada. Finally, one of the new acquisitions remanufactures
diesel engine fuel injectors and other related parts and distributes them across
the United States and Canada as well as overseas. This acquisition complements
the Company's existing parts distribution and repair business and broadens the
Company's product offerings.
IMPACT OF RECENT EVENTS ON THE COMPANY'S ACQUISITION STRATEGY. The Company
went public in June 1998 with a strategy of aggressively pursuing acquisitions
to consolidate the heavy duty parts and repair
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TRANSPORTATION COMPONENTS, INC.
industry. During the same time period when the Company went public, two venture
capital companies formed competitors with a similar consolidation business
strategy as the Company. These two competitors subsequently acquired a
significant number of the acquisition candidates that the Company had been
pursuing, and in the process, also raised the prices being paid for acquisitions
in the industry to higher levels than the Company had originally anticipated.
The Company expects the competition for acquisition candidates to continue from
these two competitors.
The Company's acquisition program also has been negatively impacted by the
volatility of the market price of the Company's common stock. The Company's
strategy when it went public was to finance future acquisitions by using its
common stock for a portion of the consideration. During the period from June 19,
1998 to November 12, 1998, the closing price of the Company's common stock
ranged from a high of $11.50 to a low of $3.38. This volatility has made it more
difficult for the Company to use its common stock for acquisitions since issuing
stock at lower prices would cause acquisitions to be dilutive to the Company's
earnings.
When the Company has been unable to use its Common Stock for acquisitions,
the Company has used cash and convertible promissory notes as consideration. The
Company's ability to use cash and notes, however, is limited by its ability to
generate excess cash flow and borrow under its existing $75 million credit
facility. The Company's credit facility contains customary covenants, including
a negative covenant that will not permit the Company's total debt to exceed
certain a specified multiple of its earnings before interest, taxes and
depreciation. After closing the nine acquisitions described above, the cash,
notes and assumed debt used for the acquisitions, together with the debt already
outstanding, have used up a substantial portion of the available credit under
the Company's credit facility. As a result, the Company will not be able to
pursue acquisitions as aggressively as it had intended when the Company went
public unless the market price of the Company's common stock rises to levels
that will make acquisitions accretive to the Company's earnings or the Company
can amend or replace its credit facility to permit the Company to make more
acquisitions for cash and notes. The Company also may pursue additional
financing from other equity and/or debt sources, although there can be no
assurances that such additional financing would be available on terms attractive
to the Company.
FUTURE OPERATING STRATEGY. The Company intends to shift its focus in the
near term from aggressive acquisition growth to selectively pursuing
acquisitions and integrating its existing 18 companies. In the near future, the
Company will concentrate on:
(i) INCREASING PURCHASING SYNERGIES. The Company expects to realize
significant cost savings from parts purchasing. The Company is in
the process of implementing product line commonality among its 18
companies that will increase volume to the selected vendors. The
increased volume generated from TransCom USA's size and common
vendors will provide greater purchasing discounts for the Company.
The impact of these purchasing synergies was not material in the
third quarter of 1998, but is expected to increase in the fourth
quarter of 1998 and throughout 1999.
(ii) ACHIEVING GEOGRAPHIC OPERATING EFFICIENCIES. The Company believes
that its geographic concentrations in California and Florida will
enable the Company to achieve operating efficiencies within these
geographic areas. These efficiencies include the ability to service
existing customers in additional market areas, provide greater
product availability and decrease duplicative inventory. The Company
also believes that it will have greater opportunities to cross-sell
products and services to the customers of its companies within each
region. Finally, the Company is contacting national and regional
fleet services for opportunities to be a single-source, preferred
provider for replacement parts and installation and repair services.
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TRANSPORTATION COMPONENTS, INC.
(iii) CENTRALIZING APPROPRIATE ADMINISTRATIVE FUNCTIONS. The Company is
working to realize cost savings by consolidating administrative
functions such as purchasing, inventory financing, insurance, risk
management, employee benefits, and marketing. While the
consolidation of inventory financing and insurance has already been
substantially implemented, the consolidation of the other areas is
in various stages of being implemented.
(iv) INSTALLING INFORMATION TECHNOLOGY SYSTEMS. The Company is working to
install a common information system among the companies to track and
manage inventory and to network the accounting systems of all of the
companies to provide real time information to Company management.
These systems are expected to provide timely, accurate and uniform
information to the Company's management which will enable the
Company to provide better service to its customers and operate more
efficiently.
GENERAL
On June 24, 1998, TransCom USA consummated its initial public offering
(the "Offering") and the mergers (the "Mergers") of the nine original companies
(the "Founding Companies"). The unaudited pro forma combined financial
statements give effect to the acquisition by TransCom USA of the Founding
Companies. TransCom USA and the Founding Companies are hereinafter referred to
as the Company.
The Company engages in the distribution of replacement parts for
commercial trucks and trailers and other types of specialized heavy-duty
vehicles and equipment. The Company purchases heavy duty parts from component
manufacturers, inventories these parts in over 90 facilities across the United
States, Canada and Mexico and distributes them to over 18,000 customers.
From October 1997 through March 1998, the Company sold an aggregate of
1,106,829 shares of Common Stock to management, directors and certain
consultants of the Company for $0.01 per share. As a result, the Company
recorded a non-recurring, non-cash compensation charge of $3.1 million and $4.9
million during 1997 and the first quarter of 1998, respectively, representing
the difference between the amount paid for the shares and the estimated fair
value of the shares on the date of the sale.
The Mergers were accounted for using the purchase method of accounting.
Accordingly, the excess of the fair value of the Merger consideration paid of
$48.3 million over the fair value of the net assets acquired by TransCom USA
from the Founding Companies was recorded as "goodwill". The goodwill will be
amortized over its estimated useful life of 40 years as a non-cash charge to
operating income. The pro forma effect of this amortization expense, which is
not deductible for tax purposes, is approximately $1.2 million per year.
RESULTS OF OPERATIONS--COMBINED (PRO FORMA)
The unaudited pro forma combined statements of operations give effect to
the acquisition of the Founding Companies and the Offering as if they had
occurred on January 1, 1997.
To the extent the former owners of the Founding Companies agreed
prospectively to reductions in salary, bonuses and benefits, these reductions
have been reflected in the pro forma combined statements of operations. On June
24, 1998, the Company entered into a three-year revolving credit facility, which
provides for a line of credit of up to $75 million (the "Credit Facility") with
the First National Bank of Chicago, as agent. Based on terms of the Credit
Facility, a reduction in interest expense has been reflected in the pro forma
combined statements of operations. While the Company cannot quantify the other
potential cost savings, it is anticipated that a portion of such savings will be
offset by the additional overhead costs attributable to the Company's corporate
staff and by the costs associated with being a public company. Since these
savings cannot be accurately quantified, they have not been included in the pro
forma combined financial information of the Company.
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TRANSPORTATION COMPONENTS, INC.
The pro forma adjustments are based on estimates, available information
and certain assumptions, which may be revised, as additional information becomes
available. Pro-forma adjustments include the amortization of goodwill as a
result of the acquisition of the Founding Companies and the adjustment for
non-recurring, non-cash compensation charges. The pro forma combined statements
of operations do not purport to represent what the Company's consolidated
results of operations would actually have been if such transactions had in fact
occurred on those dates and are not necessarily representative of the Company's
results of operations for any future period. Since the Founding Companies were
not under common control or management, historical consolidated results may not
be comparable to, or indicative of, future performance.
The following financial information reflects the pro forma financial
statements of TransCom USA.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------ --------------------------------------------
1998 % 1997 % 1998 % 1997 %
-------- ----- -------- ----- --------- ----- --------- -----
(IN THOUSANDS OF DOLLARS, EXCEPT PERCENTAGES)
Revenues ................. $ 58,423 100.0% $ 52,819 100.0% $ 176,851 100.0% $ 153,389 100.0%
Cost of sales ............ 41,189 70.5% 37,631 71.2% 124,873 70.6% 108,531 70.8%
-------- ----- -------- ----- --------- ----- --------- -----
Gross profit ......... 17,234 29.5% 15,188 28.8% 51,978 29.4% 44,858 29.2%
Selling, general and
administrative ......... 13,674 23.4% 11,756 22.3% 39,999 22.6% 34,554 22.5%
-------- ----- -------- ----- --------- ----- --------- -----
Income from operations 3,560 6.1% $ 3,432 6.5% $ 11,979 6.8% $ 10,304 6.7%
Interest expense ......... (651) (1.1%) (342) (0.6%) (1,287) (0.7%) (1,053) (0.7%)
Other income ............. 297 0.5% 146 0.3% 112 0.1% 320 0.2%
-------- ----- -------- ----- --------- ----- --------- -----
Income before income
taxes .............. $ 3,206 5.5% $ 3,236 6.1% $ 10,804 6.1% $ 9,571 6.2%
======== ===== ======== ===== ========= ===== ========= =====
RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE
MONTHS ENDED SEPTEMBER 30, 1997 (PRO FORMA)
REVENUES. Revenues increased $5.6 million, or 10.6%, from $52.8 million
for the three months ended September 30, 1997 to $58.4 million for the three
months ended September 30, 1998. The increase in revenues was principally
attributable to increased parts sales and an increase in sales associated with
the equipment assembly business.
GROSS PROFIT. Gross profit increased $2.0 million, or 13.5%, from $15.2
million for the three months ended September 30, 1997, to $17.2 million for the
three months ended September 30, 1998. The increase in gross profit was
principally due to the increase in revenues described above. As a percentage of
revenues, gross profit increased from 28.8% for the three months ended September
30, 1997 to 29.5% for the three months ended September 30, 1998. This increase
in gross profit as a percentage of revenues was primarily due to improved
margins on sales in Mexico and purchasing synergies.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $1.9 million, or 16.3%, from $11.8 million for the three
months ended September 30, 1997 to $13.7 million for the three months ended
September 30, 1998. As a percentage of revenues, selling, general and
administrative expenses increased from 22.3% for the three months ended
September 30, 1997 to 23.4% for the three months ended September 30, 1998. This
increase was primarily attributable to the cost of the Company's corporate staff
and the expenses associated with being a public company.
INTEREST EXPENSE. Interest expense increased $309,000 or 90%, from
$342,000 for the three months ended September 30, 1997 to $651,000 for the three
months ended September 30, 1998. The increase in interest
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TRANSPORTATION COMPONENTS, INC.
expense is primarily attributable to increased borrowings resulting from
increased inventories and receivables needed to support increased sales levels.
OTHER INCOME. Other income increased $151,000, or 103%, from $146,000 for
the three months ended September 30, 1997 to $297,000 for the three months ended
September 30, 1998. The increase in other income is primarily attributable to a
$318,000 gain on cancellation of a deferred compensation agreement resulting
from the death of the beneficiary, which was partially offset by losses from
foreign currency translation adjustments associated with operations in Mexico.
RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1997 (PRO FORMA)
REVENUES. Revenues increased $23.5 million, or 15.3%, from $153.4 million
for the nine months ended September 30, 1997 to $176.9 million for the nine
months ended September 30, 1998. The increase in net sales was principally
attributable to increased revenues associated with the equipment assembly
business, increased sales in Mexico and increased sales to specialty original
equipment manufacturers.
GROSS PROFIT. Gross profit increased $7.1 million, or 15.8%, from $44.9
million for the nine months ended September 30, 1997, to $52.0 million for the
nine months ended September 30, 1998. The increase in gross profit was
principally due to the increase in revenues described above. As a percentage of
revenues, gross profit remained relatively unchanged.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $5.4 million, or 15.6%, from $34.6 million for the nine
months ended September 30, 1997 to $40.0 million for the nine months ended
September 30, 1998. As a percentage of net sales, selling, general and
administrative expenses remained relatively unchanged.
INTEREST EXPENSE. Interest expense increased $234,000 or 22%, from
$1,053,000 for the nine months ended September 30, 1997 to $1,287,000 for the
nine months ended September 30, 1998. The increase in interest expense is
primarily attributable to increased borrowings resulting from increased
inventories and receivables needed to support increased sales levels.
OTHER INCOME. Other income decreased $209,000, or 65%, from $320,000 for
the nine months ended September 30, 1997 to $112,000 for the nine months ended
September 30, 1998. The decrease in other income is primarily attributable to
losses from foreign currency translation adjustments associated with operations
in Mexico.
LIQUIDITY AND CAPITAL RESOURCES - HISTORICAL
On June 24, 1998 the Company entered into a three-year revolving credit
facility which provides for a line of credit up to $75 million (the "Credit
Facility") with the First National Bank of Chicago, as agent. The Credit
Facility was used in part to fund the acquisition of the Founding Companies,
refinance certain indebtedness of the Founding Companies and for general
corporate and working capital requirements. The Credit Facility matures on June
24, 2001, bears interest at the bank's prime rate or LIBOR, at the Company's
option, plus an applicable margin based on the ratio of funded debt to cash
flows (as defined). An annual commitment fee of up to 1/4% is payable on any
unused portion of the Credit Facility. At September 30, 1998, $44.3 million was
available to the Company under the Credit Facility. The Credit Facility is to be
used to fund acquisitions, capital expenditures and working capital
requirements. Under the terms of the Credit Facility, the Company is required to
comply with various affirmative and negative covenants including: (i) the
maintenance of certain financial ratios, (ii) restrictions on additional
indebtedness, (iii) restrictions on liens, guarantees and dividends,
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TRANSPORTATION COMPONENTS, INC.
(iv) obtaining the lenders' consent with respect to certain individual
acquisitions, (v) the maintenance of a specified level of consolidated net
worth, and (vi) a restriction that total debt may not exceed a specified level
of the Company's earnings before interest, taxes and depreciation. In addition,
the Company's Credit Facility and the Indenture include restrictions on the
ability of the Company to pay dividends. Borrowings under the Credit Facility
are secured by the pledge of all of the capital stock of each of the Company's
material subsidiaries (as defined). The outstanding balance on the Credit
Facility as of September 30, 1998 was $30.7 million.
The Company used $1.1 million in net cash from operating activities for
the nine months ended September 30, 1998. Net cash used for investing activities
was $19.2 million for the nine months ended September 30, 1998 primarily
relating to the acquisitions of the Founding Companies and Parts Pacific. The
principal use of cash during the nine months ended September 30, 1998 was to
fund the cash portion of the acquisition cost for The Founding Companies. Net
cash provided by financing activities was $23.7 million for the nine months
ended September 30, 1998. For the nine months ended September 30, 1998, the cash
provided by financing activities consisted primarily of $35.7 million in
proceeds net of offering costs from the sale of the 5,750,000 shares of common
stock to the public at $8.00 per share (the Offering) and $30.7 million from
borrowings on the Company's line of credit, less $41.9 million in principal
payments of debt acquired with the acquisition of The Founding Companies. At
September 30, 1998, the Company had cash of $3.4 million, working capital of
$62.2 million and total debt of $39.4 million. As of November 6, 1998, the
Company had total debt of approximately $84 million, and approximately $11
million available for use under the Credit Facility.
Subsequent to September 30, 1998, and through November 6, 1998, the
Company completed eight acquisitions for approximately $30 million in cash
(including the payoff of acquired debt), 1.2 million shares of common stock and
$11 million in subordinated convertible notes. These acquisitions have
approximately $79 million of combined annualized revenues. All of these
acquisitions will be accounted for as purchase transactions.
The Company anticipates that its cash flow from operations will provide
cash in excess of the Company's normal working capital needs. Planned capital
expenditures for equipment are expected to be funded from cash flow from
operations and supplemented as necessary by borrowings from the Credit Facility
or other sources of financing.
The Company intends to pursue acquisition opportunities, but will require
additional capital to fund future acquisitions. After closing the nine
acquisitions described above, the cash, notes and assumed debt used for the
acquisitions, together with the debt already outstanding, have used up a
substantial portion of the available credit under the Credit Facility. The
Company expects to fund future acquisitions through the issuance of additional
common stock, issuance of convertible debt, working capital, cash flow from
operations and borrowings, including use of amounts available under the Credit
Facility. To the extent the Company funds a portion of the consideration for
future acquisitions with cash, it expects it will have to increase the amount of
the Credit Facility or obtain other sources of financing including the public or
private sale of equity or debt securities. There can be no assurance that the
Company can secure such financing if and when needed, or that such financing
will be available on terms the Company deems acceptable.
INFORMATION TECHNOLOGY SYSTEMS AND YEAR 2000 STRATEGY
The Company currently operates in a decentralized information systems
environment and uses a variety of software and computer systems for operations,
accounting and internal management activities. When the Company went public, its
goal was to install common information systems among all of its companies for
tracking and managing inventory and for accounting. The Company is in the
process of evaluating and selecting the new information systems which will be
installed at all of the companies and replace the Company's existing operating
systems. The total expenditures for the new information systems are estimated
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TRANSPORTATION COMPONENTS, INC.
at $3.0 million. Funding for these expenditures will come from operating cash
flows and borrowings under the Company's Credit Facility as necessary.
The new information systems that the Company adopts for company-wide use
will be certified to be Year 2000 compliant by the software vendors. The Company
is in the preliminary stages of evaluating the Year 2000 compliance of any other
information systems used by the individual companies that will not be replaced
by the new company-wide systems. The Company also is in the process of
determining the extent to which the Company's suppliers and customers are Year
2000 compliant and expects to finalize this determination and to develop and
implement any necessary plans to address deficiencies. The Company expects to
complete these evaluations by the end of the first quarter of 1999 and to
develop a plan by that time to remedy any problems. The Company has engaged an
outside consulting firm to assist it to address and formulate a Year 2000 plan.
This same firm is helping the Company evaluate, select and install the
company-wide information system described above. Finally, the Company is in the
preliminary stages of developing contingency plans for disruptions caused by
Year 2000 issues. This assessment of costs, however, may change as the Company
continues its assessments of any Year 2000 issues facing the Company. Costs
associated with any necessary plans will be expensed as incurred and are not
expected to be significant.
The Company faces significant risks in implementing its company-wide
information systems as well as developing and implementing a Year 2000 strategy.
There can be no assurance that the Company will be able to coordinate and
integrate the information systems economically or that the Company will not
experience delays, disruptions and unanticipated expenses in doing so. There can
also be no assurances that the Company will successfully develop and implement a
Year 2000 plan. Furthermore, any future acquisitions will further complicate the
Company's ability to implement its company-wide information systems and its Year
2000 strategy. Any failure with respect to such implementation could have a
material adverse effect on the Company's business, financial condition and
results of operations.
FOREIGN CURRENCY FLUCTUATIONS
A portion of the Company's consolidated revenues are billed and collected
in a foreign currency. Additionally, substantially all of the operating expenses
related to foreign locations are incurred in a foreign currency. Consequently,
the Company's reported financial results are affected by fluctuation of foreign
currencies against the U.S. dollar. The Company periodically performs 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 the Company's 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, the Company's 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any litigation that management considers to
be of a material nature.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
27.1 Financial Data Schedule
b. REPORTS ON FORM 8-K:
None
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TRANSPORTATION COMPONENTS, INC.
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.
By:/s/MAC MCCONNELL
Mac McConnell, Senior Vice President
Date: November 13, 1998 and Chief Financial Officer