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Exhibit 13
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Financial Highlights
Year Ended December 31, 1998 1997 1996 1995 1994 1993
Statement of Operations Data (in thousands of dollars)
Net sales $841,598 $813,729 $534,478 $541,749 $501,269 $444,214
Operating profit 75,649 75,198 56,103 52,815 1,728 (23,486)
Net income (loss) 40,989 40,013 43,153 25,395 (10,985) (20,504)
Share Data (in thousands, except per share data)
Income (loss) per common share - diluted $1.58 $1.55 $1.69 $1.02 ($0.45) ($0.83)
Cash dividends per share $0.16 $0.16 $0.08 - - $0.12
Weighted average shares outstanding - diluted 25,947 25,783 25,594 24,893 24,591 24,564
Balance Sheet Data (in thousands of dollars,
except return on equity data)
Total assets $584,015 $539,446 $526,312 $274,071 $306,264 $307,458
Long-term debt due after one year 156,690 167,295 149,477 32,675 87,698 93,391
Total long-term debt 163,101 177,833 162,153 35,271 99,715 95,854
Shareholders' equity 217,005 175,428 141,102 98,028 67,971 75,532
Return on equity 19% 23% 30% 26% (16%) (27%)
==============================================================================================================================
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
THE CHAIRMAN'S LETTER AND THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 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 THE COMPANY
OR ITS MANAGEMENT, ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS
AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE IN
THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS INCLUDING, BUT NOT
LIMITED TO: (I) GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE COMPANY
OPERATES; (II) FLUCTUATIONS IN WORLDWIDE OR REGIONAL AUTOMOBILE AND LIGHT AND
HEAVY TRUCK PRODUCTION; (III) LABOR DISPUTES INVOLVING THE COMPANY OR ITS
SIGNIFICANT CUSTOMERS; (IV) CHANGES IN PRACTICES AND/OR POLICIES OF THE
COMPANY'S SIGNIFICANT CUSTOMERS TOWARD OUTSOURCING AUTOMOTIVE COMPONENTS AND
SYSTEMS; (V) FOREIGN CURRENCY AND EXCHANGE FLUCTUATIONS; (VI) FACTORS AFFECTING
THE ABILITY OF THE COMPANY OR ITS KEY SUPPLIERS TO RESOLVE YEAR 2000 ISSUES IN A
TIMELY MANNER; AND (VII) OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY DOES NOT INTEND
TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
UNLESS THE CONTEXT INDICATES OTHERWISE, AS USED IN THIS MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, THE TERM
"COMPANY" REFERS TO INTERMET CORPORATION, ITS CONSOLIDATED SUBSIDIARIES AND
THEIR RESPECTIVE PREDECESSORS. THE COMPANY ACQUIRED SUDBURY, INC. ("SUDBURY")
EFFECTIVELY ON DECEMBER 21, 1996; AND ACCORDINGLY, INCLUDED SUDBURY IN THE
DECEMBER 31, 1996 BALANCE SHEET. THE RESULTS OF OPERATIONS OF SUDBURY FROM THE
DATE OF ACQUISITION TO DECEMBER 31, 1996 WERE NOT SIGNIFICANT.
Results of Operations
1998 Compared to 1997
Sales in 1998 were $841.6 million compared to 1997 sales of $813.7 million, an
increase of 3.4%. Sales from continuing operations (without Industrial Powder
Coatings ("IPC") and IWESA GmbH ("IWESA")) were 6.9% higher in 1998 than in
1997. Sales at the Company's domestic foundry operations were up 8.2% in 1998
from the prior year as North American light vehicle production for 1998 was
greater than 15 million units for the fifth consecutive year and U.S. sales of
light vehicles in 1998 were the second highest ever. Light truck production was
the highest ever in 1998. The Company's sales into Europe from continuing
operations increased 9.4% in local currency and increased 7.9% in U.S. dollars
for 1998 over 1997. This set a new record compared to previous years. These
sales were negatively impacted $1.5 million by exchange rates. Sales at other
continuing operations were down 5.2% for 1998 from 1997 due primarily to a
decrease in market demand. Looking forward to 1999, light vehicle production is
expected to taper off slightly but still to exceed 15 million units. Actual
results may differ materially.
Gross profit increased to $110.7 million in 1998 from $107.0 million in 1997.
Gross profit for continuing operations was $6.2 million higher in 1998 than in
1997. This improvement is due primarily to higher sales. Gross profit was
negatively affected by production inefficiencies resulting from operating some
facilities in excess of capacity and the cost associated with launching in
excess of 100 parts. Gross profit as a percentage of sales was 13.2 % in 1998
versus 13.1% in 1997.
Operating expenses in 1998 were $35.1 million, an increase of $3.3 million over
1997. This increase relates primarily to the write-off of certain assets at
IWESA. Operating expenses as a percentage of sales for the years ended December
31, 1998 and 1997 were 4.2% and 3.9%, respectively. Operating expenses include
expenses related to acquisition investigations of $0.5 and $0.4 million in 1998
and 1997, respectively. Also included in 1997 were $0.3 million of expenses
related to the secondary stock offering for the George Mathews family and
certain related parties.
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Interest expense for the years ended December 31, 1998 and 1997 was $11.4
million and $12.4 million, respectively. This change was a result of a decrease
in borrowings due to cash provided by operating activities and the sale of IPC.
The net of other income and expenses was income of $0.6 million in 1998 compared
to $2.0 million of net expense in 1997. This change relates primarily to equity
in net losses in 1997 of $3.2 million from minority holdings, principally IWESA.
For information concerning the provision for income taxes as well as information
regarding differences between effective tax rates and statutory rates, see Note
11 of the Notes to Consolidated Financial Statements.
Results of Operations
1997 Compared to 1996
Sales in 1997 were $813.7 million compared to 1996 sales of $534.5 million. This
52.2% increase in sales related primarily to the acquisition of Sudbury in late
December 1996. Domestic sales during 1997, excluding Sudbury, were relatively
flat from 1996. European sales, excluding Sudbury, were strong, down only 2.6%
despite a 13% ($13.5 million) negative exchange rate impact from 1996 to 1997.
The Company's European sales, in local currency, set a new record for the year.
Sales at machining operations (i.e., operations in place both years) increased
$12.0 million for 1997, over the same period in 1996, with the launch of new
products. Sales at the Company's domestic foundry operations, excluding Sudbury,
were down 3.8% in 1997 from the prior year. This decrease was primarily due to
the "selling gap" created by capacity constraints in 1993 and 1994.
Gross profit increased to $107.0 million in 1997 from $77.9 million in 1996.
This improvement is due primarily to the acquisition of Sudbury. Gross profit as
a percentage of sales was 13.1% in 1997 versus 14.6% in 1996 (13.3% in 1996
including Sudbury). Gross profit as a percentage of sales was lower in 1997
primarily because the Sudbury subsidiaries in the aggregate generate lower
percentage margins than pre-acquisition Intermet subsidiaries in the aggregate.
In addition, the Company continues to have higher than anticipated costs
associated with new product launches at the Company's lost foam aluminum plant
and underutilized capacity at certain other domestic foundries.
Operating expenses in 1997 were $31.8 million, an increase of $10.0 million over
1996. This increase relates primarily to expenses incurred by the operating
units of Sudbury which were not part of the Company's results in 1996. Operating
expenses as a percentage of sales for the years ended December 31, 1997 and 1996
were 3.9% and 4.1%, respectively. Operating expenses in 1997 include expenses
related to acquisition investigations of $0.4 million and $0.3 million of
expenses related to the secondary stock offering for the George Mathews family
and certain related parties.
Interest expense for the years ended December 31, 1997 and 1996 was $12.4
million and $3.1 million, respectively. This change was a result of an increase
in borrowings that were used primarily to finance the Sudbury acquisition and,
to a lesser extent, to fund working capital.
Other expenses increased from $0.1 million in 1996 to $2.0 million in 1997. This
increase relates primarily to equity in net losses of $3.2 million from minority
holdings, principally IWESA.
Income tax expense for 1996 was reduced $11.5 million for an adjustment to the
deferred tax valuation allowance. For additional information concerning the
provision for income taxes as well as information regarding differences between
effective tax rates and statutory rates, see Note 11 of the Notes to
Consolidated Financial Statements.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Liquidity and Capital Resources
During 1998, net cash provided by operating activities was $96.4 million.
Non-cash charges (principally depreciation and amortization expense) were $37.5
million. Overall working capital provided by operations increased from 1997,
with the higher sales level and new programs. Accounts receivable increased
primarily because of higher sales of light truck components. Accounts payable
and current liabilities increased from December 31, 1997 as the Company managed
its cash to align its customers' and vendors' terms. The Company's investing
activities for 1998 used cash of $88.4 million. This included $60.3 million paid
for the purchase of businesses and $49.5 million for property, plant and
equipment additions. Bank borrowings decreased $6.8 million, in the aggregate,
from the end of 1997 as cash from operations decreased the need for borrowings.
Cash and cash equivalents decreased to $5.8 million at December 31, 1998 from
$7.0 million at December 31, 1997. Since the beginning of 1996, the Company has
reduced the cash on hand to a level that management believes is required for
current operations. The Company declared cash dividends of $0.04 per share per
quarter ($4.1 million in the aggregate) during 1998.
Outstanding funded debt moved from a high in early 1998 of $185.3 million to a
low in 1998 of $129.9 million just before the acquisitions of Tool Products,
Inc. ("Tool Products") and Vorpommersche Eisenwerke GmbH UeckermUnde ("VEGU") in
late December 1998. Outstanding funded debt, including notes payable, at
December 31, 1998 was $164.1 million. The decrease in borrowings during 1998 was
mainly attributable to the sale of IPC and elimination of IWESA. Conversely, the
increase in borrowings at the end of the year was expected and related primarily
to funds required for the Tool Products and VEGU acquisitions. The Company's
debt-to-capital ratio decreased from 52% at December 31, 1997 to 43% at December
31, 1998 (32% without Tool Products and VEGU).
Shareholders' equity increased $41.6 million from $175.4 million at December 31,
1997, to $217.0 million at December 31, 1998.
The Company has recurring costs related to environmental matters, particularly
the management and disposition of waste (principally non-hazardous waste)
generated as part of ongoing operations. In 1998 and 1997, such costs totaled
approximately $14.4 and $12.3 million, respectively. Although the Company
continues to take various steps to control environmental costs, they are
expected to increase in the future. In addition, a portion of the Company's
capital expenditures is regularly incurred to limit or monitor pollution,
principally for ventilation and dust control equipment. Such expenditures were
approximately $5.2 million in 1998 and $6.9 million in 1997. The Company expects
to spend $4.8 million in capital expenditures related to environmental matters
in 1999. Sales volume levels and available engineering resources, among other
factors, will influence the actual amount of capital expenditures.
In addition, certain operating and non-operating subsidiaries of the Company
have been named as potentially responsible parties liable for cleanup of known
environmental conditions. For known environmental conditions, the Company, with
the assistance of environmental engineers and consultants, has accrued $4.6
million to cover estimated future environmental expenditures. 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 accrued at
December 31, 1998.
In addition to these recurring and anticipated expenditures, the 1990 amendments
to the Federal Clean Air Act, and regulations promulgated thereunder are
expected to have a major impact on the compliance cost of many U.S. companies,
including foundries of the type owned by the Company. Until Federal and State
governments
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adopt final regulations implementing those amendments and until certain control
measures under existing regulations are determined, it is not possible to
estimate such costs.
The Company is also a party to certain lawsuits and claims arising out of the
conduct of its business, including those relating to commercial transactions,
product liability, environmental, safety and health matters. The Company
self-insures a significant portion of its health care, property and casualty
insurance risks. However, the Company purchases additional insurance for
catastrophic losses.
While the ultimate result of the contingencies described above cannot be
predicted with certainty, management of the Company does not expect such known
contingencies to have a material adverse effect on the consolidated financial
position, results of operations or cash flows of the Company. However, the
Company cannot be assured that its activities will not give rise to actions by
governmental agencies or private parties which could cause the Company to incur
fines, penalties, operational shutdowns, damages, cleanup costs or other similar
expenses. In addition, the Company's foundry capacity levels and increases
therein are dependent upon the Company's ability to maintain, or obtain
increases in such capacity levels, in its permits for air emissions and water
discharges.
At December 31, 1998, the Company had commitments for the purchase of operating
equipment of approximately $8.2 million, which the Company expects to fund
through cash flow from operations. The Company has an unsecured revolving credit
agreement with a bank group, which was extended to January 1, 2000, and provides
for loans up to $200 million in the aggregate. The Company had $164.1 million of
long-term debt and notes payable outstanding at December 31, 1998. Of this
amount, the Company is scheduled to pay $7.4 million during 1999. The Company
had committed and uncommitted bank credit facilities with outstanding borrowing
capacity of approximately $100.3 million at December 31, 1998.
Year 2000
The Company has conducted an evaluation of its Informational Technology ("IT")
and non-IT computer systems with respect to the "Year 2000" issue. This issue
arises because many electronic systems use two digits rather than four to
determine dates. This could cause information technology systems such as
software applications, hardware, network systems and embedded systems to misread
important dates beginning in the year 2000, which could cause system failures
and disruption of operations.
The Company has completed a Year 2000 readiness assessment of its business
critical IT and non-IT systems. As a result of the assessment, the Company is in
the process of developing and implementing corrective action plans designed to
address Year 2000 issues. These plans include modification, upgrade and
replacement of the Company's critical administrative, production, and research
and development computer systems to make them Year 2000 ready. Implementation of
corrective action plans has begun, and the Company expects to have its critical
systems Year 2000 ready by the end of March 1999 for its facilities servicing
the automotive industry and by June 1999 for the remainder of the Company.
Because the Company's operations depend on the uninterrupted flow of materials
and services from its suppliers, the Company has requested and has been
receiving and analyzing information from its suppliers with regard to their
progress toward Year 2000 readiness. The Company intends to continue to monitor
the progress of its key suppliers toward Year 2000 readiness.
A small number of the Company's products incorporate electronic components that
are purchased from third parties. The Year 2000 readiness of these purchased
components is also being assessed.
The Company began addressing Year 2000 issues in 1995, and prior to 1998 spent
approximately $2.2 million on Year 2000 readiness. In 1998, the Company spent
approximately $2.5 million to address the Year 2000 issue. The Company estimates
that it will spend in total between $7.5 and $8.0 million to become Year 2000
ready. The majority of this spending is for required upgrades to or for new
business systems required in the ordinary
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course of business, which will also be Year 2000 ready. It is possible that the
actual cost of the Company's Year 2000 readiness effort could exceed these
estimates.
Although the Company has a process in place to assess Year 2000 readiness on the
part of its suppliers, the Company considers the most reasonably likely worst
case scenario is that one or more of the Company's suppliers might encounter a
Year 2000 problem and be unable to supply materials. If this was to occur and
the Company could not obtain the same materials from another vendor, production
could be interrupted, which could result in lost sales and profits. However, it
is highly unlikely that the Company could not obtain the same materials from
another vendor. In addition, while the Company is taking action to correct
deficiencies in its own systems, it is possible that one or more of the
Company's facilities or critical business systems might not achieve Year 2000
readiness as anticipated. This could also result in disruption of operations and
lost sales and profits.
Contingency plans are being or will be developed that are intended to avoid or
mitigate the risks that either key suppliers or the Company might not achieve
Year 2000 readiness in time to avoid disruption of the Company's operations.
Readers are cautioned that forward looking statements contained in this Year
2000 discussion should be read in conjunction with the Company's disclosures
under the cautionary statement for the purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995, included elsewhere in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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Consolidated Financial Statements
Intermet Corporation
Years ended December 31, 1998, 1997 and 1996
with Report of Independent Auditors
8
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, 1998 and 1997, 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, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Detroit, Michigan
January 28, 1999
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Intermet Corporation
Consolidated Statements of Operations
Years ended December 31,
1998 1997 1996
---- ---- ----
(in thousands of dollars, except per share data)
Net sales $841,598 $813,729 $534,478
Cost of sales 730,857 706,771 456,618
-------- -------- --------
Gross profit 110,741 106,958 77,860
Operating expenses:
Selling 8,878 9,810 3,646
General and administrative 26,214 21,950 18,111
-------- -------- --------
Operating profit 75,649 75,198 56,103
Other income and expenses:
Interest income 230 546 1,403
Interest expense (11,305) (12,396) (3,056)
Other, net 614 (1,959) (128)
-------- -------- --------
(10,461) (13,809) (1,781)
-------- -------- --------
Income before income taxes 65,188 61,389 54,322
Provision for income taxes 24,199 21,376 11,169
-------- -------- --------
Net income $40,989 $40,013 $43,153
======== ======== ========
Income per common share - Basic $1.60 $1.59 $1.72
======== ======== ========
Income per common share - Diluted $1.58 $1.55 $1.69
======== ======== ========
See accompanying notes.
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Intermet Corporation
Consolidated Statements of Comprehensive Income
Years ended December 31,
1998 1997 1996
---- ---- ----
(in thousands of dollars, except per share data)
Net income $40,989 $40,013 $43,153
Other comprehensive loss, net of tax:
Foreign currency translation adjustment 348 (1,440) (1,752)
Minimum pension liability adjustment (837) 473 1,151
------- ------- -------
Total other comprehensive loss (489) (967) (601)
------- ------- -------
Comprehensive income $40,500 $39,046 $42,552
======= ======= =======
Comprehensive income per common share - Basic $1.58 $1.55 $1.70
======= ======= =======
Comprehensive income per common share - Diluted $1.56 $1.51 $1.66
======= ======= =======
See accompanying notes.
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Intermet Corporation
Consolidated Balance Sheets
December 31,
1998 1997
---- ----
(in thousands of dollars)
Assets
Current assets:
Cash and cash equivalents $5,848 $7,022
Accounts receivable:
Trade, less allowances of $5,133 in 1998 and
$4,118 in 1997 105,678 92,871
Other 8,713 7,549
-------- --------
114,391 100,420
Inventories:
Finished goods 14,701 13,852
Work in process 18,522 13,897
Raw materials 8,467 11,533
Supplies and patterns 24,208 23,440
-------- --------
65,898 62,722
Assets held for sale - 16,892
Deferred income taxes 2,829 3,244
Other current assets 8,464 2,982
-------- --------
Total current assets 197,430 193,282
Property, plant and equipment, at cost:
Land 4,567 4,783
Buildings and improvements 93,667 89,215
Machinery and equipment 357,545 357,745
Construction in progress 29,303 20,238
-------- --------
485,082 471,981
Less:
Foreign industrial development grants, net of
amortization 4,153 5,638
Accumulated depreciation and amortization 240,227 224,444
-------- --------
Net property, plant and equipment 240,702 241,899
Intangible assets, net of amortization 126,896 86,014
Other noncurrent assets 18,987 18,251
-------- --------
$584,015 $539,446
======== ========
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Intermet Corporation
Consolidated Balance Sheets
December 31,
1998 1997
---- ----
(in thousands of dollars,
except share and per share data)
Liabilities and shareholders' equity Current liabilities:
Notes payable $1,000 $9,087
Accounts payable 90,205 59,173
Accrued wages, severance and benefits 24,117 28,522
Income taxes payable 5,684 8,635
Other accrued liabilities 21,121 19,999
Long-term debt due within one year 6,411 10,538
-------- ---------
Total current liabilities 148,538 135,954
Noncurrent liabilities:
Long-term debt 156,690 167,295
Retirement benefits 45,964 49,013
Other noncurrent liabilities 13,481 9,419
-------- ---------
Total noncurrent liabilities 216,135 225,727
Minority interest 2,337 2,337
Shareholders' equity:
Preferred stock; 5,000,000 shares authorized; none issued
Common stock, $0.10 par value; 50,000,000 shares
authorized; 25,832,824 and 25,256,374 shares issued
in 1998 and 1997, respectively 2,583 2,526
Capital in excess of par value 63,382 58,176
Retained earnings 151,131 114,242
Accumulated other comprehensive income 72 561
Unearned restricted stock (163) (77)
-------- ---------
Total shareholders' equity 217,005 175,428
-------- ---------
$584,015 $539,446
======== =========
See accompanying notes.
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Intermet Corporation
Consolidated Statements of Cash Flows
Years ended December 31,
1998 1997 1996
---- ---- ----
(in thousands of dollars)
Operating activities:
Net income $40,989 $40,013 $43,153
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation 31,975 32,482 25,016
Amortization 3,868 3,849 1,837
Equity in results of minority holdings 351 3,199 -
Gain on sale of subsidiary (115) - -
Dissolution of foreign holding 4,282 - -
(Gain) loss on sale of assets (460) (320) 552
Deferred income taxes (2,406) (2,577) (6,364)
Changes in operating assets and liabilities excluding the effects of
acquisitions and dispositions:
Accounts receivable (13,944) (6,098) 279
Inventories (78) (5,608) (5,225)
Accounts payable and current liabilities 35,078 (6,219) 5,133
Other assets and liabilities (3,095) 4,094 6,750
------- ------- --------
Cash provided by operating activities 96,445 62,815 71,131
Investing activities:
Additions to property, plant and equipment (49,496) (40,585) (26,025)
Purchase of businesses, net of cash acquired (60,339) (36,396) (153,456)
Investment in joint venture (2,000) - -
Proceeds from sales of property, plant and equipment 1,441 815 3,516
Proceeds from sale of subsidiary 22,860 - -
Other, net (915) (616) (105)
------- ------- --------
Cash used in investing activities (88,449) (76,782) (176,070)
Financing activities:
Net increase in revolving credit facility 5,000 6,600 118,400
Reduction in debt (7,787) (12,576) (2,337)
(Payment on) proceeds from notes payable (4,000) 5,000 -
Issuance of common stock 5,263 877 889
Dividends paid (4,100) (4,038) (2,011)
Other, net (836) 420 -
------- ------- --------
Cash (used in) provided by financing activities (6,460) (3,717) 114,941
Effect of exchange rate changes on cash and cash equivalents (2,710) 1,221 2,310
------- ------- --------
Net (decrease) increase in cash and cash equivalents (1,174) (16,463) 12,312
Cash and cash equivalents at beginning of year 7,022 23,485 11,173
------- ------- --------
Cash and cash equivalents at end of year $5,848 $7,022 $23,485
======= ======= ========
See accompanying notes.
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Intermet Corporation
Consolidated Statements of Shareholders' Equity
Years ended December 31,
1998 1997 1996
---- ---- ----
(in thousands of dollars, except share and per share
data)
Common stock
Beginning balance $2,526 $2,517 $2,505
Exercise of options to purchase 576,450, 88,500 and
114,500 shares of common stock in 1998, 1997 and 1996,
respectively 57 9 12
-------- -------- --------
Ending balance 2,583 2,526 2,517
Capital in excess of par value
Beginning balance 58,176 57,308 56,431
Exercise of options to purchase shares of common
stock 5,206 868 877
-------- -------- --------
Ending balance 63,382 58,176 57,308
Retained earnings
Beginning balance 114,242 78,267 37,125
Net income 40,989 40,013 43,153
Cash dividends of $0.16 per share in 1998 and 1997 and
$0.08 per share in 1996 (4,100) (4,038) (2,011)
-------- -------- --------
Ending balance 151,131 114,242 78,267
Accumulated translation adjustment
Beginning balance 573 3,548 3,765
Translation adjustment 535 (4,575) (344)
Related income tax effect (187) 1,600 127
-------- -------- --------
Ending balance 921 573 3,548
Minimum pension liability adjustment
Beginning balance (12) (485) (1,636)
Adjustment (1,379) 776 1,887
Related income tax effect 542 (303) (736)
-------- -------- --------
Ending balance (849) (12) (485)
Unearned restricted stock
Beginning balance (77) (53) (162)
Issuance of 8,000 and 7,500 shares of common stock in
1998 and 1997, respectively (155) (115) -
Amortization 69 91 109
-------- -------- --------
Ending balance (163) (77) (53)
-------- -------- --------
Total shareholders' equity $217,005 $175,428 $141,102
======== ======== ========
See accompanying notes.
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Intermet Corporation
Notes to Consolidated Financial Statements
Years ended December 31, 1998, 1997 and 1996
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements, presented in conformity with
generally accepted accounting principles ("GAAP"), include the accounts of
Intermet Corporation ("Intermet") and its subsidiaries (collectively, the
"Company"). All significant intercompany transactions and balances have been
eliminated in consolidation.
Business
The Company produces iron and aluminum castings and performs value-added
services, principally for automotive manufacturers in North America and Europe.
The Company also supplies cranes, truck bodies and related equipment, and
precision machined components to automotive and other industrial customers.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Reclassification
Certain amounts previously reported in the 1997 financial statements and notes
thereto have been reclassified to conform to the 1998 presentation.
Revenue Recognition
The Company recognizes revenue upon shipment of products.
Income per Common Share
Basic and diluted earnings per share are calculated in accordance with the
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share". All earnings per share amounts
for all periods have been presented, and where appropriate, restated to conform
to the requirements of SFAS No. 128.
Cash and Cash Equivalents
All short-term investments with original maturities of less than 90 days are
deemed to be cash equivalents for purposes of the statements of cash flows.
8
16
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on the
last-in, first-out ("LIFO") method for 34% and 36% of the December 31, 1998 and
1997 inventories, respectively. Certain raw materials and supplies inventories
are valued on a weighted average cost basis; average production cost is used for
certain work in process and finished goods inventories and other inventories are
valued by the first-in, first-out ("FIFO") method. The specific identification
method is used for pattern inventories. If LIFO inventories were valued using
the same cost methods used for other inventories, their carrying values would
have increased by $1,105,000 and $1,273,000 at December 31, 1998 and 1997,
respectively.
Property, Plant and Equipment
The provision for depreciation and amortization of property, plant and equipment
is determined on the basis of estimated useful lives using the straight-line
method. Certain 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.
Intangible Assets
Intangible assets of $126,896,000 and $86,014,000 (net of accumulated
amortization of $7,147,000 and $4,392,000) at December 31, 1998 and 1997,
respectively, consist principally of costs in excess of net assets acquired.
Such costs are being amortized using the straight-line method over periods
ranging principally from ten to forty years. The Company periodically assesses
the recoverability of the cost of its intangibles based on a review of projected
undiscounted cash flows of the related operating entities.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value. The fair value of the Company's debt approximates the reported amounts in
the accompanying consolidated balance sheets as their respective interest rates
approximate the respective year end market rates for similar debt instruments.
The Company obtains the fair value of the interest rate swaps from dealer
quotes. These values represent the estimated amount the Company would receive or
pay to terminate agreements taking into consideration current interest rates,
the creditworthiness of the counter-parties and current foreign currency
exchange rates.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees and
directors with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees", and,
accordingly, recognizes no compensation expense for the stock option grants.
9
17
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Company expects to adopt SFAS No. 133
effective January 1, 2000. SFAS No. 133 will require the Company to recognize
all derivatives on the balance sheet at fair value. The Company does not
anticipate that the adoption of this SFAS will have a significant effect on its
results of operations or financial position.
2. Reporting for Business Segments
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which the Company has adopted and which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise". SFAS No. 131 requires a public enterprise to present specific
segment information according to how management internally evaluates the
operating performance of its business units. It also requires public enterprises
to present certain "enterprise wide" information, including revenue related to
products and services and geographic areas in which they operate. The Company's
management evaluates the operating performance of its business units
individually. Under the provisions of SFAS No. 131, the Company has aggregated
operating segments that have similar characteristics, which has resulted in one
reportable segment. The foundry segment consists of foundry operations, which
include both iron and aluminum castings and their related machining operations.
The operating units that comprise other are all nonfoundry operations, and none
of them constitutes a reportable segment on its own. This information is
displayed in the table below.
Foundry Other Consolidated
------- ----- ------------
(in thousands of dollars)
Year ended December 31, 1998
Net sales $731,111 $110,487 $841,598
Depreciation expense 28,725 3,250 31,975
Amortization expense 3,868 - 3,868
Provision for income taxes 23,607 592 24,199
Net income 40,048 941 40,989
Purchases of property, plant and equipment 45,372 4,124 49,496
December 31, 1998
Total assets $544,864 $39,151 $584,015
Year ended December 31, 1997
Net sales $666,094 $147,635 $813,729
Depreciation expense 27,824 4,658 32,482
Amortization expense 3,849 - 3,849
Provision for income taxes 18,337 3,039 21,376
Net income 34,903 5,110 40,013
Purchases of property, plant and equipment 32,716 7,869 40,585
December 31, 1997
Total assets $465,390 $74,056 $539,446
10
18
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
3. Comprehensive Income
During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which the Company adopted as of January 1, 1998. SFAS No. 130 establishes new
rules for reporting and display of comprehensive income and its components. The
adoption of this SFAS had no impact on the Company's net income or shareholders'
equity. SFAS No. 130 requires the components of comprehensive income, which
include the foreign currency translation adjustment and minimum pension
liability adjustment, to be combined and reported as accumulated other
comprehensive income. Prior to adoption, these items were reported separately in
shareholders' equity. In addition, SFAS No. 130 requires net income and other
comprehensive income to be included as components of comprehensive income, which
is displayed in the consolidated statements of comprehensive income.
4. Acquisitions and Dispositions
On December 31, 1998, the Company acquired certain operating assets and the
aluminum die-casting business of Quadion Corporation for $56,951,000 and certain
operating supplies inventories for $1,353,000, both in cash. These assets form
the base of the Company's wholly owned subsidiary, Tool Products, Inc. ("Tool
Products"). This transaction has been accounted for as a purchase and,
accordingly, the purchase price has been allocated to the assets purchased and
the liabilities assumed based upon the estimated fair values at the date of
acquisition. The excess of the purchase price over the fair value of tangible
net assets acquired was approximately $39,052,000 and was recorded as goodwill,
which will be amortized on a straight-line basis over 40 years. The consolidated
financial statements include the balance sheet of Tool Products as of December
31, 1998. The balance sheet of Tool Products is subject to audit, which may
result in an adjustment to the purchase price subsequent to December 31, 1998.
Tool Products manufactures aluminum die castings for broad applications in the
automotive, electronics and other industries and has manufacturing facilities in
New Hope, Minnesota and Jackson, Tennessee.
On December 31, 1998 the Company acquired 100% of the outstanding shares of
Vorpommersche Eisenwerke GmbH UeckermUnde ("VEGU") for DM 6,000,000 in cash. The
transaction was accounted for as a purchase and, accordingly, the purchase price
has been allocated to the assets purchased and the liabilities assumed based
upon the estimated fair values at the date of acquisition. The fair values of
tangible net assets acquired exceeded the purchase price and has resulted in
negative goodwill of approximately DM 3,300,000, which will be amortized on a
straight-line basis over five years. The consolidated financial statements
include the balance sheet of VEGU as of December 31, 1998. VEGU is a ferrous
foundry company located in Eastern Germany.
In June 1998 the Company sold substantially all the operating assets of its
subsidiary, Industrial Powder Coatings, for $22,338,000 in cash, net of related
selling expenses, and recognized a net gain of approximately $115,000.
11
19
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
4. Acquisitions and Dispositions (continued)
The following represents the unaudited pro forma consolidated results of
operations (in thousands of dollars, except per share data) for the Company for
1998 and 1997, assuming the above acquisitions and disposition occurred on
January 1 of each year presented.
1998 1997
---- ----
Net sales $889,464 $818,425
Net income $44,286 $42,863
Income per common share - Basic $1.73 $1.70
Income per common share - Diluted $1.71 $1.66
These unaudited pro forma results are presented for comparative purposes only.
They are not necessarily indicative of what would have occurred had the
acquisitions and dispositions actually been made on the dates indicated or of
future results of operations.
During the second quarter of 1998, the Company entered into an agreement with
Portuguese Grupo Jorge de Mello, creating a joint venture company called
PortCast-Fundicao Nodular, S.A. ("PortCast"). PortCast is located in Porto,
Portugal and increases the Company's foundry capacity in Europe. The Company
spent $2,000,000 of capital toward its investment in a 50% equity interest in
PortCast. The Company's investment in PortCast is accounted for on the equity
method. During the third quarter of 1998, the Company advanced approximately
$1,300,000 to PortCast for its working capital requirements. The Company has
managerial control. The Company's equity in net loss of PortCast for 1998 is
$440,000 and is included in other income and expense in the accompanying
statements of operations.
In December 1996, the Company acquired substantially all of the outstanding
stock of Sudbury, Inc. for $182,434,000 in cash, including costs of $5,277,000
directly related to the acquisition. The transaction was accounted for as a
purchase. The results of operations of Sudbury from the date of acquisition to
December 31, 1996 were not significant.
In 1996, the Company purchased for cash a minority interest in IWESA GmbH
("IWESA"), for DM 4,000,000. The Company also purchased a newly issued share
from IWESA for DM 374,000 bringing its share interest to 49% and contributed DM
6,000,000 to the capital reserves of IWESA in support of new capital expansion
projects. During 1997, the Company's ownership interest in IWESA was increased
to 82.4% for DM 1 as a result of the financial difficulties IWESA was
experiencing. Accordingly, the Company accounted for IWESA as a consolidated
subsidiary at December 31, 1997. In the first half of 1998, the Company
wrote-off certain assets related to IWESA. In May 1998, IWESA entered bankruptcy
proceedings whereby the receiver assumed all remaining assets and obligations,
without cash effect, in accordance with German bankruptcy laws.
12
20
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
5. Minority Interest
In 1988, the Company purchased all of the common stock of Ironton Iron, Inc.
("Ironton"), a foundry company in Ohio. As a part of the transaction, the
previous common stockholders of Ironton received an equivalent number of shares
of Ironton's new 5% cumulative preferred stock with an aggregated par value of
$2,337,000. The preferred shares are to be retired at par value from net income
of Ironton, if available. No shares have been retired and no dividends have been
accrued or paid to date because Ironton has incurred a cumulative net loss since
1988. The preferred shares are included in minority interest in the consolidated
balance sheets.
6. Notes Payable
The Company maintains various uncommitted bank lines of credit which are payable
on demand. At December 31, 1998, Intermet's borrowings under the lines of credit
totaled $1,000,000. Availability under these lines of credit at December 31,
1998 was $24,000,000. At December 31, 1997, Intermet's borrowings under the
lines of credit totaled $5,000,000. Availability under these lines of credit at
December 31, 1997 was $40,000,000. Interest is paid on a daily basis at a
negotiated rate. At December 31, 1998, the interest rate was 7.25% per annum.
Columbus Neunkirchen Foundry GmbH ("Neunkirchen"), a wholly owned subsidiary of
the Company, has various revolving note agreements which are payable upon the
earlier of demand or December 31, 1999, unless extended. These notes provide for
borrowings up to DM 19,000,000 (approximately $11,356,000) at December 31, 1998.
There were no outstanding borrowings under these agreements as of December 31,
1998 and 1997.
7. Long-Term Debt
Long-term debt consists of the following at December 31, (in thousands of
dollars):
1998 1997
---- ----
Intermet:
Revolving credit facility $130,000 $125,000
Prudential note 20,000 25,000
Domestic Subsidiaries:
Industrial development bonds 8,075 4,320
Capitalized leases 3,781 -
Other 3 248
Foreign Subsidiaries:
Foreign bank term notes 1,242 1,306
IWESA bank term debt - 15,947
IWESA capitalized leases - 6,012
-------- --------
Total $163,101 $177,833
Less long-term debt due within one year 6,411 10,538
-------- --------
Long-term debt due after one year $156,690 $167,295
======== ========
13
21
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
The Company has an unsecured revolving credit agreement with a bank group, which
has been extended to January 1, 2000, and provides for loans up to $200,000,000
in the aggregate. Certain standby letters of credit reduce the borrowing limit.
At December 31, 1998 such standby letters of credit totaled $4,959,279. The
revolving credit agreement provides the Company with several interest
rate-pricing mechanisms ranging from 5.71% to 6.12% per annum at December 31,
1998. The Company must also pay a fee, at a rate of 0.15% per annum, on any
unused portion of the loan commitment. The revolving credit agreement requires
the Company to maintain certain financial ratios and imposes limitations on
certain activities.
The Prudential note is unsecured and bears interest at a rate of 8.05% per
annum, payable quarterly. Annual principal payments of $5,000,000 are required.
The note agreement requires the Company to maintain certain financial ratios and
imposes limitations on certain activities.
Under the terms of the bond indenture, Lynchburg Foundry Company, a wholly owned
subsidiary of the Company, is required to redeem various amounts of industrial
development revenue bonds on an annual basis through June 2006. These amounts
range from $175,000 to $350,000 per year, with a final payment at maturity of
$1,650,000. The balance outstanding as of December 31, 1998 was $3,575,000. The
bonds are subject to optional redemption prior to maturity.
As part of the Company's acquisition of Tool Products, the Company assumed
$4,500,000 of industrial development revenue bond debt. The Company is required
to make annual principal payments of $500,000, with a final maturity date of
January 1, 2007.
The Company also has capital leases of approximately $3,781,000 at December 31,
1998, which relate to assets with net book values of approximately $3,849,000.
Interest rates for these leases range from 7.50% to 8.58%.
The foreign bank term notes are amortized approximately $221,000 per year,
through 2002, with the remainder amortized approximately $90,000 per year, from
2003 through 2006. These notes bear an interest rate of 5.0% per annum. These
borrowings are secured by property, plant and equipment with net book values
aggregating to approximately $22,743,000 at December 31, 1998.
As a result of IWESA entering bankruptcy proceedings in May 1998, the receiver
assumed all of IWESA's obligations, without cash effect, in accordance with
German bankruptcy laws.
Maturities of long-term debt and capital leases at December 31, 1998 are as
follows (in thousands of dollars):
1999 $6,411
2000 136,445
2001 6,433
2002 6,648
2003 1,579
Thereafter 5,585
--------
Totals $163,101
--------
Interest paid totaled $10,398,000, $11,500,000 and $3,048,000 in 1998, 1997 and
1996, respectively.
14
22
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
7. Long-Term Debt (continued)
The Company is in compliance with the terms and restrictions of its various loan
and credit agreements. At December 31, 1998, approximately $84,012,000 of the
Company's retained earnings was restricted and unavailable for the payment of
dividends.
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. At December
31, 1998, the Company has two interest rate swap transaction arrangements in
effect for which the Company pays a fixed interest rate of 6.75% and 6.755% per
annum with respect to notional amounts, and off balance sheet risk, of
$40,000,000 and $30,000,000, respectively. These swaps are used to partially
hedge an underlying debt obligation and are not marked to market. The Company
does not expect to terminate the swaps prior to maturity. Had the swaps been
terminated at December 31, 1998, the Company would have been obligated to the
counter-parties for approximately $1.7 million. The swap transactions terminate
in May 2000.
8. Shareholders' Equity
The Company has a Key Individual Stock Option Plan ("Individual Plan") and a
Directors' Stock Option Plan ("Directors' Plan"). The Individual Plan, which
granted options and restricted shares for 1,500,000 shares of common stock, was
approved by the shareholders of the Company on April 27, 1995. The Directors'
Plan was approved by the shareholders of the Company on April 10, 1997 and
granted options to purchase 150,000 shares of common stock. Options granted
under the Individual Plan vest over a four-year period. All other options
granted in 1998 were exercisable at the grant date. Certain options also remain
outstanding from prior stock option plans. At December 31, 1998 options for
557,050 shares were exercisable, while 365,000 Individual Plan shares and
129,000 Directors' Plan shares were available for future grant.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation expense has been recognized for the Company's stock option plans.
Had compensation expense for these plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
SFAS No. 123, the Company's pro forma net income, basic earnings per share and
diluted earnings per share would have been $40,290,000, $39,413,000 and
$42,863,000; $1.57, $1.56 and $1.71; and $1.55, $1.53 and $1.67 in 1998, 1997
and 1996, respectively.
The fair values of the Company's stock options, as disclosed above, were
estimated as of the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions for 1998, 1997 and 1996:
risk-free interest rates ranged from 4.75% to 5.25%; a dividend yield of 1.0%;
volatility factors of the expected market price of the Company's common stock
ranged from 0.32 to 0.43; and a weighted average expected life of the options of
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.
15
23
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
8. Shareholders' Equity (continued)
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
the Company's 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 its stock options.
A summary of the Company's stock option activity for the three years ended
December 31, 1998 is as follows:
Weighted
Number of Average Exercise
Options Exercise Price Price Range
--------- -------------- -----------
Outstanding at December 31, 1995 1,192,500 $ 8.74
Granted 381,500 13.03 $12.75-$13.81
Exercised (114,500) 8.44 5.69-10.75
Forfeited (69,500) 10.12 9.00-12.75
---------
Outstanding at December 31, 1996 1,390,000 $9.87
=========
Exercisable at December 31, 1996 660,000 $8.48
Weighted average fair value of
options granted during 1996 $5.33
Outstanding at December 31, 1996 1,390,000 $ 9.87
Granted 219,500 16.27 $15.375-$17.00
Exercised (88,500) 7.22 5.69-12.75
Forfeited (41,500) 10.12 9.00-12.75
---------
Outstanding at December 31, 1997 1,479,500 $9.87
=========
Exercisable at December 31, 1997 856,375 $9.36
Weighted average fair value of
options granted during 1997 $6.48
Outstanding at December 31, 1997 1,479,500 $ 9.87
Granted 305,750 18.11 $18.06-$19.38
Exercised (576,450) 8.79 5.69-12.75
Forfeited (24,750) 13.74 9.00-17.00
---------
Outstanding at December 31, 1998 1,184,050 $13.64
=========
Exercisable at December 31, 1998 557,050 $11.14
Weighted average fair value of
options granted during 1998 $7.91
Exercise prices for options outstanding as of December 31, 1998 ranged
principally from $9.00 to $18.06. The weighted-average remaining contractual
life of those options is 7.4 years.
16
24
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
8. Shareholders' Equity (continued)
The Company has an Employee Stock Ownership Plan and Trust ("ESOP") for certain
of its United States employees who are not covered by collective bargaining
agreements. The ESOP requires contributions by the Company equal to 3% of the
annual compensation of the ESOP participants. The Company may, at its
discretion, make additional contributions within specified limits. Contributions
to the ESOP of $872,000, $827,000 and $665,000 were expensed in 1998, 1997 and
1996, respectively.
On October 6, 1995 the Company's 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 ("Rights Agreement") dated October 6, 1995. The Rights are generally
not exercisable until 10 days after an announcement by the Company that a
person, as defined (excluding, with certain limitations, certain holders of 10%
or more of the Company's Common Stock who do not acquire additional shares, any
of the Company's ESOPs or benefit plans, and the Company or any of its
wholly-owned subsidiaries), has acquired 10% of the Company's Common Stock or
announces a tender offer which could result in the ownership of 10% or more of
the Company's 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 the Company's Preferred Stock, at an exercise price of $40. On
October 16, 1997, the Company amended the Rights Agreement to provide that
certain institutional investors who own in excess of 10%, but less than 15% of
the Company's 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 the Company merges
with another company under certain conditions or redeems or exchanges the Rights
before October 6, 2005, the Rights will expire on such date.
9. 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, 1998 are as follows (in thousands of dollars):
1999 $4,126
2000 3,439
2001 2,467
2002 1,963
2003 812
Thereafter 517
-------
Total $13,324
=======
17
25
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
9. Commitments and Contingencies (continued)
Total rental expense under operating leases aggregated $5,255,000, $5,445,000
and $2,833,000 in 1998, 1997 and 1996, respectively.
At December 31, 1998 the Company had commitments to purchase operating equipment
of approximately $8,176,000 in the aggregate.
Certain subsidiaries of the Company have been named as potentially responsible
parties liable for cleanup of known environmental conditions. For known
environmental situations, the Company, with the assistance of environmental
engineers and consultants, has recorded reserves to cover estimated future
environmental expenditures. Environmental reserves at December 31, 1998 and 1997
approximated $4,633,000 and $5,477,000 respectively. The Company has initiated
corrective action and/or preventive environmental projects to ensure the safe
and lawful operation of its 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, 1998.
The Company is also engaged in various legal proceedings and other matters
incidental to its normal business activities. The Company does not believe any
of these above-mentioned proceedings or matters will have a material adverse
effect on the Company's consolidated financial position or results of operations
or cash flows.
18
26
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
10. Retirement Plans and Benefits
The Company maintains several noncontributory defined benefit pension plans for
certain of its U.S. employees covered by collective bargaining agreements. The
benefits are based on years of service. The Company's policy is to fund amounts
as required under applicable laws and regulations. In addition to providing
pension benefits, the Company provides 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. The
following disclosures are provided in accordance with SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits", which became
effective in 1998:
Years ended December 31,
Pension Benefits Other Benefits
---------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands of dollars)
Change in benefit obligation
Benefit obligation at beginning of year $ 55,246 $ 50,949 $ 35,191 $ 38,952
Service cost 1,204 1,232 707 949
Interest cost 4,044 3,855 2,490 2,924
Amendments 772 -- (358) --
Actuarial (gains)/losses 3,865 1,969 3,133 (4,514)
Acquisition -- -- 183 --
Benefits paid (3,204) (2,759) (3,395) (3,120)
-------- -------- -------- --------
Benefit obligation at end of year $ 61,927 $ 55,246 $ 37,951 $ 35,191
Change in plan assets
Fair value of plan assets at beginning of year $ 58,962 $ 47,435
Actual return on plan assets 3,315 10,198
Company contributions 1,945 4,088
Benefits paid (3,203) (2,759)
-------- --------
Fair value of plan assets at end of year $ 61,019 $ 58,962
Funded status of the plan (under-funded) ($ 908) $ 3,716 ($37,951) ($35,191)
Unrecognized net actuarial loss/(gain) 1,504 (4,110) (11,038) (15,463)
Unrecognized transition obligation 171 224 -- --
Unrecognized prior service cost 2,348 1,809 (90) 240
-------- -------- -------- --------
Prepaid (accrued) benefit cost $ 3,115 $ 1,639 ($49,079) ($50,414)
19
27
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
10. Retirement Plans and Benefits (continued)
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.125% in 1998 and 7.5% in 1997. The expected
long-term rate of return on assets used in determining net pension expense was
9.0% to 9.5% in 1998 and 9.0% in 1997. Plan assets consist of publicly traded
stocks and bonds, cash equivalents and insurance contracts.
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation was 7.0% to 10.5% in 1998, declining by 0.5%
per year to an ultimate rate of 5.5% to 6.0% for the applicable employee age
groups. Certain subsidiaries providing a dental benefit assumed a 6.0% cost
trend rate for dental in 1998, declining to 5.5% in 1999.
Years ended December 31,
Pension Benefits Other Benefits
---------------- --------------
Components of net periodic cost: 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
(in thousands of dollars)
Service cost $1,204 $1,232 $842 $707 $949 $1,073
Interest cost 4,044 3,855 1,805 2,490 2,924 2,425
Expected return on plan assets (5,062) (10,198) (3,886) - - -
Amortization of prior service cost and
net transition obligation 283 6,264 2,494 (508) 11 -
Recognized net actuarial gain - - - (813) (783) (496)
------ ------ ------ ------ ------ ------
Benefit cost $ 469 $1,153 $1,255 $1,876 $3,101 $3,002
====== ====== ====== ====== ====== ======
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 1998 $278 $264
Effect on postretirement benefit obligation as of
December 31, 1998 3,034 2,474
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Intermet Corporation
Notes to Consolidated Financial Statements (continued)
10. Retirement Plans and Benefits (continued)
Amounts recognized for pension benefits in the consolidated balance sheets
consist of:
December 31,
1998 1997
---------------- --------------
(in thousands of dollars)
Prepaid benefit cost $3,115 $1,639
Accrued benefit liability (3,910) (238)
Intangible asset 2,519 219
Accumulated other comprehensive income (pretax) 1,391 19
------ ------
Net amount recognized $3,115 $1,639
====== ======
Because the Company aggregates the disclosures for its pension plans with plans
with accumulated benefit obligations in excess of plan assets (underfunded
plans), the following additional disclosures are applicable to the Company's
pension plans with accumulated benefit obligations in excess of plan assets, in
thousands of dollars, as of December 31, 1998:
Projected benefit obligation $35,619
Accumulated benefit obligation 35,619
Fair value of plan assets 32,408
The Company maintains several defined contribution plans for certain hourly
employees. Contributions to these plans, which are principally based on hours
worked by each employee, totaled $1,034,000, $1,173,000 and $724,000 in 1998,
1997 and 1996, respectively. Some of the plans allow participants to make pretax
contributions as a percentage of their compensation.
The Company also maintains defined contribution plans for domestic salaried
employees. In certain plans the Company contributes a specified percentage of
the annual compensation of participants. Participants are also allowed to make
pretax contributions to the plans, as a percentage of their compensation. The
Company matches participant contributions up to a specified limit and, in
certain plans, provides for a discretionary profit-sharing contribution by the
Company. The Company accrued contributions to the plans of $1,602,000,
$1,297,000 and $991,000 in 1998, 1997 and 1996, respectively.
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Intermet Corporation
Notes to Consolidated Financial Statements (continued)
11. Income Taxes
The provision for income taxes consists of the following (in thousands of
dollars):
Years ended December 31,
1998 1997 1996
----- ---- ----
Current:
Federal $22,317 $13,489 $ 6,642
State 3,555 2,811 2,448
Foreign 733 7,653 8,443
------- ------- -------
26,605 23,953 17,533
Deferred:
Federal (5,651) (1,769) (5,280)
State (467) (71) (1,748)
Foreign 3,712 (737) 664
------- ------- -------
(2,406) (2,577) (6,364)
======= ======= =======
Totals $24,199 $21,376 $11,169
======= ======= =======
Income taxes paid were approximately $15,245,000, $2,931,000 and $17,380,000 in
1998, 1997 and 1996, respectively.
The provision for income taxes differs from the amount computed using the
statutory U.S. federal income tax rate for the following reasons (in thousands
of dollars):
Years ended December 31,
1998 1997 1996
Provision for income taxes at U.S. statutory
rate $22,816 $21,486 $19,013
(Income) loss with no tax effect (267) 1,160 -
Difference between U.S. and foreign tax rates
84 1,561 3,734
Utilization of NOL and credit carryforwards
- (4,862) (2,137)
State income taxes, net of federal income
tax benefits 2,030 1,781 455
Reduction in deferred valuation allowance
- (1,246) (11,513)
Other (464) 1,496 1,617
------- ------- -------
Totals $24,199 $21,376 $11,169
======= ======= =======
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Intermet Corporation
Notes to Consolidated Financial Statements (continued)
11. Income Taxes (continued)
The tax effects of temporary differences and carryforwards that give rise to
deferred income tax assets (liabilities) at December 31, 1998 and 1997 are as
follows (in thousands of dollars):
1998 1997
---- ----
Compensation and benefit items, primarily related to SFAS
No. 106 $ 22,896 $ 23,364
Operating loss, capital loss, foreign tax credit and AMT
credit carryforwards 23,092 17,403
Other temporary differences 7,929 10,290
------- -------
Gross deferred tax assets 53,917 51,057
Depreciation and related items (19,935) (20,729)
Other temporary differences (13,590) (12,048)
------- -------
Gross deferred tax liabilities (33,525) (32,777)
Net deferred tax asset 20,392 18,280
Valuation allowance (16,240) (11,722)
------- -------
Net deferred income taxes $ 4,152 $ 6,558
======= =======
At December 31, 1998, $6,455,000 of the Company's NOLs related to the
acquisition of VEGU (see Note 4 - Acquisitions and Dispositions). These NOLs
have no expiration date but are subject to certain statutory limitations. For
financial reporting purposes, a valuation allowance of $4,518,000 has been
recognized to offset the deferred tax asset related to this carryforward.
Current accounting standards require the reduction of the deferred tax asset by
a valuation allowance, based on the weight of available evidence, if it is more
likely than not that a portion or the entire deferred tax asset will not be
realized. Excluding VEGU, the Company did not change its valuation allowance in
1998. In 1997 the Company reduced the valuation allowance by $1,246,000 due to
the increased viability of anticipated future income. The Company has provided a
valuation allowance in the amount of $16,240,000, including VEGU, at December
31, 1998 for capital losses, foreign tax credits and operating loss
carryforwards, the utilization of which is presently uncertain.
There are certain limitations on the use of most of the tax loss and credit
carryforwards noted above. Tax loss and credit carryforwards, with a value of
approximately $16,637,000 expire in various amounts between 1999 and 2010.
German loss carryforwards with a value of approximately $6,455,000 have an
unlimited life.
These amounts are included in the consolidated balance sheets as follows (in
thousands of dollars):
December 31,
1998 1997
---- ----
Current assets $2,829 $3,244
Other noncurrent assets 4,449 4,741
Other noncurrent liabilities (3,126) (1,427)
------ ------
Totals $4,152 $6,558
====== ======
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Intermet Corporation
Notes to Consolidated Financial Statements (continued)
12. Geographic Area and Major Customer Information
All sales are to unaffiliated customers. Revenue and income amounts for the
three years ended December 31, 1998, and identifiable assets at the end of each
year, were as follows for North American, principally United States, and
European, principally Germany, source operations:
At and for the years ended December 31,
1998 1997 1996
---- ---- ----
(in thousands of dollars)
Net sales:
North America $733,889 $723,644 $441,942
Europe 107,709 90,085 92,536
Operating profit:
North America 61,413 59,466 38,338
Europe 14,236 15,732 17,765
Income before income taxes:
North America 53,239 50,972 36,960
Europe 11,949 10,417 17,362
Assets:
North America 517,515 453,992 469,359
Europe 66,500 85,454 63,003
Net sales to customers exceeding 10% of consolidated net sales in 1998, 1997 or
1996 were as follows (as a percentage of consolidated net sales):
1998 1997 1996
---- ---- ----
Customer:
DaimlerChrysler 20% 18% 23%
Ford 18% 18% 19%
General Motors 6% 8% 12%
Ford sales include sales to Ford (10%) and Ford Visteon (8%) and GM sales
include sales to GM (2%) and Delphi (4%). Credit is extended based on an
evaluation of the customer's financial condition, and collateral is generally
not required. Credit losses are provided for in the financial statements and
consistently have been within management's expectation.
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Intermet Corporation
Notes to Consolidated Financial Statements (continued)
13. Earnings per Share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Dilutive earnings per share reflects the assumed exercise of stock
options and unearned restricted stock.
Years ended December 31,
1998 1997 1996
---- ---- ----
(in thousands, except per share data)
Numerator:
Net income $40,989 $40,013 $43,153
Denominator:
Denominator for basic earnings per
share - weighted average shares 25,610 25,211 25,067
Effect of dilutive securities:
Employee stock options and unearned
restricted stock 337 572 527
--- --- ---
Denominator for diluted earnings per share
- adjusted weighted average shares and
assumed conversions 25,947 25,783 25,594
====== ====== ======
Basic earnings per share $1.60 $1.59 $1.72
===== ===== =====
Diluted earnings per share $1.58 $1.55 $1.69
===== ===== =====
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Intermet Corporation
Notes to Consolidated Financial Statements (continued)
14. Quarterly Data and Share Information (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands of dollars, except per share data)
1998
Net sales $224,033 $219,857 $188,808 $208,900
Gross profit 29,975 31,500 22,494 26,772
Net income 11,271 12,337 9,314 8,067
Net income per common share - Basic 0.44 0.48 0.36 0.31
Net income per common share - Diluted 0.43 0.47 0.36 0.31
Share prices (NASDAQ):
High 22.5000 23.7500 20.1880 17.1250
Low 16.0000 16.8750 12.6250 8.5000
1997
Net sales $209,491 $210,898 $189,535 $203,805
Gross profit 27,605 28,259 22,063 29,031
Net income 10,951 11,136 7,356 10,570
Net income per common share - Basic 0.43 0.44 0.29 0.43
Net income per common share - Diluted 0.43 0.43 0.28 0.41
Share prices (NASDAQ):
High 17.2500 16.0625 18.6250 19.8750
Low 11.7500 11.1250 15.2500 15.8125
Third and fourth quarter sales are usually lower than the first and second
quarter sales due to plant closings by automotive manufacturers for vacations
and model changeovers. The above share price information represents inter-dealer
transactions in The NASDAQ National Market without retail markup, markdown or
commission.
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