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 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 [ ] TRANSITION REPORT PURSUANT OR SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission File No. 0-7770 MCCLAIN INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Michigan 38-1867649 State of Incorporation I.R.S. 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 9, 1997. Common Stock, No Par Value 4,744,357 - -------------------------- ---------------- Class Number of Shares 1 of 11 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MCCLAIN INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, SEPTEMBER 30, 1997 1996 (unaudited) * -------------- ------------- CURRENT ASSETS Cash and Cash Equivalents $ 1,507,580 $ 1,065,039 Accounts Receivable (Net) 18,244,577 18,502,950 Inventories 32,249,506 25,577,000 Net Investment in Sales Type Leases - Current Portion 2,790,000 1,910,000 Prepaid expenses 326,111 191,645 ----------- ----------- Total Current Assets 55,117,774 47,246,634 ----------- ----------- Property and equipment 41,027,855 38,147,522 Accumulated depreciation (15,393,514) (13,899,589) ----------- ----------- Net Property and Equipment 25,634,341 24,247,933 ----------- ----------- Net Investment in Sales Type Leases - Less Current Portion 5,412,071 3,706,350 ----------- ----------- Other Assets 3,667,940 4,224,338 ----------- ----------- Total Assets $89,832,126 $79,425,255 =========== =========== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES Current Portion of Long-Term Debt $2,900,000 $ 2,132,201 Accounts Payable 15,246,938 10,547,642 Accrued Liabilities 2,499,137 2,165,869 Federal and State Income Taxes 797,269 29,283 ----------- ----------- Total Current Liabilities 21,443,344 14,874,995 ----------- ----------- Deferred Income Taxes 2,100,000 2,100,000 ----------- ----------- Long Term Debt - Less Current Portion 36,395,293 34,217,149 ----------- ----------- Other Liabilities 2,933,589 2,775,856 ----------- ----------- Stockholders' Investment 26,959,900 25,457,255 ----------- ----------- Total Liabilities and Stockholders' Investment $89,832,126 $79,425,255 =========== =========== See notes to condensed consolidated financial statements. * Derived from audited financial statements 2 of 11 3 MCCLAIN INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED Three Months Ended Nine Months Ended June 30, June 30, 1997 1996 1997 1996 ------------------- ------------------ Net Sales $26,082,847 $24,924,635 $66,372,622 $62,006,070 Cost of Sales 20,065,011 18,414,853 51,520,407 47,069,571 ----------- ----------- ----------- ----------- Gross Profit 6,017,836 6,509,782 14,852,215 14,936,499 Selling, General and Administrative Expenses 3,564,626 3,069,875 10,207,635 9,483,823 ----------- ----------- ----------- ----------- Operating Profit 2,453,210 3,439,907 4,644,580 5,452,676 ----------- ----------- ----------- ----------- Other Income (Expense) Interest expense (842,055) (753,650) (2,511,449) (2,310,200) Interest income 304,540 196,096 884,975 559,481 Other expense (344,936) ( 33,278) ( 820,937) (440,394) ----------- ----------- ----------- ----------- Net Other Expense (882,451) (590,832) (2,447,411) (2,191,113) ----------- ----------- ----------- ----------- Income before Income taxes 1,570,759 2,849,075 2,197,169 3,261,563 Income taxes 534,000 969,000 747,000 1,109,000 ----------- ----------- ----------- ----------- Net Income $ 1,036,759 $ 1,880,075 $ 1,450,169 $ 2,152,563 =========== =========== =========== =========== Net Income Per Common Equivalent Shares $ .21 $ .40 $ .30 $ .46 =========== =========== =========== =========== Weighted Average Number of Common and Common Equivalent Shares Outstanding 4,773,727 4,698,042 4,773,727 4,698,042 =========== =========== =========== =========== See notes to condensed consolidated financial statements. 3 of 11 4 MCCLAIN INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED NINE MONTHS ENDED JUNE 30, ------------------ 1 9 9 7 1 9 9 6 ------------------ CASH FLOW FROM OPERATING ACTIVITIES: Net income $1,450,169 $2,152,563 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,685,268 1,885,700 Common stock issued in lieu of cash 20,244 4,246 Changes in operating assets and liabilites which provided (used) cash: Current assets excluding cash & cash equivalents (7,428,600) (2,863,752) Other assets (1,605,890) (1,000,881) Accounts payable 4,699,296 1,428,184) Accrued liabilities 333,268 ( 127,057) Federal income tax 767,986 433,415 Other liabilities 151,733 564,101 ----------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,079,474 2,476,519 ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (3,615,109) (1,236,035) ----------- ---------- NET CASH USED IN INVESTING ACTIVITIES (3,615,109) (1,236,035) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Additions (repayments of) long term debt 2,945,943 ( 540,790) Sale of common stock 129,201 169,219 Redemption of common stock ( 96,968) - ----------- ---------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,978,176 ( 371,571) ----------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 442,541 868,913 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,065,039 1,173,370 ----------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,507,580 $ 2,042,283 =========== =========== See notes to condensed consolidated financial statements. 4 of 11 5 MCCLAIN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 1997 1. Basis of Presentation The accompanying unaudited Condensed 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 accruals) considered necessary for a fair presentation have been included. Operating results for the three month and nine month periods ended June 30, 1997, are not necessarily indicative of the results that may be expected for the year ending September 30, 1997. 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, 1996. 2. Inventories Inventories at June 30, 1997 and September 30, 1996 are summarized as follows: (Unaudited) June 30, 1997 September 30,1996 ------------- ----------------- Material and Supplies $14,512,278 $11,677,000 Work in Process 8,707,367 6,776,000 Finished Goods 9,029,861 7,124,000 ----------- ----------- $32,249,506 $25,577,000 =========== =========== 3. Earnings per Common Share and Common Equivalent Share Earnings per common share and common equivalent share were calculated using the weighted average number of common shares and common share equivalents outstanding during the period. The weighted average number of common shares actually outstanding was increased by the number of shares issuable on the exercise of the dilutive stock options when the market price of the common shares exceeds the option price granted. This increase in the number of common shares was reduced by the number of common shares that are assumed to have been repurchased with the proceeds from the exercise of the stock options; those repurchases were assumed to have been made at the average price of the common stock during the period. 5 of 11 6 MCCLAIN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 1997 3. Earnings per Common Share and Common Equivalent Share - (continued) In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. SFAS No. 128 simplifies the standards for computing earnings per share (EPS) and makes them comparable to international EPS standards. It also replaces the presentation of primary EPS with a presentation of basic EPS. Implementation of SFAS No. 128 is not expected to have a material impact on the Corporation's reporting of EPS. SFAS No. 128 is required to be implemented for periods ending after December 15, 1997. 4. Depreciation For the nine months ended June 30, 1997 and 1996, depreciation charges were $2,228,700 and $1,791,124. respectively. 5. Contingencies Legal Proceedings The Company is from time to time subject to various claims from existing or former employees alleging gender, age or racial discrimination and anti-union activity, none of which are expected to have a material adverse affect on the Company. In addition, as a manufacturer of industrial products, the Company is, from time to time, 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. While such claims have not been material to the Company in any year and the Company believes that it maintains adequate product liability insurance, there can be no assurance that such insurance will continue to be available on terms acceptable to the Company. Any product liability claim not fully covered by insurance, as well as any adverse publicity from a product liability claim, could have a material adverse effect on the Company. The Company is currently defending a few legal proceedings involving product liability claims relating to McClain, Galion Dump and E-Z Pack brand products. Galion Holding, pursuant to an indemnification it provided Peabody 6 of 11 7 MCCLAIN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 1997 5. Contingencies - (continued) Galion Division of Peabody International Corporation ("Peabody") in connection with the Galion Acquisition, is currently defending a number of legal proceedings involving product liability claims arising out of products manufactured by Peabody prior to the date of the Galion Acquisition. These claims are also covered by insurance. Although the Company has already settled many of these cases and the Company believes that it can continue to successfully resolve these product liability claims, there can be no assurance that the Company can continue to do so. The Company is not presently a party to any material legal proceedings except as described above. 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. 7 of 11 8 MCCLAIN INDUSTRIES, INC. ITEM 2. 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, 1997 1996 1997 1996 ----- ---- ---- ---- Net Sales $26,082,847 $24,924,635 $66,372,622 $62,006,070 Net Income $ 1,036,759 $ 1,880,075 $ 1,450,169 $ 2,152,563 Net Earnings Per Common and Common Equivalent Share $ .21 $ .40 $ .30 $ .46 (unaudited) As of As of June 30, September 30, 1997 1996 ----------- ------------- Working Capital $33,674,430 $32,371,639 Total Assets 89,832,126 79,425,255 Long-Term Debt 36,395,293 34,217,149 Stockholders' Investment 26,959,900 25,427,255 Weighted Average Number of Common and Common Equivalent Shares Outstanding 4,773,727 4,752,050 Current Ratio 2.57:1 3.18:1 Long-Term Debt to Stockholders'Equity 1.35:1 1.34:1 8 of 11 9 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, ----------------- ----------------- 1997 1996 1997 1996 ---- ---- ---- ---- Net Sales 100.00% 100.00% 100.00% 100.00% Cost of Sales 76.93 73.88 77.62 75.91 ------ ------ ------ ------ Gross Profit 23.07 26.12 22.38 24.09 Selling, General & Administrative Expenses 13.67 12.32 15.38 15.30 ------ ------ ------ ------ Operating Income 9.40 13.80 7.00 8.79 Other Expenses ( 3.38) ( 2.37) ( 3.69) (3.53) ------ ------ ------ ------ Income Before Income Taxes 6.02 11.43 3.31 5.26 Provision for Income Taxes 2.05 3.89 1.13 1.79 ------ ------ ------ ------ Net Income 3.97% 7.54% 2.18% 3.47% ====== ======= ====== ====== 9 of 11 10 MCCLAIN INDUSTRIES, INC. DISCUSSION OF RESULTS OF OPERATIONS Net sales for the quarter ended June 30, 1997 (Quarter 1997) increased 4.64% to $26.1 million from $24.9 million for the quarter ended June 30, 1996 (Quarter 1996). The increase in sales is attributable primarily to the acquisition of the Demopolis facility in August of 1996 (see the Company's annual report on Form 10-K for the year ended September 30, 1996). The restructuring and consolidation of certain national and regional refuse haulers continues to create intense competition among manufacturers in the Solid Waste Equipment Industry causing significant pressure on selling prices and gross margins. Management believes that the Company's continuing efforts to evaluate and upgrade its internal processes together with the diverse product line the Company has to offer will provide better cost conrols and increased sales allowing for stronger profits to be generated. Cost of sales increased to 76.92% for the Quarter 1997 compared to 73.88% for the Quarter 1996. Selling, General, and Administrative expenses increased to 13.67% of net sales for the Quarter 1997 compared to 12.32% for the Quarter 1996 due primarily to increased sales costs and the addition of the Demopolis facility. Net sales for the nine months ended June 30, 1997 increased to 7.04% to $66.4 million from $62.0 million for the nine months ended June 30, 1996. Cost of sales for the nine months ended June 30, 1997 increased to 77.62% from 75.91% for the nine months ended June 30, 1996. Selling, General, and Administrative expenses increased to 15.38% of net sales for the nine months ended June 30, 1997 from 15.30% for the nine months ended June 30, 1996. DISCUSSION OF FINANCIAL CONDITION The Company had working capital of approximately $33.7 million at June 30, 1997 compared to $32.4 million at September 30, 1996. The ratio of current assets to current liabilities was 2.57 to 1 at June 30, 1997 compared to 3.18 to 1 at September 30, 1996. Cash flows provided by operations were approximately $1.1 million for the nine months ended June 30, 1997. During this period the Company utilized $3.6 million for the acquisition of machinery and equipment. 10 of 11 11 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 authorizd. McCLAIN INDUSTRIES, INC. Date: AUGUST 11, 1997 By: /s/ Kenneth D. McClain -------------------- ------------------------------- Kenneth D. McClain, President Date: AUGUST 11, 1997 By: /s/ Mark S. Mikelait -------------------- ------------------------------- Mark S. Mikelait, Treasurer 11 of 11 12 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 27 Financial Data Schedule