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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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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, 1999
Common Stock, Class B, $100 par value- 0 shares as of July 31, 1999
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NEENAH FOUNDRY COMPANY
Form 10-Q Index
For the Quarter Ended June 30, 1999
<TABLE>
<CAPTION>
Page
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<S> <C>
Part 1. Financial Information
Item 1. Financial Statements
Condensed consolidated balance sheets -- June 30, 1999 and September 30, 1998 3
Condensed consolidated statements of operations -- Three and nine months ended June 30, 1999
and 1998 4
Condensed consolidated statements of cash flows -- Nine months ended June 30, 1999
and 1998 5
Notes to condensed consolidated financial statements -- June 30, 1999 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 8
Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holde 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
Exhibit Index 15
</TABLE>
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NEENAH FOUNDRY COMPANY
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30 September 30
1999 1998(1)
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 11,563 $ 19,798
Accounts receivable, net .............................. 72,710 71,655
Inventories ........................................... 57,653 40,841
Refundable income taxes ............................... 1,858 375
Deferred income taxes ................................. 5,008 4,888
Other current assets .................................. 5,750 5,060
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Total current assets ....................... 154,542 142,617
Property, plant and equipment ........................... 244,703 198,671
Less accumulated depreciation ........................... 35,761 18,134
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208,942 180,537
Identifiable intangible assets, net ..................... 67,106 69,904
Goodwill, net ........................................... 197,093 184,181
Other assets ............................................ 7,310 7,070
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$ 634,993 $ 584,309
============== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable ...................................... $ 28,102 $ 29,920
Income taxes payable .................................. - -
Accrued liabilities ................................... 28,553 30,326
Current portion of long-term debt ..................... 4,274 4,185
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Total current liabilities .................. 60,929 64,431
Long-term debt .......................................... 426,138 367,686
Postretirement benefit obligations ...................... 5,490 5,220
Deferred income taxes ................................... 67,534 68,069
Other liabilities ....................................... 10,844 10,981
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Total liabilities .......................... 570,935 516,387
Commitments and contingencies
STOCKHOLDER'S EQUITY:
Preferred stock, par value $100 per share --
authorized 3,000 shares, no shares
issued or outstanding .......................... - -
Common stock, par value $100 per share --
authorized 11,000 shares, issued
and outstanding 1,000 shares ................... 100 100
Additional paid in capital ............................ 51,317 55,167
Retained earnings ..................................... 14,211 14,225
Pension liability adjustment .......................... (1,570) (1,570)
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Total stockholder's equity ................. 64,058 67,922
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$ 634,993 $ 584,309
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</TABLE>
See notes to condensed consolidated financial statements.
(1) The balance sheet as of September 30, 1998 has been derived from
the audited financial statements as of that date but does not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
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NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
June 30, June 30,
-------------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------ ----------- -----------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net sales ..................................... $ 140,361 $ 84,688 $ 392,568 $ 201,422
Cost of sales ................................. 113,691 60,800 323,539 146,843
------------ ---------- ----------- -----------
Gross profit .................................. 26,670 23,888 69,029 54,579
Selling, general and administrative expenses... 9,516 6,157 26,405 16,293
Amortization of intangible assets ............. 2,611 2,179 8,640 4,995
------------ ---------- ----------- -----------
Total operating expenses ...................... 12,127 8,336 35,045 21,288
------------ ---------- ----------- -----------
Operating income .............................. 14,543 15,552 33,984 33,291
Net interest expense .......................... 10,571 7,588 31,349 19,236
------------ ---------- ----------- -----------
Income before income taxes .................... 3,972 7,964 2,635 14,055
Provision for income taxes .................... 2,134 3,539 2,649 6,530
------------ ---------- ----------- -----------
Net income (loss) ............................. $ 1,838 $ 4,425 $ (14) $ 7,525
============ ========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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NEENAH FOUNDRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
(Restated)
Nine Months Nine Months
Ended Ended
June 30, June 30,
1999 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ................................................ $ (14) $ 7,525
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ................................. 26,385 12,934
Amortization of deferred financing costs and premium on notes 865 503
Deferred income taxes ......................................... (597) -
Changes in operating assets and liabilities ................... (13,008) (10,534)
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Net cash provided by operating
activities ............................................... 13,631 10,428
INVESTING ACTIVITIES
Purchase of property, plant and equipment ........................ (31,040) (6,866)
Acquisition of Deeter Foundry, Inc. .............................. - (20,759)
Acquisition of Mercer Forge Corporation .......................... - (47,420)
Acquisition of Cast Alloys, Inc., net of cash acquired of $489.... (42,717) -
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Net cash used in investing
activities ............................................... (73,757) (75,045)
FINANCING ACTIVITIES
Proceeds from long-term debt ..................................... 91,605 57,302
Payments on long-term debt ....................................... (32,628) (2,147)
Debt issuance costs .............................................. (3,236) (1,143)
Return of capital to parent ...................................... (3,850) -
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Net cash provided by financing
activities ............................................... 51,891 54,012
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Decrease in cash and cash equivalents ............................ (8,235) (10,605)
Cash and cash equivalents at beginning of period ................. 19,798 20,346
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Cash and cash equivalents at end of period ....................... $ 11,563 $ 9,741
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
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NEENAH FOUNDRY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1999
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal and recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and nine months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending September 30, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto included in
Neenah Foundry Company's Annual Report on Form 10-K for the year ended September
30, 1998.
On September 8, 1998, the capital stock of Advanced Cast Products, Inc. (ACP),
was contributed to the Company by ACP Holding Company. ACP is a manufacturer of
ductile and malleable iron castings. The acquisition of ACP was accounted for in
a manner similar to a pooling of interests because the Company and ACP were
under common control. Accordingly, the prior period financial statements of the
Company for the period during which the Company and ACP were under common
ownership have been restated.
NOTE 2 -- INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
June 30 September 30
1999 1998
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(000's omitted)
<S> <C> <C>
Raw materials .................................. $ 10,673 $ 4,550
Work in process and finished goods ............. 37,891 28,141
Supplies ....................................... 9,089 8,150
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57,653 $ 40,841
============ ==============
</TABLE>
If the FIFO method of inventory valuation had been used on all components,
inventories would have been approximately $690 and $499 higher than reported at
June 30, 1999 and September 30, 1998, respectively.
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs. Because these are
subject to many forces beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
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NOTE 3 - - ACQUISITIONS
On March 30, 1998, the Company purchased Deeter Foundry, Inc. ("Deeter"), a
manufacturer of gray iron castings, for $20,759 in cash (including direct costs
of $313) and a $3,850 note issued by ACP Holding Company payable to the selling
shareholders of Deeter which has been accounted for as a contribution to the
capital of the Company.
On April 3, 1998, the Company purchased Mercer Forge Corporation ("Mercer"), a
manufacturer of forged components, for $47,420 (including direct costs of $525
and net of $154 of acquired cash). The acquisition of Mercer was financed
through borrowings under the Tranche B term loan.
On September 8, 1998, the Company purchased Dalton Corporation ("Dalton"), a
manufacturer of gray iron castings, for $100,930 (including direct costs of $601
and net of $1,679 of acquired cash). The acquisition of Dalton was financed
through drawings under the Tranche B term loan and the Acquisition Loan
Facility.
On December 31, 1998, the Company purchased Niemin Porter & Co. d/b/a Cast
Alloys, Inc. ("Cast Alloys"), a manufacturer of investment-cast titanium and
stainless steel golf club heads, for $42,717 in cash (including direct costs of
$1,206 and net of $489 of acquired cash). The acquisition of Cast Alloys was
financed out of a portion of the proceeds of the issuance of the Company's 11
1/8% Senior Subordinated Notes due 2007 issued on November 24, 1998. Had the
acquisition occurred as of October 1, 1998, there would have been no material
proforma effect on net sales or net income for the nine months ended June 30,
1999.
The acquisitions of Deeter, Mercer, Dalton and Cast Alloys (the "Recently
Acquired Subsidiaries") have been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated on the basis
of fair values to the underlying assets acquired and liabilities assumed. The
allocation of the purchase price paid for Cast Alloys was based on preliminary
estimates of fair values and will be revised when final amounts of fair values
are determined. The excess of the cost of acquisition over the fair value of the
net tangible and identifiable intangible assets acquired has been allocated to
goodwill. The operating results of Deeter, Mercer, Dalton and Cast Alloys are
included in the consolidated statements of income since the date of their
respective acquisition.
NOTE 4 -- GUARANTOR SUBSIDIARIES
Neenah Transport, Inc., Hartley Controls Corporation, Deeter Foundry, Inc.,
Mercer Forge Corporation (and its subsidiary A&M Specialties, Inc.), Dalton
Corporation (and its subsidiaries Dalton Corporation, Warsaw Manufacturing
Facility, Dalton Corporation, Kendallville Manufacturing Facility, Dalton
Corporation, Ashland Manufacturing Facility, and Dalton Corporation, Stryker
Machining Facility, Inc.), Advanced Cast Products, Inc. (and its subsidiaries
Belcher Corporation and Peerless Corporation) and Niemin Porter & Co.
(collectively, the "Guarantor Subsidiaries") are wholly-owned subsidiaries of
Neenah Foundry Company and have fully and unconditionally guaranteed the Senior
Subordinated Notes on a joint and several basis. The Guarantor Subsidiaries
comprise all of the Company's direct and indirect domestic subsidiaries. The
separate financial statements of the Guarantor Subsidiaries have not been
included herein because management has concluded that such financial statements
would not provide additional information that is material to investors.
The following is summarized combined financial information of the Guarantor
Subsidiaries. Net sales include net sales to Neenah Foundry Company of $2,210
and $5,409 for the three and nine months ended June 30, 1999 respectively.
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<TABLE>
<CAPTION>
June 30, 1999
------------------
(000's omitted)
<S> <C>
Current assets $ 71,017
Noncurrent assets 233,490
Current liabilities 32,909
Noncurrent liabilities 32,535
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, 1999 June 30, 1999
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(000's omitted)
<S> <C> <C>
Net sales $ 89,074 $ 259,669
Gross profit 7,058 23,549
Net loss (2,588) (6,422)
</TABLE>
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, 1999, to the results of the operations
of the Company for the three and nine months ended June 30, 1998.
RESULTS OF OPERATIONS (dollars in thousands)
Three Months Ended June 30, 1999 and 1998
Net sales. Net sales for the three months ended June 30, 1999 were $140,361
which are $55,673 or 65.7% higher than the quarter ended June 30, 1998. The
increase in net sales resulted from the inclusion of the operating results of
the Recently Acquired Subsidiaries after their acquisition.
Gross profit. Gross profit for the three months ended June 30, 1999 was $26,670,
an increase of $2,782, or 11.6%, as compared to the quarter ended June 30, 1998.
The increase in gross profit resulted from the inclusion of the operating
results of the Recently Acquired Subsidiaries after their acquisition. Gross
profit as a percentage of net sales decreased to 19.0% for the three months
ended June 30, 1999 from 28.2% for the quarter ended June 30, 1998. The decline
in gross profit percentage is partially attributable to a greater percentage of
sales of lower margin industrial products in the three months ended June 30,
1999 as compared to the three months ended June 30, 1998. Also, gross profit was
negatively impacted by a strike at Mercer which began in April, 1999 and was
settled in July, 1999 as well as the inclusion in the quarter ended June 30,
1999 of the operations of Cast Alloys, which was acquired on December 31, 1998
and whose gross profit for the three months ended June 30, 1999 was break even.
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Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended June 30, 1999 were $9,516, an
increase of $3,359, or 54.6%, as compared to the $6,157 for the quarter ended
June 30, 1998. The increase was due to the inclusion of the operating results of
the Recently Acquired Subsidiaries after their acquisition. As a percentage of
net sales, selling, general and administrative expenses decreased from 7.3% for
the quarter ended June 30, 1998 to 6.8% for the three months ended June 30,
1999. The decrease in selling, general and administrative expenses as a
percentage of net sales was mainly due to expenses being spread over a larger
revenue base with the inclusion of the Recently Acquired Subsidiaries.
Amortization of intangible assets. Amortization of intangible assets was $2,611
for the three months ended June 30, 1999, an increase of $432, or 19.8%, as
compared to the $2,179 for the quarter ended June 30, 1998. The increase is due
to the increased amortization of goodwill and identifiable intangible assets
from the Recently Acquired Subsidiaries.
Operating income. Operating income was $14,543 for the three months ended June
30, 1999, a decrease of $1,009, or 6.5%, from the quarter ended June 30, 1998.
The decrease in operating income was caused by the reasons discussed above under
gross profit. As a percentage of net sales, operating income decreased from
18.4% for the quarter ended June 30, 1998 to 10.4% for the three months ended
June 30, 1999. The decrease in operating income percentage was due to the
factors discussed above under gross profit, as well as increased amortization of
intangible assets.
Net interest expense. Net interest expense was $10,571 for the three months
ended June 30, 1999 compared to $7,588 for the quarter ended June 30, 1998. The
increased interest expense resulted from the interest on the drawings under the
Company's Senior Bank Facilities and the Senior Subordinated Notes used to
finance the purchase of the Recently Acquired Subsidiaries.
Provision for income taxes. The provision for income taxes for the three months
ended June 30, 1999 and 1998 is higher than the amount computed by applying the
statutory rate of approximately 40% to income before income taxes mainly due to
the amortization of goodwill which is not deductible for income tax purposes.
Nine months ended June 30, 1999 and 1998
Net sales. Net sales for the nine months ended June 30, 1999 were $392,568 which
are $191,146 or 94.9% higher than the nine months ended June 30, 1998. The
increase in net sales resulted from the inclusion of the operating results of
the Recently Acquired Subsidiaries after their acquisition.
Gross profit. Gross profit for the nine months ended June 30, 1999 was $69,029,
an increase of $14,450, or 26.5%, as compared to the nine months ended June 30,
1998. The increase in gross profit resulted from the inclusion of the operating
results of the Recently Acquired Subsidiaries after their acquisition. Gross
profit as a percentage of net sales decreased to 17.6% for the nine months ended
June 30, 1999 from 27.1% for the nine months ended June 30, 1998. The decline in
gross profit percentage is partially attributable to a greater percentage of
sales of lower margin industrial products in the nine months ended June 30, 1999
as compared to the nine months ended June 30, 1998. Also, gross profit was
negatively impacted by a strike at Mercer which began in April, 1999 and was
settled in July, 1999 as well as the inclusion of Cast Alloys operations since
its acquisition on December 31, 1998. The operations of Cast Alloys have
resulted in a negative gross profit since its acquisition.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the nine months ended June 30, 1999 were $26,405, an
increase of $10,112, or 62.1%, as compared to the $16,293 for the nine months
ended June 30, 1998. Approximately $8,100 of the increase was due to the
inclusion of the operating results of the Recently Acquired Subsidiaries and the
remainder of the increase was due to professional and other expenses related to
completed and potential acquisitions. As a percentage of net sales, selling,
general and administrative expenses decreased from 8.1% for the nine months
ended June 30, 1998 to 6.7% for the nine months ended June 30, 1999. The
decrease in selling, general and administrative expenses as a percentage of net
sales was mainly due to expenses being spread over a larger revenue base with
the inclusion of the Recently Acquired Subsidiaries.
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Amortization of intangible assets. Amortization of intangible assets was $8,640
for the nine months ended June 30, 1999, an increase of $3,645, or 73.0%, as
compared to the $4,995 for the nine months ended June 30, 1998. The increase is
due to the increased amortization of goodwill and identifiable intangible assets
from the Recently Acquired Subsidiaries.
Operating income. Operating income was $33,984 for the nine months ended June
30, 1999, an increase of $693, or 2.1%, from the nine months ended June 30,
1998. The improvement in operating income was due to the inclusion of the
operating results of the Recently Acquired Subsidiaries. As a percentage of net
sales, operating income decreased from 16.5% for the nine months ended June 30,
1998 to 8.7% for the nine months ended June 30, 1999. The decrease in operating
income percentage was due to the factors discussed above under gross profit, as
well as increased amortization of intangible assets.
Net interest expense. Net interest expense was $31,349 for the nine months ended
June 30, 1999 compared to $19,236 for the nine months ended June 30, 1998. The
increased interest expense resulted from the interest on the drawings under the
Company's Senior Bank Facilities and the Senior Subordinated Notes used to
finance the purchase of the Recently Acquired Subsidiaries.
Provision for income taxes. The provision for income taxes for the nine months
ended June 30, 1999 and 1998 is higher than the amount computed by applying the
statutory rate of approximately 40% to income before income taxes mainly due to
the amortization of goodwill which is not deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands)
On April 30, 1997, the Company issued $150.0 million principal amount of 11-1/8%
Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes") and entered
into a credit agreement providing for term loans of $45.0 million and a
revolving credit facility of up to $50.0 million, as amended (the "Senior Bank
Facility" or "Credit Agreement"). On July 1, 1997, the Company issued an
additional $45.0 million principal amount of Senior Subordinated Notes and used
the proceeds of $47.6 million to pay the term loans, the accrued interest
thereon and related fees and expenses. On April 3, 1998, in connection with the
acquisition of Mercer, the Company amended the Credit Agreement to provide
availability of $75.0 million of term loans to the Company (consisting of $20.0
million of Tranche A Loans and $55.0 million of Tranche B Loans) in addition to
the Company's existing $50.0 million Revolving Credit Facility. On September 8,
1998, in connection with the acquisition of Dalton and the contribution of the
capital stock of ACP, the Company amended and restated the Credit Agreement to
provide for additional Tranche B Loans in an aggregate principal amount of $70.0
million and an Acquisition Loan Facility in aggregate principal amount
outstanding at any one time not to exceed $50.0 million. On November 24, 1998,
the Company sold $87.0 million principal amount of Senior Subordinated Notes,
using $42.7 million of the total proceeds of $86.8 million (net of debt issuance
costs) to finance the acquisition of Cast Alloys and $29.0 million of the
proceeds to pay down borrowings under the Acquisition Loan Facility and used the
remaining proceeds for general corporate purposes.
The Company's liquidity needs will arise primarily from debt service on the
above indebtedness, working capital needs and funding of capital expenditures
and additional acquisitions. Borrowings under the Senior Bank Facilities bear
interest at variable interest rates. The Senior Bank Facility imposes
restrictions on the Company's ability to make capital expenditures and both the
Senior Bank Facility and the indentures governing the Senior Subordinated Notes
limit the Company's ability to incur additional indebtedness. The covenants
contained in the Senior Bank Facility also, among other things, restrict the
ability of the Company and its subsidiaries to dispose of assets, incur
guarantee obligations, prepay the Senior Subordinated Notes or amend the
indentures, pay dividends, create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, change the business conducted by the Company, make
capital expenditures or engage in certain transactions with affiliates, and
otherwise restrict corporate activities.
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For the nine months ended June 30, 1999 and June 30, 1998, capital expenditures
were $31,040 and $6,866, respectively. The $24,174 increase in capital
expenditures was primarily the result of planned enhancements to certain
equipment in the manufacturing area, including significant expenditures at ACP
and Deeter, which were acquired in fiscal 1998.
The Company's principal source of cash to fund its liquidity needs will be net
cash from operating activities and borrowings under its Senior Bank Facilities.
Net cash from operating activities for the nine months ended June 30, 1999 was
$13,631, an increase of $3,203 from $10,428 for the nine months ended June 30,
1998. The increase in net cash from operating activities was primarily the
result of increased cash flow from the Recently Acquired Subsidiaries.
The Company believes that cash generated from operations and existing revolving
lines of credit under the Senior Bank Facilities will be sufficient to meet its
normal operating requirements, including working capital needs and interest
payments on the Company's outstanding indebtedness.
Year 2000
The Company and its subsidiaries have conducted an evaluation of the actions
necessary in order to ensure that its computer systems will be able to function
without disruption with respect to the application of dating systems in the year
2000. As a result of this evaluation, each company within the consolidated
entity is engaged in the process of upgrading, replacing and testing certain of
its information and other computer systems in order to operate without
disruption due to year 2000 issues. The following represents a summary of the
status of information systems and non-information systems by subsidiary:
Neenah Foundry Company
Information Systems. As of June 30, 1999, we believe that our information
systems are fully compliant with the year 2000. A local consulting firm has been
engaged since March, 1998 to assess the adequacy of all Neenah's software and
make whatever changes are necessary to be compliant with year 2000 issues. As of
June 30, 1999, Neenah completed all assessment, remediation and testing of its
software.
Non-Information Systems. With respect to date sensitive non-information systems,
Neenah is currently in the assessment phase and is internally checking all
computer programs and PC units, including embedded chip technology and
microcontrollers, for year 2000 compliance. This phase is expected to be
completed by September 30, 1999. Remediation will begin upon completion of the
assessment phase and is scheduled to be completed before December 31, 1999 for
material programs and equipment. Additionally, we are working with our insurance
carrier to develop contingency plans in the event a system failure occurs in our
holding furnaces and other equipment used in processing molten metal.
Dalton Corporation
Information Systems. The task force organized to address year 2000 issues at
Dalton Corporation has completed its inventory, assessment, and remediation
phases for all critical systems. Testing is complete on all critical systems
with the exception of the general ledger, payroll, and miscellaneous mainframe
reporting systems which are scheduled to be completed by September 30, 1999. In
addition, installation and implementation of a new release of QAS software at
the Warsaw facility is also scheduled to be completed by September 30, 1999 with
all critical systems year 2000 compliant prior to December 31, 1999.
Non-Information Systems. Virtually all of Dalton's non-information systems used
in the operation of its facility are not date sensitive. All date sensitive
non-information systems have been inventoried, assessed, and remediated. Final
testing for all material and equipment programs will be completed prior to
December 31, 1999. Additionally, we are working with our insurance carrier to
develop contingency plans in the event a system failure occurs in our holding
furnaces or other equipment used in processing molten metal.
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Advanced Cast Products
Information Systems. An internal task force has reviewed all financial and
information systems currently in use and has determined that all existing
systems are year 2000 compliant.
Non-Information Systems. We believe all computer numeric controls and other
controls within the operation are year 2000 compliant.
Mercer Forge Corporation
Information Systems. New year 2000 compliant software
has been installed and is fully operative for information systems.
Non-Information Systems. Older PC's are currently being replaced and custom
programs are being reviewed and updated where necessary. Manufacturing
programmable controllers and computer numeric controls have been analyzed for
year 2000 problems and we believe no problems exist that will have any material
adverse effect on the business. The total review process is expected to be
completed by September 30, 1999.
Deeter Foundry
Information Systems. New year 2000 compliant software has been installed and is
fully operating for information systems.
Non-information systems. With respect to non-information systems, Deeter has
just completed major renovations in the melting and sand system areas. As a
result, all of these systems are compliant with Year 2000 issues.
Cast Alloys, Inc.
Information Systems. Cast Alloys has assembled a year 2000 task force consisting
of representatives from each company location to complete the assessment phase,
conduct research, complete testing and create contingency plans at Cast Alloys.
The task force has estimated that the cost to render the financial software year
2000 compliant is $25,000. This new year 2000 compliant software has been
purchased and will be installed in August, 1999. The remediation phase is
expected to be completed prior to September 30, 1999. Contingency plans will be
completed prior to December 31, 1999 for those areas in which remediation is not
feasible.
Non-Information Systems. With respect to non-information systems, Cast Alloys is
in the assessment phase and is currently internally reviewing all critical
systems as well as embedded chip technology and microcontrollers to make sure
they are year 2000 compliant. The assessment and remediation phase is expected
to be completed by September 30, 1999.
In addition to investigations of its own systems, the Company has begun
assessing the Year 2000 readiness of its important vendors and customers. Key
customers, vendors and service providers have been queried about their year 2000
readiness and their responses are being analyzed.
The Company serves over 17,000 active customers in the municipal business. No
one customer accounts for a significant percentage of the total business. Three
key customers comprise over 60% of the Company's industrial sales. These
customers are very large manufacturers. Dialogue concerning year 2000 compliance
is ongoing. The Company mailed an inquiry letter to its 32 vendors regarding
their compliance with the year 2000. All 32 vendors have responded that they are
currently year 2000 compliant or will be by the end of the calendar year.
Utility companies are the most critical vendors for the foundry operation. The
Company is engaged in ongoing discussions with each provider. We have been
assured that each utility company will be year 2000 compliant. Although other
vendors supply critical raw materials, any year 2000 compliance problems would
only result in temporary shortages which would not seriously jeopardize the
overall business.
In summary, we believe that all our important critical vendors and customers
either have or will have addressed any problems associated with the year 2000
issue such that there will be no significant deterioration in future business
dealings due to this issue.
Page 12
<PAGE> 13
Costs specifically associated with renovating software for year 2000 readiness
are funded through operating cash flows and expensed as incurred. Year 2000
related costs have not had a material effect on the Company's financial position
or results of operations. The Company and subsidiaries expect to incur total
costs (capital and expense) in the range of $1.5 to $2.0 million on the year
2000 problem of which a total of approximately 20% to 25% is remaining to be
incurred. Costs of replacing some of the systems with Year 2000 complaint
systems (including both hardware and software) that have an extended useful life
in excess of one year have been appropriately capitalized.
Although there can be no assurance that the remedial actions being implemented
by the Company and its subsidiaries will address every issue relating to the
year 2000 issue, the Company believes it is unlikely that any disruptions
resulting from the year 2000 issue would have a significant impact on its
overall operations. Although it is highly unlikely that the Company will face
year 2000 issues that significantly impact its overall operations, business
continuity plans may have to be developed later this year should facts and
circumstances dictate such a strategy to handle potential contingencies
regarding unforeseen Y2K problems. Up to this point, no critical informational
technology projects have been either delayed or curtailed due to Year 2000
efforts. In addition, the Company and subsidiaries have not experienced any
significant Year 2000 problems to date.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates. The
Company does not use derivative financial instruments for speculative or trading
purposes.
Interest Rate Sensitivity. The Company's earnings are affected by changes in
short-term interest rates as a result of its borrowings under the Senior Bank
Facilities. If market interest rates for such borrowings had averaged 1% more
during the nine months ended June 30, 1999, the Company's interest expense would
increase, and income before income taxes would decrease by approximately $1.1
million. This analysis does not consider the effects of the reduced level of
overall economic activity that could exist in such an environment. Further, in
the event of a change of such magnitude, management could take actions to
further mitigate its exposure to the change. However, due to the uncertainty of
the specific actions that would be taken and their possible effects, the
sensitivity analysis assumes no changes in the Company's financial structure.
Page 13
<PAGE> 14
NEENAH FOUNDRY COMPANY
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended June 30, 1999.
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 12, 1999 /s/ Gary LaChey
----------------------------------------------
Gary LaChey
Vice President-Finance, Secretary & Treasurer
(Principal Financial Officer and Duly
Authorized Officer)
Page 14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF NEENAH FOUNDRY COMPANY AS OF AND FOR THE
NINE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> JUN-30-1999
<CASH> 11,563
<SECURITIES> 0
<RECEIVABLES> 73,742
<ALLOWANCES> 1,032
<INVENTORY> 57,653
<CURRENT-ASSETS> 154,542
<PP&E> 244,703
<DEPRECIATION> 35,761
<TOTAL-ASSETS> 634,993
<CURRENT-LIABILITIES> 60,929
<BONDS> 426,138
0
0
<COMMON> 100
<OTHER-SE> 63,958
<TOTAL-LIABILITY-AND-EQUITY> 634,993
<SALES> 392,568
<TOTAL-REVENUES> 392,568
<CGS> 323,539
<TOTAL-COSTS> 323,539
<OTHER-EXPENSES> 35,045
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (31,349)
<INCOME-PRETAX> 2,635
<INCOME-TAX> 2,649
<INCOME-CONTINUING> (14)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14)
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