10-Q 1 c05301e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2006 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 registrant as specified 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 by check mark whether the registrant is a large accelerated filer, an accelerated flier, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated Filer Non-accelerated filer X --- --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On April 30, 2006, the registrant had 1,000 shares of Common Stock, par value $100 per share, outstanding, all of which were owned by NFC Castings, Inc., a wholly owned subsidiary of ACP Holding Company. 1 NEENAH FOUNDRY COMPANY Form 10-Q Index For the Quarter Ended March 31, 2006
Page ---- Part I. Financial Information Item 1. Financial Statements Condensed consolidated balance sheets -- Neenah Foundry Company as of March 31, 2006 and September 30, 2005 3 Condensed consolidated statements of operations -- Neenah Foundry Company for the three and six months ended March 31, 2006 and 2005 4 Condensed consolidated statements of cash flows -- Neenah Foundry Company for the six months ended March 31, 2006 and 2005 5 Notes to condensed consolidated financial statements -- March 31, 2006 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Item 4. Controls and Procedures 21 Part II. Other Information Item 6. Exhibits 22 Signatures 23 Exhibits 24
2 NEENAH FOUNDRY COMPANY PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
March 31, September 30, 2006 2005(1) --------- ------------- (Unaudited) ASSETS Current assets: Cash ............................................. $ -- $ 3,484 Accounts receivable, net ......................... 79,716 85,795 Inventories ...................................... 65,332 59,123 Deferred income taxes ............................ 3,304 3,304 Other current assets ............................. 6,567 6,897 -------- -------- Total current assets .......................... 154,919 158,603 Property, plant and equipment ....................... 122,667 113,398 Less accumulated depreciation ....................... 28,506 22,148 -------- -------- 94,161 91,250 Deferred financing costs, net ....................... 1,943 2,192 Identifiable intangible assets, net ................. 65,633 69,192 Goodwill ............................................ 86,699 86,699 Other assets ........................................ 4,733 4,619 -------- -------- $408,088 $412,555 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable ................................. $ 28,774 $ 30,305 Income taxes payable ............................. 670 5,562 Accrued wages and employee benefits .............. 11,109 16,586 Accrued interest ................................. 7,202 7,134 Other accrued liabilities ........................ 3,099 2,411 Current portion of long-term debt ................ 40,651 33,668 -------- -------- Total current liabilities ..................... 91,505 95,666 Long-term debt ...................................... 238,383 238,086 Deferred income taxes ............................... 23,759 23,759 Postretirement benefit obligations .................. 10,559 10,404 Other liabilities ................................... 24,752 27,287 -------- -------- Total liabilities ............................. 388,958 395,202 Commitments and contingencies STOCKHOLDER'S EQUITY: Common stock, par value $100 per share -- authorized, issued and outstanding 1,000 shares ..................................... 100 100 Capital in excess of par value ................... 5,429 5,429 Retained earnings ................................ 20,127 18,350 Accumulated other comprehensive loss ............. (6,526) (6,526) -------- -------- Total stockholder's equity .................... 19,130 17,353 -------- -------- $408,088 $412,555 ======== ========
See notes to condensed consolidated financial statements. (1) The balance sheet as of September 30, 2005 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. 3 NEENAH FOUNDRY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands)
Three Months Ended Six Months Ended March 31, March 31, ------------------- ------------------- 2006 2005 2006 2005 -------- -------- -------- -------- Net sales ..................................... $130,513 $131,527 $252,227 $253,391 Cost of sales ................................. 109,294 111,067 211,918 213,763 -------- -------- -------- -------- Gross profit .................................. 21,219 20,460 40,309 39,628 Selling, general and administrative expenses .. 9,197 8,331 17,156 16,284 Amortization of intangible assets ............. 1,779 1,780 3,559 3,563 Gain on disposal of equipment ................. (3) -- (8) (1) -------- -------- -------- -------- Total operating expenses ...................... 10,973 10,111 20,707 19,846 -------- -------- -------- -------- Operating income .............................. 10,246 10,349 19,602 19,782 Net interest expense ....................... (8,323) (8,389) (16,548) (16,800) -------- -------- -------- -------- Income before income taxes .................... 1,923 1,960 3,054 2,982 Income tax provision .......................... 866 785 1,277 1,195 -------- -------- -------- -------- Net income .................................... $ 1,057 $ 1,175 $ 1,777 $ 1,787 ======== ======== ======== ========
See notes to condensed consolidated financial statements. 4 NEENAH FOUNDRY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended March 31, ------------------ 2006 2005 -------- ------- OPERATING ACTIVITIES Net income .......................................................... $ 1,777 $ 1,787 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization .................................... 10,007 9,299 Amortization of deferred financing costs and discount on notes ... 1,041 1,033 Changes in operating assets and liabilities ...................... (13,438) (7,042) -------- ------- Net cash provided by (used in) operating activities ................................................. (613) 5,077 INVESTING ACTIVITIES Purchase of property, plant and equipment ........................... (9,359) (8,226) -------- ------- Net cash used in investing activities ................................................. (9,359) (8,226) FINANCING ACTIVITIES Net change in revolver balance ...................................... 6,851 6,210 Proceeds from long-term debt ........................................ 1,244 -- Payments on long-term debt and capital lease obligations ............ (1,607) (2,910) Debt issuance costs ................................................. -- (151) -------- ------- Net cash provided by financing activities ................................................. 6,488 3,149 -------- ------- Decrease in cash .................................................... (3,484) -- Cash at beginning of period ......................................... 3,484 -- -------- ------- Cash at end of period ............................................... $ -- $ -- ======== =======
See notes to condensed consolidated financial statements. 5 NEENAH FOUNDRY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands) NOTE 1 -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. 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 U.S. 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 six months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending September 30, 2006. 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, 2005. NOTE 2 -- INVENTORIES The components of inventories are as follows:
March 31, September 30, 2006 2005 --------- ------------- Raw materials ........................ $ 6,182 $ 6,905 Work in process and finished goods ... 43,115 37,088 Supplies ............................. 16,035 15,130 ------- ------- $65,332 $59,123 ======= =======
NOTE 3 -- RECENT ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company adopted Statement 123(R) on October 1, 2005. The adoption of Statement 123(R) did not have an impact on the Company's results of operations or financial position as the Company has no stock-based compensation plans. 6 NOTE 4 -- EMPLOYEE BENEFIT PLANS COMPONENTS OF NET PERIODIC BENEFIT COST The Company has five defined-benefit pension plans covering the majority of its hourly employees and also sponsors unfunded defined benefit postretirement health care plans covering substantially all salaried and hourly employees and their dependents. Components of net periodic benefit costs are as follows for the three and six months ended March 31, 2006 and 2005 (in thousands):
Pension Postretirement Benefits Benefits --------------- --------------- Three Months Three Months Ended March 31, Ended March 31, --------------- --------------- 2006 2005 2006 2005 ------- ----- ----- ---- Service cost $ 667 $ 487 $ 68 $ 75 Interest cost 1,052 883 160 137 Expected return on plan assets (1,141) (899) -- -- Amortization of prior service credit -- -- (10) (6) Recognized net actuarial loss (gain) 6 -- (108) (7) ------- ----- ----- ---- Net periodic benefit cost $ 584 $ 471 $ 110 $199 ======= ===== ===== ====
Postretirement Pension Benefits Benefits ----------------- --------------- Six Months Six Months Ended March 31, Ended March 31, ----------------- --------------- 2006 2005 2006 2005 ------- ------- ----- ---- Service cost $ 1,335 $ 973 $ 136 $150 Interest cost 2,103 1,767 320 275 Expected return on plan assets (2,281) (1,799) -- -- Amortization of prior service credit -- -- (20) (12) Recognized net actuarial loss (gain) 11 -- (216) (15) ------- ------- ----- ---- Net periodic benefit cost $ 1,168 $ 941 $ 220 $398 ======= ======= ===== ====
EMPLOYER CONTRIBUTIONS For the six months ended March 31, 2006, $3,500 of contributions have been made to the defined-benefit pension plans. The Company presently anticipates contributing an additional $3,400 to fund its pension plans in fiscal 2006 for a total of $6,900. 7 NOTE 5 -- GUARANTOR SUBSIDIARIES The following tables present condensed consolidating financial information as of March 31, 2006 and September 30, 2005 and for the three and six months ended March 31, 2006 and 2005 for: (a) Neenah Foundry Company ("Neenah") and (b) on a combined basis, the guarantors of the 11% Senior Secured Notes due 2010 and 13% Senior Subordinated Notes due 2013, which include all of the wholly owned subsidiaries of Neenah (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. CONDENSED CONSOLIDATING BALANCE SHEET MARCH 31, 2006
Subsidiary Neenah Guarantors Eliminations Consolidated -------- ---------- ------------ ------------ ASSETS Current assets: Cash $ (87) $ 87 $ -- $ -- Accounts receivable, net 32,771 46,945 -- 79,716 Inventories 28,139 37,193 -- 65,332 Deferred income taxes 4,537 (1,233) -- 3,304 Other current assets 4,053 2,514 -- 6,567 -------- -------- --------- -------- Total current assets 69,413 85,506 -- 154,919 Investments in and advances to subsidiaries 117,233 -- (117,233) -- Property, plant and equipment, net 38,443 55,718 -- 94,161 Deferred financing costs and identifiable intangible assets, net 50,635 16,941 -- 67,576 Goodwill 86,699 -- -- 86,699 Other assets 1,834 2,899 -- 4,733 -------- -------- --------- -------- $364,257 $161,064 $(117,233) $408,088 ======== ======== ========= ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable $ 7,449 $ 21,325 $ -- $ 28,774 Net intercompany payable -- 87,485 (87,485) -- Income taxes payable 1,240 (570) -- 670 Accrued liabilities 13,207 8,203 -- 21,410 Current portion of long-term debt 40,507 144 -- 40,651 -------- -------- --------- -------- Total current liabilities 62,403 116,587 (87,485) 91,505 Long-term debt 237,230 1,153 -- 238,383 Deferred income taxes 20,539 3,220 -- 23,759 Postretirement benefit obligations 10,559 -- -- 10,559 Other liabilities 14,396 10,356 -- 24,752 Stockholder's equity 19,130 29,748 (29,748) 19,130 -------- -------- --------- -------- $364,257 $161,064 $(117,233) $408,088 ======== ======== ========= ========
8 NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2005
Subsidiary Neenah Guarantors Eliminations Consolidated -------- ---------- ------------ ------------ ASSETS Current assets: Cash $ 4,952 $ (1,468) $ -- $ 3,484 Accounts receivable, net 37,085 48,710 -- 85,795 Inventories 22,754 36,369 -- 59,123 Deferred income taxes 4,537 (1,233) -- 3,304 Other current assets 3,908 2,989 -- 6,897 -------- -------- --------- -------- Total current assets 73,236 85,367 -- 158,603 Investments in and advances to subsidiaries 114,430 -- (114,430) -- Property, plant and equipment, net 36,519 54,731 -- 91,250 Deferred financing costs and identifiable intangible assets, net 53,736 17,648 -- 71,384 Goodwill, net 86,699 -- -- 86,699 Other assets 1,834 2,785 -- 4,619 -------- -------- --------- -------- $366,454 $160,531 $(114,430) $412,555 ======== ======== ========= ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable $ 8,442 $ 21,863 $ -- $ 30,305 Net intercompany payable -- 81,907 (81,907) -- Income taxes payable 5,562 -- -- 5,562 Accrued liabilities 15,304 10,827 -- 26,131 Current portion of long-term debt 33,658 10 -- 33,668 -------- -------- --------- -------- Total current liabilities 62,966 114,607 (81,907) 95,666 Long-term debt 238,015 71 -- 238,086 Deferred income taxes 20,539 3,220 -- 23,759 Postretirement benefit obligations 10,404 -- -- 10,404 Other liabilities 17,177 10,110 -- 27,287 Stockholder's equity 17,353 32,523 (32,523) 17,353 -------- -------- --------- -------- $366,454 $160,531 $(114,430) $412,555 ======== ======== ========= ========
9 NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2006
Subsidiary Neenah Guarantors Eliminations Consolidated ------- ---------- ------------ ------------ Net sales $55,249 $76,813 $(1,549) $130,513 Cost of sales 41,504 69,339 (1,549) 109,294 ------- ------- ------- -------- Gross profit 13,745 7,474 -- 21,219 Selling, general and administrative expenses 5,025 4,172 -- 9,197 Amortization of intangible assets 1,426 353 -- 1,779 Gain on disposal of equipment (3) -- -- (3) ------- ------- ------- -------- Operating income 7,297 2,949 -- 10,246 Net interest expense (4,478) (3,845) -- (8,323) ------- ------- ------- -------- Income (loss) before income taxes and equity in loss of subsidiaries 2,819 (896) -- 1,923 Income tax provision (benefit) 1,270 (404) -- 866 ------- ------- ------- -------- 1,549 (492) -- 1,057 Equity in loss of subsidiaries (492) -- 492 -- ------- ------- ------- -------- Net income (loss) $ 1,057 $ (492) $ 492 $ 1,057 ======= ======= ======= ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2005
Subsidiary Neenah Guarantors Eliminations Consolidated ------- ---------- ------------ ------------ Net sales $50,486 $82,363 $(1,322) $131,527 Cost of sales 39,680 72,709 (1,322) 111,067 ------- ------- ------- -------- Gross profit 10,806 9,654 -- 20,460 Selling, general and administrative expenses 4,101 4,230 -- 8,331 Amortization of intangible assets 1,426 354 -- 1,780 ------- ------- ------- -------- Operating income 5,279 5,070 -- 10,349 Net interest expense (4,484) (3,905) -- (8,389) ------- ------- ------- -------- Income before income taxes and equity in loss of subsidiaries 795 1,165 -- 1,960 Income tax provision 318 467 -- 785 ------- ------- ------- -------- 477 698 -- 1,175 Equity in income of subsidiaries 698 -- (698) -- ------- ------- ------- -------- Net income $ 1,175 $ 698 $ (698) $ 1,175 ======= ======= ======= ========
10 NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 2006
Subsidiary Neenah Guarantors Eliminations Consolidated -------- ---------- ------------ ------------ Net sales $107,622 $147,699 $(3,094) $252,227 Cost of sales 80,993 134,019 (3,094) 211,918 -------- -------- ------- -------- Gross profit 26,629 13,680 -- 40,309 Selling, general and administrative expenses 9,130 8,026 -- 17,156 Amortization of intangible assets 2,852 707 -- 3,559 Loss (gain) on disposal of equipment (9) 1 -- (8) -------- -------- ------- -------- Operating income 14,656 4,946 -- 19,602 Net interest expense (8,831) (7,717) -- (16,548) -------- -------- ------- -------- Income (loss) before income taxes and equity in loss of subsidiaries 5,825 (2,771) -- 3,054 Income tax provision (benefit) 2,436 (1,159) -- 1,277 -------- -------- ------- -------- 3,389 (1,612) -- 1,777 Equity in loss of subsidiaries (1,612) -- 1,612 -- -------- -------- ------- -------- Net income (loss) $ 1,777 $ (1,612) $ 1,612 $ 1,777 ======== ======== ======= ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 2005
Subsidiary Neenah Guarantors Eliminations Consolidated -------- ---------- ------------ ------------ Net sales $105,521 $150,659 $(2,789) $253,391 Cost of sales 82,638 133,914 (2,789) 213,763 -------- -------- ------- -------- Gross profit 22,883 16,745 -- 39,628 Selling, general and administrative expenses 8,427 7,857 -- 16,284 Amortization of intangible assets 2,853 710 -- 3,563 Gain on disposal of equipment (1) -- -- (1) -------- -------- ------- -------- Operating income 11,604 8,178 -- 19,782 Net interest expense (8,920) (7,880) -- (16,800) -------- -------- ------- -------- Income before income taxes and equity in loss of subsidiaries 2,684 298 -- 2,982 Income tax provision 1,076 119 -- 1,195 -------- -------- ------- -------- 1,608 179 -- 1,787 Equity in income of subsidiaries 179 -- (179) -- -------- -------- ------- -------- Net income $ 1,787 $ 179 $ (179) $ 1,787 ======== ======== ======= ========
11 NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED MARCH 31, 2006
Subsidiary Neenah Guarantors Eliminations Consolidated -------- ---------- ------------ ------------ OPERATING ACTIVITIES Net income (loss) $ 1,777 $(1,612) $ 1,612 $ 1,777 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 4,335 5,672 -- 10,007 Amortization of deferred financing costs and discount on notes 1,041 -- -- 1,041 Changes in operating assets and liabilities (11,180) (2,258) -- (13,438) -------- ------- ------- -------- Net cash provided by (used in) operating activities (4,027) 1,802 1,612 (613) INVESTING ACTIVITIES Investments in and advances to subsidiaries (2,879) 4,491 (1,612) -- Purchase of property, plant and equipment (3,406) (5,953) -- (9,359) -------- ------- ------- -------- Net cash used in investing activities (6,285) (1,462) (1,612) (9,359) FINANCING ACTIVITIES Net change in revolver balance 6,851 -- -- 6,851 Proceeds from long-term debt -- 1,244 -- 1,244 Payments on long-term debt and capital lease obligations (1,578) (29) -- (1,607) -------- ------- ------- -------- Net cash provided by financing activities 5,273 1,215 -- 6,488 -------- ------- ------- -------- Increase (decrease) in cash (5,039) 1,555 -- (3,484) Cash at beginning of period 4,952 (1,468) -- 3,484 -------- ------- ------- -------- Cash at end of period $ (87) $ 87 $ -- $ -- ======== ======= ======= ========
12 NOTE 5 -- GUARANTOR SUBSIDIARIES (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED MARCH 31, 2005
Subsidiary Neenah Guarantors Eliminations Consolidated -------- ---------- ------------ ------------ OPERATING ACTIVITIES Net income $ 1,787 $ 179 $(179) $ 1,787 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 4,053 5,246 -- 9,299 Amortization of deferred financing costs and discount on notes 1,033 -- -- 1,033 Changes in operating assets and liabilities 7,399 (14,441) -- (7,042) -------- -------- ----- ------- Net cash provided by (used in) operating activities 14,272 (9,016) (179) 5,077 INVESTING ACTIVITIES Investments in and advances to subsidiaries (16,765) 16,586 179 -- Purchase of property, plant and equipment (4,615) (3,611) -- (8,226) -------- -------- ----- ------- Net cash provided by (used in) investing activities (21,380) 12,975 179 (8,226) FINANCING ACTIVITIES Net change in revolver balance 6,210 -- 6,210 Payments on long-term debt and capital lease obligations (1,577) (1,333) (2,910) Deferred financing costs (151) -- -- (151) -------- -------- ----- ------- Net cash provided by (used in) financing activities 4,482 (1,333) -- 3,149 -------- -------- ----- ------- Increase (decrease) in cash (2,626) 2,626 -- -- Cash at beginning of period 1,683 (1,683) -- -- -------- -------- ----- ------- Cash at end of period $ (943) $ 943 $ -- $ -- ======== ======== ===== =======
13 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. The Company evaluates performance and allocates resources based on the operating income before depreciation and amortization charges of each segment. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in the Company's Annual Report on Form 10-K. Intersegment sales and transfers are recorded at cost plus a share of operating profit. The following segment information is presented for continuing operations:
Three months ended Six months ended March 31, March 31, ------------------- ------------------- 2006 2005 2006 2005 -------- -------- -------- -------- Revenues from continuing operations: Castings $117,439 $116,916 $226,517 $226,634 Forgings 10,155 12,669 20,061 23,364 Other 5,767 6,009 11,059 11,270 Elimination of intersegment revenues (2,848) (4,067) (5,410) (7,877) -------- -------- -------- -------- Consolidated $130,513 $131,527 $252,227 $253,391 ======== ======== ======== ======== Income (loss) from continuing operations: Castings $ 306 $ 1,004 $ (1,129) $ (703) Forgings (679) 836 (875) 1,310 Other 537 853 1,009 1,474 Elimination of intersegment (income) loss 893 (1,518) 2,772 (294) -------- -------- -------- -------- Consolidated $ 1,057 $ 1,175 $ 1,777 $ 1,787 ======== ======== ======== ========
March 31, September 30, 2006 2005 --------- ------------- Total assets: Castings $474,901 $475,725 Forgings 5,637 7,040 Other 16,220 13,268 Elimination of intersegment assets (88,670) (83,478) -------- -------- Consolidated $408,088 $412,555 ======== ========
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 may cause actual results to differ materially from those currently anticipated. Factors that could cause the Company's results to differ materially from current expectations include material disruptions to the major industries served by the Company; continued price fluctuations in the scrap metal market; developments affecting the valuation or prospects of the casting and forging industries generally or the Company in particular; and other factors described or referenced in the Company's Form 10-K for the year ended September 30, 2005 or subsequent SEC filings. The forward-looking statements made herein are made only as of the date of this report and, unless required by law, the Company undertakes no obligation to update such forward-looking statements to reflect subsequent events or circumstances. RECENT DEVELOPMENTS Major Customer Declares Bankruptcy. On March 3, 2006, Dana Corporation ("Dana"), a major customer of the Company, filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. The total accounts receivable owed to the Company by Dana on March 3, 2006 were approximately $4.7 million. Total payments received from Dana in the 90 days preceding the bankruptcy filing were approximately $7.4 million. Sales to Dana accounted for approximately 7%, 5%, 6% and 6% of the Company's net sales for the fiscal years ended September 30, 2003, 2004, 2005 and the six months ended March 31, 2006, respectively. These amounts reflect the Company's transactions directly with Dana and exclude Dana products supplied to machine shops, which are not owned by Dana but whose business sourcing is controlled by Dana. The Company is currently in negotiations with Dana concerning payment of outstanding accounts receivable owed to the Company. The Company has reflected its estimate of the amounts that will not be collected in the accompanying financial statements. Since the bankruptcy process is still in the early stages, it is very fluid, and therefore difficult to precisely calculate any losses that may result from this process. Accordingly, actual results may differ, requiring adjustments to the allowance. The Company has engaged legal counsel to monitor the proceedings and to assist in negotiations as required. 15 RESULTS OF OPERATIONS (dollars in thousands) The following discussions compare the results of operations of the Company for the three and six months ended March 31, 2006, to the results of the operations of the Company for the three and six months ended March 31, 2005. Three Months Ended March 31, 2006 and 2005 Net sales. Net sales for the three months ended March 31, 2006 were $130,513, which are $1,014 or .8% lower than the quarter ended March 31, 2005. Reduced shipments of products to the industrial (HVAC and heavy-duty truck) markets, somewhat offset by increased sales of municipal products, resulted in a slightly lower level of net sales for the three months ended March 31, 2006 compared to the three months ended March 31, 2005. Gross profit. Gross profit for the three months ended March 31, 2006 was $21,219, an increase of $759, or 3.7%, as compared to the quarter ended March 31, 2005. Gross profit as a percentage of net sales increased to 16.3% for the three months ended March 31, 2006 from 15.6% for the three months ended March 31, 2005. The increase in gross profit resulted from a more favorable mix of products sold throughout the Company during the three months ended March 31, 2006 as compared to the three months ended March 31, 2005. Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended March 31, 2006 were $9,197, an increase of $866, or 10.4%, as compared to the $8,331 for the quarter ended March 31, 2005. Selling, general and administrative expenses as a percentage of net sales increased to 7.0% for the quarter ended March 31, 2006 from 6.3% for the quarter ended March 31, 2005. The increase in selling, general and administrative expenses is due mainly to increased costs related to existing health care plans and estimated bad debts. Amortization of intangible assets. Amortization of intangible assets was $1,779 for the three months ended March 31, 2006, which is comparable to the $1,780 for the quarter ended March 31, 2005. Operating income. Operating income was $10,246 for the three months ended March 31, 2006, a decrease of $103 from operating income of $10,349 for the quarter ended March 31, 2005. As a percentage of net sales, operating income was 7.9% for the three months ended March 31, 2006 and 2005. Net interest expense. Net interest expense was $8,323 for the three months ended March 31, 2006 compared to $8,389 for the quarter ended March 31, 2005. Interest expense for the three months ended March 31, 2006 included amortization of bond discount of $396 and amortization of deferred financing costs of $125. Income tax provision. The effective tax rate for the second quarter of 2006 and 2005 was 45% and 40%, respectively. The effective tax rate for the three months ended March 31, 2006 includes the impact of the resolution of an IRS tax audit, partially offset by the estimated favorable impact of the Production Activities Deduction as permitted under the American Jobs Creation Act of 2004. 16 Six Months Ended March 31, 2006 and 2005 Net sales. Net sales for the six months ended March 31, 2006 were $252,227, which are $1,164 or .5% lower than six months ended March 31, 2005. Reduced shipments of products to the industrial (HVAC and heavy-duty truck) markets, somewhat offset by increased sales of municipal products, resulted in a slightly lower level of net sales for the six months ended March 31, 2006 compared to the six months ended March 31, 2005. Gross profit. Gross profit for the six months ended March 31, 2006 was $40,309, an increase of $681, or 1.7%, as compared to the six months ended March 31, 2005. Gross profit as a percentage of net sales was 16.0% for the six months ended March 31, 2006, compared to 15.6% for the six months ended March 31, 2005. The increase in gross profit resulted from a more favorable mix of products sold throughout the Company during the six months ended March 31, 2006 as compared to the six months ended March 31, 2005. Selling, general and administrative expenses. Selling, general and administrative expenses for the six months ended March 31, 2006 were $17,156, an increase of $872, or 5.4%, as compared to the $16,284 for the six months ended March 31, 2005. Selling, general and administrative expenses as a percentage of net sales were 6.8% for the six months ended March 31, 2006, compared to 6.4% for the six months ended March 31, 2005. The increase in selling, general and administrative expenses is due mainly to increased costs related to existing health care plans and estimated bad debts. Amortization of intangible assets. Amortization of intangible assets was $3,559 for the six months ended March 31, 2006, which is comparable to the $3,563 for the six months ended March 31, 2005. Operating income. Operating income was $19,602 for the six months ended March 31, 2006, a decrease of $180 from operating income of $19,782 for the six months ended March 31, 2005. As a percentage of net sales, operating income was 7.8% for the six months ended March 31, 2006 and 2005. Net interest expense. Net interest expense was $16,548 for the six months ended March 31, 2006 compared to $16,800 for the six months ended March 31, 2005. Interest expense for the six months ended March 31, 2006 included amortization of bond discount of $792 and amortization of deferred financing costs of $249. Income tax provision. The effective tax rate for the six months ended March 31, 2006 and 2005 was 42% and 40%, respectively. The effective tax rate for the six months ended March 31, 2006 includes the impact of the resolution of an IRS tax audit, partially offset by the estimated favorable impact of the Production Activities Deduction as permitted under the American Jobs Creation Act of 2004. 17 LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands) Credit Facility The Company's bank Loan and Security Agreement, as amended (the "Credit Facility"), consists of a revolving credit facility of up to $92,085 (with a $5,000 sublimit available for letters of credit and term loans in the aggregate original principal amount of $22,085). The Credit Facility matures on October 8, 2009, and bears interest at rates based on the lenders' Base Rate, as defined in the Credit Facility, or an adjusted rate based on LIBOR. Availability under the Credit Facility is based on various advance rates against the Company's accounts receivable and inventory. Amounts under the revolving credit facility may be borrowed, repaid and reborrowed subject to the terms of the facility. At March 31, 2006, the Company had approximately $37,400 outstanding under the revolving credit facility and approximately $15,000 outstanding under the term loan facility. No portion of the term loan, once repaid, may be reborrowed. Substantially all of the Company's wholly owned subsidiaries are co-borrowers with the Company under the Credit Facility and are jointly and severally liable with the Company for all obligations under the Credit Facility, subject to customary exceptions for transactions of this type. In addition, NFC Castings, Inc. (NFC), the Company's immediate parent, and the remaining wholly owned subsidiaries of the Company jointly and severally guarantee the Company's obligations under the Credit Facility, subject to customary exceptions for transactions of this type. The borrowers' and guarantors' obligations under the Credit Facility are secured by a first priority perfected security interest, subject to customary restrictions, in substantially all of the tangible and intangible assets of the Company and its subsidiaries. The senior secured notes, discussed below, and the guarantees in respect thereof, are equal in right of payment to the Credit Facility, and the guarantees in respect thereof. The liens in respect of the senior secured notes are junior to the liens securing the Credit Facility and guarantees thereof. Voluntary prepayments may be made at any time on the term loan borrowings or the revolving borrowings upon customary prior notice. Prepayments on the term loan borrowings may be made at any time without premium or penalty unless a simultaneous reduction of the revolving loan commitment amount is being made or if any such reduction of the revolving loan commitment amount has been made previously. Reductions of the revolving loan commitment are subject to certain premiums specified in the Credit Facility. Mandatory repayments are required under certain circumstances, including a sale of assets or the issuance of debt or equity. The Credit Facility requires the Company to observe certain customary conditions, affirmative covenants and negative covenants including financial covenants. The Credit Facility also contains events of default customary for these types of facilities, including, without limitation, payment defaults, material misrepresentations, covenant defaults, bankruptcy and a change of ownership of the Company, NFC or ACP Holding Company, NFC's immediate parent. The Company is prohibited from paying dividends and is restricted to a maximum yearly stock repurchase of $250. At March 31, 2006, the Company is in compliance with existing bank covenants. 18 11% Senior Secured Notes due 2010. The Company has outstanding Senior Secured Notes due 2010 in the principal amount of $133,130, with a coupon rate of 11%. These notes were issued at a price which included a discount of $11,692. The obligations under the senior secured notes are equal in right of payment to the Credit Facility and the associated guarantees. The liens securing the senior secured notes are junior to the liens securing the Credit Facility and guarantees thereof. Interest on the senior secured notes is payable on a semi-annual basis. The Company's obligations under the notes are guaranteed on a secured basis by each of its wholly owned subsidiaries. Subject to the restrictions in the Credit Facility, the notes are redeemable at the Company's option in whole or in part at any time on or after September 30, 2007, with not less than 30 days nor more than 60 days notice, at the redemption price specified in the indenture governing the notes (105.500% of the principal amount redeemed beginning September 30, 2007, 104.125% beginning September 30, 2008, and 102.750% beginning September 30, 2009 and thereafter), plus accrued and unpaid interest up to the redemption date. Upon the occurrence of a "change of control" as defined in the indenture governing the notes, the Company may be required to make an offer to purchase the secured notes at 101% of the outstanding principal amount thereof, plus accrued and unpaid interest up to the purchase date. The secured notes contain customary covenants typical to this type of financing, such as limitations on (1) indebtedness, (2) restricted payments (among other things, currently limiting most dividends and similar payments by Neenah and its subsidiaries to no more than approximately $14 million), (3) liens, (4) restrictions on distributions from restricted subsidiaries, (5) sale of assets, (6) affiliate transactions, (7) mergers and consolidations and (8) lines of business. The secured notes also contain customary events of default typical to this type of financing, such as (1) failure to pay principal and/or interest when due, (2) failure to observe covenants, (3) certain events of bankruptcy, (4) the rendering of certain judgments or (5) the loss of any guarantee. 13% Senior Subordinated Notes due 2013. The Company has outstanding Senior Subordinated Notes due 2013 in the principal amount of $100,000, with a coupon rate of 13%. The obligations under the senior subordinated notes are senior to the Company's subordinated unsecured indebtedness, if any, and are subordinate to the Credit Facility and the senior secured notes. Interest on the senior subordinated notes is payable on a semi-annual basis. Not less than five percent of the interest on the senior subordinated notes will be paid in cash and up to 8% interest may be paid-in-kind. The Company's obligations under the notes are guaranteed on an unsecured basis by each of its wholly owned subsidiaries. Subject to the restrictions in the Credit Facility, the notes are redeemable at our option in whole or in part at any time, with not less than 30 days nor more than 60 days notice, at the redemption price specified in the indenture governing the notes (currently 101% of the principal amount redeemed and 100% beginning September 30, 2006 and thereafter), plus accrued and unpaid interest up to the redemption date. Upon the occurrence of a "change of control" as defined in the indenture governing the notes, the Company may be required to make an offer to purchase the subordinated notes at 101% of the outstanding principal amount thereof, plus accrued and unpaid interest up to the purchase date. The subordinated notes contain customary covenants typical to this type of financing, such as limitations on (1) indebtedness, (2) restricted payments (among other things, currently limiting most dividends and similar payments by Neenah and its subsidiaries to no more than approximately $14 million), (3) liens, (4) restrictions on distributions from restricted subsidiaries, (5) sale of assets, (6) affiliate transactions, (7) mergers and consolidations and (8) lines of business. The subordinated notes also contain customary events of default typical to this type of financing, such as, (1) failure to pay principal and/or interest when due, (2) failure to observe covenants, (3) certain events of bankruptcy, (4) the rendering of certain judgments or (5) the loss of any guarantee. For the six months ended March 31, 2006 and March 31, 2005, capital expenditures were $9,359 and $8,226, respectively. Both periods represent a level of capital expenditures necessary to maintain equipment and facilities. Capital spending for the six months ended March 31, 2006 includes $541 for MACT (Maximum Achievable Control Technology) compliance at Neenah and Dalton. 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. The Company had remaining availability of $39,747 under the revolving credit facility at March 31, 2006. Net cash used in operating activities for the six months ended March 31, 2006 was $613, a decrease of $5,690 from cash provided by operating activities for the six months ended March 31, 2005 of $5,077. The increase in net cash used in operating activities was due to reductions in accounts payable and accrued wages, payment of $4,700 of additional income taxes and $2,600 of additional pension contributions during the six months ended March 31, 2006, offset by a larger decrease in accounts receivable for the six months ended March 31, 2006 compared to the six months ended March 31, 2005. 19 Future Capital Needs. The Company is significantly leveraged and its ability to meet debt obligations will depend upon future operating performance which will be affected by many factors, some of which are beyond the Company's control. Based on the Company's current level of operations, the Company anticipates that its operating cash flows and available credit facilities will be sufficient to fund anticipated operational investments, including working capital and capital expenditure needs, for at least the next twelve months. If, however, the Company is unable to service its debt requirements as they become due or is unable to maintain ongoing compliance with restrictive covenants, the Company may be forced to adopt alternative strategies that may include reducing or delaying capital expenditures, selling assets, restructuring or refinancing indebtedness or seeking additional equity capital. There can be no assurances that any of these strategies could be effected on satisfactory terms, if at all. Adjusted EBITDA. Our borrowing arrangement contains certain financial covenants which are tied to ratios based on Adjusted EBITDA. Adjusted EBITDA is defined in the Company's Credit Facility as "EBITDA" and is generally calculated as the sum of net income (excluding non-recurring non-cash charges and certain one-time cash charges), income taxes, interest expense, and depreciation and amortization. Adjusted EBITDA is presented herein because it is a material component of the covenants contained within the Company's Credit Facility. Non-compliance with the covenants could result in the requirement to immediately repay all amounts outstanding under the Credit Facility which could have a material adverse effect on our results of operations, financial position and cash flow. Management also believes that certain investors use information concerning Adjusted EBITDA as a measure of a company's performance and ability to service its debt. Adjusted EBITDA should not be considered a substitute for, or more meaningful than, income from operations, net income, cash flows or other measures of financial performance prepared in accordance with accounting principles generally accepted in the United States. Adjusted EBITDA, as presented by the Company, may not be comparable to similarly titled measures reported by other companies. A reconciliation of Adjusted EBITDA for the three and six months ended March 31, 2006, compared to the three and six months ended March 31, 2005, is provided below (in thousands):
Three Months Ended Six Months Ended March 31, March 31, ------------------- ----------------- 2006 2005 2006 2005 --------- ------- ------- ------- Net income ........................... $ 1,057 $ 1,175 $ 1,777 $ 1,787 Income tax provision ................. 866 785 1,277 1,195 Net interest expense ................. 8,323 8,389 16,548 16,800 Depreciation and amortization ........ 5,023 4,672 10,007 9,299 Gain on disposal of equipment ........ (3) -- (8) (1) Gregg write-off of lease deposits .... -- 104 -- 104 ------- ------- ------- ------- Adjusted EBITDA (as defined above) ... $15,266 $15,125 $29,601 $29,184 ======= ======= ======= =======
CONTRACTUAL OBLIGATIONS There have been no material changes to our contractual obligations outside the ordinary course of our business from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2005. OFF-BALANCE SHEET ARRANGEMENTS None. 20 CRITICAL ACCOUNTING ESTIMATES There have been no changes in critical accounting estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2005. 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. Although the senior secured notes and senior subordinated notes are subject to fixed interest rates, the Company's earnings are affected by changes in short-term interest rates as a result of its borrowings under the Credit Facility. If market interest rates for such borrowings change by 1% during the remainder of the fiscal year ending September 30, 2006, the Company's interest expense would increase or decrease by approximately $249. 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. Item 4. CONTROLS AND PROCEDURES Disclosure Control and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based upon such evaluation, the Chief Executive Officer Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act. Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 21 NEENAH FOUNDRY COMPANY PART II. OTHER INFORMATION Item 6. EXHIBITS (a) Exhibits 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 32 Chief Executive and Chief Financial Officers' certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEENAH FOUNDRY COMPANY DATE: May 11, 2006 /s/ Gary W. LaChey ---------------------------------------- Gary W. LaChey Corporate Vice President - Finance (Principal Financial Officer and Duly Authorized Officer) 23