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| NENA.OB > SEC Filings for NENA.OB > Form 10-Q on 13-Aug-2009 | All Recent SEC Filings |
13-Aug-2009
Quarterly Report
Kendallville Closure. In December 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 its holdings in NEI and
Neenah. The timing, manner and aggregate amount of any such dispositions is
unknown at this time and may have a substantial effect on the future capital
structure and operations of the Company. On March 18, 2009 Tontine announced
that it (i) is continuing to explore alternatives for the disposition of its
holdings in NEI and Neenah, and (ii) has engaged, on an ongoing basis, in
discussions with the Company's Board of Directors regarding various options and
alternatives specifically related to enhancing the Company's liquidity, capital
structure and long term business prospects. 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 its 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 June 30, 2009, we had expended $52.7 million
(including capitalized interest of $2.3 million) and an additional $3.8 million
of expenditures are necessary to complete the second phase of the new mold line
project as of such date. The second phase expenditures will provide greater
operational efficiency, but do not impact the functionality of the mold line. 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.
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 and increased by
$72 per ton from March 2009 to July 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.
Results of Operations
The following discussions compare the results of operations of the Company for
the three and nine months ended June 30, 2009, to the results of the operations
of the Company for the three and nine months ended June 30, 2008.
Three months ended June 30, 2009 and 2008
Net sales. Net sales for the three months ended June 30, 2009 were
$72.4 million, which were $81.9 million or 53.1% lower than the quarter ended
June 30, 2008. The decrease was primarily the result of a 53.4% decrease in
volume, as measured in tons sold. Sales to the construction and agriculture
equipment market were down approximately $8.7 million in the third quarter of
fiscal 2009 from the third quarter of fiscal 2008. Sales of municipal products
were down approximately $12.5 million in the third quarter of fiscal 2009 from
the third quarter of fiscal 2008. Sales to heating, ventilation and air
conditioning (HVAC) customers were down approximately $13.0 million in the third
quarter of fiscal 2009 from the third quarter of fiscal 2008. Sales of
heavy-duty truck products were down approximately $29.7 million in the third
quarter of fiscal 2009 from the third quarter of fiscal 2008. Sales to other
markets were down approximately $18.0 million in the third quarter of fiscal
2009 from the third quarter of fiscal 2008.
Cost of sales. Cost of sales for the three months ended June 30, 2009 were
$72.4 million, a decrease of $60.3 million, or 45.4%, as compared to the quarter
ended June 30, 2008. The decrease was the result of reduced production volumes
and an approximate 46.3% decrease in raw material unit costs, principally in the
price of steel scrap, compared to the three months ended June 30, 2008. The
decrease was partially offset by $3.4 million in costs related to the closures
of Kendallville and Gregg. Cost of sales as a percentage of net sales increased
to 100.0% for the three months ended June 30, 2009 from 86.0% for the three
months ended June 30, 2008.
Gross profit. Gross profit for the three months ended June 30, 2009 was $35
thousand, as compared to $21.6 million for the quarter ended June 30, 2008.
Gross profit as a percentage of net sales was 0.0% for the three months ended
June 30, 2009 compared to a gross profit as a percentage of net sales of 14.0%
for the three months ended June 30, 2008. The decrease in gross profit
percentage was the result of the additional depreciation charges related to the
Kendallville and Gregg closures, other shutdown related 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 June 30, 2009 were
$8.3 million, a decrease of $0.6 million, or 6.7%, as compared to the quarter
ended June 30, 2008. The decrease was due to a $0.7 million reduction in wages
and other expenses and $0.5 million received from the sale of emission credits,
partially offset by 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 11.5% for the quarter ended June 30, 2009
from 5.8% for the quarter ended June 30, 2008, due to the reduced sales volumes
as discussed above.
Restructuring costs. Restructuring costs for the three months ended June 30,
2009 consisted of shutdown related costs of $1.6 million at our Kendallville
manufacturing facility. See Note 5 to the condensed consolidated financial
statements for further information.
Amortization of intangible assets. Amortization of intangible assets was
$1.7 million and $1.8 million for the three months ended June 30, 2009 and 2008,
respectively.
Operating income (loss). Operating loss was $11.5 million for the three months
ended June 30, 2009, a decrease of $22.4 million from the operating income of
$10.9 million for the quarter ended June 30, 2008. As a percentage of net sales,
the operating loss was 15.9% for the three months ended June 30, 2009 compared
to the operating income of 7.1% for the three months ended June 30, 2008. The
increase in operating loss was a result of the 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 $8.3 million for the three months
ended June 30, 2009 compared to $8.5 million for the quarter ended June 30,
2008. The decrease in interest expense was the result of the reduced level of
borrowing on the revolving line of credit.
Income tax provision. The effective tax rate for the three months ended June 30,
2009 and 2008 was 33.2% and 4.5%, respectively. For the three months ended
June 30, 2009, the decrease in the effective tax rate from the statutory rate
was primarily due to a valuation allowance on state tax net operating loss carry
forwards. For the three months ended June 30, 2008, the decrease in the
effective tax rate from the statutory rate was primarily due to the reversal of
reserves for tax contingencies which were no longer required due to completion
of an IRS examination in the third quarter of fiscal 2008.
Nine months ended June 30, 2009 and 2008
Net sales. Net sales for the nine months ended June 30, 2009 were
$249.9 million, which were $120.3 million or 32.5% lower than the nine months
ended June 30, 2008. The decrease was primarily the result of a 34.5% decrease
in volume, as measured in tons sold. Sales to the construction and agriculture
equipment market were down approximately $9.8 million in the first nine months
of fiscal 2009 from the first nine months of fiscal 2008. Sales of municipal
products were down approximately $11.6 million in the first nine months of
fiscal 2009 from the first nine months of fiscal 2008. Sales to HVAC customers
were down approximately $18.2 million in the first nine months of fiscal 2009
from the first nine months of fiscal 2008. Sales of heavy-duty truck products
were down approximately $39.9 million in the first nine months of fiscal 2009
from the first nine months of fiscal 2008. Sales to other markets were down
approximately $40.8 million in the first nine months of fiscal 2009 from the
first nine months of fiscal 2008.
Cost of sales. Cost of sales for the nine months ended June 30, 2009 were
$258.9 million, a decrease of $67.4 million, or 20.7%, as compared to the nine
months ended June 30, 2008. The decrease was the result of reduced production
volumes and an approximately 16.9% decrease in raw material unit costs,
principally in the price of steel scrap, compared to the nine months ended
June 30, 2008. The decrease was partially offset by $14.5 million of costs
related to the closures of Kendallville and Gregg. Cost of sales as a percentage
of net sales increased to 103.6% for the nine months ended June 30, 2009 from
88.1% for the nine months ended June 30, 2008.
Gross profit (loss). Gross loss for the nine months ended June 30, 2009 was
$9.0 million as compared to a gross profit of $43.9 million for the nine months
ended June 30, 2008. As a percentage of net sales, the gross loss was 3.6% for
the nine months ended June 30, 2009, compared to a gross profit of 11.9% for the
nine months ended June 30, 2008. The decrease in gross profit percentage was the
result of the additional depreciation charges related to the Kendallville and
Gregg closures, writedown of current assets to fair market value, other shutdown
related 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 nine months ended June 30, 2009 were
$25.5 million, a decrease of $1.3 million, or 4.9%, as compared to the nine
months ended March 31, 2008. The decrease was due to a $2.2 million reduction in
wages and other expenses and $0.5 million received from the sale of emission
credits, partially offset by a $0.9 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 10.2% for the
nine months ended June 30, 2009 from 7.2% for the nine months ended June 30,
2008, due to reduced sales as discussed above.
Restructuring costs. Restructuring costs for the nine months ended June 30, 2009
consisted of shutdown related costs of $4.8 million at our Kendallville
manufacturing facility. See Note 5 to the condensed consolidated financial
statements for further information.
Goodwill impairment charge. Goodwill impairment charge for the nine months ended
June 30, 2009 consisted of the Company's entire goodwill balance of
$88.1 million. See Note 7 to the condensed consolidated financial statements for
further information.
Amortization of intangible assets. Amortization of intangible assets was
$5.3 million for the nine months ended June 30, 2009 and 2008.
Operating income (loss). Operating loss was $132.7 million for the nine months
ended June 30, 2009, an increase of $143.3 million from the operating income of
$10.6 million for the nine months ended June 30, 2008. As a percentage of net
sales, the operating loss was 53.1% for the nine months ended June 30, 2009
compared to the operating income of 2.9% for the nine months ended June 30,
2008. The increase in operating loss was a result of the 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 the Gregg Industries, Inc. facility.
Net interest expense. Net interest expense was $25.4 million for the nine months
ended June 30, 2009 compared to $23.8 million for the nine months ended June 30,
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 nine months ended June 30,
2009 and 2008 was 14.9% and 41.7%, respectively. The decrease in the effective
tax rate was primarily due to the recording of goodwill impairment and 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 June 30, 2009, our outstanding indebtedness consisted of Neenah's
$225.0 million of outstanding 91/2% Notes, $1.6 million of capital lease
obligations, Neenah's $75.0 million of outstanding 121/2% Notes, and
$41.8 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
. . .
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