EXHIBIT 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations
THE CHAIRMAN'S LETTER, THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND THE QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WHEN USED IN
THESE SECTIONS, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE" AND "EXPECT" AND
SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. READERS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS, INCLUDING
STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF INTERMET OR
ITS MANAGEMENT, ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS INCLUDING, BUT NOT
LIMITED TO:
- - General economic conditions, including any economic downturn in the
markets in which we operate
- - Fluctuations in worldwide or regional automobile and light and heavy
truck production
- - Changes in practices or policies of our significant customers toward
outsourcing their requirements for automotive components
- - Changes in the sourcing and pricing practices of our major customers,
including demands for price concessions as a condition to retaining
current business or obtaining new business
- - Fluctuations in foreign currency exchange rates
- - Fluctuations in interest rates that may affect our borrowing costs
- - Fluctuations in the cost of raw materials, including the cost of
energy, and our ability, if any, to pass those costs on to our
customers
- - Work stoppages or other labor disputes that could disrupt production at
our facilities or those of our major customers
- - Factors or presently unknown circumstances that may affect the charges
related to the impairment of assets
- - Our ability to fully utilize the capacity available from the rebuilding
of our New River facility within the timeframes we are projecting
- - Our ability to meet the financial covenants set forth in our debt
agreements
- - Other risks as detailed from time to time in our filings with the
Securities and Exchange Commission
WE DO NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATION 2001 COMPARED TO 2000
For the year ended December 31, 2001, we had sales of $843 million compared to
2000 sales of $1,039 million, a decrease of $196 million or 18.9%. For
operations continuing into 2001, sales were down $145 million or 14.7%,
reflecting primarily the lower North American light vehicle builds in 2001, down
from 17.2 million in 2000 to 15.5 million in 2001 - a drop of 1.7 million
vehicles or 9.9%. The total North American vehicle production, at 15.8 million,
was lower than 2000 build rates of 17.7 million by 1.9 million, or 11%. Losses
for the year were ($8.7) million compared to net income of $40.9 million in
2000.
This decrease in our profitability can be traced to several issues we faced
during this last fiscal year. First, our decreased profitability is mainly a
result of the reduction in light vehicle builds. Compounding this was the
reduction in business that did not return to us in 2001 because of the
explosion. This year the 2000 accident not only resulted in a loss in sales, but
also caused production issues at other plants as they tried to absorb capacity
to keep all of our customers supplied in 2000 after the New River explosion.
These production issues continued into 2001. We reduced our workforce over 25%,
which caused some short term inefficiencies as the workforce was reduced and
redeployed in different positions. Lastly, exchange rates had an unfavorable
impact on our earnings of approximately $1.2 million when compared with the
prior year.
The North American light vehicle builds for 2001 were 15.5 million, propped up
after September 11, 2001 by the zero-percentage financing programs offered by
the American automobile manufacturers. European light vehicle build weakened in
the fourth quarter. Analysts are predicting builds in excess of 15 million in
2002; however actual results may materially differ in view of economic
uncertainties.
Sales for the ferrous metals segment were $526 million in 2001 compared with
$634 million in 2000, a decrease of $108 million, or (17%). The main factors
contributing to this decrease were the downturn in the economy and the business
that was lost because of the explosion at our New River plant.
Sales in the light metals segment were $301 million. This is a decrease of $33
million, or 10% compared with 2000 levels. The decrease is mainly due to the
economy and recession in the automotive industry. As had previously been
announced, on December 21, 2001, we closed our Alexander City, Alabama lost-foam
aluminum plant ("Alexander City") and recognized pre-tax shutdown costs of $12.9
million, $11.7 million of which are non-cash charges. In the second quarter of
2001, we announced the shutdown of our Reynosa, Mexico machining operation
(acquired with the Tool Products acquisition) and took a $0.6 million charge.
Profitability in our light metals group, excluding the shutdown costs and
goodwill amortization, increased $6.5 million on a pretax basis reflecting the
impact of significant restructuring on our less capital-intensive segment.
Sales for our domestic continuing operations were $753 million in 2001, down
$140 million or 15.9% from 2000. This was due to inventory adjustments made at
the OEM's in the early part of the year followed by a slumping economy and a
further slowdown with the events of September 11, 2001. The year finished with a
pick-up from the OEM zero percent financing programs before moving into the
December vacation shutdown period. In total, domestic sales were down $190
million after taking into account the sale of Iowa Mold Tool Co., Inc. ("IMT")
in 2000.
Sales in our non-core businesses were down $54.5 million (77%) for the year.
This decrease results mainly from the sale of IMT in 2000.
European sales during 2001, in local currency, were 3% below the previous year
level. The effect of changes in exchange rates on 2001 consolidated sales was an
unfavorable $2.7 million (2.9%) when compared with European sales using exchange
rates for 2000.
Our gross profits for 2001 of $61.5 million were 7.2% of sales, down from the
2000 gross profit percentage of 12.1%. The lower demand from the weakening
economy was a principal factor in our lower gross profit. The foundries are very
capital intensive, resulting in a higher level of fixed costs in the operations
than most manufacturing companies. We reacted to the downturn by reducing
headcount and better utilizing our equipment. Sales generally do not uniformly
reduce or increase across the company, which would allow for more efficient
production scheduling. Some of our plants were operating very near to breakeven,
where a small change in sales has an almost similar change in cost.
Consequently, these plants operated less efficiently than the year before, since
they were not able to reduce their breakeven costs in line with the sales drop.
One of our ferrous facilities continued to be adversely affected by the
repositioning of product transferred from other foundries. These inefficiencies
combined with the lower overall volume at that plant caused this facility to
report losses around $8.7 million after tax.
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Selling, general and administrative expenses were down $9.4 million, and down
slightly as a percent of sales at 3.5% from 2000 expenses at 3.7%. Goodwill
amortization was about the same as 2000 at $6.3 million. In December, as part of
the Alexander City plant closure, $1.9 million in goodwill was written off.
Other operating expense (income) for 2001 is primarily composed of the plant
shutdown charges for the Alexander City plant ($12.9 million) and the Reynosa,
Mexico plant ($0.6 million).
Net interest expense for the years ended December 31, 2001 and 2000 was $31.0
million and $39.3 million, respectively. This change was the result of a lower
borrowing rate and lower debt levels in 2001. Interest expense capitalized was
$1.1 million and $1.5 million in 2001 and 2000, respectively.
Diluted earnings per share, excluding plant shutdowns, was close to breakeven.
Diluted earnings per share including the plant shutdowns was a loss of ($0.34).
The effective income tax rate for 2001 was 37.8%. For information concerning the
provision for income taxes, as well as information regarding differences between
effective tax rates and statutory rates, see Note 10 of the Notes to our
Consolidated Financial Statements.
RESULTS OF OPERATIONS 2000 COMPARED TO 1999
Sales in 2000 were $1,039 million compared to 1999 sales of $957 million, an
increase of $82 million or 8.6%. Sales for operations in place both years were
8.3% higher in 2000 than in 1999. Ferrous metals segment sales for 2000 were
$634 million or 17.6% lower in 2000 than for 1999. The explosion of our plant at
New River, the fire at our Neunkirchen facility, and closing of our Ironton
facility had a negative impact on 2000 sales results. The decrease in sales is
largely explained by these three events. Year over year sales for the ferrous
segment from operations without regard to the events were $512 million in 2000
and $502 million in 1999. This represents an increase of 1.8% over 1999. This
increase was due to the strong automobile industry during most of 2000.
Sales in the light metals segment for 2000 were $334 million, an increase of
$232 million over 1999 levels. This increase was mainly due to the acquisition
of Ganton Technologies, Inc. ("Ganton") and Diversified Diemakers, Inc.
("Diemakers") in December of 1999, which have been successfully integrated into
our core operations. Light metal sales year over year for operations in place
during both years were $104 million in 2000 and $97 million in 1999, an increase
of $7 million, or 7.3%.
Sales in our non-core business were down about $14 million (16.2%) for the year.
This decrease mainly results from the sale of IMT.
Sales for our domestic operations were up 11.4% in 2000 from the prior year,
inclusive of the events mentioned above. Sales in 2000 for domestic operations
in place for both periods increased $2.7 million from 1999, primarily because
North American light vehicle production was an all-time record. In 2000, North
American light vehicle production was 17.2 million units and exceeded 15 million
units for the seventh consecutive year.
European sales during 2000, in local currency, approximated 1999 levels. Sales
would have been up significantly over 1999 had it not been for the fire at our
Neunkirchen Foundry. However, 2000 was still a record setting year for our
European operations. This was due primarily to an increase in production and
sales of light and heavy duty vehicles in Europe. The effect of changes in
exchange rates on 2000 consolidated European sales was an unfavorable $13.8
million (12.6%) when compared with sales using exchange rates for 1999.
Gross profit for 2000 of $126 million was 12.1% in 2000 versus 12.8% in 1999.
This decrease in our profitability can be traced to several issues the Company
faced during 2000. First, our decreased profitability was a result of the
reduction in operations due to the explosion at the New River foundry and the
fire at our Neunkirchen foundry. These accidents also caused production issues
at other plants as they tried to absorb the
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lost capacity due to these two accidents. Further, operating issues at two
locations were primarily responsible for the negative effect on gross profit in
2000. Our lost foam operation had technical difficulties launching two new
complex products, and our Columbus Foundry, a ductile iron casting operation,
had extraordinary high costs related to the launch of a ductile iron casting as
well as serious equipment start-up problems.
Selling, general and administrative expenses for 2000 were flat to the prior
year and down slightly as a percent of sales at 3.7%, compared with 1999
expenses at 3.9%. Goodwill amortization in 2000 increased to $6.4 million from
$4.2 million the prior year, as a result of the additional goodwill generated
from the acquisition of Ganton and Diemakers in late 1999. In 2000, "Other
operating (income) expenses" were attributable to the gain on the sale of IMT,
offset by the first quarter operating results from Ironton and the write down of
other non-core assets. In 1999, "Other operating (income) expenses" were
primarily comprised of asset impairment and shutdown costs related to the
shutdown of Ironton.
Other income for 2000 is composed primarily of gains related to the replacement
of assets at our New River and Neunkirchen foundries, net of the write-off for
destroyed assets. Insurance proceeds covered the replacement costs of these
assets.
Interest expense for the years ended December 31, 2000 and 1999 was $39.2
million and $14.9 million, respectively. This change was a result of an increase
in borrowings to purchase Ganton and Diemakers at the end of 1999, coupled with
slightly higher interest rates for the period.
Diluted earnings per share for 2000 were $1.61. Diluted earnings per share from
operations, excluding the events, asset impairment, and shutdown costs mentioned
above, would have been $1.10 for 2000.
During 2000, we had various events impacting current operations and net income.
On October 12, 2000, we sold our interest in IMT, resulting in a pre-tax gain of
$22.3 million ($11.4 million net of taxes or $0.45 per diluted share). During
2000, INTERMET completed the shutdown of Ironton Iron, Inc. and incurred pre-tax
loss of $6.1 million (net loss of $4.0 million or $0.16 per diluted share)
during the first quarter. During the fourth quarter of 2000, INTERMET recorded a
pre-tax workforce reduction charge of $1.7 million (net loss of $1.1 million or
$0.04 per diluted share) and a loss in connection with the valuation of non-core
assets of $7.5 million (net loss of $6.8 million or $0.27 per diluted share).
Also in 2000, we had gains related to the replacement of assets as a result of
the explosion at the New River foundry and the fire at the Neunkirchen foundry,
both of which will be discussed further below. The pre-tax insurance gain, net
of related costs, was $20.5 million (after-tax gain of $13.4 million or $0.53
gain per diluted share). The insurance gain was principally included in "other
non-operating income and expense" on a pre-tax basis in the accompanying
statements of operations, while the other one-time events impacting current
operations and net income were included in "other operating expenses" on a
pre-tax basis in the accompanying statements of operations.
The effective income tax rate for 2000, excluding the impact of the sale of
non-core assets, was 43.5%. Sale of our investment in General Products and IMT
caused the effective tax rate for the year to increase from 43.5% to 46.9%.
During 1999, we implemented foreign tax strategies which, together with a change
in German tax law, resulted in a decrease in the effective tax rate of
approximately 18.6%. The effective tax rate for 1999 without the benefit of the
foreign tax restructuring would also have been 43.5%. During 2000, we amortized
$5.8 million in nondeductible goodwill, which also increased our effective tax
rate. For information concerning the provision for income taxes as well as
information regarding differences between effective tax rates and statutory
rates, see Note 10 of the notes to our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
During 2001, cash provided by operating activities was $71.6 million, as
compared to $69.4 million in 2000. We were able to maintain strong cash flow
from operations despite our loss during the year due to our increased focus on
working capital management. Also included in 2001 was a non-recurring receipt of
$30.6 million for insurance reimbursement.
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Non-cash charges from depreciation and amortization were $58.5 million. Our
investing activities for 2001 used cash of $36.4 million for the purchase of
fixed assets. Bank and other borrowings decreased $35.8 million, in the
aggregate, from the end of 2000. In addition, we paid $3.2 million in dividends
during 2001 ($0.04 per share per quarter). The third quarter dividend was paid
in January 2002.
Cash and cash equivalents decreased to $13.9 million at December 31, 2001 from
$19.7 million at December 31, 2000 due in part to the timing of payments from
significant customers and applying these funds at year-end to reduce debt.
Outstanding funded debt decreased from $399.2 million at December 31, 2000 to
$363.4 million at December 31, 2001. The decrease in debt is primarily from cash
provided from operations. Our debt-to-capital ratio at 59% was level with the
prior year due to lower debt levels being offset by a reduction in equity as
described below. Shareholders' equity decreased $26.1 million to $253.3 million
at December 31, 2001. This change is due primarily to a $6.9 million pension
adjustment, net losses of $8.7 million for the year, declared dividends of $4.1
million, $1.9 million for financial derivative adjustments, and a translation
adjustment of $4.3 million from our foreign operations.
We, like many large manufacturing companies, have recurring costs related to
environmental clean-up, pollution prevention measures and disposition of waste
(principally non-hazardous waste) generated as part of ongoing operations. Such
costs totaled approximately $10.0 million each in years 2001 and 2000 and $15.1
million in 1999. Although we continue to take various steps to control
environmental costs, they are expected to increase in the future. A portion of
our capital expenditures is regularly incurred to prevent or monitor pollution,
principally for ventilation and dust control equipment. Sales volume levels and
available engineering resources, among other factors, will influence the actual
amount of capital expenditures.
We also have current and former operating entities that are potentially
responsible for cleanup of known environmental sites. These include third party
owned sites, as well as sites that are currently owned, or formerly owned, by us
or our subsidiaries. For known environmental sites, we, with the assistance of
environmental engineers and consultants, have accrued $6.3 million to cover
estimated future environmental expenditures. This reserve includes $0.4 million
related to the shutdown of Alexander City. There could exist, however, more
extensive or unknown environmental situations for which the future cost is not
known or accrued at December 31, 2001.
In addition to these recurring and anticipated expenditures, the 1990 amendments
to the Federal Clean Air Act, and regulations promulgated thereunder are
expected to have a major impact on the compliance cost of many U.S. companies,
including foundries of the type we own. Until Federal and state governments
adopt final regulations implementing those amendments and until certain control
measures under existing regulations are determined, it is not possible to
estimate such costs.
We are also a party to certain lawsuits and claims arising out of the conduct of
our business, including those relating to commercial transactions, employment
matters, product liability, environmental and safety and health matters. We
self-insure a significant portion of our health care and property and casualty
insurance risks. However, we purchase additional insurance for catastrophic
losses. The events of September 11, 2001 caused extreme turmoil in the property
and casualty insurance market. As a result, while we have insurance for
catastrophic losses, our property deductible was increased to $10.0 million on
November 1, 2001. A major property loss could have a significant impact on our
operations.
While the contingencies mentioned above are estimates of our future obligations
and their ultimate impact on us is unknown, we do not believe that these
contingencies will have a material adverse effect on our consolidated financial
position, results of operations or cash flows. However, we cannot be assured
that our activities will not give rise to actions by private parties or
governmental agencies that could cause us to incur liability from damages,
fines, penalties, operational shutdowns, damages, cleanup costs or other similar
expenses.
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At December 31, 2001, we had commitments for the purchase of operating equipment
of approximately $0.9 million, which we expect to fund through cash flow from
operations. We have secured revolving credit agreements with a bank group that
provide for loans up to $300 million in the aggregate, and a secured term loan
with a balance of $171.7 million. We had $363.4 million of debt outstanding at
December 31, 2001. All of the term loan is due in December of 2002. We presently
expect to refinance the $171.7 million term loan with a receivables
securitization program of our domestic receivables early in 2002 and refinance
the remaining current portion of long-term debt by accessing the capital
markets. Based on the end of 2001 cash position and our projections for 2002,
the current portion of the long term debt could be covered through working
capital availability, and availability under our line of credit. However, this
liquidity could be affected by a downturn in the economy in which we operate
which would have a negative affect on our financial ratios and thereby reduce
bank financing availability. In addition, uncertainty in the capital markets or
a decline in the credit worthiness of our receivable portfolio could also have a
negative affect. We had committed and uncommitted bank credit facilities with
unused borrowing capacity of $103.9 million at December 31, 2001.
Our debt agreements require us to maintain certain financial ratios. We are in
compliance with our covenants as of December 31, 2001:
Financial Covenant Requirement Actual
------------------ ----------------- ---------------
Fixed charge coverage ratio > 1.25 : 1 1.39 : 1
-
Consolidated EBITDA to consolidated
interest expense > 2.75 : 1 2.81 : 1
-
Funded debt to consolidated EBITDA < 4.50 : 1 4.28 : 1
-
Capital expenditures ($000) < $50,000 $36,368
-
If our operations deteriorate and we were unable to obtain a waiver from our
lenders, our debt would be in default with our lenders and our loans could be
called. Due to cross-fault provisions in a majority of our debt agreements,
approximately 88% of our debt might be due if any of the debt is in default. We
believe our results of operations will improve for the year ending December 31,
2002 and thereafter assuming the automotive market and the economy do not
worsen. We believe with a stable U.S. and European economy, default is unlikely.
We also believe our lenders would provide us with waivers if necessary. However,
our expectations of future operating results and continued compliance with our
debt covenants cannot be assured and our lenders' actions are not controllable
by us. If our projections of future operating results are not achieved and our
debt is placed in default, we would experience a material adverse impact on our
reported financial position and results of operation.
The Company is not involved in any related party transactions whereby the
related party or the Company is receiving any benefit, except for our
transactions with PortCast-Fundicao Nodular, S.A. (our 50% Portuguese joint
venture) where we receive management and technical support fees.
ASSET IMPAIRMENT AND SHUTDOWN
In October 2001, we announced plans to permanently close our Alexander City
aluminum plant in mid December 2001 and subsequently closed operations December
21, 2001. Alexander City is included in the light metals segment of the
Reporting for Business Segments footnote, which is footnote 2 to our
consolidated financial statements. The lost foam aluminum plant was purchased in
1995 and had employed 117 people prior to its closing. Alexander City had
significant operational difficulties with launches of very complex components in
late 2000 through the first quarter of 2001 causing its two principal customers
to question the viability of the facility. Our two customers began a re-sourcing
process that became too difficult and expensive to be retracted once the
turnaround at the plant had occurred. Alexander City had revenues of $39
million, $23 million and $15 million, and net losses of approximately $9.8
million, $10.9 million, and $1.7 million for the years ended 2001, 2000, and
1999, respectively. The net loss of $9.8 million for 2001 includes charges for
asset impairment and shutdown of $8.4 million after tax.
The decision to close this plant was the principal reason we recorded a $11.7
million charge for impairment of assets and a $1.2 million charge for shutdown
costs in the fourth quarter of 2001. All of the charges are included
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in "Other operating expenses" in the accompanying statements of operations. The
charge included a write-down of $9.8 million to fair market value for capital
assets and inventories; site remediation and disposal costs of $0.7 million;
goodwill of $1.9 million; provisions totaling $0.4 million for severance (for 18
salaried employees) and employee pay related costs, and $0.1 million in legal
costs. The accrual for shutdown costs of $1.2 million is included in "Accrued
liabilities" in the accompanying balance sheet in 2001. We intend that the
assets will be sold.
In December of 1999, we announced plans to permanently close our Ironton Iron,
Inc. Foundry. Ironton is included in the ferrous metals segment of the Reporting
for Business Segments footnote. Ironton had revenues of $6 million and $57
million and net losses of approximately $4.4 million and $22.8 million for the
years ended December 31, 2000 and 1999, respectively. Operations at the foundry
continued through the first quarter of 2000 in order to fulfill customer needs.
The results of current operations for 2000 have been classified within "Other
operating expenses" on the accompanying statements of operations. The foundry
ceased operations at the end of the first quarter of 2000 and demolition was
completed during the second quarter of 2001. The facility utilized the proceeds
from the sale of certain assets of $0.3 million and $4.5 million during 2001 and
2000, respectively, to fund the cost of demolishing the foundry. Also, during
2001 and 2000, $0.7 million and $1.4 million of the assets remaining at the
facility at December 31, 1999 were transferred to our other facilities.
The decision to close the Ironton foundry was the principal reason for
recording an $18.5 million charge for impairment of assets and shutdown costs
in the fourth quarter of 1999, which was included in the accompanying
statements of operations in 1999. The charge included a writedown of $10.7
million to fair value for capital assets; building demolition and remediation
costs of $6.6 million; and provisions totaling $1.2 million for severance pay
and employee benefits.
During 2001 and 2000 we incurred $1.5 million and $5.2 million, respectively,
related to Ironton for demolition and environmental remediation and $0.4 million
and $1.0 million, respectively, for wages and benefits. These expenditures were
accrued for at December 31, 1999. Also during 2000 we paid $1.0 million in
severance and benefits relating to the 500 union employees at Ironton, which was
not previously accrued.
In December of 2000, we recorded a charge in connection with a writedown of the
value of certain assets of our non-core operations. The basis for the writedown
was poor operating results from these non-core assets. In determining the amount
of the necessary reserve, we utilized discounted future cash flows. Based on
this evaluation we have decreased the carrying value of these assets by $7.5
million. This amount eliminated $5.7 million of goodwill and $1.8 million of
fixed assets.
IMPACT OF INSURANCE PROCEEDS IN 2001 AND 2000
In the first half of 2000, we suffered two extensive losses: an explosion on
March 5, 2000 at our New River Foundry, which shut down operations at that
facility until November of 2000, and a fire at our Neunkirchen Foundry in May of
2000 that caused extensive damage, shutting down the foundry for two weeks. (See
Note 15, Insurance Claims, of the Notes to our Consolidated Financial
Statements).
The resulting business interruption and loss of fixed assets was covered under
our insurance policies for the period. At December 31, 2000 approximately $10.4
million was recorded as deferred revenues and $16.0 million as accounts
receivable. As of December 31, 2001 we had received final settlements totaling
$133.8 million with our insurance carriers, $30.6 million in 2001 and $103.2
million in 2000.
The settlement for these two losses has been recorded as follows:
- - For the year ended December 31, 2001, we recorded insurance recovery of
approximately $13.4 million related to business interruption for a
total over the two years of $41.7 million for the claims made in 2000
mentioned above. Business interruption recovery monies offset cost of
sales.
- - We incurred accident-related expenses in total of $53.4 million, which
were offset by insurance recovery within cost of sales, $7.8 million in
2001 and $45.6 million in 2000.
- - In total, we recorded approximately $37.6 million for the replacement
of property, plant and equipment. Of this amount, $3.2 million and
$26.5 million has been recorded as a gains in "Other, net" in the
accompanying statement of operations in 2001 and 2000, respectively.
- - At December 31, 2001, approximately $0.2 million remains as deferred
revenue and $0.9 million as accrued costs. No monies were still
receivable.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We have exposure to four types of market risk. The first is the risk of interest
rate changes and how it impacts our current results. Second, we have risk with
regard to foreign currency and its impact on our international operating
results. Third, we have risk related to commodity pricing which, based on
current pricing trends, has been immaterial to us with the exception of energy
costs. Our energy costs more than doubled during the last quarter of 2000 and
continued at the higher cost level through the first half of 2001. Though we
have seen a softening of these costs, the overall trend does represent a risk to
our operating results. Last, we have consumer risk. We operate principally in
the cyclical automotive industry, which is currently in a recession. A further
weakening of the economy does represent a risk to our operating results.
Most of our debt is variable rate debt. However, we have entered into an
interest rate swap on $50 million to reduce the impact of a significant interest
rate fluctuation. Nonetheless, a 1% change in interest rates on the debt not
covered by swap agreements would have changed net income approximately $2.8
million, $2.5 million and $2.6 million for 2001, 2000 and 1999, respectively.
This interest rate sensitivity analysis does not consider the effects of the
reduced or increased level of overall economic activity that could result from a
change in interest rates.
Due to the size of our European operations, our earnings are also affected by
fluctuations in the value of the U.S. dollar as compared to foreign currencies,
predominately in Germany. A 5% change in the value of the dollar relative to the
currencies in which our sales are denominated (the Euro starting in 2001) would
have resulted in a change in net income of approximately $2.0 million, $1.0
million, and $0.5 million for the years ended December 31, 2001, 2000, and 1999
respectively. This sensitivity analysis of the effects of the changes in foreign
currency exchange rates does not factor in a potential change in the sales
levels or local currency sales prices.
CRITICAL ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE - SIGNIFICANT CUSTOMER
We generate approximately 21% of our revenues and corresponding accounts
receivable from sales to a single customer in the automotive manufacturing
industry. As of December 31, 2001, about $19 million of accounts receivable were
attributable to this customer. If our primary customer experiences significant
adverse conditions in its industry or operations, including the continued impact
of the current downturn in demand for new automobiles, our customer may not be
able to meet its ongoing financial obligations to us for prior sales or complete
the purchase of additional products from us.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We evaluate the collectibility of our accounts receivable based on a combination
of factors. In circumstances where we are aware of customer charge-backs or a
specific customer's inability to meet its financial obligations to us, we record
a specific reserve for bad debts against amounts due to reduce the net
recognized receivable to the amount we reasonably believe will be collected.
Unless active discussions/negotiations with the specific customer are occurring,
we record bad debt charges based on our past loss history and the length of time
the receivables are past due. In those situations with active discussions, the
amount of bad debt recognized is based on the status of the discussions. If
circumstances change, our estimates of the recoverability of amounts due us
could be reduced by a material amount.
VALUATION OF FINANCIAL INSTRUMENTS
Cash and cash equivalents have a readily identified market value. For debt, we
evaluate the year end market rates for similar debt instruments to assess fair
value. We obtain the fair value of the interest rate swaps, as noted in Note 14,
from dealer quotes. These values represent the estimated amount we would receive
or pay to terminate agreements taking into consideration current interest rates
and the creditworthiness of the counter-parties.
8
DEFERRED TAX ASSETS
As of December 31, 2001, we have approximately $5.5 million of deferred tax
assets related principally to a foreign tax credit that expires in 2006, for
which no valuation allowance has been recorded. We expect to fully realize these
assets since we project both sufficient foreign source income and sufficient
U.S. tax liabilities before their expiration. We also have additional net
deferred tax assets of $13.8 million. The realization of these assets is based
upon estimates of future taxable income. In preparing estimates of future
taxable income, we have used the same assumptions and projections utilized in
our internal 3-year forecasts and 5-year estimates. Based on these projections,
we expect to achieve an increase in income principally through increased sales
from recovery in the automotive industry in general and increased new business
while continuing cost reductions.
DERIVATIVES
In 2001 the company adopted FAS 133, "Accounting for Derivative Instruments and
Hedging Activities." We may hold derivative financial instruments to hedge a
variety of risk exposures including interest rate risks associated with our
long-term debt, foreign currency fluctuations for transactions with our overseas
subsidiaries and customers, and purchase commitments for certain raw materials
used in our production processes. At December 31, 2001 and 2000, we held an
interest rate swap. This derivative qualifies for hedge accounting as discussed
in Note 14 to our consolidated financial statements.
We do not participate in speculative derivatives trading. Hedge accounting
results when we designate and document the hedging relationships involving these
derivative instruments. While we intend to continue to meet the conditions for
hedge accounting, if a hedge did not qualify as highly effective or if we did
not believe that forecasted transactions would occur, the changes in the fair
value of the derivatives used as hedges would be reflected in earnings.
To hedge interest rate risk, an interest rate swap is used in which we pay a
fixed rate and receive a variable rate. This instrument is valued using the
market standard methodology of netting the discounted future fixed cash receipts
and the discounted expected variable cash payments. The variable cash payments
are based on an expectation of future interest rates derived from observed
market interest rate curves. We have not changed our methods of calculating
these fair values or developing the underlying assumptions. The value of these
derivatives will change over time as cash receipts and payments are made and as
market conditions change. We do not believe we are exposed to more than a
nominal amount of credit risk in our interest rate and/or foreign currency
hedges, as the counter parties are established, well capitalized financial
institutions. Information about the fair values, notional amounts, and
contractual terms of these instruments can be found in Note 14 to our
consolidated financial statements.
To hedge foreign currency risks, we may use exchange-traded options and futures
contracts. The fair values of these instruments are determined from market
quotes. In addition, from time to time, we have used over-the-counter forward
contracts in hedging these risks. These forward contracts are valued in a manner
similar to that used by the market to value exchange traded contracts; that is,
using standard valuation formulas with assumptions about future foreign currency
exchange rates derived from existing exchange rates, commodity prices and
interest rates observed in the market. There were no forward exchange contracts
outstanding at December 31, 2001 or 2000, to hedge foreign currency risks.
In addition to the above derivative financial instruments, we have other
contracts that have the characteristics of derivatives but are not required to
be accounted for as derivatives. These contracts for the physical delivery of
commodities qualify for the normal purchases and normal sales exception under
FAS133 as we take physical delivery of the commodity and use it in the
production process. This exception is an election and, if not elected, these
contracts would be carried in the balance sheet at fair value with changes in
the fair value reflected in income. These contracts cover our base raw materials
and energy.
9
LONG-LIVED ASSETS
We evaluate our property, plant, and equipment for impairment whenever
indicators of impairment exist. Our current estimates of recoverability for
approximately $541 million of domestic long-lived assets for which impairment
indicators were present (principally due to the drop in volume from the economic
recession and the plant explosion) indicated that overall those assets would not
have been recoverable if our estimates of future cash flows had been 25% lower
than our current estimate. Our recoverability estimates are based on estimates
of future operating results of the various facilities. Estimates of future cash
flows used to test the assets for recoverability were based on current operating
projections extended to the useful life of the asset groups for which the
company measures profits.
In first quarter of 2002, we expect to adopt FAS 141, Business Combinations, and
FAS 142, Goodwill and Other Intangible Assets. The adoption of FAS 141 is
expected to have little impact on the company as acquisitions have typically
been accounted for under purchase accounting. Application of the nonamortization
provisions in FAS 142 is expected to result in an increase of about 23 cents in
earnings per diluted share. During 2002, we will perform the first of the
impairment tests of goodwill as of January 1, 2002. It has not yet been
determined what the effect might be, if any, that these tests will have on the
earnings and financial position of the company.
LITIGATION AND TAX CONTINGENCIES
We have been notified that we are a defendant in a number of legal proceedings
associated with environmental, employment, commercial, and other matters. We do
not believe we are a party to any legal proceedings that will have a material
adverse effect on our consolidated financial position. It is possible, however,
that future results of operations for any particular quarterly or annual period
could be materially affected by changes in our assumptions related to these
proceedings.
We have accrued our best estimate of the probable cost for the resolution of
these claims. This estimate has been developed in consultation with counsel that
is handling our defense in these matters and is based upon a combination of
litigation and settlement strategies. To the extent additional information
arises or our strategies change, it is possible that our best estimate of our
probable liability in these matters could change. We recognize the costs of
legal defense in the periods incurred. Accordingly, the future costs of
defending claims are not included in our estimated liability.
Occasionally we are subject to examination from domestic and foreign tax
authorities regarding the amount of taxes due. These examinations include
questions regarding the timing and amount of deductions and the allocation of
income among various tax jurisdictions. In evaluating the exposure associated
with our various filing positions, we record reserves for probable exposures.
Based on our evaluation of tax positions, we believe we have appropriately
accrued for probable exposures. To the extent we were to prevail in matters for
which accruals have been established or be required to pay amounts in excess of
our reserves, our effective tax rate in a given financial statement period may
be materially impacted. In addition, one of our two open tax years is undergoing
examination by the United States Internal Revenue Service as of December 31,
2001.
10
Consolidated Financial Statements
INTERMET Corporation
Years ended December 31, 2001, 2000 and 1999
with Report of Independent Auditors
Report of Independent Auditors
The Board of Directors and Shareholders
INTERMET Corporation
We have audited the accompanying consolidated balance sheets of INTERMET
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of operations, comprehensive income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also include the financial statement schedule included as item 14(a)(2).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of INTERMET
Corporation at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Detroit, Michigan
February 6, 2002
INTERMET Corporation
Consolidated Statements of Operations
Years ended December 31,
2001 2000 1999
----------------- ----------------- --------------
(in thousands of dollars, except per share data)
Net sales $843,173 $1,038,844 $956,832
Cost of sales 781,650 913,262 834,545
----------------- ----------------- --------------
Gross profit 61,523 125,582 122,287
Selling, general and administrative 29,177 38,546 37,473
Goodwill amortization 6,328 6,353 4,154
Other operating expenses (income) 13,427 (8,009) 18,499
----------------- ----------------- --------------
Operating profit 12,591 88,692 60,126
Other income and expenses:
Interest expense, net (31,025) (39,261) (14,905)
Other, net 4,431 27,668 1,197
----------------- ----------------- --------------
(26,594) (11,593) (13,708)
----------------- ----------------- --------------
Income (loss) before income taxes (14,003) 77,099 48,453
Income tax (benefit) expense (5,300) 36,191 12,076
----------------- ----------------- --------------
Net (loss) income $ (8,703) $40,908 $36,377
================= ================= ==============
Net (loss) income per common share $ (0.34) $ 1.61 $ 1.43
================= ================= ==============
Net (loss) income per common share - assuming
dilution $ (0.34) $ 1.61 $ 1.42
================= ================= ==============
See accompanying notes.
2
INTERMET Corporation
Consolidated Statements of Comprehensive Income
Years ended December 31,
2001 2000 1999
----------------- ---------------- --------------
(in thousands of dollars, except per share data)
Net (loss) income $(8,703) $40,908 $36,377
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment (4,278) (129) (1,155)
Derivative instrument adjustment (1,858) - -
Minimum pension liability adjustment (6,890) - 849
----------------- ---------------- --------------
Total other comprehensive (loss) (13,026) (129) (306)
----------------- ---------------- --------------
Comprehensive (loss) income $(21,729) $40,779 $36,071
================= ================ ==============
See accompanying notes.
3
INTERMET Corporation
Consolidated Balance Sheets
December 31,
2001 2000
--------------- -------------
(in thousands of dollars)
Assets
Current assets:
Cash and cash equivalents $13,866 $19,737
Accounts receivable:
Trade, less allowances of $10,727 in 2001 and
$9,451 in 2000 95,601 125,745
Other 16,439 9,136
--------------- -------------
112,040 134,881
Inventories:
Finished goods 15,756 17,865
Work in process 12,080 21,816
Raw materials 6,259 8,940
Supplies and patterns 37,762 45,249
--------------- -------------
71,857 93,870
Deferred income taxes 29,461 13,999
Other current assets 4,171 17,961
--------------- -------------
Total current assets 231,395 280,448
Property, plant and equipment, at cost:
Land 5,204 5,408
Buildings and improvements 122,425 116,181
Machinery and equipment 505,025 467,819
Construction in progress 13,983 46,724
--------------- -------------
646,637 636,132
Less:
Accumulated depreciation and foreign industrial development
grants, net 275,881 238,498
--------------- -------------
Net property, plant and equipment 370,756 397,634
Intangible assets, net of amortization 217,016 224,873
Other non-current assets 24,166 15,841
--------------- -------------
$843,333 $918,796
=============== =============
4
INTERMET Corporation
Consolidated Balance Sheets
December 31,
2001 2000
--------------- -------------
(in thousands of dollars,
except share and per share data)
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $81,244 $103,501
Accrued wages, severance and benefits 28,822 31,520
Accrued liabilities 34,186 51,035
Long-term debt due within one year 173,352 216,479
--------------- -------------
Total current liabilities 317,604 402,535
Noncurrent liabilities:
Long-term debt 190,070 182,687
Retirement benefits 60,583 45,685
Other noncurrent liabilities 21,796 8,479
--------------- -------------
Total noncurrent liabilities 272,449 236,851
Shareholders' equity:
Preferred stock; 5,000,000 shares authorized; none issued Common stock, $0.10
par value; 50,000,000 shares authorized;
25,415,324 and 25,393,824 shares issued and outstanding in 2001
and 2000 2,590 2,590
Capital in excess of par value 56,761 57,110
Retained earnings 207,512 220,279
Accumulated other comprehensive loss (13,389) (363)
Unearned restricted stock (194) (206)
--------------- -------------
Total shareholders' equity 253,280 279,410
--------------- -------------
$843,333 $918,796
=============== =============
See accompanying notes.
5
INTERMET Corporation
Consolidated Statements of Cash Flows
Years ended December 31,
2001 2000 1999
-------------- ------------- --------------
(in thousands of dollars)
Operating activities:
Net income ($8,703) $40,908 $36,377
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation 52,149 45,122 35,140
Amortization 7,823 8,600 4,978
Impairment of assets 11,734 7,476 10,811
Results of equity investments (964) (782) (337)
Deferred income taxes (4,086) 14,459 (6,391)
Dissolution of foreign holding - - -
(Gain) loss on sale of subsidiary and other assets (73) (22,392) 692
Gain on insurance proceeds from involuntary conversion of assets (3,220) (26,502) -
Changes in operating assets and liabilities excluding the effects of
acquisitions and dispositions:
Accounts receivable 21,504 30,835 (18,688)
Inventories 21,375 1,844 (4,811)
Accounts payable and current liabilities (40,593) (10,490) 10,305
Shutdown costs 1,186 - 7,789
Other assets and liabilities 13,462 (19,723) (5,606)
-------------- ------------- --------------
Cash provided by operating activities 71,594 69,355 70,259
Investing activities:
Additions to property, plant and equipment (36,368) (57,747) (78,743)
Additions to property, plant and equipment from insurance (3,389) (34,414) -
Proceeds from insurance for replacement of property, plant and equipment 3,389 34,414 -
Purchase of businesses, net of cash acquired - - (274,338)
Investment in joint venture - - (4,500)
Proceeds from sales of assets 10,309 1,032
Proceeds from sale of subsidiary - 53,903 -
Other, net - (1,628) (418)
-------------- ------------- --------------
Cash provided by (used in) investing activities (36,368) 4,837 (356,967)
Financing activities:
Net change in revolving credit facility 9,000 (54,500) 193,500
Proceeds from (Payoff of) term loan (43,250) - 200,000
Repayment of revolving credit facility - (130,000)
Change in other debt (1,494) (1,307) 31,342
Payment on notes payable - - (5,000)
Acquisition of treasury stock - - (6,833)
Issuance (purchase) of common stock (349) 452 114
Dividends paid (3,183) (4,061) (4,076)
Other, net - (140) 849
-------------- ------------- --------------
Cash provided by (used in) financing activities (39,276) (59,556) 279,896
Effect of exchange rate changes on cash and cash equivalents (1,821) 1,685 4,380
-------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents (5,871) 16,321 (2,432)
Cash and cash equivalents at beginning of year 19,737 3,416 5,848
-------------- ------------- --------------
Cash and cash equivalents at end of year $13,866 $19,737 $3,416
============== ============= ==============
See accompanying notes.
6
INTERMET Corporation
Consolidated Statements of Shareholders' Equity
Years ended December 31,
2001 2000 1999
----------------- -------------- --------------
(in thousands of dollars, except share and per share data)
Common stock
Beginning balance $2,590 $2,585 $2,583
Exercise of options to purchase 26,000, and 14,000 shares of
common stock in 2000 and 1999 - 5 2
----------------- -------------- --------------
Ending balance 2,590 2,590 2,585
Capital in excess of par value
Beginning balance 57,110 56,661 63,382
Exercise of options to purchase shares of common stock - 449 112
Purchase of 104,000 shares for deferred compensation plan (349) - -
Purchase of 509,000 shares of treasury stock - - (6,833)
----------------- -------------- --------------
Ending balance 56,761 57,110 56,661
Retained earnings
Beginning balance 220,279 183,432 151,131
Net income (loss) (8,703) 40,908 36,377
Cash dividends of $0.16 per share in 2001, 2000 and 1999 (4,064) (4,061) (4,076)
----------------- -------------- --------------
Ending balance 207,512 220,279 183,432
Accumulated translation adjustment
Beginning balance (363) (234) 921
Translation adjustment (6,582) (198) (1,777)
Related income tax effect 2,304 69 622
----------------- -------------- --------------
Ending balance (4,641) (363) (234)
Derivative instrument adjustment
Beginning balance - - -
Adjustment (2,858) - -
Related income tax effect 1,000 - -
----------------- -------------- --------------
Ending balance (1,858) - -
Minimum pension liability adjustment
Beginning balance - - (849)
Adjustment (10,600) - 1,306
Related income tax effect 3,710 - (457)
----------------- -------------- --------------
Ending balance (6,890) - -
Unearned restricted stock
Beginning balance (206) (67) (163)
Issuance of 23,000 and 30,000 shares of common stock in 2001
and 2000 (64) (251) -
Amortization 76 112 96
----------------- -------------- --------------
Ending balance (194) (206) (67)
----------------- -------------- --------------
Total shareholders' equity $253,280 $279,410 $242,377
================= ============== ==============
See accompanying notes.
7
INTERMET Corporation
Notes to Consolidated Financial Statements
Years ended December 31, 2001, 2000 and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements, presented in conformity with
accounting principles generally accepted in the United States ("GAAP"), include
the accounts of INTERMET Corporation ("INTERMET") and its subsidiaries. All
significant inter-company transactions and balances have been eliminated in
consolidation. All subsidiaries have a fiscal year ending December 31.
Business
INTERMET produces ferrous metals castings, including ductile and gray iron, and
light metals castings, including aluminum, magnesium and zinc. In addition, we
perform value-added services, principally for automotive manufacturers in North
America and Europe. We also supply precision-machined components to automotive
and other industrial customers.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Reclassification
Certain amounts previously reported in the 2000 and 1999 financial statements
and notes thereto have been reclassified to conform to the 2001 presentation.
Revenue Recognition
We recognize revenue upon shipment of products. Tooling revenue is recognized
when billed either on completion of the tool or through the piece price as
agreed in the purchase order.
Shipping and Handling Costs
We record shipping and handling costs as component of "Cost of sales" within our
statements of operations.
Cash and Cash Equivalents
All short-term investments with original maturities of less than 90 days are
deemed to be cash equivalents for purposes of the statements of cash flows.
8
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivatives
As of January 1, 2001 we adopted FAS 133, "Accounting for Derivative Instruments
and Hedging Activities." FAS 133 requires companies to recognize all of their
derivative instruments as either assets or liabilities in the statement of
financial position at fair value. The accounting for changes in the fair value
(i.e., gains or losses) of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and further, on
the type of hedging relationship. For those derivative instruments that are
designated and qualify as hedging instruments, a company must designate the
hedging instrument, based upon the exposure being hedged, as either a fair value
hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
The adoption of FAS133 did not have a material impact on our financial
statements. We do not participate in speculative derivatives trading.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on the
last-in, first-out ("LIFO") method for 6% of both the December 31, 2001 and 2000
inventories. If LIFO inventories were valued using the same cost methods used
for other inventories, their carrying values would have increased by $1,191,000
and $1,149,000 at December 31, 2001 and 2000, respectively. Certain raw
materials and supplies inventories are valued on a weighted average cost basis;
average production cost is used for certain work in process and finished goods
inventories and other inventories are valued by the first-in, first-out ("FIFO")
method. The specific identification method is used for pattern inventories.
Supplies inventories are evaluated for obsolescence based on length of time in
the store room and expected near term use.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The provision for depreciation
and amortization of property, plant and equipment is determined on the basis of
estimated useful lives using the straight-line method. Industrial development
grants provided by the Federal and state governments of Germany are included as
reductions of property, plant and equipment and are being amortized over the
estimated useful lives of the related assets. We evaluate our property, plant
and equipment for impairment whenever indicators of impairment exist. Our
recoverability estimates are based on estimates of future operating results of
the various facilities. Estimates of future cash flows used to test the assets
for recoverability are based on current operating projections extended to the
useful life of the asset group for which we measure profits.
Intangible Assets
Intangible assets of $217,016,000 and $224,873,000 (net of accumulated
amortization of $21,859,000 and $15,531,000) at December 31, 2001 and 2000,
respectively, consist principally of costs in excess of net assets acquired. We
amortize these costs using the straight-line method over periods ranging
principally over forty years. In setting the life of intangibles, we consider
the long-term strategic value of the acquired assets. We evaluate our intangible
assets for impairment whenever indicators exist. Our recoverability estimates
are based on a review of projected undiscounted cash flows of the related
operating entities.
In first quarter of 2002, we expect to adopt FAS 141, Business Combinations, and
FAS 142, Goodwill and Other Intangible Assets. The adoption of FAS 141 is
expected to have little impact on the company as acquisitions have typically
been accounted for under purchase accounting. Application of the nonamortization
provisions in FAS 142 is expected to result in an increase of about 23 cents in
earnings per diluted share. During 2002, we will perform the first of the
impairment tests of goodwill as of January 1, 2002. It has not yet been
determined what effect, if any, that these tests will have on the earnings and
financial position of the company.
9
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value. The fair value of our debt approximates the reported amounts in the
accompanying consolidated balance sheets as their respective interest rates
approximate the respective year end market rates for similar debt instruments.
We obtain the fair value of the interest rate swaps, as noted in Note 14, from
dealer quotes. These values represent the estimated amount we would receive or
pay to terminate agreements taking into consideration current interest rates and
the creditworthiness of the counter-parties.
Stock-Based Compensation
We generally grant stock options for a fixed number of shares to employees and
directors with an exercise price equal to the fair value of the shares at the
date of grant. We account for stock option grants in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees", and, accordingly, recognize
no compensation expense for the stock option grants. We use the Black-Scholes
option pricing model to estimate fair value of our stock options as described in
Note 7.
Joint Venture Accounting
Joint venture investments of 50% or less are considered minority investments and
are accounted for under the equity method. Our 50% investment in Portcast is
accounted for on the equity method and our equity in the results of the venture
is included in other income and expense.
Prepaid Expenses
We recognize payments made in advance for future services (e.g., insurance
premiums) as prepaid expenses and include them in other current assets.
10
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
2. REPORTING FOR BUSINESS SEGMENTS
We evaluate the operating performance of our business units individually. We
have aggregated operating segments that have similar characteristics, including
manufacturing processes and raw materials. The ferrous metals segment consists
of ferrous foundry operations and their related machining operations. The light
metals segment consists of aluminum, magnesium and zinc casting operations and
their related machining operations. Due to changes in the makeup of the other
segment, the Company has realigned the other segment to include the operations
which do not fall within the ferrous metals segment or the light metals segment.
These operations have been combined with the corporate business unit and its
related expenses and eliminations. This realigned segment is referred to as
corporate and other. Certain administrative costs such as interest and
amortization are included within the corporate and other segment. This
information is displayed in the following table.
Corporate
Ferrous Metals Light Metals and Other Consolidated
-------------- ------------ --------- ------------
(in thousands of dollars)
Year ended December 31, 2001
Net sales $526,281 $300,745 $16,147 $843,173
Depreciation expense 27,834 20,274 3,866 51,974
Amortization expense - - 6,328 6,328
Interest expense 6,781 6,003 18,241 31,025
Provision for income taxes 4,588 (691) (9,197) (5,300)
Net income 8,398 (3,346) (13,755) (8,703)
Purchases of property, plant and equipment* 20,986 14,440 942 36,368
December 31, 2001
Total assets $455,034 $234,806 $153,493 $843,333
Year ended December 31, 2000
Net sales $634,392 $333,851 $70,601 $1,038,844
Depreciation expense 23,072 19,482 2,568 45,122
Amortization expense - - 6,353 6,353
Interest expense 6,128 7,081 26,052 39,261
Provision for income taxes 34,770 1,555 (134) 36,191
Net income 52,996 1,063 (13,151) 40,908
Purchases of property, plant and equipment* 36,283 17,691 3,773 57,747
December 31, 2000
Total assets $492,081 $401,655 $25,060 $918,796
Year ended December 31, 1999
Net sales $770,393 $102,239 $84,200 $956,832
Depreciation expense 27,780 3,925 3,435 35,140
Amortization expense - - 4,154 4,154
Interest expense 8,448 2,065 4,392 14,905
Provision for income taxes 21,050 1,415 (10,389) 12,076
Net income 27,038 1,851 7,488 36,377
Purchases of property, plant and equipment 60,813 13,661 4,269 78,743
December 31, 1999
Total assets $410,001 $388,055 $159,236 $957,292
11
* Does not include capital recovered through insurance - $3,389,000 and
$34,414,000 in 2001 and 2000, respectively.
12
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
3. ACQUISITIONS AND DISPOSITIONS
On October 12, 2000, we sold our interest in Iowa Mold Tooling Co. Inc.,
("IMT"). This was a consolidated subsidiary that is included in "Corporate and
other" in the Reporting for Business Segments footnote. This sale is indicative
of our commitment to place emphasis on our core business. We sold our interest
in IMT for $53.9 million. The pre-tax gain of $22.3 million is included in
"Other operating (income) expenses" in the accompanying statements of operations
in 2000.
On March 7, 2000, we sold our equity interest in General Products Corporation
for $10.3 million, net of expenses. We realized a pretax gain from the
transaction of $762,000. Prior to the sale, General Products was an equity
investment included in "Other non-current assets".
On December 20, 1999, we acquired all of the issued and outstanding stock of
Diversified Diemakers, Inc. ("Diemakers") and Ganton Technologies, Inc.
("Ganton") for a purchase price of $270,000,000. We accounted for this
transaction using purchase accounting and, accordingly, the excess purchase
price of the transaction of $127,261,000 was allocated to goodwill and is being
amortized over the next 40 years. We accrued approximately $3.7 million for
severance and office closing costs. Sales, engineering and certain other
administrative and operating functions of Ganton and Diemakers have been
combined with our existing functions. As a result of this combination of
activities, we eliminated duplicate activities during fiscal year 2000. All but
$500,000 of the amounts accrued either were paid during 2000 and 2001 or will be
paid over the next year. Through December 31, 2001 we have paid $2.4 million. We
reversed $800,000 against the allocated goodwill in 2000.
13
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
3. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
The following represents our unaudited pro forma consolidated results of
operations (in thousands of dollars, except per share data) for 2000 and 1999,
based on the purchase of Ganton and Diemakers and the sale of IMT and General
Products assuming the acquisitions and dispositions occurred on January 1 of
each year presented.
2000 1999
----------------- -------------------
Net sales $988,221 $1,122,018
Net income $25,811 $32,368
Income per common share $1.01 $1.27
Income per common share - assuming
dilution $1.01 $1.27
These unaudited pro forma results are presented for comparative purposes only.
They are not necessarily indicative of what would have occurred had the
acquisitions and dispositions actually been made on the dates indicated or of
future results of operations.
14
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
4. IMPAIRMENT OF ASSETS AND SHUTDOWN
In October 2001, we announced plans to permanently close our Alexander City lost
foam aluminum plant in mid December 2001, and subsequently ceased operations on
December 21, 2001. Alexander City is included in the light metals segment of the
Reporting for Business Segments footnote. The plant was purchased in 1995 and
had employed 117 people. Alexander City had significant operational difficulties
with the launches of very complex components in late 2000 through the first
quarter of 2001. This caused its two principal customers to question the
viability of the facility. They began a re-sourcing process that became too
difficult and expensive to be retracted once the turnaround at the plant had
occurred. Alexander City had revenues of $39 million, $23 million and $15
million, and net losses of approximately $9.8 million, $10.9 million, and $1.7
million for the years ended 2001, 2000, and 1999, respectively. The net loss of
$9.8 million for 2001 includes charges for asset impairment and shutdown of $8.4
million, after tax.
The decision to close this foundry was the principal reason for recording a
$11.7 million charge for impairment of assets and a $1.2 million charge for
shutdown costs in the fourth quarter of 2001. All of the charges are included in
"Other operating expense (income)" in the accompanying statements of operations.
The charge included a write-down of $9.8 million to fair market value for
capital assets and inventories; site remediation and disposal costs of $0.7
million; goodwill write-down of $1.9 million; provisions totaling $0.4 million
for severance (for 18 salaried employees) and employee pay related costs, and
$0.1 million in legal costs. The accrual for shutdown costs of $1.2 million is
included in "Accrued liabilities" in the accompanying balance sheet in 2001.
During December 2000, due to unfavorable operating results of our non-core
operations and our concern for the continuing decline in the market share, we
assessed the ongoing value of our non-core assets. Based on this assessment, we
recorded a charge of $7.5 million, which eliminated goodwill of $5.7 million and
resulted in a write-down of certain fixed assets of $1.8 million. This charge
was determined based on an estimate of the discounted future cashflows and is
included in "Other operating expense (income)" in the accompanying statements of
operations.
In December of 1999, we announced plans to permanently close our Ironton Iron,
Inc. foundry ("Ironton"). Ironton was included in the ferrous metals segment of
the Reporting for Business Segments footnote. Ironton's continuing operational
difficulties and significant operating losses, as well as loss of customer base,
impacted our decision. Ironton had revenues of $6 million and $57 million and
net losses of approximately $4.4 million and $22.8 million for the years ended
December 31, 2000 and 1999, respectively.
The decision to close the Ironton foundry was the principal reason for recording
an $18.5 million charge for impairment of assets and shutdown costs in the
fourth quarter of 1999, which was included in "Other operating expense (income)"
in the accompanying statements of operations in 1999. The charge included a
writedown of $10.7 million to fair value for capital assets; building demolition
and remediation costs of $6.6 million; and provisions totaling $1.2 million for
severance pay and employee benefits.
In 2001, we spent approximately $1.5 million for shutdown and professional fees
related to costs for Ironton remediation. Additionally, we paid out
approximately $0.4 million in workers' compensation. These expenditures were
accrued for at December 31, 1999. The remaining accrual of $0.5 million, which
is included in "Other accrued liabilities" in the accompanying balance sheet in
2001, is our estimates of the remaining costs to be incurred related primarily
to workers' compensation and legal. During 2000, we incurred approximately $5.2
million related to Ironton costs for remediation and to raze the building. This
amount was accrued at December 31, 1999 and no remaining accrual exists at
December 31, 2001.
15
In 2000, we paid out approximately $1.0 million accrued at December 31, 1999
for the severance and related benefits of 100 Ironton salaried employees. The
remaining $0.2 million of the amount accrued during 1999 was recorded as a
recovery in "Other operating (income) expenses" in the accompanying statements
of operations in 2000. In addition, during the first quarter of 2000, we paid
$1.0 million for severance and employees benefits for approximately 500 union
employees, which was not previously accrued.
During 2001 and 2000, we transferred Ironton assets with net book values of
approximately $0.7 million and $1.4 million, respectively, to our other
facilities. During 2001 and 2000 we sold certain assets of $0.3 million and $4.5
million. The remaining $0.9 million of assets of the $8.0 million shown as held
for sale in 1999 represents our estimate of the assets' fair value.
As a service to our customers, we continued operations at Ironton at a greatly
reduced pace through March 31, 2000, in order to allow them to re-source the
parts to other suppliers. Since Ironton is no longer a continuing operation, and
we continued operations in 2000 merely to accommodate our customers, we
reclassified Ironton's sales and related cost of sales, which net to a negative
$6.1 million, to "Other operating expense (income)" in the accompanying
statements of operations in 1999.
16
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
5. SHORT-TERM LINES OF CREDIT
Columbus Neunkirchen Foundry GmbH and INTERMET Europe GmbH, our wholly owned
subsidiaries, have various revolving note agreements which are payable upon the
earlier of demand or December 31, 2002, unless extended. These notes provide for
borrowings up to Euros 7,336,000 (approximately $6,547,000) at December 31,
2001. There were no outstanding borrowings under these agreements as of December
31, 2001 and 2000.
6. DEBT
Long-term debt consists of the following at December 31, (in thousands of
dollars):
2001 2000
----------------- ----------------
INTERMET:
Revolving credit facility $148,000 $139,000
Term loan 171,750 200,000
Bank of Nova Scotia - 15,000
Domestic Subsidiaries:
Industrial development bonds 41,050 41,725
Capitalized leases 2,181 2,803
Foreign Subsidiaries:
Foreign bank term notes 441 638
----------------- ----------------
Total $363,422 $399,166
Less long-term debt due within one year 173,352 216,479
----------------- ----------------
Long-term debt due after one year $190,070 $182,687
================= ================
On July 17, 2001, we amended our $300 million unsecured revolving credit
agreement with a bank group. The maturity date continues to be November 5, 2004.
Also on July 17, 2001, we amended and restated our term loan agreement. The Bank
of Nova Scotia debt was rolled into the amended and restated term loan. Under
the terms of the term loan agreement, we reduced the principal balance. In
addition, the maturity date was extended to December 20, 2002.
Both the revolving credit facility and the term loan are secured by all domestic
assets and a pledge of 65% of the stock of foreign subsidiaries. Pricing and
covenants are identical. These agreements require us to maintain compliance with
specified financial covenants and impose limitations on certain activities. We
are in compliance with our covenants as of December 31, 2001:
Financial Covenant Requirement Actual
------------------ ----------------- ----------------
Fixed charge coverage ratio > 1.25 : 1 1.39 : 1
-
Consolidated EBITDA to consolidated
interest expense > 2.75 : 1 2.81 : 1
-
Funded debt to consolidated EBITDA < 4.50 : 1 4.28 : 1
-
Capital expenditures ($000) < $50,000 $36,368
-
If our operations deteriorate and we were unable to obtain a waiver from our
lenders, our debt would be in default with our lenders and our loans could be
called. Due to cross-fault provisions in a majority of our debt agreements,
approximately 88% of our debt might be due if any of the debt is in default.
The interest rate at December 31, 2001 on the term loan was LIBOR plus 3.25%
(approximately 5.35%). The interest rate on the revolving credit was LIBOR plus
3.25% (approximately 5.18%). The spread over LIBOR that
17
we must pay is the same for both loans and is based on our total debt (including
letters of credit) divided by EBITDA. We must also pay a fee, at a rate of 0.75%
to 1.00% per annum, on any unused portion of the $300 million revolving credit
facility. Standby letters of credit reduce the amount we are able to borrow
under our revolving credit facility. At December 31, 2001 such standby letters
of credit totaled $48,055,000. At December 31, 2001, we had $103,945,000
available under our revolving credit facility.
Columbus Foundry, L.P., our wholly-owned subsidiary, has outstanding $35,000,000
of variable rate limited obligation revenue bonds. Under the terms of the
indenture, Columbus Foundry, L.P., is required to make interest only payments at
a variable rate. The interest rate resets weekly and at December 31, 2001 it was
2.15%. The principal is due December 1, 2019.
Under the terms of a bond indenture, Lynchburg Foundry Company, our wholly-owned
subsidiary, is required to make partial redemption of its industrial development
revenue bonds on an annual basis through June 2006. These amounts are $350,000
per year, with a final payment at maturity of $1,650,000. The balance
outstanding as of December 31, 2001 was $3,050,000. The bonds are subject to
optional redemption prior to maturity and bear an interest rate of 7.0%.
We have other industrial development revenue bond debt of $3,000,000. We are
required to make annual principal payments of $500,000, with a final maturity
date of January 1, 2007.
We also have capital leases of approximately $2,181,000 at December 31, 2001,
which relate to assets with net book values of approximately $2,772,000.
Interest rates for these leases range from 7.50% to 8.58%. The amortization of
assets recorded under leases is included in depreciation expense.
The foreign bank term notes bear interest rates from 5.00% to 5.10% per annum.
These borrowings are secured by property, plant and equipment with net book
values aggregating to approximately $29,534,000 at December 31, 2001.
Maturities of long-term debt and capital leases at December 31, 2001 are as
follows (in thousands of dollars):
2002 $173,352
2003 1,549
2004 149,403
2005 1,441
2006 2,177
Thereafter 35,500
----------------
Totals $363,422
================
Interest paid totaled approximately $30,810,000, $41,101,000, and $12,953,000 in
2001, 2000, and 1999, respectively. We capitalized interest expense of
$1,100,000 and $1,500,000 in 2001 and 2000, respectively.
Per the terms of our bank agreements, we are able to pay dividends of up to
$5,000,000 per fiscal year.
7. STOCK COMPENSATION
We have executive stock option and incentive award plans ("Employee Plans") and
a directors' stock option plan ("Directors' Plan"). The Employee Plans permit
the grant of options and restricted shares for up to 3,000,000 shares of common
stock. The Directors' Plan permits the grant of options to purchase up to
150,000 shares of common stock. Options granted under the Employee Plans vest
over a four-year period. Options under the Directors' Plan are exercisable at
the grant date. Certain options also remain outstanding from prior stock option
plans. At December 31, 2001, options for 889,230 shares were exercisable, while
1,307,700 of the Employee Plans' shares and 58,000 Directors' Plan shares were
available for future grant.
18
We apply Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for the stock option plans. Accordingly, we have not recognized
compensation expense for our stock option plans. Had compensation expense for
these plans been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of FAS No. 123, our pro
forma net income, basic earnings per share and diluted earnings per share would
have been approximately $(9,601,000), $40,033,000, and $35,581,000; $(0.38),
$1.58 and $1.40; and $(0.38), $1.57 and $1.39 in 2001, 2000 and 1999,
respectively.
The fair values of our stock options, as disclosed above, were estimated as of
the date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 2001, 2000 and 1999: risk-free interest rates
ranging from 2.0% to 4.5%; a dividend yield of 1.0%; volatility factor of the
expected market price of our common stock ranging from .451 to .831; and a
weighted average expected life of the options of 6 years. For purposes of the
pro forma disclosures required under FAS No. 123, the estimated fair value of
the options is amortized over the options' vesting period.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
our employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of our stock options.
19
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
7. STOCK COMPENSATION (CONTINUED)
A summary of our stock option activity for the three years ended December 31,
2001 is as follows:
Weighted
Number of Average Exercise
Options Exercise Price Price Range
---------------- ----------------- -------------------
Outstanding at January 1, 1999 1,184,050 $13.64
Granted 323,000 14.28 $12.75-$14.31
Exercised (14,000) 8.05 5.69-10.75
Forfeited (43,500) 15.94 12.75 - 18.06
----------------
Outstanding at December 31, 1999 1,449,550 $13.76
================
Exercisable at December 31, 1999 784,500 $12.14
Weighted average fair value of
Options granted during 1999 $14.31
Outstanding at January 1, 2000 1,449,550 $13.76
Granted 502,250 6.76 $6.34 - $8.94
Exercised (26,000) 7.75 7.25 - 8.56
Forfeited (401,750) 13.86 9.00 - 18.06
----------------
Outstanding at December 31, 2000 1,524,050 $11.53
================
Exercisable at December 31, 2000 772,358 $12.69
Weighted average fair value of
Options granted during 2000 $6.87
Outstanding at January 1, 2001 1,524,050 $11.31
Granted 462,300 3.54 $3.37 - $5.04
Exercised 0 0.00 $0.00 - $0.00
Forfeited (315,500) 10.30 $3.37 - $18.06
----------------
Outstanding at December 31, 2001 1,670,850 9.47 $3.37 - $19.375
================
Exercisable at December 31, 2001 899,230 $11.94
Weighted average fair value of
Options granted during 2001 $1.51
Exercise prices for options outstanding as of December 31, 2001 ranged
principally from $1.94 to $9.69 and $11.63 to $19.38, with weighted-average
remaining contractual lives of those options ranging from 4.5 to 9.1 and 4.7 to
6.5 years, respectively.
20
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
7. STOCK COMPENSATION (continued)
We have an Employee Stock Ownership Plan and Trust ("ESOP") for some of our
United States employees who are not covered by collective bargaining agreements.
The ESOP requires that we make contributions equal to 3% of the annual
compensation of the ESOP participants. We may, at our discretion, make
additional contributions within specified limits. Contributions to the ESOP of
$554,000, $1,020,000, and $984,000 were expensed in 2001, 2000 and 1999,
respectively.
On October 6, 1995, our board of directors declared a dividend of one right for
each share of INTERMET common stock held of record at the close of business on
October 17, 1995, pursuant to a Shareholder Protection Rights Agreement dated
October 6, 1995. The rights generally are not exercisable until 10 days after an
announcement by us that a person, as defined (excluding, with certain
limitations, certain holders of 10% or more of our common stock who do not
acquire additional shares, any of our ESOPs or benefit plans, and INTERMET or
any of its wholly-owned subsidiaries), has acquired 10% of our common stock or
announces a tender offer that could result in the ownership of 10% or more of
our common stock. Each right, should it become exercisable, will entitle the
owner to buy 1/100th of a share of Participating Preferred Stock, a new series
of our preferred stock, at an exercise price of $40. On October 16, 1997, we
amended the rights agreement to provide that certain institutional investors who
own in excess of 10%, but less than 15% of our common stock, are not "Acquiring
Persons", as defined by the rights agreement.
In the event the rights become exercisable as a result of the acquisition of
shares, each right will entitle the owner, other than the acquiring person, to
buy at the rights' then current exercise price a number of shares of common
stock with a market value equal to twice the exercise price. In addition, unless
the acquiring person owns more than 50% of the outstanding shares of common
stock, the board of directors may elect to exchange all outstanding rights
(other than those owned by such acquiring person or affiliates thereof) at an
exchange ratio of one share of common stock per right. Unless we merge with
another company under certain conditions or redeem or exchange the rights before
October 6, 2005, the rights will expire on such date.
In February 2001 our board approved a Restricted Share Unit Award Plan for
certain key executives. Under this plan, eligible executives were entitled to
surrender all or a portion of the bonuses they earned under our 2000 profit
sharing plan in exchange for an award of Restricted Share Units. The number of
shares awarded under this program will be matched one for one if the employee
remains with the company for two years from the award date.
8. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments required under building and equipment operating
leases that have initial or remaining non-cancelable lease terms in excess of
one year at December 31, 2001 are as follows (in thousands of dollars):
2002 $4,911
2003 3,605
2004 2,414
2005 2,027
2006 1,619
Thereafter 51
----------------
Total $14,627
================
21
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rental expense under operating leases aggregated $6,046,000, $5,059,000
and $5,242,000 in 2001, 2000 and 1999, respectively.
At December 31, 2001, we had commitments to purchase capital equipment of
approximately $906,000 in the aggregate.
43% of the domestic labor force is covered by collective bargaining agreements
and of those covered by collective bargaining, none have contracts expiring
within one year.
Some of our subsidiaries have been named as potentially responsible parties
liable for cleanup of known environmental conditions. For known environmental
situations, INTERMET, with the assistance of environmental engineers and
consultants, has recorded reserves to cover estimated undiscounted future
environmental expenditures. Environmental reserves at December 31, 2001 and 2000
approximated $6,291,000 and $7,469,000, respectively. The environmental reserve
at December 31, 2001 includes $410,000 related to the shutdown of Alexander
City. The environmental reserve at December 31, 2000 included $1,200,000 related
to the shutdown of Ironton. We also have corrective action plans and/or
preventive environmental projects to ensure the safe and lawful operation of our
facilities. There could exist, however, more extensive or unknown environmental
situations at existing or previously owned businesses for which the future cost
is not known or exceeds amounts accrued at December 31, 2001.
In addition to these recurring and anticipated expenditures, the 1990 amendments
to the Federal Clean Air Act, and regulations promulgated thereunder are
expected to have a major impact on the compliance cost of many U.S. companies,
including foundries of the type owned by INTERMET. Until Federal and state
governments adopt final regulations implementing those amendments and until
certain control measures under existing regulations are determined, it is not
possible to estimate such costs.
We are also engaged in various legal proceedings and other matters incidental to
our normal business activities. We do not believe any of these above-mentioned
proceedings or matters will have a material adverse effect on our consolidated
financial position or results of operations or cash flows.
22
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
9. RETIREMENT PLANS AND BENEFITS
We maintain four noncontributory defined benefit pension plans for certain U.S.
employees covered by collective bargaining agreements. The benefits are based on
years of service. Additionally, we maintain two non-contributory defined benefit
pension plans for certain U.S. salaried and non-union hourly employees. The
benefits are based on final average compensation. Our policy is to fund amounts
as required under applicable laws and regulations. In addition to providing
pension benefits, we provide health care and life insurance benefits to certain
retired U.S. employees and their dependents. Certain salaried employees can
become eligible for retiree health care benefits at age 55 depending on years of
service. Certain hourly employees currently can become eligible for retiree
health care benefits at age 60 depending on years of service. Retirees receive
substantially the same health care benefits as active employees. The medical
plans generally pay most medical expenses less deductible and co-pay amounts.
Salaried and hourly employees also contribute to the cost of dependent coverage.
Certain salaried employee coverage converts to a Medicare supplement at age 65,
while most hourly employee coverage ceases at age 65.
Years ended December 31,
Pension Benefits Other Benefits
---------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
(in thousands of dollars)
Change in benefit obligation:
Benefit obligation at beginning of year $73,546 $65,950 $ 35,545 $35,218
Service cost 2,109 1,904 899 816
Interest cost 5,747 5,151 2,701 2,673
Amendments 667 4,888 181 38
Actuarial losses (gains) 2,495 (310) 5,238
109
Benefits paid (3,369) (4,037) (3,694) (3,309)
------------------ ----------------- ---------------- ----------------
Benefit obligation at end of year $81,195 $73,546 $ 40,870 $35,545
Change in plan assets:
Fair value of plan assets at beginning of year $73,695 $72,724
Actual return on plan assets (5,371) 4,173
Company contributions 1,695 835
Benefits paid (3,369) (4,037)
------------------ -----------------
Fair value of plan assets at end of year $66,650 $73,695
------------------ -----------------
Funded status of the plan (under-funded) $ (14,545) $149 $(40,870) ($35,545)
Unrecognized net actuarial loss(gain) 10,982 (3,820) (5,659) (12,272)
Unrecognized transition obligation 15 67 - -
Unrecognized prior service cost 6,604 6,655 126 (64)
------------------ ----------------- ---------------- ----------------
Prepaid (accrued) benefit cost $3,056 $3,051 $(46,403) ($47,881)
================== ================= ================ ================
23
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
9. RETIREMENT PLANS AND BENEFITS (CONTINUED)
In 2001, an amendment to increase the level of pension benefits earned caused an
increase in the projected benefit obligation of $0.7 million and pension expense
of $0.1 million. In 2000, an amendment to increase the level of pension benefits
earned caused an increase in the projected benefit obligation of $4.9 million
and pension expense of $1.1 million.
At September 30 of each year, we determine the discount rate to be used to
discount plan liabilities. The discount rate used in determining the actuarial
present value of the projected benefit obligations was 7.5% in 2001 and 8.0% in
2000 and 1999. The expected long-term rate of return on assets used in
determining net pension expense was 9.5% in 2001, 2000 and 1999. Plan assets
consist of publicly traded stocks and bonds, cash equivalents and insurance
contracts.
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation was 6.5% to 7.5% in 2001, declining by 0.25%
per year to an ultimate rate of 5.0% for the applicable employee age groups.
Certain subsidiaries providing a dental benefit assumed a 5.0% cost trend rate
for dental in 2001.
Years ended December 31,
Pension Benefits Other Benefits
---------------- --------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
(in thousands of dollars)
Components of net periodic cost:
Service cost $2,109 $1,904 $1,434 $899 $816 $749
Interest cost 5,747 5,151 4,335 2,701 2,673 2,535
Expected return on plan assets (6,275) (6,465) (5,665) - - -
Amortization of prior service cost
and net transition obligation 107 (119) 344 (13) (13) (13)
Recognized net actuarial gain - - - (992) (1,091) (980)
----------- ----------- ---------- ----------- ----------- -----------
Benefit cost $1,688 $471 $448 $2,595 $2,385 $2,291
=========== =========== ========== =========== =========== ===========
The assumed health care cost trend rate has a significant effect on the amounts
reported. A one-percentage-point change in the assumed health care cost trend
rate would have the following effects:
One Percentage One Percentage
Point Increase Point Decrease
---------------------- -----------------------
(in thousands of dollars)
Effect on total service and interest cost
components in 2001 $252 ($226)
Effect on postretirement benefit obligation as of
December 31, 2001 $2,413 ($2,161)
24
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
9. RETIREMENT PLANS AND BENEFITS (CONTINUED)
Amounts recognized for pension benefits in the consolidated balance sheets
consist of:
December 31,
2001 2000
---------------- --------------
(in thousands of dollars)
Prepaid benefit cost $4,315 $4,177
Accrued benefit liability (18,478) (1,981)
Intangible asset 6,619 855
Accumulated other comprehensive income, pretax 10,600 -
---------------- --------------
Net amount recognized $3,056 $3,051
================ ==============
At December 31, 2001 all of our pension plans had accumulated benefit
obligations in excess of plan assets (underfunded plans).
We maintain several defined contribution plans for certain salaried employees
and certain hourly employees covered by collective bargaining agreements.
Contributions to these plans, which are principally based on hours worked by
each employee, totaled $3,207,000, $2,097,000 and $1,308,000 in 2001, 2000 and
1999, respectively. All of the plans allow participants to make pretax
contributions as a percentage of their compensation.
We also maintain defined contribution plans for domestic salaried employees and
non-union hourly employees. In certain plans we contribute a specified
percentage of the annual compensation of participants. All of the plans allow
participants to make pretax contributions as a percentage of their compensation.
Certain plans provide a matching contribution on employees' pretax contribution
to a specified limit. Certain plans provide for discretionary profit-sharing
contributions. We accrued contributions to the plans of $2,065,000, $2,509,000
and $1,838,000 in 2001, 2000 and 1999, respectively.
25
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES
The provision for income taxes consists of the following (in thousands of
dollars):
Years ended December 31,
2001 2000 1999
-------------- -------------- -------------
Current:
Federal ($6,364) $10,086 $14,890
State 1,506 3,233 3,716
Foreign 3,644 8,413 (139)
-------------- -------------- -------------
$ (1,214) $21,732 $18,467
Deferred:
Federal ($4,247) $11,644 $ (7,406)
State 161 2,815 (922)
Foreign - - 1,937
-------------- -------------- -------------
(4,086) 14,459 (6,391)
-------------- -------------- -------------
Totals ($5,300) $36,191 $12,076
============== ============== =============
No federal income taxes were paid in 2001. We paid federal income taxes of
approximately $15,000,000, and $14,949,000 in 2000 and 1999, respectively.
The provision for income taxes differs from the amount computed using the
statutory U.S. federal income tax rate for the following reasons (in thousands
of dollars):
Years ended December 31,
2001 2000 1999
------------- -------------- -------------
Provision for income taxes at U.S. statutory
rate ($4,901) $26,985 $16,959
Income with no tax effect - (335) (118)
Difference between U.S. and foreign tax rates
(1,658) (531) 82
Utilization of NOL and credit carryforwards
- - (190)
State income taxes, net of federal income
tax benefits 979 2,641 2,810
Reduction in valuation allowance - - (9,018)
Goodwill amortization/write-off 1,613 8,573 766
Other (1,333) (1,142) 785
------------- -------------- -------------
Totals ($5,300) $36,191 $12,076
============= ============== =============
26
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
The tax effects of temporary differences and carryforwards that give rise to
deferred income tax assets (liabilities) at December 31, 2001 and 2000 are as
follows (in thousands of dollars):
2001 2000
--------------- --------------
Compensation and benefit items, primarily related to FAS No.
106 $26,102 $21,361
Operating loss, capital loss, foreign tax credit and AMT
credit carryforwards 9,030 4,062
Impairment and shutdown costs 5,204 1,280
Deductible goodwill 2,188 1,320
Other temporary differences 27,735 23,559
--------------- --------------
Gross deferred tax assets 70,259 51,582
Depreciation and related items (47,588) (32,165)
Other temporary differences (3,361) (4,193)
--------------- --------------
Gross deferred tax liabilities (50,949) (36,358)
--------------- --------------
Net deferred tax asset 19,310 15,224
Valuation allowance (50) (50)
--------------- --------------
Net deferred income taxes $19,260 $15,174
=============== ==============
During 2001, INTERMET generated a foreign tax credit of $7,500,000; $2,000,000
of which was used in the current year. We do not believe a valuation allowance
is required since we project both sufficient foreign source income and
sufficient U.S. tax liabilities to fully utilize this credit before its
expiration date in 2006. We expect to fully realize the remaining net deferred
tax asset of $13.8 million based on estimates of future taxable income.
During 2000, we reduced the deferred tax assets and the corresponding valuation
allowance by $3,678,000. Of this amount, $1,975,000 related to net operating
loss carryforwards of the Ironton Iron facility. As this operation has been
shutdown, there is no possibility these losses will ever be utilized.
Consequently, we have reversed the deferred tax asset and related valuation
allowance. In addition, $1,703,000 relates to foreign tax credit carryforwards,
which expired in 2000. Tax loss carryforwards with a value of $3,562,000 expire
in various amounts between 2002 and 2010.
During 1999, we reversed a valuation allowance of $4,518,000, due to a change in
German tax law in 1999, which allowed us to utilize 100% of the net operating
loss (NOL) for Ueckermunde. In addition, we reduced the valuation allowance
approximately $4,500,000 as a result of a recapitalization of our international
operations. This recapitalization will allow us to utilize foreign tax credits
that would have otherwise expired.
These income tax amounts are included in the consolidated balance sheets as
follows (in thousands of dollars):
December 31,
2001 2000
---------------- -------------
Current assets $29,461 $13,999
Other non-current assets
(liabilities) (10,201) 1,175
---------------- -------------
Totals $19,260 $15,174
================ =============
27
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
11. GEOGRAPHIC AREA AND MAJOR CUSTOMER INFORMATION
The following is a breakout of sales, operating profit, net income and assets
based on geographic locals as of and for years ended December 31, 2001, 2000 and
1999. We operate in North America and have other international operations,
mainly German.
As of and for the years ended December 31,
2001 2000 1999
-------------- ------------- -------------
(in thousands of dollars)
Net sales:
North America $753,187 $943,371 $846,876
Other international 89,986 95,473 109,956
Operating profit:
North America $1,641 $72,409 $41,708
Other international 10,950 16,283 20,453
Income before income taxes:
North America $ (28,352) $50,892 $29,263
Other international 14,349 26,207 19,190
Assets:
North America $767,697 $841,016 $888,720
Other international 75,636 77,780 68,572
Net sales to customers exceeding 10% of consolidated net sales in 2001, 2000 or
1999, and other major customers, were as follows (as a percentage of
consolidated net sales):
2001 2000 1999
--------- --------- ----------
Customer:
DaimlerChrysler 21% 18% 17%
Ford 11% 11% 16%
Delphi 9% 8% 7%
General Motors 6% 6% 2%
Visteon 6% 7% -
PBR 4% 3% 3%
For 1999, Ford sales include sales to Ford Motor Company (8.1%) and Visteon
Automotive Systems (8.1%).
28
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
12. EARNINGS PER SHARE
Earnings per share are computed as follows:
Years ended December 31,
2001 2000 1999
------------- ----------- ------------
(in thousands, except per share data)
Numerator:
Net income (loss) $(8,703) $40,908 $36,377
Denominator:
Denominator for basic earnings per
share - weighted average shares 25,264 25,362 25,480
Effect of dilutive securities:
Employee stock options and unearned
restricted stock - 76 91
------------ ----------- ------------
Denominator for diluted earnings per share
- adjusted weighted average shares and
assumed conversions 25,264 25,438 25,571
============ =========== ============
Net income (loss) per share $ (0.34) $ 1.61 $ 1.43
============ =========== ============
Net income (loss) per share - assuming
dilution $ (0.34) $ 1.61 $ 1.42
============ =========== ============
Dilutive earnings per share reflects the assumed exercise of stock options and
unearned restricted stock.
29
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
13. QUARTERLY DATA AND SHARE INFORMATION (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2000. The data provided below for 2001 varies from
amounts previously reported on Form 10-Q. We have reconciled the amounts given
with those previously reported and described the reason for the differences.
Previously Previously Previously
Reported Restated Reported Restated Reported Restated
Mar. 31 Mar. 31 Jun. 30 Jun. 30 Sept. 30 Sept. 30 Dec. 31
------------- ----------- ----------- ----------- ------------ ----------- -------------
2001
Net sales (1) $223,925 $223,732 $228,190 $227,997 $197,871 $197,264 $194,180
Gross profit (2) 18,693 17,345 24,328 21,806 13,896 12,050 10,322
Net income (3)(4) 339 800 3,821 2,865 (2,704) (3,405) (8,963)
Net income per common share
- Basic 0.01 0.03 0.15 0.11 (0.11) (0.13) (0.35)
- Diluted 0.01 0.03 0.15 0.11 (0.11) (0.13) (0.35)
Share prices (Nasdaq):
High 4.625 5.810 5.900 4.010
Low 2.500 3.000 2.800 2.510
2000 (5)
Net sales $302,245 $281,855 $239,585 $215,159
Gross profit 44,269 41,290 28,169 11,854
Net income 9,496 11,870 8,022 11,520
Net income per common share
- Basic 0.37 0.47 0.32 0.45
- Diluted 0.37 0.47 0.32 0.45
Share prices (Nasdaq):
High 14.500 9.844 10.188 7.875
Low 8.250 4.563 5.000 3.000
1. Adjusts sales for an overbilling of one customer during 2001 based on
miscommunication on selling price.
2. During 2001, depreciation was not commenced with the start of the
assets being placed into production for certain capital additions and
therefore, pre-tax earnings has been restated by $175,000, $462,000 and
$194,000 for first, second and third quarter, respectively. Inventories
were over valued by $1,184,000, $2,076,000, and $1,249,000 in the
previously stated first, second, and third quarters, respectively, and
have been reduced to market in a lower of cost or market calculation.
Operating expenses were recognized prematurely by $204,000, $209,000,
and $204,000 for the previously reported first, second, and third
quarters, respectively.
3. Selling, general, and administrative expenses were prematurely
recognized by $73,000, $660,000, and $465,000 in the previously
reported first, second, and third quarters, respectively. Interest
expense was overstated by the capitalized amounts of $488,000,
$269,000, and $213,000 in the previously reported first, second, and
third quarters, respectively. A favorable adjustment in other (income)
expenses of $1,555,000 for the final German insurance claim settlement
was not recorded in the first quarter previously reported.
4. During the fourth quarter of 2001, we recorded asset impairment and
shutdown costs for the closure of Alexander City totaling $12.9 million
before taxes. Without this item, proforma results for the fourth
quarter of 2001 would have been as follows:
Net income (in thousands) $ (565)
Net income per common share $(0.02)
Net income per common share - assuming dilution $(0.02)
5. During 2000 we had various events that impacted our quarterly net
income. During the first quarter, we had losses at our Ironton foundry,
which resulted from the fulfillment of certain customer needs. Further,
during the third and fourth quarters, we had gains from insurance and
the sale of a subsidiary and also during the fourth quarter we took a
charge for a workforce reduction and the writedown of non-core assets.
Without this impact, the results of our pro-forma quarterly net income
would have been as follows:
30
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net income $13,235 $11,870 $5,261 $(2,428)
Net income per common share - Basic 0.52 0.47 0.21 (0.10)
Net income per common share - Assuming
Dilution 0.52 0.47 0.21 (0.10)
Pro forma fourth quarter net income was impacted by the severe slowdown
in the auto industry as well as under performance of certain foundries.
Third and fourth quarter sales are usually lower than the first and second
quarter sales due to plant closings by automotive manufacturers for vacations
and model changeovers. The above share price information represents inter-dealer
transactions in The Nasdaq National Market without retail markup, markdown or
commission.
14. DERIVATIVE FINANCIAL INFORMATION
We adopted FAS 133 on January 1, 2001. The impact of this adoption on our
financial position as of January 1, 2001 was immaterial.
Under our risk management policy, the use of derivatives for managing risk is
confined to hedging the exposure related to variable rate funding activities.
Specifically, we review our liability structure on a recurring basis and make
the determination as to whether the risk of rising interest rates should be
adjusted using derivative instruments. In addition, the policy allows the use of
derivatives for hedging foreign currency exposure and hedging purchase
commitments as it relates to raw materials used in our production processes.
On October 24, 2000, we entered into an interest rate swap agreement through
Scotia Capital, Inc., a broker-dealer subsidiary of the bank of Nova Scotia. The
agreement terminates on October 24, 2003. Interest rate swaps are contractual
agreements between parties to exchange fixed and floating interest rate payments
periodically, over the life of the agreements, without the exchange of
underlying principal amounts. This swap is used to partially hedge an underlying
debt obligation and is marked to market.
The notional principal amount of this contract is $50,000,000. INTERMET pays
quarterly at a fixed interest rate of 6.468% with Scotia Capital, Inc. paying at
the three-month LIBOR rate. The LIBOR rate for the most recent calculation
period (October 24, 2001 through January 24, 2002) is 2.3525%. We do not expect
to terminate the swap prior to maturity. The fair value of the swap is
approximately $2,858,000 and has been recorded as a liability on the balance
sheet.
We have designated this swap transaction as a cash flow hedge. The effectiveness
of this hedge transaction is being assessed using the short cut method as it
meets the criteria outlined in FAS 133. The above hedge is considered to be
perfectly effective; therefore, the entire change in the fair value of the
derivative has been recorded in other comprehensive income, and no hedge
ineffectiveness is recorded in earnings.
15. INSURANCE CLAIMS
Neunkirchen Foundry
On May 20, 2000, INTERMET's Neunkirchen Foundry suffered a fire that caused
extensive damage. There were no injuries resulting from the accident but the
Foundry was shut down for a period of approximately two weeks. As of December
31, 2000, the plant was fully operational with a few minor repairs remaining.
Local fire and law enforcement officials completed their investigation of the
incident. The cause of the fire was deemed accidental. The assets lost and the
resulting business interruption are covered under the insurance policies
INTERMET had in place for our Columbus Neunkirchen facility. As of December 31,
2000, we had reached final settlement with our insurance company for the
expenses and lost profit related to this incident.
31
New River Foundry
On March 5, 2000 our New River Foundry suffered an explosion that shut down
operations at the facility until November of 2000. Based on our investigation,
our conclusion is that the incident was accidental. However, on September 5,
2000 the Virginia Department of Labor and Industry issued citations of alleged
violations for applicable health and safety requirements and assessed fines in
the total amount of $0.8 million, which are included in "Other, net" in the
accompanying statements of operations. The rebuilding of our New River facility
is complete. Both lines are operational and New River's capacity is
approximately the same as pre-accident levels. As of December 31, 2001 we have
reached final settlement with our insurance carriers related to the New River
accident.
The resulting business interruption and loss of fixed assets was covered under
INTERMET's insurance policies for the period. At December 31, 2000 approximately
$10.4 million was recorded as deferred revenues and $16.0 million as accounts
receivable. As of December 31, 2001 we have received final settlements totaling
$133.8 million with our insurance carriers, $30.6 million in 2001 and $103.2
million in 2000.
The settlement for the above two claims has been recorded as follows:
- - For the year ended December 31, 2001, we recorded insurance recovery of
approximately $13.4 million related to business interruption for a
total over the two years of $41.7 million for the claims made in 2000
mentioned above. Business interruption recovery monies offset cost of
sales.
- - We incurred accident-related expenses in total of $53.4 million, which
were offset by insurance recovery within cost of sales, $7.8 million in
2001 and $45.6 million in 2000.
- - In total, we recorded approximately $37.6 million for the replacement
of property, plant and equipment. Of this amount, $3.2 million and
$26.5 million have been recorded as gains in "Other, net" in the
accompanying statements of operations in 2001 and 2000, respectively.
- - At December 31, 2001, approximately $0.2 million remains as deferred
revenue and $0.9 million as accrued costs. No monies were still
receivable.
32