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, 1998 [ ] 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 5, 1998. Common Stock, No Par Value 4,684,439 - -------------------------- ----------------- 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, 1998 1997 (unaudited) ------------ -------------- CURRENT ASSETS Cash and Cash Equivalents $ 2,016,583 $ 2,402,421 Accounts Receivable (Net) 24,429,886 16,589,263 Inventories 36,650,767 31,011,766 Net Investment in Sales Type Leases - Current Portion 2,550,000 2,900,000 Prepaid expenses 70,301 362,029 Refundable Federal & State Taxes - 837,638 ----------- ----------- Total Current Assets 65,717,537 54,103,117 ----------- ----------- Property and equipment 43,032,616 41,470,473 Accumulated depreciation (18,447,179) (16,229,849) Net Property and Equipment 24,585,437 25,240,624 ----------- ----------- Net Investment in Sales Type Leases - Less Current Portion 4,955,686 5,348,773 ----------- ----------- Other Assets 2,158,548 2,493,053 ----------- ----------- Total Assets $97,417,208 $87,185,567 =========== =========== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES Current Portion of Long-Term Debt$ 2,900,000 $ 2,800,000 Accounts Payable 20,062,059 14,132,646 Accrued Liabilities 4,324,414 3,650,468 Federal & State Taxes 383,888 - ----------- ----------- Total Current Liabilities 27,670,361 20,583,114 ----------- ----------- Deferred Income Taxes 2,100,000 2,100,000 ----------- ----------- Long Term Debt - Less Current Portion 40,313,753 38,513,490 ----------- ----------- Other Liabilities 2,130,378 2,151,872 ----------- ----------- Stockholders' Investment 25,202,716 23,837,091 ----------- ----------- Total Liabilities and Stockholders' Investment $97,417,208 $87,185,567 =========== =========== See notes to condensed consolidated financial statements. 2 of 11 3 McCLAIN INDUSTRIES, INC. CONDENSED CONSOLIDATED STATMENTS OF OPERTATIONS UNAUDITED Three Months Ended Nine Months Ended June 30, June 30, 1998 1997 1998 1997 ------------------ ------------------- Net Sales $33,441,088 $26,861,586 $80,681,338 $69,515,401 Cost of Sales 27,487,916 21,211,323 65,977,131 55,030,759 ----------- ---------- ----------- ----------- Gross Profit 5,953,172 5,650,263 14,704,207 14,484,642 Selling, General and Administrative Expenses 3,548,809 3,564,626 10,086,462 10,207,635 ----------- ----------- ----------- ----------- Operating Profit 2,404,363 2,085,637 4,617,745 4,277,007 ----------- ----------- ----------- ----------- Other Income (Expense) Interest expense (826,462) (842,055) (2,402,986) (2,511,449) Interest income 311,133 304,540 930,865 884,975 Other expense (277,581) ( 22,637) ( 524,734) (453,364) ----------- ----------- ----------- ----------- Net Other Expense (792,910) (514,878) (1,996,855) (2,079,838) ----------- ----------- ----------- ----------- Income before Income taxes 1,611,453 1,570,759 2,620,890 2,197,169 Income taxes 551,000 534,000 891,000 747,000 ----------- ----------- ----------- ----------- Net Income $ 1,060,453 $ 1,036,759 $ 1,729,890 $ 1,450,169 =========== =========== =========== =========== Net Income Per Basic And Diluted Common Shares $ .23 $ .21 $ .37 $ .30 =========== =========== =========== =========== Weighted Average Number Of Basic And Diluted Common Shares 4,684,439 4,773,727 4,684,439 4,773,727 =========== =========== =========== =========== 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 8 1 9 9 7 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $1,729,890 $1,450,169 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,586,766 2,685,268 Common stock issued in lieu of cash 15,367 20,244 Changes in operating assets and liabilites which provided (used) cash: Current assets excluding cash & cash equivalents (12,837,896) (7,428,600) Other assets 388,080 (1,605,890) Accounts payable 5,929,413 4,699,296 Accrued liabilities 672,022 333,268 Federal income tax 1,221,526 767,986 Other liabilities ( 21,494) 151,733 ---------- ---------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ( 316,326) 1,079,474 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (1,590,134) (3,615,109) ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (1,590,134) (3,615,109) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Additions to long term debt 1,900,263 2,945,943 Sale of common stock 61,369 129,201 Redemption of common stock ( 441,000) ( 96,968) --------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,520,632 2,978,176 --------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 385,838) 442,541 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,402,421 1,065,039 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $2,016,583 $1,507,580 ========== ========== 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, 1998 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, 1998, are not necessarily indicative of the results that may be expected for the year ending September 30, 1998. 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, 1997. Certain amounts reported in 1997 have been reclassified to conform to the 1998 presentation. 2. Inventories Inventories at June 30, 1998 and September 30, 1997 are summarized as follows: (Unaudited) June 30, 1998 September 30,1997 ------------- ----------------- Material and Supplies $17,310,767 $17,221,766 Work in Process 7,633,000 6,664,000 Finished Goods 11,707,000 7,126,000 ----------- ----------- $36,650,767 $31,011,766 =========== =========== 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, 1998 4. Depreciation For the nine months ended June 30, 1998 and 1997, depreciation charges were $2,245,321 and $2,228,699, 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 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 (continued) 6 of 11 7 MCCLAIN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 1998 5. Contingencies - (continued) certainty. The Company has incurred and will continue to incur costs, on an ongoing basis, associated with environmental regulatory compliance in its business. State and local agencies have become increasingly active in the environmental area. The increased regulation by multiple agencies can be expected to increase the Comapany's future environmental costs. In particular, properties under federal and state scrutiny frequently result in significant clean-up costs and litigation expenses related to a party's clean-up obligation. However, the Company believes that the ever-increasing waste stream and the continuing initiatives of government authorities relating to environmental and waste disposal problems, including restrictions on landfill locations and operations and extensive regulation relating to the disposal of waste, create significant opportunities for companies in the solid waste handling equipment industry. In addition, the trend towards classifying more materials as "semi-hazardous" or "hazardous" waste may be expected to continue to make handling such materials more complex, thereby further facilitating the market for solid waste handling products. 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, 1998 1997 1998 1997 ---- ---- ---- ---- Net Sales $33,441,088 $26,861,586 $80,681,338 $69,515,401 Net Income $ 1,060,453 $ 1,036,759 $ 1,729,890 $ 1,450,169 Net Earnings Per Basic and Diluted Common Shares $ .23 $ .21 $ .37 $ .30 (unaudited) As of As of June 30, September 30, 1998 1997 ------------- --------------- Working Capital $38,047,176 $33,520,003 Total Assets 97,417,208 87,185,567 Long-Term Debt 40,313,753 38,513,490 Stockholders' Investment 25,202,716 23,837,091 Weighted Average Number of Basic And Diluted Common Shares Outstanding 4,684,439 4,773,727 Current Ratio 2.38:1 2.63:1 Long-Term Debt to Stockholder's Investment 1.60:1 1.62:1 8 of 11 9 MCCLAIN INDUSTRIES, INC. 12.50 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, ------------------------------------- --------------------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net Sales 100.00% 100.00% 100.00% 100.00% Cost of Sales 82.20 78.96 81.77 79.16 ------ ------ ------ ------ Gross Profit 17.80 21.04 18.23 20.83 Selling, General & Administrative Expenses 10.61 13.27 12.50 14.69 ------ ------ ------ ------ Operating Income 7.19 7.77 5.72 6.15 Other Expenses ( 2.37) ( 1.92) ( 2.47) (2.99) ------ ------ ------ ------ Income Before Income Taxes 4.82 5.85 3.25 3.16 Provision for Income Taxes 1.65 1.99 1.10 1.07 ------ ------ ------ ------ Net Income 3.17% 3.86% 2.15% 2.09% ====== ====== ====== ====== 9 of 11 10 MCCLAIN INDUSTRIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Net sales increased 24.9% to $33.4 million for the quarter ended June 30, 1998 (Quarter 1998) from $26.9 million for the quarter ended June 30, 1997 (Quarter 1997). The increase was due primarily to strong sales by the Company's McClain E-Z Pack and Commodity facilities and the expansion of Company's truck chassis program. Although the sales for the Quarter 1998 increased substantially, the Company's, McClain E-Z Pack and Galion Dump Bodies facilities sales were slower than expected due to logistical problems resulting from the Truck Chassis shortage experienced during the second quarter. Cost of sales as a percentage of net sales increased to 82.20% for the Quarter 1998 from 78.96% for the Quarter 1997, primarily due to the increase in chassis sales. Cost of sales for the products manufactured by the company was 79.26% for the Quarter 1998 compared to 78.80% for the Quarter 1997. Selling, General and Administrative expenses decreased to 10.61% for the Quarter 1998 from 13.27% for the Quarter 1997 as a result of the increased sales volume and the continued restructuring of certain administrative processes. Net sales for the nine months ended June 30, 1998 increased 16.06% to $80.7 million from $69.5 million for the nine months ended June 30, 1997. Cost of sales for the nine months ended June 30, 1998 increased to 81.77% from 79.16% for the nine months ended June 30, 1997, primarily due to the increase in chassis sales. Cost of sales for the products manufactured by the Company was 79.80% for the nine months ended June 30, 1998 compared to 78.1% for the nine months ended June 30, 1997. Selling, General and Administrative expenses decreased to 12.5% of net sales for the nine months ended June 30, 1998 from 14.69% for the nine months ended June 30, 1997. In July of 1997 the State of Ohio announced that employers enrolled in the state workers compensation program would receive a credit for the fiscal year July 1, 1997 through June 30, 1998. This one time credit reduced the Company's worker compensation insurance expense by approximately $.4 million for the nine months ended June 30, 1998. The Company had working capital of $38.0 million at June 30, 1998 compared to $33.5 million at September 30, 1997. The ratio of current assets to current liabilities was 2.38 to 1 at June 30, 1998 from 2.63 to 1 at September 30, 1997. The Company's cash and cash equivalents totaled $2.0 million at June 30, 1998. Cash flows used by operations were $0.3 million for the nine months ended June 30, 1998, primarily due to increased inventory resulting from the shortage of chassis previously discussed. On April 16, 1998 the Company signed a new agreement with its principal lender that restructured the Company's debt structure to provide additional availability on the Company's working capital line of credit. Additionally, the agreement changed the basis of the Company's interest rate structure from a Prime Rate base to a LIBOR base. This change effectively reduced the Company's primary borrowing rate by approximately 0.75%. The Company uses a third party software package run on a mid-range computer for all its manufacturing and accounting operations. The Company has received letters from both vendors certifying that their products are year 2000 compliant. 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 10, 1998 By: /s/ Kenneth D. McClain ---------------------- ------------------------------ Kenneth D. McClain, President Date: AUGUST 10, 1998 By: /s/ Mark S. Mikelait ---------------------- ----------------------------- Mark S. Mikelait, Treasurer 11 of 11 12 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ----------- ----------- Ex 27. Financial Data Schedule