-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SQ+HG2RteSF7EHQgSOf6AZEPWrd8bMvBPOdilITZYdHBWB0YJMCARohMjqOyKaSH YW1krMNHzouInks8inJ7Yw== 0000950131-96-002794.txt : 19960617 0000950131-96-002794.hdr.sgml : 19960617 ACCESSION NUMBER: 0000950131-96-002794 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960427 FILED AS OF DATE: 19960614 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABC RAIL PRODUCTS CORP CENTRAL INDEX KEY: 0000913364 STANDARD INDUSTRIAL CLASSIFICATION: METAL FORGING & STAMPINGS [3460] IRS NUMBER: 363499749 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22906 FILM NUMBER: 96580981 BUSINESS ADDRESS: STREET 1: 200 S MICHIGAN AVE STREET 2: STE 1300 CITY: CHICAGO STATE: IL ZIP: 60604-2402 BUSINESS PHONE: 3123220360 MAIL ADDRESS: STREET 1: 200 S MICHIGAN AVE STREET 2: 200 S MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60604 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 April 30, 1996 0-22906 - ------------------------------- ------------------------ For the Quarter Ended Commission File Number ABC Rail Products Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3498749 - --------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 200 South Michigan Avenue, Chicago, IL 60604-2402 - -------------------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number (312) 322-0360 ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- -------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at June 7, 1996 - -------------------------------- --------------------------------- Common Stock, $.01 par value 8,261,026 Shares ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES INDEX
Page ---- Part I Financial Information Item 1 Consolidated Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Operations 4 Consolidated Statements of Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Unaudited Consolidated Financial Statements 7-11 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 12-16 Part II Other Information Item 6 Exhibits and Reports on Form 8-K 17
2 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of April 30, 1996 and July 31, 1995
(In thousands, except share and per share data) April 30, July 31, ASSETS 1996 1995 - ------ ----------- -------- (unaudited) CURRENT ASSETS: Cash $ - $ 1,966 Accounts receivable, less allowances of $692 and $716, respectively 30,065 38,738 Inventories (Note 4) 36,258 35,560 Prepaid expenses and other current assets 2,145 1,656 Prepaid income taxes 1,405 1,563 -------- -------- Total current assets 69,873 79,483 -------- -------- PROPERTY, PLANT AND EQUIPMENT: Land 1,358 1,321 Buildings and improvements 11,320 10,448 Machinery and equipment 69,789 66,090 Construction in progress 10,180 8,037 -------- -------- 92,647 85,896 Less - Accumulated depreciation (28,129) (22,207) -------- -------- Net property, plant and equipment 64,518 63,689 -------- -------- INVESTMENT IN UNCONSOLIDATED JOINT VENTURES 4,845 5,354 -------- -------- OTHER ASSETS - net 8,237 8,738 -------- -------- Total assets $147,473 $157,264 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Cash overdrafts $ 3,505 $ - Current maturities of long-term debt 7,567 7,574 Accounts payable 16,921 22,743 Due to affiliate 1,534 2,335 Accrued liabilities 10,657 9,520 -------- -------- Total current liabilities 40,184 42,172 -------- -------- LONG-TERM DEBT, less current maturities 44,009 55,970 -------- -------- DEFERRED INCOME TAXES 4,910 4,612 -------- -------- OTHER LONG-TERM LIABILITIES 4,044 4,056 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value; 1,000,000 shares authorized; no shares issued or outstanding - - Common stock, $.01 par value; 25,000,000 shares authorized; 8,112,137 shares and 7,983,387 shares issued and outstanding as of April 30, 1996 and July 31, 1995, respectively 81 80 Additional paid-in capital 51,171 49,671 Retained earnings 3,074 703 -------- -------- Total stockholders' equity 54,326 50,454 -------- -------- Total liabilities and stockholders' equity $147,473 $157,264 ======== ========
The accompanying notes to the unaudited consolidated financial statements are an integral part of these consolidated balance sheets. 3 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three and Nine Months Ended April 30, 1996 and 1995 (Unaudited)
(In thousands, except per share data) Three Months Ended Nine Months Ended April 30 April 30 -------------------- --------------------- 1996 1995 1996 1995 --------- --------- -------- ----------- (Restated - See Note 5) NET SALES $60,139 $62,147 $177,258 $172,995 COST OF SALES 56,286 52,075 156,859 147,553 ------- ------- -------- -------- Gross profit 3,853 10,072 20,399 25,442 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,668 2,781 9,161 9,915 SPECIAL CHARGE (Note 7) 3,155 - 3,155 - ------- ------- -------- -------- Operating income (loss) (2,970) 7,291 8,083 15,527 Interest expense 1,263 812 3,942 1,998 AMORTIZATION OF DEFERRED FINANCING COSTS 46 69 124 237 ------- ------- -------- -------- Income (loss) before income taxes, cumulative effect of accounting change and extraordinary item (4,279) 6,410 4,017 13,292 PROVISION (BENEFIT) FOR INCOME TAXES (1,752) 2,627 1,646 5,450 ------- ------- -------- -------- Income (loss) before cumulative effect of accounting change and extraordinary item (2,527) 3,783 2,371 7,842 CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 5) - - - (1,214) EXTRAORDINARY ITEM (Note 2) - (814) - (814) ------- ------- -------- -------- Net income (loss) $(2,527) $ 2,969 $ 2,371 $ 5,814 ======= ======= ======== ======== NET INCOME (LOSS) PER COMMON SHARE: Income (loss) before cumulative effect of accounting change and extraordinary item $ (0.30) $ 0.47 $ 0.29 $ 0.98 Cumulative effect of accounting change - - - (0.15) Extraordinary item - (0.10) - (0.10) ------- ------- -------- -------- Net income (loss) $ (0.30) $ 0.37 $ 0.29 $ 0.73 ======= ======= ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,347 8,030 8,273 7,974 ======= ======= ======== ========
The accompanying notes to the unaudited consolidated financial statements are an integral part of these consolidated statements. 4 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Nine Months Ended April 30, 1996 and 1995 (Unaudited)
(In thousands) Additional Retained Common Paid-in Earnings Stock Capital (Deficit) ----- ------- ------- BALANCE, July 31, 1994 $77 $43,193 $(8,352) Net income (Restated - See Note 5) - - 5,814 Issuance of common stock, net - 135 - --- ------- ------- BALANCE, April 30, 1995 $77 $43,328 $(2,538) === ======= ======= BALANCE, July 31, 1995 $80 $49,671 $ 703 Net income - - 2,371 Issuance of common stock, net 1 1,500 - --- ------- ------- BALANCE, April 30, 1996 $81 $51,171 $ 3,074 === ======= =======
The accompanying notes to the unaudited consolidated financial statements are an integral part of these consolidated statements. 5 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three and Nine Months Ended April 30, 1996 and 1995 (Unaudited)
(In thousands) Three Months Ended Nine Months Ended April 30 April 30 -------------------- --------------------- 1996 1995 1996 1995 --------- --------- -------- ----------- (Restated - See Note 5) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(2,527) $ 2,969 $ 2,371 $ 5,814 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of accounting change - - - 1,214 Extraordinary item - 814 - 814 Depreciation and amortization 2,484 1,921 7,727 4,852 Deferred income taxes 147 125 456 393 Changes in certain assets and liabilities Accounts receivable - net 469 2,077 8,673 (477) Inventories 4,259 (2,680) (698) (4,555) Prepaid expenses and other current assets (73) 376 (489) (989) Other assets - net 204 (907) (476) (1,894) Accounts payable, due to affiliate and accrued liabilities 1,311 (744) (5,450) 4,017 Other long-term liabilities (3) 8 (12) 9 ------- -------- ------- -------- Total adjustments 8,797 990 9,731 3,384 ------- -------- ------- -------- Net cash provided by operating activities 6,271 3,959 12,102 9,198 ------- -------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (2,000) (8,194) (6,751) (22,320) Change in restricted cash - 224 - 468 ------- -------- ------- -------- Net cash used in investing activities (2,000) (7,970) (6,751) (21,852) ------- -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in cash overdrafts 316 2,148 3,505 3,465 Net receipts (payments) under previous line of credit - (22,366) - (22,914) Activity under New Credit Agreement: Issuance of non-amortizing term loan - 15,000 - 15,000 Net activity under revolving line of credit (3,672) 7,320 (8,697) 7,320 Repayment of acquisition facility (1,416) - (4,248) - Issuance of other long-term debt - 2,804 2,632 9,221 Repayment of other long-term debt (572) (555) (1,654) (555) Payment of deferred financing costs (78) (340) (356) (486) Issuance of common stock - net 1,151 - 1,501 135 ------- -------- ------- -------- Net cash provided by (used in) financing activities (4,271) 4,011 (7,317) 11,186 ------- -------- ------- -------- Net change in cash - - (1,966) (1,468) CASH, beginning of period - - 1,966 1,468 ------- -------- ------- -------- CASH, end of period $ - $ - $ - $ - ======= ======== ======= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 1,424 $ 962 $ 3,868 $ 1,811 Cash paid for income taxes, net 862 1,039 2,703 3,423
The accompanying notes to the unaudited consolidated financial statements are an integral part of these consolidated statements. 6 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION ABC Rail Products Corporation (the "Company") is a leader in the engineering, manufacturing and marketing of replacement products and original equipment for the freight railroad and rail transit industries. The Company's products include specialty trackwork, such as rail crossings and switches, and mechanical products, such as railcar, locomotive and idler wheels, mounted wheel sets and metal brake shoes. The accompanying unaudited consolidated financial statements include, in the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of the results of operations and financial condition of the Company for and as of the interim dates. Results for the interim periods are not necessarily indicative of results for the entire year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures contained herein are adequate to make the information presented not misleading. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1995 Annual Report to Stockholders. 2. REFINANCING AND PUBLIC STOCK OFFERING On March 31, 1995, the Company negotiated a new five-year credit agreement (the "New Credit Agreement") with a group of lenders allowing for maximum direct borrowings and outstanding letters of credit of up to $80 million. The new facility included a $15 million non-amortizing term loan, a $40 million revolving credit line and a one-time $25 million acquisition facility. On November 30, 1995, the Company and its lenders amended the new facility by increasing the revolving credit line to $50 million from $40 million, and by recharging the availability under the acquisition line from the $8 million remaining after the wheel mounting business acquisition (see Note 3 for additional comments) to $17.8 million. Maximum availability under the revolving credit line is limited to certain advance rates on eligible accounts receivable and inventories. At April 30, 1996, total remaining availability under the New Credit Agreement was $37.3 million and the weighted average interest rate on outstanding borrowings was 8.2%. The New Credit Agreement and other credit facilities contain customary financial and other covenants. As a result of the special charge recorded during the quarter (see Note 7 for additional comments), the Company was in technical default of the minimum fixed charge coverage ratio contained in the New Credit Agreement. The Company immediately obtained a waiver of default from its group of lenders and an amendment allowing for the exclusion of the special charge from current and future covenant compliance calculations. As a result of the amendment, the Company was in compliance with all of the covenants under its credit facilities as of April 30, 1996. The fiscal 1995 third quarter includes an extraordinary after-tax, non-cash charge of $0.8 million related to the write-off of unamortized deferred financing charges associated with debt which was refinanced under the New Credit Agreement. 7 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In June 1995, the Company issued shares of common stock for net proceeds of $6.5 million. Such proceeds were used to pay down indebtedness under the New Credit Agreement. 3. BUSINESS COMBINATIONS Effective May 15, 1995, the Company purchased from General Electric Railcar Wheel and Parts Services Corporation ("GESC") substantially all of the assets of the railcar wheel mounting facilities of GESC (the "Wheel Mounting Business"). In consideration for the acquisition of the assets of the Wheel Mounting Business, the Company paid GESC approximately $26.1 million in cash and assumed certain of GESC's contractual liabilities. The Company obtained the funds to pay the purchase price and related transaction costs of approximately $1.0 million from borrowings under the New Credit Agreement. The acquisition was accounted for as a purchase for financial reporting purposes. Accordingly, certain recorded assets and liabilities of the acquired business were revalued at estimated fair values as of the acquisition date. Management has used its best judgment and available information in estimating the fair value of those assets and liabilities. Any changes to these estimates are not expected to be material. The operating results of the Wheel Mounting Business are included in the consolidated statements of operations from the date of acquisition. The following data represents the Company's unaudited pro forma results of operations for the nine months ended April 30, 1995 as if the Wheel Mounting Business acquisition had occurred on August 1, 1994 (in thousands, except per share data):
Nine Months Ended April 30, 1995 ----------------- Net sales $203,647 Income before cumulative effect of accounting change and extraordinary item 9,047 Net income 7,019 Per share data: Income before cumulative effect of accounting change and extraordinary item $ 1.13 Net income $ 0.88
8 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The pro forma operating results include the pre-acquisition results of operations of the Wheel Mounting Business for the indicated years with adjustments to reflect amortization of goodwill, different depreciation expense, interest expense on the acquisition borrowings and the effect of income taxes thereon. The pro forma information given above does not purport to be indicative of the results that actually would have been obtained if the operations were combined during the period presented and is not intended to be a projection of future results or trends. On July 31, 1995, the Company entered into a 50-50 joint venture with Anchor Brake Shoe Company ("Anchor"). The purpose of the joint venture is to design, manufacture, market and sell railcar composite brake shoes. The Company's initial contribution to the joint venture included the inventories and property, plant and equipment of its composite brakeshoe facility in Chicago, Illinois and certain related accounts receivable and other current assets aggregating $3.5 million. Anchor contributed its composite brakeshoe facility which, net of a promissory note from the joint venture, resulted in an initial contribution of $3.5 million. Certain of the assets contributed to the joint venture by the Company may be sold by the joint venture by July 31, 1996. Any difference between the sale proceeds and the contributed value of such assets will be credited to the appropriate partner. Pursuant to a related Commission Agreement between the Company and the joint venture, the joint venture must pay the Company a 3% commission on sales of the joint venture that are generated through the Company. 4. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for substantially all inventories. Inventory costs include material, labor and manufacturing overhead. Supplies and spare parts primarily consist of manufacturing supplies and equipment replacement parts. Inventories at April 30, 1996, and July 31, 1995, consisted of the following (in thousands): April 30, July 31, 1996 1995 --------- -------- Raw materials $20,956 $22,316 Work in process 7,438 7,769 Finished goods 3,522 1,522 Supplies and spare parts 4,342 3,953 ------- ------- $36,258 $35,560 ======= ======= 9 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. RESTATEMENT The Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" in the fourth quarter of fiscal 1995, but effective, and therefore reflected herein, as of August 1, 1994. The adoption resulted in a one-time cumulative adjustment of $2.1 million ($1.2 million, net of income tax). Previously reported net income and net income per share for the nine months ended April 30, 1995 were $7.0 million and $0.88, respectively. The incremental costs of adopting this statement are insignificant on an ongoing basis. 6. COMMITMENTS AND CONTINGENCIES In connection with its formation and the purchase of certain assets and liabilities from the Railroad Products Group of Abex Corporation ("Abex") in 1987, the Company obtained a comprehensive environmental indemnity from Abex. Pursuant to that indemnity, the Company filed suit against Abex in a 1991 lawsuit to recoup costs incurred and paid by the Company related to environmental matters that existed prior to the purchase by the Company. In October 1995, a judgment in the lawsuit was finalized whereby the Company received a payment of $2.8 million from Abex. The Company recorded the receipt of this payment as a reserve to address other potential matters related to ongoing Abex issues. The judgment is exclusive of indemnification for any future environmental claims. The Company's claim regarding the loss it incurred on the subsequent sale of one of the properties purchased from Abex was not included in the judgment and is the subject of another lawsuit. 7. SPECIAL CHARGE During the third quarter of fiscal 1996, the Company recorded a special charge of $3.2 million. The special charge consisted of the following (in thousands):
Plant closure expenses $1,177 Reengineering costs 1,651 Settlement fees 327 ------ $3,155 ======
As described in Note 3, on July 31, 1995, the Company entered into a 50-50 joint venture with Anchor Brake Shoe Company for the purpose of selling railcar composite brake shoes. The success of the joint venture in meeting total production needs from one plant has resulted in the closure of the Company's former brake shoe facility. The plant closure expenses represent the severance, pension and other related exit expenses for those employees associated with the permanent displacement of the plant's vested hourly employees. Pursuant to the joint venture agreement, any such displacement costs were to be borne by the Company. In conjunction with the Company's overall strategic goals and growth objectives, costs are being incurred to reengineer a number of key business processes. The costs reflect the overall restructuring of the Company's human resources to support the newly-designed 10 work processes. During fiscal 1995, the Company sold metal brake shoes to the National Railroad of Mexico. Subsequent to this transaction, the Mexican government assessed additional excise and value added taxes. A final settlement was reached on this issue during this quarter. 11 ABC RAIL PRODUCTS CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations The following is management's discussion and analysis of certain significant factors which have affected the Company's financial condition and results of operations during the interim periods included in the accompanying unaudited Consolidated Financial Statements. RESULTS OF OPERATIONS - --------------------- THREE MONTHS ENDED APRIL 30, 1996 COMPARED TO THREE MONTHS ENDED APRIL 30, 1995 Net Sales. Net sales decreased 3.2% to $60.1 million from $62.1 million. The decrease in sales was principally caused by a fire January 31, 1996 at the Company's Calera Wheel Mounting plant which was out of production most of February and has required a much longer than anticipated time to return to normal production levels. The sales decline also reflects the absence of composite brake shoe sales due to the recent formation of an unconsolidated joint venture with Anchor Brake Shoe Company for the manufacturing of composite brake shoes, and lower specialty trackwork sales due to merger-induced slowdowns of order releases on western Class I railroads. Sales declines were offset by the sales from the wheel mounting business acquired in late fiscal 1995. Gross Profit and Cost of Sales. Gross profit decreased 61.7% to $3.9 million from $10.1 million. The $6.2 million decrease was primarily due to the sales volume declines discussed above, and a gross margin decrease to 6.4% from 16.2% due principally to fire-related production and cost problems at the Calera wheel plant, which continued to experience higher scrap levels and increased production costs during the restart period. The Company is insured against physical damage and business interruption. The claim process is expected to take four or five months to complete. Insurance deductibles are minimal and coverage is continued on the facility. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $0.9 million. As a percent of net sales, selling, general and administrative expenses increased to 6.1% from 4.5% but would have been at 5% relative to expected sales levels. The increase in expenses reflects the selective recruitment of personnel and business development costs to support the strategic direction of the Company. Special Charge. During the current quarter, the Company recorded a $3.2 million special charge arising from a plant closure resulting from the success of its composite brake shoe joint venture, reengineering-related costs and the settlement of disputed excise and value-added taxes in Mexico. (See Note 7 for additional information.) Operating Income (Loss). Operating income was $7.3 million in the three months ended April 30, 1995 versus an operating loss of $3.0 million in the comparable 1996 period The decrease resulted from the 61.7% ($6.2 million) decrease in gross profit, along with the increase in selling, general and administrative expenses ($0.9 million) and the third quarter fiscal 1996 special charge ($3.2 million). 12 Other. Interest expense increased 55.5%, or $0.5 million, due primarily to increases in indebtedness related to funding for the new wheel machining center at Calera and the May, 1995 acquisition of the wheel mounting business. The $0.8 million extraordinary charge in 1995 represents the after-tax effect of the write-off of unamortized deferred financing costs related to the early extinguishment of debt in connection with the Company's refinancing of its line of credit in March 1995. NINE MONTHS ENDED APRIL 30, 1996 COMPARED TO NINE MONTHS ENDED APRIL 30, 1995 Net Sales. Net sales increased 2.5% to $177.3 million from $173.0 million. The increase in sales reflects the acquisition of the wheel mounting business in late fiscal 1995, offset by lower sales of wheels and idlers, composite brake shoes and specialty trackwork for the reasons noted above in the third quarter comments. Due to the recent formation of an unconsolidated joint venture with Anchor Brake Shoe Company for the manufacturing of composite brake shoes, the first nine months of fiscal 1996 do not include any sales from that product line. Gross Profit and Cost of Sales. Gross profit decreased 19.8% to $20.4 million from $25.4 million. The $5.0 million decrease was primarily due to the fire and restart costs at the Calera Wheel Mounting plant and the sales changes discussed above in the third quarter sales and margin comments. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $0.8 million. As a percent of net sales, selling, general and administrative expenses decreased to 5.2% from 5.7%. The decreases were primarily due to the absence in fiscal 1996 of significant legal fees incurred in the Abex environmental lawsuit, the fees related to the October 1994 sale of the Company's common stock by the Company's then majority shareholder and continued focus in fiscal 1996 on control of operating expenses. Special Charge. During the current quarter, the Company recorded a $3.2 million special charge arising from a plant closure resulting from the success of its composite brake shoe joint venture, reengineering-related costs incurred to enhance trackwork products profitability and the settlement of disputed excise and value-added taxes in Mexico. (See Note 7 for additional information.) Operating Income. Operating income decreased 47.9% to $8.1 million from $15.5 million. The decrease resulted largely from the 19.8% ($5.0 million) decrease in gross profit and the third quarter fiscal 1996 special charge ($3.2 million), offset by the decrease in selling, general and administrative expenses ($0.8 million). The Company's sales and profits are typically lower during the first half of the Company's fiscal year than during the second half of the fiscal year. See "Seasonality." Other. Interest expense increased 97.3%, or $1.9 million, due primarily to increases in indebtedness related to funding for the new wheel machining center at Calera and the May, 1995 acquisition of the wheel mounting business. The $1.2 million cumulative effect of accounting change in fiscal 1995 represents the after-tax effect of the Company's adoption of SFAS No. 112, "Employers' Accounting for Postemployment Benefits." See Note 5 for additional information. 13 The $0.8 million extraordinary charge in 1995 represents the after-tax effect of the write-off of unamortized deferred financing costs related to the early extinguishment of debt in connection with the Company's refinancing of its line of credit in March, 1995. SEASONALITY - ----------- The peak season for installation of specialty trackwork extends from March through October, when weather conditions are generally favorable for installation and, as a result, net sales of specialty trackwork have historically been more concentrated in the period from January through June, a period roughly corresponding to the second half of the Company's fiscal year. In addition, a number of the Company's facilities close for regularly scheduled maintenance in the late summer and late December, which tends to reduce operating results during the first half of the Company's fiscal year. Transit industry practice with respect to specialty trackwork generally involves the periodic shipment of large quantities, which may be unevenly distributed throughout the year. The Company does not expect any significant departure from the historical demand patterns during the present fiscal year ending July 31, 1996. The following graphs illustrate the historical results of the Company's seasonal pattern of sales and income. DESCRIPTION OF GRAPHS (FOR EDGAR FILING ONLY) - ---------------------------------------------- The following graphs represent our seasonal pattern of net sales and income (loss) before cumulative effect of accounting change and extraordinary items. Each graph shows, by quarter, the net sales and income (loss) for the current year as well as the previous four fiscal years. QUARTERLY NET SALES ($ in Millions) [GRAPH APPEARS HERE] QUARTERLY NET SALES ($ in Millions) [GRAPH APPEARS HERE] * Before Cumulative Effect of Accounting Change and Extraordinary Items 14 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash generated from operations, structured borrowings and equity offerings have been the major sources of funds for working capital, capital expenditures and acquisitions. For the nine months ended April 30, 1996 and 1995, net cash provided by operating activities totaled $12.1 million and $9.2 million, respectively. On March 31, 1995, the Company negotiated a new five-year credit agreement (the "New Credit Agreement") with a group of lenders allowing for maximum direct borrowings and outstanding letters of credit of up to $80 million. The new facility included a $15 million non-amortizing term loan, a $40 million revolving credit line and a one-time $25 million acquisition facility. On November 30, 1995, the Company and its lenders amended the new facility by increasing the revolving credit line to $50 million from $40 million, and by recharging the availability under the acquisition line from the $8 million remaining after the wheel mounting business acquisition to $17.8 million. Capital expenditures were $6.8 million in the nine months ended April 30, 1996, primarily reflecting capital spending for normal support of business activities and cost improvement programs. The Company's special capital expenditure program, started in fiscal 1995, includes expenditures of $24.0 million to build the recently completed wheel machining plant and to build the rail mill now in progress. Cumulatively, approximately $19.9 million had been spent on these special capital projects as of April 30, 1996. At April 30, 1996, total remaining availability under the New Credit Agreement was $37.3 million and the weighted average interest rate on outstanding borrowings was 8.2%. The New Credit Agreement and other credit facilities contain customary financial and other covenants. As a result of the special charge recorded during the quarter, the Company was in technical default of the minimum fixed charge coverage ratio contained in the New Credit Agreement. The Company immediately obtained a waiver of default from its group of lenders and an amendment allowing for the exclusion of the special charge from current and future covenant compliance calculations. As a result of the amendment, the Company was in compliance with all of its credit facilities as of April 30, 1996. On September 26, 1994, the Company entered into a five-year term loan agreement to finance up to $9.9 million in capital expenditures for the new wheel machining center for its Calera, Alabama facility. A total of $9.2 million was drawn under this loan. The Company entered into an additional seven-year term loan agreement with the same lender on July 20, 1995 to finance up to $12.5 million of capital expenditures for the new rail mill center located in Chicago Heights, Illinois. Through April 30, 1996, $2.6 million has been drawn under this second term loan. In connection with its formation and the purchase of certain assets and liabilities from the Railroad Products Group of Abex Corporation ("Abex") in 1987, the Company obtained a comprehensive environmental indemnity from Abex. Pursuant to that indemnity, the Company filed suit against Abex in a 1991 lawsuit to recoup costs incurred and paid by the Company related to environmental matters that existed prior to the purchase by the Company. In October 1995, a judgment in the lawsuit was finalized with the Company receiving a payment of $2.8 million from Abex. The Company recorded the receipt of this payment as a reserve to address other potential matters related to ongoing Abex issues. The judgment is exclusive of indemnification for any future environmental claims. The Company's claim regarding the loss it incurred on the subsequent sale of one of the properties purchased from Abex was not included in the judgment and is the subject of another lawsuit. 15 During the current quarter, the Company announced a joint venture agreement with China's Ministry of Railroads to establish the Datong ABC Castings Company Ltd. The joint venture will manufacture wheels in China primarily for the rapidly growing Chinese railway markets. The Company's contribution of its 40 percent share in the joint venture will consist of technical know-how, expertise and cash. The Company's cash infusion of approximately $9.3 million will be made over the next nine months, and is expected to be funded from operations. The special charge of $3.2 million reflects $1.0 million paid out in quarter ended April 30, 1996, $1.3 million to be paid out during six month period ended October 31, 1996 and the balance to be paid out over the next several months. In May, 1996, the Company acquired Deco Industries for a combination of cash and stock. Deco Industries is a leading manufacturer of railroad classification yard retarders, retarder control systems and automation systems. 16 Part II OTHER INFORMATION - -------------------------------------------------------------------------------- Item 6 - Exhibits and Reports on Form 8-K (A) Exhibits 27 Financial Data Schedule (B) Reports on Form 8-K None 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ABC RAIL PRODUCTS CORPORATION /s/ D. Chisholm MacDonald ------------------------------------ D. Chisholm MacDonald Senior Vice President and Chief Financial Officer (Duly authorized Officer and Principal Financial and Accounting Officer) Date: June 14, 1996 -------------------------------- 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIOD ENDED APRIL 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JUL-31-1996 AUG-01-1995 APR-27-1996 0 0 30,065 0 36,258 69,873 92,647 28,129 147,473 40,184 44,009 81 0 0 54,245 147,473 177,258 177,258 156,859 156,859 16,382 0 4,066 4,017 1,646 2,371 0 0 0 2,371 $0.29 $0.29 Notes and accounts receivable - trade are reported net of allowances for doubtful accounts in the Consolidated Balance Sheets.
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