UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- --------------------
Commission File Number 333-28751
NEENAH FOUNDRY COMPANY
(Exact name of each registrant as it appears in its charter)
Wisconsin 39-1580331
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
2121 Brooks Avenue, P.O. Box 729, Neenah, Wisconsin 54957
(Address of principal executive offices) (Zip Code)
(920) 725-7000
(Registrant's telephone number, including area code)
None
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, Class A, $100 par value- 1,000 shares as of July 31, 2002
Common Stock, Class B, $100 par value- 0 shares as of July 31, 2002
NEENAH FOUNDRY COMPANY
Form 10-Q Index
For the Quarter Ended June 30, 2002
Page
----
Part 1. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets -- June 30, 2002 and September 30, 2001 3
Condensed consolidated statements of operations -- Three and nine months ended June 30, 2002
and 2001 4
Condensed consolidated statements of cash flows -- Nine months ended June 30, 2002 and 2001 5
Notes to condensed consolidated financial statements -- June 30, 2002 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 16
Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
Page 2
NEENAH FOUNDRY COMPANY
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
June 30 September 30
2002 2001(1)
----------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 11,832 $ 4,346
Accounts receivable, net ........................................ 63,317 69,845
Inventories ..................................................... 56,922 71,695
Refundable income taxes ......................................... 2,634 2,148
Deferred income taxes ........................................... 10,769 3,069
Other current assets ............................................ 4,673 5,852
Current assets of discontinued operations ....................... 207 --
--------- ---------
Total current assets ................................ 150,354 156,955
Property, plant and equipment ..................................... 291,530 308,698
Less accumulated depreciation ..................................... 106,052 94,865
--------- ---------
185,478 213,833
Deferred financing costs, net ..................................... 7,246 7,811
Identifiable intangible assets, net ............................... 38,130 55,932
Goodwill .......................................................... 180,214 186,005
Other assets ...................................................... 6,219 5,907
--------- ---------
$ 567,641 $ 626,443
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................................ $ 23,326 $ 30,568
Accrued liabilities ............................................. 19,570 31,518
Current portion of long-term debt ............................... 41,604 20,424
Current portion of capital lease obligations .................... 2,393 2,305
--------- ---------
Total current liabilities ........................... 86,893 84,815
Long-term debt .................................................... 413,072 413,653
Capital lease obligations ......................................... 5,964 7,845
Deferred income taxes ............................................. 52,244 63,719
Postretirement benefit obligations ................................ 6,687 6,345
Other liabilities ................................................. 8,532 8,127
--------- ---------
Total liabilities ................................... 573,392 584,504
Commitments and contingencies
STOCKHOLDER'S EQUITY (DEFICIT):
Preferred stock, par value $100 per share -- authorized
3,000 shares, no shares issued or outstanding ............ -- --
Common stock, par value $100 per share -- authorized
11,000 shares, issued and outstanding 1,000 shares ....... 100 100
Additional paid in capital ...................................... 51,317 51,317
Accumulated deficit ............................................. (55,550) (7,860)
Accumulated other comprehensive loss ............................ (1,618) (1,618)
--------- ---------
Total stockholder's equity (deficit) ................ (5,751) 41,939
--------- ---------
$ 567,641 $ 626,443
========= =========
See notes to condensed consolidated financial statements.
(1) The balance sheet as of September 30, 2001 has been derived from the audited
financial statements as of that date but does not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
Page 3
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------------- ------------------------------------
2002 2001 2002 2001
-------------- -------------- --------------- ---------------
(Unaudited) (Unaudited)
Net sales ............................................... $ 115,476 $ 111,197 $ 296,426 $ 314,344
Cost of sales ........................................... 93,403 91,528 253,005 269,367
--------- --------- --------- ---------
Gross margin ............................................ 22,073 19,669 43,421 44,977
Selling, general and administrative expenses ............ 7,400 7,489 20,727 22,279
Amortization of intangible assets ....................... 956 2,653 2,871 7,959
Loss (gain) on disposal of equipment .................... -- 340 (19) 280
--------- --------- --------- ---------
Total operating expenses ................................ 8,356 10,482 23,579 30,518
--------- --------- --------- ---------
Operating income ........................................ 13,717 9,187 19,842 14,459
Net interest expense .................................... (11,388) (10,920) (31,450) (32,993)
--------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes .......................................... 2,329 (1,733) (11,608) (18,534)
Income tax provision (benefit) .......................... 924 (169) (4,651) (5,994)
--------- --------- --------- ---------
Income (loss) from continuing operations ................ 1,405 (1,564) (6,957) (12,540)
Gain on sale of discontinued operations, net of
income tax provision of $1,603 ........................ -- -- -- 2,404
Loss from discontinued operations, net of income tax
provision (benefit) of $(55), $622, $(16,134),
and $(709) ............................................ (118) (1,097) (41,997) (3,614)
--------- --------- --------- ---------
Net income (loss) ....................................... $ 1,287 $ (2,661) $ (48,954) $ (13,750)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
Page 4
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
June 30,
----------------------------------
2002 2001
---------------- ---------------
(Unaudited)
OPERATING ACTIVITIES
Net loss ....................................................... $(48,954) $(13,750)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for obsolete inventories .......................... 15,187 --
Provision for uncollectible accounts receivable ............. 3,365 --
Provision for impairment of assets .......................... 30,646 --
Depreciation and amortization ............................... 22,079 31,710
Amortization of deferred financing costs and premium
on notes .................................................. 957 881
Gain on sale of discontinued operations ..................... -- (2,552)
Deferred income taxes ....................................... (16,781) (1,762)
Changes in operating assets and liabilities ................. (12,479) (18,811)
-------- --------
Net cash used in operating
activities ............................................. (5,980) (4,284)
INVESTING ACTIVITIES
Purchase of property, plant and equipment ...................... (4,948) (13,177)
Net proceeds from sale of discontinued operations .............. -- 5,044
-------- --------
Net cash used in investing
activities ............................................. (4,948) (8,133)
FINANCING ACTIVITIES
Proceeds from long-term debt ................................... 33,400 16,000
Payments on long-term debt and capital lease obligations ....... (14,128) (18,761)
Deferred financing costs ....................................... (858) (907)
-------- --------
Net cash provided by (used in) financing
activities ............................................. 18,414 (3,668)
-------- --------
Increase (decrease) in cash and cash equivalents ............... 7,486 (16,085)
Cash and cash equivalents at beginning of period ............... 4,346 19,478
-------- --------
Cash and cash equivalents at end of period ..................... $ 11,832 $ 3,393
======== ========
See notes to condensed consolidated financial statements.
Page 5
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2002
(In thousands)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States 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 accounting principles generally accepted
in the United States 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, 2002 are not necessarily
indicative of the results that may be expected for the year ending September 30,
2002. For further information, refer to the consolidated financial statements
and footnotes thereto included in Neenah Foundry Company's Annual Report on Form
10-K for the year ended September 30, 2001.
NOTE 2 -- INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141),
and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The Company
adopted SFAS 142 as of October 1, 2001. Under SFAS 142, goodwill and intangible
assets deemed to have indefinite lives are no longer amortized but are subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their estimated useful lives.
Application of the nonamortization provisions of SFAS 142 resulted in a decrease
in the net loss of $5,218 for the nine months ended June 30, 2002. In accordance
with SFAS 141, the Company also reclassified the identifiable intangible assets
related to the assembled workforce and facilities in place with an unamortized
balance of $4,660 and $3,469, respectively, net of related deferred income taxes
of $1,864 and $1,388, respectively, to goodwill at the date of adoption.
The Company has performed the required impairment tests of goodwill as of
October 1, 2001 and concluded that an impairment charge resulting from the
transitional impairment test is not required. The transitional impairment test
was performed based on the expected present value of future cash flows for each
of the Company's reporting units.
Page 6
NOTE 2 -- INTANGIBLE ASSETS (CONTINUED)
June 30, 2002 September 30, 2001
------------------------------- ------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
--------------- ------------- -------------- ------------
Amortizable intangible assets:
Customer lists $31,441 $14,029 $35,041 $12,662
Tradenames 22,553 2,507 27,053 2,392
Other 1,295 623 16,001 7,109
------- ------- ------- -------
Total $55,289 $17,159 $78,095 $22,163
======= ======= ======= =======
The Company does not have any intangible assets deemed to have indefinite lives.
Amortization expense expected to be recognized in subsequent years ending
September 30, is as follows:
<Table>
September 30, 2002 $ 3,832
September 30, 2003 3,832
September 30, 2004 3,832
September 30, 2005 3,832
September 30, 2006 3,832
</Table>
Changes in the carrying amount of goodwill for the nine months ended June 30,
2002, are as follows:
Castings Forgings Other
Segment Segment Segment Total
-------------------------------------------------------------
Balance as of September 30, 2001 .......... $ 168,709 $ 17,296 $ -- $ 186,005
Reclassification of assembled workforce and
facilities in place ..................... 4,595 282 -- 4,877
Impairment charge - see Note 3 ............ (10,668) -- -- (10,668)
-------------------------------------------------------------
Balance as of June 30, 2002 ............... $ 162,636 $ 17,578 $ -- $ 180,214
=============================================================
NOTE 3 -- DISCONTINUED OPERATIONS
In August 2001, the FASB issued Statement of Financial Accounting Standards
No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144). While the adoption of SFAS 144 as of October 1, 2001 did not have a
significant impact on the Company's financial position and results of
operations, the provisions of this standard were applied during the nine months
ended June 30, 2002 as discussed below.
Customer actions and the significant deterioration of the U.S. economy during
the quarter ended December 31, 2001 had a dramatic effect on the operations of
Cast Alloys, Inc. (Cast Alloys). This resulted in a significant reduction in
sales, operating profits and cash flows of Cast Alloys for the three months
ended December 31, 2001. Based on these factors, a goodwill impairment charge of
$10,668 was recognized during the three months ended December 31, 2001 related
to the decline in fair value of the Cast Alloys reporting unit which is included
in the Castings segment.
These events also had a significant impact on the value of Cast Alloys' fixed
assets and long-lived assets with finite lives. Due to the existing impairment
indicators, management assessed the recoverability of these fixed assets and
long-lived assets. As the expected undiscounted cash flows were less than the
carrying value of the related assets, an impairment charge was recognized for
the difference between the fair value and carrying value of such assets of
$19,978 during the three months ended December 31, 2001.
Page 7
In January, 2002 management initiated a plan for the discontinuation of the
operations of Cast Alloys by closing its manufacturing facilities. Severance
costs of approximately $2.2 million associated with this plan were recognized
during the three months ending March 31, 2002. All employees of Cast Alloys were
terminated by April 2002. In accordance with the provisions of SFAS 144, the
results of operations for Cast Alloys have been reported as discontinued
operations in the accompanying statements of operations. Previously, Cast Alloys
was included in the Castings segment. Revenues for Cast Alloys for the three
months ended June 30, 2002 and 2001 were $14 and $16,926, respectively, and
revenues for the nine months ended June 30, 2002 and 2001 were $8,641 and
$40,933, respectively.
On October 2, 2000, the Company sold all of the issued and outstanding shares of
common stock of Hartley Controls Corporation (Hartley) for a cash purchase price
of $5,190, net of fees of $129 and recognized a gain of $2,404, net of income
taxes of $1,603.
NOTE 4 -- INVENTORIES
The components of inventories are as follows:
June 30, September 30,
2002 2001
--------------- ---------------
Raw materials .................... $ 4,097 $ 9,519
Work in process and finished
goods .......................... 39,983 50,210
Supplies ......................... 12,842 11,966
------- -------
$56,922 $71,695
======= =======
If the FIFO method of inventory valuation had been used on all components,
inventories would have been approximately $1,164 and $1,041 higher than reported
at June 30, 2002 and September 30, 2001, respectively.
NOTE 5 -- GUARANTOR SUBSIDIARIES
The following tables present condensed consolidating financial information for
the three and nine months ended June 30, 2002 and 2001 for: (a) the Company and
(b) on a combined basis, the guarantors of the Senior Subordinated Notes, which
include all of the wholly owned subsidiaries of the Company (Subsidiary
Guarantors). Separate financial statements of the Subsidiary Guarantors are not
presented because the guarantors are jointly, severally and unconditionally
liable under the guarantees, and the Company believes separate financial
statements and other disclosures regarding the Subsidiary Guarantors are not
material to investors.
Page 8
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2002
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,146 $ (1,314) $ -- $ 11,832
Accounts receivable, net 31,407 31,910 -- 63,317
Inventories 24,165 32,757 -- 56,922
Refundable income taxes 2,634 -- -- 2,634
Deferred income taxes 5,343 5,426 -- 10,769
Other current assets 1,583 3,090 -- 4,673
Current assets of discontinued operations -- 207 -- 207
----------------------------------------------------------
Total current assets 78,278 72,076 -- 150,354
Investments in and advances to subsidiaries 219,590 (51,834) (167,756) --
Property, plant and equipment, net 84,155 101,323 -- 185,478
Deferred financing costs and identifiable intangible
assets, net 24,970 20,406 -- 45,376
Goodwill 105,766 74,448 -- 180,214
Other assets 3,876 2,343 -- 6,219
----------------------------------------------------------
$ 516,635 $ 218,762 $(167,756) $ 567,641
==========================================================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 6,289 $ 17,037 $ -- $ 23,326
Accrued liabilities 11,896 7,674 -- 19,570
Current portion of long-term debt 41,604 -- -- 41,604
Current portion of capital lease obligations -- 2,393 -- 2,393
----------------------------------------------------------
Total current liabilities 59,789 27,104 -- 86,893
Long-term debt 413,072 -- -- 413,072
Capital lease obligations -- 5,964 -- 5,964
Deferred income taxes 38,690 13,554 -- 52,244
Postretirement benefit obligations 6,687 -- -- 6,687
Other liabilities 4,148 4,384 -- 8,532
Stockholder's equity (deficit) (5,751) 167,756 (167,756) (5,751)
----------------------------------------------------------
$ 516,635 $ 218,762 $(167,756) $ 567,641
==========================================================
Page 9
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
---------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,682 $ (336) $ - $ 4,346
Accounts receivable, net 30,862 38,983 - 69,845
Inventories 21,131 50,564 - 71,695
Refundable income taxes 2,148 - - 2,148
Deferred income taxes 559 2,510 - 3,069
Other current assets 2,361 3,491 - 5,852
---------------------------------------------------------------
Total current assets 61,743 95,212 - 156,955
Investments in and advances to subsidiaries 263,249 (41,712) (221,537) -
Property, plant and equipment, net 87,587 126,246 - 213,833
Deferred financing costs and identifiable intangible assets, net 28,357 35,386 - 63,743
Goodwill, net 104,898 81,107 - 186,005
Other assets 3,891 2,016 - 5,907
---------------------------------------------------------------
$ 549,725 $ 298,255 $ (221,537) $ 626,443
===============================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 7,534 $ 23,034 $ - $ 30,568
Accrued liabilities 20,067 11,451 - 31,518
Current portion of long-term debt 20,424 - - 20,424
Current portion of capital lease obligations - 2,305 - 2,305
---------------------------------------------------------------
Total current liabilities 48,025 36,790 - 84,815
Long-term debt 413,653 - - 413,653
Capital lease obligations - 7,845 - 7,845
Deferred income taxes 35,357 28,362 - 63,719
Postretirement benefit obligations 6,345 - - 6,345
Other liabilities 4,406 3,721 - 8,127
Stockholder's equity 41,939 221,537 (221,537) 41,939
---------------------------------------------------------------
$ 549,725 $ 298,255 $ (221,537) $ 626,443
===============================================================
Page 10
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002
Subsidiary
Company Guarantors Eliminations Consolidated
-----------------------------------------------------------
Net sales $49,524 $ 68,275 $ (2,323) $ 115,476
Cost of sales 33,859 61,867 (2,323) 93,403
-----------------------------------------------------------
Gross margin 15,665 6,408 - 22,073
Selling, general and administrative expenses 3,213 4,187 - 7,400
Amortization of intangible assets 458 498 - 956
-----------------------------------------------------------
Operating income 11,994 1,723 - 13,717
Net interest expense (6,044) (5,344) - (11,388)
-----------------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity in loss
of subsidiaries 5,950 (3,621) - 2,329
Income tax provision (benefit) 2,372 (1,448) - 924
-----------------------------------------------------------
3,578 (2,173) - 1,405
Equity in loss of subsidiaries (2,291) - 2,291 -
-----------------------------------------------------------
Income (loss) from continuing operations 1,287 (2,173) 2,291 1,405
Loss from discontinued operations, net of tax - (118) - (118)
-----------------------------------------------------------
Net income (loss) $ 1,287 $ (2,291) $ 2,291 $ 1,287
===========================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
-------------------------------------------------------------
Net sales $ 45,136 $ 67,731 $ (1,670) $ 111,197
Cost of sales 30,583 62,615 (1,670) 91,528
-------------------------------------------------------------
Gross profit 14,553 5,116 - 19,669
Selling, general and administrative expenses 3,454 4,035 - 7,489
Amortization of intangible assets 1,229 1,424 - 2,653
Loss (gain) on disposal of equipment 341 (1) - 340
-------------------------------------------------------------
Operating income (loss) 9,529 (342) - 9,187
Net interest expense (4,887) (6,033) - (10,920)
-------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity in loss
of subsidiaries 4,642 (6,375) - (1,733)
Income tax provision (benefit) 2,152 (2,321) - (169)
-------------------------------------------------------------
2,490 (4,054) - (1,564)
Equity in loss of subsidiaries (5,151) - 5,151 -
-------------------------------------------------------------
Loss from continuing operations (2,661) (4,054) 5,151 (1,564)
Loss from discontinued operations, net of tax - (1,097) (1,097)
-------------------------------------------------------------
Net loss $ (2,661) $ (5,151) $ 5,151 $ (2,661)
=============================================================
Page 11
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2002
Subsidiary
Company Guarantors Eliminations Consolidated
--------------------------------------------------------------
Net sales $ 117,877 $ 184,447 $ (5,898) $ 296,426
Cost of sales 84,796 174,107 (5,898) 253,005
--------------------------------------------------------------
Gross margin 33,081 10,340 - 43,421
Selling, general and administrative expenses 8,723 12,004 - 20,727
Amortization of intangible assets 1,375 1,496 - 2,871
Gain on disposal of equipment (2) (17) - (19)
--------------------------------------------------------------
Operating income (loss) 22,985 (3,143) - 19,842
Net interest expense (15,406) (16,044) - (31,450)
--------------------------------------------------------------
Income (loss) before income taxes and
equity in loss of subsidiaries 7,579 (19,187) - (11,608)
Income tax provision (benefit) 3,023 (7,674) - (4,651)
--------------------------------------------------------------
4,556 (11,513) - (6,957)
Equity in loss of subsidiaries (53,510) - 53,510 -
--------------------------------------------------------------
Loss from continuing operations (48,954) (11,513) 53,510 (6,957)
Loss from discontinued operations, net of tax - (41,997) - (41,997)
--------------------------------------------------------------
Net loss $ (48,954) $ (53,510) $ 53,510 $ (48,954)
==============================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
--------------------------------------------------------------
Net sales $ 114,706 $ 203,510 $ (3,872) $ 314,344
Cost of sales 82,137 191,102 (3,872) 269,367
--------------------------------------------------------------
Gross profit 32,569 12,408 - 44,977
Selling, general and administrative expenses 10,117 12,162 - 22,279
Amortization of intangible assets 3,688 4,271 - 7,959
Loss on disposal of equipment 280 - - 280
--------------------------------------------------------------
Operating income (loss) 18,484 (4,025) - 14,459
Net interest expense (14,889) (18,104) - (32,993)
--------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity in loss
of subsidiaries 3,595 (22,129) - (18,534)
Income tax provision (benefit) 2,265 (8,259) - (5,994)
--------------------------------------------------------------
1,330 (13,870) - (12,540)
Equity in loss of subsidiaries (17,484) - 17,484 -
--------------------------------------------------------------
Loss from continuing operations (16,154) (13,870) 17,484 (12,540)
Gain on sale of discontinued operations, net of tax 2,404 - - 2,404
Loss from discontinued operations, net of tax - (3,614) - (3,614)
--------------------------------------------------------------
Net loss $ (13,750) $ (17,484) $ 17,484 $ (13,750)
==============================================================
Page 12
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2002
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (48,954) $ (53,510) $ 53,510 $ (48,954)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for obsolete inventories - 15,187 - 15,187
Provision for uncollectible accounts receivable - 3,365 - 3,365
Provision for impairment of assets - 30,646 - 30,646
Depreciation and amortization 7,765 14,314 - 22,079
Amortization of deferred financing costs and
premium on notes 957 - - 957
Deferred income taxes - (16,781) - (16,781)
Changes in operating assets and liabilities (3,118) (9,361) - (12,479)
----------------------------------------------------------------
Net cash used in
operating activities (43,350) (16,140) 53,510 (5,980)
INVESTING ACTIVITIES
Investments in and advances to subsidiaries 34,563 18,947 (53,510) -
Purchase of property, plant and equipment (2,958) (1,990) - (4,948)
----------------------------------------------------------------
Net cash provided by (used in)
investing activities 31,605 16,957 (53,510) (4,948)
FINANCING ACTIVITIES
Proceeds from long-term debt 33,400 - - 33,400
Payments on long-term debt and capital lease obligations (12,335) (1,793) - (14,128)
Deferred financing costs (858) - - (858)
----------------------------------------------------------------
Net cash provided by (used in) financing activities 20,207 (1,793) - 18,414
----------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 8,462 (976) - 7,486
Cash and cash equivalents at beginning
of period 4,684 (338) - 4,346
----------------------------------------------------------------
Cash and cash equivalents at end of period $ 13,146 $ (1,314) $ - $ 11,832
================================================================
Page 13
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
-----------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (13,750) $ (17,484) $ 17,484 $ (13,750)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 10,078 21,632 - 31,710
Amortization of deferred financing costs and
premium on notes 881 - - 881
Gain on sale of discontinued operations (2,552) - - (2,552)
Deferred income taxes (207) (1,555) - (1,762)
Changes in operating assets and liabilities (9,609) (9,202) - (18,811)
-----------------------------------------------------------
Net cash used in
operating activities (15,159) (6,609) 17,484 (4,284)
INVESTING ACTIVITIES
Investments in and advances to subsidiaries 2,232 15,252 (17,484) -
Purchase of property, plant and equipment (3,481) (9,696) - (13,177)
Proceeds from sale of discontinued operations 5,044 - - 5,044
-----------------------------------------------------------
Net cash provided by (used in)
investing activities 3,795 5,556 (17,484) (8,133)
FINANCING ACTIVITIES
Proceeds from long-term debt 16,000 - - 16,000
Payments on long-term debt and capital
lease obligations (16,958) (1,803) - (18,761)
Deferred financing costs (907) - - (907)
-----------------------------------------------------------
Net cash used in financing activities (1,865) (1,803) - (3,668)
-----------------------------------------------------------
Decrease in cash and cash equivalents (13,229) (2,856) - (16,085)
Cash and cash equivalents at beginning
of period 16,982 2,496 - 19,478
-----------------------------------------------------------
Cash and cash equivalents at end of period $ 3,753 $ (360) $ - $ 3,393
===========================================================
Page 14
NOTE 6 -- SEGMENT INFORMATION
The Company has two reportable segments, Castings and Forgings. The Castings
segment manufactures and sells castings for the industrial and municipal
markets, while the Forgings segment manufactures forged components for the
industrial market. The Other segment includes machining operations and freight
hauling.
Three months ended Nine months ended
June 30, June 30,
---------------------------- ---------------------------
2002 2001 2002 2001
------------- ------------- ----------- -------------
Revenues from continuing operations:
Castings $ 108,401 $ 100,463 $ 275,714 $ 284,056
Forgings 6,181 7,150 17,690 19,540
Other 5,726 5,844 15,330 17,473
Elimination of intersegment revenues (4,832) (2,260) (12,308) (6,725)
--------- --------- --------- ---------
Consolidated $ 115,476 $ 111,197 $ 296,426 $ 314,344
========= ========= ========= =========
Income (loss) from continuing operations:
Castings $ 1,405 $ (1,564) $ (6,957) $ (12,540)
Forgings (922) 4 (3,439) (3,265)
Other 101 830 (144) 441
Elimination of intersegment loss (income) 821 (834) 3,583 2,824
--------- --------- --------- ---------
Consolidated $ 1,405 $ (1,564) $ (6,957) $ (12,540)
========= ========= ========= =========
June 30, September 30,
2002 2001
--------- ---------
Total Assets:
Castings $ 667,461 $ 770,044
Forgings 41,991 51,148
Other 16,608 16,149
Elimination of intersegment assets (158,419) (210,898)
--------- ---------
Consolidated $ 567,641 $ 626,443
========= =========
Page 15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Certain matters discussed in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other sections of this
quarterly report are "forward-looking statements" intended to qualify for the
safe harbors from liability established by the Private Securities Litigation
Reform Act of 1995. These forward looking statements can generally be identified
as such because the context of the statement will include words such as the
Company "believes," "anticipates," "expects" or words of similar import.
Similarly, statements that describe the Company's future plans, objectives or
goals are also forward-looking statements. Such forward-looking statements are
subject to certain risks and uncertainties which are described in close
proximity to such statements and which may cause actual results to differ
materially from those currently anticipated. The forward-looking statements made
herein are made only as of the date of this report and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
The following discussions compare the results of operations of the Company for
the three and nine months ended June 30, 2002, to the results of the operations
of the Company for the three and nine months ended June 30, 2001.
RESULTS OF OPERATIONS (dollars in thousands)
Three Months Ended June 30, 2002 and 2001
Net sales. Net sales for the three months ended June 30, 2002 were $115,476
which are $4,279 or 3.9% higher than the quarter ended June 30, 2001. The
increase in net sales was due to increased demand for industrial castings used
in the heavy duty truck market.
Gross margin. Gross margin for the three months ended June 30, 2002 was $22,073,
an increase of $2,404, or 12.2%, as compared to the quarter ended June 30, 2001.
Gross margin as a percentage of net sales increased to 19.1% for the three
months ended June 30, 2002 from 17.7% for the quarter ended June 30, 2001. The
increase in gross margin percentage resulted from a greater utilization of
manufacturing facilities due to higher production levels and the transfer of
certain production to a more efficient manufacturing location.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended June 30, 2002 were $7,400, a
decrease of $89, or 1.2%, as compared to the $7,489 for the quarter ended June
30, 2001. Selling, general and administrative expenses decreased as a percentage
of net sales to 6.4% compared to the 6.7% for the quarter ended June 30, 2001.
The percentage decrease is due to a relatively fixed level of expenses being
spread over a larger sales base.
Amortization of intangible assets. Amortization of intangible assets was $956
for the three months ended June 30, 2002, a decrease of $1,697, or 64.0%, as
compared to the $2,653 for the quarter ended June 30, 2001. The decrease was due
to the adoption of SFAS 142 as of October 1, 2001. Under SFAS 142, goodwill is
no longer amortized.
Operating income. Operating income was $13,717 for the three months ended June
30, 2002, an increase of $4,530 from operating income of $9,187 for the quarter
ended June 30, 2001. The increased operating income was caused by the reduced
amortization expense noted above as well as increased sales and higher margins.
As a percentage of net sales, operating income increased from 8.3% for the
quarter ended June 30, 2001 to 11.9% for the three months ended June 30, 2002.
Net interest expense. Net interest expense was $11,388 for the three months
ended June 30, 2002 compared to $10,920 for the quarter ended June 30, 2001. The
increased interest expense resulted from a higher level of borrowings
outstanding on the Company's Revolving Credit Facility during the three months
ended June 30, 2002 as compared to the three months ended June 30, 2001.
Page 16
Income tax provision. The income tax provision for the three months ended June
30, 2002 and 2001 is reasonable to the amount computed by applying the Company's
statutory rate of approximately 40% to the loss before income taxes.
Loss from discontinued operations. In January, 2002 management initiated a plan
for the discontinuation of the operations of Cast Alloys by closing its
manufacturing facilities. In accordance with the provisions of SFAS 144, the
results of operations for Cast Alloys have been reported as discontinued
operations in the statement of operations.
Nine months ended June 30, 2002 and 2001
Net sales. Net sales for the nine months ended June 30, 2002 were $296,426 which
are $17,918 or 5.7% lower than the nine months ended June 30, 2001. The decrease
in net sales was driven primarily by significant weakness in the demand for
industrial castings used for the heating, ventilation and air conditioning
(HVAC) market and a weakness in demand in the heavy duty truck market during the
first four months of the period.
Gross margin. Gross margin for the nine months ended June 30, 2002 was $43,421,
a decrease of $1,556, or 3.5%, as compared to the nine months ended June 30,
2001. The decrease in gross margin resulted from lower sales volume noted above
and an inability, at the lower production and sales levels, to sufficiently
absorb the overhead costs necessary to effectively run the foundry operations.
Gross margin as a percentage of net sales increased to 14.6% for the nine months
ended June 30, 2002 from 14.3% for the nine months ended June 30, 2001.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the nine months ended June 30, 2002 were $20,727, a
decrease of $1,552, or 7.0%, as compared to the $22,279 for the nine months
ended June 30, 2001. The decrease was due to decreased corporate expense and a
reduction in the Company's salaried workforce due to the decreased sales level.
Selling, general and administrative expenses decreased as a percentage of net
sales to 7.0% compared to the 7.1% for the nine months ended June 30, 2001.
Amortization of intangible assets. Amortization of intangible assets was $2,871
for the nine months ended June 30, 2002, a decrease of $5,088, or 63.9%, as
compared to the $7,959 for the nine months ended June 30, 2001. The decrease was
due to the adoption of SFAS 142 as of October 1, 2001. Under SFAS 142, goodwill
is no longer amortized.
Operating income. Operating income was $19,842 for the nine months ended June
30, 2002, an increase of $5,383 from operating income of $14,459 for the nine
months ended June 30, 2001. The increase was caused by the reduced selling,
general and administrative expenses and amortization expense noted above,
partially offset by the lower gross margin. As a percentage of net sales,
operating income increased from 4.6% for the nine months ended June 30, 2001 to
6.7% for the nine months ended June 30, 2002.
Net interest expense. Net interest expense was $31,450 for the nine months ended
June 30, 2002 compared to $32,993 for the nine months ended June 30, 2001. The
decreased interest expense resulted from the Company's principal debt repayments
and lower interest rates on the Company's Senior Bank Facility, partially offset
by the interest on the higher level of borrowings outstanding on the Company's
Revolving Credit Facility during the nine months ended June 30, 2002 as compared
to the nine months ended June 30, 2001.
Income tax benefit. The income tax benefit for the nine months ended June 30,
2002 and 2001 is reasonable to the amount computed by applying the Company's
statutory rate of approximately 40% to the loss before income taxes.
Gain on sale of discontinued operations. On October 2, 2000, the Company sold
the common stock of Hartley. The disposition of Hartley resulted in a gain of
$2,404, net of tax, which was recognized in the three months ended December 31,
2000.
Page 17
Loss from discontinued operations. Certain events which occurred during the
three months ended December 31, 2001 had a dramatic negative impact on the
operations of the Cast Alloys subsidiary. The significant deterioration of the
U.S. economy caused a substantial downturn in the consumer golf market served by
Cast Alloys. In addition, both of Cast Alloys' two major customers indicated
they would seek alternative supply sources for their golf clubheads. The sale of
Cast Alloys' inventory to parties other than the two major customers was
considered doubtful and a provision of $15,187 was recorded during the three
months ended December 31, 2001 to reduce the inventory to market value.
Additionally, collection of substantially all of the remaining outstanding
receivables was not probable and a provision of $3,265 was recorded during the
three months ended December 31, 2001. The Company also recorded an impairment
charge during the three months ended December 31, 2001 of $30,646 to write down
goodwill, fixed assets and other long-lived assets to their fair values. In
January, 2002 management initiated a plan for the discontinuation of the
operations of Cast Alloys by closing its manufacturing facilities. Severance
costs of approximately $2,200 associated with this plan were recognized during
the three months ending March 31, 2002. All employees of Cast Alloys were
terminated by April 2002. In accordance with the provisions of SFAS 144, the
results of operations for Cast Alloys have been reported as discontinued
operations in the accompanying statements of operations.
LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands)
The Company has outstanding $282,000 principal of 11 1/8% Senior Subordinated
Notes due 2007 (the "Senior Subordinated Notes"). In addition, the Company has a
credit agreement (the "Senior Bank Facility" or "Credit Agreement") providing
for term loans, an Acquisition Loan Facility, and a Revolving Credit Facility of
up to $29,600 At June 30, 2002, there is $28,500 outstanding on the Revolving
Credit Facility, $12,600 outstanding on the Acquisition Loan Facility and
$118,500 outstanding under the term loans.
The Company's liquidity needs will arise primarily from debt service on the
above indebtedness, working capital needs and funding of capital expenditures.
Borrowings under the Senior Bank Facility bear interest at variable interest
rates. Both the Senior Bank Facility and the indentures governing the Senior
Subordinated Notes limit the Company's ability to incur additional indebtedness.
The covenants contained in the Senior Bank Facility also, among other things,
restrict the ability of the Company and its subsidiaries to dispose of assets,
incur guarantee obligations, prepay the Senior Subordinated Notes or amend the
indentures, pay dividends, create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, change the business conducted by the Company, make
capital expenditures or engage in certain transactions with affiliates, and
otherwise restrict corporate activities. These covenants also require the
Company to maintain leverage, interest coverage and senior debt coverage ratios.
Effective December 31, 2001, the Credit Agreement was amended to provide relief
from the above financial ratio covenants through December 31, 2003, to reduce
the amount of the Revolving Credit Facility and define minimum EBITDA and
liquidity covenants. At June 30, 2002, the Company is in compliance with
existing bank covenants.
For the nine months ended June 30, 2002 and June 30, 2001, capital expenditures
were $4,948 and $13,177, respectively. The substantial decrease in capital
expenditures of $8,229 was the result of tighter spending controls placed on
capital expenditures during the nine months ended June 30, 2002.
The Company's principal source of cash to fund its liquidity needs will be net
cash from operating activities and borrowings under the Revolving Credit
Facility. Net cash used in operating activities for the nine months ended June
30, 2002 was $5,980, an increase of $1,696 from cash used in operating
activities for the nine months ended June 30, 2001 of $4,284. The increase in
net cash used in operating activities was the result of the operating losses
incurred by Cast Alloys prior to the discontinuation of its operations and the
closing of its manufacturing facilities.
The Company believes that cash generated from operations and its existing
Revolving Credit Facility under the Senior Bank Facility will be sufficient to
meet its normal operating requirements, including working capital needs and
interest payments on outstanding indebtedness. In conjunction with the amendment
of the Credit Agreement in April 2002, the Company has received cash of $9,900
from its parent company in exchange for the issuance of a PIK note with
principal plus 14% interest payable at the maturity date of December 31, 2005.
Also, the Company believes that the discontinuance of operations of Cast Alloys
should continue to improve the Company's cash position by eliminating the need
to carry excess inventory for the consumer golf market. The Company believes
that these factors should assist the Company in generating sufficient cash to
meet its operating requirements and pay obligations under its existing
indebtedness for the remainder of fiscal 2002.
Page 18
CRITICAL ACCOUNTING POLICIES
Our accounting policies are more fully described in Note 1 of notes to
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended September 30, 2001. As disclosed in Note 1 of notes to
consolidated financial statements, the preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires us to make estimates and assumptions about future events that affect
the amounts reported in the financial statements and accompanying notes. Future
events and their effects cannot be determined with absolute certainty.
Therefore, the determination of estimates requires the exercise of judgment.
Actual results inevitably will differ from those estimates, and such differences
may be material to the financial statements.
The most significant accounting estimates inherent in the preparation of our
financial statements include estimates associated with the evaluation of the
recoverability of certain assets including goodwill, other intangible assets and
fixed assets as well as those estimates used in the determination of reserves
related to the allowance for doubtful accounts, obsolescence, workers
compensation and pensions and other post-retirement benefits. Various
assumptions and other factors underlie the determination of these significant
estimates. The process of determining significant estimates is fact specific and
takes into account factors such as historical experience, product mix, and in
some cases, actuarial techniques. We constantly reevaluate these significant
factors and make adjustments where facts and circumstances dictate.
Historically, actual results have not significantly deviated from those
determined using the estimates described above.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates. The
Company does not use derivative financial instruments for speculative or trading
purposes.
Interest Rate Sensitivity. The Company's earnings are affected by changes
in short-term interest rates as a result of its borrowings under the Senior Bank
Facility. If market interest rates for such borrowings change by 1% during the
remainder of the fiscal year ended September 30, 2002, the Company's interest
expense would increase or decrease by approximately $.4 million. This analysis
does not consider the effects of changes in the level of overall economic
activity that could occur due to interest rate changes. Further, in the event of
an upward change of such magnitude, management could take actions to further
mitigate its exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects, the sensitivity
analysis assumes no changes in the Company's financial structure.
Page 19
NEENAH FOUNDRY COMPANY
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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
None.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEENAH FOUNDRY COMPANY
DATE: August 13, 2002 /s/ Gary LaChey
----------------------------------------------
Gary LaChey
Vice President-Finance, Secretary & Treasurer
(Principal Financial Officer and Duly
Authorized Officer)
Page 20