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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended September 30, 2001.
[ ] 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 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)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act: NONE
(Title of class)
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 period 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 November 30, 2001
Common Stock, Class B, $100 par value- 0 shares as of November 30, 2001
PART I
Item 1. BUSINESS
On April 30, 1997, pursuant to an Agreement and Plan of Reorganization (the
"Merger Agreement") with NC Merger Company and NFC Castings, Inc., Neenah
Corporation (the "Predecessor Company") was acquired by NFC Castings, Inc., a
holding company and a wholly owned subsidiary of ACP Holding Company ("ACP
Holdings") (the "Merger"). Prior to July 1, 1997, Neenah Foundry Company was one
of three wholly owned subsidiaries of Neenah Corporation, a holding company with
no significant assets or operations other than its holdings in the common stock
of its three wholly owned subsidiaries. On July 1, 1997, Neenah Foundry Company
merged with and into Neenah Corporation and the surviving company changed its
name to Neenah Foundry Company (the "Company").
Unless otherwise stated in this document or unless the context otherwise
requires, references herein to the "Company" include Neenah Foundry Company and
its wholly owned subsidiaries Neenah Transport, Inc., Deeter Foundry, Inc.
("Deeter"), Mercer Forge Corporation ("Mercer"), Dalton Corporation ("Dalton"),
Advanced Cast Products ("ACP"), Niemin Porter & Co. d/b/a Cast Alloys, Inc.
("Cast Alloys") and Gregg Industries, Inc. ("Gregg"), and their respective
subsidiaries. "Neenah" refers to Neenah Foundry Company, not including any of
its wholly owned subsidiaries.
The Company changed its fiscal year end to September 30 from March 31 effective
September 30, 1997.
General Development of Business
The Company designs, manufactures and markets a wide range of metal
castings and forgings for the heavy municipal market and selected segments of
the industrial and consumer markets. Neenah began business in 1872 and has built
a strong reputation for producing quality iron castings. After Neenah was
acquired by ACP Holding Company in 1997, the Company began a strategic
initiative to grow and diversify its business by making selected acquisitions
within the metals industry. As part of the Company's strategy, the Company
completed the following acquisitions:
- - Deeter, a manufacturer of gray iron castings for the heavy municipal
market, in March 1998.
- - Mercer, a producer of complex-shaped forged components for use in
transportation, railroad, mining and heavy industrial applications, in
April 1998.
- - Dalton, a manufacturer of gray iron castings primarily for the
refrigeration and air conditioning, transportation and heavy equipment
industrial markets, in September 1998.
- - ACP, a manufacturer of ductile and malleable iron castings for various
industrial markets, in September 1998.
- - Cast Alloys, a manufacturer of investment-cast titanium and stainless steel
golf clubheads, in December 1998.
- - Gregg, a manufacturer of gray and ductile iron castings for various
industrial markets, in November 1999.
The Company believes it is the largest manufacturer of heavy municipal iron
castings in the United States. The Company's broad range of heavy municipal iron
castings includes manhole covers and frames, storm sewer frames and grates,
heavy duty airport castings, specialized trench drain castings, specialty flood
control castings and ornamental tree grates. These municipal castings are sold
throughout the United States to state and local government entities, utility
companies, precast concrete manhole structure producers and contractors for both
new construction and infrastructure replacement. The Company believes it is also
a leading manufacturer of a wide range of complex industrial castings, including
castings for the transportation industry, a broad range of castings for the farm
equipment industry, specific components for compressors used in heating,
ventilation and air conditioning systems and golf clubheads for the consumer
industry.
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The Company has invested heavily to modernize its manufacturing plants at
many of its subsidiaries. This plant modernization program is a critical part of
a long-term strategy to produce higher volume, value-added castings for its
existing industrial customers and to penetrate other selected segments of the
industrial market, while preserving its position as the leader in the heavy
municipal market.
The Company has two reportable segments, Castings and Forgings. The
Castings segment manufactures and sells iron castings for the municipal and
industrial markets, while the Forgings segment manufactures forged components
for the industrial market.
CASTINGS SEGMENT
Overview
The Castings segment is a leading producer of iron and other metal castings
for use in heavy municipal and industrial applications. It is also a leading
producer of golf clubheads for the golfing industry. This segment sells directly
to OEMs, as well as to industrial end users.
Products, Customers and Markets
The Castings segment provides a variety of products to both the heavy
municipal and industrial markets. Sales to the heavy municipal market are
comprised of storm and sanitary sewer castings, manhole covers and frames, and
storm sewer frames and grates. Sales also include heavy airport castings,
specialized trench drain castings, specialty flood control castings and
ornamental tree grates. Customers for these products include state and local
government entities, utility companies, precast concrete structure producers,
and contractors.
Sales to the industrial market are comprised of differential carriers and
casings, transmission, gear and axle housings, calipers, yokes, planting and
harvesting equipment parts, and compressor components. Customers for these
products include medium and heavy-duty truck, farm equipment, and heating,
ventilating, and air-conditioning manufacturers. In addition, the Company sells
golf clubheads to golf club manufacturers.
Heavy Municipal. The Company's broad heavy municipal product line consists
of two general categories of castings, "standard" and "specialty" castings.
Standard castings principally consist of storm and sanitary sewer castings that
are consistent with pre-existing dimension and strength specifications
established by local authorities. Standard castings are generally high volume
items that are routinely used in new construction and infrastructure
replacement. Specialty castings are generally lower volume, higher margin
products which include heavy-duty airport castings, trench drain castings, flood
control castings, special manhole and inlet castings and ornamental tree grates.
These specialty items are frequently selected and/or specified from the
Company's municipal product catalog and its tree grate catalog, which together
encompass over 4,400 standard and specialty patterns. For many of these
specialty products, the Company believes it is the only manufacturer with
existing patterns to produce such a particular casting, although a competing
manufacturer could elect to make the investment in patterns or equipment
necessary to produce a similar casting.
The Company's municipal castings are sold to state and local government
entities, utility companies, pre-cast concrete manhole structure producers and
contractors for both new construction and infrastructure replacement. The
Company's active municipal customers generally make purchase decisions based on
a number of criteria, including acceptability of the product per local
specification, quality, service, price and the customer's relationship with the
foundry. Relative to customers in the industrial market, municipal market
customers are less technically demanding and rely more on published product
specifications to ensure product performance.
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Over its 70 years of heavy municipal market participation, the Company has
emphasized sales and marketing and believes it has built a strong reputation for
customer service. The Company believes that it is one of the leaders in U.S.
heavy municipal casting production and that it has strong name recognition. The
Company has the largest sales and marketing effort of any foundry serving the
heavy municipal market. The dedicated sales force works out of regional sales
offices to market the Company's municipal castings to contractors and state and
local governmental entities throughout the United States. The Company operates a
number of regional distribution and sales centers throughout the Unites States.
The Company believes this regional approach enhances its knowledge of local
specifications and its position in the heavy municipal market.
Industrial. The Company's industrial castings have increased in complexity
since the early 1990's and are generally produced in higher volumes than
municipal castings. Complexity in the industrial market is determined by the
intricacy of a casting's shape, the thinness of its walls and the amount of
processing by a customer required before a part is suitable for use. Original
equipment manufacturers (OEMs) and their first tier suppliers have been
demanding higher complexity parts principally to reduce labor costs in their own
production processes by using fewer parts to manufacture the same finished
product or assembly and by using parts which require less preparation before
entering the production process.
The Company's industrial castings are primarily sold to a limited number of
customers with whom the Company has established a close working relationship.
These customers make purchasing decisions based on, among other things,
technical ability, price, service, quality assurance systems, facility
capabilities and reputation. However, as in the municipal market, the Company's
assistance in product engineering plays an important role in winning bids for
industrial castings. The average industrial casting typically takes between 12
and 18 months to go from the design phase to full production and has an average
product life cycle of approximately 8 to 10 years. The patterns for industrial
castings, unlike the patterns for municipal castings, are owned by the Company's
customers rather than the Company. However, such industrial patterns are not
readily transferable to other foundries without, in most cases, significant
additional investment. Although foundries, including the Company, do not design
industrial castings, a close working relationship between a foundry and the
customer during a product launch is critical to reduce potential production
problems and minimize the customer's risk of incurring lost sales or damage to
its reputation due to a delayed launch. Involvement by a foundry early in the
design process generally improves the likelihood that the customer will design a
casting within the manufacturing capabilities of such foundry and also improves
the likelihood that such foundry will be awarded the casting for full
production.
The Company estimates that it has historically retained approximately 90%
of the castings it has been awarded throughout the product life cycle, which is
typical for the industry. The Company believes industrial customers will
continue to seek out foundries with a strong reputation for performance who are
capable of providing a cost-effective combination of manufacturing technology
and quality. The Company's strategy is to further its relationships with
existing customers by participating in the design and production of more complex
industrial castings, while seeking out selected new customers who would value
the Company's performance reputation, technical ability and high level of
quality and service.
The Company employs a dedicated industrial casting sales force at all of
its subsidiary locations. The sales force supports ongoing customer
relationships and organizes the scheduling and delivery of shipments, as well as
working with customers' engineers and procurement representatives, Company
engineers, manufacturing management and quality assurance representatives
throughout all stages of the production process to ensure that the final product
consistently meets or exceeds customer specifications. This team approach,
consisting of sales, marketing, manufacturing, engineering and quality assurance
efforts is an integral part of the Company's marketing strategy.
4
Manufacturing Process
Iron Casting
The Company's foundries manufacture gray and ductile iron and cast it into
intricate shapes according to customer metallurgical and dimensional
specifications. The Company continually invests in the improvement of process
controls and product performance and believes that these investments and its
significant experience in the industry have made it one of the most efficient
manufacturers of industrial and heavy municipal casting products.
The casting process involves using metal, wood or urethane patterns to make
an impression of a casting product in a mold made primarily of sand. Cores, also
made primarily of sand, are used to make the internal cavities and openings in a
casting product. Once the casting impression is made in the mold, the cores are
set into the mold and the mold is closed. Molten metal is then poured into the
mold, which fills the mold cavity and takes on the shape of the desired casting
product. Once the iron has solidified and cooled, the mold is shaken from the
casting and the sand is recycled. The selection of the appropriate casting
method, pattern, core-making equipment and sand and other raw materials depends
on the final product, including its complexity, specifications, and function as
well as intended production volumes. Because the casting process involves many
critical variables, such as choice of raw materials, design and production of
tooling, iron chemistry and metallurgy, and core and molding sand properties, it
is important to monitor the process parameters closely to ensure dimensional
precision and metallurgical consistency. The Company continually seeks to find
ways to expand the capabilities of existing technology to improve its
manufacturing processes.
The Company also achieves productivity gains by improving upon the
individual steps of the casting process such as reducing the amount of time
required to make a pattern change to produce a different casting product. The
reduced time permits it to profitably produce castings in medium volume
quantities on high volume, cost-effective equipment. Additionally, extensive
effort in real time process controls permits the Company to produce a
consistent, dimensionally accurate casting product, which requires less time and
effort in the final processing stages of production. This accuracy contributes
significantly to the Company's manufacturing efficiency.
Continual testing and monitoring of the manufacturing process is important
to maintain product quality. The Company has adopted sophisticated quality
assurance techniques and policies for its manufacturing operations. During and
after the casting process, the Company performs numerous tests, including
tensile, proof-load, radiography, ultrasonic, magnetic particle and chemical
analysis. The Company utilizes statistical process controls to measure and
control significant process variables and casting dimensions. The results of
this testing are documented in metallurgical certifications, which are provided
with each shipment to most industrial customers. The Company strives to maintain
systems that provide for continual improvement of operations and personnel,
emphasize defect prevention and reduce variation and waste in all areas.
Investment Casting
The Cast Alloys foundry purchases titanium and stainless steel and utilizes
investment casting to cast golf club heads. Investment casting is a highly
specialized method of making metal products and has become the principal method
for the manufacture of metal golf clubheads. Investment casting permits greater
flexibility in the shape and weight distribution of clubheads than alternative
methods such as forging and machining. Investment casting facilitates perimeter
weighting, hollow forms and the utilization of lighter and higher-performance
alloys. It enhances manufacturing precision and uniformity, which is critical in
the manufacture of metal woods.
5
The Company conducts golf clubhead polishing and finishing operations, including
painting, at its facilities in Tijuana, Mexico. When the process is completed, a
fully finished golf clubhead is delivered to the customer per their exact
specifications.
All of the clubheads manufactured by the Company are made of titanium or
stainless steel alloys. Titanium clubheads have higher tensile strength than
stainless steel with approximately one-half the weight of steel. Therefore, a
larger oversized clubhead can be manufactured using titanium without increasing
clubhead weight.
The Company believes that its success as a leading supplier of golf clubheads is
largely attributable to its statistical quality control measures. The Company
attempts to monitor every aspect of the engineering and manufacturing process to
assure the quality of the clubheads manufactured. Particular attention is paid
to the quality of raw materials (principally wax, ceramic and metal alloys),
gating techniques employed in channeling the flow of molten metal into the
ceramic shell in the casting process, and rigorous inspection standards to
assure compliance with a customer's product specifications throughout the
manufacturing process. Statistical process control is utilized to maintain
consistency in manufacturing.
Raw Materials
The primary raw materials used by the Company to manufacture ductile and
gray iron castings are steel scrap, pig iron, metallurgical coke and silica
sand. Titanium and stainless steel are the primary raw materials used to
manufacture golf clubheads. While there are multiple suppliers for each of these
commodities, the Company has single-source arrangements with its suppliers for
each of these major raw materials, with the exception of pig iron. Due to long
standing relationships with each of its suppliers, the Company believes that it
will continue to be able to secure raw materials at competitive prices. The
primary energy sources for the Company's operations, electricity and natural
gas, are purchased through utilities.
Although the prices of all raw materials used by the Company vary, the
fluctuations in the price of steel scrap are the most significant to the
Company. The Company has arrangements with most of its industrial customers
which allow the Company to adjust industrial casting prices to reflect scrap
price fluctuations. In periods of rapidly rising or falling scrap prices, these
adjustments will lag the current scrap price because they are generally based on
average market prices for prior periods, which periods vary by customer but are
generally no longer than six months. Castings are generally sold to the heavy
municipal market on a bid basis and, after a bid is won, the price for the
municipal casting generally cannot be adjusted for raw material price increases.
However, in most cases the Company believes it has been successful in obtaining
higher municipal casting unit prices in subsequent bids to compensate for rises
in scrap prices in prior periods. Rapidly fluctuating scrap prices may have an
adverse or positive effect on the Company's financial condition and results of
operations.
Cyclicality and Seasonality
The Company has historically experienced moderate cyclicality in the heavy
municipal market. Sales of municipal products are influenced by, among other
things, public spending. In the industrial market, the Company has experienced
cyclicality in sales resulting from fluctuations in the medium- and heavy-duty
truck market and the farm equipment market, which are subject to general
economic trends.
The Company experiences seasonality in its municipal business where sales
tend to be higher during the construction season, which occurs during the warmer
months, generally the third and fourth quarters of the Company's fiscal year.
The Company maintains level production throughout the year in anticipation of
such seasonality and does not experience production volume fluctuations as a
result. The Company builds inventory in anticipation of the construction season
with such inventories reaching a peak near the end of
6
its second quarter in March. The Company has not historically experienced
seasonality in industrial casting sales.
Competition
The markets for the Company's products are highly competitive. Competition
is based not only on price, but also on quality of product, range of capability,
level of service and reliability of delivery. The Company competes with numerous
independent and captive foundries, as well as with a number of foreign iron
foundries, including certain foundries located in India. The Company also
competes with several large domestic manufacturers whose products are made with
materials other than ductile and gray iron, such as steel or aluminum. The
industry consolidation that has occurred over the past 20 years has resulted in
a significant reduction in the number of smaller foundries and a rise in the
share of production by larger foundries, some of which have significantly
greater financial resources than the Company. Competition from India has had a
strong presence in the heavy municipal market and continues to be a factor,
primarily in the western and eastern United States, due in part to costs
associated with transportation.
FORGINGS SEGMENT
Overview
The forgings segment, operated by Mercer, is a leading producer of
complex-shaped forged components for use in transportation, railroad, mining and
heavy industrial applications. Mercer is also a leading producer of microalloy
forgings. Mercer sells directly to OEMs, as well as to industrial end users.
Mercer's subsidiary, A&M Specialties, Inc.(A&M), machines forgings and castings
for Mercer and other industrial applications.
Until the mid-1980's, Mercer produced military tank parts, but successfully
converted from a defense contractor to a commercial manufacturer and today is
one of the leading suppliers to the heavy duty truck sector. Mercer produces
approximately 500 individually forged components and has developed specialized
expertise in forgings of microalloy steel.
Products, Customers and Markets
Mercer manufactures its products to customer specification with typical
production runs of 1,000 or more units. Mercer currently operates mechanical
press lines, from 1,300 tons to 4,000 tons. Key markets for Mercer include truck
and automotive parts, railroad equipment and general industrial machinery.
Mercer's in-house sales organization sells direct to end users and OEMs. A
key element of Mercer's sales strategy is its ability to develop strong customer
relationships through responsive engineering capability, dependable quality and
just-in-time performance.
Demand for forged products for civilian application closely follows the
general business cycles of the various market segments and the demand level for
capital goods. While there is a more consistent base level of demand for the
replacement parts portion of the business, the strongest expansions in the
forging industry coincide with the periods of industrial segment economic
growth. Mercer's largest industry segment, the heavy truck segment is extremely
weak due to overbuilds and energy costs. Mercer's other market segments are also
showing weakness following general economic slowdowns in those industrial areas.
Management attributes this to normal industrial cycles in these markets and
adjustments to overbuilds in inventory levels as well as high energy costs.
Manufacturing Process
Forgings and castings (together with a third process, fabrication) are the
principal commercial metal working processes. In forging, metal is pressed,
pounded or squeezed under great pressure, with or without
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the use of heat, into parts that retain the metal's original grain flow,
imparting high strength, ductility and resistance properties.
Forging itself usually entails one of four principal processes: impression
die; open die; cold; and seamless rolled ring forging. Impression die forging,
commonly referred to as "closed die" forging, is the principal process employed
by Mercer, and involves bringing two or more dies containing "impressions" of
the part shape together under extreme pressure, causing the forging stock to
undergo plastic reformation. Because the metal flow is restricted by die
containers, this process can yield more complex shapes and closer tolerances
than the "open die" forging process. Impression die forging is used to produce
products such as military and off-highway track and drive train parts;
automotive and truck drive train and suspension parts; railroad engine, coupling
and suspension parts; military ordinance parts and other items where close
tolerances are required.
Once a rough forging is produced, regardless of the forging process, it
must generally still be machined. This process, known as "finishing" or
"conversion", smoothes the component's exterior and mating surfaces and adds any
required specification, such as groves, threads, bolt holes and brand name
markings. The finishing process can contribute significantly to the value of the
end product, in particular in certain custom situations where high value
specialized machining is required. Machining can be performed either in-house by
the forger, by a machine shop which performs this process exclusively or by the
end-user.
An internal staff of engineers designs products to meet customer
specifications incorporating computer assisted design (CAD) work stations for
tooling design. Because its forged products are inherently less expensive and
stronger, Mercer has been successful in replacing certain cast parts previously
supplied by third party foundries. Management believes that Mercer is an
industry leader in forging techniques using microalloy steel which produces
parts which are lighter and stronger than those forged from conventional carbon
steel.
Raw Materials
The principal raw materials used in Mercer's products are carbon and
microalloy steel. Mercer purchases substantially all of its carbon steel from
four principal sources. While Mercer has never suffered an interruption of
materials supply, management believes that, in the event of any disruption from
any individual source, adequate alternative sources of supply are available
within the immediate vicinity.
Cyclicality and Seasonality
Mercer has experienced moderate cyclicality in sales resulting from
fluctuations in the medium- and heavy-duty truck market and the heavy industrial
market, which are subject to general economic trends.
Mercer has not historically experienced seasonality in its sales.
Competition
Mercer competes primarily in a highly fragmented industry which includes
several dozen other press forgers and hammer forge shops. Hammer shops cannot
typically match press forgers' for high volume, single component manufacturing,
or close tolerance production. Competition in the forging industry has also
historically been determined both by product and geography, with a large number
of relatively small forgers across the country carving out their own product and
customer niches. In addition, most end users manufacture some forgings
themselves, often maintaining a critical minimum level of production in-house
and contracting out the balance. The primary basis of competition in the forging
industry is price, but engineering, quality and dependability are also
important, particularly with respect to building and maintaining customer
relationships. Some of Mercer's competitors have significantly greater resources
than
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Mercer. There can be no assurance that Mercer will be able to maintain or
improve its competitive position in the markets in which it competes.
EMPLOYEES
As of September 30, 2001 the Company had approximately 4,800 full time
employees, of whom 4,000 were hourly employees and 800 were salaried employees.
Nearly all of the hourly employees at Neenah, Dalton, ACP and Mercer are members
of either the United Steelworkers of America or the Glass, Molders, Pottery,
Plastics and Allied Workers International Union. A collective bargaining
agreement is negotiated every three to five years. The current agreements expire
as follows: Neenah, December 2001; Dalton- Warsaw, April 2003;
Dalton-Kendallville, June 2002; ACP-Meadville, October 2004; ACP-Belcher, June
2004; and Mercer, June 2004. All employees at Deeter, Cast Alloys and Gregg are
non-union. The Company believes that it has a good relationship with its
employees.
ENVIRONMENTAL MATTERS
The facilities of the Company are subject to federal, state and local laws
and regulations relating to the protection of the environment and worker health
and safety, including those relating to discharges to air, water and land, the
handling and disposal of solid and hazardous waste and the cleanup of properties
affected by hazardous substances. Such laws include the Federal Clean Air Act,
the Clean Water Act, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA"), and the Occupational Health and Safety Act. The Company believes
that each of its operations are currently in substantial compliance with
applicable environmental laws, and that it has no liabilities arising under such
environmental laws, except as would not be expected to have a material adverse
effect on the Company's operations, financial condition or competitive position.
However, some risk of environmental liability and other cost is inherent in each
of the Company's businesses. Any of the Company's businesses might in the future
incur significant costs to meet current or more stringent compliance, cleanup or
other obligations pursuant to environmental requirements. Such costs may include
expenditures related to remediation of historical releases of hazardous
substances or clean-up of physical structures prior to decommissioning.
Under the Federal Clean Air Act Amendments of 1990, the Environmental
Protection Agency ("EPA") is directed to establish maximum achievable control
technology ("MACT") standards for certain industrial operations that are major
sources of hazardous air pollutants ("HAPs"). The iron foundry industry is not
expected to be required to implement the MACT emission limits, control
technologies or work practices until the year 2004 at the earliest. Although the
Company cannot accurately estimate the costs to comply with the MACT standard
until it is issued, the MACT standard, when implemented, and state laws
governing the emission of toxic air pollutants may require that certain of the
Company's facilities incur significant costs for air emission control equipment,
air emission monitoring equipment or process modifications.
Compliance Impacts - Water Discharge Permit
Dalton's Warsaw facility was issued an NPDES permit in 2000 that limits the
level of chlorine and the temperature of its non-contact cooling water permitted
to be discharged to a waterway by the year 2003. Although the chlorine is
already in the water when purchased from the city, Dalton is responsible for the
elimination. Dalton has several alternatives to meet the chlorine discharge
permit requirements by 2003, including the installation of a re-circulating
water system. It is expected that the savings to be realized by reduced water
purchases from the city will offset the cost of the proposed re-circulating
water system.
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Item 2. PROPERTIES
The Company maintains the following locations. All of the facilities are
owned, with the exception of Cast Alloys' facilities and Mercer's machining
facility, which are leased.
ENTITY LOCATION PURPOSE
------ -------- -------
Neenah Foundry Company Neenah, WI 2 manufacturing facilities
Office facility
Dalton Corporation Warsaw, IN Manufacturing and office facilities
Kendallville, IN Manufacturing facility
Stryker, OH Machining facility
Advanced Cast Products, Inc. Meadville, PA Manufacturing and office facility
South Easton, MA Manufacturing facility
Ironton, OH Manufacturing facility
Mercer Forge Corporation Mercer, PA Manufacturing and office facility
Sharon, PA Machining facility
Deeter Foundry, Inc. Lincoln, NE Manufacturing and office facility
Cast Alloys, Inc. Carlsbad, CA Office facility
Northridge, CA Manufacturing facility
Tijuana, Mexico Manufacturing facility
Gregg Industries, Inc. El Monte, CA Manufacturing and office facility
The principal equipment at the facilities consists of molding machines, presses,
machining equipment, welding, grinding and painting equipment. The Company
regards its plant and equipment as well maintained and adequate for its needs.
In addition to the facilities above, Neenah owns seven and leases six
distribution and sales centers.
Item 3. LEGAL PROCEEDINGS
The Company is involved in routine litigation incidental to its business.
Such litigation is not, in the opinion of management, likely to have a material
adverse effect on the financial condition or results of operations of the
Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
year ended September 30, 2001.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no public market for the common stock of the Company. There was
one holder of record of the Company's common stock as of September 30, 2001.
Item 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth the selected historical consolidated
financial and other data of the Predecessor Company for the six months ended
March 31, 1997, and the one month ended April 30, 1997, which have been derived
from the Predecessor Company's historical consolidated financial statements
before the Merger, and the selected historical consolidated financial and other
data of the Company for the five months ended September 30, 1997 and the years
ended September 30, 1998, 1999, 2000, and 2001 which have been derived from the
Company's historical consolidated financial statements. The information
contained in the following table should also be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's historical consolidated financial statements and
related notes included elsewhere in this report.
Predecessor Company
-------------------------
Six Months One Month Five Months
Ended Ended Ended Fiscal Year Ended
March 31, April 30, Sept. 30, September 30,
---------------------------------------------
(Dollars in thousands) 1997 1997 1997 1998 (1) 1999 (2) 2000 (3) 2001
-------- -------- -------- -------- -------- -------- ----
STATEMENT OF
INCOME DATA:
Net sales $ 72,749 $ 16,970 $ 106,168 $ 303,090 $ 530,354 $ 549,656 $ 470,037
Cost of sales 52,096 11,127 76,237 224,548 434,722 454,813 402,364
----------------------------------------------------------------------------------
Gross profit 20,653 5,843 29,931 78,542 95,632 94,843 67,673
Selling, general, and
administrative
expenses 7,755 1,618 7,947 21,435 34,061 39,176 32,402
Amortization expense - - 3,900 7,727 11,696 11,641 11,638
Other expenses (income) (4) - 10 38 7,502 104 (337)
----------------------------------------------------------------------------------
Operating income 12,898 4,225 18,074 49,342 42,373 43,922 23,970
Interest expense
(income), net (1,146) (116) 10,025 27,208 42,401 47,782 47,891
----------------------------------------------------------------------------------
Income (loss) from
continuing operations
before taxes and
extraordinary item 14,044 4,341 8,049 22,134 (28) (3,860) (23,921)
Provision (credit) for
Income Taxes 4,563 1,633 3,876 10,650 1,982 1,448 (6,467)
----------------------------------------------------------------------------------
Income (loss) from
continuing operations
before extraordinary item 9,481 2,708 4,173 11,484 (2,010) (5,308) (17,454)
Income (loss) from
discontinued operations (5) 234 (29) 193 397 118 165 -
Gain on sale of
discontinued operations (5) - - - - - - 2,404
Extraordinary item (6) - - (1,630) (392) - - -
----------------------------------------------------------------------------------
Net income (loss) $ 9,715 $ 2,679 $ 2,736 $ 11,489 $ (1,892) $ (5,143) $ (15,050)
==================================================================================
11
Predecessor Company
-------------------------
Six Months One Month Five Months
Ended Ended Ended Fiscal Year Ended
March 31, April 30, Sept. 30, September 30,
----------------------------------------
(Dollars in thousands) 1997 1997 1997 1998 (1) 1999 (2) 2000 (3) 2001
------ ------ ------ -------- -------- -------- ----
BALANCE SHEET
DATA (AT END
OF PERIOD):
Cash and cash $ 22,403 $ 29,046 $ 20,346 $ 19,978 $ 17,368 $ 19,478 $ 4,346
equivalents
Working capital 43,707 34,052 40,849 78,186 83,962 86,080 72,140
Total assets 93,869 102,067 358,406 584,309 641,702 666,218 626,443
Total debt 134 129 218,314 371,871 428,007 449,607 434,077
Total stockholder's 68,857 74,458 47,407 67,922 63,750 58,518 41,939
equity
============================================================================================================
(1) The amounts include the results of Deeter subsequent to March 30, 1998, the
results of Mercer subsequent to April 3, 1998 and the results of Dalton
subsequent to September 8, 1998.
(2) The amounts include the results of Cast Alloys subsequent to December 31,
1998.
(3) The amounts include the results of Gregg subsequent to November 30, 1999.
(4) In 1999, other expenses includes a $6,713 charge related to the closure of
Dalton's Ashland facility.
(5) On October 2, 2000, the Company sold all of the issued and outstanding
shares of common stock of Hartley. The results of the operations of Hartley
have been reported separately as discontinued operations for all periods
presented. The sale resulted in a gain of $2,404, net of income taxes of
$1,603.
(6) The extraordinary item includes the write off of unamortized deferred
financing costs due to the early extinguishment of debt, net of tax of $260
and $999, for the year ended September 30, 1998 and the five months ended
September 30, 1997, respectively.
12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain matters discussed in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and other sections of this annual
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.
COMPARISON OF FISCAL YEAR ENDED SEPTEMBER 30, 2001 TO FISCAL YEAR ENDED
SEPTEMBER 30, 2000
Net Sales. Net sales for the year ended September 30, 2001 were $470.0
million, which was $79.7 million or 14.5% lower than the year ended September
30, 2000. The decrease in net sales resulted from significant weakness in the
demand for industrial castings used for the heavy duty truck and HVAC markets
and an overall slowing of demand for castings in the Company's other major
markets.
Gross Profit. Gross profit for the year ended September 30, 2001 was $67.7
million, a decrease of $27.2 million or 28.6%, as compared to the year ended
September 30, 2000. Gross profit as a percentage of net sales decreased to 14.4%
during the year ended September 30, 2001 from 17.3% for the fiscal year ended
September 30, 2000. The decrease in gross profit resulted from lower sales
volumes noted above and an inability, at the lower production and sales levels,
to sufficiently absorb the overhead costs necessary to effectively run the
foundry operations. Gross profit percentage was also negatively impacted during
the year ended September 30, 2001 by intense market pressure to reduce product
pricing.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended September 30, 2001 were $32.4
million, a decrease of $6.8 million from the $39.2 million for the year ended
September 30, 2000. As a percentage of net sales, selling, general and
administrative expenses decreased from 7.1% for the fiscal year ended September
30, 2000 to 6.9% for the year ended September 30, 2001. The decrease was due to
decreased corporate expense and the implementation of other cost cutting
measures, including salary reductions and consolidation of facilities, in
response to the decreased sales level.
Amortization of intangible assets. Amortization of intangible assets was
$11.6 million in each of the years ended September 30, 2001 and 2000.
Other expenses. Included in other expenses for the years ended September
30, 2001 and 2000 are gains of $0.3 million and losses of $0.1 million,
respectively, for the disposal of long-lived assets in the ordinary course of
business.
Operating Income. Operating income was $24.0 million for the year ended
September 30, 2001, a decrease of $20.0 million or 45.4% from the year ended
September 30, 2000. As a percentage of net sales, operating income was 5.1% for
the year ended September 30, 2001, as compared to 8.0% for the year ended
September 30, 2000. These decreases were caused by the reasons discussed above
under gross profit, partially offset by decreased selling, general and
administrative expenses
13
Net Interest Expense. Net interest expense increased from $47.8 million for
the year ended September 30, 2000 to $47.9 million for the year ended September
30, 2001. The increase in net interest expense resulted from interest on capital
leases entered into during the second half of fiscal 2000 and interest on the
increased borrowings outstanding on the Company's Revolving Credit Facility,
partially offset by lower interest rates on the Company's Senior Bank
Facilities.
Provision for Income Taxes. The credit for income taxes for the year ended
September 30, 2001 is lower than the amount computed by applying the statutory
rate of approximately 40% to loss before income taxes principally due to the
amortization of goodwill, which is not deductible for income tax purposes.
Discontinued Operations. On October 2, 2000, the Company sold the common
stock of Hartley. The disposition of Hartley resulted in a gain of $2,404, net
of income taxes of $1,603. The results of operations of Hartley for the year
ended September 30, 2000 have been reported separately as discontinued
operations.
COMPARISON OF FISCAL YEAR ENDED SEPTEMBER 30, 2000 TO FISCAL YEAR ENDED
SEPTEMBER 30, 1999
Net Sales. Net sales for the year ended September 30, 2000 were $549.7
million, which was $19.3 million or 3.6% higher than the year ended September
30, 1999. The increase in net sales resulted from the inclusion of the operating
results of Gregg after its acquisition, offset by lower sales volumes in the
fourth quarter of fiscal 2000 triggered by a slowdown in the heavy duty truck
market.
Gross Profit. Gross profit for the year ended September 30, 2000 was $94.8
million, a decrease of $0.8 million or 0.8%, as compared to the year ended
September 30, 1999. The decrease was from lower margins on sales and a $2.5
million provision for obsolete inventory at Cast Alloys. This was partially
offset by the inclusion of the operating results of Gregg after its acquisition
on November 30, 1999. Gross profit as a percentage of net sales decreased to
17.3% (17.7% without the $2.5 million provision for obsolete inventory) during
the year ended September 30, 2000 from 18.0% for the fiscal year ended September
30, 1999. Gross profit percentage was negatively impacted during the year ended
September 30, 2000 by the provision for obsolete inventory and other operating
difficulties at Cast Alloys. In addition, the Company has experienced extreme
market pressure to reduce pricing on its products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended September 30, 2000 were $39.2
million, an increase of $5.1 million over the $34.1 million for the year ended
September 30, 1999. As a percentage of net sales, selling, general and
administrative expenses increased from 6.4% for the fiscal year ended September
30, 1999 to 7.1% for the year ended September 30, 2000. The increase in selling,
general and administrative expense was due to the inclusion of expenses from
Gregg after its acquisition, costs to improve future operations at Cast Alloys
and the recognition of severance benefits payable to the former CEO of the
Company.
Amortization of intangible assets. Amortization of intangible assets was
$11.6 million for the year ended September 30, 2000, a decrease of $0.1 million,
or 0.9%, as compared to the $11.7 million for the year ended September 30, 1999.
The decrease is due to the decreased amortization of certain identifiable
intangible assets, which were fully amortized in the year ended September 30,
1999.
Other expenses. During the year ended September 30, 1999, a restructuring
charge of $6.7 million was recorded to exit the Company's operations at its
Ashland, Ohio facility. The decision to close the facility was made due to
recurring operating losses by the Ashland division over the past several years.
Of the $6.7 million charge, $6.0 million was a non-cash charge for impairment of
assets and $.7 million was cash outlays for exit activity costs which were paid
during the year ended September 30, 2000. Also included in other expenses for
the years ended September 30, 2000 and 1999 are losses of $0.1 and $0.8 million,
respectively, for the disposal of long-lived assets in the ordinary course of
business.
14
Operating Income. Operating income was $43.9 million for the year ended
September 30, 2000, an increase of $1.5 million or 3.5% from the year ended
September 30, 1999. The increase in operating income was caused by the $6.7
million charge related to the closing of the Ashland facility in 1999, with no
corresponding charge for the year ended September 30, 2000. This was partially
offset by higher selling, general and administrative expenses as noted above. As
a percentage of net sales, operating income remained at 8.0% for the years ended
September 30, 2000 and 1999.
Net Interest Expense. Net interest expense increased from $42.4 million for
the year ended September 30, 1999 to $47.8 million for the year ended September
30, 2000. The increase in net interest expense resulted from interest on the
drawings under the Company's Senior Bank Facilities to finance the Gregg
acquisition. In addition, the Senior Subordinated Notes used to finance the Cast
Alloys acquisition were outstanding for the entire year ended September 30,
2000.
Provision for Income Taxes. The provision for income taxes for the year
ended September 30, 2000 is higher than the amount computed by applying the
statutory rate of approximately 40% to loss before income taxes principally due
to the amortization of goodwill, which is not deductible for income tax
purposes.
Income from discontinued operations. Income from discontinued operations
includes the results of operations of Hartley, which was sold on October 2,
2000. The results of operations of Hartley are comparable for the years ended
September 30, 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has outstanding $282.0 million principal of 11 1/8% Senior
Subordinated Notes due 2007 (the "Senior Subordinated Notes"). In addition, the
Company has entered into a credit agreement (the "Senior Bank Facility" or
"Credit Agreement"), as amended, providing for term loans maturing in September
2005, an Acquisition Loan Facility maturing in June 2004 and a Revolving Credit
Facility of up to $50.0 million maturing in April 2002. At September 30, 2001,
there is $5.0 million outstanding on the Revolving Credit Facility, $19.9
million outstanding on the Acquisition Loan Facility and $123.5 million
outstanding under the term loans.
The Company's liquidity needs will arise primarily from debt service on the
above indebtedness, working capital needs and the funding of capital
expenditures. Borrowings under the Senior Bank Facilities bear interest at
variable interest rates. Both the Senior Bank Facility and the indentures
governing the Senior Subordinated Notes limit the Company's ability to incur
additional indebtedness. The covenants contained in the Senior Bank Facility
also, among other things, restrict the ability of the Company and its
subsidiaries to dispose of assets, incur guarantee obligations, prepay the
Senior Subordinated Notes or amend its 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, engage in certain transactions with
affiliates, and otherwise restrict corporate activities. These covenants also
require the Company to maintain leverage, net worth and interest coverage
ratios. The Company is in compliance with these ratios at September 30, 2001. To
remain in compliance at subsequent measurement dates, the Company must attain
profitable operations. If the Company does not meet the covenants at subsequent
measurement dates, the Credit Agreement will need to be refinanced or amended
for the Company to remain in compliance. Management intends to negotiate with
the bank to amend the Credit Agreement in fiscal 2002.
15
For the years ended September 30, 2001, 2000 and 1999, capital expenditures
were $16.9 million, $19.3 million, and $41.6 million, respectively. During the
years ended September 30, 2000 and 1999, the Company incurred additional capital
expenditures of $13.3 million and $1.1 million, respectively, which the Company
financed by entering into capital leases. The Company did not enter into any
capital leases during the year ended September 30, 2001. The decrease in capital
expenditures during the year ended September 30, 2001 was the result of tighter
spending controls placed on capital expenditures. The capital expenditures for
the year ended September 30, 1999 included significant expenditures for updating
of molding machines, melt and sand systems and purchase of an R&D facility at
certain subsidiaries. No similar projects were entered into in 2001 and 2000.
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 provided by operating activities for the years ended
September 30, 2001 and 2000 was $9.3 million and $29.5 million, respectively.
The decrease in net cash provided by operating activities for the year ended
September 30, 2001 was due to decreased operating income, which was caused by
lower sales volume and an inability to absorb overhead costs at the reduced
sales level, and a slowdown in accounts receivable collections. Net cash from
operating activities for the year ended September 30, 2000 was $29.5 million, a
decrease of $1.6 million from $31.1 million for the year ended September 30,
1999, primarily as a result of a decrease in operating income (before
amortization and restructuring charges), partially offset by improved control of
accounts receivable balances.
The Company believes that cash generated from operations and existing
revolving lines of credit under the Senior Bank Facilities will be sufficient to
meet its normal operating requirements, including working capital needs and
interest payments on the Company's outstanding indebtedness. In fiscal 2002, the
Company anticipates receiving an income tax refund from the carryback of net
operating losses and has also initiated specific inventory control programs to
reduce current inventory levels. These factors will assist the Company in
generating sufficient cash to meet its operating requirements in fiscal 2002.
Amounts under the $50 million Revolving Credit Facility may be used for
working capital and general corporate purposes, subject to certain limitations
under the Senior Bank Facilities. The Company believes that such resources,
together with the potential future use of debt or equity financing, will allow
the Company to pursue its strategic goals of growth and returning to acceptable
levels of profitability.
RECENT DEVELOPMENTS
The continued deterioration of the U.S. economy and other events subsequent
to the Company's fiscal year end, have had a significant negative impact on the
operations of one of the Company's subsidiaries. Recent customer actions at this
subsidiary could have a significant impact on the long-term value of this
subsidiary's assets. Management is currently considering various alternatives
related to the future operations of this subsidiary. These alternatives include
the potential sale, restructuring or the discontinuation of the operations of
the subsidiary. At the time the Company finalizes its plans with respect to this
subsidiary, there could be a significant reduction in future earnings of the
Company resulting from charges related to these alternatives.
Item 7A. 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,
hedging or trading purposes.
16
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 averaged 1% more during
the fiscal year ended September 30, 2002 than they did during fiscal 2001, the
Company's interest expense would increase, and income before income taxes would
decrease by approximately $1.7 million. This analysis does not consider the
effects of the reduced level of overall economic activity that may 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 such 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules are listed in Part IV Item 14 of
this Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
17
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information as of September 30, 2001, with
respect to the persons who are members of the Board of Directors and executive
officers.
Name Age Position
---- --- --------
William M. Barrett 54 President and Chief Executive Officer, Director
Gary W. LaChey 55 Corporate Vice President - Finance
Charles M. Kurtti 64 Executive Vice President
Phillip C. Zehner 59 Vice President, Secretary and Treasurer
Brenton F. Halsey 72 Director
David F. Thomas 51 Director
John D. Weber 37 Director
Mr. Barrett is President and Chief Executive Officer of the Company, a
position he has held since May 15, 2000. Mr. Barrett joined the Company in 1992
serving as General Sales Manager - Industrial Castings until May 1, 1997. Mr.
Barrett was Vice President and General Manager from May 1, 1997 to September 30,
1998 and President from October 1, 1998 to April 30, 2000. From 1985 to 1992,
Mr. Barrett was the Vice President - Sales for Harvard Industries Cast Products
Group. Mr. Barrett has also been a director of the Company since May, 2000.
Mr. LaChey is Corporate Vice President - Finance of the Company, a position
he has held since June 1, 2000. Mr. LaChey joined the Company in 1971, serving
in a variety of positions of increasing responsibility in the finance
department. Mr. LaChey was most recently Vice President - Finance, Treasurer and
Secretary of the Company.
Mr. Kurtti is Executive Vice President of the Company, a position he has
held since July 2000. Mr. Kurtti joined the Company in 1976 as a salesman. Mr.
Kurtti has served as Director of Marketing, Director of Purchasing -
Engineering, Director - Manufacturing and Engineering and Vice President -
Manufacturing and Engineering.
Mr. Zehner is Vice President, Secretary and Treasurer for the Company, a
position he has held since June 1, 2000. Mr. Zehner joined the Company in 1974,
serving in a variety of positions of increasing responsibility in the finance
department.
Mr. Halsey is a director of the Company, a position he has held since May
1, 1997. Mr. Halsey was the founding Chief Executive Officer and Chairman of the
James River Corporation from 1969 to 1990. He continued as Chairman until 1992
when he became Chairman Emeritus.
Mr. Thomas is a director of the Company, a position he has held since May
1, 1997. Mr. Thomas has been a Managing Director of Citicorp Venture Capital,
Ltd. since 1991. Mr. Thomas is a director of Lifestyles Furnishings
International Ltd., Galey & Lord, Inc., Anvil Knitwear, Inc. and a number of
private companies.
Mr. Weber is a director of the Company, a position he has held since May 1,
1997. Since 1994, Mr. Weber has been a Vice President at Citicorp Venture
Capital, Ltd. Previously, Mr. Weber worked at Putnam Investments from 1992
through 1994. Mr. Weber is a director of Anvil Knitwear, Inc. and a number of
private companies.
18
Directors of the Company do not receive compensation for their services as
directors. They are reimbursed for their out-of-pocket expenses in connection
with their travel to and attendance at meetings of the board of directors.
19
ITEM 11. Executive Compensation
The compensation of executive officers of the Company is determined by the
Board of Directors of the Company. The following table sets forth information
concerning compensation received by the officers of the Company for services
rendered in the fiscal years ended September 30, 2001, 2000 and 1999.
Long-Term Compensation
----------------------
Name and Principal Fiscal Annual Compensation Other Annual Options/ LTIP All Other
-------------------
Position Year Salary Bonus Compensation(1) SARs(#) Payouts Compensation
-------- ---- ------ ----- --------------- ------- ------- ------------
William M. Barrett 2001 275,000 -- 33,048 -- -- --
President and Chief 2000 275,000 99,418 31,866
Executive Officer 1999 240,629 160,738 30,271
Gary W. LaChey 2001 208,334 -- 33,680 -- -- --
Corporate Vice 2000 200,000 58,568 31,452
President - Finance 1999 175,000 106,120 29,909
Charles M. Kurtti 2001 176,174 22,362 34,321 -- -- --
Executive Vice 2000 167,500 48,319 32,743
President 1999 150,100 87,549 31,063
Phillip C. Zehner 2001 125,800 19,124 30,902 -- -- --
Vice President, 2000 109,200 26,312 29,021
Secretary and 1999 99,450 37,459 17,343
Treasurer
Joseph L. DeRita 2001 224,000 -- 19,182 -- -- --
President- 2000 218,000 92,887 18,915
Dalton Corporation 1999 178,500 85,795 14,766
(1) The named officers have participated in the Company's voluntary profit
sharing contributions or matching 401(k) contributions, and excess benefit
programs. The aggregate payments made by the Company pursuant to such
employee benefit programs are listed as Other Annual Compensation.
20
MANAGEMENT INCENTIVE PLAN
The Company provides performance-based compensation awards to executive
officers and key employees for achievement during each year as part of a bonus
plan. Such compensation awards may be a function of individual performance and
consolidated corporate results. The qualitative and quantitative criteria will
be determined from time to time by the Board of Directors of the Company.
MANAGEMENT EQUITY PARTICIPATION
In connection with the Merger, the then current Management Investors
acquired units representing membership interests in ACP Products, L.L.C., which
represent, in the aggregate, approximately a ten percent beneficial interest in
the Company (the "Purchased Interests"). In addition, in connection with certain
of the acquisitions, certain senior managers of certain of the subsidiaries
purchased common interests in ACP Products, L.L.C. The Management Investors and
certain other employees of the Company may be given the opportunity to purchase
additional Purchased Interests either in connection with future acquisitions or
otherwise.
Upon the termination of employment with the Company, an employee's
Purchased Interests will be subject to certain repurchase provisions exercisable
by ACP Products, L.L.C. or its designees. Any Purchased Interests issued in the
future are expected to be subject to rights and restrictions similar to those of
the Purchased Interests purchased in connection with the Merger. The price of
the future Purchased Interests will be established by ACP Products, L.L.C. in
consultation with the Board of Directors of the Company or a compensation
committee thereof.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company's authorized capital stock consists of (a) 11,000 shares of
common stock, par value $100 per share (the "Common Stock"), 1,000 shares of
which are issued and outstanding and owned by NFC Castings, Inc. and are pledged
to the lenders under the Senior Bank Facilities; (b) 3,000 shares of preferred
stock, par value $100 per share, none of which are issued or outstanding. NFC
Castings, Inc. is a wholly owned subsidiary of ACP Holdings which in turn is
wholly owned by ACP Products, L.L.C.
The Company's authorized preferred stock consists of 3,000 shares of
preferred stock, par value $100 per share. There are no issued or outstanding
shares of preferred stock.
The outstanding common units of ACP Products, L.L.C. consist of 95,000
Class A-3 Common Units (the "Class A Common Units"), 936,735 Class B-3 Common
Units (the "Class B Common Units") and 132,937 Class C-3 Common Units (the
"Class C Common Units"), and together with the Class A "Common Units" and the
Class B Common Units, the "Common Units"). Holders of Class A Common Units are
entitled to one vote per Class A Common Unit on all matters to be voted upon by
the holders of Class A Common Units. Holders of Class C Common Units are
entitled to a number of votes per Class C Common Unit based on the total number
of Class C Common Units outstanding, on all matters to be voted upon by the
holders of Class C Common Units. Holders of Class B Common Units have no right
to vote on any matters to be voted on by holders of Common Units. Holders of
Class B Common Units may elect at any time to convert any or all of such Units
into Class A Common Units, on a Common Unit-for-Common-Unit basis.
21
Set forth below is certain information regarding the beneficial ownership
as of September 30, 2001 of Class A Common Units and Class C Common Units,
respectively, by each person who beneficially owns 5.0% or more of the
outstanding Class A Common Units or Class C Common Units, each director and
Named Executive Officer and all directors and Named Executive Officers as a
group. Except as indicated below, the address for each of the persons listed
below is c/o Neenah Foundry Company, 2121 Brooks Avenue, Box 729, Neenah,
Wisconsin 54957.
- ------------------------------------------------------------------------------------------------------------------------
Number of Number of Percentage Percentage Percentage
Voting Class Voting Class of Voting of Voting of Voting
NAME AND ADDRESS OF BENEFICIAL OWNER A Common C Common Class A Class C Common
- ------------------------------------ Units Units Common Common Units
Units Units
- ------------------------------------------------------------------------------------------------------------------------
Citicorp Venture Capital, Ltd. (1) (2) 81,000 -- 85.26% -- 35.54%
399 Park Avenue
New York, New York 10043
- ------------------------------------------------------------------------------------------------------------------------
Metropolitan Life Insurance Company (1) 5,000 -- 5.26% -- 2.19%
One Madison Avenue
New York, New York 10010
- ------------------------------------------------------------------------------------------------------------------------
Executive Officers (1) -- 64,000 -- 48.10% 28.08%
- ------------------------------------------------------------------------------------------------------------------------
David F Thomas (1) (3) 84,167 -- 88.60% -- 36.93%
- ------------------------------------------------------------------------------------------------------------------------
John D. Weber (1) (3) 81,169 -- 85.44% -- 35.61%
- ------------------------------------------------------------------------------------------------------------------------
Directors and named executive officers as
a group 89,336 64,000 94.04% 48.10% 35.61%
- ------------------------------------------------------------------------------------------------------------------------
(1) Such persons disclaim beneficial ownership of the Common Stock.
(2) Citicorp Venture Capital, Ltd. and its affiliates (collectively,
"CVC") own 766,794 Class B Common Units representing 81.86% of
the Class B Common Units outstanding.
(3) Consists of the Class A Common Units held directly by Messrs.
Thomas and Weber and the 81,000 held by CVC, which may be deemed
to be beneficially owned by Messrs. Thomas and Weber. Messrs.
Thomas and Weber disclaim beneficial ownership of Units held by
CVC. Mr. Thomas is a managing director of CVC. Mr. Weber is a
vice president of CVC.
22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH ACP HOLDINGS
ACP Products, L.L.C. holds all of the issued and outstanding shares of
capital stock of ACP Holdings. ACP Holdings is the parent company of NFC
Castings, Inc., and thus ACP Holdings indirectly owns 100% of the Common Stock
of the Company. William M. Barrett, who serves as the President and Chief
Executive Officer of the Company, currently serves as President and Chief
Executive Officer of ACP Holdings.
SHAREHOLDER RELATIONSHIPS
The Management Investors and certain institutional investors, including
Citicorp Venture Capital, Ltd., are parties to the Fifth Amended and Restated
Limited Liability Agreement of ACP Products, L.L.C. (the "L.L.C. Agreement").
The L.L.C. Agreement contains certain provisions with respect to the beneficial
equity interests and corporate governance of the Company. The L.L.C. Agreement
provides that the Investor Group and the Management Investors, as the only
members of ACP Products, L.L.C. holding beneficial interests in the Company,
have the right to direct all actions taken in respect of NFC Castings, Inc. and
the Company, including, without limitation, appointing members of the Board of
Directors of the Company and of NFC Castings, Inc..
CONTRIBUTION OF ACP CAPITAL STOCK
On September 8, 1998, the capital stock of ACP was contributed to the
Company by ACP Holdings. In connection with the contribution, the Company
assumed $14.6 million of indebtedness of ACP, which was refinanced through
borrowings of Tranche A Loans. In connection with the contribution of the
capital stock of ACP to the Company, (i) NFC Castings, Inc. issued a $4.2
million senior subordinated note to CVC in exchange for a $4.2 million current
pay obligation of ACP to CVC and (ii) $6.7 million of outstanding subordinated
debt of ACP to ACP Holdings and NFC Castings, Inc. was contributed to the
capital of ACP.
REGISTRATION RIGHTS AGREEMENT
The Company entered into a registration rights agreement (the "Registration
Rights Agreement") with the Investor Group and the Management Investors.
Pursuant to the terms of the Registration Rights Agreement, certain holders of
the Company's Common Stock have the right to require the Company, at the
Company's sole cost and expense and subject to certain limitations, to register
under the Securities Act of 1933, as amended, or list on any recognized stock
exchange all or part of the Common Stock beneficially owned by such holders (the
"Registrable Securities"). All such holders will be entitled to participate in
all registrations by the Company or other holders, subject to certain
limitations. In connection with all such registrations, the Company agreed to
indemnify all beneficial owners of Registrable Securities against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
and other applicable state or foreign securities laws. Registrations pursuant to
the Registration Rights Agreement will be made, if applicable, on the
appropriate registration form and may be underwritten registrations.
23
EMPLOYMENT AGREEMENTS
The Company, ACP, ACP Holdings and ACP Products, L.L.C. entered into an
executive employment and consulting agreement with James K. Hildebrand dated as
of September 15, 1998. Such agreement provided for (I) an initial term of
employment until September 30, 2001 after which, barring termination by the
Company under certain circumstances (including gross negligence, willful
misconduct and commission of certain crimes), Mr. Hildebrand will serve as a
consultant to the Company for a period of two years with automatic renewal,
subject to earlier termination notice by either party, for successive one year
periods up to an additional three years; (ii) a minimum base salary of $500,000
and a bonus to be calculated based on achieved EBITDA performance so long as Mr.
Hildebrand is employed by the Company; (iii) severance benefits; (iv)
non-competition, non-solicitation and confidentiality agreements; (v) an option
to purchase certain common membership units of ACP Products L.L.C.; and (vi)
other terms and conditions of Mr. Hildebrand's employment including health
benefits. Mr. Hildebrand resigned his position in May, 2000. At that time, the
Company recorded severance benefits payable to Mr. Hildebrand under the terms of
the above agreement.
In connection with the Company's acquisition of all of the capital stock of
Dalton, Dalton entered into an employment agreement with K.L. Davidson dated as
of September 8, 1998 to serve as President of Dalton. Such agreement provides
for (I) an initial one year term which shall be renewed automatically, subject
to earlier termination notice by either party, for successive one year terms
until Mr. Davidson attains the age of 65; (ii) a minimum base salary and bonus
following the end of each fiscal year so long as Dalton employs Mr. Davidson;
(iii) severance benefits; (iv) non-solicitation, non-compete and confidentiality
agreements; and (v) other terms and conditions of Mr. Davidson's employment. On
June 30, 1999, Mr. Davidson elected to retire as President of Dalton under the
terms of the above employment agreement.
24
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Page
----
(a) (1) Consolidated Financial Statements of Neenah Foundry Company
Report of Ernst & Young LLP, Independent Auditors 32
Consolidated Balance Sheets 33
Consolidated Statements of Operations 35
Consolidated Statements of Changes in Stockholder's Equity 36
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 39
(2) Financial Statements Schedules
Report of Ernst & Young LLP, Independent Auditors 68
Schedule II - Valuation and Qualifying Accounts of Neenah Foundry Company 69
Schedules I, III, IV, and V are omitted since they are not applicable or not
required under the rules of Regulation S-X.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 2001.
(c) Exhibits
See Exhibit Index.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of Neenah,
State of Wisconsin, on December 21, 2001.
NEENAH FOUNDRY COMPANY
(Registrant)
/s/ Gary W. LaChey
--------------------------------------
Gary W. LaChey
Corp. Vice President - Finance
(Principal Financial and Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on December 21, 2001, by the following persons on behalf
of the registrant and in the capacities indicated.
/s/ William M. Barrett /s/ Brenton F. Halsey
- -------------------------------------- --------------------------------------
William M. Barrett Brenton F. Halsey
President and Director
Chief Executive Officer, Director
(Principal Executive Officer)
/s/ David F. Thomas /s/ Gary W. LaChey
- -------------------------------------- --------------------------------------
David F. Thomas Gary W. LaChey
Director Corp. Vice President - Finance
(Principal Financial and Principal
Accounting Officer)
/s/ John D. Weber
- --------------------------------------
John D. Weber
Director
26
EXHIBIT INDEX
EXHIBITS
2.1 Agreement and Plan of Reorganization, dated November 20, 1996, by and
among NFC Castings, Inc., NC Merger Company and Neenah Corporation. **
2.2 First Amendment to Agreement and Plan of Reorganization, dated as of
January 13, 1997, by and among NFC Castings, Inc., NC Merger Company
and Neenah Corporation. **
2.3 Second Amendment to Agreement and Plan of Reorganization, dated as of
February 21, 1997, by and among NFC Castings, Inc., NC Merger Company
and Neenah Corporation. **
2.4 Third Amendment to Agreement and Plan of Reorganization, dated as of
April 3, 1997, by and among NFC Castings, Inc., NC Merger Company and
Neenah Corporation. **
2.5 Merger Agreement, made as of July 1,1997, by and between Neenah
Corporation and Neenah Foundry Company. **
2.6 Stock Purchase Agreement for the acquisition of Deeter Foundry, Inc.
dated as of March 26, 1998 by and among Neenah Foundry Company and the
Selling Shareholders of Deeter Foundry, Inc. (incorporated by reference
to the Company's Form 10-Q for the period ended March 31, 1998 filed on
May 14, 1998.)
2.7 Stock Purchase Agreement for the acquisition of Mercer dated as of
April 3, 1998 by and among Neenah Foundry Company, Mercer Forge
Corporation and the Selling Shareholders of Mercer (incorporated by
reference to the Company's Form 8-K filed on April 14, 1998.)
2.8 Stock Purchase Agreement for the acquisition of Dalton dated as of
August 7, 1998 by and among Neenah Foundry Company, Dalton Corporation
and the Dalton Corporation Employee Stock Ownership Plan and Trust
(incorporated by reference to the Company's Form 8-K filed on September
21, 1998.)
2.9 Stock Purchase Agreement dated as of December 3, 1998 among Niemin
Porter & Co. d/b/a Cast Alloys, Inc., the Sellers as defined therein
and Neenah Foundry Company. ****
2.10 First Amendment to the Stock Purchase Agreement dated December 30, 1998
among Niemin Porter & Co. d/b/a Cast Alloys, Inc., the Sellers as
defined therein and Neenah Foundry Company. ****
3.1 Restated Articles of Incorporation of Neenah Foundry Company. **
3.2 By-laws of Neenah Foundry Company. **
3.3 (Intentionally omitted.)
3.4 (Intentionally omitted.)
3.5 Restated Articles of Incorporation of Hartley Controls Corporation. **
3.6 By-laws of Hartley Controls Corporation. **
3.7 Restated Articles of Incorporation of Neenah Transport, Inc.**
3.8 By-laws of Neenah Transport, Inc. **
4.1 Indenture dated as of April 30, 1997 among NC Merger Company and United
States Trust Company of New York. **
4.2 Purchase Agreement dated as of April 23, 1997 among NC Merger Company,
Chase Securities Inc. and Morgan Stanley & Co. Incorporated. **
4.3 Exchange and Registration Rights Agreement dated as of April 30, 1997
among Neenah Corporation, Neenah Foundry Company, Hartley Controls
Corporation and Neenah Transport, Inc. and Chase Securities, Inc.**
4.4 First Supplemental Indenture, dated as of April 30, 1997 among Neenah
Corporation, Neenah Foundry Company, Neenah Transport, Inc. and Hartley
Controls Corporation and United States Trust Company of New York. **
4.5 Letter Agreement, dated as of April 30, 1997 among Neenah Corporation,
Neenah Foundry Company, Hartley Controls Corporation and Neenah
Transport, Inc. and Chase Securities Inc. and Morgan Stanley & Co.
Incorporated. **
4.6 Form of Global Note relating to the Indenture dated as of April 23,
1997. **
27
4.7 Indenture dated as of July 1, 1997 among Neenah Corporation, Neenah
Foundry Company, Neenah Transport, Inc., Hartley Controls Corporation
and United States Trust Company of New York. **
4.8 Purchase Agreement dated as of June 26, 1997 among Neenah Corporation,
Neenah Foundry Company, Hartley Controls Corporation, Neenah Transport,
Inc. and Chase Securities Inc. **
4.9 Exchange and Registration Rights Agreement dated as of July 1, 1997 by
and between Neenah Corporation, Neenah Foundry Company, Hartley
Controls Corporation, Neenah Transport, Inc. and Chase Securities, Inc.
**
4.10 Form of Global Note related to the Indenture dated as of July 1, 1997.
**
4.11 Indenture dated as of November 24, 1998 among Neenah Foundry Company,
Neenah Transport, Inc., Hartley Controls Corporation, the Guarantors
and United States Trust Company of New York. ****
10.1 Master Lease Agreement between Neenah Foundry Company and Bank One
Leasing Corporation dated December 14, 1992. **
10.2 Agreement between Neenah Foundry Company and Rockwell International
Corporation effective April 1, 1995. **
10.3 Letter Agreement between Neenah Foundry Company and Eaton Corporation
dated April 4, 1996.**
10.4 (Intentionally omitted).
10.5 1999-2001 Collective Bargaining Agreement between Neenah Foundry
Company and Local 121B Glass, Molders, Pottery, Plastics and Allied
Workers International Union AFL-CIO-CLC (incorporated by reference to
the Company's Form 10-K filed on December 28, 1999).
10.6 (Intentionally omitted).
10.7 Credit Agreement dated as of April 30, 1997 as Amended and Restated as
of September 12, 1997, as of April 3, 1998, and as of September 8, 1998
by and among Neenah Foundry Company, NFC Castings, Inc., the Chase
Manhattan Bank as Administrative Agent, Chase Securities, Inc. as
Arranger and the other Lenders from time to time party thereto
(incorporated by reference to the Company's Form 8-K filed on September
21, 1998.)
10.8 Employment Agreement dated September 9, 1994 between the Neenah
Corporation, Neenah Foundry Company, Harley Controls Corporation,
Neenah Transport, Inc. and James P. Keating, Jr.**
10.9 Consulting Agreement dated September 9, 1994 between the Neenah Foundry
Company and the Guarantors and James P. Keating, Jr. **
10.10 First Amendment to Employment Agreement, dated September 9, 1994,
between Neenah Foundry Company, Neenah Corporation, Hartley Controls
Corporation and James P. Keating, Jr. **
10.11 Pledge Agreement dated as of April 30, 1997, among NC Merger Company, a
Wisconsin Corporation, NFC Castings, Inc., a Delaware Corporation. **
10.12 Subsidiary Guarantee Agreement dated as of April 30, 1997, among each
of the subsidiaries listed of NC Merger Company, a Wisconsin
corporation, and The Chase Manhattan Bank, a New York banking
corporation, as collateral agent for the secured parties. **
10.13 Parent Guarantee Agreement dated as of April 30, 1997, between NFC
Castings, Inc., a Delaware corporation and The Chase Manhattan Bank, a
New York banking corporation, as collateral agent for the secured
parties. **
10.14 Security Agreement dated as of April 30, 1997, among NC Merger Company,
a Wisconsin corporation, each subsidiary of the borrower and The Chase
Manhattan Bank, a New York banking corporation, as collateral agent for
the secured parties. **
10.15 Form of Mortgage. **
28
10.16 Amendment No. 1, Consent and Waiver, dated as of November 18, 1998, to
the Credit Agreement dated as of April 30, 1997 as Amended and Restated
as of September 12, 1997, as of April 3, 1998, and as of September 8,
1998 by and among Neenah Foundry Company, NFC Castings, Inc., the
Lenders from time to time party thereto, and the Chase Manhattan Bank.
***
10.17 Cash Collateral Account Agreement dated as of November 24, 1998,
between Neenah Foundry Company and the Chase Manhattan Bank. ***
10.18 Executive Employment and Consulting Agreement dated September 15, 1998
by and among Neenah Foundry Co., Advanced Cast Products, Inc., ACP
Holding Co., ACP Products, LLC and James K. Hildebrand.***
10.19 Dalton Corporation, KLDavidson Employment Agreement dated September 8,
1998. ***
10.20 Purchase Agreement dated November 19, 1998 among Neenah Foundry
Company. Neenah Transport, Inc., Hartley Controls Corporation, the
Guarantors and the Initial Purchasers. ****
10.21 Exchange and Registration Rights Agreement dated November 24, 1998
among Neenah Foundry Company, Neenah Transport, Inc., Hartley Controls
Corporation, the Guarantors and the Initial Purchasers. ****
10.22 Stock Purchase Agreement dated October 2, 2000 by and between Neenah
Foundry Company (as seller) and Simpson Technologies Corp. (as buyer)
(incorporated by reference to the Company's Form 10-Q for the period
ended December 31, 2000 filed on February 9, 2001).
10.23 Amendment No. 2 dated as of March 16, 2001, to the Credit Agreement
dated as of April 30, 1997 as Amended and Restated as of September 12,
1997, as of April 3, 1998, and as of September 8, 1998 by and among
Neenah Foundry Company, NFC Castings, Inc., the Lenders from time to
time party thereto, and the Chase Manhattan Bank (incorporated by
reference to the Company's Form 10-Q for the period ended March 31,
2001 filed on May 9, 2001).
21.1 Subsidiaries of the Registrant. *
- ----
* Filed herewith.
** Incorporated by reference to the Company's Form S-4 (Registration No.
333-28751) which became effective August 29, 1997.
*** Incorporated by reference to the Company's Form 10-K (Registration No.
332-28751) which was filed December 23, 1998.
**** Incorporated by reference to the Company's Form S-4 (Registration No.
333-72455) which became effective May 13, 1999.
29
CONSOLIDATED FINANCIAL STATEMENTS
Neenah Foundry Company
Years ended September 30, 2001, 2000 and 1999
30
Neenah Foundry Company
Consolidated Financial Statements
Years ended September 30, 2001, 2000 and 1999
CONTENTS
Report of Independent Auditors...........................................................................1
Consolidated Financial Statements
Consolidated Balance Sheets..............................................................................2
Consolidated Statements of Operations....................................................................4
Consolidated Statements of Changes in Stockholder's Equity...............................................5
Consolidated Statements of Cash Flows....................................................................6
Notes to Consolidated Financial Statements...............................................................8
31
Report of Independent Auditors
Board of Directors
Neenah Foundry Company
We have audited the accompanying consolidated balance sheets of Neenah Foundry
Company (the Company) as of September 30, 2001 and 2000, and the related
consolidated statements of operations, changes in stockholder's equity and cash
flows for each of the three years in the period ended September 30, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at September 30, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
November 7, 2001
32
Neenah Foundry Company
Consolidated Balance Sheets
(In Thousands, Except Share and per Share Amounts)
SEPTEMBER 30
2001 2000
----------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,346 $ 19,478
Accounts receivable, less allowance for doubtful
accounts of $1,437 in 2001 and $1,001 in 2000 69,845 72,873
Inventories 71,695 65,119
Refundable income taxes 2,148 167
Deferred income taxes 3,069 2,748
Other current assets 5,852 6,131
----------------------------------
Total current assets 156,955 166,516
Property, plant and equipment:
Land 6,226 6,456
Buildings and improvements 31,346 31,992
Machinery and equipment 236,852 224,252
Patterns 28,034 27,458
Construction in progress 6,240 5,404
----------------------------------
308,698 295,562
Less accumulated depreciation 94,865 67,323
----------------------------------
213,833 228,239
Deferred financing costs, net of accumulated amortization
of $6,327 in 2001 and $4,484 in 2000 7,811 8,748
Identifiable intangible assets, net of accumulated
amortization of $22,920 in 2001 and $16,834 in 2000 55,932 62,018
Goodwill, net of accumulated amortization of $22,619 in
2001 and $17,067 in 2000 186,005 191,557
Other assets 5,907 9,140
----------------------------------
255,655 271,463
----------------------------------
$626,443 $666,218
==================================
33
Neenah Foundry Company
Consolidated Balance Sheets
(In Thousands, Except Share and per Share Amounts)
SEPTEMBER 30
2001 2000
---------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 30,568 $ 31,172
Accrued wages and employee benefits 13,250 16,170
Accrued interest 13,567 13,881
Other accrued liabilities 4,701 5,782
Current portion of long-term debt 20,424 11,280
Current portion of capital lease obligations 2,305 2,151
---------------------------------
Total current liabilities 84,815 80,436
Long-term debt 413,653 438,327
Capital lease obligations 7,845 10,143
Deferred income taxes 63,719 66,046
Postretirement benefit obligations 6,345 6,118
Other liabilities 8,127 6,630
---------------------------------
Total liabilities 584,504 607,700
Commitments and contingencies
Stockholder's equity:
Preferred stock, par value $100 per share; 3,000 shares
authorized; no shares issued or outstanding - -
Common stock, Class A (voting), par value $100 per
share; 1,000 shares authorized, issued and outstanding 100 100
Common stock, Class B (nonvoting), par value $100 per
share; 10,000 shares authorized, no shares issued or
outstanding - -
Capital in excess of par value 51,317 51,317
Retained earnings (accumulated deficit) (7,860) 7,190
Accumulated other comprehensive loss (1,618) (89)
---------------------------------
Total stockholder's equity 41,939 58,518
---------------------------------
$ 626,443 $ 666,218
=================================
Neenah Foundry Company
Consolidated Statements of Operations
(In Thousands)
YEAR ENDED SEPTEMBER 30
2001 2000 1999
---------------------------------------------------------------
Net sales $ 470,037 $ 549,656 $ 530,354
Cost of sales 402,364 454,813 434,722
---------------------------------------------------------------
Gross profit 67,673 94,843 95,632
Selling, general and administrative
expenses 32,402 39,176 34,061
Amortization expense 11,638 11,641 11,696
Restructuring charge - - 6,713
(Gain) loss on disposal of
equipment (337) 104 789
---------------------------------------------------------------
Operating income 23,970 43,922 42,373
Other income (expense):
Interest expense (48,336) (48,760) (43,803)
Interest income 445 978 1,402
---------------------------------------------------------------
Loss from continuing operations
before income taxes (23,921) (3,860) (28)
Provision (credit) for income taxes (6,467) 1,448 1,982
---------------------------------------------------------------
Loss from continuing operations (17,454) (5,308) (2,010)
Discontinued operations:
Income from discontinued
operations net of income taxes
of $152 in 2000 and $82
in 1999 - 165 118
Gain on sale of discontinued
operations, net of income taxes
of $1,603 2,404 - -
---------------------------------------------------------------
Net loss $ (15,050) $ (5,143) $ (1,892)
===============================================================
See accompanying notes. 35
Neenah Foundry Company
Consolidated Statements of Changes in Stockholder's Equity
(In Thousands)
Common Stock
--------------------------
Preferred Capital in
Stock Class A Class B Excess of Par
Value
------------ ------------ ------------- ---------------
Balance at September 30, 1998 $ - $100 $ - $55,167
Return of fiscal 1998 capital contribution - - - (3,850)
Components of comprehensive loss:
Net loss - - - -
Pension liability adjustment, net of tax
effect of $1,048 - - - -
Total comprehensive loss
------------ ------------ ------------- ----------------
Balance at September 30, 1999 - 100 - 51,317
Components of comprehensive loss:
Net loss - - - -
Pension liability adjustment, net of tax
effect of $60 - - - -
-
Total comprehensive loss
------------ ------------ ------------- ----------------
Balance at September 30, 2000 - 100 - 51,317
Components of comprehensive income:
Net loss - - - -
Pension liability adjustment, net of tax
effect of $1,018 - - - -
-
Total comprehensive loss
------------ ------------ ------------- ----------------
Balance at September 30, 2001 $ - $100 $ - $51,317
============ ============ ============= ================
Retained Accumulated
Earnings Other
(Accumulated Comprehensive
Deficit) Loss Total
------------- ------------- --------------
Balance at September 30, 1998 $ 14,225 $(1,570) $ 67,922
Return of fiscal 1998 capital contribution - - (3,850)
Components of comprehensive loss:
Net loss (1,892) - (1,892)
Pension liability adjustment, net of tax
effect of $1,048 - 1,570 1,570
--------------
Total comprehensive loss (322)
-------------- ------------- --------------
Balance at September 30, 1999 12,333 - 63,750
Components of comprehensive loss:
Net loss (5,143) - (5,143)
Pension liability adjustment, net of tax
effect of $60 - (89) (89)
--------------
Total comprehensive loss (5,232)
-------------- ------------- --------------
Balance at September 30, 2000 7,190 (89) 58,518
Components of comprehensive income:
Net loss (15,050) - (15,050)
Pension liability adjustment, net of tax
effect of $1,018 - (1,529) (1,529)
--------------
Total comprehensive loss (16,579)
-------------- ------------- --------------
Balance at September 30, 2001 $ (7,860) $(1,618) $ 41,939
============== ============= ==============
See accompanying notes. 36
Neenah Foundry Company
Consolidated Statements of Cash Flows
(In Thousands)
YEAR ENDED SEPTEMBER 30
2001 2000 1999
--------------------------------------------------
OPERATING ACTIVITIES
Net loss $(15,050) $ (5,143) $ (1,892)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for obsolete inventories 248 2,500 -
Provision for impairment of assets - - 6,030
Depreciation 29,636 28,112 23,990
Amortization of identifiable intangible assets
and goodwill 11,638 11,641 11,696
Amortization of deferred financing costs and
premium on notes 1,222 1,082 1,011
Gain on sale of discontinued operations (4,007) - -
(Gain) loss on disposal of property, plant and
equipment (337) 104 789
Deferred income taxes (1,630) (358) (8,248)
Changes in operating assets and liabilities:
Accounts receivable 2,145 8,558 (2,977)
Inventories (7,405) (7,759) (1,028)
Other current assets 45 (378) 684
Accounts payable (474) (3,842) (5,217)
Accrued liabilities (3,911) (3,924) 4,452
Income taxes (2,152) (1,183) 1,504
Postretirement benefit obligations 379 477 421
Other liabilities (1,060) (405) (110)
--------------------------------------------------
Net cash provided by operating activities 9,287 29,482 31,105
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired - (29,502) (40,824)
Proceeds from disposition of business, net of fees 5,190 - -
Purchase of property, plant and equipment (16,882) (19,268) (41,643)
Proceeds from sale of property, plant and equipment 2,859 2,381 -
Other 2,373 (936) (780)
--------------------------------------------------
Net cash used in investing activities (6,460) (47,325) (83,247)
37
Neenah Foundry Company
Consolidated Statements of Cash Flows (continued)
(In Thousands)
YEAR ENDED SEPTEMBER 30
2001 2000 1999
-------------------------------------------------
FINANCING ACTIVITIES
Proceeds from long-term debt $ 5,000 $29,750 $ 90,405
Payments on long-term debt and capital lease
obligations (22,053) (9,797) (33,607)
Return of capital contribution - - (3,850)
Debt issuance costs (906) - (3,236)
-------------------------------------------------
Net cash provided by (used in) financing activities (17,959) 19,953 49,712
-------------------------------------------------
Increase (decrease) in cash and cash equivalents (15,132) 2,110 (2,430)
Cash and cash equivalents at beginning of period 19,478 17,368 19,798
-------------------------------------------------
Cash and cash equivalents at end of period $ 4,346 $19,478 $ 17,368
=================================================
Supplemental disclosures of cash flow information:
Interest paid $ 47,428 $47,475 $ 38,961
Income taxes paid (refunded) (1,253) 3,141 8,656
38
Neenah Foundry Company
Notes to Consolidated Financial Statements
September 30, 2001
(In Thousands)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Neenah Foundry Company (Neenah), together with its subsidiaries (the Company)
manufactures gray and ductile iron castings for sale to industrial and municipal
customers. Industrial castings are custom-engineered and are produced for
customers in several industries, including the medium and heavy-duty truck
components, farm equipment, heating, ventilation and air-conditioning
industries. Municipal castings include manhole covers and frames, storm sewer
frames and grates, tree grates and specialty castings for a variety of
applications and are sold principally to state and local government entities,
utilities and contractors. The Company's sales generally are unsecured.
Neenah has the following subsidiaries, all of which are wholly owned: Deeter
Foundry, Inc. (Deeter); Mercer Forge Corporation and subsidiaries (Mercer);
Dalton Corporation and subsidiaries (Dalton); Advanced Cast Products, Inc. and
subsidiaries (ACP); Cast Alloys, Inc. and subsidiaries (Cast Alloys); Gregg
Industries, Inc. (Gregg); and Neenah Transport, Inc. (Transport). Deeter
manufactures gray iron castings for the municipal market and special application
construction castings. Mercer manufactures forged components for use in
transportation, railroad, mining and heavy industrial applications and
microalloy forgings for use by original equipment manufacturers and industrial
end users. Dalton manufactures gray iron castings for refrigeration systems, air
conditioners, heavy equipment, engines, gear boxes, stationary transmissions,
heavy duty truck transmissions and other automotive parts. ACP manufactures
ductile and malleable iron castings for use in various industrial segments,
including heavy truck, construction equipment, railroad, mining and automotive.
Cast Alloys manufactures investment-cast titanium and stainless steel golf club
heads for the golf industry. Gregg manufacturers gray and ductile iron castings
for industrial and commercial use. Transport is a common and contract carrier
licensed to operate in the continental United States. The majority of
Transport's revenues are derived from transport services provided to the Company
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Neenah and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation
39
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The cost (which
approximated fair value) of cash equivalents, consisting entirely of Euro-Dollar
investments, totaled $15,000 at September 30, 2000. There were no cash
equivalents at September 30, 2001.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of inventories
for Neenah and Dalton is determined on the last-in, first-out (LIFO) method for
substantially all inventories except supplies, for which cost is determined on
the first-in, first-out (FIFO) method. The cost of inventories for Deeter,
Mercer, Cast Alloys, ACP and Gregg is determined on the FIFO method. LIFO
inventories comprise 40% and 43% of total inventories at September 30, 2001 and
2000, respectively. If the FIFO method of inventory valuation had been used by
all companies, inventories would have been approximately $1,041 and $549 higher
than reported at September 30, 2001 and 2000, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation for financial
reporting purposes is provided over the estimated useful lives of the respective
assets, using the straight-line method.
DEFERRED FINANCING COSTS
Costs incurred to obtain long-term financing are amortized using the effective
interest method over the term of the related debt.
40
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IDENTIFIABLE INTANGIBLE ASSETS
Identifiable intangible assets are amortized on a straight-line basis over the
estimated useful lives of 5 to 40 years.
GOODWILL
Goodwill is amortized on a straight-line basis over 15 to 40 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Property, plant and equipment, identifiable intangible assets and goodwill are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of the expected
undiscounted cash flows is less than the carrying value of the related asset or
group of assets, a loss is recognized for the difference between the fair value
and carrying value of the asset or group of assets. Such analyses necessarily
involve significant judgment.
REVENUE RECOGNITION
Revenues are recognized upon shipment of product, which generally corresponds
with the transfer of title.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of sales.
ADVERTISING COSTS
Advertising costs are expensed as incurred and amounted to $615, $636 and $854
for the years ended September 30, 2001, 2000 and 1999.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the
financial reporting and income tax basis of the Company's assets and liabilities
and are measured using currently enacted tax rates and laws.
41
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which are held for
trading purposes. The following presents the carrying amounts and estimated fair
values of such instruments:
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
---------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------
Cash and cash equivalents $ 4,346 $ 4,346 $ 19,478 $ 19,478
Accounts receivable 69,845 69,845 72,873 72,873
Accounts payable 30,568 30,568 31,172 31,172
Long-term debt 434,077 308,586 449,607 380,656
Capital lease obligations 10,150 10,150 12,294 12,294
The fair value of the Senior Subordinated Notes is based on quoted market
prices.
PENDING ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards No. 141, "Business Combinations," effective
for business combinations after June 30, 2001, and No. 142, "Goodwill and Other
Intangible Assets," (SFAS 142), effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests. Other intangible assets will continue to be amortized over
their useful lives.
The Company is currently evaluating when it will adopt SFAS 142. Application of
the nonamortization provisions of the Statement is expected to result in a
reduction in net loss of $7,825 per year. The Company will perform the first of
the required impairment tests of goodwill and indefinite lived intangible assets
as of the date of adoption and has not yet determined what the effect of these
tests will be on the Company's financial position and results of operations.
42
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and the accounting and reporting provisions of Accounting Principles Board (APB)
Opinion No. 30, "Reporting the Results of Operations," for a disposal of a
segment of a business. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The Company expects to adopt SFAS 144 as of October 1, 2001,
and it does not expect that the adoption of the Statement will have a
significant impact on the Company's financial position and results of
operations.
2. ACQUISITIONS AND DISPOSITION
On December 31, 1998, Neenah purchased Cast Alloys, a manufacturer of
investment-cast titanium and stainless steel golf club heads, for $40,824 in
cash (including direct costs of $1,206, and net of $488 of acquired cash). The
acquisition of Cast Alloys was financed by the issuance of the Company's 11 1/8%
Series F Senior Subordinated Notes.
On November 30, 1999, the Company purchased Gregg, a manufacturer of gray and
ductile iron castings, for $23,002 (including direct costs of $485 and net of
$403 of acquired cash). Additional purchase consideration of $6,500 was paid in
April 2000 based on Gregg's operating results for the calendar year ended
December 31, 1999. The acquisition of Gregg was financed through borrowings
under the Company's Acquisition Loan Facility.
The acquisitions of Cast Alloys and Gregg 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 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 Cast Alloys and Gregg are
included in the consolidated statements of operations since the date of their
respective acquisition.
43
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
2. ACQUISITIONS AND DISPOSITION (CONTINUED)
Pro forma unaudited consolidated operating results of the Company for the year
ended September 30, 2000, assuming Gregg had been acquired as of October 1,
1999, are summarized below:
Net sales $555,434
Net loss (5,266)
These pro forma results have been prepared for informational purposes only and
include certain adjustments to depreciation expense related to acquired plant
and equipment, amortization expense arising from goodwill and identifiable
intangible assets, interest expense on debt incurred to finance the acquisition
and the estimated related income tax effects of all such adjustments. The pro
forma results do not purport to be indicative of the results of operations,
which would have resulted had the business combinations occurred on October 1,
1999, or of the future results of operations of the consolidated entities.
On October 2, 2000, the Company sold all of the issued and outstanding shares of
common stock of Hartley for cash of $5,190, net of fees of $129. The disposition
of Hartley resulted in a gain of $2,404, net of income taxes of $1,603. Proceeds
from the sale were used to reduce outstanding debt. Hartley designs and
manufactures customized sand control systems. In accordance with the provisions
of APB Opinion No. 30, the results of operations of Hartley have been reported
separately as discontinued operations in the consolidated statements of
operations. Revenues for Hartley for the years ended September 30, 2000 and
1999, were $5,514 and $5,619, respectively.
3. INVENTORIES
Inventories consist of the following as of September 30:
2001 2000
-----------------------------------
Raw materials $ 9,519 $10,333
Work in process and finished goods 50,210 43,946
Supplies 11,966 10,840
-----------------------------------
$71,695 $65,119
===================================
44
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
4. IDENTIFIABLE INTANGIBLE ASSETS
Identifiable intangible assets consist of the following as of September 30:
2001 2000
-----------------------------------
Customer lists $35,041 $35,041
Trade names 27,053 27,053
Assembled workforce 10,342 10,342
Facilities in place 2,982 2,982
Other 3,434 3,434
-----------------------------------
78,852 78,852
Less accumulated amortization 22,920 16,834
-----------------------------------
$55,932 $62,018
===================================
5. LONG-TERM DEBT
Long-term debt consists of the following as of September 30:
2001 2000
-----------------------------
11 1/8% Series B Senior Subordinated Notes $150,000 $150,000
11 1/8% Series D Senior Subordinated Notes, including unamortized premium of
$1,469 in 2001 and $1,732 in 2000 46,469 46,732
11 1/8% Series F Senior Subordinated Notes, including unamortized premium of
$2,000 in 2001 and $2,358 in 2000 89,000 89,358
Term Loan Facilities 123,542 135,747
Acquisition Loan Facility 19,891 27,292
Revolving Credit Facility 5,000 -
Other 175 478
-----------------------------
434,077 449,607
Less current portion 20,424 11,280
-----------------------------
$413,653 $438,327
=============================
45
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
5. LONG-TERM DEBT (CONTINUED)
The Series B, Series D and Series F Senior Subordinated Notes (collectively, the
Notes) are unsecured and mature on May 1, 2007. Interest is payable semiannually
on May 1 and November 1. The Notes are fully, unconditionally, jointly and
severally guaranteed by all subsidiaries. The Notes are subordinated to all
existing and future senior indebtedness of the Company but rank equally in right
of payment with any future senior subordinated indebtedness of the Company. The
Notes contain covenants which restrict the Company from incurring additional
indebtedness and prohibit dividend payments, stock redemptions and certain other
transactions.
The Company has a Credit Agreement, as amended, with a bank, which provides Term
Loan Facilities, an Acquisition Loan Facility and a Revolving Credit Facility.
Covenants in the Credit Agreement restrict the payment of dividends, capital
expenditures and certain other transactions and require the Company to maintain
leverage, net worth and interest coverage ratios. The Company is in compliance
with these covenants at September 30, 2001. To remain in compliance at
subsequent measurement dates, the Company must attain profitable operations. If
the Company does not meet the covenants at subsequent measurement dates, the
Credit Agreement will need to be refinanced or amended in order for the Company
to remain in compliance. Management intends to negotiate with the bank to amend
the Credit Agreement in fiscal 2002.
The Term Loan Facilities consist of two tranches of term loans. The Tranche A
term loans outstanding at September 30, 2001 and 2000, total $9,057 and $12,965,
respectively, and mature on September 30, 2003. The Tranche B term loans
outstanding at September 30, 2001 and 2000, total $114,485 and $122,782,
respectively, and mature on September 30, 2005. Installments of the Tranche A
term loans are due in aggregate principal amounts of $1,000 per quarter until
September 30, 2002, $1,250 per quarter from December 31, 2002 through June 30,
2003, and the remaining principal due September 30, 2003. Installments on
$48,833 of the Tranche B term loans are due in aggregate principal amounts of
$250 per quarter until September 30, 2003, $6,250 per quarter from December 31,
2003 through June 30, 2005, and the remaining principal due September 30, 2005.
Installments on $65,652 of the Tranche B term loans are due in aggregate
principal amounts of $8,750 per quarter commencing on December 31, 2003, with
the remaining principal due September 30, 2005. Interest on the Tranche A and
Tranche B term loans is at LIBOR (2.532% at September 30, 2001) plus 3.50% and
3.75%, respectively.
Borrowings under the Acquisition Loan Facility are due in quarterly principal
installments of $1,820 through June 30, 2004, with interest at LIBOR plus 3.50%.
46
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
5. LONG-TERM DEBT (CONTINUED)
The Company is entitled to draw amounts under the Revolving Credit Facility up
to $50 million for general corporate purposes, including permitted acquisitions,
as defined. The Revolving Credit Facility includes a $15 million sublimit for
letters of credit and matures on April 30, 2002.
Scheduled maturities of long-term debt during fiscal years subsequent to
September 30, 2001, are as follows:
2002 $ 20,424
2003 12,417
2004 63,532
2005 52,235
2006 -
Thereafter 282,000
----------------------
$430,608
======================
6. COMMITMENTS AND CONTINGENCIES
The Company leases certain plants, warehouse space, machinery and equipment,
office equipment and vehicles under operating leases. Rent expense under these
operating leases for the years ended September 30, 2001, 2000 and 1999 totaled
$3,509, $3,940 and $2,595, respectively.
The Company did not enter into any capital leases during the year ended
September 30, 2001. During the years ended September 30, 2000 and 1999, the
Company financed purchases of property, plant and equipment totaling $13,348 and
$1,143, respectively, by entering into capital leases.
Property, plant and equipment under leases accounted for as capital leases as of
September 30 are as follows:
2001 2000
-----------------------------------
Machinery and equipment $14,308 $14,308
Less accumulated depreciation 2,419 1,729
-----------------------------------
$11,889 $12,579
===================================
47
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum rental payments due under operating and capital leases for fiscal years
subsequent to September 30, 2001, are as follows:
Operating Capital
Leases Leases
------------------------------------
2002 $2,819 $ 3,451
2003 2,030 3,387
2004 1,382 3,175
2005 997 2,339
2006 820 535
Thereafter 141 -
------------------------------------
Total minimum lease payments $8,189 12,887
====================
Less amount representing interest 2,737
-----------------
Present value of minimum lease payments 10,150
Less current portion 2,305
-----------------
Capital lease obligations $ 7,845
=================
The Company is partially self-insured for workers' compensation claims. An
accrued liability is recorded for claims incurred but not yet paid or reported
and is based on current and historical claim information. The accrued liability
may ultimately be settled for an amount different than the recorded amount.
Adjustments of the accrued liability are recorded in the period in which they
become known.
Approximately 45% of the Company's work force is covered by collective
bargaining agreements. Collective bargaining agreements for Neenah and the
Kendalville location of Dalton are scheduled to expire during fiscal 2002.
As of September 30, 2001, the Company had outstanding letters of credit of
$1,065, which secure certain workers' compensation and other obligations. The
outstanding letters of credit reduce the availability under the Revolving Credit
Facility.
48
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
7. RESTRUCTURING CHARGE
During fiscal 1999, the Company recorded a restructuring charge of $6,713 to
close one of their manufacturing facilities. Impairment and abandonment of
assets at this facility that will no longer be used represented $6,030 of the
restructuring charge. Other components of the restructuring charge totaling $683
included employee severance costs, lease commitments and contractual
obligations, and other exit costs. All components of the restructuring charge
requiring the use of cash were disbursed in fiscal 2000. For the years ended
September 30, 2000 and 1999, net sales related to this manufacturing facility
were $3,689 and $17,213, respectively, and the operating loss related to this
manufacturing facility was $724 and $10,071, respectively, including the
restructuring charge of $6,713 in fiscal 1999.
8. INCOME TAXES
The provision (credit) for income taxes consists of the following:
YEAR ENDED SEPTEMBER 30
2001 2000 1999
--------------------------------------------------------
Current:
Federal $(2,902) $1,804 $ 8,615
State (1,218) 154 1,697
Foreign 886 - -
--------------------------------------------------------
(3,234) 1,958 10,312
Deferred (1,630) (358) (8,248)
--------------------------------------------------------
$(4,864) $1,600 $ 2,064
========================================================
Income tax expense (benefit) is included in the consolidated statements of
operations as follows:
YEAR ENDED SEPTEMBER 30
2001 2000 1999
--------------------------------------------------------
Continuing operations $(6,467) $1,448 $1,982
Discontinued operations 1,603 152 82
--------------------------------------------------------
$(4,864) $1,600 $2,064
========================================================
49
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
8. INCOME TAXES (CONTINUED)
The provision (credit) for income taxes differs from the amount computed by
applying the federal statutory rate of 35%, 35% and 34% as of September 30,
2001, 2000 and 1999, respectively, to income before income taxes as follows:
YEAR ENDED SEPTEMBER 30
2001 2000 1999
-----------------------------------------------
Provision (credit) at statutory rate $(6,970) $(1,240) $ 59
State income taxes (benefit), net of federal taxes (535) 452 161
Amortization of goodwill 1,943 1,927 1,799
Additional provision recorded in connection with pending
tax examinations 417 405 -
Other 281 56 45
-----------------------------------------------
Provision (credit) for income taxes $(4,864) $ 1,600 $ 2,064
===============================================
50
Neenah Foundry Company
Notes to Consolidated Financial Statements
(In Thousands)
8. INCOME TAXES (CONTINUED)
Deferred income tax assets and liabilities consist of the following as of
September 30:
2001 2000
-------------------------------------
Deferred income tax liabilities:
Book basis of assets in excess of tax basis:
Inventories $ (2,605) $ (2,788)
Property, plant and equipment (44,519) (45,319)
Identifiable intangible assets (22,892) (24,807)
Other (1,619) (662)
------------------ -----------------
(71,635) (73,576)
Deferred income tax assets:
Employee benefit plans 5,570 4,366
Accrued vacation 2,251 2,430
Other accrued liabilities 1,251 2,575
State net operating loss carryforwards 1,945 431
Other 622 907
Valuation allowance (654) (431)
------------------ -----------------
10,985 10,278
------------------ -----------------
Net deferred income tax liability $(60,650) $(63,298)
================== =================
Included in the consolidated balance sheets as:
Current deferred income tax asset $ 3,069 $ 2,748
Noncurrent deferred income tax liability (63,719) (66,046)
------------------ -----------------
$(60,650) $(63,298)
================== =================
As of September 30, 2001, the Company has state net operating loss (NOL)
carryforwards for income tax purposes of $38 million, which expire in varying
amounts through September 30, 2016. Of these NOLs, Cast Alloys has $8,676 in
state NOLs which expire in September 2004 to 2006. A valuation allowance has
been provided against the deferred tax asset related to the Cast Alloys state
NOL carryforwards as the benefit related to these carryforwards may not be
realized.
51
Neenah Foundry Company
Notes to Consolidated Financial Statements
(In Thousands)
9. EMPLOYEE BENEFIT PLANS
DEFINED-BENEFIT PENSION PLANS AND POSTRETIREMENT BENEFITS
The Company sponsors five defined-benefit pension plans covering the majority of
its hourly employees. Retirement benefits under the pension plans are based on
years of service and defined-benefit rates. The Company funds the pension plans
based on actuarially determined cost methods allowable under Internal Revenue
Service regulations. Plan assets consist primarily of mutual funds. The
measurement date for three of the defined-benefit pension plans is September 30.
The remaining plans use a measurement date of June 30.
The Company also sponsors unfunded defined-benefit postretirement health care
plans covering substantially all salaried and hourly employees at Neenah and
their dependents. For salaried employees at Neenah, benefits are provided from
the date of retirement for the duration of the employee's life, while benefits
for hourly employees at Neenah are provided from retirement to age 65. Retirees'
contributions to the plans are based on years of service and age at retirement.
The Company funds benefits as incurred. These plans use a measurement date of
September 30.
52
Neenah Foundry Company
Notes to Consolidated Financial Statements
(In Thousands)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes the funded status of the pension plans and
postretirement benefit plans and the amounts recognized in the consolidated
balance sheets at September 30, 2001 and 2000:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
-----------------------------------------------------------
2001 2000 2001 2000
-----------------------------------------------------------
Change in benefit obligation:
Benefit obligation, October 1 $40,400 $38,206 $ 6,692 $ 6,502
Service cost 1,543 1,383 204 206
Interest cost 3,036 2,768 493 476
Curtailment - - (153) -
Actuarial (gains) losses 1,246 (71) 148 (242)
Benefits paid (2,059) (1,886) (360) (250)
-----------------------------------------------------------
Benefit obligation, September 30 $44,166 $40,400 $ 7,024 $ 6,692
===========================================================
Change in plan assets:
Fair value of plan assets, October 1 $42,122 $36,718 $ - $ -
Actual return (loss) on plan assets (2,068) 4,713 - -
Company contributions 2,025 2,577 360 250
Benefits paid (2,059) (1,886) (360) (250)
-----------------------------------------------------------
Fair value of plan assets, September 30 $40,020 $42,122 $ - $ -
===========================================================
Funded status of the plans:
Benefit obligation less than (in excess of)
plan assets $(4,146) $ 1,722 $(7,024) $(6,692)
Unrecognized prior service cost 1,856 1,884 626 671
Unrecognized net (gains) losses 3,447 (3,350) 53 (97)
-----------------------------------------------------------
$(1,157) $ 256 $(6,345) $(6,118)
===========================================================
Amounts recognized in the consolidated balance
sheets at September 30:
Accrued pension liability $(3,395) $(1,739) $(6,345) $(6,118)
Prepaid pension asset - 1,726 - -
Intangible asset 1,856 120 - -
Deferred income tax asset 1,078 60 - -
Accumulated other comprehensive loss 1,618 89 - -
-----------------------------------------------------------
$(1,157) $ 256 $(6,345) $(6,118)
===========================================================
53
Neenah Foundry Company
Notes to Consolidated Financial Statements
(In Thousands)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
Amounts applicable to the Company's pension plans with accumulated benefit
obligations and projected benefit obligations in excess of plan assets:
2001 2000
-------------------------------
Projected benefit obligation $44,166 $11,588
Accumulated benefit obligation 44,166 11,588
Fair value of plan assets 40,020 10,883
Components of net periodic pension cost for the years ended September 30,
2001, 2000 and 1999, respectively, are as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------- -------------------------------
2001 2000 1999 2001 2000 1999
----------------------------------- -------------------------------
Service cost $1,543 $ 1,383 $ 1,263 $204 $206 $202
Interest cost 3,036 2,768 2,533 493 476 419
Expected return on plan assets (3,580) (2,755) (2,488) - - -
Amortization of prior service cost 123 117 22 45 45 45
Recognized net actuarial loss 2 1 10 2 - -
----------- ----------- ---------- ------- ---------- ---------
Net periodic benefit cost $1,124 $ 1,514 $ 1,340 $744 $727 $666
=========== =========== ========== ========= ========== =========
Assumptions as of September 30:
Discount rate 7.25% to 7.25% to 7.25% to
7.625% 7.75% 7.75% 7.625% 7.75% 7.0%
Expected long-term rate of return 7.50% to 7.50% to 7.50% to
9.00% 9.50% 9.50% - - -
For measurement purposes, the healthcare cost trend rate was assumed to be 7.5%
decreasing gradually to 4.5% in 2010 and then remaining at that level
thereafter. The healthcare cost trend rate assumption has a significant effect
on the amounts reported. A one percentage point change in the healthcare cost
trend rate would have the following effect:
1% Increase 1% Decrease
---------------------------------
Effect on total of service and interest cost $ 127 $(101)
Effect on postretirement benefit obligation 1,162 (935)
54
Neenah Foundry Company
Notes to Consolidated Financial Statements
(In Thousands)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
DEFINED-CONTRIBUTION RETIREMENT PLANS
The Company sponsors various defined-contribution retirement plans (the Plans)
covering substantially all salaried and certain hourly employees. The Plans
allow participants to make 401(k) contributions in amounts ranging from 1% to
15% of their compensation. The Company matches between 35% and 50% of the
participants' contributions up to a maximum of 6% of the employee's
compensation, as defined. The Company may make additional voluntary
contributions to the Plans as determined annually by the Board of Directors.
Total Company contributions amounted to $1,882, $1,828 and $1,759 for the years
ended September 30, 2001, 2000 and 1999, respectively.
OTHER EMPLOYEE BENEFITS
The Company provides unfunded supplemental retirement benefits to certain active
and retired employees at Dalton. At September 30, 2001, the present value of the
current and long-term portion of these supplemental retirement obligations
totaled $147 and $2,954, respectively.
Certain of Dalton's hourly employees are covered by a multi-employer,
defined-benefit pension plan pursuant to a collective bargaining agreement. The
Company's expense for the years ended September 30, 2001, 2000 and 1999, was
$470, $567 and $567.
The Company is one of the sponsors of a noncontributory, multiemployer,
defined-benefit pension plan covering substantially all of the union employees
at Mercer pursuant to a collective bargaining agreement. The Company's expense
for the years ended September 30, 2001, 2000 and 1999, was $135, $159 and $166.
10. SEGMENT INFORMATION
The Company has two reportable segments, Castings and Forgings. The Castings
segment manufactures and sells iron 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.
55
Neenah Foundry Company
Notes to Consolidated Financial Statements
(In Thousands)
10. SEGMENT INFORMATION (CONTINUED)
The Company evaluates performance and allocates resources based on the operating
income before depreciation, amortization of goodwill and intangibles and
restructuring charges of each segment. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. Intersegment sales and transfers are recorded at cost plus
a share of operating profit.
YEAR ENDED SEPTEMBER 30
2001 2000 1999
----------------------------------------------------
Revenues from external customers:
Castings $ 435,088 $ 502,664 $ 481,209
Forgings 28,109 36,779 39,493
Other 19,460 28,147 27,692
Elimination of intersegment revenues (12,620) (17,934) (18,040)
----------------------------------------------------
Total revenues $ 470,037 $ 549,656 $ 530,354
====================================================
Income (loss) from continuing operations:
Castings $ (17,454) $ (5,308) $ (2,010)
Forgings (5,112) (3,716) (2,650)
Other (711) 509 589
Elimination of intersegment loss 5,823 3,207 2,061
----------------------------------------------------
Loss from continuing operations $ (17,454) $ (5,308) $ (2,010)
====================================================
Assets:
Castings $ 770,044 $ 832,256 $ 792,939
Forgings 51,148 57,933 57,321
Other 16,149 19,654 19,127
Elimination of intersegment assets (210,898) (243,625) (227,685)
----------------------------------------------------
Total assets $ 626,443 $ 666,218 $ 641,702
====================================================
56
Neenah Foundry Company
Notes to Consolidated Financial Statements
(In Thousands)
10. SEGMENT INFORMATION (CONTINUED)
Castings Forgings Other Total
-------------------------------------------------------------
Year ended September 30, 2001:
Interest expense $42,400 $4,953 $ 983 $48,336
Interest income 445 - - 445
Depreciation and amortization expense 35,885 3,884 1,505 41,274
Expenditures for long-lived assets 16,219 228 435 16,882
Year ended September 30, 2000:
Interest expense $43,089 $4,816 $ 855 $48,760
Interest income 967 - 11 978
Depreciation and amortization expense 34,454 3,357 1,942 39,753
Expenditures for long-lived assets 17,387 793 1,088 19,268
Year ended September 30, 1999:
Interest expense 38,849 4,388 586 43,803
Interest income 1,303 33 66 1,402
Depreciation and amortization expense 30,420 3,277 1,989 35,686
Restructuring charge 6,713 - - 6,713
Expenditures for long-lived assets 39,725 855 1,513 41,643
GEOGRAPHIC INFORMATION
Long-Lived
Net Sales Assets(1)
-------------------------------------
Year ended September 30, 2001:
United States $460,024 $211,375
Foreign countries 10,013 2,458
-------------------------------------
Total $470,037 $213,833
=====================================
Year ended September 30, 2000:
United States $536,099 $225,244
Foreign countries 13,557 2,995
-------------------------------------
Total $549,656 $228,239
=====================================
Year ended September 30, 1999:
United States $513,237 $206,432
Foreign countries 17,117 2,372
-------------------------------------
Total $530,354 $208,804
=====================================
(1) Represents tangible long-lived assets only
57
Neenah Foundry Company
Notes to Consolidated Financial Statements
(In Thousands)
11. GUARANTOR SUBSIDIARIES
The following tables present condensed consolidating financial information for
fiscal 2001, 2000 and 1999 for: (a) the Company, and (b) on a combined basis,
the guarantors of the Senior Subordinated Notes, which include all of the wholly
owned subsidiaries of the Company (Subsidiary Guarantors). Separate financial
statements of the Subsidiary Guarantors are not presented because the guarantors
are jointly, severally and unconditionally liable under the guarantees, and the
Company believes separate financial statements and other disclosures regarding
the Subsidiary Guarantors are not material to investors.
58
Neenah Foundry Company
Notes to Consolidated Financial Statements
(In Thousands)
11. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
----------------- ------------------ --------------- -----------------
Net sales $160,735 $315,430 $(6,128) $470,037
Cost of sales 113,550 294,942 (6,128) 402,364
----------------- ------------------ --------------- -----------------
Gross profit 47,185 20,488 - 67,673
Selling, general and
administrative expenses 11,857 20,545 - 32,402
Amortization expense 4,919 6,719 - 11,638
Gain on disposal of equipment (11) (326) - (337)
----------------- ------------------ --------------- -----------------
Operating income 30,420 (6,450) - 23,970
Other income (expense):
Interest expense (19,828) (28,508) - (48,336)
Interest income 411 34 - 445
----------------- ------------------ --------------- -----------------
Income (loss) from continuing
operations before income taxes
and equity in earnings of
subsidiaries 11,003 (34,924) - (23,921)
Provision (credit) for income taxes
6,361 (12,828) - (6,467)
----------------- ------------------ --------------- -----------------
4,642 (22,096) - (17,454)
Equity in losses of subsidiaries (22,096) - 22,096 -
----------------- ------------------ --------------- -----------------
Loss from continuing operations
(17,454) (22,096) 22,096 (17,454)
Gain on sale of discontinued
operations, net of income taxes
2,404 - - 2,404
----------------- ------------------ --------------- -----------------
Net loss $(15,050) $(22,096) $22,096 $(15,050)
================= ================== =============== =================
59
Neenah Foundry Company
Notes to Consolidated Financial Statements
(In Thousands)
11. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2000
Subsidiary
Company Guarantors Eliminations Consolidated
----------------- ------------------ --------------- -----------------
Net sales $191,138 $364,712 $(6,194) $549,656
Cost of sales 132,061 328,946 (6,194) 454,813
----------------- ------------------ --------------- -----------------
Gross profit 59,077 35,766 - 94,843
Selling, general and
administrative expenses 15,014 24,162 - 39,176
Amortization expense 4,916 6,725 - 11,641
(Gain) loss on disposal of
equipment 298 (194) - 104
----------------- ------------------ --------------- -----------------
Operating income 38,849 5,073 - 43,922
Other income (expense):
Interest expense (22,003) (26,757) - (48,760)
Interest income 764 214 - 978
----------------- ------------------ --------------- -----------------
Income (loss) from continuing
operations before income taxes
and equity in earnings of
subsidiaries 17,610 (21,470) - (3,860)
Provision (credit) for income taxes
8,335 (6,887) - 1,448
----------------- ------------------ --------------- -----------------
9,275 (14,583) - (5,308)
Equity in losses of subsidiaries (14,418) - 14,418 -
----------------- ------------------ --------------- -----------------
Loss from continuing operations
(5,143) (14,583) 14,418 (5,308)
Income from discontinued
operations, net of income taxes
- 165 - 165
----------------- ------------------ --------------- -----------------
Net loss $ (5,143) $(14,418) $14,418 $ (5,143)
================= ================== =============== =================
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
11. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999
Subsidiary
Company Guarantors Eliminations Consolidated
-------------------------------------------------------------------
Net sales $ 197,911 $ 339,569 $ (7,126) $ 530,354
Cost of sales 134,578 307,270 (7,126) 434,722
-------------------------------------------------------------------
Gross profit 63,333 32,299 - 95,632
Selling, general and
administrative expenses 16,297 17,764 - 34,061
Amortization expense 4,918 6,778 - 11,696
Restructuring charge - 6,713 - 6,713
Loss on disposal of equipment 709 80 - 789
-------------------------------------------------------------------
Operating income 41,409 964 - 42,373
Other income (expense):
Interest expense (22,727) (21,076) - (43,803)
Interest income 1,121 281 - 1,402
-------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes
and equity in earnings of
subsidiaries 19,803 (19,831) - (28)
Provision (credit) for income taxes 8,566 (6,584) - 1,982
-------------------------------------------------------------------
11,237 (13,247) - (2,010)
Equity in losses of subsidiaries (13,129) - 13,129 -
-------------------------------------------------------------------
Loss from continuing operations (1,892) (13,247) 13,129 (2,010)
Income from discontinued
operations, net of income taxes - 118 - 118
-------------------------------------------------------------------
Net loss $ (1,892) $ (13,129) $ 13,129 $ (1,892)
===================================================================
61
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
11. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
-------------- ---------------- --------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,682 $ (336) $ - $ 4,346
Accounts receivable, net 30,862 38,983 - 69,845
Inventories 21,131 50,564 - 71,695
Refundable income taxes 2,148 - - 2,148
Deferred income taxes 559 2,510 - 3,069
Other current assets 2,361 3,491 - 5,852
-------------------------------------------------------------------
Total current assets 61,743 95,212 - 156,955
Investments in and advances to
subsidiaries 263,249 (41,712) (221,537) -
Property, plant and equipment, net 87,587 126,246 - 213,833
Deferred financing costs,
identifiable intangible assets and 133,255 116,493 - 249,748
goodwill, net
Other assets 3,891 2,016 - 5,907
-------------------------------------------------------------------
$ 549,725 $ 298,255 $(221,537) $ 626,443
===================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 7,534 $ 23,034 $ - $ 30,568
Accrued wages and employee benefits
5,300 7,950 - 13,250
Accrued interest 13,567 - - 13,567
Other accrued liabilities 1,200 3,501 - 4,701
Current portion of long-term debt 20,424 - - 20,424
Current portion of capital lease
obligations - 2,305 - 2,305
-------------------------------------------------------------------
Total current liabilities 48,025 36,790 - 84,815
Long-term debt 413,653 - - 413,653
Capital lease obligations - 7,845 - 7,845
Deferred income taxes 35,357 28,362 - 63,719
Postretirement benefit obligations 6,345 - - 6,345
Other liabilities 4,406 3,721 - 8,127
Stockholder's equity 41,939 221,537 (221,537) 41,939
-------------------------------------------------------------------
$549,725 $298,255 $(221,537) $626,443
===================================================================
62
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
11. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2000
Subsidiary
Company Guarantors Eliminations Consolidated
-------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,982 $ 2,496 $ - $ 19,478
Accounts receivable, net 29,270 43,603 - 72,873
Inventories 22,036 43,083 - 65,119
Refundable income taxes 347 (180) - 167
Deferred income taxes (885) 3,633 - 2,748
Other current assets 1,391 4,740 - 6,131
-------------------------------------------------------------------
Total current assets 69,141 97,375 - 166,516
Investments in and advances to
subsidiaries 278,429 (32,318) (246,111) -
Property, plant and equipment, net 91,509 136,730 - 228,239
Deferred financing costs,
identifiable intangible assets and 139,109 123,214 - 262,323
goodwill, net
Other assets 3,831 5,309 - 9,140
-------------------------------------------------------------------
$ 582,019 $ 330,310 $ (246,111) $ 666,218
===================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 7,667 $ 23,505 $ - $ 31,172
Accrued wages and employee benefits 6,172 9,998 - 16,170
Accrued interest 13,876 5 - 13,881
Other accrued liabilities 1,445 4,337 - 5,782
Current portion of long-term debt 11,280 - - 11,280
Current portion of capital lease
obligations - 2,151 - 2,151
-------------------------------------------------------------------
Total current liabilities 40,440 39,996 - 80,436
Long-term debt 438,095 232 - 438,327
Capital lease obligations - 10,143 - 10,143
Deferred income taxes 36,868 29,178 - 66,046
Postretirement benefit obligations 5,724 394 - 6,118
Other liabilities 2,374 4,256 - 6,630
Stockholder's equity 58,518 246,111 (246,111) 58,518
-------------------------------------------------------------------
$ 582,019 $ 330,310 $ (246,111) $ 666,218
===================================================================
63
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
11. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 2001
Subsidiary
Company Guarantors Eliminations Consolidated
-------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (15,050) $ (22,046) $ 22,046 $ (15,050)
Gain on sale of discontinued
operations (4,007) - - (4,007)
Noncash adjustments 11,621 28,908 - 40,529
Changes in operating assets and
liabilities (4,849) (7,522) - (12,371)
-------------------------------------------------------------------
Net cash provided by operating
activities (12,285) (660) 22,046 9,101
INVESTING ACTIVITIES
Investments in and advances to
subsidiaries 14,650 7,396 (22,046) -
Proceeds from disposition of
business, net of fees 5,190 - - 5,190
Purchase of property, plant and
equipment (4,371) (12,511) - (16,882)
Other 99 5,319 - 5,418
-------------------------------------------------------------------
Net cash used in investing
activities 15,568 204 (22,046) (6,274)
FINANCING ACTIVITIES
Proceeds from long-term debt 5,000 - - 5,000
Payments on long-term debt and
capital lease obligations (19,677) (2,376) - (22,053)
Debt issuance costs (906) - - (906)
-------------------------------------------------------------------
Net cash used in financing
activities (15,583) (2,376) - (17,959)
-------------------------------------------------------------------
Decrease in cash and cash
equivalents (12,300) (2,832) - (15,132)
Cash and cash equivalents at
beginning of year 16,982 2,496 - 19,478
-------------------------------------------------------------------
Cash (overdraft) and cash
equivalents at end of year $ 4,682 $ (336) $ - $ 4,346
===================================================================
64
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
11. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 2000
Subsidiary
Company Guarantors Eliminations Consolidated
-------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (5,143) $ (14,418) $ 14,418 $ (5,143)
Noncash adjustments 14,490 28,591 - 43,081
Changes in operating assets and
liabilities (1,946) (6,510) - (8,456)
-------------------------------------------------------------------
Net cash provided by operating
activities 7,401 7,663 14,418 29,482
INVESTING ACTIVITIES
Investments in and advances to
subsidiaries (23,061) 37,479 (14,418) -
Acquisition of business - (29,502) - (29,502)
Purchase of property, plant and
equipment (5,644) (13,624) - (19,268)
Other 212 1,233 - 1,445
-------------------------------------------------------------------
Net cash used in investing
activities (28,493) (4,414) (14,418) (47,325)
FINANCING ACTIVITIES
Proceeds from long-term debt 29,750 - - 29,750
Payments on long-term debt and
capital lease obligations (7,528) (2,269) - (9,797)
-------------------------------------------------------------------
Net cash provided by (used in)
financing activities 22,222 (2,269) - 19,953
-------------------------------------------------------------------
Increase in cash and cash
equivalents 1,130 980 - 2,110
Cash and cash equivalents at
beginning of year 15,852 1,516 - 17,368
-------------------------------------------------------------------
Cash and cash equivalents at end
of year $ 16,982 $ 2,496 $ - $ 19,478
===================================================================
65
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
11. GUARANTOR SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1999
Subsidiary
Company Guarantors Eliminations Consolidated
-------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (1,892) $ (13,129) $ 13,129 $ (1,892)
Noncash adjustments 11,177 24,091 - 35,268
Changes in operating assets and
liabilities 4,535 (6,806) - (2,271)
-------------------------------------------------------------------
Net cash provided by operating
activities 13,820 4,156 13,129 31,105
INVESTING ACTIVITIES
Investments in and advances to
subsidiaries (57,178) 70,307 (13,129) -
Acquisition of business - (40,824) - (40,824)
Purchase of property, plant and
equipment (7,162) (34,481) - (41,643)
Other (746) (34) - (780)
-------------------------------------------------------------------
Net cash used in investing
activities (65,086) (5,032) (13,129) (83,247)
FINANCING ACTIVITIES
Proceeds from long-term debt 90,405 - - 90,405
Payments on long-term debt and
capital lease obligations (33,320) (287) - (33,607)
Return of capital contribution (3,850) - - (3,850)
Debt issuance costs (3,236) - - (3,236)
-------------------------------------------------------------------
Net cash provided by (used in)
financing activities 49,999 (287) - 49,712
-------------------------------------------------------------------
Decrease in cash and cash
equivalents (1,267) (1,163) - (2,430)
Cash and cash equivalents at
beginning of year 17,119 2,679 - 19,798
-------------------------------------------------------------------
Cash and cash equivalents at end
of year $ 15,852 $ 1,516 $ - $ 17,368
===================================================================
66
Neenah Foundry Company
Notes to Consolidated Financial Statements (continued)
(In Thousands)
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
YEAR ENDED SEPTEMBER 30, 2001
-------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------------------------------------------------------------
Net sales $114,570 $112,584 $128,123 $114,760
Gross profit 13,721 12,642 20,968 20,342
Net loss (4,248) (6,841) (2,661) (1,300)
YEAR ENDED SEPTEMBER 30, 2000
-------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------------------------------------------------------------
Net sales $126,850 $142,738 $144,798 $135,270
Gross profit 20,793 24,571 26,461 23,018
Net income (loss) (2,591) (910) 38 (1,680)
67
Report of Ernst & Young LLP, Independent Auditors
We have audited the consolidated financial statements of Neenah Foundry Company
as of September 30, 2001, 2000 and 1999, and have issued our report thereon
dated November 7, 2001 (included elsewhere in this Annual Report on Form 10-K).
Our audits also included the financial statement schedule listed in the index at
Item 14(a). This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Milwaukee, Wisconsin ERNST & YOUNG LLP
November 7, 2001
68
Schedule II
NEENAH FOUNDRY COMPANY
VALUATION AND QUALIFYING ACCOUNTS Years ended
September 30, 2001, 2000 and 1999.
(Dollars in Thousands)
BALANCE AT PURCHASE ADDITIONS
BEGINNING ACCOUNTING CHARGED TO BALANCE AT
DESCRIPTION OF PERIOD ADJUSTMENTS EXPENSE DEDUCTIONS END OF PERIOD
- ----------------------------------------------------------------------------------------------------------------
Allowance for doubtful
accounts receivable:
1999 $ 853 $ 90 $ 266 $ 189 (A) $1,020
======= ======= ======= ======= ======
2000 $ 1,020 $ 130 $ 242 $ 391 (A) $1,001
======= ======= ======= ======= ======
2001 $ 1,001 $ - $ 761 $ 325 (A) $1,437
======= ======= ======= ======= ======
(A) Uncollectible accounts written off, net of recoveries
Reserve for obsolete
inventory:
1999 $ 500 $ - $ 186 $ - $ 686
======= ======= ======= ======= ======
2000 $ 686 $ - $ 2,300 $ - $2,986
======= ======= ======= ======= ======
2001 $ 2,986 $ - $ 248 $ 2,749 (B) $ 485
======= ======= ======= ======= ======
(B) Reduction for disposition of inventory
69