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ABC-NACO 1st Quarter Results

5 May 2000

ABC-NACO 1st Quarter Results Show Operating Improvement

    DOWNERS GROVE, Ill.--May 4, 2000--ABC-NACO Inc. (ABCR) reported results for its first quarter ended March 31 that included a 6% increase in gross profit and a 79% improvement in operating income, before merger and other restructuring charges, compared with the first three months of 1999. This improvement was achieved despite a 6% drop in sales, which was due primarily to lower demand for new freight cars and related components and overall spending cutbacks by major railroads.
    Net sales for the Company totaled $157.0 million for the quarter just ended, compared with $166.7 million in the year-earlier period.
    Operating income, before merger and restructuring charges, improved to $7.1 million for the quarter, compared with $4.0 million in the same three months of 1999. "We were able to improve operating margins despite industry demand being lower because of our infrastructure improvements and other efficiencies that we have recently achieved," said Chief Executive Officer Joseph A. Seher.
    Net income, before the after-tax impact of merger-related expenses and a merger-related extraordinary item in the 1999 quarter, was $533,000 in the first quarter of 2000, compared with a net loss of $566,000 in the same quarter last year. After-tax merger-related costs in the quarter just ended were $1.0 million, equal to $0.06 per share. The after-tax merger-related costs in the 1999 quarter, including the merger-related extraordinary item, were $15.0 million, equal to $0.82 per share.
    Looking forward, the Company now believes the rail supply industry may perform at much lower levels than previously expected for the remainder of the year. This is based on a growing consensus in the industry that predicts freight car build rates may be moving lower, as much as 40% to 45% below last year's level. There are also warnings of lower earnings by other rail supply companies, recent production shutdowns within the industry and reported higher levels of unplanned inventory.
    As the Company moves into the second half of the year, it anticipates a much lower backlog of new freight car orders as compared to last year, which will impact the demand for suspension systems, couplers and wheels. The order level for new locomotives has begun to move lower and this trend is expected to continue into next year. The mild Winter and early Spring has reduced wheel consumption considerably due to less wear and tear incurred under normal, harsh, cold weather conditions. In addition, the Company believes the major railroads have had to temporarily defer spending on repair and maintenance projects to offset higher fuel prices.
    According to Seher, "The order rate and spending patterns for the major railroads are becoming less predictable as they adjust to market and economic conditions that are affecting their operating ratios. We have seen this same unpredictability with specialty track products over the past eighteen months which is just now returning to more normal levels. We are now seeing this pattern spread to other product lines and our business may not return to normal levels until early next year. With these conditions prevailing, we believe it is now prudent to take a much more conservative view of our projection for calendar year 2000 earnings.
    "Even with this current industry trend, we expect to have solid quarter-to-quarter financial improvement through the current year and will show substantial improvement over calendar year 1999. As evidence of this improvement, our EBITDA, before merger-related expenses, in the first quarter improved by more than 33% over the prior year quarter. Capital spending was 37% lower than the same period last year and will remain at substantially lower levels during the current year".
    While these industry conditions are not permanent, the Company is making the necessary management, marketing and operational adjustments that will allow for continued year-to-year bottom-line growth despite weaker industry demand. For example, in order to become more competitive in the global market place, the Company announced plans to produce locomotive suspension frames and other related components in Mexico.
    "While our Rail Products segment is being impacted by this industry softness, there are several encouraging developments for our Company. Both the Rail Systems and Services and the Flow and Specialty segments had higher sales and operating profits in the first quarter of this year. The latter enjoyed an especially strong three months and I expect this business will hold at about the same level through the balance of the year. Our European business continues to grow, as does our e-commerce services and solutions business, which is proving very popular with a number of major customers.
    "The specialty track business in this country is finally showing some improvement and the Rail Systems Division has just signed an important signal systems contract with the Wisconsin Central Railroad. This business, in addition to the recently announced $51-million SEPTA signal/communications contract, should begin to have a positive impact on our results later in the year.
    "These factors are the basis of my continuing confidence in the long-term performance of our Company, even though the market softness we are experiencing may remain with us throughout the year", concluded Seher.

     ABC-NACO INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, 2000 and 1999 (Unaudited) (In thousands, except per share data) Three Months Ended March 31, ---------------------- 2000 1999 ---------- --------- NET SALES $ 156,978 $166,715 COST OF SALES 136,135 147,088 ---------- --------- Gross profit 20,843 19,627 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 13,751 15,666 MERGER AND OTHER RESTRUCTURING CHARGES 1,589 16,096 ---------- --------- Operating income (loss) 5,503 (12,135) EQUITY INCOME OF UNCONSOLIDATED JOINT VENTURES (453) (397) INTEREST EXPENSE 6,172 4,253 AMORTIZATION OF DEFERRED FINANCING COSTS 245 187 ---------- --------- Loss before income taxes and extraordinary item (461) (16,178) PROVISION (CREDIT) FOR INCOME TAXES 43 (3,813) ---------- --------- Loss before extraordinary item (504) (12,365) EXTRAORDINARY ITEM, net of income tax of $2,062 - (3,158) ---------- --------- Net loss $ (504) $(15,523) ========== ========= EARNINGS PER SHARE DATA Loss before extraordinary item $ (504) $(12,365) Adjustment related to preferred stock (12,030) - ---------- --------- Adjusted loss before extraordinary item $ (12,534) $(12,365) Extraordinary item - (3,158) ---------- --------- Net loss available to common stockholders $ (12,534) $(15,523) ========== ========= BASIC AND DILUTED EARNINGS PER SHARE: Adjusted loss before extra ordinary item $ (0.65) $ (0.68) Extraordinary item - (0.17) ---------- --------- Net loss available to common stockholders $ (0.65) $ (0.85) ========== ========= WEIGHTED AVERAGE SHARES OUTSTANDING 19,372 18,239 ========== ========= The accompanying notes to the unaudited consolidated financial statements are an integral part of these consolidated statements.