-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P6fvQqmMWBQUtbzu+XFySbmJ+msE8eKkLF3W1HPw2f15T2XHqmed8U6ToL0wRLdF CoCsmrtrwH17IR+gOeSuMA== 0000950124-99-003336.txt : 19990518 0000950124-99-003336.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950124-99-003336 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEENAH FOUNDRY CO CENTRAL INDEX KEY: 0001040599 STANDARD INDUSTRIAL CLASSIFICATION: GLASS, GLASSWARE, PRESSED OR BLOWN [3220] IRS NUMBER: 391580331 STATE OF INCORPORATION: WI FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-28751-03 FILM NUMBER: 99625477 BUSINESS ADDRESS: STREET 1: 2121 BROOKS AVE STREET 2: PO BOX 729 CITY: NEENAH STATE: WI ZIP: 54927 BUSINESS PHONE: 9207257000 MAIL ADDRESS: STREET 1: 2121 BROOKS AVE STREET 2: PO BOX 729 CITY: NEENAH STATE: WI ZIP: 54927 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- --------- Commission File Number 333-28751 NEENAH FOUNDRY COMPANY (Exact name of each registrant as it appears in its charter) Wisconsin 39-1580331 (State or other jurisdiction of (IRS Employer ID Number) incorporation or organization) 2121 Brooks Avenue, P.O. Box 729, Neenah, Wisconsin 54957 (Address of principal executive offices) (Zip Code) (920) 725-7000 (Registrant's telephone number, including area code) None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, Class A, $100 par value- 1,000 shares as of April 30, 1999 Common Stock, Class B, $100 par value- 0 shares as of April 30, 1999 Page 1 2 NEENAH FOUNDRY COMPANY Form 10-Q Index For the Quarter Ended March 31, 1999
Page Part 1. Financial Information Item 1. Financial Statements Condensed consolidated balance sheets -- March 31, 1999 and September 30, 1998 3 Condensed consolidated statements of operations -- Three and six months ended March 31, 1999 and 1998 4 Condensed consolidated statements of cash flows -- Six months ended March 31, 1999 and 1998 5 Notes to condensed consolidated financial statements -- March 31, 1999 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 8 Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 Part II. Other Information Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 14 Exhibit Index 15
Page 2 3 NEENAH FOUNDRY COMPANY PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
March 31 September 30 1999 1998(1) --------------- -------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents ............................. $ 26,045 $ 19,798 Accounts receivable, net .............................. 69,707 71,655 Inventories ........................................... 61,139 40,841 Refundable income taxes ............................... -- 375 Deferred income taxes ................................. 4,460 4,888 Other current assets .................................. 6,392 5,060 --------- --------- Total current assets .................... 167,743 142,617 Property, plant and equipment ........................... 233,471 198,671 Less accumulated depreciation ........................... 29,597 18,134 --------- --------- 203,874 180,537 Identifiable intangible assets, net ..................... 68,657 69,904 Goodwill, net ........................................... 198,450 184,181 Other assets ............................................ 7,686 7,070 --------- --------- $ 646,410 $ 584,309 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable ...................................... $ 33,756 $ 29,920 Income taxes payable .................................. 193 -- Accrued liabilities ................................... 34,706 30,326 Current portion of long-term debt ..................... 4,255 4,185 --------- --------- Total current liabilities ............... 72,910 64,431 Long-term debt .......................................... 427,394 367,686 Postretirement benefit obligations ...................... 5,398 5,220 Deferred income taxes ................................... 67,606 68,069 Other liabilities ....................................... 10,882 10,981 --------- --------- Total liabilities ....................... 584,190 516,387 Commitments and contingencies STOCKHOLDER'S EQUITY: Preferred stock, par value $100 per share -- authorized 3,000 shares, no shares issued or outstanding .......................... -- -- Common stock, par value $100 per share -- authorized 11,000 shares, issued and outstanding 1,000 shares ................... 100 100 Additional paid in capital ............................ 51,317 55,167 Retained earnings ..................................... 12,373 14,225 Pension liability adjustment .......................... (1,570) (1,570) --------- --------- Total stockholder's equity .............. 62,220 67,922 --------- --------- $ 646,410 $ 584,309 ========= =========
See notes to condensed consolidated financial statements (1) The balance sheet as of September 30, 1998 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Page 3 4 NEENAH FOUNDRY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
Three Months Ended Six Months Ended March 31, March 31, --------------------------------- ----------------------------- 1999 1998 1999 1998 --------------- --------------- -------------- ------------ (Restated) (Restated) Net sales .................................... $ 136,943 $ 58,746 $ 252,207 $ 116,734 Cost of sales ................................ 116,356 43,330 209,848 86,043 --------- --------- --------- --------- Gross profit ................................. 20,587 15,416 42,359 30,691 Selling, general and administrative expenses.. 8,629 5,238 16,889 10,136 Amortization of intangible assets ............ 2,614 1,404 6,029 2,816 --------- --------- --------- --------- Total operating expenses ..................... 11,243 6,642 22,918 12,952 --------- --------- --------- --------- Operating income ............................. 9,344 8,774 19,441 17,739 Net interest expense ......................... (10,871) (5,808) (20,778) (11,648) --------- --------- --------- --------- Income (loss) before income taxes ............ (1,527) 2,966 (1,337) 6,091 Provision (credit) for income taxes .......... (34) 1,482 515 2,991 --------- --------- --------- --------- Net income (loss) ............................ $ (1,493) $ 1,484 $ (1,852) $ 3,100 ========= ========= ========= =========
See notes to condensed consolidated financial statements. Page 4 5 NEENAH FOUNDRY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
(Restated) Six Months Six Months Ended Ended March 31, March 31, 1999 1998 --------------- -------------- (Unaudited) OPERATING ACTIVITIES Net income (loss) ................................................ $ (1,852) $ 3,100 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ................................. 17,609 7,621 Amortization of deferred financing costs and premium on notes.. 548 247 Deferred income taxes ......................................... 23 -- Changes in operating assets and liabilities ................... (762) (3,203) -------- -------- Net cash provided by operating activities ............................................... 15,566 7,765 INVESTING ACTIVITIES Purchase of property, plant and equipment ........................ (19,808) (3,486) Acquisition of Deeter Foundry, Inc. .............................. -- (20,759) Acquisition of Cast Alloys, Inc., net of cash acquired of $489 ... (42,484) -- -------- -------- Net cash used in investing activities ............................................... (62,292) (24,245) FINANCING ACTIVITIES Proceeds from long-term debt ..................................... 91,605 1,380 Payments on long-term debt ....................................... (31,546) (1,819) Debt issuance costs .............................................. (3,236) -- Return of capital to parent ...................................... (3,850) -- -------- -------- Net cash provided by (used in) financing activities ............................................... 52,973 (439) -------- -------- Increase (decrease) in cash and cash equivalents ................. 6,247 (16,919) Cash and cash equivalents at beginning of period ................. 19,798 20,346 -------- -------- Cash and cash equivalents at end of period ....................... $ 26,045 $ 3,427 ======== ========
See notes to condensed consolidated financial statements. Page 5 6 NEENAH FOUNDRY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 1999 NOTE 1 -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending September 30, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in Neenah Foundry Company's Annual Report on Form 10-K for the year ended September 30, 1998. On September 8, 1998, the capital stock of Advanced Cast Products, Inc. (ACP), was contributed to the Company by ACP Holding Company. ACP is a manufacturer of ductile and malleable iron castings. The acquisition of ACP was accounted for in a manner similar to a pooling of interests because the Company and ACP were under common control. Accordingly, the prior period financial statements of the Company for the period during which the Company and ACP were under common ownership have been restated. NOTE 2 -- INVENTORIES The components of inventories are as follows:
March 31 September 30 1999 1998 --------------- --------------- (000's omitted) Raw materials ............................. $10,965 $ 4,550 Work in process and finished goods ........ 41,249 28,141 Supplies .................................. 8,925 8,150 ------- ------- $61,139 $40,841 ======= =======
If the FIFO method of inventory valuation had been used on all components, inventories would have been approximately $657 and $499 higher than reported at March 31, 1999 and September 30, 1998, respectively. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end inventory levels and costs. Because these are subject to many forces beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. Page 6 7 NOTE 3 -- AQUISITIONS On March 30, 1998, the Company purchased Deeter Foundry, Inc. ("Deeter"), a manufacturer of gray iron castings, for $20,759 in cash (including direct costs of $313) and a $3,850 note issued by ACP Holding Company payable to the selling shareholders of Deeter which has been accounted for as a contribution to the capital of the Company. On April 3, 1998, the Company purchased Mercer Forge Corporation ("Mercer"), a manufacturer of forged components, for $47,420 (including direct costs of $525 and net of $154 of acquired cash). The acquisition of Mercer was financed through borrowings under the Tranche B term loan. On September 8, 1998, the Company purchased Dalton Corporation ("Dalton"), a manufacturer of gray iron castings, for $100,930 (including direct costs of $601 and net of $1,679 of acquired cash). The acquisition of Dalton was financed through drawings under the Tranche B term loan and the Acquisition Loan Facility. On December 31, 1998, the Company purchased Niemin Porter & Co. d/b/a Cast Alloys, Inc. ("Cast Alloys"), a manufacturer of investment-cast titanium and stainless steel golf club heads, for $42,484 in cash (including direct costs of $1,001 and net of $489 of acquired cash). The acquisition of Cast Alloys was financed out of a portion of the proceeds of the issuance of the Company's 11 1/8% Senior Subordinated Notes due 2007 issued on November 24, 1998. Had the acquisition occurred as of October 1, 1998, there would have been no material proforma effect on net sales or net income for the six months ended March 31, 1999. The acquisitions of Deeter, Mercer, Dalton and Cast Alloys (the "Recently Acquired Subsidiaries" have been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated on the basis of fair values to the underlying assets acquired and liabilities assumed. The allocation of the purchase price paid for Cast Alloys was based on preliminary estimates of fair values and will be revised when final amounts of fair values are determined. The excess of the cost of acquisition over the fair value of the net tangible and identifiable intangible assets acquired has been allocated to goodwill. The operating results of Deeter, Mercer, Dalton and Cast Alloys are included in the consolidated statements of income since the date of their respective acquisition. NOTE 4 -- GUARANTOR SUBSIDIARIES Neenah Transport, Inc., Hartley Controls Corporation, Deeter Foundry, Inc., Mercer Forge Corporation (and its subsidiary A&M Specialties, Inc.), Dalton Corporation (and its subsidiaries Dalton Corporation, Warsaw Manufacturing Facility, Dalton Corporation, Kendallville Manufacturing Facility, Dalton Corporation, Ashland Manufacturing Facility, and Dalton Corporation, Stryker Machining Facility, Inc.), Advanced Cast Products, Inc. (and its subsidiaries Belcher Corporation and Peerless Corporation) and Niemin Porter & Co. (collectively, the "Guarantor Subsidiaries") are wholly-owned subsidiaries of Neenah Foundry Company and have fully and unconditionally guaranteed the Senior Subordinated Notes on a joint and several basis. The Guarantor Subsidiaries comprise all of the Company's direct and indirect domestic subsidiaries. The separate financial statements of the Guarantor Subsidiaries have not been included herein because management has concluded that such financial statements would not provide additional information that is material to investors. Page 7 8 The following is summarized combined financial information of the Guarantor Subsidiaries. Net sales include net sales to Neenah Foundry Company of $1,695 and $3,199 for the three and six months ended March 31, 1998, respectively.
March 31, 1999 ---------------------- (000's omitted) Current assets $ 83,988 Noncurrent assets 230,318 Current liabilities 39,933 Noncurrent liabilities 32,728
Three Months Six Months Ended Ended March 31, 1999 March 31, 1999 --------------- -------------- (000's omitted) Net sales $ 96,524 $ 170,595 Gross profit 7,413 16,491 Net loss (2,707) (3,834)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Certain matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this quarterly report are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company "believes," "anticipates," "expects" or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which may cause actual results to differ materially from those currently anticipated. The forward-looking statements made herein are made only as of the date of this report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. The following discussions compare the results of operations of the Company for the three and six months ended March 31, 1999, to the results of the operations of the Company for the three and six months ended March 31, 1998. RESULTS OF OPERATIONS (dollars in thousands) Three Months Ended March 31, 1999 and 1998 Net sales. Net sales for the three months ended March 31, 1999 were $136,943 which are $78,197 or 133.1% higher than the quarter ended March 31, 1998. The increase in net sales resulted from the inclusion of the operating results of the Recently Acquired Subsidiaries after their acquisition. Gross profit. Gross profit for the three months ended March 31, 1999 was $20,587, an increase of $5,171, or 33.5%, as compared to the quarter ended March 31, 1998. The increase in gross profit resulted from the inclusion of the operating results of the Recently Acquired Subsidiaries after their acquisition. Gross profit as a percentage of net sales decreased to 15.0% for the three months ended March 31, 1999 from 26.2% for the quarter ended March 31, 1998. The decline in gross profit percentage is attributable to a greater percentage of sales of lower margin industrial products in the three months ended March 31, 1999 as compared to the three months ended March 31, 1998. Page 8 9 Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended March 31, 1999 were $8,629, an increase of $3,391, or 64.7%, as compared to the $5,238 for the quarter ended March 31, 1998. The increase was due to the inclusion of the operating results of the Recently Acquired Subsidiaries after their acquisition. As a percentage of net sales, selling, general and administrative expenses decreased from 8.9% for the quarter ended March 31, 1998 to 6.3% for the three months ended March 31, 1999. The decrease in selling, general and administrative expenses as a percentage of net sales was mainly due to expenses being spread over a larger revenue base with the inclusion of the Recently Acquired Subsidiaries. Amortization of intangible assets. Amortization of intangible assets was $2,614 for the three months ended March 31, 1999, an increase of $1,210, or 86.2%, as compared to the $1,404 for the quarter ended March 31, 1998. The increase is due to the increased amortization of goodwill and identifiable intangible assets from the Recently Acquired Subsidiaries. Operating income. Operating income was $9,344 for the three months ended March 31, 1999, an increase of $570, or 6.5%, from the quarter ended March 31, 1998. The improvement in operating income was achieved for the reasons discussed above under gross profit. As a percentage of net sales, operating income decreased from 14.9% for the quarter ended March 31, 1998 to 6.8% for the three months ended March 31, 1999. The decrease in operating income percentage was due to the factors discussed above under gross profit, as well as increased amortization of intangible assets. Net interest expense. Net interest expense was $10,871 for the three months ended March 31, 1999 compared to $5,808 for the quarter ended March 31, 1998. The increased interest expense resulted from the interest on the drawings under the Company's Senior Bank Facilities and the Senior Subordinated Notes used to finance the purchase of the Recently Acquired Subsidiaries. Provision for income taxes. The provision for income taxes for the three months ended March 31, 1999 and 1998 is higher than the amount computed by applying the statutory rate of approximately 40% to income before income taxes mainly due to the amortization of goodwill which is not deductible for income tax purposes. Six Months Ended March 31, 1999 and 1998 Net sales. Net sales for the six months ended March 31, 1999 were $252,207 which are $135,473 or 116.1% higher than the six months ended March 31, 1998. The increase in net sales resulted from the inclusion of the operating results of the Recently Acquired Subsidiaries after their acquisition. Gross profit. Gross profit for the six months ended March 31, 1999 was $42,359, an increase of $11,668, or 38.0%, as compared to the six months ended March 31, 1998. The increase in gross profit resulted from the inclusion of the operating results of the Recently Acquired Subsidiaries after their acquisition. Gross profit as a percentage of net sales decreased to 16.8% for the six months ended March 31, 1999 from 26.3% for the six months ended March 31, 1998. The decline in gross profit percentage is attributable to a greater percentage of sales of lower margin industrial products in the six months ended March 31, 1999 as compared to the six months ended March 31, 1998. Selling, general and administrative expenses. Selling, general and administrative expenses for the six months ended March 31, 1999 were $16,889, an increase of $6,753, or 66.6%, as compared to the $10,136 for the six months ended March 31, 1998. Approximately $6,400 of the increase was due to the inclusion of the operating results of the Recently Acquired Subsidiaries and the remainder of the increase was due to professional and other expenses related to completed and potential acquisitions. As a percentage of net sales, selling, general and administrative expenses decreased from 8.7% for the six months ended March 31, 1998 to 6.7% for the six months ended March 31, 1999. The decrease in selling, general and administrative expenses as a percentage of net sales was mainly due to expenses being spread over a larger revenue base with the inclusion of the Recently Acquired Subsidiaries. Page 9 10 Amortization of intangible assets. Amortization of intangible assets was $6,029 for the six months ended March 31, 1999, an increase of $3,213, or 114.1%, as compared to the $2,816 for the six months ended March 31, 1998. The increase is due to the increased amortization of goodwill and identifiable intangible assets from the Recently Acquired Subsidiaries. Operating income. Operating income was $19,441 for the six months ended March 31, 1999, an increase of $1,702, or 9.6%, from the six months ended March 31, 1998. The improvement in operating income was achieved for the reasons discussed above under gross profit. As a percentage of net sales, operating income decreased from 15.2% for the six months ended March 31, 1998 to 7.7% for the six months ended March 31, 1999. The decrease in operating income percentage was due to the factors discussed above under gross profit, as well as increased amortization of intangible assets. Net interest expense. Net interest expense was $20,778 for the six months ended March 31, 1999 compared to $11,648 for the six months ended March 31, 1998. The increased interest expense resulted from the interest on the drawings under the Company's Senior Bank Facilities and the Senior Subordinated Notes used to finance the purchase of the Recently Acquired Subsidiaries. Provision for income taxes. The provision for income taxes for the six months ended March 31, 1999 and 1998 is higher than the amount computed by applying the statutory rate of approximately 40% to income before income taxes mainly due to the amortization of goodwill which is not deductible for income tax purposes. LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands) On April 30, 1997, the Company issued $150.0 million principal amount of 11-1/8% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes") and entered into a credit agreement providing for term loans of $45.0 million and a revolving credit facility of up to $50.0 million, as amended (the "Senior Bank Facility" or "Credit Agreement"). On July 1, 1997, the Company issued an additional $45.0 million principal amount of Senior Subordinated Notes and used the proceeds of $47.6 million to pay the term loans, the accrued interest thereon and related fees and expenses. On April 3, 1998, in connection with the acquisition of Mercer, the Company amended the Credit Agreement to provide availability of $75.0 million of term loans to the Company (consisting of $20.0 million of Tranche A Loans and $55.0 million of Tranche B Loans) in addition to the Company's existing $50.0 million Revolving Credit Facility. On September 8, 1998, in connection with the acquisition of Dalton and the contribution of the capital stock of ACP, the Company amended and restated the Credit Agreement to provide for additional Tranche B Loans in an aggregate principal amount of $70.0 million and an Acquisition Loan Facility in aggregate principal amount outstanding at any one time not to exceed $50.0 million. On November 24, 1998, the Company sold $87.0 million principal amount of Senior Subordinated Notes, using a portion of the proceeds to finance the acquisition of Cast Alloys and $29 million of the proceeds to pay down borrowings under the Acquisition Loan Facility. The remaining proceeds are to be used for general corporate purposes. The Company's liquidity needs will arise primarily from debt service on the above indebtedness, working capital needs and funding of capital expenditures and additional acquisitions. Borrowings under the Senior Bank Facilities bear interest at variable interest rates. The Senior Bank Facility imposes restrictions on the Company's ability to make capital expenditures and both the Senior Bank Facility and the indentures governing the Senior Subordinated Notes limit the Company's ability to incur additional indebtedness. The covenants contained in the Senior Bank Facility also, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur guarantee obligations, prepay the Senior Subordinated Notes or amend the indentures, pay dividends, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, change the business conducted by the Company, make capital expenditures or engage in certain transactions with affiliates, and otherwise restrict corporate activities. Page 10 11 For the six months ended March 31, 1999 and March 31, 1998, capital expenditures were $19,808 and $3,486, respectively. The $16,322 increase in capital expenditures was primarily the result of planned enhancements to certain equipment in the manufacturing area, including significant expenditures at ACP and Deeter, which were acquired in fiscal 1998. The Company's principal source of cash to fund its liquidity needs will be net cash from operating activities and borrowings under its Senior Bank Facilities. Net cash from operating activities for the six months ended March 31, 1999 was $15,566, an increase of $7,801 from $7,765 for the six months ended March 31, 1998. The increase in net cash from operating activities was primarily the result of increased cash flow from the Recently Acquired Subsidiaries and improved control of inventory and accounts receivable balances. The Company believes that cash generated from operations and existing revolving lines of credit under the Senior Bank Facilities will be sufficient to meet its normal operating requirements, including working capital needs and interest payments on the Company's outstanding indebtedness. YEAR 2000 The Company and its subsidiaries have conducted an evaluation of the actions necessary in order to ensure that its computer systems will be able to function without disruption with respect to the application of dating systems in the year 2000. As a result of this evaluation, each company within the consolidated entity is engaged in the process of upgrading, replacing and testing certain of its information and other computer systems in order to operate without disruption due to year 2000 issues. The following represents a summary of the status of information systems and non-information systems by subsidiary: Neenah Foundry Company Information Systems. As of March 31, 1999, we believe that our information systems are fully compliant with the year 2000. A local consulting firm has been engaged since March, 1998 to assess the adequacy of all Neenah's software and make whatever changes are necessary to be compliant with year 2000 issues. As of March 31, 1999, Neenah completed all assessment, remediation and testing of its software. Non-Information Systems. With respect to date sensitive non-information systems, Neenah is currently in the assessment phase and is internally checking all computer programs and PC units, including embedded chip technology and microcontrollers, for year 2000 compliance. This phase is expected to be completed by September 30, 1999. Remediation will begin upon completion of the assessment phase and is scheduled to be completed before December 31, 1999 for material programs and equipment. Additionally, we are working with our insurance carrier to develop contingency plans in the event a system failure occurs in our holding furnaces and other equipment used in processing molten metal. Dalton Corporation Information Systems. An internal task force was created to access all information systems to test their compliance with year 2000 issues. The task force has completed the assessment phase and is currently in the remediation phase. The remediation phase is expected to be completed by September 30, 1999 with all critical systems year 2000 compliant. Non-Information Systems. Most of Dalton's non-information systems used in the operation of its facility are not date sensitive. With respect to date sensitive non-information systems, Dalton is currently in the assessment phase and is internally checking all computer programs and equipment that are date sensitive as well as embedded chip technology and microcontrollers for year 2000 compliance. Remediation will begin upon completion of the assessment phase and is scheduled to be completed before December 31, 1999 for material programs and equipment. Additionally, we are working with our insurance carrier to develop contingency plans in the event a system failure occurs in our holding furnaces or other equipment used in processing molten metal. Page 11 12 Advanced Cast Products Information Systems. An internal task force has reviewed all financial and information systems currently in use and has determined that all existing systems are year 2000 compliant. Non-Information Systems. We believe all computer numeric controls and other controls within the operation are year 2000 compliant. Mercer Forge Corporation Information Systems. New year 2000 compliant software has been installed and is fully operative for information systems. Non-Information Systems. Older PC's are currently being replaced and custom programs are being reviewed and updated where necessary. Manufacturing programmable controllers and computer numeric controls have been analyzed for year 2000 problems and we believe no problems exist that will have any material adverse effect on the business. The total review process is expected to be completed by September 30, 1999. Deeter Foundry Information Systems. New year 2000 compliant software has been installed and is fully operating for information systems. Non-information systems. With respect to non-information systems, Deeter has just completed major renovations in the melting and sand system areas. As a result, all of these systems are compliant with Year 2000 issues. Cast Alloys, Inc. Information Systems. Cast Alloys has assembled a year 2000 task force consisting of representatives from each company location to complete the assessment phase, conduct research, complete testing and create contingency plans at Cast Alloys. The task force has estimated that the cost to render the financial software year 2000 compliant is $25,000. This new year 2000 compliant software has not yet been purchased. The task force review is expected to be completed by September 20, 1999. The remediation phase is expected to be completed prior to December 31, 1999. Contingency plans will be completed prior to December 31, 1999 for those areas in which remediation is not feasible. Non-Information Systems. With respect to non-information systems, Cast Alloys is in the assessment phase and is currently internally reviewing all critical systems as well as embedded chip technology and microcontrollers to make sure they are year 2000 compliant. The assessment and remediation phase is expected to be completed by September 30, 1999. In addition to investigations of its own systems, the Company has begun assessing the Year 2000 readiness of its important vendors and customers. Key customers, vendors and service providers have been queried about their year 2000 readiness and their responses are being analyzed. The Company serves over 17,000 active customers in the municipal business. No one customer accounts for a significant percentage of the total business. Three key customers comprise over 60% of the Company's industrial sales. These customers are very large manufacturers. Dialogue concerning year 2000 compliance is ongoing. The Company mailed an inquiry letter to its 32 vendors regarding their compliance with the year 2000. All 32 vendors have responded that they are currently year 2000 compliant or will be by the end of the calendar year. Utility companies are the most critical vendors for the foundry operation. The Company is engaged in ongoing discussions with each provider. We have been assured that each utility company will be year 2000 compliant. Although other vendors supply critical raw materials, any year 2000 compliance problems would only result in temporary shortages which would not seriously jeopardize the overall business. In summary, we believe that all our important critical vendors and customers either have or will have addressed any problems associated with the year 2000 issue such that there will be no significant deterioration in future business dealings due to this issue. Page 12 13 Costs specifically associated with renovating software for year 2000 readiness are funded through operating cash flows and expensed as incurred. Year 2000 related costs have not had a material effect on the Company's financial position or results of operations. The Company and subsidiaries expect to incur total costs (capital and expense) in the range of $1.5 to $2.0 million on the year 2000 problem of which a total of approximately 25% to 30% is remaining to be incurred. Costs of replacing some of the systems with Year 2000 complaint systems (including both hardware and software) that have an extended useful life in excess of one year have been appropriately capitalized. Although there can be no assurance that the remedial actions being implemented by the Company and its subsidiaries will address every issue relating to the year 2000 issue, the Company believes it is unlikely that any disruptions resulting from the year 2000 issue would have a significant impact on its overall operations. Although it is highly unlikely that the Company will face year 2000 issues that significantly impact its overall operations, business continuity plans may have to be developed later this year should facts and circumstances dictate such a strategy to handle potential contingencies regarding unforeseen Y2K problems. Up to this point, no critical informational technology projects have been either delayed or curtailed due to Year 2000 efforts. In addition, the Company and subsidiaries have not experienced any significant Year 2000 problems to date. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk related to changes in interest rates. The Company does not use derivative financial instruments for speculative or trading purposes. Interest Rate Sensitivity. The Company's earnings are affected by changes in short-term interest rates as a result of its borrowings under the Senior Bank Facilities. If market interest rates for such borrowings had averaged 1% more during the six months ended March 31, 1999, the Company's interest expense would increase, and income before income taxes would decrease by approximately $0.8 million. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management could take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the Company's financial structure. Page 13 14 NEENAH FOUNDRY COMPANY PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None. Item 2. CHANGES IN SECURITIES None. Item 3. DEFAULTS UPON SENIOR SECURITIES None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Item 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K The Company filed one report on Form 8-K during the quarter ended March 31, 1999. The report, dated January 14, 1999, disclosed that the Company had acquired Niemin Porter & Co., a California corporation d/b/a Cast Alloys, Inc. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEENAH FOUNDRY COMPANY DATE: May 10, 1999 /s/ Gary LaChey ------------------------------------ Gary LaChey Vice President-Finance, Secretary & Treasurer (Principal Financial Officer and Duly Authorized Officer) Page 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF NEENAH FOUNDRY COMPANY AS OF AND FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS SEP-30-1999 OCT-01-1998 MAR-31-1999 26,045 0 70,680 973 61,139 167,743 233,471 29,597 646,410 72,910 427,394 0 0 100 62,120 646,410 252,207 252,207 209,848 209,848 22,918 0 20,778 (1,337) 515 (1,852) 0 0 0 (1,852) 0 0
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