Filed pursuant to Rules 424(b)(3)
Registration Statement File Nos. 333-111008 to 333-111008-14
Prospectus Supplement dated August 12, 2005
(to the Prospectus Supplements dated January 20, 2005, March 22, 2005 and
June 8, 2005 and the Prospectus dated October 22, 2004)
$133,130,000
NEENAH FOUNDRY COMPANY
11% SENIOR SECURED NOTES DUE 2010
This prospectus supplement should be read in conjunction with the
prospectus supplements dated January 20, 2005, March 22, 2005 and June 8, 2005
and the prospectus dated October 22, 2004 relating to the offer and sale from
time to time by each of the selling noteholders identified in the prospectus of
up to $133,130,000 aggregate principal amount at maturity of our 11% Senior
Secured Notes due 2010. We will not receive any of the proceeds from the sale of
the Notes being sold by the selling Noteholders.
FOR A DISCUSSION OF SPECIFIC RISKS YOU SHOULD CONSIDER, SEE "RISK
FACTORS" BEGINNING ON PAGE 5 OF THE RELATED PROSPECTUS DATED OCTOBER 22, 2004.
This prospectus supplement includes our attached Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2005.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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, 2005
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 registrant as specified 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. 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.
On July 31, 2005, the registrant had 1,000 shares of Common Stock, par value
$100 per share, outstanding, all of which were owned by NFC Castings, Inc., a
wholly owned subsidiary of ACP Holding Company.
1
NEENAH FOUNDRY COMPANY
Form 10-Q Index
For the Quarter Ended June 30, 2005
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets -- Reorganized Neenah Foundry Company as of June 30, 2005 and
September 30, 2004 3
Condensed consolidated statements of operations -- Reorganized Neenah Foundry Company for the three
months ended June 30, 2005 and 2004 4
Condensed consolidated statements of operations -- Reorganized Neenah Foundry Company for the nine
months ended June 30, 2005 and 2004, and for Predecessor Neenah Foundry Company for October 1, 2003 5
Condensed consolidated statements of cash flows -- Reorganized Neenah Foundry Company for the nine
months ended June 30, 2005 and 2004, and for Predecessor Neenah Foundry Company for October 1, 2003 6
Notes to condensed consolidated financial statements -- June 30, 2005 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits 23
Signatures 24
Exhibits 25
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,
2005 2004(1)
----------- -------------
(Unaudited)
ASSETS
Current assets:
Accounts receivable, net ................................... $ 89,706 $ 81,320
Inventories ................................................ 65,140 61,119
Other current assets ....................................... 8,028 6,978
Current assets of discontinued operations .................. 200 200
----------- -------------
Total current assets ............................ 163,074 149,617
Property, plant and equipment ................................ 109,342 98,074
Less accumulated depreciation ................................ 19,084 10,798
----------- -------------
90,258 87,276
Deferred financing costs, net ................................ 2,332 2,566
Identifiable intangible assets, net .......................... 70,974 76,316
Goodwill ..................................................... 86,699 86,699
Other assets ................................................. 4,809 4,966
----------- -------------
$ 418,146 $ 407,440
=========== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ........................................... $ 33,259 $ 29,150
Accrued wages and employee benefits ........................ 14,772 12,881
Accrued interest ........................................... 233 7,140
Other accrued liabilities .................................. 14,855 4,953
Deferred income taxes ...................................... 1,360 1,360
Current portion of long-term debt .......................... 43,423 44,215
----------- -------------
Total current liabilities ....................... 107,902 99,699
Long-term debt ............................................... 238,482 239,586
Deferred income taxes ........................................ 28,636 28,636
Postretirement benefit obligations ........................... 10,980 10,575
Other liabilities ............................................ 18,124 20,160
----------- -------------
Total liabilities ............................... 404,124 398,656
Commitments and contingencies
STOCKHOLDER'S EQUITY:
Common stock, par value $100 per share -- authorized,
issued and outstanding 1,000 shares ................. 100 100
Capital in excess of par value ............................. 5,429 5,429
Retained earnings .......................................... 8,493 3,255
----------- -------------
Total stockholder's equity ...................... 14,022 8,784
----------- -------------
$ 418,146 $ 407,440
=========== =============
See notes to condensed consolidated financial statements.
(1) The balance sheet as of September 30, 2004 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.
3
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Reorganized
----------------------
Three Months Ended
June 30,
----------------------
2005 2004
--------- ---------
Net sales ...................................... $ 145,685 $ 124,717
Cost of sales .................................. 114,338 98,654
--------- ---------
Gross profit ................................... 31,347 26,063
Selling, general and administrative expenses ... 8,884 6,941
Litigation settlement .......................... 6,500 -
Amortization of intangible assets .............. 1,778 1,773
Loss (gain) on disposal of equipment ........... 104 (205)
--------- ---------
Total operating expenses ....................... 17,266 8,509
--------- ---------
Operating income ............................... 14,081 17,554
Net interest expense ......................... (8,328) (8,468)
--------- ---------
Income before income taxes ..................... 5,753 9,086
Income tax provision ........................... 2,302 300
--------- ---------
Net income ..................................... $ 3,451 $ 8,786
========= =========
See notes to condensed consolidated financial statements.
4
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
Reorganized Predecessor
------------------------ -----------
Nine Months Ended
June 30,
------------------------ October 1,
2005 2004 2003
---------- ---------- ----------
Net sales ...................................... $ 399,076 $ 319,655 $ -
Cost of sales .................................. 328,101 268,371 -
---------- ---------- ----------
Gross profit ................................... 70,975 51,284 -
Selling, general and administrative expenses ... 25,168 19,300 -
Litigation settlement .......................... 6,500 - -
Amortization of intangible assets .............. 5,341 5,344 -
Loss (gain) on disposal of equipment ........... 103 (257) -
---------- ---------- ----------
Total operating expenses ....................... 37,112 24,387 -
---------- ---------- ----------
Operating income ............................... 33,863 26,897 -
Net interest expense ......................... (25,128) (25,540) -
Reorganization gain, net ..................... - - 43,943
---------- ---------- ----------
Income from continuing operations before
income taxes ................................. 8,735 1,357 43,943
Income tax provision ........................... 3,497 540 -
---------- ---------- ----------
Income from continuing operations .............. 5,238 817 43,943
Loss from discontinued operations .............. - (359) -
---------- ---------- ----------
Net income ..................................... $ 5,238 $ 458 $ 43,943
========== ========== ==========
See notes to condensed consolidated financial statements.
5
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Reorganized Predecessor
------------------------ -----------
Nine Months Ended
June 30,
------------------------ October 1,
2005 2004 2003
---------- ---------- ----------
OPERATING ACTIVITIES
Net income .......................................................... $ 5,238 $ 458 $ 43,943
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Non-cash reorganization items .................................... - - (68,299)
Depreciation and amortization .................................... 13,944 13,256 -
Amortization of deferred financing costs and discount on notes ... 1,573 2,111 -
Changes in operating assets and liabilities ...................... (5,936) (23,198) -
---------- ---------- ----------
Net cash provided by (used in) operating
activities .................................................. 14,819 (7,373) (24,356)
INVESTING ACTIVITIES
Purchase of property, plant and equipment ........................... (11,499) (9,161) -
---------- ---------- ----------
Net cash used in investing
activities .................................................. (11,499) (9,161) -
FINANCING ACTIVITIES
Net change in revolver balance ...................................... 732 20,131 -
Payments on long-term debt and capital lease obligations ............ (3,901) (3,246) -
Debt issuance costs ................................................. (151) (351) -
---------- ---------- ----------
Net cash provided by (used in) financing
activities .................................................. (3,320) 16,534 -
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents .................... - - (24,356)
Cash and cash equivalents at beginning of period .................... - - 24,356
---------- ---------- ----------
Cash and cash equivalents at end of period .......................... $ - $ - $ -
========== ========== ==========
See notes to condensed consolidated financial statements.
6
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands)
NOTE 1 -- BASIS OF PRESENTATION
On August 5, 2003, Neenah Foundry Company (the Company) filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code with
the United States Bankruptcy Court, District of Delaware (the Bankruptcy Court).
On September 26, 2003, the Bankruptcy Court confirmed the Company's Plan of
Reorganization, and, on October 8, 2003, the Company consummated the Plan of
Reorganization and emerged from its Chapter 11 reorganization proceedings with a
significantly restructured balance sheet.
The Company implemented the fresh start accounting provisions (fresh start) of
the AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code," (SOP 90-7) as of October 1, 2003.
Under fresh start, the fair value of the reorganized Company was allocated among
its assets and liabilities, and its accumulated deficit as of October 1, 2003
was eliminated. The implementation of fresh start has resulted in a substantial
reduction in the carrying value of the Company's long-lived assets, including
property, plant and equipment and intangible assets, and long-term liabilities.
As a result, the predecessor financial statements are not comparable to
financial statements of the reorganized Company.
The Company adopted fresh start accounting as of October 1, 2003. Although the
effective date of the Plan of Reorganization was October 8, 2003, due to the
immateriality of the results of operations for the period between October 1,
2003 and the effective date, the Company has accounted for the consummation of
the Plan of Reorganization as if it had occurred on October 1, 2003 and
implemented fresh start reporting as of that date. Fresh start required that the
Company adjust the historical cost of its assets and liabilities to their fair
value. The fair value of the reorganized Company, or the reorganization value,
of approximately $290,000 was determined by an independent party based on
multiples of earnings before interest, income taxes, depreciation and
amortization (EBITDA) and discounted cash flows under the Company's financial
projections.
Reorganization gain for the Predecessor on October 1, 2003 consisted of the
following:
Net gain on extinguishment of debt $ 168,208
Net loss resulting from fresh start
fair value adjustments to assets
and liabilities (124,265)
---------
Total reorganization gain $ 43,943
=========
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, 2005 are not necessarily
indicative of the results that may be expected for the year ending September 30,
2005. 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, 2004.
NOTE 2 -- INVENTORIES
The components of inventories are as follows:
June 30, September 30,
2005 2004
-------- -------------
Raw materials .................................... $ 7,803 $ 5,218
Work in process and finished goods ............... 42,864 41,566
Supplies ......................................... 14,473 14,335
-------- -------------
$ 65,140 $ 61,119
======== =============
7
8
NOTE 3 -- RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision
of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the
approach in Statement 123(R) is similar to the approach described in Statement
123. However, Statement 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative.
Under the amended compliance dates recently adopted by the SEC, Statement 123(R)
must be adopted by the Company no later than October 1, 2005, the beginning of
the Company's next fiscal year. Early adoption will be permitted in periods in
which financial statements have not yet been issued. The Company expects to
adopt Statement 123(R) on October 1, 2005. The adoption of Statement 123(R) will
not have a material impact on the Company's results of operations or financial
position as the Company has no stock-based compensation plans.
NOTE 4 -- EMPLOYEE BENEFIT PLANS
COMPONENTS OF NET PERIODIC BENEFIT COST
The Company has five defined-benefit pension plans covering the majority of its
hourly employees and also sponsors unfunded defined benefit postretirement
health care plans covering substantially all salaried and hourly employees and
their dependents. Components of net periodic benefit costs are as follows for
the three and nine months ended June 30, 2005 and 2004 (in thousands):
Pension Benefits Postretirement Benefits
--------------------------- ---------------------------
Three Months Ended June 30, Three Months Ended June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------- -------- ------- -------
Service cost $ 535 $ 491 $ 75 $ 60
Interest cost 1,066 896 137 116
Expected return on plan assets (1,194) (890) - -
Amortization of prior service cost (credit) - 10 (6) 11
Recognized net actuarial loss (gain) - 37 (7) -
------- -------- ------- -------
Net periodic benefit cost $ 407 $ 544 $ 199 $ 187
======= ======== ======= =======
Pension Benefits Postretirement Benefits
--------------------------- ---------------------------
Nine Months Ended June 30, Nine Months Ended June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------- -------- ------- -------
Service cost $ 1,508 $ 1,473 $ 225 $ 180
Interest cost 2,833 2,688 413 348
Expected return on plan assets (2,993) (2,670) - -
Amortization of prior service cost (credit) - 30 (19) 33
Recognized net actuarial loss (gain) - 111 (23) -
------- -------- ------- -------
Net periodic benefit cost $ 1,348 $ 1,632 $ 596 $ 561
======= ======== ======= =======
EMPLOYER CONTRIBUTIONS
For the nine months ended June 30, 2005, $3,700 of contributions have been made.
The Company presently anticipates contributing an additional $1,300 to fund its
pension plans in 2005 for a total of $5,000.
9
NOTE 5 -- SUBSEQUENT EVENTS
The Company was involved in a litigation matter related to a proposed sale of
one of its subsidiaries. The matter was settled on August 5, 2005 with the
Company being obligated to pay a cash settlement of $6,500 within 7 business
days. This amount has been accrued in the June 30, 2005 financial statements.
On July 28, 2005, the Company amended its bank Loan and Security Agreement (the
"Credit Facility"). The following principal changes were made to the Credit
Facility: (i) the revolving loan commitment under the Credit Facility was
increased from $70,000 to $92,085 (provided, however, that the outstanding
aggregate amount of revolving loans, letters of credit and term loans provided
under the Credit Facility may not exceed the revolving loan commitment at any
time), (ii) the interest rates applicable to revolving loans and term loans were
reduced, (iii) the maturity of the Credit Facility was extended by one year, to
October 8, 2009 (iv) the Company was provided additional flexibility to pay
deferrable interest on its outstanding 13 % Senior Subordinated Notes due 2013
and to make repayments, prepayments, redemptions and repurchases of the
Subordinated Notes, (v) the Company was authorized to sell Mercer Forge
Corporation and/or Gregg Industries, Inc., subject to certain conditions, and
(vi) the principal financial covenant in the Credit Facility was revised in a
manner that is more favorable to the Company than before.
NOTE 6 -- GUARANTOR SUBSIDIARIES
The following tables present condensed consolidating financial information as of
June 30, 2005 and September 30, 2004 and for the three and nine months ended
June 30, 2005 and 2004 for: (a) the Company and (b) on a combined basis, the
guarantors of the Company's 11% Senior Secured Notes due 2010 and 13% Senior
Subordinated Notes due 2013, 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.
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2005
Subsidiary
Company Guarantors Eliminations Consolidated
----------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ (109) $ 109 $ - $ -
Accounts receivable, net 41,583 48,123 - 89,706
Inventories 27,604 37,536 - 65,140
Other current assets 4,223 4,005 - 8,228
----------- ---------- ------------ ------------
Total current assets 73,301 89,773 - 163,074
Investments in and advances to subsidiaries 119,172 - (119,172) -
Property, plant and equipment, net 35,912 54,346 - 90,258
Deferred financing costs and identifiable
intangible assets, net 55,303 18,003 - 73,306
Goodwill 86,699 - - 86,699
Other assets 1,895 2,914 - 4,809
----------- ---------- ------------ ------------
$ 372,282 $ 165,036 $ (119,172) $ 418,146
=========== ========== ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 6,645 $ 26,614 $ - $ 33,259
Accrued liabilities 20,939 10,281 - 31,220
Current portion of long-term debt 43,364 59 - 43,423
----------- ---------- ------------ ------------
Total current liabilities 70,948 36,954 - # 107,902
Long-term debt 238,408 74 - 238,482
Deferred income taxes 27,747 889 - 28,636
Postretirement benefit obligations 10,980 - - 10,980
Other liabilities 10,177 7,947 - 18,124
Stockholder's equity 14,022 119,172 (119,172) 14,022
----------- ---------- ------------ ------------
$ 372,282 $ 165,036 $ (119,172) $ 418,146
=========== ========== ============ ============
10
NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2004
Subsidiary
Company Guarantors Eliminations Consolidated
----------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,683 $ (1,683) $ - $ -
Accounts receivable, net 39,487 41,833 - 81,320
Inventories 25,481 35,638 - 61,119
Deferred income taxes 4,086 (4,086) - -
Other current assets 3,638 3,540 - 7,178
----------- ---------- ------------ ------------
Total current assets 74,375 75,242 - 149,617
Investments in and advances to subsidiaries 111,982 - (111,982) -
Property, plant and equipment, net 31,683 55,593 - 87,276
Deferred financing costs and identifiable
intangible assets, net 59,816 19,066 - 78,882
Goodwill, net 86,699 - - 86,699
Other assets 1,895 3,071 - 4,966
----------- ---------- ------------ ------------
$ 366,450 $ 152,972 $ (111,982) $ 407,440
=========== ========== ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 8,457 $ 20,693 $ - $ 29,150
Accrued liabilities 16,054 10,280 - 26,334
Current portion of long-term debt 42,632 1,583 - 44,215
----------- ---------- ------------ ------------
Total current liabilities 67,143 32,556 - 99,699
Long-term debt 239,586 - - 239,586
Deferred income taxes 27,747 889 - 28,636
Postretirement benefit obligations 10,575 - - 10,575
Other liabilities 12,615 7,545 - 20,160
Stockholder's equity 8,784 111,982 (111,982) 8,784
----------- ---------- ------------ ------------
$ 366,450 $ 152,972 $ (111,982) $ 407,440
=========== ========== ============ ============
11
NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005
Subsidiary
Company Guarantors Eliminations Consolidated
----------- ---------- ------------ ------------
Net sales $ 67,049 $ 80,324 $ (1,688) $ 145,685
Cost of sales 46,323 69,703 (1,688) 114,338
----------- ---------- ------------ ------------
Gross profit 20,726 10,621 - # 31,347
Selling, general and administrative expenses 4,367 4,517 - 8,884
Litigation settlement 6,500 - - 6,500
Amortization of intangible assets 1,426 352 1,778
Loss (gain) on disposal of equipment (14) 118 - 104
----------- ---------- ------------ ------------
Operating income 8,447 5,634 - 14,081
Net interest expense (4,434) (3,894) - (8,328)
----------- ---------- ------------ ------------
Income before income taxes and equity in
earnings of subsidiaries 4,013 1,740 - 5,753
Income tax provision 1,606 696 - 2,302
----------- ---------- ------------ ------------
2,407 1,044 - 3,451
Equity in income of subsidiaries 1,044 - (1,044) -
----------- ---------- ------------ ------------
Net income $ 3,451 $ 1,044 $ (1,044) $ 3,451
=========== ========== ============ ============
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004
Subsidiary
Company Guarantors Eliminations Consolidated
----------- ---------- ------------ ------------
Net sales $ 57,248 $ 69,055 $ (1,586) $ 124,717
Cost of sales 39,405 60,835 (1,586) 98,654
----------- ---------- ------------ ------------
Gross profit 17,843 8,220 - # 26,063
Selling, general and administrative expenses 3,142 3,799 - 6,941
Amortization of intangible assets 1,426 347 - 1,773
Gain on disposal of equipment (5) (200) - (205)
----------- ---------- ------------ ------------
Operating income 13,280 4,274 - 17,554
Net interest expense (4,454) (4,014) - (8,468)
----------- ---------- ------------ ------------
Income before income taxes and equity in
earnings of subsidiaries 8,826 260 - 9,086
Income tax provision 291 9 - 300
----------- ---------- ------------ ------------
8,535 251 - 8,786
Equity in earnings of subsidiaries 251 - (251) -
----------- ---------- ------------ ------------
Net income $ 8,786 $ 251 $ (251) $ 8,786
=========== ========== ============ ============
12
NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2005
Subsidiary
Company Guarantors Eliminations Consolidated
----------- ---------- ------------ ------------
Net sales $ 172,570 $ 230,983 $ (4,477) $ 399,076
Cost of sales 128,961 203,617 (4,477) 328,101
----------- ---------- ------------ ------------
Gross profit 43,609 27,366 - # 70,975
Selling, general and administrative expenses 12,794 12,374 - 25,168
Litigation settlement 6,500 - - 6,500
Amortization of intangible assets 4,279 1,062 - 5,341
Loss (gain) on disposal of equipment (15) 118 - 103
----------- ---------- ------------ ------------
Operating income 20,051 13,812 - 33,863
Net interest expense (13,354) (11,774) - (25,128)
----------- ---------- ------------ ------------
Income before income taxes and equity in
earnings of subsidiaries 6,697 2,038 - 8,735
Income tax provision 2,681 816 - 3,497
----------- ---------- ------------ ------------
4,016 1,222 - 5,238
Equity in income of subsidiaries 1,222 - (1,222) -
----------- ---------- ------------ ------------
Net income $ 5,238 $ 1,222 $ (1,222) $ 5,238
=========== ========== ============ ============
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2004
Subsidiary
Company Guarantors Eliminations Consolidated
----------- ---------- ------------ ------------
Net sales $ 135,254 $ 188,437 $ (4,036) $ 319,655
Cost of sales 99,002 173,405 (4,036) 268,371
----------- ---------- ------------ ------------
Gross profit 36,252 15,032 - # 51,284
Selling, general and administrative expenses 8,817 10,483 - 19,300
Amortization of intangible assets 4,279 1,065 - 5,344
Gain on disposal of equipment (53) (204) - (257)
----------- ---------- ------------ ------------
Operating income 23,209 3,688 - 26,897
Net interest expense (13,455) (12,085) - (25,540)
----------- ---------- ------------ ------------
Income (loss) from continuing operations
before income taxes and equity in loss
of subsidiaries 9,754 (8,397) - 1,357
Income tax provision (benefit) 3,881 (3,341) - 540
----------- ---------- ------------ ------------
5,873 (5,056) - 817
Equity in loss of subsidiaries (5,415) - 5,415 -
----------- ---------- ------------ ------------
Income (loss) from continuing operations 458 (5,056) 5,415 817
Loss from discontinued operations - (359) - (359)
----------- ---------- ------------ ------------
Net income (loss) $ 458 $ (5,415) $ 5,415 $ 458
=========== ========== ============ ============
13
NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2005
Subsidiary
Company Guarantors Eliminations Consolidated
----------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net income $ 5,238 $ 1,222 $ (1,222) $ 5,238
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,079 7,865 - 13,944
Amortization of deferred financing costs and
discount on notes 1,573 - - 1,573
Changes in operating assets and liabilities 322 (6,258) - (5,936)
----------- ---------- ------------ ------------
Net cash provided by
operating activities 13,212 2,829 (1,222) 14,819
INVESTING ACTIVITIES
Investments in and advances to subsidiaries (7,190) 5,968 1,222 -
Purchase of property, plant and equipment (6,029) (5,470) - (11,499)
----------- ---------- ------------ ------------
Net cash used in
investing activities (13,219) 498 1,222 (11,499)
FINANCING ACTIVITIES
Net change in revolver balance 732 - - 732
Payments on long-term debt and capital lease obligations (2,366) (1,535) - (3,901)
Deferred financing costs (151) - - (151)
----------- ---------- ------------ ------------
Net cash used in financing activities (1,785) (1,535) - (3,320)
----------- ---------- ------------ ------------
Increase (decrease) in cash and cash equivalents (1,792) 1,792 - -
Cash and cash equivalents at beginning
of period 1,683 (1,683) - -
----------- ---------- ------------ ------------
Cash and cash equivalents at end of period $ (109) $ 109 $ - $ -
=========== ========== ============ ============
14
NOTE 6 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 2004
Subsidiary
Company Guarantors Eliminations Consolidated
-------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ 458 $ (5,415) $ 5,415 $ 458
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 5,908 7,348 - 13,256
Amortization of deferred financing costs and
discount on notes 2,111 - - 2,111
Changes in operating assets and liabilities (20,357) (2,841) - (23,198)
-------- ---------- ------------ ------------
Net cash used in
operating activities (11,880) (908) 5,415 (7,373)
INVESTING ACTIVITIES
Investments in and advances to subsidiaries (2,973) 8,388 (5,415) -
Purchase of property, plant and equipment (2,840) (6,321) - (9,161)
-------- ---------- ------------ ------------
Net cash provided by (used in)
investing activities (5,813) 2,067 (5,415) (9,161)
FINANCING ACTIVITIES
Net change in revolver balance 20,131 - 20,131
Payments on long-term debt and capital lease obligations (1,273) (1,973) (3,246)
Deferred financing costs (351) - - (351)
-------- ---------- ------------ ------------
Net cash provided by (used in) financing activities 18,507 (1,973) - 16,534
-------- ---------- ------------ ------------
Increase (decrease) in cash and cash equivalents 814 (814) - -
Cash and cash equivalents at beginning
of period 76 (76) - -
-------- ---------- ------------ ------------
Cash and cash equivalents at end of period $ 890 $ (890) $ - $ -
======== ========== ============ ============
15
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 in the Company's Annual Report
on Form 10-K. 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 Nine months ended
June 30, June 30,
--------------------- ---------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Revenues from continuing operations:
Castings $ 132,528 $ 115,177 $ 359,162 $ 294,594
Forgings 10,034 7,763 33,398 20,124
Other 6,036 6,297 17,306 16,640
Elimination of intersegment revenues (2,913) (4,520) (10,790) (11,703)
--------- --------- --------- ---------
Consolidated $ 145,685 $ 124,717 $ 399,076 $ 319,655
========= ========= ========= =========
Income (loss) from continuing operations:
Castings $ 4,373 $ 8,849 $ 3,670 $ (6,820)
Forgings (18) (666) 1,292 (2,607)
Other 834 863 2,308 1,839
Elimination of intersegment (income) loss (1,738) (260) (2,032) 8,405
--------- --------- --------- ---------
Consolidated $ 3,451 $ 8,786 $ 5,238 $ 817
========= ========= ========= =========
June 30, September 30,
2005 2004
--------- -------------
Total assets:
Castings $ 434,944 $ 420,437
Forgings 9,853 8,110
Other 13,945 12,097
Elimination of intersegment assets (40,596) (33,204)
--------- -------------
Consolidated $ 418,146 $ 407,440
========= =============
16
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 may cause actual results to
differ materially from those currently anticipated. Factors that could cause the
Company's results to differ materially from current expectations include
material disruptions to the major industries served by the Company; continued
price fluctuations in the scrap metal market; developments affecting the
valuation or prospects of the casting and forging industries generally or the
Company in particular; and other factors described or referenced in the
Company's Form 10-K for the year ended September 30, 2004 or subsequent SEC
filings. The forward-looking statements made herein are made only as of the date
of this report and, unless required by law, the Company undertakes no obligation
to update such forward-looking statements to reflect subsequent events or
circumstances.
Due to the Company's emergence from its Chapter 11 proceedings on October 8,
2003, the Company has implemented the "fresh start" accounting provisions of
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code," to its financial statements. Fresh
start requires that, upon the Company's emergence, the Company establish a "fair
value" basis for the carrying value of the assets and liabilities for the
reorganized Company. Although the effective date of the Plan of Reorganization
was October 8, 2003, due to the immateriality of the results of operations for
the period between October 1, 2003 and the effective date, the Company accounted
for the consummation of the Plan of Reorganization as if it had occurred on
October 1, 2003 and implemented fresh start accounting as of that date.
RECENT DEVELOPMENTS
Amendment of Credit Facility. As previously reported, on July 28, 2005, the
Company amended its Credit Facility in several respects, as described in this
Item 2 under "Liquidity and Capital Resources- Credit Facility."
Exploration of Potential Sale Transaction. As previously reported, Neenah
Foundry Company and its indirect parent company, ACP Holding Company, announced
on July 29, 2005 that the Company has engaged Citigroup Global Markets Inc. to
assist it in exploring the potential sale or merger of the Company or a
significant portion of its assets or capital stock. Although there have been
preliminary contacts with a number of potential purchasers, the process is in
its early stages, no sale agreement has been reached and there can be no
assurance as to whether, and if so when or at what price, structure and other
terms and conditions, a transaction may occur. The Company undertakes no
obligation to make any further announcement with respect to this process unless
and until its Board of Directors has approved a definitive transaction.
Settlement of Litigation. As previously reported, on November 22, 2004, the
Company entered into a letter of intent ("LOI") with respect to a proposed
management buyout of all the outstanding stock of our wholly owned subsidiary
Mercer Forge Corporation ("Mercer"). The parties to the LOI, however, were
unable to agree on the terms of a definitive agreement by the extended
termination date of the LOI, which thus has lapsed. The long-lived assets of
Mercer were classified as held for use as of September 30, 2004 and continue to
be so classified. On January 24, 2005, JD Holdings, LLC ("JDH"), one of the
counterparties to the LOI, filed a complaint in the United States District Court
for the Southern District of New York against the Company alleging, among other
things, that the Company breached the terms of the LOI by not consummating the
sale of the stock of Mercer to JDH. The complaint sought an order of specific
performance of the LOI or, in the alternative, no less than $35 million in
damages and, in either case, an order temporarily, preliminarily and permanently
restraining the Company from transferring the stock of Mercer to any third
party.
The Company answered the complaint, denying the material allegations thereof,
and filed a counterclaim against JDH alleging breach of the LOI and seeking
damages for the costs associated with the negotiation of the potential
transaction. The parties agreed to mediate this dispute and the litigation was
stayed pending the outcome of the mediation and of follow-on settlement
discussions.
17
On August 5, 2005, the parties agreed to settle this matter. The settlement
provides for a $6,500 cash payment by the Company to JDH and the exchange of
full and final releases by the parties on behalf of themselves and their
respective members, officers, directors, affiliates and shareholders. Each party
will dismiss with prejudice the claims pending against the other in the Southern
District of New York. The entry into the settlement, and the consequent
avoidance of the costs and distractions of continued litigation, as well as of
the uncertainty associated with the judicial process, was deemed to be in the
best interests of the Company.
RESULTS OF OPERATIONS (dollars in thousands)
The following discussions compare the results of operations of the Company for
the three and nine months ended June 30, 2005, to the results of the operations
of the Company for the three and nine months ended June 30, 2004.
Three Months Ended June 30, 2005 and 2004
Net sales. Net sales for the three months ended June 30, 2005 were $145,685,
which are $20,968 or 16.8% higher than the quarter ended June 30, 2004.
Approximately $6,200, which represents 30% of the total increase in net sales,
was due to the increased cost of steel scrap charged to customers. Most of the
remainder of the increase was due to increased demand for industrial castings
used in the heavy duty truck market, increased shipments of municipal products
and new business at all locations.
Gross profit. Gross profit for the three months ended June 30, 2005 was $31,347,
an increase of $5,284, or 20.3%, as compared to the quarter ended June 30, 2004.
Gross profit as a percentage of net sales increased to 21.5% for the three
months ended June 30, 2005 from 20.9% for the quarter ended June 30, 2004. The
majority of the increase in gross profit resulted from sales volume increases
and the efficiencies achieved by operating the manufacturing plants at higher
capacity. The Company continues to recover the increased cost of its steel scrap
through its surcharge mechanism for industrial products. These increased scrap
metal costs are recovered on a delayed basis from the Company's industrial
customers and require a general price increase to recover the costs from
municipal customers.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended June 30, 2005 were $8,884, an
increase of $1,943, or 28.0%, as compared to the $6,941 for the quarter ended
June 30, 2004. The increase was due to increased expense for incentive plans
based on improved profitability, the writeoff of a large accounts receivable
balance of a customer who filed for Chapter 11 bankruptcy protection and
increases in fringe benefit costs. Selling, general and administrative expenses
increased as a percentage of net sales to 6.1% compared to the 5.6% for the
quarter ended June 30, 2004.
Litigation settlement. As explained in the "Recent Developments" section above,
the Company has settled the litigation matter with JDH regarding the proposed
sale of Mercer. The $6,500 cash payment was accrued in the June 30, 2005
financial statements.
Amortization of intangible assets. Amortization of intangible assets was $1,778
for the three months ended June 30, 2005, which is comparable to the $1,773 for
the quarter ended June 30, 2004.
Operating income. Operating income was $14,081 for the three months ended June
30, 2005, a decrease of $3,473 from operating income of $17,554 for the quarter
ended June 30, 2004. The decreased operating income was caused by the accrual of
the $6.5 million litigation settlement and increased selling, general and
administrative expenses, partially offset by the positive factors discussed
above under gross profit. As a percentage of net sales, operating income
decreased from 14.1% for the three months ended June 30, 2004 to 9.7% for the
three months ended June 30, 2005.
Net interest expense. Net interest expense was $8,328 for the three months ended
June 30, 2005 compared to $8,468 for the quarter ended June 30, 2004. Interest
expense for the three months ended June 30, 2005 included amortization of bond
discount of $396 and amortization of deferred financing costs of $144.
Income tax provision. The income tax provision for the three months ended June
30, 2005 is based on the Company's 2005 estimated effective tax rate of
approximately 40%. The income tax provision recorded for the three months ended
June 30, 2004 is substantially less than the amount computed by applying the
Company's statutory rate of approximately 40% to the income before income taxes
due to the realization of the net operating loss generated for the six months
ended March 31, 2004 to substantially offset future taxable income in the three
month period ended June 30, 2004. Prior to this period, it was deemed more
likely than not that the Company would not be able to utilize the net operating
loss to offset future taxable income.
18
'
Nine Months Ended June 30, 2005 and 2004
Net sales. Net sales for the nine months ended June 30, 2005 were $399,076,
which are $79,421 or 24.8% higher than for the nine months ended June 30, 2004.
Approximately $31,100, which represents 39% of the total increase in net sales,
was due to the increased cost of steel scrap charged to customers. Most of the
remainder of the increase was due to increased demand for industrial castings
used in the heavy duty truck market, increased shipments of municipal products
and new business at all locations.
Gross profit. Gross profit for the nine months ended June 30, 2005 was $70,975,
an increase of $19,691, or 38.4%, as compared to the nine months ended June 30,
2004. Gross profit as a percentage of net sales increased to 17.8% for the nine
months ended June 30, 2005 from 16.0% for the nine months ended June 30, 2004.
The majority of the increase in gross profit resulted from sales volume
increases and the efficiencies achieved by operating the manufacturing plants at
higher capacity. The Company continues to recover the increased cost of its
steel scrap through its surcharge mechanism for industrial products. These
increased scrap metal costs are recovered on a delayed basis from the Company's
industrial customers and require a general price increase to recover the costs
from municipal customers.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the nine months ended June 30, 2005 were $25,168, an
increase of $5,868, or 30.4%, as compared to the $19,300 for the nine months
ended June 30, 2004. The increase was due to increased expense for incentive
plans based on improved profitability, the writeoff of a large accounts
receivable balance of a customer who filed for Chapter 11 bankruptcy protection,
a decrease in the rebate received from countervailing duties assessed on
imported products, and increases in fringe benefit costs, specifically health
care and workers' compensation costs. Also, legal and professional costs
increased in comparison to the prior year; however, the prior year cost level
was abnormally low due to the majority of the 2004 legal and professional fees
related to bankruptcy reorganization, which were recorded in fresh start
accounting. Selling, general and administrative expenses increased as a
percentage of net sales to 6.3% compared to 6.0% for the nine months ended June
30, 2004.
Litigation settlement. As explained in the "Recent Developments" section above,
the Company has settled the litigation matter with JDH regarding the proposed
sale of Mercer. The $6,500 cash payment was accrued in the June 30, 2005
financial statements.
Amortization of intangible assets. Amortization of intangible assets was $5,341
for the nine months ended June 30, 2005, which is comparable to the $5,344 for
the nine months ended June 30, 2004.
Operating income. Operating income was $33,863 for the nine months ended June
30, 2005, an increase of $6,966 from operating income of $26,897 for the nine
months ended June 30, 2004. The increased operating income was caused by the
factors discussed above under gross profit partially offset by the accrual of
the $6.5 million litigation settlement and increased selling, general and
administrative expenses. As a percentage of net sales, operating income
increased from 8.4% for the nine months ended June 30, 2004 to 8.5% for the nine
months ended June 30, 2005.
Net interest expense. Net interest expense was $25,128 for the nine months ended
June 30, 2005 compared to $25,540 for the nine months ended June 30, 2004.
Interest expense for the nine months ended June 30, 2005 included amortization
of bond discount of $1,188 and amortization of deferred financing costs of $385.
Income tax provision. The income tax provision for the nine months ended June
30, 2005 and 2004 is based on the Company's estimated effective tax rate of
approximately 40%.
19
LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands)
Credit Facility
On July 28, 2005, the Company amended its bank Loan and Security Agreement (the
"Credit Facility"). The following principal changes were made to the Credit
Facility: (i) the revolving loan commitment under the Credit Facility was
increased from $70,000 to $92,085 (provided, however, that the outstanding
aggregate amount of revolving loans, letters of credit and term loans provided
under the Credit Facility may not exceed the revolving loan commitment at any
time), (ii) the interest rates applicable to revolving loans and term loans were
reduced, (iii) the maturity of the Credit Facility was extended by one year, to
October 8, 2009 (iv) the Company was provided additional flexibility to pay
deferrable interest on its outstanding 13 % Senior Subordinated Notes due 2013
and to make repayments, prepayments, redemptions and repurchases of the
Subordinated Notes, (v) the Company was authorized to sell Mercer Forge
Corporation and/or Gregg Industries, Inc., subject to certain conditions, and
(vi) the principal financial covenant in the Credit Facility was revised in a
manner that is more favorable to the Company than before.
The Company's Credit Facility, as amended on July 28, 2005, consists of a
revolving credit facility of up to $92,085 (with a $5,000 sublimit available for
letters of credit and term loans in the aggregate original principal amount of
$22,085). The Credit Facility matures on October 8, 2009, and bears interest at
rates based on the lenders' Base Rate, as defined in the Credit Facility, or an
adjusted rate based on LIBOR. Availability under the Credit Facility is based on
various advance rates against the Company's accounts receivable and inventory.
Amounts under the revolving credit facility may be borrowed, repaid and
reborrowed subject to the terms of the facility. At June 30, 2005, the Company
had approximately $40,200 outstanding under the revolving credit facility, which
includes $13,800 borrowed on June 30, 2005 for an interest payment due July 1,
2005, and approximately $17,400 outstanding under the term loan facility. No
portion of the term loan, once repaid, may be reborrowed.
Substantially all of the Company's wholly owned subsidiaries are co-borrowers
with the Company under the Credit Facility and are jointly and severally liable
with the Company for all obligations under the Credit Facility, subject to
customary exceptions for transactions of this type. In addition, NFC Castings,
Inc. (NFC), the Company's immediate parent, and the remaining wholly owned
subsidiaries of the Company jointly and severally guarantee the Company's
obligations under the Credit Facility, subject to customary exceptions for
transactions of this type. The borrowers' and guarantors' obligations under the
Credit Facility are secured by a first priority perfected security interest,
subject to customary restrictions, in substantially all of the tangible and
intangible assets of the Company and its subsidiaries. The senior secured notes,
and the guarantees in respect thereof, are equal in right of payment to the
Credit Facility, and the guarantees in respect thereof. The liens in respect of
the senior secured notes are junior to the liens securing the Credit Facility
and guarantees thereof.
Voluntary prepayments may be made at any time on the term loan borrowings or the
revolving borrowings upon customary prior notice. Prepayments on the term loan
borrowings may be made at any time without premium or penalty unless a
simultaneous reduction of the revolving loan commitment amount is being made or
if any such reduction of the revolving loan commitment amount has been made
previously. Reductions of the revolving loan commitment are subject to certain
premiums specified in the Credit Facility. Mandatory repayments are required
under certain circumstances, including a sale of assets or the issuance of debt
or equity.
The Credit Facility requires the Company to observe certain customary
conditions, affirmative covenants and negative covenants including financial
covenants. The Credit Facility also contains events of default customary for
these types of facilities, including, without limitation, payment defaults,
material misrepresentations, covenant defaults, bankruptcy and a change of
ownership of the Company, NFC or ACP Holding Company, NFC's immediate parent. At
June 30, 2005, the Company is in compliance with existing bank covenants.
20
11% Senior Secured Notes due 2010. The Company has outstanding Senior Secured
Notes due 2010 in the principal amount of $133,130, with a coupon rate of 11%.
These notes were issued at a price which included a discount of $11,692. The
obligations under the senior secured notes are equal in right of payment to the
Credit Facility and the associated guarantees. The liens securing the senior
secured notes are junior to the liens securing the Credit Facility and
guarantees thereof. Interest on the senior secured notes is payable on a
semi-annual basis. The Company's obligations under the notes are guaranteed on a
secured basis by each of its wholly owned subsidiaries. Subject to the
restrictions in the Credit Facility, the notes are redeemable at the Company's
option in whole or in part at any time on or after September 30, 2007, with not
less than 30 days nor more than 60 days notice, at the redemption price
specified in the indenture governing the notes (105.500% of the principal amount
redeemed beginning September 30, 2007, 104.125% beginning September 30, 2008,
and 102.750% beginning September 30, 2009 and thereafter), plus accrued and
unpaid interest up to the redemption date. Upon the occurrence of a "change of
control" as defined in the indenture governing the notes, the Company may be
required to make an offer to purchase the secured notes at 101% of the
outstanding principal amount thereof, plus accrued and unpaid interest up to the
purchase date. The secured notes contain customary covenants typical to this
type of financing, such as limitations on (1) indebtedness, (2) restricted
payments, (3) liens, (4) restrictions on distributions from restricted
subsidiaries, (5) sale of 'assets, (6) affiliate transactions, (7) mergers and
consolidations and (8) lines of business. The secured notes also contain
customary events of default typical to this type of financing, such as (1)
failure to pay principal and/or interest when due, (2) failure to observe
covenants, (3) certain events of bankruptcy, (4) the rendering of certain
judgments or (5) the loss of any guarantee.
13% Senior Subordinated Notes due 2013. The Company has outstanding Senior
Subordinated Notes due 2013 in the principal amount of $100,000, with a coupon
rate of 13%. The obligations under the senior subordinated notes are senior to
the Company's subordinated unsecured indebtedness, if any, and are subordinate
to the Credit Facility and the senior secured notes. Interest on the senior
subordinated notes is payable on a semi-annual basis. Not less than five percent
of the interest on the senior subordinated notes will be paid in cash and up to
8% interest may be paid-in-kind. The Company's obligations under the notes are
guaranteed on an unsecured basis by each of its wholly owned subsidiaries.
Subject to the restrictions in the Credit Facility, the notes are redeemable at
our option in whole or in part at any time, with not less than 30 days nor more
than 60 days notice, at the redemption price specified in the indenture
governing the notes (currently 102% of the principal amount redeemed; 101%
beginning September 30, 2005, and 100% beginning September 30, 2006 and
thereafter), plus accrued and unpaid interest up to the redemption date. Upon
the occurrence of a "change of control" as defined in the indenture governing
the notes, the Company may be required to make an offer to purchase the
subordinated notes at 101% of the outstanding principal amount thereof, plus
accrued and unpaid interest up to the purchase date. The subordinated notes
contain customary covenants typical to this type of financing, such as
limitations on (1) indebtedness, (2) restricted payments, (3) liens, (4)
restrictions on distributions from restricted subsidiaries, (5) sale of assets,
(6) affiliate transactions, (7) mergers and consolidations and (8) lines of
business. The subordinated notes also contain customary events of default
typical to this type of financing, such as, (1) failure to pay principal and/or
interest when due, (2) failure to observe covenants, (3) certain events of
bankruptcy, (4) the rendering of certain judgments or (5) the loss of any
guarantee.
For the nine months ended June 30, 2005 and June 30, 2004, capital expenditures
were $11,584 and $9,161, respectively. Both periods represent a level of capital
expenditures necessary to maintain equipment and facilities. The 2005 period
includes some make-up of deferred capital projects during the nine months ended
June 30, 2005.
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. After the borrowing of $13,800 on June 30, 2005 to make the interest
payment due July 1, 2005, the Company still had remaining availability of
$29,284 under the revolving credit facility at June 30, 2005. Net cash provided
by operating activities for the nine months ended June 30, 2005 was $14,819, an
increase of $22,192 from cash used by operating activities for the nine months
ended June 30, 2004 of $7,373. The increase in net cash provided by operating
activities was due to the increase in net income, as well as a smaller increase
in the accounts receivable balance relative to the start of the fiscal year.
Future Capital Needs. Despite the significant decrease in leverage as a result
of the Plan of Reorganization, the Company is still significantly leveraged and
its ability to meet debt obligations will depend upon future operating
performance which will be affected by many factors, some of which are beyond the
Company's control. Based on the Company's current level of operations, the
Company anticipates that its operating cash flows and available credit
facilities will be sufficient to fund anticipated operational investments,
including working capital and capital expenditure needs, for at least the next
twelve months. If, however, the Company is unable to service its debt
requirements as they become due or is unable to maintain ongoing compliance with
restrictive covenants, the Company may be forced to adopt alternative strategies
that may include reducing or delaying capital expenditures, selling assets,
restructuring or refinancing indebtedness or seeking additional equity capital.
There can be no assurances that any of these strategies could be effected on
satisfactory terms, if at all.
21
A reconciliation of EBITDA for the three and nine months ended June 30, 2005,
compared to the three and nine months ended June 30, 2004, is provided below:
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- --------------------
2005 2004 2005 2004
--------- -------- -------- ---------
Net income............................................. $ 3,451 $ 8,786 $ 5,238 $ 458
Income tax provision................................... 2,302 300 3,497 540
Net interest expense................................... 8,328 8,468 25,128 25,540
Depreciation and amortization.......................... 4,645 4,390 13,944 13,256
Loss (gain) on disposal of equipment................... 104 (205) 103 (257)
Loss from discontinued operations...................... - - - 359
Gregg non-cash inventory charge........................ - 157 - 1,181
Deeter non-cash inventory charge....................... - - - 624
Gregg write-off of lease deposits...................... (39) - 65 -
--------- -------- -------- ---------
EBITDA (as defined below) $ 18,791* $ 21,896 $ 47,975* $ 41,701
========= ======== ======== =========
EBITDA is defined in the Company's Credit Facility and is generally calculated
as the sum of net income (excluding non-cash charges), income taxes, interest
expense, and depreciation and amortization. EBITDA is not a measure prepared in
accordance with accounting principles generally accepted in the United States,
but is being presented because the Company and the Company's lenders use it to
evaluate operating performance relative to the financial covenants contained in
the Company's Credit Facility, and management believes that certain investors
use information concerning EBITDA as a measure of a company's performance and
ability to service its debt. EBITDA should not be considered a substitute for,
or more meaningful than, income from operations, net income, cash flows or
other measures of financial performance prepared in accordance with accounting
principles generally accepted in the United States, EBITDA, as presented by the
Company, may not be comparable to similarly titled measures reported by other
companies.
- ----------------
*EBITDA for the three months and nine months ended June 30, 2005 is $6,500
lower than it would have been without the $6,500 litigation settlement accrued
in the three months ended June 30, 2005.
CONTRACTUAL OBLIGATIONS
There have been no material changes to our contractual obligations outside the
ordinary course of our business from those disclosed in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2004.
CRITICAL ACCOUNTING POLICIES
Our accounting policies are more fully described in Note 4 of notes to
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended September 30, 2004. As disclosed in Note 4 of notes to
consolidated financial statements, the preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires the Company 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 the
Company's 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, inventory obsolescence,
workers compensation and pensions and other post-retirement benefits. Various
assumptions and other factors impact 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. The Company constantly reevaluates these
significant factors and makes adjustments where facts and circumstances dictate.
Historically, actual results have not significantly deviated from those
determined using the estimates described above.
22
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. Although the senior secured notes and senior
subordinated notes are subject to fixed interest rates, the Company's earnings
are affected by changes in short-term interest rates as a result of its
borrowings under the Credit Facility. If market interest rates for such
borrowings change by 1% during the remainder of the fiscal year ending September
30, 2005, the Company's interest expense would increase or decrease by
approximately $146 thousand. 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
Disclosure Control and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of the Company's disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (Exchange Act)) as of the end of the period
covered by this report. Based upon such evaluation, the Chief Executive Officer
Chief Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that the Company files or submits
under the Exchange Act.
Internal Control Over Financial Reporting. There have not been any changes in
the Company's internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal
quarter to which this report relates that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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NEENAH FOUNDRY COMPANY
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The following should be read in conjunction with Item 3, Legal Proceedings
in Part I of our Annual Report on Form 10-K for the fiscal year ended
September 30, 2004 and Item 1, Legal Proceedings in Part II of our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.
See "Recent Developments" in Item 2 in Part I of this report for
information concerning the settlement of a legal proceeding which is
incorporated herein by reference.
We are involved in routine litigation incidental to our business. Such
litigation is not, in our opinion, likely to have a material adverse
effect on our financial condition or results of operations.
Item 6. EXHIBITS
(a) Exhibits
10.1 Amendment No. 1 dated July 28, 2005, to Loan and Security Agreement
dated as of October 8, 2003, by and among Neenah Foundry Company,
its subsidiaries party thereto, the various lenders party thereto
and Fleet Capital Corporation, as agent (Incorporated by reference
to Exhibit 10.1 to the Company's Form 8-K filed on August 3, 2005).
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certification of Periodic Financial Report by CEO and CFO Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of the Securities 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 11, 2005 /s/ Gary W. LaChey
-------------------------------------------
Gary W. LaChey
Corporate Vice President - Finance
(Principal Financial Officer and Duly
Authorized Officer)
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