1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------- ----------------------
Commission File Number 333-28751
NEENAH FOUNDRY COMPANY
(Exact name of each registrant as it appears in its charter)
Wisconsin 39-1580331
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
2121 Brooks Avenue, P.O. Box 729, Neenah, Wisconsin 54957
(Address of principal executive offices) (Zip Code)
(920) 725-7000
(Registrant's telephone number, including area code)
None
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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NEENAH FOUNDRY COMPANY
Form 10-Q Index
For the Quarter Ended March 31, 1998
Page
----
Part 1. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets -- March 31, 1998 and September 30, 1997 3
Condensed consolidated statements of income -- Three and six months ended March 31, 1998
and March 31, 1997 4
Condensed consolidated statements of cash flows -- Six months ended March 31, 1998
and March 31, 1997 5
Notes to condensed consolidated financial statements -- March 31, 1998 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 7
Operations
Part II. Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
Exhibit Index 12
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NEENAH FOUNDRY COMPANY
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31 September 30
1998 1997(1)
---------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 3,427 $ 20,344
Accounts receivable, net .............................. 25,341 29,932
Inventories ........................................... 25,635 19,639
Other current assets .................................. 987 318
Prepaid income taxes .................................. 1,921 --
Deferred income taxes ................................. 1,710 1,695
-------- --------
Total current assets ...................... 59,021 71,928
Property, plant and equipment ........................... 111,349 103,710
Less accumulated depreciation ........................... 7,105 3,131
-------- --------
104,244 100,579
Identifiable intangible assets, net ..................... 33,777 35,277
Goodwill, net ........................................... 130,775 116,690
Other assets ............................................ 3,714 3,951
-------- --------
$331,531 $328,425
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 9,572 $ 10,333
Income taxes payable .................................. -- 4,384
Accrued liabilities ................................... 18,818 17,283
Current portion of long-term debt ..................... 60 98
-------- --------
Total current liabilities ................. 28,450 32,098
Long-term debt .......................................... 197,390 197,522
Postretirement benefit obligations ...................... 5,056 4,894
Deferred income taxes ................................... 45,074 44,519
Other liabilities ....................................... 2,151 2,172
-------- --------
Total liabilities ......................... 278,121 281,205
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, par value $100 per share --
authorized 3,000 shares, no shares
issued or outstanding .......................... -- --
Common stock, par value $100 per share --
authorized 11,000 shares, issued
and outstanding 1,000 shares ................... 100 100
Additional paid in capital ............................ 48,750 44,900
Retained earnings ..................................... 4,560 2,220
-------- --------
Total stockholders' equity ................ 53,410 47,220
-------- --------
$331,531 $328,425
======== ========
See notes to condensed consolidated financial statements.
(1)The balance sheet as of September 30, 1997 has been derived from the audited
financial statements as of that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
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NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands)
Predecessor Predecessor
----------- -----------
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- ----------------------------
1998 1997 1998 1997
--------- --------- -------- ---------
Net sales .................................. $ 43,971 $ 37,871 $ 89,825 $ 75,686
Cost of sales .............................. 31,308 26,759 64,079 53,749
-------- -------- -------- --------
Gross profit ............................... 12,663 11,112 25,746 21,937
Selling, general and administrative
expenses.................................. 4,147 3,779 7,972 8,247
Amortization of intangible assets .......... 1,230 -- 2,459 --
-------- -------- -------- --------
Total operating expenses ................. 5,377 3,779 10,431 8,247
-------- -------- -------- --------
Operating income ........................... 7,286 7,333 15,315 13,690
Net interest income (expense) .............. (5,234) 379 (10,489) 726
-------- -------- -------- --------
Income before income taxes ................. 2,052 7,712 4,826 14,416
Provision for income taxes ................. 1,117 2,631 2,486 4,701
-------- -------- -------- --------
Net income ................................. $ 935 $ 5,081 $ 2,340 $ 9,715
======== ======== ======== ========
See notes to condensed consolidated financial statements.
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NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Predecessor
-----------
Six Months Six Months
Ended Ended
March 31, March 31,
1998 1997
---------- -----------
OPERATING ACTIVITIES
Net income ........................................................ $ 2,340 $ 9,715
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................................. 6,426 3,362
Amortization of deferred financing costs and premium on notes... 158 --
Deferred income taxes .......................................... -- (103)
Changes in operating assets and liabilities .................... (2,928) (4,664)
-------- --------
Net cash provided by operating
activities ................................................ 5,996 8,310
INVESTING ACTIVITIES
Purchase of property, plant and equipment ......................... (2,115) (1,782)
Acquisition of Deeter Foundry, Inc. ............................... (20,759) --
Other ............................................................. -- (36)
-------- --------
Net cash used in investing
activities ................................................ (22,874) (1,818)
FINANCING ACTIVITIES
Dividends paid .................................................... -- (2,220)
Payments on long-term debt ........................................ (39) (35)
-------- --------
Net cash provided by (used in) financing
activities ................................................ (39) (2,255)
-------- --------
Increase (decrease) in cash and cash equivalents .................. (16,917) 4,237
Cash and cash equivalents at beginning of period .................. 20,344 18,166
-------- --------
Cash and cash equivalents at end of period ........................ $ 3,427 $ 22,403
======== ========
See notes to condensed consolidated financial statements.
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NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1998
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal and recurring adjustments ) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the period ending September 30, 1998. (The Company changed its
fiscal year end to September 30 effective September 30, 1997). For further
information, refer to the consolidated financial statements and footnotes
thereto included in Neenah Foundry Company's Annual Report on Form 10-K for the
period ended September 30, 1997.
NOTE 2 -- INVENTORIES
The components of inventories are as follows:
March 31 September 30
1998 1997
-------- -------------
(000's omitted)
Raw materials ....................... $ 1,990 $ 1,688
Work in process and finished goods... 19,836 13,379
Supplies ............................ 4,662 4,572
-------- --------
Inventories at FIFO cost ............ 26,488 19,639
Excess of FIFO cost over LIFO cost... (853) --
-------- --------
$ 25,635 $ 19,639
======== ========
At September 30, 1997, inventories at LIFO approximated FIFO cost.
NOTE 3 -- PURCHASE OF DEETER FOUNDRY, INC.
On March 30, 1998, the Company purchased Deeter Foundry, Inc. (a manufacturer of
gray iron construction castings) for $24,296 in cash and notes. The acquisition
has been accounted for using the purchase method of accounting. The purchase
price has been allocated on the basis of fair values of the underlying assets
acquired and liabilities assumed. The excess of the cost of acquisition over the
fair value of the net tangible and identifiable intangible assets acquired has
been allocated to goodwill. Had the acquisition occurred as of October 1, 1996
or 1997, there would have been no material proforma effect on net sales or net
income for the six months ended March 31, 1998 or 1997.
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NOTE 4 -- GUARANTOR SUBSIDIARIES
Neenah Transport, Inc.,Hartley Controls Corporation, and Deeter Foundry, Inc.
(the "Guarantor Subsidiaries") are wholly-owned subsidiaries of Neenah Foundry
Company and have fully and unconditionally guaranteed the Senior Subordinated
Notes on a joint and several basis. The Guarantor Subsidiaries comprise all of
the Company's direct and indirect subsidiaries. The separate financial
statements of the Guarantor Subsidiaries have not been included herein because
management has concluded that such financial statements would not provide
additional information that is material to investors.
The following is summarized combined financial information of the wholly owned
subsidiaries. Net sales include net sales to Neenah Foundry Company of $972 and
$2,041 for the three and six months ended March 31, 1998, respectively.
March 31, 1998
---------------
(000's omitted)
Current assets $ 7,639
Noncurrent assets 24,016
Current liabilities 3,085
Noncurrent liabilities 949
Three Months Six Months
Ended Ended
March 31, 1998 March 31, 1998
-------------- --------------
(000's omitted)
Net sales $2,193 $4,650
Gross profit 732 1,556
Net income 101 269
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
On April 30, 1997, pursuant to an Agreement and Plan of Reorganization with NC
Merger Company and NFC Castings, Inc., the stock of Neenah Corporation (the
"Predecessor Company") was acquired by NFC Castings, Inc. (the "Merger"). On
July 1, 1997, Neenah Foundry Company, which was the principal operating
subsidiary of Neenah Corporation, merged with and into Neenah Corporation and
the surviving company changed its name to Neenah Foundry Company (the
"Company").
The following discussion and analysis of the Company's financial condition and
results of operations addresses the periods both before and after the Merger.
The Merger has had a significant impact on the Company's results of operations
and financial condition. The Merger resulted in the recording of goodwill and
identifiable intangible assets totaling approximately $148.8 million. These
amounts are being amortized over their estimated useful lives, ranging from five
months to 40 years. The Merger has also resulted in a significant increase in
the Company's interest expense.
The Merger has been accounted for as a business combination and has resulted in
differences in the basis of certain assets and liabilities between the
Predecessor Company and the Company. The Company changed its fiscal year end to
September 30 from March 31 effective September 30, 1997. The following
discussions compare the results of operations of the Company for the three and
six months ended March 31, 1998, to the historical results of the Predecessor
Company for the three and six months ended March 31, 1997.
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RESULTS OF OPERATIONS (dollars in thousands)
Three Months Ended March 31, 1998 and 1997
Net sales. Net sales for the three months ended March 31, 1998 were $43,971
which are $6,100 or 16.1% higher than the quarter ended March 31, 1997. Net
sales of municipal castings increased by $1,704 or 16.1% due primarily to market
share gains in strategic focus areas of the Eastern and Southwestern United
States as well as a continuation of the successful transition to a modernized
product line. Net sales of industrial castings increased by $4,375 or 17.0% due
to the overall strength of the heavy duty truck market coupled with very high
demand in the agricultural business. Net sales for Hartley Controls Corporation
for the three months ended March 31, 1998, increased by $138 which is
attributable to increased equipment and replacement parts sales.
Gross profit. Gross profit for the three months ended March 31, 1998 was
$12,663, an increase of $1,551, or 14.0%, as compared to the quarter
ended March 31, 1997. The margin improvement was due to the combined effect of
spreading manufacturing overhead over a greater volume and improved efficiency
in plant operations.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended March 31, 1998 were $4,147,
an increase of $368, or 9.7%, as compared to the $3,779 for the quarter ended
March 31, 1997. The increase was due to costs incurred to upgrade computer
systems for the Year 2000 and travel and other costs related to potential
acquisitions of additional companies. As a percentage of net sales, selling,
general and administrative expenses decreased from 10.0% for the quarter ended
March 31, 1997 to 9.4% for the three months ended March 31, 1998. The decrease
in selling, general and administrative expenses as a percentage of net sales was
mainly due to the reduction in compensation for senior executives who did not
remain with the Company after the Merger.
Amortization of intangible assets. Amortization of intangible assets of $1,230
for the three months ended March 31, 1998, results from goodwill and
identifiable intangible assets from the Merger.
Operating income. Operating income was $7,286 for the three months ended March
31, 1998, a decrease of $47, or 0.6%, from the quarter ended March 31, 1997. As
a percentage of net sales, operating income decreased from 19.4% for the quarter
ended March 31, 1997 to 16.6% for the three months ended March 31, 1998. The
decrease in operating income was due to the amortization of intangible assets as
discussed above.
Net interest income (expense). Net interest expense was $5,234 for the three
months ended March 31, 1998 compared to interest income of $379 for the quarter
ended March 31, 1997. The interest expense resulted from the issuance of Senior
Subordinated Notes in connection with the Merger (see "Liquidity and Capital
Resources" section).
Provision for income taxes. The provision for income taxes for the three months
ended March 31, 1998 is higher than the amount computed by applying the
statutory rate of approximately 40% to income before income taxes mainly due to
the amortization of intangible assets which is not deductible for income tax
purposes.
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Six Months Ended March 31, 1998 and 1997
Net sales. Net sales for the six months ended March 31, 1998 were $89,825 which
are $14,139 or 18.7% higher than the six months ended March 31, 1997. Net sales
of municipal castings increased by $2,710 or 10.1% due primarily to market share
gains in strategic focus areas of the Eastern and Southwestern United States as
well as a continuation of the successful transition to a modernized product
line. Net sales of industrial castings increased by $11,803 or 26.1% due to the
overall strength of the heavy duty truck market coupled with very high demand in
the agricultural business. Net sales for Hartley Controls Corporation for the
six months ended March 31, 1998 declined by $228 which is mostly attributable to
a reduction in foundry expansion and lower capital spending at the major foundry
customers that Hartley Controls Corporation services.
Gross profit. Gross profit for the six months ended March 31, 1998 was $25,746,
an increase of $3,809, or 17.4%, as compared to the six months ended March 31,
1997. The margin improvement was due to the combined effect of spreading
manufacturing overhead over a greater volume, improved efficiency in plant
operations and, to a lesser extent, improved pricing of industrial castings.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the six months ended March 31, 1998 were $7,972, a
decrease of $275, or 3.3%, as compared to the $8,247 for the six months ended
March 31, 1997. As a percentage of net sales, selling, general and
administrative expenses decreased from 10.9% for the six months ended March 31,
1997 to 8.9% for the six months ended March 31, 1998. The decrease in selling,
general and administrative expenses was mainly due to the reduction in
compensation for senior executives who did not remain with the Company after the
Merger.
Amortization of intangible assets. Amortization of intangible assets of $2,459
for the six months ended March 31, 1998, results from goodwill and identifiable
intangible assets from the Merger.
Operating income. Operating income was $15,315 for the six months ended March
31, 1998, an increase of $1,625, or 11.9%, from the six months ended March 31,
1997. As a percentage of net sales, operating income decreased from 18.1% for
the six months ended March 31, 1997 to 17.0% for the six months ended March 31,
1998. The decrease in operating income as a percentage of net sales was due to
the amortization of intangible assets as discussed above.
Net interest income (expense). Net interest expense was $10,489 for the six
months ended March 31, 1998 compared to interest income of $726 for the six
months ended March 31, 1997. The interest expense resulted from the issuance of
Senior Subordinated Notes in connection with the Merger (see "Liquidity and
Capital Resources" section).
Provision for income taxes. The provision for income taxes for the six months
ended March 31, 1998 is higher than the amount computed by applying the
statutory rate of approximately 40% to income before income taxes mainly due to
the amortization of intangible assets which is not deductible for income tax
purposes.
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LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands)
In connection with the Merger, the Company issued $150.0 million principal
amount of 11-1/8% Senior Subordinated Notes due 2007 (the "Senior Subordinated
Notes") and entered into a credit agreement providing for term loans of $45.0
million and a revolving credit facility of up to $50.0 million, as amended (the
"Senior Bank Facility"). On July 1, 1997, the Company issued an additional $45.0
million principal amount of Senior Subordinated Notes and used the proceeds of
$47.6 million to pay the term loans, the accrued interest thereon and related
fees and expenses. In March, 1998, the Company amended the Senior Bank Facility,
providing for term loans of $75.0 million and a revolving credit facility of up
to $50.0 million. The term loans of $75.0 million will be used for acquisitions
subsequent to March 31, 1998.
The Company's liquidity needs will arise primarily from debt service on the
above indebtedness, working capital needs and funding of capital expenditures
and additional acquisitions. Borrowings under the revolving credit facility bear
interest at variable interest rates. The Senior Bank Facility imposes
restrictions on the Company's ability to make capital expenditures and both the
Senior Bank Facility and the indentures governing the Senior Subordinated Notes
limit the Company's ability to incur additional indebtedness. The covenants
contained in the Senior Bank Facility also, among other things, restrict the
ability of the Company and its subsidiaries to dispose of assets, incur
guarantee obligations, prepay the Senior Subordinated Notes or amend the
indentures, pay dividends, create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, change the business conducted by the Company, make
capital expenditures or engage in certain transactions with affiliates, and
otherwise restrict corporate activities.
For the six months ended March 31, 1998 and March 31, 1997, capital expenditures
were $2,115 and $1,782, respectively. The $333 increase in capital expenditures
was primarily the result of planned enhancements to certain equipment in the
manufacturing area.
The Company's principal source of cash to fund its liquidity needs will be net
cash from operating activities and borrowings under its revolving credit
facility. Net cash from operating activities for the six months ended March 31,
1998 was $5,996, a decrease of $2,314 from $8,310 for the six months ended March
31, 1997. The decrease in net cash from operating activities was primarily a
result of a decrease in net income resulting from interest expense incurred on
the Company's outstanding indebtedness in connection with the Merger.
The Company believes that cash generated from operations and existing revolving
lines of credit under the Senior Bank Facility will be sufficient to meet its
normal operating requirements, including interest payments on the Company's
outstanding indebtedness.
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NEENAH FOUNDRY COMPANY
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2.1 - Stock Purchase Agreement for the acquisition of Deeter
Foundry, Inc. dated as of March 26, 1998 by and among Neenah Foundry
Company and the Selling Shareholders of Deeter Foundry, Inc.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed one report on Form 8-K during the quarter ended March 31,
1998. The report, dated February 27, 1998, disclosed that the Company had
entered into a letter of intent for the acquisition of Mercer Forge
Corporation.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrants have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEENAH FOUNDRY COMPANY
DATE: May 13, 1998 /s/ Gary LaChey
----------------------------------------------
Gary LaChey
Vice President-Finance, Secretary & Treasurer
(Principal Financial Officer and Duly
Authorized Officer)