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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 30,1999.
[ ] Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934
For the transition period from to
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Commission file number 333-28751
NEENAH FOUNDRY COMPANY
(Exact name of 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, 1999
Common Stock, Class B, $100 par value- 0 shares as of November 30, 1999
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PART I
Item 1. BUSINESS
THE COMPANY (OTHER THAN THE ACQUIRED SUBSIDIARIES)
Overview
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, Hartley Controls Corporation and
Neenah Transport, Inc., and exclude Deeter Foundry, Inc. ("Deeter"), Mercer
Forge Corporation ("Mercer"), Dalton Corporation ("Dalton"), Niemen Porter & Co.
d/b/a Cast Alloys, Inc. ("Cast Alloys"), and their respective subsidiaries, each
of which were acquired and Advanced Cast Products ("ACP") and its respective
subsidiaries, whose capital stock was contributed to the Company by ACP
Holdings. Deeter, Mercer, Dalton, Cast Alloys and ACP are referred to herein as
the "Acquired Subsidiaries." The Company changed its fiscal year end to
September 30 from March 31 effective September 30, 1997.
The Company, founded in 1872, is one of the largest manufacturers of a
wide range of high quality ductile and gray iron castings for the heavy
municipal market and selected segments of the industrial market. The Company
believes it is the largest manufacturer of heavy municipal iron castings in the
United States with approximately a 19% market share in calendar year 1998. 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 heavy municipal market generated
approximately 44% of the Company's net sales for the year ended September 30,
1999. The Company believes it is also a leading manufacturer of a wide range of
complex industrial castings, including castings for medium- and heavy-duty truck
drive line components, a broad range of castings for the farm equipment industry
and specific components for compressors used in heating, ventilation and air
conditioning systems. The industrial market generated approximately 53% of the
Company's net sales for the year ended September 30, 1999. In addition, the
Company engineers, manufactures and sells customized sand control systems and
related products, which are an essential part of the casting process, to other
iron foundries. Sales of these sand control systems and related products
represented approximately 3% of the Company's net sales for the year ended
September 30, 1999.
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The Company currently operates two modern foundries with an annual
aggregate rated capacity of approximately 187,000 tons at a single site in
Neenah, Wisconsin. From 1985 to 1998, the Company has invested heavily in its
production facilities, with approximately $73 million invested in a major plant
modernization program from 1985 to 1990. This plant modernization program was 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. This modernization program entailed the closing
of the Company's oldest foundry, Plant 1, and the updating of the Company's
other two foundries, Plants 2 and 3, which enabled the Company both to produce
higher volume, complex castings for selected industrial segments and to improve
the Company's cost position in the heavy municipal market. Following the
completion of the modernization program, the Company has steadily decreased its
production of lower margin products such as axle covers and brake drums and
increased the production of higher margin, more complex parts, such as
transmission and axle housings. As a result of this strategy, the Company's
ongoing improvements in its manufacturing process and increased demand for
medium- and heavy-duty truck components have caused net sales and EBITDA to
increase.
Products, Customers and Markets
The Company provides a variety of products to both the heavy municipal and
industrial markets. The heavy municipal market is comprised of storm and
sanitary sewer castings, manhole covers and frames, and storm sewer frames and
grates. It also includes 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.
The industrial market is 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.
Heavy Municipal. Based on industry reported data, the Company believes it
is the largest manufacturer of heavy municipal iron castings in the United
States with an estimated 19% market share in calendar year 1998. 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 17,000 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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Industrial. The Company believes it is a leading manufacturer of a wide
range of complex industrial castings, including castings for medium- and
heavy-duty truck drive line components and farm equipment as well as castings
for specific components for compressors used in heating, venting and air
conditioning (HVAC) systems. 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 by it.
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.
The Company has sold to certain industrial customers for over 20 years and
currently has a multi-year arrangement with one of those customers. 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 reputation damage 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.
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Sales and Marketing
Heavy Municipal. 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, including 59 Company employees and
28 commissioned representatives. 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 ten regional distribution and sales centers and has two other sales
offices in Oklahoma City, Oklahoma and Norwood, Pennsylvania. The Company
believes this regional approach enhances its knowledge of local specifications
and its position in the heavy municipal market.
Industrial. The Company employs a dedicated industrial casting sales force
of six people, five based in Neenah, Wisconsin and one based in Mansfield, Ohio.
These six people consist of three account coordinators, who support the ongoing
customer relationships and organize the scheduling and delivery of shipments,
and three major account managers, who work 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.
Manufacturing Process
The Company operates two modern foundries with an annual rated capacity of
approximately 187,000 tons at a single location in Neenah, Wisconsin. The
Company's foundries manufacture gray and ductile iron and cast it into intricate
shapes according to customer metallurgical and dimensional specifications. From
1985 to 1998, the Company has invested heavily in its production facilities,
with approximately $73 million invested from 1985 to 1990 in plant modernization
and new equipment. The Company also 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.
During the fiscal year ended September 30, 1999, the Company had a combined
scrap rate of 2.5%.
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.
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The Company continually seeks to find ways to expand the capabilities of
existing technology to improve manufacturing processes. An example of this
expansion is the Company's integration of Disamatic molding machines into its
operations. Disamatic molding machines are considered to be among the most
efficient sand molding machines because of their ability to produce high quality
molds at high production rates. Disamatic molding machines are also used by most
of the Company's direct competitors. Although the Company was not the first
foundry to acquire Disamatic molding machines, it has significantly enhanced the
equipment's range of production by combining the equipment with core-setting
capabilities which exceed those of most foundries. To further improve upon the
productivity of the Disamatic molding machines, the Company has recently
increased the length of two of its cooling lines, making each line among the
longest lines in the world for comparable Disamatic equipment. This extension
allows the Company to run its machines at higher production rates while
providing sufficient in-mold cooling time prior to mold shakeout to facilitate
the production of high quality castings. As a result of these and other similar
efforts, the Company has been able to increase productivity as measured in the
number of molds per hour.
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 such as the Disamatic
molding machines. 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.
Quality Assurance
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.
Distribution
The Company sells a substantial amount of its municipal castings through its
network of two warehouses, ten distribution and sales centers and two other
sales offices. Industrial castings are shipped direct to customers from the
Company. For many municipal and a small portion of its industrial customers,
castings are delivered by Neenah Transport, Inc., a wholly owned subsidiary of
the Company ("Neenah Transport"), which operates a fleet of 28 tractors and 101
trailers that deliver products throughout the Midwest. For sales outside of the
Midwest, increased transportation costs impact the ability of the Company to
compete on a cost basis. Neenah Transport also backhauls raw materials for use
by the Company on return trips. Neenah Transport is staffed with professional
drivers who are trained in service standards and product knowledge as
representatives of the Company. To the Company's knowledge, none the Company's
major heavy municipal competitors have a captive transportation subsidiary. The
Company believes Neenah Transport's service and drivers provide another
differentiating factor in favor of the Company as compared to other major heavy
municipal manufacturers.
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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. 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 require 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.
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. However, foreign companies have been, and
continue to be, subject to antidumping and countervailing duty enforcement
litigation which the Company believes has had a negative effect on foreign
companies' ability to compete in the U.S. markets. There can be no assurance
that these factors will continue to mitigate the impact of foreign competition,
or that the Company will be able to maintain or improve its competitive position
in the markets in which it competes.
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Hartley Controls Corporation
Hartley Controls Corporation, a wholly owned subsidiary of the Company
("Hartley Controls"), engineers, manufactures and sells customized sand control
systems, which are an essential part of the casting process, to other iron
foundries. The sand molding media used in all high production iron foundries is
a critical element in determining mold quality. Exacting and consistent control
of this sand with respect to moisture and chemical additives is an essential
element for process control and relates directly to casting quality, scrap rate
and the ability to produce complex molds for highly engineered castings. Harley
Controls is a major U.S. supplier of sand control systems with over 300
installations since 1986. Harley Controls has made investments in process
technology and has several patented technologies related to sand systems,
including the "Automatic Moisture Controller," the "Even-Flo Bin," the
"Automatic Compactibility Tester," the "Automatic Bond Determinator," the "Green
Stand Reconditioner" and the "Sandman." Sales of these sand systems and related
products represented approximately 3% of the Company's net sales for the year
ended September 30, 1999.
Employees
As of September 30, 1999 the Company had 1,030 full time employees, of whom
805 were hourly employees and 225 were salaried employees. The Local 121B of the
Glass, Molders, Pottery, Plastics and Allied Workers International Union AFL-CIO
is the major bargaining agent for the representative of 726 of the Company's
hourly employees. A collective bargaining agreement with Local 121B was reached
on January 1, 1999 and expires on December 31, 2001. The Independent
Patternmakers Union of Neenah, Wisconsin is the major bargaining agent for and
representative of 36 of the Company's hourly employees. A collective bargaining
agreement with the Independent Patternmakers Union was reached on January 1,
1998 and expires on December 31, 2000. The Company believes that it has a good
relationship with its employees.
Environmental Matters
The facilities of the Company and Acquired Subsidiaries' 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 its and each of the Acquired
Subsidiaries' 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 or any of the Acquired Subsidiaries' operations,
financial condition or competitive position. However, some risk of environmental
liability and other costs is inherent in each of the Company's and Acquired
Subsidiaries' businesses. Any of the Company or the Acquired Subsidiaries 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 2003 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 or the Acquired Subsidiaries' facilities incur significant costs for
air emission control equipment, air emission monitoring equipment or process
modifications.
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ACQUISITIONS
On March 30, 1998, the Company acquired all the capital stock of Deeter for
$24.3 million (excluding fees and expenses incurred in connection with the
acquisition of $0.3 million), consisting of $20.4 million of cash and a $3.9
million seller note (the "Deeter Seller Note"). The Deeter Seller Note, which
did not bear interest, was issued to the selling shareholders of Deeter by ACP
Holdings and matured on March 30, 1999. The Company financed the cash portion of
the consideration and all fees and expenses from cash on hand. Since 1945,
Deeter has been producing gray iron castings for the heavy municipal market.
Deeter's municipal casting product line includes manhole frames and covers,
storm sewer inlet frames, grates and curbs, trench grating and tree grates.
Deeter also produces a wide variety of special application construction
castings. These products are utilized in waste treatment plants, airports,
telephone and electrical construction projects.
On April 3, 1998, the Company acquired all the capital stock of Mercer for
$47.0 million in cash (excluding fees and expenses incurred in connection with
the acquisition of $0.5 million). Concurrently with the acquisition of Mercer,
the Company, ACP Holdings and the lenders party thereto amended and restated the
Credit Agreement (the "Credit Agreement") dated April 30, 1997, as amended and
restated on September 12, 1997. The Credit Agreement, as so amended and
restated, provided availability of $75.0 million of term loans to the Company
(consisting of $20.0 million of Tranche A Loans (as defined) and $55.0 million
of Tranche B Loans (as defined) in addition to the Company's existing $50.0
million Revolving Credit Facility (as defined). On April 3, 1998, the Company
borrowed $55.0 million of the Tranche B Loans, of which $48.6 million was used
to finance the acquisition of Mercer, to pay fees and expenses incurred in
connection with the acquisition and to pay financing costs. The available
Tranche A Loans were not borrowed on April 3, 1998. Founded in 1954, 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.
On September 8, 1998, the Company acquired all the capital stock of Dalton
for $102.0 million in cash (excluding fees and expenses incurred in connection
with the acquisition of $0.6 million). Dalton manufactures and sells gray iron
castings for refrigeration systems, air conditioners, heavy equipment, engines,
gear boxes, stationary transmissions, heavy duty truck transmissions and other
automotive parts.
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 $14.9 million of indebtedness of ACP, $14.6 million of which was
refinanced with borrowings under the Senior Bank Facilities. ACP is a leading
independent manufacturer of ductile and malleable iron castings that are
produced through both traditional casting methods and through ACP's Evapcast
lost foam casting process. ACP's production capabilities also include a range of
finishing operations including austempering and machining. ACP sells its
products primarily to companies in the heavy truck, construction equipment,
railroad, mining, electrical fittings and automotive industries.
In connection with the acquisition of Dalton and the contribution of the
capital stock of ACP, the Company, ACP Holdings and the lenders party thereto
amended and restated the Credit Agreement to provide availability of additional
Tranche B Loans in an aggregate principal amount of $70.0 million and an
Acquisition Loan Facility (as defined) in an aggregate principal amount
outstanding at any one time not to exceed $50.0 million. In connection with the
acquisition of Dalton and the contribution of the capital stock of ACP, the
Company borrowed $29.0 million under the Acquisition Loan Facility, $20.0
million of Tranche A Loans and $70.0 million of Tranche B Loans.
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On December 31, 1998, the Company purchased Niemin Porter & Co. d/b/a Cast
Alloys, Inc. ("Cast Alloys"), a manufacturer of investment-cast titanium and
stainless steel golf clubheads, for $40.1 million in cash (excluding fees and
expenses incurred in connection with the acquisition of $1.2 million). The
acquisition of Cast Alloys was financed out of a portion of the proceeds of the
issuance of the Company's 11 1/8% Senior Subordinated Notes due 2007 issued on
November 24, 1998.
Currently, each of the Acquired Subsidiaries is operating as a separate
subsidiary of the Company with independent operations under the direction of the
management that was in place prior to its acquisition by the Company. Although
the Company currently does not have plans to integrate the operations of the
Company with the Acquired Subsidiaries, it may to some extent do so in the
future.
Each of the Deeter, Mercer, Dalton and Cast Alloys acquisitions were
accounted for using the purchase method of accounting. The acquisition of ACP
was accounted for at historical cost in a manner similar to that in pooling of
interest accounting since the Company and ACP were under common control.
The foregoing transactions are herein referred to as the "Acquisitions."
The credit facilities available under the Credit Agreement are collectively
referred to herein as the "Senior Bank Facilities".
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DALTON CORPORATION
Overview
Dalton manufactures and sells gray iron castings for refrigeration systems,
air conditioners, heavy equipment, engines, gear boxes, stationary
transmissions, heavy duty truck transmissions and other automotive parts.
Dalton's operating facilities have been structured to manufacture or machine
specific components to customer specifications. Dalton specializes in using cold
box and shell core products as well as precision high-pressure molds to
manufacture gray iron castings. The majority of Dalton's castings range in size
from one pound to 700 pounds.
Products and Markets
During fiscal year 1999, the nine months ended September 30, 1998, and
calendar year 1997 Dalton produced 209,334, 159,728, and 192,495 tons of
castings, respectively. As a result of being acquired in September, 1998 the
figures for 1998 only include nine months of production. Dalton's revenues are
generated from customers in several industries, however, refrigeration and air
conditioning represent the largest concentration of tons shipped, which
management estimates was approximately 45% of tons shipped in 1999.The next
largest markets served include heavy truck at an estimated 16% and
automotive/light truck at an estimated 10% of the tons shipped in 1999. Dalton
serves primarily three markets: refrigeration and air conditioning,
automotive/truck market and heavy equipment.
Customers
Dalton has over 100 customers across several industries, with four of
Dalton's largest five customers operating in the refrigeration/air conditioning
industry. Dalton's largest 10 customers accounted for approximately 70% of
Dalton's 1999 net sales. Dalton's largest customer, Copeland Corporation,
accounted for approximately 18% of Dalton's 1999 net sales.
Raw Materials
The primary raw materials used by Dalton to manufacture iron castings are
steel scrap, pig iron, metallurgical coke and silica sand. By using steel scrap
in its production process, Dalton becomes significant contributor to the
recycling efforts being undertaken around the world. While there are multiple
suppliers for each of these commodities, Dalton has sourcing 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 and the
supply availability, Dalton management believes that it will continue to be able
to secure raw materials from its suppliers at competitive prices. The primary
energy sources for Dalton's operations, electricity and natural gas, are
purchased through utilities.
Although the prices of all raw materials used by Dalton vary, the
fluctuations in the price of steel scrap are the most significant to Dalton.
Dalton has arrangements with most of its industrial customers which require
Dalton to adjust industrial casting prices to reflect fluctuations in scrap
metal prices. 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. Rapidly fluctuating scrap prices may have a
temporary adverse or positive effect on Dalton's results of operations.
11
12
Competition
Dalton operates in the same industry as the Company and therefore faces the
same competitive environment as the company. See "-The Company (other than the
Acquired Subsidiaries) -Competition."
Manufacturing Facilities
Dalton currently operates four facilities. The main plant, located in
Warsaw, Indiana ("Warsaw") was established in 1910. In 1992 Dalton acquired a
second plant in Kendallville, Indiana ("Kendallville") and in 1995, Dalton
acquired a third plant in Ashland, Ohio ("Ashland"). On September 30, 1999
Dalton announced the closure of the Ashland plant, with all manufacturing
expected to be completed by December 31, 1999. In addition to the foundry
operations, Dalton owns a machining facility in Stryker, Ohio ("Stryker").
Dalton has established a separate General Office for centralized finance and MIS
operations along with executive management of Dalton.
Employees
At September 30, 1999, Dalton employed 1,668 individuals, consisting of
1,365 hourly employees and 303 salaried and clerical employees.Nearly all of
Dalton's production employees are members of either the Steel Workers' Union 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: Warsaw, April 5, 2003; Kendallville, June
28, 2002; and Ashland, April 27, 2002.
Environmental Matters
Dalton is subject to environmental, health and safety laws comparable to
those governing the Company. See "-The Company (other than the Acquired
Subsidiaries) -Environmental Matters."
Status of Dalton's Air Emission Compliance In connection with Dalton's
submission of draft operating permits for air emission sources at its facilities
in Warsaw and Kendallville under Title V of the federal Clean Air Act Amendments
of 1990 ("Title V"), the Indiana Department of Environmental Management ("IDEM")
has asked Dalton to address several issues of concern: (i) alleged exceedances
of particulate and volatile organic compound emission levels; (ii) the
applicability of Prevention of Significant Deterioration ("PSD") permit review
requirements; and (iii) alleged construction and operation of sources without
the required permits. Depending on the results of ongoing discussions with IDEM
and the course of developing regulations, the costs of addressing Dalton's air
emission control issues could be material.
Dalton has retained an environmental consultant to address the concerns
identified by IDEM. IDEM may require Dalton to perform tests on various emission
sources, install new or upgrade existing emission capture or control equipment,
use substitute materials or modify production rates to reduce regulated
emissions and/or perform PSD review for several sources. IDEM issued Notices of
Violations ("NOVs") in 1999 to both facilities regarding the failure to permit
equipment. Negotiations between IDEM and Dalton continue regarding the NOVs and
the content of its air permits. Penalties will be assessed against Dalton for
the failure to permit, but at this time IDEM has not set any penalties. IDEM
could also assess penalties against Dalton for the other identified concerns. At
this time, management believes that any penalties assessed by IDEM will not be
material.
12
13
Warsaw Monofill NOVs On May 15, 1998, IDEM issued an NOV to Dalton
regarding Dalton's operation of an authorized landfill used exclusively by the
Warsaw facility to dispose of its foundry waste (the"monofill"). IDEM issued the
NOV after Dalton notified the agency that it had disposed of materials outside
the authorized landfill area. IDEM is currently reviewing Dalton's request to
modify the landfill permit and allow the disposal of wastes in the overfilled
locations. IDEM is seeking a civil penalty of $100,000 to $150,000 from Dalton
to resolve the NOV. Dalton could be required to relocate the overfill material
to an authorized off-site disposal location if IDEM denies the pending request
for permit modification.
ADVANCED CAST PRODUCTS, INC.
Overview
ACP produces its products through three principal facilities. The largest
operation, Meadville, manufactures ductile iron castings through both the
traditional green sand molding process and its proprietary Evapcast lost foam
casting process. The Belcher operation manufactures malleable cast iron parts
primarily for the electrical fittings industry. Finally, the Peerless operation
produces bearing adapters for use in rail cars. Peerless is one of only three
U.S. companies that manufacture railroad bearing adapters. Since 1990, ACP has
generated gradually increasing sales and operating income primarily due to
increased volume of products shipped.
Products and Markets
ACP is a leading independent manufacturer of ductile and malleable iron
castings that are produced through both traditional casting methods and through
ACP's Evapcast lost foam casting process. ACP's production capabilities also
include a range of finishing operations including austempering and machining.
ACP sells its products primarily to companies in the heavy truck, construction
equipment, railroad, mining, electrical fittings and automotive industries.
Evapcast and CasTuf are two of ACP's proprietary casting processes.
Evapcast utilizes lost foam molding technology to produce near net-shape
castings, which allow for tighter tolerances, a smoother surface and enhanced
part complexity and require significantly less machining. CasTuf process
produces austempered ductile iron castings with superior strength
characteristics. CasTuf replaces more expensive steel castings, forgings and
fabrications, providing increased design flexibility. Management believes that
ACP is the first and only ductile foundry in the U.S. with its own in-house
austemper furnace and is one of only two ductile iron foundries to have
developed the lost-foam casting process. ACP is also a leading provider of
in-house machined castings through its expanded machining capability, which
utilizes state-of-the-art CNC machines.
ACP's products and processes have enabled the development of long-term
working relationships with many key customers. This has allowed ACP to retain
existing customers, build on its customer base and obtain favorable pricing.
Customers
ACP serves a diverse base of approximately 400 customers. Freightliner
Corporation, ACP's largest customer, accounted for more than 21% of ACP's net
sales for its fiscal year ended September 30, 1999. ACP specializes in meeting
the more difficult requirements of its largest customers such as Caterpillar,
Freightliner and Dana. ACP has been presented supplier awards from each of these
OEMs and has earned the ability to obtain new part awards as they become
available.
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14
ACP works closely with its customers from the beginning of the design
process until the shipment of finished parts. Due to this level of customer
service along with its products and services, ACP has been able to increase
sales to existing customers as well as expand its customer base. ACP offers its
customers a package, which includes casting, austempering, machining, painting
and assembly. This combination of products and services reduces the risk of ACP
customers moving their products to other manufacturers.
Raw Materials
The primary raw materials used by ACP to manufacture iron castings are
steel scrap, alloys and silica sand. While there are multiple suppliers for each
of these commodities, ACP has sourcing arrangements with its suppliers of each
of these major raw materials. Due to long standing relationships with each of
its suppliers, ACP believes that it will continue to be able to secure raw
materials from its suppliers at competitive prices. The primary energy sources
for ACP's operations, electricity and natural gas, are purchased through
utilities and competitive third party bidding.
Although the prices of all raw materials used by ACP vary over time, the
fluctuations in the price of steel scrap are the most significant to ACP. ACP
has arrangements with most of its industrial customers which allow ACP to adjust
industrial casting prices to reflect scrap price fluctuations.
Competition
ACP operates in the same industry as the Company and therefore faces the
same competitive environment as the Company. See "-The Company (other than the
Acquired Subsidiaries) -Competition."
Manufacturing Facilities
ACP currently operates 3 facilities. Since 1989, ACP has spent over $31.2
million on capital equipment to expand production capacity, improve efficiency,
add new production capabilities, replace equipment and improve the quality of
its products. ACP investments have included, for example, state of the art
Disamatic molding lines at both its Meadville and Belcher facilities and
computer numerical controlled ("CNC") machining centers at Meadville. The new
molding lines have increased capacity with the potential to reduce operating
costs.
In addition, new capital expenditures have been completed for Meadville
that include an autopour unit for its current Disamatic line, a larger Disamatic
molding line for larger castings, and additional CNC machines. Belcher's new
capital expenditures also include an autopour unit in addition to a heat treat
furnace.
Employees
ACP has approximately 101 salaried and approximately 425 hourly employees
represented by the United Steelworkers of America. The collective bargaining
agreement for Belcher and Meadville expires in June 2004 and in October 2004,
respectively.
Environmental Matters
ACP is subject to environmental, health and safety laws comparable to those
governing the Company. See "-The Company (other than the Acquired Subsidiaries)
- -Environmental Matters."
14
15
Intellectual Property
Meadville holds trademark rights on two advanced proprietary processes,
Evapcast and CasTuf. ACP's Evapcast process utilizes a lost foam casting
technique which produces near net shape castings. Evapcast eliminates the need
for coring and reduces the need for machining resulting in significant cost
savings to the customer. CasTuf is a process to produce a line of austempered
ductile iron castings which have superior strength characteristics and are
easier to cast than steel products, thus providing greater design freedom.
Meadville is the only ductile iron casting company in North America with
in-house austempering capabilities (CasTuf) and one of only two independent,
ductile iron foundries with lost foam technology (EvapCast). Additionally,
Meadville was one of the first foundry operations to provide completely finished
parts through an integrated machining capability.
MERCER FORGE CORPORATION
Overview
Founded in 1954, 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 which management estimates accounts
for approximately 40% of its production.
Products and Markets
Mercer manufactures its products to customer specification with typical
production runs of 1,000 or more units. Mercer currently operates eight
mechanical press lines, from 1,300 tons to 4,000 tons. Mercer's principal plant
is a 130,000 square foot facility located in Mercer, Pennsylvania. Key markets
for Mercer include truck and automotive parts, railroad equipment and general
industrial machinery.
The following is a summary of Mercer's product capabilities, broken out by
the principal customer categories it serves:
- -----------------------------------------------------------------------------------------------
INDUSTRY PRODUCTS
- -----------------------------------------------------------------------------------------------
Truck Drive Train Components; Sector Shafts; Knuckles,
Spindles; King Pins
- -----------------------------------------------------------------------------------------------
Automotive Transmission Gears; Hubs, Front Wheel Universal
Components; Drive Train Yokes; Spindles
- -----------------------------------------------------------------------------------------------
Mining Equipment Shoes; Fight Bars; Gear Blanks; Hubs; Sleeves
- -----------------------------------------------------------------------------------------------
Railroad Wheels; Draft Gear Components; Tank Car Valves; Piston
Carries; Articulated Car Bearings; Connecting Rods
- -----------------------------------------------------------------------------------------------
Off-Highway/ Yokes; Spindles; Flanges; Gear Blanks; Hubs; Track Links; Roller
Agriculture Shafts; Drive Line Components
- -----------------------------------------------------------------------------------------------
Industrial Gears; Bearings; Wheels; Cams
- -----------------------------------------------------------------------------------------------
Military Ordnance Projectile Components; Missile Components; Center
Guides; End Connectors; Tank Track Components
- -----------------------------------------------------------------------------------------------
15
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The Forged Components Market
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. While the heavy truck segment remains relatively strong, there has been
some weakness in the railroad car building components and mining equipment
during recent months. Management attributes this to normal industrial cycles in
these markets and adjustments to overbuilds in inventory levels. Mercer
experienced a three month strike in 1999 which had an adverse impact on its
volume levels and customers. After a five year settlement at the end of June of
1999, management is working to rebuild and restore its volume and customer base
to pre-strike levels.
Sales of military forgings, which was at one time Mercer's principal
product, have been virtually eliminated and replaced with an industrial base of
sales. Mercer operates two of its eight forge press lines under contracts with
the U.S. Government, but no longer actively bids for defense contracts. During
the 1990-92 Gulf War period, Mercer was active in producing ordnance components.
Management anticipates, however, that military products will continue to account
for a small portion of its business on an intermittent basis.
Manufacturing Process
Forgings and casting (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 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 five 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.
16
17
Customers
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. Mercer currently serves approximately 40 individual
customer accounts. Dana Corporation represents Mercer's largest customer and
accounted for approximately 46% of Mercer's fiscal year ended September 30, 1999
sales.
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. Mercer typically maintains 10 to 30 days supply on hand.
Mercer buys approximately 25,000 tons of raw steel per year. 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 although there can
be no assurance in this regard.
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 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.
Mercer is not aware of any significant offshore competition within its
current product categories. Due to the importance of customer relationships and
engineering capabilities, most foreign producers are unable to compete.
Manufacturing Facilities
Mercer is located in northwest Pennsylvania, about 60 miles north and west
of the Greater Pittsburgh airport. Mercer owns it principal forging facility,
which occupies a twenty-one acre site, and consists of a 130,000 square foot
manufacturing facility (which was partially rebuilt and expanded by 50,000
square feet in 1989) and an adjacent office complex. Mercer's subsidiary, A&M,
also leases an 18,000 square foot machine shop facility located in Sharon,
Pennsylvania, approximately ten miles from Mercer's headquarters.
Mercer's main plant is able to forge complex components in runs from 500 to
more than 10,000 units. Mercer manufactures approximately 500 individual
products (SKUs) of which approximately half run throughout the production year.
Heating capacity is 59,000 pounds per hour through eight induction heaters.
Mercer's existing equipment can handle forging weights from 3 to 100 pounds and
forging diameters ranging from 2 1/2 inches to 5 1/2 inches. Shear/saw
production can handle up to 6 inch diameter billets.
17
18
Mercer presently operates eight press lines consisting of one 4,000 ton,
two 3,000 ton, two 2,000 ton and three 1,300 ton press lines with billet
loaders, induction furnaces, and trim presses. The plant uses four microalloy
conveyors. Mercer is also equipped with saws and shearers to cut billets from
round and square steel bars. Mercer maintains a fully equipped quality control
facility, magniflux machine, shot cleaning equipment, complete die welding
facility and die repair machine shop. A&M operates approximately 20 CNC lathes
and mills as well as a high speed die machining operation utilizing 2 CNC mills.
Employees
Mercer currently employs approximately 140 full time hourly forging
employees and A&M employs approximately 40 full time hourly machining employees,
all of whom are represented by collective bargaining agreements with United
Steel Workers of America. Following a three month strike ending June 28, 1999,
Mercer has a five year contract ending in 2004. Management believes labor
relations are stable and improving following the three-month strike.
Environmental Matters
Mercer is subject to environmental, health and safety laws comparable to
those governing the Company. See "- The Company (other than the Acquired
Subsidiaries) -Environmental Matters."
DEETER FOUNDRY, INC.
Overview
Since 1945, Deeter has been producing gray iron castings for the heavy
municipal market. Deeter's municipal casting product line includes manhole
frames and covers, storm sewer inlet frames, grates and curbs, trench grating
and tree grates. Deeter also produces a wide variety of special application
construction castings. These products are utilized in waste treatment plants,
airports, telephone and electrical construction projects. Deeter's centralized
location in Lincoln, Nebraska allows it to service the majority of its
geographical market area with overnight delivery. In addition, Deeter maintains
2 stockyards located in the midwest and western U.S.
Products, Customers and Markets
Deeter manufactures the same products, serves the same markets and sells
to the same customer and market base as Neenah's heavy municipal line. See"-The
Company (other than the Acquired Subsidiaries) -Products, Customers and
Markets."
Raw Materials
The primary raw materials used by Deeter to manufacture iron castings are
cast iron scrap, metallurgical coke and silica sand. While there are multiple
suppliers for each of these commodities, Deeter has sourcing arrangements with
its suppliers of each of these major raw materials. Due to long standing
relationships with each of its suppliers, Deeter believes that it will continue
to be able to secure raw materials from its suppliers at competitive prices. The
primary energy sources for Deeter's operations, electricity and natural gas, are
purchased through utilities.
18
19
Although the prices of all raw materials used by Deeter vary, the
fluctuations in the price of steel scrap are the most significant to Deeter.
Deeter builds to stock based on forecast sales during any given period and
generally does not have any long term customer contracts. As a result, in
periods of rapidly rising or falling scrap prices, prices charged to customers
will relatively quickly reflect the current scrap price. Rapidly fluctuating
scrap prices may have a temporary adverse or positive effect on Deeter's results
of operations.
Competition
Deeter operates in the same industry as the Company and therefore faces the
same competitive environment as the Company. See "-The Company (other than the
Acquired Subsidiaries) -Competition."
Manufacturing Facilities
Deeter is located on an 10 acre site with 65,000 square feet of
manufacturing area. Deeter operates three green sand molding lines with a
current annual capacity of 24,000 net saleable tons. Deeter maintains stockyards
located in Denver, Colorado and their primary distribution yard is located on
site in Lincoln, Nebraska.
Employees
At September 30, 1999 Deeter had 97 full time hourly employees and 25
salaried employees. The workers are non-union and Deeter believes its relations
with its employees are good.
Environmental Matters
Deeter is subject to environmental, health and safety laws comparable to
those governing the Company. See " -Company (other than the Acquired
Subsidiaries) -Environmental Matters."
On May 30, 1997, prior to the Company's acquisition of Deeter, Deeter
pleaded guilty to disposing of hazardous waste without a permit and agreed to
pay a fine of $500,000, performed (by its president, Douglas E. Deeter) 300
hours of community service and provided certain information regarding its waste
handling and disposal practices. Management believes that Deeter has complied
with regulations and that the matter will result in no further liabilities.
CAST ALLOYS INC.
Overview
Cast Alloys manufactures and sells titanium and stainless steel clubheads
for the golf industry. Cast Alloy's operating facilities have been structured to
manufacture and machine specific components to customer specifications. Cast
Alloys uses an investment casting manufacturing process utilizing equipment
which will allow the expansion into alternative commercial products.
Products and Markets
Cast Alloy's clubheads are generally used in premium-quality stainless
steel and titanium golf clubs targeted at the high end of the market. These
clubs must satisfy the requirements of highly-skilled amateur and professional
golfers, including touring professionals. Cast Alloys' clubheads are included in
a variety of leading metal woods, irons and putters.
19
20
Manufacturing Process
Investment Casting. Investment-casting is highly specialized method of
making metal products and has become the principal method for the manufacture of
metal 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.
Polishing and finishing process. Cast Alloys conducts golf clubhead polishing
and finishing operations, including painting, at its facilities in Tijuana,
Mexico. Finishing of the head for an iron or putter can require more than 50
separate steps and finishing of a head for a metal wood can involve as many as
100 separate steps. When the process is completed, a fully finished golf
clubhead is delivered to the customer per their exact specifications.
Metal Alloys. All of the clubheads manufactured by Cast Alloys 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. Cast Alloys' Northridge facility is designed
exclusively for high volume titanium casting operations.
Quality Control. Cast Alloys believes that its success as a leading supplier of
golf clubheads is largely attributable to its statistical quality control
measures. Cast Alloys 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.
Customers
Substantially all of the clubheads manufactured by Cast Alloys are used by
leading golf equipment companies in the production of high-quality,
premium-priced golf clubs. Most golf club companies source the three principal
components of a golf club--the clubhead, shaft, and grip--from independent
suppliers like Cast Alloys, which manufacture these components to meet each
customer's specifications. Cast Alloys is currently a major supplier of
stainless steel and titanium clubheads to Callaway and Taylor Made.
Cast Alloys believes that it has successfully established close working
relationships with the leading golf club manufacturers. Cast Alloys' sales and
marketing activities are conducted by a limited number of direct sales
employees, as well as senior executives of Cast Alloys.
Raw Materials
All of the clubheads and other commercial/industrial parts manufactured by
Cast Alloys 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 alloys from overseas and steel is procured domestically, both at
very competitive prices with long term supply agreements.
Competition
Cast Alloys operates in a highly competitive market and competes primarily
with four major golf clubhead manufacturers in the United States, including but
not limited to Coastcast Corporation, Sturm Ruger, Inc., Selmet, Inc., and
Hitchiner Manufacturing Co., Inc.
20
21
Manufacturing Facilities
Cast Alloys' corporate and administrative offices and manufacturing
facilities currently occupy an aggregate of 231,277 square feet in six separate
locations. All of Cast Alloys' facilities are leased. Cast Alloys believes that
each of these properties are in good condition and that these facilities are
sufficient for current and anticipated needs. In June, 1999 Cast Alloys
purchased an R&D facility from Callaway Golf which it will use for its
manufacturing operations. Eventually, the facilities at Northridge and
Chatsworth, CA. will be vacated.
Employees
At September 30, 1999, Cast Alloys had 377 full time employees at its U.S.
locations and 1,923 full time employees at its three Mexican locations. The
workers are non-union and Cast Alloys believes its relations with its employees
are good.
Environmental Matters
None.
Item 2. PROPERTIES
The Company and the Acquired Subsidiaries maintain the following locations.
All of the facilities are owned, with the exception of Cast Alloys' facilities,
Mercer's machining facility and the Dublin, OH office facility, which are
leased.
ENTITY LOCATION PURPOSE
------ -------- -------
ACP Holding Company Dublin, OH Office facility
Neenah Foundry Company Neenah, WI 2 manufacturing facilities
Office facility
Dalton Corporation Warsaw, IN Manufacturing/office facility
Kendallville, IN Manufacturing facility
Ashland, OH Manufacturing facility
Stryker, OH Machining facility
Advanced Cast Products, Inc. Meadville, PA Manufacturing/office facility
South Easton, MA Manufacturing facility
Ironton, OH Manufacturing facility
Mercer Forge Corporation Mercer, PA Manufacturing/office facility
Sharon, PA Machining facility
Deeter Foundry, Inc. Lincoln, NE Manufacturing/office facility
Cast Alloys, Inc. Carlsbad, CA Office facility / R&D Center
Northridge, CA Manufacturing facility
Tijuana, B.C.N. Mexico Manufacturing facility
Chatsworth, CA Storage facility
The principal equipment at the facilities consist of molding machines,
presses, machining equipment, welding, grinding and painting equipment. The
Company and its acquired subsidiaries regard its plant and equipment as
well-maintained and adequate for its needs. In addition to the facilities above,
the Company owns seven and leases seven distribution and sales centers.
21
22
Item 3. LEGAL PROCEEDINGS
The Company and Acquired Subsidiaries are 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, or the Acquired Subsidiaries.
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, 1999.
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23
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, 1999.
Item 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth the selected historical consolidated
financial and other data of the Company for the three years ended March 31,1997,
the six months ended March 31, 1997, and the one month ended April 30, 1997 (the
"Predecessor Company"), which have been derived from the Company historical
consolidated financial statements before the Merger and the five months ended
September 30, 1997 and the years ended September 30, 1998 and 1999, which have
been derived from the Company's historical consolidated financial statements
following the Merger. 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
------------------------------------------------------
Fiscal Year Ended
-----------------
March 31,
--------- Six Months One Month Five Months Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
--------- -------- -------- March 31, April 30, September 30, September 30, September 30,
(Dollars in thousands) 1995 1996 1997 1997 1997 1997 1998 (1) 1999 (2)
STATEMENT OF ---- ---- ---- ---- ---- ---- -------- --------
INCOME DATA:
Net sales $160,621 $166,951 $165,426 $75,686 $17,276 $ 108,353 $ 303,414 $ 530,057
Cost of sales 120,981 121,631 116,736 53,749 11,351 77,444 222,451 432,437
------------------------------------------------------------------------------------------------
Gross profit 39,640 45,320 48,690 21,937 5,925 30,909 80,963 97,620
Selling, general,
and administrative
expenses 16,673 16,983 17,547 8,247 1,752 8,642 23,192 35,855
Other expenses (3) - - - - - 10 38 7,502
Amortization expense - - - - - 3,900 7,727 11,696
------------------------------------------------------------------------------------------------
Operating income 22,967 28,337 31,143 13,690 4,173 18,357 50,006 42,567
Interest expense
(income), net 397 (481) (1,162) (726) (121) 9,991 27,203 42,395
------------------------------------------------------------------------------------------------
Income before taxes &
extraordinary item 22,570 28,818 32,305 14,416 4,294 8,366 22,803 172
Provision for income
taxes 8,866 11,676 12,467 4,701 1,615 4,000 10,922 2,064
------------------------------------------------------------------------------------------------
Income/(loss) 13,704 17,142 19,838 9,715 2,679 4,366 11,881 (1,892)
before
Extraordinary item
Extraordinary item (4) - - - - - 1,630 392 -
------------------------------------------------------------------------------------------------
Net income/(loss) $13,704 $ 17,142 $19,838 $9,715 $ 2,679 $2,736 $ 11,489 $(1,892)
================================================================================================
=====================================================================================================================
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24
Predecessor Company
----------------------------------------------------
Fiscal Year Ended Six Months One Month Five Months Fiscal Year Fiscal Year
March 31, Ended Ended Ended Ended Ended
--------- -------- -------- March 31, April 30, September 30, September 30, September 30,
(Dollars in thousands) 1995 1996 1997 1997 1997 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ----
- ------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET
DATA (AT END
OF PERIOD):
Cash and Cash $ 118 $ 238 $10,126 $22,403 $29,046 $20,346 $19,978 $17,368
Equivalents
Working Capital 14,419 15,239 28,113 43,707 34,052 40,849 78,186 83,962
Total Assets 74,327 73,813 82,957 93,869 102,067 358,406 584,309 641,702
Total Debt 13,325 887 241 134 129 218,314 371,871 429,221
Total Stockholder's 37,929 43,198 54,970 68,857 74,458 47,407 67,922 63,750
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) In 1999, this amount includes a $6.7 million charge related to the
closure of Dalton's Ashland facility.
(4) 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.
24
25
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.
On April 30, 1997, pursuant to the Merger Agreement, the Predecessor
Company was acquired by NFC Castings, Inc. On July 1, 1997, Neenah Foundry
Company, which was the principal operating subsidiary of Neenah Corporation,
merged with and into Neenah Corporation and the surviving company changed its
name to Neenah Foundry Company.
The following discussion and analysis of the Company's financial condition
and results of operations addresses the periods both before and after the
Merger. The Merger has had a significant impact on the Company's results of
operations and financial condition. The Merger resulted in the recording of
goodwill and identifiable intangible assets totaling $148.8 million. These
amounts are being amortized over their estimated useful lives, ranging from 5 to
40 years. The Merger has also resulted in a significant increase in the
Company's interest expense as a result of an increased level of indebtedness. As
a result of the Merger, the financial data presented herein for the Pro Forma
Twelve Months Ended September 30, 1997 period represents the combination of
financial data for the Predecessor Company's seven month period ended April 30,
1997 and the Company's five month period ended September 30, 1997 and does not
include any financial data for the Recent Acquisitions, excluding ACP. The Pro
Forma Twelve Months Ended September 30, 1997 data was prepared by adding
together the respective amounts of each line item for such seven month and five
month periods. No purchase accounting or other pro forma adjustments have been
made. The following discussion includes the comparison of the results of
operations of the Company for the fiscal year ended September 30, 1998 to the
combined historical results of the operations of the Company and the Predecessor
Company for the twelve months ended September 30, 1997.
The Recent Acquisitions have had a significant impact on the Company's
results of operations and financial condition. Each of the Recent Acquisitions
(other than the ACP acquisition) was accounted for using the purchase method of
accounting. These Recent Acquisitions resulted in the recording of goodwill and
identifiable intangible assets totaling $129.3 million. These amounts are being
amortized over their estimated useful lives, ranging from 5 to 40 years. The
Recent Acquisitions have also resulted in a significant increase in the
Company's interest expense as a result of a substantially increased level of
indebtedness incurred to finance the Recent Acquisitions. The contribution of
the capital stock of ACP was accounted for in a manner similar to a pooling of
interests because the Company and ACP were under common control. The financial
results for the period from inception, May 1, 1997 through September 30, 1997
have been restated to account for this transaction.
The Company changed its fiscal year end to September 30 from March 31 effective
September 30, 1997.
On November 30, 1999, the Company acquired all of the capital stock of
Gregg Industries, Inc., (Gregg) and all the assets of its affiliate,
Environmental Sand Reclamation and Coating, Inc. for approximately $22.5
million, subject to adjustments as defined in the Agreement and Plan of Merger.
Gregg is a manufacturer of gray and ductile iron castings for industrial and
commercial use. The acquisition was financed through borrowings under the
Company's Acquisition Loan Facility.
25
26
COMPARISON OF FISCAL YEAR ENDED SEPTEMBER 30, 1999 TO FISCAL YEAR ENDED
SEPTEMBER 30, 1998
Net Sales. Net sales for the year ended September 30, 1999 were $530.1
million which was $226.7 million or 74.7% higher than the fiscal year ended
September 30, 1998. The Acquired Subsidiaries accounted for an increase of
$225.0 million in net sales. Net sales of municipal castings increased by $9.1
million or 11.7% due primarily to a strong economy in the upper Midwest and
market share gains in strategic focus areas of the East and Southwest. Net sales
of industrial castings decreased by $6.5 million or 5.2% as the continued
strength of the heavy duty truck market was more than offset by sharply lower
demand in the agricultural business.
Gross Profit. Gross profit for the year ended September 30, 1999 was $97.6
million, an increase of $16.6 million or 20.5%, as compared to the fiscal year
ended September 30, 1998. The increase of $14.8 million was from the inclusion
of the operating results of the Acquired Subsidiaries excluding ACP after their
acquisition. The remaining margin improvement was due to favorable pricing for
certain raw materials and improved efficiency in plant operations. Gross profit
as a percentage of net sales decreased to 18.4% during the year ended September
30, 1999 from 26.7% for the fiscal year ended September 30, 1998. Gross profit
was negatively impacted by a strike at Mercer which began in April, 1999 and was
settled in July, 1999. In addition, Cast Alloys had a negative gross margin for
the first four months (January 1999 through April 1999) after its acquistion.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended September 30, 1999 were $35.9
million, an increase of $12.7 million over the $23.2 million for the fiscal year
ended September 30, 1998. The majority of the increase in selling, general and
administrative expense was due to the inclusion of $10.3 million of expenses
from the Acquired Subsidiaries. The remainder of the increase was due to higher
acquisition expenses. As a percentage of net sales, selling, general and
administrative expenses decreased from 7.7% for the fiscal year ended September
30, 1998 to 6.8% for the year ended September 30, 1999. The percentage decrease
was due to expenses being spread over a larger volume base with the inclusion of
the Acquired Subsidiaries' operating results.
Amortization of intangible assets. Amortization of intangible assets was
$11.7 million for the year ended September 30, 1999, an increase of $4.0
million, or 51.9%, as compared to the $7.7 million for the fiscal year ended
September 30, 1998. The increase is due to the increased amortization from
goodwill and identifiable intangible assets from the Acquired Subsidiaries,
excluding ACP.
Other expenses. During the year ended September 30, 1999, a restructuring
charge of $6.7 million was recorded to close Dalton's Ashland 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 is a non-cash charge for impairment of assets that will no longer be
used and the remaining amount of $.7 million will be cash outlays for exit
activity costs during the year ended September 30, 2000. The restructuring is
expected to improve future operating results and liquidity, however, the amount
of the improvement is undeterminable at this time. Also included in other
expenses for the year ended September 30, 2000 is a loss of $.7 million for the
disposal of assets in the ordinary course of business.
Operating Income. Operating income was $42.6 million for the year ended
September 30, 1999, a decrease of $7.4 million or 14.8% from fiscal year ended
September 30, 1998. The decrease in operating income was caused by a $6.7
million charge related to the closing of Dalton's Ashland facility and increased
amortization expense. This was partially offset by the inclusion of the
operating results of the Acquired Subsidiaries. As a percentage of net sales,
operating income decreased from 16.5% for the fiscal year ended September 30,
1998 to 8.0% for the year ended September 30, 1999.
26
27
Net Interest Expense. Net interest expense increased from $27.2 million for
the fiscal year ended September 30, 1998 to $42.4 million for the year ended
September 30, 1999. The increased interest expense resulted from the drawings
under the Company's Senior Bank Facilities to finance the Mercer, Deeter,
Dalton, and ACP acquisitions which were outstanding for the entire year ended
September 30, 1999. In addition, interest was incurred on the Senior
Subordinated Notes used to finance the Cast Alloys acquisition.
Provision for Income Taxes. The provision for income taxes for the year
ended September 30, 1999 is higher than the amount computed by applying the
statutory rate of approximately 40% to income before income taxes mainly due to
the amortization of goodwill which is not deductible for income tax purposes.
Extraordinary Item. During the year ended September 30, 1998, the Company
recorded an extraordinary loss of $0.4 million (which is net of an income tax
benefit of $0.3 million) for the write-off of unamortized deferred financing
costs in connection with the repayment in full of indebtedness of ACP prior to
its scheduled maturity.
COMPARISON OF FISCAL YEAR ENDED SEPTEMBER 30, 1998 TO PRO FORMA TWELVE MONTHS
ENDED SEPTEMBER 30, 1997
Net Sales. Net sales for the year ended September 30, 1998 were $303.4
million which was $102.1 million or 50.7% higher than the pro forma twelve
months ended September 30, 1997. The Acquired Subsidiaries excluding ACP
accounted for an increase of $53.5 million in net sales. The inclusion of ACP
for twelve months in 1998 versus five months in 1997 accounted for an increase
of $33.7 million in net sales. Net sales of municipal castings increased by $3.1
million or 4.2 % due primarily to a strong economy in the upper Midwest and
market share gains in strategic focus areas of the East and Southwest. Net sales
of industrial castings increased by $11.7 million or 11.8% due to the overall
strength of the heavy duty truck market coupled with high demand in the
agricultural business.
Gross Profit. Gross profit for the year ended September 30, 1998 was $81.0
million, an increase of $22.2 million or 37.8%, as compared to the pro forma
twelve months ended September 30, 1997. Approximately $8.0 million of the
increase was from the inclusion of the operating results of the Acquired
Subsidiaries excluding ACP after their acquisition. The inclusion of ACP for
twelve months in 1998 versus five months in 1997 accounted for an increase of
$6.4 million in gross profit. The remaining margin improvement was due to the
combined effect of spreading manufacturing overhead over a greater volume and
improved efficiency in plant operations. Gross profit as a percentage of net
sales decreased to 26.7% during the year ended September 30, 1998 from 29.2% for
the pro forma twelve months ended September 30, 1997. The decline in gross
profit percentage is attributable to the mix of industrial products and lack of
seasoning from the Acquired Subsidiaries excluding ACP.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended September 30, 1998 were $23.2
million, an increase of $4.5 million or 24.4% over the $18.7 million for the pro
forma twelve months ended September 30, 1997. The increase in selling, general
and administrative expense was due to the inclusion of $2.7 million of expenses
from the Acquired Subsidiaries, excluding ACP, after their acquisition. The
inclusion of ACP for twelve months in 1998 versus five months in 1997 accounted
for an increase of $3.0 million in expenses. As a percentage of net sales,
selling, general and administrative expenses decreased from 9.3% for the pro
forma twelve months ended September 30, 1997 to 7.7% for the year ended
September 30, 1998. The percentage decrease was due to expenses being spread
over a larger volume base with the inclusion of the Acquired Subsidiaries'
operating results, excluding ACP.
27
28
Amortization of intangible assets. Amortization of intangible assets was
$7.7 million for the year ended September 30, 1998, an increase of $3.8 million,
or 97.4%, as compared to the $3.9 million for the pro forma twelve months ended
September 30, 1997. The increase is due to the recording of twelve months of
amortization during the period ended September 30, 1998 for the goodwill and
identifiable intangible assets arising from the Merger versus five months of
amortization during the period ended September 30, 1997 as well as increased
amortization from goodwill and identifiable intangible assets from the Acquired
Subsidiaries, excluding ACP.
Operating Income. Operating income was $50.0 million for the year ended
September 30, 1998, an increase of $13.8 million or 38.1% from the pro forma
twelve months ended September 30, 1997. The improvement in operating income was
achieved for the reasons discussed above under gross profit. As a percentage of
net sales, operating income decreased from 18.0% for the pro forma twelve months
ended September 30, 1997 to 16.5% for the year ended September 30, 1998. The
decrease in operating income percentage was due to the factors discussed above
under gross profit, as well as increased amortization of intangible assets.
Net Interest Expense. Net interest expense increased from $9.1 million for
the pro forma twelve months ended September 30, 1997 to $27.2 million for the
year ended September 30, 1998. The increased interest expense resulted from the
Company's Senior Subordinated Notes being outstanding for twelve months during
the year ended September 30, 1998 and only five months during the period ended
September 30, 1997 and the interest on the drawings under the Company's Senior
Bank Facilities to finance the Recent Acquisitions.
Provision for Income Taxes. The provision for income taxes for the year
ended September 30, 1998 is higher than the amount computed by applying the
statutory rate of approximately 40% to income before income taxes mainly due to
the amortization of goodwill which is not deductible for income tax purposes.
Extraordinary Item. During the year ended September 30, 1998, the Company
recorded an extraordinary loss of $0.4 million (which is net of an income tax
benefit of $0.3 million) for the write-off of unamortized deferred financing
costs in connection with the repayment in full of indebtedness of ACP prior to
its scheduled maturity. For the pro forma twelve months ended September 30,
1997, the Company recorded an extraordinary loss of $1.6 million (which is net
of an income tax benefit of $1.0 million) for the write-off of unamortized
deferred financing costs in connection with the repayment in full of the term
indebtedness under the Company's Senior Bank Facilities.
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29
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Merger, the Company issued $150.0 million principal
amount of 11-1/8% Senior Subordinated Notes due 2007 (the Senior Subordinated
Notes) and entered into a credit agreement providing for term loans of $45.0
million and a revolving credit facility of up to $30.0 million (the "Senior Bank
Facilities.) On July 1, 1997, the Company issued an additional $45.0 million
principal amount of 11-1/8% Senior Subordinated Notes and used the proceeds of
$47.6 million to pay the term loans under the Senior Bank Facility, the accrued
interest thereon and related fees and expenses. In addition, on September 12,
1997, the Company amended the revolving credit facility under the Senior Bank
Facility to increase the borrowings available under the revolving credit
facility from $30.0 million to $50.0 million and eliminate all borrowing base
limitations. On April 3, 1998, in connection with the acquisition of Mercer, the
Company, ACP Holdings and the lenders party thereto amended the Credit Agreement
to provide availability of $75.0 million of term loans to the Company
(consisting of $20.0 million of Tranche A Loans and $55.0 million of Tranche B
Loans) in addition to the Company's existing $50.0 million Revolving Credit
Facility. On September 8, 1998, in connection with the acquisition of Dalton and
the contribution of the capital stock of ACP, the Company, ACP Holdings and the
lenders party thereto amended and restated the Credit Agreement to provide for
additional Tranche B Loans in an aggregate principal amount of $70.0 million and
an Acquisition Loan Facility in aggregate principal amount outstanding at any
one time not to exceed $50.0 million. On November 24, 1998, the Company sold
$87.0 million principal amount of Senior Subordinated Notes, using $42.7 million
of the total proceeds of $86.8 million (net of debt issuance costs) to finance
the acquisition of Cast Alloys and $29.0 million of the proceeds to pay down
borrowings under the Acquisition Loan Facility. The Company used the remaining
proceeds for general corporate purposes.
The Company's liquidity needs will arise primarily from debt service on the
above indebtedness, working capital needs, the funding of capital expenditures
and additional acquisitions. Borrowings under the Senior Bank Facilities bear
interest at variable interest rates. The Senior Bank Facility imposes
restrictions on the Company's ability to make capital expenditures and both the
Senior Bank Facility and the indentures governing the Senior Subordinated Notes
limit the Company's ability to incur additional indebtedness. The covenants
contained in the Senior Bank Facility also, among other things, restrict the
ability of the Company and its subsidiaries to dispose of assets, incur
guarantee obligations, prepay the Senior Subordinated Notes or amend 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, make
capital expenditures or engage in certain transactions with affiliates, and
otherwise restrict corporate activities.
For the fiscal year ended March 31, 1997, the pro forma twelve months ended
September 30, 1997 and the fiscal years ended September 30, 1998 and 1999,
capital expenditures were $4.5 million, $5.1 million, $13.1 million and $41.6
million, respectively. The capital expenditures for the year ended September 30,
1999 were primarily the result of planned enhancements to certain equipment in
the manufacturing area and include expenditures of the Acquired Subsidiaries,
excluding ACP, since their acquisition date. Beside normal capital expenditures
at Neenah of $7.2 million, other significant capital expenditures were incurred
for updating of molding machines, melt and sand systems and purchase of an R&D
facility at certain subsidiaries during the fiscal year ended September 30,
1999.
The Company's principal source of cash to fund its liquidity needs will be
net cash from operating activities and borrowings under its Senior Bank
Facilities. Net cash from operating activities for the years ended September 30,
1999 and 1998 was $31.1 million and $24.2 million, respectively. The increase
was due to increased operating income (before amortization and restructuring
charges) from the inclusion of the operating results of the Acquired
Subsidiaries. Net cash from operating activities for the pro forma twelve months
ended September 30, 1997 was $37.4 million, an increase of $13.9 million from
$23.5 million for the year ended March 31, 1997, primarily as a result of an
increase in operating income.
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.
29
30
Amounts under the $50.0 million Revolving Credit Facility may be used for
working capital and general corporate purposes, subject to certain limitations
under the Senior Bank Facilities. Amounts under the Acquisition Loan Facility
may be used to make acquisitions permitted 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 goal of
making selective acquisitions.
RAW MATERIALS
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 require 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 subject to the bid generally cannot be adjusted for raw
material price increases. However, in most cases the Company 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 a temporary adverse or positive effect on the Company's results
of operations.
INFLATION
The Company does not believe that inflation has had a material impact on
its financial position or results of operations during the past three years.
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 its second quarter in
March. The Company has not historically experienced seasonality in industrial
casting sales.
YEAR 2000
The company and its subsidiaries have conducted an evaluation of the
actions necessary in order to ensure that its computer systems will be able to
function without disruption with respect to the application of dating systems in
the year 2000. As a result of this evaluation, each company within the
consolidated entity is engaged in the process of upgrading, replacing and
testing certain of its information and other computer systems in order to
operate without disruption due to the year 2000 issues. The following represents
a summary of the status of information systems and non-information systems by
subsidiary:
Neenah Foundry Company
Information Systems. As of September 30, 1999, we believe that our information
systems are fully compliant with the year 2000. A local consulting firm has been
engaged since March, 1998 to assess the adequacy of all Neenah's software and
make whatever changes are necessary to be compliant with year 2000 issues. As of
September 30, 1999, Neenah completed all assessment, remediation and testing of
its software.
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31
Non-Information Systems. With respect to date sensitive non-information systems,
Neenah has completed the assessment phase and internal checking all computer
programs and PC units, including embedded chip technology and microcontrollers,
for year 2000 compliance. This phase was completed by September 30, 1999.
Remediation began upon completion of the assessment phase and is scheduled to be
completed before December 31, 1999 for material programs and equipment.
Additionally, we are working with our insurance carrier to develop contingency
plans in the event a system failure occurs in our holding furnaces and other
equipment used in processing molten metal.
Dalton Corporation
Information Systems. The task force organized to address year 2000 issues at
Dalton Corporation has completed all phases of its plan to ensure all critical
systems are Year 2000 compliant. These efforts included full time dedication to
the project by approximately six employees over the past 18 months. Total costs
incurred during the project, including wages and benefits, are estimated at
$500,000.
Non-Information Systems. Virtually all of Dalton's non-information systems used
in the operation of its facility are not date sensitive. All date sensitive
non-information systems have been inventoried, assessed, remediated and tested
and are believed to be Year 2000 compliant.
Advanced Cast Products
Information Systems. An internal task force has reviewed
all financial and information systems currently in use and has determined that
all existing systems are year 2000 compliant.
Non-Information Systems. We believe all computer numeric controls and other
controls within the operation are year 2000 compliant.
Mercer Forge Corporation
Information Systems. New year 2000 compliant software has been purchased for
Mercer and A&M . Mercer's software has been installed and is fully operative.
The same package has been installed at A&M and will be fully operative by
December 15, 1999.
Non-Information Systems. Older PC's are currently being replaced and custom
programs have been reviewed and updated where necessary. Manufacturing
programmable controllers and computer numeric controls have been analyzed for
year 2000 problems and we believe no problems exist that will have any material
adverse effect on the business.
Deeter Foundry
Information Systems. New year 2000 compliant software has been installed and is
fully operational.
Non-Information Systems. With respect to non-information systems, Deeter has
just completed major renovations in the melting and sand system areas. As a
result, all of these systems are compliant with year 2000 issues.
Cast Alloys, Inc.
Information Systems. Cast Alloys has assembled a year 2000 task force consisting
of representatives from each company location to complete the assessment phase,
conduct research, complete testing and create contingency plans at Cast Alloys.
New year 2000 compliant financial software was installed in August, 1999 for
approximately $25,000. This remediation phase is complete. Contingency plans
will be completed prior to December 31, 1999 for those areas in which
remediation is not feasible.
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32
Non-Information Systems. With respect to non-information systems, Cast Alloys is
in the assessment phase and is currently reviewing all critical systems
internally as well as embedded chip technology and microcontrollers to make sure
they are year 2000 compliant. The assessment and remediation phase is expected
to be completed by December 31, 1999, and contingency plans will be completed
for those areas in which remediation is not feasible.
In summary, we believe that all out important critical vendors and
customers either have or will have addressed any problems associated with the
year 2000 issue such that there will be no significant deterioration in future
business dealings due to this issue.
Costs specifically associated with renovating software for year 2000
readiness are funded through operating cash flows and expensed as incurred. Year
2000 related costs have not had a material effect on the Company's financial
position or results of operations. The Company and subsidiaries expect to incur
total costs (capital and expense) in the range of $1.5 to $2.0 million on the
year 2000 problem of which a total of approximately 5% to 10% is remaining to be
incurred. Costs of replacing some of the systems with Year 2000 compliant
systems (including both hardware and software) that have an extended useful life
in excess of one year have been appropriately capitalized.
Although there can be no assurance that the remedial actions being
implemented by the Company and its subsidiaries will address every issue
relating to the year 2000 issue, the Company believes it is unlikely that any
disruptions resulting from the year 2000 issue would have any significant impact
on its overall operations. Although it is highly unlikely that the Company will
face year 2000 issues that significantly impact its overall operations, business
continuity plans have been developed to handle potential contingencies regarding
unforeseen year 2000 problems. Up to this point, no critical informational
technology projects have been either delayed or curtailed due to year 2000
efforts. In addition, the Company and subsidiaries have not experienced any
significant year 2000 problems to date.
Item 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 or trading
purposes.
Interest Rate Sensitivity. The Company's earnings are affected by changes
in short-term interest rates as a result of its borrowings under the Senior Bank
Facilities. If market interest rates for such borrowings averaged 1% more during
the fiscal year ended September 30, 2000 than they did during fiscal 1999, the
Company's interest expense would increase, and income before income taxes would
decrease by approximately $4.0 million. This analysis does not consider the
effects of the reduced level of overall economic activity that could exist in
such an environment. Further, in the event of a change of such magnitude,
management could take actions to further mitigate its exposure to the change.
However, due to the uncertainty of the specific actions that would be taken and
their possible effects, the sensitivity analysis assumes no changes in the
Company's financial structure.
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.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information as of September 30, 1999, with
respect to the persons who are members of the Board of Directors, key executive
officers and certain other key employees of the Company.
Name Age Position
---- --- --------
James K. Hildebrand 63 Chairman of the Board and Chief Executive Officer
William M. Barrett 52 President
Gary W. LaChey 53 Vice President - Finance, Treasurer and Secretary
Charles M. Kurtti 62 Vice President - Manufacturing and Engineering
William J. Martin 52 President - Hartley Controls Corporation
John Z. Rader 51 Vice President - Human Resources
Timothy J. Koller 50 Vice President - Construction Products, Sales, and Engineering
Frank C. Headington 50 Vice President - Marketing and Technology
Brenton F. Halsey 70 Director
David F. Thomas 49 Director
John D. Weber 35 Director
Mr. Hildebrand is Chairman of the Board and Chief Executive Officer of ACP
Holding Company, a position he has held since May 1, 1997. Mr. Hildebrand had
been President and Chief Executive Officer of Advanced Cast Products, Inc. from
1988 to 1997. Previously, he served as President of the Cast Products Group of
Amcast Industrial Corp.
Mr. Barrett is President of the Company, a position he has held since
October 1, 1998. 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. From 1985 to 1992,
Mr. Barrett was the Vice President - Sales for Harvard Industries Cast Products
Group.
Mr. LaChey is Vice President - Finance, Treasurer and Secretary of the
Company, a position he has held since May 1, 1997. 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 - Administration
of the Company.
Mr. Kurtti is Vice President - Manufacturing and Engineering, of the
Company, a position he has held since 1991. Mr. Kurtti joined the Company in
1976 as a salesman. Mr. Kurtti has served as Director of Marketing, Director of
Purchasing - Engineering and Director - Manufacturing and Engineering.
Mr. Martin is President - Hartley Controls Corporation, a wholly owned
subsidiary of the Company, a position he has held since 1998. From 1996 to
September 30, 1998 Mr. Martin was Vice President and General Manager.
Previously, Mr. Martin was Territory Sales Manager at Disamatic, Inc., a molding
machine manufacturer, from 1986 to 1996.
Mr. Rader is Vice President - Human Resources, a position he has held since
1990. Mr. Rader joined The Company in 1987, serving as Director - Personnel
until 1989 and as Director - Human Resources until 1990. Mr. Rader resigned his
position effective September 30, 1999.
Mr. Koller is Vice President - Construction Products, Sales and Engineering
for the Company. Mr. Koller joined the Company in 1978, serving in a variety of
positions of increasing responsibility in the sales and marketing departments.
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Mr. Headington is Vice President - Marketing and Technology, a position he
has held since 1999. Mr. Headington joined the Company in 1989, as Manager -
Technical Services, a position he held until 1991. Previously Mr. Headington
served as Director - Product Reliability, from 1991 to 1999.
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. for more than the past five years. 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.
Directors of the Company who are officers or employees of the Company or
its affiliates are presently not expected to receive compensation for their
services as directors. No determination has yet been made with respect to
compensation for directors of the Company who are not officers or employees of
the Company or any of its affiliates. Directors of the Company will be entitled
to reimbursement of their reasonable out-of-pocket expenses in connection with
their travel to and attendance at meetings of the board of directors or
committees thereof.
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ITEM 11. Executive Compensation
The compensation of executive officers of the Company will be determined by
the Board of Directors of the Company. None of the histori