<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d) of
The Securities Exchange Act of 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 14 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT OR SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-7770
MCCLAIN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-1867649
State of Incorporation IRS Employer I.D. No.
6200 Elmridge Road
Sterling Heights, Michigan 48310
(810) 264-3611
(Address of principal executive offices and telephone number)
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 .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of May 7, 1999.
Common Stock, No Par Value 4,674,923
- -------------------------- ----------------
Class Number of Shares
1 of 14
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MCCLAIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1999 1998
(unaudited)
------------- -------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 1,796,391 $ 1,924,006
Accounts Receivable (Net) 17,404,013 24,235,761
Inventories 52,839,690 38,873,477
Net Investment in Sales Type
Leases - Current Portion 3,785,000 3,100,000
Prepaid Expenses 762,571 543,095
--------------- --------------
Total Current Assets 76,587,665 68,676,339
--------------- --------------
Property and Equipment 44,290,422 42,100,575
Accumulated Depreciation (20,311,559) (18,834,030)
--------------- --------------
Net Property and Equipment 23,978,863 23,266,545
--------------- --------------
Net Investment in Sales Type
Leases - Less Current Portion 7,351,051 6,013,959
--------------- --------------
Other Assets 1,631,774 2,290,124
--------------- --------------
Total Assets $109,549,353 $100,246,967
=============== ==============
</TABLE>
2 of 14
<PAGE> 3
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES
<S> <C> <C>
Current Portion of Long-Term Debt $ 3,300,000 $ 3,300,000
Accounts Payable 20,805,487 18,405,224
Accrued Liabilities 5,030,159 4,537,434
Federal and State Income Taxes 476,881 513,994
------------ ------------
Total Current Liabilities 29,612,527 26,756,652
------------ ------------
Deferred Income Taxes 2,215,000 2,215,000
------------ ------------
Long-Term Debt - Less
Current Portion 47,252,977 42,530,105
------------ ------------
Product Liability 2,196,670 1,909,904
------------ ------------
Stockholders' Equity 28,272,179 26,835,306
------------ ------------
Total Liabilities and
Stockholders' Equity $109,549,353 $100,246,967
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3 of 14
<PAGE> 4
MCCLAIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Net Sales $ 31,856,781 $ 23,614,926 $ 59,013,687 $ 47,240,250
Cost of Sales 26,104,253 19,236,285 48,419,062 38,489,215
------------ ------------ ------------ ------------
Gross Profit 5,752,528 4,378,641 10,594,625 8,751,035
Selling, General
And Administrative
Expenses 3,892,886 3,258,728 7,339,429 6,537,653
------------ ------------ ------------- ------------
Operating Income 1,859,642 1,119,913 3,255,196 2,213,382
------------ ------------ ------------- ------------
Other Income (Expense)
Interest Expense (771,449) (744,950) ( 1,634,525) ( 1,576,524)
Interest Income 396,093 310,913 759,732 619,732
Other Expense ( 56,635) (187,976) ( 102,266) ( 247,153)
------------ ------------ ------------ ------------
(431,991) (622,013) ( 977,059) ( 1,203,945)
------------ ------------ ------------ ------------
Income Before
Income Taxes 1,427,651 497,900 2,278,137 1,009,437
Provision for
Income Taxes 486,000 166,000 775,000 340,000
------------ ------------ ------------ ------------
Net Income $ 941,651 $ 331,900 $ 1,503,137 $ 669,437
============ ============ ============ ============
Net Income per
Common Shares
(Basic and Diluted) $ .20 $ .07 $ .32 $ .14
============ =========== ============ ============
Weighted Average
Number of Common Shares
Outstanding
(Basic and Diluted) 4,667,427 4,719,870 4,667,427 4,719,870
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements
4 of 14
<PAGE> 5
MCCLAIN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 1,503,137 $ 669,437
=========== ===========
Adjustments to reconcile net income to net
Cash used in operating activities:
Depreciation and amortization 1,656,548 1,724,250
Common Stock Issued in Lieu of Cash 10,114 8,248
Changes in Operating Assets and Liabilities
Which Provided (Used) Cash:
Current Assets Excluding
Cash & Cash Equivalents ( 8,038,942) ( 5,692,668)
Other assets 915,820 330,860
Accounts payable 2,400,263 1,679,443
Accrued liabilities 492,725 491,065
Federal Income Tax 37,113 636,286
Other liabilities 286,766 101,412
------------ -------------
TOTAL ADJUSTMENTS (4,145,459) ( 724,102)
------------ -------------
NET CASH USED IN OPERATING ACTIVITIES (2,642,322) ( 51,665)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ( 2,131,787) (1,123,615)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long term debt 4,722,872 951,757
Sale of common stock -- 61,369
Redemption of common stock ( 76,378) ( 241,000)
------------ -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,646,494 772,126
------------ -------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS ( 127,615) ( 403,156)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 1,924,006 2,402,421
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,796,391 $1,999,265
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5 of 14
<PAGE> 6
MCCLAIN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 1999
1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements
of McClain Industries, Inc. and subsidiaries (the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, such Statements 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
consisting of normal recurring items considered necessary for a fair
presentation have been included. Operating results for the three-month and six
month periods ended March 31, 1999, are not necessarily indicative of the
results that may be expected for the year ending September 30, 1999. For further
information, refer to the Consolidated Financial Statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
September 30, 1998.
2. Inventories
Inventories at March 31, 1999 and September 30, 1998 are summarized as
follows:
<TABLE>
<CAPTION>
(Unaudited)
March 31, 1999 September 30, 1998
-------------- ------------------
<S> <C> <C>
Materials and Supplies $31,339,690 $22,100,252
Work in Process 6,604,961 5,707,374
Finished Goods 14,895,309 11,065,851
----------- -----------
$52,839,690 $38,873,477
----------- -----------
</TABLE>
3. Earnings per Common Share
Earnings per share are computed using the weighted average number of
common shares outstanding during the year. The Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", effective
September 30, 1998. This statement requires a dual presentation and
reconciliation of "basic" and "diluted" per share amounts. Diluted reflects the
potential dilution of all common stock equivalents. At March 31, 1999, and 1998
options to purchase 259,464 and 199,464 shares, respectively, were excluded from
the computation of earnings per share because the options' exercise prices were
greater than the average market price of the common shares.
6 of 14
<PAGE> 7
MCCLAIN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 1999
4. Depreciation
For the six months ended March 31, 1999 and 1998, depreciation charges
were $1,419,471 and $1,498,028, respectively.
5. Contingencies
Product Liability
As a manufacturer of industrial products, the Company is occasionally
subjected to various product liability claims. Such claims typically involve
personal injury or wrongful death associated with the use or misuse of the
Company's products. The Company is currently defending certain legal proceedings
involving allegations of product liability relating to products manufactured and
sold by the Company. Historically, such claims have not resulted in material
losses to the Company in any one year, and the Company maintains product
liability insurance in amounts believed by management to be adequate.
Galion Holding Company (GHC), pursuant to an indemnification it
provided to the seller in connection with GHC's July 1992 acquisition of the
Galion operations, is currently defending a number of legal proceedings
involving product liability claims arising out of products manufactured and sold
prior to the acquisition. These claims are covered by insurance and many of
these cases have been settled. In addition, the acquisition agreement called for
the seller to share in the payment of certain costs related to the defense of
these cases. On December 29, 1998 the Company reached a settlement agreement
with the seller, the terms of which called for the Company to release the seller
from its obligations related to product liability claims under the Galion
acquisition agreement in exchange for a cash payment of $1,050,000.
A reserve to provide for these product claims was established at the
acquisition date. Since many of the cases have been settled and insurance
coverage exists, management believes that the ongoing costs to defend these
claims will not exceed the amount accrued on the accompanying condensed
consolidated balance sheet at March 31, 1999.
7 of 14
<PAGE> 8
MCCLAIN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 1999
5. CONTINGENCIES - CONTINUED
Environmental Matters
The Company's operations are subject to extensive federal, state and
local regulation under environmental laws and regulations concerning, among
other things, emissions into the air, discharges into the waters and the
generation, handling, storage, transportation, treatment and disposal of waste
and other materials. Inherent in manufacturing operations and in owning real
estate is the risk of environmental liabilities as a result of both current and
past operations, which cannot be predicted with certainty. The Company has
incurred and will continue to incur costs, on an ongoing basis, associated with
environmental regulatory compliance in its business.
Labor Union Matters
Certain of the Company's hourly employees are represented by various
labor unions pursuant to collective bargaining agreements which expire between
September 1999 and June 2000.
On February 23, 1995, the National Labor Relations Board (NLRB) conducted an
election in response to a petition filed by a local union (Union) to represent
the hourly employees at the Company's Macon, Georgia plant. The ballots of
certain employees were challenged as ineligible. The Union filed charges
asserting that the Company committed various unfair labor practices, which
affected the election results, and that the challenged ballots should be
counted. On October 17, 1996, the NLRB upheld the unfair labor practice charges
and on November 5, 1996, the NLRB determined that the results of the election
were in favor of the Union. Management, based upon the opinion of counsel, does
not believe a final decision upholding the Union certification or the unfair
labor practice charges would have a material adverse effect on the Company.
Other Legal Matters
The Company is also involved in routine litigation incidental to its
business. Management believes that the resolution of these matters will not
materially affect the consolidated financial statements.
8 of 14
<PAGE> 9
MCCLAIN INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED MARCH 31, 1999
6. Year 2000 Compliance
The Company purchases the various computer hardware and software used
in the administration of its financial, manufacturing and engineering processes
from third party suppliers. A centralized computer and software is used for
approximately 90% of the financial and manufacturing applications of the Company
and certification has been received from both the hardware and software
suppliers that these products are Year 2000 compliant. The engineering software
is run on either a LAN (local area network) or individual personal computers
depending on the size of the manufacturing facility. All the necessary hardware
and software for the engineering is Year 2000 compliant. Additionally, the
Company has various stand alone personal computers and laptop computers that run
word processing, database and spreadsheet software. The Company is currently in
the process of upgrading all the software run on these stand alone computers
with versions that are Year 2000 compliant and estimates completion of this
project by the end of the Company's fiscal year on September 30, 1999.
To date, the Company has expended approximately $50,000 to make its
engineering hardware and software and certain of its stand alone computers and
software Year 2000 compliant and estimates that it will expend approximately
$40,000 on its remaining computers and software. These amounts represent
approximately 50% of the Company's information technology budget for the fiscal
year ended September 30, 1999 and will be paid from the cash flow from
operations.
The Company believes that the steps it has taken regarding the Year
2000 issue will allow operations to run normally on January 1, 2000 and
thereafter. The possibility exists however, that certain stand alone computers
or software may not be upgraded timely or unforeseen circumstances may arise
that interrupt certain areas of the Company's business or operations. In the
case of any such occurrence, management believes that it can correct the problem
within a few days and no material interruption of its business or operations
will occur.
The Company has made no formal assessment concerning the status of its
customers or suppliers regarding the Year 2000 issue. If any of the Company's
significant suppliers or customers does not successfully and timely become Year
2000 compliant, the Company's business or operations could be adversely
affected. The Company has not yet generated and does not intend to generate any
disaster contingency plans related to the Year 2000 compliance issue.
9 of 14
<PAGE> 10
MCCLAIN INDUSTRIES, INC.
ITEM TWO. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
The following discussion should be read in conjunction with the
condensed consolidated financial statements, including the notes thereto,
appearing elsewhere in this report.
Selected financial data for the Company for the periods indicated:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net Sales $31,856,781 $23,614,926 $59,613,687 $47,240,250
Net Income 941,651 331,900 1,503,137 669,437
Net Earnings Per Common
Share (Basic and Diluted) $ .20 .07 $ .32 $ .14
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
As of As of
March 31, September 30,
1999 1998
--------------- --------------
<S> <C> <C>
Working Capital $ 46,975,138 $ 41,919,687
Total Assets 109,549,353 100,246,967
Long-Term Debt 47,252,977 42,530,105
Stockholders' Equity 28,272,179 26,835,306
Weighted Average Number
Of Common Shares Outstanding
(Basic and Diluted) 4,667,427 4,667,427
Current Ratio 2.59:1 2:57:1
Long-Term Debt to
Stockholders' Equity 1.67:1 1.59:1
</TABLE>
10 of 14
<PAGE> 11
MCCLAIN INDUSTRIES, INC.
The following table presents, as a percentage of net sales, certain
selected financial data for the Company for the periods indicated:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net Sales 100.00% 100.00% 100.00% 100.00%
Cost of Sales 81.94 81.46 82.05 81.47
-------- -------- --------- ---------
Gross Profit 18.06 18.56 17.95 18.53
Selling, General &
Administrative Expenses 12.22 13.80 12.44 13.84
-------- -------- --------- ---------
Operating Income 5.84 4.74 5.51 4.69
Other Expenses ( 1.36) ( 2.63) ( 1.66) ( 2.55)
-------- -------- --------- ---------
Income before Income Taxes 4.48 2.11 3.85 2.14
Provision for Income Taxes ( 1.53) ( .70) ( 1.31) ( .72)
-------- -------- --------- ---------
Net Income 2.95% 1.41% 2.54% 1.42%
-------- -------- --------- ---------
</TABLE>
11 of 14
<PAGE> 12
MCCLAIN INDUSTRIES, INC.
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Net sales increased 34.9% to $31.2 million for the quarter ended March
31, 1999 (Quarter 1999) from $23.6 million for the quarter ended March 31, 1998
(Quarter 1998). The increase was due primarily to strong sales by the Company's
McClain E-Z Pack and McClain Truck divisions. Sales for McClain E-Z Pack
increased 64.0% or $4.0 million for the Quarter 1999 over the Quarter 1998.
While McClain Truck sales increased 334.9% or $3.7 million during the Quarter
1999 compared to the Quarter 1998. Sales of the Company's other product lines
were flat for the Quarter 1999 compared to the Quarter 1998. The sales of the
McClain Truck division accounted for 16.2% of the Company's sales for the
Quarter 1999 compared to 6.5% of the Company's sales for the Quarter 1998.
Cost of goods sold increased to 81.9% for the Quarter 1999 from 81.5%
for the Quarter 1998 due primarily to the higher percentage of truck sales
discussed previously. The gross profit margin on manufactured products increased
to 22.9% for the Quarter 1999 compared to 20.9% for the Quarter 1998. This
increase resulted from reduced steel prices and increased production, providing
overhead reductions, at certain of the Company's manufacturing facilities. The
gross profit margin for the McClain Truck division decreased slightly to 6.1%
for the Quarter 1999 from 6.2% for the Quarter 1998.
Selling, General & Administrative Expenses decreased to 12.22% of net
sales for the Quarter 1999 from 13.8% of net sales for the Quarter 1998 as a
result of the increased sales volume and the continued restructuring of certain
administrative processes.
Net sales increased 24.9% to $59.0 million for the six month ended
March 31, 1999 (six months 1999) from $47.2 million for the six months ended
March 31, 1998 (six months 1998). The increase was due primarily to strong sales
by the Company's McClain E-Z Pack and McClain Truck divisions. Sales for McClain
E-Z Pack increased 51.0% or $5.7 million for the six month 1999 over the six
months 1998, while McClain Truck sales increased 280.0% or $7.4 million during
the six months 1999 compared to the six months 1998. Sales of the Company's
other product lines were flat for the six months 1999 compared to the six months
1998. The sales of the McClain truck division accounted for 19.2% of the
Company's sales for the six months 1999 compared to 8.5% of the Company's sales
for the six months 1998.
12 of 14
<PAGE> 13
Cost of goods sold increased to 82.0% for the six months 1999 from
81.4% for the six months 1998 due primarily to the higher percentage of truck
sales discussed previously. The gross profit margin on manufactured products
increased to 22.0% for the six months 1999 compared to 21.0% for the six months
1998. This increase results from reduced steel prices and increased production,
providing overhead reductions, at certain of the Company's manufacturing
facilities. The gross profit margin for the McClain Truck division increased to
6.4% for the six months 1999 from 4.7% for the six months 1998.
Selling, General & Administrative Expenses decreased to 12.44% of net
sales for the six months 1999 from 13.8% of net sales for the six months 1998 as
a result of the increased sales volume and the continued restructuring of
certain administrative processes.
The Inventory has increased to $52.8 million at March 31, 1999 from
$38.9 million at September 30, 1998. Approximately $17.5 million of the
inventory consists of trucks and related equipment the Company has dedicated to
its truck ready program. This increase is the result of the Company's decision
in the fourth quarter of fiscal 1998 to more aggressively pursue a market for
package units, consisting of a truck chassis and a piece of equipment
manufactured by the Company (Roll-Off Hoists, Refuse Truck Bodies and Dump
Bodies), that it believes is currently expanding.
The Company had working capital of $47.0 million at March 31, 1999
compared to $41.9 million at September 30, 1998. The ratio of current assets to
current liabilities was 2.59:1 at March 31, 1999 and 2.57:1 at September 30,
1998. The Company's cash and cash equivalents totaled $1.8 million at March 31,
1999. Cash flows used by operations were $4.1 million for the six months ended
March 31, 1999, primarily due to the increased inventory dedicated to the
Company's truck program as discussed previously.
On March 8, 1999 the Company signed a new agreement with its principal
lender that expanded its existing line of credit to $25 million to provide
additional working capital for the inventory expansion previously discussed. The
Company was in violation of one of its debt covenants at March 31, 1999. The
Bank has issued a waiver of its rights related to this covenant violation.
13 of 14
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
McCLAIN INDUSTRIES, INC.
Date: May 7, 1999 By: Kenneth D. McClain
---------------------------- -----------------------------
Kenneth D. McClain, President
Date: May 7, 1999 By: Mark S. Mikelait
---------------------------- ----------------------------
Mark S. Mikelait, Treasurer
14 of 14
<PAGE> 15
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,796,391
<SECURITIES> 0
<RECEIVABLES> 17,404,013
<ALLOWANCES> 0
<INVENTORY> 52,839,690
<CURRENT-ASSETS> 76,587,665
<PP&E> 44,290,422
<DEPRECIATION> 20,311,559
<TOTAL-ASSETS> 109,549,353
<CURRENT-LIABILITIES> 29,612,527
<BONDS> 0
0
0
<COMMON> 4,931,545
<OTHER-SE> 23,340,634
<TOTAL-LIABILITY-AND-EQUITY> 109,549,353
<SALES> 59,013,687
<TOTAL-REVENUES> 59,013,687
<CGS> 48,419,062
<TOTAL-COSTS> 48,419,062
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,634,525
<INCOME-PRETAX> 2,278,137
<INCOME-TAX> 775,000
<INCOME-CONTINUING> 1,503,137
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,503,137
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
