1
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 June 30, 2001
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 333-28751
NEENAH FOUNDRY COMPANY
(Exact name of each registrant as it appears in its charter)
Wisconsin 39-1580331
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
2121 Brooks Avenue, P.O. Box 729, Neenah, Wisconsin 54957
(Address of principal executive offices) (Zip Code)
(920) 725-7000
(Registrant's telephone number, including area code)
None
(Former name, former address and former
fiscal year, if changed since last report)
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 periods 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 practical date.
Common Stock, Class A, $100 par value- 1,000 shares as of July 31, 2001
Common Stock, Class B, $100 par value- 0 shares as of July 31, 2001
Page 1
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NEENAH FOUNDRY COMPANY
Form 10-Q Index
For the Quarter Ended June 30, 2001
PAGE
----
Part 1. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets -- June 30, 2001 and September 30, 2000 3
Condensed consolidated statements of operations -- Three and nine months ended June 30, 2001
and 2000 4
Condensed consolidated statements of cash flows -- Nine months ended June 30, 2001 and 2000 5
Notes to condensed consolidated financial statements -- June 30, 2001 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 15
Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
Page 2
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NEENAH FOUNDRY COMPANY
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30 September 30
2001 2000(1)
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 3,393 $ 19,478
Accounts receivable, net ................................ 72,108 72,873
Inventories ............................................. 72,893 65,119
Refundable income taxes ................................. 2,108 167
Deferred income taxes ................................... 4,026 2,748
Other current assets .................................... 6,048 6,131
--------- ---------
Total current assets ................. 160,576 166,516
Property, plant and equipment ............................. 307,849 295,562
Less accumulated depreciation ............................. 89,427 67,323
--------- ---------
218,422 228,239
Identifiable intangible assets, net ....................... 65,763 70,766
Goodwill, net ............................................. 187,404 191,557
Other assets .............................................. 6,552 9,140
--------- ---------
$ 638,717 $ 666,218
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ........................................ $ 33,356 $ 31,172
Accrued liabilities ..................................... 23,853 35,833
Current portion of long-term debt ....................... 27,280 11,280
Current portion of capital lease obligations ............ 2,239 2,151
--------- ---------
Total current liabilities ............ 86,728 80,436
Long-term debt ............................................ 420,671 438,327
Capital lease obligations ................................. 8,484 10,143
Deferred income taxes ..................................... 65,770 66,046
Postretirement benefit obligations ........................ 6,066 6,118
Other liabilities ......................................... 6,230 6,630
--------- ---------
Total liabilities .................... 593,949 607,700
Commitments and contingencies
STOCKHOLDER'S EQUITY:
Preferred stock, par value $100 per share -- authorized
3,000 shares no shares issued or outstanding ..... -- --
Common stock, par value $100 per share -- authorized
11,000 shares, issued and outstanding 1,000 shares 100 100
Additional paid in capital .............................. 51,317 51,317
Retained earnings (accumulated deficit) ................. (6,560) 7,190
Accumulated other comprehensive loss .................... (89) (89)
--------- ---------
Total stockholder's equity ........... 44,768 58,518
--------- ---------
$ 638,717 $ 666,218
========= =========
See notes to condensed consolidated financial statements.
(1) The balance sheet as of September 30, 2000 has been derived from the
audited financial statements as of that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements
Page 3
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NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(Unaudited) (Unaudited)
Net sales ......................................... $ 128,123 $ 145,262 $ 355,277 $ 414,358
Cost of sales ..................................... 107,155 119,298 307,946 344,237
--------- --------- --------- ---------
Gross profit ...................................... 20,968 25,964 47,331 70,121
Selling, general and administrative expenses ...... 8,274 10,089 25,489 28,947
Amortization of intangible assets ................. 2,905 2,729 8,715 8,162
Loss (gain) on disposal of equipment .............. (3) 26 (113) 26
--------- --------- --------- ---------
Total operating expenses .......................... 11,176 12,844 34,091 37,135
--------- --------- --------- ---------
Operating income .................................. 9,792 13,120 13,240 32,986
Net interest expense .............................. (12,000) (12,177) (36,245) (35,484)
--------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes ...................................... (2,208) 943 (23,005) (2,498)
Income tax provision (benefit ..................... 453 927 (6,703) 1,112
--------- --------- --------- ---------
Income (loss) from continuing operations .......... (2,661) 16 (16,302) (3,610)
Gain on sale of discontinued operations, net of tax -- -- 2,552 --
Income from discontinued operations, net of tax ... -- 22 -- 147
--------- --------- --------- ---------
Net income (loss) ................................. $ (2,661) $ 38 $ (13,750) $ (3,463)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
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NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
June 30,
-------------------------------
2001 2000
-------- --------
(Unaudited)
OPERATING ACTIVITIES
Net loss ....................................................... $(13,750) $ (3,463)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................... 31,710 29,520
Amortization of deferred financing costs and premium on notes 881 812
Gain on sale of discontinued operations ..................... (2,552) --
Deferred income taxes ....................................... (1,762) (784)
Changes in operating assets and liabilities ................. (18,811) (13,617)
-------- --------
Net cash provided by (used in) operating
activities ............................................. (4,284) 12,468
INVESTING ACTIVITIES
Purchase of property, plant and equipment ...................... (13,177) (13,270)
Acquisition of Gregg Industries, Inc., net of cash acquired .... -- (29,502)
Proceeds from sale of Hartley Controls Corporation, net of fees 5,044 --
-------- --------
Net cash used in investing
activities ............................................. (8,133) (42,772)
FINANCING ACTIVITIES
Proceeds from long-term debt ................................... 16,000 29,750
Payments on long-term debt and capital lease obligations ....... (18,761) (6,033)
Debt issuance costs ............................................ (907) --
-------- --------
Net cash provided by (used in) financing
activities ............................................. (3,668) 23,717
-------- --------
Decrease in cash and cash equivalents .......................... (16,085) (6,587)
Cash and cash equivalents at beginning of period ............... 19,478 17,368
-------- --------
Cash and cash equivalents at end of period ..................... $ 3,393 $ 10,781
======== ========
See notes to condensed consolidated financial statements.
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NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2001
(in thousands)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal and recurring adjustments ) considered necessary for a fair
presentation have been included. Operating results for the three and nine months
ended June 30, 2001 are not necessarily indicative of the results that may be
expected for the year ending September 30, 2001. For further information, refer
to the consolidated financial statements and footnotes thereto included in
Neenah Foundry Company's Annual Report on Form 10-K for the year ended September
30, 2000.
NOTE 2 -- NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company is currently evaluating when it will apply the new rules on
accounting for goodwill and other intangible assets. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in net income of $7,300 per year. The Company will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of the date of adoption and has not yet determined what the effect of these
tests will be on the earnings and financial position of the Company.
NOTE 3 -- INVENTORIES
The components of inventories are as follows:
June 30, September 30,
2001 2000
------- -------
Raw materials ...................... $ 9,547 $10,333
Work in process and finished goods . 51,017 43,946
Supplies ........................... 12,329 10,840
------- -------
$72,893 $65,119
======= =======
If the FIFO method of inventory valuation had been used on all components,
inventories would have been approximately $225 and $549 higher than reported at
June 30, 2001 and September 30, 2000, respectively.
Page 6
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NOTE 4 -- ACQUISITIONS
On November 30, 1999, the Company purchased Gregg Industries, Inc. ("Gregg"), a
manufacturer of gray and ductile iron castings, for $23,002 (including direct
costs of $735 and net of $403 of acquired cash). The acquisition of Gregg was
financed through drawings under the Company's Acquisition Loan Facility.
Additional purchase consideration of $6,500 was paid in April, 2000 based on
Gregg's operating results for the calendar year ended December 31, 1999. Had the
acquisition of Gregg occurred as of October 1, 1999, there would have been no
material pro forma effect on net sales or net income (loss) for the three and
nine months ended June 30, 2000.
The acquisition of Gregg has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated on the basis
of fair values to the underlying assets acquired and liabilities assumed. The
excess of the cost of acquisition over the fair value of the net tangible and
identifiable assets acquired has been allocated to goodwill. The operating
results of Gregg are included in the consolidated statements of operations since
the date of its acquisition.
NOTE 5 -- SALE OF SUBSIDIARY
On October 2, 2000, the Company sold all of the issued and outstanding shares of
common stock of Hartley Controls Corporation ("Hartley") for a cash purchase
price of $5,500, subject to adjustment as defined in the Stock Purchase
Agreement. The disposition of Hartley resulted in a pretax gain of $4,252 which
was recognized in the three months ended December 31, 2000. In accordance with
the provisions of Accounting Principles Board Opinion No. 30, the results of
operations of Hartley for the three and nine months ended June 30, 2000, have
been reported separately as discontinued operations in the consolidated
statements of operations. Revenues for Hartley for the three and nine months
ended June 30, 2000 were $1,110 and $3,994, respectively.
NOTE 6 -- GUARANTOR SUBSIDIARIES
The following tables present condensed consolidating financial information for
the three and nine month periods ended June 30, 2001 and 2000 for: (a) the
Company and (b) on a combined basis, the guarantors of the Senior Subordinated
Notes, which include all of the wholly owned subsidiaries of the Company
(Subsidiary Guarantors). Separate financial statements of the Subsidiary
Guarantors are not presented because the guarantors are jointly, severally and
unconditionally liable under the guarantees, and the Company believes separate
financial statements and other disclosures regarding the Subsidiary Guarantors
are not material to investors.
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NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,753 $ (360) $ -- $ 3,393
Accounts receivable, net 30,496 41,612 -- 72,108
Inventories 24,159 48,734 -- 72,893
Refundable income taxes (5,707) 7,815 -- 2,108
Deferred income taxes 2,069 1,957 -- 4,026
Other current assets 1,739 4,309 -- 6,048
---------------------------------------------------------------
Total current assets 56,509 104,067 -- 160,576
Investments in and advances to subsidiaries 276,197 (50,612) (225,585) --
Property, plant and equipment, net 88,600 129,822 -- 218,422
Identifiable intangible assets, net 29,346 36,417 -- 65,763
Goodwill, net 105,635 81,769 -- 187,404
Other assets 3,977 2,575 -- 6,552
---------------------------------------------------------------
$ 560,264 $ 304,038 $(225,585) $ 638,717
===============================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 7,647 $ 25,709 $ -- $ 33,356
Accrued liabilities 11,635 12,218 -- 23,853
Current portion of long-term debt 27,280 -- -- 27,280
Current portion of capital lease obligations -- 2,239 -- 2,239
---------------------------------------------------------------
Total current liabilities 46,562 40,166 -- 86,728
Long-term debt 420,671 -- -- 420,671
Capital lease obligations -- 8,484 -- 8,484
Deferred income taxes 39,823 25,947 -- 65,770
Postretirement benefit obligations 6,066 -- -- 6,066
Other liabilities 2,374 3,856 -- 6,230
Stockholder's equity 44,768 225,585 (225,585) 44,768
---------------------------------------------------------------
$ 560,264 $ 304,038 $(225,585) $ 638,717
===============================================================
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NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2000
Subsidiary
Company Guarantors Eliminations Consolidated
-----------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,982 $ 2,496 $ -- $ 19,478
Accounts receivable, net 29,270 43,603 -- 72,873
Inventories 22,036 43,083 -- 65,119
Refundable income taxes 347 (180) -- 167
Deferred income taxes (885) 3,633 -- 2,748
Other current assets 1,391 4,740 -- 6,131
---------------------------------------------------------------
Total current assets 69,141 97,375 -- 166,516
Investments in and advances to subsidiaries 278,429 (32,318) (246,111) --
Property, plant and equipment, net 91,509 136,730 -- 228,239
Identifiable intangible assets, net 31,263 39,503 -- 70,766
Goodwill, net 107,846 83,711 -- 191,557
Other assets 3,831 5,309 -- 9,140
---------------------------------------------------------------
$ 582,019 $ 330,310 $(246,111) $ 666,218
===============================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 7,667 $ 23,505 $ -- $ 31,172
Accrued liabilities 21,493 14,340 -- 35,833
Current portion of long-term debt 11,280 -- -- 11,280
Current portion of capital lease obligations -- 2,151 -- 2,151
---------------------------------------------------------------
Total current liabilities 40,440 39,996 -- 80,436
Long-term debt 438,095 232 -- 438,327
Capital lease obligations -- 10,143 -- 10,143
Deferred income taxes 36,868 29,178 -- 66,046
Postretirement benefit obligations 5,724 394 -- 6,118
Other liabilities 2,374 4,256 -- 6,630
Stockholder's equity 58,518 246,111 (246,111) 58,518
---------------------------------------------------------------
$ 582,019 $ 330,310 $(246,111) $ 666,218
===============================================================
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NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------------
Net sales $ 114,706 $ 244,443 $ (3,872) $ 355,277
Cost of sales 82,137 229,681 (3,872) 307,946
----------------------------------------------------------------
Gross profit 32,569 14,762 -- 47,331
Selling, general and administrative expense 10,265 15,224 -- 25,489
Amortization of intangible assets 3,688 5,027 -- 8,715
Loss (gain) on disposal of equipment 280 (393) -- (113)
----------------------------------------------------------------
Operating income (loss) 18,336 (5,096) -- 13,240
Net interest expense (14,889) (21,356) -- (36,245)
----------------------------------------------------------------
Income (loss) from continuing operations before
income taxes and equity in loss
of subsidiaries 3,447 (26,452) -- (23,005)
Income tax provision (benefit) 2,265 (8,968) -- (6,703)
----------------------------------------------------------------
1,182 (17,484) -- (16,302)
Equity in loss of subsidiaries (17,484) -- 17,484 --
----------------------------------------------------------------
Loss from continuing operations (16,302) (17,484) 17,484 (16,302)
Gain on sale of discontinued operations,
net of tax 2,552 -- -- 2,552
----------------------------------------------------------------
Net loss $ (13,750) $ (17,484) $ 17,484 $ (13,750)
================================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2000
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------------
Net sales $142,467 $277,065 $ (5,174) $ 414,358
Cost of sales 98,302 251,109 (5,174) 344,237
----------------------------------------------------------------
Gross profit 44,165 25,956 -- 70,121
Selling, general and administrative expense 11,212 17,735 -- 28,947
Amortization of intangible assets 3,688 4,474 -- 8,162
Loss (gain) on disposal of equipment 37 (11) -- 26
----------------------------------------------------------------
Operating income 29,228 3,758 -- 32,986
Net interest expense (15,869) (19,615) -- (35,484)
----------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity in loss
of subsidiaries 13,359 (15,857) -- (2,498)
Income tax provision (benefit) 6,027 (4,915) -- 1,112
----------------------------------------------------------------
7,332 (10,942) -- (3,610)
Equity in loss of subsidiaries (10,942) -- 10,942 --
----------------------------------------------------------------
Loss from continuing operations (3,610) (10,942) 10,942 (3,610)
Income from discontinued operations, net
of tax 147 -- -- 147
----------------------------------------------------------------
Net loss $ (3,463) $ (10,942) $ 10,942 $ (3,463)
================================================================
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NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------------
Net sales $ 45,136 $ 84,657 $ (1,670) $ 128,123
Cost of sales 30,583 78,242 (1,670) 107,155
----------------------------------------------------------------
Gross profit 14,553 6,415 -- 20,968
Selling, general and administrative expense 3,454 4,820 -- 8,274
Amortization of intangible assets 1,229 1,676 -- 2,905
Loss (gain) on disposal of equipment 341 (344) -- (3)
----------------------------------------------------------------
Operating income 9,529 263 -- 9,792
Net interest expense (4,887) (7,113) -- (12,000)
----------------------------------------------------------------
Income (loss) before income taxes and
equity in loss of subsidiaries 4,642 (6,850) -- (2,208)
Income tax provision (benefit) 2,152 (1,699) -- 453
----------------------------------------------------------------
2,490 (5,151) -- (2,661)
Equity in loss of subsidiaries (5,151) -- 5,151 --
----------------------------------------------------------------
Net loss $ (2,661) $ (5,151) $ 5,151 $ (2,661)
================================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------------
Net sales $ 51,754 $ 95,182 $ (1,674) $ 145,262
Cost of sales 34,494 86,478 (1,674) 119,298
----------------------------------------------------------------
Gross profit 17,260 8,704 -- 25,964
Selling, general and administrative expense 3,907 6,182 -- 10,089
Amortization of intangible assets 1,229 1,500 -- 2,729
Loss (gain) on disposal of equipment 37 (11) -- 26
----------------------------------------------------------------
Operating income 12,087 1,033 -- 13,120
Net interest expense (5,348) (6,829) -- (12,177)
----------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity in loss
of subsidiaries 6,739 (5,796) -- 943
Income tax provision (benefit) 2,788 (1,861) -- 927
----------------------------------------------------------------
3,951 (3,935) -- 16
Equity in loss of subsidiaries (3,935) -- 3,935 --
----------------------------------------------------------------
Income (loss) from continuing operations 16 (3,935) 3,935 16
Income from discontinued operations, net of tax 22 -- -- 22
----------------------------------------------------------------
Net income (loss) $ 38 $ (3,935) $ 3,935 $ 38
================================================================
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NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $(13,750) $(17,484) $ 17,484 $(13,750)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 10,078 21,632 -- 31,710
Amortization of deferred financing costs and
premium on notes 881 -- -- 881
Gain on sale of discontinued operations (2,552) -- -- (2,552)
Deferred income taxes (207) (1,555) -- (1,762)
Changes in operating assets and liabilities (9,609) (9,202) -- (18,811)
----------------------------------------------------------------
Net cash provided by (used in)
operating activities (15,159) (6,609) 17,484 (4,284)
INVESTING ACTIVITIES
Investments in and advances to subsidiaries 2,232 15,252 (17,484) --
Purchase of property, plant and equipment (3,481) (9,696) -- (13,177)
Proceeds from sale of discontinued operations 5,044 -- -- 5,044
----------------------------------------------------------------
Net cash provided by (used in)
investing activities 3,795 5,556 (17,484) (8,133)
FINANCING ACTIVITIES
Proceeds from long-term debt 16,000 -- -- 16,000
Payments on long-term debt and capital
lease obligations (16,958) (1,803) -- (18,761)
Debt issuance costs (907) -- -- (907)
----------------------------------------------------------------
Net cash used in financing activities (1,865) (1,803) -- (3,668)
----------------------------------------------------------------
Decrease in cash and cash equivalents (13,229) (2,856) -- (16,085)
Cash and cash equivalents at beginning
of year 16,982 2,496 -- 19,478
----------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,753 $ (360) $ -- $ 3,393
================================================================
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NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2000
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (3,463) $(10,942) $ 10,942 $ (3,463)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 9,988 19,532 -- 29,520
Amortization of deferred financing costs and
premium on notes 812 -- -- 812
Deferred income taxes -- (784) -- (784)
Changes in operating assets and liabilities (6,636) (6,981) -- (13,617)
----------------------------------------------------------------
Net cash provided by
operating activities 701 825 10,942 12,468
INVESTING ACTIVITIES
Investments in and advances to subsidiaries (31,568) 42,510 (10,942) --
Purchase of property, plant and equipment (3,621) (9,649) -- (13,270)
Acquisition of business -- (29,502) -- (29,502)
----------------------------------------------------------------
Net cash provided by (used in)
investing activities (35,189) 3,359 (10,942) (42,772)
FINANCING ACTIVITIES
Proceeds from long-term debt 29,750 -- -- 29,750
Payments on long-term debt and capital
lease obligations (4,442) (1,591) -- (6,033)
----------------------------------------------------------------
Net cash provided by (used in) financing activities 25,308 (1,591) -- 23,717
----------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (9,180) 2,593 -- (6,587)
Cash and cash equivalents at beginning
of year 15,852 1,516 -- 17,368
----------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,672 $ 4,109 $ -- $ 10,781
================================================================
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NOTE 7 -- SEGMENT INFORMATION
The Company has two reportable segments, Castings and Forgings. The Castings
segment manufactures and sells castings for the industrial and municipal
markets, while the Forgings segment manufactures forged components for the
industrial market. The Other segment includes machining operations and freight
hauling.
Three months ended Nine months ended
June 30, June 30,
------------------------------------------------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues from external customers:
Castings $ 117,389 $ 133,613 $ 324,989 $ 368,569
Forgings 7,150 8,987 19,540 26,763
Other 5,844 7,183 17,473 32,910
Elimination of intersegment revenues (2,260) (4,521) (6,725) (13,884)
--------- --------- --------- ---------
Consolidated $ 128,123 $ 145,262 $ 355,277 $ 414,358
========= ========= ========= =========
Income (loss) from continuing operations:
Castings $ (6,534) $ (3,846) $ (28,849) $ (11,582)
Forgings (1,245) (1,203) (4,514) (3,265)
Other (32) 1,150 (421) 441
Elimination of intersegment income 5,150 3,915 17,482 10,796
--------- --------- --------- ---------
Consolidated $ (2,661) $ 16 $ (16,302) $ (3,610)
========= ========= ========= =========
June 30, September 30,
2001 2000
-------- --------
Identifiable Assets:
Castings $ 791,609 $ 832,256
Forgings 49,830 57,933
Other 16,490 19,654
Elimination of intersegment assets (219,212) (243,625)
-------- --------
Total consolidated assets $ 638,717 $ 666,218
========= =========
Page 14
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Certain matters discussed in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other sections of this annual
report are "forward-looking statements" intended to qualify for the safe harbors
from liability established by the Private Securities Litigation Reform Act of
1995. These forward looking statements can generally be identified as such
because the context of the statement will include words such as the Company
"believes," "anticipates," "expects" or words of similar import. Similarly,
statements that describe the Company's future plans, objectives or goals are
also forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties which are described in close proximity to such
statements and which may cause actual results to differ materially from those
currently anticipated. The forward-looking statements made herein are made only
as of the date of this report and the Company undertakes no obligation to
publicly update such forward-looking statements to reflect subsequent events or
circumstances.
The following discussions compare the results of operations of the Company for
the three and nine months ended June 30, 2001, to the results of the operations
of the Company for the three and nine months ended June 30, 2000.
RESULTS OF OPERATIONS (dollars in thousands)
Three Months Ended June 30, 2001 and 2000
Net sales. Net sales for the three months ended June 30, 2001 were $128,123
which are $17,139 or 11.8% lower than the quarter ended June 30, 2000. The
decrease in net sales resulted from continued significant weakness in the demand
for industrial castings used for the heavy duty truck market and an overall
slowing of demand for castings in the Company's other major markets.
Gross profit. Gross profit for the three months ended June 30, 2001 was $20,968,
a decrease of $4,996, or 19.2%, as compared to the quarter ended June 30, 2000.
Gross profit as a percentage of net sales decreased to 16.4% for the three
months ended June 30, 2001 from 17.9% for the quarter ended June 30, 2000. The
decrease in gross profit resulted from lower sales volume noted above and an
inability, at the lower production and sales levels, to sufficiently absorb the
overhead costs necessary to effectively run the foundry operations.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended June 30, 2001 were $8,274, a
decrease of $1,815, or 18.0%, as compared to the $10,089 for the quarter ended
June 30, 2000. The decrease was due to decreased corporate expense and the
implementation of other cost cutting measures due to the decreased sales level.
As a percentage of net sales, selling, general and administrative expenses
decreased from 6.9% for the quarter ended June 30, 2000 to 6.5% for the three
months ended June 30, 2001.
Amortization of intangible assets. Amortization of intangible assets was $2,905
for the three months ended June 30, 2001, an increase of $176, or 6.5%, as
compared to the $2,729 for the quarter ended June 31, 2000. The increase is due
to the increased amortization of goodwill and identifiable intangible assets of
Gregg, due to the additional purchase price paid for Gregg in April, 2000.
Operating income. Operating income was $9,792 for the three months ended June
30, 2001, a decrease of $3,328, or 25.4%, from the quarter ended June 30, 2000.
The decrease in operating income was caused by the reasons discussed above under
gross profit, partially offset by decreased selling, general and administrative
expenses. As a percentage of net sales, operating income decreased from 9.0% for
the quarter ended June 30, 2000 to 7.6% for the three months ended June 30,
2001.
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Net interest expense. Net interest expense was $12,000 for the three months
ended June 30, 2001 compared to $12,177 for the quarter ended June 30, 2000. The
decreased interest expense resulted from lower interest rates on the Company's
Senior Bank Facilities, partially offset by the interest on capital leases
entered into during the second half of fiscal 2000 and interest on borrowings
outstanding on the Company's Revolving Credit Facility during the three months
ended June 30, 2001.
Provision for income taxes. The provision for income taxes for the three months
ended June 30, 2001 and 2000 is higher than the amount computed by applying the
statutory rate of approximately 40% to income before income taxes mainly due to
the amortization of goodwill which is not deductible for income tax purposes.
Nine Months Ended June 30, 2001 and 2000
Net sales. Net sales for the nine months ended June 30, 2001 were $355,277 which
are $59,081 or 14.3% lower than the nine months ended June 30, 2000. The
decrease in net sales resulted from continued significant weakness in the demand
for industrial castings used for the heavy duty truck market and an overall
slowing of demand for castings in the Company's other major markets.
Gross profit. Gross profit for the nine months ended June 30, 2001 was $47,331,
a decrease of $22,790, or 32.5%, as compared to the nine months ended June 30,
2000. Gross profit as a percentage of net sales decreased to 13.3% for the nine
months ended June 30, 2001 from 16.9% for the nine months ended June 30, 2000.
The decrease in gross profit resulted from lower sales volume noted above,
significantly increased energy prices, and an inability, at the lower production
and sales levels, to sufficiently absorb the overhead costs necessary to
effectively run the foundry operations.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the nine months ended June 30, 2001 were $25,489, a
decrease of $3,458, or 12.0%, as compared to the $28,947 for the nine months
ended June 30, 2000. The decrease was due to decreased corporate expense and the
implementation of other cost cutting measures partially offset by the
recognition of severance benefits payable to certain terminated employees and
the inclusion of Gregg's operating expenses for the entire nine month period in
2001. As a percentage of net sales, selling, general and administrative expenses
increased from 7.0% for the nine months ended June 30, 2000 to 7.2% for the nine
months ended June 30, 2001.
Amortization of intangible assets. Amortization of intangible assets was $8,715
for the nine months ended June 30, 2001, an increase of $553, or 6.8%, as
compared to the $8,162 for the nine months ended June 30, 2000. The increase is
due to the increased amortization of goodwill and identifiable intangible assets
of Gregg, due to the additional purchase price paid for Gregg in April, 2000.
Operating income. Operating income was $13,240 for the nine months ended June
30, 2001, a decrease of $19,746, or 59.9%, from the nine months ended June 30,
2000. The decrease in operating income was caused by the reasons discussed above
under gross profit. As a percentage of net sales, operating income decreased
from 8.0% for the nine months ended June 30, 2000 to 3.7% for the nine months
ended June 30, 2001.
Net interest expense. Net interest expense was $36,245 for the nine months ended
June 30, 2001 compared to $35,484 for the nine months ended June 30, 2000. The
increased interest expense resulted from the interest on the drawings under the
Company's Senior Bank Facilities which were outstanding for the entire nine
months ended June 30, 2001 as compared to seven months during the nine months
ended June 30, 2000. These borrowings were used to finance the purchase of Gregg
on November 30, 1999. Also, increased interest expense was incurred on capital
leases entered into during the second half of fiscal 2000 and on borrowings
outstanding on the Company's Revolving Credit Facility during the three months
ended June 30, 2001.
Provision for income taxes. The provision for income taxes for the nine months
ended June 30, 2001 and 2000 is higher than the amount computed by applying the
statutory rate of approximately 40% to income before income taxes mainly due to
the amortization of goodwill which is not deductible for income tax purposes.
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Discontinued operations. On October 2, 2000, the Company sold the common stock
of Hartley. The disposition of Hartley resulted in a gain of $2,552, net of tax,
which was recognized in the nine months ended June 30, 2001. The results of
operations of Hartley for the three and nine months ended June 30, 2000 have
been reported separately as discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands)
The Company has outstanding $282.0 million principal of 11 1/8% Senior
Subordinated Notes due 2007 (the "Senior Subordinated Notes"). In addition, the
Company has a credit agreement (the "Senior Bank Facility" or "Credit
Agreement") providing for term loans, an Acquisition Loan Facility, and a
Revolving Credit Facility of up to $50.0 million. At June 30, 2001, there is
$16.0 million outstanding on the Revolving Credit Facility, $20.4 million
outstanding on the Acquisition Loan Facility and $125.8 million outstanding
under the term loans.
The Company's liquidity needs will arise primarily from debt service on the
above indebtedness, working capital needs and funding of capital expenditures
and additional acquisitions, if any. Borrowings under the Senior Bank Facilities
bear interest at variable interest rates. The Senior Bank Facility imposes
restrictions on the Company's ability to make capital expenditures. Both the
Senior Bank Facility and the indentures governing the Senior Subordinated Notes
limit the Company's ability to incur additional indebtedness. The covenants
contained in the Senior Bank Facility also, among other things, restrict the
ability of the Company and its subsidiaries to dispose of assets, incur
guarantee obligations, prepay the Senior Subordinated Notes or amend the
indentures, pay dividends, create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, change the business conducted by the Company, make
capital expenditures or engage in certain transactions with affiliates, and
otherwise restrict corporate activities. In March 2001, the Credit Agreement was
amended to provide temporary reductions of certain financial ratio covenants and
to further restrict capital expenditure limits and permitted acquisitions.
For the nine months ended June 30, 2001 and June 30, 2000, capital expenditures
were $13,177 and $23,217, respectively, including capital expenditures of $9,947
for the nine months ended June 30, 2000 which were financed through capital
lease obligations. The decrease in capital expenditures of $10,040 was the
result of tighter spending controls placed on capital expenditures during the
nine months ended June 30, 2001.
The Company's principal source of cash to fund its liquidity needs will be net
cash from operating activities and borrowings under its Senior Bank Facilities.
Net cash used in operating activities for the nine months ended June 30, 2001
was $4,284, a decrease of $16,752 from cash provided by operating activities for
the nine months ended June 30, 2000 of $12,468. The decrease in net cash from
operating activities was the result of decreased operating income and slower
collection of accounts receivable balances reflecting the overall weakness in
the Company's industrial markets.
The Company believes that cash generated from operations and existing revolving
lines of credit under the Senior Bank Facilities will be sufficient to meet its
normal operating requirements, including working capital needs and interest
payments on the Company's outstanding indebtedness.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates. The
Company does not use derivative financial instruments for speculative or trading
purposes.
Interest Rate Sensitivity. The Company's earnings are affected by changes
in short-term interest rates as a result of its borrowings under the Senior Bank
Facilities. If market interest rates for such borrowings change by 1% during the
remainder of the fiscal year ended September 30, 2001, the Company's interest
expense would increase or decrease by approximately $.4 million. This analysis
does not consider the effects of changes in the level of overall economic
activity that could occur due to interest rate changes. Further, in the event of
an upward change of such magnitude, management could take actions to further
mitigate its exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects, the sensitivity
analysis assumes no changes in the Company's financial structure.
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NEENAH FOUNDRY COMPANY
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
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
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEENAH FOUNDRY COMPANY
DATE: August 13, 2001 /s/ Gary LaChey
--------------------------------
Gary LaChey
Vice President-Finance,
Secretary & Treasurer
(Principal Financial Officer and
Duly Authorized Officer)
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