10-Q 1 e10-q.txt FORM 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15 (d) of The Securities Exchange Act of 1934 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 14 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 [ ] TRANSITION REPORT PURSUANT OR SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-7770 McCLAIN INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Michigan 38-1867649 State of Incorporation IRS Employer I.D. No. 6200 Elmridge Road Sterling Heights, Michigan 48310 (810) 264-3611 (Address of principal executive offices and telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of August 4, 2000. Common Stock, No Par Value 4,576,216 -------------------------------------------------------------------------------- Class Number of Shares 1 of 15 2 McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS JUNE 30 SEPTEMBER 30, 2000 1999 (UNAUDITED) ------------------------- ----------------------- CURRENT ASSETS Cash and cash equivalents $1,569,030 $1,908,397 Accounts receivable, (Net) 17,890,146 20,140,166 Inventories 54,511,958 63,281,785 Net investment in sales-type leases, current portion 7,750,000 5,900,000 Prepaid expenses 693,911 237,129 ------------------------- ----------------------- TOTAL CURRENT ASSETS 82,415,045 91,467,477 ------------------------- ----------------------- PROPERTY, PLANT AND EQUIPMENT, NET 23,198,071 23,236,170 ------------------------- ----------------------- NET INVESTMENT IN SALES-TYPE LEASES, NET OF CURRENT PORTION 15,037,164 12,871,973 ------------------------- ----------------------- OTHER ASSETS 2,229,590 2,348,369 ------------------------- ----------------------- TOTAL ASSETS 122,879,870 129,923,989 ========================= ======================= LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES Accounts payable $10,397,119 $21,775,139 Current portion of long-term debt 4,500,000 4,450,000 Accrued expenses 4,386,855 4,682,156 Federal and state income taxes 690,059 1,870,217 ------------------------- ----------------------- TOTAL CURRENT LIABILITIES 19,974,033 32,777,512 Long-term debt, net of current portion 67,413,960 62,648,684 Product liability 1,282,093 1,406,828 Deferred income taxes 2,200,000 2,200,000 ------------------------- ----------------------- TOTAL LIABILITIES - 90,870,086 99,033,024 ------------------------- ----------------------- STOCKHOLDERS' INVESTMENT 32,027,784 30,890,965 ------------------------- ----------------------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $122,879,870 $129,923,989 ========================= =======================
See notes to condensed consolidated financial statements 2 of 15 3 McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------------------------ --------------------------------------- 2000 1999 2000 1999 ------------------ ------------------ ------------------ ------------------ Net sales $ 40,634,125 $ 42,932,485 $ 108,560,823 $ 101,946,172 Cost of sales 33,826,791 35,247,417 89,641,340 83,666,479 ------------------ ------------------ ------------------ ------------------ GROSS PROFIT 6,807,334 7,685,068 18,919,483 18,279,693 Selling, general and administrative expenses 5,033,101 4,683,884 13,214,543 12,023,313 ------------------ ------------------ ------------------ ------------------ INCOME FROM OPERATIONS 1,774,233 3,001,184 5,704,940 6,256,380 ------------------ ------------------ ------------------ ------------------ OTHER INCOME (EXPENSE) Interest expense (1,701,772) (1,019,744) (4,395,821) (2,654,269) Interest income 591,799 381,596 1,586,720 1,141,328 Other, net (136,427) 2,303 (432,122) (99,963) ------------------ ------------------ ------------------ ------------------ OTHER EXPENSE - NET (1,246,400) (635,845) (3,241,223) (1,612,904) ------------------ ------------------ ------------------ ------------------ INCOME BEFORE INCOME TAXES 527,833 2,365,339 2,463,717 4,643,476 Income taxes 180,000 804,000 838,000 1,579,000 ------------------ ------------------ ------------------ ------------------ NET INCOME $ 347,833 $ 1,561,339 $1,625,717 $3,064,476 ================== ================== ================== ================== Net income per share: Basic $ 0.08 $ 0.33 $ 0.36 $ 0.65 ================== ================== ================== ================== Assuming dilution $ 0.08 $ 0.33 $ 0.36 $ 0.65 ================== ================== ================== ==================
See notes to condensed consolidated financial statements 3 of 15 4 McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES CONDENDSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
NINE MONTHS ENDED JUNE 30, --------------------------------------------------- 2000 1999 ------------------------- ----------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $1,625,717 $3,064,476 Adjustments to reconcile net income to net cash (used) provided by operating activities Depreciation and amortization 2,542,088 2,451,924 Common stock issued to directors for services 23,977 10,114 Net changes in operating assets and liabilities which provided (used) cash: Current assets excluding cash & cash equivalents 8,713,065 (17,761,479) Other assets (2,447,543) (1,776,788) Accounts payable (11,378,020) 10,810,606 Accrued expenses (313,300) 993,298 Federal and state income taxes (1,180,158) 924,145 ------------------------- ----------------------- NET CASH (USED IN) OPERATING ACTIVITIES (2,414,174) (1,283,704) ------------------------- ----------------------- ------------------------- ----------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of plant and equipment (2,102,859) (3,293,071) Payments (made on) received from liabilities assumed upon the Galion acquisition (124,735) (282,567) ------------------------- ----------------------- NET CASH (USED IN) INVESTING ACTIVITIES (2,227,594) (3,575,638) ------------------------- ----------------------- ------------------------- ----------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal increase of long term debt 4,815,276 5,945,914 Repurchase of common stock (512,875) (151,378) ------------------------- ----------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 4,302,401 5,794,536 ------------------------- ----------------------- ------------------------- ----------------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (339,367) 935,194 ------------------------- ----------------------- Cash and cash equivalents, beginning of period 1,908,397 1,924,006 ------------------------- ----------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $1,569,030 $2,859,200 ========================= =======================
See notes to condensed consolidated financial statements 4 of 15 5 McCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 2000 1. Basis of Presentation The accompanying unaudited Consolidated Financial Statements of McClain Industries, Inc. and subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, such Statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring items considered necessary for a fair presentation have been included. Operating results for the nine-month period ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending September 30, 2000. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 1999. 2. Inventories Inventories at June 30, 2000 and September 30, 1999 are summarized as follows:
(Unaudited) June 30, 2000 September 30, 1999 ------------------------------------ Materials and Supplies $ 18,111,958 $ 19,416,535 Work in Process 6,100,000 5,555,977 Finished Goods 11,500,000 11,120,913 Chassis 18,800,000 27,188,360 -------------- -------------- $ 54,511,958 $ 63,281,785 -------------- ---------------
3. Earnings per Common Share and Common Equivalent Share: Earnings per share are computed using the weighted average number of common shares outstanding during the periods, including a dual presentation and reconciliation of "basic" and "diluted" per share amounts. Diluted reflects the potential dilution of all common stock equivalents. For the periods ended June 30, 2000 and 1999 options to purchase 239,665 and 183,339 shares, respectively, were excluded from the computation of earnings per share because the options' exercise prices were greater than the average market price of the common shares. 5 of 15 6 McCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 2000 4. Depreciation For the nine months ended June 30, 2000 and 1999, depreciation charges were $2,140,958 and $2,096,308, respectively. Accumulated depreciation totaled $23,047,879 and $21,046,447 at June 30, 2000 and September 30, 1999, respectively. 5. Contingencies Product Liability As a manufacturer of industrial products, the Company is occasionally subjected to various product liability claims. Such claims typically involve personal injury or wrongful death associated with the use or misuse of the Company's products. The Company is currently defending certain legal proceedings involving allegations of product liability relating to products manufactured and sold by the Company. Historically, such claims have not resulted in material losses to the Company in any one year, and the Company maintains product liability insurance in amounts believed by management to be adequate. McClain E-Z Pack, Inc., as successor to Galion Holding Company (GHC), pursuant to an indemnification it provided to the seller in connection with GHC's July 1992 acquisition of the Galion operations, is currently defending a number of legal proceedings involving product liability claims arising out of products manufactured and sold prior to the acquisition. These claims are covered by insurance and many of these cases have been settled. In addition, the acquisition agreement called for the seller to share in the payment of certain costs related to the defense of these cases. On December 29, 1998 the Company reached a settlement agreement with the seller, the terms of which called for the Company to release the seller from its obligations related to product liability claims under the Galion acquisition agreement in exchange for a cash payment of $1,050,000. A reserve to provide for these product claims was established at the acquisition date. Since many of the cases have been settled and insurance coverage exists, management believes that the ongoing costs to defend these claims will not exceed the amount accrued on the accompanying consolidated balance sheet at June 30, 2000. Nevertheless, it is not possible to predict the ultimate outcome of any product liability claim, and any such claim not fully covered by insurance, as well as adverse publicity from a product claim, could have a material adverse effect on the Company. 6 of 15 7 McCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 2000 Environmental Matters The Company's operations are subject to extensive federal, state and local regulation under environmental laws and regulations concerning, among other things, emissions into the air, discharges into the waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. Inherent in manufacturing operations and in owning real estate is the risk of environmental liabilities as a result of both current and past operations, which cannot be predicted with certainty. The Company has incurred and will continue to incur costs, on an ongoing basis, associated with environmental regulatory compliance in its business. Labor Union Matters Certain of the Company's hourly employees are represented by various labor unions pursuant to collective bargaining agreements which expire between June 2000 and June 2003. On February 23, 1995, the National Labor Relations Board (NLRB) conducted an election in response to a petition filed by a local union (Union) to represent the hourly employees at the Company's Macon, Georgia plant. The ballots of certain employees were challenged as ineligible. The Union filed charges asserting that the Company committed various unfair labor practices, which affected the election results, and that the challenged ballots should be counted. On October 17, 1996, the NLRB upheld the unfair labor practice charges and on November 5, 1996, the NLRB determined that the results of the election were in favor of the Union. The Company continues to vigorously defend against the unfair labor practice allegations. The Company does not believe a final decision upholding the Union certification or the unfair labor practice charges would have a material adverse effect on the Company. The Company believes that relations with the hourly employees at McClain of Georgia are generally satisfactory. There have been no work stoppages due to labor difficulties. Other Legal Matters The Company is also involved in routine litigation incidental to its business. Management believes that the resolution of these matters will not materially affect the consolidated financial statements. 7 of 15 8 McCLAIN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 2000 6. Year 2000 Compliance The Company did not experience any significant disruptions in its operation that were related to the Year 2000 issue. 7. Segment Information The Company operates in three principal operating segments 1) Manufactured Equipment, 2) Truck Chassis Sales, and 3) Leasing Operations. Management evaluates the performance of its operating segments separately to individually monitor the different factors affecting performance. The Company measures the performance of its operating segments based on net revenue and operating income. Income taxes are managed on a Company-wide basis. Segment performance is also evaluated based on profit or loss before income taxes. 8 of 15 9 McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 2000 Information regarding the Company's operating segments follows for the three months ended June 30, 2000 and 1999 follows:
Manufacturing Truck Leasing Operations Group Operations Totals ------------------- ------------------- ------------------ -------------------- 2000 Net sales $ 30,934,539 $ 9,699,586 $ 0 $ 40,634,125 Lease revenues $ 0 0 1,516,119 1,516,119 Operating income (loss) $ 1,711,698 (176,994) 239,529 1,774,233 Interest expense, net $ 861,161 457,879 382,732 1,701,772 Income (loss) before income taxes $ 1,029,865 (643,874) 141,842 527,833 Identifiable assets $ 81,706,922 18,385,784 22,787,164 122,879,870 Capital expenditures $ 2,102,859 0 0 2,102,859 Depreciation and amortization $ 850,553 0 0 850,553 1999 Net sales $ 33,281,049 $ 9,651,436 $ 0 $ 42,932,485 Lease revenues $ 0 0 901,146 901,146 Operating income $ 858,556 292,484 211,935 1,362,975 Interest expense, net $ 526,040 297,380 196,324 1,019,744 Income (loss) before income taxes $ 2,169,642 (10,822) 181,215 2,340,035 Identifiable assets $ 95,030,841 22,257,376 12,635,772 129,923,989 Capital expenditures $ 3,293,071 0 0 3,293,071 Depreciation and amortization $ 795,376 0 0 795,376
9 of 15 10 McCLAIN INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 2000 Information regarding the Company's operating segments follows for the nine months ended June 30, 2000 and 1999 follows:
Manufacturing Truck Leasing Operations Group Operations Totals ------------------- ------------------- ------------------ -------------------- 2000 Net sales $ 81,848,439 $ 26,712,384 $ 0 $ 108,560,823 Lease revenues $ 0 0 4,154,626 4,154,626 Operating income (loss) $ 5,303,398 (235,401) 636,943 5,704,940 Interest expense, net $ 2,185,373 1,344,270 866,178 4,395,821 Income (loss) before income taxes $ 3,524,574 (1,606,672) 545,815 2,463,717 Identifiable assets $ 81,706,922 18,385,784 22,787,164 122,879,870 Capital expenditures $ 2,102,859 0 0 2,102,859 Depreciation and amortization $ 2,542,088 0 0 2,542,088 1999 Net sales $ 78,648,664 $ 23,297,508 $ 0 $ 101,946,172 Lease revenues $ 0 0 2,613,233 2,613,233 Operating income (loss) $ 3,231,138 882,998 529,340 4,643,476 Interest expense, net $ 1,613,454 535,524 505,291 2,654,269 Income (loss) before income taxes $ 3,707,791 406,345 529,340 4,643,476 Identifiable assets $ 95,030,841 22,257,376 12,635,772 129,923,989 Capital expenditures $ 3,293,071 0 0 3,293,071 Depreciation and amortization $ 2,451,924 0 0 2,451,924
10 of 15 11 McCLAIN INDUSTRIES, INC. ITEM TWO. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview The following discussion should be read in conjunction with the condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this report. Selected financial data for the Company for the periods indicated:
(Unaudited) (Unaudited) Three Months Ended Nine Months Ended June 30, June 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net Sales $ 40,634,125 $ 42,932,485 $108,560,823 $101,946,172 Net Income $ 347,833 $ 1,561,339 $ 1,625,717 $ 3,064,476 Net Earnings Per Common Share (Basic and Diluted) $ .08 .33 $ .36 $ .65
(Unaudited) As of As of June 30, September 30, 2000 1999 ---------------- ------------------ Working Capital $ 62,441,012 $ 58,689,965 Total Assets 122,879,870 129,923,989 Long-Term Debt 67,413,960 62,648,684 Stockholder's Investment 32,027,784 30,890,965 Common shares outstanding (Basic and Diluted) 4,581,084 4,684,439 Current Ratio 4.13:1 2:79:1 Long-Term Debt to Equity Stockholders' Investment 2.11:1 2.03:1
11 of 15 12 MCCLAIN INDUSTRIES, INC. The following table presents, as a percentage of net sales, certain selected financial data for the Company for the periods indicated:
(Unaudited) (Unaudited) Three Months Ended Nine Months Ended June 30, June 30, 2000 1999 2000 1999 ------------------------ ------------------------ Net Sales 100.00% 100.00% 100.00% 100.00% Cost of Sales 83.25 82.20 82.57 82.07 ------ ------ ------ ------ Gross Profit 16.75 17.80 17.43 17.93 Selling, General & Administrative Expenses 12.38 10.61 12.17 11.79 ------ ------ ------ ------ Operating Income 4.37 7.19 5.26 6.14 Other Expenses (3.07) (2.37) (2.99) (1.58) ------ ------ ------ ------ Income before Income Taxes 1.30 4.82 2.27 4.56 Income Taxes (0.44) (1.65) (0.77) (1.55) ------ ------ ------ ------ Net Income 0.86% 3.17% 1.50% 3.01% ------ ------ ------ ------
12 of 15 13 McCLAIN INDUSTRIES, INC. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Net sales decreased 5.4% to $40.6 million for the quarter ended June 30, 2000 (Quarter 2000) from $42.9 million for the quarter ended June 30, 1999 (Quarter 1999). The decrease was due primarily to slower sales by the Company's McClain E-Z Pack division. Sales for McClain E-Z Pack decreased 17.3% or $1.6 million for the Quarter 2000 from the Quarter 1999. Sales of the Company's other product lines were flat for the Quarter 2000 compared to the Quarter 1999. The sales of the McClain Truck division accounted for 18.7% of the Company's sales for the Quarter 2000 compared to 17.4% of the Company's sales for the Quarter 1999. Cost of goods sold increased to 83.25% for the Quarter 2000 from 82.20% for the Quarter 1999. The gross profit margin on manufactured products decreased to 19.1% for the Quarter 2000 compared to 20.0% for the Quarter 1999. The gross profit margin for the McClain Truck division decreased to 6.5% for the Quarter 2000 from 8.1% for the Quarter 1999 due to tighter margins on the dump truck chassis sold by the Company that result from continued softness in the dump truck market. Selling, General & Administrative Expenses increased to 12.38% of net sales for the Quarter 2000 from 10.61% of net sales for the Quarter 1999 due primarily to lower sales. Net Income for the quarter decreased to .86% of sales for the quarter 2000 from 3.17% for the quarter 1999. This decrease was due primarily to the additional interest costs of carrying the increased debt necessary to fund the Company's expanded truck inventory and increased health insurance costs. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 1999. Net sales increased 6.5% to $108.6 million for the nine months ended June 30, 2000 (nine months 2000) from $101.9 million for the nine months ended June 30, 1999 (nine months 1999). The increase was due primarily to strong sales by the Company's McClain Commodities and McClain Truck divisions. Sales for McClain Commodities increased 11.6% or $4.4 million for the nine months 2000 over the nine months 1999, while McClain Truck sales increased 13.5% or $2.6 million during the nine months 2000 compared to the nine months 1999. Sales of the Company's other product lines were flat for the nine months 2000 compared to the nine months 1999. The sales of the McClain truck division accounted for 19.9% of the Company's sales for the nine months 2000 compared to 18.7% of the Company's sales for the nine months 1999. Cost of goods sold increased to 82.6% for the nine months ended June 2000 from 82.1% for the nine months ended June 1999 due primarily to the higher percentage of truck sales discussed previously. The gross profit margin on manufactured products increased to 21.2% for 13 of 15 14 the nine months 2000 compared to 20.5% for the nine months 1999. This increase is the result of increased production, providing overhead reductions at certain of the Company's manufacturing facilities. The gross profit margin for the McClain Truck division decreased to 2.3% for the nine months 2000 from 7.0% for the nine months 1999 due to tighter margins on the dump truck chassis sold by the Company that result from continued softness in the dump truck market. Selling, General & Administrative Expenses increased to 12.17% of net sales for the nine months 2000 from 11.79% of net sales for the nine months 1999. Net Income for the quarter decreased to 1.5% of sales for the nine months 2000 from 3.01% for the nine months 1999. This decrease was due primarily to the additional interest costs of carrying the increased debt necessary to fund the Company's expanded truck inventory and increased health insurance costs. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 1999. The Company had working capital of $62.4 million at June 30, 2000 compared to $58.7 million at September 30, 1999. The ratio of current assets to current liabilities was 4.13:1 at June 30, 2000 and 2.79:1 at September 30, 1999. The Company's cash and cash equivalents totaled $1.6 million at June 30, 2000. Cash flows used by operations were $2.4 million for the nine months ended June 30, 2000. 14 of 15 15 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. McCLAIN INDUSTRIES, INC. Date: August 7, 2000 By: /s/ Kenneth D. McClain ------------------------------- ------------------------------- Kenneth D. McClain, President Date: August 7, 2000 By: /s/ Mark S. Mikelait ------------------------------- ------------------------------- Mark S. Mikelait, Treasurer 15 of 15 16 EXHIBIT INDEX -------------
Exhibit No. Description ----------- ----------- 27 Financial Data Schedule