NEW HAVEN, CT -- Proliance International has announced profitable results for the third quarter ended Sept. 30.
The company reported income from continuing operations for the third quarter of 2006 of $1.3 million, or 8 cents per basic and diluted share, compared to a loss from continuing operations in the third quarter of 2005 of $9.9 million, or 75 cents per basic and diluted share. This improvement from a year ago is a result of both actions taken under the company’s previously announced synergy and cost reduction programs and the impact in the third quarter of 2005 of purchase accounting adjustments, which were largely related to the merger transaction that combined Transpro, Inc. and Modine Aftermarket Holdings, Inc. to form Proliance International, Inc. in July 2005.
Net sales in the third quarter of 2006 were $120.7 million, compared to $102 million in the third quarter of 2005, up 18.4 percent from last year, driven by the company’s merger transaction, as well as organic growth in some product lines.
The company said 2006 third quarter and nine month results include sales by businesses acquired from Modine for the entire quarter and nine months, while last year’s results include them only from the date of acquisition, July 22, 2005. In addition, the 2005 results included only slightly more than one month of the European operations because the company reports the European business acquired from Modine on a one-month lag. On a pro forma basis, assuming the Modine Aftermarket operations had merged earlier so that a full quarter of operating results were included, dollar sales for the third quarter of 2005 would have been slightly higher than the sales in 2006, although unit sales increased overall. The loss from continuing operations in the third quarter of 2005 of $9.9 million would not have changed significantly on a pro forma basis; thus, indicating a significant year-over-year improvement in results as discussed in more detail below.
The company reported net income for the third quarter of 2006 of $1.3 million, or 8 cents per basic and diluted share, compared to net income of $3.3 million, or 25 cents per basic and diluted share, in the third quarter of 2005, which included recognition during 2005 of extraordinary income associated with negative goodwill arising from the aforementioned merger of $13.2 million, or $1 per basic and diluted share. Also, the average number of outstanding shares was lower for the three and nine months of 2005 because they do not include, for the full periods, the number of shares issued on July 22, 2005 in connection with the merger transaction.
For the first nine months of 2006, the company reported a loss from continuing operations and a net loss of $2.8 million, or $0.18 per basic and diluted share, compared to a loss from continuing operations of $14.2 million, or $1.55 per basic and diluted share in the comparable period of 2005. The net income of $3.7 million, or 40 cents per basic and diluted share, in the first nine months of 2005 included income from a discontinued operation of $0.8 million, or 9 cents per basic and diluted share, a gain on sale of discontinued operation associated with the sale of the company’s Heavy Duty OEM business in March 2005 of $3.9 million, or 42 cents per basic and diluted share, and recognition of the extraordinary income attributable to negative goodwill arising from the merger of $13.2 million, or $1.44 per basic and diluted share.
In addition to operating issues, two other factors impacted the quarter. First, the company had placed its idle Emporia, KS, manufacturing facility on the market for sale and had anticipated closing the sale in the third quarter of 2006. The proposed transaction did not close, and the company is now pursuing new purchasers. Second, interest costs were higher by approximately $1.5 million in the third quarter of 2006, compared to 2005, reflecting higher interest rates, higher debt levels and increased usage of customer sponsored payment programs. As noted above, the company is taking action to bring its inventories in line with demand, thereby reducing debt.
Consolidated gross margin for the third quarter of 2006 was $30.4 million, or 25.2 percent of sales, versus a consolidated gross margin of $15.1 million, or 14.8 percent of sales, in the same period in 2005. The improvement in gross margin primarily reflects purchasing and manufacturing cost savings initiatives executed in conjunction with the integration of the company’s aforementioned merger and additional cost reduction activities. These factors were partially offset by the impact of rising raw material costs, continuing competitive pricing pressures and a shift in sales toward the wholesale channel, as previously discussed. In the third quarter of 2005, gross margin was lowered by a $1.1 million write-off of a portion of the fair market value adjustment of inventory, which was recorded as part of purchase accounting with respect to the Modine Aftermarket merger. Third quarter 2005 gross margin was also reduced by $0.5 million as a result of restructuring costs associated with the write-down of inventory to net realizable value, by $2.6 million due to unabsorbed overhead from production cutbacks at our Nuevo Laredo facility and by $0.9 million of higher cost inventory acquired in the merger.
Selling, general and administrative expenses totaled $23.9 million, or 19.8 percent of net sales, in the 2006 third quarter, compared to $21.0 million, or 20.6 percent of net sales, in the same period in 2005. The decrease in expenses, as a percentage of sales, reflects initiatives executed in conjunction with the integration of the company’s merger and cost reduction activities. It is important to note that the total expense dollars increased, year-over-year, as a result of the Modine aftermarket branch outlets added by the merger.
The company reported operating income from continuing operations for the third quarter of 2006 of $5.6 million, including $0.8 million in restructuring charges related to ongoing integration actions, which were part of the restructuring program announced by the company in connection with the merger. In the third quarter of 2005, the company reported an operating loss from continuing operations of $7.5 million, including $1.5 million in restructuring charges due to the company’s closure of its aluminum heater manufacturing facility in Buffalo, New York and the relocation of these activities to an existing facility in Nuevo Laredo, Mexico and $0.5 million of non-cash restructuring charges, reported in cost of sales, associated with the write-down of inventory to its net realizable value.
With regard to further anticipated actions to reduce cost and improve Proliance’s “go-to-market” model, the company recently initiated actions related to its branch locations, which resulted in consolidation or closure of some locations, addition of new locations and expansion of relationships, in some regions, with distribution partners. As a result of these actions, the company has announced a net reduction of 22 locations from the prior branch count of 123 and anticipates a related 2007 improvement in the company’s operating performance. The company will continue to evaluate opportunities for reduction of costs to manufacture and distribute its products, as well as opportunities to reduce overhead relative to sales.
The company previously disclosed that it would utilize all of the $14 million in restructuring costs announced at the time of the merger. To date, the company has incurred or announced actions, which support $12 million of this total, with $2 million more to be incurred in activities already announced. It is expected that additional cost improvement opportunities being considered could add approximately $2 to $3 million to the previous $14 million total, which may be reflected in the results of the fourth quarter of 2006, dependent on completion of planning activities, but for which the benefits will not be substantially realized until 2007.
The fourth quarter outlook currently anticipates a greater net loss from continuing operations before restructuring charges than previously expected, but anticipates some improvement over the same quarter in 2005. As noted, the maximum impact in 2006 of the steep rise in commodity costs will occur in the fourth quarter, as will the period charges of unabsorbed overhead attributable to the inventory reduction program. The benefits of conversion to aluminum products, realignment of the branch distribution network, the cumulative impact of synergy savings and other cost and expense reduction initiatives will be realized in 2007. The sales market shift toward wholesale customers at lower average selling prices and related gross margins will be a continuing factor in the fourth quarter; however, we anticipate that this mix will become more favorable as we move into 2007 based on continued improvement in our overall “go-to-market” model and various new marketing initiatives. Higher interest costs for the reasons already mentioned will also adversely impact the fourth quarter.
Commenting on the results, Charles Johnson, president and chief executive officer of Proliance, said, “Clearly, we were happy to report a profit for the third quarter; however, our objective was to do even better. Although Proliance has faced a number of challenges in 2006, some of which have been unprecedented for our industry, we believe we are taking the right actions to posture the company for success as market conditions improve. During the quarter, we have consistently worked to improve our strategic positioning, including the closing in October 2006 on the first phase of our agreement to purchase the Standard Motor Products heater business. As a result of the actions we are taking, we will be better postured for improved margins and profitability in 2007, and we are encouraged by the improvements we have made. Everyone on the Proliance Team has made a significant contribution to this progress, and we thank them for their dedication to our ultimate success.”
