1
EXHIBIT 13
DISCUSSION OF FINANCIAL INFORMATION
Results of Operations
1993 Compared to 1992
Net sales in 1993 rose $42.3 million over 1992. This growth was the result of
an increase in shipments to the Company's U.S. automotive customers of almost
20%, approximately one-third of which related to a major new order from Ford
which was only in production for part of 1992. Partially offsetting this
growth was a 20% drop in shipments from the Company's German foundry due to the
recession in Europe. Sales in the U.S. are expected to continue improving in
1994, but the rate of improvement will be lower than in 1993. Sales in Europe
are expected to remain weak throughout 1994.
Gross profit fell $4.8 million in 1993 despite the higher sales, reducing the
consolidated gross margin to 8% of sales from 10% in 1992. Losses at the
Ironton, Ohio foundry were one reason for the lower gross profit. These losses
were the result of continuing startup costs and manufacturing problems related
to the additions of both a new production line for the Ford order noted above
and a second shift on the existing production line at that plant in the last
half of 1992. The workload also became unbalanced among certain plants when
U.S. sales surged in the first half of 1993. This led to inefficient
utilization of the Company's domestic foundry capacity. In addition, profits
and margins fell at the German foundry as a result of the sharp decline in
sales from that plant. Offsetting these factors was a significant improvement
in the operating results of the Columbus, Georgia foundry after replacement of
the molding lines there was completed in early 1993.
Operating expenses were relatively unchanged in 1993 compared to 1992 and, as a
result, fell as a percent of sales from 8.5% to 7.8%. Operating expenses
should remain at their current level for 1994 as well.
The Company reported an operating loss of $23.5 million in 1993. In 1992 the
Company had an operating profit of $5.8 million. While the factors noted above
contributed to the loss, the principal reason for the loss was a $24 million
restructuring charge. This charge was primarily related to the Company's
decision to close the Lower Basin foundry in Virginia. A number of factors led
to this decision, including the amount of capital expenditures required at the
plant in the next few years, its location in a flood plain and the uncertain
outlook for profitable operations. The foundry had stopped pouring iron by the
end of 1993 and will close completely during 1994. The restructuring charge
included provisions for severance pay and employee benefits for Lower Basin and
certain other employees who supported the plant's operation, write-down of
assets, operating losses until closing and other costs expected to be incurred
as a result of this decision. Management expects this decision to pay
2
for itself within three years through improved operations and lower overhead.
Operating results are expected to improve significantly in 1994 over 1993, even
after ignoring the effect of the restructuring charge on 1993 results. This
expectation is based on continued growth in the U.S. market, better and more
efficient utilization of remaining capacity and price increases obtained or
expected to be obtained on certain products.
Net interest expense for 1993 increased $1.4 million over the prior year, due
largely to higher borrowing levels used to fund capital expenditures. The
effect of higher borrowing levels was offset in part by capitalized interest of
approximately $1 million related to the expansion of the New River foundry in
Virginia.
The Company recorded an income tax benefit of $8.5 million on a pretax loss of
$29.1 million in 1993. Deferred tax assets increased $14 million during the
year to more than $50 million. While management believes most of these
deferred tax assets will eventually be realized, valuation allowances have been
established for a substantial portion of these assets given the available
objective evidence required under generally accepted accounting principles.
Management did not believe it was necessary to fully reserve all of the 1993
increase because it believes it is more likely than not that sufficient pretax
income (approximately $25 million) can be generated through future profitable
operations or tax planning strategies. The 1993 income tax benefit was also
affected by a decrease in the German tax rate.
The Company adopted Statements of Financial Accounting Standards No. 106 and
109 in 1992. These statements changed the methods of accounting for
postretirement benefits and income taxes, and their adoption resulted in a net
charge against 1992 results of $28.4 million for the cumulative effect on prior
years. Such adoption also caused postretirement benefit expense to increase by
$2.4 million and $1.6 million in 1993 and 1992, respectively.
1992 Compared to 1991
Net sales in 1992 climbed $82.2 million over 1991. Over $26 million of this
rise was due to the acquisition of PBM Industries and InterMotive Technologies
at the end of March 1992. Another $38 million was the result of an increase in
sales by the Company's U.S. foundry group. Sales at the Company's German
foundry grew over $15 million, approximately $4 million of which was due to a
change in the average exchange rate between 1991 and 1992. The growth in sales
at the Company's foundries was due to an increase in tons shipped, primarily
for existing orders with current customers. Approximately one-fourth of the
increase in sales of the U.S. foundry group was related to a major new order
from Ford.
3
Gross profit rose $3.7 million in 1992 compared to 1991, although it fell as a
percent of sales to 10% from 11.4%. The consolidated gross margin suffered
primarily for three reasons. First, the changes previously noted at the
Ironton plant caused significant startup costs in the second half of the year.
Second, the acquisition of PBM had a minimal effect on gross profit relative to
its effect on sales, thereby diluting the consolidated gross margin. Finally,
the change in accounting for postretirement benefits reduced gross profit
approximately $1.6 million effective January 1, 1992.
Operating expenses rose $5.4 million in 1992 over the prior year, almost $2
million of which was related to the addition of PBM. Other factors
contributing to this rise were costs associated with the Company's recent
pursuit of the aluminum castings market and increased costs at the U.S. foundry
group. The increase in costs at the U.S. foundry group reflects increasing
demands from customers for support services and effects of the Company's
capital expenditure program. As a percent of sales, operating expenses fell
from 9% for 1991 to 8.5% for 1992.
Net interest expense increased from $3.1 million in 1991 to $4.1 million in
1992. Interest income fell as U.S. interest rates dropped and average cash
balances declined. Interest expense was up slightly as the effect of increased
borrowing levels was largely offset by the effect of lower interest rates in
the U.S. The decline in cash balances and increase in borrowing levels were
due to the Company's capital expenditure program discussed further below.
The Company recorded an income tax provision of $4.3 million on pretax income
of $2.3 million in 1992. This compares to an income tax provision of $3.1
million on pretax income of $11.9 million in 1991. The effective rate was high
in 1992 primarily because the German foundry, which was taxed at rates over
50%, generated a pretax profit while the combined U.S. operations, which were
taxed at much lower rates, produced a net pretax loss. Also, the additional
postretirement benefit expense accrued in 1992 was recorded without a related
tax benefit. The 1991 rate was unusually low because the gain from sale of a
subsidiary actually generated a capital loss for tax purposes. This in turn
led to a reduction of the 1991 income tax provision.
Liquidity and Capital Resources
The Company's financial position weakened during 1993 due to the net loss and
increased borrowings to fund capital expenditures. Certain balance sheet data
is summarized below:
4
December 31
1992 1993
- --------------------------------------------------------------
Funded debt $ 76,751,000 $106,593,000
Shareholders' equity 101,054,000 75,532,000
Net working capital 30,406,000 39,631,000
The significant increase in borrowings during 1993 was primarily used to fund
capital expenditures and an increase in working capital. The major capital
expenditure program begun two years ago is almost completed. The last project,
the addition of a new molding line at the New River foundry, is expected to
begin operating during the second quarter of 1994. Capital expenditures are
expected to be at or below the level of depreciation in 1994.
The net loss led to a significant decrease in shareholders' equity. Much of
the net loss was due to the $24 million restructuring charge accrued in 1993,
most of which has yet to require the use of funds. The Company expects to
spend approximately $4 million in each of 1993, 1994 and 1995 from cash
provided by operations to fund items accrued as part of the restructuring. At
least $6 million of the restructuring charge represents noncash charges which
will not result in a cash outflow. Most of the remaining amount will probably
not require funding for several years.
At December 31, 1993 the Company and its subsidiaries had approximately $19
million of unused borrowing capacity under various credit agreements, and an
additional $16 million available if certain financial ratios are maintained.
Management believe cash from operations and the availability of unused
borrowing capacity will be sufficient to fund 1994 working capital needs and
expected capital expenditures.
The Environmental Protection Agency ("EPA") filed a complaint against one of
the Company's subsidiaries in August 1991. The complaint alleged various
violations, the most significant of which related to the treatment of certain
hazardous wastes at two foundries. The complaint demanded a penalty of
approximately $1,500,000. Certain provisions were made in 1991 for the EPA
penalty demand, for remediation costs at the two sites in question and for
other environmental matters. The Company and the EPA reached an agreement in
principle during 1993 for a reduced penalty of $330,000.
The Company has entered into negotiations with the Ohio Attorney General's
office concerning past violations of Ohio water pollution laws and regulations
at the Ironton foundry. In March 1994 the Attorney General's office advised
the Company it could avoid litigation with respect to these violations by
entering into a consent order. The Company will fully respond to the Attorney
General by mid-April and expects to enter into a consent order providing for
monetary penalties. Management does not expect
5
this mattter to have a material adverse effect on the Company's operations or
consolidated financial position.
The Company also incurs recurring costs to manage and dispose of waste
(principally nonhazardous waste) generated as part of ongoing operations. In
1993 such costs totaled approximately $10 million. Although the Company
continues to take various steps to control these costs, they are expected to
increase in the future. In addition, a portion of the Company's capital
expenditures are regularly incurred to limit or monitor pollution, principally
for ventilation and dust control equipment. It is difficult to estimate such
expenditures, but management believes they generally have been and will
continue to be less than 30% of total capital expenditures.
6
Five Year Financial Review
Years Ended December 31 1989 1990 1991 1992 1993
=================================================================================================================
Statement of Operations Data (in thousands)
Net sales $397,122 $386,318 $319,784 $401,951 $444,214
Restructuring Charge -- 12,500 -- -- 24,000
Operating profit (loss) 28,390 1,034 7,563 5,830 (23,486)
Income (loss) before cumulative effect of
accounting changes 14,530 (10,389) 8,803 (1,515) (20,504)
Cumulative effect on prior years of
changes in accounting methods -- -- -- (28,421) --
Net income (loss) 14,530 (10,389) 8,803 (29,936) (20,504)
=================================================================================================================
Share Data
Earnings (loss) per share before
cumulative effect of accounting changes $0.68 ($0.55) $0.42 ($0.06) ($0.83)
Earnings (loss) per share 0.68 (0.55) 0.42 (1.31) (0.83)
Cash dividends per share 0.20 0.20 0.14 0.16 0.12
=================================================================================================================
Balance Sheet Data (in thousands)
Total assets $277,458 $214,875 $214,207 $274,457 $307,458
Debt due after one year 74,776 45,138 32,906 69,478 101,861
Shareholders' equity 113,833 103,591 105,407 101,054 75,532
7
Report of Independent Auditors
The Board of Directors and Shareholders
Intermet Corporation
We have audited the accompanying consolidated balance sheets of Intermet
Corporation as of December 31, 1993 and 1992, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Intermet
Corporation at December 31, 1993 and 1992, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Notes 9 and 10 to the consolidated financial statements, in
1992 the Company changed its methods of accounting for postretirement benefits
other than pensions and income taxes.
/s/ Ernst & Young
Atlanta, Georgia
February 9, 1994
8
Intermet Corporation
Consolidated Balance Sheets
DECEMBER 31
1993 1992
-----------------------------
(In Thousands of Dollars)
ASSETS
Current assets:
Cash and cash equivalents $ 11,240 $ 6,097
Accounts receivable:
Trade, less allowance for doubtful accounts of
$518 in 1993 and $367 in 1992 47,440 39,748
Other 5,502 4,929
-----------------------------
52,942 44,677
Inventories:
Finished goods 6,316 5,673
Work in process 7,154 4,184
Raw materials 5,345 6,050
Supplies and patterns 18,417 19,080
-----------------------------
37,232 34,987
Income taxes 5,629 -
Other current assets 1,586 3,504
-----------------------------
Total current assets 108,629 89,265
Property, plant and equipment, at cost:
Land 3,520 3,535
Buildings and improvements 62,669 64,148
Machinery and equipment 218,733 218,637
Construction in progress 43,743 22,661
-----------------------------
328,665 308,981
Less:
Foreign industrial development grants, net of
amortization 5,275 6,118
Accumulated depreciation and amortization 150,093 139,638
-----------------------------
Net property, plant and equipment 173,297 163,225
Other assets 19,634 21,967
Deferred income taxes 5,898 -
-----------------------------
$ 307,458 $ 274,457
=============================
9
DECEMBER 31
1993 1992
-----------------------------
(In Thousands of Dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,784 $ 29,372
Income taxes - 820
Accrued wages and benefits 13,092 12,873
Accrued restructuring costs 7,316 -
Other accrued liabilities 9,074 8,521
Long-term debt due within one year 4,732 7,273
-----------------------------
Total current liabilities 68,998 58,859
Noncurrent liabilities:
Long-term debt due after one year 101,861 69,478
Deferred income taxes 4,482 947
Retirement benefits 45,624 41,163
Other noncurrent liabilities 8,124 -
-----------------------------
Total noncurrent liabilities 160,091 111,588
Minority interests 2,837 2,956
Shareholders' equity:
Preferred stock; 5,000,000 shares
authorized; none issued - -
Common stock, $.10 par value;
50,000,000 shares authorized; 24,572,219 and
24,534,349 shares issued in 1993 and 1992,
respectively 2,457 2,453
Capital in excess of par value 51,742 51,473
Retained earnings 22,715 46,166
Accumulated translation adjustments 1,499 2,636
Minimum pension liability adjustment (2,881) (1,674)
-----------------------------
Total shareholders' equity 75,532 101,054
-----------------------------
$ 307,458 $ 274,457
=============================
See accompanying notes.
10
Intermet Corporation
Consolidated Statements of Operations
YEARS ENDED DECEMBER 31
1993 1992 1991
-------------------------------------------------
(In Thousands of Dollars, Except Per Share Data)
Net sales $444,214 $401,951 $319,784
Cost of sales 408,835 361,807 283,355
-------------------------------------------------
Gross profit 35,379 40,144 36,429
Operating expenses:
Selling 6,114 6,684 5,510
General and administrative 28,751 27,630 23,356
Restructuring charge (Note 3) 24,000 - -
-------------------------------------------------
Operating profit (loss) (23,486) 5,830 7,563
Other income and expenses:
Interest income 135 289 1,153
Interest expense (5,625) (4,343) (4,253)
Other, net (Note 3) (159) 531 7,397
-------------------------------------------------
(5,649) (3,523) 4,297
-------------------------------------------------
Income (loss) before income taxes, minority
interest and cumulative effect of accounting
changes (29,135) 2,307 11,860
Provision (benefit) for income taxes (8,512) 4,310 3,078
-------------------------------------------------
Income (loss) before minority interest and
cumulative effect of accounting changes (20,623) (2,003) 8,782
Minority interest in loss of subsidiaries 119 488 21
-------------------------------------------------
Income (loss) before cumulative effect of
accounting changes (20,504) (1,515) 8,803
Cumulative effect on prior years of changes in
accounting for:
Postretirement benefits - (34,544) -
Income taxes - 6,123 -
-------------------------------------------------
Net income (loss) $(20,504) $(29,936) $ 8,803
=================================================
Amounts per common share:
Income (loss) before cumulative effect of
accounting changes $ (.83) $ (.06) $ .42
Cumulative effect on prior years of changes in
accounting for:
Postretirement benefits - (1.52) -
Income taxes - .27 -
-------------------------------------------------
Net income (loss) $ (.83) $ (1.31) $ .42
=================================================
See accompanying notes.
11
Intermet Corporation
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31
1993 1992 1991
-------------------------------------------------
(In Thousands of Dollars, Except Per Share Data)
OPERATING ACTIVITIES
Net income (loss) $(20,504) $(29,936) $ 8,803
Adjustments to reconcile net income
(loss) to cash provided by operating
activities:
Depreciation and amortization 26,583 22,996 19,731
Restructuring charge 24,000 - -
Cumulative effect of accounting
changes - 28,421 -
Loss on sale of assets 1,053 891 458
Gain on sale of subsidiary - - (7,266)
Deferred income taxes (4,640) (853) (1,619)
Minority interest in loss of
subsidiaries (119) (488) (21)
Changes in operating assets and
liabilities excluding the effects of
acquisitions:
Accounts receivable (9,221) (3,262) 3,874
Inventories (4,929) (5,423) 2,016
Accounts payable and accrued
liabilities 5,358 (1,609) (2,806)
Other assets and liabilities 183 (933) (1,429)
-------------------------------------------------
Cash provided by operating activities 17,764 9,804 21,741
INVESTING ACTIVITIES
Additions to property, plant and
equipment (41,018) (51,783) (24,813)
Cost of acquisitions - (6,750) -
Proceeds from sale of assets 1,012 220 2,901
Proceeds from sale of subsidiary - - 11,852
Other, net (877) (1,478) 317
-------------------------------------------------
Cash used in investing activities (40,883) (59,791) (9,743)
12
Intermet Corporation
Consolidated Statements of Cash Flows (continued)
YEARS ENDED DECEMBER 31
1993 1992 1991
-------------------------------------------------
(In Thousands of Dollars, Except Per Share Data)
FINANCING ACTIVITIES
Increase in debt 35,579 51,835 6,094
Reduction in debt (4,482) (31,248) (10,473)
Issuance of common stock 273 31,399 -
Repurchase of common stock - - (3,474)
Dividends paid (2,947) (3,634) (2,925)
Other, net (140) (407) -
-------------------------------------------------
Cash provided by (used in) financing
activities 28,283 47,945 (10,778)
Effect of exchange rate changes on cash (21) (367) 15
-------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 5,143 (2,409) 1,235
Cash and cash equivalents at beginning of
year 6,097 8,506 7,271
-------------------------------------------------
Cash and cash equivalents at end of year $ 11,240 $ 6,097 $ 8,506
=================================================
See accompanying notes.
13
Intermet Corporation
Consolidated Statements of Shareholders' Equity
YEARS ENDED DECEMBER 31
1993 1992 1991
--------------------------------------------------
(In Thousands of Dollars, Except Per Share Data)
Common stock:
Beginning balance $ 2,453 $ 2,089 $ 2,142
Issuance of 3,639,750 shares of common stock - 364 -
Exercise of options to purchase 45,000 shares of
common stock 4 - -
Repurchase and retirement of 529,369 shares of
common stock - - (53)
--------------------------------------------------
Ending balance 2,457 2,453 2,089
Capital in excess of par value:
Beginning balance 51,473 20,438 23,859
Issuance of 3,639,750 shares of common stock - 31,035 -
Exercise of options to purchase 45,000 shares of
common stock 269 - -
Repurchase and retirement of 529,369 shares of
common stock - - (3,421)
--------------------------------------------------
Ending balance 51,742 51,473 20,438
Retained earnings:
Beginning balance 46,166 79,736 73,858
Net income (loss) (20,504) (29,936) 8,803
Cash dividends ($.12 per share in 1993, $.16 per
share in 1992 and $.14 per share in 1991) (2,947) (3,634) (2,925)
--------------------------------------------------
Ending balance 22,715 46,166 79,736
Accumulated translation adjustments:
Beginning balance 2,636 3,144 3,732
Translation adjustments (1,137) (508) (588)
--------------------------------------------------
Ending balance 1,499 2,636 3,144
Minimum pension liability adjustment:
Beginning balance (1,674) - -
Adjustment (1,207) (1,674) -
--------------------------------------------------
Ending balance (2,881) (1,674) -
--------------------------------------------------
Total shareholders' equity $ 75,532 $101,054 $105,407
==================================================
See accompanying notes.
14
Intermet Corporation
Notes to Consolidated Financial Statements
December 31, 1993, 1992, and 1991
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Intermet Corporation ("Intermet") and its subsidiaries (collectively, the
"Company"). All significant intercompany transactions and balances have been
eliminated in consolidation.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on
the last-in, first-out (LIFO) method as to 24% and 15% of the December 31, 1993
and 1992 inventories, respectively. For other inventories, raw materials and
supplies are valued on a weighted average cost basis, while average production
cost is used for work in process and finished goods valuation. The specific
identification method is used for patterns. If LIFO inventories were valued
using the same cost methods used for other inventories, their carrying values
would have increased by $1,042,000 and $835,000 at December 31, 1993 and 1992,
respectively.
PROPERTY, PLANT AND EQUIPMENT
The provision for depreciation and amortization of property, plant and
equipment is determined on the basis of estimated useful lives using the
straight-line method. Certain industrial development grants provided by the
Federal and state governments of Germany are included as reductions of
property, plant and equipment and are being amortized over the period the
related assets are being depreciated.
INTANGIBLE ASSETS
Intangible assets consist principally of costs in excess of net assets acquired
which are being amortized using the straight-line method over periods from ten
to forty years.
15
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share amounts are based on the weighted average
number of shares outstanding during the period, after giving effect to the
exercise of options (see Note 7) and assuming the repurchase, at fair market
value, of shares using the proceeds from such exercise, unless the effect is
antidilutive.
2. ACQUISITIONS
In March 1992 the Company's wholly owned domestic subsidiary, Intermet
Machining, Inc. ("IMI"), acquired all of the common and preferred stock of PBM
Industries, Inc. ("PBM"). IMI also acquired all of the outstanding preferred
stock of Batten Design and Engineering Services, Inc. ("Batten"). PBM owned
80% of the common stock of Batten at that time. The purchase price for all of
the shares totaled $3,750,000 and was funded by a cash payment of $850,000 and
debt of IMI totaling $2,900,000. In addition, IMI made a cash investment of
$1,900,000 into PBM which was used to repay certain long-term debt of PBM.
In August 1992 the Company purchased Ford Motor Company's 40% minority interest
in the common stock of New River Castings Company ("New River"), making New
River a wholly owned subsidiary of the Company. The purchase price of
$4,500,000 comprised a cash payment of $4,000,000 and preferred stock of New
River with a par value of $500,000. The preferred shares are included in
minority interests in the consolidated balance sheet.
Both of the foregoing transactions have been accounted for as purchases. The
consolidated financial statements include the results of operations of PBM and
Batten (now called InterMotive Technologies, Inc.) since their date of
acquisition. The accounts of New River were already included in the
consolidated financial statements by virtue of the Company's 60% ownership
interest. The following represents the (unaudited) pro forma consolidated
results of operations of the Company for the years ended December 31, 1992 and
1991, assuming both acquisitions had occurred on January 1, 1992 (for 1992
amounts) and 1991 (for 1991 amounts) (in thousands of dollars, except for per
share data):
16
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
1992 1991
-----------------------------
Net sales $411,579 $357,818
Net income (loss) (30,412) 7,304
Net income (loss) per common share (1.33) .35
These pro forma results are presented for comparative purposes only. They are
not necessarily indicative of what would have occurred had the acquisitions
actually been made at the beginning of the respective periods, or of future
results of operations.
3. RESTRUCTURING ACTIVITIES
In August 1993 the Company decided to close its oldest plant, the Lower Basin
foundry in Virginia. A number of factors led to this decision, including the
amount of capital expenditures required at the plant in the next few years, its
location in a flood plain and the uncertain outlook for profitable operations.
The decision to close this foundry was the principal reason for recording a
$24,000,000 restructuring charge in the third quarter of 1993. The charge
included provisions for severance pay and employee benefits of $8,000,000,
write-down of capital assets and inventories of $6,000,000, provisions for
operating losses until closing of $4,500,000 and other costs expected to be
incurred of $5,500,000.
In February 1991 the Company sold its 60% interest in INTAT Precision, Inc., a
foundry company in Indiana. The sale proceeds totaled $11,852,000, resulting
in a net gain of $7,266,000. This amount is included in other income in the
consolidated statement of operations.
4. JOINT VENTURES AND MINORITY INTERESTS
The Company and an Australian company have, through subsidiaries, formed a
joint venture, ICA Castings ("ICA"). ICA has constructed a pilot casting line
in Kentucky for the manufacture of aluminum automotive castings. The Company
accounts for its 50% interest in ICA under the equity method.
17
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
4. JOINT VENTURES AND MINORITY INTERESTS (CONTINUED)
The Company also had a joint venture with a Korean company. The joint venture
owned and operated an iron foundry in Korea. The Company sold its 20% interest
in the joint venture during 1993. This investment and the effects of its sale
were not material to the Company's consolidated financial position or results
of operations.
In 1988 the Company purchased all of the common stock of Ironton Iron, Inc.
("Ironton"), a foundry company in Ohio. As a part of the transaction, the
previous common stockholders of Ironton received an equivalent number of shares
of Ironton's new 5% cumulative preferred stock with an aggregate par value of
$2,337,000. The preferred shares are to be retired at par value from net
income of Ironton, if available. No shares have been retired and no dividends
have been paid to date since Ironton has incurred a cumulative net loss since
1988. The preferred shares are included in minority interests in the
consolidated balance sheet.
5. CASH FLOW INFORMATION
All short-term investments with original maturities of less than 90 days are
deemed to be cash equivalents for purposes of the statements of cash flows.
There were no non-cash investing and financing activities in 1993 or 1991.
Such activities in 1992 were as follows (in thousands of dollars):
Fair value of assets acquired $ 15,073
Costs in excess of net assets acquired 10,822
Less:
Liabilities and funded debt assumed (18,512)
Minority interest in Batten (133)
Preferred stock of New River (500)
---------------
Net cash paid for acquisitions $ 6,750
===============
18
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT AND REVOLVING CREDIT
Long-term debt and revolving credit loans consist of the following (in
thousands of dollars):
1993 1992
-----------------------------
Intermet:
Term loan with insurance company (a) $ 25,000 $ 25,000
Revolving credit bank loan (b) 54,624 19,969
Bank lines of credit (c) 8,470 9,625
Subsidiaries:
Lynchburg revenue bonds (d) 6,970 7,565
Neunkirchen bank loans (e) 2,269 5,695
Neunkirchen term notes (f) 6,536 5,767
IMI promissory notes (g) 2,724 2,754
Other - 376
-----------------------------
Total 106,593 76,751
Less debt due within one year 4,732 7,273
-----------------------------
Debt due after one year $101,861 $ 69,478
=============================
(a) In December 1992 the Company entered into a term loan agreement
with The Prudential Insurance Company of America. The loan bears
interest at a base rate plus an additional lender margin in
certain circumstances, with interest payable in quarterly
installments. The interest rate at December 31, 1993 was 9.05%.
Principal amounts are to be repaid in five equal annual
installments beginning in December 1998. The term loan agreement
requires the Company to maintain certain financial ratios and
imposes limitations on dividends and certain activities of the
Company.
19
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT AND REVOLVING CREDIT (CONTINUED)
(b) In August 1992 the Company entered into a revolving credit
agreement with a bank consortium. The agreement provides for
loans up to $75,000,000 and DM 8,000,000 (approximately
$4,624,000). Interest rates on both the U.S. dollar and deutsche
mark facilities are based on various market rates, and in most
cases include additional lender margins. The weighted average
interest on borrowings at December 31, 1993 was 5.3%. The
Company also must pay a fee of 0.375% on any unused portion of
the loan commitment. The balances outstanding in August 1995 may
be converted to term loans payable in sixteen quarterly principal
installments bearing interest at the prevailing market rates at
that time. The revolving credit agreement requires the Company
to maintain certain financial ratios and imposes limitations on
dividends and certain activities.
(c) In August 1992 the Company entered into uncommitted line of
credit agreements with two banks. The agreements provide for
loans up to $12,000,000 bearing interest at the prime rate or
other specified rates. The weighted average interest rate on
borrowings at December 31, 1993 was 4.5%. The availability of
these lines are at the discretion of the banks and borrowings are
payable on demand. The borrowings are classified as long-term
since the Company has the intent and ability to refinance them
under the revolving credit facility described in (b) above.
(d) Lynchburg Foundry Company ("Lynchburg"), a wholly-owned
subsidiary of the Company, issued $4,400,000 of 6 1/4% Pollution
Control Revenue Bonds Series 1973 maturing in December 1998 and
$4,800,000 of 7% Industrial Revenue Bonds maturing in June 2006.
Bonds in the aggregate amount of $4,750,000 are subject to
mandatory redemption prior to maturity in annual amounts ranging
from $175,000 to $705,000 in 1994 through 2005. The bonds are
also subject to optional redemption prior to maturity. Intermet
has agreed to indemnify Lynchburg's former owner for any
liability that may be incurred with respect to its guarantee of
the bonds.
20
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT AND REVOLVING CREDIT (CONTINUED)
(e) The Company's German subsidiary, Columbus Neunkirchen Foundry
GmbH ("Neunkirchen"), has various revolving credit agreements in
place which permit borrowings up to DM 25,000,000. The revolving
credit agreement described in (b) above limits such borrowings to
DM 15,000,000 (approximately $8,670,000). The revolving credit
lines bear interest at current market rates (8.75% at December
31, 1993).
(f) The term notes bear interest at rates ranging from 5% to 10.5%
and mature at various times through March 2003. Borrowings
totaling $4,802,000 are secured by property, plant and equipment
with net book values aggregating $29,073,000 at December 31,
1993.
(g) IMI issued various promissory notes totaling $2,900,000 to the
selling shareholders of PBM and Batten (see Note 2). The notes
bear interest at 7% for the first year, 7.5% for the second year
and 8% thereafter. Principal on the notes is payable in three
annual installments beginning in March 1994. The principal
amounts are subject to adjustment for the outcome of certain
contingencies. The amounts outstanding at December 31, 1993 and
1992 reflect adjustments for certain such items.
Maturities of long-term debt at December 31, 1993 are as follows (in thousands
of dollars):
1994 $ 4,732
1995 8,074
1996 18,194
1997 17,316
1998 22,356
Thereafter 35,921
-------------
$106,593
=============
21
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
6. LONG-TERM DEBT AND REVOLVING CREDIT (CONTINUED)
The amount reported in the consolidated balance sheets for long-term debt
approximates the fair value of the obligations.
Interest paid totaled $6,654,000, $4,385,000 and $4,392,000 in 1993, 1992 and
1991, respectively. Interest of $1,032,000, $168,000 and $150,000 was
capitalized in 1993, 1992 and 1991, respectively.
The Company is in compliance with the terms and restrictions of its various
loan and credit agreements. At December 31, 1993, all of the Company's
retained earnings were restricted and unavailable for the payment of dividends
under these agreements.
7. SHAREHOLDERS' EQUITY
The Company has a Key Individual Stock Option Plan ("Individual Plan") and a
Directors Stock Option Plan ("Directors Plan") which provide for the issuance
of up to 1,440,000 and 100,000 shares, respectively, of the Company's unissued
common stock. Information regarding the Plans is as follows:
PRICE PER NUMBER OF
SHARE SHARES
--------------------------------
Outstanding at December 31, 1990 $ 7.25-12.62 338,000
Granted 5.69-6.26 258,000
Canceled 7.25-8.87 (54,000)
------------
Outstanding at December 31, 1991 5.69-12.62 542,000
Granted 7.25-11.55 288,000
Canceled 5.69-8.87 (38,000)
------------
Outstanding at December 31, 1992 5.69-12.62 792,000
Granted 10.75-11.83 304,000
Exercised 5.69-8.87 (43,000)
Canceled or expired 5.69-10.75 (82,000)
------------
Outstanding at December 31, 1993 5.69-12.62 971,000
============
22
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
7. SHAREHOLDERS' EQUITY (CONTINUED)
In addition to the above, options for 12,000 shares were outstanding at
December 31, 1993 and options for 2,000 shares were exercised in 1993, all at a
price of $8.87. Options for 388,000 shares, which includes all options granted
to directors, are currently exercisable. The remaining options outstanding
under the Individual Plan will become exercisable in increments in the future.
The Company has an Employee Stock Ownership Plan ("Plan") for certain of its
United States employees who are not covered by collective bargaining
agreements. The Plan requires contributions by the Company equal to 3% of the
annual compensation of the Plan participants. The Company may, at its
discretion, make additional contributions within specified limits.
Contributions to the Plan of $786,000, $744,000 and $650,000 were accrued in
1993, 1992 and 1991, respectively.
8. COMMITMENTS AND CONTINGENCIES
Future minimum rental payments required under building and equipment operating
leases that have initial or remaining noncancelable lease terms in excess of
one year at December 31, 1993 are as follows (in thousands of dollars):
1994 $ 2,559
1995 2,205
1996 1,881
1997 1,841
1998 1,518
Thereafter 2,401
-------------
$ 12,405
=============
Total rental expense under operating leases was $2,847,000, $2,562,000 and
$1,852,000 in 1993, 1992 and 1991, respectively.
At December 31, 1993 the Company had commitments for the purchase of equipment
totaling approximately $7,225,000.
23
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Environmental Protection Agency ("EPA") filed a complaint against a
subsidiary of the Company in August 1991. The complaint alleged various
violations, the most significant of which related to the treatment of certain
hazardous waste at two foundries. The complaint demanded a penalty of
approximately $1,500,000. Certain provisions were made in 1991 for the EPA
penalty demand, for remediation costs at the two sites in question and for
other environmental matters. The Company and the EPA reached an agreement in
principle during 1993 for a reduced penalty of $330,000.
The Company is also engaged in various legal proceedings and other matters
incidental to its normal business activities. The Company does not believe any
of these proceedings or matters are material in relation to the Company's
consolidated financial position or results of operations.
9. RETIREMENT PLANS AND BENEFITS
The Company maintains several noncontributory defined benefit pension plans for
certain of its employees covered by collective bargaining agreements. The
benefits are based on years of service. The Company's policy is to fund
amounts as required under applicable laws and regulations.
Net pension expense included the following components (in thousands of
dollars):
1993 1992 1991
------------------------------------
Service cost (benefits earned) $ 917 $ 955 $ 806
Interest cost on projected benefit
obligations 1,253 1,112 950
Return on plan assets (1,227) (1,313) (1,542)
Net amortization and deferral 598 843 1,251
------------------------------------
$ 1,541 $ 1,597 $ 1,465
====================================
24
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
9. RETIREMENT PLANS AND BENEFITS (CONTINUED)
The reconciliation of the U.S. plans' funded status to the amounts reported in
the Company's consolidated balance sheets at December 31, 1993 and 1992 is as
follows (in thousands of dollars):
1993 1992
-------------------------
Actuarial present value of accumulated benefit
obligations:
Vested $20,934 $14,577
Nonvested 1,329 2,215
-------------------------
Total accumulated benefit obligations $22,263 $16,792
=========================
Projected benefit obligations $22,263 $16,792
Plan assets at fair value 13,166 11,482
-------------------------
Excess of projected benefit obligations
over assets
9,097 5,310
Unrecognized prior service cost (674) (1,459)
Unrecognized net actuarial loss (4,723) (2,697)
Unrecognized transition obligation (433) (856)
Additional minimum liability 5,831 5,015
-------------------------
Pension liabilities included in consolidated
balance sheets $ 9,098 $ 5,313
=========================
The above pension liabilities include $8,410,000 and $5,015,000 shown in
noncurrent liabilities in the Company's consolidated balance sheets at December
31, 1993 and 1992, respectively. The decision to close the Lower Basin foundry
(see Note 3) increased the pension liability by $2,579,000.
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 6.75% in 1993 and 7.5% in 1992. The expected
long-term rate of return on assets used in determining net pension expense was
9% in 1993, 1992 and 1991. Plan assets consist of publicly traded stocks and
bonds, cash equivalents and insurance contracts.
25
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
9. RETIREMENT PLANS AND BENEFITS (CONTINUED)
The Company maintains several defined contribution plans for certain hourly
employees. Contributions to these plans are accrued based on hours worked by
each employee, and totaled $520,000, $339,000 and $139,000 in 1993, 1992 and
1991, respectively. Some of the plans allow participants to make
contributions, on a pretax basis, of up to 20% of their compensation.
The Company also maintains a defined contribution plan for domestic salaried
employees. The Company contributes a specified percentage of the annual
compensation of participants. Participants are also allowed to make
contributions to the plan, on a pretax basis, of up to 10% of their
compensation. The Company matches 50% of participant contributions, up to a
specified limit. The Company accrued contributions to the plan of $1,024,000,
$1,059,000, and $847,000 in 1993, 1992 and 1991, respectively.
In addition to providing pension benefits, the Company provides health care and
life insurance benefits to certain retired U.S. employees and their dependents.
Salaried employees can become eligible for retiree health care benefits at age
55 depending on years of service. Certain hourly employees currently can
become eligible for retiree health care benefits at age 60 depending on years
of service. Retirees receive substantially the same health care benefits as
active employees. The medical plans generally pay 80% of most medical expenses
less deductible amounts. Salaried employees also contribute to the cost of
dependent coverage. The salaried employee coverage converts to a Medicare
supplement at age 65, while most hourly employee coverage ceases at age 65.
The Company adopted Statement of Financial Accounting Standards No. 106 ("SFAS
106") effective January 1, 1992. This statement requires accrual of the
expected cost of providing postretirement benefits. This cost, principally for
health care benefits, had previously been recognized as expense only when
payments were made. The Company recognized the entire accumulated benefit
obligation at the date of adoption, resulting in a one-time charge of
$34,544,000. This amount is reported separately on the consolidated statement
of operations. In addition, the Company's postretirement benefit costs
increased approximately $2,400,000 and $1,600,000 in 1993 and 1992,
respectively, as a result of adopting the new standard.
26
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
9. RETIREMENT PLANS AND BENEFITS (CONTINUED)
Net postretirement benefit expense for 1993 and 1992 included the following
components (in thousands of dollars):
1993 1992
-----------------------
Service cost (benefits earned) $1,217 $1,033
Interest cost on accumulated benefit obligation 2,745 2,671
Amortization of loss 51 -
-----------------------
$4,013 $3,704
=======================
Payments for postretirement benefits charged to expense were $1,370,000 in
1991. The Company intends to continue funding the plan on a pay-as-you-go
basis.
The reconciliation of the plan's funded status to the amounts reported in the
Company's consolidated balance sheets at December 31, 1993 and 1992 is as
follows (in thousands of dollars):
1993 1992
-----------------------
Present value of accumulated postretirement
benefit obligation:
Retirees $14,471 $13,940
Fully eligible active participants 6,273 2,949
Other active participants 20,252 20,407
-----------------------
40,996 37,296
Unrecognized net loss (3,782) (1,148)
-----------------------
Postretirement benefit liability included in
consolidated balance sheets $37,214 $36,148
=======================
The discount rate used in determining the present value of the accumulated
postretirement benefit obligation was 6.75% at December 31, 1993, 7.5% at
December 31, 1992 and 8% at January 1, 1992. The assumed health care cost
trend rate used in measuring the accumulated postretirement benefit obligation
was 12.5% in 1993, declining by 0.5% per
27
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
9. RETIREMENT PLANS AND BENEFITS (CONTINUED)
year to an ultimate rate of 6%. If the assumed health care cost trend rate
were increased 1% in all future years, the accumulated postretirement benefit
obligation would increase by $3,117,000 and postretirement benefit expense
would increase by $401,000.
10. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS
109") effective January 1, 1992. Prior to then the Company calculated its
income tax provision in accordance with SFAS 96. The cumulative effect on
prior years of adopting SFAS 109 was a benefit of $6,123,000. This amount is
reported separately on the consolidated statement of operations. The provision
(benefit) for income taxes consists of the following (in thousands of dollars):
1993 1992 1991
-------------------------------------------
Current:
Federal $(6,609) $(1,000) $ 225
State 1,394 1,238 889
Foreign 1,343 4,925 3,583
-------------------------------------------
(3,872) 5,163 4,697
Deferred:
Federal (3,100) (848) (1,364)
State (1,241) (167) (188)
Foreign (299) 162 (67)
-------------------------------------------
(4,640) (853) (1,619)
-------------------------------------------
$(8,512) $ 4,310 $ 3,078
===========================================
Income taxes paid (refunded) were $(626,000), $5,779,000 and $5,526,000 in
1993, 1992 and 1991, respectively.
28
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes differs from the amount computed by
applying statutory U.S. federal income tax rates to income before income taxes
for the following reasons (in thousands of dollars):
1993 1992 1991
-------------------------------------------
Provision (benefit) for income taxes
at U.S. statutory rate $(10,197) $ 784 $ 4,032
(Gains) losses with no tax effect - 403 (2,865)
Other charges with no tax effect 1,244 545 -
Difference between U.S. and
foreign tax rates (85) 1,975 1,158
State income taxes, net of federal
tax benefits 99 707 463
Other 427 (104) 290
-------------------------------------------
$ (8,512) $ 4,310 $ 3,078
===========================================
29
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
The tax effects of the types of temporary differences and carryforwards which
give rise to deferred income tax assets (liabilities) at December 31, 1993 and
1992 are as follows (in thousands of dollars):
1993 1992
-----------------------------
Compensation and benefit items,
primarily related to SFAS 106 $ 20,649 $ 16,126
Operating, capital loss and AMT credit
carryforwards 13,909 10,583
Tax basis of investment in former
Swedish operations 7,271 6,746
Other temporary differences 10,125 4,446
-----------------------------
Gross deferred income tax assets 51,954 37,901
Valuation allowance (30,520) (20,846)
-----------------------------
21,434 17,055
-----------------------------
Depreciation and related items (13,638) (14,755)
Other temporary differences (2,645) (3,247)
-----------------------------
Gross deferred income tax liabilities (16,283) (18,002)
-----------------------------
Net deferred income taxes $ 5,151 $ (947)
=============================
These amounts are included in the consolidated balance sheets as follows (in
thousands of dollars):
1993 1992
-----------------------------
Current assets $ 3,735 $ -
Other assets 5,898 -
Noncurrent liabilities (4,482) (947)
-----------------------------
$ 5,151 $ (947)
=============================
The net change in the valuation allowance during 1992 was an increase of
$2,931,000, primarily related to acquired operating loss carryforwards.
30
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
The deferred income tax benefit recorded in 1991 was primarily due to
differences in recognizing depreciation and compensation and benefits expense
for income tax and financial reporting purposes.
There are certain limitations on the use of most of the tax loss carryforwards
noted above. Tax loss carryforwards of approximately $12,991,000 expire in
various amounts between 1996 and 2008, while approximately $918,000 of such
carryforwards may be used indefinitely.
Approximately $4,300,000 of the deferred tax asset valuation allowance will be
allocated to costs in excess of net assets acquired if the related future tax
benefits are subsequently recognized.
31
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
11. GEOGRAPHIC AREA AND MAJOR CUSTOMER INFORMATION
The Company produces iron castings principally for automotive and industrial
manufacturers. Its operations include foreign manufacturing facilities,
primarily in Europe. All sales are to unaffiliated customers. Revenue and
income amounts for the three years ended December 31, 1993, and identifiable
assets at the end of each year, were as follows for U.S. and foreign operations
(in thousands of dollars):
1993 1992 1991
--------------------------------------------
Net sales:
U.S $383,182 $315,399 $248,026
Foreign 61,032 86,552 71,758
Operating profit (loss):
U.S (29,015) (5,541) (1,331)
Foreign 5,529 11,371 8,894
Income (loss) before taxes,
minority interest, and
cumulative effect of
accounting changes:
U.S. (32,524) (7,243) 4,098
Foreign 3,389 9,550 7,762
Identifiable assets:
U.S. 261,195 222,298 161,328
Foreign 46,263 52,159 52,879
Net sales to customers exceeding 10% of consolidated net sales were as follows
(as a percentage of consolidated net sales):
CUSTOMER 1993 1992 1991
------------------------------------------------------------
Chrysler 23% 22% 23%
Ford 23 20 20
General Motors 10 10 6
32
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY DATA AND SHARE INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-----------------------------------------------------------
(In Thousands of Dollars, Except Per Share Data)
1993
Net sales $122,763 $122,692 $ 92,694 $106,065
Gross profit 12,707 12,923 1,089 8,660
Net income (loss) 720 1,213 (21,268) (1,169)
Net income (loss) per common
share .03 .05 (.87) (.05)
Share prices (OTC):
High 12 11 11 10
Low 9.5 9 9 6
Cash dividends per common share .04 .04 .04 -
1992
Net sales $ 87,045 $109,096 $101,352 $104,458
Gross profit 9,857 14,644 9,941 5,702
Income (loss) before cumulative
effect of accounting changes 114 2,107 (690) (3,046)
Net income (loss) (28,307) 2,107 (690) (3,046)
Per share amounts:
Income (loss) before cumulative
effect of accounting changes .01 .10 (.03) (.12)
Net income (loss) (1.34) .10 (.03) (.12)
Share prices (OTC):
High 12 13.25 10.75 10.25
Low 7.25 9.75 8.875 8.125
Cash dividends per common share .04 .04 .04 .04
33
Intermet Corporation
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY DATA AND SHARE INFORMATION (UNAUDITED) (CONTINUED)
The Company was granted a retroactive price increase on certain products in
December 1993. Had this price increase been in effect at the beginning of the
year, first, second and third quarter net income (loss) would each have been
favorably affected by $.01 per share.
Third and fourth quarter sales are usually lower than the first and second
quarter sales due to plant closings by automotive manufacturers for vacations
and model changeovers. The above share price information represents
inter-dealer transactions in The Nasdaq National Market without retail
markup, markdown or commission.