NEW HAVEN, Conn. -- Proliance International has announced results for the fourth quarter and year ended Dec. 31, 2007.
Charles Johnson, president and CEO of Proliance stated, “Despite a challenging market environment, Proliance delivered substantially improved operating results in the fourth quarter and second half of 2007, as the benefits of our cost reduction efforts significantly improved our gross margins and reduced our operating expenses. We achieved our previous guidance of profitability on a pre-tax basis before restructuring and debt extinguishment expenses for the second half of 2007. EBITDA before restructuring charges for the same period was over $13 million, an improvement of almost $15 million from year ago levels. We also achieved positive operating income before restructuring charges for the fourth quarter and full year ended Dec. 31, 2007.”
For the fourth quarter of 2007, net sales were $84.3 million, compared to $91.9 million in the fourth quarter of 2006. The company said this decline in sales primarily reflects lower sales of air conditioning and heat exchange products in the domestic market, mainly attributable to actions taken by Proliance to reduce the number of branch locations, as well as continued soft market conditions and customer inventory reduction actions.
International sales for the fourth quarter of 2007 increased by $3.1 million, or 13 percent, on a year-over-year basis, primarily due to higher marine sales, the strength in the heavy duty market and the effect of changes in currency exchange rates. Excluding the impact of changes in exchange rates, international sales increased by 3.4 percent.
Despite the decline in net sales, gross margin for the 2007 fourth quarter improved nearly 50 percent to $17.2 million, or 20.4 percent of net sales, compared to $11.4 million, or 12.4 percent of net sales, in the fourth quarter of 2006. This improvement reflects the benefits of the company’s restructuring and cost reduction programs, which more than offset margin pressure resulting from higher commodity costs, the competitive pricing environment, a shift in the customer sales mix away from branch locations to wholesale customers and one time adjustments in 2006 that lowered gross margin by $3.8 million.
Selling, general and administrative expenses in the 2007 fourth quarter declined 27.2 percent to $16.4 million, or 19.5 percent of net sales, from $22.6 million, or 24.6 percent of net sales, in the fourth quarter of last year, reflecting the steps the company has taken to lower administrative spending and a decline in branch expenses resulting from the reduction in branch locations on a year-over-year basis.
Including restructuring charges of $0.9 million, which were primarily related to branch closures, the company reported an operating loss in the 2007 fourth quarter of $0.2 million, compared with an operating loss of $12.8 million in the same period a year ago, which included restructuring charges of $1.6 million.
For the 2007 fourth quarter, Proliance reported a net loss of $4.4 million, or 28 cents per basic and diluted share, compared to a net loss of $15.3 million, or $1 per basic and diluted share, for the fourth quarter of 2006.
As previously announced, the company closed 37 branch locations during the fourth quarter of 2007 and has closed an additional 10 branch locations since the beginning of 2008. These actions are driving selling, general and administrative expenses lower and improving the company’s overall operating performance. Proliance currently operates 36 branch and agency locations, reduced from 94 at the beginning of 2007.
Earnings before interest, taxes, depreciation and amortization (EBITDA) excluding restructuring charges were $3.1 million and ($9.3) million for the three months ended Dec. 31, 2007 and 2006, respectively. This represents an EBITDA improvement of $12.4 million. For the 2007 full year period, EBITDA excluding restructuring charges and the previously announced arbitration earn-out decision charge incurred in the second quarter of 2007 was $15.2 million, compared to $4.2 million in 2006. For the second half of 2007, EBITDA excluding restructuring charges was $13.4 million, compared to ($1.2) million in 2006. The EBITDA and related measures above constitute “non-GAAP financial measures” as defined by the rules of the Securities and Exchange Commission. Proliance has provided the foregoing data as it believes that it provides the marketplace with additional information useful in evaluating the financial performance of the company during the three, six and 12 months ended Dec. 31, 2007 and 2006.
Inventories at Dec. 31, 2007 of $106.8 million were $4.4 million lower than levels at Sept. 30, 2007 of $111.2 million and $12.2 million lower than levels at Dec. 31, 2006, reflecting the company’s efforts to better manage its inventory levels through additional speed and supply flexibility, along with other ongoing inventory reduction efforts.
On Feb. 5, the company’s Southaven, Miss., distribution facility received damage from a series of severe storms and tornadoes. The Southaven facility was leased by Proliance and contained primarily automotive and light truck heat exchange p rod ucts. Approximately $25 million of heat exchange inventory was damaged and scrapped as a result of this event. The company’s other p rod uct lines and businesses continued to perform without interruption. On Feb.14, Proliance began shipping p rod uct from a temporary distribution facility in Southaven. Proliance’s insurance policy covers loss of property and business interruption coverage up to $80 million, which the company believes should provide more than sufficient coverage with respect to the damages arising from this event.
As previously announced, on March 12, due to the loss of the inventory collateral from the Southaven tornadoes, Proliance entered into an amendment to its loan agreement to enable the company to receive additional funds to operate the business and to rebuild or purchase inventory to fill customer orders. The amendment will require the company to incur additional interest expense, bank fees and debt extinguishment costs in 2008. On March 26, the company and its lender completed the terms of the warrants required to be issued under the amendment and also entered into a third amendment to the credit agreement that finalized the financial covenants for 2008. The company is filing a report today on Form 8-K with the Securities and Exchange Commission that will describe the warrants issued and the third amendment in greater detail. In addition, the company’s 2007 Annual Report on Form 10-K will also be filed later today.
As a result of the uncertainty concerning the company’s ability to satisfy a covenant in its credit agreement to reduce its over advance resulting from the Southaven casualty to zero by May 31, the company’s auditors, BDO Seidman, LLP, have included an explanatory paragraph in their audit opinion, which will be included in Proliance’s 2007 Annual Report on Form 10-K, concerning the company’s ability to continue as a going concern. The covenant in question requires the company to receive, from business operations, insurance proceeds and if necessary through new financing, sufficient funds to repay by May 31, the over advance caused by the Southaven incident. The company believes it can meet the requirements under this covenant but there is some risk that it may not be successful, in which case the company would be required to obtain appropriate waivers from its lender. While the company has been successful in gaining waivers in the past from its lender, there can be no assurance that the company will gain such waivers, on acceptable terms or at all, if they are needed in the future.
The company expects for the full year 2008, excluding one-time costs associated with the damage sustained at the Southaven distribution facility and the additional operating expenses associated with amendments of our credit facility, operating income in the range of $20 million.
