<PAGE> 1
UNITED STATES
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 MARCH 31, 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 0-23802
MOTIVEPOWER INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 82-0461010
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Gateway Center 14th Floor, Pittsburgh, PA 15222
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 201-1101
---------------------------------------------------
(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
--- ---
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 7, 1999
- ---------------------------- --------------------------
Common stock, $.01 par value 27,042,660
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MOTIVEPOWER INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE MONTHS ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income for the Three Months Ended March 31, 3
1999 and 1998 (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 4
(Unaudited)
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 5
1999 and 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MOTIVEPOWER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
(In thousands except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net sales $ 107,274 $ 82,853
Cost of sales (79,751) (61,497)
--------- ---------
Gross profit 27,523 21,356
Selling, general and administrative expenses (12,718) (10,353)
--------- ---------
Operating income 14,805 11,003
Investment income 246 279
Interest expense (2,194) (1,213)
Other income 91 90
Foreign exchange (loss) gain (538) 588
--------- ---------
Income before income taxes and extraordinary item 12,410 10,747
Income tax expense (4,532) (3,627)
--------- ---------
Income before extraordinary item 7,878 7,120
Extraordinary loss on extinguishment of debt, net of income tax
benefit of $265 in 1998 -- (472)
--------- ---------
Net income $ 7,878 $ 6,648
========= =========
EARNINGS PER COMMON SHARE - BASIC:
(Adjusted to reflect the 3-for-2 stock split effective April 2, 1999)
Income before extraordinary item $ .29 $ .27
Extraordinary item -- (.02)
--------- ---------
Net income $ .29 $ .25
========= =========
Adjusted weighted average common shares outstanding 26,986 26,709
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
(Adjusted to reflect the 3-for-2 stock split effective April 2, 1999)
Income before extraordinary item $ .28 $ .26
Extraordinary item -- (.02)
--------- ---------
Net income $ .28 $ .24
========= =========
Adjusted weighted average common shares outstanding 28,146 27,824
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
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MOTIVEPOWER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 1999 AND DECEMBER 31, 1998 (UNAUDITED)
(In thousands except share and per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 11,170 $ 5,660
Receivables from customers:
Billed, net of allowance for doubtful accounts of $717 and $673, respectively 56,518 54,428
Unbilled 97 2,831
Inventories 99,539 92,993
Deferred income taxes 7,639 6,765
Income tax receivable 2,220 5,216
Other 5,441 4,230
--------- ---------
Total current assets 182,624 172,123
Locomotive lease fleet, net 1,168 1,189
Property, plant and equipment:
Land 2,512 2,420
Buildings and improvements 53,144 50,997
Machinery and equipment 97,902 94,143
--------- ---------
Property, plant and equipment, cost 153,558 147,560
Less accumulated depreciation 58,249 54,492
--------- ---------
Property, plant and equipment, net 95,309 93,068
Underbillings - MPI de Mexico 26,868 26,775
Goodwill and other intangibles, net 87,571 63,593
Other 14,272 14,450
--------- ---------
Total assets $ 407,812 $ 371,198
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 557 $ 549
Accounts payable - trade 32,780 34,293
Accrued expenses and other current liabilities 33,453 30,919
Revolving credit agreement borrowings -- 10,000
Advances from customers 282 1,174
--------- ---------
Total current liabilities 67,072 76,935
Long-term debt 133,607 95,249
Commitments and contingencies 17,692 19,205
Deferred income taxes 1,419 559
Other 1,385 1,321
--------- ---------
Total liabilities 221,175 193,269
--------- ---------
Stockholders' Equity:
Common Stock, par value $.01 per share 260 179
Additional paid-in capital 207,418 206,434
Deficit (15,368) (23,156)
Accumulated other comprehensive income (5,321) (5,105)
Deferred compensation 5,634 4,113
--------- ---------
192,623 182,465
Less - Treasury stock, at cost 5,986 4,536
--------- ---------
Total stockholders' equity 186,637 177,929
--------- ---------
Total liabilities and stockholders' equity $ 407,812 $ 371,198
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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MOTIVEPOWER INDUSTRIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Operating Activities
- --------------------
Net income $ 7,878 $ 6,648
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation 2,843 1,653
Amortization 971 826
Extraordinary loss on extinguishment of debt, net of tax -- 472
Changes in operating assets and liabilities exclusive of effects of 1999
purchase of G&G Locotronics and Q-Tron:
Receivables from customers 6,721 (8,202)
Inventories (978) (8,408)
Underbillings - MPI de Mexico (93) 4,576
Accounts payable and accrued expenses (3,831) (7,358)
Advances from customers (892) 438
Other, net 550 4,090
-------- --------
Net cash provided by (used in) operating activities 13,169 (5,265)
-------- --------
Investing Activities
- --------------------
Payment for purchase of G&G Locotronics (17,770) --
Payment for purchase of Q-Tron (14,854) --
Additions to property, plant and equipment (3,769) (6,177)
Other, net 243 38
-------- --------
Net cash used in investing activities (36,150) (6,139)
-------- --------
Financing Activities
- --------------------
Increase in intangibles (704) --
Net borrowings under credit facilities 28,366 326
Proceeds from exercise of stock options including tax-related benefit 985 164
Other, net (156) --
-------- --------
Net cash provided by financing activities 28,491 490
-------- --------
Net increase (decrease) in cash and cash equivalents 5,510 (10,914)
Cash and cash equivalents at beginning of period 5,660 16,897
-------- --------
Cash and cash equivalents at end of period $ 11,170 $ 5,983
======== ========
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Interest paid $ 1,936 $ 376
Income taxes paid (refunded), net 44 (659)
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
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MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein are
unaudited. In the opinion of management, these statements include all
adjustments, consisting of normal, recurring adjustments, necessary for a fair
presentation of the financial position of MotivePower Industries, Inc. and
subsidiaries (the "Company") at March 31, 1999 and the results of its operations
and its cash flows for the three months ended March 31, 1999 and 1998. These
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto for the year
ended December 31, 1998 included in the Company's 1998 Form 10-K. The results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of the results to be expected for the full year.
The Company is a leader in the manufacturing and distribution of
products for rail and other power-related industries. Through its subsidiaries,
the Company manufactures and distributes engineered locomotive components and
parts; provides locomotive and freight car fleet maintenance; overhauls and
remanufactures locomotives and diesel engines; manufactures environmentally
friendly, switcher, commuter and mid-range DC and AC traction, diesel-electric
and liquefied natural gas locomotives up to 4,000 horsepower; and manufactures
components and software for power, marine and industrial markets. The Company's
primary customers are freight and passenger railroads, including every Class I
railroad in North America.
On February 16, 1999, the Company's Board of Directors approved a
three-for-two common stock split in the form of a 50 percent stock dividend
effective April 2, 1999. Shareholders of record as of March 17, 1999 received
one additional share of stock for each two shares they own. All share and
per-share amounts in the accompanying condensed consolidated statement of income
have been restated to give effect to the stock split.
The Company operates on a four- four- five-week accounting quarter. The
Company's quarters end on or about March 31, June 30, and September 30. The
Company's fiscal year ends December 31.
Certain reclassifications have been made to the 1998 condensed
consolidated financial statements to conform to the 1999 presentation.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In June 1998, Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activity," was issued. SFAS No. 133 is effective for
financial statements for fiscal quarters of fiscal years beginning after June
15, 1999. The Company has not yet determined the effect of this standard on its
financial statements.
CHANGES IN LINE-OF-CREDIT OR REVOLVING-DEBT ARRANGEMENTS: In January
1999, the Emerging Issues Task Force ("EITF") reached a tentative conclusion
regarding EITF Issue No. 98-14, "Debtor's Accounting for Changes in
Line-of-Credit or Revolving-Debt Arrangements" ("EITF 98-14"). The Company has
reflected the adoption of EITF 98-14 in its March 31, 1999 financial statements.
Under EITF 98-14, the Company has capitalized the costs related to the first
quarter 1999 amendment of its revolving credit agreement and will amortize these
costs along with previously capitalized costs over the life of the amended
agreement.
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2. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax effects, are
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
(In thousands)
1999 1998
------- -------
<S> <C> <C>
Net income $ 7,878 $ 6,648
Foreign currency translation adjustment (216) --
------- -------
Comprehensive income $ 7,662 $ 6,648
======= =======
</TABLE>
SFAS No. 130, "Reporting Comprehensive Income," was effective for
fiscal years beginning after December 15, 1997. With the Company's acquisition
of Q-Tron in January 1999, the Company is required to report the translation
adjustment relating to Q-Tron (whose functional currency is the Canadian dollar)
as a component of comprehensive income, as defined per SFAS 130. Prior to the
acquisition of Q-Tron, the Company's comprehensive income equaled net income.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Cores $13,238 $11,854
Raw materials 49,616 46,646
Work in progress 15,921 14,411
Finished goods 20,764 20,082
------- -------
$99,539 $92,993
======= =======
</TABLE>
Approximately $36.8 million and $38.3 million of total inventories at
March 31, 1999 and December 31, 1998, respectively, were valued on the last-in
first-out ("LIFO") cost method. The excess of current replacement cost of these
inventories over the stated LIFO value was $2 million and $1.9 million at March
31, 1999 and December 31, 1998, respectively. Costs for other inventories have
been determined principally by the first-in first-out method. The Company
defines cores as inventory designated for unit exchange programs.
4. INDEBTEDNESS
On March 2, 1999, MotivePower amended and restated the terms of its
revolving credit facilities with a syndicate of 12 lenders led by ABN AMRO Bank
as agent. The amendment increases the amount of the credit line from $200
million to $350 million, available as a five-year $175 million revolving credit
facility, and a 364-day $175 million revolving credit facility, which the
Company may renew annually with the approval of the lenders.
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<PAGE> 8
The facilities provide for revolving borrowings at a variable margin
over the London Interbank Offered Rate ("LIBOR"), or at Prime Rate, at the
Company's option. The margin over LIBOR at which the Company may borrow is
adjusted each fiscal quarter based on the ratio obtained when the Company's debt
at the end of the quarter is divided by the Company's cash flow over the past
four quarters, as measured by earnings before interest and income taxes, plus
depreciation and amortization ("EBITDA"). At March 31, 1999, the Company had
$127 million drawn under its LIBOR option at an effective annual interest rate
of 5.8%.
The Company's maximum borrowings under the facilities are limited to
the lesser of $350 million or 3.5 times trailing 12-month EBITDA. At March 31,
1999, the Company's gross availability under its domestic credit facilities was
approximately $270 million. After deducting outstanding debt and other reserves,
the Company has calculated its net available domestic borrowing capacity on
March 31, 1999 as $130 million.
On July 15, 1998, a domestic subsidiary of the Company entered into a
10-year $7.5 million debt obligation. This obligation consists of an Industrial
Revenue Bond ("IRB") and bears interest at a rate of 5.5%.
Maturities under long-term obligations at March 31, 1999 were as
follows: 1999 - $368,000; 2000 - $577,000; 2001 - $610,000; 2002- $644,000; 2003
- - $680,000; thereafter - $131.3 million.
5. COMMITMENTS AND CONTINGENCIES
The Company has commitments and performance guarantees arising from
locomotive remanufacturing contracts and maintenance agreements, and warranties
from the sale of new locomotives, remanufactured locomotives and components for
locomotives and engines.
Environmental: The Company is subject to a RCRA Part B Closure Permit (the
"Permit") issued by the Environmental Protection Agency and the Idaho Department
of Health and Welfare, Division of Environmental Quality relating to the
monitoring and treatment of groundwater contamination on, and adjacent to, the
Company's Boise Locomotive facility. In compliance with the Permit, the Company
has drilled wells onsite to retrieve and treat contaminated groundwater, and
onsite and offsite to monitor the amount of hazardous constituents. The Company
has estimated the expected aggregate undiscounted costs to be incurred over the
next 23 years, adjusted for inflation at 3% per annum, to be $4 million, based
on the Permit's Corrective Action Plan, and $3.7 million for contingent
additional Permit compliance requirements related to offsite groundwater
contamination. The discounted liability at March 31, 1999, using a discount rate
of 5.25%, was $2.2 million based on the Permit's Corrective Action Plan, and $2
million for contingent additional Permit compliance requirements related to
offsite groundwater contamination. The estimated outlays for each of the five
succeeding years from 1999 to 2003 are: $245,000, $290,000, $260,000, $268,000,
and $276,000. The Company was in compliance with the Permit at March 31, 1999.
Legal Proceedings: The Company is involved in legal proceedings incident to the
normal conduct of its business, including contract claims and employee matters.
Although the outcome of any pending legal proceeding cannot be predicted with
certainty, management believes that such legal proceedings are adequately
provided for in the condensed consolidated financial statements and that the
proceedings, individually and in the aggregate, will not have a material adverse
effect on the consolidated operations or financial condition of the Company.
8
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6. REPORTABLE SEGMENTS
The Company has two reportable segments: Locomotive and Components
Groups of subsidiaries. The reportable segments are comprised of strategic
business units which offer different products and services. The Locomotive Group
provides locomotive and freight car fleet maintenance; overhauls locomotives,
freight cars and diesel engines; and manufactures environmentally friendly
switcher, commuter and mid-range DC and AC traction, diesel-electric and
liquefied natural gas locomotives up to 4,000 horsepower. The Components Group
manufactures and distributes primarily aftermarket, or replacement, new and
remanufactured components and parts, for freight and passenger railroads,
including every Class I Railroad in North America, metropolitan transit and
commuter rail authorities, original equipment manufacturers, industrial
power-related markets and other customers internationally.
The Company evaluates segment performance based primarily on operating
income, excluding unusual items. The Company accounts for intercompany sales and
transfers as if the sales or transfers were to third parties at current market
prices.
Following is unaudited condensed segment financial information for the
three months ended March 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------- ----------------------------------------------
Locomotive Components Total Locomotive Components Total
------------- ------------- ------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross sales $33,864 $79,460 $113,324 $38,994 $52,009 $91,003
Intercompany sales 288 5,762 6,050 1,774 6,376 8,150
Operating income 4,999 12,624 17,623 6,622 7,618 14,240
Segment assets 116,351 270,552 386,903 139,582 139,226 278,808
</TABLE>
9
<PAGE> 10
The following reconciles segment information presented above to the unaudited
condensed consolidated financial statements:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
NET SALES:
- ----------
Gross sales from segments $ 113,324 $ 91,003
Intercompany sales elimination (6,050) (8,150)
--------- ---------
Net sales $ 107,274 $ 82,853
========= =========
OPERATING INCOME:
- -----------------
Segment operating income $ 17,623 $ 14,240
Unallocated corporate expenses (2,818) (3,237)
--------- ---------
Operating income $ 14,805 $ 11,003
========= =========
ASSETS:
- -------
Segment assets $ 386,903 $ 278,808
Corporate assets, including domestic deferred income taxes 20,909 6,799
--------- ---------
Total assets $ 407,812 $ 285,607
========= =========
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
MotivePower Industries' business strategy is to grow and continue to
strengthen its core businesses, including manufacturing and distributing
engineered locomotive components, software and parts; providing locomotive fleet
maintenance; overhauling and remanufacturing locomotives, freight cars and
diesel engines; and manufacturing environmentally friendly switcher, commuter
and mid-range DC and AC traction, diesel-electric and liquefied natural gas
locomotives up to 4,000 horsepower. The Company is looking to expand further
into other niche power, marine and industrial markets by growing the existing
business in these markets and by modifying certain existing products to fit new
applications.
The Company believes that it has six primary opportunities for growth,
or "growth engines": (1) capitalize on the NAFTA railroads' desire to outsource
non-transportation functions such as running locomotive maintenance and repair
projects by continuing to improve quality and by reducing product cycle times;
(2) continue to grow its Mexican market share and operations by expanding
current capabilities; (3) expand sales of components in targeted non-NAFTA
markets, such as South America, China, the Middle East and the Pacific Rim; (4)
develop new products for the rail industry and expand sales of similar
components into non-rail markets; (5) acquire companies that provide products or
services that complement the Company's current capabilities either
geographically or technically, or that expand the Company's product line; and
(6) develop alliances and joint ventures with other global rail industry
suppliers.
SIGNIFICANT EVENTS
During the quarter ended March 31, 1999, and subsequently, the Company
has been party to the following transactions and events:
- On January 11, 1999, the Company acquired certain assets of G&G
Locotronics, a privately held designer and manufacturer of high
voltage electrical cabinets and control stands for locomotives, for
total consideration of $17.8 million.
- On January 14, 1999, the Company acquired 100% of the common shares
of Q-Tron Ltd. ("Q-Tron"), a privately held designer and
manufacturer of locomotive electronics equipment, for total
consideration of $14.9 million.
- On February 12, 1999, the Company announced that Boise Locomotive
Company had signed expanded contracts totaling approximately $3
million with Amtrak and Utah Railway Company.
- On February 16, 1999, the Company's Board of Directors approved a
three-for-two common stock split in the form of a 50 percent stock
dividend effective April 2, 1999. This reflects the confidence the
board and management has in the continuing growth of the Company, as
well as an effort to increase trading liquidity by increasing the
size of the float. Shareholders of record as of March 17, 1999
received one additional share of stock for each two shares they
owned. This resulted in the issuance of 8,996,043 additional shares
of common stock.
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<PAGE> 12
- On February 16, 1999, the Company announced that MPI de Mexico
signed a five-year contract with Ferrocarril Mexicano S.A. de C.V.
("Ferromex") valued at $48.6 million. The contract replaces a
previous contract of the same length and revenues with the Mexican
National Railroad.
- On March 29, 1999, the Company announced that G&G Locotronics and
Q-Tron had been awarded contracts totaling $3 million.
G&G Locotronics will supply 30 Dash-2 electrical cabinets to a
locomotive rebuilder for the remanufacture of 3,000-horsepower
SD40-2 units. The cabinets are scheduled to be delivered in the
second quarter of 1999.
Q-Tron will provide 14 QTRAC-1000 traction control kits to Amtrak in
the second quarter of 1999 for a locomotive remanufacturing project.
This system will improve the units' traction and pulling capacity.
- On April 29, 1999, the Company announced that Power Parts Company
signed a $4 million international contract to supply remanufactured
engines to Brush Traction LTD. The engine work will be performed at
Boise Locomotive Company with delivery in 1999 and the first quarter
of 2000.
- On May 10, 1999, the Company announced that Bay State Transit
Services LLC had been selected by the Massachusetts Bay
Transportation Authority ("MBTA") to negotiate a five-year contract,
not to exceed $175 million, to provide rail equipment maintenance
for MBTA's commuter rail line in Boston.
Bay State Transit is a joint venture of Boise Locomotive Company and
Herzog Transit Services Inc. Boise Locomotive Company owns 75% of
the joint venture company.
Bay State Transit is scheduled to begin work in the fourth quarter
of 1999, subject to negotiating and signing the agreement.
12
<PAGE> 13
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented
by certain items in the Company's Unaudited Condensed Consolidated Statements of
Income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
------ ------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales (74.3) (74.2)
----- -----
Gross profit 25.7 25.8
Selling, general and administrative expenses (11.9) (12.5)
----- -----
Operating income 13.8 13.3
Investment income 0.2 0.3
Interest expense (2.0) (1.4)
Other income 0.1 0.1
Foreign exchange (loss) gain (0.5) 0.7
----- -----
Income before income taxes
and extraordinary item 11.6 13.0
Income tax expense (4.2) (4.4)
----- -----
Income before extraordinary item 7.4 8.6
Extraordinary item -- (0.6)
----- -----
Net income 7.4% 8.0%
===== =====
</TABLE>
CONSOLIDATED UNAUDITED OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31
------------------------------------------------
1999 1998 %CHANGE
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Net sales $107,274 $82,853 29.5%
Gross profit 27,523 21,356 28.9%
Selling, general and administrative expenses (12,718) (10,353) 22.8%
Operating income 14,805 11,003 34.6%
Income before extraordinary item 7,878 7,120 10.6%
Net income 7,878 6,648 18.5%
</TABLE>
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<PAGE> 14
Net sales for the first quarter of 1999 were $107.3 million, compared
to $82.9 million for the first quarter of 1998, an increase of 29.5%. The
increase in net sales is attributed to a 62% increase in sales in the Components
Group partially offset by a 10% decrease in the Locomotive Group. Included in
the Components Group were net sales of approximately $21 million for the first
quarter 1999 from the companies acquired in November 1998 and January 1999.
Gross profit for the first quarter of 1999 was $27.5 million or 25.7%
of net sales, compared to $21.4 million or 25.8% of net sales for the first
quarter of 1998. The first quarter of 1998 was favorably impacted by a $1.2
million gain recorded on a 1994 contract contingency that expired in the
quarter. This was partially offset by $621,000 of expenses related to facility
relocations. The normalized gross margin for the first quarter of 1998 was $20.8
million, or 25.1% of net sales. The increase in the adjusted gross margin is
primarily the result of a favorable product mix, efficiencies being realized
from the 1998 capital expenditure projects and strong cost controls.
Selling, general and administrative expenses for the first quarter of
1999 were $12.7 million, compared to $10.4 million for the first quarter of
1998. The increase is primarily attributed to expenses of approximately $2.3
million from the companies acquired in November 1998 and January 1999, and
approximately $300,000 of non-recurring expenses for due diligence costs related
to an acquisition which the Company decided not to pursue because it did not
meet the Company's internal requirements for earnings accretion. Selling,
general and administrative expenses declined as a percentage of net sales
compared to the first quarter of 1998 due to the Company's continuing focus on
cost controls.
Interest expense for the first quarter of 1999 was $2.2 million,
compared to $1.2 million for the first quarter of 1998. Increased borrowings on
the Company's credit facilities to fund acquisitions, capital expenditures and
working capital requirements, were partially offset by decreased borrowings on
the Company's higher rate Mexican credit facility which was prepaid in the
fourth quarter of 1998.
The Company realized a foreign exchange loss of $538,000 in the first
quarter of 1999, compared to a foreign exchange gain of $588,000 in the first
quarter of 1998. Both the loss and the gain are the results primarily of
fluctuations in the value of the Mexican peso, and the Company's net peso
position during the period. The Company continually monitors its net peso
position in determining its hedging strategies.
Excluding the effects of the foreign exchange remeasurement gain (loss)
on pretax income, income tax expense for the first quarter of 1999 was $4.5
million, or 35% of pre-tax income, compared to $3.6 million or 36% of pre-tax
income for the first quarter of 1998. The decrease in income tax expense as a
percentage of pre-tax income is primarily attributed to a reduced income tax
rate in Mexico resulting from international tax planning strategies.
14
<PAGE> 15
Locomotive Group
- ----------------
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
--------------------------
1999 1998 % CHANGE
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Net sales $33,576 $37,220 (9.8)%
Operating income 4,999 6,622 (24.5)%
</TABLE>
The decrease in net sales for the first quarter of 1999 compared to the
first quarter of 1998 is the result of lower sales of locomotive overhauls to
Class I railroads in the U.S., offset partially by increased sales volume of
overhauls and third party work at MPI de Mexico.
The decrease in operating income for the first quarter of 1999 compared
to the first quarter of 1998 is due to the first quarter of 1998 including a
$1.2 million non-recurring gain related to a 1994 contract contingency that
expired in the first quarter of 1998. Excluding this non-recurring gain,
operating income decreased 8% due to lower sales volume at Boise Locomotive
offset somewhat by increased volume at MPI de Mexico.
Components Group
- ----------------
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
--------------------------
1999 1998 % CHANGE
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Net sales $73,698 $45,633 61.5%
Operating income 12,624 7,618 65.7%
</TABLE>
The increase in net sales for the first quarter of 1999 compared to the
first quarter of 1998 is primarily the result of net sales from the companies
acquired in November 1998 and January 1999 which approximated $21 million.
Excluding acquisitions, the Component Group's net sales increased 16%, with
nearly all Component companies reporting first quarter 1999 increases over the
prior-year quarter.
Operating income increased in the first quarter of 1999 compared to the
first quarter of 1998 primarily due to the acquisitions noted above, increased
sales volume and a favorable product mix, and efficiencies being realized from
the 1998 capital expenditure projects which were largely within the Components
Group. The 1998 first quarter also included $621,000 of facility relocation
expenses.
15
<PAGE> 16
FINANCIAL CONDITION AND LIQUIDITY
On March 2, 1999, the Company amended and restated the terms of its
revolving credit facilities with a syndicate of 12 lenders led by ABN AMRO Bank
as agent. The amendment increases the amount of the credit line from $200
million to $350 million, available as a five-year $175 million revolving credit
facility, and a 364-day $175 million revolving credit facility, which the
Company may renew annually with the approval of the lenders. Under the new
facilities the Company may issue up to $35 million in letters of credit.
The Company anticipates that capital spending in 1999 will be
approximately $11-$13 million. The Company is continuing to monitor first-half
spending in 1999 and will closely monitor global economic indicators before
proceeding with projects which the Company believes can be delayed until the
second half of 1999 or until the year 2000. Capital spending for the first
quarter of 1999 has totaled $3.8 million, primarily for equipment upgrades, and
includes carryover from approved 1998 expenditures.
The table below highlights the debt and cash position of the Company at the
dates noted:
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(In thousands)
<S> <C> <C>
Revolver $127,000 $ 98,500
Industrial revenue bonds 7,164 7,298
-------- --------
Total debt 134,164 105,798
Less cash and cash equivalents 11,170 5,660
-------- --------
Net debt $122,994 $100,138
======== ========
</TABLE>
The Company's net debt increased in the first quarter of 1999 due
primarily to the acquisition of G&G Locotronics and Q-Tron in January 1999. With
the Company's credit facilities, the Company's cash position and the Company's
profitable operating results, management believes that its financing is adequate
to support its normal operations, capital spending and contemplated
acquisitions. This is a forward-looking statement, and factors such as a
decrease in rail traffic, a reduction in railroads' capital and maintenance
spending plans with regard to their locomotive fleets, or the Company's
inability to retain existing contracts and/or obtain new contract awards are
among the factors which could affect the Company's financing needs.
16
<PAGE> 17
The following table summarizes the net changes in cash flows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
------------------------------
1999 1998
-------- ----------
(In thousands)
<S> <C> <C>
Net cash provided by (used in):
Operating activities $ 13,169 $ (5,265)
Investing activities (36,150) (6,139)
Financing activities 28,491 490
-------- ---------
Net increase (decrease) in cash and cash equivalents $ 5,510 $ (10,914)
======== =========
Cash and cash equivalents at end of period $ 11,170 $ 5,983
======== =========
</TABLE>
Net cash provided by operating activities totaled $13.2 million for the
first three months of 1999, compared to net cash used in operating activities of
$5.3 million for the first three months of 1998. Cash provided by operations in
the first quarter of 1999 was primarily the result of the Company's net income
of $7.8 million, depreciation and amortization of $3.8 million and a decrease in
receivables from customers of $6.7 million. The decrease in receivables from
customers is primarily due to the timing of sales in the Locomotive Group.
Offsetting these sources of cash was a decrease in accounts payable and accrued
expenses of $3.5 million, an increase in inventories of $1 million and other net
changes of $600,000. The decrease in accounts payable and accrued expenses is
primarily due to the timing of expenses in the Locomotive Group.
Net cash used in investing activities totaled $36.2 million for the
first three months of 1999, compared to $6.1 million for the first three months
of 1998. The increase in cash used in investing activities in the first quarter
of 1999 is due to the acquisitions of G&G Locotronics and Q-Tron for $32.6
million.
Net cash provided by financing activities totaled $28.5 million for the
first three months of 1999 compared to $490,000 for the first three months of
1998. The increase in net cash provided by financing activities in the first
quarter of 1999 is due to increased borrowings under the Company's credit
facilities to fund the acquisitions of G&G Locotronics and Q-Tron and to fund
capital expenditures.
17
<PAGE> 18
BACKLOG
The Company defines backlog as future sales commitments which
constitute a binding agreement between the Company and the customer. Examples
include signed contracts and purchase orders. The Company is the preferred
supplier of certain components to certain customers, having received notice of
the customers' estimate of anticipated purchases. Because these notices are not
binding commitments, the Company does not include these amounts in backlog
calculations. At March 31, 1999, these anticipated purchases totaled $67.5
million.
The Company's multi-year locomotive fleet maintenance contracts account
for the majority of the Locomotive Group backlog. Multi-year fleet maintenance
contracts are expected to continue to produce additional sales of components and
parts.
The backlog as of March 31, 1999 and December 31, 1998 and the expected
year of recognition is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------------------------------------------------------
1999 2000 OTHER YEARS TOTAL BACKLOG
-------- ------- ----------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Locomotive $ 82,161 $70,768 $484,547 $637,476
Components 54,512 1,463 448 56,423
======== ======= ======== ========
Total $136,673 $72,231 $484,995 $693,899
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------
1999 OTHER YEARS TOTAL BACKLOG
-------- ----------- -------------
(In thousands)
<S> <C> <C> <C>
Locomotive $99,574 $553,347 $652,921
Components 51,664 1,220 52,884
======== ======= ========
Total $151,238 $554,567 $705,805
======== ======= ========
</TABLE>
INFORMATION TECHNOLOGY AND YEAR 2000 COMPLIANCE
The Company is currently engaged in a $7.2 million multi-year
information technology upgrade and business improvement project. This project,
which encompasses all of the Company's subsidiaries, includes a thorough review
of manufacturing, material flow and administrative business processes. Where
appropriate, hardware and software upgrades are being applied. To manage the
improved processes and systems moving forward, additional training,
implementation support and hiring of staff are being provided. The Company
expects that the project will improve working capital through improved material
management and production planning and control, in addition to cost reductions
for communications and other related expenses.
As part of its project, the Company is addressing the Year 2000
compliance issue. The Company has developed a four-step approach regarding the
Year 2000 compliance issue. The steps are to: (1) assess; (2) remediate; (3)
test and audit; and (4) develop a contingency plan. The Company is using both
internal and external resources to execute its plan. The assessment phase is
completed with respect to the Company's business systems, and the Company is in
the process of remediation. All mission critical business systems have been
upgraded to software release levels which, per the vendor, are Year 2000
compliant. Testing of these mission critical systems is currently underway. The
Company's Year 2000 Testing program is divided into three primary areas: mission
critical application software, non-mission critical software, and shop floor
(manufacturing) equipment. While all mission critical software applications have
been upgraded to Year 2000 compliant version levels, the Company is conducting
comprehensive testing to ensure software compliance. The non-mission critical
software applications are also being tested as considered appropriate. The
Company has also completed a detailed analysis of all
18
<PAGE> 19
shop equipment and has identified mission critical equipment. While the vast
majority of this equipment has been certified Year 2000 compliant by the
equipment manufacturer, the Company is also conducting its own testing to ensure
compliance. As of March 31, 1999, the Company had not uncovered any significant
problems with respect to its detailed testing program. The focus is now on
remediating non-mission critical systems. The Company expects that the
remediation and testing of all mission critical and non-mission critical systems
will be completed in the second quarter of 1999. The Company is also assessing
its own products which are date sensitive to provide assurances to its customers
that its products are Year 2000 compliant. In addition to the Company's internal
activities, the Company is in the process of contacting key material suppliers,
vendors and customers to determine their readiness with respect to the Year
2000. The Company has developed a compliance questionnaire, which was circulated
to its key material suppliers, vendors and customers in the third quarter of
1998. Suppliers have been divided into critical and non-critical suppliers. The
majority of the non-critical suppliers have been assessed and the Company feels
there are no significant Year 2000 related issues remaining with this supplier
group. From this point forward, the Company's focus and priority will be on
managing the issues associated with critical suppliers. The Company has received
responses from 75% of the critical suppliers and has found no significant Year
2000 issues related to this segment. The remaining 25% of the critical suppliers
are being addressed by developing a Contingency Plan for each of the suppliers
that pose a potential risk. Specifically, one of the four following actions are
being taken for each of the critical suppliers that pose a potential risk to the
Company: (1) generate a second source of supply; (2) replace the supplier; (3)
increase inventory levels to cover potential delivery issues; and (4) on-site
verification that the supplier will not pose a risk to the Company.
The Company has estimated that as part of its $7.2 million information
technology upgrade project approximately $900,000 is specifically Year 2000
related. The Company has expended approximately $600,000 in completing the items
noted above as of March 31, 1999. These costs have been and are expected to
continue to be funded out of the Company's operating cash flow. The Company is
expensing as incurred all costs related specifically to Year 2000 activities;
however, costs associated with new systems and the Company's information
technology upgrade are being capitalized in accordance with the Company's
accounting policies. The Company continually reviews its cost estimates for the
Year 2000 project and makes changes as deemed necessary.
The Company has recently completed three acquisitions: Young Radiator
Company (November 1998); G&G Locotronics, Inc. (January 1999); and Q-Tron
(January 1999). The Company assessed the Year 2000 compliance issue as part of
its due diligence efforts and is currently in the remediation stage. The Company
expects all three subsidiaries to be Year 2000 compliant by August 31, 1999.
The Company's Year 2000 plan only contemplates its current group of
subsidiaries and does not consider future acquisition candidates. These
acquisitions, if completed, will be evaluated separately from the Company's
current Year 2000 plan. Though the Company expects to be Year 2000 compliant, a
contingency plan is to be finalized by August 31, 1999. As the results of the
Company's test and audit phase of the Year 2000 Program begin to materialize, we
have started developing the overall Contingency Plan. The Plan has been divided
into six primary sections: (1) critical suppliers; (2) shop equipment; (3)
mission critical applications; (4) products; (5) banks; and (6) facilities. The
Plan will address specific actions to be taken in the event of issues occurring
in any of these six areas. Despite the Company's efforts and contingency plans,
the most reasonably likely worst case scenario of a Year 2000 failure by the
Company or its key suppliers, vendors or customers would likely be a slowdown of
the Company's manufacturing operations at one or more of the Company's
subsidiaries and/or an inability of the Company to process orders and meet
customer delivery schedules.
The foregoing discussion regarding the Year 2000 involves management's
current assessment and estimates with respect to the Company's Year 2000 efforts
which include inherent risks and uncertainties whereby the actual results could
differ materially from the discussion above. Various factors could cause actual
plans and results to differ materially from those contemplated by such
assessments and estimates and, as such, noncompliant computer systems and/or
noncompliant suppliers, vendors or customers could have a material adverse
effect on the Company's results of operations and financial condition.
19
<PAGE> 20
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements. The Company's
actual results could differ materially from the results suggested in any
forward-looking statement. Factors that could cause or contribute to these
material differences include, but are not limited to, the following: a slowdown
in the U.S. or Mexican economies; a decrease in North American Free Trade
Agreement ("NAFTA") rail traffic; continued rail consolidation by U.S. and
Canadian railroads, which could cause them to reduce purchases of goods and
services; a strengthening or a weakening of the U.S. dollar and/or a change in
the availability of letters of credit in targeted foreign markets; the Company's
ability to timely and efficiently implement productivity improvement plans; the
Company's ability to maintain current favorable relations with its labor unions;
and the Company's ability to successfully implement its information technology
upgrade and business improvement project, including "Year 2000" compliance. The
Company assumes no obligation to update these forward-looking statements or
advise of changes in the assumptions on which they were based.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no reportable legal proceedings initiated in the quarter ended
March 31, 1999 and there were no material developments to any previously
reported legal proceedings not included in this Form 10-Q.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
27.01 Article 5 Financial Data Schedule as of and for the three months
ended March 31, 1999.
REPORTS ON FORM 8-K
None.
21
<PAGE> 22
SIGNATURE
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.
MOTIVEPOWER INDUSTRIES, INC.
By: /s/ David L. Bonvenuto
------------------------------
David L. Bonvenuto
Vice President, Controller and
Principal Accounting Officer
Date: May 14, 1999
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS CONSOLIDATED SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,170
<SECURITIES> 0
<RECEIVABLES> 57,332
<ALLOWANCES> 717
<INVENTORY> 99,539
<CURRENT-ASSETS> 184,432
<PP&E> 153,558
<DEPRECIATION> 58,249
<TOTAL-ASSETS> 407,812
<CURRENT-LIABILITIES> 67,072
<BONDS> 133,607
0
0
<COMMON> 260
<OTHER-SE> 186,377
<TOTAL-LIABILITY-AND-EQUITY> 407,812
<SALES> 107,274
<TOTAL-REVENUES> 107,274
<CGS> 79,751
<TOTAL-COSTS> 79,751
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,194
<INCOME-PRETAX> 12,410
<INCOME-TAX> 4,532
<INCOME-CONTINUING> 7,878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,878
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.28
</TABLE>
