UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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 1-13894
TRANSPRO, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1807383
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 Gando Drive, New Haven, Connecticut 06513
(Address of principal executive offices, including zip code)
(203) 401-6450
(Registrant's telephone number, including area code)
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 [ ]
The number of shares of common stock, $.01 par value, outstanding as of
November 7, 2001 was 6,608,610.
Exhibit Index is on page 15 of this report.
Page 1 of 16
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2001 and 2000 3
Condensed Consolidated Statements of Comprehensive
(Loss) Income for the Three and Nine Months Ended 4
September 30, 2001 and 2000
Condensed Consolidated Balance Sheets at September 30,
2001 and December 31, 2000 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market 15
Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSPRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales $ 57,224 $ 53,625 $ 158,089 $ 155,894
Cost of sales 42,303 41,562 125,566 120,305
--------- --------- --------- ---------
Gross margin 14,921 12,063 32,523 35,589
Selling, general and administrative expenses 12,586 12,764 37,209 35,827
Restructuring and other special charges 2,926 425 2,926 1,220
--------- --------- --------- ---------
Loss from continuing operations before interest, taxes
and extraordinary item (591) (1,126) (7,612) (1,458)
Interest expense, net 1,261 1,071 3,655 3,500
--------- --------- --------- ---------
Loss from continuing operations before taxes and
extraordinary item (1,852) (2,197) (11,267) (4,958)
Income tax benefit (821) (577) (4,179) (1,700)
--------- --------- --------- ---------
Loss from continuing operations before extraordinary
item (1,031) (1,620) (7,088) (3,258)
Income from discontinued operation, net of taxes -- -- -- 440
Gain on sale of discontinued operation, including
income from operations during phase-out period, net
of taxes -- 187 -- 6,189
--------- --------- --------- ---------
(Loss) income before extraordinary item (1,031) (1,433) (7,088) 3,371
Loss on debt extinguishment, net of taxes -- -- (380) --
--------- --------- --------- ---------
Net (loss) income $ (1,031) $ (1,433) $ (7,468) $ 3,371
========= ========= ========= =========
Basic (loss) earnings per common share:
Continuing operations $ (0.16) $ (0.25) $ ( 1.09) $ (0.50)
Discontinued operation -- -- -- 0.07
Gain on sale of discontinued operation -- 0.03 -- 0.94
Loss on debt extinguishment -- -- (0.06) --
--------- --------- --------- ---------
Net (loss) earnings per common share $ (0.16) $ (0.22) $ (1.15) $ 0.51
========= ========= ========= =========
Diluted (loss) earnings per common share:
Continuing operations $ (0.16) $ (0.25) $ (1.09) $ (0.50)
Discontinued operation -- -- -- 0.07
Gain on sale of discontinued operation -- 0.03 -- 0.94
Loss on debt extinguishment -- -- (0.06) --
--------- --------- --------- ---------
Net (loss) earnings per common share $ (0.16) $ (0.22) $ (1.15) $ 0.51
========= ========= ========= =========
Weighted average common shares - basic 6,609 6,575 6,593 6,574
========= ========= ========= =========
Weighted average common shares and equivalents
-diluted 6,609 6,575 6,593 6,574
========= ========= ========= =========
Cash dividends per common share $ -- $ -- $ -- $ 0.10
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
3
TRANSPRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------- ------- ------- -------
Net (loss) income $(1,031) $(1,433) $(7,468) $ 3,371
Other comprehensive income, net of
tax:
Foreign currency translation -- -- -- 12
Minimum pension liability -- -- -- (645)
------- ------- ------- -------
Comprehensive (loss) income $(1,031) $(1,433) $(7,468) $ 2,738
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
4
TRANSPRO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) SEPTEMBER 30, DECEMBER 31,
ASSETS 2001 2000
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents $ -- $ 172
Accounts receivable (less allowances of $3,034 and $2,698) 39,413 34,154
Inventories, net:
Raw materials 16,021 21,350
Work in process 2,340 2,391
Finished goods 40,391 51,545
--------- ---------
Total inventories 58,752 75,286
--------- ---------
Deferred income tax benefit 12,161 5,703
Other current assets 1,456 4,890
--------- ---------
Total current assets 111,782 120,205
--------- ---------
Property, plant and equipment 81,244 80,567
Accumulated depreciation and amortization (56,098) (53,856)
--------- ---------
Net property, plant and equipment 25,146 26,711
--------- ---------
Goodwill (net of amortization of $806 and $1,130) 4,741 6,869
Other assets 2,341 2,478
--------- ---------
Total assets $ 144,010 $ 156,263
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit debt and current portion of long-term debt $ 35,077 $ 39,680
Accounts payable 15,415 21,972
Accrued expenses 8,746 6,904
Accrued insurance 2,364 2,446
Accrued salaries and wages 4,408 2,910
Accrued taxes 1,431 1,142
--------- ---------
Total current liabilities 67,441 75,054
Long-term liabilities:
Long-term debt, net of current portion 7,869 4,658
Retirement and post-retirement obligations 3,218 3,867
Deferred income taxes 1,398 926
Other liabilities 146 281
--------- ---------
Total liabilities Commitments and contingent liabilities 80,072 84,786
--------- ---------
Stockholders' equity:
Preferred stock, $0.01 par value: authorized 2,500,000 shares;
Issued and outstanding as follows:
Series A junior participating preferred stock, $0.01 par value
Authorized: 200,000 shares; issued and outstanding:
none at September 30, 2001 and December 31, 2000 -- --
Series B convertible preferred stock, $0.01 par value
Authorized: 30,000 shares; issued and outstanding:
30,000 shares at September 30, 2001 and December 31,
2000; (liquidation preference $3,000 at September 30,
2001 and December 31, 2000) -- --
Common stock, $0.01 par value: authorized 17,500,000 shares:
6,650,546 shares issued at September 30, 2001 and 6,662,446
at December 31, 2000; 6,608,610 shares outstanding at September 30, 2001
and 6,590,335 at December 31, 2000 66 66
Paid-in capital 55,029 55,019
Unearned compensation -- (21)
Retained earnings 9,143 16,724
Accumulated other comprehensive loss (285) (285)
Treasury stock, at cost:
41,936 shares at September 30, 2001 and 72,111 at December 31, 2000 (15) (26)
--------- ---------
Total stockholders' equity 63,938 71,477
--------- ---------
Total liabilities and stockholders' equity $ 144,010 $ 156,263
========= =========
The accompanying notes are an integral part of these statements.
5
TRANSPRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) NINE MONTHS ENDED
(in thousands) SEPTEMBER 30,
----------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net (loss) income $ (7,468) $ 3,371
Adjustments to reconcile net (loss) income to cash
(used in) provided by operating activities:
Restructuring and other special charges 2,926 1,220
Loss on extinguishment of debt 380 --
Gain on sale of discontinued operation -- (6,189)
Income from discontinued operation -- (440)
Depreciation and amortization 4,172 4,416
Deferred income taxes (5,837) 261
Provision for losses - accounts receivable 898 288
Changes in operating assets and liabilities:
Accounts receivable (6,157) (3,976)
Inventories 16,534 (8,963)
Accounts payable (6,557) 6,921
Accrued expenses 2,470 (4,215)
Net assets held for disposition -- (37)
Other 2,882 (1,665)
-------- --------
Net cash provided by (used in) operating activities 4,243 (9,008)
-------- --------
Cash flows from investing activities:
Net proceeds from sale of discontinued operation -- 26,772
Capital expenditures, net of retirements (2,091) (3,653)
-------- --------
Net cash (used in) provided by investing activities (2,091) 23,119
-------- --------
Cash flows from financing activities:
Dividends paid (113) (760)
Net borrowings under revolving credit facility 34,811 --
Repayments under term loan (570) --
Borrowings under term loan 4,490 --
Net repayments of previous revolving credit arrangement (40,042) (13,374)
Deferred debt costs (900) --
-------- --------
Net cash used in financing activities (2,324) (14,134)
-------- --------
Decrease in cash and cash equivalents (172) (23)
Cash and cash equivalents:
Beginning of period 172 222
-------- --------
End of period $ -- $ 199
======== ========
The accompanying notes are an integral part of these statements.
6
TRANSPRO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial information should be read in
conjunction with the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000 including the financial statements and notes thereto
included therein.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
which are of a normal recurring nature, considered necessary for a fair
presentation of consolidated financial position, consolidated results of
operations and consolidated cash flows have been included in the accompanying
unaudited condensed consolidated financial statements.
NOTE 2 - RESTRUCTURING AND OTHER SPECIAL CHARGES
During the third quarter of 2001, the Company implemented a
restructuring program designed around its business initiatives to improve
operating performance. The program, which is expected to continue into 2002,
includes the redesign of our distribution system, headcount reductions, the
transfer of production between manufacturing facilities and a reevaluation of
our product offerings.
As a part of this program, the Company recorded restructuring and other
special charges of $2.9 million during the third quarter of 2001. A summary of
this charge is as follows:
(in thousands) BALANCE REMAINING AT
CHARGE TO OPERATIONS CASH PAYMENTS NON-CASH CHARGES SEPTEMBER 30, 2001
-------------------- ------------- ---------------- ------------------
Workforce related $ 784 $273 $ -- $511
Facility consolidations 312 77 -- 235
Impairment of goodwill 1,830 -- 1,830 --
------ ---- ------ ----
Total $2,926 $350 $1,830 $746
====== ==== ====== ====
The workforce-related charge reflects the elimination of 28 salaried
and hourly positions within the OEM and aftermarket segments during the quarter.
Cash payments are expected to continue through the end of 2002.
The $312 thousand facility consolidation charge represents inventory
and machinery movement, lease termination and facility exit expenses associated
with the transfer of several product lines between OEM segment manufacturing
locations and the closure of five Aftermarket segment branch facilities as part
of the redesign of the Company's distribution system. Cash payments are expected
to continue into 2002.
Due to changes in product demand, the Company has decided to exit its
copper-brass condenser product line and close a California manufacturing plant,
resulting in the impairment of $1.8 million of goodwill recorded as part of the
Rahn Industries acquisition in 1996. The write-off is the result of a
7
determination that the present value of estimated future cash flows is less than
the carrying amount of the goodwill.
During the first quarter of 2000, the Company recorded $795 thousand in
closure costs related to actions taken in the Aftermarket segment to close a
regional radiator manufacturing facility and to consolidate one distribution
facility into another existing location. A summary of the closure costs is as
follows:
(Amounts in thousands)
AMOUNTS PAID AND AMOUNTS
REVERSED THROUGH PAID BALANCE REMAINING AT
CHARGE TO OPERATIONS DECEMBER 31, 2000 DURING 2001 SEPTEMBER 30, 2001
-------------------- ----------------- ----------- ------------------
Workforce related $222 $222 $ -- $--
Facility consolidations 542 491 51 --
Asset write down 31 31 -- --
---- ---- ---- ---
Total $795 $744 $ 51 $--
==== ==== ==== ===
NOTE 3 - BORROWING AGREEMENT
For the period April 30, 2001 through June 30, 2001, the Company was in
default of the net worth covenant contained in its loan agreement with Congress
Financial Corporation ("Congress"). Congress has waived the default by executing
the first amendment to the loan agreement. The amendment provides that effective
July 1, 2001, borrowings will bear interest at either 1.5% above the prime rate
or 4% in excess of the Eurodollar rate, at the Company's option.
On July 30, 2001, the Company entered into a second amendment to the
loan agreement. The amendment provides for a lower net worth covenant threshold
for periods ending after July 30, 2001.
NOTE 4 - STOCK OPTION TENDER OFFER
On July 5, 2001, the Company commenced a tender offer for all
outstanding options under the 1995 Stock Plan having an exercise price in excess
of $4.00 per share. Under the terms of the offer, tendered options would be
cancelled and exchanged for new options to be granted on or about the first
business day which is six months and one day after the option cancellation date.
The number of options to be granted would be equal to one half of the tendered
options for those grants with an exercise price between $4.00 and $6.00 and one
third of the tendered options for those grants greater than $6.00. The tender
offer expired on August 2, 2001. Of the options to purchase 116,576 shares
available to be tendered, options to purchase 69,176 shares were tendered and
have been cancelled. Options which were not tendered continue with their
original terms and conditions. The Company's Chief Executive Officer and Chief
Financial Officer did not have outstanding options eligible for the tender
offer. In addition, the Directors Stock Option Plan was not included in the
tender offer.
NOTE 5 - RELATED PARTY TRANSACTION
During the second quarter of 2001, the Board of Directors authorized
the issuance of 30,175 shares of treasury stock and the payment of $96,565 to
the Chairman of the Board as compensation for serving as interim President of
the Company.
8
NOTE 6 - (LOSS) INCOME PER SHARE
The following table sets forth the computation of basic and diluted
(loss) income per share:
(in thousands, except per share data) THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2001 2000 2001 2000
------- ------- ------- -------
Numerator:
Loss from continuing operations $(1,031) $(1,620) $(7,088) $(3,258)
Less: preferred stock dividend (37) (30) (113) (72)
------- ------- ------- -------
Loss from continuing operations attributable to common
stockholders - basic and diluted (1,068) (1,650) (7,201) (3,330)
Income from discontinued operation, net of tax -- -- -- 440
Gain on sale of discontinued operation, net of tax -- 187 -- 6,189
Loss on debt extinguishment, net of tax -- -- (380) --
------- ------- ------- -------
Net (loss) income (attributable) available to common
stockholders - basic and diluted $(1,068) $(1,463) $(7,581) $ 3,299
======= ======= ======= =======
Denominator:
Weighted average common shares 6,609 6,597 6,593 6,597
Non-vested restricted stock -- (22) -- (23)
------- ------- ------- -------
Adjusted weighted average common shares - basic and
diluted 6,609 6,575 6,593 6,574
======= ======= ======= =======
Basic and diluted (loss) income per common share:
Continuing operations $ (0.16) $ (0.25) $ (1.09) $ (0.50)
Discontinued operation -- -- -- 0.07
Gain on sale of discontinued operation -- 0.03 -- 0.94
Loss on debt extinguishment -- -- (0.06) --
------- ------- ------- -------
Net (loss) income per common share $ (0.16) $ (0.22) $ (1.15) $ 0.51
======= ======= ======= =======
The weighted average basic common shares outstanding was used in the
calculation of the diluted loss per common share for the three and nine months
ended September 30, 2001 and 2000 as the use of weighted average diluted common
shares outstanding would have an anti-dilutive effect on loss per share from
continuing operations for the periods.
Certain options to purchase common stock were outstanding during the
three and nine months ended September 30, 2001 and 2000, but were not included
in the computation of diluted loss per share because their exercise prices were
greater than the average market price of common shares for the period. The
anti-dilutive options outstanding and their exercise prices are as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
Options outstanding 81,300 500,304 81,300 500,304
Range of exercise prices $5.50 - $11.75 $5.50 - $11.75 $5.50 - $11.75 $5.50 - $11.75
NOTE 7 - SERIES B CONVERTIBLE PREFERRED STOCK
In connection with the acquisition of Evap, Inc., the Company issued
30,000 shares of TransPro, Inc. Series B Convertible Preferred Stock (the
"Series B Preferred Stock"). The purchase agreement
9
provides for a potential additional payout for the Evap acquisition based on the
earnings performance of the business for the period January 1, 1999 through
December 31, 2000 that would take the form of an increase in the liquidation
preference of the Series B Preferred Stock. The holder of the Series B Preferred
Stock has disputed the calculation of the payout amount and, the Company is
attempting to resolve the differences in accordance with the provisions of the
Evap stock purchase agreement.
NOTE 8 - SEGMENT AND BUSINESS INFORMATION
The table below sets forth information about reported segments:
(in thousands) THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Trade Sales:
Aftermarket heating and cooling systems $ 49,596 $ 45,237 $ 135,348 $ 126,089
OEM heat transfer systems 7,628 8,388 22,741 29,805
Inter-segment Sales:
Aftermarket heating and cooling systems 1,159 1,196 3,605 5,995
OEM heat transfer systems 281 25 406 47
Eliminations (1,440) (1,221) (4,011) (6,042)
--------- --------- --------- ---------
Consolidated Total $ 57,224 $ 53,625 $ 158,089 $ 155,894
========= ========= ========= =========
(Loss) Income from Continuing Operations Before Interest,
Taxes and Extraordinary Item:
Aftermarket heating and cooling systems $ 4,430 $ 1,356 $ 3,161 $ 3,561
Restructuring and other special charges (2,353) -- (2,353) (795)
--------- --------- --------- ---------
Aftermarket total 2,077 1,356 808 2,766
--------- --------- --------- ---------
OEM heat transfer systems (617) (862) (4,302) (1,100)
Restructuring and other special charges (573) -- (573) --
--------- --------- --------- ---------
OEM total (1,190) (862) (4,875) (1,100)
--------- --------- --------- ---------
Corporate expenses (1,478) (1,195) (3,545) (2,699)
Restructuring and other special charges -- (425) -- (425)
--------- --------- --------- ---------
Corporate total (1,478) (1,620) (3,545) (3,124)
--------- --------- --------- ---------
Consolidated Total $ (591) $ (1,126) $ (7,612) $ (1,458)
========= ========= ========= =========
NOTE 9 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS 141"), and Statement No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 deals with
accounting for acquisitions while SFAS 142 will require that goodwill and
certain intangibles no longer be amortized, but instead be tested for impairment
at least annually. SFAS 141 is effective for all business combinations initiated
after June 30, 2001, while SFAS 142 will be effective for years beginning after
December 15, 2001. The adoption of SFAS 141 will not have a material impact on
the Company's results of operations or financial position. The Company is
currently assessing the impact of SFAS 142 on its operating results and
financial condition. Annual goodwill amortization approximates $400 thousand.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The standard requires that legal obligations associated
with the retirement of tangible long-lived assets be recorded at fair value when
incurred and is effective for years beginning after June 15, 2002. In August
10
2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", which provides guidance on the accounting for the
impairment or disposal of long-lived assets and will be effective for years
beginning after December 15, 2001. The Company is currently reviewing the
provisions of SFAS 143 and 144 to determine their impact on its operating
results and financial condition.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OPERATING RESULTS
QUARTER ENDED SEPTEMBER 30, 2001 VERSUS QUARTER ENDED SEPTEMBER 30, 2000
Net sales increased $3.6 million or 6.7% from a year ago. Sales in the
Aftermarket Heating and Cooling Systems segment ("Aftermarket") increased 9.6%
largely due to increased unit sales of radiators and air conditioning parts.
Sales in the OEM Heat Transfer System Segment ("OEM") declined 9.1% as an 11.8%
unit volume drop offset the favorable impact of price increases. The heavy-duty
truck marketplace continues to be softer than a year ago. While the Company did
experience a softening of sales during the remainder of the month, as a result
of the terrorist attacks of September 11, October results did return to more
normal levels.
Gross margins improved to 26.1% versus 22.5% a year ago, due largely to
improvements within the Aftermarket segment. Aftermarket margins benefited from
material cost and other spending reductions and higher production levels caused
by an increase in unit sales, which generated increased overhead absorption. OEM
segment margins were slightly lower than a year ago as the impact of lower
production levels offset spending reductions which have been implemented. Last
year's gross margin percentage reflects that the Company had begun to reduce
production levels in an effort to lower inventories which resulted in lower
levels of overhead absorption.
Selling, general and administrative expenses declined from a year ago
by $178 thousand and as a percent of sales from 23.8% last year to 22.0%. Lower
expense levels in 2001 were the result of cost reduction programs implemented
during the quarter and offset the impact of a $328 thousand provision made for
the write-off of a receivable from a customer which declared bankruptcy.
During the third quarter of 2001, the Company implemented a
restructuring program designed around its previously announced business
initiatives to improve operating performance. The program, which is expected to
continue into 2002, includes the redesign of our distribution system, headcount
reductions, the transfer of production between manufacturing facilities and a
reevaluation of our product offering. As part of this program, the Company
recorded restructuring and other special charges of $2.9 million. This
represents $784 thousand to cover work force related costs, $312 thousand for
facility consolidations and $1.8 million for the impairment of goodwill. The
workforce-related charge reflects the elimination of 28 salaried and hourly
positions within the OEM and Aftermarket segments during the quarter. Cash
payments made during the quarter were $273 thousand and payments are expected to
continue through the end of 2002. The facility consolidation charge represents
inventory and machinery movement, lease termination and facility exit expenses
associated with the transfer of several product lines between OEM segment
manufacturing locations and the closure of five Aftermarket segment branch
facilities as part of the redesign of the Company's distribution system. During
the quarter, $77 thousand in cash payments was made, and we expect these to
continue into 2002. Due to changes in product demand, the Company has decided to
exit its copper brass condenser product line and close a California
manufacturing facility, resulting in the impairment of $1.8 million of goodwill
recorded as part of the Rahn Industries acquisition in 1996. The write-off of
this goodwill is the result of a determination that the present value of
estimated future cash flows is less than the carrying amount of the goodwill. We
expect that pretax savings from these restructuring programs will be
approximately $3 million on an annualized basis. Last year $425 thousand of
severance was recorded as a result of the departure of the Company's former
President and CEO.
Interest expense was 17.7% above a year ago as higher average debt
levels offset the impact of lower interest rates.
12
The income tax benefit in the quarter reflects the change in the
expected effective tax rate for the year from 29.7% to 32%.
NINE MONTHS ENDED SEPTEMBER 30, 2001 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2000
Nine month sales are $2.2 million or 1.4% above a year ago. Aftermarket
sales, which were 7.3% higher, benefited from increased radiator and heater
volume. OEM sales declined 23.7% as lower volume exceeded the impact of
favorable pricing actions implemented in the third quarter.
The gross margin percentage was 20.6% versus 22.8% a year ago. Margins
were lowered by 1.2% due to adjustments recorded in the second quarter to
reflect higher OEM warranty program costs and the settlement of a vendor
dispute. Aftermarket margins have declined due to unabsorbed overhead caused by
production cutbacks earlier in the year and lower average selling prices. The
OEM segment reduced margins are caused by lower production for the weak
heavy-duty truck market.
Operating expenses increased 3.9% to 23.5% of sales versus 23% a year
ago. This increase reflects the write-off of a bankrupt customer's accounts
receivable, higher self-insured health care costs and higher costs associated
with the Company's computer upgrade project.
Restructuring and other special charges of $2.9 million were recorded
during the third quarter of 2001. A year ago, the Company recorded $425 thousand
for severance payments to the former President and CEO and $795 for closure
costs.
Higher average debt levels caused the 4.4% increase in interest
expense.
The income tax benefit includes $554 thousand resulting from the
favorable settlement of an IRS audit during the second quarter of 2001 and the
increase of the effective annual tax rate to 32% from the 29.7% rate used in the
second quarter.
As a result of the pay down of the previous revolving credit agreement
during the first quarter of 2001, an extraordinary charge of $380 thousand, net
of tax, was recorded to reflect the write-off of unamortized debt issue costs.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company entered into a $65 million Loan and Security Agreement (the
"Loan Agreement") on January 4, 2001 with Congress Financial Corporation (New
England) ("Congress"), an affiliate of First Union National Bank. The Loan
Agreement replaces a $52 million revolving credit arrangement with five banking
institutions.
The Loan Agreement provides for collateralized borrowings or the
issuance of letters of credit in an aggregate amount not to exceed $65 million
and is comprised of a $60 million Revolving Credit Facility and a $5 million
Term Loan. The initial term of the Loan Agreement expires on January 5, 2004,
with annual extensions thereafter at the option of Congress.
The Loan Agreement is collateralized by a blanket first security
interest in substantially all of the Company's assets plus a pledge of the stock
of the Company's subsidiaries. Available borrowings under the Revolving Credit
Facility are determined by a borrowing base consisting of the Company's eligible
accounts receivable and inventory, as adjusted by an advance rate. Borrowings
under the Revolving
13
Credit Facility are classified as short term in the condensed consolidated
balance sheet. The Term Loan is payable in 59 consecutive equal monthly
installments of $75 thousand commencing February 1, 2001, with a balloon payment
due on January 5, 2004.
Amounts borrowed under the Loan Agreement initially bore interest at
variable rates based, at the Company's option, on either the Eurodollar rate
plus a margin of 2.0%, 2.25% or 2.50% depending on the Company's pretax profit
performance, or the First Union National Bank base lending rate. The Loan
Agreement contains covenants regarding working capital and net worth and
prohibits the payment of common stock dividends.
For the period April 30, 2001 through June 30, 2001, the Company was in
default of the net worth covenant contained in the Loan Agreement. Congress
waived the default by executing the first amendment to the Loan Agreement. The
amendment provides that effective July 1, 2001, borrowings will bear interest at
either 1.5% above the prime rate or 4% in excess of the Eurodollar rate at the
Company's option.
On July 30, 2001, the Company entered into a second amendment to the
Loan Agreement which provides for a lower net worth covenant threshold for
periods ending after July 30, 2001.
Operations generated $4.2 million of cash in the first nine months of
2001 versus 2000 when $9.0 million was used. In 2001, the Company's inventory
reduction plan, implemented in the second quarter, generated $16.5 million of
cash while $6.6 million of cash was utilized to pay down trade accounts payable
in order to bring outstanding balances in line with stated terms. A year ago
inventories rose by $9.0 million due to increased purchases and higher
production levels. As a result of the September 11 terrorist attacks, the bank
lock box processing center used by the Company was forced to relocate resulting
in a delay in processing customer receipts for the month. The Company estimates
that $2 million to $2.5 million of remittances were not processed until early
October resulting in a higher level of accounts receivable and debt at the end
of the quarter than would otherwise have been achieved.
Capital expenditures are running below a year ago due to the Company's
efforts to control spending levels. The Company expects that expenditures for
the year will approximate depreciation expense.
Funds provided by the new Loan Agreement were utilized to pay off the
previous revolver and provide funds for operating activities. During the third
quarter, $5.4 million of the revolver was repaid utilizing funds generated by
operations. During 2000, the Company utilized the proceeds from the sale of its
discontinued operation to pay down $13.4 million of the old revolving credit
agreement and fund operating needs. As of September 30, 2001, the Company had
approximately $5 million available for future borrowings under the Loan
Agreement.
The future liquidity and ordinary capital needs of the Company in the
short term are expected to be met from operations. The Company's working capital
requirements peak during the second and third quarters, reflecting the normal
seasonality of the Aftermarket Heating and Cooling Systems business. The Company
believes that, together with borrowings under its current Loan Agreement, its
cash flow from operations will be adequate to meet its anticipated ordinary
capital expenditure and working capital requirements.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS 141"), and Statement No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 deals with
accounting for acquisitions while SFAS 142 will require that goodwill and
certain intangibles no longer be amortized, but instead be tested for impairment
at least annually. SFAS 141 is effective for all business combinations initiated
after June 30, 2001, while SFAS 142 will be
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effective for fiscal years beginning after December 15, 2001. The adoption of
SFAS 141 will not have a material impact on the Company's results of operations
or financial position. The Company is currently assessing the impact of SFAS
142. Annual goodwill amortization approximates $400 thousand.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The standard requires that legal obligations associated
with the retirement of tangible long-lived assets be recorded at fair value when
incurred and is effective for years beginning after June 15, 2002. In August
2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", which provides guidance on the accounting for the
impairment or disposal of long-lived assets and will be effective for years
beginning after December 15, 2001. The Company is currently reviewing the
provisions of SFAS 143 and 144 to determine their impact on its operating
results and financial condition.
FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in nature
are forward-looking statements. Such forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The Company's Annual Report on Form 10-K contains certain
detailed factors that could cause the Company's actual results to materially
differ from the forward-looking statements made by the Company. In particular,
statements relating to the future financial performance of the Company are
subject to business conditions and growth in the general economy and automotive
and truck business, the impact of competitive products and pricing, changes in
customer product mix, failure to obtain new customers or retain old customers or
changes in the financial stability of customers, changes in the cost of raw
materials, components or finished products and changes in interest rates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposures to market risk related to changes in interest
rates, foreign currency exchange rates and commodities. There have been no
material changes in market risk since the filing of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3.1 Amended and Restated By-Laws of TransPro, Inc.
b) Reports on Form 8-K
On October 24, 2001, the Company filed a Current Report on Form 8-K,
which included the press release of October 23, 2001 announcing guidance on
third quarter results and preliminary details on a restructuring charge to be
taken between the third quarter of 2001 and the second quarter of 2002.
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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.
TRANSPRO, INC.
(Registrant)
Date: November 9, 2001 By: \s\ Charles E. Johnson
----------------------------------
Charles E. Johnson
President and Chief Executive
Officer (Principal Executive
Officer)
Date: November 9, 2001 By: \s\ Richard A. Wisot
----------------------------------
Richard A. Wisot
Vice President, Treasurer,
Secretary, and Chief Financial
Officer (Principal Financial
and Accounting Officer)
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