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FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2001
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 1-7872
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TRANSTECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-4062211
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
150 Allen Road 07938
Liberty Corner, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (908) 903-1600
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 _____
As of August 7, 2001, the total number of outstanding
shares of registrant's one class of common stock was
6,176,926.
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TRANSTECHNOLOGY CORPORATION
INDEX
PART I. Financial Information Page No.
--------------------- --------
Item 1. Financial Statements.................................................... 2
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Statements of Consolidated Operations--
Three Month Periods Ended July 1, 2001
and July 2, 2000........................................................ 3
Consolidated Balance Sheets--
July 1, 2001 and March 31, 2001......................................... 4
Statements of Consolidated Cash Flows--
Three Month Periods Ended July 1, 2001 and
July 2, 2000............................................................ 5
Notes to Consolidated Financial Statements.............................. 6-11
Item 2. Management's Discussion and Analysis of Financial
------- Condition and Results of Operations.....................................12-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............. 19
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PART II. Other Information
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Item 1. Legal Proceedings....................................................... 20
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Item 6. Exhibits and Reports on Form 8-K........................................ 20
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SIGNATURES............................................................................. 20
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Statements of Consolidated Operations, Consolidated
Balance Sheets, and Consolidated Cash Flows are of TransTechnology Corporation
and its consolidated subsidiaries (collectively, "the Company"). These reports
reflect all adjustments of a normal recurring nature, which are, in the opinion
of management, necessary for a fair presentation of the results of operations
for the interim periods reflected therein. The results reflected in the
unaudited Statement of Consolidated Operations for the period ended July 1,
2001, are not necessarily indicative of the results to be expected for the
entire year. The following unaudited Consolidated Financial Statements should be
read in conjunction with the notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations set forth in Item 2 of
Part I of this report, as well as the audited financial statements and related
notes thereto contained in the Company's Annual Report on Form 10-K filed for
the fiscal year ended March 31, 2001.
[THIS PAGE INTENTIONALLY LEFT BLANK]
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STATEMENTS OF CONSOLIDATED OPERATIONS
UNAUDITED
(In Thousands of Dollars, Except Share Data)
THREE MONTHS ENDED
----------------------------------------------
JULY 1, 2001 JULY 2, 2000
----------------- -----------------
Net sales $ 79,005 $ 84,365
Cost of sales 56,603 61,186
Plant consolidation charge -- 1,330
----------------- -----------------
Gross profit 22,402 21,849
----------------- -----------------
General, administrative
and selling expenses 11,987 14,709
Interest expense 8,097 7,784
Interest income (30) (53)
Other income - net (10) (526)
Forbearance fees 1,059 --
Write-off of bank fees -- 1,148
----------------- -----------------
Income (loss) before income taxes 1,299 (1,213)
Provision (benefit) for income taxes 493 (461)
----------------- -----------------
Net income (loss) $ 806 $ (752)
================= =================
Basic earnings per share: (Note 1)
Net income (loss) $ 0.13 $ (0.12)
================= =================
Diluted earnings per share:
Net income (loss) $ 0.13 $ (0.12)
================= =================
Numbers of shares used in computation
of per share information:
Basic 6,172,000 6,147,000
Diluted 6,183,000 6,147,000
See accompanying notes to unaudited consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Data)
(UNAUDITED)
JULY 1, 2001 MARCH 31, 2001
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,741 $ 1,964
Accounts receivable (net of allowance for doubtful accounts
of $1,482 at July 1, 2001 and $1,529 at March 31, 2001) 53,838 58,581
Inventories 59,752 61,346
Prepaid expenses and other current assets 3,045 1,839
Income tax receivable 428 5,600
Deferred income taxes 1,486 1,512
--------------- ---------------
Total current assets 123,290 130,842
--------------- ---------------
Property, plant and equipment 149,184 149,826
Less accumulated depreciation and amortization 68,747 68,572
--------------- ---------------
Property, plant and equipment - net 80,437 81,254
--------------- ---------------
Other assets:
Notes receivable 61 61
Costs in excess of net assets of acquired businesses (net of
accumulated amortization:
July 1, 2001, $16,390; March 31, 2001, $15,589) 138,997 139,793
Patents and trademarks (net of accumulated amortization:
July 1, 2001, $2,715; March 31, 2001, $2,310) 16,627 16,902
Deferred income taxes 11,360 11,360
Other 12,284 13,037
--------------- ---------------
Total other assets 179,329 181,153
--------------- ---------------
Total $ 383,056 $ 393,249
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Callable long-term debt $ 266,401 $ 271,307
Current portion of long-term debt 88 88
Accounts payable-trade 16,303 20,067
Accrued compensation 7,978 10,295
Accrued income taxes 1,809 3,194
Other current liabilities 17,662 16,734
--------------- ---------------
Total current liabilities 310,241 321,685
--------------- ---------------
Long-term debt payable to banks and others 1,043 1,055
--------------- ---------------
Deferred income taxes 5,246 5,298
--------------- ---------------
Other long-term liabilities 15,364 13,336
--------------- ---------------
Stockholders' equity:
Preferred stock-authorized, 300,000 shares; none issued -- --
Common stock-authorized, 14,700,000 shares of $.01 par value;
issued 6,718,614 at July 1, 2001, and 6,718,614 at March 31, 2001 67 67
Additional paid-in capital 78,091 78,091
Notes receivable from officers (191) (191)
Accumulated deficit (9,640) (10,446)
Accumulated other comprehensive loss (7,873) (6,323)
Unearned compensation (221) (253)
--------------- ---------------
60,233 60,945
Less treasury stock, at cost - (546,537 shares at July 1, 2001 and
546,428 at March 31, 2001) (9,071) (9,070)
--------------- ---------------
Total stockholders' equity 51,162 51,875
--------------- ---------------
Total $ 383,056 $ 393,249
=============== ===============
See accompanying notes to consolidated financial statements.
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STATEMENTS OF CONSOLIDATED CASH FLOWS
UNAUDITED
(In Thousands of Dollars)
THREE MONTHS ENDED
---------------------------------------------------
JULY 1, 2001 JULY 2, 2000
----------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 806 $ (752)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Gain on sale of marketable securities -- (7)
Depreciation and amortization 3,108 5,566
Non-cash interest expense 626 --
Provision for losses on accounts receivable 55 106
Loss on sale or disposal of fixed assets -- 133
Change in assets and liabilities
Decrease in accounts receivable 4,255 3,318
Decrease in income tax receivable 5,172 --
Decrease (increase) in inventories 1,253 (1,205)
Increase in other assets (1,456) (741)
Decrease in accounts payable (2,316) (2,434)
Decrease in accrued compensation (2,318) (2,457)
Decrease in income taxes payable (134) (3,605)
(Decrease) increase in other liabilities (288) 886
-------------- -------------
Net cash provided by (used in) operating activities 8,763 (1,192)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (722) (1,768)
Proceeds from sale of fixed assets 18 16
Proceeds from sale of marketable securities -- 11
Decrease in notes and other receivables -- 97
-------------- -------------
Net cash used in investing activities (704) (1,644)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (5,600) (1,875)
Issuance of other debt, net 336 4,170
Dividends paid -- (399)
-------------- -------------
Net cash (used in) provided by financing activities (5,264) 1,896
-------------- -------------
Effect of exchange rate changes on cash (18) (18)
Increase (decrease) in cash and cash equivalents 2,777 (958)
Cash and cash equivalents at beginning of period 1,964 3,350
-------------- -------------
Cash and cash equivalents at end of period $ 4,741 $ 2,392
============== =============
Supplemental Information:
Interest payments $ 6,765 $ 7,566
Income tax payments $ 603 $ 1,703
Increase in senior subordinated note for paid-in-kind interest expense $ 572 $ --
- ----------------------------------
See accompanying notes to unaudited consolidated financial statements.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars)
NOTE 1. Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares outstanding. Diluted earnings per
share is computed by dividing net income by the sum of the
weighted-average number of shares outstanding plus the dilutive effect
of shares issuable through the exercise of stock options.
The components of the denominator for basic earnings per common share
and diluted earnings per common share are reconciled as follows (in
thousands):
Three Months Ended
---------------------------------------
July 1, 2001 July 2, 2000
---------------- -----------------
Basic Earnings per Common Share:
Weighted average common
shares outstanding 6,172 6,147
================ =================
Diluted Earnings per Common Share:
Weighted average common
shares outstanding 6,172 6,147
Stock Options* 11 --
---------------- -----------------
Denominator for Diluted Earnings
per Common Share 6,183 6,147
================ =================
* Not including anti-dilutive stock options totaling 451 for the three
month period ended July 1, 2001 and 395 for the three month period ended
July 2, 2000. Also excludes anti-dilutive warrants totaling 428 for the
three month period ended July 1, 2001.
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NOTE 2. Comprehensive Loss
Comprehensive loss is summarized below.
Three Months Ended
-------------------------------------------------
July 1, 2001 July 2, 2000
-------------------- -------------------
Net income (loss) $ 806 $ (752)
Other comprehensive income
(loss), net of tax:
Foreign currency translation 491 (818)
adjustment
Fair value of financial
instruments (2,041) --
Unrealized investment
holding gain -- (5)
-------------- ---------------
Total comprehensive loss $ (744) $ (1,575)
============== ===============
NOTE 3. Inventories
Inventories are summarized as follows:
Three Months Ended
-------------------------------------------------
July 1, 2001 March 31, 2001
-------------------- -------------------
Finished goods $ 23,220 $ 21,114
Work in process 14,297 18,075
Purchased and
manufactured parts 22,235 22,157
-------------- ---------------
Total $ 59,752 $ 61,346
============== ===============
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NOTE 4. Long-term Debt Payable to Banks and Others
Long-term debt payable to banks and others, including current
maturities, consisted of the following:
July 1, 2001 March 31, 2001
----------------- ------------------
Credit agreement - 10.8% $158,264 $ --
Credit agreement 10.5% -- 2,900
Credit agreement - 9.95% -- 153,368
Term loan 9.25% 31,275 --
Term loan - 9.06% -- 38,750
Senior Subordinated Notes - 16% 76,905 76,332
Other 1,267 1,289
----------------- ------------------
267,711 272,639
Less current maturities and
amounts callable by lenders 266,489 271,395
Less unamortized discount 179 189
----------------- ------------------
Total long-term debt $ 1,043 $ 1,055
================= ==================
CREDIT FACILITIES - Effective December 31, 2000, the Company was not
able to meet certain financial ratio requirements of the credit facility
(the "Credit Facility") as amended. Pursuant to discussions with the
senior debt lenders (the "Lenders"), the Company and the Lenders agreed
to an amendment to the Credit Facility to include a forbearance
agreement as well as certain other fees and conditions, including the
suspension of dividend payments. During the forbearance period the
Lenders agree not to exercise certain of their rights and remedies under
the Credit Agreement. The Company has, accordingly, classified its bank
debt as "current" to reflect the fact that the forbearance period is
less than one year. The term of the forbearance period, initially
scheduled to expire on January 31, 2001, was subsequently extended by an
additional amendment to March 29, 2001. This additional amendment also
reduced the Revolver from $200 million to $175 million with an
additional sub-limit on usage at $162 million. Prior to the March 29,
2001 expiration date, an extension was agreed to extend the termination
date until June 27, 2001, provided that certain performance and debt
reduction requirements are achieved in which case the forbearance
termination date may be further extended under similar terms and
conditions until September 27, 2001. The debt reduction requirements of
the forbearance agreement stipulated that $50 million was to be repaid
prior to the June 27, 2001 date, which was deemed satisfied, with the
consent of the Lenders, by the sale of the Company's Breeze Industrial
and Pebra divisions in July 2001, and the remainder to be repaid prior
to the September 27, 2001 termination date. Funds for such debt
repayments are expected to be realized from the sale of business assets
with the prior consent of the Lenders. The forbearance agreement also
requires the achievement of minimum levels of EBITDA (earnings before
interest, taxes, depreciation, and amortization), and the adherence to
borrowing limits as adjusted based on the scheduled debt reduction.
Other terms of the forbearance agreement include certain fees, reporting
and consulting requirements. The Company has taken action to reduce its
debt by preparing to sell certain of its businesses in order to either
comply with the requirements of the existing
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agreement as amended or to be in an improved financial position to
negotiate further amendments or borrowing alternatives. The Company has
made all of its scheduled interest and principal payments on a timely
basis. Various factors, including changes in business conditions,
anticipated proceeds from the sale of operations and economic conditions
in domestic and international markets in which the Company competes,
will impact the restructuring results and may affect the ability of the
Company to restore compliance with the financial ratios specified in the
existing Credit Facility.
The Company has unused borrowing capacity for both domestic and
international operations of $4.2 million as of July 1, 2001, including
letters of credit. The Revolver and Term Loan are secured by the
Company's assets. As of July 1, 2001, the Company had total borrowings
of $266.3 million which have a current weighted-average interest rate of
12.3%.
Borrowings under the Revolver as of July 1, 2001, were $158.3 million.
Interest on the Revolver is tied to the primary bank's prime rate, or at
the Company's option, the London Interbank Offered Rate ("LIBOR"), plus
a margin that varies depending upon the Company's achievement of certain
operating results. As of July 1, 2001, none of the Company's outstanding
borrowings utilized LIBOR because the terms of the forbearance agreement
precluded the Company's option to borrow at LIBOR pending the
achievement of $50 million in debt reduction which was not deemed
satisfied until the sale of the Breeze Industrial and Pebra hose clamp
businesses on July 10, 2001 for $46.2 million was completed.
Borrowings under the Term Loan as of July 1, 2001, were $31.3 million.
As discussed above, the Term Debt, as well as all other debt under the
Credit Facility, has been classified as currently payable to reflect the
forbearance agreement in place. Effective July 10, 2001 the Term Loan
was repaid in full with the Breeze Industrial and Pebra sale proceeds.
The Credit Facility requires the Company to maintain interest rate
protection on a minimum of 50% of its variable rate debt. The Company
has, accordingly, provided sufficiently for this protection by means of
interest rate swap agreements which have fixed the rate of interest on
$50.0 million of debt at a base rate of 5.48% through May 4, 2002, and
$75.0 million of debt at a base rate of 6.58% through March 3, 2003.
Under the agreement, the base interest rate is added to the applicable
interest rate margin to determine the total interest rate in effect. The
Credit Facility restricts annual capital expenditures to $13.0 million
in 2002 and $15.0 million thereafter, and contains other customary
financial covenants, including the requirement to maintain certain
financial ratios relating to performance, interest expense and debt
levels.
SENIOR SUBORDINATED NOTES - On August 30, 2000, the Company completed a
private placement of $75 million in senior subordinated notes (the
"Notes") and certain warrants to purchase shares of the Company's common
stock (the "Warrants") to a group of institutional investors
(collectively, the "Purchasers"). The Company used the proceeds of the
private placement to retire, in full, a $75 million Bridge Loan held by
a group of lenders led by Fleet National Bank. The Notes are due on
August 29, 2005 and bear interest at a rate of 16% per annum, consisting
of 13% cash interest on principal, payable quarterly, and 3% interest on
principal, payable quarterly in "payment-in-kind" promissory notes.
Prepayment of the Notes is permitted after August 29, 2001 at a premium
initially of 9% declining to 5%, 3%, and 1% annually, respectively,
thereafter. The Notes contain customary financial covenants and events
of default, including a cross-default provision to the Company's senior
credit facility.
The Warrants entitle the Purchasers to acquire in the aggregate 427,602
shares, or 6.5%, of the common stock of the Company at an exercise price
of $9.93 a share, which represents the average daily closing price of
the Company's common stock on the New York Stock Exchange for the thirty
(30) days preceding the completion of the private placement, and which
may be subject to a price adjustment on
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the first anniversary of the issuance of the Warrants. The Warrants must
be exercised by August 29, 2010. These Warrants have been valued at an
appraised amount of $0.2 million and have been recorded in paid in
capital. In connection with the transaction, the Company and certain of
its subsidiaries signed a Consent and Amendment Agreement with the
Lenders under the Company's $250 million Credit Facility existing at
that time, in which the Lenders consented to the private placement and
amended certain financial covenants associated with the Credit Facility.
OTHER - As of March 31, 2001, the Company had $1.3 million of other
long-term debt consisting of collateralized borrowing arrangements with
fixed interest rates of 3% and 3.75% and loans on life insurance
policies owned by the Company with a fixed interest rate of 5%.
NOTE 5. Change in Accounting for Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities". In June
2000, the FASB issued SFAS No. 138, which amends certain provisions of
SFAS No. 133. The Company has adopted SFAS No. 133 and the corresponding
amendments under SFAS No. 138 on April 1, 2001. This resulted in a
charge to other comprehensive income of $2.0 million, an offsetting
liability of $3.3 million, and a tax asset of $1.3 million.
NOTE 6. New Accounting Standards
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets",
which is effective January 1, 2002. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the
standard includes provisions for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the identification
of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete
a transitional goodwill impairment test six months from the date of
adoption. The Company is currently assessing but has not yet determined
the impact of SFAS 142 on its financial position and results of
operations.
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NOTE 7. Disclosures about Segments and Related Information
Three Months Ended
-----------------------------------------------
July 1, 2001 July 2, 2000
-------------------- ------------------
Net sales:
Specialty fastener products $ 57,209 $66,634
Aerospace products 21,796 17,731
-------------------- ------------------
Total $ 79,005 $84,365
==================== ==================
Operating profit
Specialty fastener products (a) $ 7,913 $ 7,663
Aerospace products (b) 4,880 3,070
-------------------- ------------------
Total $ 12,793 $10,733
Corporate expense (c) (3,414) (3,130)
Corporate interest and
other income 17 116
Interest expense (d) (8,097) (8,932)
-------------------- ------------------
Income (loss) before income taxes $ 1,299 $(1,213)
==================== ==================
Note: Effective April 1, 2001, the Aerospace Rivet Manufacturers
business had been transferred from the Specialty Fastener Products
Segment to the Aerospace Segment to reflect the Company's change in
direction and the fact that the customers for these products are in the
aerospace industry. All related historical financial data has been
restated to reflect this transfer.
(a) The results of operations of the Specialty Fasteners Products segment
for the three month period ended July 2, 2000 includes a charge of
$1,330 related to the consolidation of its two U.K. plants. The results
of operations of the Specialty Fasteners Products segment for the period
ended July 1, 2001 reflects the discontinuation of depreciation and
amortization for the businesses the Company announced it intends to sell
(Engineered Rings, Hose Clamps and TCR).
(b) The results of operations of the Aerospace Products segment for the
period ended July 1, 2001 reflects the discontinuation of depreciation
and amortization for the Aerospace Rivet Manufacturers business which
the Company had announced it intends to sell.
(c) Corporate expenses for the period ended July 1, 2001 include loan
forbearance fees of $1,059.
(d) Interest expense for the period ended July 2, 2000 includes a write-off
of bank loan fees of $1,148.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All references to three month periods in this Management's Discussion refer to
the three month period ended July 1, 2001 for fiscal year 2002 and the three
month period ended July 2, 2000 for fiscal year 2001. Also, when referred to
herein, operating profit means net sales less operating expenses, without
deduction for general corporate expenses, interest and income taxes.
MANAGEMENT INITIATIVES AND RESTRUCTURING
On January 19, 2001, the Company announced its intention to restructure and
divest its cold-headed products (TCR), aerospace rivet (Aerospace Rivet
Manufacturers Corp), retaining ring (Seeger-Orbis, TransTechnology (GB), TT
Brasil, and TransTechnology Engineered Rings USA) and hose clamp operations
(Breeze Industrial and Pebra). The Company also announced that it had retained
an investment banking firm to consider further strategic and business
initiatives following these actions. In association with the restructuring, the
Company stated it would suspend the payment of its quarterly dividend and
recognize a non-recurring charge in the fourth fiscal quarter of 2001 related to
anticipated losses on the sale of several of these businesses as well as the
provision for severance and other costs associated with these divestitures.
Proceeds from the sales of the businesses will be used to repay debt and to
refocus the Company's efforts on the design, manufacture and marketing of
specialized aerospace equipment.
The Company entered into an amendment of its existing credit agreement under
which the Company's senior lenders agreed to forbearance with respect to the
Company's continuing violations of certain covenants in the senior agreement
through September 27, 2001, subject to the Company meeting certain interim debt
reduction and EBITDA targets. The Company's subordinated lenders also entered
into a letter forbearance agreement with respect to the Company's expected
violation of its net worth covenant as the result of write-offs to be incurred
in the fourth fiscal quarter of 2001 as part of its restructuring plan.
The Company reported, on a pre-tax basis, asset impairment charges in the fourth
fiscal quarter of 2001 of $67.9 million related to estimated losses on
businesses to be sold, primarily related to the write-off of intangible assets
and property. In addition, in the fourth fiscal quarter of 2001 the Company
reported a pre-tax charge of $10.2 million associated with the write-down of
real estate held for sale and equity investments and notes receivable from a
1995 divestiture. The Company expects additional net non-cash write-offs of
goodwill in fiscal 2002 resulting from the divestiture process, including a gain
on the July 10, 2001 sale of its Breeze Industrial Products and Pebra hose clamp
businesses and an anticipated non-cash loss resulting from the planned sale of
the TransTechnology Engineered Components business.
On April 12, 2001, the Company announced that, following a review of alternative
strategic initiatives, it would become solely a manufacturer of niche aerospace
products. As a result, the Company will divest TransTechnology Engineered
Components (TTEC), a manufacturer of spring steel engineered fasteners
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and headlight adjusters. The Company will seek to have all the divestitures,
including TTEC completed by September 2001.
Following the divestiture of the fastener business units, the Company expects to
have retired substantially all of its debt and expects to reduce its corporate
overhead by more than $4 million from its present $8.7 million level.
Additionally, for tax purposes, the Company expects to have significant
operating loss carry-forwards which will shelter future earnings from taxes for
several years. The Company expects, when repositioned as an aerospace products
manufacturer with revenues from new equipment sales, maintenance and service of
existing equipment, and spare parts sales, to be significantly more profitable
and less leveraged, with substantial growth opportunities. Management believes
that the Company will present substantially more value to its shareholders after
the restructuring than in its present form.
On July 10, consistent with the aforementioned actions, the Company completed
the previously announced sale of its Breeze Industrial and Pebra hose clamp
businesses in the U.S. and Germany, respectively, to Industrial Growth Partners
and the current management team of these divested companies for $46.2 million in
cash. Proceeds were used to repay debt. Breeze Industrial's land and building is
scheduled to be sold in the second fiscal quarter of 2002 for expected proceeds
of $1.1 million (net of associated debt).
The Company expects additional net non-cash write-offs of goodwill in fiscal
2002 resulting from the divestiture process, including a gain on the July 10,
2001 sale of its Breeze Industrial Products and Pebra hose clamp businesses and
an anticipated non-cash loss resulting from the planned sale of the
TransTechnology Engineered Components business.
RESULTS OF OPERATIONS
Net sales for the three-month period in 2002 were $79.0 million compared to
$84.4 million in 2001.
Gross profit was $22.4 million compared to $21.8 million in 2001. The gross
profit reported in 2002 includes the benefit of discontinued depreciation
expense for the business units the Company announced it planned to divest, which
included the hose clamp (Breeze Industrial and Pebra), its retaining rings, TCR,
and Aerospace Rivet Manufacturers businesses. This reduced depreciation expense
improved gross margins in 2002 by $1.8 million over 2001, which included full
depreciation expense for these business units. The gross profit in 2001 included
a plant consolidation charge related to its U.K. operations of $1.3 million.
General, administrative and selling expenses were $12.0 million in 2002 compared
to $14.7 million in 2001. The reduction in general, administrative and selling
expense in 2002 is partly attributable to the elimination of amortization of
intangible assets in the amount of $0.4 million related to those business units
the Company announced it would divest.
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Operating profit in 2002 was $12.8 million compared to $10.7 million in 2001.
Operating profit in 2002 reflects the benefit of $2.2 million of reduced
depreciation and amortization as discussed above. The Operating profit in 2001
included a plant consolidation charge of $1.3 million.
Interest expense in 2002 was $8.1 million compared to $8.9 million in 2001.
Interest expense in 2001 included an accelerated write-off of $1.1 million of
bank fees related to the refinancing of the bridge loan. In 2002 the Company's
interest expense was adversely affected by higher effective interest rates
reflecting increased bank margins over LIBOR and Base (Prime) lending rates and
increased borrowing at Base rates rather than the LIBOR rates in 2002 compared
to 2001.
Net income was $0.8 million in 2002 compared to a loss of $0.8 million in 2001.
New orders in 2002 were $88.8 million compared to $84.3 million in 2001. The
backlog of unfilled orders was $108.4 million at July 1, 2001, compared to
$109.5 million at July 2, 2000.
Changes in net sales, gross margin, expenses, bookings and backlog are discussed
below by segment.
SPECIALTY FASTENER PRODUCTS SEGMENT
Note: Effective April 1, 2001, the Aerospace Rivet Manufacturers business had
been transferred from the Specialty Fastener Products Segment to the Aerospace
Segment to reflect the Company's change in direction and the fact that the
customers for these products are in the aerospace industry. All related
historical financial data has been restated to reflect this transfer.
Net sales for the segment were $57.2 million in 2002 compared to $66.6 million
in 2001. Net sales were down 7% in the hose clamps businesses related to weak
demand in the heavy-duty truck markets. Net sales decreases of 17% in the
Engineered Components and 18% at the TCR businesses were directly attributable
to weakness in the U.S. production of new cars.
Net sales in the Engineered Rings businesses were down 12% in 2002 compared to
2001, primarily at the U. K. operation due to production inefficiencies
associated with the plant consolidation and, to a lesser extent, in the U.S.
Sales at the German and Brazilian Rings businesses, in dollar terms, were flat
from last year. Approximately $1.1 million of the sales decline in 2002 results
from the exchange rate weakness of the British pound and deutschemark.
Gross margin for the segment was $14.6 million in 2002 compared to $15.9 million
in 2001. 2001 included a charge for plant consolidation of $1.3 million. 2002
included the benefit of reporting no depreciation expense for the businesses
announced to be sold which improved gross margins by $1.6 million. Before the
effect of discontinuing depreciation for the businesses announced to be sold,
gross margin levels were lower at the Hose Clamp businesses due to reduced
volume. Gross margin was lower at the Engineered Components business, reflecting
lower volume and a slight reduction in the gross margin rate as a result of
pricing pressures. Gross margin at the Engineered Rings business in Germany was
up substantially, reflecting volume increases and an improvement in the gross
margin rate.
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Gross margin in the U.K. rings business was down from 2001 as a result of
production inefficiencies associated with the plant consolidation and lower
volume levels.
General, administrative and selling expenses were down by $1.7 million in 2002
from 2001 as a result of cost reduction programs in place.
New orders for the segment were $55.9 million in 2002 compared to $67.5 million
in 2001. New orders were down $2.3 million in the hose clamps businesses
reflecting weakness in the heavy truck markets, $2.4 million in Engineered
Components and $0.7 million at TCR as a result of slowdown in U.S. auto
production during the period, and $5.6 million in the Engineered Rings
businesses, primarily in the U.K. and U.S. markets. Backlog was $52.2 million at
July 1, 2001 compared to $63.9 million at July 2, 2000.
AEROSPACE PRODUCTS SEGMENT
Note: Effective April 1, 2001, the Aerospace Rivet Manufacturers business had
been transferred from the Specialty Fastener Products Segment to the Aerospace
Products Segment. All related historical financial data has been restated to
reflect this transfer.
Net sales for the segment were $21.8 million in 2002 compared to $17.7 million
in 2001. Sales increased 25%, 13%, and 39% for Breeze-Eastern, Norco, and
Aerospace Rivet Manufacturers, respectively. All increases were based on strong
product demand and to a lesser extent, pricing improvements.
Gross margin reported by Breeze-Eastern increased by 29% in 2002 over 2001
primarily attributable to higher volume and to a lesser extent, improved
pricing. Gross margin at Norco increased 9% over the same period. Aerospace
Rivet Manufacturers reported higher gross margins over 2001 based primarily on
higher sales activity.
General, selling and administrative expenses for the segment were essentially
flat in 2002 as compared to 2001.
Operating profit increased $1.8 million over 2001 due to the above factors.
Order intake for the segment was $32.9 million in 2002 compared to $16.8 million
in 2001. Bookings were up $14.9 million at Breeze-Eastern and $1.4 million at
Norco reflecting strong market demand. Backlog at July 1, 2001 for the segment
was $56.2 million compared to $45.6 million at July 2, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's credit facilities are considered short term and reflect the terms
of the forbearance agreement with its lenders (the "Lenders"). The Company plans
to reduce debt by selling several of its fastener business units, and has taken
action and initiated discussions with interested parties. The terms
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of sale of each business unit are subject to the approval of the Lenders. The
Company's debt-to-capitalization ratio was 84% as of July 1, 2001 which is
unchanged from March 31, 2001.
The current ratio as of July 1, 2001 was 0.40, compared to 0.41 as of March 31,
2001. Working capital was ($187.0) million at July 1, 2001, compared to ($190.8)
million from March 31, 2001. The change in working capital for the three months
ended July 1, 2001 was primarily due to the receipt of a tax refund in the
amount of $5.6 million. Total debt as of July 1, 2001 was $267.5 million or $5.0
million less than the March 31, 2001 amount.
Effective December 31, 2000, the Company was not able to meet certain financial
ratio requirements of the credit facility (the "Credit Facility") as amended.
Pursuant to discussions with the senior debt lenders (the "Lenders"), the
Company and the Lenders agreed to an amendment to the Credit Facility to include
a forbearance agreement as well as certain other fees and conditions, including
the suspension of dividend payments. During the forbearance period the Lenders
agree not to exercise certain of their rights and remedies under the Credit
Agreement. The Company has, accordingly, classified its bank debt as "current"
to reflect the fact that the forbearance period is less than one year. The term
of the forbearance period, initially scheduled to expire on January 31, 2001,
was subsequently extended by an additional amendment to March 29, 2001. This
additional amendment also reduced the Revolver from $200 million to $175 million
with an additional sub-limit on usage at $162 million. Prior to the March 29,
2001 expiration date, an extension was agreed to extend the termination date
until June 27, 2001, provided that certain performance and debt reduction
requirements are achieved in which case the forbearance termination date may be
further extended under similar terms and conditions until September 27, 2001.
The debt reduction requirements of the forbearance agreement stipulated that $50
million was to be repaid prior to the June 27, 2001 date, which was deemed
satisfied, with the consent of the Lenders, by the sale of the Company's Breeze
Industrial and Pebra divisions in July 2001, and the remainder to be repaid
prior to the September 27, 2001 termination date. Funds for such debt repayments
are expected to be realized from the sale of business assets with the prior
consent of the Lenders. The forbearance agreement also requires the achievement
of minimum levels of EBITDA (earnings before interest, taxes, depreciation, and
amortization), and the adherence to borrowing limits as adjusted based on the
scheduled debt reduction. Other terms of the forbearance agreement include
certain fees, reporting and consulting requirements. The Company has taken
action to reduce its debt by preparing to sell certain of its businesses in
order to either comply with the requirements of the existing agreement as
amended or to be in an improved financial position to negotiate further
amendments or borrowing alternatives. The Company has made all of its scheduled
interest and principal payments on a timely basis. Various factors, including
changes in business conditions, anticipated proceeds from the sale of operations
and economic conditions in domestic and international markets in which the
Company competes, will impact the restructuring results and may affect the
ability of the Company to restore compliance with the financial ratios specified
in the existing Credit Facility.
The Company has unused borrowing capacity for both domestic and international
operations of $4.2 million as of July 1, 2001, including letters of credit. The
Revolver and Term Loan are secured by the Company's assets. As of July 1, 2001,
the Company had total borrowings of $266.3 million which have a current
weighted-average interest rate of 12.3%.
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Borrowings under the Revolver as of July 1, 2001, were $158.3 million. Interest
on the Revolver is tied to the primary bank's prime rate, or at the Company's
option, the London Interbank Offered Rate ("LIBOR"), plus a margin that varies
depending upon the Company's achievement of certain operating results. As of
July 1, 2001, none of the Company's outstanding borrowings utilized LIBOR
because the terms of the forbearance agreement precluded the Company's option to
borrow at LIBOR pending the achievement of $50 million in debt reduction which
was not deemed satisfied until the sale of the Breeze Industrial and Pebra hose
clamp businesses on July 10, 2001 for $46.2 million was completed.
Borrowings under the Term Loan as of July 1, 2001, were $31.3 million. As
discussed above, the Term Debt, as well as all other debt under the Credit
Facility, has been classified as currently payable to reflect the forbearance
agreement in place. Effective July 10, 2001 the Term Loan was repaid in full
with the Breeze Industrial and Pebra sale proceeds.
Management believes that the Company's plan to divest several of its business
units in order to reduce debt, along with the anticipated cash flow from its
retained business operations, will be sufficient to support working capital,
capital expenditure, and debt service costs. The amount and timing of proceeds
from such sales is subject to market and other conditions which the Company
cannot control. Capital expenditures in the first quarter of 2002 were $0.7
million compared to $1.8 million in 2001. The Company expects capital
expenditures in 2002 to be lower than the 2001 amount due to its planned lower
capital spending levels and planned business unit dispositions.
EURO CURRENCY
Effective January 1, 1999, eleven countries comprising the European Union
established fixed foreign currency exchange rates and adopted a common currency
unit designated as the "Euro." The Euro has since become publicly traded and is
currently used in commerce during the present transition period which is
scheduled to end January 1, 2002, at which time a Euro denominated currency is
scheduled to be issued and is intended to replace those currencies of the eleven
member countries. The transition to the Euro has not resulted in problems for
the Company to date, and is not expected to have any material adverse impact on
the Company's future operations.
INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this document constitute "forward-looking statements"
within the meaning of the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Acts"). Any statements contained herein
that are not statements of historical fact are deemed to be forward-looking
statements.
The forward-looking statements in this document are based on current beliefs,
estimates and assumptions concerning the operations, future results, and
prospects of the Company. As actual operations and results may materially differ
from those assumed in forward-looking statements, there is no assurance that
forward-looking statements will prove to be accurate. Forward-looking statements
are subject to the safe harbors created in the Acts.
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Any number of factors could affect future operations and results, including,
without limitation, the Company's ability to dispose of some or all of the
business operations proposed for divestiture for the consideration currently
estimated to be received by the Company or within the timeframe anticipated by
the Company; the Company's ability to arrive at a mutually satisfactory
amendment of its credit facilities with its lenders, if required; in the event
of divestiture, the Company's ability to be profitable with a smaller and less
diverse base of operations that will generate less revenue; the value of
replacement operations, if any; general industry and economic conditions;
interest rate trends; capital requirements; competition from other companies;
changes in applicable laws, rules and regulations affecting the Company in the
locations in which it conducts its business; the availability of equity and/or
debt financing in the amounts and on the terms necessary to support the
Company's future business and/or to provide adequate financing for parties
interested in purchasing operations identified for divestiture; and those
specific risks that are discussed in the Company's previously filed Annual
Report on Form 10-K for the fiscal year ended March 31, 2001.
The Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information or future events.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company enters into financial instruments to manage and reduce the impact of
changes in foreign currency exchange rates and interest rates. The counter
parties are major financial institutions.
The Company uses forward exchange contracts principally to hedge the currency
fluctuations in transactions denominated in foreign currencies, thereby limiting
the Company's risk that would otherwise result from changes in exchange rates.
The principal transactions hedged are intercompany loans, intercompany purchases
and trade flows. Gains and losses on forward foreign exchange contracts and the
offsetting gains and losses on hedged transactions are reflected in the
Statement of Consolidated Operations.
At July 1, 2001, the Company had one outstanding forward exchange contract to
sell the equivalency of $10.0 million of Deutsche marks. This contract relates
to a hedge of an intercompany loan made to its German subsidiary. At July 1,
2001, if this forward contract was closed out, the Company would receive
approximately $0.3 million (the difference between the fair value of all
outstanding contacts and the contract amounts). A 10% fluctuation in exchange
rates for these currencies against the U.S. dollar would change the fair value
of the outstanding exchange contract by $0.9 million. However, since this
contract hedges foreign currency denominated transactions, any change in the
fair value of the contracts would be offset by changes in the underlying value
of the transaction being hedged.
The Company enters into interest rate swap agreements to manage its exposure to
interest rate changes. The swaps involve the exchange of fixed and variable
interest rate payments without exchanging the notional principal amount.
Payments or receipts on the swap agreements are recorded as adjustments to
interest expense. At July 1, 2001, the Company had entered into interest rate
swap agreements to convert $125.0 million of floating interest rate debt to
fixed rate. At July 1, 2001, the fair value of these swap agreements was
approximately ($3.3) million. Under SFAS No. 133 the fair value of these
contracts has been reflected in the Company's balance sheet at July 1, 2001.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is engaged in various legal proceedings incidental to its
business. It is the opinion of management that, after taking into
consideration information furnished by its counsel, these matters will
not have a material effect on the Company's consolidated financial
position or the results of the Company's operations in future periods.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Form 8-K filed by the Company on July 25, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSTECHNOLOGY CORPORATION
(Registrant)
Dated: August 13, 2001 By: /s/Joseph F. Spanier
------------------------------------------
JOSEPH F. SPANIER, Vice President
Treasurer and Chief Financial Officer*
*On behalf of the Registrant and as Principal Financial and Accounting
Officer.
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