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 December 31, 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 January 31, 2002
Common Stock, Class B, $100 par value- 0 shares as of January 31, 2002
NEENAH FOUNDRY COMPANY
Form 10-Q Index
For the Quarter Ended December 31, 2001
Page
----
Part 1. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets -- December 31, 2001 and September 30, 2001 3
Condensed consolidated statements of operations -- Three months ended December 31, 2001
and 2000 4
Condensed consolidated statements of cash flows -- Three months ended December 31, 2001
and 2000 5
Notes to condensed consolidated financial statements -- December 31, 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 17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 18
Page 2
NEENAH FOUNDRY COMPANY
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31 September 30
2001 2001(1)
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 14,094 $ 4,346
Accounts receivable, net ................................ 51,162 69,845
Inventories ............................................. 56,695 71,695
Refundable income taxes ................................. 6,805 2,148
Deferred income taxes ................................... 10,450 3,069
Other current assets .................................... 4,430 5,852
--------- ---------
Total current assets ........................ 143,636 156,955
Property, plant and equipment ............................. 297,904 308,698
Less accumulated depreciation ............................. 102,094 94,865
--------- ---------
195,810 213,833
Deferred financing costs, net ............................. 7,348 7,811
Identifiable intangible assets, net ....................... 40,044 55,932
Goodwill, net ............................................. 180,214 186,005
Other assets .............................................. 6,078 5,907
--------- ---------
$ 573,130 $ 626,443
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ........................................ $ 23,217 $ 30,568
Accrued liabilities ..................................... 20,673 31,518
Current portion of long-term debt ....................... 165,870 20,424
Current portion of capital lease obligations ............ 2,362 2,305
--------- ---------
Total current liabilities ................... 212,122 84,815
Long-term debt ............................................ 285,394 413,653
Capital lease obligations ................................. 7,230 7,845
Deferred income taxes ..................................... 52,352 63,719
Postretirement benefit obligations ........................ 6,459 6,345
Other liabilities ......................................... 8,708 8,127
--------- ---------
Total liabilities ........................... 572,265 584,504
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
Accumulated deficit ..................................... (48,934) (7,860)
Accumulated other comprehensive loss .................... (1,618) (1,618)
--------- ---------
Total stockholder's equity .................. 865 41,939
--------- ---------
$ 573,130 $ 626,443
========= =========
See notes to condensed consolidated financial statements.
(1) The balance sheet as of September 30, 2001 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
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three Months Ended
December 31,
-------------------------
2001 2000
--------- ---------
(Unaudited)
Net sales ......................................... $ 94,867 $ 114,570
Cost of sales ..................................... 102,648 100,849
--------- ---------
Gross margin ...................................... (7,781) 13,721
Selling, general and administrative expenses ...... 10,883 8,887
Amortization of intangible assets ................. 1,076 2,905
Gain on disposal of equipment ..................... (26) (32)
Provision for impairment of assets ................ 30,646 --
--------- ---------
Total operating expenses .......................... 42,579 11,760
--------- ---------
Operating income (loss) ........................... (50,360) 1,961
Net interest expense .............................. (11,058) (12,177)
--------- ---------
Loss from continuing operations before
income taxes .................................... (61,418) (10,216)
Income tax benefit ................................ (20,344) (3,564)
--------- ---------
Loss from continuing operations ................... (41,074) (6,652)
Gain on sale of discontinued operations, net of tax -- 2,404
--------- ---------
Net loss .......................................... $ (41,074) $ (4,248)
========= =========
See notes to condensed consolidated financial statements.
Page 4
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
December 31,
------------------------
2001 2000
-------- --------
(Unaudited)
OPERATING ACTIVITIES
Net loss ....................................................... $(41,074) $ (4,248)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for obsolete inventories .......................... 15,187 --
Provision for uncollectible accounts receivable ............. 3,265 --
Provision for impairment of assets .......................... 30,646 --
Depreciation and amortization ............................... 8,281 10,510
Amortization of deferred financing costs and premium on
notes...................................................... 308 272
Gain on sale of discontinued operations ..................... -- (4,007)
Deferred income taxes ....................................... (15,496) (625)
Changes in operating assets and liabilities ................. (5,874) 1,839
-------- --------
Net cash provided by (used in) operating
activities ............................................. (4,757) 3,741
INVESTING ACTIVITIES
Purchase of property, plant and equipment ...................... (2,279) (5,815)
Proceeds from sale of Hartley Controls Corporation, net of fees -- 5,044
-------- --------
Net cash used in investing
activities ............................................. (2,279) (771)
FINANCING ACTIVITIES
Proceeds from long-term debt ................................... 23,500 --
Payments on long-term debt and capital lease obligations ....... (6,716) (8,974)
-------- --------
Net cash provided by (used in) financing
activities ............................................. 16,784 (8,974)
-------- --------
Increase (decrease) in cash and cash equivalents ............... 9,748 (6,004)
Cash and cash equivalents at beginning of period ............... 4,346 19,478
-------- --------
Cash and cash equivalents at end of period ..................... $ 14,094 $ 13,474
======== ========
See notes to condensed consolidated financial statements.
Page 5
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 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 months ended
December 31, 2001 are not necessarily indicative of the results that may be
expected for the year ending September 30, 2002. 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, 2001.
NOTE 2 -- INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141),
effective for business combinations after June 30, 2001 and No. 142, "Goodwill
and Other Intangible Assets" (SFAS 142), effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized but are subject to
annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company adopted SFAS 142 as of October 1, 2001. Application of the
nonamortization provisions of the Statement resulted in a decrease in the net
loss of $1,829 for the three months ended December 31, 2001. In accordance with
SFAS 141, the Company also reclassified the identifiable intangible assets
related to the assembled workforce and facilities in place with an unamortized
balance of $4,660 and $3,469, respectively, net of related deferred income taxes
of $1,864 and $1,388, respectively, to goodwill at the date of adoption.
The Company is in the process of performing the required impairment tests of
goodwill as of October 1, 2001 and preliminarily concluded that an impairment
charge resulting from the transitional impairment test is not required. The
transitional impairment test is being performed based on the expected present
value of future cash flows for each of the Company's reporting units.
Page 6
NOTE 2 -- INTANGIBLE ASSETS (CONTINUED)
December 31, 2001
------------------------
Gross
Carrying Accumulated
Amount Amortization
-------- ------------
Amortized intangible assets:
Customer lists $31,441 $12,459
Tradenames 22,553 2,224
Other 1,295 562
------- -------
Total $55,289 $15,245
======= =======
The Company does not have any intangible assets deemed to have indefinite
lives. Amortization expense expected to be recognized in subsequent years
ending September 30, is as follows:
September 30, 2002 $3,950
September 30, 2003 3,832
September 30, 2004 3,832
September 30, 2005 3,832
September 30, 2006 3,832
The changes in the carrying amount of goodwill for the three months ended
December 31, 2001, are as follows:
Castings Forgings Other
Segment Segment Segments Total
----------------------------------------------------------
Balance as of September 30, 2001 $ 168,709 $ 17,296 $ -- $ 186,005
Reclassification of assembled workforce and
facilities in place 4,595 282 -- 4,877
Impairment charge - see Note 3 (10,668) -- -- (10,668)
----------------------------------------------------------
Balance as of December 31, 2001 $ 162,636 $ 17,578 $ -- $ 180,214
==========================================================
NOTE 3 -- PROVISION FOR IMPAIRMENT OF ASSETS
In August 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No.144, "Accounting for the Impairment or
Disposal of Long-lived Assets" (SFAS 144). While the adoption of SFAS 144 as of
October 1, 2001 did not have a significant impact on the Company's financial
position and results of operations, the provisions of this standard were applied
during the quarter ended December 31, 2001 as discussed below.
Customer actions and the significant deterioration of the U.S. economy during
the quarter ended December 31, 2001 have had a dramatic effect on the operations
of Cast Alloys, Inc. (Cast Alloys). This has resulted in a significant reduction
in sales, operating profits and cash flows of Cast Alloys for the three months
ended December 31, 2001. In December 2001, management approved a plan for the
discontinuation of the operations of Cast Alloys. Based on these factors, a
goodwill impairment charge of $10,668 was recognized during the three months
ended December 31, 2001 related to the decline in fair value of the Cast Alloys
reporting unit which is included in the Castings segment.
These events have also had a significant impact on the value of Cast Alloys'
fixed assets and long-lived assets with finite lives. Due to the existing
impairment indicators, management assessed the recoverability of these fixed
assets and long-lived assets. As the expected undiscounted cash flows were less
than the carrying value of the related assets, an impairment charge was
recognized for the difference between the fair value and carrying value of such
assets of $19,978 during the three months ended December 31, 2001.
In January 2002, management communicated its plan to the affected employees for
the discontinuation of the operations of Cast Alloys. Severance costs of
approximately $2.9 million and potential long-term lease costs associated with
the discontinuance of the operations of Cast Alloys will be recognized during
the three months ending March 31, 2002.
Page 7
NOTE 4 -- INVENTORIES
The components of inventories are as follows:
December 31, September 30,
2001 2001
------------ -------------
Raw materials ............................. $ 5,154 $ 9,519
Work in process and finished goods......... 38,881 50,210
Supplies .................................. 12,660 11,966
------- -------
$56,695 $71,695
======= =======
If the FIFO method of inventory valuation had been used on all components,
inventories would have been approximately $1,186 and $1,041 higher than reported
at December 31, 2001 and September 30, 2001, respectively.
NOTE 5 -- DISCONTINUED OPERATIONS
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 $5,190, net of fees of $129. The disposition
of Hartley resulted in a gain of $2,404, net of income taxes of $1,603, which
was recognized in the three months ended December 31, 2000.
NOTE 6 -- LONG-TERM DEBT
At December 31, 2001, the Company is not in compliance with the leverage, net
worth and interest coverage covenants in the Senior Bank Facility. Discussions
with the lenders to secure a waiver for such non-compliance and amend the Credit
Agreement are current and ongoing. However, since the Company is not in
compliance with certain provisions under the Senior Bank Facility at December
31, 2001, all amounts outstanding under the Credit Agreement are classified as
current liabilities on the balance sheet. As a result of such classification,
the Company's current liabilities exceed its current assets. Although management
expects to obtain a waiver and amend the Credit Agreement in the near future,
there can be no assurance that such waiver and amendment will be forthcoming
from the lenders. If the Company does not obtain such waiver and amendment and
loans under the Credit Agreement are accelerated, the Company would not be able
to satisfy its current liabilities out of its current assets or operating cash
flow. The acceleration of the loans under the Credit Agreement would also cause
a default under the Senior Subordinated Notes, allowing the holders of the
Senior Subordinated Notes to accelerate the obligations due under the Senior
Subordinated Notes. Any such acceleration of the Senior Subordinated Notes could
have a material adverse effect on the Company.
NOTE 7 -- GUARANTOR SUBSIDIARIES
The following tables present condensed consolidating financial information for
the three months ended December 31, 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.
Page 8
NOTE 7 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
---------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,797 $ (703) $ - $ 14,094
Accounts receivable, net 21,797 29,365 - 51,162
Inventories 20,543 36,152 - 56,695
Refundable income taxes 6,805 - - 6,805
Deferred income taxes 559 9,891 - 10,450
Other current assets 1,136 3,294 - 4,430
---------------------------------------------------------------------------
Total current assets 65,637 77,999 - 143,636
Investments in and advances to subsidiaries 224,331 (46,088) (178,243) -
Property, plant and equipment, net 86,799 109,011 - 195,810
Identifiable intangible assets, net 25,987 21,405 - 47,392
Goodwill, net 105,766 74,448 - 180,214
Other assets 3,887 2,191 - 6,078
---------------------------------------------------------------------------
$ 512,407 $ 238,966 $ (178,243) $ 573,130
===========================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 4,977 $ 18,240 $ - $ 23,217
Accrued liabilities 10,429 10,244 - 20,673
Current portion of long-term debt 165,870 - - 165,870
Current portion of capital lease obligations - 2,362 - 2,362
---------------------------------------------------------------------------
Total current liabilities 181,276 30,846 - 212,122
Long-term debt 285,394 - 285,394
Capital lease obligations - 7,230 - 7,230
Deferred income taxes 33,906 18,446 - 52,352
Postretirement benefit obligations 6,459 - - 6,459
Other liabilities 4,507 4,201 - 8,708
Stockholder's equity 865 178,243 (178,243) 865
---------------------------------------------------------------------------
$ 512,407 $ 238,966 $ (178,243) $ 573,130
===========================================================================
Page 9
NOTE 7 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
---------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,682 $ (336) $ - $ 4,346
Accounts receivable, net 30,862 38,983 - 69,845
Inventories 21,131 50,564 - 71,695
Refundable income taxes 2,148 - - 2,148
Deferred income taxes 559 2,510 - 3,069
Other current assets 2,361 3,491 - 5,852
---------------------------------------------------------------------------
Total current assets 61,743 95,212 - 156,955
Investments in and advances to subsidiaries 263,249 (41,712) (221,537) -
Property, plant and equipment, net 87,587 126,246 - 213,833
Identifiable intangible assets, net 28,357 35,386 - 63,743
Goodwill, net 104,898 81,107 - 186,005
Other assets 3,891 2,016 - 5,907
---------------------------------------------------------------------------
$ 549,725 $ 298,255 $ (221,537) $ 626,443
===========================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 7,534 $ 23,034 $ - $ 30,568
Accrued liabilities 20,067 11,451 - 31,518
Current portion of long-term debt 20,424 - - 20,424
Current portion of capital lease obligations - 2,305 - 2,305
---------------------------------------------------------------------------
Total current liabilities 48,025 36,790 - 84,815
Long-term debt 413,653 - - 413,653
Capital lease obligations - 7,845 - 7,845
Deferred income taxes 35,357 28,362 - 63,719
Postretirement benefit obligations 6,345 - - 6,345
Other liabilities 4,406 3,721 - 8,127
Stockholder's equity 41,939 221,537 (221,537) 41,939
---------------------------------------------------------------------------
$ 549,725 $ 298,255 $ (221,537) $ 626,443
===========================================================================
Page 10
NOTE 7 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
---------------------------------------------------------------------------
Net sales $ 34,696 $ 61,845 $ (1,674) $ 94,867
Cost of sales 25,639 78,683 (1,674) 102,648
---------------------------------------------------------------------------
Gross margin 9,057 (16,838) - (7,781)
Selling, general and administrative expenses 2,658 8,225 - 10,883
Amortization of intangible assets 458 618 - 1,076
Gain on disposal of equipment (2) (24) - (26)
Provision for impairment of assets - 30,646 - 30,646
---------------------------------------------------------------------------
Operating income (loss) 5,943 (56,303) - (50,360)
Net interest expense (4,718) (6,340) - (11,058)
---------------------------------------------------------------------------
Income (loss) before income taxes and
equity in loss of subsidiaries 1,225 (62,643) - (61,418)
Income tax provision (benefit) 477 (20,821) - (20,344)
---------------------------------------------------------------------------
748 (41,822) - (41,074)
Equity in loss of subsidiaries (41,822) - 41,822 -
---------------------------------------------------------------------------
Net loss $ (41,074) $ (41,822) $ 41,822 $ (41,074)
===========================================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2000
Subsidiary
Company Guarantors Eliminations Consolidated
---------------------------------------------------------------------------
Net sales $ 36,590 $ 79,178 $ (1,198) $ 114,570
Cost of sales 26,497 75,550 (1,198) 100,849
--------------------------------------------------------------------------
Gross profit 10,093 3,628 - 13,721
Selling, general and administrative expenses 3,138 5,749 - 8,887
Amortization of intangible assets 1,229 1,676 - 2,905
Gain on disposal of equipment - (32) - (32)
--------------------------------------------------------------------------
Operating income (loss) 5,726 (3,765) - 1,961
Net interest expense (5,067) (7,110) - (12,177)
--------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity in loss
of subsidiaries 659 (10,875) - (10,216)
Income tax provision (benefit) 501 (4,065) - (3,564)
--------------------------------------------------------------------------
158 (6,810) - (6,652)
Equity in loss of subsidiaries (6,810) - 6,810 -
--------------------------------------------------------------------------
Loss from continuing operations (6,652) (6,810) 6,810 (6,652)
Gain on sale of discontinued operations, net of tax 2,404 - - 2,404
--------------------------------------------------------------------------
Net loss $ (4,248) $ (6,810) $ 6,810 $ (4,248)
==========================================================================
Page 11
NOTE 7 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
---------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (41,074) $ (41,822) $ 41,822 $ (41,074)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for obsolete inventories - 15,187 - 15,187
Provision for bad debts - 3,265 - 3,265
Provision for impairment of assets - 30,646 - 30,646
Depreciation and amortization 2,590 5,691 - 8,281
Amortization of deferred financing costs and
premium on notes 308 - - 308
Deferred income taxes - (15,496) - (15,496)
Changes in operating assets and liabilities (780) (5,094) - (5,874)
--------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (38,956) (7,623) 41,822 (4,757)
INVESTING ACTIVITIES
Investments in and advances to subsidiaries 33,012 8,810 (41,822) -
Purchase of property, plant and equipment (1,342) (937) - (2,279)
--------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 31,670 7,873 (41,822) (2,279)
FINANCING ACTIVITIES
Proceeds from long-term debt 23,500 - - 23,500
Payments on long-term debt and capital
lease obligations (6,101) (615) - (6,716)
--------------------------------------------------------------------------
Net cash provided by (used in) financing activities 17,399 (615) - 16,784
--------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 10,113 (365) - 9,748
Cash and cash equivalents at beginning
of year 4,684 (338) - 4,346
--------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 14,797 $ (703) $ - $ 14,094
==========================================================================
Page 12
NOTE 7 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2000
Subsidiary
Company Guarantors Eliminations Consolidated
---------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (4,248) $ (6,810) $ 6,810 $ (4,248)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 3,359 7,151 - 10,510
Amortization of deferred financing costs and
premium on notes 272 - - 272
Gain on sale of dinued operations (4,007) - - (4,007)
Deferred income taxes (207) (418) - (625)
Changes in operating assets and liabilities (72) 1,911 - 1,839
--------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (4,903) 1,834 6,810 3,741
INVESTING ACTIVITIES
Investments in and advances to subsidiaries 6,002 808 (6,810) -
Purchase of property, plant and equipment (1,305) (4,510) - (5,815)
Proceeds from sale of discontinued operations 5,044 - - 5,044
--------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 9,741 (3,702) (6,810) (771)
FINANCING ACTIVITIES
Payments on long-term debt and capital
lease obligations (8,491) (483) - (8,974)
--------------------------------------------------------------------------
Net cash used in financing activities (8,491) (483) - (8,974)
--------------------------------------------------------------------------
Decrease in cash and cash equivalents (3,653) (2,351) - (6,004)
Cash and cash equivalents at beginning
of year 16,982 2,496 - 19,478
--------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 13,329 $ 145 $ - $ 13,474
==========================================================================
Page 13
NOTE 8 -- 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
December 31,
-------------------------------------------
2001 2000
-------------------- -------------------
Revenues from external customers:
Castings $ 87,588 $ 106,367
Forgings 6,062 5,785
Other 4,692 5,979
Elimination of intersegment revenues (3,475) (3,561)
-------------------- -------------------
Consolidated $ 94,867 $ 114,570
==================== ===================
Income (loss) from continuing operations:
Castings $ (41,074) $ (6,652)
Forgings (1,287) (1,984)
Other (201) (38)
Elimination of intersegment loss 1,488 2,022
-------------------- -------------------
Consolidated $ (41,074) $ (6,652)
==================== ===================
December 31, September 30,
2001 2001
-------------------- -------------------
Total Assets:
Castings $ 678,441 $ 770,044
Forgings 47,684 51,148
Other 13,670 16,149
Elimination of intersegment assets (166,665) (210,898)
-------------------- -------------------
Total consolidated assets $ 573,130 $ 626,443
==================== ===================
Page 14
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
quarterly 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 months ended December 31, 2001, to the results of the operations of
the Company for the three months ended December 31, 2000.
RESULTS OF OPERATIONS (dollars in thousands)
Three Months Ended December 31, 2001 and 2000
Certain events have occurred during the three months ended December 31, 2001
which have had a dramatic negative impact on the operations of the Cast Alloys
subsidiary. The significant deterioration of the U.S. economy has caused a
substantial downturn in the consumer golf market served by Cast Alloys. In
addition, both of Cast Alloys' two major customers indicated they would be
seeking alternative supply sources for their golf clubheads. In December 2001,
management committed to a plan for the discontinuation of the operations of Cast
Alloys. The sale of Cast Alloys' inventory to parties other than the two major
customers is doubtful and a provision of $15.2 million has been recorded during
the three months ended December 31, 2001 to reduce the inventory to current
market value. Additionally, collection of substantially all of the remaining
outstanding receivables is not probable and a provision of $3.3 million was
recorded during the three months ended December 31, 2001. The Company has also
recorded an impairment charge of $30,646 to write down the goodwill, fixed
assets and other long-lived assets to their fair values during the three months
ended December 31, 2001. In January 2002, management communicated its plan to
the affected employees. Severance costs of approximately $2.9 million and
potential long-term lease costs associated with the discontinuance of the
operations of Cast Alloys will be recognized during the three months ended March
31, 2002.
Net sales. Net sales for the three months ended December 31, 2001 were $94,867
which are $19,703 or 17.2% lower than the quarter ended December 31, 2000. The
decrease in net sales was driven primarily by significant weakness in the demand
for industrial castings used for the heating, ventilation and air conditioning
(HVAC) market and a sharp decline in sales of golf clubheads at Cast Alloys to
$6.8 million for the three months ended December 31, 2001 compared to $12.3
million for the three months ended December 31, 2000.
Gross margin. Gross margin for the three months ended December 31, 2001 was
$(7,781), a decrease of $21,502, or 156.7%, as compared to the quarter ended
December 31, 2000. Gross margin as a percentage of net sales decreased to (8.2)%
for the three months ended December 31, 2001 from 12.0% for the quarter ended
December 31, 2000. The decrease in gross margin resulted from the Company
recording a provision of $15.2 million at Cast Alloys to reduce the inventory
valuation of golf clubheads to the current market value and 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. Without the recognition of the reduction in inventory
valuation at Cast Alloys, gross margin for the three months ended December 31,
2001 decreased $6,315 to $7,406.
Page 15
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended December 31, 2001 were
$10,883, an increase of $1,996, or 22.5%, as compared to the $8,887 for the
quarter ended December 31, 2000. The increase was due to the recognition of a
provision for bad debts of $3.3 million at Cast Alloys related to receivables
which the Company does not believe are collectible. This is offset by decreased
corporate expense and a reduction in the Company's salaried workforce due to the
decreased sales level. Accordingly, selling, general and administrative expenses
increased as a percentage of net sales to 11.5% compared to the 7.8% for the
quarter ended December 31, 2000. Without the recognition of bad debts at Cast
Alloys, selling, general and administrative expenses for the three months ended
December 31, 2001 decreased $1,269 to a level of 8.0% of sales.
Amortization of intangible assets. Amortization of intangible assets was $1,076
for the three months ended December 31, 2001, a decrease of $1,829, or 63.0%, as
compared to the $2,905 for the quarter ended December 31, 2000. The decrease was
due to the adoption of Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets" as of October 1, 2001. Under SFAS
142, goodwill and infinite-lived identifiable intangible assets are no longer
amortized.
Provision for impairment of assets. Customer actions and the significant
deterioration of the U.S. economy during the quarter ended December 31, 2001
have had a dramatic negative impact on the operations of Cast Alloys. These
events have also had a significant impact on the value of Cast Alloys' goodwill,
other intangible assets, and fixed assets. Based on these factors, the Company
recorded a provision for impairment of assets of $30,646 related to the Cast
Alloys subsidiary during the quarter ended December 31, 2001. The provision
consists of a writedown of the value of fixed assets of $13,097, a write off of
long-term deposits totaling $198 and an impairment of goodwill and other
intangible assets totaling $17,351.
Operating income (loss). Operating loss was $50,360 for the three months ended
December 31, 2001, a decrease of $52,321 from operating income of $1,961 for the
quarter ended December 31, 2000. The operating loss was caused by the reasons
discussed above under gross profit, as well as the $3.3 million provision for
bad debts discussed in selling, general and administrative and the $30.6 million
provision for the impairment of assets of the Cast Alloys subsidiary. As a
percentage of net sales, operating income decreased from 1.7% for the quarter
ended December 31, 2000 to (53.1)% for the three months ended December 31, 2001.
Without the $49.1 million of total charges for the writedown of assets at Cast
Alloys, operating loss for the three months ended December 31, 2001 was $1,262
or (1.3)% of net sales.
Net interest expense. Net interest expense was $11,058 for the three months
ended December 31, 2001 compared to $12,177 for the quarter ended December 31,
2000. The decreased interest expense resulted from the Company's principal debt
repayments and lower interest rates on the Company's Senior Bank Facilities,
partially offset by the interest on the higher level of borrowings outstanding
on the Company's Revolving Credit Facility during the three months ended
December 31, 2001 as compared to the three months ended December 31, 2000.
Income tax benefit. The income tax benefit for the three months ended December
31, 2001 is lower than the amount computed by applying the Company's statutory
rate of approximately 40% to the loss before income taxes due to the impairment
of goodwill of $10,668 which is not deductible for tax purposes. The income tax
benefit for the three months ended December 31, 2000 is higher than the amount
computed by applying the statutory rate of approximately 40% to the loss before
income taxes mainly due to the amortization of goodwill of $1,385 which is not
deductible for income tax purposes.
Gain on sale of discontinued operations. On October 2, 2000, the Company sold
the common stock of Hartley. The disposition of Hartley resulted in a gain of
$2,404, net of tax, which was recognized in the three months ended December 31,
2000.
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 December 31, 2001, there is
$28.5 million outstanding on the Revolving Credit Facility, $16.3 million
outstanding on the Acquisition Loan Facility and $121.0 million outstanding
under the term loans.
Page 16
The Company's liquidity needs will arise primarily from debt service on the
above indebtedness, working capital needs and funding of capital expenditures.
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. These covenants also require the company to maintain leverage, net
worth, interest coverage and senior debt coverage ratios.
At December 31, 2001, the Company is not in compliance with the leverage, net
worth and interest coverage covenants in the Senior Bank Facility. Discussions
with the lenders to secure a waiver for such non-compliance and amend the Credit
Agreement are current and ongoing. However, since the Company is not in
compliance with certain provisions under the Senior Bank Facility at December
31, 2001, all amounts outstanding under the Credit Agreement are classified as
current liabilities on the balance sheet. As a result of such classification,
the Company's current liabilities exceed its current assets. Although management
expects to obtain a waiver and amend the Credit Agreement in the near future,
there can be no assurance that such waiver and amendment will be forthcoming
from the lenders. If the Company does not obtain such waiver and amendment and
loans under the Credit Agreement are accelerated, the Company would not be able
to satisfy its current liabilities out of its current assets or operating cash
flow. The acceleration of the loans under the Credit Agreement would also cause
a default under the Senior Subordinated Notes, allowing the holders of the
Senior Subordinated Notes to accelerate the obligations due under the Senior
Subordinated Notes. Any such acceleration of the Senior Subordinated Notes could
have a material adverse effect on the Company.
For the three months ended December 31, 2001 and December 31, 2000, capital
expenditures were $2,279 and $5,815, respectively. The substantial decrease in
capital expenditures of $3,536 was the result of tighter spending controls
placed on capital expenditures during the three months ended December 31, 2001.
The Company's principal source of cash to fund its liquidity needs will be net
cash from operating activities and borrowings under the revolving credit
facility under the Senior Bank Facility. Net cash used in operating activities
for the three months ended December 31, 2001 was $4,757, a decrease of $8,498
from cash provided by operating activities for the three months ended December
31, 2000 of $3,741. The decrease in net cash from operating activities was the
result of decreased operating income and a reduction of accounts payable
balances resulting from the decline in sales during the three months ended
December 31, 2001.
Assuming a waiver and an amended Credit Agreement is obtained, the Company
believes that cash generated from operations and its existing revolving credit
facility under the Senior Bank Facility will be sufficient to meet its normal
operating requirements, including working capital needs and interest payments on
outstanding indebtedness. In January 2002, the Company received a federal income
tax refund of $5.3 million from the carryback of net operating losses. Also, the
discontinuance of operations of Cast Alloys will significantly improve the
Company's cash position by eliminating the need to carry excess inventory for
the consumer golf market. These factors will assist the Company in generating
sufficient cash to meet its operating requirements for the remainder of fiscal
2002.
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
Facility. If market interest rates for such borrowings change by 1% during the
remainder of the fiscal year ended September 30, 2002, the Company's interest
expense would increase or decrease by approximately $1.2 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.
Page 17
NEENAH FOUNDRY COMPANY
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
At December 31, 2001, the Company is not in compliance with the leverage, net
worth and interest coverage covenants in the Senior Bank Facility. Discussions
with the lenders to secure a waiver for such non-compliance and amend the Credit
Agreement are current and ongoing. However, since the Company is not in
compliance with certain provisions under the Senior Bank Facility at December
31, 2001, all amounts outstanding under the Credit Agreement are classified as
current liabilities on the balance sheet. As a result of such classification,
the Company's current liabilities exceed its current assets. Although management
expects to obtain a waiver and amend the Credit Agreement in the near future,
there can be no assurance that such waiver and amendment will be forthcoming
from the lenders. If the Company does not obtain such waiver and amendment and
loans under the Credit Agreement are accelerated, the Company would not be able
to satisfy its current liabilities out of its current assets or operating cash
flow. The acceleration of the loans under the Credit Agreement would also cause
a default under the Senior Subordinated Notes, allowing the holders of the
Senior Subordinated Notes to accelerate the obligations due under the Senior
Subordinated Notes. Any such acceleration of the Senior Subordinated Notes could
have a material adverse effect on the Company.
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: February 13, 2002 /s/ Gary LaChey
---------------------------------------------
Gary LaChey
Vice President-finance, Secretary & Treasurer
(Principal Financial Officer and Duly
Authorized Officer)
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