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 June 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition per to -------- -------- Commission File Number 333-28751 NEENAH FOUNDRY COMPANY (Exact name of each registrant as it appears in its charter) Wisconsin 39-1580331 (State or other jurisdiction of (IRS Employer ID Number) incorporation or organization) 2121 Brooks Avenue, P.O. Box 729, Neenah, Wisconsin 54957 (Address of principal executive offices) (Zip Code) (920) 725-7000 (Registrant's telephone number, including area code) None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, Class A, $100 par value-1,000 shares as of July 31, 1998 Common Stock, Class B, $100 par value-0 shares as of July 31, 1998 Page 1 2 NEENAH FOUNDRY COMPANY Form 10-Q Index For the Quarter Ended June 30, 1998 Page ---- Part 1. Financial Information Item 1. Financial Statements Condensed consolidated balance sheets -- June 30, 1998 and September 30, 1997 3 Condensed consolidated statements of income -- Three months ended June 30, 1998, One month ended April 30, 1997, and Two months ended June 30, 1997; and Nine months ended 4 June 30, 1998, Seven months ended April 30, 1998, and Two months ended June 30, 1997 Condensed consolidated statements of cash flows -- Nine months ended June 30, 1998, Seven months ended April 30, 1997, and Two months ended June 30, 1997 5 Notes to condensed consolidated financial statements -- June 30, 1998 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 8 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 Page 2 3 NEENAH FOUNDRY COMPANY PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) June 30 September 30 1998 1997(1) ----------- ------------ (Unaudited) ASSET Current assets: Cash and cash equivalents ............................. $ 9,741 $ 20,344 Accounts receivable, net .............................. 38,333 29,932 Inventories ........................................... 26,686 19,639 Other current assets .................................. 2,936 318 Refundable income taxes ............................... 1,155 - Deferred income taxes ................................. 1,710 1,695 --------- ---------- Total current assets ............................ 80,561 71,928 Property, plant and equipment ........................... 138,116 103,710 Less accumulated depreciation ........................... 9,820 3,131 --------- ---------- 128,296 100,579 Identifiable intangible assets, net ..................... 41,951 35,277 Goodwill, net ........................................... 147,487 116,690 Other assets ............................................ 3,756 3,951 --------- ---------- $ 402,051 $ 328,425 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ...................................... $ 14,558 $ 10,333 Income taxes payable .................................. - 4,384 Accrued liabilities ................................... 15,601 17,283 Current portion of long-term debt ..................... 77 98 --------- ---------- Total current liabilities ....................... 30,236 32,098 Long-term debt .......................................... 252,465 197,522 Postretirement benefit obligations ...................... 5,137 4,894 Deferred income taxes ................................... 54,592 44,519 Other liabilities ....................................... 2,151 2,172 --------- ---------- Total liabilities ............................... 344,581 281,205 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 ..................................... 8,620 2,220 --------- ---------- Total stockholders' equity ...................... 57,470 47,220 --------- ---------- $ 402,051 $ 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. Page 3 4 NEENAH FOUNDRY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands) Predecessor -------------- Three Months Two Months One Month Ended Ended Ended June 30, 1998 June 30, 1997 April 30, 1997 ------------- ------------- -------------- (Unaudited) Net sales ............................... $ 70,616 $ 34,367 $ 17,276 Cost of sales ........................... 49,180 24,094 11,351 -------- -------- -------- Gross profit ............................ 21,436 10,273 5,925 Selling, general and administrative expenses .............................. 5,051 3,095 1,752 Amortization of intangible assets........ 2,008 1,034 - -------- -------- -------- Total operating expenses................. 7,059 4,129 1,752 -------- -------- -------- Operating income ........................ 14,377 6,144 4,173 Net interest income (expense) ........... (7,023) (3,241) 121 -------- -------- -------- Income before income taxes .............. 7,354 2,903 4,294 Provision for income taxes .............. 3,294 1,133 1,615 -------- -------- -------- Net income .............................. $ 4,060 $ 1,770 $ 2,679 ======== ======== ======== Predecessor ------------- Nine Months Two Months Seven Months Ended Ended Ended June 30, 1998 June 30, 1997 April 30, 1997 ------------- ------------- -------------- (Unaudited) Net sales ............................... $ 160,441 $ 34,367 $ 92,962 Cost of sales ........................... 113,259 24,094 65,100 --------- -------- -------- Gross profit ............................ 47,182 10,273 27,862 Selling, general and administrative expenses .............................. 13,023 3,095 9,999 Amortization of intangible assets........ 4,467 1,034 - --------- -------- -------- Total operating expenses................. 17,490 4,129 9,999 --------- -------- -------- Operating income ........................ 29,692 6,144 17,863 Net interest income (expense) ........... (17,512) (3,241) 847 --------- -------- -------- Income before income taxes .............. 12,180 2,903 18,710 Provision for income taxes .............. 5,780 1,133 6,316 --------- -------- -------- Net income .............................. $ 6,400 $ 1,770 $ 12,394 ========= ======== ======== See notes to condensed consolidated financial statements. Page 4 5 NEENAH FOUNDRY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Predecessor Nine Months -------------- Ended Two Months Seven Months June 30, Ended Ended 1998 June 30, 1997 April 30, 1997 ----------- ------------- -------------- (Unaudited) Operating activities Net income ......................................................... $ 6,400 $ 1,770 $ 12,394 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,149 2,126 3,880 Amortization of deferred financing costs and premium on notes 368 - - Deferred income taxes - - (223) Changes in operating assets and liabilities...................... (9,936) 2,819 (21,348) ---------- ---------- ---------- Net cash provided by (used in) operating activities ................................................ 7,981 6,715 (5,297) Investing activities Purchase of property, plant and equipment .......................... (4,265) (400) (1,972) Proceeds from life insurance policy ................................ - 864 - Acquisition of Deeter Foundry, Inc. ................................ (20,759) - - Acquisition of Mercer Forge Corporation ............................ (47,536) - - Other .............................................................. - - (37) ---------- ---------- ---------- Net cash provided by (used in) investing activities. ................................................ (72,560) 464 (2,009) Financing activities Dividends paid ..................................................... - - (2,220) Proceeds from long-term debt ....................................... 55,177 - 24 Payments on long-term debt ......................................... (58) (34) (40) Debt issuance costs ................................................ (1,143) - - Collection of notes receivable from owners ......................... - - 2,922 ---------- ---------- ---------- Net cash provided by (used in) financing activities.................................................. 53,976 (34) 686 ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents ................... (10,603) 7,145 (6,620) Cash and cash equivalents at beginning of period ................... 20,344 11,546 18,166 ---------- ---------- ---------- Cash and cash equivalents at end of period ......................... $ 9,741 $ 18,691 $ 11,546 ========== ========== ========== See notes to condensed consolidated financial statements. Page 5 6 NEENAH FOUNDRY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 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 nine months ended June 30, 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: June 30 September 30 1998 1997 --------- ------------ (000's omitted) Raw materials ............................ $ 2,021 $ 1,688 Work in process and finished goods ....... 20,928 13,379 Supplies ................................. 4,590 4,572 --------- --------- Inventories at FIFO cost ................. 27,539 19,639 Excess of FIFO cost over LIFO cost ....... (853) -- --------- --------- $ 26,686 $ 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, 1997 or May 1, 1997, respectively, there would have been no material proforma effect on net sales or net income for the nine months ended June 30, 1998 or the two months ended June 30, 1997, respectively. Page 6 7 Note 4 -- Purchase of Mercer Forge Corporation On April 3, 1998, the Company purchased Mercer Forge Corporation (a closed die forging company serving industrial customers) for $47,536 financed through drawings under the Tranche B term loan facility of the Company's Senior Bank Facility. 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. The pro forma unaudited results of operations for the nine months ended June 30, 1998 and two months ended June 30, 1997 assuming consummation of the purchase and drawings under the Senior Bank Facility as of October 1, 1997 and May 1, 1997, respectively, are as follows: Nine Months Two Months Ended Ended June 30,1998 June 30,1997 ------------ ------------ (ooo's omitted) Net sales $187,970 $42,367 Net income 6,645 1,430 Note 5 -- Guarantor Subsidiaries Neenah Transport, Inc.,Hartley Controls Corporation, Deeter Foundry, Inc., and Mercer Forge Corporation ( 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 $1,171 and $3,212 for the three and nine months ended June 30, 1998, respectively. June 30, 1998 --------------- (000's omitted) Current assets $ 25,095 Noncurrent assets 71,976 Current liabilities 10,087 Noncurrent liabilities 10,614 Three Months Nine Months Ended Ended June 30, 1998 June 30, 1998 --------------- --------------- (000's omitted) Net sales $ 20,798 $ 25,448 Gross profit 4,758 6,314 Net income 1,194 1,463 Page 7 8 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 nine months ended June 30, 1998, to the combined historical results of the operations of the Company and the Predecessor Company for the three and nine months ended June 30, 1997. Results of Operations (dollars in thousands) Three Months Ended June 30, 1998 and 1997 Net sales. Net sales for the three months ended June 30, 1998 were $70,616 which are $18,973 or 36.7% higher than the pro forma quarter ended June 30, 1997. The increase in sales resulted from the acquisitions of Mercer and Deeter in 1998. Gross profit. Gross profit for the three months ended June 30, 1998 was $21,436, an increase of $5,238, or 32.3%, as compared to the pro forma quarter ended June 30, 1997. Approximately $3,200 of the increase was from the inclusion of Mercer Forge Corporation ("Mercer") and Deeter Foundry Inc. ("Deeter") operating results after their acquisition, with the remaining margin improvement 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 June 30, 1998 were $5,051, an increase of $204, or 4.2%, as compared to the $4,847 for the pro forma quarter ended June 30, 1997. The increase was due to the acquisitions of Mercer and Deeter and costs incurred to upgrade computer systems for the Year 2000. As a percentage of net sales, selling, general and administrative expenses decreased from 9.4% for the pro forma quarter ended June 30, 1997 to 7.2% for the three months ended June 30, 1998. The decrease in selling, general and administrative expenses as a percentage of net sales was mainly due to the increased sales from acquisitions, lower legal and professional fees during the period and the reduction in compensation for senior executives who did not remain with the Company after the Merger. Page 8 9 Amortization of intangible assets. Amortization of intangible assets was $2,008 for the three months ended June 30, 1998, an increase of $974, or 94.2%, as compared to the $1,034 for the pro forma quarter ended June 30, 1997. The increase is due to the recording of three months of amortization during the period ended June 30, 1998 versus two months during the period ended June 30, 1997 due to the timing of the Merger as well as increased amortization from goodwill and identifiable intangible assets from the Mercer and Deeter acquisitions. Operating income. Operating income was $14,377 for the three months ended June 30, 1998, an increase of $4,060, or 39.4%, from the pro forma quarter ended June 30, 1997. As a percentage of net sales, operating income increased from 20.0% for the pro forma quarter ended June 30, 1997 to 20.4% for the three months ended June 30, 1998. The increase in operating income was due to the sales and gross profit increases as discussed above. Net interest income (expense). Net interest expense was $7,023 for the three months ended June 30, 1998 compared to $3,120 for the pro forma quarter ended June 30, 1997. The increased interest expense resulted from the Company's Senior Subordinated Notes being outstanding for three months during the period ended June 30, 1998 and only two months during the period ended June 30, 1997 and the interest on the drawings under the Company's Senior Bank Facility to finance the Mercer acquisition (see "Liquidity and Capital Resources" section). Provision for income taxes. The provision for income taxes for the three months ended June 30, 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 goodwill which is not deductible for income tax purposes. Nine Months Ended June 30, 1998 and 1997 Net sales. Net sales for the nine months ended June 30, 1998 were $160,441 which are $33,112 or 26.0% higher than the pro forma nine months ended June 30, 1997. Net sales of municipal castings increased by $1,699 or 3.4% 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 $13,621 or 18.8% due to the overall strength of the heavy duty truck market coupled with very high demand in the agricultural business. In addition, the acquisitions of Mercer and Deeter accounted for an increase of $18,143 in net sales for the nine months ended June 30, 1998 compared to the pro forma nine months ended June 30, 1997. Gross profit. Gross profit for the nine months ended June 30, 1998 was $47,182, an increase of $9,047, or 23.7%, as compared to the pro forma nine months ended June 30, 1997. Approximately $3,200 of the increase was from the inclusion of Mercer and Deeter operating results after their acquisition, with the remaining margin improvement 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 nine months ended June 30, 1998 were $13,023, a decrease of $71, or .5%, as compared to the $13,094 for the pro forma nine months ended June 30, 1997. As a percentage of net sales, selling, general and administrative expenses decreased from 10.3% for the pro forma nine months ended June 30, 1997 to 8.1% for the nine months ended June 30, 1998. The decrease in selling, general and administrative expenses was mainly due to lower legal and professional fees incurred during the period when compared to those paid in connection with the Merger and 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 was $4,467 for the nine months ended June 30, 1998, an increase of $3,433, or 332.0%, as compared to the $1,034 for the pro forma nine months ended June 30, 1997. The increase is due to the recording of nine months of amortization during the period ended June 30, 1998 versus two months during the period ended June 30, 1997 due to the timing of the Merger as well as increased amortization from goodwill and identifiable intangible assets from the Mercer and Deeter acquisitions. Operating income. Operating income was $29,692 for the nine months ended June 30, 1998, an increase of $5,685, or 23.7%, from the pro forma nine months ended June 30, 1997. As a percentage of net sales, operating income decreased from 18.9% for the pro forma nine months ended June 30, 1997 to 18.5% for the nine months ended June 30, 1998. The decrease in operating income as a percentage of net sales was due to the increased amortization of intangible assets as discussed above. Page 9 10 Net interest income (expense). Net interest expense was $17,512 for the nine months ended June 30, 1998 compared to $2,394 for the pro forma nine months ended June 30, 1997. The increased interest expense resulted from the Company's Senior Subordinated Notes being outstanding for nine months during the period ended June 30, 1998 and only two months during the period ended June 30, 1997 and the interest on the drawings under the Company's Senior Bank Facility to finance the Mercer acquisition (see "Liquidity and Capital Resources" section). Provision for income taxes. The provision for income taxes for the nine months ended June 30, 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 goodwill which is not deductible for income tax purposes. 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. Of the total term loan facility of $75.0 million, $55.0 million was used for the acquisition of Mercer and $20.0 million is available for future acquisitions occurring prior to October 3, 1998 in accordance with the terms of the Senior Bank Facility. 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 nine months ended June 30, 1998 and June 30, 1997, capital expenditures were $4,265 and $2,372, respectively. The $1,893 increase in capital expenditures was primarily the result of planned enhancements to certain equipment in the manufacturing area, including expenditures at Mercer and Deeter, which were acquired in 1998. 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 nine months ended June 30, 1998 was $7,981, an increase of $6,563 from $1,418 for the pro forma nine months ended June 30, 1997. The increase in net cash from operating activities was primarily the result of increased cash flow from Mercer and Deeter and improved control of inventory and accounts receivable balances. 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 working capital needs and interest payments on the Company's outstanding indebtedness. Page 10 11 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 27 - Financial Data Schedule (b) Reports on Form 8-K The Company filed two reports on Form 8-K during the quarter ended June 30, 1998. The first report, dated April 14, 1998, disclosed that the Company had acquired Deeter Foundry, Inc. and Mercer Forge Corporation. The second report, a Form 8-K/A dated June 12, 1998, provided the required historical and pro forma financial information related to the acquisition of Mercer Forge Corporation. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEENAH FOUNDRY COMPANY DATE: August 14, 1998 /s/ Gary LaChey ---------------------------------- Gary LaChey Vice President-Finance, Secretary & Treasurer (Principal Financial Officer and Duly Authorized Office EXHIBITS Page 11