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:
o General economic conditions, including any downturn in the markets in
which we operate
o Fluctuations in worldwide or regional automobile and light- and heavy-
truck production, which affect demand for our products
o Changes in practices or policies of our customers toward outsourcing
their requirements for automotive components, including the risk of the
loss of any of our major customers
o Sourcing and pricing practices of our customers, including demands for
price concessions as a condition to retaining current business or
obtaining new business
o Deterioration in the market share of any of our major customers
o Fluctuations in foreign currency exchange rates
o Fluctuations in interest rates that may affect our borrowing costs
o Fluctuations in the cost of raw materials, including the cost of
energy, aluminum, magnesium and scrap steel, and our ability, if any,
to pass those costs on to our customers
o Work stoppages or other labor disputes that could disrupt production at
our facilities or those of our customers
o Factors or presently unknown circumstances that may affect the charges
related to the impairment of our long-lived assets
o Changes in environmental regulations to which we are subject, including
Maximum Achievable Control Technology standards applicable to the
foundry industry, and our ability to meet these standards
o Our ability to meet the financial covenants set forth in our debt
agreements, and our ability to negotiate less restrictive covenants if
necessary
o 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 OPERATIONS 2002 COMPARED TO 2001
For the year ended December 31, 2002, we had sales of $814.9 million compared to
sales of $843.2 million in 2001, a decrease of $28.3 million, or 3.3%. This
decrease in sales is more than accounted for by the closure of our Alexander
City plant in late 2001, which had sales of $39.1 million in 2001. For
operations continuing into 2002, sales increased by $10.9 million, or 1.4% over
2001, reflecting domestic market growth and the launch of new domestic products
such as steering knuckles made with our PCPC(TM) process. Domestic sales for our
operations continuing into 2002 were $726.9 million
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compared with $714.1 million in 2001, an increase of $12.8 million, or 1.8%.
North American light vehicle builds increased from 15.5 million in 2001 to 16.4
million in 2002, an increase of 5.8%. The increase in our sales from operations
continuing into 2002 did not keep pace with the increase in light vehicle builds
because our primary customers lost market share and therefore did not experience
an increase in 2002 vehicle builds commensurate with other North American
vehicle manufacturers. European sales in 2002, in local currency, were 7% below
2001 due to a weakening economy. The effect of changes in exchange rates on 2002
consolidated sales was favorable by $4.0 million, or 4.8%, when compared with
exchange rates for 2001.
Sales for the Ferrous Metals segment were $529.7 million in 2002 compared with
$526.3 million in 2001, an increase of $3.4 million, or 0.6%. This increase was
mainly attributable to the launch of new products, partly offset by a weaker
European automotive market. Sales in the Light Metals segment were $271.6
million in 2002 compared with $300.7 million in 2001, a decrease of $29.1
million, or 9.7%. The decrease was more than accounted for by the closure of the
Alexander City plant in 2001. Excluding 2001 sales of $39.1 million from this
closed plant, 2002 sales increased by $10.0 million over 2001, reflecting the
favorable impact of our introduction of new products and technology such as
PCPC(TM). Sales in our Corporate and Other segment were down from $16.1 million
in 2001 to $13.6 million in 2002, a decrease of $2.5 million, or 15.5%. This
decrease resulted mainly from the loss of business due to increased offshore
competition in 2002.
Our gross profit for 2002 of $70.2 million was 8.6% of sales compared with gross
profit for 2001 of $61.5 million representing 7.3% of sales. Our continuing
efforts in cost reduction were the principal factor in our higher gross profit
for 2002.
Selling, general and administrative expenses increased by $2.7 million from
$29.2 million in 2001 to $31.9 million in 2002, and increased slightly as a
percent of sales to 3.9% in 2002 as compared to 3.5% in 2001. The increase is
attributable to higher spending in the development and launch of our new
technologies, along with costs for outside legal expenses and profit-sharing
accruals. We adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" on January 1, 2002, thereby
eliminating the amortization impact on 2002 results of operations. Pretax
goodwill amortization was $6.3 million in 2001 ($5.3 million after tax). Net
other operating expense of $1.6 million for 2002 was primarily comprised of a
$1.7 million charge for an adverse arbitration award in a dispute with a
consulting company over fees.
Net interest expense for the years ended December 31, 2002 and 2001 was $27.9
million and $31.0 million, respectively. The decrease was the result of lower
debt levels in 2002, partially offset by higher interest rates on our newly
issued unsecured senior notes. Capitalized interest expense was $1.1 million in
2001. No interest expense was capitalized in 2002.
The effective income tax rate for 2002 was 15.3%, largely attributable to the
use of foreign tax credits and state tax incentives. For information concerning
the provision for income taxes, as well as information regarding differences
between effective tax rates and statutory rates, see Note 13, Income Taxes, to
our Consolidated Financial Statements.
Net income for 2002 was $9.0 million compared to a net loss of $8.7 million in
2001. The improvement in our profitability reflects higher plant efficiencies
resulting from our efforts to reduce cost. The improvement was also because of
the elimination of goodwill amortization due to the adoption on January 1, 2002,
of SFAS No. 142. Goodwill amortization after tax in 2001 was $5.3 million. In
addition, there was an after tax impairment and shutdown charge of $8.4 million
in 2001 related to the closure of our Alexander City plant in December 2001.
Exchange rates had negligible impact on our 2002 earnings when compared with
exchange rates for 2001. Diluted earnings per share increased from diluted loss
per share of $0.34 in 2001 to diluted earnings per share of $0.35 in 2002.
RESULTS OF OPERATIONS 2001 COMPARED TO 2000
For the year ended December 31, 2001, we had sales of $843.2 million compared to
2000 sales of $1,038.8 million, a decrease of $195.6 million, or 18.8%.
Comparing only operations continuing into 2001, sales were down $145.0 million,
or 14.7%, reflecting primarily lower North American light vehicle builds in
2001, down from 17.2 million in 2000 to 15.5 million in 2001. European light
vehicle builds weakened in the fourth quarter of 2001. Sales for our domestic
continuing operations were $753.2 million in 2001, down $139.5 million or 15.6%
from 2000. This was due to inventory adjustments made at the original equipment
manufacturers in the early part of the year of 2001, followed by a slumping
economy and a further slowdown with the events of September 11, 2001. In total,
domestic sales were down $190.2 million after taking into account the $50.6
million of sales generated in 2000 by Iowa Mold Tooling, which was sold in
October of 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, or 2.9%, when compared with
exchange rates for 2000.
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Sales for the Ferrous Metals segment were $526.3 million in 2001 compared with
$634.4 million in 2000, a decrease of $108.1 million, or 17.0%. The main factors
contributing to this decrease were the downturn in the economy and the business
that was lost because of the explosion that occurred in 2000 at our New River
foundry. Sales in the Light Metals segment were $300.7 million in 2001 compared
with $333.9 million in 2000, a decrease of $33.2 million, or 9.9%. The decrease
was mainly due to the weaker economy and slowdown in the automotive industry. On
December 21, 2001, we closed our Alexander City, Alabama, plant and recognized
pretax impairment and shutdown costs of $12.9 million, $11.7 million of which
were 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 recorded a $0.6 million shutdown charge. Profitability in our
Light Metals group, excluding the impairment and shutdown costs, increased $6.2
million on a pretax basis reflecting the impact of significant restructuring.
Sales in our Corporate and Other segment were down from $70.6 million in 2000 to
$16.1 million in 2001, a decrease of $54.5 million, or 77.2%. This decrease
resulted mainly from the sale of Iowa Mold Tooling in 2000.
Our gross profit for 2001 of $61.5 million was 7.3% of sales, down from $125.6
million, or 12.1% of sales for 2000. The lower demand from the weakening economy
was a principal factor in our lower gross profit.
Selling, general and administrative expenses were down $9.3 million from $38.5
million in 2000 to $29.2 million in 2001, and down slightly as a percent of
sales at 3.5% in 2001 as compared to 3.7% in 2000. Goodwill amortization was
$6.3 million pretax, about the same as in 2000. In December 2001, as part of the
Alexander City plant closure, $1.9 million in goodwill was written off. Net
other operating expense of $13.4 million for 2001 was primarily comprised of the
plant shutdown charges of $12.9 million for the Alexander City plant and $0.6
million for the Reynosa, Mexico, plant.
Net interest expense for the years ended December 31, 2001 and 2000 was $31.0
million and $39.3 million, respectively. The decrease was the result of a lower
interest rate and lower debt levels in 2001. Capitalized interest expense was
$1.1 million and $1.5 million in 2001 and 2000, respectively.
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 13, Income Taxes, to our
Consolidated Financial Statements.
Losses for 2001 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 2001. First, our decreased profitability was 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 at our New
River facility in 2000. This accident not only resulted in a loss in 2001 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 explosion.
These production issues continued into 2001. We reduced our workforce by over
25%, which caused some short term inefficiencies as the workforce was redeployed
in different positions. Lastly, exchange rates had an unfavorable impact on our
earnings of $1.2 million when compared with 2000. Diluted loss per share,
excluding plant shutdowns, was $0.02. Diluted loss per share including the plant
shutdowns was $0.34.
LIQUIDITY AND CAPITAL RESOURCES, INCLUDING OFF-BALANCE SHEET ARRANGEMENTS
Our principal source of liquidity is from the cash provided by operating
activities. During 2002, cash provided by operating activities was $89.2
million, compared to $71.6 million in 2001. We are able to maintain strong
operating cash flows; however, a number of key risk factors could affect our
ability to generate cash. First, we operate principally in the cyclical
automotive industry. A weakening of the economy would negatively affect our
operating results. Second, we are dependent on a small number of major customers
for a significant portion of sales. The loss of any of our major customers could
adversely affect our revenue, and thereby reduce the ability to generate cash.
Our cash outflow for investing activities for 2002 totaled $9.4 million for the
purchase of fixed assets, compared to $39.8 million in 2001. Bank and other
borrowings decreased $83.3 million, in the aggregate, during 2002. In addition,
we paid $4.1 million in dividends during 2002.
Cash and cash equivalents decreased to $3.3 million at December 31, 2002, from
$13.9 million at December 31, 2001, due in part to the timing of payments from
significant customers and applying these funds to reduce debt.
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Outstanding debt decreased from $363.4 million at December 31, 2001, to $280.1
million at December 31, 2002. The decrease in debt is primarily from cash
provided from operations. Our debt-to-capital ratio was 52% at December 31,
2002. This was seven percentage points lower than the prior year due to lower
debt levels.
Shareholders' equity increased $4.3 million from $253.3 million at December 31,
2001, to $257.6 million at December 31, 2002. This increase was due primarily to
net income of $9.0 million for the year, a favorable currency translation
adjustment of $9.8 million related to our foreign operations, and financial
derivative adjustments of $0.5 million. The increase was reduced by an increase
in our minimum pension liability of $11.5 million and dividends of $4.1 million.
We have recurring costs related to environmental clean-up, pollution prevention
measures and disposal of waste (mostly non-hazardous waste) generated as part of
ongoing operations. These expenses totaled $10.9 million in 2002 and $10.0
million in 2001. A portion of our capital expenditures is regularly incurred to
prevent or monitor pollution, principally for ventilation and dust control
equipment.
ENVIRONMENTAL MATTERS
We are subject to federal, state, local and foreign environmental laws and
regulations concerning, among other things, air emissions, effluent discharges,
storage treatment and disposal of hazardous materials and remediation of
contaminated soil and groundwater. At some of our industrial sites hazardous
materials have been managed for many years. Consequently, we are subject to
various environmental laws that impose compliance obligations and can create
liability for historical releases of hazardous substances. It is likely that we
will be subject to increasingly stringent environmental standards in the future
(including Maximum Achievable Control Technology standards for our industry and
other requirements under the Clean Air Act Amendments of 1990, storm-water
permit programs and toxic use reduction programs) and that we will be required
to make additional expenditures, which could be significant, relating to
environmental matters on an ongoing basis. As discussed below, we will be
required to incur significant costs to bring our Radford foundry into compliance
with applicable clean air regulations, and may be required to implement
corrective action for any contamination of soil and groundwater at the Radford
site.
We also have current and former operating entities (for which we may be
responsible) 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 $5.8 million to cover estimated future environmental
expenditures. This amount includes a $3.4 million escrow account acquired as a
part of the acquisition of Ganton Technologies in 1999 that is being used to
fund the clean-up of an inactive property located in Addison, Illinois. There
can be no assurance, however, that costs in excess of these accruals will not be
incurred, or that unknown conditions will not be discovered that result in
material expenditures by us for environmental matters. 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,
including Maximum Achievable Control Technology standards for our industry, and
until we are able to evaluate necessary control measures, it is not possible to
estimate these costs.
On June 14, 2000, the Virginia Department of Environmental Quality issued a new
air emissions permit for our Radford foundry which, as amended on July 23, 2002,
requires that new air emission controls be installed in the Radford foundry and
be operational by December 31, 2004. Our best current estimates are that the
cost of these new emission controls will be in the range of $3 to $5 million,
although the cost could be substantially higher than our estimates. We are
evaluating the future business prospects for the Radford foundry in light of
this required capital investment.
On March 14, 2002, we entered into a Consent Order with the U.S. Environmental
Protection Agency ("USEPA"), which will require investigation of the nature and
extent of any hazardous waste disposed of at our Radford, Virginia, facilities.
We have entered into this Consent Order in connection with the USEPA's
Corrective Action Program. The Corrective Action Program is being undertaken on
a nationwide basis by USEPA pursuant to the Resource Conservation and Recovery
Act of 1976. The Corrective Action Program requires facilities that have
historically generated or handled hazardous waste to determine whether those
activities have or could adversely affect groundwater or human health. Because
we historically disposed of waste material at this site, it is possible that
fines or penalties could be assessed, or that remedial action could be
4
required, with respect to that on-site disposal. At this time we cannot predict
the amount of potential fines or penalties or the cost of remedial action, if
any.
We are also a party to certain lawsuits and claims arising out of the conduct of
our business, including those relating to commercial transactions, product
liability, employment matters, 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. This, coupled with property losses at our New
River and Neunkirchen plants that were incurred in the first half of 2000,
resulted in increases in our property insurance deductible. We now carry a $2.5
million property deductible per occurrence.
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 for damages, fines,
penalties, operational shutdowns, cleanup costs or other similar expenses, any
of which could be material.
As of December 31, 2002, our contractual obligations and commercial commitments
are summarized as follows:
Payments due in
----------------------------------------------------------------------
Less than More than
Contractual obligations Total 1 year 1 to 3 years 4 to 5 years 5 years
--------------------------------------- -------- --------- ------------ ------------ ---------
(in thousands of dollars)
Long term debt $278,522 $ 961 $ 67,061 $ 500 $210,000
Capital lease obligations 1,581 606 975 - -
Operating leases 8,149 3,609 4,242 298 -
Unconditional purchase obligations 3,985 3,985 - - -
Other long term obligations - - - - -
-------- -------- -------- -------- --------
Total $292,237 $ 9,161 $ 72,278 $ 798 $210,000
======== ======== ======== ======== ========
Payments due in
-------------------------------------------------------------------
Less than More than
Commercial Commitments Total 1 year 1 to 3 years 4 to 5 years 5 years
--------------------------------------- ------- ---------- ------------ ------------ -----------
(in thousands of dollars)
Lines of credit $ - $ - $ - $ - $ -
Standby letters of credit 57,200 - 57,200 - -
Guarantees - - - - -
Standby repurchase obligations - - - - -
Other commercial commitments - - - - -
------- ----------- ------- ----------- -----------
Total $57,200 $ - $57,200 $ - $ -
======= =========== ======= =========== ===========
At December 31, 2002, we had commitments for the purchase of capital equipment
of approximately $4.0 million, which we expect to fund through cash flow from
operations.
We have a secured revolving credit facility of $300 million and outstanding
unsecured senior notes of $175 million. The revolving credit facility expires on
November 5, 2004, and the senior notes will be due on June 15, 2009. Based on
our cash position at December 31, 2002, and our projections for 2003, the
current portion of our long-term debt could be covered through working capital
availability and the borrowing availability under our revolving credit facility.
We had committed and uncommitted bank credit facilities with unused borrowing
capacity of $184.6 million at December 31, 2002. However, due to loan covenants
restrictions, our borrowing availability at December 31, 2002, was $32 million.
Our liquidity would be affected by a downturn in the economy or other factors
affecting our earnings, which would have negative effects on our financial
ratios and thereby reduce bank financing availability.
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We were in compliance with our revolving credit agreement covenants as of
December 31, 2002. The revolving credit agreement financial covenant ratios as
of December 31, 2002 are provided below:
Financial Covenant Requirement Actual
- ------------------ --------------- --------------
Fixed charge coverage ratio > 1.00 2.05
-
Consolidated EBITDA to consolidated interest expense > 3.00 3.18
-
Funded debt to consolidated EBITDA < 3.75 3.38
-
Capital expenditures ($000) < $50,000 $9,445
-
These ratios are calculated based on the last twelve months activities. EBITDA
is defined in our revolving credit agreement and is generally calculated as the
sum of net income (excluding certain non-cash charges), income taxes, interest
expense, and depreciation and amortization. EBITDA is adjusted for acquisitions
or dispositions. EBITDA is not a measure prepared in accordance with accounting
principles generally accepted in the United States, but is being presented
because we use it to evaluate our operating performance relative to our
revolving credit agreement. EBITDA should not be considered a substitute for
income from operations, net income, cash flows or other measure of financial
performance prepared in accordance with accounting principles generally
accepted in the United States.
The above financial covenant ratios become more restrictive over the remaining
term of our revolving credit agreement in accordance with the terms of the
agreement. Depending on economic conditions and the results of our operations,
there is some risk that we could be in default of certain of these financial
covenant ratios during 2003. In order to address this risk, we are currently in
discussions with our lenders and we believe that we will be able to reach an
agreement with them in the near future making the covenants less restrictive.
However, the actions of our lenders are not controllable by us and our
expectation of continued compliance with these covenants cannot be assured with
certainty. If we were to be in default under our revolving credit agreement and
our lenders were to accelerate payment, we would also be in default under the
indenture governing our senior notes. Default under either or both of our
revolving credit agreement or senior notes and acceleration of payment by our
revolving credit lenders would have a material adverse impact on our reported
financial position and results of operation.
RELATED PARTY TRANSACTIONS
We received management and technical support fees from PortCast-Fundicao
Nodular, S.A. ("PortCast"), our 50% owned Portuguese joint venture, for
providing administrative service and technical support to them. We also have an
outstanding interest-bearing loan to and other receivables from PortCast, mainly
consisting of management and technical support fee receivables and advances made
by us to finance PortCast's operations. The interest rates on the loan and
receivables are determined by the prevailing market rates. See Note 19, Related
Party Transactions, for further details.
There were no other material transactions with, or material balances due to or
from, any related party.
ASSET IMPAIRMENT AND SHUTDOWN
On December 21, 2001, we permanently closed our Alexander City plant. Alexander
City is included in the Light Metals segment in Note 3, Reporting for Business
Segments. Alexander City had revenues of $39.1 million and $22.8 million, and
net losses of $9.8 million and $10.9 million for the years ended December 31,
2001 and 2000, respectively. The net loss of $9.8 million for 2001 includes
charges for asset impairment and shutdown costs of $8.4 million after tax.
The decision to close this plant was the principal reason we recorded an $11.7
million charge for impairment of assets and a $1.2 million charge of shutdown
costs in the fourth quarter of 2001. All of the charges are included in "Other
operating expense (income), net" in the accompanying statements of operations.
The $11.7 million impairment charge included a write-down of $9.8 million to
fair market value for capital assets and inventories, and a write-down of
goodwill of $1.9 million. The $1.2 million shutdown charge included $0.7 million
for site environmental remediation and disposal costs, $0.4 million of
provisions for severance (for 18 salaried employees) and employee pay-related
costs, and $0.1 million for legal costs. The accrual for shutdown costs of $1.2
million is included in "Accrued liabilities" in the accompanying balance sheet
in 2001. During 2002, we paid all of the $0.4 million of severance accrued at
December 31, 2001.
In the second quarter of 2001, we announced the shutdown of our Reynosa, Mexico,
machining operation and recorded a $0.6 million shutdown charge.
During December 2000, due to poor operating results of our Corporate and Other
segment, we assessed the ongoing value of its assets. In determining the amount
of the necessary reserve, we utilized discounted future cash flows. Based on
this evaluation, we decreased the carrying value of goodwill by $5.7 million and
fixed assets by $1.8 million, and recorded an impairment charge of $7.5 million
which is included in "Other operating expense (income), net" in the accompanying
statements of operations in 2000.
In December 1999, we announced plans to permanently close our Ironton Iron, Inc.
foundry. Operations at the foundry continued through the first quarter of 2000
in order to fulfill customer needs. The foundry was permanently closed on March
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31, 2000. Ironton was included in the Ferrous Metals segment in Note 3,
Reporting for Business Segments. Ironton had revenues of $6.1 million and net
losses of $4.4 million for the year ended December 31, 2000. The results of
operations for 2000 have been classified in "Other operating expenses (income),
net" in the accompanying statements of operations. Demolition was completed
during the second quarter of 2001. We 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.
In 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 employee benefits. These expenditures were
accrued for at December 31, 1999. In addition, in 2000 we paid $1.0 million in
severance and employee benefits relating to the 500 union employees. This amount
was not previously accrued. In 2001 we also incurred $0.8 million in workers'
compensation and group insurance which were not previously accrued.
In 2002, Ironton incurred approximately $0.2 million for workers' compensation
claims, $0.3 million for health insurance, and $0.1 million for environmental
remediation. The remaining accrual of $0.2 million as of December 31, 2002,
which is included in "Other accrued liabilities" in the accompanying balance
sheet, is our estimate of the remaining costs to be incurred, primarily related
to workers' compensation.
During 2001 and 2000, $0.7 million and $1.4 million of the assets remaining at
the Ironton foundry at December 31, 1999, were transferred to our other
facilities, and we also sold certain assets. The remaining assets of $0.9
million as of December 31, 2002, which are included in "Property, plant and
equipment" in the accompanying balance sheet, are recorded based on our estimate
of the fair value of the remaining real property and machinery.
IMPACT OF INSURANCE PROCEEDS
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
2000 that caused extensive damage, shutting down the foundry for two weeks. (See
Note 18, Insurance Claims, to our Consolidated Financial Statements).
The resulting business interruption and loss of fixed assets was covered under
our insurance policies. As of December 31, 2001, we had received final
settlements totaling $133.8 million from our insurance carriers, comprised of
$30.6 million in 2001 and $103.2 million in 2000.
The settlement for these two losses has been recorded in 2001 and 2000 as
follows:
o 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.
o We incurred accident-related expenses in total of $53.4 million, comprised
of $7.8 million in 2001 and $45.6 million in 2000. These expenses were
offset by insurance recovery within cost of sales.
o We recorded a total of $37.8 million for the replacement of property, plant
and equipment in 2001 and 2000. Of this amount, $3.2 million and $26.5
million have been recorded as gains in "Other expense (income), net" in the
accompanying statements of operations in 2001 and 2000, respectively.
o At December 31, 2001, approximately $0.2 million remained as deferred
revenue and $0.9 million as accrued costs. No deferred revenue or accrued
costs remained as of December 31, 2002.
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 European 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, and costs
of aluminum, magnesium and scrap steel. The cost of scrap steel has increased
steadily since early 2002. Though we have seen a softening of these costs, the
overall trend represents a risk to our operating results. Lastly, we have
consumer risk. We operate principally in the cyclical automotive industry. A
weakening of the economy represents a risk to our operating results.
7
Most of our debt is at a fixed interest rate. In October 2000 we entered into an
interest rate swap on $50 million of bank debt to insulate against the risk of
rising interest rates on a portion of our debt that has a variable interest
rate. A 1% increase in interest rates on the debt not covered by swap agreements
would have decreased net income by approximately $1.4 million, $2.5 million, and
$2.8 million for 2002, 2001, and 2000, 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,
predominantly the Euro. A 5% appreciation in the value of the U.S. dollar
relative to the currencies in which our sales are denominated (the Euro starting
in 2001) would have resulted in a decrease in net income of approximately $0.1
million, $0.3 million, and $0.7 million for the years ended December 31, 2002,
2001, and 2000, 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
REVENUE RECOGNITION
We recognize revenue when persuasive evidence of a final agreement exists,
delivery has occurred, title has transferred, the selling price is fixed or
determinable, and collectibility is reasonably assured. We record provisions
against our gross revenue for estimated product returns and allowances in the
period when the related revenue is recorded. These estimates are primarily based
on factors such as historical sales returns, credit memo activities, and changes
in our customers' demand. Should our actual product returns and allowances
exceed our estimates, additional provisions against our revenue would result.
ACCOUNTS RECEIVABLE - SIGNIFICANT CUSTOMERS
In 2002, we generated approximately 44% of our revenues and corresponding
accounts receivable from sales to three customers in the automotive
manufacturing industry. As of December 31, 2002, about $27 million of trade
accounts receivable were attributable to these customers. If our primary
customers experience significant adverse conditions in their industry or
operations, our customers may not be able to meet their 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 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 to 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 discussed in Note
17 to the Consolidated Financial Statements, Derivative Financial Instruments,
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 terms of the agreements.
8
DEFERRED TAX ASSETS
As of December 31, 2002, we had approximately $6.0 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 had additional net
deferred tax assets of $16.8 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 three-year forecasts and five-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
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, 2002 and 2001, we held an interest rate
swap with a notional amount of $50 million. This derivative qualifies for hedge
accounting as discussed in Note 17, Derivative Financial Instruments, to our
Consolidated Financial Statements.
We do not hold or issue derivative instruments for trading purposes. Hedge
accounting is applied 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,
the ineffective portion of the derivative 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 17, Derivative
Financial Instruments, to our Consolidated Financial Statements.
To hedge foreign currency risks, we periodically use over-the-counter forward
contracts. At December 31, 2002, we had outstanding foreign exchange contracts
with a notional amount of $15.9 million to hedge our European operations. The
market value of such foreign exchange contracts was minimal at December 31,
2002.
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
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" 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 earnings. These contracts are used to cover our raw materials and
energy purchases.
LONG-LIVED ASSETS
In the first quarter of 2002, we adopted SFAS No. 141, "Business Combinations",
SFAS No. 142, "Goodwill and Other Intangible Assets", and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". The adoption
of SFAS No. 141 had no impact on the company as acquisitions have been accounted
for under purchase accounting. Application of the non-amortization provisions in
SFAS No. 142 resulted in an earnings-per-share increase of about 20 cents per
diluted share in 2002.
We evaluate our goodwill for impairment by the combination of an income method
and a market method. The results of our tests performed in 2002 indicated that
the goodwill is not impaired. Based on these tests, the goodwill would not have
been fully recoverable if our future cash flows from our Ferrous Metals and
Light Metals reporting units had been 42% and 31%, respectively, lower than our
current projections used.
9
We evaluate our property, plant, and equipment for impairment whenever
indicators of impairment exist in accordance with SFAS No. 144. Our current
estimates of recoverability of approximately $60 million of long-lived assets
for the plants at which impairment indicators were present (principally due to
the drop in sales volume) indicated that those assets would not have been
recoverable if our estimates of future cash flows from these plants had been 20%
to 54% lower than our current estimates. 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.
LITIGATION AND CONTINGENCIES
We are a defendant in a number of legal proceedings associated with
environmental, employment, commercial, product liability 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, results of operations and
cash flows. 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 cost for the resolution of these
claims, where we are able to estimate the cost and where we have determined that
it is probable that we will incur them. Our estimates have been developed in
consultation with counsel that is handling our defense in these matters. To the
extent additional information arises, 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 tax filing positions, we record reserves for potential
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. However, based on our evaluation of tax positions, we believe we have
appropriately accrued for probable exposures. The United States Internal Revenue
Service had completed their examination of our tax years 2000 and 1999 during
the fourth quarter of 2002, which concluded that no additional tax provision for
those tax years is required.
PENSION AND POST-RETIREMENT BENEFITS
With the assistance of our actuaries, we determine the discount rate to be used
to discount pension and post-retirement plans liabilities based on a review of
high-quality long-term bonds. The discount rate used in determining the
actuarial present value of the projected benefit obligations was 6.75% in 2002.
The actuaries also determine the expected long-term rate of return on plan
assets used in calculating net pension expense based on the historical and
projected rates of return on the types of plan assets in which the plans have
invested. The expected long-term rate of return in 2002 was 8.75%.
10
INTERMET Corporation
Consolidated Statements of Operations
Years ended December 31,
2002 2001 2000
----------- ----------- -----------
(in thousands of dollars, except per share data)
Net sales $ 814,932 $ 843,173 $ 1,038,844
Cost of sales 744,769 781,650 913,262
----------- ----------- -----------
Gross profit 70,163 61,523 125,582
Operating expenses (income):
Selling, general and administrative 31,870 29,177 38,546
Goodwill amortization - 6,328 6,353
Other operating expenses (income), net 1,592 13,427 (8,009)
----------- ----------- -----------
Total operating expenses 33,462 48,932 36,890
----------- ----------- -----------
Operating profit 36,701 12,591 88,692
Other expenses (income):
Interest expense, net 27,914 31,025 39,261
Other income, net (1,992) (4,431) (27,668)
----------- ----------- -----------
Total other expenses 25,922 26,594 11,593
----------- ----------- -----------
Income (loss) before income taxes 10,779 (14,003) 77,099
Income tax expense (benefit) 1,654 (5,300) 36,191
----------- ----------- -----------
Net income (loss) before extraordinary item and cumulative
effect of a change in accounting principle 9,125 (8,703) 40,908
Extraordinary item, net of tax (603) - -
Cumulative effect of a change in accounting principle,
net of tax 481 - -
----------- ----------- -----------
Net income (loss) $ 9,003 $ (8,703) $ 40,908
=========== =========== ===========
Net income (loss) per common share - basic:
Net income (loss) before extraordinary item and cumulative
effect of a change in accounting principle $ 0.36 $ (0.34) $ 1.61
Extraordinary item (0.02) - -
Cumulative effect of a change in accounting principle 0.01 - -
----------- ----------- -----------
Net income (loss) $ 0.35 $ (0.34) $ 1.61
=========== =========== ===========
Net income (loss) per common share - assuming dilution
Net income (loss) before
extraordinary item and cumulative
effect of a change in accounting principle $ 0.35 $ (0.34) $ 1.61
Extraordinary item (0.02) - -
Cumulative effect of a change in accounting principle 0.02 - -
----------- ----------- -----------
Net income (loss) $ 0.35 $ (0.34) $ 1.61
=========== =========== ===========
See accompanying notes.
2
INTERMET Corporation
Consolidated Statements of Comprehensive Income
Years ended December 31,
2002 2001 2000
-------- -------- --------
(in thousands of dollars)
Net income (loss) $ 9,003 $ (8,703) $ 40,908
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 9,793 (4,278) (129)
Derivative instrument adjustment 515 (1,858) -
Minimum pension liability adjustment (11,481) (6,890) -
-------- -------- --------
Total other comprehensive income (loss) (1,173) (13,026) (129)
-------- -------- --------
Comprehensive income (loss) $ 7,830 $(21,729) $ 40,779
======== ======== ========
See accompanying notes.
3
INTERMET Corporation
Consolidated Balance Sheets
December 31,
2002 2001
-------- --------
(in thousands of dollars)
ASSETS
Current assets:
Cash and cash equivalents $ 3,298 $ 13,866
Accounts receivable:
Trade, less allowances of $9,229 in 2002 and $10,727 in 2001 74,025 95,601
Other 12,754 16,439
-------- --------
86,779 112,040
Inventories 65,456 71,857
Deferred income tax assets 20,230 25,969
Other current assets 4,645 4,171
-------- --------
Total current assets 180,408 227,903
-------- --------
Property, plant and equipment, net 332,034 370,756
Goodwill, net of amortization of $21,859 in 2002 and 2001 217,016 217,016
Deferred income tax assets 5,443 1,575
Other noncurrent assets 29,197 23,289
-------- --------
Total noncurrent assets 583,690 612,636
-------- --------
Total assets $764,098 $840,539
======== ========
4
INTERMET Corporation
Consolidated Balance Sheets
December 31,
2002 2001
--------- ---------
(in thousands of dollars, except
share and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 70,933 $ 81,244
Accrued payroll and benefits 31,148 28,822
Other accrued liabilities 34,057 37,781
Long-term debt due within one year 1,567 173,352
--------- ---------
Total current liabilities 137,705 321,199
Noncurrent liabilities:
Long-term debt due after one year 278,536 190,070
Pension and other post-retirement benefits 77,571 60,583
Deferred income tax liabilities 2,913 4,689
Other noncurrent liabilities 9,804 10,718
--------- ---------
Total noncurrent liabilities 368,824 266,060
Shareholders' equity:
Preferred stock; 5,000,000 shares authorized; none
issued in 2002 and 2001
Common stock, $0.10 par value; 50,000,000 shares
authorized in 2002 and 2001; 25,491,178 and 25,415,324
shares issued and outstanding in 2002 and 2001 2,601 2,590
Capital in excess of par value 57,124 56,761
Retained earnings 212,437 207,512
Accumulated other comprehensive loss (14,562) (13,389)
Unearned restricted stock (31) (194)
--------- ---------
Total shareholders' equity 257,569 253,280
--------- ---------
Total liabilities and shareholders' equity $ 764,098 $ 840,539
========= =========
See accompanying notes.
5
INTERMET Corporation
Consolidated Statements of Cash Flows
Years ended December 31,
2002 2001 2000
--------- --------- ---------
(in thousands of dollars)
OPERATING ACTIVITIES:
Net income (loss) before extraordinary item and cumulative $ 9,125 ($ 8,703) $ 40,908
effect of a change in accounting principle
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Depreciation 50,253 51,373 45,122
Amortization of debt discount and issuance costs 2,083 1,476 1,208
Amortization of goodwill and other assets 139 7,123 7,392
Impairment of assets - 11,734 7,476
Equity in earnings of 20%-50% owned companies (1,573) (946) (782)
Deferred income tax provision (benefit) 548 (4,086) 14,459
Gain on sale of a subsidiary and other assets - (73) (22,392)
Loss on disposal of property, plant and equipment 3,109 - -
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 28,891 21,504 30,835
Inventories 7,655 21,375 1,844
Accounts payable and current liabilities (15,836) (39,407) (10,490)
Other assets and liabilities 4,981 13,444 (19,723)
--------- --------- ---------
Cash provided by operating activities 89,375 71,594 69,355
INVESTING ACTIVITIES:
Additions to property, plant and equipment (9,445) (36,368) (57,747)
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
Proceeds from sale of a subsidiary and other assets - - 64,212
Other, net - - (1,628)
--------- --------- ---------
Cash (used in) provided by investing activities (9,445) (36,368) 4,837
FINANCING ACTIVITIES:
Net (decrease) increase in revolving credit facility (85,000) 9,000 (54,500)
Proceeds from term loan - 182,750 -
Proceeds from debt offering 175,000 - -
Repayment of term loans (171,750) (211,000) -
Decrease in other debt (1,646) (16,494) (1,307)
Payments of debt issuance costs (6,022) - -
Issuance (purchase) of common stock 374 (349) 452
Dividends paid (4,075) (3,183) (4,061)
Other, net - - (140)
--------- --------- ---------
Cash used in financing activities (93,119) (39,276) (59,556)
Effect of exchange rate changes on cash and cash equivalents 2,621 (1,821) 1,685
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (10,568) (5,871) 16,321
Cash and cash equivalents at beginning of year 13,866 19,737 3,416
--------- --------- ---------
Cash and cash equivalents at end of year $ 3,298 $ 13,866 $ 19,737
========= ========= =========
See accompanying notes.
6
INTERMET Corporation
Consolidated Statements of Shareholders' Equity
Years ended December 31,
2002 2001 2000
--------- --------- ---------
(in thousands of dollars, except
share and per share data)
COMMON STOCK, $0.10 PAR VALUE
Balance as of January 1 $ 2,590 $ 2,590 $ 2,585
Issued in connection with exercise of options to purchase
19,750, nil and 26,000 shares of common stock in 2002, 2001
and 2000 2 - 5
Issued in connection with deferred compensation plan 9 - -
--------- --------- ---------
Balance as of December 31 2,601 2,590 2,590
CAPITAL IN EXCESS OF PAR VALUE
Balance as of January 1 56,761 57,110 56,661
Amounts in excess of par value of common stock issued n
connection with exercise of options to purchase shares 189 - 449
Amounts in excess of par value of common stock issued in
connection with deferred compensation plan 174 - -
Purchase of 104,000 shares for deferred compensation plan - (349) -
--------- --------- ---------
Balance as of December 31 57,124 56,761 57,110
RETAINED EARNINGS
Balance as of January 1 207,512 220,279 183,432
Net income (loss) 9,003 (8,703) 40,908
Cash dividends of $0.16 per share in 2002, 2001 and 2000 (4,078) (4,064) (4,061)
--------- --------- ---------
Balance as of December 31 212,437 207,512 220,279
ACCUMULATED TRANSLATION
Balance as of January 1 (4,641) (363) (234)
Foreign currency translation adjustment 14,932 (6,582) (198)
Related income tax effect (5,139) 2,304 69
--------- --------- ---------
Balance as of December 31 5,152 (4,641) (363)
DERIVATIVE INSTRUMENT
Balance as of January 1 (1,858) - -
Derivative instrument adjustment 792 (2,858) -
Related income tax effect (277) 1,000 -
--------- --------- ---------
Balance as of December 31 (1,343) (1,858) -
MINIMUM PENSION LIABILITY
Balance as of January 1 (6,890) - -
Minimum pension liability adjustment (17,663) (10,600) -
Related income tax effect 6,182 3,710 -
--------- --------- ---------
Balance as of December 31 (18,371) (6,890) -
UNEARNED RESTRICTED STOCK
Balance as of January 1 (194) (206) (67)
Issuance of 6,000, 23,000 and 30,000 shares of common stock in
2002, 2001 and 2000 (20) (64) (251)
Amortization 44 76 112
Forfeitures 139 - -
--------- --------- ---------
Balance as of December 31 (31) (194) (206)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY $ 257,569 $ 253,280 $ 279,410
========= ========= =========
See accompanying notes.
7
INTERMET Corporation
Notes to Consolidated Financial Statements
Years ended December 31, 2002, 2001 and 2000
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
INTERMET Corporation produces castings worldwide for light vehicle and
industrial components including chassis, axle and suspension components,
powertrain components, and electronic components. In addition, we perform
value-added services including advanced design and engineering, casting,
machining and sub-assembly, principally for automotive manufacturers in North
America.
Our primary material capabilities include two groups: Ferrous Metals Group and
Light Metals Group. Ferrous metals include ductile and gray iron. Light metals
include aluminum, magnesium and zinc.
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 and its domestic and foreign subsidiaries. All
significant inter-company transactions and balances have been eliminated in
consolidation. All subsidiaries have a fiscal year ending December 31.
Investments in 20% to 50% owned companies are accounted for under the equity
method.
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 and such differences could be material to the financial
statements.
RECLASSIFICATIONS
Certain amounts previously reported in the 2001 and 2000 financial statements
and notes thereto have been reclassified to conform to the 2002 presentation.
REVENUE RECOGNITION
We recognize revenue upon shipment of products and transfer of title.
SHIPPING AND HANDLING COSTS
We record shipping and handling costs as components of "Cost of sales" within
our statements of operations.
STOCK-BASED COMPENSATION
We grant stock options 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 Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and, accordingly, recognize no
compensation expense for the stock option grants. Had compensation expense for
these stock option grants been determined based on the fair value at the grant
dates for awards under the stock option plans consistent with the method of SFAS
No. 13, "Accounting for Stock-Based Compensation," our pro forma net income
(loss), basic earnings (loss) per share and diluted earnings (loss) per share
would have been the following:
2002 2001 2000
------- -------- --------
(in thousands of dollars,
except per share data)
Net income (loss), as reported $9,003 $(8,703) $40,908
Less: Total stock-based employee compensation expense determined under
fair value method for all awards, net of related tax effects (794) (898) (875)
------- -------- --------
Pro forma net income (loss) $8,209 $(9,601) $40,033
======= ======== ========
Earnings (loss) per share:
Basic - as reported $ 0.35 $ (0.34) $1.61
======= ======== ========
Basic - pro forma $ 0.32 $ (0.38) $1.58
======= ======== ========
Diluted - as reported $ 0.35 $ (0.34) $1.61
======= ======== ========
Diluted - pro forma $ 0.32 $ (0.38) $1.57
======= ======== ========
We use the Black-Scholes option pricing model to estimate the fair value of our
stock options as described in Note 10, Stock Compensation.
8
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance for doubtful accounts reduces trade accounts receivable to its net
recognizable amount. It is determined by a combination of factors, such as
customer charge-backs, customer's inability to meet its financial obligations to
us, our past loss history, and the length of time the trade account receivables
are past due. If circumstances change, our estimates of the recoverability of
trade accounts receivable could be reduced by a material amount.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on the
last-in, first-out ("LIFO") method for 5% and 6% of inventories as of December
31, 2002 and 2001, respectively. If LIFO inventories were valued using the same
cost methods used for other inventories, their carrying values would have
increased by $897,000 and $1,191,000 at December 31, 2002 and 2001,
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. 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.
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" in the
accompanying balance sheet.
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 using the
straight-line method on the basis of the following estimated useful lives: 2 to
40 years for buildings and improvements, and 2 to 21 years for machinery and
equipment. The amortization of property, plant and equipment under capital
leases is included in depreciation expense. 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 events or changes in circumstances
indicate that the carrying amounts of such assets may not be recoverable. Our
recoverability estimates are based on the projected future cash flows expected
to result from the use of the assets at various facilities. An impairment loss
is measured as the amount by which the carrying amount of the assets exceeds the
fair value.
GOODWILL
Goodwill represents the excess acquisition cost over the fair value of net
assets acquired. On January 1, 2002, we adopted SFAS No. 142 "Goodwill and Other
Intangible Assets". Under this statement, goodwill is no longer amortized but is
subject to annual impairment tests (or more frequent tests if impairment
indicators arise). We performed impairment tests of our goodwill as required. We
evaluated our goodwill recoverability based on a combination of an income method
and a market method. The results of our tests performed in 2002 indicated that
the goodwill is not impaired.
9
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
DERIVATIVES
SFAS No. 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. Our interest rate swap with a
notional amount of $50 million is stated as a liability on the consolidated
balance sheets at fair value which is obtained from dealer quotes as noted in
Note 17, Derivative Financial Instruments. Changes in the fair value of the
derivative is recognized through other comprehensive income. We do not
participate in speculative derivatives trading.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain financial instruments such as cash and cash
equivalents, accounts receivable and accounts payable approximate fair value
because of their short maturities. The carrying values of our debts approximate
the fair values as the respective effective interest rates of our debts
approximate the respective year end market rates for similar debt instruments,
with the exception of our senior notes (see Note 8, Debt). The carrying values
reported in the consolidated balance sheets represent the estimated amounts we
would receive or pay to terminate agreements taking into consideration current
interest rates and the creditworthiness of the counter-parties.
ENVIRONMENTAL MATTERS
Accruals for environmental matters are recorded when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated. These accruals are adjusted periodically as assessment and
remediation efforts progress or other information becomes available. Accruals
for related insurance or other third-party recoveries for environmental
liabilities are recorded when it is probable that a recovery will be realized.
Environmental costs are capitalized if the costs extend the life of the
property, increase its capacity, and / or mitigate or prevent contamination from
future operations. Costs related to environmental contamination treatment and
cleanup are charged to expense.
INCOME TAXES
The Company accounts for taxes on income using the asset and liability method
wherein deferred tax assets and liabilities are recognized for the future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities using statutory tax rates.
Annual tax provisions include provision for the current year and amounts
considered sufficient to pay assessments that may result from examinations of
prior year tax returns. However, the amount ultimately paid upon resolution of
issues raised may differ from the amounts accrued.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of foreign subsidiaries for which the local currency
is the functional currency are translated into U.S. dollars at year-end exchange
rates. Income and expense items are translated at average exchange rates
prevailing during the year. The resulting translation adjustments are recorded
in accumulated other comprehensive income as a component of stockholder's
equity.
10
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections". This Statement requires certain
gains and losses associated with the extinguishment of debt previously treated
as extraordinary items to be classified as income or loss from continuing
operations. We will be required to adopt SFAS No. 145 on January 1, 2003.
Accordingly, as of January 1, 2003, a pretax extraordinary item of $927,000
resulting from the extinguishment of debt for the year ended December 31, 2002
will be reclassified.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which supersedes Emerging Issues Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". SFAS No. 146 requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. SFAS No. 146 will be effective for
exit or disposal activities initiated after December 31, 2002.
11
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
2. BALANCE SHEET DETAILS
Inventories:
The components of inventories are as follows:
December 31,
-------------------------------
2002 2001
------------- --------------
(in thousands of dollars)
Finished goods $ 15,804 $ 15,756
Work in process 9,059 12,080
Raw materials 6,794 6,259
Supplies and patterns 33,799 37,762
------------- --------------
$ 65,456 $ 71,857
============= ==============
Property, Plant and Equipment, Net:
The components of property, plant and equipment are as follows:
December 31,
-------------------------------
2002 2001
------------- --------------
(in thousands of dollars)
Land $ 5,304 $ 5,204
Buildings and improvements 135,191 122,425
Machinery and equipment 510,917 505,025
Construction in progress 9,595 13,983
------------- --------------
Property, plant and equipment, at cost 661,007 646,637
Less: Accumulated depreciation and foreign
industrial development grants, net 328,973 275,881
------------- --------------
Property, plant and equipment, net $ 332,034 $ 370,756
============= ==============
12
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
3. REPORTING FOR BUSINESS SEGMENTS
We individually evaluate the operating performance of our business units. 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, including
the operations of PortCast-Fundicao Nodular, S.A. ("PortCast"), our 50% owned
Portuguese equity investment. Our equity in earnings of PortCast in 2002 was
$1,573,000. The Light Metals segment consists of aluminum, magnesium and zinc
casting operations and their related machining operations. Corporate and Other
segment includes operations which do not fall within the Ferrous Metals segment
or the Light Metals segment and the corporate business unit and its related
expenses and eliminations. Certain administrative costs such as interest and
amortization are included within Corporate and Other segment. This information
is displayed in the following table.
Ferrous Corporate
Metals Light Metals and Other Consolidated
----------- ------------ ----------- ------------
(in thousands of dollars)
Year ended December 31, 2002
Net sales $ 529,738 $ 271,591 $ 13,603 $ 814,932
Depreciation expense 29,918 18,019 2,316 50,253
Amortization expense - - 139 139
Interest expense, net 3,860 4,390 19,664 27,914
Provision for income taxes (benefits) 6,818 6,381 (11,545) 1,654
Extraordinary item - - (603) (603)
Cumulative effect of a change in accounting - - 481 481
principle
Net income 14,736 9,424 (15,157) 9,003
Purchases of property, plant and equipment 3,483 4,065 1,897 9,445
As of December 31, 2002
Total assets $ 385,831 $ 234,566 $ 143,701 $ 764,098
Year ended December 31, 2001
Net sales $ 526,281 $ 300,745 $ 16,147 $ 843,173
Depreciation expense 27,834 20,274 3,265 51,373
Amortization expense - - 7,123 7,123
Interest expense, net 6,781 6,003 18,241 31,025
Provision for income taxes (benefits) 4,588 (691) (9,197) (5,300)
Net income (loss) 8,398 (3,346) (13,755) (8,703)
Purchases of property, plant and equipment* 20,986 14,440 942 36,368
As of December 31, 2001
Total assets $ 455,034 $ 234,806 $ 150,699 $ 840,539
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 - - 7,392 7,392
Interest expense, net 6,128 7,081 26,052 39,261
Provision for income taxes (benefits) 34,770 1,555 (134) 36,191
Net income (loss) 52,996 1,063 (13,151) 40,908
Purchases of property, plant and equipment* 36,283 17,691 3,773 57,747
As of December 31, 2000
Total assets $ 492,081 $ 401,655 $ 25,060 $ 918,796
* Does not include capital reimbursed through insurance - $3,389,000 and
$34,414,000 in 2001 and 2000, respectively.
13
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
4. DISPOSITIONS
On October 12, 2000, we sold our interest in Iowa Mold Tooling Co. Inc.. This
was a consolidated subsidiary that is included in our "Corporate and Other"
segment in 2000 in Note 3, Reporting for Business Segments. We sold our interest
in Iowa Mold Tooling for $53.9 million. The pretax gain of $22.3 million is
included in "Other operating expenses (income), net" 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 $0.8 million.
5. GOODWILL
On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible
Assets". Under this statement, goodwill is no longer amortized but is subject to
annual impairment tests (or more frequent tests if impairment indicators arise).
As required under SFAS No. 142, we wrote off negative goodwill of $481 thousand
net of taxes, in the first quarter of 2002 as a cumulative effect of a change in
accounting principle. In 2002, we performed impairment tests according to the
requirements of SFAS No. 142. Specifically, during the second quarter of 2002,
we performed our initial impairment test on our goodwill. In addition, we
performed our annual impairment test as of November 30, 2002. Both tests apply a
combination of valuation techniques including an income method and a market
method. The results of our tests indicated that goodwill is not impaired.
The following table reflects the proforma effect of SFAS No. 142 on our net
income for the years ended December 31:
2002 2001 2000
---------------- ---------------- ----------------
(in thousands of dollars, except per share data)
Reported net income (loss) after extraordinary item and
cumulative effect of a change in accounting principle $9,003 $(8,703) $40,908
Add back: Goodwill amortization, net of taxes - 5,298 5,314
---------------- ---------------- ----------------
Adjusted net income (loss) $9,003 $(3,405) $46,222
================ ================ ================
Basic and diluted earnings (loss) per share:
Reported net income (loss) $0.35 $(0.34) $1.61
Add back: Goodwill amortization, net of taxes - 0.21 0.21
---------------- ---------------- ----------------
Adjusted net income (loss) $0.35 $(0.13) $1.82
================ ================ ================
14
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
6. IMPAIRMENT OF ASSETS AND SHUTDOWN
On December 21, 2001, we permanently closed our Alexander City, Alabama,
aluminum plant. Alexander City is included in the Light Metals segment in Note
3, Reporting for Business Segments. Alexander City had revenues of $39.1 million
and $22.8 million, and net losses of approximately $9.8 million and $10.9
million for 2001 and 2000, respectively. The net loss of $9.8 million for 2001
includes charges for asset impairment and shutdown of $8.4 million after tax in
the fourth quarter of 2001.
The decision to close this plant was the principal reason we recorded an $11.7
million charge for impairment of assets and a $1.2 million charge of shutdown
costs in the fourth quarter of 2001. All of these charges are included in "Other
operating expense (income), net" in the accompanying statements of operations.
The $11.7 million impairment charge included a write-down of $9.8 million to
fair market value for capital assets and inventories, and a write-down of
goodwill of $1.9 million. The $1.2 million shutdown charge included $0.7 million
for site environmental remediation and disposal costs, $0.4 million in
provisions 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 2002, we paid all of the $0.4 million of severance accrued at
December 31, 2001.
In the second quarter of 2001, we announced the shutdown of our Reynosa, Mexico,
machining operation and recorded a $0.6 million shutdown charge.
During December 2000, due to poor operating results of our Corporate and Other
segment, we assessed the ongoing value of its assets. In determining the amount
of the necessary reserve, we utilized discounted future cash flows. Based on
this evaluation, we recorded an impairment charge of $7.5 million, including
elimination of goodwill of $5.7 million and a write-down of fixed assets of $1.8
million. This charge was included in "Other operating expense (income), net" in
the accompanying statements of operations in 2000.
On March 31, 2000, we permanently closed our Ironton, Ohio, foundry. Ironton was
included in the Ferrous Metals segment in Note 3, Reporting for Business
Segments. Ironton had revenues of $6.1 million and net losses of $4.4 million
for the year ended December 31, 2000.
In 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 employee benefits. These expenditures were
accrued for at December 31, 1999. In addition, we paid $1.0 million in severance
and employee benefits in 2000 relating to 500 union employees. This amount was
not previously accrued. In 2001, we also incurred $0.8 million in workers'
compensation and group insurance which were not previously accrued.
In 2002, Ironton incurred approximately $0.2 million for workers' compensation
claims, $0.3 million for health insurance, and $0.1 million for environmental
remediation. The remaining accrual of $0.2 million as of December 31, 2002,
which is included in "Other accrued liabilities" in the accompanying balance
sheet, is our estimate of the remaining costs to be incurred, related primarily
to workers' compensation.
During 2001 and 2000, $0.7 million and $1.4 million, respectively, of the assets
remaining at the Ironton foundry at December 31, 1999, were transferred to our
other facilities. We also sold certain assets of $0.3 million and $4.5 million
in 2001 and 2000, respectively. The remaining assets of $0.9 million as of
December 31, 2002, which are included in "Property, plant and equipment" in the
accompanying balance sheet, are recorded based on our estimate of the fair value
of the remaining real property and machinery.
15
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
7. 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, 2003, unless extended. These notes provide for
borrowings up to Euros 4.6 million (approximately $4.8 million) at December 31,
2002. There were no outstanding borrowings under these agreements as of December
31, 2002 and 2001.
8. DEBT
Long-term debt consists of the following at December 31:
2002 2001
-------- --------
(in thousands of dollars)
INTERMET:
Revolving credit facility $ 63,000 $148,000
Term loan - 171,750
Senior notes from June 2002 debt offering 175,000 -
Domestic subsidiaries:
Industrial development bonds 40,200 41,050
Capitalized leases 1,581 2,181
Foreign subsidiaries:
Foreign bank term notes 322 441
-------- --------
Total 280,103 363,422
Less: Long-term debt due within one year 1,567 173,352
-------- --------
Long-term debt due after one year $278,536 $190,070
======== ========
On June 13, 2002, we completed a senior note offering of $175 million. The notes
bear a fixed rate of interest at 9.75% and will mature on June 15, 2009.
Interest is due each June 15 and December 15. The notes are unsecured and rank
equally with all of our existing and future unsecured senior debt. The net
proceeds of the senior note offering were used to pay the remaining balance on a
bank term loan and for working capital purposes. The write-off of unamortized
debt issuance costs of $0.9 million pretax and $0.6 million net of taxes,
related to the extinguishment of the bank term loan, was recorded as an
extraordinary item in the accompanying statements of operations in the second
quarter of 2002. Debt issuance costs of $5.9 million were capitalized in
connection with the debt offering and are included in "Other noncurrent assets"
in the accompanying balance sheet and are being amortized over seven years. See
Note 9, Supplemental Condensed Consolidating Financial Information, for
additional information regarding the senior unsecured notes. The estimated fair
value of our senior notes based on market data as of December 31, 2002, was
approximately $157.5 million.
On July 17, 2001, Intermet amended its $300 million unsecured revolving credit
agreement with its bank group. The maturity date continues to be November 5,
2004. Under the new terms, the revolving credit facility is secured by all
domestic assets and a pledge of 65% of the stock of foreign subsidiaries. The
agreement requires us to maintain specified financial ratios and imposes
limitations on certain activities. We are in compliance with our covenants as of
December 31, 2002. The interest rate on the secured revolving credit for LIBOR
borrowings at December 31, 2002, was LIBOR plus 3.00% (approximately 4.84%).
Overnight borrowings under the revolving credit agreement were at 6.25%. The
spread over LIBOR that we must pay is based on the ratio of our total debt
(including letters of credit) to our EBITDA. We must also pay a fee, at a rate
of 0.50% per annum, on any unused portion of the $300 million secured revolving
credit facility. Standby letters of credit reduce the amount that the Company is
able to borrow under its secured revolving credit facility. At December 31,
2002, such standby letters of credit totaled $57.2 million. Revolving credit
agreement covenants limit our availability to access the entire $300 million
secured revolving credit facility. At December 31, 2002, total borrowings and
letter of credit obligations under the $300 million secured revolving credit
agreement were $120.2 million.
16
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
8. DEBT (CONTINUED)
On December 23, 1999, Columbus Foundry, L.P., a wholly owned subsidiary, issued
$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,
2002, was 1.60%. The principal is due December 1, 2019.
Under the terms of a bond indenture entered into by Lynchburg Foundry Company, a
wholly owned subsidiary, Lynchburg Foundry Company is required to make partial
redemption of its industrial development revenue bonds on an annual basis
through June 2006. The redemption amount is $350,000 per year, with a final
payment at maturity of $1,650,000. The balance outstanding as of December 31,
2002 was $2,700,000. The bonds are subject to optional redemption prior to
maturity and bear an interest rate of 7.0%.
As part of our acquisition of Tool Products, Inc. in 1998, we assumed $4,500,000
of industrial development revenue bond debt. We are required to make annual
principal payments of $500,000, with a final maturity date of January 1, 2007.
The balance as of December 31, 2002, was $2,500,000. The interest rate resets
weekly and it was 1.75% at December 31, 2002.
We have capital leases of approximately $1.6 million and $2.2 million, and these
leases relate to assets with net book values of approximately $2.4 million and
$2.8 million at December 31, 2002 and 2001, respectively. Interest rates for
these leases range from 7.50% to 8.58% in 2002 and 2001. The amortization of
assets under capital 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 $30.9 million at December 31, 2002.
Maturities of long-term debt and capital leases at December 31, 2002, are as
follows:
(In thousands of dollars)
2003 $ 1,567
2004 64,418
2005 1,426
2006 2,192
2007 500
Thereafter 210,000
-------------
Totals $ 280,103
=============
We paid interest of approximately $26.5 million, $30.8 million, and $41.1
million in 2002, 2001, and 2000, respectively. We capitalized interest expense
of $1.1 million and $1.5 million in 2001 and 2000, respectively. No interest
expense was capitalized in 2002.
Our bank agreement and senior notes limit our ability to pay dividends. In 2002,
under such agreements, we were able to pay dividends of up to $5,000,000.
17
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On June 13, 2002, we issued $175 million of senior notes, which will mature in
2009. The senior notes are guaranteed by certain of our domestic wholly owned
subsidiaries ("Combined Guarantor Subsidiaries"). The guarantees are
unconditional and joint and several. The senior notes are effectively
subordinated to the secured debt of the Company ("Parent"). Restrictions
contained in the indenture covering the senior notes include, but are not
limited to, restrictions on incurring additional secured debt, repurchasing of
our capital stock, disposal of assets, affiliate transactions, and transfer of
assets. As of December 31, 2002, the Parent and the Combined Guarantor
Subsidiaries had approximately $102.3 million of secured debt outstanding and
approximately $179.8 million of unused commitments, net of outstanding letters
of credit, under our credit facility. The secured debt of the Parent is also
guaranteed by each of the Combined Guarantor Subsidiaries.
Certain of our domestic subsidiaries (Intermet International, Inc., Intermet
Holding Company, Transnational Indemnity Company, and Western Capital
Corporation) and all of our foreign subsidiaries are not guarantors of the notes
("Combined Non-Guarantor Subsidiaries"). The Combined Non-Guarantor Subsidiaries
had approximately $0.3 million of debt outstanding as of December 31, 2002.
Presented below are summarized condensed consolidating financial information for
the Parent, the Combined Guarantor Subsidiaries, the Combined Non-Guarantor
Subsidiaries, and the Company on a consolidated basis as of and for the years
ended December 31, 2002 and 2001.
Investments in subsidiaries are presented using the equity method of accounting.
Separate financial statements of the Combined Guarantor Subsidiaries are not
provided as the condensed consolidating financial information contained herein
provides a more meaningful disclosure to allow investors to determine the nature
of the assets held by and the operations of the combined group.
18
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Year ended December 31, 2002
--------------------------------------------------------------------------
Combined Combined
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
(in thousands of dollars)
INCOME STATEMENT DATA
Net sales $ - $ 742,829 $ 87,950 $ (15,847) $ 814,932
Cost of sales (35) 681,466 79,225 (15,887) 744,769
--------- --------- --------- --------- ---------
Gross profit 35 61,363 8,725 40 70,163
Selling, general and administrative 1,669 23,217 6,223 761 31,870
Other operating expenses (income), net 2,040 (3) 314 (759) 1,592
--------- --------- --------- --------- ---------
Operating (loss) profit (3,674) 38,149 2,188 38 36,701
Other expenses (income), net:
Interest expense (income), net 19,332 9,039 (457) - 27,914
Other expense (income), net 57 (358) (1,691) - (1,992)
--------- --------- --------- --------- ---------
(Loss) income before income taxes (23,063) 29,468 4,336 38 10,779
Income tax (benefit) expense (10,232) 11,832 54 - 1,654
--------- --------- --------- --------- ---------
Net (loss) income before
extraordinary item and cumulative
effect of change in accounting
principle (12,831) 17,636 4,282 38 9,125
Extraordinary item, net of tax (603) - - - (603)
Cumulative effect of change in
accounting principle, net of tax - - 481 - 481
--------- --------- --------- --------- ---------
Net (loss) income $ (13,434) $ 17,636 $ 4,763 $ 38 $ 9,003
========= ========= ========= ========= =========
19
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Year Ended December 31, 2001
----------------------------------------------------------------------
Combined Combined
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
(in thousands of dollars)
INCOME STATEMENT DATA
Net sales $ - $ 770,408 $ 89,986 $ (17,221) $ 843,173
Cost of sales 292 722,969 74,585 (16,196) 781,650
--------- --------- --------- --------- ---------
Gross (loss) profit (292) 47,439 15,401 (1,025) 61,523
Selling, general and administrative 2,887 26,403 6,026 189 35,505
Other operating expenses (income), net 756 12,793 67 (189) 13,427
--------- --------- --------- --------- ---------
Operating (loss) profit (3,935) 8,243 9,308 (1,025) 12,591
Other expenses (income), net:
Interest expense (income), net 17,588 13,638 (201) - 31,025
Other (income) expense, net (30) 87 (4,488) - (4,431)
--------- --------- --------- --------- ---------
(Loss) income before income taxes (21,493) (5,482) 13,997 (1,025) (14,003)
Income tax (benefit) expense (7,198) (1,067) 3,223 (258) (5,300)
--------- --------- --------- --------- ---------
Net (loss) income $ (14,295) $ (4,415) $ 10,774 $ (767) $ (8,703)
========= ========= ========= ========= =========
20
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
As of December 31, 2002
----------------------------------------------------------------------
Combined Combined
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------------------------------------------------------------------
(in thousands of dollars)
BALANCE SHEET DATA
ASSETS
Current assets:
Cash and cash equivalents $ 1,122 $ 167 $ 2,009 $ - $ 3,298
Accounts receivable, net 162 63,336 23,281 - 86,779
Inventories - 57,376 8,139 (59) 65,456
Other current assets 21,291 2,901 682 1 24,875
--------- --------- --------- --------- ---------
Total current assets 22,575 123,780 34,111 (58) 180,408
Property, plant and equipment, net 4,598 294,781 32,112 543 332,034
Other assets:
Goodwill - 217,016 - - 217,016
Other noncurrent assets 18,749 3,867 10,581 1,443 34,640
Intercompany, net (40,038) 63,759 (25,323) 1,602 -
Investments in subsidiaries 592,765 - - (592,765) -
--------- --------- --------- --------- ---------
Total assets $ 598,649 $ 703,203 $ 51,481 $(589,235) $ 764,098
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,462 $ 63,399 $ 5,337 $ (265) $ 70,933
Accrued liabilities 19,603 34,480 11,041 81 65,205
Long-term debt due within one year 350 1,107 110 - 1,567
--------- --------- --------- --------- ---------
Total current liabilities 22,415 98,986 16,488 (184) 137,705
Long-term debt due after one year 240,350 37,974 212 - 278,536
Pension and other post-retirement
benefits 70,812 6,759 - - 77,571
Other noncurrent liabilities 7,503 6,955 (2,488) 747 12,717
--------- --------- --------- --------- ---------
Total noncurrent liabilities 318,665 51,688 (2,276) 747 368,824
Shareholders' equity 257,569 552,529 37,269 (589,798) 257,569
--------- --------- --------- --------- ---------
Total liabilities and shareholders'
equity $ 598,649 $ 703,203 $ 51,481 $(589,235) $ 764,098
========= ========= ========= ========= =========
21
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
As of December 31, 2001
----------------------------------------------------------------------
Combined Combined
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
(in thousands of dollars)
BALANCE SHEET DATA
ASSETS
Current assets:
Cash and cash equivalents $ 2,328 $ 466 $ 11,072 $ - $ 13,866
Accounts receivable, net 820 90,487 20,733 - 112,040
Inventories - 64,758 7,158 (59) 71,857
Other current assets 27,086 2,414 639 1 30,140
--------- --------- --------- --------- ---------
Total current assets 30,234 158,125 39,602 (58) 227,903
Property, plant and equipment, net 3,971 335,448 30,757 580 370,756
Other assets:
Goodwill - 217,016 - - 217,016
Other noncurrent assets 12,922 5,053 6,889 - 24,864
Intercompany, net 44,352 (26,627) (20,770) 3,045 -
Investments in subsidiaries 575,249 - - (575,249) -
--------- --------- --------- --------- ---------
Total assets $ 666,728 $ 689,015 $ 56,478 $(571,682) $ 840,539
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,621 $ 73,796 $ 6,498 $ (671) $ 81,244
Accrued liabilities 26,454 27,248 12,414 487 66,603
Long-term debt due within one year 171,750 1,084 518 - 173,352
--------- --------- --------- --------- ---------
Total current liabilities 199,825 102,128 19,430 (184) 321,199
Long-term debt due after one year 148,000 39,097 2,973 - 190,070
Pension and other post-retirement
benefits 54,824 5,759 - - 60,583
Other noncurrent liabilities 10,799 7,160 (3,299) 747 15,407
--------- --------- --------- --------- ---------
Total noncurrent liabilities 213,623 52,016 (326) 747 266,060
Shareholders' equity 253,280 534,871 37,374 (572,245) 253,280
--------- --------- --------- --------- ---------
Total liabilities and shareholders'
equity $ 666,728 $ 689,015 $ 56,478 $(571,682) $ 840,539
========= ========= ========= ========= =========
22
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Year ended December 31, 2002
----------------------------------------------------------------------------------
Combined Combined
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
(in thousands of dollars)
CASH FLOW DATA
Net cash provided by (used in) operating
activities $ 92,225 $ 7,177 $ (10,027) $ - $ 89,375
Investing activities:
Additions to property, plant and equipment (1,714) (6,376) (1,355) - (9,445)
--------- --------- --------- --------- ---------
Net cash used in investing activities (1,714) (6,376) (1,355) - (9,445)
Financing activities:
Net decrease in revolving credit facility (85,000) - - - (85,000)
Proceeds from debt offering 175,000 - - - 175,000
Payments of long-term debt (171,750) - - - (171,750)
Net decrease in other debt (244) (1,100) (302) - (1,646)
Payment of debt issuance costs (6,022) - - - (6,022)
Dividends paid (4,075) - - - (4,075)
Issuance of common stock 374 - - - 374
--------- --------- --------- --------- ---------
Net cash used in financing activities (91,717) (1,100) (302) - (93,119)
Effect of exchange rate changes on cash and
cash equivalents - - 2,621 - 2,621
--------- --------- --------- --------- ---------
Net decrease in cash and cash equivalents $ (1,206) $ (299) $ (9,063) $ - $ (10,568)
========= ========= ========= ========= =========
23
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
9. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
Year ended December 31, 2001
---------------------------------------------------------------------
Combined Combined
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
(in thousands of dollars)
CASH FLOWS DATA
Net cash provided by operating activities $ 29,320 $ 28,159 $ 14,115 $ - $ 71,594
Investing activities:
Additions to property, plant and
equipment (456) (27,644) (8,268) - (36,368)
Proceeds from insurance for replacement
of property, plant and equipment - - 3,389 - 3,389
Additions to property, plant and
equipment covered by insurance - - (3,389) - (3,389)
--------- --------- --------- -------- ---------
Net cash used in investing activities (456) (27,644) (8,268) - (36,368)
Financing activities:
Net increase in revolving credit facility 9,000 - - - 9,000
Proceeds from term loan 182,750 - - - 182,750
Repayments of term loans (211,000) - - - (211,000)
Net decrease in other debt (15,175) (1,149) (170) - (16,494)
Dividends paid (3,183) - - - (3,183)
Purchase of common stock (349) - - - (349)
--------- --------- --------- -------- ---------
Net cash used in financing activities (37,957) (1,149) (170) - (39.276)
Effect of exchange rate changes on cash
and cash equivalents - - (1,821) - (1,821)
--------- --------- --------- -------- ---------
Net (decrease) increase in cash and cash
equivalents $ (9,093) $ (634) $ 3,856 $ - $ (5,871)
========= ========= ========= ======== =========
24
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
10. 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. The exercise prices of options issued under Employee Plans and Directors
Plan are equal to the fair values of the common stock at the option grant date.
Certain options also remain outstanding from prior stock option plans. At
December 31, 2002, options for 1,141,248 shares were exercisable, while
1,133,633 of the Employee Plans options and restricted shares and 37,000
Directors Plan options were available for future grant.
We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations in accounting for the stock
option plans. Accordingly, we have not recognized compensation expense for our
stock option plans.
The fair values of our stock options presented in Note 1 were estimated as of
the date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 2002, 2001 and 2000:
2002 2001 2000
------- ------- -------
Risk-free interest rate 3.00% 2.50% 4.75%
Dividend yield 1.00% 1.00% 1.00%
Volatility 0.769 0.480 0.831
Expected life 6 years 6 years 6 years
For purposes of the pro forma disclosures required under SFAS 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.
25
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
10. STOCK COMPENSATION (CONTINUED)
A summary of our stock option activity for the three years ended December 31,
2002, is as follows:
Weighted
Number of Average Exercise
Options Exercise Price Price Range
---------------- ----------------- -------------------
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 $11.31 5.69 - 19.38
================
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 - - -
Forfeited (320,500) 10.30 3.37 - 18.06
----------------
Outstanding at December 31, 2001 1,665,850 $9.54 3.37 - 19.38
================
Exercisable at December 31, 2001 899,230 $11.94
Weighted average fair value of
options granted during 2001 $1.51
Outstanding at January 1, 2002 1,665,850 $9.54
Granted 175,000 5.07 $4.20 - $8.39
Exercised (19,750) 9.67 8.66 - 11.20
Forfeited (80,125) 5.41 3.44 - 18.06
----------------
Outstanding at December 31, 2002 1,740,975 $9.27 3.38 - 19.38
================
Exercisable at December 31, 2002 1,141,248 $11.25
Weighted average fair value of
options granted during 2002 $3.03
26
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
10. STOCK COMPENSATION (CONTINUED)
The following table summarizes information about options outstanding as of
December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Weighted-Average
Remaining Weighted- Weighted-
Contractual Average Average
Range of Exercise Number Life Exercise Number Exercise
Price Outstanding (in years) Price Exercisable Price
- ---------------------- -------------- -------------- ------------ -------------- ------------
$0.00 - $9.68 1,079,725 6.9 $ 5.85 520,750 $ 6.90
9.69 - 19.38 661,250 4.6 14.86 620,498 14.90
-------------- --------------
1,740,975 1,141,248
============== ==============
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. Costs recognized as ESOP
expenses were $615,000, $554,000, and $1,020,000 in 2002, 2001 and 2000,
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 of Directors adopted 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.
27
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
11. 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, 2002 are as follows:
(In thousands of dollars)
2003 $3,609
2004 2,348
2005 1,505
2006 389
2007 265
Thereafter 33
-----------
Total $8,149
===========
Total rental expense under operating leases aggregated $5,464,000, $6,046,000,
and $5,059,000 in 2002, 2001 and 2000, respectively.
At December 31, 2002, we had commitments to purchase capital equipment of
approximately $4.0 million in the aggregate.
Fifty-one percent of the domestic labor force is covered by collective
bargaining agreements, and 18 percent of the domestic labor force is
covered by collective bargaining agreements that will expire within one year.
On March 14, 2002, we entered into a Consent Order with the U.S. Environmental
Protection Agency ("USEPA"), which will require investigation of the nature and
extent of any hazardous waste disposed of at our Radford, Virginia, facilities.
We have entered into this Consent Order in connection with the USEPA's
Corrective Action Program. The Corrective Action Program is being undertaken on
a nationwide basis by USEPA pursuant to the Resource Conservation and Recovery
Act of 1976. The Corrective Action Program requires facilities that have
historically generated or handled hazardous waste to determine whether those
activities have or could adversely affect groundwater or human health. Because
we historically disposed of waste material at this site, it is possible that
fines or penalties could be assessed, or that remedial action could be required,
with respect to that on-site disposal. At this time we cannot predict the amount
of potential fines or penalties or the cost of remedial action, if any.
On March 5, 2000, we suffered a catastrophic accidental explosion and fire at
our New River Foundry, located in Radford, Virginia. Three employees were
fatally injured and others were injured, several seriously. On March 2, 2002,
the representatives of the three deceased employees, and three of the injured
employees, filed six separate lawsuits seeking damages from us and others in the
Circuit Court for the City of Radford, Virginia. It is also possible that one or
more of the other defendants in these cases might assert cross-claims against
us. On December 11, 2002, five of the six cases were dismissed by the court. We
have both primary and excess liability insurance policies covering potential
liability to employees and others and believe that we are adequately insured
against any likely liability for the deaths or injuries arising out of this
incident. However, if we were held to be liable in these cases, and if our
insurance policies did not provide coverage for the damages, the amounts that
could be incurred could be material.
Some of our subsidiaries have been named as potentially responsible parties
liable for cleanup of known environmental conditions. For known environmental
situations, we, with the assistance of environmental engineers and consultants,
have recorded reserves to cover estimated undiscounted future environmental
expenditures. Environmental reserves at December 31, 2002 and 2001, were
$5,845,000 and $5,344,000, respectively. 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, 2002.
28
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
We are subject to federal, state, local and foreign environmental laws and
regulations concerning, among other things, air emissions, effluent discharges,
storage treatment and disposal of hazardous materials and remediation of
contaminated soil and groundwater. At some of our industrial sites, hazardous
materials have been managed for many years. Consequently, we are subject to
various environmental laws that impose compliance obligations and can create
liability for historical releases of hazardous substances. It is likely that we
will be subject to increasingly stringent environmental standards in the future
(including Maximum Achievable Control Technology standards for our industry and
other requirements under the Clean Air Act Amendments of 1990, storm-water
permit programs and toxic use reduction programs) and that we will be required
to make additional expenditures, which could be significant, relating to
environmental matters on an ongoing basis. As discussed below, we will be
required to incur significant costs to bring our Radford foundry into compliance
with applicable clean air regulations, and may be required to implement
corrective action for any contamination of soil and groundwater at the Radford
site.
We also have current and former operating entities (for which we may be
responsible) 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 $5.8 million to cover estimated future environmental
expenditures. This amount includes a $3.4 million escrow account acquired as a
part of the acquisition of Ganton Technologies in 1999 that is being used to
fund the clean-up of an inactive property located in Addison, Illinois. There
can be no assurance, however, that costs in excess of these accruals will not be
incurred, or that unknown conditions will not be discovered that result in
material expenditures by us for environmental matters. 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,
including Maximum Achievable Control Technology standards for our industry, and
until we are able to evaluate necessary control measures, it is not possible to
estimate these costs.
On June 14, 2000, the Virginia Department of Environmental Quality issued a new
air emissions permit for our Radford foundry which, as amended on July 23, 2002,
requires that new air emission controls be installed in the Radford foundry and
be operational by December 31, 2004. Our best current estimates are that the
cost of these new emission controls will be in the range of $3 to $5 million,
although the cost could be substantially higher than our estimates. We are
evaluating the future business prospects for the Radford foundry in light of
this required capital investment.
We are also a party to a number of other legal proceedings associated with
environment, employment, commercial, product liability and other matters in the
ordinary course of our business. We do not believe that product liability such
pending or threatened legal proceedings to which we are a party, or to which any
of our property is subject, will have a material adverse effect on our
consolidated financial position or results of operations or liquidity, taken as
a whole. 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.
29
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
12. 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 Post-Retirement Benefits
---------------- ------------------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands of dollars)
Change in benefit obligation:
Benefit obligation at beginning of year $ 81,195 $ 73,546 $ 40,870 $ 35,545
Service cost - benefits earned during the year 1,922 2,109 973 899
Interest cost on benefit obligation 5,966 5,747 2,925 2,701
Amendments - 667 142 181
Actuarial losses 5,391 2,495 2,177 5,238
Benefits paid (3,646) (3,369) (3,652) (3,694)
---------------------------------------------------------------------
Benefit obligation at end of year $ 90,828 $ 81,195 $ 43,435 $ 40,870
---------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 66,650 $ 73,695
Actual return on plan assets (5,890) (5,371)
Company contributions 1,783 1,695
Benefits paid (3,646) (3,369)
----------------------------------
Fair value of plan assets at end of year $ 58,897 $ 66,650
----------------------------------
Funded status of the plan (under-funded) $(31,931) $(14,545) $ (43,435) $ (40,870)
Unrecognized net actuarial losses (gains) 28,767 10,982 (3,037) (5,659)
Unrecognized transition obligation 58 15 - -
Unrecognized prior service cost 5,849 6,604 271 126
---------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 2,743 $ 3,056 $ (46,201) $ (46,403)
=====================================================================
There was no amendment to pension plans in 2002. 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 6.75%, 7.50%, and 8.00%
in 2002, 2001 and 2000, respectively. The expected long-term rate of return on
plan assets used in determining net pension expense was 8.75%, 9.5%, and 9.5% in
2002, 2001, and 2000 respectively. Plan assets consist of publicly traded stocks
and bonds, cash equivalents and insurance contracts.
30
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
12. RETIREMENT PLANS AND BENEFITS (CONTINUED)
Years ended December 31
----------------------------------------------------------------------------
Pension Benefits Other Post-Retirement Benefits
--------------------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Components of net periodic cost: (in thousands of dollars)
Service cost - benefits earned during
the year $ 1,922 $ 2,109 $ 1,904 $ 973 $ 899 $ 816
Interest cost on benefit obligation 5,966 5,747 5,151 2,925 2,701 2,673
Expected return on plan assets (6,120) (6,275) (6,465) - - -
Amortization of prior service
cost and net transition obligation 389 107 (119) (2) (13) (13)
Recognized net actuarial gain - - - (445) (992) (1,091)
------------- ------------ ----------- ------------ ------------ -----------
Net periodic cost $ 2,157 $ 1,688 $ 471 $3,451 $2,595 $ 2,385
============= ============ =========== ============ ============ ===========
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation was 9.00% to 12.00% in 2002, declining by
1.00% per year to an ultimate rate of 5.00% for the applicable employee age
groups. 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 2002 $ 284 $ (248)
Effect on post-retirement benefit obligation as of December 31, 2002 $ 2,688 $ (2,401)
Amounts recognized for pension benefits in the consolidated balance sheets
consist of:
December 31,
2002 2001
---------------- --------------
(in thousands of dollars)
Prepaid benefit cost $ 4,815 $ 4,315
Accrued benefit liability (36,184) (18,478)
Intangible asset 5,849 6,619
Accumulated other comprehensive income, pretax 28,263 10,600
---------------- --------------
Net amount recognized $ 2,743 $ 3,056
================ ==============
At December 31, 2002, all of our pension plans had accumulated benefit
obligations in excess of plan assets (underfunded plans).
We also maintain several defined contribution plans for certain salaried
employees, hourly employees covered by collective bargaining agreements, and
non-union hourly employees. All of the plans allow participants to make pretax
contributions as a percentage of their compensation. We contribute a specified
percentage of the annual compensation of participants of some of the plans.
Certain plans provide a matching contribution on employees' pretax contribution
to a specified limit. Some plans provide for contributions based on hours worked
by each employee; other plans provide for profit-sharing contributions or other
base contributions. Costs recognized as expenses to these plans, excluding ESOP
expenses, totaled $2,414,000, $2,065,000, and $2,509,000 in 2002, 2001 and 2000,
respectively.
31
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
13. INCOME TAXES
The provision for income taxes consists of the following:
Years ended December 31,
2002 2001 2000
-------------- -------------- --------------
(in thousands of dollars)
Current:
Federal $ - $(6,364) $10,086
State 367 1,506 3,233
Foreign 739 3,644 8,413
-------------- -------------- --------------
1,106 (1,214) 21,732
Deferred:
Federal 683 (4,247) 11,644
State (135) 161 2,815
Foreign - - -
-------------- -------------- --------------
548 (4,086) 14,459
-------------- -------------- --------------
Totals $ 1,654 $(5,300) $36,191
============== ============== ==============
We paid federal income taxes of approximately $1,100,000, $0, and $15,000,000 in
2002, 2001, and 2000, respectively.
The provision for income taxes differs from the amount computed using the
statutory U.S. federal income tax rate for the following reasons:
Years ended December 31,
2002 2001 2000
------------ ------------ -------------
(in thousands of dollars)
Provision for income taxes (benefits) at U.S. statutory rate $3,773 ($4,901) $26,985
Tax exempt income - - (335)
Foreign operations 573 (1,658) (531)
Utilization of credits and credit carryforwards (3,065) - -
State income taxes, net of federal income tax benefits 579 979 2,641
Non-deductible goodwill amortization and write-off - 1,613 8,573
Other (206) (1,333) (1,142)
------------ ------------ -------------
Totals $1,654 ($5,300) $36,191
============ ============ =============
32
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
13. INCOME TAXES (CONTINUED)
The components of the Company's net deferred income tax assets at December 31,
2002 and 2001 are as follows:
2002 2001
------------- --------------
(in thousands of dollars)
Compensation and benefit items $ 37,003 $ 29,810
Operating loss, capital loss, foreign tax credit and Alternative
Minimum Tax credit carryforwards 9,641 9,030
Impairment and shutdown costs 3,272 3,785
Deductible goodwill 2,512 2,188
Other temporary differences 23,362 28,066
------------- --------------
Gross deferred tax assets 75,790 72,879
Valuation allowance (50) (50)
------------- --------------
Deferred tax assets 75,740 72,829
Depreciation and related items (47,431) (48,528)
Other temporary differences (5,549) (1,446)
------------- --------------
Gross deferred tax liabilities (52,980) (49,974)
------------- --------------
Net deferred tax assets $ 22,760 $ 22,855
============= ==============
During 2002, we generated a foreign tax credit of $2,586,000; $2,000,000 of
which was used in the current year. There is no valuation allowance for the
accumulated foreign tax credit of $6.0 million since we project both sufficient
foreign source income and sufficient U.S. tax liabilities to fully utilize this
credit before its expiration date in 2007. We also expect to fully realize the
remaining net deferred tax assets of $16.8 million based on our estimates of
future taxable income.
33
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
14. GEOGRAPHIC AREA AND MAJOR CUSTOMER INFORMATION
The following is a breakout of sales, operating profit, net income and assets
based on geographic locations as of and for years ended December 31, 2002, 2001
and 2000. We operate in North America and have international operations in
Europe, mainly Germany.
For the years ended December 31,
2002 2001 2000
---------- ---------- ----------
(in thousands of dollars)
Net sales:
North America $ 726,982 $ 753,187 $ 943,371
Europe 87,950 89,986 95,473
---------- ---------- ----------
Total net sales $ 814,932 $ 843,173 $1,038,844
========== ========== ==========
Operating profit:
North America $ 33,263 $ 1,641 $ 72,409
Europe 3,438 10,950 16,283
---------- ---------- ----------
Total operating profit $ 36,701 $ 12,591 $ 88,692
========== ========== ==========
Income (loss) before income taxes:
North America $ 6,017 $ (28,352) $ 50,892
Europe 4,762 14,349 26,207
---------- ---------- ----------
Total income (loss) before income taxes $ 10,779 $ (14,003) $ 77,099
========== ========== ==========
As of December 31,
2002 2001 2000
---------- ---------- ----------
Assets:
North America $ 683,775 $ 764,903 $ 841,016
Europe 80,323 75,636 77,780
---------- ---------- ----------
Total assets $ 764,098 $ 840,539 $ 918,796
========== ========== ==========
Net sales to customers exceeding 10% of consolidated net sales in 2002, 2001 or
2000, and other major customers, were as follows (as a percentage of
consolidated net sales):
2002 2001 2000
--------- --------- ----------
Customer:
DaimlerChrysler 20% 21% 18%
Delphi 13% 9% 8%
Ford 11% 11% 11%
General Motors 7% 6% 6%
Visteon 6% 6% 7%
PBR Automotive 5% 4% 3%
34
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
15. EARNINGS PER SHARE
Earnings per share are computed as follows:
Years ended December 31,
2002 2001 2000
------- ------- -------
(in thousands, except
per share data)
Numerator:
Net income (loss) $ 9,003 $(8,703) $40,908
======= ======= =======
Denominator:
Denominator for basic earnings per
share - weighted average shares 25,441 25,359 25,362
Effect of dilutive securities:
Employee stock options and unearned
restricted stock 437 - 76
------- ------- -------
Denominator for diluted earnings per share
- adjusted weighted average shares and
assumed conversions 25,878 25,359 25,438
======= ======= =======
Net income (loss) per common share - basic $ 0.35 $ (0.34) $ 1.61
======= ======= =======
Net income (loss) per common share -
assuming dilution $ 0.35 $ (0.34) $ 1.61
======= ======= =======
Dilutive earnings per share reflect the assumed exercise of stock options and
unearned restricted stock.
35
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
16. QUARTERLY DATA AND SHARE INFORMATION (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 2002 and 2001.
Three months ended
----------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(in thousands of dollars, except per share data)
2002
Net sales $206,096 $217,958 $196,564 $194,314
Gross profit 20,519 22,945 12,046 14,653
Net income (loss) before extraordinary item(1)
and cumulative effect of a change in
accounting principle(2) 4,355 5,353 (1,013) 430
Net income (loss) 4,836 4,750 (1,013) 430
Net income (loss) before extraordinary item(1)
and cumulative effect of a change in
accounting principle(2) per common share
- Basic 0.17 0.21 (0.04) 0.02
- Diluted 0.17 0.20 (0.04) 0.02
Net income (loss) per common share
- Basic 0.19 0.19 (0.04) 0.02
- Diluted 0.19 0.18 (0.04) 0.02
Share prices (Nasdaq) (3)
- High 7.100 11.800 11.240 5.590
- Low 3.120 7.080 4.500 3.150
2001(4)
Net sales $223,732 $227,997 $197,264 $194,180
Gross profit 17,345 21,806 12,050 10,322
Net income (loss) 800 2,865 (3,405) (8,963)
Net income (loss) per common share
- Basic 0.03 0.11 (0.13) (0.35)
- Diluted 0.03 0.11 (0.13) (0.35)
Share prices (Nasdaq) (3)
- High 4.625 5.810 5.900 4.010
- Low 2.500 3.000 2.800 2.510
(1) During the second quarter of 2002, we completed a senior note offering
of $175 million. The net proceeds of the senior note offering were used
to pay off the remaining balance of the bank term loan ($161.7 million)
and for working capital purposes. Unamortized financing costs of
$927,000 were written off as a result of the extinguishment of debt.
The net of tax amount of $603,000 was reported as an extraordinary
item.
(2) During the first quarter of 2002, we adopted SFAS No. 142. As required
under SFAS No. 142, we wrote off negative goodwill of $481,000, net of
taxes, as a cumulative effect of a change in accounting principle. In
addition, goodwill is no longer amortized since January 1, 2002.
(3) The above share price information represents inter-dealer transactions
in the Nasdaq National Market (Nasdaq) without detail markup, markdown
or commission.
(4) Certain 2001 data are different from the amounts previously reported on
respective 2001 form 10-Q. See 2001 annual report for the
reconciliations of the restated amounts with those previously reported
and the reasons for the differences.
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.
36
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
17. DERIVATIVE FINANCIAL INSTRUMENTS
Under our risk management policy, the use of derivatives for managing risk is
confined to hedging the exposure related to variable rate funding activities,
hedging the foreign currency exposure of intercompany payables and receivables,
and hedging purchase commitments relating to raw materials used in our
production processes and related energy costs. Specifically, we review our
liability structure on a recurring basis and make the determination as to
whether our risk exposure should be adjusted using derivative instruments. We do
not use derivative financial instruments for trading purposes.
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 interest rate swap agreement is
$50,000,000. We pay 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, 2002 through January 24, 2003) is 1.84%.
We do not expect to terminate the swap prior to maturity. As of December 31,
2002, the fair value of the swap was approximately $2.1 million and has been
recorded as "Other Noncurrent Liabilities" on the balance sheet.
We have designated this swap transaction as a cash flow hedge. The effectiveness
of this hedge transaction is assessed using the short-cut method as it meets the
criteria outlined in SFAS No. 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.
During 2002, we entered into foreign currency forward contracts to hedge our
exposure to Euro denominated loans from our European operation. We have
designated these forward contracts as fair value hedges.
37
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
18. INSURANCE CLAIMS
Neunkirchen Foundry
On May 20, 2000, our 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. The assets lost
and the resulting business interruption were covered under the insurance
policies we 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.
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. 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 income, net" in the
accompanying statements of operations. The rebuilding of our New River facility
was completed in 2001. As of December 31, 2001, we reached final settlement with
our insurance carriers related to the New River accident.
We received final settlements totaling $133.8 million from 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:
o 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.
o We incurred accident-related expenses in total of $53.4 million, comprised
of $7.8 million in 2001 and $45.6 million in 2000. These expenses were
offset by insurance recovery within cost of sales.
o We recorded a total of $37.8 million for the replacement of property, plant
and equipment in 2001 and 2000. Of this amount, $3.2 million and $26.5
million have been recorded as gains in "Other income, net" in the
accompanying statements of operations in 2001 and 2000, respectively.
o At December 31, 2001, approximately $0.2 million remained as deferred
revenue and $0.9 million as accrued costs. No deferred revenue or accrued
costs remained as of December 31, 2002.
38
INTERMET Corporation
Notes to Consolidated Financial Statements (continued)
19. RELATED PARTY TRANSACTIONS
We received management and technical support fees from PortCast-Fundicao
Nodular, S.A. ("PortCast"), our 50% owned Portuguese joint venture, for
providing administrative service and technical support to them. These fees are
reviewed by PortCast and us annually. We also have outstanding interest-bearing
loan and other receivables from PortCast, mainly comprising of management and
technical support fees receivables and advances made to finance PortCast's
operations. Interest rates on these loan and other receivables range from
three-month European Interbank Offered Rate ("EURIBOR") plus 0.8% to three-month
EURIBOR plus 1.0%.
The related party transactions with PortCast are summarized as follows:
For the year ended December 31,
-------------------------------
2002 2001 2000
---- ---- ----
(in thousands of dollars)
Management fee $329 $319 $326
Technical support fee 427 480 422
Interest income 164 153 160
As of December 31,
------------------
2002 2001 2000
---- ---- ----
(in thousands of dollars)
Loan receivable $ 812 $ 691 $ 475
Other receivable 4,144 2,756 2,763
There were no other material transactions with, or material balances due to or
from, any other related party.
39
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, 2002 and 2001, 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, 2002. Our
audits also include the financial statement schedule included as item 15(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, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, 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.
As discussed in Note 5 to the consolidated financial statements, the Company
adopted SFAS No. 142 Accounting for Goodwill and Other Intangible Assets in
2002.
/s/ Ernst & Young LLP
- ----------------------
Detroit, Michigan
January 30, 2003
40