<PAGE> 1
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 27, 1999
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
(State or other jurisdiction of 95-4062211
incorporation or organization) (I.R.S. employer
150 Allen Road identification no.)
Liberty Corner, New Jersey 07938
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 903-1600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
As of August 5, 1999, the total number of outstanding shares of
registrant's one class of common stock was 6,132,003.
<PAGE> 2
TRANSTECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information Page No.
<S> <C> <C>
Item 1. Financial Statements.................................................................... 2
-------
Statements of Consolidated Operations--
Three Month Periods Ended June 27, 1999
and June 28, 1998....................................................................... 3
Consolidated Balance Sheets--
June 27, 1999 and March 31, 1999........................................................ 4
Statements of Consolidated Cash Flows--
Three Month Periods Ended June 27, 1999 and
June 28, 1998........................................................................... 5
Statements of Consolidated Stockholders' Equity--
Three Month Period Ended June 27, 1999 ................................................. 6
Notes to Consolidated Financial Statements.............................................. 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................................... 11 - 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................. 16
-------
</TABLE>
<TABLE>
<CAPTION>
PART II. Other Information
<S> <C> <C>
Item 1. Legal Proceedings....................................................................... 17
-------
Item 6. Exhibits and Reports on Form 8-K........................................................ 17
-------
SIGNATURES.................................................................................................... 17
EXHIBIT 27.................................................................................................... 18
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Statements of Consolidated Operations, Consolidated
Balance Sheets, Consolidated Cash Flows and Consolidated Stockholders' Equity
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 27, 1999 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 Conditions 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
Annual Report on Form 10-K filed for the fiscal year ended March 31, 1999.
[THIS SPACE INTENTIONALLY LEFT BLANK]
2
<PAGE> 4
STATEMENTS OF CONSOLIDATED OPERATIONS
UNAUDITED
(In Thousands of Dollars Except Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
JUNE 27, 1999 JUNE 28, 1998
---------------- ----------------
<S> <C> <C>
Net sales $ 55,368 $ 51,483
Cost of sales 39,251 34,583
---------------- ----------------
Gross profit 16,117 16,900
---------------- ----------------
General, administrative
and selling expenses 11,185 10,336
Interest expense 1,630 1,351
Interest income (63) (99)
Royalty and other income (232) (70)
---------------- ----------------
Income before income taxes 3,597 5,382
Income taxes 1,439 2,180
---------------- ----------------
Net income $ 2,158 $ 3,202
================ ================
Basic Earnings per Share (Note 1) $ 0.35 $ 0.51
================ ================
Diluted Earnings per Share $ 0.35 $ 0.50
================ ================
Number of shares used in computation
of per share information:
Basic 6,124,000 6,285,000
Diluted 6,158,000 6,439,000
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars Except Share Data)
<TABLE>
<CAPTION>
UNAUDITED
JUNE 27, 1999 MARCH 31, 1999
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 69 $ 2,255
Accounts receivable (net of allowance for doubtful accounts
of $289 at June 27, 1999 and $240 at March 31, 1999) 37,527 36,323
Notes and other receivables 687 658
Inventories 55,955 58,668
Prepaid expenses and other current assets 1,317 1,702
Deferred income taxes 1,246 1,295
--------- ---------
Total current assets 96,801 100,901
--------- ---------
Property, Plant and Equipment 111,881 111,401
Less accumulated depreciation and amortization 37,102 35,017
--------- ---------
Property, Plant and Equipment - net 74,779 76,384
--------- ---------
Other assets:
Notes receivable 3,497 3,694
Costs in excess of net assets of acquired businesses (net of accumulated amortization:
June 27, 1999, $7,533; March 31, 1999, $7,002) 76,545 76,731
Other 22,110 22,010
--------- ---------
Total other assets 102,152 102,435
--------- ---------
Total $ 273,732 $ 279,720
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 46 $ 46
Accounts payable-trade 10,786 14,247
Accrued compensation 5,078 6,161
Accrued income taxes 1,912 765
Other current liabilities 6,553 8,588
--------- ---------
Total current liabilities 24,375 29,807
--------- ---------
Long-term debt payable to banks and others 100,429 102,463
--------- ---------
Other long-term liabilities 23,537 23,740
--------- ---------
Stockholders' equity:
Preferred stock-authorized, 300,000 shares; none issued -- --
Common stock-authorized, 14,700,000 shares of $.01 par value;
issued 6,678,397 at June 27, 1999, and 6,653,855 at March 31, 1999 67 67
Additional paid-in capital 77,483 77,246
Retained earnings 60,482 58,721
Accumulated other comprehensive loss (3,277) (3,021)
Unearned compensation (295) (239)
--------- ---------
134,460 132,774
Less treasury stock, at cost - (546,394 shares at June 27, 1999 and 546,213
at March 31, 1999) (9,069) (9,064)
--------- ---------
Total stockholders' equity 125,391 123,710
--------- ---------
Total $ 273,732 $ 279,720
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
STATEMENTS OF CONSOLIDATED CASH FLOWS
UNAUDITED
(In Thousands of Dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
JUNE 27, 1999 JUNE 28, 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,158 $ 3,202
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,055 2,426
Provision for losses on accounts receivable 59 20
Loss on sale or disposal of fixed assets 37 12
Change in assets and liabilities:
(Increase) decrease in accounts receivable (1,507) 1,432
Decrease (increase) in inventories 2,201 (1,835)
Decrease in assets held for sale -- 5,442
Increase in other assets (318) (5,154)
Decrease in accounts payable (2,931) (2,223)
Decrease in accrued compensation (1,061) (5,538)
Increase in income tax payable 1,149 2,125
Decrease in other liabilities (1,984) (1,145)
------------- -------------
Net cash provided by (used in) operating activities 858 (1,236)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,628) (1,790)
Proceeds from sale of fixed assets 8 44
Proceeds from sale of marketable securities 3 --
Decrease in notes receivable 168 225
------------- -------------
Net cash used in investing activities (1,449) (1,521)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 11,200 18,041
Payments on long-term debt (12,557) (13,741)
Proceeds from issuance of stock under stock option plan 185 190
Dividends paid (397) (408)
------------- -------------
Net cash (used in) provided by financing activities (1,569) 4,082
------------- -------------
Effect of exchange rate changes on cash (26) 12
(Decrease) increase in cash and cash equivalents (2,186) 1,337
Cash and cash equivalents at beginning of period 2,255 2,960
------------- -------------
Cash and cash equivalents at end of period $ 69 $ 4,297
============= =============
Supplemental Information:
Interest payments $ 1,611 $ 1,365
Income tax payments $ 549 $ 94
Non cash investing activities:
Exchange of note receivable for equity interest $ -- $ 3,170
</TABLE>
- ----------
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
UNAUDITED
(In Thousands of Dollars Except Share Data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS COMMON STOCK TREASURY STOCK ADDITIONAL
------------------------------ ----------------------------- PAID-IN
ENDED JUNE 27, 1999 SHARES AMOUNT SHARES AMOUNT CAPITAL
- --------------------------- ----------- ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1999 6,653,855 $ 67 (546,213) $ (9,064) $ 77,246
Net Income -- -- -- -- --
Other comprehensive income:
Currency translation adjustment
(net of taxes of $172) -- -- -- -- --
Unrealized investment holding
gain (net of taxes of $1) -- -- -- -- --
Cash dividends
($.026 per share) -- -- -- -- --
Issuance of stock under
stock option plan 20,000 -- -- -- 149
Issuance of stock under
bonus plan 4,542 -- (181) (5) 88
--------- --------- --------- --------- ---------
Balance, June 27, 1999 6,678,397 $ 67 (546,394) $ (9,069) $ 77,483
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
FOR THE THREE MONTHS OTHER TOTAL
RETAINED COMPREHENSIVE UNEARNED COMPREHENSIVE
ENDED JUNE 27, 1999 EARNINGS LOSS COMPENSATION INCOME
- --------------------------- ------------ ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Balance, March 31, 1999 $ 58,721 $ (3,021) $ (239) $ 13,283
=========
Net Income 2,158 -- -- $ 2,158
Other comprehensive income:
Currency translation adjustment
(net of taxes of $172) -- (258) -- (258)
Unrealized investment holding
gain (net of taxes of $1) -- 2 -- 2
Cash dividends
($.026 per share) (397) -- --
Issuance of stock under
stock option plan -- -- --
Issuance of stock under
bonus plan -- -- (56)
--------- --------- --------- ---------
Balance, June 27, 1999 $ 60,482 $ (3,277) $ (295) $ 1,902
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(In Thousands of Dollars)
NOTE 1. Earnings Per Share:
Basic earnings per share is computed by dividing net income by the
weighted-average number of shares outstanding. Diluted earnings per
share is computed by dividing net income by the sum of the
weighted-average number of shares outstanding plus the dilutive effect
of shares issuable through the exercise of stock options.
The components of the denominator for basic earnings per share and
diluted earnings per share are reconciled as follows: (in thousands)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------
June 27, 1999 June 28, 1998
---------------------- ----------------------
<S> <C> <C>
Basic Earnings per Share:
Weighted average common
shares outstanding 6,124 6,285
====================== ======================
Diluted Earnings per Share:
Weighted average common
shares outstanding 6,124 6,285
Stock Options 34 154
---------------------- ----------------------
Denominator for diluted
Earnings per Share 6,158 6,439
====================== ======================
</TABLE>
7
<PAGE> 9
NOTE 2. Comprehensive Income
For the three month periods ended June 27, 1999 and June 28, 1998,
other comprehensive income is comprised of foreign currency
translation adjustments and unrealized holding gains/(losses) on
marketable securities. Comprehensive income is summarized below:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------
June 27, 1999 June 28, 1998
------------------- ------------------
<S> <C> <C>
Net income $ 2,158 $ 3,202
Other comprehensive income (loss)
net of tax:
Foreign currency translation
adjustment (258) 58
Unrealized investment holding
gain 2 21
------------------- ------------------
Total comprehensive income $ 1,902 $ 3,281
=================== ==================
</TABLE>
NOTE 3. Inventories:
Inventories are summarized as follows:
<TABLE>
<CAPTION>
June 27, 1999 March 31, 1999
------------------ --------------------
<S> <C> <C>
Finished goods $ 22,067 $ 23,592
Work-in-process 11,942 11,403
Purchased and
manufactured parts 21,946 23,673
------------------ --------------------
Total inventories $ 55,955 $ 58,668
================== ====================
</TABLE>
8
<PAGE> 10
NOTE 4. Long-Term Debt Payable to Banks and Others
Long-term debt payable, including current maturities, consisted of the
following:
<TABLE>
<CAPTION>
June 27, 1999 March 31, 1999
------------- --------------
<S> <C> <C> <C>
Credit agreement - 6.12% $ -- $101,440
Credit agreement - 7.75% 4,300 400
Credit agreement - 6.13% 95,520 --
Other 655 669
------------- --------------
100,475 102,509
Less current maturities 46 46
------------- --------------
Total $100,429 $102,463
============= ==============
</TABLE>
Credit Agreement
On June 27, 1999 the Company's debt consisted of $100.5 million of
borrowings of which $99.8 million was due under the Company's revolving
credit line (the "Revolver") and $0.7 million were other borrowings.
The Company has a credit facility in place with a group of lenders
providing for a revolving credit line of $145 million which includes up
to $25.0 million for international borrowings in Deutsche marks and
Pounds sterling, and up to $5.0 million for letters of credit. The
other borrowings of $0.7 million consist of a collateralized borrowing
arrangement with a fixed interest rate of 3% due December 2004, and
loans on life insurance policies owned by the Company with a fixed
interest rate of 5%.
As of June 27, 1999, the Company had domestic borrowings of $79.3
million, international borrowings of $20.5 million, and letters of
credit of $0.1 million under the Revolver. Interest on the Revolver is
tied to the primary bank's prime rate, or at the Company's option, the
London Interbank Offered Rate ("LIBOR"), plus a margin that varies
depending upon the Company's achievement of certain operating results.
As of June 27, 1999, $95.5 million of the Company's outstanding
borrowings utilized LIBOR of which $7.4 million and $13.1 million were
payable in Deutsche marks and Pounds sterling, respectively.
The credit facility requires the Company to maintain interest rate
protection on a minimum of $50.0 million of its variable rate debt. The
company has obtained this protection by means of interest rate swap
agreements which have effectively fixed the rate of interest on $50.0
million of debt at a base rate of 5.48% until May 4, 2002. The credit
agreement also limits the Company's ability to pay dividends to 25%
of net income and restricts capital expenditures to a range of $11.8
and $15.8 million annually, and contains other customary financial
covenants.
The Company has announced two acquisitions which are more fully
discussed under the heading of Subsequent Events (Note 6). One of these
acquisitions has since been completed and has been funded from the
current credit facility. The other acquisition will require a new
credit facility that will be comprised of $250 million of Senior Debt
(Revolver of $200 million and a Term Loan of $50 million) plus a $75
million Bridge Loan. The new agreement is expected to be with
substantially the same group of lenders plus others, but is expected to
have more financial covenants and higher effective interest rates. The
Bridge Loan financing is intended to be short term and is expected to
be replaced with long term subordinated debt as soon as practicable
after the closing of the acquisition.
NOTE 5. New Accounting Pronouncements Not Yet Adopted
In June 1998, Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued and is effective for the Company for its fiscal year ending
March 31, 2002. SFAS No. 133 requires that all derivative instruments
be measured at fair value and recognized in the balance sheet as either
assets or liabilities. The Company is currently evaluating the impact
this pronouncement will have on its consolidated financial statements.
9
<PAGE> 11
NOTE 6. Subsequent Events
On July 13, 1999, the Company announced that it had signed a definitive
agreement to purchase the Engineered Fasteners business unit from Eaton
Corporation for a price of $173 million. The Engineered Fasteners
division had sales of $94 million in calendar year 1998 and had 650
employees at its three manufacturing facilities, two of which are in
Ohio and one of which is in Ontario, Canada. The acquisition will
include the product brand name "Tinnerman" and will expand the
Company's product lines for fastening products designed for the
automotive, business equipment, consumer electronics, and home
appliance markets. The acquisition is subject to regulatory approval
and financing arrangements which are currently underway. The
acquisition agreement includes a letter of credit commitment for $4.0
million, which the Company has complied with, as a requirement prior to
closing.
On July 19, 1999, the Company acquired Ellison Holdings, PLC
("Ellison") as previously announced for a purchase price of $15 million
plus other contingent consideration. Ellison has its headquarters in
Glusburn, West Yorkshire England where it employs 275 people and had
sales of $22 million for the fiscal year ended March 31, 1999. Ellison
manufactures retaining rings, and other products similar to the
Company's Anderton production facility which is located nearby in
Bingley, England. In order to eliminate duplicate operations, the
Company is planning to close its existing Anderton facility and move
its operations to the new Ellison facility. The merged company will
operate under the name TransTechnology (GB) Ltd. The Company expects
to incur closure costs for the Anderton facility which are estimated
to be within $3.0 and $4.0 million, to be recorded as a one time
charge in the three month period ending September 26, 1999.
NOTE 7. Disclosures about Segments and Related Information
<TABLE>
<CAPTION>
Three Months Ended Net Change
------------------------------------ ----------------------------
June 27, 1999 June 28, 1998 $ %
-------------- ------------- ---------- --------
<S> <C> <C> <C> <C>
Sales:
Specialty fastener products $ 41,184 $ 42,220 $ (1,036) (2)
Aerospace products 14,184 9,263 4,921 53
-------- -------- --------
Total $ 55,368 $ 51,483 $ 3,385 8
======== ======== ========
Operating profit:
Specialty fastener products $ 4,227 $ 6,879 $ (2,652) (39)
Aerospace products 3,223 2,389 834 35
-------- -------- --------
Total $ 7,450 $ 9,268 $ (1,818) (20)
Corporate expense (2,394) (2,635) 241 9
Corporate interest and
other income 171 100 71 71
Interest expense (1,630) (1,351) (279) (21)
-------- -------- --------
Income before income taxes $ 3,597 $ 5,382 $ (1,785) (33)
======== ======== ========
</TABLE>
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
All references to three-month periods in this Management's Discussion refer to
the three-month period ended June 27, 1999 for fiscal year 2000 and the
three-month period ended June 28, 1998 for fiscal year 1999. Also, when referred
to herein, operating profit means net sales less operating expenses, without
deduction for general corporate expenses, interest and income taxes.
Net sales for the three-month period in 2000 were $55.4 million, a $3.9 million
or 7.5% increase from the comparable period in 1999. Gross profit was $16.1
million for the three-month period in 2000, down $0.8 million or 4.6% from the
comparable period in 1999. Operating profit for the three-month period in 2000
was $7.5 million, a decrease of $1.8 million or 19.6% from the comparable period
in 1999. Changes in sales, operating profit and new orders from continuing
operations are discussed below by segment.
Net income for the three-month period in 2000 was $2.2 million or $.35 per
diluted share, compared to $3.2 million or $.50 per diluted share for the
comparable period in 1999. As further discussed below, the decreased earnings
performance in 2000 resulted primarily from the decreased sales and operating
profit in the Specialty Fastener Products segment, particularly in the segment's
international operations. Interest expense increased $0.3 million for the
three-month period in 2000, primarily as a result of increased bank debt
resulting from the Aerospace Rivet Manufacturers Corporation ("ARM") and NORCO,
Inc. ("NORCO") acquisitions last year. New orders received during the
three-month period in 2000 totaled $57.3 million, an increase of $6.7 million
or 13.3% from 1999's comparable period. At June 27, 1999, total backlog of
unfilled orders was $89.0 million compared to $74.9 million at June 28, 1998.
SPECIALTY FASTENER PRODUCTS SEGMENT
Sales for the Specialty Fastener products segment were $41.2 million for the
three-month period in 2000, a decrease of $1.0 million, or 2% from the same
period in 1999. The decrease was primarily due to economic weakness in European
markets which was partially offset by the inclusion of ARM's sales for the
period. ARM was purchased last year on June 29, 1998.
Operating profit for the three-month period in 2000 was $4.2 million, a decrease
of $2.7 million or 39% from the comparable period of 1999. The decrease was
primarily due to lower sales from our European and Brazilian operations which
reflected a slowdown of automotive demand. Reduced demand and operating profit
also occurred in the domestic retaining ring operations. The domestic retaining
ring operations were fully consolidated last year but continue to lag in the
level of new orders. Reduced demand in the domestic airframe construction
industry and competitive price pressures in general have also adversely affected
operating profit for the fastener segment.
11
<PAGE> 13
New orders for the three-month period in 2000 decreased $4.3 million or 10% from
the comparable period in 1999, reflecting the above market conditions. Backlog
of unfilled orders at June 27, 1999 was $42.8 million, compared to $46.1 million
at June 28, 1998.
Two new acquisitions in the Specialty Fastener Product line have been announced
and are discussed under the topic of Subsequent Events.
AEROSPACE PRODUCTS SEGMENT
Sales for the Aerospace products segment were $14.2 million for the three-month
period in 2000, an increase of $4.9 million or 53% from the comparable period in
1999. The increase was primarily due to the acquisition of NORCO, Inc. on July
28, 1998.
Operating profit for the three-month period in 2000 was $3.2 million, an
increase of $0.8 million or 35% from the comparable period in 1999. The primary
factors contributing to the increase in the segment's operating profit in the
2000 three-month period were the inclusion of NORCO operations, partially offset
by lower profit margins due to a heavier mix of rescue hoist cargo products
versus overhaul work and spares.
New orders increased for the three-month period in 2000 by $11.0 million or 196%
from the comparable period in 1999 mainly due to the inclusion of NORCO orders
as well as increased rescue hoist orders reflecting the timing and placement of
new orders, in particular one order for $3.4 million placed during the last week
of June. Backlog of unfilled orders at June 27, 1999 was $46.2 million, compared
to $28.8 million at June 28, 1998 mainly due to the inclusion of the NORCO
backlog as well as the increase in new orders this period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's debt-to-capitalization ratio was 44.5% as of June 27, 1999,
compared to 45.3% as of March 31, 1999. The current ratio at June 27, 1999, was
3.97 compared to 3.39 at March 31, 1999. Working Capital was $72.4 million at
June 27, 1999, up $1.3 million from March 31, 1999.
On June 27, 1999 the Company's debt consisted of $100.5 million of borrowings of
which $99.8 million was due under the Company's revolving credit line (the
"Revolver") and $0.7 million were other borrowings. The Company has a credit
facility in place with a group of lenders providing for a revolving credit line
of $145 million, which includes up to $25.0 million for international borrowings
in Deutsche marks and Pounds sterling, and up to $5.0 million for letters of
credit. The other borrowings of $0.7 million consist of a collateralized
borrowing arrangement with a fixed interest rate of 3% due December 2004, and
loans on life insurance policies owned by the Company with a fixed interest rate
of 5%.
As of June 27, 1999, the Company had domestic borrowings of $79.3 million,
international borrowings of $20.5 million, and letters of credit of $0.1 million
under the Revolver. Interest on the Revolver is tied to the primary bank's prime
rate, or at the Company's option, the London Interbank Offered Rate ("LIBOR"),
plus a margin that varies depending upon the Company's achievement of certain
operating results. As of June 27, 1999, $95.5 million of the Company's
outstanding
12
<PAGE> 14
borrowings utilized LIBOR of which $7.4 million and $13.1 million were payable
in Deutsche marks and Pounds sterling, respectively.
The credit facility requires the Company to maintain interest rate protection on
a minimum of $50.0 million of its variable rate debt. The company has obtained
this protection by means of interest rate swap agreements which have effectively
fixed the rate of interest on $50.0 million of debt at a base rate of 5.48%
until May 4, 2002. The credit agreement limits the Company's ability to pay
dividends to 25% of net income and restricts capital expenditures to a range
between $11.8 million and $15.8 million annually, and contains other customary
financial covenants.
The Company has announced two acquisitions which are more fully discussed under
the heading of Subsequent Events (Note 6). One of these acquisitions has been
completed and has been funded from the current credit facility. The other
acquisition will require a new credit facility that will be comprised of $250
million of Senior Debt (Revolver of $200 million and a Term Loan of $50
million) plus a $75 million Bridge Loan. The new agreement is expected to be
with substantially the same group of lenders plus others, but is expected to
have more financial covenants and higher effective interest rates. The Bridge
Loan financing is intended to be short term and is expected to be replaced with
long term subordinated debt as soon as practicable after the closing of the
acquisition. As a result of the new financing arrangements, the Company expects
to increase its debt-to-capitalization ratio from approximately 45% to
approximately 70% immediately after the acquisition, and expects to reduce this
ratio in subsequent periods by the generation of operating cash flow.
Management believes that the Company's anticipated cash flow from operations,
combined with the bank credit lines available, will be sufficient to support
working capital requirements, capital expenditures and dividend payments at
their current or expected levels for the next twelve months. Capital
expenditures in the three-month period in 2000 were $1.6 million as compared
with $1.8 million in the comparable period in 1999.
SUBSEQUENT EVENTS
On July 13, 1999, the Company announced that it had signed a definitive
agreement to purchase the Engineered Fasteners business unit from Eaton
Corporation for a purchase price of $173 million. The Engineered Fasteners
division had sales of $94 million in calendar year 1998 and had 650 employees
at its three manufacturing facilities, two of which are in Ohio and one of
which is in Ontario, Canada. The acquisition will include the product brand
name "Tinnerman" and will expand the Company's product lines for fastening
products designed for the automotive, business equipment, consumer electronics,
and home appliance markets. The acquisition is subject to regulatory approval
and financing arrangements which are currently underway. The acquisition
agreement includes a letter of credit commitment for $4.0 million, which the
Company has complied with, as a requirement prior to closing.
On July 19, 1999, the Company acquired Ellison Holdings, PLC ("Ellison") as
previously announced for a purchase price of $15 million plus other contingent
consideration. Ellison has its headquarters in Glusburn, West Yorkshire England
where it employs 275 people and had sales of $22 million for the fiscal year
ended March 31, 1999. Ellison manufactures retaining rings, and other products
similar to the Company's Anderton production facility which is located nearby in
Bingley,
13
<PAGE> 15
England. In order to eliminate duplicate operations, the Company is planning to
close its existing Anderton facility and move its operations to the new Ellison
facility. The merged company will operate under the name TransTechnology (GB)
Ltd. The Company expects to incur closure costs for the Anderton facility which
are estimated to be within $3.0 and $4.0 million, to be recorded as a one time
charge in the three month period ending September 26, 1999.
YEAR 2000 READINESS
The Company has been addressing the year 2000 issue since 1997 and has been
monitoring the progress made at each business unit. The year 2000 problem
relates to the method that computer programs use to specify a date. In order to
save space in computer data storage, many programs in the past have been written
with two digits for the year specification instead of four digits. The two-
digit date field can make it difficult for computer programs to distinguish
between years such as 1900 and 2000, and therefore can cause malfunctions in
computers. Such malfunctions could interfere with any date sensitive processes
which exist in most computer operations as well as any equipment which uses
semiconductor or "embedded" chip technology. Similar system malfunctions could
also occur at third party supplier locations and consequently create delivery
and service problems for the Company.
The Company has taken steps to have all of its computer systems and facilities
in compliance with the Year 2000 date requirement before that date is reached.
Thus far, the Company has reviewed its facilities and internal computer systems
at all locations for compliance and identified all critical systems in need of
correction. The correction and testing of all critical systems has progressed
substantially and is scheduled for completion by September 1999. The approximate
level of completion at each business unit presently varies between eighty and
ninety-five percent based on current information available. The Company
generally does not sell products that are year 2000 sensitive, however, it does
sell test equipment which is presently Year 2000 compliant, and is providing
retrofit compliant programs to customers with older equipment.
The Company has also taken steps to review Year 2000 compliance by its major
vendors and customers. Survey results have been received and are being reviewed
and updated on a continuing basis. Based on information received to date, there
are no expected interruptions from critical customers or vendors. The cost of
year 2000 compliance is expected to be $0.5 million of which $0.3 million has
already been incurred and $0.2 million is anticipated to be incurred during
fiscal year 2000. The total cost capitalized for Year 2000 compliance is
expected to be less than $0.1 million.
As a precaution against unforeseen Year 2000 problems, the Company has
considered contingency plans including alternative automated as well as manual
backup methods. Other contingency plans which the Company is considering include
the outsourcing and sharing of computer processing requirements. Based on the
present and contingent planning assessment, the Company believes that the
"worst-case" scenario for the Year 2000 problem is in the category of outside
third party services and supplies. Certain government and utility provided
services are not generally available from alternative sources. Should such
services become unavailable there would be a likelihood of manufacturing
interruptions and resulting adverse financial consequences to the Company.
14
<PAGE> 16
Based on the information obtained to date, the Company does not believe that
there will be any significant interruptions in systems that will adversely
affect the Company relative to the Year 2000 issue. The Company is not, however,
able to identify or control all external Year 2000 issues which may exist at
third-party levels or provide contingency plans for all possible future events.
Assessments of future events and other forward-looking assessments may be
adversely affected by subsequent findings and test results which could have a
material impact on the Company's financial condition and results of operations.
EURO CURRENCY
Effective January 1, 1999, eleven countries comprising the European Union
established fixed foreign currency exchange rates and adopted a common currency
unit designated as the "Euro". The Euro has since become publicly traded and may
be used in commerce during the transition period which is scheduled to end
January 1, 2002, at which time a Euro denominated currency is scheduled to be
issued and is intended to replace those currencies of the eleven member
countries. The transition to the Euro has not resulted in problems for the
Company to date, and is not expected to have any material adverse impact on the
Company's future operations.
15
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company enters into financial instruments to manage and reduce the impact of
changes in foreign currency exchange rates and interest rates. The counter
parties are major financial institutions.
The Company enters into forward exchange contracts principally to hedge the
currency fluctuations in transactions denominated in foreign currencies, thereby
limiting the Company's risk that would otherwise result from changes in exchange
rates. The principal transactions hedged are intercompany loans, intercompany
purchases and trade flows. Gains and losses on forward foreign exchange
contracts and the offsetting gains and losses on hedged transactions are
reflected in the Statement of Consolidated Operations.
At June 27, 1999, the Company had outstanding forward foreign exchange contracts
to purchase and sell $15.6 million of various currencies (principally Deutsche
marks and Pounds sterling). At June 27, 1999, if all forward contracts were
closed out, the Company would receive approximately $1.1 million (the difference
between the fair value of all outstanding contracts and the contract amounts). A
10% fluctuation in exchange rates for these currencies would change the fair
value by $1.2 million. However, since these contracts hedge foreign currency
denominated transactions, any change in the fair value of the contracts would be
offset by changes in the underlying value of the transaction being hedged.
The Company enters into interest rate swap agreements to manage its exposure to
interest rate changes. The swaps involve the exchange of fixed and variable
interest rate payments without exchanging the notional principal amount.
Payments or receipts on the swap agreements are recorded as adjustments to
interest expense. At June 27, 1999 the Company had entered into interest rate
swap agreements to convert $50.0 million of floating interest rate debt to fixed
rate. At June 27, 1999, the fair value of these swap agreements was
approximately $0.7 million.
16
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is engaged in various legal proceedings incidental to its
business. It is the opinion of management that, after taking into
consideration information furnished by its counsel, these matters will
not have a material effect on the Company's consolidated financial
position or the results of the Company's operations in future periods.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended June 27, 1999.
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 10, 1999 By: /s/ Joseph F. Spanier
-----------------------------------------
JOSEPH F. SPANIER, Vice President,
Treasurer and Chief Financial Officer*
* On behalf of the Registrant and as Principal Financial and Accounting Officer.
17
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