10-Q 1 y12382e10vq.txt 10-Q 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