UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
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 1-12541
ATCHISON CASTING CORPORATION
(Exact name of registrant as specified in its charter)
Kansas 48-1156578
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 South Fourth Street
Atchison, Kansas 66002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (913) 367-2121
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ------------------------
Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: NONE
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 period 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the Common Stock, par value $.01 per share, of the
registrant held by nonaffiliates of the registrant as of September 9, 1998 was
$93,022,031.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value, outstanding as of September 9, 1998: 8,127,768
Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Proxy Statement for the Annual Meeting of
Stockholders to be held November 20, 1998, are incorporated by reference into
Part III.
PART I
ITEM 1. BUSINESS
GENERAL
ACC manufactures highly engineered metal castings that are utilized in a
wide variety of products, such as tractor-crawlers, excavators,
wheel-loaders, gas, steam and hydroelectric turbines, pumps, valves,
locomotives, passenger rail cars, automobiles, trucks, army tanks, navy
ships, paper-making machinery, oil field equipment, computer peripherals,
office furniture, home appliances, satellite receivers and consumer goods.
Having completed seventeen acquisitions since its inception in 1991, the
Company has established itself as a leading consolidator in the castings
industry. As a result of these acquisitions, the Company has the ability to
produce castings from a wide selection of materials, including carbon,
low-alloy and stainless steel, gray and ductile iron, aluminum and zinc as
well as the ability to manufacture parts in a variety of sizes, ranging from
small die cast components for the computer industry that weigh a few ounces
to mill housings for the steel industry that weigh up to 275 tons. Moreover,
ACC has extensive tooling and machining operations. The Company believes
that its broad range of capabilities, which addresses the needs of many
different markets, provides a distinct competitive advantage in the casting
industry.
The Company was founded to pursue a strategy of growth and diversification
through acquisitions in the highly fragmented foundry industry. Following
the initial acquisition of the steel casting operations of Rockwell
International in 1991, the Company has continued to acquire foundries in the
U.S., Canada and the U.K. As a result of these acquisitions, as well as
internal growth, ACC's net sales have increased from approximately $54.7
million in its first fiscal year ended June 30, 1992, to $373.8 million for
the fiscal year ended June 30, 1998, resulting is a compound annual growth
rate of 37.8%.
Since 1991, the number of customers served by the Company has increased
from 12 to more than 400, including companies such as Caterpillar, Gardner
Denver, General Motors, General Electric, Westinghouse, General Dynamics,
Shell, British Steel, Nucor, Ingersoll-Dresser, John Deere, Chrysler, and
Meritor (formerly Rockwell International). The Company has received supplier
excellence awards for quality from, or has been certified by, substantially
all of its principal customers.
The Company's favorable industry position is attributable to several
factors, including: (i) its use of new and advanced casting technologies;
(ii) its ability to cast substantially all types of iron and steel, as well
as aluminum and zinc; (iii) the Company's emphasis on customer service and
marketing; and (iv) the Company's position as a long-term supplier to many of
its major customers.
The principal executive offices of the Company are located at 400 South
Fourth Street, Atchison, Kansas 66002-0188, and the Company's telephone
number is (913) 367-2121.
2
COMPANY STRATEGY
ACC is pursuing growth and diversification through a two-pronged
approach of: (i) making strategic acquisitions within the widely fragmented
and consolidating foundry industry; and (ii) integrating the acquired
foundries to achieve economies of scale, while strengthening marketing and
promoting the use of new casting technology.
STRATEGIC ACQUISITIONS
ACQUIRE LEADERS AND BUILD CRITICAL MASS. The Company initially seeks to
acquire foundries that are considered leaders in their respective sectors.
After acquiring a leader in a new market, ACC strives to make subsequent
acquisitions that further penetrate that market and take advantage of the
leader's technical expertise. The Atchison/St. Joe Division is a leader in
the field of large, complex steel castings. This acquisition in 1991 provided
credibility for ACC's presence in the industry and established a base for
add-on acquisitions. Following the Atchison/St. Joe Division acquisition, the
Company added capacity and strengthened its base through the add-on
acquisitions of Amite Foundry and Machine, Inc. ("Amite") in 1993 and
Canadian Steel Foundries, Ltd. ("Canadian Steel") in 1994. As an additional
example, Prospect Foundry, Inc. ("Prospect") was acquired in 1994 due to its
leading position in gray and ductile iron casting production. The subsequent
acquisition of La Grange Foundry Inc. ("La Grange") in 1995 further enhanced
ACC's position in this market.
BROADEN PRODUCT OFFERINGS AND CAPABILITIES. The Company also seeks to
acquire foundries that add a new product line or customer base that can be
leveraged throughout ACC's network of foundries. For example, prior to the
acquisition of Prospect in 1994, which expanded ACC's capabilities to include
gray and ductile iron, the Company only produced carbon and low alloy steel
castings. The acquisition of Quaker Alloy, Inc. ("Quaker Alloy") expanded
ACC's stainless and high alloy steel capabilities to include a wider range of
casting sizes. Los Angeles Die Casting Inc. ("LA Die Casting"), a leading die
caster of aluminum and zinc components for the computer and recreation
markets, provides ACC with an entry into the aluminum and zinc die casting
markets. PrimeCast, Inc. ("PrimeCast") (formerly the Beloit Castings Division
of Beloit Corporation) expanded ACC's capabilities to produce large iron
castings. The acquisition of Sheffield Forgemasters Group Limited
("Sheffield") brings to ACC the ability to offer cast and forged rolls,
larger steel castings and centrifically cast parts.
DIVERSIFY END MARKETS. The Company attempts to lessen the cyclical
exposure at individual foundries by creating a diversified network of
foundries that serve a variety of end markets. Kramer International, Inc.
("Kramer"), a supplier of pump impellers, was acquired in 1995, expanding
ACC's sales to the energy and utility sectors. The Company believes ACC's
presence in these markets somewhat offsets its exposure to the railroad and
mining and construction markets, as energy and utility cycles do not
necessarily coincide with railroad investment or mining and construction
cycles. The acquisition of Prospect diversified the end markets served by the
Company by providing access to both the agricultural equipment and trucking
industries. Currently, the Company serves more than ten major end-user
markets, compared to three in 1991.
The following table presents the Company's seventeen acquisitions and
their primary strategic purpose.
3
DATE
MANUFACTURING UNIT ACQUIRED STRATEGIC PURPOSE
- --------------------- -------- -----------------
Atchison/St. Joe Division 06/14/91 Leader in carbon and low
alloy, large, complex steel
castings. Initial platform for
Company strategy.
Amite 02/19/93 Increase capacity to take on
new projects with customers.
Add-on to Atchison/St. Joe
Division.
Prospect 04/01/94 Leader in gray and ductile
iron castings.
Quaker Alloy 06/01/94 Develop position in stainless
and high alloy steel castings.
Canadian Steel 11/30/94 Access to hydroelectric and
steel mill markets. Develop
position in large castings.
Kramer 01/03/95 Leader in castings for pump
industry.
Empire Steel Castings, Inc. 02/01/95 Build position in pump and
valve markets. Add-on to Quaker
Alloy.
La Grange 12/14/95 Build position in gray and
ductile iron casting markets.
The G&C Foundry Company 03/11/96 Highly regarded in fluid power
market. Build position in gray
and ductile iron casting
markets.
LA Die Casting 10/01/96 Leader in aluminum and zinc
die casting.
Canada Alloy Castings, Ltd. 10/26/96 Build position in existing
markets. Smaller castings than
Canadian Steel, but similar
markets and materials.
Pennsylvania Steel Foundry 10/31/96 Well regarded in turbine
& Machine Company industry. Build position
in power generation, pump
and valve markets. Add-on
to Quaker Alloy and Empire.
Jahn Foundry Corp. 02/14/97 Develop position in market for
automotive castings. Add-on
iron foundry.
PrimeCast 07/01/97 Build position in gray and
ductile iron casting markets.
Enter paper-machinery market,
acquire capability for large
iron castings and expand
ability to cast bronze.
Inverness Castings Group, Inc. 10/06/97 Expand in automotive and
aluminum products.
Sheffield 04/06/98 Enter European marketplace and
add new product lines,
including forgings.
Claremont Foundry, Inc. 05/01/98 Company's first automatic
molding line for steel castings
made in green sand molds.
Penetrate more deeply into mass
transit market.
4
INTEGRATION OF ACQUIRED FOUNDRIES
STRENGTHEN MARKETING FUNCTIONS. Many foundries, particularly those that
operate as captive foundries or only rely on a small number of customers, do
not have strong marketing capabilities. ACC views this industry-wide
marketing weakness as an opportunity to establish a competitive advantage.
The Company places great emphasis on maximizing new business opportunities by
strengthening marketing capabilities, adding sales people and cross-selling
between foundries.
One way in which ACC builds the marketing efforts of its foundries is to
increase the number of sales personnel at both existing and acquired
foundries. In addition to sales people added through acquisitions, the
Company has incrementally increased the sales force by 29%. Another element
of the Company's marketing effort is to jointly develop castings with its
customers. Joint development projects using new technology, and the resulting
increased service and flexibility provided to customers, is an important
marketing tool and has been instrumental in receiving several new orders. For
example, a joint development project between Caterpillar and ACC led to the
production of the boom tip casting for one of Caterpillar's new hydraulic
excavators. Joint development projects have also taken place with General
Motors, Nordberg and Chrysler, among others.
An increasingly important aspect of the Company's marketing strategy has
been to develop its ability to cross-sell among its foundries. In acquiring
new foundries and expanding into new markets, the Company has gained a
significant advantage over smaller competitors since its sales force is able
to direct its customers to foundries with different capabilities. This
benefits ACC in that it enables foundries to use the Atchison name and
relationships to gain new customers as well as helping customers to reduce
their supplier base by providing "one-stop" shopping. The Company facilitates
cross-selling by reinforcing the sales force's knowledge of Company-wide
capabilities through visits to individual facilities.
INTRODUCE ADVANCED TECHNOLOGY. As part of its acquisition strategy, the
Company is systematically introducing new advanced technologies into each of
its acquired foundries to enhance their competitive position. For example,
the Company's capabilities in finite element analysis and three-dimensional
solid modeling are having a beneficial impact on sales and casting production
by helping customers to design lighter and stronger castings, shortening
design cycles, lowering casting costs and in some cases creating new
applications. These new technologies have enhanced the Company's ability to
assist customers in the component design and engineering stages,
strengthening the Company's relationships with its customers. New techniques
involve computerized solid models that are used to simulate the casting
process, to make patterns and auxiliary tooling and to machine the finished
castings. The Company intends to implement this new technology in all of its
foundries and, to date, eleven of ACC's foundries have implemented or are in
the process of implementing this technology.
Investments by the Company in technology improvements include: (i) new
solidification software and hardware for better casting design and process
improvement; (ii) Computer Numerical Control ("CNC") machine tools,
computer-assisted, laser measurement devices and new cutting head designs for
machine tools to improve productivity and quality in the machining of
castings; (iii) Argon-Oxygen Decarburization ("AOD") refining, which is used
to make high-quality stainless steel; (iv) computer-controlled sand binder
pumps to improve mold quality and reduce cost; and (v) equipment for
measuring the nitrogen content of steel, which helps in casting quality
improvement. ACC is one of the few foundry companies that uses its own
scanning electron microscope to analyze inclusions in cast metal. The Company
also participates in technical projects led by the Steel Founders' Society of
America and the American Foundrymen's Society, which are
5
exploring ways to melt and cast cleaner iron and steel, as well as U.S.
government/industry specific projects to shorten and improve the casting
design cycle.
INCREASE CAPACITY UTILIZATION. A principal objective of the Company in
integrating and operating its foundries is to increase capacity utilization
at both its existing and newly acquired facilities. Many of the Company's
foundries at the time of their acquisition have been operating with
underutilized capacity. The Company seeks to improve capacity utilization by
introducing more effective marketing programs and applying advanced
technologies as described above.
ACHIEVE PURCHASING ECONOMIES. Once an acquisition has been completed,
ACC makes its volume purchasing programs available to the newly acquired
foundry. ACC has realized meaningful cost savings by achieving purchasing
efficiencies for acquired foundries. By jointly coordinating the purchase of
raw materials, negotiation of insurance premiums and procurement of freight
services, ACC's individual foundries have, in some cases, realized savings of
10% to 30% of these specific costs.
LEVERAGE MANAGEMENT EXPERTISE. The Company believes that improvements
can often be made in the way acquired foundries are managed, including the
implementation of new technologies, advanced employee training programs,
standardized budgeting processes and profit sharing programs and providing
access to capital. To this effect, ACC enhances management teams to add
technical, marketing or production experience, if needed. For example, ACC
was able to significantly improve the profitability of Canadian Steel by
adding new members to management, entering new markets, installing finite
element solidification modeling and providing capital. As another example,
under ACC ownership, La Grange was able to negotiate a new labor agreement,
create profit sharing for all employees, broaden its customer base and
install solidification modeling.
INDUSTRY TRENDS
The American Foundrymen's Society estimates that global casting
production was 67.9 million metric tons in 1996, of which steel castings
accounted for approximately 5.5 million tons, iron castings for approximately
54.1 million tons and nonferrous castings for approximately 8.3 million tons.
It is further estimated that the top ten producing countries represent 72%
of the total production, with the U.S. representing in excess of 20% of the
world market.
The U.S. casting industry is estimated to have had shipments of
approximately 14.1 million tons in 1996, of which steel castings accounted
for approximately 1.4 million tons, iron castings for approximately 10.3
million tons and nonferrous castings for approximately 2.4 million tons.
Recent estimates forecast approximately 3% growth in shipments in each of
1997 and 1998. The Company has been able to grow at a rate in excess of the
overall industry principally as a result of its strategy and due to key
trends affecting the casting industry, including the following:
INDUSTRY CONSOLIDATION
Although still highly fragmented, the foundry industry has consolidated
from approximately 465 steel foundries and 1,400 iron foundries in 1982 to
approximately 285 and 700 foundries, respectively, in 1997. As the industry
has consolidated, capacity utilization has increased from approximately 45%
in 1982 to more than 75% in 1997. This consolidation trend has been
accompanied by increased outsourcing of casting production and OEM supplier
rationalization.
6
OUTSOURCING. Many OEMs are outsourcing the manufacture of cast
components to independent foundries in an effort to reduce their capital and
labor requirements and to focus on their core businesses. Management believes
that captive foundries are often underutilized, inefficiently operated and
lack the latest technology. Several of ACC's OEM customers, such as
Caterpillar, General Motors, General Electric, Meritor (formerly Rockwell
International), Ingersoll-Dresser, Gardner Denver and Beloit Corporation,
have closed or sold one or more of their captive foundries during the past
ten years and have outsourced the castings which they once made to
independent suppliers such as the Company. As described above, the closure of
these facilities has contributed to increased capacity utilization at the
remaining foundries.
OEM SUPPLIER RATIONALIZATION. OEMs are rationalizing their supplier
base to fewer foundries that are capable of meeting increasingly complex
requirements. For example, OEMs are asking foundries to play a larger role in
the design, engineering and development of castings. In addition, some
customers have demanded that suppliers implement new technologies, adopt
quality (ISO 9000 and QS 9000) standards and make continuous productivity
improvements. As a result, many small, privately-owned businesses have chosen
to sell their foundries because they are unwilling or unable to make
investments necessary to remain competitive. Moreover, the EPA and OSHA
require compliance with increasingly stringent environmental and governmental
regulations.
NEW CASTING TECHNOLOGY
Recent advances in casting technology and pattern-making have created
new opportunities for reducing costs while increasing efficiency and product
quality. The combination of powerful, low cost computer workstations with
finite element modeling software for stress analysis and metal solidification
simulation is helping foundries and customers to design castings that are
lighter, stronger and more easily manufactured at a competitive cost.
The Company believes new casting technologies have led to growth in
casting shipments by replacing forgings and fabrications in certain
applications. In the past, fabricated (welded) components have been used in
order to reduce tooling costs and product development lead-time. New casting
technology has helped to reduce the weight and cost, and shorten the
lead-time, of castings and has therefore increased the relative
attractiveness of cast components. For example, these improvements allowed an
ACC customer to replace a fabricated steel boom that is used in a typical
mining vehicle with one that is cast. The cast steel boom weighs 20% less
than the fabricated component that it replaced, allowing an increase in
payload. Product life is increased due to greater corrosion resistance.
Another customer replaced the combination cast/fabricated body of a rock
crusher with a one-piece casting, reducing labor for cutting, welding and
machining as a result. An example of an application in which castings have
replaced forged products is the blow-out preventer that is used to control a
well "blow-out" during drilling. These products are required to comply with
stringent safety standards because blow-out preventers must be able to
contain pressures of 15,000 pounds per-square-inch. Due to lower costs and
equally stringent safety features made possible by new casting technologies,
castings have substantially replaced forgings for some blow-out preventer
bodies.
MARKETS AND PRODUCTS
MINING AND CONSTRUCTION. ACC's castings are used in tractor-crawlers,
mining trucks, excavators, drag lines, wheel-loaders, rock crushers, diesel
engines, slurry pumps, coal mining machines and ore-processing equipment.
Mining and construction equipment customers include Caterpillar, Nordberg,
Meritor (formerly Rockwell International), Gardner Denver, John Deere,
Komatsu, Harnischfeger and Euclid, among others. Products supplied to the
mining and construction
7
industry accounted for 31.1%, 31.4% and 23.1% of the Company's net sales in
fiscal 1996, fiscal 1997 and fiscal 1998, respectively.
AUTOMOTIVE. The automotive industry uses both iron and aluminum
castings, as well as aluminum die castings. ACC recently entered this market
through the purchase of Jahn Foundry Corp. ("Jahn Foundry") in Springfield,
Massachusetts and Inverness Castings Group, Inc. ("Inverness") in Dowagiac,
Michigan. Customers in this market include General Motors and Chrysler, among
others. Automotive products produced by the Company accounted for 1.6% and
10.4% of the Company's net sales in fiscal 1997 and fiscal 1998, respectively.
UTILITIES. Many of ACC's castings are used in products for the utility
industry, such as pumps, valves and gas compressors. ACC also makes steam,
gas and hydroelectric turbine castings, nuclear plant components, sewage
treatment parts and other castings for the utility industry. In addition, the
Company manufactures replacement products that are used when customers
perform refurbishments. Customers include Westinghouse, General Electric,
GEC-Alsthom, Sulzer, Siemens, Kvaerner, Goulds Pumps, and Neles Controls.
Utility products produced by the Company accounted for 21.5%, 13.1% and
9.9% of the Company's net sales in fiscal 1996, fiscal 1997 and fiscal 1998,
respectively.
ENERGY. The Company's products for the energy market include pumps,
valves and compressors for transmission and refining of petrochemicals,
blow-out preventers and mud pumps for drilling and work-over of wells,
lifting hooks and shackles for offshore installation of equipment, winch
components for rig positioning, nodes for platform construction, subsea
components and other oil field castings. Shell, Amoco, Aker-Verdal, Shaffer,
Cooper Energy, Hydril, Solar, Nordstrom, Ingersoll-Dresser Pumps and Amclyde
are among the Company's many energy-related customers. Energy products
produced by the Company accounted for 12.2%, 14.3% and 8.9% of the Company's
net sales in fiscal 1996, fiscal 1997 and fiscal 1998, respectively.
RAILROAD. The Company supplies cast steel undercarriages for
locomotives, among other parts, for this market. GM is ACC's largest
locomotive customer, and has purchased locomotive castings from the
Atchison/St. Joe Division for over 50 years.
MILITARY. Weapons and equipment for the Army, Navy and Coast Guard
employ many different types of castings. The Company makes components for
ships, battle tanks, howitzers and other heavy weapons. The military casting
market has declined sharply, but ACC has been able to replace this volume by
targeting new products such as turbines, compressors, pumps and valves.
Customers in this market include General Dynamics, Litton, Bath Iron Works,
Boeing, the U.S. Army and Avondale Shipyards, among others.
TRUCKING. The Company manufactures components used on truck engines and
suspension systems. Many of ACC's castings are used in aftermarket products
to achieve better fuel economy or to enhance ride characteristics. Customers
include Horton Industries, Detroit Diesel and others.
FARM EQUIPMENT. ACC makes a variety of castings for farm tractors,
baling equipment, harvesters, sugar cane processors and other agricultural
equipment for customers such as John Deere, Caterpillar and New Holland.
PAPER-MAKING MACHINERY. The paper-making machinery industry uses a
variety of iron, steel and non-ferrous castings, both in original equipment
and for the aftermarket. ACC has been a minor
8
supplier to this market since 1992. The acquisition of the castings division
of Beloit Corporation in July 1997 makes ACC a significant supplier of
castings to this market.
MASS TRANSIT. ACC began making undercarriages for passenger rail cars
in 1992 and is a leading casting supplier to the mass transit market. The
Company's castings are used on the BART system in San Francisco, METRA in
Chicago, NCTD in San Diego, MARTA in Atlanta, and in Miami and Vancouver.
ACC's La Grange and Claremont Foundry, Inc. ("Claremont") cast components
used in subway cars in several cities, including New York City, which is the
largest user of subway cars in North America.
STEEL INDUSTRY. The steel industry uses rolls to form cast steel into
sheets, bars, rods, beams and plates, which are then used to make end
products such as car bodies, tin cans and bridges. Rolls are consumed as
steel is rolled, so there is a steady demand for rolls. Customers in this
market include British Steel and Nucor, among others. Sheffield Forgemasters
Rolls Limited ("Forgemasters Rolls") is one of the world leaders in cast and
forged rolls for the steel making industry.
OTHER. Other markets include process equipment such as rubber mixers,
plastic extruders, dough mixers, machine tools and a variety of general
industrial applications. With the acquisition of LA Die Casting, the Company
entered the consumer market. LA Die Casting supplies components used to make
recreational vehicles, computer peripherals, direct satellite receivers and
pool tables. Customers include California Amplifier, RC Design, Care Free of
Colorado and Printronix.
SALES AND MARKETING
New foundry technologies and the new applications resulting therefrom
require a more focused and knowledgeable sales force. The Company pursues an
integrated sales and marketing approach that includes senior management,
engineering and technical professionals, production managers and others, all
of whom work closely with customers to better understand their specific
requirements and improve casting designs and manufacturing processes. The
Company supplements its direct sales effort with participation in trade
shows, marketing videos, brochures, technical papers and customer seminars on
new casting designs.
The Company's engineering and technical professionals are actively
involved in marketing and customer service, often working with customers to
improve existing products and develop new casting products and applications.
They typically remain involved throughout the product development process,
working directly with the customer to design casting patterns, build the
tooling needed to manufacture the castings and sample the castings to ensure
they meet customers' specifications. The Company believes that the technical
assistance in product development, design, manufacturing and testing that it
provides to its customers gives it an advantage over its competition.
Customers tend to develop long-term relationships with foundries that
can provide high quality, machined castings delivered on a just-in-time basis
that do not require on-site inspection. Frequently, the Company is the only
current source for the castings that it produces. Maintaining duplicate
tooling in multiple locations is costly, so customers prefer to rely on one
supplier for each part number. Moving the tooling to another foundry is
possible, however, such a move entails considerable time and expense on the
customer's part. In addition, ACC is forming product development partnerships
with a number of customers to develop new applications for castings.
9
BACKLOG
The Company's backlog is based upon customer purchase orders that the
Company believes are firm and does not include purchase orders anticipated
but not yet placed. At June 30, 1998, the Company's backlog was approximately
$198.2 million, as compared to backlog of approximately $80.8 million at June
30, 1997. The backlog is scheduled for delivery in fiscal 1999 except for
approximately $27.1 million, of which $20.3 million is scheduled for delivery
in fiscal 2000. The level of backlog at any particular time is not
necessarily indicative of the future operating performance of the Company.
The Company historically has not experienced cancellation of any significant
portion of customer orders.
COMPETITION
The Company competes with a number of foundries in one or more product
lines, although none of the Company's competitors compete with it across all
product lines. The principal competitive factors in the castings market are
quality, delivery and price; however, breadth of capabilities and customer
service have become increasingly important. The Company believes that it is
able to compete successfully in its markets by: (i) offering high quality,
machined castings; (ii) working with customers to develop and design new
castings; (iii) providing reliable delivery and short lead-times; (iv)
containing its manufacturing costs, thereby pricing competitively; and (v)
offering a broad range of cast materials.
The Company believes that the market for iron and steel castings is
attractive because of a relatively favorable competitive environment, high
barriers to entry and the opportunity to form strong relationships with
customers. New domestic competitors are unlikely to enter the foundry
industry because of the high cost of new foundry construction, the need to
secure environmental approvals at a new foundry location, the technical
expertise required and the difficulty of convincing customers to switch to a
new, unproven supplier.
ACC, and the foundry industry in general, competes with manufacturers of
fabrications in some application areas. The Company believes that the
relative advantages of castings, particularly in light of new casting design
technology, which reduces weight, cost and leadtime while improving casting
quality, will lead to increased replacement of fabrications by iron and steel
castings. The Company competes with foundries in Asia, Europe and North
America.
MANUFACTURING
CASTINGS. Casting is one of several methods, along with forging and
fabricating, which shape metal into desired forms. Castings are made by
pouring or introducing molten metal into a mold and allowing the metal to
cool until it solidifies, creating a monolithic component. Some castings,
such as die castings, are made with a permanent metal mold which can be used
repeatedly. Others, such as sand castings, are made in a sand mold which is
used only once. Forgings are made by shaping solid metal with pressure,
usually in a die or with hammers. Fabrications are made by welding together
separate pieces of metal. Castings may offer significant advantages over
forgings and fabrications. A well-designed casting can be lighter, stronger
and more stress and corrosion resistant than a fabricated part. Although
castings and forgings are similar in several respects, castings are generally
less expensive than forgings.
10
CASTING PROCESS. The steel casting manufacturing process involves
melting steel scrap in electric arc or induction furnaces, adding alloys,
pouring the molten metal into molds made of sand or iron and removing the
solidified casting for cleaning, heat treating and quenching prior to
machining the casting to final specifications. The manufacture of a steel
casting begins with the molding process. Initially, a pattern constructed of
wood, aluminum or plastic is created to duplicate the shape of the desired
casting. The pattern, which has similar exterior dimensions to the final
casting, is positioned in a flask and foundry sand is packed tightly around
it. After the sand mold hardens, the pattern is removed. When the sand mold
is closed, a cavity remains within it shaped to the contours of the removed
pattern. Before the mold is closed, sand cores are inserted into the cavity
to create internal passages within the casting. For example, a core would be
used to create the hollow interior of a valve casing. With the cores in
place, the mold is closed for pouring. Castings for rolls are sometimes made
by stirring the mold while the liquid steel or iron is being poured into it.
Steel scrap and alloys are melted in an electric arc furnace at
approximately 2,900 degrees Fahrenheit, and the molten metal is poured from a
ladle into molds. After pouring and cooling, the flask undergoes a "shakeout"
procedure in which the casting is removed from the flask and vibrated to
remove sand. The casting is then moved to a blasting chamber for removal of
any remaining foundry sand and scale. Next, the casting is sent to the
cleaning room, where an extensive process removes all excess metal. Cleaned
castings are put through a heat treating process, which improves properties
such as hardness and tensile strength through controlled increases and
decreases in temperature. A quench tank to reduce temperatures rapidly is
also available for use in heat treatment. The castings are shot blasted again
and checked for dimensional accuracy. Each casting undergoes a multi-stage
quality control procedure before being transported to one of the Company's or
the customer's machine shops for any required machining.
Iron castings are processed similarly in many respects to steel
castings. Melting and pouring temperatures for molten iron are approximately
2,400 degrees Fahrenheit, and less cleaning and finishing is required for
iron castings than is typically required for steel castings. Iron and steel
scrap may both be used in making cast iron.
Die casting, as contrasted to sand casting, uses a permanent metal mold
that is reused. Melting and pouring temperatures for aluminum are less than
half that used for steel, and die castings normally require less cleaning
than iron or steel castings.
FORGING PROCESS. The forging process applies pressure by hitting or
pressing a heated ingot or wrought steel blank. The forged piece is then
heat-treated and machined much in the same manner as a steel casting.
MATERIALS. Steel is more difficult to cast than iron, copper or
aluminum because it melts at higher temperatures, undergoes greater shrinkage
as it solidifies, causing the casting to crack or tear if the mold is not
properly designed, and is highly reactive with oxygen, causing chemical
impurities to form as it is poured through air into the mold. Despite these
challenges, cast steel has become a vital material due to its superior
strength compared to other ferrous metals. In addition, most of the
beneficial properties of steel match or exceed those of competing ferrous
metals. The Company's first foundry, which today forms the Atchison/St. Joe
Division, produced carbon and low alloy steel castings when it was acquired
from Rockwell International in 1991. ACC added an AOD vessel for making
stainless steel in order to better supply the pump and valve markets, which
sometimes require stainless steel castings to be made from the same patterns
used for carbon steel castings. Also in 1994, ACC purchased Quaker Alloy,
which specialized in casting high alloy and stainless steels for valves,
pumps and other equipment. Sheffield, Canadian Steel and Canada Alloy
Castings, Ltd.
11
("Canada Alloy") also make high alloy and stainless castings, further
reinforcing ACC's market position and skill base concerning the casting of
stainless and specialty, high alloy steels.
In applications that do not require the strength, ductility and/or
weldability of steel, iron castings are generally preferred due to their
lower cost, shorter lead-times and somewhat simpler manufacturing processes.
Ductile iron is stronger and more flexible than traditional cast iron, known
as gray iron, but is easier and less expensive to cast than steel. Due to
these qualities, the demand for ductile iron is increasing faster than for
either traditional gray cast iron or cast steel. In 1994, ACC initiated
manufacturing of gray and ductile iron through the acquisition of Prospect.
ACC's presence in ductile iron was increased through the subsequent purchases
of La Grange, The G&C Foundry Company ("G&C") and PrimeCast.
Aluminum castings (including die castings) generally offer lighter
weight than iron or steel, and are usually easier to cast because aluminum
melts at a lower temperature. These advantages, coupled with low prices for
aluminum during the last decade, have led to a substantial increase in the
use of aluminum castings, especially in motor vehicles. Aluminum's relative
softness, lower tensile strength and poor weldability limit its use in many
applications where iron and steel castings are currently employed. In 1996,
ACC entered the nonferrous market with the purchase of LA Die Casting, which
die casts aluminum and zinc.
Steel, unlike iron, can be forged as well as cast. Forging compresses
steel, and is preferred for some critical applications like nuclear vessels,
turbine shafts and pressure vessels, among others.
The ability to provide cast and forged components in a broad range of
materials allows ACC to present itself as a "one-stop shop" for some
customers and simplifies purchasing for others. Since customers in general
have a goal of reducing their total number of suppliers, a broader range of
materials and casting skills gives ACC an advantage over many other foundry
operations.
MACHINING. The Company machines many of its steel castings, typically
to tolerances within 30 thousandths of an inch. Some castings are machined to
tolerances of one thousandth of an inch. Machining includes drilling,
threading or cutting operations. The Company's Sheffield, St. Joe, Amite and
Inverness machine shops have a wide variety of machine tools, including CNC
machine tools. The Company also machines some of its castings at Canadian
Steel, Quaker Alloy, Empire Steel Castings, Inc. ("Empire") and Kramer. The
ability to machine castings provides a higher value-added product to the
customer and improved quality. Casting imperfections, which are typically
located near the surface of the casting, are usually discovered during
machining and corrected before the casting is shipped to the customer.
NON-DESTRUCTIVE TESTING. Customers typically specify the physical
properties, such as hardness and strength, which their castings are to
possess. The Company determines how best to meet those specifications.
Regular testing and monitoring of the manufacturing process are necessary to
maintain high quality and to ensure the consistency of the castings.
Electronic testing and monitoring equipment for tensile, impact, radiography,
ultrasonic, magnetic particle, dye penetrant and spectrographic testing are
used extensively to analyze molten metal and test castings.
ENGINEERING AND DESIGN. The Company's process engineering department
assists the customer in designing the product and works with manufacturing
departments to determine the most cost effective way to produce the casting.
Among other computer-aided design techniques, the Company uses
three-dimensional solid modeling and solidification software. This equipment
reduces the time required to produce sample castings for customers by several
weeks and improves the casting design.
12
CAPACITY UTILIZATION. The following table shows the type and the
approximate amount of available capacity, in tons, for each foundry and die
caster. The actual number of tons that a foundry can produce annually is
dependent on product mix. Complicated castings, such as those used for
military applications or in steam turbines, require more time, effort and use
of facilities, than do simpler castings such as those for the mining and
construction market. Also, high alloy and stainless steel castings generally
require more processing time and use of facilities than do carbon and low
alloy steel castings.
TONS
SHIPPED
ESTIMATED* 12 MONTHS
ANNUAL ENDED ESTIMATED*
MANUFACTURING METALS CAST OR CAPACITY JUNE 30, CAPACITY
UNIT FORGED MAJOR APPLICATIONS IN NET TONS 1998 UTILIZATION
------------- -------------- ------------------ ----------- --------- -----------
Atchison/St. Joe Carbon, low Mining and construction, 30,000 27,500 92%
Division alloy and rail, military, valve,
stainless steel turbine and compressor
Amite Carbon and Marine, mining and 14,000 4,391 31%
low alloy steel construction
Prospect Gray and Construction, agricultural, 12,500 10,624 85%
ductile iron trucking, hydraulic, power
transmission and machine
tool
Quaker Alloy Carbon, low Pump and valve 6,000 1,774 30%
alloy and
stainless steel
Canadian Steel Carbon, low Hydroelectric and steel 6,000 2,327 39%
alloy and mill
stainless steel
Kramer Carbon, low Pump impellers and 1,450 1,011 70%
alloy and casings
stainless steel,
gray and
ductile iron
Empire Carbon and Pump and valve 4,800 1,243 26%
low alloy steel
and gray,
ductile and
nickel resistant
iron
La Grange Gray, ductile Mining and construction 14,000 10,315 74%
and compacted and transportation
graphite iron
G&C Gray and Fluid power (hydraulic 12,000 9,356 78%
ductile iron control valves)
13
TONS
SHIPPED
ESTIMATED* 12 MONTHS
ANNUAL ENDED ESTIMATED*
MANUFACTURING METALS CAST OR CAPACITY JUNE 30, CAPACITY
UNIT FORGED MAJOR APPLICATIONS IN NET TONS 1998 UTILIZATION
------------- -------------- ------------------ ----------- --------- -----------
LA Die Casting Aluminum and Communications, 2,400 1,221 51%
zinc recreation and computer
Canada Alloy Carbon, low Power generation, pulp 2,500 1,301 52%
alloy and and paper machinery,
stainless steel pump and valve
Pennsylvania Carbon and Power generation, pump 3,700 2,310 62%
Steel Foundry stainless steel and valve
and Machine
Company
Jahn Gray iron Automotive, air 11,000 6,199 56%
conditioning and
agricultural
PrimeCast Gray and Paper-making machinery 19,840 11,512 58%
ductile iron
and stainless
steel
Inverness Aluminum Automotive, furniture and 10,400 8,183 79%
appliances
Forgemasters Rolls Iron and Steel Steel and aluminum 31,000 26,623 86%
rolling
Sheffield Iron and Steel Oil and gas, ingot, 113,000 63,146 56%
Forgemasters petrochemical, power
Engineering generation
Limited
Claremont Steel Mining and mass transit 6,000 1,776 30%
-------- ------- ----
Totals 300,590 190,812 63%
-------- ------- ----
-------- ------- ----
- -------------
* Estimated annual capacity and utilization are based upon management's estimate of the applicable manufacturing unit's
theoretical capacity assuming a certain product mix and assuming such unit operated five days a week, three shifts per day and
assuming normal shutdown periods for maintenance. Actual capacities will vary, and such variances may be material, based upon a
number of factors, including product mix and maintenance requirements.
14
RAW MATERIALS
The principal raw materials used by the Company include scrap iron and
steel, aluminum, zinc, molding sand, chemical binders and alloys, such as
manganese, nickel and chrome. The raw materials utilized by the Company are
available in adequate quantities from a variety of sources. From time to time
the Company has experienced fluctuations in the price of scrap steel, which
accounts for approximately 4% of net sales, and alloys, which account for
less than 2% of net sales. The Company has generally been able to pass on the
increased costs of raw materials and has escalation clauses for scrap with
certain of its customers. As part of its commitment to quality, the Company
issues rigid specifications for its raw materials and performs extensive
inspections of incoming raw materials.
QUALITY ASSURANCE
The Company has adopted sophisticated quality assurance techniques and
policies which govern every aspect of its operations to ensure high quality.
During and after the casting process, the Company performs many tests,
including tensile, impact, radiography, ultrasonic, magnetic particle, dye
penetrant and spectrographic tests. The Company has long utilized statistical
process control to measure and control dimensions and other process
variables. Analytical techniques such as Design of Experiments and the
Taguchi Method are employed for troubleshooting and process optimization.
As a reflection of its commitment to quality, the Company has been
certified by, or won supplier excellence awards from, substantially all of
its principal customers. Of 600 suppliers to General Motors' Electromotive
Division, the Company was the first supplier to receive the prestigious
Targets of Excellence award. Reflecting its emphasis on quality, the
Atchison/St. Joe Division was certified to ISO 9001 in August 1995, which
represents compliance with international standards for quality assurance.
Quaker Alloy, La Grange, Canada Alloy, Jahn Foundry, Pennsylvania Steel
Foundry & Machine Company ("Pennsylvania Steel") and Canadian Steel have each
been certified to ISO 9002. Other ACC foundries are preparing for ISO
certification.
EMPLOYEE AND LABOR RELATIONS
As of June 30, 1998, the Company had approximately 4,700 full-time
employees. In the last five years, the Company has not had any work
stoppages. The Company's hourly employees are covered by collective
bargaining agreements with several unions at fourteen of its locations. These
agreements expire at varying times over the next several years. The following
table sets forth a summary of the principal unions and term of the principal
collective bargaining agreements at the respective locations.
15
APPROXIMATE
NUMBER OF
MANUFACTURING DATE OF MEMBERS (AS
UNIT NAME OF PRINCIPAL UNION EFFECTIVE DATE EXPIRATION OF 06/30/98)
------------- ----------------------- -------------- ----------- ------------
Atchison/St. Joe United Steelworkers of 03/04/96 05/09/99 430
America, Local 6943
Prospect Glass, Molders, Pottery, 03/18/95 06/01/99 208
Plastics & Allied Workers
International, Local 63B
Quaker Alloy United Steelworkers of 07/15/95 07/15/99 142
America, Local 7274
Canadian Steel Metallurgistes Unis 02/12/96 02/12/01 105
d'Amerique, Local 6859
Empire United Steelworkers of 03/01/97 02/28/02 101
America, Local 3178
La Grange Glass, Molders, Pottery, 12/14/95 12/16/00 203
Plastics & Allied Workers
Union, Local 143
G&C United Electrical, Radio and 03/01/97 06/30/01 125
Machine Workers of America,
Local 714
LA Die Casting United Automobile, Aircraft, 12/13/97 12/08/00 63
Agricultural Implement
Workers of America, Local 509
Canada Alloy United Steelworkers of 04/04/97 04/03/02 70
America, Local 5699
Pennsylvania United Steelworkers of 10/23/95 10/24/98 150
Steel America, Local 6541
Jahn Glass, Molders, Pottery, 06/01/98 06/03/01 92
Plastics and Allied Workers
International, Local 97
PrimeCast Glass, Molders, Pottery, 08/04/96 08/04/00 121
Plastics and Allied Workers
International, Local 320
Inverness United Paperworker's 02/05/97 08/05/01 203
International, Local 7363
16
APPROXIMATE
NUMBER OF
MANUFACTURING DATE OF MEMBERS (AS
UNIT NAME OF PRINCIPAL UNION EFFECTIVE DATE EXPIRATION OF 06/30/98)
------------- ----------------------- -------------- ----------- ------------
Sheffield Allied Engineering 01/01/97 12/31/98 163
Forgemasters
Engineering
Limited
Allied Engineering 01/01/98 12/31/98 39
Foundry Section
General Municipal 01/01/98 12/31/98 60
and Boilermakers
Iron and Steel Trades 01/01/97 12/31/98 76
Confederation
Manufacturing Science and 01/01/97 12/31/98 50
Finance
Forgemasters Allied Engineering 01/08/97 01/08/99 147
Rolls
Allied Engineering 01/08/97 01/08/99 117
Foundry Section
Allied Engineering - Sheffield 01/01/98 12/31/98 82
17
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company.
NAME AGE POSITION WITH THE COMPANY
- ------- --- -------------------------
Hugh H. Aiken.............. 54 Chairman of the Board, President, Chief
Executive Officer and Director
David Fletcher............. 52 Group Vice President
John R. Kujawa............. 44 Group Vice President
Donald J. Marlborough...... 62 Group Vice President
Kevin T. McDermed.......... 38 Vice President, Chief Financial Officer,
Treasurer and Secretary
Richard J. Sitarz.......... 57 Vice President
James Stott................ 56 Vice President
HUGH H. AIKEN has been the Chairman of the Board, President, Chief
Executive Officer and a Director since June 1991. From 1989 to 1991, Mr.
Aiken served as an Associate of Riverside Partners, Inc., an investment firm
located in Boston, Massachusetts, and from 1985 to 1989, Mr. Aiken served as
General Manager for AMP Keyboard Technologies, Inc., a manufacturer of
electromechanical assemblies located in Milford, New Hampshire. Mr. Aiken
previously served as a Director and Chief Operating Officer of COMNET
Incorporated and as a Director and Chief Executive Officer of General
Computer Systems, Inc., both public companies.
DAVID FLETCHER has been Group Vice President and Chairman and CEO of
Atchison Casting UK Limited and the Sheffield Forgemasters Group since April
1998. Prior to this he was Chief Executive Officer of the Sheffield
Forgemasters Group in Sheffield, England, having joined the group in 1986 as
the main board director responsible for the Engineering group of companies
comprising Forgemasters Steel & Engineering Limited, River Don Castings
Limited, Forged Rolls (UK) Limited and British Rollmakers Corporation. From
1977 to 1986, Mr. Fletcher was Managing Director of various subsidiaries of
the Aurora Group, including Darwin Alloy Castings, Edgar Allen Foundry,
Willen Metals and Aurora Steels.
JOHN R. KUJAWA has been Group Vice President-Atchison/St. Joe and Amite
since November 1996 and Vice President-Atchison/St. Joe from August 1994 to
November 1996. He served as Executive Vice President-Operations of the
Company from July 1993 to August 1994, Vice President-Foundry of the Company
from June 1991 to July 1993, Assistant Foundry Manager of the Company from
1990 to 1991 and as Senior Process Engineer of the Company from 1989 to 1990.
He served as Operations Manager for Omaha Steel Castings, a foundry in Omaha,
Nebraska, from 1984 to 1989.
18
DONALD J. MARLBOROUGH has been Group Vice President-Canadian Steel, La
Grange and Canada Alloy since November 1996, Vice President-Corporate
Development and Canadian Steel from December 1994 to November 1996 and Vice
President-La Grange from December 1995 to November 1996. From May 1991 to
October 1994, Mr. Marlborough served as Vice President-Manufacturing and
Plant Manager for American Steel Foundries, a foundry in Chicago, Illinois,
and served as President and Director of Manufacturing for Racine Steel
Castings, a foundry in Racine, Wisconsin, from 1985 to June 1990.
KEVIN T. MCDERMED has been Vice President, Chief Financial Officer and
Treasurer of the Company since June 1991 and has served as Secretary of the
Company since May 1992. He served as the Controller of the Company from 1990
to June 1991 and as its Finance Manager from 1986 to 1990. Mr. McDermed has
been with the Company since 1981.
RICHARD J. SITARZ has been Vice President-Prospect since September 1994
and has served as President of Prospect since July 1992. He served as
Executive Vice President of Prospect since 1985. Mr. Sitarz has been with
Prospect since 1967.
JAMES STOTT has been Vice President - Kramer since May 1998. He served
as Group Vice President-Empire, Kramer, Pennsylvania Steel and Quaker Alloy
from November 1996 to May 1998 and Vice President-Kramer from January 1995 to
November 1996. He has served as President, Chief Executive Officer and Chief
Operating Officer of Kramer International, Inc. (the predecessor of Kramer)
since 1980.
PRODUCT WARRANTY
The Company warrants that every product will meet a set of
specifications, which is mutually agreed upon with each customer. The
Company's written warranty provides for the repair or replacement of its
products and excludes contingency costs. Often, the customer is authorized
to make the repair within a dollar limit, in order to minimize freight
costs and the time associated therewith. Although the warranty period is 90
days, this time limit is not strictly enforced if there is a defect in the
casting. In fiscal 1998, warranty costs amounted to less than one percent
of the Company's net sales.
ENVIRONMENTAL REGULATIONS
Companies in the foundry industry must comply with numerous federal,
state and local (and, with respect U.K. and Canadian operations, federal,
provincial and local) environmental laws and regulations relating to air
emissions, solid waste disposal, stormwater runoff, landfill operations,
workplace safety and other matters. The Clean Air Act, as amended, the Clean
Water Act, as amended, and similar provincial, state and local counterparts
of these federal laws regulate air and water emissions and discharges into
the environment. The Resource Conservation and Recovery Act, as amended, and
the Comprehensive Environmental Response, Compensation and Liability Act, as
amended ("CERCLA"), among other laws, address the generation, storage,
treatment, transportation and disposal of solid and hazardous waste and
releases of hazardous substances into the environment, respectively. The
Company believes that it is in material compliance with applicable
environmental laws and regulations and is not aware of any material
outstanding violations or citations with respect thereto at any of its
facilities, which would have a material adverse effect on the Company's
financial condition and results of operations, with the exception that in
July 1998,
19
EPA Region VII advised the Company of potential noncompliance with
CERCLA/EPRCRA continuous release reporting requirements at its Atchison,
Kansas facility. The Company is currently investigating its compliance
status to determine if such noncompliance exists or existed. Depending upon
the results of the investigation, the Company will either certify compliance
or pay an $11,000 penalty that will absolve the Company from all alleged
prior noncompliance at its Atchison, Kansas facility.
A Phase I environmental assessment of each of the Company's facilities
has been performed, and no significant or widespread contamination has been
identified at any Company facility. A Phase I assessment includes an
historical review, a public records review, a preliminary investigation of
the site and surrounding properties and the preparation and issuance of a
written report, but it does not include soil sampling or subsurface
investigations. There can be no assurance that these Phase I assessments have
identified, or could be expected to identify, all areas of contamination. As
the Company evaluates and updates the environmental compliance programs at
foundry facilities recently acquired, the Company may become aware of matters
of noncompliance that need to be addressed or corrected. In addition, there
is a risk that material adverse conditions could have developed at the
Company's facilities since such assessments.
The chief environmental issues for the Company's foundries are air
emissions and solid waste disposal. Air emissions, primarily dust particles,
are handled by dust collection systems. The Company anticipates that it will
incur additional capital and operating costs to comply with the Clean Air Act
Amendments of 1990 and the regulations that are in the process of being
promulgated thereunder. The Company is currently in the process of obtaining
permits under the new regulations and estimating the cost of compliance with
these requirements and the timing of such costs. Such compliance costs,
however, could have a material adverse effect on the Company's results of
operations and financial condition.
The solid waste generated by the Company's foundries generally consists
of nonhazardous foundry sand that is reclaimed for reuse in the foundries
until it becomes dust. The nonhazardous foundry dust waste is then disposed
of in landfills, two of which are owned by the Company (one in Atchison
County, Kansas, and one in Myerstown, Pennsylvania). No other parties are
permitted to use the Company's landfills, which are both in material
compliance with all applicable regulations to the Company's knowledge. Costs
associated with the future closure of the landfills according to regulatory
requirements could be material.
While under prior ownership, Kramer was identified as a potentially
responsible party ("PRP") with respect to cleanup of a waste disposal site
located in Franklin, Wisconsin, which was used by one of Kramer's former
subcontractors. The $6 million cleanup of this site has been completed.
Kramer's insurance carriers paid $300,000 toward clean-up. The performing PRP
has sued a group of nonperforming PRPs, including Kramer, for contribution.
ACME PRINTING INK COMPANY V. MENARD, ET AL., Case No 89C834 (E.D. Wis.).
Because of alleged unexpected cleanup costs, the performing PRP is demanding
additional contribution from Kramer beyond the $300,000 already paid.
Management believes that the resolution of this matter will not result in a
material adverse effect of the Company's results of operations or financial
condition. To date, all litigation costs related to this matter, including
attorneys' fees have been paid by Kramer's insurance carriers.
The Company also operates pursuant to regulations governing workplace
safety. The Company samples its interior air quality to ensure compliance
with OSHA requirements. To the Company's knowledge, it currently operates in
material compliance with all OSHA and other regulatory requirements governing
workplace safety.
20
The Company continues to evaluate its manufacturing processes and
equipment (including its recently acquired facilities) to ensure compliance
with the complex and constantly changing environmental laws and regulations.
Although the Company believes it is currently in material compliance with
such laws and regulations, the operation of casting manufacturing facilities
entails environmental risks, and there can be no assurance that the Company
will not be required to make substantial additional expenditures to remain in
or achieve compliance in the future.
21
ITEM 2. PROPERTIES
The Company's principal facilities are listed in the accompanying
table, together with information regarding their location, size and primary
function. The two landfills are used solely by the Company and contain
nonhazardous materials only, principally foundry sand. All of the Company's
principal facilities are owned.
The following table sets forth certain information with respect to the
Company's principal facilities.
FLOOR SPACE
NAME LOCATION PRINCIPAL USE IN SQ. FEET
---- -------- ------------- -----------
Corporate Office Atchison, KS Offices 3,907
Atchison Foundry Atchison, KS Steel foundry 451,218
Atchison Pattern Atchison, KS Pattern storage 159,711
Storage
St. Joe Machine Shop St. Joseph, MO Machine shop 142,676
Atchison Casting Atchison, KS Landfill for N/A
Landfill foundry sand
Amite Foundry & Amite, LA Steel foundry and 282,000
Machine Shop machine shop
Prospect Minneapolis, Iron foundry 133,000
MN
Quaker Alloy Myerstown, Steel foundry & 301,000
PA landfill for
foundry sand
Canadian Steel Montreal, Steel foundry 455,335
Quebec
Kramer Milwaukee, Steel foundry 23,000
WI
Empire Reading, PA Iron and steel 177,000
foundry
La Grange La Grange, Iron foundry 189,000
MO
G & C Sandusky, OH Iron foundry 80,000
LA Die Casting Los Angeles, Aluminum and zinc 35,000
CA die casting
Canada Alloy Kitchener, Steel foundry 83,000
Ontario
Pennsylvania Steel Hamburg, PA Steel foundry 158,618
Jahn Springfield, Iron foundry 207,689
MA
PrimeCast South Iron foundry 325,000
Beloit, IL
and Beloit,
WI
22
FLOOR SPACE
NAME LOCATION PRINCIPAL USE IN SQ. FEET
---- -------- ------------- -----------
Inverness Dowagiac, MI Aluminum die 210,900
casting
Forgemasters Rolls Sheffield Iron and steel 694,306
and Crewe, foundry
England and and machine shop
Coatbridge,
Scotland
Sheffield Forgemasters Sheffield, Iron and steel 1,225,247
Engineering Limited England foundry, forge and
machine shop
Claremont Claremont, Steel Foundry 110,000
NH
23
ITEM 3. LEGAL PROCEEDINGS
Except for the suit involving Kramer in the section entitled
"Environmental Regulations," the Company is not a party to any material legal
proceedings involving claims against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Common Stock was traded in the Nasdaq National Market under the
symbol "ACCX" from October 4, 1993 until December 11, 1996 when it began
trading on the New York Stock Exchange under the symbol "FDY." Prior to
October 4, 1993 there was no trading market for the Common Stock. The
following table sets forth the high and low sales prices for the shares of
Common Stock on the Nasdaq National Market and New York Stock Exchange for
the periods indicated.
HIGH LOW
------ --------
Fiscal Year Ending June 30, 1997:
First Quarter. . . . . . . . . . . . . . . . . . 16 1/4 13
Second Quarter . . . . . . . . . . . . . . . . . 18 1/8 15 1/4
Third Quarter. . . . . . . . . . . . . . . . . . 20 1/2 16 3/4
Fourth Quarter . . . . . . . . . . . . . . . . . 19 3/8 15 11/16
Fiscal Year Ending June 30, 1998:
First Quarter. . . . . . . . . . . . . . . . . . 22 16 3/4
Second Quarter . . . . . . . . . . . . . . . . . 21 9/16 15 5/8
Third Quarter. . . . . . . . . . . . . . . . . . 17 3/16 15 3/8
Fourth Quarter . . . . . . . . . . . . . . . . . 20 1/8 15 3/8
Fiscal Year Ending June 30, 1999:
First Quarter (through September 9, 1998). . . . 18 1/2 12 5/16
As of September 9, 1998, there were over 2,200 holders of the Common
Stock, including shares held in nominee or street name by brokers.
24
DIVIDEND POLICY
The Company has not declared or paid cash dividends on shares of its
Common Stock. The Company does not anticipate paying any cash dividends or
other distributions on its Common Stock in the foreseeable future. The
current policy of the Company's Board of Directors is to reinvest all
earnings to finance the expansion of the Company's business. The agreements
governing the Company's credit facility and $20 million senior notes contain
limitations on the Company's ability to pay dividends. See Note 8 of Notes to
Consolidated Financial Statements.
UNREGISTERED SECURITIES TRANSACTIONS
In lieu of cash compensation for services rendered in their capacity as
Directors of the Company, Mr. Ray Witt, Mr. John Whitney and Mr. Stuart Uram
were each provided at their election 869, 434 and 849 shares, respectively,
of common stock on July 22, 1997, July 22, 1997 and January 7, 1998,
respectively, with a then-current market value of $18.42, $18.42 and $16.38
per share, respectively. Such transactions were exempt from registration
under the Securities Act of 1933, as amended (the "Act"), pursuant to
Section 4(2) of the Act.
25
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain selected historical consolidated
financial information and is qualified by the more detailed Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual
Report on Form 10-K. The selected consolidated financial information for the
fiscal years ended June 30, 1994, 1995, 1996, 1997 and 1998 has been derived
from audited consolidated financial statements. The information below should
be read in conjunction with Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Annual Report on Form 10-K.
26
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1994 1995 1996 1997 1998
------- -------- -------- -------- --------
Net Sales. . . . . . . . . . . . . . . . . . . . . $82,519 $141,579 $185,081 $245,769 $373,768
Cost of Sales. . . . . . . . . . . . . . . . . . . 66,304 115,458 156,612 203,386 318,280
------- -------- -------- -------- --------
Gross Profit . . . . . . . . . . . . . . . . . 16,215 26,121 28,469 42,383 55,488
Operating Expenses:
Selling, General & Administrative. . . . . . . 6,581 13,058 15,459 21,559 28,798
Amortization of Intangibles. . . . . . . . . . 1,209 1,392 1,508 632 850
Other Income(1). . . . . . . . . . . . . . . . - 6,370 26,957 - -
------- -------- -------- -------- --------
Operating Income . . . . . . . . . . . . . . 8,425 18,041 38,459 20,192 25,840
Interest Expense . . . . . . . . . . . . . . . . 1,223 2,326 2,845 3,227 3,896
Minority Interest in Net Income of Subsidiaries. 62 280 225 270 448
------- -------- -------- -------- --------
Income Before Taxes and Extraordinary Item . . 7,140 15,435* 35,389* 16,695 21,496
Income Taxes . . . . . . . . . . . . . . . . . . 2,494 5,971 14,063 6,967 8,731
------- -------- -------- -------- --------
Income Before Extraordinary Item . . . . . . . 4,646 9,464 21,326 9,728 12,765
Extraordinary Item, net of tax(2). . . . . . . . 1,230 - - - -
------- -------- -------- -------- --------
Net Income . . . . . . . . . . . . . . . . . . $3,416 $9,464 $21,326 $9,728 $12,765
------- -------- -------- -------- --------
------- -------- -------- -------- --------
Earnings Per Share:
Basic. . . . . . . . . . . . . . . . . . . . . . $0.72 $1.73 $3.87 $1.68 $1.56
------- -------- -------- -------- --------
------- -------- -------- -------- --------
Diluted. . . . . . . . . . . . . . . . . . . . . $0.72 $1.73 $3.87 $1.67 $1.55
------- -------- -------- -------- --------
------- -------- -------- -------- --------
Net Income Per Share Excluding Extraordinary Item
and Other Income(1)(2)
Basic. . . . . . . . . . . . . . . . . . . . . . $0.98 $1.02 $0.92 $1.68 $1.56
------- -------- -------- -------- --------
------- -------- -------- -------- --------
Diluted. . . . . . . . . . . . . . . . . . . . . $0.98 $1.02 $0.92 $1.67 $1.55
------- -------- -------- -------- --------
------- -------- -------- -------- --------
Weighted Average Common Shares Outstanding
Basic. . . . . . . . . . . . . . . . . . . . . . 4,757,607 5,477,881 5,510,410 5,796,281 8,167,285
Diluted. . . . . . . . . . . . . . . . . . . . . 4,757,607 5,484,745 5,516,597 5,830,695 8,218,686
SUPPLEMENTAL DATA:
Depreciation and Amortization . . . . . . . . . . $4,541 $6,067 $7,411 $8,667 $11,695
Capital Expenditures(3) . . . . . . . . . . . . . 7,524 12,837 12,740 13,852 18,495
Number of Operating Units at Period End . . . . . 3 7 9 13 17
BALANCE SHEET DATA (AT PERIOD END):
Working Capital . . . . . . . . . . . . . . . . . $19,240 $27,727 $36,419 $57,231 $76,782
Total Assets. . . . . . . . . . . . . . . . . . . 87,217 130,287 162,184 213,408 346,139
Long-Term Obligations . . . . . . . . . . . . . . 22,549 34,920 34,655 27,758 87,272
Total Stockholders' Equity. . . . . . . . . . . . 42,683 52,698 74,654 122,731 135,614
* Includes other income of $6.4 million and $27.0 million for fiscal 1995 and
fiscal 1996, respectively, consisting primarily of insurance proceeds
related to the July 1993 Missouri River flood.
27
(1) Other income consists of $6.4 million and $27.0 million ($3.9 million
and $16.2 million net of tax or $0.71 and $2.95 per share), for fiscal 1995
and fiscal 1996, respectively, consisting primarily of insurance proceeds
related to the July 1993 Missouri River flood. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations-General."
(2) In connection with the repayment in October 1993 of substantially all
of the Company's interest-bearing indebtedness with the net proceeds of the
Company's initial public offering of Common Stock, the Company recorded an
extraordinary charge to income in the amount of approximately $1.2 million
(net of related income tax benefit of $787,000), relating to the early
retirement of debt and the write-off of deferred financing charges.
(3) During fiscal 1994, fiscal 1995, fiscal 1996, fiscal 1997 and fiscal
1998, the Company made capital expenditures of $4.7 million, $8.1 million,
$1.8 million, $1.4 million and $589,000 respectively, in connection with
the refurbishment of Amite. This 282,000 square foot facility was acquired
in February 1993 and had been inactive for several years.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company has pursued an active acquisition program designed to take
advantage of consolidation opportunities in the widely fragmented foundry
industry. The Company has acquired seventeen foundries since its inception.
As a result of these completed transactions as well as internal growth, the
Company's net sales have increased from approximately $54.7 million for its
first full fiscal year ended June 30, 1992 to $373.8 million for the fiscal
year ended June 30, 1998.
As an important part of the Company's growth strategy, the Company
evaluates on an ongoing basis potential industry-related acquisitions. While
the Company has not at the present time entered into any definitive agreement
contemplating any such acquisition, the Company is currently in various
stages of negotiations with potential acquisition candidates. There can be no
assurance as to whether or when any such negotiations will ultimately
culminate in a definitive agreement or, if a definitive agreement is reached,
whether any such acquisition will ultimately be consummated. To complete any
such acquisition, the Company may use its revolving credit facility. In the
event that no further borrowings are available under the revolving credit
facility, the Company would consider other financing alternatives available
at that time.
Due to the large size of certain orders, the timing for deliveries of
orders and the number and types of castings produced, the Company's net sales
and net income may fluctuate materially from quarter to quarter. Generally,
the first fiscal quarter is seasonally weaker than the other quarters as a
result of plant shutdowns for maintenance at most of the Company's foundries
as well as at many customers' plants. See "-Supplemental Quarterly
Information."
During July 1993, flooding of the Missouri River halted production of
the Company's Atchison, Kansas foundry for four weeks, negatively impacting
operating results. Although the Company was able to resume production at the
Atchison facility without a significant loss of existing orders, the 1993
flood has had a continuing negative effect on productivity and sales due to
increased equipment maintenance, production downtime and employee overtime.
The Company constructed a flood wall surrounding the Atchison facility that
the Company believes has significantly reduced the risk of future flood
damage. Following the flood, the Company was unable to renew its flood
insurance coverage at reasonable rates for this facility.
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements and Notes thereto and other financial information
included elsewhere in this Report.
29
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
Net sales for fiscal 1998 were $373.8 million, representing an increase
of $128.0 million, or 52.0%, over net sales of $245.8 million in fiscal 1997.
The operations acquired by the Company since the beginning of fiscal 1997
generated net sales of $33.8 million and $163.0 million in fiscal 1997 and
fiscal 1998, respectively, as follows:
Date FY 1997 FY 1998
Operation Acquired Net Sales Net Sales
- --------- -------- --------- ---------
(In (In
millions) millions)
LA Die Casting.................... 10/01/96 $ 7.1 $10.4
Canada Alloy...................... 10/26/96 6.4 10.0
Pennsylvania Steel................ 10/31/96 14.9 15.8
Jahn.............................. 02/14/97 5.4 12.1
PrimeCast......................... 07/01/97 -- 33.9
Inverness......................... 10/06/97 -- 41.9
Sheffield......................... 04/06/98 -- 37.6
Claremont......................... 05/01/98 -- 1.3
Excluding net sales attributable to the operations acquired in fiscal
1997 and fiscal 1998, net sales for fiscal 1998 were $210.8 million,
representing a decrease of $1.2 million, or 0.6%, over net sales of $212.0
million in fiscal 1997. This 0.6% decrease in net sales was due primarily to
decreases in net sales to the energy, utility and military markets, partially
offset by an increase in net sales to the rail market.
Gross profit for fiscal 1998 increased by $ 13.1 million, or 30.9%, to
$55.5 million, or 14.9% of net sales, compared to $42.4 million, or 17.2% of
net sales, for fiscal 1997. The increase in gross profit was primarily
attributable to the increase in net sales. The decrease in gross profit as a
percentage of net sales is primarily attributable to: (i) a decrease in the
absorption of overhead resulting from a reduction in net sales at PrimeCast,
Inc. ("PrimeCast"), La Grange Foundry Inc. ("La Grange"), Canadian Steel
Foundries, Ltd. ("Canadian Steel") and Canada Alloy Castings, Ltd. ("Canada
Alloy"), (ii) above average training expenses associated with the startup of
new customer jobs at Amite Foundry and Machine, Inc. ("Amite") and (iii)
increased warranty costs at Pennsylvania Steel Foundry and Machine, Inc.
("Pennsylvania Steel"). In addition to these factors were non-recurring
costs associated with the installation of a new sand system at the Atchison /
St. Joe Division and a new molding line at Prospect Foundry, Inc.
("Prospect").
Selling, general and administrative expense ("SG&A") for fiscal 1998 was
$28.8 million, or 7.7% of net sales, compared to $21.6 million, or 8.8% of
net sales, in fiscal 1997. The increase in SG&A was primarily attributable
to expenses associated with the operations acquired by the Company in fiscal
1997 and fiscal 1998. The decrease in SG&A as a percentage of net sales was
primarily due to decreased expenses related to the Company's management
incentive bonus plans and decreased expenditures for outside professional
services.
30
Amortization of certain intangibles for fiscal 1998 was $850,000 or 0.2%
of net sales, compared to $632,000, or 0.3% of net sales, in fiscal 1997.
The intangible assets consist of goodwill recorded in connection with the
acquisitions of Prospect, Kramer International, Inc. ("Kramer"), Empire Steel
Castings, Inc. ("Empire"), The G & C Foundry Company ("G&C"), Los Angeles Die
Casting Inc. ("LA Die Casting") and Inverness Castings Group, Inc
("Inverness"). Partially offsetting the expense relating to the amortization
of these assets is the amortization of the excess of acquired net assets over
cost (negative goodwill) recorded by the Company in connection with the
acquisition of Canadian Steel.
Interest expense for fiscal 1998 increased to $3.9 million, or 1.0% of
net sales, from $3.2 million, or 1.3% of net sales, in fiscal 1997. The
increase in interest expense is primarily the result of an increase in the
average amount of indebtedness outstanding during fiscal 1998.
Income tax expense for fiscal 1998 and fiscal 1997 reflected the
combined federal, state and provincial statutory rate of approximately 40%
and 41%, respectively. The Company's combined effective tax rate reflects
the different federal, state and provincial statutory rates of the various
jurisdictions in which the Company operates, and the proportion of taxable
income earned in each of those tax jurisdictions.
As a result of the foregoing, net income increased from $9.7 million in
fiscal 1997 to $12.8 million in fiscal 1998.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
Net sales for fiscal 1997 were $245.8 million, representing an increase
of $60.7 million, or 32.8%, over net sales of $185.1 million in fiscal 1996.
The operations acquired by the Company since the beginning of fiscal 1996
generated net sales of $14.8 million and $71.9 million in fiscal 1996 and
fiscal 1997, respectively, as follows:
Date FY 1996 FY 1997
Operation Acquired Net Sales Net Sales
- --------- -------- --------- ---------
(In (In
millions) millions)
La Grange......................... 12/14/95 $10.9 $ 23.5
G&C............................... 03/11/96 3.9 14.6
LA Die Casting.................... 10/01/96 -- 7.1
Canada Alloy...................... 10/26/96 -- 6.4
Pennsylvania Steel................ 10/31/96 -- 14.9
Jahn Foundry...................... 02/14/97 -- 5.4
Excluding net sales attributable to the operations acquired in fiscal
1996 and fiscal 1997, net sales for fiscal 1997 were $173.9 million,
representing an increase of $3.6 million, or 2.1%, over net sales of $170.3
million in fiscal 1996. This 2.1% increase in net sales was due primarily to
increases in net sales to the mining and construction and energy markets,
partially offset by decreases in net sales to the utility and military
markets.
Gross profit for fiscal 1997 increased by $14.0 million, or 49.3%, to
$42.4 million, or 17.2% of net sales, compared to $28.4 million, or 15.4% of
net sales, for fiscal 1996. The increase in gross
31
profit was primarily attributable to the increase in net sales. The increase
in gross profit as a percentage of net sales was primarily attributable to:
(i) higher margin sales at Canadian Steel; (ii) lower operating costs at
Amite; (iii) lower training expenses associated with new products; and (iv)
lower maintenance expenses at some of the Company's other facilities.
Partially offsetting these factors were costs associated with the conversion
from cupola to electric melting at G&C and the addition of iron casting
capability at Empire.
SG&A for fiscal 1997 was $21.6 million, or 8.8% of net sales, compared
to $15.5 million, or 8.4% of net sales, in fiscal 1996. The increase in SG&A
was primarily attributable to expenses associated with the operations
acquired by the Company in fiscal 1996 and fiscal 1997. The increase in SG&A
as a percentage of net sales was primarily attributable to increased expenses
related to the Company's management incentive bonus plans and increased
expenses related to identifying and completing the Company's acquisitions.
Amortization of certain intangibles for fiscal 1997 was $632,000, or
0.3% of net sales, compared to $1.5 million, or 0.8% of net sales, in fiscal
1996. The intangible assets consist of goodwill recorded in connection with
the acquisitions of Prospect, Kramer, Empire, G&C and LA Die Casting. During
fiscal 1996, the intangible assets included the capitalized value of a
non-compete agreement with Rockwell International, which became fully
amortized in June 1996. Partially offsetting the expense relating to the
amortization of these assets is the amortization of the excess of acquired
net assets over cost (negative goodwill) recorded by the Company in
connection with the acquisition of Canadian Steel.
Other income for fiscal 1996 was $27.0 million ($16.2 million, net of
related income tax expense of $10.8 million), consisting primarily of
insurance payments for business interruption and property damage. The
Company's insurance claim was filed as a result of the July 1993 Missouri
River flood.
Interest expense for fiscal 1997 increased to $3.2 million, or 1.3% of
net sales, from $2.8 million, or 1.5% of net sales, in fiscal 1996. The
increase in interest expense was primarily the result of an increase in the
average amount of indebtedness outstanding as a result of the Company's
acquisitions.
Income tax expense for fiscal 1997 and fiscal 1996 reflected the
combined federal, state and provincial statutory rate of approximately 41%
and 40%, respectively. The Company's combined effective tax rate reflects the
different federal, state and provincial statutory rates of the various
jurisdictions in which the Company operates, and the proportion of taxable
income earned in each of those tax jurisdictions.
As a result of the foregoing factors, net income for fiscal 1997 was
$9.7 million, compared to net income of $21.3 million for fiscal 1996.
Excluding other income resulting from flood insurance payments, net income
increased from $5.1 million in fiscal 1996 to $9.7 million in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed operations with internally
generated funds, proceeds from the sale of senior notes and available
borrowings under its bank credit facilities. Cash provided by operating
activities for fiscal 1998 was $15.9 million, a decrease of $6.4 million from
fiscal 1997. This decrease was primarily attributable to increased working
capital requirements primarily relating to accounts payable balances.
32
Working capital was $76.8 million at June 30, 1998, as compared to $57.2
million at June 30, 1997. The increase primarily resulted from net
additional working capital of $44.8 million associated with the Company's
acquisitions, partially offset by the use of existing cash balances for the
Company's acquisitions and a $5.1 million increase in the current maturities
of the Company's existing outstanding indebtedness.
During fiscal 1998, the Company made capital expenditures of $18.4
million, as compared to $13.9 million for fiscal 1997. Included in fiscal
1998 were capital expenditures of $1.8 million on a new sand reclamation
system at the Atchison/St. Joe Division and $3.2 million on a new mold line
at Prospect. The balance of capital expenditures was used for routine
projects at each of the Company's facilities, primarily related to
productivity enhancing equipment, such as new mold lines, CNC pattern-cutting
machines, machine tools, sand reclamation systems and computer hardware and
software modeling systems. The Company expects to make approximately $25.0
million of capital expenditures during fiscal 1999, including new machining
cells at the Atchison/St. Joe Division and new sand reclamation systems at
Canadian Steel and PrimeCast.
On April 3, 1998, the Company and its banks entered into an Amended and
Restated Credit Agreement (the "Credit Agreement") providing for an increase
in unsecured loans from $60 million to $110 million and an extension of the
maturity date to April 3, 2003. This Credit Agreement consists of a $40
million term loan and a $70 million revolving credit facility. The term loan
begins amortizing on March 31, 1999, with a final maturity of April 3, 2003.
Loans under the Credit Agreement will bear interest at fluctuating rates of
either: (i) the agent bank's corporate base rate subject to a reduction of
0.25% (25 basis points) if certain financial ratios are met or (ii) LIBOR
plus 1.50% subject, in the case of the LIBOR rate option, to a reduction of
up to 0.50% (50 basis points) if certain financial ratios are met. In
connection with this amendment, $409,000 of financing costs were capitalized
and are being amortized over five years. Loans under this revolving credit
facility may be used for general corporate purposes, acquisitions and
approved investments. On April 6, 1998, the Company entered into an agreement
under which it agreed to convert the $40 million U.S. denominated term loan
to British pounds at a 8.32% fixed rate of interest. In addition, the Company
entered into an interest rate swap agreement under which it agreed to pay
quarterly a 7.42% fixed rate of interest in exchange for quarterly receipt of
LIBOR plus 1.50% on $15.0 million of its revolving credit facility.
On April 3, 1998, the Company and the insurance company holding the
Company's $20 million aggregate principal amount of unsecured, senior notes
entered into the Third Amendment to the Note Purchase Agreement providing
for an increase in permitted subsidiary indebtedness from $3.5 million to
$8.0 million.
On August 12, 1998, the Company announced that its Board of Directors
had authorized a stock repurchase program of up to 1.2 million common shares
of its then outstanding 8.2 million common shares. The stock repurchases may
be made from time to time at prevailing prices in the open market or in
privately negotiated transactions, depending on market conditions, the price
of Company's common stock and other factors. The Company will make such
stock repurchases using internally generated funds and borrowings under its
credit facility, which currently allows repurchases of up to nearly $3.2
million of Company common stock. The Company intends to amend its financing
agreements to permit the repurchases contemplated by this stock repurchase
program, although there can be no assurance as to the amount to which the
lenders will agree. Any share repurchases will be added to the Company's
treasury shares and will be available for reissuance in connection with the
Company's acquisitions, employee benefit plans or for other corporate
purposes. Through August 31, 1998, the Company had repurchased 62,800 shares.
33
The Company also announced that it is contemplating the issue of up to
$100 million of senior subordinated notes through a private placement under
Rule 144A, subject to market conditions. If consummated, the Company expects
to use the net proceeds of the offering to reduce the Company's bank loans,
fund future acquisitions and for working capital and general corporate
purposes. The notes will not be registered under the Securities Act and may
not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. This announcement is
neither an offer to sell nor a solicitation of an offer to buy these
securities. If the Rule 144A offering is completed it is anticipated that
the Company would subsequently register substantially similar notes to be
offered in exchange for the initial notes by means of a prospectus.
Total indebtedness of the Company at June 30, 1998 was $93.3 million, as
compared to $28.7 million at June 30, 1997. This increase of $64.6 million
reflects indebtedness incurred of $18.1 and $54.9 million to finance the
acquisitions of Inverness and Sheffield, respectively. At June 30, 1998,
$35.1 million was available for borrowing under the Company's revolving
credit facility.
The Company believes that its operating cash flow and amounts available
for borrowing under its revolving credit facility will be adequate to fund
its capital expenditure and working capital requirements for the next two
years. However, the level of capital expenditure and working capital
requirements may be greater than currently anticipated as a result of the
size and timing of future acquisitions, or as a result of unforeseen
expenditures relating to compliance with environmental laws. Acquisitions
have been financed with borrowings under the Company's bank credit facilities
and occasionally with common stock. During fiscal 1998, the Company
purchased PrimeCast, 91.5% of the outstanding capital stock of Inverness and
Sheffield for $8.2 million, $5.9 million (in addition to the payment and
assumption of $12.2 million of outstanding indebtedness) and $54.9 million
(in addition to $915,000 of subsidiary stock), respectively, in each case
with available cash and funds available under the Company's then existing
revolving credit facility.
Effective September 1, 1998, the Company purchased 90% of the
outstanding shares of London Precision Machine and Tool Ltd. ("London
Precision") for U.S. $13.7 million cash, subject to adjustment. London
Precision, located in London, Ontario, Canada, is an industrial machine shop
which serves the locomotive, mining and construction, pulp and paper markets,
among others. The Company financed this transaction with funds available
under its revolving credit facility.
MARKET RISK
The Company's market risk is impacted by changes in interest rates and
foreign currency exchange rates. Derivative financial instruments are used
by the Company to manage its exposure to interest rate and foreign currency
risk. The Company does not hold or issue derivative instruments for trading
purposes.
The Company's floating rate debt obligations expose the Company to
interest rate risk. To manage this potential risk, the Company may use
interest rate swap agreements to limit the effect of increases in interest
rates on any of the Company's U.S. dollar floating rate debt by fixing the
rate without the exchange of the underlying principal or notional amount. Net
amounts paid or received are added to or deducted from interest expense in
the period accrued.
The Company's British subsidiary, Sheffield, generates significant sales
to customers outside of Great Britain whereby Sheffield invoices and receives
payment from those customers in their local
34
currencies. This creates foreign currency risk for Sheffield. To manage
this risk Sheffield uses forward foreign exchange contracts to hedge receipts
and payments of foreign currencies related to sales to its customers and
purchases from its vendors outside of Great Britain.
The Company also has foreign currency exposure with respect to its net
investment in Sheffield. This exposure is to changes in the British Pound.
To manage a portion of this exposure the Company entered into a combined
interest rate and foreign currency swap. The Company also structures foreign
balance sheets with appropriate levels of debt to reduce subsidiary net
investments and subsidiary cash flows subject to conversion risk.
At June 30, 1998, the Company had the following financial instruments
with market risk exposure (currency amounts in thousands):
PRINCIPAL NOTIONAL MATURITY PAY RECEIVE FAIR
INTEREST RATE RISK AMOUNT AMOUNT DATE RATE RATE VALUE
- ------------------ --------- -------- -------- ---- ------- -----
Unsecured, Revolving
Credit Facility $ 15,000 N/A April 3, 2003 7.16% (1) N/A $15,000
Interest Rate Swap N/A $15,000 April 3, 2003 5.92% (2) 5.67% (3) ($77)
Unsecured, Revolving
Credit Facility $ 8,000 N/A April 3, 2003 7.15% (1) N/A $ 8,000
Unsecured, Revolving
Credit Facility $ 2,000 N/A April 3, 2003 8.50% (4) N/A $ 2,000
Term Loan between
La Grange Foundry and
the Missouri Department
Finance Board $ 5,000 N/A Nov. 1, 2011 3.80% (5) N/A $ 5,000
Unsecured, Term Loan $ 40,000 N/A April 3, 2003(6) 7.15% (1) N/A $40,000
Interest Rate and Foreign
Currency Swap (7) - N/A L24,002 (8) April 3, 2003 6.82% (2) N/A
(Interest Rate Component) N/A $40,000 N/A 5.67% (3) $55
FOREIGN CURRENCY RISK
- ---------------------
Interest Rate and Foreign
Currency Swap (7) - N/A L24,002 (8) April 3, 2003 N/A N/A $(90)
(Foreign Currency
Component) N/A $40,000
At June 30, 1998, Sheffield had net contracts with a single counterparty
to sell the following currencies and no significant un-hedged foreign
currency exposure related to sales and purchase transactions (in thousands):
Local Approximate Local Approximate
Amount Value(9) Amount Value(9)
----- ----------- ------ -----------
U.S. dollars 28,239 $28,222 Spanish pesata 224,713 $1,464
Deutsche marks 17,754 9,816 Austrian schilling 14,628 1,149
French Francs 20,792 3,429 Japanese yen 63,300 453
Canadian dollars 4,805 3,270 Danish krona 2,556 371
Italian lira 3,425,686 1,923 Irish punt 251 349
Belgium francs 66,123 1,773 Finish marka 340 62
Dutch guilder 3,613 1,772 Swiss francs 13 9
Swedish krona 14,009 1,755 ----------
Total $55,817
----------
35
(1) Rate resets periodically to LIBOR plus 1.50%. Rate represents rate in
effect at June 30, 1998.
(2) Fixed payment rate.
(3) Rate resets periodically to LIBOR. Rate represents rate in effect at
June 30, 1998.
(4) Rate resets periodically to the Prime lending rate. Rate represents
rate in effect at June 30, 1998.
(5) Rate resets weekly. Rate represents rate in effect at June 30, 1998.
(6) Final maturity indicated. Equal quarterly installments of $1,429 are
due commencing on March 31, 1999, with a final payment of $17,143 due
at final maturity.
(7) The Interest Rate and Foreign Currency swap includes both an interest
rate component and foreign currency component. The swap requires the
periodic payment by the Company of principal and interest at a fixed
rate in British Pounds, while the Company receives periodic principal
payments and interest at a LIBOR rate from the counterparty. The U.S.
dollar notional amount of the swap amortizes in accordance with the
Company's $40,000 Term Loan (see (6) above) and the British Pound
notional amortizes with the U.S. dollar notional at a fixed rate of
exchange throughout the swap agreement. The interest rate portion of
this swap is not considered an effective hedge against interest rate
risk. The currency portion of the swap acts as an effective hedge on a
portion of the Company's 31,213 British Pound denominated net
investment in Sheffield, however, as the swap amortizes, the hedge on
the net investment in Sheffield becomes less effective.
(8) Denominated in British Pounds.
(9) The approximate value is the value of the local currencies translated
first into British Pounds, which is the functional currency of
Sheffield, at the June 30, 1998 spot rates, and then translated to
U.S. dollars at the June 30, 1998 spot rate.
INFLATION
Management does not believe that inflation has had a material adverse
effect on the Company's operations or its prices.
YEAR 2000 COMPUTER ISSUES
The Company has conducted a comprehensive review of its hardware and
software systems to identify those systems that could be affected by the
"Year 2000" issue and has developed an implementation plan to resolve the
identified issues. The Company believes that, with replacement or
modification of its existing computer systems, updates by vendors and
conversion to new software, the Year 2000 issue will not pose significant
operational problems for the Company's computer systems. The Company expects
to complete implementation of computer systems that are Year 2000 compliant
in fiscal 1999, although testing may continue in the first two quarters of
fiscal 2000. Based on its review of non-information technology systems to
date, the Company does not anticipate the need to develop an extensive
contingency plan for such systems or to incur material costs in that regard.
The Company relies on a number of customers and suppliers, including
banks, telecommunication providers, utilities, and other providers of goods
and services. The inability of these third parties to conduct their business
for a significant period of time due to the Year 2000 issue could have a
material adverse impact on the Company's operations. The Company is
currently assessing the Year 2000 compliance of its significant customers and
suppliers. To date, the Company has been advised by over half of its
significant customers that they will be Year 2000 compliant by the end of
calendar 1999. There can be no assurance that the systems of other companies
that interact with the Company will be sufficiently Year 2000 compliant. The
Company's reliance on single source suppliers, however, is minimal, and the
Company seeks to limit sole source supply relationships. The Company,
however, has entered into national service agreements for the supply of
36
certain raw materials and freight service from single sources. If the Company
does not identify or fix all year 2000 problems in critical operations, or if
a major supplier or customer is unable to supply raw materials or receive the
Company's product, the Company's results of operations or financial condition
could be materially impacted.
Year 2000 project expenditures to date total $550,000. The Company
expects to incur an additional $1.6 million of additional costs. The Company
presently anticipates that it will complete its Year 2000 assessment and
remediation by June 30, 1999. However, there can be no assurance that the
Company will be successful in implementing its Year 2000 implementation plan
according to the anticipated schedule due to the potential lack of
availability of trained personnel and their ability to identify relevant
computer codes among other uncertainties. Although the Company expects its
internal systems to be Year 2000 compliant as described above, the Company
intends to prepare a contingency plan that will specify what it plans to do
if it or important external companies are not Year 2000 compliant in a timely
manner. The Company expects to prepare its contingency plan during fiscal
1999.
Statements above in the subsections entitled "General," "Liquidity and
Capital Resources," "Market Risk" and this subsection of this Annual Report
on Form 10-K such as "expects," "intends," "contemplating" and statements
regarding quarterly fluctuations, statements regarding the adequacy of
funding for capital expenditure and working capital requirements for the next
two years and similar expressions that are not historical are forward-looking
statements that involve risks and uncertainties. Such statements include the
Company's expectations as to future performance. Among the factors that could
cause actual results to differ materially from such forward-looking
statements are the following: the size and timing of future acquisitions,
business conditions and the state of the general economy, particularly the
capital goods industry, the strength of the dollar and the British pound,
interest rates, the competitive environment in the casting industry and
changes in laws and regulations that govern the Company's business,
particularly environmental regulations.
37
SUPPLEMENTAL QUARTERLY INFORMATION
The Company's business is characterized by large unit and dollar volume
customer orders. As a result, the Company has experienced and may continue to
experience fluctuations in its net sales and net income from quarter to
quarter. Generally, the first fiscal quarter is seasonally weaker than the
other quarters as a result of plant shutdowns for maintenance at most of the
Company's foundries as well as at many customers' plants. In addition, the
Company's operating results may be adversely affected in fiscal quarters
immediately following the consummation of an acquisition while the operations
of the acquired business are integrated into the operations of the Company.
The following table presents selected unaudited supplemental quarterly
results for fiscal 1997 and fiscal 1998.
FISCAL 1997 FISCAL 1998
QUARTERS ENDED QUARTERS ENDED
--------------------------------------------- ---------------------------------------------
SEPT. DEC. MAR. JUNE SEPT. DEC. MAR. JUNE
----- ---- ---- ---- ----- ---- ---- ----
(unaudited) (unaudited)
(In thousands, except per share data)
Net Sales. . . . . . . . . . . $48,998 $61,622 $66,313 $68,836 $68,796 $84,435 $91,623 $128,914
Gross Profit . . . . . . . . . 6,641 10,111 11,976 13,655 9,212 12,663 14,120 19,493
Operating Income . . . . . . . 2,238 4,963 5,794 7,197 3,688 5,176 7,638 9,338
Net Income . . . . . . . . . . $ 941 $ 2,371 $ 2,862 $ 3,554 $ 1,825 $ 2,390 $ 3,913 $ 4,637
------- ------- ------- ------- ------- ------- ------- --------
------- ------- ------- ------- ------- ------- ------- --------
Net Income Per Share
Basic . . . . . . . . . . . $ 0.17 $ 0.43 $ 0.52 $ 0.54 $ 0.22 $ 0.29 $ 0.48 $ 0.57
------- ------- ------- ------- ------- ------- ------- --------
------- ------- ------- ------- ------- ------- ------- --------
Diluted . . . . . . . . . . $ 0.17 $ 0.43 $ 0.51 $ 0.54 $ 0.22 $ 0.29 $ 0.48 $ 0.56
------- ------- ------- ------- ------- ------- ------- --------
------- ------- ------- ------- ------- ------- ------- --------
NEW ACCOUNTING STANDARDS
For a discussion of new accounting standards, see Note 1 of the
Company's Notes to Consolidated Financial Statements.
38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by
reference to the section entitled "Market Risk" in the Company's Management's
Discussion and Analysis of Results of Operations and Financial Condition in
this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are filed under
this Item, beginning on page F-1 of this Report. No financial statement
schedules are required to be filed under Regulation S-X.
Selected quarterly financial data required under this item is included
in Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated herein by reference to the Registrant's Proxy Statement for the
1998 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A.
The required information as to executive officers is set forth in Part I
hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for by this item is incorporated herein by
reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by
reference to the Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders to be filed pursuant to Regulation 14A.
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
PAGE
(a) DOCUMENTS LIST NUMBER
-------------- ------
(1) The following financial statements are included in
Part II Item 8:
Report of Independent Accountants F-1
Consolidated Balance Sheets at June 30, 1997 and 1998 F-2
Consolidated Statements of Income For the Years F-4
Ended June 30, 1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity F-5
For the Years Ended June 30, 1996, 1997 and 1998
Consolidated Statements of Cash Flows For the Years F-6
Ended June 30, 1996, 1997 and 1998
Notes to Consolidated Financial Statements For the Years F-7
Ended June 30, 1996, 1997 and 1998
(2) No Financial Statement Schedules are required to be filed.
(3) List of Exhibits:
Exhibits required by Item 601 of Regulation S-K are listed in the
Exhibit Index which is incorporated herein by reference.
(b) REPORTS ON FORM 8-K
-------------------
The Company filed a Form 8-K dated April 6, 1998, as amended by the
Form 8-K/A dated June 22, 1998.
Items Reported:
Item 2. Acquisition of Sheffield Forgemasters Group Limited
Item 7. Financial Statements and Exhibits
(1) Audited Consolidated Financial Statements of Sheffield
Forgemasters Group Limited as of April 6, 1998 and March 31, 1997
and for the twelve months ended April 6, 1998, March 31, 1997 and
March 31, 1996.
(2) Pro forma Consolidated Financial Information consisting of a pro
forma consolidated balance sheet as of March 31, 1998 and pro
forma consolidated statements of operations for the twelve-months
ended March 31, 1998, the nine-months ended March 31, 1998 and
the year ended June 30, 1997.
41
(c) EXHIBITS
--------
The response to this portion of Item 14 is submitted as a separate
section to this report.
(d) FINANCIAL STATEMENTS SCHEDULES
------------------------------
The consolidated financial statement schedules required by this Item
are listed under Item 14(a)(2).
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
ATCHISON CASTING CORPORATION
(Registrant)
By: /s/ HUGH H. AIKEN
---------------------------
Hugh H. Aiken
Principal Executive Officer
Dated: SEPTEMBER 9, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and
on the dated indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/S/ HUGH H. AIKEN Chairman of the Board, SEPTEMBER 9, 1998
- ---------------------- President, Chief Executive
Hugh H. Aiken Officer and Director
(Principal Executive Officer)
/S/ STUART Z. URAM Director SEPTEMBER 9, 1998
- ----------------------
Stuart Z. Uram
/S/ DAVID L. BELLUCK Director SEPTEMBER 16, 1998
- ----------------------
David L. Belluck
/S/ RAY H. WITT Director SEPTEMBER 9, 1998
- ----------------------
Ray H. Witt
/S/ JOHN O. WHITNEY Director SEPTEMBER 11, 1998
- ----------------------
John O. Whitney
/S/ KEVIN T. MCDERMED Vice President, Chief SEPTEMBER 9, 1998
- ---------------------- Financial Officer, Treasurer
Kevin T. McDermed and Secretary
(Principal Financial Officer
and Principal Accounting
Officer)
43
ATCHISON CASTING
CORPORATION AND
SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR
THE YEARS ENDED JUNE 30, 1996, 1997 AND 1998,
AND INDEPENDENT AUDITORS' REPORT
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND 1998:
Consolidated Balance Sheets - June 30, 1997 and 1998 F-2 - F-3
Consolidated Statements of Income - Years Ended June 30, 1996, 1997 and
1998 F-4
Consolidated Statements of Stockholders' Equity - Years Ended June 30, 1996,
1997 and 1998 F-5
Consolidated Statements of Cash Flows - Years Ended June 30, 1996, 1997
and 1998 F-6
Notes to Consolidated Financial Statements F-7 - F-30
INDEPENDENT AUDITORS' REPORT
Board of Directors of
Atchison Casting Corporation
Atchison, Kansas
We have audited the accompanying consolidated balance sheets of Atchison
Casting Corporation and subsidiaries (the "Company") as of June 30, 1997 and
1998 and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended June 30, 1998.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 1997
and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles.
Kansas City, Missouri
August 14, 1998
(September 3, 1998 with respect to Note 21)
F-1
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------
ASSETS 1997 1998
CURRENT ASSETS:
Cash and cash equivalents $ 19,819 $ 9,336
Customer accounts receivable, net of allowance for doubtful
accounts of $381 and $508 at June 30, 1997 and 1998, respectively 40,310 88,469
Inventories 30,867 62,146
Deferred income taxes 1,501 3,186
Other current assets 2,336 9,615
--------- --------
Total current assets 94,833 172,752
PROPERTY, PLANT AND EQUIPMENT, Net 93,116 137,290
INTANGIBLE ASSETS, Net 21,866 25,424
DEFERRED FINANCING COSTS, Net 525 746
OTHER ASSETS 3,068 9,927
--------- --------
TOTAL $ 213,408 $346,139
--------- --------
--------- --------
See notes to consolidated financial statements.
F-2
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1998
CURRENT LIABILITIES:
Accounts payable $ 11,530 $ 37,259
Accrued expenses 25,145 52,690
Current maturities of long-term obligations 927 6,021
--------- --------
Total current liabilities 37,602 95,970
LONG-TERM OBLIGATIONS 27,758 87,272
DEFERRED INCOME TAXES 16,349 12,608
OTHER LONG-TERM OBLIGATIONS 1,243 3,670
EXCESS OF FAIR VALUE OF ACQUIRED NET ASSETS OVER COST, Net 633 349
POSTRETIREMENT OBLIGATION OTHER THAN PENSION 5,844 7,596
MINORITY INTEREST IN SUBSIDIARIES 1,248 3,060
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 authorized
shares; no shares issued and outstanding
Common stock, $.01 par value, 19,300,000 authorized
shares; 8,146,765 and 8,190,568 shares issued
and outstanding in 1997 and 1998, respectively 81 82
Class A common stock (non-voting), $.01 par
value, 700,000 authorized shares; no shares
issued and outstanding
Additional paid-in capital 80,342 80,957
Retained earnings 42,440 55,205
Accumulated foreign currency translation adjustment (132) (630)
Common stock held in treasury, 36,002
shares in 1997 and 1998, at cost
--------- --------
Total stockholders' equity 122,731 135,614
--------- --------
TOTAL $ 213,408 $ 346,139
--------- --------
--------- --------
See notes to consolidated financial statements.
F-3
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------
1996 1997 1998
NET SALES $ 185,081 $ 245,769 $ 373,768
COST OF GOODS SOLD 156,612 203,386 318,280
--------- --------- --------
GROSS PROFIT 28,469 42,383 55,488
OPERATING EXPENSES:
Selling, general and administrative 15,459 21,559 28,798
Amortization of intangibles 1,508 632 850
Other income (26,957)
--------- --------- --------
Total operating expenses (9,990) 22,191 29,648
--------- --------- --------
OPERATING INCOME 38,459 20,192 25,840
INTEREST EXPENSE 2,845 3,227 3,896
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES 225 270 448
--------- --------- --------
INCOME BEFORE INCOME TAXES 35,389 16,695 21,496
INCOME TAXES 14,063 6,967 8,731
--------- --------- --------
NET INCOME $ 21,326 $ 9,728 $ 12,765
--------- --------- --------
--------- --------- --------
NET INCOME PER COMMON AND
EQUIVALENT SHARES:
BASIC $ 3.87 $ 1.68 $ 1.56
--------- --------- --------
--------- --------- --------
DILUTED $ 3.87 $ 1.67 $ 1.55
--------- --------- --------
--------- --------- --------
WEIGHTED AVERAGE NUMBER OF COMMON
AND EQUIVALENT SHARES OUTSTANDING:
BASIC 5,510,410 5,796,281 8,167,285
--------- --------- ---------
--------- --------- ---------
DILUTED 5,516,597 5,830,695 8,218,686
--------- --------- ---------
--------- --------- ---------
See notes to consolidated financial statements.
F-4
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------
ACCUMULATED
MINIMUM FOREIGN
ADDITIONAL PENSION CURRENCY
COMMON PAID-IN RETAINED LIABILITY TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT TOTAL
------ ---------- -------- ----------- ------------ --------
Balance, July 1, 1995 $ 55 $ 41,623 $ 11,386 $ (375) $ 9 $ 52,698
Issuance of 34,333 shares 1 402 403
Exercise of stock options (10,000 shares) 134 134
Minimum pension liability adjustment,
net of income tax expense of $59 82 82
Purchase of 5,179 nonvested shares
under Stock Restriction Agreement
Foreign currency translation adjustment
of investment in subsidiary 11 11
Net income 21,326 21,326
------ -------- -------- ------- ------ ---------
Balance, June 30, 1996 56 42,159 32,712 (293) 20 74,654
Issuance of 2,610,203 shares 25 38,080 38,105
Exercise of stock options (7,600 shares) 103 103
Foreign currency translation
adjustment of investment in subsidiary (152) (152)
Minimum pension liability adjustment,
net of income tax expense of $187 293 293
Net income 9,728 9,728
------ -------- -------- ------- ------ ---------
Balance, June 30, 1997 81 80,342 42,440 (132) 122,731
Issuance of 15,793 shares 227 227
Exercise of stock options (28,060 shares) 1 388 389
Foreign currency translation
adjustment of investment in subsidiaries (498) (498)
Net income 12,765 12,765
------ -------- -------- ------- ------ ---------
Balance, June 30, 1998 $ 82 $ 80,957 $ 55,205 $ $ (630) $ 135,614
------ -------- -------- ------- ------ ---------
------ -------- -------- ------- ------ ---------
See notes to consolidated financial statements.
F-5
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
1996 1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,326 $ 9,728 $ 12,765
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 7,411 8,667 11,695
Minority interest in net income of subsidiaries 225 270 448
Loss on disposal of capital assets 8 54 176
Accretion of long-term obligation discount 161
Deferred income taxes 7,918 1,816 1,394
Changes in assets and liabilities (exclusive of effects of acquired
companies):
Receivables (8,286) (349) 13,071
Insurance receivable 6,137
Inventories 1,614 1,231 (374)
Other current assets (715) 205 (719)
Accounts payable (1,480) 190 (6,854)
Accrued expenses 2,073 23 (16,472)
Postretirement obligation other than pension 209 430 467
Other 9 36 265
-------- ------- --------
Cash provided by operating activities 36,610 22,301 15,862
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (12,740) (13,852) (18,495)
Proceeds from sale of capital assets 8 38 1,219
Payment for purchase of net assets of subsidiaries,
net of cash acquired (13,251) (27,698) (74,299)
Assets held for resale (274) 840
(Advances) repayments under subordinated note receivable (800) 800
Payment for investments in unconsolidated subsidiaries (330) (330)
-------- ------- --------
Cash used in investing activities (26,587) (41,802) (90,775)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of costs 537 38,208 616
Proceeds from sale (payments for purchase) of stock in subsidiaries 63 178 (64)
Proceeds from issuance of long-term obligations 5,309 1,293
Payments on long-term obligations (2,646) (1,343) (979)
Capitalized financing costs paid (283) (214) (409)
Net borrowings (repayments) under revolving loan note (6,031) (6,521) 65,519
-------- ------- --------
Cash provided by (used in) financing activities (3,051) 31,601 64,683
-------- ------- --------
EFFECT OF EXCHANGE RATE ON CASH (12) (253)
NET INCREASE (DECREASE ) IN CASH AND CASH EQUIVALENTS 6,972 12,088 (10,483)
CASH AND CASH EQUIVALENTS, Beginning of period 759 7,731 19,819
-------- ------- --------
CASH AND CASH EQUIVALENTS, End of period $ 7,731 $ 19,819 $ 9,336
-------- ------- --------
-------- ------- --------
See notes to consolidated financial statements.
F-6
ATCHISON CASTING CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - Atchison Casting Corporation and subsidiaries
("ACC" or the "Company") was organized in 1991 for the purpose of
becoming a broad based manufacturer of metal castings, producing iron,
steel and non-ferrous castings ranging in size from a few ounces to
275 tons. A majority of the Company's sales are to U.S. customers,
however, the Company also has sales to Canadian, European and other
foreign customers.
PERVASIVENESS OF ESTIMATES - The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
BASIS OF PRESENTATION - The consolidated financial statements present
the financial position of the Company and its subsidiaries, Amite
Foundry and Machine, Inc. ("AFM"), Prospect Foundry, Inc. ("Prospect
Foundry"), Quaker Alloy, Inc. ("Quaker"), Canadian Steel Foundries,
Ltd. ("Canadian Steel"), Kramer International, Inc. ("Kramer"), Empire
Steel Castings, Inc. ("Empire"), La Grange Foundry Inc. ("La Grange
Foundry"), The G&C Foundry Company ("G&C"), Los Angeles Die Casting
Inc. ("LA Die Casting"), Canada Alloy Castings, Ltd. ("Canada Alloy"),
Pennsylvania Steel Foundry & Machine Company ("Pennsylvania Steel"),
Jahn Foundry Corp. ("Jahn Foundry"), PrimeCast, Inc. ("PrimeCast"),
Inverness Castings Group, Inc. ("Inverness"), Sheffield Forgemasters
Group Limited ("Sheffield") and Claremont Foundry, Inc. ("Claremont").
AFM, Kramer, Empire, La Grange Foundry, Canada Alloy, Pennsylvania
Steel, Jahn Foundry, PrimeCast and Claremont are wholly owned
subsidiaries. The Company owns 90.9%, 95.7%, 90.2%, 92.0%, 90.7%,
91.6% and 95.0% of the outstanding capital stock of Prospect Foundry,
Quaker, Canadian Steel, G&C, LA Die Casting, Inverness and Sheffield,
respectively. All significant intercompany accounts and balances have
been eliminated.
STATEMENT OF CASH FLOWS - For purposes of cash flow reporting, cash
and cash equivalents include cash on hand, amounts due from banks and
temporary investments with original maturities of 90 days or less at
the date of purchase.
REVENUE RECOGNITION - Sales and related cost of sales are recognized
upon shipment of products. Sales and related cost of sales are
recognized as units are delivered.
F-7
CUSTOMER ACCOUNTS RECEIVABLE - Approximately 21%, 17% and 18% of the
Company's business in 1996, 1997 and 1998, respectively, was with two
major customers in the automotive, locomotive and general industrial
markets. As of June 30, 1997 and 1998, 15% and 13% respectively, of
accounts receivable were with these two major customers. The Company
generally does not require collateral or other security on accounts
receivable. Credit risk is controlled through credit approvals, limits
and monitoring procedures.
INVENTORIES - Approximately 14% of the Company's inventory is valued
at the lower of cost, determined on the last-in, first-out ("LIFO")
method, or market. The remaining inventory is valued at the lower of
cost, determined on the first-in, first-out ("FIFO") method, or market.
PROPERTY, PLANT AND EQUIPMENT - Major renewals and betterment's are
capitalized while replacements, maintenance and repairs which do not
improve or extend the life of the respective assets are charged to
expense as incurred. Upon sale or retirement of assets, the cost and
related accumulated depreciation applicable to such assets are removed
from the accounts and any resulting gain or loss is reflected in
operations.
Property, plant and equipment is carried at cost less accumulated
depreciation. Plant and equipment is depreciated over the estimated
useful lives of the assets using the straight-line method.
INTANGIBLE ASSETS - Intangible assets acquired are being amortized
over their estimated lives using the straight-line method. The Company
periodically reviews the continuing value of intangibles to determine
if there has been an impairment. The basis of this valuation includes
the continuing profitability of the acquired operations, their
expected future undiscounted cash flows, the maintenance of a
significant customer base and similar factors.
ACCRUED INSURANCE EXPENSE - Costs estimated to be incurred in the
future for employee medical benefits and casualty insurance programs
resulting from claims which have occurred are accrued currently.
In order to support claims for workers' compensation benefits, at June
30, 1998 the Company has letters of credit aggregating $3,954 and a
certificate of deposit of $200.
INCOME TAXES - Deferred income taxes are provided on temporary
differences between the financial statements and tax basis of the
Company's assets and liabilities in accordance with the liability
method.
STOCK PLANS - The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION," in October 1995. SFAS No.
123 allows companies to continue under the approach set forth in
Accounting Principles Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees, for recognizing stock-based compensation
expense in the financial statements, but encourages companies to adopt
provisions of SFAS No. 123 based on the estimated fair value of
employee stock options. Companies electing to retain the approach
under APB No. 25 are required to disclose pro forma net income and net
income per share in the notes to the financial statements, as if they
had adopted the fair value accounting method under SFAS No. 123. The
Company has elected to retain its current accounting approach under
APB No. 25.
F-8
EARNINGS PER SHARE - In February 1997, the FASB issued SFAS No. 128,
"EARNINGS PER SHARE", effective for periods ending after December 15,
1997. SFAS No. 128 requires the disclosure of basic earnings per share
and diluted earnings per share on the face of the income statement,
and a reconciliation of the numerator and denominator of the basic
earnings per share computation to the numerator and denominator of the
diluted earnings per share computation in the notes to the financial
statements. The Company adopted SFAS No. 128 effective for the year
ended June 30, 1998. Accordingly, net earnings per share for all
periods presented have been restated to conform to the new standard.
NEW ACCOUNTING STANDARDS - SFAS No. 130, "REPORTING COMPREHENSIVE
INCOME," was issued in June 1997. This Statement established standards
for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. This Statement is effective for the Company's
fiscal 1999 financial statements. Management does not expect the
implementation of this Statement to have a material impact on its
financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION". The Statement
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Company will be required to adopt SFAS No. 131 during
the fiscal year ending June 30, 1999.
SFAS No. 132, "EMPLOYERS' DISCLOSURES ABOUT PENSION AND OTHER
POSTRETIREMENT BENEFITS," was issued by the FASB in February 1998.
This Statements revises employers' disclosures about pension and other
postretirement benefit plans, but does not change the measurement or
recognition of such plans. This Statement is effective for fiscal
years beginning after December 15, 1997, including restatement of
prior periods provided for comparative purposes. The Company will
adopt SFAS No. 132 in fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 133 requires companies
to record derivative instruments as assets or liabilities, measured at
fair value. The recognition of gains or losses resulting from changes
in the values of those derivative instruments is based on the use of
each derivative instrument and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes
in fair value or cash flows. The Company has not yet determined their
evaluation of the impact of SFAS No. 133 on the consolidated financial
statements. The Company will be required to adopt SFAS No. 133 during
the fiscal year ending June 30, 2000.
2. ACQUISITIONS
On October 1, 1996, the Company purchased all of the outstanding
capital stock of LA Die Casting, a California corporation, for $8,753
in cash and $221 of related expenses. ACC subsequently issued 9.3% of
the acquired LA Die Casting stock to LA Die Casting management. The
difference between the fair market value of the minority interest, as
estimated by the Company's management, and the consideration paid by
LA Die Casting management, was not material. LA Die Casting, located
in Los Angeles, California, produces precision aluminum and zinc die
castings for the computer, communications and recreation industries.
The Company financed this transaction with funds available under its
revolving credit facility.
F-9
On October 26, 1996, the Company purchased all of the outstanding
capital stock of Canada Alloy for $4,421(U.S.) in cash and $36 of
related expenses. Canada Alloy, located in Kitchener, Ontario,
produces stainless, carbon and alloy steel castings for a variety of
markets, including power generation equipment, pulp and paper
machinery, pumps and valves. The Company financed this transaction
with funds available under its revolving credit facility.
On October 31, 1996, the Company purchased all of the outstanding
capital stock of Pennsylvania Steel, a Pennsylvania corporation, for
$8,170 in cash and $24 of related expenses. Pennsylvania Steel,
located in Hamburg, Pennsylvania, produces carbon and stainless steel
castings for the power generation, valve, pump and other industrial
equipment markets. The Company financed this transaction with funds
available under its revolving credit facility.
On February 14, 1997, the Company purchased all of the outstanding
capital stock of Jahn Foundry, a Massachusetts corporation, for $5,900
in cash and $315 of related expenses. Jahn Foundry, located in
Springfield, Massachusetts, produces gray iron castings for the
automotive, air conditioning and agricultural markets. The Company
financed this transaction with funds available under its revolving
credit facility.
On July 1, 1997, the Company purchased the Beloit Castings Division
("BCD") of Beloit Corporation for $8,209 in cash and $102 of related
expenses. BCD now operates under the name PrimeCast, as a subsidiary
of ACC. PrimeCast is a group of four foundries in Beloit, Wisconsin
and South Beloit, Illinois, including two iron foundries, a steel
foundry and a non-ferrous foundry, that produce castings for the
paper-machinery, pump, valve, mining and construction markets. The
Company financed this acquisition with available cash balances.
On October 6, 1997, the Company acquired approximately 91.5% of the
outstanding capital stock of Inverness, a Delaware corporation, for
$5,882 in cash and $202 of related expenses, in addition to the
assumption of $587 of outstanding indebtedness. Contemporaneous with
the consummation of this acquisition, the Company retired
approximately $11,602 of Inverness' outstanding indebtedness. The
remaining 8.5% of Inverness capital stock was retained by Inverness
management. Inverness, located in Dowagiac, Michigan, produces
aluminum die castings for the automotive, furniture and appliance
markets. The Company financed this transaction with available cash
balances and funds available under its revolving credit facility.
On April 6, 1998, Atchison Casting UK Ltd. ("ACUK"), a subsidiary of
the Company, acquired all of the outstanding capital stock ,
consisting of 76,987,733 ordinary shares of capital stock, of
Sheffield, incorporated in England and Wales, from the stockholders of
Sheffield for approximately $54,931 in cash, 1,040,000 ordinary shares
of ACUK valued at $915 and $226 of related expenses. The 1,040,000
ordinary shares, consisting of 5.0% of the outstanding stock, of ACUK
were issued to Sheffield management in exchange for 1,267,477 shares
of Sheffield instead of cash consideration. Sheffield includes
Forgemasters Steel & Engineering Limited, River Don Castings Limited,
Forged Rolls (UK) Limited and British Rollmakers Limited, among other
operating units. The companies' products serve a variety of markets
and end users, including steel rolling mills, paper and plastic
processing, oil and gas exploration and production, fossil and nuclear
electricity generation and forging ingots. The Company financed this
transaction with funds available under its bank credit facility.
F-10
On May 31, 1996, the Company purchased approximately 21.0% of the
outstanding shares of capital stock of Claremont for $330 in cash and
$17 of related expenses. On November 29, 1996, the Company purchased
an additional 4.5% of the outstanding capital stock of Claremont for
$40 in cash. On May 1, 1998, the Company purchased the balance of
Claremont's outstanding capital stock for $1 in cash, the contribution
of equipment with a fair market value of $300, the forgiveness of a
subordinated note payable to the Company of $2,924 and related
expenses of $7. Contemporaneous with the consummation of this
acquisition, the Company retired $165 of Claremont's outstanding
indebtedness. Claremont, located in Claremont, New Hampshire, is a
foundry that produces steel castings for the mining and mass transit
industries, among others. The Company financed this transaction with
funds available under its revolving credit facility.
The acquisitions have been accounted for by the purchase method of
accounting, and accordingly, the purchase price including the related
acquisition expenses has been allocated to the assets acquired based
on the estimated fair values at the date of the acquisitions. For the
LA Die Casting and Inverness acquisitions, the excess of purchase
price over estimated fair values of the net assets acquired has been
included in "Intangible Assets, net" on the Consolidated Balance
Sheets. For the Canada Alloy, Pennsylvania Steel, Jahn Foundry,
PrimeCast, Sheffield and Claremont acquisitions, the fair value of the
net assets acquired exceeded the purchase price. Accordingly, the
excess fair value was subtracted from identifiable long-term assets
ratably based on their relative fair values as a percentage of total
long-term assets.
The estimated fair values of assets and liabilities acquired in the
1996, 1997 and 1998 acquisitions are summarized as follows:
1996 1997 1998
Cash $ 1,778 $ 142 $ 10,244
Customer accounts receivable 1,791 7,835 61,669
Inventories 2,557 7,799 31,231
Property, plant and equipment 7,825 15,872 38,164
Intangible assets, primarily goodwill 4,779 4,336 4,666
Other assets 206 737 14,670
Accounts payable and accrued expenses (1,529) (5,535) (75,775)
Deferred income taxes 247 (2,141) 6,731
Other long-term obligations (101) (705) (6,470)
Long-term obligations (2,524) (500) (587)
-------- -------- --------
15,029 27,840 84,543
Cash acquired (1,778) (142) (10,244)
-------- -------- --------
Cash used in acquisitions $ 13,251 $ 27,698 $ 74,299
-------- -------- --------
-------- -------- --------
F-11
The operating results of these acquisitions are included in ACC's
Consolidated Statements of Income from the dates of acquisition. The
following unaudited pro forma summary presents the consolidated results
of operations as if the acquisitions occurred at July 1, 1996, after
giving effect to certain adjustments, including amortization of goodwill,
interest expense on the acquisition debt and related income tax effects.
These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of what would have occurred had the
acquisitions been made as of that date or of results which may occur in
the future.
1997 1998
(UNAUDITED)
Net sales $ 515,036 $ 506,423
Net income 17,010 9,236
Net income per common and equivalent shares:
Basic 2.93 1.13
Diluted 2.92 1.12
3. INVENTORIES
1997 1998
Raw materials $ 5,186 $ 11,152
Work-in-process 17,540 37,939
Finished goods 3,967 7,385
Deferred supplies 4,174 5,670
-------- --------
$ 30,867 $ 62,146
-------- --------
-------- --------
Inventories as of June 30, 1997 and 1998 would have been higher by
$326 and $314, respectively, had the Company used the first-in,
first-out method of valuing those inventories valued using the last-in,
first-out method.
F-12
4. PROPERTY, PLANT AND EQUIPMENT
LIVES
(IN YEARS) 1997 1998
Land $ 3,584 $ 16,868
Improvements to land 12-15 2,695 4,645
Buildings and improvements 35 22,553 29,298
Machinery and equipment 5-14 75,341 103,184
Automobiles and trucks 3 1,261 2,226
Office furniture, fixtures and equipment 5-10 3,141 4,756
Tooling and patterns 1.5-6 3,579 4,582
-------- --------
112,154 165,559
Less accumulated depreciation 24,994 35,267
-------- --------
87,160 130,292
Construction in progress 5,437 6,998
Unexpended bond funds 519
-------- --------
$ 93,116 $ 137,290
-------- --------
-------- --------
Depreciation expense was $5,745, $7,903 and $10,656 for the years ended
June 30, 1996, 1997 and 1998, respectively.
5. INTANGIBLE ASSETS
LIVES
(IN YEARS) 1997 1998
Goodwill 25 $ 23,914 $ 28,580
Less accumulated amortization 2,048 3,156
-------- --------
$ 21,866 $ 25,424
-------- --------
-------- --------
Amortization expense was $1,744, $911 and $1,108 for the years ended
June 30, 1996, 1997 and 1998, respectively.
6. DEFERRED FINANCING COSTS
LIVES
(IN YEARS) 1997 1998
Capitalized financing costs 3 to 10 $ 786 $ 1,087
Less accumulated amortization 261 341
-------- --------
$ 525 $ 746
-------- --------
-------- --------
Amortization of such costs was $158, $129 and $188 for the years ended
June 30, 1996, 1997 and 1998, respectively, of which $69, $129 and $188,
respectively, is included in interest expense.
F-13
7. ACCRUED EXPENSES
1997 1998
Accrued warranty $ 815 $ 16,339
Payroll, vacation and other compensation 6,425 9,491
Accrued pension liability 1,822 2,983
Advances from customers 913 4,381
Reserve for flood repairs 6,773 5,932
Reserve for workers' compensation and employee
health care 3,884 3,570
Income taxes payable 1,442 1,158
Taxes other than income 584 541
Interest payable 740 1,076
Other 1,747 7,219
-------- --------
$ 25,145 $ 52,690
-------- --------
-------- --------
8. LONG-TERM OBLIGATIONS
On May 1, 1996, the Company's La Grange Foundry subsidiary entered into a
Loan Agreement with the Missouri Development Finance Board (the "Board"),
providing for a loan of $5,100 to La Grange Foundry using the proceeds of
the Board's Industrial Development Revenue Bonds, Series 1996 (La Grange
Foundry Inc. Project). Loans under the Loan Agreement will bear interest at
rates that fluctuate weekly based upon the then-prevailing market rates for
such securities. Loans under this Loan Agreement were used to finance the
costs of acquiring, reconstructing, improving and equipping certain
additions and improvements to the Company's La Grange Foundry manufacturing
facilities. The Loan Agreement terminates on November 1, 2011.
On May 24, 1996, the Company entered into a new credit agreement with
Harris Trust and Savings Bank ("Harris") providing for unsecured loans of
up to $40 million in a revolving credit facility terminating on July 29,
1998. Loans under this revolving credit facility will bear interest at
fluctuating rates of either (i) the bank's corporate base rate or (ii)
LIBOR plus 1.50% subject, in the case of the LIBOR rate option, to a
reduction of up to 0.50% (50 basis points) if certain financial ratios are
met. Loans under this revolving credit facility may be used for general
corporate purposes, acquisitions and approved investments.
On May 12, 1997, the Company and Harris entered into the First Amendment to
the Credit Agreement providing for an increase in unsecured loans from $40
million to $60 million and an extension of the maturity date to July 29,
2000.
On April 3, 1998, the Company and Harris entered into the Amended and
Restated Credit Agreement (the "Credit Agreement") providing for an
increase in unsecured loans from $60 million to $110 million and an
extension of the maturity date to April 3, 2003. This Credit Agreement
consists of a $40 million term loan and a $70 million revolving credit
facility. The term loan begins amortizing on March 31, 1999, with a final
maturity of April 3, 2003. Loans under the Credit Agreement will bear
interest at fluctuating rates of either: (i) the agent bank's corporate
base rate subject to a reduction of 0.25% (25 basis points) if certain
financial ratios are met or (ii) LIBOR plus 1.50% subject, in the case of
the LIBOR rate option, to a reduction of up to 0.50% (50 basis points) if
certain financial ratios are met. Loans under this revolving credit
facility may be used for general corporate purposes, acquisitions and
approved investments. At
F-14
June 30, 1998, $35.1 million was available for borrowing under this
facility after consideration of outstanding advances of $65.0 million and
letters of credit of $9.9 million (see Note 10).
On April 3, 1998, the Company and the insurance company holding the
Company's $20 million aggregate principal amount of unsecured, senior notes
entered into the Third Amendment to the Note Purchase Agreement providing
for an increase in permitted subsidiary indebtedness from $3.5 million to
$8.0 million.
Long-term obligations consist of the following as of June 30, 1997 and
1998:
1997 1998
Unsecured, senior notes with an insurance company,
maturing on July 30, 2004 and bearing interest at
a fixed rate of 8.44% per year $ 20,000 $ 20,000
Unsecured, revolving credit facility with Harris, maturing
on April 3, 2003, $40,000 bearing interest at 7.15%
(LIBOR plus 1.50%), $15,000 bearing interest at 7.16%
(LIBOR plus 1.50%), $8,000 bearing interest at 7.15%
(LIBOR plus 1.50%) and $2,000 bearing interest at 8.50% (Prime) 65,000
Term loan between G&C and the Ohio Department of
Development, secured by certain assets of G&C,
maturing on June 1, 1999, bearing interest at 5.00% 64 31
Term loan between G&C and OES Capital, Incorporated (assignee of
loan agreement with Ohio Air Quality Development Authority),
secured by certain assets of G&C, maturing on December 31,
2006, bearing interest at 6.50% 2,854 2,608
Term loan between La Grange Foundry and the Missouri
Development Finance Board, secured by a letter
of credit, maturing on November 1, 2011 bearing
interest at 3.69% and 3.80%, respectively 5,100 5,100
Term loan between Inverness and the City of Dowagiac, Michigan,
secured by certain assets of Inverness, maturing on
April 30, 2007, bearing interest at 7.11% 554
Other long-term obligations maturing on June 11, 1998,
non interest bearing 667
-------- --------
28,685 93,293
Less current maturities 927 6,021
-------- --------
Total long-term obligations $ 27,758 $ 87,272
-------- --------
-------- --------
The credit agreement with Harris and a note purchase agreement with an
insurance company limit the Company's ability to pay dividends in any
fiscal year to an amount not more than 25% of net earnings in the preceding
fiscal year.
F-15
The amounts of long-term obligations outstanding as of June 30, 1998 mature
as follows:
1999 $ 6,021
2000 8,883
2001 8,906
2002 8,927
2003 48,237
Thereafter 12,319
The amounts of interest expense for the years ended June 30, 1996, 1997
and 1998 consisted of the following:
1996 1997 1998
Senior notes with an insurance company $ 1,688 $ 1,688 $ 1,688
Credit facility with Harris 902 1,236 2,020
Subordinated promissory note payable to Rockwell 161
Amortization of deferred financing costs 69 129 188
Other 25 174
------- ------- -------
$ 2,845 $ 3,227 $ 3,896
------- ------- -------
------- ------- -------
9. INCOME TAXES
Income taxes for the years ended June 30, 1996, 1997 and 1998 are comprised
of the following:
1996 1997 1998
Current expense/(benefit):
Federal $ 4,972 $ 3,601 $ 4,298
State and local 1,376 867 1,410
Foreign (203) 683 913
------- ------- -------
6,145 5,151 6,621
Deferred expense 7,918 1,816 2,110
------- ------- -------
$ 14,063 $ 6,967 $ 8,731
------- ------- -------
------- ------- -------
F-16
1996 1997 1998
Items giving rise to the provision for deferred income taxes:
Postretirement (benefits) costs $ (145) $ (167) $ 10
Accrued liabilities 160 350 555
Net operating loss carryforwards (190) 313
Pension costs 16 (53) (397)
Alternative minimum tax credit carryforward 724
Flood wall capitalization 36
Deferred gain on flood proceeds 5,898 560
Depreciation and amortization 1,003 978 1,776
Inventories 56 406 (430)
Minimum pension liability (70)
Valuation allowance 190 128
All other 240 (258) 155
------- -------- -------
$ 7,918 $ 1,816 $ 2,110
------- -------- -------
------- -------- -------
Following is a reconciliation between the total income taxes and the amount
computed by multiplying income before income taxes plus the minority
interest in net income of subsidiaries by the statutory federal income
tax rate:
1996 1997 1998
-------------------- ----------------------- -----------------------
AMOUNT % AMOUNT % AMOUNT %
Computed expected
federal income tax
expense $ 12,465 35.0 $ 5,938 35.0 $ 7,680 35.0
State income taxes,
net of federal benefit 1,498 4.2 717 4.2 1,139 5.2
Non - U.S. taxes (75) (0.3)
Permanent differences 337 0.9 310 1.8 344 1.6
Other, net (237) (0.6) 2 (357) (1.7)
-------- ---- ----- ----- ------- ----
$ 14,063 39.5 $ 6,967 41.0 $ 8,731 39.8
-------- ---- ------- ----- ------- ----
-------- ---- ------- ----- ------- ----
F-17
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws and regulations. Deferred income
taxes as of June 30, 1997 and 1998 are comprised of the following:
1997 1998
Deferred tax assets:
Postretirement benefits $ 2,155 $ 2,839
Accrued liabilities 1,539 2,773
Net operating loss carryforwards 472 18,655
General business tax credits 574
Pension costs 964 1,386
Flood wall capitalization 429 429
Other 22 349
--------- --------
5,581 27,005
Valuation allowance (472) (12,959)
--------- --------
Net deferred tax assets 5,109 14,046
Deferred tax liabilities:
Depreciation and amortization (11,416) (14,913)
Deferred gain on flood proceeds (6,811) (6,811)
Inventories (1,585) (1,160)
Discharge of indebtedness (422)
Other (145) (162)
--------- --------
(19,957) (23,468)
--------- --------
Total $ (14,848) $ (9,422)
--------- --------
--------- --------
SFAS No. 109 requires a valuation allowance against deferred tax assets
if, based on the weight of available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized. An
allowance of $472 and $12,959 had been recorded as of June 30, 1997 and
1998, respectively. The principal reason for the increase in the
valuation allowance is attributable to acquired subsidiaries with tax
benefits.
In general, it is the practice and intention of the Company to reinvest
the earnings of its non - U.S. subsidiaries in those operations on a
permanent basis. Applicable U.S. federal taxes are provided only on
amounts actually or deemed to be remitted to the Company as dividends.
U.S. income taxes have not been provided on $1,470 of cumulative
undistributed earnings of ACUK. U.S. income taxes on such earnings, if
ultimately remitted to the U.S., might be recoverable as foreign tax
credits.
The Company has federal net operating loss carryforwards totaling
approximately $7,266 at June 30, 1998, which expire in the years 2007
through 2012. The federal net operating loss carryforwards were acquired
during the current year and are subject to the ownership change rules
defined by section 382 of the Internal Revenue code. As the result of this
event, the Company will be limited in its ability to use such net operating
loss carry forwards. The amount of taxable income that can be offset by
pre-change tax attributes in any annual period is limited to approximately
$500,000.
F-18
The Company has foreign net operating loss carryforwards totaling
approximately $50,735 at June 30, 1998, which have no expiration
date. The utilization of such net operating loss carryforwards are
restricted to the earnings of specific foreign subsidiaries.
10. FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts
receivable, accounts payable, debt obligations, and derivative
financial instruments, including an interest rate agreement,
forward foreign exchange contracts and a combined interest rate and
foreign currency swap.
The derivative financial instruments are used by the Company to
manage its exposure to interest rate and foreign currency risk. The
Company does not intend to use such instruments for trading or
speculative purposes. The counterparties to these instruments are
major financial institutions with which the Company has other
financial relationships.
The Company is exposed to credit loss in the event of
nonperformance by these counterparties. However, the Company does
not anticipate nonperformance by the other parties, and no material
loss would be expected from their nonperformance. The Company's
financial instruments also expose it to certain additional market
risks as discussed below.
INTEREST RATE RISK - The Company's floating rate debt obligations
(see Note 8) expose the Company to interest rate risk, such that
when LIBOR or Prime rates increase or decrease, so will the
Company's interest expense. To manage this potential risk, the
Company may use interest rate swap agreements to limit the effect
of increases in interest rates on any of the Company's U.S. dollar
floating rate debt by fixing the rate without the exchange of the
underlying principal or notional amount. Net amounts paid or
received are added to or deducted from interest expense in the
period accrued.
At June 30, 1998, Company had $65,000 of floating rate debt tied to
LIBOR or Prime rates. In April 1998, the Company entered into a
$15,000 notional amount interest rate swap agreement under which
the Company will pay a fixed rate of 5.92% and receive a LIBOR
floating rate (5.67188% at June 30, 1998). This agreement is a
hedge against $15,000 of the $65,000 outstanding on the Company's
unsecured revolving credit facility as of June 30, 1998. At June
30, 1998, the fair value of this agreement based on a quote
received from the counterparty, indicating the amount the Company
would pay or receive to terminate the agreement, is a payment of
$77.
FOREIGN CURRENCY RISK - The Company's British subsidiary,
Sheffield, generates significant sales to customers outside of
Great Britain whereby Sheffield invoices and receives payment from
those customers in their local currencies. This creates foreign
currency risk for Sheffield as the value of such currencies in
British Pound terms may be higher or lower when such transactions
are actually settled. To manage this risk, Sheffield uses forward
foreign exchange contracts to hedge receipts and payments of
foreign currencies related to sales to its customers and purchases
from its vendors outside of Great Britain. When Sheffield accepts
an order from a customer that will be invoiced in a currency other
than British Pounds (anticipated sales), it enters into a forward
foreign exchange contract to sell such currency and receive British
Pounds at a fixed rate during some specified future period that is
expected to approximate the customer's payment date. Upon shipment
of the product to the customer, the sale and receivable are
recorded in British Pounds in the amount of the contract. When
Sheffield purchases materials or equipment from a vendor that bills
them in foreign currency, Sheffield will also enter into a forward
foreign exchange contract to sell British Pounds and purchase that
foreign currency to settle the payable.
F-19
At June 30, 1998, Sheffield has net contracts with a single
counterparty to sell the following currencies and has no
significant un-hedged foreign currency exposure related to sales
and purchase transactions:
LOCAL APPROXIMATE
AMOUNT VALUE (1)
U.S. dollars $ 28,239 $ 28,222
Deutsche marks 17,754 9,816
French Francs 20,792 3,429
Canadian dollars 4,805 3,270
Italian liar 3,425,686 1,923
Belgium francs 66,123 1,773
Dutch Guilder 3,613 1,772
Swedish krona 14,009 1,755
Spanish Pesata 224,713 1,464
Austrian schilling 14,628 1,149
Japanese yen 63,300 453
Danish krona 2,556 371
Irish punt 251 349
Finish marka 340 62
Swiss francs 13 9
--------
Total $ 55,817
--------
--------
(1) The approximate value is the value of the local currencies translated first
into British Pounds, which is the functional currency of Sheffield, at the
June 30, 1998 spot rates, and then translated to U.S. dollars at the June
30, 1998 spot rate.
The Company also has foreign currency exposure with respect to its net
investment in Sheffield. This exposure is to changes in the British
Pound and affects the translation of the investment into U.S.
dollars in consolidation. To manage a portion of this exposure the
Company entered into a combined interest rate and foreign currency
swap in April 1998. The swap is an amortizing principal swap that
fixes the exchange rate on the periodic and final principal cash
exchanges and initially requires the payment of interest on 24,002
British Pounds by the Company at a fixed rate of 6.82% and the
receipt of interest on 40,000 U.S. dollars at a floating rate tied
to LIBOR rates (5.67% at June 30, 1998). At June 30, 1998, the
foreign currency portion of this swap is an effective hedge against
the net investment in Sheffield, has a carrying value of $7 and is
recorded as an adjustment to the cumulative translation adjustment
account in equity and in other assets. The fair value of the
foreign currency portion, based on amounts that would be paid or
received to terminate the agreement is a loss of $90 to the
Company. The interest portion of the swap does not qualify for
hedge treatment and therefore is required to be marked-to-market
through other income or expense. At June 30, 1998, the interest
portion has a fair value of $55 that is included in other assets
and other income and represents the amount that the Company would
receive if the swap was terminated.
FAIR VALUE OF FINANCIAL INSTRUMENTS - As of June 30, 1998, the
carrying value of cash, customer accounts receivable and accounts
payable approximates fair value of those instruments due to their
liquidity and short-term nature.
Based on borrowing rates currently available to the Company and the
remaining terms, the carrying value of debt obligations as of June
30, 1998 approximates fair value.
F-20
The estimated fair values of the Company's financial instruments
have been determined by the Company using available market
information and appropriate valuation methodologies. However,
considerable judgement is necessarily required in interpreting
market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts that the Company could realize in current market exchange.
The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair
value amounts.
11. STOCKHOLDERS' EQUITY
The Atchison Casting 1993 Incentive Stock Plan (the "Incentive
Plan") was adopted by the Board of Directors on August 10, 1993 and
approved by the Company's stockholders on September 27, 1993. At
the annual meeting in November 1997, the Company's stockholders
approved increasing the number of options available for grant under
the Incentive Plan by 400,000. The Incentive Plan allows the
Company to grant stock options to employees to purchase up to
700,000 shares of common stock at prices that are not less than the
fair market value at the date of grant. The options become
exercisable with respect to one-third of the shares subject to the
options each year from the date of grant and remain exercisable for
a term of not more than 10 years after the date of grant. The
Incentive Plan provides that no options may be granted more than 10
years after the date of approval by the stockholders. The changes
in outstanding options were as follows:
SHARES PRICE RANGE
UNDER OPTION PER SHARE
Balance, June 30, 1995 170,400 $12.875-14.750
Issued 45,800 14.125
Surrendered (4,000) 13.375
--------
Balance, June 30, 1996 212,200 12.875-14.750
Issued 33,533 15.750-19.125
Exercised (7,600) 13.375-14.500
Surrendered (8,134) 13.375-14.500
--------
Balance, June 30, 1997 229,999 12.875-19.125
Issued 33,333 15.750-18.625
Exercised (18,060) 12.875-14.500
Surrendered (11,873) 13.375-14.500
---------
Balance, June 30, 1998 233,399 12.875-19.125
---------
Exercisable
June 30, 1998 164,044 $12.875-19.125
---------
---------
At June 30, 1998, options to purchase 440,941 shares were
authorized but not granted.
F-21
The 1993 Atchison Casting Corporation Employee Stock Purchase Plan
(the "Purchase Plan") was adopted by the Board of Directors on
August 10, 1993 and approved by the Company's stockholders on
September 27, 1993. An aggregate of 400,000 shares of common stock
were initially made available for purchase by employees upon the
exercise of options under the Purchase Plan. On the first day of
every option period (option periods are three-month periods
beginning on January 1, April 1, July 1 or October 1 and ending on
the next March 31, June 30, September 30 or December 31,
respectively), each eligible employee is granted a nontransferable
option to purchase common stock from the Company on the last day of
the option period. As of the last day of an option period, employee
contributions (authorized payroll deductions) during such option
period will be used to purchase full and partial shares of common
stock. The price for stock purchased under each option is 90% of
the stock's fair market value on the first day or the last day of
the option period, whichever is lower. During the years ended June
30, 1996, 1997 and 1998, 34,333, 11,179 and 15,793 common shares,
respectively, were purchased by employees under the Purchase Plan.
At June 30, 1998, 323,073 shares remained available for grant.
On November 18, 1994, the Company's stockholders approved the
Atchison Casting Non-Employee Director Option Plan (the "Director
Option Plan"). The Director Option Plan provides that each
non-employee director of the Company who served in such capacity on
April 15, 1994 and each non-employee director upon election or
appointment to the Board of Directors thereafter shall
automatically be granted an option to purchase 10,000 shares of the
Company's common stock. No person shall be granted more than one
such option pursuant to the Director Option Plan. An aggregate of
100,000 shares were reserved for purchase under the plan. The price
for stock purchased under the plan is the fair market value at the
date of grant. The changes in outstanding options were as follows:
SHARES PRICE
UNDER OPTION PER SHARE
Balance, June 30, 1996 40,000 $ 13.375
------
Balance, June 30, 1997 40,000 13.375
------
Exercised (10,000) 13.375
Issued 10,000 19.125
------
Balance, June 30, 1998 40,000 $13.375-19.125
------
At June 30, 1998, options to purchase 40,000 shares were authorized
but not granted.
F-22
The Company applies APB No. 25 in accounting for its stock option
plans, under which no compensation cost has been recognized for
stock option awards. Had compensation cost for the stock option
plans been determined in accordance with the fair value accounting
method prescribed under SFAS No. 123, the Company's net earnings
per share on a pro forma basis would have been as follows:
1996 1997 1998
Net income:
As reported $ 21,326 $ 9,728 $ 12,765
Pro forma 21,129 9,353 12,578
Net income per share:
As reported:
Basic 3.87 1.68 1.56
Diluted 3.87 1.67 1.55
Pro forma:
Basic 3.83 1.61 1.54
Diluted 3.83 1.60 1.53
The SFAS No. 123 fair value method of accounting is not required to
be applied to options granted prior to July 1, 1995, therefore, the
pro forma compensation cost may not be representative of that to be
expected in future years. Compensation cost for 1998 includes
options granted during a three-year period.
For the purpose of computing the pro forma effects of stock option
grants under the fair value accounting method, the fair value of
each stock option grant was estimated on the date of the grant
using the Binomial Method pricing model. The weighted-average fair
value of stock options granted during 1998 was $8.35. The following
weighted average assumptions were used for grants during the years
ended June 30, 1996, 1997 and 1998:
Risk-free interest rate 6.5%
Expected life 10 years
Expected volatility 15%
Dividend yield Nil
12. EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "EARNINGS PER
SHARE". This Statement established new standards for computing and
presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. It replaces
the presentation of primary EPS with a presentation of basic EPS
and also requires that entities with simple capital structures,
that is, those with only common stock outstanding, shall present
basic per-share amounts for income from continuing operations and
for net income on the face of the statement of income. In addition
the Statement requires dual presentation of basic and diluted EPS
on the face of the statement of income for entities with complex
capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
The Company was required to adopt SFAS No. 128 effective for the
year ended June 30, 1998. EPS for the prior periods have been
restated according to the new standard. Following is a
reconciliation of basic and diluted EPS for the years ended June
30, 1996, 1997 and 1998, respectively.
F-23
1996 1997 1998
-------------------------------- ---------------------------- ----------------------------------
WEIGHTED EARNINGS WEIGHTED EARNINGS WEIGHTED EARNINGS
NET AVERAGE PER NET AVERAGE PER NET AVERAGE PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
Basic EPS $21,326,000 5,510,410 $ 3.87 $9,728,000 5,796,281 $ 1.68 $12,765,000 8,167,285 $ 1.56
Effect of dilutive
securities -
stock options 6,187 34,414 (0.01) 51,401 (0.01)
----------- --------- ------ ---------- --------- ------ ----------- --------- ------
Diluted EPS $21,326,000 5,516,597 $ 3.87 $9,728,000 5,830,695 $ 1.67 $12,765,000 8,218,686 $ 1.55
----------- --------- ------ ---------- --------- ------ ----------- --------- ------
----------- --------- ------ ---------- --------- ------ ----------- --------- ------
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the periods ended June 30, 1998
and 1997 are as follows:
YEAR ENDED JUNE 30, 1998
--------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
-------------- --------------- -------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $ 68,796 $ 84,435 $ 91,623 $ 128,914
Gross profit 9,212 12,663 14,120 19,493
Operating income 3,688 5,176 7,638 9,338
Net income 1,825 2,390 3,913 4,637
Earnings per common share:
Basic 0.22 0.29 0.48 0.57
Diluted 0.22 0.29 0.48 0.56
YEAR ENDED JUNE 30, 1997
--------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
-------------- --------------- -------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $ 48,998 $ 61,622 $ 66,313 $ 68,836
Gross profit 6,641 10,111 11,976 13,655
Operating income 2,238 4,963 5,794 7,197
Net income 941 2,371 2,862 3,554
Earnings per common share:
Basic 0.17 0.43 0.52 0.54
Diluted 0.17 0.43 0.51 0.54
The aggregate total of the individual quarterly amounts may not
equal the amount reported for the fiscal year due to rounding.
14. PENSION PLANS
The Company sponsors separate defined benefit pension plans for
certain of its salaried and hourly employees. Employees are
eligible to participate on the date of employment with vesting
after five years of service. Benefits for hourly employees are
determined based on years of credited service multiplied by a
benefit formula or unit. Benefits for salaried employees are
determined based on credited service and employee earnings.
F-24
Pension expense for the defined benefit plans is presented below:
1996 1997 1998
Service costs $ 717 $ 929 $ 1,018
Interest costs 1,961 2,389 2,851
Actual return on net assets (4,302) (3,308) (8,263)
Net deferral items 2,559 810 5,141
------ ------ -------
$ 935 $ 820 $ 747
------ ------ -------
------ ------ -------
The pension plans' assets (primarily U. S. Government securities,
common stock and corporate bonds) are deposited with a bank. A
comparison of projected benefit obligation and plan assets at fair
value as of June 30, 1997 and 1998 is presented below:
1997 1998
------------------------------------------ -----------------------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
Actuarial present value of:
Vested benefit obligation $ (27,221) $ (5,295) $ (201,369) $ (7,322)
--------- -------- ---------- --------
Accumulated benefit
obligation $ (28,120) $ (5,509) $ (202,511) $ (7,638)
--------- -------- ---------- --------
Projected benefit obligation $ (32,131) $ (5,509) $ (234,221) $ (7,682)
Plan assets at fair value 31,579 4,782 242,510 6,250
--------- -------- ---------- --------
Projected benefit obligation
in excess of plan assets (552) (727) 8,289 (1,432)
Unrecognized prior
service costs 118 79 105 74
Unrecognized net obligation (3) 196 (190)
Unrecognized net (gain)/loss (277) (152) (809) 397
Additional liability (42) (407)
--------- -------- ---------- --------
Accrued pension asset (liability) $ (714) $ (842) $ 7,781 $ (1,558)
--------- -------- ---------- --------
The actuarial valuation was prepared assuming:
Discount rate 7.75 % 6.75 %
Expected long-term rate of
return on plan assets 9.00 % 9.00 %
Salary increases per year 5.00 % 5.00 %
F-25
In accordance with SFAS No. 87, the Company has recorded an
additional minimum pension liability for underfunded plans of $42
and $407 at June 30, 1997 and 1998, respectively, representing the
excess of unfunded accumulated benefit obligations over previously
recorded pension cost liabilities. A corresponding amount is
recognized as an intangible asset except to the extent that these
additional liabilities exceed related unrecognized prior service
cost and net transition obligation, in which case the increase in
liabilities is charged directly to stockholders' equity. For 1997,
$293 of the excess minimum pension liability resulted in a credit
to equity, net of income taxes of $187.
In addition, the Company sponsors a defined contribution 401(k)
benefit plan covering certain of its salaried employees who have
attained age 21 and have completed one year of service. The Company
matches 75% of employee contributions up to 8% of an employee's
salary. Employees vest in the Company matching contributions after
five years. The cost of the Company's contribution was $429, $452
and $535 for the years ended June 30, 1996, 1997 and 1998,
respectively.
The Company's subsidiaries, Prospect Foundry, LA Die Casting and
Jahn Foundry contributed $189, $274 and $345 for the fiscal years
ended June 30, 1996, 1997 and 1998, respectively, to multiemployer
pension plans for employees covered by a collective bargaining
agreement. These plans are not administered by the Company and
contributions are determined in accordance with provisions of
negotiated labor contracts. Information with respect to the
Company's proportionate share of the excess of the actuarially
computed value of vested benefits over the total of the pension
plans' net assets is not available from the plans' administrators.
The Multiemployer Pension Plan Amendments Act of 1980 (the "Act")
significantly increased the pension responsibilities of
participating employers. Under the provisions of the Act, if the
plans terminate or the Company withdraws, the Company may be
subject to a substantial "withdrawal liability." As of the date of
the most current unaudited information submitted by the plan's
administrators (December 31, 1997), no withdrawal liabilities exist.
The Company also has various other profit sharing plans. Costs of
such plans charged against earnings were $878, $553 and $913 for
the years ended June 30, 1996, 1997 and 1998, respectively.
F-26
15. POSTRETIREMENT OBLIGATION OTHER THAN PENSION
The Company provides certain health care and life insurance
benefits to certain of its retired employees. SFAS No. 106,
"EMPLOYER'S ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS," requires the Company to accrue the estimated cost of
retiree benefit payments during the years the employee provides
services. The accumulated postretirement benefit obligation and the
accrued postretirement benefit cost as of June 30, 1997 and 1998 is
as follows:
1997 1998
Accumulated postretirement benefit obligation:
Retirees $ 1,231 $ 2,246
Fully eligible active plan participants 742 2,159
Other active plan participants 4,428 5,238
------- -------
6,401 9,643
Plan assets at fair value ------- -------
Accumulated postretirement benefit obligation
in excess of plan assets 6,401 9,643
Unrecognized net loss (1,535) (2,894)
Unrecognized prior service cost 978 847
------- -------
Accrued postretirement benefit cost $ 5,844 $ 7,596
------- -------
------- -------
F-27
Net postretirement benefit cost for the years ended June 30, 1996,
1997 and 1998 consisted of the following components:
1996 1997 1998
Service cost - benefits earned during the year $ 223 $ 289 $ 386
Interest cost on accumulated postretirement
benefit obligation 328 429 599
Amortization of prior service cost (132) (69) (63)
Amortization of loss 7
----- ----- -----
$ 426 $ 649 $ 922
----- ----- -----
----- ----- -----
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation for pre-age 65
benefits as of June 30, 1998 was 8.9% decreasing each successive
year until it reaches 5.0% in 2018, after which it remains
constant. The assumed rate used for post-age 65 benefits was 8.4%
decreasing each successive year until it reaches 5.0% in 2023. A
one-percentage-point increase in the assumed health care cost trend
rate for each year would increase the accumulated postretirement
benefit obligation as of June 30, 1998 by approximately $1,485
(15.4%) and the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost for the
year then ended by approximately $173 (17.6%). The assumed discount
rate used in determining the accumulated postretirement obligation
as of June 30, 1996, 1997 and 1998 was 7.5%, 7.75% and 6.75%,
respectively, and the assumed discount rate used in determining the
service cost and interest cost for the years ended June 30, 1996,
1997 and 1998 was 7.5%, 7.5% and 7.75%, respectively.
16. OPERATING LEASES
The Company leases certain buildings, equipment, automobiles and
trucks, all accounted for as operating leases, on an as needed
basis to fulfill general purposes. Total rental expense was $544,
$657 and $1,006 for the years ended June 30, 1996, 1997 and 1998,
respectively. Long-term, noncancelable operating leases having an
initial or remaining term in excess of one year require minimum
rental payments as follows:
1999 $ 1,115
2000 824
2001 530
2002 435
2003 162
F-28
17. MAJOR CUSTOMERS
The Company's operations are conducted within one business segment
and revenues attributable to foreign customers are not material.
Net sales to and customer accounts receivable from major customers
are as follows:
AMOUNT OF NET SALES
-----------------------------------------------------
1996 1997 1998
---------------- ---------------- ----------------
Customer A $ 24,822 $ 30,232 $ 27,713
Customer B 13,396 12,165 39,999
-------- -------- --------
$ 38,218 $ 42,397 $ 67,712
-------- -------- --------
-------- -------- --------
CUSTOMER
ACCOUNTS
RECEIVABLE
-----------------------------------
1997 1998
Customer A $ 4,966 $ 4,283
Customer B 823 7,249
------- -------
$ 5,789 $ 11,532
------- -------
------- -------
18. GEOGRAPHIC INFORMATION
The Company operates in three geographic regions, the United
States, Europe and Canada. The following is a summary of local
operations by geographic region at June 30:
UNITED
STATES EUROPE CANADA TOTAL
Sales to unaffiliated customers
1998 $ 310,235 $ 37,607 $ 25,926 $ 373,768
1997 219,239 26,530 245,769
1996 166,831 18,250 185,081
Operating income
1998 21,666 1,997 2,177 25,840
1997 17,369 2,823 20,192
1996 38,641 (182) 38,459
Identifiable assets
1998 228,075 103,604 14,460 346,139
1997 196,812 16,596 213,408
1996 151,108 11,076 162,184
Sales to unaffiliated customers are those sales of the Company that
are identified with the operations in each geographic region.
Operating income is gross profit less operating expenses.
F-29
Identifiable assets are those assets of the Company that are
identified with the operations in each geographic region.
Of the $310,235, $219,239, and $166,831, U.S. sales, $27,259,
$16,001 and $16,179, respectively, were export sales to
unaffiliated customers, principally located in Canada.
19. ADDITIONAL CASH FLOWS INFORMATION
1996 1997 1998
Cash paid during the year for:
Interest $ 2,728 $ 3,346 $ 3,915
Income taxes 6,883 4,269 7,731
Supplemental schedule of noncash investing and
financing activities:
Minimum pension liability adjustment, net of income
tax expense of $59, $187 and $0,
respectively, recorded to stockholders' equity (82) (293)
Recording of other asset related to pension liability (24) (209) 365
Recording of additional pension liability 175 689 (365)
Unexpended bond funds 1,198 (679) (519)
20. OTHER INCOME
Other income in fiscal 1996 includes $11,087 of payments received
by the Company from its insurance carrier in final settlement of
the business interruption portion of the Company's insurance claim.
Other income also includes $16,231 of payments received in the
fourth quarter from the Company's insurance carrier in final
settlement of the casualty and property damage portion of the
Company's insurance claim. The Company's claim was a result of the
July 1993 Missouri River flood. As of June 30, 1996, 1997, and 1998
the Company has recorded $6,946, $6,773, and $5,932 respectively,
in reserves against future repair expenses which have been
classified as accrued expenses.
21. SUBSEQUENT EVENTS
On August 12, 1998, the Company announced that its Board of
Directors had authorized a stock repurchase program of up to
1,200,000 shares of common stock and is considering the issuance of
up to $100 million of senior subordinated notes, subject to market
conditions.
Effective September 1, 1998, the Company purchased 90% of the
outstanding shares of London Precision Machine & Tool Ltd. ("London
Precision") for U.S. $13.7 million cash, subject to adjustment.
London Precision, located in London, Ontario, Canada, is an
industrial machine shop which serves the locomotive, mining and
construction, pulp and paper markets, among others. The Company
financed this transaction with funds available under its revolving
credit facility.
******
F-30
EXHIBIT INDEX
EXHIBIT
- -------
2.1(a) The Offer Document from ACUK to the stockholders of Sheffield dated
April 6, 1998 (incorporated by reference to Exhibit 2.1 of Form 8-K
filed April 16, 1998)
2.1(b) Deed of Warranty and Undertaking in respect of Sheffield and its
Subsidiaries dated April 6, 1998 by and among Phillip Montague Wright,
Malcom Arthur Brand and David Fletcher and ACUK (incorporated by
reference to Exhibit 2.2 of Form 8-K filed April 16, 1998)
3.1 Articles of Incorporation of Atchison Casting Corporation, a Kansas
corporation (incorporated by reference to Exhibit 4.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1994)
3.2 By-Laws of Atchison Casting Corporation, a Kansas corporation
(incorporated by reference to Exhibit 4.2 of the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1994)
4.0 Long-term debt instruments of the Company in amounts not exceeding 10%
of the total assets of the Company and its subsidiaries on a
consolidated basis will be furnished to the Commission upon request
4.1(a) The Amended and Restated Credit Agreement dated as of April 3, 1998,
among the Company, the Banks party thereto and Harris Trust and
Savings Bank, as Agent (incorporated by reference to Exhibit 4.1(a) of
Form 8-K filed April 16, 1998)
4.1(b) Pledge and Security Agreement dated as of April 3, 1998, between the
Company and Harris Trust and Savings Bank, as Agent (incorporated by
reference to Exhibit 4.1(b) of Form 8-K filed April 16, 1998)
4.2(a) Note Purchase Agreement dated as of July 29, 1994 between the Company
and Teachers Insurance and Annuity Association of America pursuant to
which the Company's 8.44% Senior Notes due 2004 were issued
(incorporated by reference to Exhibit 4.3 of the Company's Annual
Report on Form 10-K for the year ended June 30, 1994)
4.2(b) First Amendment dated as of March 8, 1996 to the Note Purchase
Agreement dated July 29, 1994, between the Company and Teachers
Insurance and Annuity Association of America (incorporated by
reference to Exhibit 4.2 of the Company's Current Report on Form 8-K
dated March 25, 1996)
4.2(c) Second Amendment dated as of May 24, 1996 to the Note Purchase
Agreement dated July 29, 1994, between the Company and Teachers
Insurance and Annuity Association of America (incorporated by
reference to Exhibit 4.2(c) of the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1996)
4.2(d) Third Amendment dated as of April 3, 1998 to the Note Purchase
Agreement dated July 29, 1994 between the Company and Teachers
Insurance and Annuity Association of America (incorporated by
reference to Exhibit 4.2 of Form 8-K filed April 16, 1998)
EXHIBIT INDEX
EXHIBIT
- -------
4.3 Specimen stock certificate (incorporated by reference to Exhibit 4.3
of Amendment No. 2 to Form S-2 Registration Statement No. 333-25157
filed May 19, 1997)
10.1(a)* Employment Agreement between the Company and Hugh H. Aiken dated as of
June 14, 1991 (incorporated by reference to Exhibit 10.1 of Form S-1
Registration Statement No. 33-67774 filed August 23, 1993)
10.1(b)* Amendment No. 1 dated as of September 27, 1993 to Employment Agreement
between the Company and Hugh H. Aiken (incorporated by reference to
Exhibit 10.1(b) of Amendment No. 1 to Form S-1 Registration Statement
No. 33-67774 filed September 27, 1993)
10.2* Atchison Casting 1993 Incentive Stock Plan (incorporated by reference
to Exhibit 10.7 of Form S-1 Registration Statement No. 33-67774 filed
August 23, 1993)
10.3 Confidentiality and Noncompetition Agreements by and among the Company
and executive officers of the Company (incorporated by reference to
Exhibit 10.8 of Form S-1 Registration Statement No. 33-67774 filed
August 23, 1993)
10.4* Atchison Casting Non-Employee Director Option Plan (incorporated by
reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K
for the year ended June 30, 1994)
10.5* Employment Incentive Stock Agreement dated as of April 1, 1994 by and
between Prospect Foundry, Inc., Atchison Casting Corporation and
Richard J. Sitarz (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994)
10.6* Plan for conversion of subsidiary stock to Atchison Casting
Corporation stock (incorporated by reference to Exhibit 10.3 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994)
10.7 Purchase and Sale Agreement dated as of December 30, 1996 by and among
Kramer, James Stott and David Jungen (incorporated by reference to
Exhibit 10 of the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1996)
EXHIBIT INDEX
EXHIBIT
- -------
10.8 Intermediary Fee Agreement between Riverside Partners, Inc. and the
Company dated February 17, 1997 (incorporated by reference to Exhibit
10.16 of Form S-2 Registration Statement No. 333-25157 filed May 19,
1997)
10.9 The Share Exchange Agreement dated April 6, 1998 in respect of the
ordinary shares of Sheffield by and among David Fletcher and others,
ACUK and the Company (incorporated by reference to Exhibit 10.1 of
Form 8-K filed April 16, 1998)
10.10(a)* Service Agreement between Sheffield and David Fletcher dated November
1, 1988
10.10(b)* Novation Agreement between Sheffield and David Fletcher dated May 2,
1996.
10.10(c)* Letter Agreement between Sheffield and David Fletcher dated May 2,
1996.
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule - Fiscal year ended FY 1998
27.2 Financial Data Schedule - Qtrs. 1, 2 and 3 of FY 1998
27.3 Financial Data Schedule - Fiscal year ended FY 1997, and Qtrs. 1, 2
and 3 of FY 1997
- --------
* Represents a management contract or a compensatory plan or arrangement.