<PAGE> 1
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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, 1999
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
October 27, 1999 was 6,597,335.
Exhibit Index is on page 16 of this report.
Page 1 of 17
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1
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the three months and nine
months ended September 30, 1999 and 1998. 3
Condensed Consolidated Statements of Comprehensive Income for the three
months and nine months ended September 30, 1999 and 1998. 3
Condensed Consolidated Balance Sheets at September 30, 1999 and December 31, 4
1998.
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998. 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSPRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 71,555 $ 68,535 $198,978 $184,724
Cost of sales 53,890 52,135 148,425 141,140
-------- -------- -------- --------
Gross margin 17,665 16,400 50,553 43,584
Selling, general and administrative expenses 13,858 13,587 39,653 37,067
Plant and business consolidation and closure costs -- -- 325 --
-------- -------- -------- --------
Income from operations 3,807 2,813 10,575 6,517
Interest expense, net 1,180 971 3,153 2,466
-------- -------- -------- --------
Income before taxes 2,627 1,842 7,422 4,051
Provision for income taxes 1,137 751 317 1,653
-------- -------- -------- --------
Net income $ 1,490 $ 1,091 $ 7,105 $ 2,398
======== ======== ======== ========
Basic earnings per common share $ .23 $ .17 $ 1.08 $ .37
======== ======== ======== ========
Diluted earnings per common share $ .21 $ .16 $ 1.00 $ .36
======== ======== ======== ========
Cash dividends per common share $ .05 $ .05 $ .15 $ .15
======== ======== ======== ========
Weighted average common shares - basic 6,573 6,562 6,573 6,561
======== ======== ======== ========
Weighted average common shares and equivalents - diluted
7,053 6,898 7,084 6,676
======== ======== ======== ========
</TABLE>
The basic and diluted earnings per share effect of the plant closure
costs is ($0.03) during the nine months ended September 30, 1999. The basic and
diluted earnings per share effect of the non-recurring, non-cash deferred tax
benefit is $0.43 and $0.40, respectively, during the nine months ended September
30, 1999.
TRANSPRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 1,490 $ 1,091 $7,105 $2,398
Other comprehensive income, net of tax:
Foreign currency translation (34) (14) 6 12
------- ------- ------ ------
Comprehensive income $ 1,456 $ 1,077 $7,111 $2,410
======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
3
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TRANSPRO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 909 $ 345
Accounts receivable (less allowances of $1,867 and $2,390) 44,329 34,173
--------- ---------
Inventories:
Raw materials 17,614 14,765
Work in process 9,444 7,124
Finished goods 49,912 37,886
--------- ---------
Total inventories 76,970 59,775
--------- ---------
Deferred income tax benefit 5,283 2,641
Other current assets 2,715 3,200
--------- ---------
Total current assets 130,206 100,134
--------- ---------
Property, plant and equipment 101,089 94,913
Less accumulated depreciation (60,591) (55,426)
--------- ---------
Net property, plant and equipment 40,498 39,487
--------- ---------
Goodwill (net of amortization of $714 and $348) 7,978 6,093
Other assets 2,684 2,813
--------- ---------
Total assets $ 181,366 $ 148,527
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,973 $ 14,797
Accrued salaries and wages 5,325 4,823
Accrued insurance 4,546 4,404
Accrued taxes 2,948 541
Accrued expenses 5,555 5,393
--------- ---------
Total current liabilities 38,347 29,958
Long-term liabilities:
Long-term debt 60,820 42,197
Retirement and post-retirement obligations 7,486 7,482
Deferred income taxes 316 973
Other liabilities 420 50
--------- ---------
Total liabilities 107,389 80,660
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value: Authorized
2,500,000 shares:
Issued and outstanding as follows:
Series A Junior participating preferred stock,
$.01 par value
Authorized 200,000 shares: none issued and
outstanding, at September 30, 1999 and
December 31, 1998 -- --
Series B convertible preferred stock, $.01 par value:
Authorized 30,000 shares; 30,000 shares issued
and outstanding at September 30, 1999 and
December 31, 1998 -- --
Common stock, $.01 par value:
Authorized 17,500,000 shares; issued 6,669,446 shares at
September 30, 1999 and December 31, 1998 66 66
Paid-in capital 55,074 55,074
Unearned compensation (78) (113)
Retained earnings 20,952 14,883
Accumulated other comprehensive income (2,011) (2,017)
Treasury stock at cost: 72,111 shares at September 30,
1999 and December 31, 1998 (26) (26)
--------- ---------
Total stockholders' equity 73,977 67,867
--------- ---------
Total liabilities and stockholders' equity $ 181,366 $ 148,527
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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TRANSPRO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,105 $ 2,413
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5,481 4,762
Gain on sale of fixed assets (5) --
Deferred tax benefit (2,858) --
Provision for losses - accounts receivable 39 787
-------- --------
Total adjustments to reconcile net income to net cash (used in) provided by operating
activities 2,657 5,549
-------- --------
Change in assets and liabilities, net of acquisitions:
Accounts receivable (10,023) (421)
Inventories (16,264) 534
Accounts payable 4,857 (2,036)
Accrued expenses 3,207 (1,621)
Other, net 379 (410)
-------- --------
Total change in operating assets and liabilities (17,844) (3,954)
-------- --------
Net cash (used in) provided by operating activities (8,082) 4,008
-------- --------
Cash flows from investing activities:
Capital expenditures (6,097) (5,444)
Sales and retirements of fixed assets 5 60
Acquisition of A/C Plus, Inc. and Evap, Inc., net of cash acquired (2,366) (2,921)
-------- --------
Net cash used in investing activities (8,458) (8,305)
-------- --------
Cash flows from financing activities:
Dividends paid (1,030) (1,007)
Payments of long-term debt -- (4,205)
Borrowings of long-term debt 18,134 12,250
-------- --------
Net cash provided by financing activities 17,104 7,038
-------- --------
Increase in cash and cash equivalents 564 2,741
Cash and cash equivalents:
Beginning of period 345 593
-------- --------
End of period $ 909 $ 3,334
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 2,962 $ 1,991
-------- --------
Taxes paid, net of refunds $ 1,382 $ 1,483
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company acquired A/C Plus, Inc. effective February 1, 1999 and Evap, Inc. effective August
1, 1998, the details of which are further described in Note 5. In connection with the
acquisitions, liabilities were assumed as follows:
Fair value of assets acquired $ 3,060 $ 5,677
Cash paid for the outstanding stock (2,250) (3,000)
-------- --------
Liabilities assumed $ 810 $ 2,677
======== ========
</TABLE>
In connection with the A/C Plus, Inc. acquisition, the Company issued a
promissory note of $250 payable on the second anniversary of the closing. In
connection with the Evap, Inc. acquisition, the Company issued 30,000 shares of
Series B Preferred Stock.
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
TRANSPRO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
TransPro, Inc. (the "Company") is a manufacturer and supplier of heat
transfer components and systems, replacement automotive air conditioning parts
and specialty fabricated metal products for a variety of Aftermarket and
Original Equipment Manufacturing ("OEM") automotive, truck and industrial
equipment applications, and performs vehicle conversions.
NOTE 2 - 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, 1998 filed with the Securities and Exchange Commission on
March 30, 1999, 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
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. All such adjustments are of a normal recurring nature. Certain items
reported in prior condensed consolidated financial statements have been
reclassified to conform to the presentation of the current condensed
consolidated financial statements. The December 31, 1998 condensed consolidated
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
NOTE 3 - SEGMENT AND BUSINESS INFORMATION
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS No. 131") "Disclosures about Segments of an Enterprise
and Related Information." In accordance with SFAS No. 131, prior year segment
information has been included for the comparable 1998 period to present the
Company's three reportable segments - Aftermarket Heating and Cooling Systems,
OEM Heat Transfer Systems and Specialty Metal Fabrication.
Aftermarket Heating and Cooling Systems product lines include complete
radiators and radiator cores, heaters, air conditioning condensers,
air-conditioning compressors and other air conditioning parts. The OEM Heat
Transfer Systems business provides manufactured specialized heavy-duty equipment
radiators, charge air coolers and oil coolers. Specialty Metal Fabrication
products and services include fabrication of metal racking, enclosures and
cabinetry and the fabrication and installation of customized van interiors and
vehicle conversion components.
6
<PAGE> 7
As of September 30, 1999, assets in the Aftermarket Heating and Cooling
Systems segment increased by $25.8 million from the amounts reported at December
31, 1998, resulting from increases in accounts receivable and inventory to
support seasonal working capital requirements, as well as the expansion of the
air conditioning parts business. Assets in the Specialty Metal Fabrication
segment increased by $5.6 million due to increased accounts receivable,
inventory and fixed assets primarily related to the metal fabrication
operations. There was no material change in the assets of the OEM Heat Transfer
Systems segment.
The tables below set forth information about reported segments for the
three and nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
CONSOLIDATED REVENUES
(Unaudited) ---------------------------------------------------------
(Amounts in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
BUSINESS SEGMENT
Aftermarket Heating and Cooling Systems $ 48,469 $ 48,923 $ 130,968 $ 120,997
OEM Heat Transfer Systems 9,694 9,328 28,780 29,280
Specialty Metal Fabrication 13,392 10,284 39,230 34,447
Inter-segment revenues:
Aftermarket Heating and Cooling Systems 1,426 878 4,131 2,742
OEM Heat Transfer Systems 1 62 13 100
Specialty Metal Fabrication -- -- -- --
Elimination of inter-segment revenues (1,427) (940) (4,144) (2,842)
--------- --------- --------- ---------
Consolidated totals $ 71,555 $ 68,535 $ 198,978 $ 184,724
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
(Unaudited) INCOME FROM OPERATIONS
-----------------------------------------------------
(Amounts in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
BUSINESS SEGMENT
Aftermarket Heating and Cooling Systems $ 4,737 $ 4,611 $ 12,941 $ 9,118
OEM Heat Transfer Systems (474) (282) (931) (1,303)
Specialty Metal Fabrication 427 (192) 1,754 2,795
-------- -------- -------- --------
Segment totals 4,690 4,137 13,764 10,610
Corporate expenses (883) (1,324) (3,189) (4,093)
-------- -------- -------- --------
Consolidated totals $ 3,807 $ 2,813 $ 10,575 $ 6,517
======== ======== ======== ========
</TABLE>
7
<PAGE> 8
NOTE 4 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
(Unaudited) THREE MONTHS ENDED NINE MONTHS ENDED
(Amounts in thousands, except per share data) SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE COMPUTATION:
Numerator:
Net income $ 1,490 $ 1,091 $ 7,105 $ 2,398
Less: preferred stock dividends (15) (15) (45) (15)
-------- ------- -------- -------
Net income available to common
stockholders $ 1,475 $ 1,076 $ 7,060 $ 2,383
======= ======= ======= =======
Denominator:
Weighted average common shares 6,597 6,616 6,597 6,615
Non-vested restricted stock (24) (54) (24) (54)
-------- ------- -------- -------
Denominator for basic earnings per share - adjusted
weighted average common shares 6,573 6,562 6,573 6,561
======= ======= ======= =======
Basic earnings per common share $ .23 $ .17 $ 1.08 $ .37
======= ======= ======= =======
DILUTED EARNINGS PER COMMON SHARE COMPUTATION:
Numerator:
Net income available to common stockholders $ 1,475 $ 1,076 $ 7,060 $ 2,383
Add back: preferred stock dividend 15 15 45 15
-------- ------- -------- -------
Net income available to stockholders and assumed
conversions $ 1,490 $ 1,091 $ 7,105 $ 2,398
======= ======= ======= =======
Denominator:
Adjusted weighted average common shares 6,573 6,562 6,573 6,561
Dilutive effect of Series B preferred stock 433 332 497 111
Dilutive effect of stock options and non-vested
restricted stock 47 4 14 4
-------- ------- -------- -------
Adjusted weighted average common shares and assumed
conversions 7,053 6,898 7,084 6,676
======= ======= ======= =======
Diluted earnings per common share $ .21 $ .16 $ 1.00 $ .36
======= ======= ======= =======
</TABLE>
Certain options to purchase common stock were outstanding during the three
months and nine months ended September 30, 1999 and 1998, but were not included
in the computation of diluted earnings per
8
<PAGE> 9
share because their exercise prices were greater than the average market price
for the common shares for the period. These anti-dilutive options outstanding
and their exercise prices are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Options outstanding 347,115 474,335 437,178 474,335
Range of exercise prices $7.50-$11.75 $7.50-$11.75 $5.88-$11.75 $7.50-$11.75
</TABLE>
NOTE 5 - ACQUISITION
Effective February 1, 1999, the Company purchased 100% of the outstanding stock
of A/C Plus, Inc. ("A/C Plus"), an air conditioning compressor remanufacturer
located in Arlington, Texas. A/C Plus had sales of approximately $2.9 million in
fiscal 1998. The transaction was structured with a purchase price of $2.25
million in cash paid at closing and a promissory note of $0.25 million payable
on the second anniversary of the closing. Concurrent with the purchase, the
Company repaid $0.5 million in working capital debt on behalf of A/C Plus. The
purchase price and working capital repayment were financed through the Company's
Revolving Credit Agreement. The acquisition was accounted for as a purchase.
Goodwill of $2.1 million was recorded in connection with the transaction and is
being amortized over 20 years.
The Company acquired 100% of the outstanding stock of Evap, Inc. ("Evap") of
Arlington, Texas effective July 31, 1998. Evap is a manufacturer and distributor
of replacement automotive air conditioning parts. Evap's fiscal 1997 sales were
$6.6 million. The transaction was structured with an initial purchase price of
$6.0 million at closing, consisting of $3.0 million cash and 30,000 shares of
TransPro, Inc. Series B Convertible Redeemable Preferred Stock with an
opportunity for a maximum additional payout of $3.75 million based upon the
future earnings performance of the Evap business. The acquisition was accounted
for as a purchase and goodwill of $3.0 million, which is being amortized over 20
years, was recorded as part of the transaction.
NOTE 6 - SUBSEQUENT EVENT
On October 22, 1999, the Company announced its intent to strategically realign
its business to significantly grow its presence in the automotive aftermarket.
The key steps in this realignment include the evaluation of strategic
alternatives with respect to the OEM Heat Transfer and Specialty Metal
Fabrication segments, the development of a 223,000 square foot manufacturing
facility for the re-manufacturing of automotive air conditioning compressors and
the completion of a new 6-millimeter condenser design to be produced on a new
manufacturing line in the Company's existing Mexico facility.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OPERATING RESULTS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Total net sales for the three months ended September 30, 1999 increased
4.5% to $71.6 million compared with $68.5 million for the three months ended
September 30, 1998. Sales in the Aftermarket Heating and Cooling Systems segment
decreased by $0.5 million, or 0.9%, from the comparable 1998 period, reflecting
lower radiator core, heater and condenser sales, offset by increased complete
radiator sales and air conditioning parts sales due to the acquisitions of Evap
in August 1998 and A/C Plus in February 1999. Sales in the OEM Heat Transfer
Systems segment increased by $0.4 million, or 3.9%, compared with the comparable
1998 quarter, due to an increase in volume resulting from the strong Class 8
truck and specialty vehicle markets. Sales in the Specialty Metal Fabrication
segment increased by $3.1 million, or 30.2%, compared with the comparable 1998
quarter, due to an increase in sales of specialty fabricated enclosures to
telecommunications customers while vehicle conversion revenues were flat.
Gross margins improved to 24.7% for the three months ended September
30, 1999 from 23.9% during the three months ended September 30, 1998. The
improvement was driven by gross margin improvements in the Aftermarket Heating
and Cooling Systems segment, reflecting the sales of higher margin air
conditioning parts by the newly acquired air conditioning parts companies as
well as lower material costs and improved manufacturing efficiencies. In the OEM
Heat Transfer Systems segment, actions the Company has taken to improve
operational efficiencies have resulted in the generation of positive gross
margins during the three months ended September 30, 1999 versus negative gross
margins in the comparable prior year period. Gross margins in the Specialty
Metal Fabrication segment improved in the third quarter of 1999 compared with
1998 primarily due to increased utilization and fixed cost coverage at the new
Plano, Texas metal fabrication facility.
Selling, general and administrative ("SG&A") expenses increased by $0.3
million or 2.0% over the prior year three month period. SG&A expenses increased
primarily due to the inclusion of a full quarter of expenses in 1999 associated
with Evap and A/C Plus operations. SG&A expenses also increased approximately
$0.3 million due to the settlement in the 1999 third quarter of an
employment-related lawsuit, offset by a reduction in health insurance costs.
SG&A expenses declined as a percentage of sales from 19.8% to 19.4%.
Net interest expense increased $0.2 million in the three months ended
September 30, 1999 compared with the three months ended September 30, 1998 due
to higher debt levels associated with the acquisition of Evap and A/C Plus, and
higher working capital levels related to the air conditioning parts business.
The Company's effective tax rate of 43.3% for the three months ended
September 30, 1999, is comprised of the U.S. Federal income tax rate plus the
estimated aggregate effective rate for foreign, state and local income taxes,
and increased from the three months ended September 30, 1998 rate of 40.8% to
reflect a higher level of non-tax deductible expenses expected in 1999 and a
valuation allowance associated with a net operating loss carryforward for the
Company's Canadian vehicle conversion operation.
10
<PAGE> 11
Net income for the three months ended September 30, 1999 was $1.5
million, or $0.23 per basic common share and $0.21 per diluted common share,
compared with net income of $1.1 million, or $0.17 per basic common share and
$0.16 per diluted common share for the three months ended September 30, 1998.
Excluding the effect of costs associated with the settlement of the employment
related lawsuit, earnings for the three months ended September 30, 1999 were
$1.6 million, or $0.25 per basic common share and $0.23 per diluted common
share.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Total net sales for the nine months ended September 30, 1999 increased
7.7% to $199.0 million compared with $184.7 million for the nine months ended
September 30, 1998. Sales in the Aftermarket Heating and Cooling Systems segment
increased by $10.0 million, or 8.2%, from the comparable 1998 period, reflecting
the sales contribution from Evap and A/C Plus and volume increases in the
complete radiator and heater product lines, partially offset by lower sales of
radiator cores and condensers. Sales in the OEM Heat Transfer Systems segment
declined by $0.5 million, or 1.7%, compared with the comparable 1998 period,
primarily as a result of higher level of sales in the first quarter of 1998
related to the catch up of overdue 1997 orders. Sales in the Specialty Metal
Fabrication segment increased by $4.8 million, or 13.9%, compared with the
comparable 1998 period, primarily due to an increase in sales of specialty
fabricated enclosures to telecommunications customers.
Gross margins for the nine months ended September 30, 1999 were 25.4%
compared with 23.6% for the nine months ended September 30, 1998. The
improvement reflects the contribution of higher margin air conditioning parts
sales from Evap and A/C Plus, coupled with lower material costs, higher volume
in complete radiators, and improved manufacturing efficiencies in the
Aftermarket Heating and Cooling Systems segment. Gross margins in the Specialty
Metal Fabrication business declined due to lower margins from vehicle
conversions offset by better utilization of fixed costs associated with the new
Plano, Texas metal fabrication facility. Actions the Company has taken to
improve operational efficiencies in the OEM Heat Transfer Systems business
generated positive gross margins for the nine months ended September 30, 1999,
compared with negative margins in the prior year period.
Selling, general and administrative expenses for the nine months ended
September 30, 1999, were $39.7 million compared with $37.1 million for the
comparable period in 1998, primarily as a result of the inclusion of expenses
associated with Evap and A/C Plus, but were essentially flat as a percentage of
sales. Included in SG&A expenses for the nine months ended September 30, 1999
were costs of approximately $0.3 million related to the settlement of an
employment related lawsuit, which is offset by a reduction in health insurance
costs.
Plant closure costs of approximately $0.3 million related to the
closure of the Company's Philadelphia, Pennsylvania and Atlanta, Georgia
replacement automotive condenser manufacturing plants were recognized in the
nine months ended September 30, 1999.
Net interest expense was $3.2 million for the nine months ended
September 30, 1999 compared with $2.5 million in the nine months ended September
30, 1998 due to higher debt levels associated with the acquisition of Evap and
A/C Plus, higher working capital levels and to support the air conditioning
parts business.
11
<PAGE> 12
During the nine months ended September 30, 1999, the Company recognized
a non-recurring, non-cash deferred tax benefit of $2.9 million related to the
change in the organizational structure of its GO/DAN Industries operation from a
partnership to a corporation. The Company's effective tax rate of 42.8% for the
nine months ended September 30, 1999, which does not include the impact of the
non-recurring, non-cash deferred tax benefit, is comprised of the U. S. Federal
income tax rate plus the estimated aggregate effective rate for foreign, state
and local income taxes and increased from 40.8% from the nine months ended
September 30, 1998 to reflect a higher level of non-tax deductible expenses
expected in 1999 and a valuation allowance associated with a net operating loss
carryforward for the Company's Canadian vehicle conversion operation.
Net income for the nine months ended September 30, 1999 was $7.1
million, or $1.08 per basic common share and $1.00 per diluted common share,
compared with net income of $2.4 million, or $0.37 per basic common share and
$0.36 per diluted common share, in the nine months ended September 30, 1998.
Excluding the effect of plant closure costs, the lawsuit settlement costs, and
the non-recurring, non-cash deferred tax benefit, net earnings for the nine
months ended September 30, 1999 were $4.6 million, or $0.70 per basic common
share and $0.65 per diluted common share.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
In July 1998, the Company entered into a Revolving Credit Agreement
(the "Revolving Credit Agreement") with five banking institutions, which
provides for secured borrowings or the issuance of letters of credit in an
aggregate amount not to exceed $75 million. The Revolving Credit Agreement is
secured by a blanket first perfected security interest in substantially all of
the Company's assets plus a pledge of the stock of the Company's subsidiaries.
The Revolving Credit Agreement expires on July 1, 2003. The security interest in
the Company's assets and the pledge of the Company's subsidiaries' stock are
eligible for release if the Company achieves certain senior debt ratings or if
certain financial ratios are met and maintained.
Available borrowings under the Revolving Credit Agreement are
determined by a borrowing base consisting of the Company's eligible (i) accounts
receivable, (ii) inventory and (iii) fixed assets, as adjusted by an advance
rate. The aggregate amount of borrowings under the Revolving Credit Agreement is
automatically reduced by $0.5 million at the end of each calendar quarter
through June 30, 1999; by $1.25 million at the end of each calendar quarter
through June 30, 2000, and by $1.5 million at the end of each calendar quarter
through June 30, 2003. The Revolving Credit Agreement bears interest at variable
rates based, at the Company's option, on either (a) a Eurodollar loan rate, plus
an applicable margin based upon the ratio of the Company's total funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA"), or
(b) the higher of (i) the BankBoston, N. A. base lending rate or (ii) one-half
of one percent above the Federal Funds Effective Rate, as defined, plus an
applicable margin based upon the ratio of the Company's total funded debt to
EBITDA. A commitment fee of .25% or .375% based upon the ratio of the Company's
total funded debt to EBITDA on the average daily unused portion of the Revolving
Credit Agreement is payable quarterly, in arrears.
The Revolving Credit Agreement contains financial covenants which,
among other things, require the maintenance of a minimum tangible net worth and
debt service coverage and a maximum level of debt to EBITDA and debt to net
worth, as well as covenants which place limits on dividend payments in excess of
$2.0 million per year and capital expenditures in excess of 140% of such year's
depreciation expense.
12
<PAGE> 13
At September 30, 1999, borrowings totaling $47.8 million were
outstanding under the Revolving Credit Agreement. The Company also has $13.0
million of borrowings under floating rate industrial revenue bonds, of which
$8.0 million matures in the year 2010 and $5.0 million matures in the year 2013.
The bonds bear interest based upon a short-term tax-exempt bond index.
Outstanding letters of credit totaled approximately $17.5 million at September
30, 1999, of which $13.0 million supported borrowings under floating rate
industrial revenue bonds.
During the nine months ended September 30, 1999, the Company required
$8.1 million of cash to support its operations as a result of a $16.3 million
increase in inventory levels and a $10.0 million increase in accounts receivable
to support seasonal working capital requirements and its expansion in the air
conditioning parts and fabricated metal enclosures businesses. Cash was used to
reduce accounts payable and accrued expenses by $8.1 million.
Capital spending during the nine months ended September 30, 1999
totaled $6.1 million and the acquisition of A/C Plus, including transaction
costs, required $2.4 million of cash. The Company paid three $0.05 per share
cash dividends, totaling $1.0 million in the aggregate during the nine months
ended September 30, 1999. Net borrowings under the Revolving Credit Agreement to
finance the operating and other cash requirements of the Company increased by
$18.1 million from December 31, 1998.
Until at least the mid-second quarter of the 2000 fiscal year, the
liquidity and ordinary capital needs of the Company are expected to be met from
operations. However, the Company does not believe that its cash flow from
operations together with borrowings under its current Revolving Credit Agreement
will be adequate to meet its ordinary capital expenditures and working capital
requirements during the second and third quarters of fiscal 2000 due primarily
to the need to build inventory for its seasonal Aftermarket Heating and Cooling
Systems segment. Furthermore, the Company believes that the amount of borrowings
available under the Revolving Credit Agreement will not be sufficient to meet
the capital needs for major growth initiatives. The Company intends to explore
financing alternatives, including increasing availability under its Revolving
Credit Agreement, obtaining a new line of credit with sufficient borrowing
capacity or securing additional sources of capital. It is also possible that
additional liquidity may be obtained through the disposition of business
operations, although there can be no assurance that any such disposition would
occur on a timely basis, or at all. No assurance can be given that the Company
will be successful in increasing its availability under its Revolving Credit
Facility, obtaining a new line of credit or securing additional sources of
capital on favorable terms, or at all.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue results from computer system software using only
two digits rather than four digits to define the applicable year for a
transaction. Such software may not recognize a date identified as "00" or may
assume the year to be 1900 instead of 2000. In the worst case, this may result
in system failure or miscalculation causing disruption of operations, including
but not limited to, a temporary inability to process transactions, send
invoices, generate disbursement checks or engage in similar normal business
activities.
The Company's Year 2000 initiative consists of: (i) performing an
inventory of all computer, facility and manufacturing equipment and external
business partners which may be Year 2000 sensitive; (ii) assessing
13
<PAGE> 14
that inventory for Year 2000 compliance; (iii) developing a plan to remediate or
replace non Year 2000 compliant inventory items; and (iv) the implementation of
that plan, including remediation, replacement, testing and contingency
arrangements, as necessary.
The Company has identified an information systems platform which is
Year 2000 compliant and to which the majority of current systems employed by the
Company have been converted. All assessment and planning tasks have been
completed. Remediation and testing of mission critical systems has also been
completed. Remaining remediation and testing tasks for non-mission critical
systems is planned for completion by the end of October 1999. Testing and
contingency planning, as necessary, will continue throughout the rest of the
year. Hardware, software and other capitalizable costs will be capitalized and
depreciated over the useful life of the systems. All other project costs will be
expensed as incurred. The total cost of the Year 2000 project is currently
estimated to be $3.2 million, which is $0.7 higher than original estimates due
to additional system conversion costs and associated labor costs identified
through the assessment process. A total of $2.2 million of the $3.2 million
estimate are for capitalizable hardware and software costs. To date, the Company
has spent approximately $2.9 million on this project, of which $2.0 million was
for capitalizable hardware and software costs.
During 1998, the Company initiated formal communications with its
information technology hardware and software providers, its significant vendors,
service providers, lenders and large customers to determine the extent to which
it is vulnerable to the Year 2000 issue externally. The Company believes that
with the completion of its Year 2000 initiatives, as scheduled, the possibility
of significant interruptions of normal operations should be significantly
reduced. However, no assurance can be given that the systems of other companies
on which the Company relies will be Year 2000 compliant on a timely basis, that
the Year 2000 systems of other companies will be compatible with the Company's
system or that external Year 2000 issues would not have a material impact on the
Company's operations. Contingency plans are being developed as necessary, to
mitigate the impact of non-year 2000 compliant external issues which, in the
worst case, may result in source of supply issues with suppliers or the
inability of customers to order product.
FORWARD-LOOKING STATEMENTS - 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.
Improvements in manufacturing efficiencies and reduction of costs are subject to
a number of factors, including but not limited to, the ability of management to
implement improvements in workforce efficiencies and the timing of such
improvements. Statements regarding the Company's Year 2000 project are subject
to numerous factors, including but not limited to, the availability and cost of
trained personnel, the ability to effect the timely conversion of all relevant
systems, and the effectiveness of contingency plans for non-year 2000 compliant
issues.
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has certain 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, 1998.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
(27) Financial Data Schedule
b) Reports on Form 8-K
On October 22, 1999, the Company filed a Current Report on Form 8-K announcing
its intention to pursue strategic alternatives for its OEM Heat Transfer and
Specialty Metal Fabrication segments.
16
<PAGE> 17
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, 1999 By: /s/ Henry P. McHale
------------------------------------------
Henry P. McHale
President, Chief Executive Officer
and Director
Date: November 9, 1999 By: /s/ Timothy E. Coyne
------------------------------------------
Timothy E. Coyne
Vice President, Treasury, Secretary,
Controller and Chief
Financial Officer (Principal Financial
and Accounting Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TRANSPRO,
INC. AND SUBSIDIARIES FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 909
<SECURITIES> 0
<RECEIVABLES> 46,196
<ALLOWANCES> 1,867
<INVENTORY> 76,970
<CURRENT-ASSETS> 130,206
<PP&E> 101,089
<DEPRECIATION> 60,591
<TOTAL-ASSETS> 181,366
<CURRENT-LIABILITIES> 38,347
<BONDS> 60,820
0
0
<COMMON> 66
<OTHER-SE> 73,911
<TOTAL-LIABILITY-AND-EQUITY> 181,366
<SALES> 198,978
<TOTAL-REVENUES> 198,978
<CGS> 148,425
<TOTAL-COSTS> 148,425
<OTHER-EXPENSES> 39,842
<LOSS-PROVISION> 136
<INTEREST-EXPENSE> 3,153
<INCOME-PRETAX> 7,422
<INCOME-TAX> 317
<INCOME-CONTINUING> 7,105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,105
<EPS-BASIC> 1.08
<EPS-DILUTED> 1.00
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