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, 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, 54957
P.O. Box 729, Neenah, Wisconsin (Zip Code)
(Address of principal
executive offices)
(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 a large accelerated filer, an
accelerated flier, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated Filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (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 practicable date.
On January 31, 2006, 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 December 31, 2005
Page
----
Part I. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets -- Neenah Foundry Company as of
December 31, 2005 and September 30, 2005 3
Condensed consolidated statements of operations -- Neenah Foundry Company
for the three months ended December 31, 2005 and 2004 4
Condensed consolidated statements of cash flows -- Neenah Foundry Company
for the three months ended December 31, 2005 and 2004 5
Notes to condensed consolidated financial statements -- December 31, 2005 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Part II. Other Information
Item 6. Exhibits 20
Signatures 21
Exhibits 22
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,
2005 2005(1)
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash .................................................... $ -- $ 3,484
Accounts receivable, net ................................ 69,296 85,795
Inventories ............................................. 62,421 59,123
Deferred income taxes ................................... 3,304 3,304
Other current assets .................................... 5,980 6,897
-------- --------
Total current assets .............................. 141,001 158,603
Property, plant and equipment .............................. 116,769 113,398
Less accumulated depreciation .............................. 25,318 22,148
-------- --------
91,451 91,250
Deferred financing costs, net .............................. 2,068 2,192
Identifiable intangible assets, net ........................ 67,412 69,192
Goodwill ................................................... 86,699 86,699
Other assets ............................................... 4,768 4,619
-------- --------
$393,399 $412,555
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ........................................ $ 24,787 $ 30,305
Income taxes payable .................................... 750 5,562
Accrued wages and employee benefits ..................... 10,341 16,586
Accrued interest ........................................ 200 7,134
Other accrued liabilities ............................... 2,651 2,411
Current portion of long-term debt ....................... 38,598 33,668
-------- --------
Total current liabilities ......................... 77,327 95,666
Long-term debt ............................................. 237,779 238,086
Deferred income taxes ...................................... 23,759 23,759
Postretirement benefit obligations ......................... 10,482 10,404
Other liabilities .......................................... 25,979 27,287
-------- --------
Total liabilities ................................. 375,326 395,202
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 .......................................... 19,070 18,350
Accumulated other comprehensive loss ....................... (6,526) (6,526)
-------- --------
Total stockholder's equity ........................ 18,073 17,353
-------- --------
$393,399 $412,555
======== ========
See notes to condensed consolidated financial statements.
(1) The balance sheet as of September 30, 2005 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)
Three Months Ended
December 31,
-------------------
2005 2004
-------- --------
Net sales ........................................ $121,714 $121,864
Cost of sales .................................... 102,624 102,696
-------- --------
Gross profit ..................................... 19,090 19,168
Selling, general and administrative expenses ..... 7,959 7,953
Amortization of intangible assets ................ 1,780 1,783
Gain on disposal of equipment .................... (5) (1)
-------- --------
Total operating expenses ......................... 9,734 9,735
-------- --------
Operating income ................................. 9,356 9,433
Net interest expense .......................... (8,225) (8,411)
-------- --------
Income before income taxes ....................... 1,131 1,022
Income tax provision ............................. 411 410
-------- --------
Net income ....................................... $ 720 $ 612
======== ========
See notes to condensed consolidated financial statements.
4
NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
December 31,
------------------
2005 2004
-------- -------
OPERATING ACTIVITIES
Net income ...................................................... $ 720 $ 612
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................ 4,984 4,627
Amortization of deferred financing costs and discount on
notes ..................................................... 520 516
Changes in operating assets and liabilities .................. (10,530) (5,565)
-------- -------
Net cash provided by (used in) operating
activities ............................................. (4,306) 190
INVESTING ACTIVITIES
Purchase of property, plant and equipment ....................... (3,405) (4,822)
-------- -------
Net cash used in investing
activities ............................................. (3,405) (4,822)
FINANCING ACTIVITIES
Net change in revolver balance .................................. 4,924 6,097
Proceeds from long-term debt .................................... 94 --
Payments on long-term debt and capital lease obligations ........ (791) (1,450)
Debt issuance costs ............................................. -- (15)
-------- -------
Net cash provided by financing
activities ............................................. 4,227 4,632
-------- -------
Increase (decrease) in cash and cash equivalents ................ (3,484) --
Cash and cash equivalents at beginning of period ................ 3,484 --
-------- -------
Cash and cash equivalents at end of period ...................... $ -- $ --
======== =======
See notes to condensed consolidated financial statements.
5
NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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, 2005 are not necessarily
indicative of the results that may be expected for the year ending September 30,
2006. 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, 2005.
NOTE 2 -- INVENTORIES
The components of inventories are as follows:
December 31, September 30,
2005 2005
------------ -------------
Raw materials ....................... $ 7,545 $ 6,905
Work in process and finished goods .. 39,244 37,088
Supplies ............................ 15,632 15,130
------- -------
$62,421 $59,123
======= =======
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.
The Company adopted Statement 123(R) on October 1, 2005. The adoption of
Statement 123(R) did not have an impact on the Company's results of operations
or financial position as the Company has no stock-based compensation plans.
6
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 months ended December 31, 2005 and 2004 (in thousands):
Pension Benefits Postretirement Benefits
------------------ -----------------------
Three Months Ended Three Months Ended
December 31, December 31,
------------------ -----------------------
2005 2004 2005 2004
------- ----- ----- ----
Service cost $ 668 $ 486 $ 68 $ 75
Interest cost 1,051 884 160 138
Expected return on plan assets (1,140) (900) -- --
Amortization of prior service cost (credit) -- -- (10) (6)
Recognized net actuarial loss (gain) 5 -- (108) (8)
------- ----- ----- ----
Net periodic benefit cost $ 584 $ 470 $ 110 $199
======= ===== ===== ====
EMPLOYER CONTRIBUTIONS
For the three months ended December 31, 2005, $1,800 of contributions have been
made. The Company presently anticipates contributing an additional $3,900 to
fund its pension plans in fiscal 2006 for a total of $5,700.
7
NOTE 5 -- GUARANTOR SUBSIDIARIES
The following tables present condensed consolidating financial information as of
December 31, 2005 and September 30, 2005 and for the three months ended December
31, 2005 and 2004 for: (a) Neenah Foundry Company ("Neenah") and (b) on a
combined basis, the guarantors of the 11% Senior Secured Notes due 2010 and 13%
Senior Subordinated Notes due 2013, which include all of the wholly owned
subsidiaries of Neenah (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
DECEMBER 31, 2005
Subsidiary
Neenah Guarantors Eliminations Consolidated
-------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ (347) $ 347 $ -- $ --
Accounts receivable, net 29,988 39,308 -- 69,296
Inventories 24,992 37,429 -- 62,421
Deferred income taxes 4,537 (1,233) -- 3,304
Other current assets 3,332 2,648 -- 5,980
-------- -------- --------- --------
Total current assets 62,502 78,499 -- 141,001
Investments in and advances to subsidiaries 112,168 -- (112,168) --
Property, plant and equipment, net 37,201 54,250 -- 91,451
Deferred financing costs and identifiable
intangible assets, net 52,186 17,294 -- 69,480
Goodwill 86,699 -- -- 86,699
Other assets 1,834 2,934 -- 4,768
-------- -------- --------- --------
$352,590 $152,977 $(112,168) $393,399
======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 5,972 $ 18,815 $ -- $ 24,787
Net intercompany payable -- 81,523 (81,523) --
Income taxes payable 799 (49) -- 750
Accrued liabilities 4,775 8,417 -- 13,192
Current portion of long-term debt 38,580 18 -- 38,598
-------- -------- --------- --------
Total current liabilities 50,126 108,724 (81,523) 77,327
Long-term debt 237,623 156 -- 237,779
Deferred income taxes 20,539 3,220 -- 23,759
Postretirement benefit obligations 10,482 -- -- 10,482
Other liabilities 15,747 10,232 -- 25,979
Stockholder's equity 18,073 30,645 (30,645) 18,073
-------- -------- --------- --------
$352,590 $152,977 $(112,168) $393,399
======== ======== ========= ========
8
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2005
Subsidiary
Neenah Guarantors Eliminations Consolidated
-------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,952 $ (1,468) $ -- $ 3,484
Accounts receivable, net 37,085 48,710 -- 85,795
Inventories 22,754 36,369 -- 59,123
Deferred income taxes 4,537 (1,233) -- 3,304
Other current assets 3,908 2,989 -- 6,897
-------- -------- --------- --------
Total current assets 73,236 85,367 -- 158,603
Investments in and advances to subsidiaries 114,430 -- (114,430) --
Property, plant and equipment, net 36,519 54,731 -- 91,250
Deferred financing costs and identifiable
intangible assets, net 53,736 17,648 -- 71,384
Goodwill, net 86,699 -- -- 86,699
Other assets 1,834 2,785 -- 4,619
-------- -------- --------- --------
$366,454 $160,531 $(114,430) $412,555
======== ======== ========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 8,442 $ 21,863 $ -- $ 30,305
Net intercompany payable -- 81,907 (81,907) --
Income taxes payable 5,562 -- -- 5,562
Accrued liabilities 15,304 10,827 -- 26,131
Current portion of long-term debt 33,658 10 -- 33,668
-------- -------- --------- --------
Total current liabilities 62,966 114,607 (81,907) 95,666
Long-term debt 238,015 71 -- 238,086
Deferred income taxes 20,539 3,220 -- 23,759
Postretirement benefit obligations 10,404 -- -- 10,404
Other liabilities 17,177 10,110 -- 27,287
Stockholder's equity 17,353 32,523 (32,523) 17,353
-------- -------- --------- --------
$366,454 $160,531 $(114,430) $412,555
======== ======== ========= ========
9
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2005
Subsidiary
Neenah Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
Net sales $52,373 $70,886 $(1,545) $121,714
Cost of sales 39,489 64,680 (1,545) 102,624
------- ------- ------- --------
Gross profit 12,884 6,206 -- 19,090
Selling, general and administrative expenses 4,105 3,854 -- 7,959
Amortization of intangible assets 1,426 354 -- 1,780
Loss (gain) on disposal of equipment (6) 1 -- (5)
------- ------- ------- --------
Operating income 7,359 1,997 -- 9,356
Net interest expense (4,353) (3,872) -- (8,225)
------- ------- ------- --------
Income (loss) before income taxes and equity in
loss of subsidiaries 3,006 (1,875) -- 1,131
Income tax provision (benefit) 1,093 (682) -- 411
------- ------- ------- --------
1,913 (1,193) -- 720
Equity in loss of subsidiaries (1,193) -- 1,193 --
------- ------- ------- --------
Net income (loss) $ 720 $(1,193) $ 1,193 $ 720
======= ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2004
Subsidiary
Neenah Guarantors Eliminations Consolidated
------- ---------- ------------ ------------
Net sales $55,035 $68,296 $(1,467) $121,864
Cost of sales 42,958 61,205 (1,467) 102,696
------- ------- ------- --------
Gross profit 12,077 7,091 -- 19,168
Selling, general and administrative expenses 4,326 3,627 -- 7,953
Amortization of intangible assets 1,427 356 -- 1,783
Gain on disposal of equipment (1) -- -- (1)
------- ------- ------- --------
Operating income 6,325 3,108 -- 9,433
Net interest expense (4,436) (3,975) -- (8,411)
------- ------- ------- --------
Income (loss) before income taxes and equity
in loss of subsidiaries 1,889 (867) -- 1,022
Income tax provision 408 2 -- 410
------- ------- ------- --------
1,481 (869) -- 612
Equity in loss of subsidiaries (869) -- 869 --
------- ------- ------- --------
Net income (loss) $ 612 $ (869) $ 869 $ 612
======= ======= ======= ========
10
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2005
Subsidiary
Neenah Guarantors Eliminations Consolidated
-------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ 720 $(1,193) $ 1,193 $ 720
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 2,167 2,817 -- 4,984
Amortization of deferred financing costs and
discount on notes 520 -- -- 520
Changes in operating assets and liabilities (13,680) 3,150 -- (10,530)
-------- ------- ------- --------
Net cash provided by (used in)
operating activities (10,273) 4,774 1,193 (4,306)
INVESTING ACTIVITIES
Investments in and advances to subsidiaries 2,262 (1,069) (1,193) --
Purchase of property, plant and equipment (1,423) (1,982) -- (3,405)
-------- ------- ------- --------
Net cash provided by (used in)
investing activities 839 (3,051) (1,193) (3,405)
FINANCING ACTIVITIES
Net change in revolver balance 4,924 -- -- 4,924
Proceeds from long-term debt -- 94 -- 94
Payments on long-term debt and capital lease
obligations (789) (2) -- (791)
-------- ------- ------- --------
Net cash provided by financing activities 4,135 92 -- 4,227
-------- ------- ------- --------
Increase (decrease) in cash and cash equivalents (5,299) 1,815 -- (3,484)
Cash and cash equivalents at beginning
of period 4,952 (1,468) -- 3,484
-------- ------- ------- --------
Cash and cash equivalents at end of period $ (347) $ 347 $ -- $ --
======== ======= ======= ========
11
NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2004
Subsidiary
Neenah Guarantors Eliminations Consolidated
-------- ---------- ------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ 612 $ (869) $ 869 $ 612
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,027 2,600 -- 4,627
Amortization of deferred financing costs and
discount on notes 516 -- -- 516
Changes in operating assets and liabilities (299) (5,266) -- (5,565)
-------- ------- ----- -------
Net cash provided by (used in)
operating activities 2,856 (3,535) 869 190
INVESTING ACTIVITIES
Investments in and advances to subsidiaries (7,499) 8,368 (869) --
Purchase of property, plant and equipment (2,974) (1,848) -- (4,822)
-------- ------- ----- -------
Net cash provided by (used in)
investing activities (10,473) 6,520 (869) (4,822)
FINANCING ACTIVITIES
Net change in revolver balance 6,097 -- 6,097
Payments on long-term debt and capital lease obligations (417) (1,033) (1,450)
Deferred financing costs (15) -- -- (15)
-------- ------- ----- -------
Net cash provided by (used in) financing activities 5,665 (1,033) -- 4,632
-------- ------- ----- -------
Increase (decrease) in cash and cash equivalents (1,952) 1,952 -- --
Cash and cash equivalents at beginning
of period 1,683 (1,683) -- --
-------- ------- ----- -------
Cash and cash equivalents at end of period $ (269) $ 269 $ -- $ --
======== ======= ===== =======
12
NOTE 6 -- SEGMENT INFORMATION
The Company has two reportable segments, Castings and Forgings. The Castings
segment manufactures and sells castings for the industrial and municipal
markets, while the Forgings segment manufactures forged components for the
industrial market. The Other segment includes machining operations and freight
hauling.
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
December 31,
-------------------
2005 2004
-------- --------
Revenues from continuing operations:
Castings $109,078 $109,718
Forgings 9,906 10,695
Other 5,292 5,261
Elimination of intersegment revenues (2,562) (3,810)
-------- --------
Consolidated $121,714 $121,864
======== ========
Income (loss) from continuing operations:
Castings $ (1,435) $ (1,707)
Forgings (196) 474
Other 472 621
Elimination of intersegment loss 1,879 1,224
-------- --------
Consolidated $ 720 $ 612
======== ========
December 31, September 30,
2005 2005
------------ -------------
Total assets:
Castings $458,579 $475,725
Forgings 6,659 7,040
Other 14,090 13,268
Elimination of intersegment assets (85,929) (83,478)
-------- --------
Consolidated $393,399 $412,555
======== ========
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 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, 2005 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.
RECENT DEVELOPMENTS
Exploration of Potential Sale Transaction. On July 29, 2005, Neenah Foundry
Company and its indirect parent company, ACP Holding Company ("ACP"), announced
that Citigroup Global Markets Inc. had been engaged to assist in exploring the
potential sale or merger of Neenah or ACP or a significant portion of their
assets or capital stock. On November 29, 2005, Neenah announced that its board
of directors, which is also the board of directors of ACP, had unanimously voted
to end the sale or merger process and turn the Company's focus to successfully
implementing the Company's business plan. The Company's business plan recognizes
a consolidating market and is intended to position the Company for growth by
expanding its revenues and further penetrating existing markets that are already
being served. It also involves exploring other strategic alternatives that would
have the effect of reducing costs and expanding capacity in selected markets.
14
RESULTS OF OPERATIONS (dollars in thousands)
The following discussions compare the results of operations of the Company for
the three months ended December 31, 2005, to the results of the operations of
the Company for the three months ended December 31, 2004.
Three Months Ended December 31, 2005 and 2004
Net sales. Net sales for the three months ended December 31, 2005 were $121,714,
which are $150 or .1% lower than the quarter ended December 31, 2004. A greater
amount of municipal products sold, offset by reduced shipments of parts for the
heavy-duty truck market, resulted in similar levels of net sales for the three
months ended December 31, 2005 and the three months ended December 31, 2004.
Gross profit. Gross profit for the three months ended December 31, 2005 was
$19,090, a decrease of $78, or .4%, as compared to the quarter ended December
31, 2004. Gross profit as a percentage of net sales was 15.7% for both the three
months ended December 31, 2005 and for the three months ended December 31, 2004.
A favorable mix of products sold throughout the Company, offset by increases in
certain production costs, resulted in similar levels of gross profit for the
three months ended December 31, 2005 and the three months ended December 31,
2004.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended December 31, 2005 were
$7,959, an increase of $6, or .1%, as compared to the $7,953 for the quarter
ended December 31, 2004. Selling, general and administrative expenses as a
percentage of net sales were 6.5% for the quarter ended December 31, 2005 as
well as for the quarter ended December 31, 2004.
Amortization of intangible assets. Amortization of intangible assets was $1,780
for the three months ended December 31, 2005, which is comparable to the $1,783
for the quarter ended December 31, 2004.
Operating income. Operating income was $9,356 for the three months ended
December 31, 2005, a decrease of $77 from operating income of $9,433 for the
quarter ended December 31, 2004. As a percentage of net sales, operating income
was 7.7% for the quarter ended December 31, 2005 as well as for the quarter
ended December 31, 2004.
Net interest expense. Net interest expense was $8,225 for the three months ended
December 31, 2005 compared to $8,411 for the quarter ended December 31, 2004.
Interest expense for the three months ended December 31, 2005 included
amortization of bond discount of $396 and amortization of deferred financing
costs of $124.
Income tax provision. The income tax provision for the three months ended
December 31, 2005 and 2004 is based on the Company's estimated effective tax
rate of approximately 40%. The provision for the three months ended December 31,
2005 is slightly lower due to the resolution of an IRS tax audit.
15
LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands)
Credit Facility
The Company's bank Loan and Security Agreement, as amended (the "Credit
Facility"), 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
December 31, 2005, the Company had approximately $35,400 outstanding under the
revolving credit facility, which includes $13,800 borrowed on December 30, 2005
for an interest payment due January 2, 2006, and approximately $15,800
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,
discussed below, 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.
The Company is prohibited from paying dividends and is restricted to a maximum
yearly stock repurchase of $250.
During the quarter ended December 31, 2005, the Company amended the Credit
Facility to allow the $6.5 million settlement paid in August 2005 in connection
with the Mercer litigation, discussed in the Company's 10-K for the year ended
September 30, 2005, to be added back in the calculation of Adjusted EBITDA. The
amendment was executed and became effective on December 9, 2005.
At December 31, 2005, the Company is in compliance with existing bank covenants.
16
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 (among other things, currently limiting most dividends and similar
payments by Neenah and its subsidiaries to no more than approximately $14
million), (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 101% of the principal amount redeemed 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
(among other things, currently limiting most dividends and similar payments by
Neenah and its subsidiaries to no more than approximately $14 million), (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 three months ended December 31, 2005 and December 31, 2004, capital
expenditures were $3,405 and $4,822, respectively. Both periods represent a
level of capital expenditures necessary to maintain equipment and facilities.
The 2004 period includes some make-up of deferred capital projects during the
three months ended December 31, 2004.
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 December 30, 2005 to make the
interest payment due January 2, 2006, the Company still had remaining
availability of $36,612 under the revolving credit facility at December 31,
2005. Net cash used in operating activities for the three months ended December
31, 2005 was $4,306, a decrease of $4,496 from cash provided by operating
activities for the three months ended December 31, 2004 of $190. The increase in
net cash used in operating activities was due to reductions in accounts payable
and accrued wages and payment of $4,700 of additional income taxes during the
quarter ended December 31, 2005, offset by a larger decrease in accounts
receivable for the quarter ended December 31, 2005 compared to the quarter ended
December 31, 2004.
17
Future Capital Needs. The Company is 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.
Adjusted EBITDA. Our borrowing arrangement contains certain financial covenants
which are tied to ratios based on Adjusted EBITDA. Adjusted EBITDA is defined in
the Company's Credit Facility as "EBITDA" and is generally calculated as the sum
of net income (excluding non-recurring non-cash charges and certain one-time
cash charges), income taxes, interest expense, and depreciation and
amortization. Adjusted EBITDA is presented herein because it is a material
component of the covenants contained within the Company's Credit Facility.
Non-compliance with the covenants could result in the requirement to immediately
repay all amounts outstanding under the Credit Facility which could have a
material adverse effect on our results of operations, financial position and
cash flow. Management also believes that certain investors use information
concerning Adjusted EBITDA as a measure of a company's performance and ability
to service its debt. Adjusted 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. Adjusted EBITDA, as
presented by the Company, may not be comparable to similarly titled measures
reported by other companies.
A reconciliation of Adjusted EBITDA for the three months ended December 31,
2005, compared to the three months ended December 31, 2004, is provided below
(in thousands):
Three Months Ended
December 31,
------------------
2005 2004
-------- -------
Net income........................ $ 720 $ 612
Income tax provision.... ......... 411 410
Net interest expense ............. 8,225 8,411
Depreciation and amortization .... 4,984 4,627
Gain on disposal of equipment .... (5) (1)
------- -------
Adjusted EBITDA
(as defined above) ............ $14,335 $14,059
======= =======
- ----------
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, 2005.
OFF-BALANCE SHEET ARRANGEMENTS
None.
18
CRITICAL ACCOUNTING ESTIMATES
There have been no changes in critical accounting estimates from those disclosed
in our Annual Report on Form 10-K for the fiscal year ended September 30, 2005.
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, 2006, the Company's interest expense would increase or decrease by
approximately $368 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 (the "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.
19
NEENAH FOUNDRY COMPANY
PART II. OTHER INFORMATION
Item 6. EXHIBITS
(a) Exhibits
10.1 Amendment No. 2, dated December 9, 2005, to Loan and Security Agreement,
dated 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
10.2(a) to Neenah Foundry Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 2005)
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 2002
32 Chief Executive and Chief Financial Officers' certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
20
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: February 13, 2006 /s/ Gary W. LaChey
----------------------------------------
Gary W. LaChey
Corporate Vice President - Finance
(Principal Financial Officer and Duly
Authorized Officer)
21