FORM 10-Q
----------
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 June 26, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-7872
----------
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.)
700 Liberty Avenue 07083
Union, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (908) 688-2440
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
As of August 29, 2005, the total number of outstanding shares of
registrant's one class of common stock was 6,700,476.
INDEX
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements ................................... 3
Statements of Consolidated Operations Three Month
Periods Ended June 26, 2005 and June 27, 2004 .......... 4
Consolidated Balance Sheets June 26, 2005 and
March 31, 2005 ......................................... 5
Statements of Consolidated Cash Flows Three Month
Periods Ended June 26, 2005 and June 27, 2004 .......... 6
Notes to Consolidated Financial Statements ............. 7-12
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 ................................................... 18
Item 4. Controls and Procedures ................................ 18
PART II. Other Information
Item 1. Legal Proceedings ...................................... 18
Item 6. Exhibits ............................................... 19
SIGNATURES .......................................................... 20
EXHIBIT 31.1 ........................................................ 21
EXHIBIT 31.2 ........................................................ 22
EXHIBIT 32 .......................................................... 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Statements of Consolidated Operations, Consolidated
Balance Sheets, and Statements of 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 June
26, 2005, 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, 2005.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
3
TRANSTECHNOLOGY CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(In Thousands of Dollars, Except Share Data)
THREE MONTHS ENDED
-----------------------------
JUNE 26, 2005 JUNE 27, 2004
------------- -------------
Net sales $ 12,982 $ 14,548
Cost of sales 7,345 8,711
---------- ----------
Gross profit 5,637 5,837
General, administrative
and selling expenses 3,154 4,023
Interest expense 2,195 2,796
Interest income and other (income) expense -net (37) 13
---------- ----------
Income (loss) before income taxes 325 (995)
Provision (benefit) for income taxes 124 (378)
---------- ----------
Net income (loss) $ 201 $ (617)
========== ==========
Basic earnings (loss) per share:
Net income (loss) $ 0.03 $ (0.09)
========== ==========
Diluted earnings (loss) per share:
Net income (loss) $ 0.03 $ (0.09)
========== ==========
Number of shares used in computation
of per share information: (Note 1)
Basic 6,698,000 6,669,000
Diluted 6,729,000 6,669,000
See accompanying notes to unaudited consolidated financial statements.
4
TRANSTECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In Thousands of Dollars, Except Share Data)
JUNE 26, 2005 MARCH 31, 2005
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,461 $ 1,039
Accounts receivable (net of allowance for doubtful accounts
of $18 at June 26, 2005 and $16 at March 31, 2005) 8,138 9,782
Inventories - net 15,929 15,897
Prepaid expenses and other current assets 878 873
Income tax receivable -- 954
Deferred income taxes 2,050 2,050
-------- --------
Total current assets 29,456 30,595
-------- --------
Property, plant and equipment 15,690 15,515
Less accumulated depreciation 11,122 11,023
-------- --------
Property, plant and equipment - net 4,568 4,492
-------- --------
Other assets:
Deferred income taxes 28,976 29,100
Other 12,190 12,251
-------- --------
Total other assets 41,166 41,351
-------- --------
Total $ 75,190 $ 76,438
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving Credit Facility $ -- $ 386
Current portion of long-term debt 3,079 3,079
Accounts payable-trade 3,355 3,768
Accrued compensation 2,341 2,270
Accrued income taxes 469 652
Accrued interest 728 781
Other current liabilities 3,371 3,303
-------- --------
Total current liabilities 13,343 14,239
-------- --------
Long-term debt payable to banks and others 57,345 57,868
-------- --------
Other long-term liabilities 10,591 10,690
-------- --------
Stockholders' deficit:
Preferred stock - authorized, 300,000 shares; none issued -- --
Common stock - authorized, 14,700,000 shares of $.01 par value;
issued 7,090,611 and 7,087,211 at June 26, 2005 and March 31, 2005,
respectively 71 71
Additional paid-in capital 74,157 74,136
Accumulated deficit (73,824) (74,025)
Unearned compensation (66) (114)
-------- --------
338 68
Less treasury stock, at cost - 390,135 shares at June 26, 2005
and at March 31, 2005 (6,427) (6,427)
-------- --------
Total stockholders' deficit (6,089) (6,359)
-------- --------
Total $ 75,190 $ 76,438
======== ========
See accompanying notes to unaudited consolidated financial statements.
5
TRANSTECHNOLOGY CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(In Thousands of Dollars)
Three Months Ended
----------------------------------
June 26, 2005 June 27, 2004
------------- -------------
Cash Flows from Operating Activities:
Net income (loss) $ 201 $ (617)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 295 410
Noncash interest expense, net 257 928
Increase in provision for bad debt 2 3
Changes in assets and liabilities:
Decrease (increase) in accounts receivable and other receivables 2,596 (156)
(Increase) decrease in inventories (32) 501
Decrease (increase) in deferred taxes, net 124 (338)
(Increase) decrease in other assets (210) 262
Decrease in accounts payable (413) (1,797)
Increase in accrued compensation 71 228
Decrease in income taxes payable (183) (68)
Decrease in other liabilities (96) (456)
------- -------
Net cash provided by (used in) operating activities 2,612 (1,100)
------- -------
Cash Flows from Investing Activities:
Additions to property, plant and equipment (175) (712)
Proceeds from sale of real estate -- 1,331
Collection of notes receivable 100 --
Increase in restricted cash -- (100)
------- -------
Net cash (used in) provided by investing activities (75) 519
------- -------
Cash Flows from Financing Activities:
Payments on long-term debt (750) --
(Repayments) borrowings of other debt (386) 1,592
Exercise of stock options 21 --
------- -------
Net cash (used in) provided by financing activities (1,115) 1,592
------- -------
Increase in cash and cash equivalents 1,422 1,011
Cash and cash equivalents at beginning of period 1,039 960
------- -------
Cash and cash equivalents at end of period $ 2,461 $ 1,971
======= =======
Supplemental information:
Interest payments $ 2,035 $ 1,835
Income tax payments 183 28
Increase in term loans and senior subordinated note for paid-in-kind
interest expense 227 881
See accompanying notes to unaudited consolidated financial statements.
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Tables are in Thousands)
NOTE 1. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss)
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 and warrants. The diluted loss per
share is computed using the same weighted average number of shares as the
basic earnings per share computation.
The components of the denominator for basic earnings (loss) per common
share and diluted earnings (loss) per common share are reconciled as
follows:
Three Months Ended
-------------------
June 26, June 27,
2005 2004
-------- --------
Basic Earnings (Loss) per Common Share:
Weighted-average common stock
out-standing for basic earnings (loss) per share
calculation 6,698 6,669
===== =====
Diluted Earnings (Loss) per Common Share:
Weighted-average common shares outstanding 6,698 6,669
Stock options and warrants* 31 --
----- -----
Weighted-average common stock outstanding for
diluted earnings (loss) per share calculation 6,729 6,669
===== =====
* Excludes anti-dilutive stock options totaling 194,000 and 210,000 for the
three month period ended June 26, 2005 and June 27, 2004, respectively.
NOTE 2. Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, the Company records expense in an amount equal to the excess, if
any, of the quoted market price on the grant date over the option price.
7
The following table includes as reported and proforma information required by
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". Proforma information is based on the
fair value method under SFAS No. 123.
Three Months Ended
-------------------
June 26, June 27,
2005 2004
-------- --------
Net income (loss) as reported $ 201 $ (617)
Add: Stock-based employee compensation expense
included in reported net income (loss), net
of related tax effects 18 32
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of related tax effects (50) (54)
----- ------
Proforma net income (loss) $ 169 $ (639)
===== ======
Basic earnings (loss) per share:
As reported $0.03 $(0.09)
Proforma $0.03 $(0.10)
Diluted earnings (loss) per share:
As reported $0.03 $(0.09)
Proforma $0.03 $(0.10)
NOTE 3. Inventories
Inventories, net of valuation allowances, are summarized as follows:
June 26, 2005 March 31, 2005
------------- --------------
Finished goods $ -- $ --
Work in process 4,948 4,120
Purchased and manufactured parts 10,981 11,777
------- -------
Total $15,929 $15,897
======= =======
8
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:
June 26, 2005 March 31, 2005
------------- --------------
Senior Credit Facility 14.7% $60,345 $61,254
Other 79 79
------- -------
60,424 61,333
Less current maturities 3,079 3,465
------- -------
Total long-term debt $57,345 $57,868
======= =======
Senior Credit Facility - On November 10, 2004, the Company refinanced and repaid
in full the Former Senior Credit Facility (see below) and the Notes (see below)
with a $71.5 million, forty-two month, senior credit facility (the "Senior
Credit Facility"). The Senior Credit Facility consists of a $10.0 million
asset-based Revolving Credit Facility, and three tranches of Term Loans totaling
$61.5 million. At June 26, 2005, the Senior Credit Facility has an effective
weighted interest rate of approximately 14.7% which is tied to the prime rate.
The Term Loans require monthly principal payments of $250,000 over the term of
the loan with the balance due at the end of the term. Accordingly, the balance
sheet reflects $3.0 million of current maturities due under the Senior Credit
Facility. The Senior Credit Facility also contains certain mandatory prepayment
provisions which are linked to cash flow and customary financial covenants and
events of default. The Senior Credit Facility is secured by all of the Company's
assets. At June 26, 2005, the Company was in compliance with the provisions of
the Senior Credit Facility. At June 26, 2005, there were no outstanding
borrowings under the revolving portion of the Senior Credit Facility. With the
previously reported delay in the completion of the audited financial statements,
for the fiscal year ended March 31, 2005, the Company sought and received from
its lenders a waiver and extension until August 29, 2005 to deliver the audited
financial statements to the lenders. The audited financial statements were
delivered to the lenders on August 15, 2005.
Former Senior Credit Facility - At the time of the refinancing on November 10,
2004, the Company had a senior credit facility consisting of an $8.0 million
asset-based revolving credit facility, which was established in August 2002 (the
"Former Senior Credit Facility") to refinance all remaining obligations
outstanding under the prior senior credit facility. The Former Senior Credit
Facility was amended on August 5, 2003 and was subsequently amended on January
30, 2004 and July 30, 2004, and was repaid in full on November 10, 2004 (see
"Senior Credit Facility" above). The maturity date of this facility, as amended,
was January 31, 2005, and had an interest rate of 5.75%. The Former Senior
Credit Facility was secured by all of the Company's assets.
Senior Subordinated Notes - On August 30, 2000, the Company completed a private
placement of $75 million of senior subordinated notes (the "Notes") and 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, as amended in
August 2002, were due on August 29, 2005 and bore interest at a rate of 18% per
annum consisting of 13% cash interest on principal, payable quarterly, and 5%
interest on principal, payable quarterly in "payment-in-kind" ("PIK") promissory
notes. The PIK portion of the interest rate increased 0.25% each quarter,
commencing December 31, 2002 until the Notes were repaid. Effective October 7,
2004, the Purchasers executed a waiver with respect to our technical compliance
with certain financial covenants. At the time of the refinancing on November 10,
2004 described above, the principal balance outstanding on the Notes amounted to
$58.7 million, which included the original principal amount plus the PIK notes.
As of November 5, 2004, all of the Warrants had been exercised by the
Purchasers.
9
NOTE 5. Employee Benefit Plans
The Company has a defined contribution plan covering all eligible employees.
Contributions are based on certain percentages of an employee's eligible
compensation. Expenses related to this plan were $0.2 million for the three
month period ending June 26, 2005 and June 27, 2004.
The Company provides postretirement benefits to certain union employees at the
Company's Breeze-Eastern division. The Company funds these benefits on a
pay-as-you-go basis. The measurement date is March 31.
In February 2002, the Company's subsidiary, Seeger-Orbis GmbH & Co. oHG, now
known as TTC Germany GmbH & Co. oHG, sold its retaining ring business in Germany
to Barnes Group Inc. (Barnes). Since German law prohibits the transfer of
unfunded pension obligations for retired and former employees who have vested,
the legal responsibility for the pension plan remained with the selling company.
The relevant information for the pension plan is shown below under the caption
Pension Plan. The measurement date is December 31. Barnes has entered into an
agreement with the Company and its subsidiary, the Selling Company, whereby
Barnes is obligated to administer and discharge the pension obligation as well
as indemnify and hold the Selling Company and the Company harmless from these
pension obligations. Accordingly, the Company has recorded an asset equal to the
benefit obligation for the pension plan of $4.2 million which is included in
other long-term assets and is restricted in use to satisfy the legal liability
associated with the pension plan of the discontinued operations.
Postretirement Benefits Pension Plan
Three Months ended Three Months ended
----------------------------- -----------------------------
June 26, 2005 June 27, 2004 June 26, 2005 June 27, 2004
------------- ------------- ------------- -------------
Components of net periodic
benefit costs:
Interest Cost $19 $18 $51 $69
Amortization of net loss 13 18 -- --
--- --- --- ---
Net periodic benefit cost $32 $36 $51 $69
=== === === ===
NOTE 6. New Accounting Standards
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"), which clarifies that
conditional asset retirement obligations are within the scope of SFAS No. 143,
"Accounting for Asset Retirement Obligations." FIN 47 requires the Company to
recognize a liability for the fair value of conditional asset retirement
obligations if the fair value of the liability can be reasonably estimated. FIN
47 is effective for fiscal years ending after December 15, 2005. Management does
not believe that this statement will have a material effect on the results of
its operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions." SFAS No. 153 amends APB Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS No.153 is effective for fiscal periods beginning after
June 15, 2005. Management does not believe that the adoption of this statement
will have a material effect on the results of operations.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based
Payment" ("SFAS No. 123R") that addresses the accounting for share-based payment
transactions in which a company receives employee services
10
in exchange for (a) equity instruments of the company or (b) liabilities that
are based on the fair value of our equity instruments or that may be settled by
the issuance of such equity instruments. SFAS No. 123R addresses all forms of
share-based payment awards, including shares issued under employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
SFAS No. 123R eliminates the ability to account for share-based compensation
transactions using APB Opinion No. 25, "Accounting for Stock Issued to
Employees", that was provided in SFAS No.123 as originally issued. Under SFAS
No. 123R companies are required to record compensation expense for all share
based payment award transactions measured at fair value. This statement is
effective for fiscal years beginning after June 15, 2005. Management has not yet
determined the transition approach in adopting this statement.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. This statement
amends the guidance in Accounting Research Bulletin ("ARB") No. 43, Restatement
and Revision of Accounting Research Bulletins, Chapter 4 "Inventory Pricing", to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage). SFAS No. 151 requires that these
items be recognized as current-period charges regardless of whether they meet
the definition of "so abnormal" in ARB No. 43. In addition, SFAS No. 151
requires that allocation of fixed overheads to the costs of conversion be based
on the normal capacity of production facilities. SFAS No. 151 is effective for
the fiscal year ending March 31, 2006. The adoption of this statement will have
not have a material effect on the Company's financial position or results of
operations.
NOTE 7. Reclassification
In the Consolidated Statement of Cash Flows for the three months ended June 26,
2005, the Company changed the classification of changes in restricted cash
balances to present such changes as an investing activity. The Company
previously presented such changes as an operating activity. In the accompanying
Statements of Consolidated Cash Flows for the three months ended June 27, 2004,
the Company reclassified changes in restricted cash balances to be consistent
with its fiscal 2006 presentation which resulted in a $100,000 decrease to
investing cash flows and a corresponding increase in operating cash flows from
the amounts previously reported.
NOTE 8. Contingencies
As previously reported, the Company has been subject to an investigation that
was conducted by the Newark, New Jersey office of the United States Attorney
with respect to Breeze-Eastern's overhaul and repair operations. The Company has
now reached an agreement in principle with the United States Government on the
resolution of the civil and contractual aspects of the investigation and has
been advised by the United States Attorney that there will be no criminal
charges against the Company. Under the agreement in principle, the Company will
pay to the United States Government $1.0 million in three installments. A first
installment of $0.1 million will be paid upon finalization of the agreement, a
second installment of $0.3 million will be paid on March 30, 2006 and a third
and final installment of $0.6 million will be paid on September 30, 2006. The
Company has recorded a pre-tax charge of $1.2 million relating to the settlement
and associated costs.
The Company sold the assets of its Breeze Industrial Products (BIP) division in
July 2001. As part of that transaction, the Company sold the land and building
occupied by the BIP operation to the Indiana County (PA) Development Corporation
(ICDC) for $2,000,000. The ICDC, in turn, entered into a lease of the facility
in September 2001 with BIP as lessee for an initial term of five years and up to
four additional five-year terms. The lease contains an option for BIP to
purchase the property from ICDC at the end of the first term for $1,500,000 (the
appraised value of the property in July 2001). In the event that BIP does not
exercise the purchase option or the renewal option at the end of the initial
term, ICDC, upon proper notification, can require the Company to repurchase the
property for $1,000,000, of which $500,000 is contractually required to be
maintained on deposit with banks located in Indiana County, Pennsylvania. The
Company considers a decision by BIP to vacate the location in Saltsburg,
Pennsylvania to be unlikely as this is a manufacturing facility with
sophisticated machinery, an established well-trained work force, dependable
suppliers, and excellent distribution access. In the event that the facility is
presented for repurchase, management is confident that the repurchase would not
have a material effect on the Company's financial position or cash flows and the
facility can be resold for at least the repurchase price.
11
The Company is also engaged in various other legal proceedings incidental to its
business. Management is of the opinion that, after taking into consideration
information furnished by our counsel, the above matters will have no material
effect on the consolidated financial position or the results of our operations
in future periods.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
This Quarterly Report on Form 10-Q may contain forward-looking statements. See
"Forward Looking Statements" on page 17 hereof for further information of the
risks and uncertainties associated with forward-looking statements.
We design, develop, and manufacture sophisticated lifting equipment for
specialty aerospace and defense applications. With over 50% of the global
market, we have long been recognized as the world's largest designer and leading
supplier of performance-critical rescue hoists and cargo-hook systems. We also
manufacture weapons-handling systems, cargo winches, tie-down equipment, and
tow-hook assemblies. Marketed under the trade name "Breeze-Eastern", our
products are designed to be efficient and reliable in extreme operating
conditions. Our equipment is used to complete rescue operations and military
insertion/extraction operations, move and transport cargo, and load weapons onto
aircraft and ground-based launching systems.
All references to fiscal 2006 and beyond in this Management's Discussion and
Analysis of Financial Condition and Results of Operations refer to the fiscal
year ending March 31, 2006 and beyond, and all references to all other fiscal
years refer to the fiscal years ended March 31.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 26, 2005 COMPARED WITH THREE MONTHS ENDED JUNE 27, 2004.
Net Sales. Our sales decreased to $13.0 million for the first quarter of fiscal
2006 from sales of $14.6 million for the first quarter of fiscal 2005. This 11%
decrease in sales for the first quarter of fiscal 2006 was primarily due to
lower sales in the weapons handling product line, which was due to the
completion of the HLU-196 Bomb Hoist program, influencing a decrease in new
product sales of 46% for the first quarter. Sales in the overhaul and repair
portion of our business increased 99% from the same period last year. (See
discussion of Gross profit below).
Gross Profit. Gross profit decreased 3% to $5.6 million for the first quarter of
fiscal 2006 from $5.8 million for the first quarter of fiscal 2005. Gross profit
from new products experienced a decrease of approximately $1.3 million. These
decreases were offset by approximately $ 0.9 million of higher gross profit in
after market sales, and an increase of approximately $0.2 million related to
better profitability in engineering sales. As a result of the process and
procedures review of the overhaul and repair portion of our business during the
first quarter of fiscal 2005, we began implementing changes in our operating
procedures and added new personnel to that portion of our business thus
producing lower gross margins for the first quarter of fiscal 2005. In the first
quarter of fiscal 2006, gross profit from overhaul and repair increased 205% to
$1.2 million from $0.4 million for the first quarter of fiscal 2005, as we
continue to benefit from the improvements we have made to this portion of our
business.
General, administrative and selling expenses. General, selling and
administrative expenses decreased 22% to $3.2 million for the first three months
of fiscal 2006 from $4.0 million for the first three months of fiscal 2005. The
agreement in principle to resolve the previously reported investigation by the
Newark office of the United States Attorney into our overhaul and repair
operation has resulted in our legal and investigative costs being lowered to
$0.1 million in the first three months of fiscal 2006 versus $0.4 million in the
first three months of fiscal 2005, and our product liability insurance premiums
were $0.1 million lower during the first quarter of fiscal 2006 as compared
12
to the same period last year. During fiscal year 2005, we completed a review of
our engineering activities, and during the first quarter of fiscal 2006
engineering costs were $0.3 million lower than last years first quarter.
Interest expense. Interest expense decreased $0.6 million to $2.2 million in the
first quarter of fiscal 2006 as compared to $2.8 million in the first quarter of
fiscal 2005 primarily from the decreased aggregate interest rate resulting from
our refinancing in November 2004.
Net Income. We reported net income of $0.2 million in the first quarter of
fiscal 2006 versus a net loss of $0.6 million in the first quarter of fiscal
2005, which primarily resulted from the reasons discussed above.
New orders. New orders received in the first quarter of fiscal 2006 totaled
$13.8 million, which represents a 51% increase from new orders of $9.2 million
in the first quarter of fiscal 2005. The rescue hoist and cargo winch product
line, for both new equipment and overhaul and repair, and cargo hook new
equipment were particularly strong in the first quarter of fiscal 2006. A
portion of the increases were offset by a decrease in orders in our weapons
handling and cargo hook spares product lines.
Backlog. Backlog at June 26, 2005 was $35.9 million, up $0.8 million from $35.1
million at March 31, 2005. The increase in the backlog is due to the order
pattern in the first three months of fiscal 2006. We measure backlog by the
amount of products or services that our customers have committed by contract to
purchase from us as of a given date. Our book to bill ratio for the first
quarter of fiscal 2006 was 1.06 compared to .63 for the first quarter of fiscal
2005. The increase in the book to bill ratio was directly related to the higher
order intake during the first quarter of fiscal 2006. Cancellations of purchase
orders or reductions of product quantities in existing contracts, although
seldom occurring, could substantially and materially reduce our backlog.
Therefore our backlog may not represent the actual amount of shipments or sales
for any future period.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements depend on a number of factors, many of which are
beyond our control, including the timing of production under our long-term
contracts with the U.S. Government. Although we have infrequently received
payments on these government contracts based on performance milestones, our
working capital needs fluctuate between periods as a result of changes in
program status and the timing of payments by program. Additionally, as our sales
are generally made on the basis of individual purchase orders, our liquidity
requirements vary based on the timing and volume of these orders.
At June 26, 2005, there were no outstanding borrowings under the revolving
portion of our Senior Credit Facility (as defined below). The Senior Credit
Facility prohibits the payment of dividends.
As previously reported, the New York Stock Exchange (NYSE) delisted the
Company's stock in January 2005 for failing to maintain the NYSE continued
listing standards. The Company's stock currently trades in customer initiated
transactions in the over-the-counter market under the symbol TTLG. The Company
expects that in the future a market maker will be approved by the National
Association of Securities Dealers for transactions in the Company's stock.
WORKING CAPITAL
Our working capital at June 26, 2005 was $16.1 million compared to $16.4 million
at March 31, 2005. The ratio of current assts to current liabilities was 2.2 to
1.0 at June 26, 2005 and 2.1 to 1.0 at March 31, 2005.
Changes in working capital during the first three months of fiscal 2006 resulted
from an increase in cash of $1.4 million, a decrease in accounts receivable of
$1.6 million, a decrease in income tax receivable of $1.0 million, a decrease in
accounts payable of $0.4 million and a decrease in income tax payable of $0.2
million. In addition the current portion of long-term debt decreased $0.4
million. The decrease in accounts receivable and the increase in cash was due to
strong collections from sales made in the fourth quarter of fiscal 2005. The
decrease in income tax
13
receivable was due to the receipt of a refund resulting from net operating loss
carry backs. The decrease in accounts payable was mainly due to the payments
coming due for purchases made in the fourth quarter of fiscal 2005. The decrease
in income tax payable is the result of a tax installment resulting from the
disposition of a former foreign affiliate. The number of days that sales were
outstanding in accounts receivable increased to 40.3 days at June 26, 2005 from
39.8 days at March 31, 2005. The increase in days was attributable to June sales
representing 32% of fiscal 2006 first quarter sales due to specific scheduling
requirements. Inventory turnover increased slightly to 1.84 turns for the first
quarter of fiscal 2006 versus 1.75 turns for the first quarter of fiscal 2005.
The increase in inventory turns is reflective of normal inventory and production
patterns.
CAPITAL EXPENDITURES
Our additions to property, plant and equipment were $0.2 million for the first
three months of fiscal 2006, compared to $0.7 million for the first three months
of fiscal 2005. Projects budgeted in fiscal 2006, are expected to be
approximately $0.5 million.
SENIOR CREDIT FACILITY
On November 10, 2004, we refinanced and repaid in full the Former Senior Credit
Facility and the Notes with a $71.5 million, forty-two month, senior credit
facility (the "Senior Credit Facility"). The Senior Credit Facility consists of
a $10.0 million asset-based Revolving Credit Facility, and three tranches of
Term Loans totaling $61.5 million. At June 26, 2005, the Senior Credit Facility
has an effective weighted interest rate of approximately 14.7% which is tied to
the prime rate. The Term Loans require monthly principal payments of $250,000
over the term of the loan with the balance due at the end of the term.
Accordingly, the balance sheet reflects $3.0 million of current maturities due
under the Senior Credit Facility. The Senior Credit Facility also contains
certain mandatory prepayment provisions which are linked to cash flow and
customary financial covenants and events of default. The Senior Credit Facility
is secured by all of the Company's assets. At June 26, 2005, we were in
compliance with the provisions of the Senior Credit Facility. With the
previously reported delay in the completion of the audited financial statements,
for the fiscal year ended March 31, 2005, we sought and received from our
lenders a waiver and extension until August 29, 2005 to deliver the audited
financial statements to the lenders.
TAX BENEFITS FROM NET OPERATING LOSSES
At June 26, 2005, we had federal and state net operating loss carryforwards, or
NOLs, of approximately $61.1 million and $110.1 million, respectively, which are
due to expire in fiscal 2022 through fiscal 2025 and fiscal 2006 through fiscal
2011, respectively. These NOLs may be used to offset future taxable income
through their respective expiration dates and thereby reduce or eliminate our
federal and state income taxes otherwise payable. Failure by the Company to
achieve sufficient taxable income to utilize the NOL's would require the
recording of an additional valuation allowance against the deferred tax assets.
The Internal Revenue Code of 1986, as amended (the "Code") imposes significant
limitations on the utilization of NOLs in the event of an "ownership change" as
defined under section 382 of the Code (the "Section 382 Limitation"). The
Section 382 Limitation is an annual limitation on the amount of pre-ownership
NOLs that a corporation may use to offset its post-ownership change income. The
Section 382 Limitation is calculated by multiplying the value of a corporation's
stock immediately before an ownership change by the long-term tax-exempt rate
(as published by the Internal Revenue Service). Generally, an ownership change
occurs with respect to a corporation if the aggregate increase in the percentage
of stock ownership by value of that corporation by one or more 5% shareholders
(including specified groups of shareholders who in the aggregate own at least 5%
of that corporation's stock) exceeds 50 percentage points over a three-year
testing period. We believe that we have not gone through an ownership change
that would cause our NOLs to be subject to the Section 382 Limitation. If we do
not generate adequate taxable earnings, some or all of our deferred tax assets
may not be realized. Additionally, changes to the federal and state income tax
laws also could impact our ability to use the net operating loss carryforwards.
The State of New Jersey, in response to a budget crisis, currently allows the
utilization of net operating loss carryforwards up to 50% of taxable income
earned in the state for our 2006 fiscal year. As a
14
result, we will be required to pay New Jersey state income taxes on 50% of
fiscal 2006 taxable income in spite of losses being carried forward. It is
possible that the State of New Jersey could extend the limitation, or reinstate
the suspension of utilization of net operating loss carryforwards. In such
cases, we may need to increase the valuation allowance established related to
deferred tax assets for state purposes.
SUMMARY DISCLOSURE ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table reflects a summary of our contractual cash obligations for
the next several fiscal years:
(DOLLARS IN THOUSANDS)
2010 AND
2006 2007 2008 2009 THEREAFTER TOTAL
------ ------ ------ ------- ---------- -------
Long-term debt $3,079 $3,000 $3,000 $51,345 $-- $60,424
Operating leases 220 173 36 17 18 464
------ ------ ------ ------- --- -------
Total $3,299 $3,173 $3,036 $51,362 $18 $60,888
====== ====== ====== ======= === =======
Obligations for long-term debt do not reflect any change that may occur due to
any future change in the Prime Rate of interest.
In addition, we have divested ten businesses since March 31, 2001. Under the
terms of the agreements associated with the sales of those businesses, we have
agreed to indemnify the purchasers for certain damages that might arise in the
event that a representation we made with respect to the divested business is
found to have contained a material misstatement, subject in each case to a
customary cap on the indemnification amount and customary limitations on the
survivability of the representations made. As of the date of this report, we
have no unresolved claims for indemnification with respect to these divested
businesses. Additionally, the terms of these divestiture agreements generally
require the calculation of purchase price adjustments based upon the amount of
working capital or net assets transferred at the closing date. In the case of
each divestiture completed as of the filing date, purchase price adjustments
have been agreed and paid.
INFLATION
While neither inflation nor deflation has had, and we do not expect it to have,
a material impact upon operating results, we cannot assure you that our business
will not be affected by inflation or deflation in the future.
ENVIRONMENTAL MATTERS
We evaluate the exposure to environmental liabilities using a financial risk
assessment methodology, including a system of internal environmental audits and
tests and outside consultants. This risk assessment includes the identification
of risk events/issues, including potential environmental contamination at
Company and off-site facilities; characterizes risk issues in terms of
likelihood, consequences and costs, including the year(s) when these costs could
be incurred; analyzes risks using statistical techniques; and, constructs risk
cost profiles for each site. Remediation cost estimates are prepared from this
analysis and are taken into consideration in developing project budgets from
third party contractors. Although we take great care in the development of these
risk assessments and future cost estimates, the actual amount of the remediation
costs may be different from those estimated as a result of a number of factors
including: changes to government regulations or laws; changes in local
construction costs and the availability of personnel and materials; unforeseen
remediation requirements that are not apparent until the work actually
commences; and other similar uncertainties. We do not include any unasserted
claims that we might have against others in determining the liability for such
costs, and, except as noted with regard to specific cost sharing arrangements,
have no such arrangements, nor have we taken into consideration any future
claims against insurance
15
carriers that we might have in determining our environmental liabilities. In
those situations where we are considered a de minimus participant in a
remediation claim, the failure of the larger participants to meet their
obligations could result in an increase in our liability with regard to such a
site.
We continue to participate in environmental assessments and remediation work at
eleven locations, including our former facilities. Due to the nature of
environmental remediation and monitoring work, such activities can extend for up
to thirty years, depending upon the nature of the work, the substances involved,
and the regulatory requirements associated with each site. In calculating the
net present value (where appropriate) of those costs expected to be incurred in
the future, we use a discount rate of 7.5%. Based on the above, we estimate the
current range of undiscounted cost for remediation and monitoring to be between
$5.4 million and $9.4 million with an undiscounted amount of $6.1 million to be
most probable. Current estimates for expenditures, net of recoveries, for each
of the five succeeding fiscal years are $1.1 million, $1.0 million, $0.8
million, $0.8 million, and $0.8 million respectively, with $1.6 million payable
thereafter. Of the total undiscounted costs, we estimate that approximately 50%
will relate to remediation activities and that 50% will be associated with
monitoring activities.
We estimate that the potential cost for implementing corrective action at nine
of these sites will not exceed $0.5 million in the aggregate, payable over the
next several years, and have provided for the estimated costs, without
discounting for present value, in our accrual for environmental liabilities. In
the first quarter of fiscal 2003, we entered into a consent order for a former
facility in New York, which is currently subject to a contract for sale,
pursuant to which we are developing a remediation plan for review and approval
by the New York Department of Environmental Conservation. Based upon the
characterization work performed to date, we have accrued estimated costs of
approximately $2.1 million without discounting for present value. The amounts
and timing of such payments are subject to an approved remediation plan.
The environmental cleanup plan we presented during the fourth quarter of fiscal
2000 for a portion of a site in Pennsylvania which continues to be owned,
although the related business has been sold, was approved during the third
quarter of fiscal 2004. This plan was submitted pursuant to the Consent Order
and Agreement with the Pennsylvania Department of Environmental Protection
("PaDEP") concluded in fiscal 1999. Pursuant to the Consent Order, upon its
execution we paid $0.2 million for past costs, future oversight expenses and in
full settlement of claims made by PaDEP related to the environmental remediation
of the site with an additional $0.2 million paid in fiscal 2001. A second
Consent Order was concluded with PaDEP in the third quarter of fiscal 2001 for
another portion of the site, and a third Consent Order for the remainder of the
site was concluded in the third quarter of fiscal 2003. An environmental cleanup
plan for the portion of the site covered by the 2003 Consent Order was presented
during the second quarter of fiscal 2004. We are also administering an agreed
settlement with the Federal government under which the government pays 50% of
the direct and indirect environmental response costs associated with a portion
of the site. We have also finalized an agreement under which the Federal
government has paid an amount equal to 45% of the estimated environmental
response costs associated with another portion of the site. At June 26, 2005,
our cleanup reserve was $2.1 million based on the net present value of future
expected cleanup and monitoring costs and is net of expected reimbursement by
the Federal Government of $1.0 million. We expect that remediation at this site,
which is subject to the oversight of the Pennsylvania authorities, will not be
completed for several years, and that monitoring costs, although expected to be
incurred over twenty years, could extend for up to thirty years.
In addition, we have been named as a potentially responsible party in four
environmental proceedings pending in several states in which it is alleged that
we are a generator of waste that was sent to landfills and other treatment
facilities and, as to one site, it is alleged that we were an owner or operator.
Such properties generally relate to businesses which have been sold or
discontinued. We estimate expected future costs, and estimated proportional
share of remedial work to be performed, associated with these proceedings will
not exceed $0.1 million without discounting for present value and have provided
for these estimated costs in our accrual for environmental liabilities.
16
LITIGATION
We are also engaged in various other legal proceedings incidental to our
business. It is our opinion that, after taking into consideration information
furnished by our counsel, the above matters will have no material effect on our
consolidated financial position or the results of our operations in future
periods.
FORWARD LOOKING STATEMENTS
Certain statements in this Quarterly Report 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 Quarterly Report 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.
Any number of factors could affect future operations and results, including,
without limitation, the results of audits and inquiries into the Company's
business practices; the Company's ability to provide a trading venue for its
shares; determination by the Company to dispose of or acquire additional assets;
general industry and economic conditions; events impacting the U.S. and world
financial markets and economies; 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 those specific
risks that are discussed elsewhere in the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 2005.
The Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information or future events.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"), which clarifies that
conditional asset retirement obligations are within the scope of SFAS No. 143,
"Accounting for Asset Retirement Obligations." FIN 47 requires us to recognize a
liability for the fair value of conditional asset retirement obligations if the
fair value of the liability can be reasonably estimated. FIN 47 is effective for
fiscal years ending after December 15, 2005. We do not believe that the adoption
of this statement will have a material effect on the results of our operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions." SFAS No. 153 amends APB Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS No.153 is effective for fiscal periods beginning after
June 15, 2005. We do not believe that the adoption of this statement will have
material effect on the results of operations.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based
Payment" ("SFAS No. 123R") that addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for (a)
equity instruments of the company or (b) liabilities that are based on the fair
value of our equity instruments or that may be settled by the issuance of such
equity instruments. SFAS No. 123R addresses all forms of share-based payment
awards, including shares issued under employee stock purchase plans, stock
options,
17
restricted stock and stock appreciation rights. SFAS No. 123R eliminates the
ability to account for share-based compensation transactions using APB Opinion
No. 25, "Accounting for Stock Issued to Employees", that was provided in SFAS
No.123 as originally issued. Under SFAS No. 123R companies are required to
record compensation expense for all share based payment award transactions
measured at fair value. This statement is effective for fiscal years beginning
after June 15, 2005. We have not yet determined the transition approach in
adopting this statement.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. This statement
amends the guidance in Accounting Research Bulletin ("ARB") No. 43, Restatement
and Revision of Accounting Research Bulletins, Chapter 4 "Inventory Pricing", to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage). SFAS No. 151 requires that these
items be recognized as current-period charges regardless of whether they meet
the definition of "so abnormal" in ARB No. 43. In addition, SFAS No. 151
requires that allocation of fixed overheads to the costs of conversion be based
on the normal capacity of production facilities. SFAS No. 151 is effective for
the fiscal year ending March 31, 2006. The adoption of this statement will have
not have a material effect on the results of our operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have been and are exposed to various market risks, primarily changes in
interest rates associated with the Senior Credit Facility under which there were
borrowings of $60.3 million at June 26, 2005. Based on current debt levels, each
quarter point increase in the Prime Rate will increase our annual interest
expense by approximately $0.2 million.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily is
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are engaged in various legal proceedings incidental to our business. It
is the opinion of management that, after taking into consideration
information furnished by our counsel, these matters will not have a
material effect on our consolidated financial position or the results of
our operations in future periods.
18
ITEM 6. EXHIBITS
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
19
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 31, 2005 By: /s/ Joseph F. Spanier
------------------------------------
Joseph F. Spanier, Vice President,
Chief Financial Officer and
Treasurer *
* On behalf of the Registrant and as Principal Financial and Accounting
Officer.
20