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 September 25, 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
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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.)
700 Liberty Avenue
Union, New Jersey 07083
(Address of principal executive offices) (Zip Code)
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 November 2, 2005, the total number of outstanding shares of
registrant's one class of common stock was 6,725,718.
INDEX
Page No.
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PART I. Financial Information
Item 1. Financial Statements....................................... 3
Statements of Consolidated Operations Three and Six
Month Periods Ended September 25, 2005 and September 26,
2004....................................................... 4
Consolidated Balance Sheets September 25, 2005 and
March 31, 2005............................................. 5
Statements of Consolidated Cash Flows Six Month Periods
September 25, 2005 and September 26, 2004.................. 6
Notes to Consolidated Financial Statements................. 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 12-20
Item 3. Quantitative and Qualitative Disclosures about Market
Risk....................................................... 20
Item 4. Controls and Procedures.................................... 20
PART II. Other Information
Item 1. Legal Proceedings.......................................... 21
Item 6. Exhibits................................................... 21
SIGNATURES........................................................... 22
EXHIBIT 31.1......................................................... 23
EXHIBIT 31.2......................................................... 24
EXHIBIT 32........................................................... 25
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
September 25, 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 and Per Share Data)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------------- ---------------------------------------
SEPTEMBER 25, 2005 SEPTEMBER 26, 2004 SEPTEMBER 25, 2005 SEPTEMBER 26, 2004
------------------ ------------------ ------------------ ------------------
Net sales $ 12,997 $ 15,249 $ 25,979 $ 29,797
Cost of sales 7,551 9,050 14,896 17,761
---------- ---------- ---------- ----------
Gross profit 5,446 6,199 11,083 12,036
General, administrative
and selling expenses 3,232 4,201 6,386 8,224
Interest expense 2,361 2,885 4,556 5,681
Interest income and other (income) expense -net 18 (82) (19) (69)
---------- ---------- ---------- ----------
Income (loss) before income taxes (165) (805) 160 (1,800)
Provision (benefit) for income taxes (63) (306) 61 (684)
---------- ---------- ---------- ----------
Net income (loss) $ (102) $ (499) $ 99 $ (1,116)
========== ========== ========== ==========
Basic earnings (loss) per share:
Net income (loss) $ (0.02) $ (0.07) $ 0.01 $ (0.17)
========== ========== ========== ==========
Diluted earnings (loss) per share:
Net income (loss) $ (0.02) $ (0.07) $ 0.01 $ (0.17)
========== ========== ========== ==========
Number of shares used in computation
of per share information: (Note 1)
Basic 6,700,000 6,682,000 6,699,000 6,676,000
Diluted 6,700,000 6,682,000 6,725,000 6,676,000
See accompanying notes to unaudited consolidated financial statements.
4
TRANSTECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Data)
(UNAUDITED)
SEPTEMBER 25, 2005 MARCH 31, 2005
------------------ --------------
ASSETS
Current assets:
Cash and cash equivalents $ 161 $ 1,039
Accounts receivable (net of allowance for doubtful
accounts of $19 at September 25, 2005 and $16 at
March 31, 2005) 9,795 9,782
Inventories - net 16,607 15,897
Prepaid expenses and other current assets 765 873
Income tax receivable -- 954
Deferred income taxes 2,050 2,050
-------- --------
Total current assets 29,378 30,595
-------- --------
Property, plant and equipment 16,247 15,515
Less accumulated depreciation 11,222 11,023
-------- --------
Property, plant and equipment - net 5,025 4,492
-------- --------
Other assets:
Deferred income taxes 29,039 29,100
Other 11,715 12,251
-------- --------
Total other assets 40,754 41,351
-------- --------
Total $ 75,157 $ 76,438
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving Credit Facility $ 69 $ 386
Current portion of long-term debt 3,079 3,079
Accounts payable-trade 4,844 3,768
Accrued compensation 1,808 2,270
Accrued income taxes 469 652
Accrued interest 781 781
Other current liabilities 3,468 3,303
-------- --------
Total current liabilities 14,518 14,239
-------- --------
Long-term debt payable to banks and others 56,833 57,868
-------- --------
Other long-term liabilities 9,965 10,690
-------- --------
Commitments and Contingencies (Note 8)
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 September 25, 2005 and March 31, 2005,
respectively 71 71
Additional paid-in capital 74,157 74,136
Accumulated deficit (73,926) (74,025)
Unearned compensation (34) (114)
-------- --------
268 68
Less treasury stock, at cost - 390,135 shares at
September 25, 2005 and at March 31, 2005 (6,427) (6,427)
-------- --------
Total stockholders' deficit (6,159) (6,359)
-------- --------
Total $ 75,157 $ 76,438
======== ========
See accompanying notes to unaudited consolidated financial statements.
5
TRANSTECHNOLOGY CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(In Thousands of Dollars)
SIX MONTHS ENDED
---------------------------------------
SEPTEMBER 25, 2005 SEPTEMBER 26, 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 99 $(1,116)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 594 806
Noncash interest expense, net 525 1,905
Increase in provision for bad debt 2 7
Changes in assets and liabilities:
Decrease (increase) in accounts receivable and
other receivables 939 (2,325)
(Increase) decrease in inventories (710) 2,351
Decrease (increase) in deferred taxes, net 61 (612)
Decrease (increase) in other assets 180 (107)
Increase (decrease) in accounts payable 716 (2,262)
Decrease in accrued compensation (462) (1,085)
Decrease in income taxes payable (183) (100)
Decrease in other liabilities (604) (483)
------- -------
Net cash provided by (used in) operating activities 1,157 (3,021)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (372) (1,044)
Proceeds from sale of real estate -- 1,331
Collection of notes receivable 133 25
Increase in restricted cash -- (100)
------- -------
Net cash (used in) provided by investing activities (239) 212
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (1,500) --
(Repayments) borrowings of other debt (317) 2,103
Exercise of stock options 21 21
------- -------
Net cash (used in) provided by financing activities (1,796) 2,124
------- -------
Decrease in cash and cash equivalents (878) (685)
Cash and cash equivalents at beginning of period 1,039 960
------- -------
Cash and cash equivalents at end of period $ 161 $ 275
======= =======
Supplemental information:
Interest payments $ 4,119 $ 3,221
Income tax payments 183 28
Increase in term loans and senior subordinated note
for paid-in-kind interest expense 465 1,812
Non-cash investing activity for addtions to property,
plant and equipment 469 172
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 Six Months Ended
----------------------------- -----------------------------
September 25, September 26, September 25, September 26,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Basic Earnings (Loss) per Common Share:
Weighted-average common stock outstanding
for basic earnings (loss) per share
calculation 6,700 6,682 6,699 6,676
====== ===== ===== =====
Diluted Earnings (Loss) per Common Share:
Weighted-average common shares outstanding 6,700 6,682 6,699 6,676
Stock options and warrants* -- -- 26 --
------ ----- ----- -----
Weighted-average common stock outstanding
for diluted earnings (loss) per share
calculation 6,700 6,682 6,725 6,676
====== ===== ===== =====
* Excludes anti-dilutive stock options totaling 337,000 and 265,000 for the
three and six month periods ended September 25, 2005, respectively, and
194,000 and 202,000 for the three and six month periods ended September 26,
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 ("APB")
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 Six Months Ended
----------------------------- -----------------------------
September 25, September 26, September 25, September 26,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net income (loss) as reported $(102) $ (499) $ 99 $(1,116)
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects 20 25 38 56
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects (63) (66) (113) (119)
------ ------ ----- -------
Proforma net income (loss) $ (145) $ (540) $ 24 $(1,179)
====== ====== ===== =======
Basic earnings (loss) per share:
As reported (0.02) (0.07) 0.01 (0.17)
Proforma (0.02) (0.08) 0.01 (0.18)
Diluted earnings (loss) per share:
As reported (0.02) (0.07) 0.01 (0.17)
Proforma (0.02) (0.08) 0.01 (0.18)
NOTE 3. Inventories
Inventories, net of valuation allowances, are summarized as follows:
September 25, 2005 March 31, 2005
------------------ --------------
Finished goods $ -- $ --
Work in process 4,844 4,120
Purchased and
manufactured parts 11,763 11,777
------- -------
Total $16,607 $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:
September 25, 2005 March 31, 2005
------------------ --------------
Senior Credit Facility $59,902 $61,254
Other 79 79
------- -------
59,981 61,333
Less current maturities 3,148 3,465
------- -------
Total long-term debt $56,833 $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 September 25, 2005, the Senior Credit Facility has an
effective weighted interest rate of approximately 15.6% 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 September 25, 2005, the Company was in
compliance with the provisions of the Senior Credit Facility. At September 25,
2005, there was $0.1 million outstanding borrowings under the revolving portion
of the Senior Credit Facility.
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 $75.0 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 $75.0 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 and $0.4 million
for the three month period and six month periods ended September 25, 2005 and
September 26, 2004, respectively.
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 (the "Selling Company"), 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
these pension obligations as well as indemnify and hold the Selling Company and
the Company harmless from these pension obligations. Accordingly, the Company
has a recorded asset equal to the benefit obligation for the pension plan of
$3.8 million at September 25, 2005 and $4.2 million at March 31, 2005 which
asset 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
-------------------------------------------------------------
Three Months Ended Six Months Ended
----------------------------- -----------------------------
September 25, September 26, September 25, September 26,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Components of net periodic benefit costs:
Interest Cost $18 $18 $37 $36
Amortization of net loss 13 18 26 36
--- --- --- ---
Net periodic benefit cost $31 $36 $63 $72
=== === === ===
Pension Plan
-------------------------------------------------------------
Three Months Ended Six Months Ended
----------------------------- -----------------------------
September 25, September 26, September 25, September 26,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Components of net periodic benefit costs:
Interest Cost $32 $69 $83 $138
Amortization of net loss -- -- -- --
--- --- --- ----
Net periodic benefit cost $32 $69 $83 $138
=== === === ====
10
NOTE 6. New Accounting Standards
In June 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154, "Accounting Changes and Error Corrections -- a replacement of APB Opinion
No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements." The new statement changes the
requirements for the accounting for and reporting of a change in accounting
principles by requiring retrospective application of changes in accounting
principles to prior periods' financial statements to the extent practicable. It
also applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition provisions, those provisions
should be followed. Management does not believe that this statement will have a
material effect on the results of its operations. This statement requires that
the new accounting principal be applied as if it were adopted prospectively from
the earliest date practicable.
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"). 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 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 December 31, 2005. Management has not yet determined the
transition approach in adopting this statement.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS No.
151"). 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 Company's fiscal year ending March 31, 2006.
Management believes that the adoption of this statement will not have a material
effect on the Company's financial position or results of operations.
NOTE 7. Statement of Cash Flows
In the Consolidated Statement of Cash Flows for the six months ended September
25, 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
11
Consolidated Cash Flows for the six months ended September 26, 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.
The Company accrues in accounts payable amounts related to capital purchases
incurred but not yet paid. In prior periods, amounts accrued but not yet paid
were classified in the Statement of Cash Flows as cash flows from investing
activities and the offsetting change in the related accounts payable as cash
flows from operating activities. In 2005, the Company revised its accounting
policy to exclude accrued capital purchases from cash flows from investing and
operating activities. Accrued capital purchases were $469,000 and $172,000 at
September 25, 2005 and September 26, 2004, respectively. The Company revised its
2004 Statement of Cash Flows to conform to this change. As a result, operating
activity cash flows decreased and investing activity cash flows increased by
$123,000 for the six months ended September 26, 2004.
NOTE 8. Contingencies
As previously reported, the Company had 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
executed an agreement with the United States Government dated September 6, 2005,
that resolves 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, the Company will pay to the
United States Government $1.0 million in three installments. A first installment
of $0.1 million was paid upon finalization of the agreement in September, 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 division (the
"Division") in July 2001 to Breeze Industrial Products Corporation ("BIP"). As
part of that transaction, the Company sold the land and building occupied by the
Division in Saltsburg, Pennsylvania 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 optional renewal 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 the location 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.
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 18 hereof for further information of the
risks and uncertainties associated with forward-looking statements.
12
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 SEPTEMBER 25, 2005 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
26, 2004
Net Sales. Our sales decreased to $13.0 million for the second quarter of fiscal
2006 from sales of $15.2 million for the second quarter of fiscal 2005. This
overall 15% decrease in sales for the second quarter of fiscal 2006 was due to
lower new production sales in our weapons handling, rescue hoist and winch and
cargo hook product lines influencing a decrease in new product sales of 34% for
the second quarter. These decreases were primarily due to timing of orders
received from customers. Sales in the overhaul and repair portion of our
business increased 23% from the same period last year. (See discussion of Gross
Profit below).
Gross Profit. Gross profit decreased 12% to $5.4 million for the second quarter
of fiscal 2006 from $6.2 million for the second quarter of fiscal 2005. Gross
profit from new products experienced a decrease of approximately $1.3 million
due primarily to the lower sales volume discussed above. These decreases were
offset by approximately $0.4 million of higher gross profit in after market
sales. As a result of the process and procedures review of the overhaul and
repair portion of our business during 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 second quarter of fiscal
2005. In the second quarter of fiscal 2006, gross profit from overhaul and
repair increased 99% to $1.4 million from $0.7 million for the second 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 23% to $3.2 million for the second quarter of
fiscal 2006 from $4.2 million for the second quarter of fiscal 2005. As a result
of the settlement with the Newark, New Jersey office of the United States
Attorney's investigation into our overhaul and repair operation, legal and
investigative costs decreased $0.3 million in the second quarter of fiscal 2006
versus the second quarter of fiscal 2005. Our product liability insurance
premiums were approximately $0.2 million lower during the second quarter of
fiscal 2006 as compared to the same period last year due to a change in our
insurance broker and insurance carriers. In the second quarter of fiscal 2006,
incentive compensation and salary costs were approximately $0.2 million lower as
compared to the second quarter of fiscal 2005. Due to lower sales in the second
quarter of fiscal 2006, engineering and marketing costs decreased approximately
$ 0.2 million as compared to the same period last year.
Interest expense. Interest expense decreased $0.5 million to $2.3 million in the
second quarter of fiscal 2006 as compared to $2.9 million in the second quarter
of fiscal 2005 primarily from the decreased aggregate interest rate resulting
from our refinancing in November 2004.
Net Loss. We incurred a net loss of $0.1 million in the second quarter of fiscal
2006 versus a net loss of $0.5 million in the second quarter of fiscal 2005,
which primarily resulted from the reasons discussed above.
New orders. New orders received in the second quarter of fiscal 2006 totaled
$15.5 million, which represents a 10% decrease from new orders of $17.3 million
in the second quarter of fiscal 2005. Orders for new equipment in the rescue
hoist and winch and tie down product lines, and orders for aftermarket cargo
hooks were $3.0 million lower
13
in the second quarter of fiscal 2006 as compared to the same period last year
due to timing of orders received from customers. These decreases were partially
offset by an increase in orders in our new product cargo hook and engineering
product lines.
Backlog. Backlog at September 25, 2005 was $38.4 million, up $3.3 million from
$35.1 million at March 31, 2005. The increase in the backlog is due to the
timing of orders in the first six 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 second
quarter of fiscal 2006 was 1.19 compared to 1.14 for the second quarter of
fiscal 2005. The increase in the book to bill ratio was directly related to the
lower sales during the second 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.
SIX MONTHS ENDED SEPTEMBER 25, 2005 COMPARED WITH SIX MONTHS ENDED SEPTEMBER 26,
2004
Net Sales. Our sales decreased to $26.0 million for the first six months of
fiscal 2006, a 13% decrease from sales of $29.8 million for the first six months
of fiscal 2005. This decrease in sales is due to a 40% decrease in new
production sales in our weapons handling, rescue hoist and winch and cargo hook
product lines due to completion of certain programs and a delay in start up of
other programs. This 40% decrease in new product sales was offset to some degree
by a 52% increase in the overhaul and repair portion of our business from the
same period last year. (See discussion of Gross Profit below).
Gross Profit. Gross profit decreased 8% to $11.1 million for the first six
months of fiscal 2006 from $12.0 million for same period last year. Gross profit
from new products experienced a decrease of approximately $2.6 million due
primarily to the lower sales volume discussed above. These decreases were
partially offset by approximately $ 1.5 million of higher gross profit in our
overhaul and repair operation. As a result of the process and procedures
review of the overhaul and repair portion of our business during 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 six months of fiscal 2005. Gross profit from overhaul and repair
increased 136% for the first six months of fiscal 2006, 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 $6.4 million for the first six months
of fiscal 2006 from $ 8.2 million for the first six months of fiscal 2005. As a
result of the settlement with the Newark, New Jersey office of the United States
Attorney's investigation into our overhaul and repair operation, we incurred
approximately $0.1 million of legal and investigative costs in the first half of
fiscal 2006 versus $0.8 million in the first half of fiscal 2005. Our product
liability insurance premiums were approximately $0.3 million lower during the
first six months of fiscal 2006 as compared to the same period last year due to
a change in our insurance broker and insurance carriers. Incentive compensation
and salary costs for the first six months of fiscal 2006 were approximately $0.3
million lower as compared to the first six months of fiscal 2005. During fiscal
year 2005, we completed a review of our engineering activities, and during the
first six months of fiscal 2006, engineering costs were approximately $0.4
million lower as compared to the same period last year due to lower sustaining
and internal research and development activities and higher billable
engineering activities. As a result of lower new product sales, marketing costs
were approximately $0.2 million lower in the first six months of fiscal 2006
than the first six months of fiscal 2005.
Interest expense. Interest expense decreased $1.1 million to $4.6 million in the
first six months of fiscal 2006 as compared to $5.7 million in the first six
months of fiscal 2005 primarily from the decreased aggregate interest rate
resulting from our refinancing in November 2004.
Net Income. We incurred net income of $0.1 million in the first six months of
fiscal 2006 versus a net loss of $1.1 million in the first six months of fiscal
2005, which primarily resulted from the reasons discussed above.
14
New orders. New orders received in the first six months of fiscal 2006 totaled
$29.3 million, which represents an 11% increase from new orders of $26.5 million
in the first six months of fiscal 2005. Orders for new equipment in the rescue
hoist and winch and cargo hook product lines were approximately $4.7 million
higher, a 44% increase, during the first half of fiscal 2006 as compared to the
same period last year. We also experienced increases of approximately $1.4
million in our overhaul and repair operation, as well as a $0.5 million increase
in new orders for engineering during the first six months of fiscal 2006 as
compared to the first six months of fiscal 2005. These increases were partially
offset by a decrease of new orders in our weapons handling and tie down product
lines of $1.1 million for new product and $ 3.4 million for after market spares.
Backlog. Backlog at September 25, 2005 was $38.4 million, up $3.3 million from
$35.1 million at March 31, 2005. The increase in the backlog is due to the
timing of orders in the first six 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 six
months of fiscal 2006 was 1.13 compared to .89 for the first six months of
fiscal 2005. The increase in the book to bill ratio was directly related to the
higher order intake and lower sales volume during the first half 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.
Borrowings and availability under the revolving portion of our Senior Credit
Facility (as defined below) at September 25, 2005 were $0.1 million and $2.1
million respectively. 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.
As we have publicly announced, we have been actively exploring both replacement
of the very expensive debt we carry, as more particularly described under the
heading Senior Credit Facility, and increasing our equity. If such a plan were
implemented, it could prove to be dilutive to current shareholders. Recognizing
this, we have a parallel project that is evaluating other alternatives that may
capture the value of the business for today's shareholders. We are working with
advisors for each project, and our Board hopes to make a decision as to which
path to take during the fiscal fourth quarter.
WORKING CAPITAL
Our working capital at September 25, 2005 was $14.9 million compared to $16.4
million at March 31, 2005. The ratio of current assets to current liabilities
was 2.0 to 1.0 at September 25, 2005 and 2.1 to 1.0 at March 31, 2005.
Changes in working capital during the first six months of fiscal 2006 resulted
from a decrease in cash of $0.9 million, a decrease in notes receivable of $0.1
million, an increase in inventory of $0.7 million, a decrease in income tax
receivable of $1.0 million, an increase in accounts payable of $1.1 million, a
decrease in accrued compensation of $0.5 million, a decrease in income tax
payable of $0.2 million, and an increase in other current liabilities of $0.2
million. In addition, the current portion of long-term debt decreased $0.3
million. The decrease in cash was due to
15
timing of collections from accounts receivable. The decrease in notes receivable
was the result of principal installments received from two previously divested
companies. The increase in inventory was largely due to the advance purchase of
long lead-time materials needed to fulfill customers' long-term purchase orders,
which is also evident in the increase in accounts payable. The decrease in
income tax receivable was due to the receipt of a refund resulting from net
operating loss carry backs. Payments of accrued incentive compensation accounted
for the decrease in accrued compensation. The decrease in income tax payable is
the result of a tax installment resulting from the disposition of a former
foreign affiliate. The recognition of environmental liabilities from long term
to current, largely accounted for the increase in other current liabilities. The
number of days that sales were outstanding in accounts receivable increased to
48.6 days at September 25, 2005 from 39.8 days at March 31, 2005. The increase
in days was attributable to September sales representing 40% of fiscal 2006
second quarter sales due to specific scheduling requirements. Inventory turnover
decreased slightly to 1.82 turns for the second quarter of fiscal 2006 versus
2.0 turns for the second quarter of fiscal 2005. The decrease in inventory turns
is reflective of the reason mentioned above.
CAPITAL EXPENDITURES
Our additions to property, plant and equipment were $0.7 million for the first
six months of fiscal 2006, compared to $1.2 million for the first six months of
fiscal 2005. Projects budgeted in fiscal 2006 are expected to be approximately
$0.9 million. The capital expenditures in both periods were primarily related to
the Company's new enterprise resource planning system.
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 September 25, 2005, the Senior Credit
Facility has an effective weighted interest rate of approximately 15.6% 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 September 25, 2005, we were in
compliance with the provisions of the Senior Credit Facility.
TAX BENEFITS FROM NET OPERATING LOSSES
At September 25, 2005, we had federal and state net operating loss
carryforwards, or NOLs, of approximately $61.0 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. A
corresponding valuation allowance of $5.9 million has been established relating
to the state net operating loss, as it is management's assertion that a portion
of the state NOL's are not more likely than not realizable. 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
16
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
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 $1,579 $3,000 $3,000 $52,333 $-- $59,912
Operating leases 149 179 37 17 17 399
------ ------ ------ ------- --- -------
Total $1,728 $3,179 $3,037 $52,350 $17 $60,311
====== ====== ====== ======= === =======
Obligations for long-term debt do not include amounts for interest, as such
amounts will vary due to fluctuation in the Prime Rate.
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
17
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
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 $1.9 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 (the "2003 Consent
Order"). 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 September 25, 2005, our cleanup reserve was $2.4 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 $0.7 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.
18
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, 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; interest rate trends; 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; 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, 2005 and the Form 10-Q
for the first quarter ended June 26, 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 June 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154, "Accounting Changes and Error Corrections -- a replacement of APB Opinion
No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements." The new statement changes the
requirements for the accounting for and reporting of a change in accounting
principle by requiring retrospective application of changes in accounting
principles to prior periods' financial statements to the extent practicable. It
also applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition provisions, those provisions
should be followed. This statement requires that the new accounting principal be
applied as if it were adopted prospectively from the earliest date practicable.
We do not believe that this statement will have a material effect on the results
of our operations.
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
Transaction ("SFAS No. 153"). SFAS No. 153 amends APB Opinion 29 to eliminate
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general
19
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, 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 December 31, 2005. We have not yet determined the
transition approach in adopting this statement.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS No.
151"). 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 our fiscal year ending March 31, 2006. We believe
that the adoption of this statement will 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 $59.9 million at September 25, 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.
20
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.
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.
21
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: November 7, 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.
22