10-Q 1 c71340e10vq.txt FORM 10-Q FOR QUARTER ENDING JUNE 30, 2002 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 June 30, 2002 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 July 31, 2002 Common Stock, Class B, $100 par value- 0 shares as of July 31, 2002 NEENAH FOUNDRY COMPANY Form 10-Q Index For the Quarter Ended June 30, 2002
Page ---- Part 1. Financial Information Item 1. Financial Statements Condensed consolidated balance sheets -- June 30, 2002 and September 30, 2001 3 Condensed consolidated statements of operations -- Three and nine months ended June 30, 2002 and 2001 4 Condensed consolidated statements of cash flows -- Nine months ended June 30, 2002 and 2001 5 Notes to condensed consolidated financial statements -- June 30, 2002 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 16 Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Part II. Other Information Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 20
Page 2 NEENAH FOUNDRY COMPANY Part I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
June 30 September 30 2002 2001(1) ----------------- ----------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents ....................................... $ 11,832 $ 4,346 Accounts receivable, net ........................................ 63,317 69,845 Inventories ..................................................... 56,922 71,695 Refundable income taxes ......................................... 2,634 2,148 Deferred income taxes ........................................... 10,769 3,069 Other current assets ............................................ 4,673 5,852 Current assets of discontinued operations ....................... 207 -- --------- --------- Total current assets ................................ 150,354 156,955 Property, plant and equipment ..................................... 291,530 308,698 Less accumulated depreciation ..................................... 106,052 94,865 --------- --------- 185,478 213,833 Deferred financing costs, net ..................................... 7,246 7,811 Identifiable intangible assets, net ............................... 38,130 55,932 Goodwill .......................................................... 180,214 186,005 Other assets ...................................................... 6,219 5,907 --------- --------- $ 567,641 $ 626,443 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Accounts payable ................................................ $ 23,326 $ 30,568 Accrued liabilities ............................................. 19,570 31,518 Current portion of long-term debt ............................... 41,604 20,424 Current portion of capital lease obligations .................... 2,393 2,305 --------- --------- Total current liabilities ........................... 86,893 84,815 Long-term debt .................................................... 413,072 413,653 Capital lease obligations ......................................... 5,964 7,845 Deferred income taxes ............................................. 52,244 63,719 Postretirement benefit obligations ................................ 6,687 6,345 Other liabilities ................................................. 8,532 8,127 --------- --------- Total liabilities ................................... 573,392 584,504 Commitments and contingencies STOCKHOLDER'S EQUITY (DEFICIT): 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 ............................................. (55,550) (7,860) Accumulated other comprehensive loss ............................ (1,618) (1,618) --------- --------- Total stockholder's equity (deficit) ................ (5,751) 41,939 --------- --------- $ 567,641 $ 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 accounting principles generally accepted in the United States for complete financial statements. Page 3 NEENAH FOUNDRY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
Three Months Ended Nine Months Ended June 30, June 30, --------------------------------- ------------------------------------ 2002 2001 2002 2001 -------------- -------------- --------------- --------------- (Unaudited) (Unaudited) Net sales ............................................... $ 115,476 $ 111,197 $ 296,426 $ 314,344 Cost of sales ........................................... 93,403 91,528 253,005 269,367 --------- --------- --------- --------- Gross margin ............................................ 22,073 19,669 43,421 44,977 Selling, general and administrative expenses ............ 7,400 7,489 20,727 22,279 Amortization of intangible assets ....................... 956 2,653 2,871 7,959 Loss (gain) on disposal of equipment .................... -- 340 (19) 280 --------- --------- --------- --------- Total operating expenses ................................ 8,356 10,482 23,579 30,518 --------- --------- --------- --------- Operating income ........................................ 13,717 9,187 19,842 14,459 Net interest expense .................................... (11,388) (10,920) (31,450) (32,993) --------- --------- --------- --------- Income (loss) from continuing operations before income taxes .......................................... 2,329 (1,733) (11,608) (18,534) Income tax provision (benefit) .......................... 924 (169) (4,651) (5,994) --------- --------- --------- --------- Income (loss) from continuing operations ................ 1,405 (1,564) (6,957) (12,540) Gain on sale of discontinued operations, net of income tax provision of $1,603 ........................ -- -- -- 2,404 Loss from discontinued operations, net of income tax provision (benefit) of $(55), $622, $(16,134), and $(709) ............................................ (118) (1,097) (41,997) (3,614) --------- --------- --------- --------- Net income (loss) ....................................... $ 1,287 $ (2,661) $ (48,954) $ (13,750) ========= ========= ========= =========
See notes to condensed consolidated financial statements. Page 4 NEENAH FOUNDRY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended June 30, ---------------------------------- 2002 2001 ---------------- --------------- (Unaudited) OPERATING ACTIVITIES Net loss ....................................................... $(48,954) $(13,750) Adjustments to reconcile net loss to net cash used in operating activities: Provision for obsolete inventories .......................... 15,187 -- Provision for uncollectible accounts receivable ............. 3,365 -- Provision for impairment of assets .......................... 30,646 -- Depreciation and amortization ............................... 22,079 31,710 Amortization of deferred financing costs and premium on notes .................................................. 957 881 Gain on sale of discontinued operations ..................... -- (2,552) Deferred income taxes ....................................... (16,781) (1,762) Changes in operating assets and liabilities ................. (12,479) (18,811) -------- -------- Net cash used in operating activities ............................................. (5,980) (4,284) INVESTING ACTIVITIES Purchase of property, plant and equipment ...................... (4,948) (13,177) Net proceeds from sale of discontinued operations .............. -- 5,044 -------- -------- Net cash used in investing activities ............................................. (4,948) (8,133) FINANCING ACTIVITIES Proceeds from long-term debt ................................... 33,400 16,000 Payments on long-term debt and capital lease obligations ....... (14,128) (18,761) Deferred financing costs ....................................... (858) (907) -------- -------- Net cash provided by (used in) financing activities ............................................. 18,414 (3,668) -------- -------- Increase (decrease) in cash and cash equivalents ............... 7,486 (16,085) Cash and cash equivalents at beginning of period ............... 4,346 19,478 -------- -------- Cash and cash equivalents at end of period ..................... $ 11,832 $ 3,393 ======== ========
See notes to condensed consolidated financial statements. Page 5 NEENAH FOUNDRY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2002 (In thousands) NOTE 1 -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended June 30, 2002 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 (FASB) issued Statements of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The Company adopted SFAS 142 as of October 1, 2001. Under SFAS 142, 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 estimated useful lives. Application of the nonamortization provisions of SFAS 142 resulted in a decrease in the net loss of $5,218 for the nine months ended June 30, 2002. 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 has performed the required impairment tests of goodwill as of October 1, 2001 and concluded that an impairment charge resulting from the transitional impairment test is not required. The transitional impairment test was 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)
June 30, 2002 September 30, 2001 ------------------------------- ------------------------------ Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization --------------- ------------- -------------- ------------ Amortizable intangible assets: Customer lists $31,441 $14,029 $35,041 $12,662 Tradenames 22,553 2,507 27,053 2,392 Other 1,295 623 16,001 7,109 ------- ------- ------- ------- Total $55,289 $17,159 $78,095 $22,163 ======= ======= ======= =======
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 $ 3,832 September 30, 2003 3,832 September 30, 2004 3,832 September 30, 2005 3,832 September 30, 2006 3,832
Changes in the carrying amount of goodwill for the nine months ended June 30, 2002, are as follows:
Castings Forgings Other Segment Segment Segment 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 June 30, 2002 ............... $ 162,636 $ 17,578 $ -- $ 180,214 =============================================================
NOTE 3 -- DISCONTINUED OPERATIONS In August 2001, the FASB issued Statement 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 nine months ended June 30, 2002 as discussed below. Customer actions and the significant deterioration of the U.S. economy during the quarter ended December 31, 2001 had a dramatic effect on the operations of Cast Alloys, Inc. (Cast Alloys). This resulted in a significant reduction in sales, operating profits and cash flows of Cast Alloys for the three months ended December 31, 2001. 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 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. Page 7 In January, 2002 management initiated a plan for the discontinuation of the operations of Cast Alloys by closing its manufacturing facilities. Severance costs of approximately $2.2 million associated with this plan were recognized during the three months ending March 31, 2002. All employees of Cast Alloys were terminated by April 2002. In accordance with the provisions of SFAS 144, the results of operations for Cast Alloys have been reported as discontinued operations in the accompanying statements of operations. Previously, Cast Alloys was included in the Castings segment. Revenues for Cast Alloys for the three months ended June 30, 2002 and 2001 were $14 and $16,926, respectively, and revenues for the nine months ended June 30, 2002 and 2001 were $8,641 and $40,933, respectively. 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 and recognized a gain of $2,404, net of income taxes of $1,603. NOTE 4 -- INVENTORIES The components of inventories are as follows:
June 30, September 30, 2002 2001 --------------- --------------- Raw materials .................... $ 4,097 $ 9,519 Work in process and finished goods .......................... 39,983 50,210 Supplies ......................... 12,842 11,966 ------- ------- $56,922 $71,695 ======= =======
If the FIFO method of inventory valuation had been used on all components, inventories would have been approximately $1,164 and $1,041 higher than reported at June 30, 2002 and September 30, 2001, respectively. NOTE 5 -- GUARANTOR SUBSIDIARIES The following tables present condensed consolidating financial information for the three and nine months ended June 30, 2002 and 2001 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 5 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 2002
Subsidiary Company Guarantors Eliminations Consolidated ---------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 13,146 $ (1,314) $ -- $ 11,832 Accounts receivable, net 31,407 31,910 -- 63,317 Inventories 24,165 32,757 -- 56,922 Refundable income taxes 2,634 -- -- 2,634 Deferred income taxes 5,343 5,426 -- 10,769 Other current assets 1,583 3,090 -- 4,673 Current assets of discontinued operations -- 207 -- 207 ---------------------------------------------------------- Total current assets 78,278 72,076 -- 150,354 Investments in and advances to subsidiaries 219,590 (51,834) (167,756) -- Property, plant and equipment, net 84,155 101,323 -- 185,478 Deferred financing costs and identifiable intangible assets, net 24,970 20,406 -- 45,376 Goodwill 105,766 74,448 -- 180,214 Other assets 3,876 2,343 -- 6,219 ---------------------------------------------------------- $ 516,635 $ 218,762 $(167,756) $ 567,641 ========================================================== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Accounts payable $ 6,289 $ 17,037 $ -- $ 23,326 Accrued liabilities 11,896 7,674 -- 19,570 Current portion of long-term debt 41,604 -- -- 41,604 Current portion of capital lease obligations -- 2,393 -- 2,393 ---------------------------------------------------------- Total current liabilities 59,789 27,104 -- 86,893 Long-term debt 413,072 -- -- 413,072 Capital lease obligations -- 5,964 -- 5,964 Deferred income taxes 38,690 13,554 -- 52,244 Postretirement benefit obligations 6,687 -- -- 6,687 Other liabilities 4,148 4,384 -- 8,532 Stockholder's equity (deficit) (5,751) 167,756 (167,756) (5,751) ---------------------------------------------------------- $ 516,635 $ 218,762 $(167,756) $ 567,641 ==========================================================
Page 9 NOTE 5 -- 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 Deferred financing costs and 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 5 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2002
Subsidiary Company Guarantors Eliminations Consolidated ----------------------------------------------------------- Net sales $49,524 $ 68,275 $ (2,323) $ 115,476 Cost of sales 33,859 61,867 (2,323) 93,403 ----------------------------------------------------------- Gross margin 15,665 6,408 - 22,073 Selling, general and administrative expenses 3,213 4,187 - 7,400 Amortization of intangible assets 458 498 - 956 ----------------------------------------------------------- Operating income 11,994 1,723 - 13,717 Net interest expense (6,044) (5,344) - (11,388) ----------------------------------------------------------- Income (loss) from continuing operations before income taxes and equity in loss of subsidiaries 5,950 (3,621) - 2,329 Income tax provision (benefit) 2,372 (1,448) - 924 ----------------------------------------------------------- 3,578 (2,173) - 1,405 Equity in loss of subsidiaries (2,291) - 2,291 - ----------------------------------------------------------- Income (loss) from continuing operations 1,287 (2,173) 2,291 1,405 Loss from discontinued operations, net of tax - (118) - (118) ----------------------------------------------------------- Net income (loss) $ 1,287 $ (2,291) $ 2,291 $ 1,287 ===========================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2001
Subsidiary Company Guarantors Eliminations Consolidated ------------------------------------------------------------- Net sales $ 45,136 $ 67,731 $ (1,670) $ 111,197 Cost of sales 30,583 62,615 (1,670) 91,528 ------------------------------------------------------------- Gross profit 14,553 5,116 - 19,669 Selling, general and administrative expenses 3,454 4,035 - 7,489 Amortization of intangible assets 1,229 1,424 - 2,653 Loss (gain) on disposal of equipment 341 (1) - 340 ------------------------------------------------------------- Operating income (loss) 9,529 (342) - 9,187 Net interest expense (4,887) (6,033) - (10,920) ------------------------------------------------------------- Income (loss) from continuing operations before income taxes and equity in loss of subsidiaries 4,642 (6,375) - (1,733) Income tax provision (benefit) 2,152 (2,321) - (169) ------------------------------------------------------------- 2,490 (4,054) - (1,564) Equity in loss of subsidiaries (5,151) - 5,151 - ------------------------------------------------------------- Loss from continuing operations (2,661) (4,054) 5,151 (1,564) Loss from discontinued operations, net of tax - (1,097) (1,097) ------------------------------------------------------------- Net loss $ (2,661) $ (5,151) $ 5,151 $ (2,661) =============================================================
Page 11 NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS NINE MONTHS ENDED JUNE 30, 2002
Subsidiary Company Guarantors Eliminations Consolidated -------------------------------------------------------------- Net sales $ 117,877 $ 184,447 $ (5,898) $ 296,426 Cost of sales 84,796 174,107 (5,898) 253,005 -------------------------------------------------------------- Gross margin 33,081 10,340 - 43,421 Selling, general and administrative expenses 8,723 12,004 - 20,727 Amortization of intangible assets 1,375 1,496 - 2,871 Gain on disposal of equipment (2) (17) - (19) -------------------------------------------------------------- Operating income (loss) 22,985 (3,143) - 19,842 Net interest expense (15,406) (16,044) - (31,450) -------------------------------------------------------------- Income (loss) before income taxes and equity in loss of subsidiaries 7,579 (19,187) - (11,608) Income tax provision (benefit) 3,023 (7,674) - (4,651) -------------------------------------------------------------- 4,556 (11,513) - (6,957) Equity in loss of subsidiaries (53,510) - 53,510 - -------------------------------------------------------------- Loss from continuing operations (48,954) (11,513) 53,510 (6,957) Loss from discontinued operations, net of tax - (41,997) - (41,997) -------------------------------------------------------------- Net loss $ (48,954) $ (53,510) $ 53,510 $ (48,954) ==============================================================
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS NINE MONTHS ENDED JUNE 30, 2001
Subsidiary Company Guarantors Eliminations Consolidated -------------------------------------------------------------- Net sales $ 114,706 $ 203,510 $ (3,872) $ 314,344 Cost of sales 82,137 191,102 (3,872) 269,367 -------------------------------------------------------------- Gross profit 32,569 12,408 - 44,977 Selling, general and administrative expenses 10,117 12,162 - 22,279 Amortization of intangible assets 3,688 4,271 - 7,959 Loss on disposal of equipment 280 - - 280 -------------------------------------------------------------- Operating income (loss) 18,484 (4,025) - 14,459 Net interest expense (14,889) (18,104) - (32,993) -------------------------------------------------------------- Income (loss) from continuing operations before income taxes and equity in loss of subsidiaries 3,595 (22,129) - (18,534) Income tax provision (benefit) 2,265 (8,259) - (5,994) -------------------------------------------------------------- 1,330 (13,870) - (12,540) Equity in loss of subsidiaries (17,484) - 17,484 - -------------------------------------------------------------- Loss from continuing operations (16,154) (13,870) 17,484 (12,540) Gain on sale of discontinued operations, net of tax 2,404 - - 2,404 Loss from discontinued operations, net of tax - (3,614) - (3,614) -------------------------------------------------------------- Net loss $ (13,750) $ (17,484) $ 17,484 $ (13,750) ==============================================================
Page 12 NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NINE MONTHS ENDED JUNE 30, 2002
Subsidiary Company Guarantors Eliminations Consolidated ---------------------------------------------------------------- OPERATING ACTIVITIES Net loss $ (48,954) $ (53,510) $ 53,510 $ (48,954) Adjustments to reconcile net loss to net cash used in operating activities: Provision for obsolete inventories - 15,187 - 15,187 Provision for uncollectible accounts receivable - 3,365 - 3,365 Provision for impairment of assets - 30,646 - 30,646 Depreciation and amortization 7,765 14,314 - 22,079 Amortization of deferred financing costs and premium on notes 957 - - 957 Deferred income taxes - (16,781) - (16,781) Changes in operating assets and liabilities (3,118) (9,361) - (12,479) ---------------------------------------------------------------- Net cash used in operating activities (43,350) (16,140) 53,510 (5,980) INVESTING ACTIVITIES Investments in and advances to subsidiaries 34,563 18,947 (53,510) - Purchase of property, plant and equipment (2,958) (1,990) - (4,948) ---------------------------------------------------------------- Net cash provided by (used in) investing activities 31,605 16,957 (53,510) (4,948) FINANCING ACTIVITIES Proceeds from long-term debt 33,400 - - 33,400 Payments on long-term debt and capital lease obligations (12,335) (1,793) - (14,128) Deferred financing costs (858) - - (858) ---------------------------------------------------------------- Net cash provided by (used in) financing activities 20,207 (1,793) - 18,414 ---------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 8,462 (976) - 7,486 Cash and cash equivalents at beginning of period 4,684 (338) - 4,346 ---------------------------------------------------------------- Cash and cash equivalents at end of period $ 13,146 $ (1,314) $ - $ 11,832 ================================================================
Page 13 NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NINE MONTHS ENDED JUNE 30, 2001
Subsidiary Company Guarantors Eliminations Consolidated ----------------------------------------------------------- OPERATING ACTIVITIES Net loss $ (13,750) $ (17,484) $ 17,484 $ (13,750) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 10,078 21,632 - 31,710 Amortization of deferred financing costs and premium on notes 881 - - 881 Gain on sale of discontinued operations (2,552) - - (2,552) Deferred income taxes (207) (1,555) - (1,762) Changes in operating assets and liabilities (9,609) (9,202) - (18,811) ----------------------------------------------------------- Net cash used in operating activities (15,159) (6,609) 17,484 (4,284) INVESTING ACTIVITIES Investments in and advances to subsidiaries 2,232 15,252 (17,484) - Purchase of property, plant and equipment (3,481) (9,696) - (13,177) Proceeds from sale of discontinued operations 5,044 - - 5,044 ----------------------------------------------------------- Net cash provided by (used in) investing activities 3,795 5,556 (17,484) (8,133) FINANCING ACTIVITIES Proceeds from long-term debt 16,000 - - 16,000 Payments on long-term debt and capital lease obligations (16,958) (1,803) - (18,761) Deferred financing costs (907) - - (907) ----------------------------------------------------------- Net cash used in financing activities (1,865) (1,803) - (3,668) ----------------------------------------------------------- Decrease in cash and cash equivalents (13,229) (2,856) - (16,085) Cash and cash equivalents at beginning of period 16,982 2,496 - 19,478 ----------------------------------------------------------- Cash and cash equivalents at end of period $ 3,753 $ (360) $ - $ 3,393 ===========================================================
Page 14 NOTE 6 -- SEGMENT INFORMATION The Company has two reportable segments, Castings and Forgings. The Castings segment manufactures and sells castings for the industrial and municipal markets, while the Forgings segment manufactures forged components for the industrial market. The Other segment includes machining operations and freight hauling.
Three months ended Nine months ended June 30, June 30, ---------------------------- --------------------------- 2002 2001 2002 2001 ------------- ------------- ----------- ------------- Revenues from continuing operations: Castings $ 108,401 $ 100,463 $ 275,714 $ 284,056 Forgings 6,181 7,150 17,690 19,540 Other 5,726 5,844 15,330 17,473 Elimination of intersegment revenues (4,832) (2,260) (12,308) (6,725) --------- --------- --------- --------- Consolidated $ 115,476 $ 111,197 $ 296,426 $ 314,344 ========= ========= ========= ========= Income (loss) from continuing operations: Castings $ 1,405 $ (1,564) $ (6,957) $ (12,540) Forgings (922) 4 (3,439) (3,265) Other 101 830 (144) 441 Elimination of intersegment loss (income) 821 (834) 3,583 2,824 --------- --------- --------- --------- Consolidated $ 1,405 $ (1,564) $ (6,957) $ (12,540) ========= ========= ========= ========= June 30, September 30, 2002 2001 --------- --------- Total Assets: Castings $ 667,461 $ 770,044 Forgings 41,991 51,148 Other 16,608 16,149 Elimination of intersegment assets (158,419) (210,898) --------- --------- Consolidated $ 567,641 $ 626,443 ========= =========
Page 15 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 nine months ended June 30, 2002, to the results of the operations of the Company for the three and nine months ended June 30, 2001. RESULTS OF OPERATIONS (dollars in thousands) Three Months Ended June 30, 2002 and 2001 Net sales. Net sales for the three months ended June 30, 2002 were $115,476 which are $4,279 or 3.9% higher than the quarter ended June 30, 2001. The increase in net sales was due to increased demand for industrial castings used in the heavy duty truck market. Gross margin. Gross margin for the three months ended June 30, 2002 was $22,073, an increase of $2,404, or 12.2%, as compared to the quarter ended June 30, 2001. Gross margin as a percentage of net sales increased to 19.1% for the three months ended June 30, 2002 from 17.7% for the quarter ended June 30, 2001. The increase in gross margin percentage resulted from a greater utilization of manufacturing facilities due to higher production levels and the transfer of certain production to a more efficient manufacturing location. Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended June 30, 2002 were $7,400, a decrease of $89, or 1.2%, as compared to the $7,489 for the quarter ended June 30, 2001. Selling, general and administrative expenses decreased as a percentage of net sales to 6.4% compared to the 6.7% for the quarter ended June 30, 2001. The percentage decrease is due to a relatively fixed level of expenses being spread over a larger sales base. Amortization of intangible assets. Amortization of intangible assets was $956 for the three months ended June 30, 2002, a decrease of $1,697, or 64.0%, as compared to the $2,653 for the quarter ended June 30, 2001. The decrease was due to the adoption of SFAS 142 as of October 1, 2001. Under SFAS 142, goodwill is no longer amortized. Operating income. Operating income was $13,717 for the three months ended June 30, 2002, an increase of $4,530 from operating income of $9,187 for the quarter ended June 30, 2001. The increased operating income was caused by the reduced amortization expense noted above as well as increased sales and higher margins. As a percentage of net sales, operating income increased from 8.3% for the quarter ended June 30, 2001 to 11.9% for the three months ended June 30, 2002. Net interest expense. Net interest expense was $11,388 for the three months ended June 30, 2002 compared to $10,920 for the quarter ended June 30, 2001. The increased interest expense resulted from a higher level of borrowings outstanding on the Company's Revolving Credit Facility during the three months ended June 30, 2002 as compared to the three months ended June 30, 2001. Page 16 Income tax provision. The income tax provision for the three months ended June 30, 2002 and 2001 is reasonable to the amount computed by applying the Company's statutory rate of approximately 40% to the loss before income taxes. Loss from discontinued operations. In January, 2002 management initiated a plan for the discontinuation of the operations of Cast Alloys by closing its manufacturing facilities. In accordance with the provisions of SFAS 144, the results of operations for Cast Alloys have been reported as discontinued operations in the statement of operations. Nine months ended June 30, 2002 and 2001 Net sales. Net sales for the nine months ended June 30, 2002 were $296,426 which are $17,918 or 5.7% lower than the nine months ended June 30, 2001. 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 weakness in demand in the heavy duty truck market during the first four months of the period. Gross margin. Gross margin for the nine months ended June 30, 2002 was $43,421, a decrease of $1,556, or 3.5%, as compared to the nine months ended June 30, 2001. The decrease in gross margin resulted 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. Gross margin as a percentage of net sales increased to 14.6% for the nine months ended June 30, 2002 from 14.3% for the nine months ended June 30, 2001. Selling, general and administrative expenses. Selling, general and administrative expenses for the nine months ended June 30, 2002 were $20,727, a decrease of $1,552, or 7.0%, as compared to the $22,279 for the nine months ended June 30, 2001. The decrease was due to decreased corporate expense and a reduction in the Company's salaried workforce due to the decreased sales level. Selling, general and administrative expenses decreased as a percentage of net sales to 7.0% compared to the 7.1% for the nine months ended June 30, 2001. Amortization of intangible assets. Amortization of intangible assets was $2,871 for the nine months ended June 30, 2002, a decrease of $5,088, or 63.9%, as compared to the $7,959 for the nine months ended June 30, 2001. The decrease was due to the adoption of SFAS 142 as of October 1, 2001. Under SFAS 142, goodwill is no longer amortized. Operating income. Operating income was $19,842 for the nine months ended June 30, 2002, an increase of $5,383 from operating income of $14,459 for the nine months ended June 30, 2001. The increase was caused by the reduced selling, general and administrative expenses and amortization expense noted above, partially offset by the lower gross margin. As a percentage of net sales, operating income increased from 4.6% for the nine months ended June 30, 2001 to 6.7% for the nine months ended June 30, 2002. Net interest expense. Net interest expense was $31,450 for the nine months ended June 30, 2002 compared to $32,993 for the nine months ended June 30, 2001. The decreased interest expense resulted from the Company's principal debt repayments and lower interest rates on the Company's Senior Bank Facility, partially offset by the interest on the higher level of borrowings outstanding on the Company's Revolving Credit Facility during the nine months ended June 30, 2002 as compared to the nine months ended June 30, 2001. Income tax benefit. The income tax benefit for the nine months ended June 30, 2002 and 2001 is reasonable to the amount computed by applying the Company's statutory rate of approximately 40% to the loss before income taxes. 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. Page 17 Loss from discontinued operations. Certain events which occurred during the three months ended December 31, 2001 had a dramatic negative impact on the operations of the Cast Alloys subsidiary. The significant deterioration of the U.S. economy 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 seek alternative supply sources for their golf clubheads. The sale of Cast Alloys' inventory to parties other than the two major customers was considered doubtful and a provision of $15,187 was recorded during the three months ended December 31, 2001 to reduce the inventory to market value. Additionally, collection of substantially all of the remaining outstanding receivables was not probable and a provision of $3,265 was recorded during the three months ended December 31, 2001. The Company also recorded an impairment charge during the three months ended December 31, 2001 of $30,646 to write down goodwill, fixed assets and other long-lived assets to their fair values. In January, 2002 management initiated a plan for the discontinuation of the operations of Cast Alloys by closing its manufacturing facilities. Severance costs of approximately $2,200 associated with this plan were recognized during the three months ending March 31, 2002. All employees of Cast Alloys were terminated by April 2002. In accordance with the provisions of SFAS 144, the results of operations for Cast Alloys have been reported as discontinued operations in the accompanying statements of operations. LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands) The Company has outstanding $282,000 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 $29,600 At June 30, 2002, there is $28,500 outstanding on the Revolving Credit Facility, $12,600 outstanding on the Acquisition Loan Facility and $118,500 outstanding under the term loans. 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 Facility bear interest at variable interest rates. 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, interest coverage and senior debt coverage ratios. Effective December 31, 2001, the Credit Agreement was amended to provide relief from the above financial ratio covenants through December 31, 2003, to reduce the amount of the Revolving Credit Facility and define minimum EBITDA and liquidity covenants. At June 30, 2002, the Company is in compliance with existing bank covenants. For the nine months ended June 30, 2002 and June 30, 2001, capital expenditures were $4,948 and $13,177, respectively. The substantial decrease in capital expenditures of $8,229 was the result of tighter spending controls placed on capital expenditures during the nine months ended June 30, 2002. 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. Net cash used in operating activities for the nine months ended June 30, 2002 was $5,980, an increase of $1,696 from cash used in operating activities for the nine months ended June 30, 2001 of $4,284. The increase in net cash used in operating activities was the result of the operating losses incurred by Cast Alloys prior to the discontinuation of its operations and the closing of its manufacturing facilities. 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 conjunction with the amendment of the Credit Agreement in April 2002, the Company has received cash of $9,900 from its parent company in exchange for the issuance of a PIK note with principal plus 14% interest payable at the maturity date of December 31, 2005. Also, the Company believes that the discontinuance of operations of Cast Alloys should continue to improve the Company's cash position by eliminating the need to carry excess inventory for the consumer golf market. The Company believes that these factors should assist the Company in generating sufficient cash to meet its operating requirements and pay obligations under its existing indebtedness for the remainder of fiscal 2002. Page 18 CRITICAL ACCOUNTING POLICIES Our accounting policies are more fully described in Note 1 of notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2001. As disclosed in Note 1 of notes to consolidated financial statements, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with the evaluation of the recoverability of certain assets including goodwill, other intangible assets and fixed assets as well as those estimates used in the determination of reserves related to the allowance for doubtful accounts, obsolescence, workers compensation and pensions and other post-retirement benefits. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, product mix, and in some cases, actuarial techniques. We constantly reevaluate these significant factors and make adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above. 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 $.4 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 19 NEENAH FOUNDRY COMPANY PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 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 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: August 13, 2002 /s/ Gary LaChey ---------------------------------------------- Gary LaChey Vice President-Finance, Secretary & Treasurer (Principal Financial Officer and Duly Authorized Officer) Page 20