<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
April 30, 1996 0-22906
- ------------------------------- ------------------------
For the Quarter Ended Commission File Number
ABC Rail Products Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3498749
- --------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 South Michigan Avenue, Chicago, IL 60604-2402
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number (312) 322-0360
------------------------
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 the latest practicable date.
Class Outstanding at June 7, 1996
- -------------------------------- ---------------------------------
Common Stock, $.01 par value 8,261,026 Shares
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C> <C>
Part I Financial Information
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 7-11
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-16
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K 17
</TABLE>
2
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of April 30, 1996 and July 31, 1995
<TABLE>
<CAPTION>
(In thousands, except share and per share data)
April 30, July 31,
ASSETS 1996 1995
- ------ ----------- --------
<S> <C> <C>
(unaudited)
CURRENT ASSETS:
Cash $ - $ 1,966
Accounts receivable, less allowances of $692 and $716, respectively 30,065 38,738
Inventories (Note 4) 36,258 35,560
Prepaid expenses and other current assets 2,145 1,656
Prepaid income taxes 1,405 1,563
-------- --------
Total current assets 69,873 79,483
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,358 1,321
Buildings and improvements 11,320 10,448
Machinery and equipment 69,789 66,090
Construction in progress 10,180 8,037
-------- --------
92,647 85,896
Less - Accumulated depreciation (28,129) (22,207)
-------- --------
Net property, plant and equipment 64,518 63,689
-------- --------
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES 4,845 5,354
-------- --------
OTHER ASSETS - net 8,237 8,738
-------- --------
Total assets $147,473 $157,264
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Cash overdrafts $ 3,505 $ -
Current maturities of long-term debt 7,567 7,574
Accounts payable 16,921 22,743
Due to affiliate 1,534 2,335
Accrued liabilities 10,657 9,520
-------- --------
Total current liabilities 40,184 42,172
-------- --------
LONG-TERM DEBT, less current maturities 44,009 55,970
-------- --------
DEFERRED INCOME TAXES 4,910 4,612
-------- --------
OTHER LONG-TERM LIABILITIES 4,044 4,056
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, $.01 par value; 25,000,000 shares authorized;
8,112,137 shares and 7,983,387 shares issued and outstanding
as of April 30, 1996 and July 31, 1995, respectively 81 80
Additional paid-in capital 51,171 49,671
Retained earnings 3,074 703
-------- --------
Total stockholders' equity 54,326 50,454
-------- --------
Total liabilities and stockholders' equity $147,473 $157,264
======== ========
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated balance sheets.
3
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended April 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data)
Three Months Ended Nine Months Ended
April 30 April 30
-------------------- ---------------------
1996 1995 1996 1995
--------- --------- -------- -----------
<S> <C> <C> <C> <C>
(Restated -
See Note 5)
NET SALES $60,139 $62,147 $177,258 $172,995
COST OF SALES 56,286 52,075 156,859 147,553
------- ------- -------- --------
Gross profit 3,853 10,072 20,399 25,442
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,668 2,781 9,161 9,915
SPECIAL CHARGE (Note 7) 3,155 - 3,155 -
------- ------- -------- --------
Operating income (loss) (2,970) 7,291 8,083 15,527
Interest expense 1,263 812 3,942 1,998
AMORTIZATION OF DEFERRED FINANCING COSTS 46 69 124 237
------- ------- -------- --------
Income (loss) before income taxes, cumulative effect of
accounting change and extraordinary item (4,279) 6,410 4,017 13,292
PROVISION (BENEFIT) FOR INCOME TAXES (1,752) 2,627 1,646 5,450
------- ------- -------- --------
Income (loss) before cumulative effect of accounting change
and extraordinary item (2,527) 3,783 2,371 7,842
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 5) - - - (1,214)
EXTRAORDINARY ITEM (Note 2) - (814) - (814)
------- ------- -------- --------
Net income (loss) $(2,527) $ 2,969 $ 2,371 $ 5,814
======= ======= ======== ========
NET INCOME (LOSS) PER COMMON SHARE:
Income (loss) before cumulative effect of accounting change and
extraordinary item $ (0.30) $ 0.47 $ 0.29 $ 0.98
Cumulative effect of accounting change - - - (0.15)
Extraordinary item - (0.10) - (0.10)
------- ------- -------- --------
Net income (loss) $ (0.30) $ 0.37 $ 0.29 $ 0.73
======= ======= ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,347 8,030 8,273 7,974
======= ======= ======== ========
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated statements.
4
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended April 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
Additional Retained
Common Paid-in Earnings
Stock Capital (Deficit)
----- ------- -------
<S> <C> <C> <C>
BALANCE, July 31, 1994 $77 $43,193 $(8,352)
Net income (Restated - See Note 5) - - 5,814
Issuance of common stock, net - 135 -
--- ------- -------
BALANCE, April 30, 1995 $77 $43,328 $(2,538)
=== ======= =======
BALANCE, July 31, 1995 $80 $49,671 $ 703
Net income - - 2,371
Issuance of common stock, net 1 1,500 -
--- ------- -------
BALANCE, April 30, 1996 $81 $51,171 $ 3,074
=== ======= =======
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated statements.
5
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three and Nine Months Ended April 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Nine Months Ended
April 30 April 30
-------------------- ---------------------
1996 1995 1996 1995
--------- --------- -------- -----------
<S> <C> <C> <C> <C>
(Restated -
See Note 5)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,527) $ 2,969 $ 2,371 $ 5,814
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Cumulative effect of accounting change - - - 1,214
Extraordinary item - 814 - 814
Depreciation and amortization 2,484 1,921 7,727 4,852
Deferred income taxes 147 125 456 393
Changes in certain assets and liabilities
Accounts receivable - net 469 2,077 8,673 (477)
Inventories 4,259 (2,680) (698) (4,555)
Prepaid expenses and other current assets (73) 376 (489) (989)
Other assets - net 204 (907) (476) (1,894)
Accounts payable, due to affiliate and accrued liabilities 1,311 (744) (5,450) 4,017
Other long-term liabilities (3) 8 (12) 9
------- -------- ------- --------
Total adjustments 8,797 990 9,731 3,384
------- -------- ------- --------
Net cash provided by operating activities 6,271 3,959 12,102 9,198
------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,000) (8,194) (6,751) (22,320)
Change in restricted cash - 224 - 468
------- -------- ------- --------
Net cash used in investing activities (2,000) (7,970) (6,751) (21,852)
------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in cash overdrafts 316 2,148 3,505 3,465
Net receipts (payments) under previous line of credit - (22,366) - (22,914)
Activity under New Credit Agreement:
Issuance of non-amortizing term loan - 15,000 - 15,000
Net activity under revolving line of credit (3,672) 7,320 (8,697) 7,320
Repayment of acquisition facility (1,416) - (4,248) -
Issuance of other long-term debt - 2,804 2,632 9,221
Repayment of other long-term debt (572) (555) (1,654) (555)
Payment of deferred financing costs (78) (340) (356) (486)
Issuance of common stock - net 1,151 - 1,501 135
------- -------- ------- --------
Net cash provided by (used in) financing activities (4,271) 4,011 (7,317) 11,186
------- -------- ------- --------
Net change in cash - - (1,966) (1,468)
CASH, beginning of period - - 1,966 1,468
------- -------- ------- --------
CASH, end of period $ - $ - $ - $ -
======= ======== ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,424 $ 962 $ 3,868 $ 1,811
Cash paid for income taxes, net 862 1,039 2,703 3,423
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated statements.
6
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
ABC Rail Products Corporation (the "Company") is a leader in the
engineering, manufacturing and marketing of replacement products and
original equipment for the freight railroad and rail transit industries.
The Company's products include specialty trackwork, such as rail crossings
and switches, and mechanical products, such as railcar, locomotive and
idler wheels, mounted wheel sets and metal brake shoes.
The accompanying unaudited consolidated financial statements include, in
the opinion of management, all adjustments (consisting of only normal
recurring adjustments) necessary for a fair statement of the results of
operations and financial condition of the Company for and as of the interim
dates. Results for the interim periods are not necessarily indicative of
results for the entire year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The Company
believes that the disclosures contained herein are adequate to make the
information presented not misleading. These unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1995
Annual Report to Stockholders.
2. REFINANCING AND PUBLIC STOCK OFFERING
On March 31, 1995, the Company negotiated a new five-year credit agreement
(the "New Credit Agreement") with a group of lenders allowing for maximum
direct borrowings and outstanding letters of credit of up to $80 million.
The new facility included a $15 million non-amortizing term loan, a $40
million revolving credit line and a one-time $25 million acquisition
facility. On November 30, 1995, the Company and its lenders amended the
new facility by increasing the revolving credit line to $50 million from
$40 million, and by recharging the availability under the acquisition line
from the $8 million remaining after the wheel mounting business acquisition
(see Note 3 for additional comments) to $17.8 million. Maximum
availability under the revolving credit line is limited to certain advance
rates on eligible accounts receivable and inventories. At April 30, 1996,
total remaining availability under the New Credit Agreement was $37.3
million and the weighted average interest rate on outstanding borrowings
was 8.2%. The New Credit Agreement and other credit facilities contain
customary financial and other covenants. As a result of the special charge
recorded during the quarter (see Note 7 for additional comments), the
Company was in technical default of the minimum fixed charge coverage ratio
contained in the New Credit Agreement. The Company immediately obtained a
waiver of default from its group of lenders and an amendment allowing for
the exclusion of the special charge from current and future covenant
compliance calculations. As a result of the amendment, the Company was in
compliance with all of the covenants under its credit facilities as of
April 30, 1996.
The fiscal 1995 third quarter includes an extraordinary after-tax, non-cash
charge of $0.8 million related to the write-off of unamortized deferred
financing charges associated with debt which was refinanced under the New
Credit Agreement.
7
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In June 1995, the Company issued shares of common stock for net proceeds
of $6.5 million. Such proceeds were used to pay down indebtedness under
the New Credit Agreement.
3. BUSINESS COMBINATIONS
Effective May 15, 1995, the Company purchased from General Electric Railcar
Wheel and Parts Services Corporation ("GESC") substantially all of the
assets of the railcar wheel mounting facilities of GESC (the "Wheel
Mounting Business"). In consideration for the acquisition of the assets of
the Wheel Mounting Business, the Company paid GESC approximately $26.1
million in cash and assumed certain of GESC's contractual liabilities. The
Company obtained the funds to pay the purchase price and related
transaction costs of approximately $1.0 million from borrowings under the
New Credit Agreement.
The acquisition was accounted for as a purchase for financial reporting
purposes. Accordingly, certain recorded assets and liabilities of the
acquired business were revalued at estimated fair values as of the
acquisition date. Management has used its best judgment and available
information in estimating the fair value of those assets and liabilities.
Any changes to these estimates are not expected to be material. The
operating results of the Wheel Mounting Business are included in the
consolidated statements of operations from the date of acquisition.
The following data represents the Company's unaudited pro forma results of
operations for the nine months ended April 30, 1995 as if the Wheel
Mounting Business acquisition had occurred on August 1, 1994 (in thousands,
except per share data):
<TABLE>
<CAPTION>
Nine Months Ended
April 30, 1995
-----------------
<S> <C>
Net sales $203,647
Income before cumulative effect of accounting change and extraordinary item 9,047
Net income 7,019
Per share data:
Income before cumulative effect of accounting change and extraordinary item $ 1.13
Net income $ 0.88
</TABLE>
8
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The pro forma operating results include the pre-acquisition results of
operations of the Wheel Mounting Business for the indicated years with
adjustments to reflect amortization of goodwill, different depreciation
expense, interest expense on the acquisition borrowings and the effect of
income taxes thereon. The pro forma information given above does not
purport to be indicative of the results that actually would have been
obtained if the operations were combined during the period presented and is
not intended to be a projection of future results or trends.
On July 31, 1995, the Company entered into a 50-50 joint venture with
Anchor Brake Shoe Company ("Anchor"). The purpose of the joint venture is
to design, manufacture, market and sell railcar composite brake shoes. The
Company's initial contribution to the joint venture included the
inventories and property, plant and equipment of its composite brakeshoe
facility in Chicago, Illinois and certain related accounts receivable and
other current assets aggregating $3.5 million. Anchor contributed its
composite brakeshoe facility which, net of a promissory note from the joint
venture, resulted in an initial contribution of $3.5 million. Certain of
the assets contributed to the joint venture by the Company may be sold by
the joint venture by July 31, 1996. Any difference between the sale
proceeds and the contributed value of such assets will be credited to the
appropriate partner. Pursuant to a related Commission Agreement between
the Company and the joint venture, the joint venture must pay the Company a
3% commission on sales of the joint venture that are generated through the
Company.
4. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method for substantially all inventories.
Inventory costs include material, labor and manufacturing overhead.
Supplies and spare parts primarily consist of manufacturing supplies and
equipment replacement parts.
Inventories at April 30, 1996, and July 31, 1995, consisted of the
following (in thousands):
April 30, July 31,
1996 1995
--------- --------
Raw materials $20,956 $22,316
Work in process 7,438 7,769
Finished goods 3,522 1,522
Supplies and spare parts 4,342 3,953
------- -------
$36,258 $35,560
======= =======
9
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. RESTATEMENT
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" in the fourth quarter
of fiscal 1995, but effective, and therefore reflected herein, as of
August 1, 1994. The adoption resulted in a one-time cumulative adjustment
of $2.1 million ($1.2 million, net of income tax). Previously reported net
income and net income per share for the nine months ended April 30, 1995
were $7.0 million and $0.88, respectively. The incremental costs of
adopting this statement are insignificant on an ongoing basis.
6. COMMITMENTS AND CONTINGENCIES
In connection with its formation and the purchase of certain assets and
liabilities from the Railroad Products Group of Abex Corporation ("Abex")
in 1987, the Company obtained a comprehensive environmental indemnity from
Abex. Pursuant to that indemnity, the Company filed suit against Abex in a
1991 lawsuit to recoup costs incurred and paid by the Company related to
environmental matters that existed prior to the purchase by the Company.
In October 1995, a judgment in the lawsuit was finalized whereby the
Company received a payment of $2.8 million from Abex. The Company recorded
the receipt of this payment as a reserve to address other potential matters
related to ongoing Abex issues. The judgment is exclusive of
indemnification for any future environmental claims. The Company's claim
regarding the loss it incurred on the subsequent sale of one of the
properties purchased from Abex was not included in the judgment and is the
subject of another lawsuit.
7. SPECIAL CHARGE
During the third quarter of fiscal 1996, the Company recorded a special
charge of $3.2 million. The special charge consisted of the following (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Plant closure expenses $1,177
Reengineering costs 1,651
Settlement fees 327
------
$3,155
======
</TABLE>
As described in Note 3, on July 31, 1995, the Company entered into a 50-50
joint venture with Anchor Brake Shoe Company for the purpose of selling
railcar composite brake shoes. The success of the joint venture in meeting
total production needs from one plant has resulted in the closure of the
Company's former brake shoe facility. The plant closure expenses represent
the severance, pension and other related exit expenses for those employees
associated with the permanent displacement of the plant's vested hourly
employees. Pursuant to the joint venture agreement, any such displacement
costs were to be borne by the Company.
In conjunction with the Company's overall strategic goals and growth
objectives, costs are being incurred to reengineer a number of key business
processes. The costs reflect the overall restructuring of the Company's
human resources to support the newly-designed
10
<PAGE>
work processes.
During fiscal 1995, the Company sold metal brake shoes to the National
Railroad of Mexico. Subsequent to this transaction, the Mexican government
assessed additional excise and value added taxes. A final settlement was
reached on this issue during this quarter.
11
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and results of
operations during the interim periods included in the accompanying unaudited
Consolidated Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED APRIL 30, 1996 COMPARED TO THREE MONTHS ENDED APRIL 30, 1995
Net Sales. Net sales decreased 3.2% to $60.1 million from $62.1 million. The
decrease in sales was principally caused by a fire January 31, 1996 at the
Company's Calera Wheel Mounting plant which was out of production most of
February and has required a much longer than anticipated time to return to
normal production levels. The sales decline also reflects the absence of
composite brake shoe sales due to the recent formation of an unconsolidated
joint venture with Anchor Brake Shoe Company for the manufacturing of composite
brake shoes, and lower specialty trackwork sales due to merger-induced slowdowns
of order releases on western Class I railroads. Sales declines were offset by
the sales from the wheel mounting business acquired in late fiscal 1995.
Gross Profit and Cost of Sales. Gross profit decreased 61.7% to $3.9 million
from $10.1 million. The $6.2 million decrease was primarily due to the sales
volume declines discussed above, and a gross margin decrease to 6.4% from 16.2%
due principally to fire-related production and cost problems at the Calera wheel
plant, which continued to experience higher scrap levels and increased
production costs during the restart period. The Company is insured against
physical damage and business interruption. The claim process is expected to
take four or five months to complete. Insurance deductibles are minimal and
coverage is continued on the facility.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.9 million. As a percent of net sales,
selling, general and administrative expenses increased to 6.1% from 4.5% but
would have been at 5% relative to expected sales levels. The increase in
expenses reflects the selective recruitment of personnel and business
development costs to support the strategic direction of the Company.
Special Charge. During the current quarter, the Company recorded a $3.2 million
special charge arising from a plant closure resulting from the success of its
composite brake shoe joint venture, reengineering-related costs and the
settlement of disputed excise and value-added taxes in Mexico. (See Note 7 for
additional information.)
Operating Income (Loss). Operating income was $7.3 million in the three months
ended April 30, 1995 versus an operating loss of $3.0 million in the comparable
1996 period The decrease resulted from the 61.7% ($6.2 million) decrease in
gross profit, along with the increase in selling, general and administrative
expenses ($0.9 million) and the third quarter fiscal 1996 special charge ($3.2
million).
12
<PAGE>
Other. Interest expense increased 55.5%, or $0.5 million, due primarily to
increases in indebtedness related to funding for the new wheel machining center
at Calera and the May, 1995 acquisition of the wheel mounting business.
The $0.8 million extraordinary charge in 1995 represents the after-tax effect of
the write-off of unamortized deferred financing costs related to the early
extinguishment of debt in connection with the Company's refinancing of its line
of credit in March 1995.
NINE MONTHS ENDED APRIL 30, 1996 COMPARED TO NINE MONTHS ENDED APRIL 30, 1995
Net Sales. Net sales increased 2.5% to $177.3 million from $173.0 million. The
increase in sales reflects the acquisition of the wheel mounting business in
late fiscal 1995, offset by lower sales of wheels and idlers, composite brake
shoes and specialty trackwork for the reasons noted above in the third quarter
comments. Due to the recent formation of an unconsolidated joint venture with
Anchor Brake Shoe Company for the manufacturing of composite brake shoes, the
first nine months of fiscal 1996 do not include any sales from that product
line.
Gross Profit and Cost of Sales. Gross profit decreased 19.8% to $20.4 million
from $25.4 million. The $5.0 million decrease was primarily due to the fire and
restart costs at the Calera Wheel Mounting plant and the sales changes discussed
above in the third quarter sales and margin comments.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $0.8 million. As a percent of net sales,
selling, general and administrative expenses decreased to 5.2% from 5.7%. The
decreases were primarily due to the absence in fiscal 1996 of significant legal
fees incurred in the Abex environmental lawsuit, the fees related to the October
1994 sale of the Company's common stock by the Company's then majority
shareholder and continued focus in fiscal 1996 on control of operating expenses.
Special Charge. During the current quarter, the Company recorded a $3.2 million
special charge arising from a plant closure resulting from the success of its
composite brake shoe joint venture, reengineering-related costs incurred to
enhance trackwork products profitability and the settlement of disputed excise
and value-added taxes in Mexico. (See Note 7 for additional information.)
Operating Income. Operating income decreased 47.9% to $8.1 million from $15.5
million. The decrease resulted largely from the 19.8% ($5.0 million) decrease
in gross profit and the third quarter fiscal 1996 special charge ($3.2 million),
offset by the decrease in selling, general and administrative expenses ($0.8
million). The Company's sales and profits are typically lower during the first
half of the Company's fiscal year than during the second half of the fiscal
year. See "Seasonality."
Other. Interest expense increased 97.3%, or $1.9 million, due primarily to
increases in indebtedness related to funding for the new wheel machining center
at Calera and the May, 1995 acquisition of the wheel mounting business.
The $1.2 million cumulative effect of accounting change in fiscal 1995
represents the after-tax effect of the Company's adoption of SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." See Note 5 for additional
information.
13
<PAGE>
The $0.8 million extraordinary charge in 1995 represents the after-tax effect of
the write-off of unamortized deferred financing costs related to the early
extinguishment of debt in connection with the Company's refinancing of its line
of credit in March, 1995.
SEASONALITY
- -----------
The peak season for installation of specialty trackwork extends from March
through October, when weather conditions are generally favorable for
installation and, as a result, net sales of specialty trackwork have
historically been more concentrated in the period from January through June, a
period roughly corresponding to the second half of the Company's fiscal year.
In addition, a number of the Company's facilities close for regularly scheduled
maintenance in the late summer and late December, which tends to reduce
operating results during the first half of the Company's fiscal year. Transit
industry practice with respect to specialty trackwork generally involves the
periodic shipment of large quantities, which may be unevenly distributed
throughout the year. The Company does not expect any significant departure from
the historical demand patterns during the present fiscal year ending July 31,
1996.
The following graphs illustrate the historical results of the Company's seasonal
pattern of sales and income.
DESCRIPTION OF GRAPHS (FOR EDGAR FILING ONLY)
- ----------------------------------------------
The following graphs represent our seasonal pattern of net sales and income
(loss) before cumulative effect of accounting change and extraordinary items.
Each graph shows, by quarter, the net sales and income (loss) for the current
year as well as the previous four fiscal years.
QUARTERLY NET SALES
($ in Millions)
[GRAPH APPEARS HERE]
QUARTERLY NET SALES
($ in Millions)
[GRAPH APPEARS HERE]
* Before Cumulative Effect of Accounting Change and Extraordinary Items
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash generated from operations, structured borrowings and equity offerings have
been the major sources of funds for working capital, capital expenditures and
acquisitions. For the nine months ended April 30, 1996 and 1995, net cash
provided by operating activities totaled $12.1 million and $9.2 million,
respectively.
On March 31, 1995, the Company negotiated a new five-year credit agreement (the
"New Credit Agreement") with a group of lenders allowing for maximum direct
borrowings and outstanding letters of credit of up to $80 million. The new
facility included a $15 million non-amortizing term loan, a $40 million
revolving credit line and a one-time $25 million acquisition facility. On
November 30, 1995, the Company and its lenders amended the new facility by
increasing the revolving credit line to $50 million from $40 million, and by
recharging the availability under the acquisition line from the $8 million
remaining after the wheel mounting business acquisition to $17.8 million.
Capital expenditures were $6.8 million in the nine months ended April 30, 1996,
primarily reflecting capital spending for normal support of business activities
and cost improvement programs. The Company's special capital expenditure
program, started in fiscal 1995, includes expenditures of $24.0 million to build
the recently completed wheel machining plant and to build the rail mill now in
progress. Cumulatively, approximately $19.9 million had been spent on these
special capital projects as of April 30, 1996.
At April 30, 1996, total remaining availability under the New Credit Agreement
was $37.3 million and the weighted average interest rate on outstanding
borrowings was 8.2%. The New Credit Agreement and other credit facilities
contain customary financial and other covenants. As a result of the special
charge recorded during the quarter, the Company was in technical default of the
minimum fixed charge coverage ratio contained in the New Credit Agreement. The
Company immediately obtained a waiver of default from its group of lenders and
an amendment allowing for the exclusion of the special charge from current and
future covenant compliance calculations. As a result of the amendment, the
Company was in compliance with all of its credit facilities as of April 30,
1996.
On September 26, 1994, the Company entered into a five-year term loan agreement
to finance up to $9.9 million in capital expenditures for the new wheel
machining center for its Calera, Alabama facility. A total of $9.2 million was
drawn under this loan. The Company entered into an additional seven-year term
loan agreement with the same lender on July 20, 1995 to finance up to $12.5
million of capital expenditures for the new rail mill center located in Chicago
Heights, Illinois. Through April 30, 1996, $2.6 million has been drawn under
this second term loan.
In connection with its formation and the purchase of certain assets and
liabilities from the Railroad Products Group of Abex Corporation ("Abex") in
1987, the Company obtained a comprehensive environmental indemnity from Abex.
Pursuant to that indemnity, the Company filed suit against Abex in a 1991
lawsuit to recoup costs incurred and paid by the Company related to
environmental matters that existed prior to the purchase by the Company. In
October 1995, a judgment in the lawsuit was finalized with the Company receiving
a payment of $2.8 million from Abex. The Company recorded the receipt of this
payment as a reserve to address other potential matters related to ongoing Abex
issues. The judgment is exclusive of indemnification for any future
environmental claims. The Company's claim regarding the loss it incurred on the
subsequent sale of one of the properties purchased from Abex was not included in
the judgment and is the subject of another lawsuit.
15
<PAGE>
During the current quarter, the Company announced a joint venture agreement with
China's Ministry of Railroads to establish the Datong ABC Castings Company Ltd.
The joint venture will manufacture wheels in China primarily for the rapidly
growing Chinese railway markets. The Company's contribution of its 40 percent
share in the joint venture will consist of technical know-how, expertise and
cash. The Company's cash infusion of approximately $9.3 million will be made
over the next nine months, and is expected to be funded from operations.
The special charge of $3.2 million reflects $1.0 million paid out in quarter
ended April 30, 1996, $1.3 million to be paid out during six month period ended
October 31, 1996 and the balance to be paid out over the next several months.
In May, 1996, the Company acquired Deco Industries for a combination of cash and
stock. Deco Industries is a leading manufacturer of railroad classification
yard retarders, retarder control systems and automation systems.
16
<PAGE>
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
None
17
<PAGE>
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.
ABC RAIL PRODUCTS CORPORATION
/s/ D. Chisholm MacDonald
------------------------------------
D. Chisholm MacDonald
Senior Vice President and
Chief Financial Officer
(Duly authorized Officer and
Principal Financial and Accounting Officer)
Date: June 14, 1996
--------------------------------
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE PERIOD ENDED APRIL 30, 1996 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> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> APR-27-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 30,065<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 36,258
<CURRENT-ASSETS> 69,873
<PP&E> 92,647
<DEPRECIATION> 28,129
<TOTAL-ASSETS> 147,473
<CURRENT-LIABILITIES> 40,184
<BONDS> 44,009
<COMMON> 81
0
0
<OTHER-SE> 54,245
<TOTAL-LIABILITY-AND-EQUITY> 147,473
<SALES> 177,258
<TOTAL-REVENUES> 177,258
<CGS> 156,859
<TOTAL-COSTS> 156,859
<OTHER-EXPENSES> 16,382
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,066
<INCOME-PRETAX> 4,017
<INCOME-TAX> 1,646
<INCOME-CONTINUING> 2,371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,371
<EPS-PRIMARY> $0.29
<EPS-DILUTED> $0.29
<FN>
<F1> Notes and accounts receivable - trade are reported net of allowances for
doubtful accounts in the Consolidated Balance Sheets.
</FN>
</TABLE>
