-----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, CwlXj+VTf0vI6vpWhGmC88fzBNSlj7rneiECnffZpGlELwYbFEnF110cVyxSz863 bpYzAOivruBiuKti0gMq3w== 0000950124-02-000396.txt : 20020414 0000950124-02-000396.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950124-02-000396 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 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: 1934 Act SEC FILE NUMBER: 333-28751-03 FILM NUMBER: 02545636 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 c67539e10-q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 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 January 31, 2002 Common Stock, Class B, $100 par value- 0 shares as of January 31, 2002 NEENAH FOUNDRY COMPANY Form 10-Q Index For the Quarter Ended December 31, 2001
Page ---- Part 1. Financial Information Item 1. Financial Statements Condensed consolidated balance sheets -- December 31, 2001 and September 30, 2001 3 Condensed consolidated statements of operations -- Three months ended December 31, 2001 and 2000 4 Condensed consolidated statements of cash flows -- Three months ended December 31, 2001 and 2000 5 Notes to condensed consolidated financial statements -- December 31, 2001 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 15 Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Part II. Other Information Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 18
Page 2 NEENAH FOUNDRY COMPANY PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
December 31 September 30 2001 2001(1) --------- --------- (Unaudited) ASSETS Current assets: Cash and cash equivalents ............................... $ 14,094 $ 4,346 Accounts receivable, net ................................ 51,162 69,845 Inventories ............................................. 56,695 71,695 Refundable income taxes ................................. 6,805 2,148 Deferred income taxes ................................... 10,450 3,069 Other current assets .................................... 4,430 5,852 --------- --------- Total current assets ........................ 143,636 156,955 Property, plant and equipment ............................. 297,904 308,698 Less accumulated depreciation ............................. 102,094 94,865 --------- --------- 195,810 213,833 Deferred financing costs, net ............................. 7,348 7,811 Identifiable intangible assets, net ....................... 40,044 55,932 Goodwill, net ............................................. 180,214 186,005 Other assets .............................................. 6,078 5,907 --------- --------- $ 573,130 $ 626,443 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable ........................................ $ 23,217 $ 30,568 Accrued liabilities ..................................... 20,673 31,518 Current portion of long-term debt ....................... 165,870 20,424 Current portion of capital lease obligations ............ 2,362 2,305 --------- --------- Total current liabilities ................... 212,122 84,815 Long-term debt ............................................ 285,394 413,653 Capital lease obligations ................................. 7,230 7,845 Deferred income taxes ..................................... 52,352 63,719 Postretirement benefit obligations ........................ 6,459 6,345 Other liabilities ......................................... 8,708 8,127 --------- --------- Total liabilities ........................... 572,265 584,504 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 51,317 Accumulated deficit ..................................... (48,934) (7,860) Accumulated other comprehensive loss .................... (1,618) (1,618) --------- --------- Total stockholder's equity .................. 865 41,939 --------- --------- $ 573,130 $ 626,443 ========= =========
See notes to condensed consolidated financial statements. (1) The balance sheet as of September 30, 2001 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 NEENAH FOUNDRY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
Three Months Ended December 31, ------------------------- 2001 2000 --------- --------- (Unaudited) Net sales ......................................... $ 94,867 $ 114,570 Cost of sales ..................................... 102,648 100,849 --------- --------- Gross margin ...................................... (7,781) 13,721 Selling, general and administrative expenses ...... 10,883 8,887 Amortization of intangible assets ................. 1,076 2,905 Gain on disposal of equipment ..................... (26) (32) Provision for impairment of assets ................ 30,646 -- --------- --------- Total operating expenses .......................... 42,579 11,760 --------- --------- Operating income (loss) ........................... (50,360) 1,961 Net interest expense .............................. (11,058) (12,177) --------- --------- Loss from continuing operations before income taxes .................................... (61,418) (10,216) Income tax benefit ................................ (20,344) (3,564) --------- --------- Loss from continuing operations ................... (41,074) (6,652) Gain on sale of discontinued operations, net of tax -- 2,404 --------- --------- Net loss .......................................... $ (41,074) $ (4,248) ========= =========
See notes to condensed consolidated financial statements. Page 4 NEENAH FOUNDRY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Three Months Ended December 31, ------------------------ 2001 2000 -------- -------- (Unaudited) OPERATING ACTIVITIES Net loss ....................................................... $(41,074) $ (4,248) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Provision for obsolete inventories .......................... 15,187 -- Provision for uncollectible accounts receivable ............. 3,265 -- Provision for impairment of assets .......................... 30,646 -- Depreciation and amortization ............................... 8,281 10,510 Amortization of deferred financing costs and premium on notes...................................................... 308 272 Gain on sale of discontinued operations ..................... -- (4,007) Deferred income taxes ....................................... (15,496) (625) Changes in operating assets and liabilities ................. (5,874) 1,839 -------- -------- Net cash provided by (used in) operating activities ............................................. (4,757) 3,741 INVESTING ACTIVITIES Purchase of property, plant and equipment ...................... (2,279) (5,815) Proceeds from sale of Hartley Controls Corporation, net of fees -- 5,044 -------- -------- Net cash used in investing activities ............................................. (2,279) (771) FINANCING ACTIVITIES Proceeds from long-term debt ................................... 23,500 -- Payments on long-term debt and capital lease obligations ....... (6,716) (8,974) -------- -------- Net cash provided by (used in) financing activities ............................................. 16,784 (8,974) -------- -------- Increase (decrease) in cash and cash equivalents ............... 9,748 (6,004) Cash and cash equivalents at beginning of period ............... 4,346 19,478 -------- -------- Cash and cash equivalents at end of period ..................... $ 14,094 $ 13,474 ======== ========
See notes to condensed consolidated financial statements. Page 5 NEENAH FOUNDRY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) December 31, 2001 (In thousands) 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 months ended December 31, 2001 are not necessarily indicative of the results that may be expected for the year ending September 30, 2002. 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, 2001. NOTE 2 -- INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141), effective for business combinations after June 30, 2001 and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company adopted SFAS 142 as of October 1, 2001. Application of the nonamortization provisions of the Statement resulted in a decrease in the net loss of $1,829 for the three months ended December 31, 2001. In accordance with SFAS 141, the Company also reclassified the identifiable intangible assets related to the assembled workforce and facilities in place with an unamortized balance of $4,660 and $3,469, respectively, net of related deferred income taxes of $1,864 and $1,388, respectively, to goodwill at the date of adoption. The Company is in the process of performing the required impairment tests of goodwill as of October 1, 2001 and preliminarily concluded that an impairment charge resulting from the transitional impairment test is not required. The transitional impairment test is being performed based on the expected present value of future cash flows for each of the Company's reporting units. Page 6 NOTE 2 -- INTANGIBLE ASSETS (CONTINUED)
December 31, 2001 ------------------------ Gross Carrying Accumulated Amount Amortization -------- ------------ Amortized intangible assets: Customer lists $31,441 $12,459 Tradenames 22,553 2,224 Other 1,295 562 ------- ------- Total $55,289 $15,245 ======= =======
The Company does not have any intangible assets deemed to have indefinite lives. Amortization expense expected to be recognized in subsequent years ending September 30, is as follows: September 30, 2002 $3,950 September 30, 2003 3,832 September 30, 2004 3,832 September 30, 2005 3,832 September 30, 2006 3,832 The changes in the carrying amount of goodwill for the three months ended December 31, 2001, are as follows:
Castings Forgings Other Segment Segment Segments Total ---------------------------------------------------------- Balance as of September 30, 2001 $ 168,709 $ 17,296 $ -- $ 186,005 Reclassification of assembled workforce and facilities in place 4,595 282 -- 4,877 Impairment charge - see Note 3 (10,668) -- -- (10,668) ---------------------------------------------------------- Balance as of December 31, 2001 $ 162,636 $ 17,578 $ -- $ 180,214 ==========================================================
NOTE 3 -- PROVISION FOR IMPAIRMENT OF ASSETS In August 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No.144, "Accounting for the Impairment or Disposal of Long-lived Assets" (SFAS 144). While the adoption of SFAS 144 as of October 1, 2001 did not have a significant impact on the Company's financial position and results of operations, the provisions of this standard were applied during the quarter ended December 31, 2001 as discussed below. Customer actions and the significant deterioration of the U.S. economy during the quarter ended December 31, 2001 have had a dramatic effect on the operations of Cast Alloys, Inc. (Cast Alloys). This has resulted in a significant reduction in sales, operating profits and cash flows of Cast Alloys for the three months ended December 31, 2001. In December 2001, management approved a plan for the discontinuation of the operations of Cast Alloys. Based on these factors, a goodwill impairment charge of $10,668 was recognized during the three months ended December 31, 2001 related to the decline in fair value of the Cast Alloys reporting unit which is included in the Castings segment. These events have also had a significant impact on the value of Cast Alloys' fixed assets and long-lived assets with finite lives. Due to the existing impairment indicators, management assessed the recoverability of these fixed assets and long-lived assets. As the expected undiscounted cash flows were less than the carrying value of the related assets, an impairment charge was recognized for the difference between the fair value and carrying value of such assets of $19,978 during the three months ended December 31, 2001. In January 2002, management communicated its plan to the affected employees for the discontinuation of the operations of Cast Alloys. Severance costs of approximately $2.9 million and potential long-term lease costs associated with the discontinuance of the operations of Cast Alloys will be recognized during the three months ending March 31, 2002. Page 7 NOTE 4 -- INVENTORIES The components of inventories are as follows:
December 31, September 30, 2001 2001 ------------ ------------- Raw materials ............................. $ 5,154 $ 9,519 Work in process and finished goods......... 38,881 50,210 Supplies .................................. 12,660 11,966 ------- ------- $56,695 $71,695 ======= =======
If the FIFO method of inventory valuation had been used on all components, inventories would have been approximately $1,186 and $1,041 higher than reported at December 31, 2001 and September 30, 2001, respectively. NOTE 5 -- DISCONTINUED OPERATIONS On October 2, 2000, the Company sold all of the issued and outstanding shares of common stock of Hartley Controls Corporation ("Hartley") for a cash purchase price of $5,190, net of fees of $129. The disposition of Hartley resulted in a gain of $2,404, net of income taxes of $1,603, which was recognized in the three months ended December 31, 2000. NOTE 6 -- LONG-TERM DEBT At December 31, 2001, the Company is not in compliance with the leverage, net worth and interest coverage covenants in the Senior Bank Facility. Discussions with the lenders to secure a waiver for such non-compliance and amend the Credit Agreement are current and ongoing. However, since the Company is not in compliance with certain provisions under the Senior Bank Facility at December 31, 2001, all amounts outstanding under the Credit Agreement are classified as current liabilities on the balance sheet. As a result of such classification, the Company's current liabilities exceed its current assets. Although management expects to obtain a waiver and amend the Credit Agreement in the near future, there can be no assurance that such waiver and amendment will be forthcoming from the lenders. If the Company does not obtain such waiver and amendment and loans under the Credit Agreement are accelerated, the Company would not be able to satisfy its current liabilities out of its current assets or operating cash flow. The acceleration of the loans under the Credit Agreement would also cause a default under the Senior Subordinated Notes, allowing the holders of the Senior Subordinated Notes to accelerate the obligations due under the Senior Subordinated Notes. Any such acceleration of the Senior Subordinated Notes could have a material adverse effect on the Company. NOTE 7 -- GUARANTOR SUBSIDIARIES The following tables present condensed consolidating financial information for the three months ended December 31, 2001 and 2000 for: (a) the Company and (b) on a combined basis, the guarantors of the Senior Subordinated Notes, which include all of the wholly owned subsidiaries of the Company (Subsidiary Guarantors). Separate financial statements of the Subsidiary Guarantors are not presented because the guarantors are jointly, severally and unconditionally liable under the guarantees, and the Company believes separate financial statements and other disclosures regarding the Subsidiary Guarantors are not material to investors. Page 8 NOTE 7 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2001
Subsidiary Company Guarantors Eliminations Consolidated --------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 14,797 $ (703) $ - $ 14,094 Accounts receivable, net 21,797 29,365 - 51,162 Inventories 20,543 36,152 - 56,695 Refundable income taxes 6,805 - - 6,805 Deferred income taxes 559 9,891 - 10,450 Other current assets 1,136 3,294 - 4,430 --------------------------------------------------------------------------- Total current assets 65,637 77,999 - 143,636 Investments in and advances to subsidiaries 224,331 (46,088) (178,243) - Property, plant and equipment, net 86,799 109,011 - 195,810 Identifiable intangible assets, net 25,987 21,405 - 47,392 Goodwill, net 105,766 74,448 - 180,214 Other assets 3,887 2,191 - 6,078 --------------------------------------------------------------------------- $ 512,407 $ 238,966 $ (178,243) $ 573,130 =========================================================================== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable $ 4,977 $ 18,240 $ - $ 23,217 Accrued liabilities 10,429 10,244 - 20,673 Current portion of long-term debt 165,870 - - 165,870 Current portion of capital lease obligations - 2,362 - 2,362 --------------------------------------------------------------------------- Total current liabilities 181,276 30,846 - 212,122 Long-term debt 285,394 - 285,394 Capital lease obligations - 7,230 - 7,230 Deferred income taxes 33,906 18,446 - 52,352 Postretirement benefit obligations 6,459 - - 6,459 Other liabilities 4,507 4,201 - 8,708 Stockholder's equity 865 178,243 (178,243) 865 --------------------------------------------------------------------------- $ 512,407 $ 238,966 $ (178,243) $ 573,130 ===========================================================================
Page 9 NOTE 7 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2001
Subsidiary Company Guarantors Eliminations Consolidated --------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 4,682 $ (336) $ - $ 4,346 Accounts receivable, net 30,862 38,983 - 69,845 Inventories 21,131 50,564 - 71,695 Refundable income taxes 2,148 - - 2,148 Deferred income taxes 559 2,510 - 3,069 Other current assets 2,361 3,491 - 5,852 --------------------------------------------------------------------------- Total current assets 61,743 95,212 - 156,955 Investments in and advances to subsidiaries 263,249 (41,712) (221,537) - Property, plant and equipment, net 87,587 126,246 - 213,833 Identifiable intangible assets, net 28,357 35,386 - 63,743 Goodwill, net 104,898 81,107 - 186,005 Other assets 3,891 2,016 - 5,907 --------------------------------------------------------------------------- $ 549,725 $ 298,255 $ (221,537) $ 626,443 =========================================================================== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable $ 7,534 $ 23,034 $ - $ 30,568 Accrued liabilities 20,067 11,451 - 31,518 Current portion of long-term debt 20,424 - - 20,424 Current portion of capital lease obligations - 2,305 - 2,305 --------------------------------------------------------------------------- Total current liabilities 48,025 36,790 - 84,815 Long-term debt 413,653 - - 413,653 Capital lease obligations - 7,845 - 7,845 Deferred income taxes 35,357 28,362 - 63,719 Postretirement benefit obligations 6,345 - - 6,345 Other liabilities 4,406 3,721 - 8,127 Stockholder's equity 41,939 221,537 (221,537) 41,939 --------------------------------------------------------------------------- $ 549,725 $ 298,255 $ (221,537) $ 626,443 ===========================================================================
Page 10 NOTE 7 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2001
Subsidiary Company Guarantors Eliminations Consolidated --------------------------------------------------------------------------- Net sales $ 34,696 $ 61,845 $ (1,674) $ 94,867 Cost of sales 25,639 78,683 (1,674) 102,648 --------------------------------------------------------------------------- Gross margin 9,057 (16,838) - (7,781) Selling, general and administrative expenses 2,658 8,225 - 10,883 Amortization of intangible assets 458 618 - 1,076 Gain on disposal of equipment (2) (24) - (26) Provision for impairment of assets - 30,646 - 30,646 --------------------------------------------------------------------------- Operating income (loss) 5,943 (56,303) - (50,360) Net interest expense (4,718) (6,340) - (11,058) --------------------------------------------------------------------------- Income (loss) before income taxes and equity in loss of subsidiaries 1,225 (62,643) - (61,418) Income tax provision (benefit) 477 (20,821) - (20,344) --------------------------------------------------------------------------- 748 (41,822) - (41,074) Equity in loss of subsidiaries (41,822) - 41,822 - --------------------------------------------------------------------------- Net loss $ (41,074) $ (41,822) $ 41,822 $ (41,074) ===========================================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2000
Subsidiary Company Guarantors Eliminations Consolidated --------------------------------------------------------------------------- Net sales $ 36,590 $ 79,178 $ (1,198) $ 114,570 Cost of sales 26,497 75,550 (1,198) 100,849 -------------------------------------------------------------------------- Gross profit 10,093 3,628 - 13,721 Selling, general and administrative expenses 3,138 5,749 - 8,887 Amortization of intangible assets 1,229 1,676 - 2,905 Gain on disposal of equipment - (32) - (32) -------------------------------------------------------------------------- Operating income (loss) 5,726 (3,765) - 1,961 Net interest expense (5,067) (7,110) - (12,177) -------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes and equity in loss of subsidiaries 659 (10,875) - (10,216) Income tax provision (benefit) 501 (4,065) - (3,564) -------------------------------------------------------------------------- 158 (6,810) - (6,652) Equity in loss of subsidiaries (6,810) - 6,810 - -------------------------------------------------------------------------- Loss from continuing operations (6,652) (6,810) 6,810 (6,652) Gain on sale of discontinued operations, net of tax 2,404 - - 2,404 -------------------------------------------------------------------------- Net loss $ (4,248) $ (6,810) $ 6,810 $ (4,248) ==========================================================================
Page 11 NOTE 7 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS THREE MONTHS ENDED DECEMBER 31, 2001
Subsidiary Company Guarantors Eliminations Consolidated --------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss $ (41,074) $ (41,822) $ 41,822 $ (41,074) Adjustments to reconcile net loss to net cash used in operating activities: Provision for obsolete inventories - 15,187 - 15,187 Provision for bad debts - 3,265 - 3,265 Provision for impairment of assets - 30,646 - 30,646 Depreciation and amortization 2,590 5,691 - 8,281 Amortization of deferred financing costs and premium on notes 308 - - 308 Deferred income taxes - (15,496) - (15,496) Changes in operating assets and liabilities (780) (5,094) - (5,874) -------------------------------------------------------------------------- Net cash provided by (used in) operating activities (38,956) (7,623) 41,822 (4,757) INVESTING ACTIVITIES Investments in and advances to subsidiaries 33,012 8,810 (41,822) - Purchase of property, plant and equipment (1,342) (937) - (2,279) -------------------------------------------------------------------------- Net cash provided by (used in) investing activities 31,670 7,873 (41,822) (2,279) FINANCING ACTIVITIES Proceeds from long-term debt 23,500 - - 23,500 Payments on long-term debt and capital lease obligations (6,101) (615) - (6,716) -------------------------------------------------------------------------- Net cash provided by (used in) financing activities 17,399 (615) - 16,784 -------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 10,113 (365) - 9,748 Cash and cash equivalents at beginning of year 4,684 (338) - 4,346 -------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 14,797 $ (703) $ - $ 14,094 ==========================================================================
Page 12 NOTE 7 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS THREE MONTHS ENDED DECEMBER 31, 2000
Subsidiary Company Guarantors Eliminations Consolidated --------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss $ (4,248) $ (6,810) $ 6,810 $ (4,248) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 3,359 7,151 - 10,510 Amortization of deferred financing costs and premium on notes 272 - - 272 Gain on sale of dinued operations (4,007) - - (4,007) Deferred income taxes (207) (418) - (625) Changes in operating assets and liabilities (72) 1,911 - 1,839 -------------------------------------------------------------------------- Net cash provided by (used in) operating activities (4,903) 1,834 6,810 3,741 INVESTING ACTIVITIES Investments in and advances to subsidiaries 6,002 808 (6,810) - Purchase of property, plant and equipment (1,305) (4,510) - (5,815) Proceeds from sale of discontinued operations 5,044 - - 5,044 -------------------------------------------------------------------------- Net cash provided by (used in) investing activities 9,741 (3,702) (6,810) (771) FINANCING ACTIVITIES Payments on long-term debt and capital lease obligations (8,491) (483) - (8,974) -------------------------------------------------------------------------- Net cash used in financing activities (8,491) (483) - (8,974) -------------------------------------------------------------------------- Decrease in cash and cash equivalents (3,653) (2,351) - (6,004) Cash and cash equivalents at beginning of year 16,982 2,496 - 19,478 -------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 13,329 $ 145 $ - $ 13,474 ==========================================================================
Page 13 NOTE 8 -- SEGMENT INFORMATION The Company has two reportable segments, Castings and Forgings. The Castings segment manufactures and sells castings for the industrial and municipal markets, while the Forgings segment manufactures forged components for the industrial market. The Other segment includes machining operations and freight hauling.
Three months ended December 31, ------------------------------------------- 2001 2000 -------------------- ------------------- Revenues from external customers: Castings $ 87,588 $ 106,367 Forgings 6,062 5,785 Other 4,692 5,979 Elimination of intersegment revenues (3,475) (3,561) -------------------- ------------------- Consolidated $ 94,867 $ 114,570 ==================== =================== Income (loss) from continuing operations: Castings $ (41,074) $ (6,652) Forgings (1,287) (1,984) Other (201) (38) Elimination of intersegment loss 1,488 2,022 -------------------- ------------------- Consolidated $ (41,074) $ (6,652) ==================== =================== December 31, September 30, 2001 2001 -------------------- ------------------- Total Assets: Castings $ 678,441 $ 770,044 Forgings 47,684 51,148 Other 13,670 16,149 Elimination of intersegment assets (166,665) (210,898) -------------------- ------------------- Total consolidated assets $ 573,130 $ 626,443 ==================== ===================
Page 14 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 months ended December 31, 2001, to the results of the operations of the Company for the three months ended December 31, 2000. RESULTS OF OPERATIONS (dollars in thousands) Three Months Ended December 31, 2001 and 2000 Certain events have occurred during the three months ended December 31, 2001 which have had a dramatic negative impact on the operations of the Cast Alloys subsidiary. The significant deterioration of the U.S. economy has caused a substantial downturn in the consumer golf market served by Cast Alloys. In addition, both of Cast Alloys' two major customers indicated they would be seeking alternative supply sources for their golf clubheads. In December 2001, management committed to a plan for the discontinuation of the operations of Cast Alloys. The sale of Cast Alloys' inventory to parties other than the two major customers is doubtful and a provision of $15.2 million has been recorded during the three months ended December 31, 2001 to reduce the inventory to current market value. Additionally, collection of substantially all of the remaining outstanding receivables is not probable and a provision of $3.3 million was recorded during the three months ended December 31, 2001. The Company has also recorded an impairment charge of $30,646 to write down the goodwill, fixed assets and other long-lived assets to their fair values during the three months ended December 31, 2001. In January 2002, management communicated its plan to the affected employees. Severance costs of approximately $2.9 million and potential long-term lease costs associated with the discontinuance of the operations of Cast Alloys will be recognized during the three months ended March 31, 2002. Net sales. Net sales for the three months ended December 31, 2001 were $94,867 which are $19,703 or 17.2% lower than the quarter ended December 31, 2000. The decrease in net sales was driven primarily by significant weakness in the demand for industrial castings used for the heating, ventilation and air conditioning (HVAC) market and a sharp decline in sales of golf clubheads at Cast Alloys to $6.8 million for the three months ended December 31, 2001 compared to $12.3 million for the three months ended December 31, 2000. Gross margin. Gross margin for the three months ended December 31, 2001 was $(7,781), a decrease of $21,502, or 156.7%, as compared to the quarter ended December 31, 2000. Gross margin as a percentage of net sales decreased to (8.2)% for the three months ended December 31, 2001 from 12.0% for the quarter ended December 31, 2000. The decrease in gross margin resulted from the Company recording a provision of $15.2 million at Cast Alloys to reduce the inventory valuation of golf clubheads to the current market value and from lower sales volume noted above and an inability, at the lower production and sales levels, to sufficiently absorb the overhead costs necessary to effectively run the foundry operations. Without the recognition of the reduction in inventory valuation at Cast Alloys, gross margin for the three months ended December 31, 2001 decreased $6,315 to $7,406. Page 15 Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended December 31, 2001 were $10,883, an increase of $1,996, or 22.5%, as compared to the $8,887 for the quarter ended December 31, 2000. The increase was due to the recognition of a provision for bad debts of $3.3 million at Cast Alloys related to receivables which the Company does not believe are collectible. This is offset by decreased corporate expense and a reduction in the Company's salaried workforce due to the decreased sales level. Accordingly, selling, general and administrative expenses increased as a percentage of net sales to 11.5% compared to the 7.8% for the quarter ended December 31, 2000. Without the recognition of bad debts at Cast Alloys, selling, general and administrative expenses for the three months ended December 31, 2001 decreased $1,269 to a level of 8.0% of sales. Amortization of intangible assets. Amortization of intangible assets was $1,076 for the three months ended December 31, 2001, a decrease of $1,829, or 63.0%, as compared to the $2,905 for the quarter ended December 31, 2000. The decrease was due to the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" as of October 1, 2001. Under SFAS 142, goodwill and infinite-lived identifiable intangible assets are no longer amortized. Provision for impairment of assets. Customer actions and the significant deterioration of the U.S. economy during the quarter ended December 31, 2001 have had a dramatic negative impact on the operations of Cast Alloys. These events have also had a significant impact on the value of Cast Alloys' goodwill, other intangible assets, and fixed assets. Based on these factors, the Company recorded a provision for impairment of assets of $30,646 related to the Cast Alloys subsidiary during the quarter ended December 31, 2001. The provision consists of a writedown of the value of fixed assets of $13,097, a write off of long-term deposits totaling $198 and an impairment of goodwill and other intangible assets totaling $17,351. Operating income (loss). Operating loss was $50,360 for the three months ended December 31, 2001, a decrease of $52,321 from operating income of $1,961 for the quarter ended December 31, 2000. The operating loss was caused by the reasons discussed above under gross profit, as well as the $3.3 million provision for bad debts discussed in selling, general and administrative and the $30.6 million provision for the impairment of assets of the Cast Alloys subsidiary. As a percentage of net sales, operating income decreased from 1.7% for the quarter ended December 31, 2000 to (53.1)% for the three months ended December 31, 2001. Without the $49.1 million of total charges for the writedown of assets at Cast Alloys, operating loss for the three months ended December 31, 2001 was $1,262 or (1.3)% of net sales. Net interest expense. Net interest expense was $11,058 for the three months ended December 31, 2001 compared to $12,177 for the quarter ended December 31, 2000. The decreased interest expense resulted from the Company's principal debt repayments and lower interest rates on the Company's Senior Bank Facilities, partially offset by the interest on the higher level of borrowings outstanding on the Company's Revolving Credit Facility during the three months ended December 31, 2001 as compared to the three months ended December 31, 2000. Income tax benefit. The income tax benefit for the three months ended December 31, 2001 is lower than the amount computed by applying the Company's statutory rate of approximately 40% to the loss before income taxes due to the impairment of goodwill of $10,668 which is not deductible for tax purposes. The income tax benefit for the three months ended December 31, 2000 is higher than the amount computed by applying the statutory rate of approximately 40% to the loss before income taxes mainly due to the amortization of goodwill of $1,385 which is not deductible for income tax purposes. Gain on sale of discontinued operations. On October 2, 2000, the Company sold the common stock of Hartley. The disposition of Hartley resulted in a gain of $2,404, net of tax, which was recognized in the three months ended December 31, 2000. LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands) The Company has outstanding $282.0 million principal of 11 1/8% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes"). In addition, the Company has a credit agreement (the "Senior Bank Facility" or "Credit Agreement") providing for term loans, an Acquisition Loan Facility, and a Revolving Credit Facility of up to $50.0 million. At December 31, 2001, there is $28.5 million outstanding on the Revolving Credit Facility, $16.3 million outstanding on the Acquisition Loan Facility and $121.0 million outstanding under the term loans. Page 16 The Company's liquidity needs will arise primarily from debt service on the above indebtedness, working capital needs and funding of capital expenditures. 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. 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. These covenants also require the company to maintain leverage, net worth, interest coverage and senior debt coverage ratios. At December 31, 2001, the Company is not in compliance with the leverage, net worth and interest coverage covenants in the Senior Bank Facility. Discussions with the lenders to secure a waiver for such non-compliance and amend the Credit Agreement are current and ongoing. However, since the Company is not in compliance with certain provisions under the Senior Bank Facility at December 31, 2001, all amounts outstanding under the Credit Agreement are classified as current liabilities on the balance sheet. As a result of such classification, the Company's current liabilities exceed its current assets. Although management expects to obtain a waiver and amend the Credit Agreement in the near future, there can be no assurance that such waiver and amendment will be forthcoming from the lenders. If the Company does not obtain such waiver and amendment and loans under the Credit Agreement are accelerated, the Company would not be able to satisfy its current liabilities out of its current assets or operating cash flow. The acceleration of the loans under the Credit Agreement would also cause a default under the Senior Subordinated Notes, allowing the holders of the Senior Subordinated Notes to accelerate the obligations due under the Senior Subordinated Notes. Any such acceleration of the Senior Subordinated Notes could have a material adverse effect on the Company. For the three months ended December 31, 2001 and December 31, 2000, capital expenditures were $2,279 and $5,815, respectively. The substantial decrease in capital expenditures of $3,536 was the result of tighter spending controls placed on capital expenditures during the three months ended December 31, 2001. The Company's principal source of cash to fund its liquidity needs will be net cash from operating activities and borrowings under the revolving credit facility under the Senior Bank Facility. Net cash used in operating activities for the three months ended December 31, 2001 was $4,757, a decrease of $8,498 from cash provided by operating activities for the three months ended December 31, 2000 of $3,741. The decrease in net cash from operating activities was the result of decreased operating income and a reduction of accounts payable balances resulting from the decline in sales during the three months ended December 31, 2001. Assuming a waiver and an amended Credit Agreement is obtained, the Company believes that cash generated from operations and its existing revolving credit facility under the Senior Bank Facility will be sufficient to meet its normal operating requirements, including working capital needs and interest payments on outstanding indebtedness. In January 2002, the Company received a federal income tax refund of $5.3 million from the carryback of net operating losses. Also, the discontinuance of operations of Cast Alloys will significantly improve the Company's cash position by eliminating the need to carry excess inventory for the consumer golf market. These factors will assist the Company in generating sufficient cash to meet its operating requirements for the remainder of fiscal 2002. 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 Facility. If market interest rates for such borrowings change by 1% during the remainder of the fiscal year ended September 30, 2002, the Company's interest expense would increase or decrease by approximately $1.2 million. This analysis does not consider the effects of changes in the level of overall economic activity that could occur due to interest rate changes. Further, in the event of an upward change of such magnitude, management could take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the Company's financial structure. Page 17 NEENAH FOUNDRY COMPANY PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None. Item 2. CHANGES IN SECURITIES None. Item 3. DEFAULTS UPON SENIOR SECURITIES At December 31, 2001, the Company is not in compliance with the leverage, net worth and interest coverage covenants in the Senior Bank Facility. Discussions with the lenders to secure a waiver for such non-compliance and amend the Credit Agreement are current and ongoing. However, since the Company is not in compliance with certain provisions under the Senior Bank Facility at December 31, 2001, all amounts outstanding under the Credit Agreement are classified as current liabilities on the balance sheet. As a result of such classification, the Company's current liabilities exceed its current assets. Although management expects to obtain a waiver and amend the Credit Agreement in the near future, there can be no assurance that such waiver and amendment will be forthcoming from the lenders. If the Company does not obtain such waiver and amendment and loans under the Credit Agreement are accelerated, the Company would not be able to satisfy its current liabilities out of its current assets or operating cash flow. The acceleration of the loans under the Credit Agreement would also cause a default under the Senior Subordinated Notes, allowing the holders of the Senior Subordinated Notes to accelerate the obligations due under the Senior Subordinated Notes. Any such acceleration of the Senior Subordinated Notes could have a material adverse effect on the Company. 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 None. (b) Reports on Form 8-K None. 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: February 13, 2002 /s/ Gary LaChey --------------------------------------------- Gary LaChey Vice President-finance, Secretary & Treasurer (Principal Financial Officer and Duly Authorized Officer) Page 18
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