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| NENA.OB > SEC Filings for NENA.OB > Form 10-Q on 12-Feb-2009 | All Recent SEC Filings |
12-Feb-2009
Quarterly Report
third quarter of fiscal 2008. The second phase of the project includes enhanced
core-making capabilities and the inclusion of ductile iron capacity. At
December 31, 2008, we had expended $51.1 million and an additional $3.0 million
of expenditures are necessary to complete the second phase of the new mold line
project as of such date. We are currently monitoring the feasibility of making
the remaining expenditures necessary to complete the second phase of the project
in light of the current trends impacting our business.
Asset Purchase. On August 5, 2008, the Company purchased substantially all of
the assets of Morgan's Welding, Inc. (Morgan's), a steel fabricator located in
Pennsylvania, for a cash purchase price of $4.1million. In addition, the Company
incurred $0.3 million in direct costs related to the acquisition and assumed
$0.6 million of current liabilities. The purchase was financed through
borrowings under the 2006 Credit Facility. This purchase is expected to
significantly improve the Company's ability to service customers in the
municipal markets in the Northeastern United States. See Note 7 to the condensed
consolidated financial statements for further information.
Increase of 2006 Credit Facility. On July 17, 2008, we received the consent
and waiver of our existing lenders to increase the maximum amount of financing
available under the 2006 Credit Facility from $100 million to $110 million. The
increase occurred in accordance with the accordion feature in the 2006 Credit
Facility.
Labor Agreement at Mercer. In June 2008, production employees at the Mercer
facility agreed to a new four-year collective bargaining agreement. This new
agreement expires in June 2012.
Labor Agreement at Dalton. In April 2008, production employees at the
Dalton-Warsaw facility agreed to a new five-year collective bargaining
agreement. This new agreement expires in April 2013.
Steel Scrap Volatility. We have experienced significant fluctuations in the
cost of steel scrap used in our manufacturing process. From December 2007 to
July 2008, the cost of steel scrap (measured by quoted prices for shredded steel
by Iron Age publication for the Chicago market) rose $313 per ton and then
decreased $218 per ton from July 2008 to September 2008. The cost of steel scrap
has decreased by $136 per ton from September 2008 to December 2008. Of all the
varying costs of raw materials, fluctuations in the cost of steel scrap impact
our business the most. The cost for steel scrap is subject to market forces that
are unpredictable and largely beyond our control, including demand by U.S. and
international industries, freight costs and speculation. Although we have
surcharge arrangements with our industrial customers that enable us to adjust
industrial casting prices to reflect steel scrap cost fluctuations, these
adjustments have historically lagged behind the current cost of steel scrap
during periods of rapidly rising or falling steel scrap costs because these
adjustments were generally based on average market costs for prior periods. We
have made changes to our surcharge procedures with our industrial customers in
an attempt to recover scrap cost increases on a more real time basis. We have
historically recovered steel scrap cost increases for municipal products through
periodic price increases. However, increases in steel scrap costs in fiscal 2008
forced us to institute price increases coupled with a surcharge on our municipal
casting products. Our ability to recover steel scrap increases from our
customers determines the extent of the adverse effect they have on our business,
financial condition and results of operations.
Cost Reduction Actions. On November 16, 2007, we announced a restructuring
plan intended to reduce costs and improve general operating efficiencies. The
restructuring primarily consisted of salaried headcount reductions at the
Company's operating facilities. In connection with the restructuring plan, the
Company incurred employee termination costs of $1.2 million, on a pretax basis,
which were recognized as a charge to operations during the first quarter of
fiscal 2008. See Note 6 to the condensed consolidated financial statements for
further information.
Results of Operations
The following discussions compare the results of operations of the Company for
the three months ended December 31, 2008, to the results of the operations of
the Company for the three months ended December 31, 2007.
Three months ended December 31, 2008 and 2007
Net sales. Net sales for the three months ended December 31, 2008 were
$97.6 million, which were $3.6 million or 3.5% lower than the quarter ended
December 31, 2007. The decrease was primarily the result of a 13.7% decrease in
volume, as measured in tons sold. The loss in volume was partially offset by
surcharge and price increases as a result of higher metal costs being passed
through to the customer. Sales to the construction and agriculture equipment
market were up approximately $3.9 million in the first quarter of fiscal 2009
from the first quarter of fiscal 2008. Sales of heavy-duty truck products were
down approximately $5.1 million in the first quarter of fiscal 2009 from the
first quarter of fiscal 2008. Sales to heating, ventilation and air conditioning
(HVAC) customers were down approximately $1.1 million in the first quarter of
fiscal 2009 from the first quarter of fiscal 2008. Sales of municipal products
were down approximately $0.6 million in the first quarter of fiscal 2009 from
the first quarter of fiscal 2008. Sales to other markets were down approximately
$0.7 million in the first quarter of fiscal 2009 from the first quarter of
fiscal 2008.
Cost of sales. Cost of sales for the three months ended December 31, 2008 were
$95.3 million, an increase of $7.6 million, or 8.7%, as compared to the quarter
ended December 31, 2007. Cost of sales as a percentage of net sales increased to
97.6% for the three months ended December 31, 2008 from 86.7% for the three
months ended December 31, 2007. The increase is a result of an additional
depreciation charge of $1.9 million to adjust the useful lives of long lived
assets at our Kendallville Manufacturing Facility, as discussed in Note 5 of the
Notes to Condensed Consolidated Financial Statements in Item 1 above, along with
an approximately 20% increase in raw material unit costs, principally in the
price of steel scrap, and the inability to spread fixed manufacturing costs over
additional inventory due to lower production levels.
Gross profit. Gross profit for the three months ended December 31, 2008 was
$2.3 million, a decrease of $11.2 million, or 82.8%, as compared to the quarter
ended December 31, 2007. Gross profit as a percentage of net sales decreased to
2.4% for the three months ended December 31, 2008 from 13.3% for the three
months ended December 31, 2007, as a result of the additional depreciation
charge, increased raw material costs and a decreased ability to absorb fixed
costs due to lower production levels as discussed above.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended December 31, 2008 were
$9.2 million, an increase of $0.2 million, or 2.2%, as compared to the quarter
ended December 31, 2007. Selling, general and administrative expenses as a
percentage of net sales increased to 9.4% for the quarter ended December 31,
2008 from 8.9% for the quarter ended December 31, 2007. The increase was due to
AQMD expenses incurred at Gregg and the inclusion of Morgan's operations.
Restructuring costs. The Company recorded $1.2 million of restructuring costs
during the three months ended December 31, 2007. These costs consisted of
employee termination costs incurred as a result of salaried headcount reductions
at the Company's operating facilities.
Amortization of intangible assets. Amortization of intangible assets was
$1.8 million for the three months ended December 31, 2008 and 2007.
Operating income (loss). Operating loss was $8.7 million for the three months
ended December 31, 2008, a decrease of $10.2 million from an operating income of
$1.5 million for the quarter ended December 31, 2007. As a percentage of net
sales, the operating loss was 8.9% for the three months ended December 31, 2008
compared to operating income of 1.5% for the three months ended December 31,
2007. The decrease in operating income was a result of reduced sales volumes,
increased raw material costs, and the additional depreciation related to
long-lived assets at the Kendallville Manufacturing Facility.
Net interest expense. Net interest expense was $8.7 million for the three months
ended December 31, 2008 compared to $7.6 million for the quarter ended
December 31, 2007. The increase in interest expense was the result of the
increased level of borrowing on the revolving line of credit.
Income tax provision. The effective tax rate for the three months ended
December 31, 2008 and 2007 was 32.6% and 37.9%, respectively. The decrease in
the effective tax rate is primarily due to the recording of a valuation
allowance on state tax net operating loss carry forwards.
Liquidity and Capital Resources
Refinancing Transactions. On December 29, 2006, we repaid our outstanding
indebtedness under Neenah's then existing credit facility, repurchased all
$133.1 million of Neenah's outstanding 11% Senior Secured Notes due 2010 through
an issuer tender offer, retired $75 million of Neenah's outstanding 13% Senior
Subordinated Notes due 2013 (the "13% Notes") by exchanging them for $75 million
of new 12 1/2% Senior Subordinated Notes due 2013 (the "12 1/2% Notes") in a
private transaction, and called for redemption all $25 million of Neenah's 13%
Notes that remained outstanding after the exchange for 12 1/2% Notes. Those
remaining 13% Notes were redeemed on February 2, 2007. To fund these payments
and to provide cash for our capital expenditures, ongoing working capital
requirements and general corporate purposes, Neenah (a) issued $225 million of
new 9 1/2% Senior Secured Notes due 2017 (the "9 1/2% Notes") and the
$75 million of 12 1/2% Notes and (b) entered into an amended and restated credit
facility (the "2006 Credit Facility") providing for borrowings in an amount of
up to $100 million. The 9 1/2% Notes were initially issued in a private offering
that was not registered under the Securities Act, and were subsequently
registered pursuant to an exchange offer in which the unregistered notes were
exchanged for freely transferable notes. That exchange offer was completed on
April 18, 2007. We refer to these actions collectively as the "Refinancing
Transactions."
As of December 31, 2008, our outstanding indebtedness consisted of Neenah's
$225.0 million of outstanding 91/2% Notes, $1.8 million of capital lease
obligations, Neenah's $75.0 million of outstanding 121/2% Notes, and
$70.1 million of borrowings outstanding under Neenah's 2006 Credit Facility. Our
primary sources of liquidity in the future will be cash flow from operations and
borrowings under Neenah's 2006 Credit Facility. We expect that ongoing
requirements for debt service, capital expenditures, including the remaining
expenditures for Neenah's new mold line, and other operating needs will be
funded from these sources of funds.
2006 Credit Facility. As expanded by the utilization of the $10 million
"accordion provision" in July 2008, the 2006 Credit Facility provides for
borrowings in an amount up to $110.0 million and matures on December 31, 2011.
Outstanding borrowings bear interest at rates based on the lenders' Base Rate,
as defined in the 2006 Credit Facility, or, if Neenah so elects, at an adjusted
rate based on LIBOR. Availability under the 2006 Credit Facility is subject to
customary conditions and is limited by our borrowing base determined by the
amount of our accounts receivable, inventories and casting patterns and core
boxes. Amounts under the 2006 Credit Facility may be borrowed, repaid and
reborrowed subject to the terms of the facility.
Most of Neenah's wholly owned subsidiaries are co-borrowers under the 2006
Credit Facility and are jointly and severally liable with Neenah for all
obligations under the 2006 Credit Facility, subject to customary exceptions for
transactions of this type. In addition, NFC Castings, Inc. ("NFC"), NEI's
immediate subsidiary, and Neenah's remaining wholly owned subsidiaries jointly,
fully, severally and unconditionally guarantee the borrowers' obligations under
the 2006 Credit Facility, subject to customary exceptions for transactions of
this type. The borrowers' and guarantors' obligations under the 2006 Credit
Facility are secured by first priority liens, subject to customary restrictions,
on Neenah's and the guarantors' accounts receivable, inventories, casting
patterns and core boxes, business interruption insurance policies, certain
inter-company loans, cash and deposit accounts and related assets, subject to
certain exceptions, and any proceeds of the foregoing, and by second priority
liens (junior to the liens securing the 91/2% Notes) on substantially all of our
and the guarantors' remaining assets. The 91/2% Notes discussed below, and the
guarantees in respect thereof, are equal in right of payment to the 2006 Credit
Facility, and the guarantees in respect thereof.
The 2006 Credit Facility requires Neenah to prepay outstanding principal amounts
upon certain asset sales, upon certain equity offerings, and under certain other
circumstances. It also requires us to observe certain customary conditions,
affirmative covenants and negative covenants including "springing" financial
covenants that require us to satisfy a trailing four quarter minimum interest
coverage ratio of 2.0x (through the fiscal quarter ended December 31, 2008) or a
trailing four quarter minimum fixed charge coverage ratio of 1.0x (commencing
with the fiscal quarter ending March 31, 2009) if our unused availability is
less than $15.0 million for any period of three consecutive business days during
a fiscal quarter. As of December 31, 2008, our borrowing base was $94.2 million
and outstanding borrowings were $70.1 million. Therefore, our unused
availability was $24.1 million, or $9.1 million in excess of the $15.0 million
threshold, and it did not fall below $15.0 million at any time during the
quarter then ended; consequently, the minimum interest coverage ratio was not
applicable. However, had we been required to calculate the minimum interest
coverage ratio for the twelve month period ended December 31, 2008, we would
have not satisfied the required ratio. At December 31, 2008, Neenah was in
compliance with applicable bank covenants. Non-compliance with the covenants
could result in the requirement to immediately repay all amounts outstanding
under the 2006 Credit Facility and cause a cross default under our outstanding
notes, which could have a material adverse effect on our results of operations,
financial position and cash flow. The 2006 Credit Facility also contains events
of default customary for these types of facilities, including, without
limitation, payment defaults, material misrepresentations, covenant defaults,
bankruptcy and certain changes of ownership or control of us, Neenah, or NFC. We
are prohibited from paying dividends, with certain limited exceptions, and are
restricted to a maximum yearly stock repurchase of $1.0 million.
91/2% Notes. The $225.0 million of outstanding 91/2% Notes mature on January 1,
2017. The 91/2% Notes are fully and unconditionally guaranteed by Neenah's
existing and certain future direct and indirect wholly-owned domestic restricted
subsidiaries. The 91/2% Notes and the guarantees are secured by first-priority
liens on substantially all of Neenah's and the guarantors' assets (other than
accounts receivable, inventory, casting patterns and core boxes, business
interruption insurance policies, certain inter-company loans, cash and deposit
accounts and related assets, subject to certain exceptions, and any proceeds of
the foregoing) and by second-priority liens, junior to the liens for the benefit
of the lenders under the 2006 Credit Facility, on Neenah's and the guarantors'
accounts receivable, inventories, casting patterns and
core boxes, business interruption insurance policies, certain inter-company
loans, cash and deposit accounts and related assets, subject to certain
exceptions, and any proceeds of the foregoing. Interest on the 91/2% Notes is
payable on a semi-annual basis. Subject to the restrictions in the 2006 Credit
Facility, the 91/2% Notes are redeemable at our option in whole or in part at
any time on or after January 1, 2012, at the redemption price specified in the
indenture governing the 91/2% Notes (104.750% of the principal amount redeemed
beginning January 1, 2012, 103.167% beginning January 1, 2013, 101.583%
beginning January 1, 2014 and 100.000% beginning January 1, 2015 and
thereafter), plus accrued and unpaid interest up to the redemption date. Subject
to certain conditions, until January 1, 2010, we also have the right to redeem
up to 35% of the 91/2% Notes with the proceeds of one or more equity offerings
at a redemption price equal to 109.500% of the face amount thereof plus accrued
and unpaid interest. Upon the occurrence of a "change of control" as defined in
the indenture governing the notes, Neenah is required to make an offer to
purchase the 91/2% Notes at 101.000% of the outstanding principal amount
thereof, plus accrued and unpaid interest up to the purchase date. The 91/2%
Notes contain customary covenants typical to this type of financing, such as
limitations on (1) indebtedness, (2) restricted payments, (3) liens,
(4) distributions from restricted subsidiaries, (5) sale of assets,
(6) affiliate transactions, (7) mergers and consolidations and (8) lines of
business. The 91/2% Notes also contain customary events of default typical to
this type of financing, such as (1) failure to pay principal and/or interest
when due, (2) failure to observe covenants, (3) certain events of bankruptcy,
(4) the rendering of certain judgments or (5) the loss of any guarantee.
121/2% Notes. The $75.0 million of Neenah's outstanding 121/2% Notes mature on
September 30, 2013. The 121/2% Notes were issued to Tontine Capital Partners,
L.P. ("Tontine") in exchange for an equal principal amount of Neenah's 13% Notes
that were then held by Tontine. The obligations under the 121/2% Notes are
senior to Neenah's subordinated unsecured indebtedness, if any, and are
subordinate to the 2006 Credit Facility and the 91/2% Notes. Interest on the
121/2% Notes is payable on a semi-annual basis. Not less than five percent (500
basis points) of the interest on the 121/2% Notes must be paid in cash and the
remainder (up to 71/2% or 750 basis points) of the interest may be deferred at
our option. We must pay interest on any interest so deferred at a rate of 121/2%
per annum. Neenah elected to defer the payment of 71/2% of the interest due on
the 121/2% Notes with respect to the January 1, 2009 interest payment date
(representing a deferral of an interest payment of approximately $2.8 million).
Neenah's obligations under the 121/2% Notes are guaranteed on an unsecured basis
by each of Neenah's wholly owned subsidiaries. Subject to the restrictions in
the 2006 Credit Facility and in the indenture for the 91/2%Notes, the 121/2%
Notes are redeemable at our option in whole or in part at any time, with not
less than 30 days nor more than 60 days notice, at 100.000% of the principal
amount thereof, plus accrued and unpaid interest up to the redemption date. Upon
the occurrence of a "change of control," Neenah is required to make an offer to
purchase the 121/2% Notes at 101.000% of the outstanding principal amount
thereof, plus accrued and unpaid interest up to the purchase date. The 121/2%
Notes contain customary covenants typical to this type of financing, such as
limitations on (1) indebtedness, (2) restricted payments, (3) liens,
(4) distributions from restricted subsidiaries, (5) sale of assets,
(6) affiliate transactions, (7) mergers and consolidations and (8) lines of
business. The 121/2% Notes also contain customary events of default typical to
this type of financing, such as, (1) failure to pay principal and/or interest
when due, (2) failure to observe covenants, (3) certain events of bankruptcy,
(4) the rendering of certain judgments or (5) the loss of any guarantee.
Under the capital structure resulting from the Refinancing Transactions, we
currently have no principal amortization requirements. We have been using cash
flow from operations and a portion of our unused availability under the 2006
Credit Facility to fund the new mold line described above under "Recent
Developments."
For the three months ended December 31, 2008 and December 31, 2007, capital
expenditures were $6.2 million and $14.3 million, respectively. The decreased
level of capital expenditures for the three months ended December 31, 2008
results from reduced expenditures necessary for the new mold line at the Neenah
location described above under "Recent Developments." Capital expenditures for
the new mold line were $1.8 million for the three months ended December 31, 2008
compared to $9.9 million (including capitalized interest of $0.6 million) for
the three months ended December 31, 2007. The remaining capital expenditures are
normal expenditures necessary to maintain facilities and operations.
Our primary sources of liquidity are cash flow from operations and borrowings
under Neenah's 2006 Credit Facility. At December 31, 2008, we had $70.1 million
. . .
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