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 December 31, 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.(1) Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
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 January 31, 2003
Common Stock, Class B, $100 par value- 0 shares as of January 31, 2003
(1) The registrant is filing this report pursuant to certain of its indenture
obligations and not as required under Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Page 1
NEENAH FOUNDRY COMPANY
Form 10-Q Index
For the Quarter Ended December 31, 2002
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets -- December 31, 2002 and September 30, 2002 3
Condensed consolidated statements of operations -- Three months ended December 31, 2002
and 2001 4
Condensed consolidated statements of cash flows -- Three months ended December 31, 2002 and 2001 5
Notes to condensed consolidated financial statements -- December 31, 2002 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 14
Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
Certifications 18
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)
December 31 September 30
2002 2002(1)
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................ $ 26,632 $ 26,354
Accounts receivable, net ................................................. 41,788 56,453
Inventories .............................................................. 57,090 51,267
Refundable income taxes .................................................. - 14,850
Deferred income taxes .................................................... 15,744 15,744
Other current assets ..................................................... 6,305 5,769
Current assets of discontinued operations ................................ 557 4,233
--------- ---------
Total current assets ......................................... 148,116 174,670
Property, plant and equipment .............................................. 281,725 278,755
Less accumulated depreciation .............................................. 110,825 105,190
--------- ---------
170,900 173,565
Deferred financing costs, net .............................................. 6,818 6,656
Identifiable intangible assets, net ........................................ 36,219 37,173
Goodwill ................................................................... 180,214 180,214
Other assets ............................................................... 10,153 6,365
Non-current assets of discontinued operations .............................. - 3,830
--------- ---------
$ 552,420 $ 582,473
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable ......................................................... $ 13,426 $ 22,591
Income taxes payable ..................................................... 221 -
Accrued liabilities ...................................................... 18,137 29,271
Current portion of long-term debt ........................................ 40,917 40,917
Current portion of capital lease obligations ............................. 2,357 2,353
Current liabilities of discontinued operations ........................... 248 1,403
--------- ---------
Total current liabilities .................................... 75,306 96,535
Long-term debt ............................................................. 407,020 410,515
Capital lease obligations .................................................. 4,246 4,816
Deferred income taxes ...................................................... 56,971 56,971
Postretirement benefit obligations ......................................... 6,810 6,696
Other liabilities .......................................................... 18,628 18,300
Non-current liabilities of discontinued operations ......................... - 582
--------- ---------
Total liabilities ............................................ 568,981 594,415
Commitments and contingencies
STOCKHOLDER'S 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 ...................................................... (60,182) (55,563)
Accumulated other comprehensive loss ..................................... (7,796) (7,796)
--------- ---------
Total stockholder's deficit .................................. (16,561) (11,942)
--------- ---------
$ 552,420 $ 582,473
========= =========
See notes to condensed consolidated financial statements.
(1) The balance sheet as of September 30, 2002 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
December 31,
---------------------------
2002 2001
------------ ------------
(Unaudited)
Net sales .................................................... $ 84,334 $ 84,105
Cost of sales ................................................ 72,169 73,691
------------ ------------
Gross margin ................................................. 12,165 10,414
Selling, general and administrative expenses ................. 5,816 6,446
Amortization of intangible assets ............................ 954 958
Gain on disposal of equipment ................................ (9) (19)
------------ ------------
Total operating expenses ..................................... 6,761 7,385
------------ ------------
Operating income ............................................. 5,404 3,029
Net interest expense ......................................... (11,488) (9,953)
------------ ------------
Loss from continuing operations before .......................
income taxes ................................................. (6,084) (6,924)
Income tax benefit ........................................... (2,436) (2,804)
------------ ------------
Loss from continuing operations .............................. (3,648) (4,120)
Loss on sale of discontinued operations, net of
income tax benefit of $(484) ............................... (726) -
Loss from discontinued operations, net of income tax
benefit of $(163) and $(17,540) ............................ (245) (36,954)
------------ ------------
Net loss ..................................................... $ (4,619) $(41,074)
============ ============
See notes to condensed consolidated financial statements.
Page 4
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
December 31,
-----------------------------
2002 2001
----------- -----------
(Unaudited)
OPERATING ACTIVITIES
Net loss ................................................................... $ (4,619) $(41,074)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for obsolete inventories ...................................... - 15,187
Provision for uncollectible accounts receivable ......................... - 3,265
Provision for impairment of assets ...................................... - 30,646
Depreciation and amortization ........................................... 6,892 8,281
Amortization of deferred financing costs and premium on notes ........... 433 308
Loss on sale of discontinued operations ................................. 1,210 -
Deferred income taxes ................................................... - (15,496)
Changes in operating assets and liabilities ............................ 3,140 (5,874)
Net cash provided by (used in) operating
activities ......................................................... 7,056 (4,757)
----------- -----------
INVESTING ACTIVITIES
Purchase of property, plant and equipment .................................. (3,119) (2,279)
Net proceeds from sale of discontinued operations .......................... 1,038 -
----------- -----------
Net cash used in investing
activities ......................................................... (2,081) (2,279)
FINANCING ACTIVITIES
Proceeds from long-term debt ............................................... - 23,500
Payments on long-term debt and capital lease obligations ................... (3,947) (6,716)
Deferred financing costs ................................................... (750) -
----------- -----------
Net cash provided by (used in) financing
activities ......................................................... (4,697) 16,784
----------- -----------
Increase in cash and cash equivalents ...................................... 278 9,748
Cash and cash equivalents at beginning of period ........................... 26,354 4,346
----------- -----------
Cash and cash equivalents at end of period ................................. $ 26,632 $ 14,094
=========== ===========
See notes to condensed consolidated financial statements.
Page 5
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 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 months ended December 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending September 30,
2003. 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, 2002.
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.
The Company has performed the required impairment tests of goodwill as of July
1, 2002 and concluded that an impairment charge resulting from the impairment
test is not required. The impairment test was performed based on the expected
present value of future cash flows for each of the Company's reporting units.
December 31, 2002 September 30, 2002
------------------------------ -----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------ --------------- ----------- ---------------
Amortizable intangible assets:
Customer lists $31,441 $15,597 $31,441 $14,814
Tradenames 22,553 2,790 22,553 2,649
Other 1,295 683 1,295 653
------------ --------------- ----------- ---------------
Total $55,289 $19,070 $55,289 $18,116
============ =============== =========== ===============
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:
2003 $ 3,832
2004 3,832
2005 3,832
2006 3,832
2007 3,195
Page 6
NOTE 3 -- DISCONTINUED OPERATIONS
During 2002 management initiated a plan for the discontinuation of the
operations of Cast Alloys, Inc.(Cast Alloys) by closing its manufacturing
facilities. In accordance with the provisions of SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", 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 December 31, 2001
were $6,769.
On December 27, 2002, the Company sold substantially all of the assets of
Belcher Corporation (Belcher) for $4,513, comprised of cash ($2,013), a note
receivable ($1,500) and preferred stock ($1,000). The result of the transaction,
net of fees of $975, was a loss on sale of $726, net of income taxes of $484.
With the exception of pension liabilities and post-retirement benefits of
employees retiring prior to December 27, 2002, the buyer assumed all liabilities
of Belcher in connection with the sale.
In accordance with the provisions of SFAS 144, the results of operations for
Belcher have been reported as discontinued operations in the accompanying
statements of operations. Previously, Belcher was included in the Castings
segment. Revenues for Belcher for the three months ended December 31, 2002 and
2001 were $3,186 and $3,993, respectively.
NOTE 4 -- INVENTORIES
The components of inventories are as follows:
December 31, September 30,
2002 2002
------------- -------------
Raw materials ...................................... $ 4,541 $ 4,021
Work in process and finished goods ................. 39,501 34,853
Supplies ........................................... 13,048 12,393
------------- -------------
$57,090 $51,267
============= =============
If the FIFO method of inventory valuation had been used on all components,
inventories would have been approximately $1,717 and $1,457 higher than reported
at December 31, 2002 and September 30, 2002, respectively.
NOTE 5 -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and nullifies Emerging Issues Task Force No. 94-3. The adoption of SFAS
146 as of October 1, 2003, did not have a material impact on the Company's
consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". SFAS 148 amends SFAS 123, "Accounting
for Stock-Based Compensation", to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
Since the Company has no stock-based compensation programs, the adoption of SFAS
148 will have no impact to the Company.
NOTE 6 -- GUARANTOR SUBSIDIARIES
The following tables present condensed consolidating financial information as of
December 31, 2002 and September 30, 2002 and for the three months ended December
31, 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 7
NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 30,212 $ (3,580) $ - $ 26,632
Accounts receivable, net 19,780 22,008 - 41,788
Inventories 21,249 35,841 - 57,090
Refundable income taxes - - - -
Deferred income taxes 8,720 7,024 - 15,744
Other current assets 2,874 3,431 - 6,305
Current assets of discontinued operations - 557 - 557
----------------------------------------------------------------
Total current assets 82,835 65,281 - 148,116
Investments in and advances to subsidiaries 201,938 (35,182) (166,756) -
Property, plant and equipment, net 82,732 88,168 - 170,900
Deferred financing costs and identifiable intangible assets, net 23,626 19,411 - 43,037
Goodwill 105,765 74,449 - 180,214
Other assets 4,186 5,967 - 10,153
----------------------------------------------------------------
$ 501,082 $ 218,094 $(166,756) $ 552,420
================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 3,885 $ 9,541 $ - $ 13,426
Income taxes payable 221 - - 221
Accrued liabilities 10,071 8,066 - 18,137
Current portion of long0term debt 40,917 - - 40,917
Current portion of capital lease obligations - 2,357 - 2,357
Current liabilities of discontinued operations - 248 - 248
----------------------------------------------------------------
Total current liabilities 55,094 20,212 - 75,306
Long0term debt 407,020 - 407,020
Capital lease obligations - 4,246 - 4,246
Deferred income taxes 36,603 20,368 - 56,971
Postretirement benefit obligations 6,810 - - 6,810
Other liabilities 12,116 6,512 - 18,628
Stockholder's equity (deficit) (16,561) 166,756 (166,756) (16,561)
----------------------------------------------------------------
$ 501,082 $ 218,094 $(166,756) $ 552,420
================================================================
Page 8
NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2002
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 29,290 $ (2,936) $ - $ 26,354
Accounts receivable, net 30,829 25,624 - 56,453
Inventories 20,535 30,732 - 51,267
Refundable income taxes 14,850 - - 14,850
Deferred income taxes 8,720 7,024 - 15,744
Other current assets 3,372 2,397 - 5,769
Current assets of discontinued operations - 4,233 - 4,233
----------------------------------------------------------------
Total current assets 107,596 67,074 - 174,670
Investments in and advances to subsidiaries 198,664 (24,033) (174,631) -
Property, plant and equipment, net 83,523 90,042 - 173,565
Deferred financing costs and identifiable intangible assets, net 23,922 19,907 - 43,829
Goodwill, net 105,765 74,449 - 180,214
Other assets 4,191 2,174 - 6,365
Non-current assets of discontinued operations - 3,830 - 3,830
----------------------------------------------------------------
$ 523,661 $ 233,443 $(174,631) $ 582,473
================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 7,740 $ 14,851 $ - $ 22,591
Accrued liabilities 21,035 8,236 - 29,271
Current portion of long-term debt 40,917 - - 40,917
Current portion of capital lease obligations - 2,353 - 2,353
Current liabilities of discontinued operations - 1,403 - 1,403
----------------------------------------------------------------
Total current liabilities 69,692 26,843 - 96,535
Long-term debt 410,515 - - 410,515
Capital lease obligations - 4,816 - 4,816
Deferred income taxes 36,603 20,368 - 56,971
Postretirement benefit obligations 6,696 - - 6,696
Other liabilities 12,097 6,203 - 18,300
Non-current liabilities of discontinued operations - 582 - 582
Stockholder's equity (deficit) (11,942) 174,631 (174,631) (11,942)
----------------------------------------------------------------
$ 523,661 $ 233,443 $(174,631) $ 582,473
================================================================
Page 9
NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2002
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------------
Net sales $ 34,633 $ 51,077 $ (1,376) $ 84,334
Cost of sales 25,817 47,728 (1,376) 72,169
----------------------------------------------------------------
Gross margin 8,816 3,349 - 12,165
Selling, general and administrative expenses 2,135 3,681 - 5,816
Amortization of intangible assets 458 496 - 954
Gain on disposal of equipment - (9) - (9)
----------------------------------------------------------------
Operating income (loss) 6,223 (819) - 5,404
Net interest expense (5,854) (5,634) - (11,488)
----------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity in loss
of subsidiaries 369 (6,453) - (6,084)
Income tax benefit (352) (2,084) - (2,436)
----------------------------------------------------------------
721 (4,369) - (3,648)
Equity in loss of subsidiaries (5,340) - 5,340 -
----------------------------------------------------------------
Loss from continuing operations (4,619) (4,369) 5,340 (3,648)
Loss on sale of discontinued operations, net of tax - (726) - (726)
Loss from discontinued operations, net of tax - (245) - (245)
----------------------------------------------------------------
Net loss $ (4,619) $ (5,340) $ 5,340 $ (4,619)
================================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------------
Net sales $ 34,696 $ 51,083 $ (1,674) $ 84,105
Cost of sales 25,639 49,726 (1,674) 73,691
----------------------------------------------------------------
Gross profit 9,057 1,357 - 10,414
Selling, general and administrative expenses 2,658 3,788 - 6,446
Amortization of intangible assets 458 500 - 958
Gain on disposal of equipment (2) (17) - (19)
----------------------------------------------------------------
Operating income (loss) 5,943 (2,914) - 3,029
Net interest expense (4,718) (5,235) - (9,953)
----------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and equity in loss
of subsidiaries 1,225 (8,149) - (6,924)
Income tax provision (benefit) 477 (3,281) - (2,804)
----------------------------------------------------------------
748 (4,868) - (4,120)
Equity in loss of subsidiaries (41,822) - 41,822 -
----------------------------------------------------------------
Loss from continuing operations (41,074) (4,868) 41,822 (4,120)
Loss from discontinued operations, net of tax - (36,954) - (36,954)
----------------------------------------------------------------
Net loss $(41,074) $(41,822) $ 41,822 $(41,074)
================================================================
Page 10
NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2002
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (4,619) $ (5,340) $ 5,340 $ (4,619)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,633 4,259 - 6,892
Amortization of deferred financing costs and
premium on notes 433 - - 433
Loss on sale of discontinued operations - 1,210 - 1,210
Changes in operating assets and liabilities 12,171 (9,031) - 3,140
----------------------------------------------------------------
Net cash provided by (used in)
operating activities 10,618 (8,902) 5,340 7,056
INVESTING ACTIVITIES
Investments in and advances to subsidiaries (4,181) 9,521 (5,340) -
Purchase of property, plant and equipment (1,384) (1,735) - (3,119)
Net proceeds from sale of discontinued operations - 1,038 - 1,038
Net cash provided by (used in)
investing activities ----------------------------------------------------------------
(5,565) 8,824 (5,340) (2,081)
FINANCING ACTIVITIES
Payments on long-term debt and capital lease obligations (3,340) (607) - (3,947)
Deferred financing costs (750) - - (750)
----------------------------------------------------------------
Net cash used in financing activities (4,090) (607) - (4,697)
----------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 963 (685) - 278
Cash and cash equivalents at beginning
of period 29,249 (2,895) - 26,354
----------------------------------------------------------------
Cash and cash equivalents at end of period $ 30,212 $ (3,580) $ - $ 26,632
================================================================
Page 11
NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
----------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $(41,074) $(41,822) $ 41,822 $(41,074)
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 - 3,265 - 3,265
Provision for impairment of assets - 30,646 - 30,646
Depreciation and amortization 2,590 5,691 - 8,281
Amortization of deferred financing costs and
premium on notes 308 - - 308
Deferred income taxes - (15,496) - (15,496)
Changes in operating assets and liabilities (780) (5,094) - (5,874)
----------------------------------------------------------------
Net cash used in
operating activities (38,956) (7,623) 41,822 (4,757)
INVESTING ACTIVITIES
Investments in and advances to subsidiaries 33,012 8,810 (41,822) -
Purchase of property, plant and equipment (1,342) (937) - (2,279)
----------------------------------------------------------------
Net cash provided by (used in)
investing activities 31,670 7,873 (41,822) (2,279)
FINANCING ACTIVITIES
Proceeds from long-term debt 23,500 - - 23,500
Payments on long-term debt and capital
lease obligations (6,101) (615) - (6,716)
----------------------------------------------------------------
Net cash provided by (used in) financing activities 17,399 (615) - 16,784
----------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 10,113 (365) - 9,748
Cash and cash equivalents at beginning
of period 4,684 (338) - 4,346
----------------------------------------------------------------
Cash and cash equivalents at end of period $ 14,797 $ (703) $ - $ 14,094
================================================================
Page 12
NOTE 7 -- 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.
The Company evaluates performance and allocates resources based on the operating
income before depreciation and amortization charges of each segment. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies. Intersegment sales and
transfers are recorded at cost plus a share of operating profit. The following
segment information is presented for continuing operations:
Three months ended
December 31,
--------------------------
2002 2001
----------- -----------
Revenues from continuing operations:
Castings $ 79,197 $ 76,826
Forgings 3,840 6,062
Other 5,049 4,692
Elimination of intersegment revenues (3,752) (3,475)
----------- -----------
Consolidated $ 84,334 $ 84,105
=========== ===========
Income (loss) from continuing operations:
Castings $ (8,333) $ (4,120)
Forgings (2,271) (1,287)
Other 129 (201)
Elimination of intersegment loss 6,827 1,488
----------- -----------
Consolidated $ (3,648) $ (4,120)
=========== ===========
December 31, September 30,
2002 2002
----------- -----------
Total Assets:
Castings $ 659,210 $ 681,754
Forgings 40,949 41,584
Other 14,546 16,494
Elimination of intersegment assets (162,285) (157,359)
----------- -----------
Consolidated $ 552,420 $ 582,473
=========== ===========
Page 13
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 months ended December 31, 2002, to the results of the operations of
the Company for the three months ended December 31, 2001.
RESULTS OF OPERATIONS (dollars in thousands)
Three Months Ended December 31, 2002 and 2001
Net sales. Net sales for the three months ended December 31, 2002 were $84,334
which are $229 or 0.3% higher than the quarter ended December 31, 2001. The
increase in net sales was due to a slight increase in demand for industrial
castings used in the heating, ventilation and air conditioning (HVAC) market and
selling price increases at various locations, offset by a decline in sales in
the forgings segment.
Gross margin. Gross margin for the three months ended December 31, 2002 was
$12,165, an increase of $1,751, or 16.8%, as compared to the quarter ended
December 31, 2001. Gross margin as a percentage of net sales increased to 14.4%
for the three months ended December 31, 2002 from 12.4% for the quarter ended
December 31, 2001. The increase in gross margin resulted from improved
productivity and cost controls implemented in the manufacturing process and
selling price increases at various locations.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended December 31, 2002 were
$5,816, a decrease of $630, or 9.8%, as compared to the $6,446 for the quarter
ended December 31, 2001. Selling, general and administrative expenses decreased
as a percentage of net sales to 6.9% compared to the 7.7% for the quarter ended
December 31, 2001. The decrease is due to a charge in the prior year for
severance costs on a former officer of the Company and an increase in the rebate
received from countervailing duties assessed on imported products in the current
year.
Amortization of intangible assets. Amortization of intangible assets was $954
for the three months ended December 31, 2002, a decrease of $4, or 0.4%, as
compared to the $958 for the quarter ended December 31, 2001.
Operating income. Operating income was $5,404 for the three months ended
December 31, 2002, an increase of $2,375 from operating income of $3,029 for the
quarter ended December 31, 2001. The increased operating income was the result
of higher margins and reduced selling, general and administrative expenses. As a
percentage of net sales, operating income increased from 3.6% for the quarter
ended December 31, 2001 to 6.4% for the three months ended December 31, 2002.
Net interest expense. Net interest expense from continuing operations was
$11,488 for the three months ended December 31, 2002 compared to $9,953 for the
quarter ended December 31, 2001. The increased interest expense resulted from
$1,105 of interest being allocated to discontinued operations for the quarter
ended December 31, 2001 and from a higher level of borrowings outstanding on the
Company's Revolving Credit Facility during the three months ended December 31,
2002 as compared to the three months ended December 31, 2001.
Page 14
Income tax benefit. The income tax benefit for the three months ended December
31, 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 December, 2002 the Company sold the assets
of Belcher Corporation (Belcher). The disposition of Belcher resulted in a loss
of $726, net of tax, which was recognized in the three months ended December 31,
2002. In accordance with the provisions of SFAS 144, the results of operations
for Belcher have been reported as discontinued operations in the statement of
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 for the
three months ended December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands)
The Company has outstanding $284,700 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"), as amended,
providing for term loans in two tranches, with Tranche A maturing in September
2003 and Tranche B maturing in September 2005, an Acquisition Loan Facility
maturing in June 2004, and a Revolving Credit Facility of up to $29,600 (of
which $1,100 is reserved for letter of credits) maturing in September 2003. At
December 31, 2002, there is $28,500 outstanding on the Revolving Credit
Facility, $9,000 outstanding on the Acquisition Loan Facility and $115,800
outstanding under the term loans. The company also has outstanding a $9,900 PIK
Note maturing in December 2005.
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, net worth and interest 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 from $50.0 million to $29.6 million and define
minimum EBITDA and liquidity covenants. At December 31, 2002, the Company is in
compliance with existing bank covenants.
For the three months ended December 31, 2002 and December 31, 2001, capital
expenditures were $3,119 and $2,279, respectively. The increase in capital
expenditures of $790 was the result of a return to a level of capital
expenditures necessary to maintain equipment and facilities.
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 provided by operating activities for the three months ended
December 31, 2002 was $7,056, an increase of $11,813 from cash used in operating
activities for the three months ended December 31, 2001 of $4,757. The increase
in net cash provided by operating activities was primarily the result of a tax
refund received in December, 2002.
The Company continues to closely monitor its cash position with regards to being
able to meet its normal operating requirements, including working capital needs
and scheduled principal and interest payments on outstanding indebtedness. In
December, 2002 the Company received an income tax refund of $18,400 from the
carryback of net operating losses which will assist the Company in its efforts
to cover its operating requirements and pay obligations under its existing
indebtedness for the remainder of fiscal 2003. The Company's ability to meet its
operating requirements in fiscal 2004 is dependent on the overall economy and
the Company's operating performance.
Page 15
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, 2002. 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, 2003, the Company's interest
expense would increase or decrease by approximately $1.2 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.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. In accordance with Rule
13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), within 90
days prior to the filing date of this quarterly report on Form 10-Q, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the Company's President and Chief Executive
Officer and Corporate Vice President - Finance, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
defined in Rule 13a-14 (c) under the Exchange Act). Based upon their evaluation
of these disclosure controls and procedures, the President and Chief Executive
Officer and Corporate Vice President - Finance concluded that the disclosure
controls and procedures were effective as of the date of such evaluation to
ensure that material information relating to the Company, including its
consolidated subsidiaries, was made known to them by others within those
entities, particularly during the period in which this Quarterly Report on Form
10-Q was being prepared. One of the consolidated subsidiaries had inadequate
controls and procedures at the time the Company acquired it. The Company has
made substantial progress to resolve these inadequacies and is continuing to
address them. This issue was considered in the evaluation of disclosure controls
and procedures for the Company but did not affect the conclusion referred to
above.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Page 16
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: February 13, 2003 /s/ Gary LaChey
------------------------------------
Gary LaChey
Corporate Vice President - Finance
(Principal Financial Officer and
Duly Authorized Officer)
Page 17
CERTIFICATIONS
I, William M. Barrett, President and Chief Executive Officer of Neenah Foundry
Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Neenah
Foundry Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and
procedures to ensure that material information
relating to the registrant, including its
consolidated subsidiaries, is made known to us
by others within those entities, particularly
during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this quarterly report
(the "Evaluation Date"); and
c) presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report
financial data and have identified for the
registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/William M. Barrett
-------------------------------------
William M. Barrett
President and Chief Executive Officer
Page 18
CERTIFICATIONS
I, Gary W. LaChey, Corporate Vice President - Finance of Neenah Foundry
Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Neenah
Foundry Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and
procedures to ensure that material information
relating to the registrant, including its
consolidated subsidiaries, is made known to us
by others within those entities, particularly
during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this quarterly report
(the "Evaluation Date"); and
c) presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report
financial data and have identified for the
registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/Gary W. LaChey
------------------------------------
Gary W. LaChey
Corporate Vice President - Finance