Lincolnshire Management Insider
SPECIAL REPORT
Transcraft Corporation
In March Lincolnshire distributed the proceeds from the successful sale of a Fund II portfolio company, Transcraft Corporation (“Transcraft”), the largest manufacturer of flatbed trailers in the United States. The road from the purchase of Transcraft to its sale at an attractive valuation was a long and at times difficult one, and is the subject of this report, which we hope will provide an insiders view and thought process of Lincolnshire Management.
We sourced the Transcraft opportunity in 1999 through our broker network in a non-auction process. Transcraft was an attractive investment opportunity for several reasons. It was the leading manufacturer of commercial over-the-road flatbed trailers in the United States. Transcraft had the largest market share in its industry segment and had long been recognized for manufacturing the most durable, highest quality flatbeds in the industry. In addition, Transcraft had the largest independent dealer network of any flatbed trailer manufacturer in the United States and offered untapped opportunities to expand this network in the western part of the U.S. as well as in Canada. Transcraft had one of the most efficient manufacturing plants in the industry, allowing the company to manufacture trailers in a fraction of the time that it took many of its competitors. The management team was strong. Competition from offshore suppliers was not likely due to shipping costs. Lastly, the products played an integral part in the successful conduct of interstate and intrastate commerce.
The greatest risk identified by the deal team during its diligence on this opportunity was the cyclicality of the industry. We extensively analyzed the cyclicality issues by researching the company and the industry going back 30 years. Comparing the company’s performance during historical down cycles versus the performance of the flatbed trailer industry, it was clear that Transcraft, on average, outperformed the industry. With this in mind, we acquired Transcraft in October 1999 for $65 million (including transaction expenses) and put in place a capital structure that would provide the company with the flexibility needed to withstand the cyclical dynamics of the industry. Transcraft’s 1999 revenues were approximately $85 million and EBITDA was approximately $11.8 million with only modest capital expenditure requirements. The initial Fund II equity investment was $15.3 million.
Beginning in 2000, the overall economy began to slow. However, Transcraft ran into a cyclical industry downturn whose depth and length were unprecedented. A series of factors combined and were exacerbated by the events of September 11th and the ensuing war; a spike in fuel costs, increases in interest rates, a tightening of credit availability, increases in insurance costs and ultimately an economic recession. The impact on the owner operators of flatbed trailers was devastating, leading to a significant decline in demand beginning in the third quarter of 2000, with net orders dropping by 40% from the prior year period. For the fiscal year ended December 31, 2001, Transcraft’s revenues had declined sharply to $48.3 million and its EBITDA had declined to $1.6 million. In addition, while the industry downturn was already in its second year there were no clear indicators of when demand within the industry would recover.
It was becoming increasingly clear that Transcraft would need a cash equity infusion to pay its bills, to continue to receive materials from its suppliers and to address the concerns of its lenders. At Lincolnshire, we never put capital into an investment to “save” our prior investment. Every investment in a portfolio company must go through a disciplined approval process and meet very high underwriting standards. Every decision to make an additional investment in a portfolio company must be supported by empirical data and a belief that the new investment will generate a satisfactory return. All of us at Lincolnshire would write significant personal equity checks for the additional Transcraft investment. So, to say the least, the decision to put additional equity into Transcraft was not taken lightly.
Many skeptics wondered if both we, and our investors, would see a return of capital on the Transcraft investments. But while the industry downturn had been the most severe in over 30 years and its severity and duration had exceeded our expectations, we re-examined our investment analysis and concluded that it remained valid, based upon the fundamental soundness of Transcraft’s business. We also knew that by all industry measurements flatbed trailers on the road were aging beyond historical norms and that when the cycle did turn there would be high pent-up demand to replace aging fleets. Several of Transcraft’s weaker competitors went out of business. We were confident that when the cycle turned, Transcraft’s superior products, management, and market position would generate dramatic increases in revenues and earnings. But we had to take action to make that happen. Over the next two and one-half years we twice supported Transcraft with additional capital. We restructured the company’s senior and mezzanine debt and ultimately acquired the senior debt at a discount.
Our decision to provide Transcraft with additional capital was rewarded by the efforts of Transcraft’s first-rate management team. Dave de Poincy, the President, Elgen Reynolds, the Chief Financial Officer, and Mike Gordy, the Vice President of Operations of Transcraft are strong managers; they worked closely with the Lincolnshire team to take all the cost out of the operation that was humanly possible. In addition, the management team aggressively moved forward with the strategic plan to expand the company’s dealer base, selectively add more financially stable fleet customers without alienating its existing customers, and introduce five new trailer models at price points which were acceptable to an increasingly cost conscious customer base.
The combination of Transcraft management and Mike Lyons and Chuck Mills of Lincolnshire was a winning team. While Transcraft’s management was cutting costs and introducing products, which the marketplace wanted, Mike and Chuck were working hard to restructure the balance sheet of Transcraft. With the restructuring done, the management had the breathing room necessary to focus on managing the business and implementing the strategic initiatives of dealer growth, fleet sales expansion and new product introductions, without day-to-day liquidity distractions.
For the year ended December 31, 2005, Transcraft enjoyed its finest year ever with $117 million in revenue and slightly under $20 million of EBITDA. Based upon the accomplishments of the company in 2005 and its prospects for 2006, on March 3, 2006 we were able to complete a very successful sale of Transcraft to Wabash, the largest trailer manufacturer in the United States, generating solid returns for Fund II investors. Our Fund II investors remained supportive throughout our trials and tribulations with Transcraft and their patience and confidence has, indeed, been rewarded.
Lincolnshire’s success with Transcraft demonstrates that making tough decisions combined with hard work, creative financing solutions, solid management and patience can and does provide “just rewards.” Dave de Poincy, Elgen Reynolds and Mike Gordy of Transcraft, and Mike Lyons and Chuck Mills of Lincolnshire, have our thanks for a job well done.