<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-22906
------------
ABC-NACO INC.
(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)
2001 Butterfield Road, Suite 502 60515
Downers Grove, IL (Zip Code)
(Address of principal executive offices)
(630)852-1300
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No_________
--------
At May 31, 1999, there were 18,356,436 shares of the registrant's common stock
outstanding.
1
<PAGE>
ABC-NACO INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Financial Information
Item 1 Unaudited Consolidated Financial Statements
Unaudited Consolidated Balance Sheets 3
Unaudited Consolidated Statements of Operations 4
Unaudited Consolidated Statements of Stockholders' Equity 5
Unaudited Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3 Quantitative and Qualitative Disclosures about Market Risks 17
Part II Other Information
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 6 Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE>
ABC -NACO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of April 30, 1999 and July 31, 1998
(Unaudited)
Part I - Financial Information
Item 1 - Unaudited Consolidated Financial Statements
(In thousands, except share data)
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash $ 3,033 $ 273
Accounts receivable, less allowances of $1,708 and $2,113, respectively 84,406 90,252
Inventories 76,576 74,521
Prepaid expenses and other current assets 14,349 4,680
Prepaid income taxes 5,020 4,164
--------- --------
Total current assets 183,384 173,890
--------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 5,222 4,423
Buildings and improvements 32,185 24,949
Machinery and equipment 270,981 172,879
Construction in progress 16,188 80,057
--------- --------
324,576 282,308
Less - Accumulated depreciation (101,844) (82,623)
--------- --------
Net property, plant and equipment 222,732 199,685
--------- --------
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES 15,073 15,586
--------- --------
OTHER ASSETS - net 34,698 35,464
--------- --------
Total assets $ 455,887 $424,625
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Cash overdrafts $ - $ 6,560
Current maturities of long-term debt 8,598 11,372
Accounts payable 70,591 59,694
Accrued liabilities 40,699 35,134
--------- --------
Total current liabilities 119,888 112,760
--------- --------
LONG-TERM DEBT, less current maturities 221,368 190,199
--------- --------
DEFERRED INCOME TAXES 13,358 10,656
--------- --------
OTHER LONG-TERM LIABILITIES 18,838 18,940
--------- --------
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;
18,356,436 and 17,872,976 shares outstanding as of April 30, 1999 and July 31, 1998 ,
respectively 184 179
Additional paid-in capital 67,981 67,980
Retained earnings 14,677 24,309
Cumulative translation adjustment (407) (398)
--------- --------
Total stockholders' equity 82,435 92,070
--------- --------
Total liabilities and stockholders' equity $ 455,887 $424,625
========= ========
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated balance sheets.
3
<PAGE>
ABC -NACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended April 30, 1999 and 1998
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
NET SALES $173,625 $173,919 $506,455 $459,581
COST OF SALES 149,072 147,221 438,020 395,059
-------- -------- -------- --------
Gross profit 24,553 26,698 68,435 64,522
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 14,919 14,316 46,070 40,607
MERGER RELATED AND OTHER RESTRUCTURING COSTS 16,096 -- 16,096 --
-------- -------- -------- --------
Operating income(loss) (6,462) 12,382 6,269 23,915
EQUITY LOSS(INCOME) OF UNCONSOLIDATED JOINT VENTURES 36 (418) (517) (1,087)
INTEREST EXPENSE 4,262 3,278 12,404 9,429
AMORTIZATION OF DEFERRED FINANCING COSTS 217 173 571 446
-------- -------- -------- --------
Income(loss) before income taxes and cumulative effect of accounting changes (10,977) 9,349 (6,189) 15,127
and extraordinary item
PROVISION(CREDIT) FOR INCOME TAXES (1,556) 3,765 (1,440) 6,527
-------- -------- -------- --------
Income(loss) before cumulative effect of accounting changes and
extraordinary item (9,421) 5,584 (4,749) 8,600
CUMULATIVE EFFECT OF ACCOUNTING CHANGES, net of income
taxes of $1,014 and $695, respectively -- -- (1,620) (1,111)
EXTRAORDINARY ITEM, net of income tax of $2,062 (3,158) -- (3,158) --
-------- -------- -------- --------
Net income (loss) $(12,579) $ 5,584 $ (9,527) $ 7,489
======== ======== ======== ========
EARNINGS PER SHARE DATA
Basic:
Income(loss) before cumulative effect of accounting changes and extraordinary item $ (0.52) $ 0.31 $ (0.26) $ 0.48
Cumulative effect of accounting changes -- -- (0.09) (0.06)
Extraordinary item ( 0.17) -- (0.18) --
-------- -------- -------- --------
Net income (loss) $ (0.69) $ 0.31 $ (0.53) $ 0.42
======== ======== ======== ========
Weighted average common shares outstanding 18,356 17,862 18,074 17,844
======== ======== ======== ========
Diluted:
Income(loss) before cumulative effect of accounting changes and extraordinary item $ (0.52) $ 0.30 $ (0.26) $ 0.47
Cumulative effect of accounting changes -- -- (0.09) (0.06)
Extraordinary item ( 0.17) -- (0.18) --
-------- -------- -------- --------
Net income (loss) $ (0.69) $ 0.30 $ (0.53) $ 0.41
======== ======== ======== ========
Weighted average common and equivalent shares outstanding 18,356 18,496 18,074 18,461
======== ======== ======== ========
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated statements.
4
<PAGE>
ABC -NACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended April 30, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Additional Currency
Common Paid-in Retained Translation
Stock Capital Earnings Adjustment Total
------- ----------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
BALANCE, July 31, 1997 $179 $67,512 $10,710 $ (35) $78,366
Former NACO comprehensive income for the three months
ended June 29, 1997 - - 932 (55) 877
Former NACO common stock cancelled during the three
months ended June 29, 1997 (1) (1) - - (2)
Comprehensive income(loss) - - 7,489 (72) 7,417
Common stock issued - 20 - - 20
Shares issued in business acquisition - 436 - - 436
---- ------- ------- ----- -------
BALANCE, April 30, 1998 $178 $67,967 $19,131 $(162) $87,114
==== ======= ======= ===== =======
BALANCE, July 31, 1998 $179 $67,980 $24,309 $(398) $92,070
Former NACO comprehensive loss for the month ended
July 31, 1998 - - (105) (99) (204)
Comprehensive income(loss) - - (9,527) 90 (9,437)
Common stock issued 5 1 - - 6
---- ------- ------- ----- -------
BALANCE, April 30, 1999 $184 $67,981 $14,677 $(407) $82,435
==== ======= ======= ===== =======
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated statements.
5
<PAGE>
ABC -NACO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three and Nine Months Ended April 30, 1999 and 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (12,579) $ 5,584 $ (9,527) $ 7,489
Adjustments to reconcile net income(loss) to net cash provided by
operating activities:
Extraordinary item 3,158 - 3,158 -
Cumulative effect of accounting change - - 1,620 1,111
Merger related and other restructuring costs 16,096 - 16,096 -
Equity (income)loss of unconsolidated joint venture 36 (418) (517) (1,087)
Depreciation and amortization 8,007 6,745 21,743 18,068
Deferred income taxes 3,067 1,925 2,358 2,559
Changes in certain assets and liabilities, net of effects of
business acquisitions
Account receivables - net (1,367) (8,357) 4,166 (24,948)
Inventories 6,544 (1,754) (1,665) (3,875)
Prepaid expenses and other current assets (14,492) 119 (18,049) (2,267)
Other assets - net 242 (1,507) (1,618) (5,370)
Accounts payable and accrued liabilities (2,308) 8,784 7,409 21,265
Other long-term liabilities 294 (1,536) (391) (1,428)
--------- -------- --------- --------
Total adjustments 19,277 4,001 34,310 4,028
--------- -------- --------- --------
Net cash provided by operating activities 6,698 9,585 24,783 11,517
--------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,428) (19,866) (41,792) (52,138)
Business acquisitions, less cash acquired - (339) - (1,378)
Investment in unconsolidated joint ventures - (21) - (362)
--------- -------- --------- --------
Net cash used in investing activities (9,428) (20,226) (41,792) (53,878)
--------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in cash overdrafts (5,543) (4,235) (10,042) (1,850)
Issuance of senior subordinated notes - - - 25,000
Net borrowings under new credit facility 132,400 - 132,400 -
Payment with proceeds from new financing (120,648) - (120,648) -
Net borrowings under other indebtedness 192 14,773 19,416 20,545
Payment of deferred financing costs (1,178) - (1,363) (1,316)
Proceeds from sale of common stock - 20 6 20
--------- -------- --------- --------
Net cash provided by financing activities 5,223 10,558 19,769 42,399
--------- -------- --------- --------
Net change in cash 2,493 (83) 2,760 38
CASH, beginning of period 540 345 273 224
--------- -------- --------- --------
CASH, end of period $ 3,033 $ 262 $ 3,033 $ 262
========= ======== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 4,148 $ 4,289 $ 15,656 $ 11,373
Cash paid for income taxes, net 25 130 3,235 1,623
</TABLE>
The accompanying notes to the unaudited consolidated financial statements are an
integral part of these consolidated statements.
6
<PAGE>
ABC -NACO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis Of Presentation
ABC-NACO, Inc. (the Company) is the leader in the design, engineering and
manufacture of high-performance freight rail car, locomotive and passenger
rail suspension and coupler systems; wheels and mounted wheel sets; and
specialty track products. The Company also supplies freight railroad and
transit signaling systems and services, as well as highly engineered valve
bodies and components for industrial flow control systems worldwide.
On February 19, 1999, the Company consummated a merger (the Merger) with
NACO, Inc.(NACO), a privately held Delaware corporation that designs,
manufactures and supplies highly engineered cast steel and related products
for the railroad supply and flow control supply markets. Pursuant to the
Amended and Restated Agreement and Plan of Merger, dated as of December 10,
1998, as amended as of February 16, 1999, by and among ABC Rail Products
Corporation (ABC), ABCR, a Delaware corporation and wholly owned subsidiary
of ABC, and NACO, ABCR merged with and into NACO, and NACO became a wholly
owned subsidiary of ABC. As a result of the Merger, each outstanding share
of NACO common stock was converted into 8.7 shares of ABC common stock. ABC
issued approximately 9.4 million shares of its common stock. The Merger was
treated as a tax-free reorganization for federal income tax purposes and
has been accounted for as a pooling-of-interests transaction.
The unaudited Consolidated Statements of Operations are presented as if the
Merger had been effective July 31, 1997. The former ABC's fiscal year ended
on July 31. The former NACO's fiscal year ended on the Sunday closest to
March 31. Former ABC's fiscal year-end has been adopted by the combined
entity as the annual financial reporting period. For purposes of the data
included in the 10-Q, the year ends of the two companies have not been
conformed, as permitted under Regulation Form S-X promulgated by the SEC.
For purposes of presenting this data, the financial position of the former
NACO as of April 30, 1999, and June 28, 1998, and the results of the former
NACO's operations for the nine months ended April 30, 1999, and March
31,1998, are combined with the former ABC's financial position as of April
30, 1999, and July 31, 1998 and the results of the former ABC's operations
for the nine months ended April 30, 1999 and 1998, respectively.
Accordingly, revenues of $26.5 million and net loss of $0.1 million, and
revenues of $70.3 million and net income of $0.9 million representing the
former NACO's results of operations for July, 1998, and the period March
31, 1997 to June 29, 1997, respectively, are excluded from the Consolidated
Statements of Operations.
7
<PAGE>
ABC-NACO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Unaudited results of operations for the former companies prior to the
Merger from July 31, 1998, to February 19, 1999 (in thousands):
Former ABC Former NACO
---------- -----------
Revenue $176,362 $214,138
Accounting change, net of tax (1,620) -
Net income $ (3,182) $ 7,096
The table below reconciles ABC's results previously reported for the three
and nine months ended April 30, 1998 to the April 30, 1998 Statements of
Operations herein that reflect the Merger and the application of the
pooling-of-interests method of accounting.
Three Months Ended Nine Months Ended
April 30, 1998 April 30, 1998
Revenues Net Income Revenues Net Income
-------- ---------- -------- ----------
Former ABC $ 89,660 $2,478 $227,915 $3,185
Former NACO 87,678 3,074 232,933 4,208
Adjustments (419) 32 (1,267) 96
-------- ------ -------- ------
$173,919 $5,584 $459,581 $7,489
======== ====== ======== ======
Certain historical and current amounts have been reclassified in order to
conform the accounting policies of both companies. These conforming
adjustments have minimal impact upon the Company's consolidated net income.
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 period 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 information and the consolidated
financial statements and notes thereto included in the 1998 Form 10-K/A and
the Form S-4 Registration Statement filed on January 21, 1999.
8
<PAGE>
ABC-NACO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company has been advised by one of its joint venture partners of its
desire to purchase the Company's share of the venture. If the Company's
shares of the venture were forced to be sold, the Company would be
precluded from continuing to account for the Merger as a pooling-of-
interests. If such a sale occurs or if the uncertainty as to whether a sale
will occur is not resolved before the Company reports its fiscal 1999
results, the Company could be required to restate the accompanying
financial statements to reflect purchase accounting as if NACO were the
acquirer. Such restatement would have a material impact on the accompanying
reported assets, liabilities, revenues and expenses of the Company. Company
management currently believes that a sale of its joint venture interest
under the above circumstances is remote.
2. 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, 1999 and July 31, 1998, consisted of the following
(in thousands):
April 30, July 31,
1999 1998
--------- --------
Raw materials $35,386 $40,765
Work in process and finished goods 36,717 29,395
Supplies and spare parts 4,473 4,361
------- -------
$76,576 $74,521
======= =======
3. Debt
In December, 1998, a $3.0 million Industrial Revenue Bond (IRB) was issued
on behalf of the Company for its new paneling facility in Ashland,
Wisconsin. The IRB bears an adjustable rate of interest as determined by
the Public Bond Market Association Index. As of April 30, 1999, the
adjustable interest rate on the bonds was set at 4.0%. The bonds mature in
December, 2018.
On February 19, 1999, the Company, in conjunction with the Merger, entered
into a new credit facility (the "Credit Facility") with a syndicate of
financial institutions. The Credit Facility provides the Company with loans
and other extensions of credit of up to $200 million. The initial net
proceeds of the Credit Facility were used to (1) refinance existing bank
debt and certain other indebtedness of the Company, (2) refinance
substantially all of the former NACO's outstanding debt, (3) provide
initial financing for the Company's on-going working capital needs, and (4)
pay fees and expenses relating to the Merger and the Credit Facility.
Availability under the Credit Facility was $64.8 million as of April 30,
1999.
9
<PAGE>
ABC-NACO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. Per Share Data
SFAS No. 128, "Earnings Per Share" was issued in February 1997 and adopted
by the Company in the second quarter of fiscal 1998. This pronouncement
established revised reporting standards for earnings per share and has been
retroactively applied to all periods presented herein. Previously reported
earnings per share for each such period were not materially different than
currently reported basic and diluted earnings per share.
Common share equivalents included in the computation of diluted earnings
per share include (in thousands):
Three Months Ended Nine Months Ended
April 30 April 30
1999 1998 1999 1998
---- ---- ---- ----
Stock Options - 77 - 80
Business Acquisition
Earn-out Agreements - 85 - 65
---- ---- ---- ----
- 162 - 145
==== ==== ==== ====
5. ACCOUNTING CHANGES
In April 1998, Statement of Position No. 98-5 was issued which requires
that companies write-off previously capitalized start-up costs and expense
future start-up costs as incurred. The Company had capitalized certain
start-up costs in prior periods. Effective August 1, 1998, the Company
elected early adoption of this standard and wrote-off $2.6 million ($1.6
million after-tax) of previously capitalized start-up costs.
On November 20, 1997, the FASB Emerging Issues Task Force reached a
consensus that all companies must write-off previously capitalized business
process reengineering costs and expense future costs as incurred. The
Company had capitalized certain process reengineering costs in prior fiscal
years. In accordance with this consensus, the Company recorded a non-cash
charge of $1.8 million ($1.1 million after-tax) in the three months ended
January 31, 1998 to reflect the cumulative effect of this accounting
change.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended, is
effective for fiscal years beginning after June 15, 2000. SFAS 133
requires all derivative instruments be recorded on the balance sheet at
their fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. The
10
<PAGE>
ABC-NACO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Company has not yet determined the impact that the adoption of SFAS 133
will have on its earnings or statement of financial position. However, the
Company anticipates that, due to its limited use of derivative instruments,
the adoption of SFAS 133 will not have a significant effect on its results
of operations or its financial position.
6. Merger and Other Restructuring Costs (in thousands)
Merger related $12,611
Restructuring 3,485
-------
Total $16,096
=======
In the third fiscal quarter of 1999, the Company recorded a special charge
of $16.1 million associated with the Merger and the restructuring of the
Track Products Group. The special charge of $12.6 million for Merger
related costs includes $0.3 million in non-cash provisions for the write-
down of obsolete assets and $12.3 million in cash provisions for workforce
reductions of $3.5 million, advisory fees of $8.1 million and other merger
related fees of $0.7 million. Workforce reductions consisted of
approximately 29 salaried personnel whose job functions were generally
duplicated upon the Merger. $8.8 million of the $12.3 million cash portion
was expended during the third fiscal quarter of 1999. The remaining $3.5
million is recorded within accrued liabilities at April 30, 1999.
The special charge of $3.5 million for the restructuring of the Track
Product Group was prompted by the capacity excess expected to result from
the operation of the Company's new state-of-the-art rail mill facility in
Chicago Heights, Illinois. With this new capacity on line, the Company has
decided to close its Cincinnati, Ohio, track manufacturing plant and to
discontinue manufacturing operations at its Newton, Kansas facility (which
also has a distribution operation). The charge includes $1.2 million in
non-cash provisions for the write-down of obsolete assets and $2.3 million
in cash provisions for workforce reductions of $1.4 million and idle
facility costs of $0.9 million. Workforce reductions consisted of
approximately 78 hourly and salaried personnel from various manufacturing
facilities. $0.1 million of the $2.3 million cash portion was expended
during the third quarter of 1999. The remaining $2.2 million is recorded
within accrued liabilities at April 30, 1999.
The Company also recorded in the third quarter of 1999 an after-tax
extraordinary charge of $3.2 million related to the company's debt
refinancing (see Note #3). The cash outlays related to the refinancing were
completed entirely during the quarter.
7. Subsequent Event
The Company announced on May 21, 1999, that it would close its foundry
operation in Anderson, Indiana, at some point during the coming summer
months. The plant produces manganese castings used in specialty track
products for the railroad industry. Production of manganese castings will
be shifted to another Company facility better suited to manufacturing this
product. As a result of this closure, the Company will record a special
charge in the fourth fiscal quarter of 1999.
11
<PAGE>
Item 2.
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.
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, except where noted, does not expect any
significant departure from the historical demand patterns during the present
fiscal year ending July 31, 1999.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended April 30, 1999 Compared to Three Months Ended April 30, 1998
Net Sales. Net sales decreased 0.2% from $173.9 million to $173.6 million. Sales
within the Rail Products Group increased by 32.4% to $79.8 million from $60.3
million. This increase was primarily driven by the increased demand for freight
car and locomotive truck assemblies. Offsetting this increase was a $9.2 million
reduction in sales within the Track Products Group. The overall level of track
orders from the Class I railroad customers are down from the third quarter of
last year. Additionally, sales within the Locomotive, Flow and Specialty Group
decreased by $8.3 million from a year ago. The revenue drop within this group is
directly related to the continued softness within the petroleum industry that
has led to depressed oil prices.
Gross Profit and Cost of Sales. Gross profit decreased to 14.1% of revenue in
1999 from 15.4% of revenue in 1998. The decrease in the gross profit percentage
is primarily related to the Track Products Group's reduction in sales volume and
inefficiencies during the start up of production at the Company's new state-of-
the-art rail mill, resulting in 64% lower gross profit percentage. In addition,
gross profit was also lower by 64% within the Locomotive, Flow and Specialty
Group again as a direct result of lower volumes. These decreases were partially
offset by strong volume related gains within the Rail Products Group and Wheel
Services Group.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.6 million. The increase in expenses between
periods primarily reflects the additional expense required to support the
Company's new information systems and other general increases.
12
<PAGE>
Merger Related and Other Restructuring Costs. The Company incurred a pre-tax
charge of $16.1 million in the quarter relative to the direct costs associated
with the February 19, 1999 merger between ABC Rail Products and NACO as well as
costs associated with the restructuring of the Track Products Group. The merger
related charge totaled $12.6 million on a pre-tax basis and included advisory
fees, employee severance obligations and other general expenses. The Track
Products Group's restructuring charge totaled $3.5 million on a pre-tax basis
and included costs for shutting down facilities, employee severance obligations
and other general expenses.
Equity Income of Unconsolidated Joint Ventures. The Company recorded a small
loss from its equity investments in joint ventures. This loss compared
unfavorably to the joint venture income of $0.4 million recorded in 1998. This
change was primarily related to the start-up of the operations at the Company's
joint venture in China that recently came on line.
Interest Expense. Interest expense increased $0.2 million, excluding the effect
of capitalizing $0.8 million in interest in the three months ended April 30,
1998.
Extraordinary Item. On February 19, 1999, the Company, in conjunction with the
merger, entered into a new credit facility with a syndicate of financial
institutions. This triggered the write-off of unamortized deferred financing
balances, make whole payments and early termination fees that resulted from the
extinguishment of the old debt. The after-tax charge recorded to account for
these items was $3.2 million.
Nine Months Ended April 30, 1999 compared to Nine Months Ended April 30, 1998
Net Sales. Net sales increased 10.2% to $506.5 million from $459.6 million. The
increase in sales was driven by gains in the Rail Products Group of $57.6
million and a $16.2 million gain within the Wheel Services Group. These
increases were a direct result of continued strong demand from freight car and
locomotive car builders and Class I railroads. Offsetting the increases was a
$19.8 million reduction in sales within the Track Products Division and a $11.2
million decrease in sales within the Locomotive, Flow and Specialty Group. The
reasons for the decrease in these two areas are the same as described in the
quarterly comparison.
Gross Profit and Cost of Sales. Gross profit decreased to 13.5% of revenue in
1999 from 14.0% of revenue in 1998. The decrease in the gross profit percentage
is primarily related to the Track Products Group's reduction in sales volume and
inefficiencies during the start up of production at the Company's new state-of-
the-art rail mill, resulting in 50% lower gross profit percentage. In addition,
gross profit was also lower by 46% within the Locomotive, Flow and Specialty
Group which was a direct result of lower volumes. These decreases were partially
offset by strong volume related gains within the Rail Products Group and Wheel
Services Group.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $5.5 million. The increase in expenses between
periods reflects the additional expense required to support the Company's new
information systems and additional salaries, related benefits and travel costs
necessary to support the increase in revenues.
Merger Related and Other Restructuring Costs. Please refer to the prior
paragraph as found in the three months ended April 30, 1999.
13
<PAGE>
Equity Income of Unconsolidated Joint Ventures. The Company recorded a profit
from its equity investments in joint ventures of $0.5 million. This compares
unfavorably to the joint venture income of $1.1 million recorded in 1998. This
change was primarily related to the start-up of the operations at the Company's
joint venture in China that recently came on line.
Interest Expense. Interest expense increased $3.0 million, due primarily to an
overall higher level of debt to support working capital increases and capital
project spending.
Extraordinary Item. Please refer to the prior paragraph as found in the three
months ended April 30, 1999.
Other. The non-cash effect of an accounting change of $2.6 million ($1.6 million
after-tax) in fiscal 1999 represents the write-off, in accordance with Statement
of Position 98-5, of previously capitalized start-up costs.
On November 20, 1997, the FASB Emerging Issues Task Force reached a consensus
that all companies must write-off previously capitalized business process
reengineering costs and expense future costs as incurred. The Company had
capitalized certain process reengineering costs in prior fiscal years. In
accordance with this consensus, the Company recorded a non-cash, charge of $1.8
million ($1.1 million after-tax) to reflect the cumulative effect of this
accounting change.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------
For the nine months ended April 30, 1999 and 1998, net cash provided by
operating activities totaled $24.8 million and $11.5 million, respectively. The
increase in operating cash flow is due primarily to a decrease in accounts
receivable in fiscal 1999 as compared to a large increase in fiscal 1998.
Capital expenditures during the first nine months of fiscal 1999 and 1998 were
$41.8 million and $52.1 million, respectively. Spending during the first nine
months of fiscal 1999 is related primarily to costs associated with the
implementation of SAP's R/3 enterprise-wide software, the capacity expansion
project in Sahagun, a new track panel facility in Ashland, Wisconsin, normal
improvements to the Calera, Alabama, wheel plant, and production equipment for a
new facility to process used rail into reusable heat-treated and head-hardened
rail.
At the beginning of the second quarter of fiscal 1998, the Company acquired
United Railway Signal Group, Inc. ("URSG") headquartered in Jacksonville,
Florida for a combination of cash and the Company's common stock totaling $1.5
million. URSG provides independent signal engineering services to the railroad
industry. 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. This acquisition was accounted for under the purchase method
of accounting.
For the nine months ended April 30, 1999 and 1998, net cash provided by
financing activities totaled $19.8 and $42.4 million, respectively.
On December 23, 1997, the Company (under the Registration Statement filed with
the SEC on November 15, 1996) completed an offering of $25 million 8 3/4% Senior
Subordinated Notes, Series B (the "8 3/4% Notes"). The Company used the $24.1
million of net proceeds of this Offering to repay indebtedness under its primary
credit facility. The 8 3/4% 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
subsidiaries. The 8 3/4% Notes rank with the 9 1/8% Notes. Financing costs of
$1.2 million were deferred in connection with the issuance of the 8 3/4% Notes.
The 8 3/4% Notes will mature in 2004, unless repurchased earlier at the option
of the Company on or after December 31, 1999 at 102% of face value prior to
December 30, 2000 or at 100% of face value thereafter. The 8 3/4% Notes are
subject to mandatory repurchase or redemption prior to maturity upon a change of
control (as defined in the Indenture). The Indenture under which the 8 3/4%
Notes were issued subjects the Company to various financial covenants which are
substantially similar to the covenants relating to the 9 1/8% Notes.
In December, 1998, a $3.0 million Industrial Revenue Bond (IRB) was issued on
behalf of the Company for the new paneling facility in Ashland, Wisconsin. The
IRB's bear an adjustable rate of interest as determined by the Public Bond
Market Association. As of April 30, 1999, the adjustable interest rate on the
bonds was set at 4.0%. The bonds mature in December 2018.
On February 19, 1999, the Company entered into a new credit facility (the
"Credit Facility") with a syndicate of financial institutions. The Credit
Facility provides ABC-NACO with loans and other extensions of credit of up to
$200 million. The initial net proceeds of the Credit Facility were used to (1)
refinance existing bank debt and certain other indebtedness of the Company, (2)
refinance substantially all of the former NACO's outstanding debt, (3) provide
initial financing for the Company's on-going working capital needs, and (4) pay
fees and expenses relating to the Merger and the Credit Facility. Availability
under the Credit Facility as of April 30, 1999 was $64.8 million.
15
<PAGE>
During the second quarter of fiscal 1999, the Company suspended the previous
plan to construct a plant in central Illinois to process used rail into reusable
heat-treated and head-hardened rail. The project is being re-evaluated in
conjunction with the ABC-NACO merger. The machinery and equipment which has been
built is being stored pending completion of a revised business plan and
selection of a more appropriate site in which to locate this facility.
As described in detail in Item 7 of ABC Rail Products Corporation fiscal 1998
Form 10-KA and the Company's S-4 Registration Statement file on January 21,
1999, the Company is actively addressing its Year 2000 ("Y2K") issues. The
Company has experienced minor delays with the implementation of its new ERP
systems. The Company anticipates completion by the end of October 1999 and does
not expect to incur any material incremental costs due to these delays. At the
present time, management is unable to estimate the potential impact on the
Company of the possible failure of its customers and suppliers to become Y2K
compliant. If the Company's major customers and suppliers are not and do not
become Y2K compliant on a timely basis, the Company's results of operations
could be adversely affected.
REGARDING FORWARD-LOOKING STATEMENTS
- ------------------------------------
The foregoing contains forward-looking statements that are based on current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from current expectations due to a number of
factors, including 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; the availability
of capital to finance possible acquisitions and to refinance debt; the ability
of management to implement the Company's long-term business strategy of
acquisitions; "Y2K" issues and the risks described from time to time in the
Company's SEC reports.
16
<PAGE>
Item 3.
Quantitative and Qualitative Disclosures about Market Risks
The Company's market risk sensitive instruments do not subject material market
risk exposures, except as such risks related to interest rate fluctuations. As
of April 30, 1999, the Company has long-term debt outstanding with a carrying
value of $221.4 million. The estimated fair value of this debt is $218.9
million. ABC historically has not entered into interest rate protection
agreements. Fixed interest rate debt outstanding as of April 30, 1999 represents
35.5% of total debt, carries an average interest rate of 8.9% and matures as
follows: $0.3 million in fiscal 2000, $1.1 million in fiscal 2001, $0.7 million
in fiscal 2002, $0.6 million in fiscal 2003 and $76.3 million thereafter.
Variable interest rate debt outstanding as April 30, 1999 represents 64.5% of
total debt, carries an average interest rate of 6.5% and matures as follows:
$1.6 million in fiscal 2000, $2.7 million in fiscal 2001, $2.5 million in fiscal
2002, $0.2 million in fiscal 2003 and $135.4 million thereafter.
17
<PAGE>
Part II OTHER INFORMATION
- ---------------------------------------------------------------------------
Item 4 - Submission of Matters to a Vote of Security Holders
On February 19, 1999, ABC held a special meeting of the
stockholders. The following matters were submitted for shareholder
approval:
1.) The issuance of shares pursuant to the Amended and Restated
Agreement and Plan of Merger (the "Merger Agreement") dated as
of December 10, 1998, which provides for the merger of ABCR
Acquisition Sub., Inc. with and into NACO Inc. The votes cast
for, votes cast against and abstentions were as follows:
For Against Abstain
-------- ------- -------
7,329,721 4,312 10,600
2.) To amend the Company's certificate of incorporation to provide
for a classified board of directors as provided in the merger
agreement. The votes cast for, votes cast against and
abstentions were as follows:
For Against Abstain
-------- ------- -------
6,130,603 1,212,474 10,600
3.) To amend the Company's certificate of incorporation The votes
cast for, votes cast against and to change the name of the
corporation to "ABC-NACO abstentions were as follows: Inc.".
For Against Abstain
-------- ------- -------
7,794,016 4,542 10,050
4.) To consider a proposal to postpone or adjourn the Special
Meeting, if proposed by the Company's board of directors. The
votes cast for, votes cast against and abstentions were as
follows:
For Against Abstain
-------- ------- -------
4,934,499 2,421,229 360,890
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
27.1 Financial Data Schedule.
(B) Reports on Form 8-K
None
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-NACO INC.
By: /s/ J. P. Singsank
----------------------------
Vice President - Finance
(Principal Financial and Accounting Officer)
Date: June 14, 1999
--------------
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED APRIL 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> APR-30-1999
<CASH> 3,033
<SECURITIES> 0
<RECEIVABLES> 84,406
<ALLOWANCES> 0
<INVENTORY> 76,576
<CURRENT-ASSETS> 183,384
<PP&E> 324,576
<DEPRECIATION> 101,844
<TOTAL-ASSETS> 455,887
<CURRENT-LIABILITIES> 119,888
<BONDS> 221,368
0
0
<COMMON> 184
<OTHER-SE> 82,251
<TOTAL-LIABILITY-AND-EQUITY> 455,887
<SALES> 506,455
<TOTAL-REVENUES> 506,455
<CGS> 438,020
<TOTAL-COSTS> 438,020
<OTHER-EXPENSES> 61,649
<LOSS-PROVISION> 134
<INTEREST-EXPENSE> 12,975
<INCOME-PRETAX> (6,189)
<INCOME-TAX> (1,440)
<INCOME-CONTINUING> (4,479)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,158)
<CHANGES> (1,620)
<NET-INCOME> (9,527)
<EPS-BASIC> (0.53)
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