UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File Number 333-28751
NEENAH FOUNDRY COMPANY
(Exact name of each registrant as it appears in its charter)
Wisconsin 39-1580331
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
2121 Brooks Avenue, P.O. Box 729, Neenah, Wisconsin 54957
(Address of principal executive offices) (Zip Code)
(920) 725-7000
(Registrant's telephone number, including area code)
None
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, Class A, $100 par value- 1,000 shares as of April 30, 2002
Common Stock, Class B, $100 par value- 0 shares as of April 30, 2002
NEENAH FOUNDRY COMPANY
Form 10-Q Index
For the Quarter Ended March 31, 2002
Page
Part 1. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets -- March 31, 2002
and September 30, 2001 3
Condensed consolidated statements of operations -- Three
and six months ended March 31, 2002 and 2001 4
Condensed consolidated statements of cash flows -- Six
months ended March 31, 2002 and 2001 5
Notes to condensed consolidated financial statements --
March 31, 2002 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
Page 2
NEENAH FOUNDRY COMPANY
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31 September 30
2002 2001(1)
-------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 10,589 $ 4,346
Accounts receivable, net........................................... 56,893 69,845
Inventories........................................................ 57,414 71,695
Refundable income taxes............................................ 2,736 2,148
Deferred income taxes.............................................. 10,450 3,069
Other current assets............................................... 4,443 5,852
Current assets of discontinued operations.......................... 2,985 -
-------- --------
Total current assets................................... 145,510 156,955
Property, plant and equipment........................................ 299,417 308,698
Less accumulated depreciation........................................ 108,513 94,865
-------- --------
190,904 213,833
Deferred financing costs, net........................................ 6,884 7,811
Identifiable intangible assets, net.................................. 39,089 55,932
Goodwill, net........................................................ 180,214 186,005
Other assets......................................................... 6,141 5,907
-------- --------
$568,742 $626,443
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................... $ 22,810 $ 30,568
Accrued liabilities................................................ 25,823 31,518
Current portion of long-term debt.................................. 41,354 20,424
Current portion of capital lease obligations....................... 2,349 2,304
Current liabilities of discontinued operations..................... 3,485 -
-------- --------
Total current liabilities.............................. 95,821 84,814
Long-term debt....................................................... 406,666 413,653
Capital lease obligations............................................ 6,587 7,845
Deferred income taxes................................................ 52,352 63,719
Postretirement benefit obligations................................... 6,573 6,345
Other liabilities.................................................... 9,045 8,127
-------- --------
Total liabilities...................................... 577,044 584,503
Commitments and contingencies
STOCKHOLDER'S EQUITY (DEFICIT):
Preferred stock, par value $100 per share -- authorized
3,000 shares, no shares issued or outstanding............... - -
Common stock, par value $100 per share -- authorized
11,000 shares, issued and outstanding 1,000 shares.......... 100 100
Additional paid in capital......................................... 51,317 51,317
Accumulated deficit................................................ (58,101) (7,860)
Accumulated other comprehensive loss............................... (1,618) (1,618)
-------- --------
Total stockholder's equity (deficit)................... (8,302) 41,939
-------- --------
$568,742 $626,442
======== ========
See notes to condensed consolidated financial statements.
(1) The balance sheet as of September 30, 2001 has been derived from the audited
financial statements as of that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements
Page 3
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- ----------------------------
2002 2001 2002 2001
-------- --------- --------- ---------
(Unaudited) (Unaudited)
Net sales...................................................... $ 92,852 $ 100,898 $ 180,950 $ 203,147
Cost of sales.................................................. 81,789 89,652 159,602 177,839
-------- --------- --------- ---------
Gross margin................................................... 11,063 11,246 21,348 25,308
Selling, general and administrative expenses................... 6,755 6,822 13,327 14,790
Amortization of intangible assets.............................. 955 2,653 1,915 5,306
Gain on disposal of equipment.................................. - (64) (19) (60)
-------- --------- --------- ---------
Total operating expenses....................................... 7,710 9,411 15,223 20,036
-------- --------- --------- ---------
Operating income............................................... 3,353 1,835 6,125 5,272
Net interest expense........................................... (9,986) (10,983) (20,062) (22,073)
-------- --------- --------- ---------
Loss from continuing operations before
income taxes................................................. (6,633) (9,148) (13,937) (16,801)
Income tax benefit............................................. (2,619) (3,261) (5,575) (5,825)
-------- --------- --------- ---------
Loss from continuing operations................................ (4,014) (5,887) (8,362) (10,976)
Gain on sale of discontinued operations, net of
income tax of $1,603......................................... - - - 2,404
Loss from discontinued operations, net
of income tax provision (benefit) of
$1,309, $(331), $(16,079), and $(1,331)...................... (5,153) (954) (41,879) (2,517)
-------- --------- --------- ---------
Net loss....................................................... $ (9,167) $ (6,841) $ (50,241) $ (11,089)
======== ========= ========= =========
See notes to condensed consolidated financial statements.
Page 4
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
March 31,
----------------------------
2002 2001
--------- ---------
(Unaudited)
OPERATING ACTIVITIES
Net loss............................................................. $ (50,241) $ (11,089)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for obsolete inventories................................ 15,187 -
Provision for uncollectible accounts receivable................... 3,265 -
Provision for impairment of assets................................ 30,646 -
Depreciation and amortization..................................... 14,774 21,052
Amortization of deferred financing costs and premium on notes..... 616 560
Gain on sale of discontinued operations........................... - (4,007)
Deferred income taxes............................................. (15,496) (1,210)
Changes in operating assets and liabilities....................... (1,522) (5,852)
--------- ---------
Net cash used in operating
activities................................................... (2,771) (546)
INVESTING ACTIVITIES
Purchase of property, plant and equipment............................ (4,026) (10,459)
Net proceeds from sale of discontinued operations.................... - 5,044
--------- ---------
Net cash used in investing
activities................................................... (4,026) (5,415)
FINANCING ACTIVITIES
Proceeds from long-term debt......................................... 23,500 -
Payments on long-term debt and capital lease obligations............. (10,460) (12,610)
Debt issuance costs.................................................. - (907)
--------- ---------
Net cash provided by (used in) financing
activities................................................... 13,040 (13,517)
--------- ---------
Increase (decrease) in cash and cash equivalents..................... 6,243 (19,478)
Cash and cash equivalents at beginning of period..................... 4,346 19,478
--------- ---------
Cash and cash equivalents at end of period........................... $ 10,589 $ -
========= =========
See notes to condensed consolidated financial statements.
Page 5
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2002
(In thousands)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal and recurring adjustments ) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ending September 30, 2002. For further information, refer
to the consolidated financial statements and footnotes thereto included in
Neenah Foundry Company's Annual Report on Form 10-K for the year ended September
30, 2001.
NOTE 2 -- INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141), and
No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The Company adopted
SFAS 142 as of October 1, 2001. Under SFAS 142, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized but are subject to
annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
Application of the nonamortization provisions of SFAS 142 resulted in a decrease
in the net loss of $3,525 for the six months ended March 31, 2002. In accordance
with SFAS 141, the Company also reclassified the identifiable intangible assets
related to the assembled workforce and facilities in place with an unamortized
balance of $4,660 and $3,469, respectively, net of related deferred income taxes
of $1,864 and $1,388, respectively, to goodwill at the date of adoption.
The Company has performed the required impairment tests of goodwill as of
October 1, 2001 and concluded that an impairment charge resulting from the
transitional impairment test is not required. The transitional impairment test
was performed based on the expected present value of future cash flows for each
of the Company's reporting units.
Page 6
NOTE 2 -- INTANGIBLE ASSETS (CONTINUED)
March 31, 2002 September 30, 2001
-------------------------- -------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
Amortized intangible assets:
Customer lists $ 31,441 $ 13,243 $ 35,041 $ 12,662
Tradenames 22,553 2,365 27,053 2,392
Other 1,295 592 16,001 7,109
-------- -------- -------- --------
Total $ 55,289 $ 16,200 $ 78,095 $ 22,163
======== ======== ======== ========
The Company does not have any intangible assets deemed to have
indefinite lives. Amortization expense expected to be recognized
in subsequent years ending September 30, is as follows:
September 30, 2002 $ 3,950
September 30, 2003 3,832
September 30, 2004 3,832
September 30, 2005 3,832
September 30, 2006 3,832
</Table>
<Table>
Changes in the carrying amount of goodwill for the six months ended March 31, 2002, are as follows:
Castings Forgings Other
Segment Segment Segment Total
--------- -------- ------ ---------
Balance as of September 30, 2001 $ 168,709 $ 17,296 $ - $ 186,005
Reclassification of assembled workforce and
facilities in place 4,595 282 - 4,877
Impairment charge - see Note 3 (10,668) - - (10,668)
--------------------------------------------------------
Balance as of March 31, 2002 $ 162,636 $ 17,578 $ - $ 180,214
========================================================
NOTE 3 -- DISCONTINUED OPERATIONS
In August 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No.144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). While the adoption of SFAS 144 as of
October 1, 2001 did not have a significant impact on the Company's financial
position and results of operations, the provisions of this standard were applied
during the six months ended March 31, 2002 as discussed below.
Customer actions and the significant deterioration of the U.S. economy during
the quarter ended December 31, 2001 had a dramatic effect on the operations of
Cast Alloys, Inc. (Cast Alloys). This resulted in a significant reduction in
sales, operating profits and cash flows of Cast Alloys for the three months
ended December 31, 2001. Based on these factors, a goodwill impairment charge of
$10,668 was recognized during the three months ended December 31, 2001 related
to the decline in fair value of the Cast Alloys reporting unit which is included
in the Castings segment.
These events also had a significant impact on the value of Cast Alloys' fixed
assets and long-lived assets with finite lives. Due to the existing impairment
indicators, management assessed the recoverability of these fixed assets and
long-lived assets. As the expected undiscounted cash flows were less than the
carrying value of the related assets, an impairment charge was recognized for
the difference between the fair value and carrying value of such assets of
$19,978 during the three months ended December 31, 2001.
Page 7
In January, 2002 management initiated a plan for the discontinuation of the
operations of Cast Alloys by closing its manufacturing facilities. Severance
costs of approximately $2.2 million associated with this plan were recognized
during the three months ending March 31, 2002. All employees of Cast Alloys are
expected to be terminated by April 2002. In accordance with the provisions of
SFAS 144, the results of operations for Cast Alloys have been reported as
discontinued operations in the accompanying statements of operations.
Previously, Cast Alloys was included in the Castings segment. Revenues for Cast
Alloys for the three months ended March 31, 2002 and 2001 were $6,769 and
$8,627, respectively, and revenues for the six months ended March 31, 2002 and
2001 were $11,686 and $24,007, respectively.
On October 2, 2000, the Company sold all of the issued and outstanding shares of
common stock of Hartley Controls Corporation for a cash purchase price of
$5,190, net of fees of $129 and recognized a gain of $2,404, net of income taxes
of $1,603.
NOTE 4 -- INVENTORIES
The components of inventories are as follows:
March 31, September 30,
2002 2001
--------- -------------
Raw materials................................... $ 4,199 $ 9,519
Work in process and finished goods.............. 40,406 50,210
Supplies........................................ 12,963 11,966
-------- --------
$ 57,568 $ 71,695
======== ========
If the FIFO method of inventory valuation had been used on all components,
inventories would have been approximately $1,142 and $1,041 higher than reported
at March 31, 2002 and September 30, 2001, respectively.
NOTE 5 -- GUARANTOR SUBSIDIARIES
The following tables present condensed consolidating financial information for
the three and six months ended March 31, 2002 and 2001 for: (a) the Company and
(b) on a combined basis, the guarantors of the Senior Subordinated Notes, which
include all of the wholly owned subsidiaries of the Company (Subsidiary
Guarantors). Separate financial statements of the Subsidiary Guarantors are not
presented because the guarantors are jointly, severally and unconditionally
liable under the guarantees, and the Company believes separate financial
statements and other disclosures regarding the Subsidiary Guarantors are not
material to investors.
Page 8
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2002
Subsidiary
Company Guarantors Eliminations Consolidated
--------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,469 $ 120 $ - $ 10,589
Accounts receivable, net 24,310 32,583 - 56,893
Inventories 23,889 33,525 - 57,414
Refundable income taxes 2,736 - - 2,736
Deferred income taxes 559 9,891 - 10,450
Other current assets 1,072 3,371 - 4,443
Current assets of discontinued operations - 2,985 - 2,985
----------------------------------------------------------------
Total current assets 63,035 82,475 - 145,510
Investments in and advances to subsidiaries 227,217 (57,994) (169,223) -
Property, plant and equipment, net 85,300 105,604 - 190,904
Identifiable intangible assets, net 25,067 20,906 - 45,973
Goodwill, net 105,766 74,448 - 180,214
Other assets 3,881 2,260 - 6,141
----------------------------------------------------------------
$ 510,266 $ 227,699 $ (169,223) $ 568,742
================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 6,637 $ 16,173 $ - $ 22,810
Accrued liabilities 18,690 7,133 - 25,823
Current portion of long-term debt 41,354 - - 41,354
Current portion of capital lease obligations - 2,349 - 2,349
Current liabilities of discontinued operations - 3,485 - 3,485
----------------------------------------------------------------
Total current liabilities 66,681 29,140 - 95,821
Long-term debt 406,666 - 406,666
Capital lease obligations - 6,587 - 6,587
Deferred income taxes 33,906 18,446 - 52,352
Postretirement benefit obligations 6,573 - - 6,573
Other liabilities 4,742 4,303 - 9,045
Stockholder's equity (deficit) (8,302) 169,223 (169,223) (8,302)
----------------------------------------------------------------
$ 510,266 $ 227,699 $ (169,223) $ 568,742
================================================================
Page 9
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
--------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,682 $ (336) $ - $ 4,346
Accounts receivable, net 30,862 38,983 - 69,845
Inventories 21,131 50,564 - 71,695
Refundable income taxes 2,148 - - 2,148
Deferred income taxes 559 2,510 - 3,069
Other current assets 2,361 3,491 - 5,852
----------------------------------------------------------------
Total current assets 61,743 95,212 - 156,955
Investments in and advances to subsidiaries 263,249 (41,712) (221,537) -
Property, plant and equipment, net 87,587 126,246 - 213,833
Identifiable intangible assets, net 28,357 35,386 - 63,743
Goodwill, net 104,898 81,107 - 186,005
Other assets 3,891 2,016 - 5,907
----------------------------------------------------------------
$ 549,725 $ 298,255 $ (221,537) $ 626,443
================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 7,534 $ 23,034 $ - $ 30,568
Accrued liabilities 20,067 11,451 - 31,518
Current portion of long-term debt 20,424 - - 20,424
Current portion of capital lease obligations - 2,305 - 2,305
----------------------------------------------------------------
Total current liabilities 48,025 36,790 - 84,815
Long-term debt 413,653 - - 413,653
Capital lease obligations - 7,845 - 7,845
Deferred income taxes 35,357 28,362 - 63,719
Postretirement benefit obligations 6,345 - - 6,345
Other liabilities 4,406 3,721 - 8,127
Stockholder's equity 41,939 221,537 (221,537) 41,939
----------------------------------------------------------------
$ 549,725 $ 298,255 $ (221,537) $ 626,443
================================================================
Page 10
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002
Subsidiary
Company Guarantors Eliminations Consolidated
--------- ---------- ------------ ------------
Net sales $ 33,657 $ 61,096 $ (1,901) $ 92,852
Cost of sales 25,298 58,392 (1,901) 81,789
----------------------------------------------------------------
Gross margin 8,359 2,704 - 11,063
Selling, general and administrative expenses 2,854 3,901 - 6,755
Amortization of intangible assets 457 498 - 955
----------------------------------------------------------------
Operating income (loss) 5,048 (1,695) - 3,353
Net interest expense (4,644) (5,342) - (9,986)
----------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity in loss
of subsidiaries 404 (7,037) - (6,633)
Income tax provision (benefit) 174 (2,793) - (2,619)
----------------------------------------------------------------
230 (4,244) - (4,014)
Equity in loss of subsidiaries (9,397) - 9,397 -
----------------------------------------------------------------
Loss from continuing operations (9,167) (4,244) 9,397 (4,014)
Loss from discontinued operations, net of tax - (5,153) - (5,153)
----------------------------------------------------------------
Net loss $ (9,167) $ (9,397) $ 9,397 $ (9,167)
===============================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
--------- ---------- ------------ ------------
Net sales $ 32,980 $ 68,922 $ (1,004) $ 100,898
Cost of sales 25,057 65,599 (1,004) 89,652
----------------------------------------------------------------
Gross profit 7,923 3,323 - 11,246
Selling, general and administrative expenses 3,525 3,297 - 6,822
Amortization of intangible assets 1,230 1,423 - 2,653
Gain on disposal of equipment (61) (3) - (64)
----------------------------------------------------------------
Operating income (loss) 3,229 (1,394) - 1,835
Net interest expense (4,935) (6,048) - (10,983)
----------------------------------------------------------------
Loss from continuing operations
before income taxes and equity in loss
of subsidiaries (1,706) (7,442) - (9,148)
Income tax benefit (388) (2,873) - (3,261)
----------------------------------------------------------------
(1,318) (4,569) - (5,887)
Equity in loss of subsidiaries (4,569) - 4,569 -
----------------------------------------------------------------
Loss from continuing operations (5,887) (4,569) 4,569 (5,887)
Loss from discontinued operations, net of tax (954) (954)
----------------------------------------------------------------
Net loss $ (6,841) $ (4,569) $ 4,569 $ (6,841)
================================================================
Page 11
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2002
Subsidiary
Company Guarantors Eliminations Consolidated
--------- ---------- ------------ ------------
Net sales $ 68,353 $ 116,172 $ (3,575) $ 180,950
Cost of sales 50,937 112,240 (3,575) 159,602
----------------------------------------------------------------
Gross margin 17,416 3,932 - 21,348
Selling, general and administrative expenses 5,510 7,817 - 13,327
Amortization of intangible assets 917 998 - 1,915
Gain on disposal of equipment (2) (17) - (19)
----------------------------------------------------------------
Operating income (loss) 10,991 (4,866) - 6,125
Net interest expense (9,362) (10,700) - (20,062)
----------------------------------------------------------------
Income (loss) before income taxes and
equity in loss of subsidiaries 1,629 (15,566) - (13,937)
Income tax provision (benefit) 651 (6,226) - (5,575)
----------------------------------------------------------------
978 (9,340) - (8,362)
Equity in loss of subsidiaries (51,219) - 51,219 -
----------------------------------------------------------------
Loss from continuing operations (50,241) (9,340) 51,219 (8,362)
Loss from discontinued operations, net of tax - (41,879) - (41,879)
----------------------------------------------------------------
Net loss $ (50,241) $ (51,219) $ 51,219 $ (50,241)
================================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
--------- ---------- ------------ ------------
Net sales $ 69,570 $ 135,779 $ (2,202) $ 203,147
Cost of sales 51,554 128,487 (2,202) 177,839
----------------------------------------------------------------
Gross profit 18,016 7,292 - 25,308
Selling, general and administrative expenses 6,663 8,127 - 14,790
Amortization of intangible assets 2,459 2,847 - 5,306
Loss (gain) on disposal of equipment (61) 1 - (60)
----------------------------------------------------------------
Operating income (loss) 8,955 (3,683) - 5,272
Net interest expense (10,002) (12,071) - (22,073)
----------------------------------------------------------------
Loss from continuing operations
before income taxes and equity in loss
of subsidiaries (1,047) (15,754) - (16,801)
Income tax provision (benefit) 113 (5,938) - (5,825)
----------------------------------------------------------------
(1,160) (9,816) - (10,976)
Equity in loss of subsidiaries (12,333) - 12,333 -
----------------------------------------------------------------
Loss from continuing operations (13,493) (9,816) 12,333 (10,976)
Gain on sale of discontinued operations, net of tax 2,404 - - 2,404
Loss from discontinued operations, net of tax - (2,517) - (2,517)
----------------------------------------------------------------
Net loss $ (11,089) $ (12,333) $ 12,333 $ (11,089)
================================================================
Page 12
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2002
Subsidiary
Company Guarantors Eliminations Consolidated
--------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net loss $(50,241) $ (51,219) $ 51,219 $(50,241)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for obsolete inventories - 15,187 - 15,187
Provision for uncollectible accounts receivable - 3,265 - 3,265
Provision for impairment of assets - 30,646 - 30,646
Depreciation and amortization 5,176 9,598 - 14,774
Amortization of deferred financing costs and
premium on notes 616 - - 616
Deferred income taxes - (15,496) - (15,496)
Changes in operating assets and liabilities 11,855 (13,377) - (1,522)
----------------------------------------------------------------
Net cash provided by (used in)
operating activities (32,594) (21,396) 51,219 (2,771)
INVESTING ACTIVITIES
Investments in and advances to subsidiaries 26,100 25,119 (51,219) -
Purchase of property, plant and equipment (1,973) (2,053) - (4,026)
----------------------------------------------------------------
Net cash provided by (used in)
investing activities 24,127 23,066 (51,219) (4,026)
FINANCING ACTIVITIES
Proceeds from long-term debt 23,500 - - 23,500
Payments on long-term debt and capital
lease obligations (9,246) (1,214) - (10,460)
----------------------------------------------------------------
Net cash provided by (used in) financing activities 14,254 (1,214) - 13,040
----------------------------------------------------------------
Increase in cash and cash equivalents 5,787 456 - 6,243
Cash and cash equivalents at beginning
of year 4,682 (336) - 4,346
----------------------------------------------------------------
Cash and cash equivalents at end of year $ 10,469 $ 120 $ - $ 10,589
================================================================
Page 13
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
--------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net loss $ (11,089) $ (12,333) $ 12,333 $ (11,089)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,719 14,333 - 21,052
Amortization of deferred financing costs and
premium on notes 560 - - 560
Gain on sale of discontinued operations (4,007) - - (4,007)
Deferred income taxes (207) (1,003) - (1,210)
Changes in operating assets and liabilities 4,072 (9,924) - (5,852)
-----------------------------------------------------------------
Net cash provided by (used in)
operating activities (3,952) (8,927) 12,333 (546)
INVESTING ACTIVITIES
Investments in and advances to subsidiaries (3,105) 15,438 (12,333) -
Purchase of property, plant and equipment (2,485) (7,974) - (10,459)
Proceeds from sale of discontinued operations 5,044 - - 5,044
-----------------------------------------------------------------
Net cash provided by (used in)
investing activities (546) 7,464 (12,333) (5,415)
FINANCING ACTIVITIES
Payments on long-term debt and capital
lease obligations (11,577) (1,033) - (12,610)
Debt issuance costs (907) - - (907)
-----------------------------------------------------------------
Net cash used in financing activities (12,484) (1,033) - (13,517)
-----------------------------------------------------------------
Decrease in cash and cash equivalents (16,982) (2,496) - (19,478)
Cash and cash equivalents at beginning
of year 16,982 2,496 - 19,478
-----------------------------------------------------------------
Cash and cash equivalents at end of year $ - $ - $ - $ -
=================================================================
Page 14
NOTE 6 -- SEGMENT INFORMATION
The Company has two reportable segments, Castings and Forgings. The Castings
segment manufactures and sells castings for the industrial and municipal
markets, while the Forgings segment manufactures forged components for the
industrial market. The Other segment includes machining operations and freight
hauling.
Three months ended Six months ended
March 31, March 31,
--------------------------- ----------------------------
2002 2001 2002 2001
-------- --------- --------- ---------
Revenues from external customers:
Castings $ 86,494 $ 89,547 $ 167,313 $ 183,593
Forgings 5,447 6,605 11,509 12,390
Other 4,912 5,650 9,604 11,629
Elimination of intersegment revenues (4,001) (904) (7,476) (4,465)
-------- --------- ---------- ---------
Consolidated $ 92,852 $ 100,898 $ 180,950 $ 203,147
======== ========= ========= =========
Loss from continuing operations:
Castings $ (4,014) $ (5,887) $ (8,362) $ (10,976)
Forgings (1,374) (1,285) (2,517) (3,269)
Other (44) (203) (245) (389)
Elimination of intersegment loss 1,418 1,488 2,762 3,658
-------- --------- ---------- ---------
Consolidated $ (4,014) $ (5,887) $ (8,362) $ (10,976)
======== ========= ========= =========
March 31, September 30,
2002 2001
---------- -------------
Total Assets:
Castings $ 676,482 $ 770,044
Forgings 45,472 51,148
Other 16,266 16,149
Elimination of intersegment assets (169,478) (210,898)
--------- ---------
Total consolidated assets $ 568,742 $ 626,443
========== =========
Page 15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Certain matters discussed in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other sections of this
quarterly report are "forward-looking statements" intended to qualify for the
safe harbors from liability established by the Private Securities Litigation
Reform Act of 1995. These forward looking statements can generally be identified
as such because the context of the statement will include words such as the
Company "believes," "anticipates," "expects" or words of similar import.
Similarly, statements that describe the Company's future plans, objectives or
goals are also forward-looking statements. Such forward-looking statements are
subject to certain risks and uncertainties which are described in close
proximity to such statements and which may cause actual results to differ
materially from those currently anticipated. The forward-looking statements made
herein are made only as of the date of this report and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
The following discussions compare the results of operations of the Company for
the three and six months ended March 31, 2002, to the results of the operations
of the Company for the three and six months ended March 31, 2001.
RESULTS OF OPERATIONS (dollars in thousands)
Three Months Ended March 31, 2002 and 2001
Net sales. Net sales for the three months ended March 31, 2002 were $92,852
which are $8,046 or 8.0% lower than the quarter ended March 31, 2001. The
decrease in net sales was driven primarily by continued significant weakness in
the demand for industrial castings used for the heating, ventilation and air
conditioning (HVAC) market.
Gross margin. Gross margin for the three months ended March 31, 2002 was
$11,063, a decrease of $183, or 1.6%, as compared to the quarter ended March 31,
2001. Gross margin as a percentage of net sales increased to 11.9% for the three
months ended March 31, 2002 from 11.1% for the quarter ended March 31, 2001. The
increase in gross margin percentage resulted from a greater utilization of
manufacturing facilities due to higher production levels and the transfer of
certain production to a more efficient manufacturing location.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended March 31, 2002 were $6,753, a
decrease of $69, or 1.0%, as compared to the $6,822 for the quarter ended March
31, 2001. Selling, general and administrative expenses increased as a percentage
of net sales to 7.3% compared to the 6.8% for the quarter ended March 31, 2001.
The percentage increase is due to a relatively fixed level of expenses being
spread over a smaller sales base.
Amortization of intangible assets. Amortization of intangible assets was $955
for the three months ended March 31, 2002, a decrease of $1,698, or 64.0%, as
compared to the $2,653 for the quarter ended March 31, 2001. The decrease was
due to the adoption of Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets" as of October 1, 2001. Under SFAS
142, goodwill is no longer amortized.
Operating income. Operating income was $3,353 for the three months ended March
31, 2002, an increase of $1,518 from operating income of $1,835 for the quarter
ended March 31, 2001. The increased operating income was caused by the reduced
amortization expense noted above. As a percentage of net sales, operating income
increased from 1.8% for the quarter ended March 31, 2001 to 3.6% for the three
months ended March 31, 2002.
Net interest expense. Net interest expense was $9,986 for the three months ended
March 31, 2002 compared to $10,983 for the quarter ended March 31, 2001. The
decreased interest expense resulted from the Company's principal debt repayments
and lower interest rates on the Company's Senior Bank Facilities, partially
offset by the interest on the higher level of borrowings outstanding on the
Company's Revolving Credit Facility during the three months ended March 31, 2002
as compared to the three months ended March 31, 2001.
Page 16
Income tax benefit. The income tax benefit for the three months ended March 31,
2002 and 2001 is reasonable to the amount computed by applying the Company's
statutory rate of approximately 40% to the loss before income taxes.
Loss from discontinued operations. In January, 2002 management initiated a plan
for the discontinuation of the operations of Cast Alloys by closing its
manufacturing facilities. In accordance with the provisions of SFAS 144, the
results of operations for Cast Alloys have been reported as discontinued
operations in the statement of operations.
Six Months Ended March 31, 2002 and 2001
Net sales. Net sales for the six months ended March 31, 2002 were $180,950 which
are $22,197 or 10.9% lower than the six months ended March 31, 2001. The
decrease in net sales was driven primarily by significant weakness in the demand
for industrial castings used for the heating, ventilation and air conditioning
(HVAC) market and a continued weakness in demand in the heavy duty truck market
during the first four months of the period.
Gross margin. Gross margin for the six months ended March 31, 2002 was $21,348,
a decrease of $3,960, or 15.6%, as compared to the quarter ended March 31, 2001.
Gross margin as a percentage of net sales decreased to 11.8% for the six months
ended March 31, 2002 from 12.5% for the six months ended March 31, 2001. The
decrease in gross margin resulted from lower sales volume noted above and an
inability, at the lower production and sales levels, to sufficiently absorb the
overhead costs necessary to effectively run the foundry operations.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the six months ended March 31, 2002 were $13,327, a
decrease of $1,463, or 9.9%, as compared to the $14,790 for the six months ended
March 31, 2001. The decrease was due to decreased corporate expense and a
reduction in the Company's salaried workforce due to the decreased sales level.
Selling, general and administrative expenses as a percentage of net sales was
7.4% for the six months ended March 31, 2002, which is consistent with the six
months ended March 31, 2001.
Amortization of intangible assets. Amortization of intangible assets was $1,915
for the six months ended March 31, 2002, a decrease of $3,391, or 63.9%, as
compared to the $5,306 for the six months ended March 31, 2001. The decrease was
due to the adoption of Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets" as of October 1, 2001. Under SFAS
142, goodwill is no longer amortized.
Operating income. Operating income was $6,125 for the six months ended March 31,
2002, an increase of $853 from operating income of $5,272 for the six months
ended March 31, 2001. The increase was caused caused by the reduced selling,
general and administrative expenses and amortization expense noted above,
partially offset by the lower gross margin. As a percentage of net sales,
operating income increased from 2.6% for the six months ended March 31, 2001 to
3.4% for the six months ended March 31, 2002.
Net interest expense. Net interest expense was $20,062 for the six months ended
March 31, 2002 compared to $22,073 for the six months ended March 31, 2001. The
decreased interest expense resulted from the Company's principal debt repayments
and lower interest rates on the Company's Senior Bank Facilities, partially
offset by the interest on the higher level of borrowings outstanding on the
Company's Revolving Credit Facility during the six months ended March 31, 2002
as compared to the six months ended March 31, 2001.
Income tax benefit. The income tax benefit for the six months ended March 31,
2002 and 2001 is reasonable to the amount computed by applying the Company's
statutory rate of approximately 40% to the loss before income taxes.
Gain on sale of discontinued operations. On October 2, 2000, the Company sold
the common stock of Hartley. The disposition of Hartley resulted in a gain of
$2,404, net of tax, which was recognized in the three months ended December 31,
2000.
Page 17
Loss from discontinued operations. Certain events which occurred during the
three months ended December 31, 2001 had a dramatic negative impact on the
operations of the Cast Alloys subsidiary. The significant deterioration of the
U.S. economy caused a substantial downturn in the consumer golf market served by
Cast Alloys. In addition, both of Cast Alloys' two major customers indicated
they would seek alternative supply sources for their golf clubheads. The sale of
Cast Alloys' inventory to parties other than the two major customers was
considered doubtful and a provision of $15.2 million was recorded during the
three months ended December 31, 2001 to reduce the inventory to market value.
Additionally, collection of substantially all of the remaining outstanding
receivables was not probable and a provision of $3.3 million was recorded during
the three months ended December 31, 2001. The Company also recorded an
impairment charge during the three months ended December 31, 2001 of $30,646 to
write down goodwill, fixed assets and other long-lived assets to their fair
values. In January, 2002 management initiated a plan for the discontinuation of
the operations of Cast Alloys by closing its manufacturing facilities. Severance
costs of approximately $2.2 million associated with this plan were recognized
during the three months ending March 31, 2002. All employees of Cast Alloys are
expected to be terminated by April 2002. In accordance with the provisions of
SFAS 144, the results of operations for Cast Alloys have been reported as
discontinued operations in the accompanying statements of operations.
LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands)
The Company has outstanding $282.0 million principal of 11 1/8% Senior
Subordinated Notes due 2007 (the "Senior Subordinated Notes"). In addition, the
Company has a credit agreement (the "Senior Bank Facility" or "Credit
Agreement") providing for term loans, an Acquisition Loan Facility, and a
Revolving Credit Facility of up to $29.6 million. At March 31, 2002, there is
$28.5 million outstanding on the Revolving Credit Facility, $14.4 million
outstanding on the Acquisition Loan Facility and $119.8 million outstanding
under the term loans.
The Company's liquidity needs will arise primarily from debt service on the
above indebtedness, working capital needs and funding of capital expenditures.
Borrowings under the Senior Bank Facilities bear interest at variable interest
rates. Both the Senior Bank Facility and the indentures governing the Senior
Subordinated Notes limit the Company's ability to incur additional indebtedness.
The covenants contained in the Senior Bank Facility also, among other things,
restrict the ability of the Company and its subsidiaries to dispose of assets,
incur guarantee obligations, prepay the Senior Subordinated Notes or amend the
indentures, pay dividends, create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, change the business conducted by the Company, make
capital expenditures or engage in certain transactions with affiliates, and
otherwise restrict corporate activities. These covenants also require the
Company to maintain leverage, interest coverage and senior debt coverage ratios.
Effective December 31, 2001, the Credit Agreement was amended to provide relief
from the above financial ratio covenants through December 31, 2003, to reduce
the amount of the Revolving Credit Facility and define minimum EBITDA and
liquidity covenants. At March 31, 2002, the Company is in compliance with
existing bank covenants.
For the six months ended March 31, 2002 and March 31, 2001, capital expenditures
were $4,026 and $10,459, respectively. The substantial decrease in capital
expenditures of $6,433 was the result of tighter spending controls placed on
capital expenditures during the six months ended March 31, 2002.
The Company's principal source of cash to fund its liquidity needs will be net
cash from operating activities and borrowings under the revolving credit
facility. Net cash used in operating activities for the six months ended March
31, 2002 was $2,771, an increase of $2,225 from cash used in operating
activities for the six months ended March 31, 2001 of $546. The decrease in net
cash from operating activities was the result of the operating losses incurred
by Cast Alloys prior to the discontinuation of its operations and the closing of
its manufacturing facilities.
The Company believes that cash generated from operations and its existing
revolving credit facility under the Senior Bank Facility will be sufficient to
meet its normal operating requirements, including working capital needs and
interest payments on outstanding indebtedness. In conjunction with the amendment
of the Credit Agreement in April 2002, the Company has received cash of $9.9
million from its parent company in exchange for the issuance of a PIK note with
principal plus 14% interest payable at the maturity date of December 31, 2005.
Also, the Company believes that the discontinuance of operations of Cast Alloys
should continue to improve the Company's cash position by eliminating the need
to carry excess inventory for the consumer golf market. The Company believes
that these factors should assist the Company in generating sufficient cash to
meet its operating requirements and pay obligations under its existing
indebtedness for the remainder of fiscal 2002.
Page 18
CRITICAL ACCOUNTING POLICIES
Our accounting policies are more fully described in Note 1 of notes to
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended September 30, 2001. As disclosed in Note 1 of notes to
consolidated financial statements, the preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires us to make estimates and assumptions about future events that affect
the amounts reported in the financial statements and accompanying notes. Future
events and their effects cannot be determined with absolute certainty.
Therefore, the determination of estimates requires the exercise of judgment.
Actual results inevitably will differ from those estimates, and such differences
may be material to the financial statements.
The most significant accounting estimates inherent in the preparation of our
financial statements include estimates associated with the evaluation of the
recoverability of certain assets including goodwill, other intangible assets and
fixed assets as well as those estimates used in the determination of reserves
related to the allowance for doubtful accounts, obsolescence, workers
compensation and pensions and other post-retirement benefits. Various
assumptions and other factors underlie the determination of these significant
estimates. The process of determining significant estimates is fact specific and
takes into account factors such as historical experience, product mix, and in
some cases, actuarial techniques. We constantly reevaluate these significant
factors and make adjustments where facts and circumstances dictate.
Historically, actual results have not significantly deviated from those
determined using the estimates described above.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates. The
Company does not use derivative financial instruments for speculative or trading
purposes.
Interest Rate Sensitivity. The Company's earnings are affected by changes
in short-term interest rates as a result of its borrowings under the Senior Bank
Facility. If market interest rates for such borrowings change by 1% during the
remainder of the fiscal year ended September 30, 2002, the Company's interest
expense would increase or decrease by approximately $.8 million. This analysis
does not consider the effects of changes in the level of overall economic
activity that could occur due to interest rate changes. Further, in the event of
an upward change of such magnitude, management could take actions to further
mitigate its exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects, the sensitivity
analysis assumes no changes in the Company's financial structure.
Page 19
NEENAH FOUNDRY COMPANY
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10 - Material Contracts
10.1 Amendment No. 3 dated as of December 31, 2001, to the Credit
Agreement dated as of April 30, 1997 as Amended and Restated as
of September 12, 1997, as of April 3, 1998, as of September 8,
1998, as of November 18, 1998, and as of March 23, 2001 by and
among Neenah Foundry Company, NFC Castings, Inc., the Lenders
from time to time party thereto, and the Chase Manhattan Bank.
10.2 Secured PIK Note dated as of April 29, 2002 between Neenah
Foundry Company and Citicorp Venture Capital, Ltd.
10.3 Secured PIK Note Purchase Agreement dated as of April 29, 2002,
by and among Neenah Foundry Company, NFC Castings, Inc., and
Citicorp Venture Capital, Ltd.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEENAH FOUNDRY COMPANY
DATE: May 13, 2002 /s/ Gary LaChey
--------------------------------------------
Gary LaChey
Vice President-Finance, Secretary & Treasurer
(Principal Financial Officer and Duly
Authorized Officer)
Page 20