<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, 1997 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 May 30, 1997
- ------------------------------ -----------------------------
Common Stock, $.01 par value 8,954,082 Shares
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C>
Page
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 -- 17
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of April 30, 1997 and July 31, 1996
<TABLE>
<CAPTION>
(In thousands, except share and per share data)
April 30, July 31,
ASSETS 1997 1996
- ------ ----------- ---------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable, less allowances of $863 and $865, respectively $ 42,184 $ 31,515
Inventories (Note 3) 48,821 39,318
Prepaid expenses and other current assets 1,580 1,810
Prepaid income taxes 3,460 3,625
-------- --------
Total current assets 96,045 76,268
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,927 1,605
Buildings and improvements 12,306 12,127
Machinery and equipment 77,347 73,664
Construction in progress 34,465 15,459
-------- --------
126,045 102,855
Less - Accumulated depreciation (35,284) (30,106)
-------- --------
Net property, plant and equipment 90,761 72,749
-------- --------
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES 11,294 5,604
-------- --------
OTHER ASSETS - net 28,462 15,483
-------- --------
Total assets $226,562 $170,104
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Cash overdrafts $ 4,404 $ 3,907
Current maturities of long-term debt 2,369 6,942
Accounts payable 24,044 22,759
Accrued liabilities 19,998 14,798
-------- --------
Total current liabilities 50,815 48,406
-------- --------
LONG-TERM DEBT, less current maturities (Note 4) 87,654 49,443
-------- --------
DEFERRED INCOME TAXES 4,266 5,316
-------- --------
OTHER LONG-TERM LIABILITIES 5,985 4,265
-------- --------
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;
8,954,082 shares and 8,271,026 shares issued and outstanding
as of April 30, 1997 and July 31, 1996, respectively 90 83
Additional paid-in capital 67,372 55,251
Retained earnings 10,380 7,340
-------- --------
Total stockholders' equity 77,842 62,674
-------- --------
Total liabilities and stockholders' equity $226,562 $170,104
======== ========
</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, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data)
Three Months Ended Nine Months Ended
April 30 April 30
-------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- --------
<S> <C> <C> <C> <C>
NET SALES $73,817 $60,139 $185,438 $177,258
COST OF SALES 67,592 56,286 165,232 156,859
------- ------- -------- --------
Gross profit 6,225 3,853 20,206 20,399
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,725 3,668 9,667 9,161
SPECIAL CHARGE (NOTE 7) - 3,155 - 3,155
------- ------- -------- --------
Operating income (loss) 2,500 (2,970) 10,539 8,083
INTEREST EXPENSE 1,943 1,263 4,641 3,942
AMORTIZATION OF DEFERRED FINANCING COSTS 117 46 229 124
------- ------- -------- --------
Income (loss) before income taxes and extraordinary item 440 (4,279) 5,669 4,017
PROVISION (BENEFIT) FOR INCOME TAXES 177 (1,752) 2,319 1,646
------- ------- -------- --------
Income (loss) before extraordinary item 263 (2,527) 3,350 2,371
EXTRAORDINARY ITEM (NOTE 4)) (310) - (310) -
------- ------- -------- --------
Net income (loss) ($ 47) ($2,527) $ 3,040 $ 2,371
======= ======= ======== ========
NET INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item $ 0.03 ($ 0.30) $ 0.38 $ 0.29
Extraordinary item (0.03) - (0.03) -
------- ------- -------- --------
Net income (loss) $ - ($ 0.30) $ 0.35 $ 0.29
======= ======= ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,954 8,347 8,671 8,273
======= ======= ======== ========
</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, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
Additional
Common Paid-in Retained
Stock Capital Earnings
------ ---------- --------
<S> <C> <C> <C>
BALANCE, July 31, 1995 $80 $49,671 $ 703
Net income - - 2,371
Exercised stock options 1 1,500 -
--- ------- -------
BALANCE, April 30, 1996 $81 $51,171 $ 3,074
=== ======= =======
BALANCE, July 31, 1996 $83 $55,251 $ 7,340
Net income - - 3,040
Exercised stock options 1 1,484 -
Income tax benefit from exercised stock options - 417 -
Shares issued in business acquisition 6 10,220 -
--- ------- -------
BALANCE, April 30, 1997 $90 $67,372 $10,380
=== ======= =======
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated statements.
5
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three and Nine Months Ended April 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Nine Months Ended
April 30 April 30
-------------------- -------------------
1997 1996 1997 1996
--------- -------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($ 47) ($2,527) $ 3,040 $ 2,371
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Extraordinary item 310 - 310 -
Depreciation and amortization 2,859 2,484 9,212 7,727
Deferred income taxes 167 147 473 456
Changes in certain assets and liabilities, net of effect of acquired business:
Accounts receivable - net (6,684) 469 (4,427) 8,673
Inventories 44 4,259 (9,312) (698)
Prepaid expenses and other current assets 1,835 (73) 330 (489)
Other assets - net (693) 204 (1,886) (476)
Accounts payable and accrued liabilities (5,346) 1,311 1,981 (5,450)
Other long-term liabilities - (3) 1 (12)
-------- ------- -------- -------
Total adjustments (7,508) 8,798 (3,318) 9,731
-------- ------- -------- -------
Net cash provided by (used in) operating activities (7,555) 6,271 (278) 12,102
-------- ------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (11,915) (2,000) (24,895) (6,751)
Business acquisitions, less cash acquired - - (2) -
Investment in joint ventures (2,050) - (4,971) -
-------- ------- -------- -------
Net cash used in investing activities (13,965) (2,000) (29,868) (6,751)
-------- ------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in cash overdrafts 2,010 316 349 3,505
Activity under the Credit Agreement:
Net activity under revolving line of credit (4,611) (3,672) 4,805 (8,697)
Repayment of acquisition facility (2,165) (1,416) (5,193) (4,248)
Draw on acquisition facility - - 1,750 -
Repayment of term loan (15,000) - (15,000) -
Issuance of senior subordinated notes 50,000 - 50,000 -
Issuance of other long-term debt - - 1,878 2,632
Repayment of other long-term debt (6,039) (572) (7,182) (1,654)
Payment of deferred financing costs (2,675) (78) (2,746) (356)
Exercised stock options - 1,151 1,485 1,501
-------- ------- -------- -------
Net cash provided by (used in) financing activities 21,520 (4,271) 30,146 (7,317)
-------- ------- -------- -------
Net change in cash - - - (1,966)
CASH, beginning of period - - - 1,966
-------- ------- -------- -------
CASH, end of period $ - $ - $ - $ -
======== ======= ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 804 $ 1,424 $ 3,430 $ 3,868
Cash paid for income taxes, net 900 862 1,576 2,703
NON-CASH TRANSACTIONS:
Business acquisitions
Common stock issued $ - $ - $ 10,226 $ -
Cash paid - - 2 -
-------- ------- -------- -------
Total consideration - - 10,228 -
Assets acquired - - 17,209 -
-------- ------- -------- -------
Liabilities assumed $ - $ - $ 6,981 $ -
======== ======= ======== =======
</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 and services include specialty trackwork, such as
rail crossings and switches; mechanical products, such as rail car,
locomotive and idler wheels, mounted wheel sets and metal brake shoes;
classification yard products and automation systems; and railway signal
system installation and maintenance.
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 as permitted by 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
included in the Company's 1996 Annual Report to Stockholders.
2. Business Combinations
Effective May 31, 1996, the Company acquired Deco Industries Inc. of
Milwaukee, Wisconsin, and selected assets of Deco Automation ("Deco")
located in Norristown, Pennsylvania, for a combination of common stock and
cash. The acquired companies manufacture railroad classification yard
retarder control and automation systems. Under the purchase agreement, the
prior owners will be issued additional shares of common stock if certain
earnings goals are met over the next five years. For the three and nine
months ended April 30, 1997, the assumed issuance of such contingent shares
(along with the assumed earnings level) would not reduce reported earnings
per share.
Effective May 31, 1996, the Company purchased its partner's interest in the
ABC Rail Cogifer Industrial joint venture partnership. The initial purpose
of ABC Rail-Cogifer Industrial was to manufacture and sell trackwork from
the Cincinnati, Ohio, facility purchased by the partnership from Cogifer
S.A. in January 1994. The plant's new role within the Company has been
redirected towards both new and remanufactured track products.
Effective June 21, 1996, the Company began operating a wheel mounting,
wheel assembly and trackwork service business in Tacoma, Washington. The
Company is currently leasing the operating facility from the previous
operators with whom the Company also entered into certain employment,
consulting and non-compete agreements.
Effective December 17, 1996, the Company acquired American Systems
Technologies, Inc. ("AST") of Verona, Wisconsin primarily with common
stock. AST provides railway signal system installation and maintenance to
the short line, regional, commuter and transit railroads.
7
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As part of the purchase agreement, the prior owners will be issued
additional shares of common stock if certain earnings goals are met over
the next three years. For the three and nine months ended April 30, 1997,
the assumed issuance of such contingent shares (along with the assumed
earnings level) would not reduce reported earnings per share.
3. 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, 1997, and July 31, 1996, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
April 30, July 31,
1997 1996
--------- --------
<S> <C> <C>
Raw materials $28,979 $22,886
Work in process 9,909 7,779
Finished goods 5,352 4,497
Supplies and spare parts 4,581 4,156
------- -------
$48,821 $39,318
======= =======
</TABLE>
4. Debt
On November 15, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission for the issuance of up to $100 million
of Subordinated Debt Securities and/or shares of its Common Stock. On
February 1, 1997, the Company completed an offering (the "Offering") of $50
million of 9 1/8% Senior Subordinated Notes (the "Notes"). The Company
used the $47.9 million of net proceeds of the Offering to repay certain
outstanding indebtedness under its primary and other credit facilities. A
$0.3 million extraordinary after-tax loss was recognized in the third
quarter of fiscal year 1997 upon the early retirement of this indebtedness.
The Notes are general unsecured obligations of the Company and are
subordinated in right of payment to all existing and future senior
indebtedness of the Company and other liabilities of the Company's
subsidiaries. The Notes will mature in 2004, unless repurchased earlier at
the option of the Company after January 15, 1999 at 102% of face value
prior to January 14, 2000, or at 100% of face value thereafter. The Notes
are subject to mandatory repurchase or redemption prior to maturity upon a
Change of Control (as defined). The Indenture under which the Notes were
issued subjects the Company to various financial covenants which, among
other things, require the Company to maintain (all as defined) (i) a
minimum Consolidated Net Worth, (ii) a minimum Operating Coverage Ratio and
(iii) a maximum Funded Debt to Consolidated Capitalization Ratio and limits
the Company's ability to (i) incur additional indebtedness, (ii) complete
certain mergers, consolidations and sales of assets, and (iii) pay
dividends or other distributions.
8
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Prior to the Offering, the Company's primary credit facilities included a
five year credit agreement (the "Credit Agreement") and two term loans.
The Credit Agreement included a $15.0 million non-amortizing term loan, a
$50.0 million (as amended) revolving credit line and a $17.8 million (as
amended) acquisition facility.
Simultaneous with the consummation of the Offering, the Company amended and
restated the Credit Agreement. Under the amended Credit Agreement (i) the
non-amortizing term loan and the acquisition facility that existed under
the Credit Agreement were paid in full and canceled, (ii) the revolving
credit line that existed under the Credit Agreement was increased to $90
million and (iii) the terms of certain financial covenants were modified.
The modified financial covenants under the amended Credit Agreement are
similar to those under the Notes Indenture. The Company was in compliance
with the new debt covenants as of April 30, 1997.
Interest on all amounts borrowed under the Credit Agreement is payable at
the option of the Company at either the base rate (as defined) plus 0.5%,
or LIBOR (as defined) plus 2.0% and is payable monthly while the base rate
is in effect or every one to six months while the LIBOR rate is in effect.
As of April 30, 1997, the weighted average interest rate of outstanding
borrowings under the Credit Agreement was 8.3%. The Company has pledged as
collateral under the Credit Agreement substantially all of its property,
plant and equipment, eligible accounts receivable and inventories,
intellectual property and capital stock of its subsidiaries. As of April
30, 1997, availability under the amended Credit Agreement was $27.7
million.
The Company entered into a seven-year term loan agreement on July 20, 1995,
to finance up to $12.5 million of capital expenditures for the rail mill
center located in Chicago Heights, Illinois. Through April 30, 1997, $4.5
million had been drawn under this term loan. The term loan is secured by
the related fixed assets, bears interest at 7.3% as of April 30, 1997 and
contains financial covenants which require the Company to maintain minimum
levels of net worth and a minimum fixed charge coverage ratio. A second,
similar term loan was repaid in full with a portion of the proceeds from
the Offering. The Company was in compliance with all of its covenants
under the term loan as of April 30, 1997.
5. 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. The indemnity covers environmental conditions, whether or not then
known, in existence at the time of purchase, without dollar or time limit.
Shortly after the purchase, the Company performed surveys to assess the
environmental conditions at the time of the purchase.
As a result of these studies, the Company has undertaken environmental
projects, including underground storage tank removal, corrective action and
other remedial action as necessary. Some of these actions are ongoing and
similar actions may be necessary in the future. When Abex refused to
compensate the Company for costs incurred, the Company filed suit against
Abex on November 18, 1991. In a separate lawsuit filed in October 1994,
the Company also
9
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
asserts that Abex is required to indemnify the Company for the reduction in
value of one of the sold properties (a Pennsylvania manufacturing facility
formerly owned by the Company) caused by the environmental contamination at
that site. In October 1995, a judgment in the 1991 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. While
the Company believes the costs of environmental projects related to ongoing
Abex issues may be properly recoverable under the indemnity, the Company is
responsible for such costs irrespective of whether it receives payment
under the indemnity.
6. China Joint Venture
In May 1996, the Company entered into 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% share in the joint venture will consist of technical know-how,
expertise and cash. The Company's cash infusion of approximately $9.2
million is expected to be complete by the end of fiscal year 1997 and is
expected to be funded from operations. Through April 30, 1997, $6.3
million ($4.7 million during the first nine months of fiscal 1997) has been
contributed to the joint venture and additional amounts have been deferred
in organizing the venture.
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>
<S> <C>
Plant closure expenses $1,177
Reengineering costs 1,651
Settlement fees 327
------
$3,155
======
</TABLE>
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 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 work processes.
10
<PAGE>
ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 the third quarter of fiscal 1996.
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, 1997 Compared to Three Months Ended April 30, 1996
Net Sales. Net sales increased 22.7% to $73.8 million from $60.1 million. The
increase in sales is due primarily to an increase in sales of wheels and idlers,
along with an increase in sales of specialty trackwork. The increase in sales of
wheels and idlers between reporting periods reflects the fact that the third
quarter of fiscal year 1996 included the negative sales impact caused by the
fire on January 31, 1996 at the Company's Calera wheel manufacturing plant. The
plant was out of production most of February of 1996 and required a longer-than-
anticipated time to return to normal production levels. Offsetting the net
increase in sales of wheels and idlers between periods was an overall lower than
normal level of capacity during the fiscal year 1997 period reflecting
difficulties implementing process improvements in the sand systems at the wheel
foundry in Calera, Alabama. While these foundry process improvements have
resulted in temporary production slowdowns at this plant, when completed, the
foundry is expected to provide the quality input needed to capitalize on the
significant improvements recently instituted in the plant's machine shop. The
increase in specialty trackwork sales reflects the increase in activity from the
Western Class I railroads, somewhat offset by the acceleration of the planned
manufacturing process changes at the Company's trackwork plants. These process
upgrades require major reconfiguring of shop floor layouts into cell
manufacturing centers resulting in disruptions to the normal manufacturing
process flow. In addition, during the third quarter of fiscal 1997, production
flows in the trackwork plants were hindered by the introduction of new turnout
designs for two major customers. The production learning curve on these new
designs should be overcome by the middle of the fourth quarter of fiscal 1997.
In addition, the sales increase includes the added sales related to the
December, 1996 acquisition of AST. (See Note 2 for additional information.)
Gross Profit and Cost of Sales. Gross profit increased 61.6% to $6.2 million
from $3.9 million while gross margins increased from 6.4% to 8.4% period to
period. The increase in margins is due primarily to the negative impact of the
Calera fire during the prior year's third quarter. However, gross margins
remain below normal levels as the difficulties in completing major improvements
to manufacturing operations continue to be overcome. These improvements have
been accelerated because of the unexpectedly rapid consolidation of the railroad
customer base which has been driven by the recent series of Class I railroad
mergers. The changed needs of railroad customers for high levels of service,
better deliveries, and advanced quality standards have necessitated a radical
response from those rail supply entities which aim at growing in the new
railroad industry.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.1 million. The small increase in expenses
between quarters does not include any unusual items.
Special Charge. During the third quarter of fiscal year 1996, the Company
recorded a $3.2 million special charge arising from a plant closure resulting
from the success of combining operations into one plant at 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.)
12
<PAGE>
Operating Income. Operating income increased $5.5 million between quarters.
The change includes the increase in gross profit, along with no re-occurrence of
the Special Charge described above.
Other. Interest expense increased 53.8%, or $0.7 million, due primarily to an
overall higher level of outstanding debt to support expanding operations, along
with the marginally higher interest rate on the new Senior Subordinated Notes.
The new Senior Subordinated Note issue provides principle funds for seven years
from issue at 9 1/8% to supplement operating cash flows during this time of
change and growth. (See Note 4 for additional information.)
The extraordinary non-cash after-tax charge of $0.3 million reflected the write-
off of unamortized financing costs tied to previous indebtedness which was
retired with proceeds from the Senior Subordinated Notes issued during the third
fiscal quarter. (See Note 4 for additional information.)
Nine Months Ended April 30, 1997 Compared to Nine Months Ended April 30, 1996
Net Sales. Net sales increased 4.6% to $185.4 million from $177.3 million. The
increase in sales is due to the reasons cited above in the third quarter
comments along with the increase in sales related to the May, 1996 acquisition
of Deco. In addition, the first half of fiscal 1997 sales were adversely
impacted by the merger-induced slowdown of trackwork order releases from the
Western Class I railroads. The slowdown in Class I railroad orders enabled
production process changes to be pursued in the trackwork operations without a
significant negative impact on deliveries.
Gross Profit and Cost of Sales. Gross profit decreased slightly from $20.4
million to $20.2 million. Gross margins decreased from 11.5% to 10.9% and
continued below more normal levels as discussed above in comments on the third
quarter. The track products plants experienced reduced efficiencies, especially
during the second quarter of fiscal 1997, due to implementation of JIT cells and
"Re-engineering" of engineering and technical support processes. The third
quarter of fiscal 1997 was also hurt by sand system difficulties at our wheel
plant and changes to track product designs as discussed above.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.5 million. The small increase in expenses
between periods does not include any unusual items. This group of costs tends
to be quite stable over fairly wide fluctuations in sales.
Special Charge. During the third quarter of fiscal year 1996, the Company
recorded a $3.2 million special charge arising from a plant closure resulting
from the success of combining operations into one plant at 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. Operating income increased 30.3% to $10.5 million from $8.1
million. The change includes the increase in gross profit, along with the
impact of the Special Charge described above.
Other. Interest expense increased 17.7% or $0.7 million, due primarily to an
overall higher level of outstanding debt to support expanding operations, along
with the marginally higher interest rate on the new Senior Subordinated Notes.
(See Note 4 for additional information.)
The extraordinary non-cash after-tax charge of $0.3 million reflected the write-
off of unamortized financing costs tied to previous indebtedness which was
retired with proceeds from the Senior Subordinated Notes issued during the third
fiscal quarter. (See Note 4 for additional information.)
13
<PAGE>
SEASONALITY
- -----------
The peak season for installation of specialty trackwork extends from March
through October, when weather conditions are generally favorable for
installation. As a result, net sales of specialty trackwork have historically
been more concentrated in the period from January through June, which roughly
corresponds to the second half of the Company's fiscal year. In addition, a
number of the Company's facilities close for regularly scheduled maintenance in
the late summer and late December. This also tends to reduce operating results
during the first half of the Company's fiscal year. Transit industry practice
with respect to specialty trackwork generally involves the periodic shipment of
large quantities, which may be unevenly distributed throughout the year. The
Company does not expect any significant departure from the historical demand
patterns during the present fiscal year ending July 31, 1997.
The following graphs illustrate the historical results of the Company's seasonal
pattern of sales and income.
QUARTERLY NET SALES
($ in millions)
Graph showing the following data (Description of Graph for Edgar Filing):
Quarterly Net Sales
In 1993: Q1 $31.8 million, Q2 $33.2 million, Q3 $40.5 million and Q4 $43.2
million
In 1994: Q1 $37.2 million, Q2 $40.1 million, Q3 $52.2 million and Q4 $57.7
million
In 1995: Q1 $54.6 million, Q2 $56.3 million, Q3 $62.1 million and Q4 $70.2
million
In 1996: Q1 $58.6 million, Q2 $58.5 million, Q3 $60.1 million and Q4 $63.4
million
In 1997: Q1 $55.9 million, Q2 $55.7 million, Q3 $73.8 million
14
<PAGE>
QUARTERLY INCOME / LOSS*
($ in millions)
*Before Cumulative Effect of Accounting Change and Extraordinary Items
Graph showing the following data (Description of Graph for Edgar Filing):
Quarterly Income / (Loss)*
In 1993: Q1 $0.1 million, Q2 $0.5 million, Q3 $1.2 million and Q4 $1.8 million
In 1994: Q1 $0.8 million, Q2 $1.3 million, Q3 $2.4 million and Q4 $2.4 million
In 1995: Q1 $2.0 million, Q2 $2.1 million, Q3 $3.8 million and Q4 $3.8 million
In 1996: Q1 $2.2 million, Q2 $2.7 million, Q3 ($2.5) million and Q4 $4.4
million
In 1997: Q1 $0.5 million, Q2 $2.6 million. Q3 $0.3 million
* Before cumulative effect of accounting change and extraordinary items.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash generated from operations, structured borrowings, and debt and equity
offerings has been the major source of funds for working capital, capital
expenditures and acquisitions. For the nine months ended April 30, 1997 and
1996, net cash provided by (used in) operating activities totaled ($0.3) million
and $12.1 million, respectively. The decrease in operating cash flow is due
primarily to the net increase in working capital items to support expanding
operations, offset by increased levels of earnings, non-cash charges and
depreciation and amortization.
Capital expenditures during the first nine months of fiscal 1997 and 1996 were
$24.9 million (including $13.4 million related to the rail mill located in
Chicago Heights, IL) and $6.8 million, respectively.
In May 1996, the Company entered into 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% share in the
joint venture will consist of technical know-how, expertise and cash. The
Company's cash infusion of approximately $9.2 million is expected to be complete
by the end of the fiscal year, and is expected to be funded from operations.
Through April 30, 1997, $6.3 million ($4.7 million during
15
<PAGE>
the first nine months of fiscal 1997) has been contributed to the joint venture
and additional amounts have been deferred in organizing the venture.
For the nine months ended April 30, 1997 and 1996, net cash provided by (used
in) financing activities totaled $30.1 million and ($7.3) million, respectively.
The increase in financing cash flows is due primarily to (a) the net draw on the
Credit Agreement to support the cash needs for operating activities and the
increased use of cash for investing activities; (b) a draw on the acquisition
facility to finance the purchase of the Company's partner's interest in the ABC
Rail-Cogifer Industrial joint venture partnership (see Note 2 for additional
information); (c) a draw on the term loan to support the capital expenditures
for the rail mill (see following for additional comments); and (d) the impact of
the debt restructuring. (See Note 4 for additional information.)
On November 15, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission for the issuance of up to $100 million of
Subordinated Debt Securities and/or shares of its Common Stock. On February 1,
1997, the Company completed an offering (the "Offering") of $50 million of 9
1/8% Senior Subordinated Notes (the "Notes"). The Company used the $47.9
million of net proceeds of the Offering to repay certain outstanding
indebtedness under its primary and other credit facilities. A $0.3 million
extraordinary after-tax loss was recognized in the third quarter of fiscal year
1997 upon the early retirement of this indebtedness.
The Notes are general unsecured obligations of the Company and are subordinated
in right of payment to all existing and future senior indebtedness of the
Company and other liabilities of the Company's subsidiaries. The Notes will
mature in 2004, unless repurchased earlier at the option of the Company after
January 15, 1999 at 102% of face value prior to January 14, 2000, or at 100% of
face value thereafter. The Notes are subject to mandatory repurchase or
redemption prior to maturity upon a Change of Control (as defined). The
Indenture under which the Notes were issued subjects the Company to various
financial covenants which, among other things, require the Company to maintain
(all as defined) (i) a minimum Consolidated Net Worth, (ii) a minimum Operating
Coverage Ratio and (iii) a maximum Funded Debt to Consolidated Capitalization
Ratio and limits the Company's ability to (i) incur additional indebtedness,
(ii) complete certain mergers, consolidations and sales of assets, and (iii) pay
dividends or other distributions.
Prior to the Offering, the Company's primary credit facilities included a five
year credit agreement (the "Credit Agreement") and two term loans. The Credit
Agreement included a $15.0 million non-amortizing term loan, a $50.0 million (as
amended) revolving credit line and a $17.8 million (as amended) acquisition
facility.
Simultaneous with the consummation of the Offering, the Company amended and
restated the Credit Agreement. Under the amended Credit Agreement (i) the non-
amortizing term loan and the acquisition facility that existed under the Credit
Agreement were paid in full and canceled, (ii) the revolving credit line that
existed under the Credit Agreement was increased to $90 million and (iii) the
terms of certain financial covenants were modified.
The modified financial covenants under the amended Credit Agreement are similar
to those under the Notes Indenture. The Company was in compliance with the new
debt covenants as of April 30, 1997.
Interest on all amounts borrowed under the Credit Agreement is payable at the
option of the Company at either the base rate (as defined) plus 0.5%, or LIBOR
(as defined) plus 2.0% and is payable monthly while the base rate is in effect
or every one to six months while the LIBOR rate is in effect. As of April 30,
1997, the weighted average interest rate of outstanding borrowings under the
Credit Agreement was 8.3%. The Company has pledged as collateral under the
Credit Agreement substantially all of its property, plant and equipment,
eligible accounts receivable and inventories, intellectual property and capital
stock of its subsidiaries. As of April 30, 1997, availability under the amended
Credit Agreement was $27.7 million.
16
<PAGE>
The Company entered into a seven-year term loan agreement on July 20, 1995, to
finance up to $12.5 million of capital expenditures for the rail mill center
located in Chicago Heights, Illinois. Through April 30, 1997, $4.5 million had
been drawn under this term loan. The term loan is secured by the related fixed
assets, bears interest at 7.3% as of April 30, 1997 and contains financial
covenants which require the Company to maintain minimum levels of net worth and
a minimum fixed charge coverage ratio. A second, similar term loan was repaid
in full with a portion of the proceeds from the Offering. The Company was in
compliance with all of its covenants under the term loan as of April 30, 1997.
FORWARD-LOOKING STATEMENTS
- --------------------------
The foregoing outlook contains forward-looking statements that are based on
current expectations and are subject to a number of risks and uncertainties.
Such forward-looking statements include the Company's expectations regarding its
cash contributions to Datong ABC Castings Company Ltd., the costs of
environmental projects relating to on-going Abex issues being properly
recoverable under the indemnity from Abex, results of the foundry process
improvements at Calera and the manufacturing process changes at the trackwork
plants and the seasonality of its sales and income. Actual results could differ
materially from current expectations due to a number of factors. Some of these
factors include general economic conditions; competitive factors and pricing
pressures; shifts in market demand, the performance and needs of industries
served by the Company's businesses; actual future costs of operating expenses
such as rail and scrap steel, self-insurance claims and employee wages and
benefits; actual costs of continuing investments in technology; and the risks
described from time to time in the Company's SEC reports.
17
<PAGE>
Part II OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
27.1 Financial Data Schedule.
(B) Reports on Form 8-K
The Company filed a Form 8-K dated April 2, 1997, under Item 5,
Other Events, to report that results for its third quarter would
be significantly below the consensus analyst estimate and to file
a press release relating thereto.
18
<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 13, 1997
---------------------------------
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEETS AS OF APRIL 30, 1997 AND CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE PERIOD ENDED APRIL 30, 1997 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-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> APR-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 42,184<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 48,821
<CURRENT-ASSETS> 96,045
<PP&E> 126,045
<DEPRECIATION> 35,284
<TOTAL-ASSETS> 226,562
<CURRENT-LIABILITIES> 50,815
<BONDS> 87,654
0
0
<COMMON> 90
<OTHER-SE> 77,752
<TOTAL-LIABILITY-AND-EQUITY> 226,562
<SALES> 185,438
<TOTAL-REVENUES> 185,438
<CGS> 165,232
<TOTAL-COSTS> 165,232
<OTHER-EXPENSES> 9,667
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,870
<INCOME-PRETAX> 5,669
<INCOME-TAX> 2,319
<INCOME-CONTINUING> 3,350
<DISCONTINUED> 0
<EXTRAORDINARY> (310)
<CHANGES> 0
<NET-INCOME> 3,040
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
<FN>
<F1> Notes and accounts receivable - trade are reported net of allowances for
doubtful accounts in the Consolidated Balance Sheets.
</FN>
</TABLE>
