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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number 0-23802
MOTIVEPOWER INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 82-0461010
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Gateway Center 14th Floor, Pittsburgh, PA 15222
- --------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(412) 201-1101
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 6, 1998
- ---------------------------- -------------------------------
Common stock, $.01 par value 17,873,568
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MOTIVEPOWER INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) for the Three 3
and Nine Months Ended September 30, 1998 and 1997
Condensed Consolidated Balance Sheets at September 30, 1998 (Unaudited) 4
and December 31, 1997
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three 5
and Nine Months Ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MOTIVEPOWER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------
1998 1997 1998 1997
-------- --------- --------- ---------
Net sales $ 87,406 $ 73,849 $ 258,720 $ 217,320
Cost of sales (68,324) (56,350) (196,946) (164,681)
-------- --------- --------- ---------
Gross profit 19,082 17,499 61,774 52,639
Selling, general and administrative expenses (8,898) (8,268) (29,395) (27,068)
-------- --------- --------- ---------
Operating income 10,184 9,231 32,379 25,571
Investment income 360 230 918 532
Interest expense (1,212) (1,275) (3,739) (3,740)
Other income - Argentina 677 391 2,622 1,186
Foreign exchange gain (loss) 1,242 (66) 2,071 (222)
-------- --------- --------- ---------
Income before income taxes and extraordinary item 11,251 8,511 34,251 23,327
Income tax expense (3,539) (3,134) (11,549) (9,064)
-------- --------- --------- ---------
Income before extraordinary item 7,712 5,377 22,702 14,263
Extraordinary loss on extinguishment of debt, net of
income tax benefit of $265 -- -- (472) --
-------- --------- --------- ---------
Net income $ 7,712 $ 5,377 $ 22,230 $ 14,263
======== ========= ========= =========
EARNINGS PER COMMON SHARE - BASIC:
Income before extraordinary item $ .43 $ .30 $ 1.27 $ .81
Extraordinary item -- -- (.02) --
======== ========= ========= ---------
Net income $ .43 $ .30 $ 1.25 $ .81
======== ========= ========= =========
Adjusted weighted average common shares outstanding 17,850 17,731 17,830 17,679
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
Income before extraordinary item $ .41 $ .29 $ 1.22 $ .79
Extraordinary item -- -- (.02) --
-------- --------- --------- ---------
Net income $ .41 $ .29 $ 1.20 $ .79
======== ========= ========= =========
Adjusted weighted average common shares outstanding 18,608 18,447 18,599 18,103
The accompanying notes are an integral part of the
condensed consolidated financial statements
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MOTIVEPOWER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(In thousands except per share data)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
--------- ---------
Current Assets:
Cash and cash equivalents $ 11,877 $ 16,897
Receivables from customers:
Billed, net of allowance for doubtful accounts of $368
and $394, respectively 45,317 34,588
Unbilled 1,091 450
Inventories 99,501 81,448
Deferred income taxes 8,811 7,596
Other 3,357 3,358
-------- --------
Total current assets 169,954 144,337
Locomotive lease fleet, net 1,210 1,468
Property, plant and equipment:
Land 1,427 1,408
Buildings and improvements 44,096 36,095
Machinery and equipment 75,194 64,862
-------- --------
Property, plant and equipment - at cost 120,717 102,365
Less accumulated depreciation (53,299) (49,942)
-------- --------
Property, plant and equipment - net 67,418 52,423
Underbillings - MPI de Mexico 27,350 32,298
Deferred income taxes 2,941 7,724
Goodwill and intangibles - net 24,770 27,362
Other 10,666 17,490
-------- --------
Total assets $304,309 $283,102
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 7,014 $ 10,725
Accounts payable - trade 30,321 30,340
Accrued expenses and other current liabilities 31,529 36,065
Income taxes payable 548 --
Revolving credit borrowings -- 5,000
Advances from customers 1,255 426
-------- --------
Total current liabilities 70,667 82,556
Long-term debt 48,091 34,782
Commitments and contingencies 15,735 15,552
Other 2,381 5,664
-------- --------
Total liabilities 136,874 138,554
-------- --------
Stockholders' Equity:
Common Stock, par value $.01 per share, authorized 55,000,000 shares;
17,832,593 shares issued and 17,591,960 shares outstanding at
September 30, 1998 and 17,774,093 shares issued and outstanding at
December 31, 1997 178 178
Additional paid-in capital 206,018 205,609
Deficit (33,125) (55,353)
Cumulative translation adjustments, net of tax (5,105) (5,105)
Deferred compensation 3,998 (781)
-------- --------
171,964 144,548
Less -
Treasury stock, at cost (240,633 shares at September 30, 1998) 4,529 --
-------- --------
Total stockholders' equity 167,435 144,548
-------- --------
Total liabilities and stockholders' equity $304,309 $283,102
======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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MOTIVEPOWER INDUSTRIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Operating Activities
- --------------------
Net income $ 7,712 $ 5,377 $ 22,230 $ 14,263
Adjustments to reconcile net income to net cash
(used in) provided by operating
activities:
Depreciation 1,946 1,575 5,560 4,941
Amortization 823 851 2,406 2,488
Extraordinary loss on
extinguishment of debt, net of tax -- -- 472 --
Receivables from customers (6,864) (6,695) (11,370) (18,066)
Inventories (5,522) (2,622) (17,858) (2,058)
Underbillings - MPI de Mexico (286) (4,777) 4,948 (8,937)
Accounts payable and accrued expenses (4,879) 3,741 (4,555) 14,330
Advances from customers (70) 1,487 829 4,301
Other, net 1,722 (3) 5,606 1,523
------- ------- -------- --------
Net cash (used in) provided by operating activities (5,418) (1,066) 8,268 12,785
------- ------- -------- --------
Investing Activities
- --------------------
Additions to property, plant and equipment (5,911) (3,143) (20,633) (7,833)
Deletions from property, plant and equipment -- 1,558 -- 2,122
Other, net (447) (205) 2,588 33
------- ------- -------- --------
Net cash used in investing activities (6,358) (1,790) (18,045) (5,678)
------- ------- -------- --------
Financing Activities
- --------------------
Increase in intangibles (265) (114) (265) (1,477)
Net borrowings (repayments) under domestic credit facilities 19,422 (2,373) 10,923 (12,185)
Net (repayments) borrowings under Mexican credit facility (3,150) 2,815 (6,325) 9,570
Proceeds from exercise of stock options including tax-related benefit 137 1,418 424 1,655
------- ------- -------- --------
Net cash provided by (used in) financing activities 16,144 1,746 4,757 (2,437)
------- ------- -------- --------
Net increase (decrease) in cash and cash equivalents 4,368 (1,110) (5,020) 4,670
Cash and cash equivalents at beginning of period 7,509 11,016 16,897 5,236
------- ------- -------- --------
Cash and cash equivalents at end of period $11,877 $ 9,906 $ 11,877 $ 9,906
======= ======= ======== ========
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Interest paid $ 677 $ 392 $ 2,543 $ 1,526
Income taxes paid, net 2,424 1,752 5,848 4,686
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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MOTIVEPOWER INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein are
unaudited. In the opinion of management, these statements include all
adjustments consisting of normal, recurring adjustments necessary for a fair
presentation of the financial position of MotivePower Industries, Inc. and
subsidiaries (the "Company") at September 30, 1998 and the results of their
operations and their cash flows for the three and nine months ended September
30, 1998 and 1997. These condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 1997 included on Form 10-K. The results
of operations for the three and nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
The Company is a leader in the manufacturing of products for rail and
other power-related industries. Through its subsidiaries, the Company
manufactures and distributes engineered locomotive components; provides
locomotive and freight car fleet maintenance; overhauls locomotives, freight
cars and diesel engines; manufactures new, environmentally friendly, switcher,
commuter and mid-range locomotives up to 4,000 horsepower; and manufactures
components for power, marine and industrial markets. The Company's primary
customers are freight and passenger railroads, including every Class I railroad
in North America.
Certain reclassifications have been made to the 1997 condensed
consolidated financial statements to conform to the 1998 presentation.
DEFERRED COMPENSATION ARRANGEMENTS: In May 1998, Emerging Issues Task
Force No. 97-14, "Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested" ("EITF 97-14") was
issued. The Company has reflected the adoption of EITF 97-14 in its September
30, 1998 financial statements. The adoption of EITF 97-14 required the Company
to record as treasury stock the historical value of the Company's stock
maintained in its deferred compensation plans.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: In June 1998, Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activity" ("SFAS 133"), was issued. SFAS 133 is effective for
financial statements for fiscal years beginning after June 15, 1999. The Company
has not yet determined the effect of this standard.
2. INVENTORIES
Inventories consisted of the following:
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------- -------
(In thousands)
Cores $ 9,844 $ 7,477
Raw materials 46,785 35,421
Work in progress 21,444 21,396
Finished goods 21,428 17,154
-------- --------
$99,501 $81,448
======= =======
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Approximately $38.9 million and $30.7 million of total inventories at
September 30, 1998 and December 31, 1997, respectively, were valued on the LIFO
cost method. The excess current replacement cost of these inventories over the
stated LIFO value was $1.3 million and $1.2 million at September 30, 1998 and
December 31, 1997, respectively. Two of the Company's domestic subsidiaries
value inventory on the LIFO basis. The Company defines cores as inventory
designated for unit exchange programs.
3. INDEBTEDNESS
Domestic facilities:
On January 27, 1998, the Company closed two revolving credit facilities
with ABN AMRO Bank, N.V. and Mellon Bank N.A. totaling $200 million. ABN AMRO
and Mellon Bank subsequently sold participations in these facilities to a
syndicate of 10 additional banks. The facilities consist of a $100 million
five-year revolving loan and a 364-day $100 million revolving loan which the
Company may renew annually with the approval of the lenders. Under the new
facilities, the Company may issue up to $35 million in letters of credit.
The facilities provide for revolving borrowings at a variable margin over
the London Interbank Offered Rate ("LIBOR"), or at Prime Rate, at the Company's
option. The margin over LIBOR at which the Company may borrow is adjusted each
fiscal quarter based on the ratio obtained when the Company's domestic debt at
the end of the quarter is divided by the Company's domestic cash flow over the
past four quarters, as measured by earnings before interest and tax, plus
depreciation and amortization ("EBITDA"). At September 30, 1998, the Company had
$25 million drawn under its LIBOR option at an effective annual rate of 5.9%. On
the same day, the Company had $1.5 million drawn under its Prime Rate option at
an effective annual rate of 8.5%.
The Company's maximum borrowings under the facilities are limited to the
lesser of $200 million or 3.5 times trailing 12-month EBITDA. At September 30,
1998, the Company's gross availability under its domestic credit facilities was
approximately $132 million. After deducting outstanding debt and other reserves,
the Company calculates its net available domestic borrowing capacity on
September 30, 1998 as $99.3 million.
On July 15, 1998, a domestic subsidiary of the Company entered into a 10
year $7.5 million debt obligation. This obligation consists of an Industrial
Revenue Bond ("IRB") and bears interest at a rate of 5.5%. Maturities under
these obligations at September 30, 1998 were as follows: 1998 - $132,000; 1999 -
$547,000; 2000 - $578,000; 2001 - $609,000; 2002 - $644,000; beyond 2002
$4,912,000.
Mexican facilities:
The Company has a U.S. dollar-denominated credit facility with a Mexican
bank, Bancomer S.A., to support its operations in Mexico. The facility is a $30
million, five-year term loan with support from the Export-Import Bank of the
United States ("Ex-Im Bank"). In June 1998, the Company amended the terms and
conditions of the facility which reduced interest rates by 1.25% per annum and
reduced reserve fund balance requirements on average by 55% commencing in
November 1998 (forecasted to be a $3.9 million decrease at December 31, 1998).
At September 30, 1998, the Company had $21.2 million outstanding under this
non-recourse facility at an effective annual rate of 8.2%. The Company had a
$3.5 million non-recourse facility with Bancomer S.A. which the Company paid off
in August 1998.
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4. COMMITMENTS AND CONTINGENCIES
The Company has commitments and performance guarantees arising from
locomotive remanufacturing contracts and maintenance agreements, and warranties
from the sale of new locomotives, remanufactured locomotives and components for
locomotives and engines.
Environmental: The Company is subject to a RCRA Part B Closure Permit (the
"Permit") issued by the Environmental Protection Agency and the Idaho Department
of Health and Welfare, Division of Environmental Quality relating to the
monitoring and treatment of groundwater contamination on, and adjacent to, the
Company's Boise Locomotive facility. In compliance with the Permit, the Company
has drilled wells onsite to retrieve and treat contaminated groundwater, and
onsite and offsite to monitor the amount of hazardous constituents. The Company
has estimated the expected aggregate undiscounted costs to be incurred over the
next 22 years, adjusted for inflation at 3% per annum, to be $4.5 million, based
on the Permit's Corrective Action Plan, and $4.1 million for contingent
additional Permit compliance requirements related to offsite groundwater
contamination. The discounted liability at September 30, 1998, using a discount
rate of 6.5%, was $2.1 million based on the Permit's Corrective Action Plan, and
$1.95 million for contingent additional Permit compliance requirements related
to offsite groundwater contamination. The estimated outlays for each of the five
succeeding years from 1998 to 2002 are: $260,000, $268,000, $317,000, $285,000,
and $293,000. The Company was in compliance with the Permit at September 30,
1998.
Legal Proceedings: The Company is involved in legal proceedings incident to the
normal conduct of its business, including contract claims and employee matters.
Although the outcome of any pending legal proceeding cannot be predicted with
certainty, management believes that such legal proceedings are adequately
provided for in the condensed consolidated financial statements and that the
proceedings individually and in the aggregate, will not have a material adverse
effect on the consolidated operations or financial condition of the Company.
5. REPORTABLE SEGMENTS
The Company has two reportable segments: Locomotive Group and Components
Group. The reportable segments are comprised of strategic business units which
offer different products and services. The Locomotive Group of wholly owned
subsidiary companies provides locomotive and freight car fleet maintenance;
overhauls locomotives, freight cars and diesel engines; and manufactures new,
environmentally friendly switcher, commuter and mid-range locomotives up to
4,000 horsepower. The Components Group of wholly owned subsidiary companies
manufactures and distributes primarily aftermarket, or replacement, new and
remanufactured components and parts, and provides inventory management services
for freight and passenger railroads, including every Class I Railroad in North
America, metropolitan transit and commuter rail authorities, original equipment
manufacturers and other customers internationally.
The Company evaluates segment performance based on a number of factors,
including asset management and profit or loss from operations excluding unusual
items. The Company accounts for intercompany sales and transfers at current
market prices, as if the sales or transfers were to third parties.
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Following is unaudited condensed segment financial information for the
three months ended September 30, 1998 and 1997:
(SEPTEMBER 30, 1998) (SEPTEMBER 30, 1997)
----------------------------------------------- ----------------------------------------------
Locomotive Components Total Locomotive Components Total
------------- ------------- ------------- ------------- ------------- -------------
(In thousands)
Gross sales 46,806 49,677 96,483 39,229 41,030 80,259
Intercompany sales 2,856 6,221 9,077 2,390 4,020 6,410
Operating income 8,475 4,353 12,828 6,532 5,534 12,066
Following is unaudited condensed segment financial information for the
nine months ended September 30, 1998 and 1997:
(SEPTEMBER 30, 1998) (SEPTEMBER 30, 1997)
----------------------------------------------- ----------------------------------------------
Locomotive Components Total Locomotive Components Total
------------- ------------- ------------- -------------- -------------- -------------
(In thousands)
Gross sales 130,013 154,956 284,969 106,472 131,283 237,755
Intercompany sales 6,733 19,516 26,249 6,418 14,017 20,435
Operating income 22,430 18,602 41,032 15,910 20,406 36,316
Assets 142,628 153,002 295,630 118,246 136,321 254,567
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The following reconciles segment information presented above to the unaudited
condensed consolidated financial statements:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
1998 1997 1998 1997
------- ------- -------- --------
(In thousands)
NET SALES:
- ---------
Gross sales from segments $96,483 $80,259 $284,969 $237,755
Intercompany sales elimination (9,077) (6,410) (26,249) (20,435)
======= ======= ======== ========
Net sales $87,406 $73,849 $258,720 $217,320
======= ======= ======== ========
OPERATING INCOME:
- ----------------
Segment operating income $12,828 $12,066 $ 41,032 $ 36,316
Unallocated corporate expenses (2,644) (2,835) (8,653) (10,745)
======= ======= ======== ========
Operating income $10,184 $ 9,231 $ 32,379 $ 25,571
======= ======= ======== ========
ASSETS:
- ------
Segment assets $295,630 $254,567
Corporate assets, including domestic deferred
income taxes 8,679 13,546
-------- --------
Total assets
$304,309 $268,113
======== ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
GENERAL
- -------
MotivePower Industries' business strategy is to grow and continue
strengthening its core businesses, including manufacturing and distributing
engineered locomotive components and parts; providing locomotive and freight car
fleet maintenance; overhauling locomotives, freight cars and diesel engines;
manufacturing new, environmentally friendly switcher, commuter and mid-range,
locomotives up to 4,000 horsepower; and manufacturing components for the power,
marine and industrial markets. The Company is looking to expand further into
other niche power, marine and industrial markets by growing the existing
business in these markets and by modifying certain existing products to fit new
applications.
The Company has outlined a six-part strategy to carry out its growth
plan: 1. Capitalize on the railroads' desire to outsource non-transportation
functions such as maintenance and repair projects by continuing to improve
quality and by reducing product cycle times; 2. Continue to grow its Mexican
operations by expanding current capabilities and by pursuing new opportunities
created by the Mexican
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government's railroad privatization program; 3. Expand sales of components in
targeted international markets, such as Latin America, China, the Middle East
and the Pacific Rim; 4. Expand sales of similar components into new, non-rail
markets and develop new products for its existing rail markets; 5. Acquire
companies that provide products or services that complement the Company's
current capabilities either geographically or technically, or that expand the
Company's product line or core businesses; and 6. Develop alliances and joint
ventures with other major rail industry suppliers.
As market conditions, technological developments or other factors change,
the Company will modify its strategy accordingly.
SIGNIFICANT EVENTS
- ------------------
During the quarter ended September 30, 1998, and subsequently, the
Company has been party to the following transactions and events:
- On August 10, 1998, the Company announced that its subsidiary
Motor Coils Manufacturing Co. signed a new, three-year labor
agreement covering 290 hourly employees at its Braddock, Pa.,
plant.
- On September 2, 1998, the Company and Westinghouse Air Brake
Company announced the expansion of their joint venture in
Mexico to include the repair and maintenance of Pulse Railway
Electronics equipment and compressors.
- On September 3, 1998, the Company announced that it signed a
definitive agreement to acquire Young Radiator Co., a
privately held manufacturer of heat transfer products, for
$70.5 million in cash. Based in Racine, Wisconsin, Young had
sales of approximately $50 million in 1997.
- On October 15, 1998, the Company announced the appointment of
Joseph S. Crawford, Jr. to the new position of executive vice
president and chief operating officer. Crawford had been
president of the Company's Locomotive Group since 1995.
- On November 11, 1998, the Company announced that its
subsidiary Motor Coils Manufacturing Co. signed a new,
four-year labor agreement covering 275 hourly employees at its
Emporium, Pa., plant.
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RESULTS OF OPERATIONS
- ---------------------
The following table sets forth the percentage of net sales represented by
certain items in the Company's Unaudited Condensed Consolidated Statements of
Operations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales (78.2) (76.3) (76.1) (75.8)
----- ----- ----- -----
Gross profit 21.8 23.7 23.9 24.2
Selling, general and administrative expenses (10.2) (11.2) (11.4) (12.5)
----- ----- ----- -----
Operating income 11.6 12.5 12.5 11.7
Investment income .4 .3 .4 .2
Interest expense (1.4) (1.7) (1.5) (1.7)
Other income - Argentina .8 .5 1.0 .6
Foreign exchange gain (loss) 1.4 (.1) .8 (.1)
----- ----- ----- -----
Income before income taxes
and extraordinary item 12.8 11.5 13.2 10.7
Income tax expense (4.0) (4.2) (4.4) (4.2)
----- ----- ----- -----
Income before extraordinary item 8.8 7.3 8.8 6.5
Extraordinary item -- -- (.2) --
----- ----- ----- -----
Net income 8.8% 7.3% 8.6% 6.5%
===== ===== ===== =====
CONSOLIDATED UNAUDITED OPERATIONS
- ---------------------------------
Three Months Ended September 30
1998 1997 %CHANGE
------- ------- -------
(In thousands)
Net sales $87,406 $73,849 18.4%
Gross profit 19,082 17,499 9.0%
Selling, general and administrative expenses (8,898) (8,268) 7.6%
Operating income 10,184 9,231 10.3%
Net income 7,712 5,377 43.4%
Net sales for the third quarter of 1998 were $87.4 million, compared to
$73.8 million for the third quarter of 1997, an increase of 18.4%. The increase
in net sales is primarily attributed to increased sales in the Locomotive Group
for locomotive and freight car projects in both the U.S. and Mexico. In
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addition, the net sales increase in the Components Group is primarily the result
of net sales from the companies acquired in December 1997, of approximately $4
million for the quarter.
Gross profit for the third quarter of 1998 was $19.1 million or 21.8% of
net sales compared to $17.5 million or 23.7% of net sales for the third quarter
of 1997. Gross profit in the third quarter of 1998 included $2.3 million of
expenses for the relocation and start-up of certain production facilities in the
Components Group and production inefficiencies associated with the renewal of a
union contract at Motor Coils. The new production facilities are expected to
reduce costs, improve productivity and efficiency, and increase throughput.
Excluding these expenses, the Company's gross margin was 24.4% for the third
quarter of 1998.
Selling, general and administrative expenses for the third quarter of
1998 were $8.9 million, compared to $8.3 million for the third quarter of 1997.
The increase is primarily attributed to expenses from the companies acquired in
December 1997. Selling, general and administrative expenses declined as a
percentage of net sales compared to the third quarter of 1997 due to the
Company's continuing focus on cost controls.
Investment income for the third quarter of 1998 was $360,000 compared to
$230,000 for the third quarter of 1997. The increase is primarily attributed to
increased earnings on funds invested in Mexico.
Interest expense for the third quarter of 1998 was $1.2 million compared
to $1.3 million for the third quarter of 1997. Increased borrowings on the
Company's domestic credit facilities to fund capital expenditures and working
capital requirements, were offset by decreased borrowings on the Company's
Mexican credit facility coupled with rate reductions on both facilities.
Other income - Argentina for the third quarter of 1998 was $677,000
compared to $391,000 for the third quarter of 1997. For both periods the amounts
represent funds received from the Company's investment in Argentina.
The Company realized a foreign exchange gain of $1.2 million in the third
quarter of 1998, compared to a foreign exchange loss of $66,000 in the third
quarter of 1997. Both the gain and the loss are the results primarily of
fluctuations in the value of the Mexican peso, and the Company's net peso
position during the period. The Company continually monitors its net peso
position in determining its hedging strategies.
Excluding the foreign exchange remeasurement gain (loss) which is not
taxable, income tax expense for the third quarter of 1998 was $3.5 million, or
35.4% of pre-tax income, compared to $3.1 million or 36.5% of pre-tax income for
the third quarter of 1997. The decrease in income tax expense as a percentage of
pre-tax income is primarily attributed to a reduced income tax rate in Mexico
resulting from tax planning opportunities associated with the signing of the new
maintenance contract.
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Nine Months Ended September 30
- ------------------------------
1998 1997 % CHANGE
-------- -------- --------
(In thousands)
Net Sales $258,720 $217,320 19.1%
Gross profit 61,774 52,639 17.4%
Selling, general and administrative expenses (29,395) (27,068) 8.6%
Operating income 32,379 25,571 26.6%
Net income 22,230 14,263 55.9%
Net sales for the first nine months of 1998 were $258.7 million, compared
to $217.3 million for the first nine months of 1997, an increase of 19.1%. The
increase in sales is primarily attributed to increased net sales in the
Locomotive Group for locomotive overhaul work for third party lessors, freight
car repair, and the sale of switcher locomotives. In addition, the net sales
increase in the Components Group is primarily the result of net sales from the
companies acquired in December 1997, of approximately $12.5 million for the nine
months ended September 30, 1998.
Gross profit for the first nine months of 1998 was $61.8 million or 23.9%
of net sales compared to $52.6 million or 24.2% of net sales for the first nine
months of 1997. The increase in gross profit is primarily attributed to the
increased sales volume, the product mix and the Company's continuing efforts to
reduce production costs. Gross profit for the first nine months of 1998 was also
favorably affected by a gain of $1.2 million related to a 1994 contract
contingency that expired in the first quarter of 1998. In addition, gross profit
in the first nine months of 1998 included $4.6 million of expenses for the
relocation of certain production facilities in the Components Group and
production inefficiencies associated with the renewal of a union contract at
Motor Coils. Excluding these items, the Company's gross margin was 25.2% for the
first nine months of 1998.
Selling, general and administrative expenses for the first nine months of
1998 were $29.4 million, compared to $27.1 million for the first nine months of
1997. The increase is primarily attributed to expenses from subsidiaries
acquired in December 1997. Selling, general and administrative expenses for the
first nine months of 1998 declined as a percentage of net sales compared to the
first nine months of 1997 due to the Company's continuing focus on cost
controls.
Investment income for the first nine months of 1998 was $918,000 compared
to $532,000 for the first nine months of 1997. The increase is primarily
attributed to increased earnings on funds invested in Mexico.
Interest expense was $3.7 million for the first nine months of 1998 and
1997. Increased borrowings on the Company's domestic credit facilities to fund
capital expenditures and working capital requirements were offset by decreased
borrowings on the Company's Mexican credit facility coupled with rate reductions
on both facilities.
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Other income - Argentina for the first nine months of 1998 was $2.6
million compared to $1.2 million for the first nine months of 1997. For both
periods the amounts represent funds received from the Company's investment in
Argentina.
The Company realized a foreign exchange gain of $2.1 million in the first
nine months of 1998, compared to a foreign exchange loss of $222,000 in the
first nine months of 1997. Both the gain and loss are the results primarily of
fluctuations in the value of the Mexican peso, and the Company's net peso
position during the period. The Company continually monitors its net peso
position in determining its hedging strategies.
Excluding the foreign exchange remeasurement gain (loss) which is not
taxable, income tax expense for the first nine months of 1998 was $11.5 million,
or 35.9% of pre-tax income compared to $9.1 million or 38.5% of pre-tax income
for the first nine months of 1997. The decrease in income tax expense as a
percentage of pre-tax income is primarily attributed to a reduced income tax
rate in Mexico resulting from tax planning opportunities associated with the
signing of a new maintenance contract and the utilization of a Foreign Sales
Corporation which began in the third quarter of 1997.
The Company recorded an extraordinary loss on the extinguishment of debt
of $472,000, net of an income tax benefit of $265,000, in the first quarter of
1998. The loss represents the write off of unamortized costs incurred previously
under the Company's prior domestic credit facility.
Locomotive Group
- ----------------
THREE MONTHS NINE MONTHS
ENDED % ENDED %
SEPTEMBER 30, CHANGE SEPTEMBER 30, CHANGE
------------------------ --------- ------------------------- --------
1998 1997 1998 1997
------- ------- -------- --------
(In thousands) (In thousands)
Net sales $43,950 $36,839 19.3% $123,280 $100,054 23.2%
Operating income 8,475 6,532 29.7% 22,430 15,910 41.0%
The increase in net sales for the third quarter of 1998 compared to the
third quarter of 1997 is the result of increased overhaul and freight car repair
in the U.S. and Mexico. The increase in operating income for the third quarter
of 1998 compared to the third quarter of 1997 is the result of production
efficiencies and sales mix at MPI de Mexico, offset by somewhat higher operating
expenses incurred by Boise Locomotive in servicing and improving availability on
certain operations and maintenance contracts.
The increase in net sales for the first nine months of 1998 compared to
the first nine months of 1997 is primarily the result of increased overhaul work
for third party lessors, an increase in freight car repair and the sale of
switcher locomotives. The increase in operating income for the first nine months
of 1998 compared to the first nine months of 1997 is the result of the increased
sales volume and mix favoring higher-margin product lines, production
efficiencies and the $1.2 million gain on the expiration of a 1994 contract
contingency.
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Components Group
- ----------------
THREE MONTHS NINE MONTHS
ENDED % ENDED %
SEPTEMBER 30, CHANGE SEPTEMBER 30, CHANGE
----------------------- -------- ----------------------- --------
1998 1997 1998 1997
-------- ------- -------- --------
(In thousands) (In thousands)
Net sales $43,456 $37,010 17.4% $135,440 $117,266 15.5%
Operating income 4,353 5,534 (21.3%) 18,602 20,406 (8.8%)
The increase in net sales for the third quarter of 1998 compared to the
third quarter of 1997 is primarily the result of net sales from the two
companies acquired in late 1997 which approximated $4 million, and unit sales
increases of cooling systems at Touchstone. Operating income decreased in the
third quarter of 1998 compared to the third quarter of 1997 primarily as a
result of costs incurred with the relocation and start-up of certain production
facilities and production inefficiencies associated with the renewal of a union
contract at Motor Coils, which totaled $2.3 million during the third quarter of
1998. Excluding these expenses, operating income increased 20.2% for the
quarter.
The increase in net sales for the first nine months of 1998 compared to
the first nine months of 1997 is the result of net sales from the two companies
acquired in late 1997 which approximated $12.5 million, unit sales increases of
turbochargers and cooling systems at Engine Systems and Touchstone,
respectively, and increased export sales at Power Parts. Operating income
decreased in the first nine months of 1998 compared to the first nine months of
1997 primarily as a result of costs incurred with the relocation and start-up of
certain production facilities and the production inefficiencies associated with
the renewal of a union contract at Motor Coils, which totaled $4.6 million.
Excluding these expenses, operating income increased 13.7% for the first nine
months of 1998.
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
On January 27, 1998 the Company closed two new revolving credit
facilities with ABN AMRO Bank N.V. and Mellon Bank NA totaling $200 million. The
facilities consist of a $100 million five-year revolving loan and a 364-day $100
million revolving loan which the Company may renew annually with the approval of
the lenders. Under the new facilities the Company may issue up to $35 million in
letters of credit.
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The Company anticipates that capital spending in 1998 will approximate
$28 million. Listed below are the 1998 anticipated project costs and the actual
expenditures incurred through September 30, 1998:
1998 PLANNED SEPTEMBER 30, 1998
PROJECT COSTS YTD ACTUAL
-------------- ------------------
(In thousands)
Expansion of Production Facilities $15,600 $12,634
Equipment Upgrades 4,800 2,147
Information Systems 2,100 1,192
Maintenance 5,500 4,660
------- -------
Total $28,000 $20,633
======= =======
In addition to the planned capital expenditures in 1998, the Company has
incurred costs to relocate equipment from Motors Coils to Mexico to produce
certain qualified locomotive components. In addition, the Company incurred costs
at Touchstone to move equipment from the existing facility to the new
manufacturing facility. As of September 30, 1998 the costs expensed to date for
these projects totaled approximately $3.3 million.
The table below highlights the debt and cash position of the Company at the
dates noted:
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(In thousands)
Domestic revolver $26,500 $ 5,000
Domestic term loans 7,422 17,999
MPI de Mexico credit facility 21,183 27,508
------- --------
Total debt 55,105 50,507
Cash and cash equivalents (11,877) (16,897)
------- --------
Net debt $43,228 $ 33,610
======= ========
With the Company's domestic credit facilities, the Company's cash
position and the Company's profitable operating results, management believes
that its financing is adequate to support its normal operations, capital
spending and contemplated acquisitions. This is a forward looking statement, and
factors such as a decrease in rail traffic, a reduction in railroads' capital
and maintenance spending plans with regard to their locomotive fleets, or the
Company's inability to retain existing contracts and/or obtain new contract
awards are among the factors which could affect the Company's financing needs.
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The following table summarizes the net changes in cash flows:
NINE MONTHS
ENDED
SEPTEMBER 30,
1998 1997
-------- -------
(In thousands)
Net cash provided by (used in):
Operating activities $ 8,268 $12,785
Investing activities (18,045) (5,678)
Financing activities 4,757 (2,437)
-------- -------
Net (decrease) increase in cash and cash equivalents $ (5,020) $ 4,670
======== =======
Cash and cash equivalents at end of period $ 11,877 $ 9,906
======== =======
Net cash provided by operating activities totaled $8.3 million for the
first nine months of 1998, compared to $12.8 million for the first nine months
of 1997. During the first nine months of 1998, inventories increased $17.9
million as a result of inventory increases at Boise Locomotive for switcher
locomotives and overhaul contracts, MPI de Mexico for overhaul contracts, the
companies acquired in late 1997 and planned inventory increases at Motor Coils
and Touchstone during their respective facility relocations and production
interruptions. Accounts receivable increased $11.4 million primarily as a result
of increased sales at Boise Locomotive and the companies acquired in late 1997.
Accounts payable and accrued expenses decreased during the first nine months of
1998 by $4.6 million. The decrease is attributed to timing of expenses.
Offsetting these uses of cash were the Company's net income of $22.2 million, a
reduction in underbillings of $4.9 million as a result of the Mexico contract
change for overhaul billings, depreciation and amortization of $8.0 million and
other net changes of $5.6 million which are primarily changes in the Company's
income taxes payable and deferred income taxes.
Net cash used in investing activities totaled $18 million for the first
nine months of 1998, compared to $5.7 million for the first nine months of 1997,
with capital expenditures of $20.6 million and $7.8 million for the first nine
months of 1998 and 1997, respectively. Offsetting the capital expenditures for
the first nine months of 1998, was a reduction in restricted cash supporting the
Mexican credit facility of $1.9 million resulting from the revisions to the
terms of the credit facility.
Net cash provided by financing activities totaled $4.8 million for the
first nine months of 1998 compared to net cash used in financing activities of
$2.4 million for the first nine months of 1997. Net borrowings (repayments)
under the domestic and Mexican credit facilities totaled $10.9 million and
$(6.3) million, respectively, in the first nine months of 1998. Increased
domestic borrowings were used to fund capital expenditures while excess cash was
used to pay down the Mexican facilities which carry a higher interest rate than
the domestic facilities.
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BACKLOG
- -------
The Company defines backlog as future sales commitments which constitute
a binding agreement between the Company and the customer. Examples include
signed contracts and purchase orders. The Company is the preferred supplier of
certain components to certain customers, having received notice of the
customers' estimate of anticipated purchases. Because these notices are not
binding commitments, the Company does not include these amounts in backlog
calculations. At September 30, 1998, these anticipated purchases totaled $51.5
million.
The Company's multi-year locomotive fleet maintenance contracts account
for the majority of the Locomotive Group backlog. Multi-year fleet maintenance
contracts are expected to continue to produce additional components and parts
sales.
The backlog as of September 30, 1998 and December 31, 1997 and the
expected year of recognition is as follows:
SEPTEMBER 30, 1998
(In thousands)
1998 1999 OTHER YEARS ORDER BACKLOG
-------- -------- ----------- -------------
Locomotive $ 64,683 $ 80,473 $560,338 $705,494
Components 30,178 5,525 -- 35,703
-------- -------- -------- --------
Total $ 94,861 $ 85,998 $560,338 $741,197
======== ======== ======== ========
DECEMBER 31, 1997
(In thousands)
1998 OTHER YEARS ORDER BACKLOG
-------- ----------- -------------
Locomotive $136,772 $364,948 $501,720
Components 36,135 -- 36,135
-------- -------- --------
Total $172,907 $364,948 $537,855
======== ======== ========
INFORMATION TECHNOLOGY AND YEAR 2000 COMPLIANCE
- -----------------------------------------------
The Company is currently engaged in a $7.2 million multi-year information
technology upgrade and business improvement project. This project, which
encompasses all of the Company's subsidiaries, includes a thorough review of
manufacturing, material flow, and administrative business processes. Where
appropriate, hardware and software upgrades are being applied. To manage the
improved processes and systems moving forward, additional training,
implementation support, and hiring of staff are being provided. The Company
expects that the project will improve working capital through improved material
management and production planning and control, in addition to cost reductions
for communications and other related expenses.
As part of its project, the Company is addressing the Year 2000
compliance issue. The Company has developed a four-step approach regarding the
Year 2000 compliance issue. The steps are to 1. Assess 2. Remediate 3. Test and
Audit 4. Develop a contingency plan. The Company is using both internal and
external resources to execute its plan. The assessment phase is completed with
respect to the
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Company's business systems and the Company is in the process of remediation. All
mission critical business systems have been upgraded to software release levels,
which per the vendor, are Year 2000 compliant. Testing of these mission critical
systems is currently underway. The focus is now on remediating non-mission
critical systems. The Company expects that the remediation and testing of all
mission critical and non-mission critical systems will be completed in the first
quarter of 1999. The Company is also assessing its own products, machinery and
equipment which are date sensitive to provide assurances to its customers that
its products are Year 2000 compliant. In addition to the Company's internal
activities, the Company is in the process of contacting key material suppliers,
vendors and customers to determine their readiness with respect to the Year
2000. The Company has developed a compliance questionnaire which was circulated
to its key material suppliers, vendors and customers in the third quarter of
1998.
The Company has estimated that as part of its $7.2 million information
technology upgrade project approximately $800,000 is specifically Year 2000
related. The Company has expended approximately $450,000 in completing the items
noted above as of September 30, 1998. These costs have been and are expected to
continue to be funded out of the Company's operating cash flow. The Company is
expensing as incurred all costs related specifically to Year 2000 activities;
however, costs associated with new systems and the Company's information
technology upgrade are being capitalized in accordance with the Company's
accounting policies. The Company continually reviews its cost estimates for the
Year 2000 and makes changes as deemed necessary as the Company completes its
four-step process.
The Company's Year 2000 plan only contemplates its current group of
subsidiaries and does not consider acquisition candidates. These acquisitions,
if completed, will be evaluated separately from the Company's current Year 2000
plan. Though the Company expects to be Year 2000 compliant, a contingency plan
is to be finalized by June 30, 1999. The Company is in the infancy stages of
developing this contingency plan. Despite the Company's efforts and contingency
plans, the most reasonably likely worst case scenario of a Year 2000 failure by
the Company or its key suppliers, vendors or customers would likely be a
slowdown of the Company's manufacturing operations at one or more of the
Company's subsidiaries and/or an inability of the Company to process orders and
meet customer delivery schedules. The foregoing discussion regarding the Year
2000 involve inherent risks and uncertainties whereby the actual results could
differ materially from the discussion above. As such, noncompliant computer
systems and/or noncompliant suppliers, vendors, or customers could have a
material adverse effect to the Company's results of operations and financial
condition.
Statements in this Form 10-Q regarding the Company's efforts to maximize
stockholder value or its efforts to improve operations by increasing
productivity or efficiency are forward-looking statements. The Company's actual
results could differ materially from the results suggested in any
forward-looking statements. Factors that could cause or contribute to these
material differences include, but are not limited to, the following: a general
decline in the NAFTA economy, which could cause a decrease in rail traffic;
continued consolidation by U.S. railroads, which could cause them to reduce
purchases of goods and services; changes in the Mexican government's railroad
privatization program; a strengthening of the U.S. dollar in targeted foreign
markets; the Company's ability to timely and efficiently complete current and
future expansion and productivity enhancement projects, and to implement related
productivity improvement plans; the Company's ability to maintain current
favorable relations with its labor unions; and the Company's ability to
successfully complete its information technology upgrade and business
improvement project, including Year 2000 compliance. In making these
forward-looking statements, the Company assumes no obligation to update them or
advise of changes in the assumptions on which they were based.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no reportable legal proceedings initiated in the quarter ended
September 30, 1998 and there were no material developments to any
previously reported legal proceedings not included in this Form 10-Q.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
27.01 Article 5 Financial Data Schedule as of and for the nine months
ended September 30, 1998.
27.02 Restated Article 5 Financial Data Schedule as of and for the nine
months ended September 30, 1997.
REPORTS ON FORM 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MOTIVEPOWER INDUSTRIES, INC.
By: /s/ DAVID L. BONVENUTO
------------------------------
David L. Bonvenuto
Vice President, Controller and
Principal Accounting Officer
Date: November 13, 1998
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