Summary of NEENAH ENTERPRISES, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
As used in this report, except as the context otherwise requires, the terms "NEI," "Company," "we," "our," "ours," and "us" refers to Neenah Enterprises, Inc. and its direct and indirect subsidiaries, collectively and individually, as appropriate from the context. Except as the context otherwise requires, "Neenah" refers to our indirect subsidiary, Neenah Foundry Company, and its wholly-owned subsidiaries.
In addition to historical information, this Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this quarterly report include some "forward-looking statements" that involve risks and uncertainties that could cause our actual results to differ materially from those currently anticipated. Forward-looking statements give our current expectations or forecasts of future events. The words "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions are generally intended to identify forward-looking statements. Factors that could cause our results to differ materially from current expectations include our ability to successfully amend our credit agreement or other borrowing arrangements to provide financial covenant relief, if necessary, and/or our ability to otherwise maintain or obtain adequate sources of liquidity; material disruptions to the major industries we serve; continued price fluctuations in the scrap metal market; increases in price or interruptions in the availability of metallurgical coke; regulatory restrictions or requirements; developments affecting the valuation or prospects of the casting and forging industries generally or our business in particular; the outcome of legal proceedings in which we are involved; changes in economic conditions affecting us, our customers and our suppliers; and other factors described or referenced in our Form 10-K for the year ended September 30, 2008 or subsequent SEC filings. You should not place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this report. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document.
Recent Developments
Goodwill. During the second quarter of fiscal 2009, in accordance with SFAS 142, the Company performed an interim goodwill impairment test, indicating the potential for impairment. Since the reporting unit carrying amounts were determined to be greater than fair value, a second step analysis must be completed to measure the amount of impairment, if any. The Company is in the process of completing the second step analysis with the assistance of a third party valuation firm, which will be completed in the third quarter of fiscal 2009. The Company recognized a non-cash charge of $88,136 in the second quarter of fiscal 2009 representing it best estimate of goodwill impairment, which will be adjusted, if necessary, concurrent with the completion of the second step analysis. See Note 7 to the condensed consolidated financial statements for further information.
Gregg Closure. In February 2009, the Company's Board of Directors approved the closure of the Company's Gregg Industries, Inc. facility. The plant, located in El Monte, California, substantially ceased production in late April 2009. The decision to close the facility was made due to pressures of the overall weak economy and the particularly difficult economic issues facing the foundry industry and manufacturing in general. The facility's machining operations will remain operational for the foreseeable future in order to satisfy customer needs related to the remaining inventory. The Company plans to terminate all operations at the El Monte facility, terminate all operational permits and close the business in accordance with applicable laws. On November 5, 2008, Gregg entered into a settlement agreement and release with the South Coast Air Quality Management District (District) to resolve outstanding notices of violation (NOV's) and to terminate an abatement order. Aside from resolving the enforcement claims, the main purpose of the settlement agreement is to obligate Gregg to undertake various operations measures and projects to reduce or eliminate odors associated with foundry operations. Gregg has completed many of the tasks set forth in the settlement agreement. In light of the pending closure of the foundry, however, Gregg has not completed, and will not complete, all of the tasks identified in the settlement agreement. Instead, Gregg has advised the District that termination of foundry operations has achieved, or will achieve, odor elimination or mitigation which is superior to the odor control which would have been achieved had Gregg implemented all the projects and measures set forth in the settlement agreement. Gregg currently is discussing with the District how, when or if to modify the settlement agreement in light of the closure of the foundry. See Notes 6 and 10 to the condensed consolidated financial statements for further information.
Deferral of Interest Payment on 12 1/2% Notes. As provided for in the December 23, 2008 notice to Tontine Capital Partners, L.P. (Tontine), the holder of all of Neenah's $75 million of 12 1/2% Senior Subordinated Notes due 2013 (the "12 1/2% notes"), the Company elected to defer the payment of 7 1/2% of the interest due on the 12 1/2% Notes with respect to the January 1, 2009 interest payment date (representing a deferral of an interest payment of approximately $2.8 million), as is permitted under the terms of the outstanding 12 1/2% Notes. See the description of the 12 1/2% Notes in this section under "Liquidity and Capital Resources - 12 1/2% Notes" for further information regarding the deferral of interest under the 12 1/2% Notes.
Kendallville Closure. On December 5, 2008, the Company's Board of Directors approved the closure of the Company's Kendallville manufacturing facility. The plant, which is located in Kendallville, Indiana, ceased production in March 2009. The decision to close the facility was made due to the pressures of an overall weak economy and the particularly difficult economic issues facing the foundry industry and manufacturing in general. See Note 5 to the condensed consolidated financial statements for further information.
Tontine Intentions. On November 10, 2008, Tontine announced its intention to begin exploring alternatives for the disposition of their holdings in NEI and Neenah. The timing, manner and aggregate amount of any such dispositions is unknown at this time and may have a

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substantial effect on the future capital structure and operations of the Company. Additionally, as discussed under Item 1A. Risk Factors in our Form 10-K for the fiscal year ended September 30, 2008, Tontine's disposition of their holdings in NEI could result in a change of control event under the 2006 Credit Facility (as defined in "Refinancing Transactions" below), the 9 1/2% Notes and the 12 1/2% Notes. See "Risk Factors - The terms of Neenah's debt impose restrictions on us that may affect our ability to successfully operate our business. In addition, we may violate applicable financial covenants in our debt agreements if the unused availability under our 2006 Credit Facility falls below $15.0 million" in our Form 10-K for the fiscal year ended September 30, 2008.
New Mold Line. We recently completed the installation phase of our $54 million capital project to replace a 40-year-old mold line at the Neenah facility. This new state-of-the-art mold line is expected to significantly enhance operating efficiencies, increase capacity and provide expanded molding capabilities for the municipal and industrial product lines. Start-up operations began on schedule during the third quarter of fiscal 2008. The second phase of the project includes enhanced core-making capabilities and the inclusion of ductile iron capacity. As of March 31, 2009, we had expended $52.4 million and an additional $2.0 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 $4.1 million. 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 9 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 $187 per ton from September 2008 to March 2009. 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 cost 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 8 to the condensed consolidated financial statements for further information.

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Results of Operations
The following discussions compare the results of operations of the Company for the three and six months ended March 31, 2009, to the results of the operations of the Company for the three and six months ended March 31, 2008. Three months ended March 31, 2009 and 2008 Net sales. Net sales for the three months ended March 31, 2009 were $79.9 million, which were $34.8 million or 30.3% lower than the quarter ended March 31, 2008. The decrease was primarily the result of a 25.7% decrease in volume, as measured in tons sold. The loss in volume was accentuated by reductions in surcharge as a result of lower metal costs being passed through to the customer. Sales of municipal products were up approximately $0.2 million in the second quarter of fiscal 2009 from the second quarter of fiscal 2008. This was the result of the addition of Morgan's operations. Sales to the construction and agriculture equipment market were down approximately $1.5 million in the second quarter of fiscal 2009 from the second quarter of fiscal 2008. Sales to heating, ventilation and air conditioning (HVAC) customers were down approximately $4.1 million in the second quarter of fiscal 2009 from the second quarter of fiscal 2008. Sales of heavy-duty truck products were down approximately $9.5 million in the second quarter of fiscal 2009 from the second quarter of fiscal 2008. Sales to other markets were down approximately $19.9 million in the second quarter of fiscal 2009 from the second quarter of fiscal 2008.
Cost of sales. Cost of sales for the three months ended March 31, 2009 were $91.2 million, a decrease of $14.6 million, or 13.8%, as compared to the quarter ended March 31, 2008. The decrease was the result of reduced production volumes and an approximate 6.9% decrease in raw material unit costs, principally in the price of steel scrap, compared to the three months ended March 31, 2008. The decrease was partially offset by $9.2 million in costs related to the closures of the Kendallville and Gregg facilities. Cost of sales as a percentage of net sales increased to 114.2% for the three months ended March 31, 2009 from 92.2% for the three months ended March 31, 2008.
Gross profit (loss). Gross loss for the three months ended March 31, 2009 was $11.3 million, a decrease of $20.2 million, as compared to a gross profit of $8.9 million for the quarter ended March 31, 2008. Gross loss as a percentage of net sales was 14.1% for the three months ended March 31, 2009 compared to a gross profit as a percentage of net sales of 7.8% for the three months ended March 31, 2008. The decrease in gross profit percentage was the result of the additional depreciation charges, the writedown of current assets to fair market value, 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 March 31, 2009 were $8.0 million, a decrease of $0.9 million, or 10.1%, as compared to the quarter ended March 31, 2008. The decrease was due to a $1.5 million reduction in wages and other expenses offset by a $0.6 million increase from higher AQMD expenses incurred at Gregg and the inclusion of Morgan's operations. Selling, general and administrative expenses as a percentage of net sales increased to 10.0% for the quarter ended March 31, 2009 from 7.8% for the quarter ended March 31, 2008. Restructuring costs. Restructuring costs for the three months ended March 31, 2009 consisted of shutdown related costs of $3.2 million at our Kendallville manufacturing facility. For more information see Note 5 to the condensed consolidated financial statements in Item 1 above.
Goodwill impairment charge. Estimated goodwill impairment charge for the three months ended March 31, 2009 consisted of the Company's entire goodwill balance of $88.1 million. For more information see Note 7 to the condensed consolidated financial statements in Item 1 above.
Amortization of intangible assets. Amortization of intangible assets was $1.8 million for the three months ended March 31, 2009 and 2008.
Operating income (loss). Operating loss was $112.5 million for the three months ended March 31, 2009, an increase of $110.7 million from the operating loss of $1.8 million for the quarter ended March 31, 2008. As a percentage of net sales, the operating loss was 140.8% for the three months ended March 31, 2009 compared to the operating loss of 1.5% for the three months ended March 31, 2008. The increase in operating loss was a result of the estimated goodwill impairment charge, reduced sales volumes, and the additional depreciation related to long-lived assets and shutdown related costs at the Kendallville manufacturing facility and Gregg Industries, Inc. facility.
Net interest expense. Net interest expense was $8.4 million for the three months ended March 31, 2009 compared to $7.7 million for the quarter ended March 31, 2008. 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 March 31, 2009 and 2008 was 9.4% and 34.7%, respectively. The decrease in the effective tax rate was primarily due to the recording of estimated goodwill impairment and a valuation allowance on state tax net operating loss carry forwards.

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Six months ended March 31, 2009 and 2008 Net sales. Net sales for the six months ended March 31, 2009 were $177.5 million, which were $38.4 million or 17.8% lower than the six months ended March 31, 2008. The decrease was primarily the result of a 23.0% decrease in volume, as measured in tons sold. The loss in volume was accentuated by reductions in surcharge as a result of lower metal costs being passed through to the customer. Sales to the construction and agriculture equipment market were up approximately $2.4 million in the first six months of fiscal 2009 from the first six months of fiscal 2008. Sales of municipal products were up approximately $0.9 million in the first six months of fiscal 2009 from the first six months of fiscal 2008. This was the result of the addition of Morgan's operations. Sales to HVAC customers were down approximately $5.2 million in the first six months of fiscal 2009 from the first six months of fiscal 2008. Sales of heavy-duty truck products were down approximately $10.2 million in the first six months of fiscal 2009 from the first six months of fiscal 2008. Sales to other markets were down approximately $26.3 million in the first six months of fiscal 2009 from the first six months of fiscal 2008.
Cost of sales. Cost of sales for the six months ended March 31, 2009 were $186.5 million, a decrease of $7.0 million, or 3.6%, as compared to the six months ended March 31, 2008. The decrease was the result of reduced production volumes. The decrease was partially offset by an approximately 5.9% increase in raw material unit costs, principally in the price of steel scrap, compared to the six months ended March 31, 2008, and by $9.2 million on costs related to the closures of the Kendallville and Gregg facilities. Cost of sales as a percentage of net sales increased to 105.1% for the six months ended March 31, 2009 from 89.6% for the six months ended March 31, 2008.
Gross profit (loss). Gross loss for the six months ended March 31, 2009 was $9.0 million as compared to a gross profit of $22.4 million for the six months ended March 31, 2008. As a percentage of net sales, the gross loss was 5.1% for the six months ended March 31, 2009, compared to a gross profit of 10.4% for the six months ended March 31, 2008. The decrease in gross profit percentage was the result of increased raw material costs, the additional depreciation charge, 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 six months ended March 31, 2009 were $17.2 million, a decrease of $0.7 million, or 3.9%, as compared to the six months ended March 31, 2008. The decrease was due to a $1.8 million reduction in wages and other expenses offset by a $1.1 million increase from higher AQMD expenses incurred at Gregg and the inclusion of Morgan's operations. Selling, general and administrative expenses as a percentage of net sales increased to 9.7% for the six months ended March 31, 2009 from 8.3% for the six months ended March 31, 2008.
Restructuring costs. Restructuring costs for the six months ended March 31, 2009 consisted of shutdown related costs of $3.2 million at our Kendallville manufacturing facility. For more information see Note 5 to the condensed consolidated financial statements in Item 1 above.
Goodwill impairment charge. Estimated goodwill impairment charge for the six months ended March 31, 2009 consisted of the Company's entire goodwill balance of $88.1 million. For more information see Note 7 to the condensed consolidated financial statements in Item 1 above.
Amortization of intangible assets. Amortization of intangible assets was $3.6 million for the six months ended March 31, 2009 and 2008.
Operating income (loss). Operating loss was $121.1 million for the six months ended March 31, 2009, an increase of $120.8 million from the operating loss of $0.3 million for the six months ended March 31, 2008. As a percentage of net sales, the operating loss was 68.2% for the six months ended March 31, 2009 compared to the operating loss of 0.1% for the six months ended March 31, 2008. The increase in operating loss was a result of the estimated goodwill impairment charge, reduced sales volumes, increased raw material costs, and the additional depreciation related to long-lived assets and shutdown related costs at the Kendallville manufacturing facility and the Gregg Industries, Inc. facility. Net interest expense. Net interest expense was $17.1 million for the six months ended March 31, 2009 compared to $15.4 million for the six months ended March 31, 2008. 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 six months ended March 31, 2009 and 2008 was 12.3% and 35.7%, respectively. The decrease in the effective tax rate was primarily due to the recording of estimated goodwill impairment and a valuation allowance on state tax net operating loss carry forwards.

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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 March 31, 2009, our outstanding indebtedness consisted of Neenah's $225.0 million of outstanding 91/2% Notes, $1.7 million of capital lease obligations, Neenah's $75.0 million of outstanding 121/2% Notes, and $57.8 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.
2006 Credit Facility. As expanded by the utilization of the $10.0 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 fixed charge coverage ratio of 1.0x if our unused availability is less than $15.0 million for any period of three consecutive business days during a fiscal quarter. As of March 31, 2009, our borrowing base was $80.2 million and outstanding borrowings were $57.8 million. Therefore, our unused availability was $22.4 million, or $7.4 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 fixed charge coverage ratio was not applicable. However, had we been required to apply the minimum fixed charge coverage ratio for the twelve month period ended March 31, 2009, we would not have satisfied the required ratio. At March 31, 2009, 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 . . .