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 May 30, 2004
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: 1-9967
- --------------------------------------------------------------------------------
AMCAST INDUSTRIAL CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-0258080
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7887 Washington Village Drive, Dayton, Ohio 45459
(Address of principal executive offices) (Zip Code)
(937) 291-7000
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
As of May 30, 2004, the number of Common Shares, no par value, outstanding
was 9,313,951 shares.
- --------------------------------------------------------------------------------
AMCAST INDUSTRIAL CORPORATION
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MAY 30, 2004
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements:
Consolidated Condensed Statements of Financial Condition - 3
May 30, 2004 and August 31, 2003
Consolidated Condensed Statements of Operations - 4
for the Quarter and Nine Months Ended May 30, 2004
and June 1, 2003
Consolidated Condensed Statements of Retained Earnings - 4
for the Quarter and Nine Months Ended May 30, 2004
and June 1, 2003
Consolidated Condensed Statements of Cash Flows - 5
for the Nine Months Ended May 30, 2004
and June 1, 2003
Notes to Consolidated Condensed Financial Statements 6-17
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-28
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 29
Item 4 - Controls and Procedures 29
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 30
Item 6 - Exhibits and Reports on Form 8-K 30
SIGNATURES 31
2
PART I - FINANCIAL INFORMATION
AMCAST INDUSTRIAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL CONDITION
($ in thousands)
(Unaudited)
May 30 August 31
2004 2003
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 7,550 $ 5,697
Accounts receivable 43,843 39,979
Inventories 19,426 19,004
Other current assets 5,548 5,338
----------- -----------
Total Current Assets 76,367 70,018
Property, Plant, and Equipment 359,968 356,408
Less accumulated depreciation (233,864) (217,011)
----------- -----------
Net Property, Plant, and Equipment 126,104 139,397
Restricted Cash 6,000 7,078
Deferred Taxes 4,206 4,204
Other Assets 8,212 9,627
----------- -----------
Total Assets $ 220,889 $ 230,324
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Short-term debt $ 856 $ 706
Current portion of long-term debt 600 1,750
Accounts payable 26,557 31,419
Accrued expenses 21,766 21,011
----------- -----------
Total Current Liabilities 49,779 54,886
Long-Term Debt (less current portion) 171,208 175,184
Deferred Liabilities 39,996 42,189
Shareholders' Deficit
Preferred shares, without par value
Authorized - 1,000,000 shares; Issued - None - -
Common shares, at stated value
Authorized - 15,000,000 shares
Issued - 9,696,442 and 9,623,634 shares, respectively 9,696 9,624
Capital in excess of stated value 72,933 72,822
Accumulated other comprehensive loss (34,195) (34,189)
Accumulated deficit (84,041) (85,705)
Cost of 382,491 common shares in treasury (4,487) (4,487)
----------- -----------
Total Shareholders' Deficit (40,094) (41,935)
----------- -----------
Total Liabilities and Shareholders' Deficit $ 220,889 $ 230,324
=========== ===========
See notes to consolidated condensed financial statements.
3
AMCAST INDUSTRIAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
($ in thousands except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
--------------------------- ----------------------
May 30 June 1 May 30 June 1
2004 2003 2004 2003
----------- ----------- ----------- ------------
Consolidated Condensed Statements of Operations
Net Sales $ 111,367 $ 111,829 $ 318,747 $ 323,196
Cost of sales 97,196 98,227 280,447 287,463
----------- ----------- ----------- ------------
Gross Profit 14,171 13,602 38,300 35,733
Selling, general and administrative expenses 8,666 9,123 25,468 28,486
----------- ----------- ----------- ------------
Operating Income 5,505 4,479 12,832 7,247
Other (income) expense (14) (665) (32) (688)
Interest expense 3,689 4,061 11,240 11,920
----------- ----------- ----------- ------------
Income (Loss) before Income Taxes, Discontinued Operations,
and Cumulative Effect of Accounting Change 1,830 1,083 1,624 (3,985)
Income tax expense (benefit) (36) 391 (40) (1,500)
----------- ----------- ----------- ------------
Income (Loss) from Continuing Operations 1,866 692 1,664 (2,485)
Loss from operations of discontinued operations, net of tax - (1,906) - (12,024)
Loss from sale of discontinued operations, net of tax of $7,589 - (601) - (50,423)
----------- ----------- ----------- ------------
Income (Loss) before Cumulative Effect of Accounting Change 1,866 (1,815) 1,664 (64,932)
Cumulative effect of accounting change, net of tax of $464 - - - (46,536)
----------- ----------- ----------- ------------
Net Income (Loss) $ 1,866 $ (1,815) $ 1,664 $ (111,468)
=========== =========== =========== ============
Consolidated Condensed Statements of Retained Earnings (Deficit)
Beginning Retained Earnings (Deficit) $ (85,907) $ (85,523) $ (85,705) $ 25,530
Net (loss) income 1,866 (1,815) 1,664 (111,468)
Common and treasury shares issued - (154) - (1,554)
----------- ----------- ----------- ------------
Ending Retained Earnings (Deficit) $ (84,041) $ (87,492) $ (84,041) $ (87,492)
=========== =========== =========== ============
Basic and Diluted Income (Loss) Per Share
Continuing operations $ 0.20 $ 0.08 $ 0.18 $ (0.28)
Discontinued operations - (0.28) - (7.05)
----------- ----------- ----------- ------------
Before cumulative effect of accounting change 0.20 (0.20) 0.18 (7.33)
Cumulative effect of accounting change - - - (5.25)
----------- ----------- ----------- ------------
Net Income (Loss) $ 0.20 $ (0.20) $ 0.18 $ (12.58)
=========== =========== =========== ============
Dividends declared and paid per share $ - $ - $ - $ -
=========== =========== =========== ============
See notes to consolidated condensed financial statements.
4
AMCAST INDUSTRIAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
Nine Months Ended
---------------------------
May 30 June 1
2004 2003
------------ ------------
Operating Activities
Net income (loss) $ 1,664 $ (111,468)
Loss from discontinued operations - 62,447
Depreciation and amortization 17,199 18,463
Cumulative effect of accounting change - 46,536
Deferred liabilities (420) (4,917)
Other 1,012 1,443
Changes in assets and liabilities
Restricted cash 1,078 (6,009)
Accounts receivable (3,864) 1,240
Inventories (422) 9,427
Other current assets (426) (1,989)
Accounts payable (4,862) (10,447)
Accrued liabilities 1,016 180
------------ ------------
Net Cash Provided by Operations 11,975 4,906
Investing Activities
Additions of property, plant, and equipment (4,235) (6,912)
Other 393 788
------------ ------------
Net Cash Used by Investing Activities (3,842) (6,124)
Financing Activities
Reduction in long-term debt (2,680) (7,410)
Net CTC revolving credit note borrowings (2,446) (800)
Short-term debt borrowings 150 363
Other (1,300) -
------------ ------------
Net Cash Used by Financing Activities (6,276) (7,847)
Effect of exchange rate changes on cash (4) 176
Cash flow related to discontinued operations - (3,024)
------------ ------------
Net change in cash and cash equivalents 1,853 (11,913)
Cash and cash equivalents at beginning of period 5,697 16,810
------------ ------------
Cash and Cash Equivalents at End of Period $ 7,550 $ 4,897
============ ============
See notes to consolidated condensed financial statements.
5
AMCAST INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
(Unaudited)
NATURE OF OPERATIONS
Amcast Industrial Corporation ("Amcast" or the "Company") is a leading
manufacturer of technology-intensive metal products. The Company serves three
major sectors of the economy: automotive, construction, and industrial. Its two
business segments are Flow Control Products, a leading supplier of copper and
brass fittings for the industrial, commercial, and residential construction
markets; and Engineered Components, a leading supplier of aluminum wheels and
aluminum components for automotive original equipment manufacturers. Amcast's
corporate offices are located in Dayton, Ohio. The Company has ten manufacturing
facilities located in the United States of America, primarily in the Midwest.
The Company also has a sales facility located in Canada.
BASIS OF PREPARATION
The accompanying consolidated condensed financial statements include the
accounts of Amcast and its subsidiaries. Intercompany accounts and transactions
have been eliminated. The consolidated condensed financial statements are
unaudited and have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q under the Securities Exchange Act of 1934, as
amended. Accordingly, these financial statements do not include all of the
information and notes required for complete annual financial statements and
should be read in conjunction with the Company's audited consolidated financial
statements and notes for the year ended August 31, 2003, included in the
Company's Annual Report on Form 10-K. In the opinion of management, all
adjustments necessary for a fair presentation of the information have been
included. Results of operations for the periods presented are not necessarily
indicative of the results for the full fiscal year. To prepare the accompanying
interim consolidated condensed financial statements, the Company is required to
make estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current
period presentation.
CHANGE IN METHOD OF ACCOUNTING IN FISCAL 2003
In the first quarter of fiscal 2003, the Company was required to adopt Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". Under the adoption of SFAS No. 142, goodwill and certain other
intangible assets are no longer amortized but are reviewed annually for
impairment. If, based on these reviews, the related assets are found to be
impaired, their carrying value will be adjusted through a charge to earnings.
Intangible assets that are not deemed to have an indefinite life continue to be
amortized over their expected useful lives and be reviewed for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets".
6
AMCAST INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
(Unaudited)
Upon adoption of SFAS No. 142 in the first quarter of fiscal 2003, the Company
completed its impairment review and determined that all of its goodwill,
relating primarily to Speedline, the Company's European operation ("Speedline"),
was impaired. This impairment was reflected in the Company's declining stock
price and the weak financial performance of the reporting units related to the
impaired goodwill. As such, in the fiscal 2003 first quarter, the Company
recorded a non-cash charge of $46,536, net of tax of $464, to reduce the
carrying value of its goodwill to zero. This charge is recorded as a cumulative
effect of an accounting change in the accompanying consolidated condensed
financial statements.
DISCONTINUED OPERATIONS
On March 17, 2003, the Company completed the sale of all the capital stock of
its wholly-owned subsidiary, ASW International II, B.V., which owned all of the
stock of Speedline, to Crown Executive Aviation Limited, a private company
organized under the laws of the United Kingdom. Principal products manufactured
by Speedline, located in Italy, include aluminum wheels for passenger cars and
trucks, as well as aluminum and magnesium racing wheels.
Speedline is reported as a discontinued operation for fiscal 2003. After
deducting costs related to the transaction, there were no net cash proceeds from
the sale. The sale resulted in an after tax loss of $50,423, of which $5,352
related to the fiscal 2003 first quarter, $44,470 related to the fiscal 2003
second quarter, and $601 related to the fiscal 2003 third quarter. Cumulative
foreign currency translation losses of $1,303 were included in the $50,423 after
tax loss.
Speedline was previously included in the Engineered Components segment of the
Company. Operating results for Speedline included in discontinued operations
are:
Three Months Ended Nine Months Ended
June 1, 2003 * June 1, 2003 *
---------- ----------
Net sales $16,792 $80,786
Operating loss (1,320) (10,821)
Other income (expense) (526) 268
Interest expense (60) (678)
---------- ----------
Loss before income taxes (1,906) (11,231)
Income tax expense - 793
---------- ----------
Loss from discontinued operations $(1,906) $(12,024)
========== ==========
* Activity is through March 17, 2003 (the date of the sale of Speedline)
7
AMCAST INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
(Unaudited)
RESTRICTED CASH
As of May 30, 2004, and August 31, 2003, the Company had $6,000 of cash that was
restricted, as required under the Company's debt agreements with its lender
group and senior note holders, which excludes Casting Technology Company
("CTC"). This cash reserve is segregated to ensure the payment of principal and
interest on the Company's bank credit facilities, senior notes and LIFO credit
agreement. As of August 31, 2003, an additional $1,078 of cash was restricted
per CTC's loan agreement. During the first quarter of fiscal 2004, the Company
refinanced its CTC loan agreement and a cash restriction was not required by the
new lenders.
INVENTORY
Inventory is valued at the lower of cost or market. The value of U.S. inventory
is determined using the last-in, first-out method (LIFO). The value of foreign
inventory, at the Company's Canadian facility, is determined using the first-in,
first-out, method (FIFO). Supplies and maintenance related materials, which are
not a component of finished goods, but are utilized during manufacturing, are
categorized as raw materials. The major components of inventory are:
May 30 August 31
2004 2003
---------- ----------
Finished products $ 11,411 $ 10,833
Work in process 3,871 3,611
Raw materials and supplies 7,920 8,336
---------- ----------
23,202 22,780
Less amount to reduce certain
inventories to LIFO value (3,776) (3,776)
---------- ----------
Total inventory $ 19,426 $ 19,004
========== ==========
8
AMCAST INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
(Unaudited)
PROPERTY, PLANT, AND EQUIPMENT
The major components of property, plant, and equipment are as follows:
May 30 August 31
2004 2003
----------- -----------
Land and buildings $ 56,710 $ 56,629
Machinery and equipment 294,290 291,006
Construction in progress 8,968 8,773
----------- -----------
359,968 356,408
Accumulated depreciation (233,864) (217,011)
----------- -----------
Net property, plant, and equipment $ 126,104 $ 139,397
=========== ===========
Depreciation expense was $5,578 and $6,089 for the three-month periods ended May
30, 2004, and June 1, 2003, respectively, and $17,164 and $18,361 for the
nine-month periods ended May 30, 2004, and June 1, 2003, respectively.
LONG-TERM DEBT
The following table summarizes the Company's borrowings:
May 30 August 31
2004 2003
----------- -----------
Lender Group and Senior Note Holder Debt:
LIFO credit facility $ 9,015 $ 11,395
Senior notes 45,664 45,664
Revolving credit notes 100,826 100,826
Lines of credit 12,793 12,793
CTC Credit Agreement:
Term loan 2,700 2,856
Revolving credit facility 810 3,400
Short-Term Debt 856 706
----------- -----------
Total Debt 172,664 177,640
Less Current Debt 1,456 2,456
----------- -----------
Long-Term Debt $ 171,208 $ 175,184
=========== ===========
9
AMCAST INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
(Unaudited)
PENSION PLANS AND POSTRETIREMENT LIFE INSURANCE BENEFITS
The Company has a noncontributory defined benefit plan that covers certain
employees, and an unfunded nonqualified supplementary benefit plan that covers
certain current and former officers and certain key employees. The Company also
provides life insurance benefits, funded on a cash basis, to certain retired
employees under contractual agreements. The benefit plans and the postretirement
life insurance benefits are more fully described in the Notes to Consolidated
Financial Statements included in the Company's annual report on Form 10-K for
the year ended August 31, 2003.
The following table summarizes the components of net periodic benefit cost for
the Company:
Three Months Ended Nine Months Ended
------------------ -----------------
May 30 June 1 May 30 June 1
2004 2003 2004 2003
-------- -------- -------- --------
Pension Plans
Net Periodic Benefit Cost
Service cost $ 418 $ 346 $ 1,253 $ 1,039
Interest cost 1,722 1,854 5,165 5,561
Expected return on plan assets (2,469) (2,505) (7,407) (7,515)
Amortization of prior service cost 107 102 320 306
Recognized net actuarial (gain) loss 1 (27) 3 (81)
-------- -------- -------- --------
Total Net Periodic Benefit Cost (Income) $ (221) $ (230) $ (666) $ (690)
======== ======== ======== ========
Postretirement Life Insurance Benefits
Net Periodic Benefit Cost
Interest cost $ 9 $ 9 $ 26 $ 27
Recognized net actuarial (gain) loss 5 4 15 12
Settlement (gain) loss (116) - (116) -
-------- -------- -------- --------
Total Net Periodic Benefit Cost (Income) $ (102) $ 13 $ (75) $ 39
======== ======== ======== ========
The Company voluntarily contributes amounts to its defined benefit pension plan
to provide assets sufficient to meet the benefits to be paid to the plan's
participants. For fiscal 2004, the pension plan expects to meet the minimum
funding requirements of the Employee Retirement Income Security Act of 1974
(ERISA), and therefore, the Company made no contributions to its defined benefit
pension plan for the first nine months of fiscal 2004. The Company does not
anticipate making any contributions to its defined benefit pension plan in the
fourth quarter of fiscal 2004.
10
AMCAST INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
(Unaudited)
INCOME (LOSS) PER SHARE
The following table reflects the calculations for basic and diluted earnings
(loss) per share for the three-month and nine-month periods ended May 30, 2004
and June 1, 2003:
Three Months Ended Nine Months Ended
----------------------- -----------------------
May 30 June 1 May 30 June 1
2004 2003 2004 2003
----------- ----------- ----------- -----------
Income (loss) from continuing operations $ 1,866 $ 692 $ 1,664 $ (2,485)
Loss from discontinued operations, net of tax - (2,507) - (62,447)
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of
accounting change 1,866 (1,815) 1,664 (64,932)
Cumulative effect of accounting change,
net of tax - - - (46,536)
----------- ----------- ----------- -----------
Net income (loss) $ 1,866 $(1,815) $ 1,664 $(111,468)
=========== =========== =========== ===========
Basic and Diluted Income (Loss) per Share:
Basic shares 9,305 9,016 9,288 8,861
=========== =========== =========== ===========
Diluted shares 9,351 9,016 9,291 8,861
=========== =========== =========== ===========
Income (loss) from continuing operations $ 0.20 $ 0.08 $ 0.18 $ (0.28)
Discontinued operations - (0.28) - (7.05)
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of
accounting change 0.20 (0.20) 0.18 (7.33)
Cumulative effect of accounting change - - - (5.25)
----------- ----------- ----------- -----------
Net income (loss) $ 0.20 $ (0.20) $ 0.18 $ (12.58)
=========== =========== =========== ===========
For each of the periods presented, there were outstanding stock options and
warrants excluded from the computation of diluted earnings per share because the
options and warrants were antidilutive.
11
AMCAST INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
(Unaudited)
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes all changes in shareholders' equity during
a period except those resulting from investments by and distributions to
shareholders. The components of comprehensive income (loss) are:
Three Months Ended Nine Months Ended
----------------------- ------------------------
May 30 June 1 May 30 June 1
2004 2003 2004 2003
----------- ----------- ----------- ------------
Net income (loss) $ 1,866 $ (1,815) $ 1,664 $(111,468)
Foreign currency translation adjustments (41) 111 (4) 176
Income (loss) on derivatives * 17 - (2) -
----------- ----------- ----------- ------------
Total comprehensive income (loss) $ 1,842 $ (1,704) $ 1,658 $(111,292)
=========== =========== =========== ============
The components of accumulated other comprehensive loss are:
May 30 August 31
2004 2003
----------- -----------
Foreign currency translation adjustment $ (215) $ (211)
Minimum pension liability adjustment (33,978) (33,978)
Income (loss) on derivatives * (2) -
----------- -----------
Accumulated other comprehensive loss $ (34,195) $ (34,189)
=========== ===========
* The Company's CTC business has one interest rate swap that was required as a
part of the CTC loan agreement. This swap agreement is discussed in "Item 3 -
Quantitative and Qualitative Disclosures About Market Risk".
12
AMCAST INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
(Unaudited)
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company accounts for its employee stock options in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, no compensation cost has been recognized related to the Company's
stock option plans.
Had the Company determined compensation cost based upon the fair value of the
options at the grant date consistent with the provisions of SFAS No. 123, net
income and income/(loss) per common share would have been adjusted to the pro
forma amounts indicated as follows:
Three Months Ended Nine Months Ended
------------------------ -------------------------
May 30 June 1 May 30 June 1
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income (loss) as reported $ 1,866 $ (1,815) $ 1,664 $(111,468)
Effect on reported net income (loss) of
accounting for stock options at fair value - (47) (1) (140)
----------- ----------- ----------- -----------
Pro forma net income (loss) $ 1,866 $ (1,862) $ 1,663 $(111,608)
=========== =========== =========== ===========
Income (loss) per common share
Basic and diluted
As reported $ 0.20 $ (0.20) $ 0.18 $ (12.58)
=========== =========== =========== ===========
Pro forma $ 0.20 $ (0.21) $ 0.18 $ (12.60)
=========== =========== =========== ===========
13
AMCAST INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
(Unaudited)
BUSINESS SEGMENTS
Operating segments are organized internally primarily by the type of products
produced and markets served, and in accordance with SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". The Company has
aggregated similar operating segments into two reportable segments, Flow Control
Products and Engineered Components. Descriptions of the products of these
business segments are included in "Item 1- Business" in the Company's Form 10-K
for the year ended August 31, 2003. The Company evaluates segment performance
and allocates resources based on several factors, of which net sales and
operating income are the primary financial measures.
Operating information related to the Company's reportable segments is as
follows:
Three Months Ended Nine Months Ended
---------------------- -----------------------
May 30 June 1 May 30 June 1
2004 2003 2004 2003
---------- ---------- ---------- ----------
Sales
Flow Control Products $43,394 $30,575 $112,660 $91,321
Engineered Components 67,973 81,254 206,087 231,875
---------- ---------- ---------- ----------
Total sales $111,367 $111,829 $318,747 $323,196
========== ========== ========== ==========
Operating income/(loss)
Flow Control Products $ 3,253 $ 429 $ 6,233 $ 1,772
Engineered Components 4,395 6,183 12,493 12,187
Corporate (2,143) (2,133) (5,894) (6,712)
---------- ---------- ---------- ----------
Total operating income 5,505 4,479 12,832 7,247
Other (income) expense (14) (665) (32) (688)
Interest expense 3,689 4,061 11,240 11,920
---------- ---------- ---------- ----------
Total income/(loss) from
continuing operations
before taxes and
cumulative effect of
accounting change $ 1,830 $ 1,083 $ 1,624 $ (3,985)
========== ========== ========== ==========
14
AMCAST INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
(Unaudited)
COMMITMENTS AND CONTINGENCIES
At May 30, 2004, the Company has committed to capital expenditures of $1,785,
primarily for the Engineered Components segment.
The Company, as is normal for the industries in which it operates, is involved
in certain legal proceedings and is subject to certain claims and site
investigations which arise under environmental laws and which have not been
finally adjudicated.
The Company has been identified as a potentially responsible party by various
state agencies and by the United States Environmental Protection Agency (U.S.
EPA) under the Comprehensive Environmental Response Compensation and Liability
Act of 1980, as amended, for costs associated with U.S. EPA-led multi-party
sites and state environmental agency-led remediation sites. The majority of
these claims involve third-party owned disposal sites for which compensation is
sought from the Company as an alleged waste generator for recovery of past
governmental costs or for future investigation or remedial actions at the
multi-party sites. The designation as a potentially responsible party and the
assertion of such claims against the Company are made without taking into
consideration the nature or extent of the Company's involvement with the
particular site. In several instances, claims have been asserted against a
number of other entities for the same recovery or other relief as was asserted
against the Company. These claims are in various stages of administrative or
judicial proceeding. The Company has no reason to believe that it will have to
pay a significantly disproportionate share of clean-up costs associated with any
non-Company-owned site.
There is one Company-owned property in Pennsylvania where state-supervised
cleanups are currently underway and two other Company-owned properties at which
the U.S. EPA is overseeing an investigation or where long-standing remediation
is underway.
To the extent possible, with the information available at the time, the Company
has evaluated its responsibility for costs and related liability with respect to
the above sites. The Company is of the opinion that its liability with respect
to those sites should not have a material adverse effect on its financial
position or results of operations. In arriving at this conclusion, the principal
factors considered by the Company were ongoing settlement discussions with
respect to certain of the sites, the volume and relative toxicity of waste
alleged to have been disposed of by the Company at certain sites, which factors
are often used to allocate investigative and remedial costs among potentially
responsible parties, the probable costs to be paid by other potentially
responsible parties, total projected remedial costs for a site, if known, and
the Company's existing reserve to cover costs associated with unresolved
environmental proceedings. At May 30, 2004, the Company's accrued undiscounted
reserve for such contingencies was $3,538.
15
AMCAST INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
(Unaudited)
At one site where the U.S. EPA is overseeing an investigation, it is reasonably
possible that the Company may incur environmental remediation costs. This
investigation is currently in the testing phase. Until the testing is complete
and the results analyzed, the Company will be unable to determine the likelihood
and estimated range of the amount of this contingency. It is disclosed in the
Notes to Consolidated Condensed Financial Statements per the requirements of
SFAS No. 5, "Accounting for Contingencies", because the potential contingency is
more than remote but less than probable.
On January 29, 1998, Cargill, Inc. and eight other plaintiffs brought a
superfund private cost recovery and contribution action against the Company and
fifty other parties in the United States District Court for the Southern
District of Ohio, Western Division, which is captioned, Cargill, Inc. et al. v.
Abco Construction, et al. (Case No. C-3-98-3601). The action involves the
Valleycrest disposal site in the Dayton, Ohio area (the "Site"). The plaintiffs
have taken the lead in investigating and remediating the Site and are asking for
an aggregate judgment against the defendants for an amount which exceeds
$31,000. Based on information to date, the Company believes it has valid
defenses against the plaintiffs' claims. The Company believes its responsibility
with respect to the Site is very limited due to the inert nature of the foundry
sand waste that the Company disposed of at the Site. While the outcome of this
matter cannot be predicted with any certainty, the Company does not believe that
this matter will have a material adverse effect on its results of operations or
financial position. The Company believes that its ultimate liability in this
matter will not exceed $400.
On June 5, 2003, Solutia, Inc. and Pharmacia Corporation brought a superfund
private cost recovery and contribution action against the Company and eighteen
other parties in the United States District Court for the Northern District of
Alabama, Eastern Division, which is captioned, Solutia, Inc and Pharmacia
Corporation v. McWane, Inc., et al. (Case No. CV-03-PWG-1345-E). The action
involves the Anniston PCB Site and the Anniston Lead Site in Calhoun County
Alabama and Tallegdega County Alabama ("the Sites"). The plaintiffs have taken
the lead in investigating and remediating the Sites and are asking for an
aggregate judgment against the defendants in the amount of $34,500. Based on
information to date, the Company believes it has valid defenses against the
plaintiffs' claims. The Company believes its responsibility with respect to the
Sites is very limited. While the outcome of this matter cannot be predicted with
any certainty, the Company does not believe that this matter will have a
material adverse effect on its results of operations or financial position.
Based upon the contracts and agreements with regard to an environmental matter,
the Company believes it is entitled to indemnity for remediation costs at a
particular site and believes it is probable that the Company can recover a
substantial portion of the costs. Accordingly, the Company has recorded a
receivable of $765, classified in other noncurrent assets, related to
anticipated recoveries from a third party.
16
AMCAST INDUSTRIAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
($ in thousands except per share amounts)
(Unaudited)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act") was signed into law. The Act introduced
both a Medicare prescription drug benefit and a federal subsidy to sponsors of
retiree healthcare plans. In January 2004, the Financial Accounting Standards
Board ("FASB") staff issued FASB Staff Position ("FSP") 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003". This statement permited a sponsor of a
postretirement health care plan that provides a prescription drug benefit to
make a one-time election to defer recognizing the effects of the Act until
authoritative guidance on accounting for the federal subsidy was issued or until
certain other events occured. In May 2004, the FASB issued FSP 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003", which superseded FSP 106-1.
FSP 106-2 provides guidance on the accounting for the effects of the Act and
requires certain disclosures regarding the effect of the federal subsidy
provided by the Act. FSP 106-2 becomes effective for the Company no later than
the Company's quarter ending November 28, 2004. The Company does not provide
retiree medical benefits. The Company's current postretirement benefit
obligation relates solely to life insurance benefits provided by contractual
agreements for certain retirees. Therefore, the Act and the accounting
requirements of FSP 106-2 should have no impact on the Company's current or
future results of operations or financial position.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132
increases the existing disclosure requirements by requiring companies to
disclose more details about pension plan assets, benefit obligations, cash
flows, benefit costs and related information. Companies will be required to
segregate plan assets by category, such as debt, equity and real estate, and to
provide certain expected rates of return and other informational disclosures.
SFAS No. 132 also requires companies to disclose various elements of pension and
postretirement benefit costs in interim-period financial statements for quarters
beginning after December 15, 2003, see "Pension Plans and Postretirement Life
Insurance Benefits" in the Notes to Consolidated Condensed Financial Statements.
17
AMCAST INDUSTRIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ in thousands except per share amounts)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995
Certain statements in this report, in the Company's press releases and in oral
statements made by or with the approval of an authorized executive officer of
the Company constitute "forward-looking statements" as that term is defined
under the Private Securities Litigation Reform Act of 1995. These statements
may, for example, state projections, forecasts, or estimates about Company
performance and industry trends. The achievement of the projections, forecasts,
or estimates is subject to certain risks and uncertainties. Due to circumstances
beyond the Company's control, actual results and events may differ materially
from those projected, forecasted, or estimated. Factors which may cause actual
results to differ materially from those contemplated by the forward-looking
statement include, among others: general economic conditions less favorable than
expected; fluctuating demand in the automotive and construction industries; less
favorable than expected growth in sales and profit margins in the Company's
product lines; increased competitive pressures in the Company's Engineered
Components and Flow Control Products segments; effectiveness of production
improvement plans; cost of raw materials; disposal of certain non-strategic
assets; labor relations at the Company and its customers; the impact of homeland
security measures; and the ability of the Company to satisfy obligations under,
and to comply with the provisions of, its loan documents. This list of factors
is not meant to be a complete list of items that may affect the accuracy of
forward-looking statements, and as such all forward-looking statements should be
analyzed with the understanding of their inherent uncertainty.
The following discussion and analysis provides information which management
believes is relevant to an understanding of the Company's consolidated results
of operations and financial condition. The Company undertakes no obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise. This discussion should be read in
conjunction with the accompanying consolidated condensed financial statements
and notes and with the Company's audited consolidated financial statements and
notes for the year ended August 31, 2003, included in the Company's Annual
Report on Form 10-K.
18
AMCAST INDUSTRIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ in thousands except per share amounts)
RESULTS OF OPERATIONS
NET SALES
Three Months Ended Nine Months Ended
---------------------- ----------------------
May 30 June 1 May 30 June 1
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net Sales $111,367 $111,829 $318,747 $323,196
========== ========== ========== ==========
Percentage increase (decrease)
from prior year (0.4)% (3.3)% (1.4)% 4.5 %
========== ========== ========== ==========
Components of percentage increase
Volume (12.3)% (4.4)% (7.8)% 3.1 %
Price 8.9 % (0.2)% 4.5 % (0.5)%
Product Mix 3.0 % 1.3 % 1.9 % 1.9 %
---------- ---------- ---------- ----------
(0.4)% (3.3)% (1.4)% 4.5 %
========== ========== ========== ==========
In the fiscal 2004 third quarter, consolidated net sales decreased by $462, or
0.4%, compared with the fiscal 2003 third quarter. The sales decrease in the
fiscal 2004 third quarter was mainly the result of lower sales volume of the
Company's aluminum components products, mostly in the gravity-cast operations,
primarily due to lost business from two major customers. The volume decrease was
partly offset by strong growth in the sales of the Company's Flow Control
Products segment. Pricing was favorable due to increased selling prices
resulting from an increase in the market price of copper and aluminum. The
Company also had an improved product mix in its Flow Control Product segment and
to a lesser degree in aluminum component sales.
For the first nine months of fiscal 2004, consolidated net sales decreased by
$4,449, or 1.4%, compared with the first nine months of fiscal 2004. The sales
decrease for the first nine months of fiscal 2004 was also mainly the result of
lower sales volume of the Company's aluminum components products, mostly in the
gravity-cast operations, primarily due to lost business from two major
customers. The volume decrease was partly offset by strong growth in the sales
of the Company's Flow Control Products segment. Pricing was favorable due to
increased selling prices resulting from an increase in the market price of
copper and aluminum. The Company also had an improved product mix in its Flow
Control Product segment and to a lesser degree in aluminum component sales.
19
AMCAST INDUSTRIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ in thousands except per share amounts)
GROSS PROFIT
Three Months Ended Nine Months Ended
---------------------- ----------------------
May 30 June 1 May 30 June 1
2004 2003 2004 2003
---------- ---------- ---------- ----------
Gross Profit $ 14,171 $ 13,602 $ 38,300 $ 35,733
========== ========== ========== ==========
Percent of Sales 12.7% 12.2% 12.0% 11.1%
For the fiscal 2004 third quarter, gross profit increased by $569, or 4.2%,
compared with the fiscal 2003 third quarter. As a percentage of sales, gross
profit improved from 12.2% for the third quarter of fiscal 2003 to 12.7% for the
third quarter of fiscal 2004. The Company increased gross profit during a period
of sales decline due to improved labor productivity and manufacturing
efficiencies from the Amcast Production System, a more efficient manufacturing
approach being implemented and utilized at the Company's manufacturing
facilities.
For the first nine months of fiscal 2004, gross profit increased by $2,567, or
7.2%, compared with the first nine months of fiscal 2003. This increase was
primarily due to the increased sales at the Company's Flow Control Product
segment and to operating improvements at the Company's Richmond, Indiana
facility, which experienced significant new product launch costs in the first
nine months of fiscal 2003. Similar costs were not incurred in the first nine
months of fiscal 2004. The Company realized improvement in gross profit in both
actual dollars and as a percentage of sales during a period when sales
decreased. Contributing to the gross profit improvements were the Amcast
Production System, increased labor productivity, reduced containment costs,
tight spending controls, and controls on labor cost.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Three Months Ended Nine Months Ended
----------------------- ----------------------
May 30 June 1 May 30 June 1
2004 2003 2004 2003
---------- ---------- ---------- ----------
SG&A $ 8,666 $ 9,123 $ 25,468 $ 28,486
========== ========== ========== ==========
Percent of Sales 7.8% 8.2% 8.0% 8.8%
Selling, general, and administrative (SG&A) expenses were $8,666, or 7.8% of
sales in the fiscal 2004 third quarter, compared with $9,123, or 8.2% of sales
in the fiscal 2003 third quarter. This decrease in SG&A was Company-wide and was
the direct result of the Company's continued focus on cost reduction.
20
AMCAST INDUSTRIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ in thousands except per share amounts)
For the first nine months of fiscal 2004, SG&A expenses were $25,468, or 8.0% of
sales, compared with $28,486, or 9.2% of sales, for the first nine months of
fiscal 2003. Almost two-thirds of the $3,018 decrease was due to the benefits
received as a direct result of the Company's cash management controls, tight
spending limits, controls on labor cost, and its focus on cost reduction. The
decrease also includes insurance and legal settlements partially offset by
additional legal and environmental reserves that combined to lower SG&A by
$1,102. Excluding these items, SG&A decreased by $1,916, or 6.7%, versus the
prior year.
OPERATING INCOME was $5,505 (4.9% of sales) in the fiscal 2004 third quarter,
compared with $4,479 (4.0% of sales) in the fiscal 2003 third quarter. For the
first nine months of fiscal 2004, operating income was $12,832 (4.0% of sales),
compared with $7,247 (2.2% of sales) for the first nine months of fiscal 2003.
The Company was able to attain this operating income growth from manufacturing
efficiencies and reduced SG&A expenses during a period when sales declined.
INTEREST EXPENSE was $3,689 for the fiscal 2004 third quarter, compared with
$4,061 for the fiscal 2003 third quarter, and $11,240 for the first nine months
of fiscal 2004, compared with $11,920 for the first nine months of fiscal 2003.
Interest expense decreased slightly due to lower debt balances in fiscal 2004
compared with the prior year.
INCOME TAX (BENEFIT) EXPENSE was $(36) and $391 for the third quarter of fiscal
2004 and 2003, respectively; and $(40) and $(1,500) for the first nine months of
fiscal 2004 and 2003, respectively. The effective tax rates were (2.0%) and
36.1% for the third quarter of fiscal 2004 and 2003, respectively; and (2.5%)
and 37.6% for the first nine months of fiscal 2004 and 2003, respectively.
Pursuant to SFAS No. 109, "Accounting for Income Taxes", the Company is
offsetting federal income taxes with existing tax loss carryforwards for amounts
recorded in fiscal 2004. The Company is currently only recording income tax
expense or benefit related to its Canadian operations and domestic state taxes.
EARNINGS BEFORE INTEREST EXPENSE, INCOME TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA) was $11,123 for the fiscal 2004 third quarter, compared with $11,311
for the fiscal 2003 third quarter. The slight decrease in EBITDA was primarily
the result of lower interest expense, taxes, and depreciation in the third
quarter of fiscal 2004. EBITDA was $30,063 for the first nine months of fiscal
2004, compared with $26,398 for the first nine months of fiscal 2003. The
increase in EBITDA was primarily the result of higher income from continuing
operations.
21
AMCAST INDUSTRIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ in thousands except per share amounts)
The following is a reconciliation of EBITDA, a non-GAAP financial measure:
Three Months Ended Nine Months Ended
------------------------ ------------------------
May 30 June 1 May 30 June 1
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income $ 1,866 $(1,815) $ 1,664 $(111,468)
Cumulative effect of
accounting change - - - 46,536
Discontinued operations - 2,507 - 62,447
----------- ----------- ----------- -----------
Income (loss) from continuing
operations 1,866 692 1,664 (2,485)
Interest expense 3,689 4,061 11,240 11,920
Income taxes (36) 391 (40) (1,500)
Depreciation and amortization 5,604 6,167 17,199 18,463
----------- ----------- ----------- -----------
EBITDA $11,123 $11,311 $30,063 $26,398
=========== =========== =========== ===========
BUSINESS SEGMENTS
Three Months Ended Nine Months Ended
---------------------- -----------------------
May 30 June 1 May 30 June 1
2004 2003 2004 2003
---------- ---------- ---------- ----------
Sales
Flow Control $43,394 $30,575 $112,660 $91,321
Engineered Components 67,973 81,254 206,087 231,875
---------- ---------- ---------- ----------
Total $111,367 $111,829 $318,747 $323,196
========== ========== ========== ==========
Operating Income (Loss)
Flow Control $ 3,253 $ 429 $ 6,233 $ 1,772
Engineered Components 4,395 6,183 12,493 12,187
Corporate (2,143) (2,133) (5,894) (6,712)
---------- ---------- ---------- ----------
Total $ 5,505 $ 4,479 $12,832 $ 7,247
========== ========== ========== ==========
22
AMCAST INDUSTRIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ in thousands except per share amounts)
FLOW CONTROL PRODUCTS
Net sales for the Flow Control Products segment increased by 41.9% to $43,394
for the fiscal 2004 third quarter, compared with $30,575 for the same period of
fiscal 2003. For the first nine months of fiscal 2004, sales increased by 23.4%
to $112,660 compared with $91,321 for the first nine months of fiscal 2003. For
the fiscal 2004 third quarter, volume grew by 8.5%, a favorable product mix
contributed 9.5%, and price increased by 23.9%. For the first nine months of
fiscal 2004, volume increased by 5.9%, a favorable product mix contributed 6.9%,
and price increased 10.6%. Flow Control Products experienced higher sales by
strong growth in plumbing products, a large increase of pistons for automotive
air conditioning compressors, and higher prices to help offset increased market
prices for copper.
Flow Control Products operating income in the fiscal 2004 third quarter was
$3,253, compared with $429 for the same period of fiscal 2003. For the first
nine months of fiscal 2004, operating income was $6,233, compared with $1,772
for the first nine months of fiscal 2003. In fiscal 2004, operating income was
positively affected by higher sales volume, manufacturing efficiencies from the
Amcast Production System, cost reduction programs, and controls on labor cost.
ENGINEERED COMPONENTS
Net sales for the Engineered Components segment decreased by 16.3% to $67,973
for the fiscal 2004 third quarter, compared with $81,254 for the same period of
fiscal 2003. For the first nine months of fiscal 2004, sales decreased by 11.1%
to $206,087, compared with $231,875 for the first nine months of fiscal 2003.
For the fiscal 2004 third quarter, volume decreased by 20.0%, a favorable
product mix contributed 0.5%, and price increased by 3.2%. For the first nine
months of fiscal 2004, volume decreased by 13.2% and price increased 2.1%. The
mix improvements were due to aluminum components, partly offset by an
unfavorable mix in wheels. The price increases were due to passing through to
customers higher market prices for aluminum. Engineered Components experienced
lower sales volume due primarily to lost business from two large aluminum
components customers.
Operating income in the fiscal 2004 third quarter was $4,395, compared with
$6,183 for the same period of fiscal 2003. This decrease primarily reflects lost
business in aluminum component sales from two large customers and lower volume.
For the first nine months of fiscal 2004, operating income was $12,493, compared
with $12,187 for the first nine months of fiscal 2003. This increase is
primarily due to the Richmond, Indiana, facility that incurred significant
product launch costs in fiscal 2003. Similar product launch costs were not
encountered in fiscal 2004.
23
AMCAST INDUSTRIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ in thousands except per share amounts)
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance at May 30, 2004 was $7,550. An additional $6,000 of
restricted cash existed for payment of principal and interest on the Company's
debt that is required under its debt agreements. Under the Company's cash
management system, issued checks that have not cleared the bank resulting in net
overdraft bank balances for accounting purposes in the amounts of $2,519 at May
30, 2004, and $5,271 at August 31, 2003, are included in accounts payable.
Cash provided by operations was $11,975 for the first nine months of fiscal 2004
compared with $4,906 in the first nine months of fiscal 2003. The income
statement and balance sheet contributors to this operating cash flow are shown
in the following table:
Nine Months Ended
-----------------------
2004 2003
---------- ----------
Income statement related impact $ 18,863 $ 15,876
Balance sheet related impact (6,888) (10,970)
---------- ----------
Net cash provided by operations $ 11,975 $ 4,906
========== ==========
The $18,863 increase in operating cash flow from the income statement was the
result of $1,664 of net income plus the non-cash expense of depreciation and
amortization in the amount of $17,199.
The improvement in the balance sheet impact on operating cash flow for the first
nine months of 2004, compared with the first nine months of 2003, reflects the
Company's continued focus on working capital and cash management controls.
Investing activities, primarily capital spending, used net cash of $3,842 in the
first nine months of fiscal 2004 compared with $6,124 used in the first nine
months of fiscal 2003. This decrease reflects management controls placed on
capital expenditures to conserve cash. Capital expenditures were primarily for
equipment to expand plant capacity for new product orders and for cost reduction
projects. At May 30, 2004, the Company had $1,785 of commitments for additional
capital expenditures, primarily for the Engineered Components segment.
Financing activities used $6,276 of cash in the first nine months of fiscal
2004, compared with $7,847 of cash used in the first nine months of fiscal 2003.
24
AMCAST INDUSTRIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ in thousands except per share amounts)
During the first nine months of fiscal 2004, the Company reduced its overall
debt balance by $4,976, as debt declined from $177,640 at August 31, 2003, to
$172,664 at May 30, 2004. The Company made cash principal payments of $2,680 for
the bank debt, senior notes, and CTC term loan plus net payments of $2,446 for
its CTC revolving credit note debt. The Company also made net short-term
borrowings of $150 related to the Company's insurance-premium financing. While
progress has been made, the Comnpany still remains highly leveraged with debt at
$172,664 and equity at a negative $40,094.
The revolving credit notes, the lines of credit, the senior notes, and the LIFO
credit agreement (the "Lender Group and Senior Note Holder Debt") mature on
September 14, 2006. The Company cannot borrow additional funds under these
borrowings. The lenders of these borrowings have security interests in the
assets of the Company. Interest rates are prime plus 2% for the revolver
borrowings, lines of credit, and the LIFO credit agreement, and 10.09% (9.09%
plus 1% payment in kind) for the senior notes.
A principal payment under the August 2003 Lender Group and Senior Note Holder
Debt agreements of $300 was paid in May 2004 , and no remaining payments are due
after May 2004. The Company's fiscal 2004 first quarter Form 10-Q and second
quarter Form 10-Q anticipated that the May 2004 payment would be $2,800, and a
payment of $2,500 would be due in August 2004. These payments were specified in
a revised loan agreement that was not executed. The current payment schedule is
the one specified in the August 2003 loan documents.
The Lender Group and Senior Note Holder Debt agreements include financial
covenants. These covenants are: a fixed cost coverage ratio; rolling twelve
month earnings before interest, taxes, depreciation, and amortization (EBITDA);
capital expenditures; and mandatory debt prepayments. As of May 30, 2004 the
Company was in compliance with all of its debt covenants. At the end of any
subsequent quarter, if the Company is not in compliance with any of its debt
covenants, any outstanding debt balances become payable on demand by the Lender
Group and Senior Note Holder Debt lenders.
25
AMCAST INDUSTRIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ in thousands except per share amounts)
Under the restructuring agreements relating to the Company's debt agreements,
including the Amended and Restated Restructuring Agreement and LIFO
Restructuring Agreement (copies were filed as Exhibits 4.1 and 4.2,
respectively, to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 3, 2003, herein the
"Restructuring Agreements"), the Company is required to use its good faith best
efforts to (i) refinance the Lender Group and Senior Note Holder Debt on or
before September 1, 2004 or (ii) sell substantially all of its assets on or
before September 1, 2004. Section 4.4 of each of the Restructuring Agreements
includes a timetable with eight milestones, and the Company is required to pay a
$200 fee for each missed milestone. The Company has met five of the eight
milestones. The sixth and seventh milestones which relate to the completion of
due diligence and delivery of a definitive purchase agreement and/or commitment
letter, were required to be satisfied by June 1, 2004. As allowed by the debt
agreements, these dates are being adjusted at the recommendation of the
Company's investment banker. The Company is continuing to have very serious
confidential negotiations with parties who have expressed an interest in
acquiring one or more business units. Since these negotiations are in various
stages of completion, the Company cannot predict if the results of these
negotiations will produce acceptable offers. However, it is the Company's
expectation that one or more of these situations will result in a transaction.
It is also not certain at this point what effect any potential divestiture might
have on the financial condition of the Company or its ability to refinance the
remaining debt.
The CTC Credit Agreement provides for borrowings under a revolving credit
facility and a term loan. The revolving line of credit facility provides for up
to $5,000 in borrowings ($4,190 was available as of May 30, 2004) and matures in
September 2006. The term loan matures in September 2008 with a current debt
payment of $600 payable in installments of $150 due in June, September, and
December of 2004 and in March of 2005. Interest on the revolving credit facility
and the term loan is based on CTC's debt to EBITDA ratio, which ranges between
prime plus 0.25% to prime plus 1.25%, or LIBOR plus 2.25% to LIBOR plus 3.25%.
The interest rates for the third quarter were prime plus 0.25% and LIBOR plus
2.25%, or 4.25% and 3.4%, respectively.
The Company's debt obligations for the remainder of fiscal 2004 and beyond are
shown in the following table. At May 30, 2004, obligations under operating
leases are not significantly different from the amounts reported in the
Company's Annual Report on Form 10-K for the year ended August 31, 2003.
Debt Obligation 2004 2005 2006 2007 2008 Thereafter
- ---------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Debt
Long-Term Debt
Corporate $ 856 $ - $ - $ 168,298 $ - $ -
CTC 150 600 600 1,410 600 150
----------- ----------- ----------- ----------- ----------- -----------
Total Debt $ 1,006 $ 600 $ 600 $ 169,708 $ 600 $ 150
=========== =========== =========== =========== =========== ===========
Operating leases $ 831 $ 2,694 $ 2,095 $ 509 $ 108 $ -
=========== =========== =========== =========== =========== ===========
26
AMCAST INDUSTRIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ in thousands except per share amounts)
CRITICAL ACCOUNTING POLICIES
The Company describes its significant accounting policies in the notes to the
consolidated financial statements included in the Company's Annual Report on
Form 10-K. Since application of these accounting policies involves the exercise
of judgement and use of estimates, actual results could differ from those
estimates.
Revenue Recognition - Revenue is recognized at the time products are shipped to
unaffiliated customers, legal title has passed, and all significant contractual
obligations of the Company have been satisfied.
Inventory Valuation - Inventories are valued at the lower of cost or market
using the last-in, first out (LIFO) and the first-in, first-out (FIFO) methods.
Raw material inventories are primarily aluminum and copper, both of which have
market prices subject to volatility.
Environmental Reserves - The Company recognizes an environmental liability when
it is probable the liability exists and the amount can be reasonably estimated.
The Company adjusts the environmental reserve when it is determined that
circumstances warrant the change. Actual remediation obligations may differ from
those estimated.
Pension Benefits and Expenses - The Company has pension benefits and expenses
that are developed from actuarial valuations. These valuations are based on
assumptions including, among other things, interest rate fluctuations, discount
rates, expected returns on plan assets, retirement ages, and years of service.
Future changes affecting the assumptions will change the related pension benefit
or expense
Deferred Taxes and Valuation Allowances - Deferred income taxes are provided for
temporary differences between financial and tax reporting in accordance with the
liability method under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". Significant factors
considered by the Company in estimating the probability of the realization of
deferred taxes include expectations of future earnings and taxable income, as
well as application of tax laws in the jurisdictions in which the Company
operates.
At May 30, 2004, the Company had valuation allowances against a significant
portion of its deferred tax assets. Valuation allowances serve to reduce the
recorded deferred tax assets to amounts reasonably expected to be realized as
tax savings in the future. Establishing valuation allowances and their
subsequent adjustments require significant judgement because realizing deferred
tax assets related to net operating loss carryforwards is generally contingent
on generating taxable income, reversing deferred tax liabilities in the future,
and the availability of qualified tax planning strategies.
27
AMCAST INDUSTRIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
($ in thousands except per share amounts)
Debt Covenants - For a substantial portion of its debt, the Company has certain
financial covenants that include: a fixed cost coverage ratio; rolling twelve
month earnings before interest, taxes, depreciation, and amortization (EBITDA);
capital expenditures; and mandatory debt prepayments. If the requirements of the
covenants are not achieved, the debt becomes immediately callable, which would
significantly impact the Company's ability to maintain its current operations.
As of May 30, 2004 the Company was in compliance with all of its debt covenants.
The Company does not have off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities or other persons, also known as
"special purpose entities" (SPEs).
INFLATION
Inflation did not have a material impact on the Company's results of operations
or financial condition for the third quarter or first nine months of fiscal
2004.
CONTINGENCIES
See "Commitments and Contingencies" in Notes to the Consolidated Condensed
Financial Statements.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
See "Impact of Recently Issued Accounting Standards" in Notes to the
Consolidated Condensed Financial Statements.
28
AMCAST INDUSTRIAL CORPORATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
($ in thousands)
The Company is exposed to market risk from changing commodity prices and
interest rates as part of its normal operations, as well as general risks and
uncertainties which are inherent in any competitive industry.
COMMODITY PRICES
The Company is exposed to market risk from price changes in commodity metals
which are raw materials used in its normal operations. The Company is able to
limit its exposure in commodity prices of aluminum to a certain degree by
adjusting prices to its customers as a result of these changes when permitted by
contract to do so. When market conditions warrant, forward fixed-price commodity
metal supply contracts may also be entered into with certain suppliers. These
purchase contracts cover normal metal usage in the ordinary course of business
over a reasonable period of time. Lower-of-cost-or-market valuation adjustments
on these contracts is reflected in earnings in the period incurred. At May 30,
2004, the Company had no forward fixed-price metal supply contracts.
INTEREST RATE RISK
The Company is exposed to variable interest rates on its revolver credit notes,
its lender group lines of credit, its LIFO credit facility, and its CTC debt.
The annual pretax earnings and cash flow impact of a one-percentage-point
increase in the variable interest rates on the Company's variable long-term debt
outstanding at May 30, 2004 would be approximately $1,261.
During the first fiscal quarter of 2004, the Company was required as a part of
its CTC loan agreement to enter into a two-year interest rate swap. This swap
converted half of the CTC variable rate debt into fixed rate debt, and was
designated as a hedge against changes in cash flows attributable to changes in
the variable interest rate. For the first nine months of fiscal 2004, the loss
on the interest rate swap was $2, which was reported in other comprehensive loss
in shareholders' deficit.
ITEM 4 - CONTROLS AND PROCEDURES
The Company's President and Chief Executive Officer and Vice President, Finance
and Chief Financial Officer, with the participation of the Company's management,
have evaluated the effectiveness of the operation of the Company's disclosure
controls and procedures, as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act"), as of the end of the period covered
by this Quarterly Report. Based upon that evaluation, the Company's President
and Chief Executive Officer and Vice President, Finance and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in the Company's periodic Exchange Act filings.
There have been no significant changes to the Company's internal controls or
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
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AMCAST INDUSTRIAL CORPORATION
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
31.1 Certification of Joseph R. Grewe, President and Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
31.2 Certification of Francis J. Drew, Vice President, Finance and Chief
Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
32.1 Certification of Joseph R. Grewe, President and Chief Executive
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
32.2 Certification of Francis J. Drew, Vice President, Finance and Chief
Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
b) REPORTS ON FORM 8-K
On March 30, 2004, the Company furnished a Current Report on Form 8-K
pursuant to Item 12 reporting that the Company issued an earnings release
announcing financial results for the quarter and six months ended February
29, 2004.
On March 30, 2004, the Company furnished a Current Report on Form 8-K
pursuant to Item 5 reporting that the Company issued a press release
announcing the retirement of Leo W. Ladehoff from the Amcast Industrial
Corporation's Board of Directors.
On May 19, 2004, the Company furnished a Current Report on Form 8-K
pursuant to Item 4 and 7 reporting a change in the Company's certifying
accountants for the Company's benefit plans.
30
AMCAST INDUSTRIAL CORPORATION
S I G N A T U R E S
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.
AMCAST INDUSTRIAL CORPORATION
(Registrant Company)
Date: June 30, 2004 By:/s/ Joseph R. Grewe
--------------------------
Joseph R. Grewe
President and
Chief Executive Officer
(Principal Executive Officer)
Date: June 30, 2004 By:/s/ Francis J. Drew
--------------------------
Francis J. Drew
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
Date: June 30, 2004 By:/s/ Mark D. Mishler
--------------------------
Mark D. Mishler
Corporate Controller
(Principal Accounting Officer)
31