NEW HAVEN, CT -- Proliance International announced its results for the second quarter ended June 30.
Proliance reported net income for the second quarter of 2006 of $1.0 million, or $0.07 per basic and diluted share, compared to a net loss of $2.1 million, or $0.30 per basic and diluted share in the second quarter of 2005. Net sales in the second quarter of 2006 were $112.1 million, compared to $59.0 million in the second quarter of 2005, up 90.1 percent from last year, largely driven by Proliance's recent merger with the aftermarket business of Modine Manufacturing Company, as well as organic growth in some product lines. For the first six months of 2006, Proliance reported a loss from continuing operations of $4.0 million, or $0.27 per basic and diluted share, compared to a net loss from continuing operations of $4.4 million, or $0.62 per basic and diluted share in the first six months of 2005. The net income of $0.4 million or $0.05 per basic and diluted share in 2005 also included income from a discontinued operation of $0.8 million or $0.12 per basic and diluted share and gain on sale of discontinued operation of $3.9 million or $0.55 per basic and diluted share, associated with the sale of Proliance's Heavy Duty OEM business in March 2005.
Charles E. Johnson, president and CEO of Proliance stated, "Our results for the 2006 second quarter reflect improved performance against the challenging operating backdrop that we have described in previous periods. We have begun to see the impact of our merger-related cost improvement programs which are expected to produce savings, versus the pre-merger baseline, of a cumulative $37 million in 2006 and a cumulative $45-$48 million in 2007. These programs helped us achieve improved margins for the second quarter. In this context, we have completed most of the programs related to the merger synergies, and we have initiated additional activities related to rolling-out our product enhancement program, improving our 'go-to-market' costs and to re-tooling many of our copper/brass construction heat exchange products in plastic/aluminum construction. On balance, we are encouraged by our improvement, although our progress to date has been impacted significantly by the record increases in raw materials costs we have seen over the last 18 months, continued price pressure on heat exchange products and the impact of high fuel costs as they affect consumer behavior and driving habits.
Johnson continued, "The second quarter also saw us benefit from the business diversification resulting from our merger with Modine Aftermarket Holdings, as strong results within both our International businesses in Europe and Latin America, as well as improved performance within the Domestic Heavy Duty product line, helped offset the challenging conditions seen in the Domestic automotive and light truck heat exchange marketplace. More specifically, our European business benefited from the roll-out of new product introductions in its automotive heat exchange product line as well as growth in demand for its Heavy Duty and Marine related products. The Domestic Heavy Duty product line showed sales improvement driven by new product introductions over the last 18 months and continued strong demand for heavy truck and industrial heat exchange products. Our improved results were further supported by market actions to recover raw materials costs in every case possible. As we have said, we anticipate that all these favorable actions will come into play in our third quarter results; however, as we have said in the past, we continue to expect that raw materials costs will increase further as we move through the year."
Consolidated gross margin for the second quarter of 2006 was $29.0 million, or 25.9 percent of sales, versus a consolidated gross margin of $11.4 million, or 19.4 percent of sales, in the same period in 2005. The improvement in gross margin reflects purchasing and manufacturing cost savings initiatives executed in conjunction with the integration of Proliance's recent merger and cost reduction activities. Gross margin also benefited from an increase in branch sales added as result of the merger, which are at higher margins, but are somewhat offset by higher operating expenses. These factors were partially offset by the impact of rising raw material costs and continuing competitive pricing pressure on Proliance's domestic heat exchange product line.
Selling, general and administrative expenses totaled $24.4 million, or 21.7 percent of net sales, in the 2006 second quarter, compared to $10.9 million, or 18.4 percent of net sales, in the same period in 2005. The increase in expenses primarily reflects the addition of the Modine aftermarket branch outlets, which represent a higher percentage of branch expenses in this expense category than in Proliance's pre-merger history. Higher freight costs caused by the rising price of fuel also contributed to the year-over-year increase.
Proliance reported operating income for the second quarter of 2006 of $4.5 million, including $0.1 million in restructuring charges related to ongoing integration actions, which were part of the restructuring program announced by Proliance at the time of the merger. In the second quarter of 2005, Proliance reported an operating loss of $0.6 million, including $1.1 million in restructuring charges related to the relocation of inventory from Memphis, TN to Southaven, MS, associated with Proliance's new distribution facility at that site, as well as charges related to Proliance's closure of its aluminum heater manufacturing facility in Buffalo, New York and the relocation of production to its Nuevo Laredo, Mexico facility.
Johnson continued, "The late advent of summer weather conditions this year along with continued roll-through of higher raw materials costs, further restructuring activities and some concerns with underlying market strength, make us more cautious regarding the second half of 2006. As a result of these factors, as opposed to our prior expectation of break-even operation for the year, we expect to be profitable in the third quarter, followed by a loss in the fourth quarter as the highest impact of raw materials costs rolls through our results, prior to the favorable impact of the greater transition to aluminum heat exchanger construction taking hold in early 2007. Overall, we currently expect that our last three quarters will exhibit break-even operation or better, in total, on a net profit basis before restructuring costs. In the second half of 2006, we will continue to take additional cost reduction and integration actions to fully realize the opportunities available to us. In this context, we expect to spend at the high end of our previously discussed restructuring cost range, or around $14 million by the time all anticipated actions are completed. While these actions will have little favorable impact on 2006, they will accrue most favorably to 2007. Actions associated with these charges will be announced at the appropriate time."
Johnson concluded that given the difficult market conditions Proliance faced in late 2005 and 2006, the company is genuinely excited about prospects for the future.
”Our performance has begun to improve, and while the results of our efforts have not shown up as rapidly as we want, in the face of a tough market, the improvements are happening,” said Johnson. “This bodes well for 2007, and is a tribute to the great efforts of the Proliance Team."
