A decline in domestic sales caused Proliance International, Inc. to report dismal sales for the second quarter, which ended June 30.
The company, which manufactures and distributes aftermarket heat exchange and temperature control products, says that net sales for the second quarter of 2007 were $102.4 million, down 8.6 percent from $112.1 million in the second quarter of 2006. In the domestic segment, the company experienced a decline in sales of air conditioning products and radiators, primarily attributable to soft market conditions, fewer branch locations and lower sales to retailers. However, international sales increased by $1.8 million, or 7.3 percent, on a year-over-year basis, primarily due to the effect of changes in exchange rates.
The net loss for the three months ended June 30 was $6.2 million, or $0.48 per basic and diluted share, which included a charge of $3.2 million for the recently-disclosed arbitration earn-out decision, as well as $1.1 million in restructuring charges. This compares to net income of $1.0 million, or $0.07 per basic and diluted share, for the same period a year ago, which included $0.1 million in restructuring charges.
Gross margin, as a percentage of net sales, was 20.8 percent during the second quarter of 2007 versus 25.9 percent in the second quarter of 2006, reflecting the impact of higher commodity costs, competitive pricing pressure, the shift in the customer mix of sales away from the branch locations to wholesale customers and lower production levels due to the company's inventory reduction actions, as well as a slow start to the normal peak selling season.
Selling, general and administrative expenses decreased, as a percentage of net sales, to 19.4 percent from 21.7 percent in the second quarter of 2006. The $4.5 million reduction in expenses reflects lower administrative spending, as a result of cost reduction actions implemented during 2006 and the first half of 2007, as well as lower branch expenses due to the program initiated in the third quarter of 2006 to better align the company's 'go-to market' strategy with customer needs. Expense levels for the second quarter of 2007 were also lowered by a $0.8 million gain on the sale of a facility.
Earnings before interest, taxes, depreciation and amortization (EBITDA) less restructuring charges and the arbitration earn-out decision charge were $3.3 million and $6.2 million for the three months ended June 30, 2007 and 2006, respectively, and $1.9 million and $5.4 million for the six months ended June 30, 2007 and 2006, respectively. The measure above constitutes a non-GAAP financial measure 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 and six months ended June 30, 2007 and 2006.
Inventories at June 30, 2007 were $2.9 million lower than levels at December 31, 2006 and $17.7 million lower compared to June 30, 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.
In the second quarter of 2007, the company reported $1.1 million of restructuring costs compared to $0.1 million in the same period a year ago. The 2007 costs were associated with changes to the company's branch operating structure and headcount reductions in the United States and Mexico. Actions during the second quarter of 2007 resulted in the reduction of branch and agency locations from 90 at March 31, 2007 to 85 at June 30, 2007 and the establishment of supply agreements with distribution partners in certain areas. These activities are part of the previously announced $5.0 million to $7.0 million in total restructuring initiatives to be undertaken throughout 2007, of which $1.3 million has been incurred in the first six months of this year.
Proliance is currently finalizing and acting upon a broad range of strategic actions to properly size its operational and administrative structure going forward, which will be part of the restructuring charges outlined for the year. These include:
- Actions to change the company's 'go-to-market' strategy through its branch operations, which will further reduce branch operating costs while also enhancing the company's capability to effectively service its local customers both profitably and with high-quality customer service.
- Further rationalization of overhead structure in North America, including a reduction in the U.S. salaried workforce by approximately 15 percent.
- Additional actions to improve product configuration and construction, which will result in lower product cost, as well as continued excellent thermal performance and reliability.
- Further inventory reductions, which are expected to result in year-end levels of approximately $100 million.
Finally, the company has organized its North American business activities under the leadership of Bill Long, who is assuming the new role of executive vice president in charge of domestic business. This move will unify the product planning, marketing, sales and operating aspects of the company's domestic activities.
"While the steps we have taken over the past couple of years have significantly reduced our cost base, the market conditions we saw in the second quarter call for additional action, and, as an organization, we are committed to taking the necessary steps to improve our performance," says Charles E. Johnson, Proliance's president and CEO. "Accordingly, through recently announced strategic actions, we are accelerating opportunities to lower operating and unit costs and implementing additional changes to our 'go-to-market' strategy, which will enable us to achieve profitable performance on a more consistent basis, despite soft market conditions."
Johnson adds: "These activities, coupled with our strengthened organization through the addition of Arlen Henock, as our new CFO, and Bill Long, in his new role, are expected to position us for profitability before restructuring and debt extinguishment expenses for the second half of 2007 and improved financial performance in the coming years."
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