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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 1-12733
TOWER AUTOMOTIVE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 41-1746238
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27175 HAGGERTY ROAD 48377
NOVI, MICHIGAN (Zip Code)
(Address of principal executive offices)
(248) 675-6000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock, par value
$.01 per share, at May 3, 2004 was 58,035,678 shares.
TOWER AUTOMOTIVE, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Page
-----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited) at March 31,
2004 and December 31, 2003 2
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months Ended March 31, 2004 and 2003 3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Three Months Ended March 31, 2004 and 2003 4
Notes to Condensed Consolidated Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Market Risk" section of Item 2
Item 4. Controls and Procedures 22
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
1
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS - UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 78,346 $ 160,899
Accounts receivable 374,089 325,599
Inventories 127,089 130,004
Deferred income taxes, net 15,295 20,116
Prepaid tooling and other 160,110 91,662
------------ ------------
Total current assets 754,929 728,280
------------ ------------
Property, plant and equipment, net 1,117,322 1,055,873
Investments in joint ventures 204,257 248,133
Deferred income taxes, net 144,512 146,944
Goodwill 495,209 498,663
Other assets, net 151,086 168,516
------------ ------------
$ 2,867,315 $ 2,846,409
============ ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt and capital lease
obligations $ 120,595 $ 99,597
Convertible Subordinated Notes 199,984 199,984
Accounts payable 579,311 556,036
Accrued liabilities 243,996 249,984
------------ ------------
Total current liabilities 1,143,886 1,105,601
------------ ------------
Long-term debt, net of current maturities 1,042,570 1,060,859
Obligations under capital leases, net of current maturities 39,551 42,798
Other noncurrent liabilities 220,979 223,641
------------ ------------
Total noncurrent liabilities 1,303,100 1,327,298
------------ ------------
Stockholders' investment:
Preferred stock -- --
Common stock 661 661
Additional paid-in capital 680,759 680,608
Retained deficit (169,831) (181,849)
Deferred compensation plans (8,027) (9,609)
Accumulated other comprehensive loss (29,683) (22,751)
Treasury stock, at cost (53,550) (53,550)
------------ ------------
Total stockholders' investment 420,329 413,510
------------ ------------
$ 2,867,315 $ 2,846,409
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2004 2003
------------ ------------
Revenues $ 781,236 $ 732,578
Cost of sales 720,591 658,054
------------ ------------
Gross profit 60,645 74,524
Selling, general and administrative expenses 34,154 34,676
Restructuring charge reversal, net (5,607) --
------------ ------------
Operating income 32,098 39,848
Interest expense, net 31,470 16,769
------------ ------------
Income before provision for income taxes 628 23,079
Provision for income taxes 478 7,847
------------ ------------
Income before equity in earnings of
joint ventures, gain on sale of joint venture
and minority interest 150 15,232
Equity in earnings of joint ventures, net 3,447 644
Gain on sale of joint venture 9,732 --
Minority interest, net (1,311) (4,304)
------------ ------------
Net income $ 12,018 $ 11,572
============ ============
Basic earnings per common share $ 0.21 $ 0.21
============ ============
Weighted average basic shares outstanding 57,342 56,194
============ ============
Diluted earnings per common share $ 0.21 $ 0.21
============ ============
Weighted average diluted shares outstanding 58,110 56,210
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS - UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2004 2003
------------ ------------
OPERATING ACTIVITIES:
Net income $ 12,018 $ 11,572
Adjustments required to reconcile net income to net cash
provided by (used in) operating activities -
Non-cash restructuring charge reversal (6,276) --
Depreciation 38,357 39,051
Deferred income tax provision (benefit) (4,104) 8,274
Gain on sale of joint venture investment (9,732) --
Equity in earnings of joint ventures, net (3,447) (644)
Change in working capital and other operating items (89,700) (57,030)
------------ ------------
Net cash provided by (used in) operating activities (62,884) 1,223
------------ ------------
INVESTING ACTIVITIES:
Capital expenditures, net (53,186) (41,200)
Divestitures and
other 54,595 3,232
Acquisitions (21,299) --
------------ ------------
Net cash used in investing activities (19,890) (37,968)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings 14,630 699,646
Repayments of debt (14,409) (658,131)
Net proceeds from issuance of stock -- 303
------------ ------------
Net cash provided by financing activities 221 41,818
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (82,553) 5,073
CASH AND CASH EQUIVALENTS:
Beginning of period 160,899 13,699
------------ ------------
End of period $ 78,346 $ 18,772
============ ============
Supplemental Cash Flow Information:
Interest paid, net of amounts capitalized $ 29,118 $ 22,626
Income taxes paid (refunded) $ (863) $ 70
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
by Tower Automotive, Inc. (the "Company"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. The information
furnished in the condensed consolidated financial statements includes primarily
normal recurring adjustments and reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of such financial
statements. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
condensed consolidated financial statements be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003.
Revenues and operating results for the three months ended March 31, 2004 are not
necessarily indicative of the results to be expected for the full year or any
future period.
2. INVENTORIES
Inventories are valued at the lower of first-in-first-out ("FIFO") cost or
market, and consisted of the following (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Raw materials $ 61,146 $ 56,100
Work in process 25,731 23,288
Finished goods 40,212 50,616
------------ ------------
$ 127,089 $ 130,004
============ ============
3. STOCKHOLDERS' INVESTMENT
EARNINGS PER SHARE:
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share for the three months ended March 31, 2004 was determined based on the
assumption that the stock options were exercised at the beginning of the period.
Diluted earnings per share for the three months ended March 31, 2003 were
determined based on the assumption that the Edgewood notes were converted at the
beginning of the period. The Convertible Subordinated Notes and the Convertible
Preferred Securities issued by Tower Automotive Capital Trust, totaling
approximately 16.2 million shares, are not included in the computation of
earnings per share for the three months ended March 31, 2004 and 2003 due to
their anti-dilutive effect (in thousands, except for per share data):
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
------------ ------------
Weighted average number of common shares outstanding 57,342 56,194
Dilutive effect of stock options 768 -
Dilutive effect of Edgewood notes, assuming conversion - 16
------------ ------------
Weighted average number of diluted shares outstanding 58,110 56,210
============ ============
5
STOCK-BASED COMPENSATION:
The Company accounts for stock options under the provisions of Accounting
Principles Board Opinion ("APB") No. 25, under which no compensation expense is
recognized when the stock options are granted to colleagues and directors at
fair market value as of the grant date. The Company may also grant stock options
to outside consultants. The fair value of these option grants are expensed over
the period services are rendered based on the Black-Scholes valuation model.
The Company has three stock option plans: the 1994 Key Employee Stock Option
Plan, the Long Term Incentive Plan and the Independent Director Stock Option
Plan and three stock purchase plans: the Employee Stock Purchase Plan, the Key
Leadership Deferred Income Stock Purchase Plan and the Director Deferred Income
Stock Purchase Plan. Had compensation cost for these plans been determined as
required under Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," amended by SFAS No. 148, "Accounting
for Stock-Based Compensation -- Transition and Disclosure," the Company's pro
forma net income and pro forma income per share would have been as follows (in
thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
2004 2003
------------ ------------
Net income
As Reported $ 12,018 $ 11,572
Add: Stock-based employee compensation expense included in reported net income, net
of related tax effects 299 249
Deduct: Total stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects (595) (1,218)
------------ ------------
Pro Forma $ 11,722 $ 10,603
============ ============
Basic earnings per share
As Reported $ 0.21 $ 0.21
Pro Forma 0.20 0.19
Diluted earnings per share
As Reported $ 0.21 $ 0.21
Pro Forma 0.20 0.19
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions: Risk free interest rates of 3.92% in the 2004 period and risk free
interest rates of 2.91% and 4.17% in the 2003 period; expected life of seven
years for the 2004 and 2003 periods; expected volatility of 58% in the 2004 and
2003 periods; and expected dividends of zero in both years.
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Senior Euro notes $ 184,635 $ 188,640
Term credit facility 239,512 239,512
Industrial development revenue bonds 43,765 43,765
Senior notes (net of discount of $6,893 and $6,955, respectively) 251,107 251,005
Due to Tower Automotive Capital Trust 258,750 258,750
Other foreign subsidiary indebtedness 152,712 145,373
Other 24,869 25,749
------------ ------------
1,155,350 1,152,794
Less-current maturities (112,780) (91,935)
------------ ------------
Total long-term debt $ 1,042,570 $ 1,060,859
============ ============
6
As of March 31, 2004, the Company's senior credit facility (the "Credit
Agreement") consists of a $240 million Term credit facility and a $360 million
revolving credit facility. The amount available to borrow under the revolver
portion of the credit facility is restricted by $137.0 million of letters of
credit and $200 million to provide flexibility for the Company to redeem its
$200 million convertible subordinated notes (due August 1, 2004), in the event
it elects to do so without refinancing the convertible notes in another manner.
The Credit Agreement also includes a multi-currency borrowing feature that
allows the Company to borrow up to $316 million in certain freely tradable
offshore currencies, and letters of credit sublimits of $250 million. As of
March 31, 2004, there were no revolver borrowings outstanding. Interest on the
Credit Agreement is at the financial institutions' reference rate, LIBOR, or the
Eurodollar rate plus a margin ranging from 100 to 325 basis points depending on
the ratio of the consolidated funded debt for restricted subsidiaries of the
Company to its total EBITDA. The weighted average interest rate for such
borrowings was 9.94% for the three months ended March 31, 2004 (including the
effect of the interest rate swap contract discussed below). The Credit Agreement
has a final maturity of 2006.
The Credit Agreement requires the Company to meet certain financial tests,
including but not limited to a minimum interest coverage and maximum leverage
ratio. The Credit Agreement limits the Company's ability to pay dividends. As of
March 31, 2004, the Company was in compliance with all debt covenants and
anticipates achieving covenant compliance for the remainder of 2004.
During the third quarter of 2003, the Company elected to adopt the current
provisions of FASB Interpretation Number (FIN) 46, "Consolidation of Variable
Interest Entities, an interpretation of Accounting Research Bulletin No. 51" as
it relates to its mandatorily redeemable convertible trust preferred securities
prior to the required effective date. Under FIN 46, the Tower Automotive Capital
Trust, which was previously consolidated by the Company, is no longer
consolidated. As a result, the Company no longer presents the mandatorily
redeemable convertible trust preferred securities as mezzanine financing, but
instead records a debt obligation for the proceeds which are owed to the Trust
by the Company. Interest is recorded at 6 3/4 % on the amount owed by the
Company to the Trust, which is equal to the amount that was previously presented
as minority interest (net of tax) for the dividends on the preferred stock.
Interest expense increased by $4.4 million in the three months ended March 31,
2004 related to this reclassification. Pursuant to the guidance in FIN 46, the
Company has elected not to reclassify the presentation in prior periods. The
$258.8 million trust convertible preferred securities held by the Trust were
issued in June 1998 at a dividend rate of 6 3/4 % and are redeemable, in whole
or in part, after June 30, 2001 but before June 30, 2018. The preferred
securities are also convertible at the option of the holder into common stock of
Tower at an equivalent conversion price of $30.713 per share. As of December 31,
2003, the Company consolidated the variable interest entity related to its
Lansing, Michigan building and equipment leasing arrangement and, therefore,
recorded property, plant and equipment of $25.7 million and related indebtedness
of $25.7 million. At March 31, 2004, this indebtedness amounted to $24.8
million.
The Company utilizes a rate swap contract to manage its interest rate exposure
on approximately $160 million of its floating rate indebtedness under its Credit
Agreement. The contracts have the effect of converting the floating rate
interest to a fixed rate of approximately 6.9%, plus any applicable margin
required under the revolving credit facility. The interest rate swap contract
was executed to balance the Company's fixed-rate and floating-rate debt
portfolios and expires in September 2005.
The Company has designated the swap as a cash flow hedge. Accordingly, gains and
losses are recorded in accumulated other comprehensive income (loss), net of
income taxes. As of March 31, 2004, $ 7.5 million (net of tax) is recorded in
accumulated other comprehensive loss related to the cash flow hedge. Derivative
liabilities relating to the interest rate swap agreement totaling $12.8 million
have been recorded in accrued liabilities in the condensed consolidated balance
sheet as of March 31, 2004. The fair value of the interest rate swap agreement
is based upon the difference between the contractual rates and the present value
of the expected future cash flows on the hedged interest rate.
7
5. ACQUISITIONS
Effective February 27, 2004, the Company acquired the remaining 34% ownership
interest in Seojin Industrial Company Limited ("Seojin") for consideration of
approximately $21.3 million. Such consideration consisted of cash of $21.3
million offset by the repayment of $11.0 million of loans to Seojin's minority
shareholder, resulting in a net cash outflow of $10.3 million. Seojin is a
supplier of frames, modules and structural components to the Korean automotive
industry with primary customers of Hyundai and Kia. The Company financed the
acquisition through Korean debt facilities, which are not covered under the
Company's Credit Agreement (Note 4). The acquisition was accounted for under the
purchase method of accounting and, accordingly, the assets acquired and
liabilities assumed have been recorded at the Company's preliminary estimate of
fair value as of the date of acquisition. The excess of the purchase price over
the fair value of the assets acquired and liabilities assumed, if any, will be
recorded as goodwill. The purchase price and related allocation may be revised
up to one year from the date of the acquisition. The Company can provide no
assurances as to whether any revisions to the original purchase price allocation
will be significant. Adjustments to the purchase price and related allocation
may occur as a result of obtaining more information regarding property
valuations, liabilities assumed and revisions of preliminary estimates of fair
values made at the date of purchase. As the Company previously consolidated
Seojin, its results of operations have been included in all periods presented
and, as a result, no pro forma information is presented.
In conjunction with previous acquisitions, reserves have been established for
certain costs associated with facility shutdown and consolidation activities,
for general and payroll related costs primarily for planned employee termination
activities, and for provisions for acquired loss contracts. A rollforward of
these reserves is as follows (in millions):
FACILITY
SHUTDOWN COSTS LOSS CONTRACTS
-------------- --------------
December 31, 2003 $ 2.0 $ 2.9
Utilization (0.1) (0.7)
------------ ------------
March 31, 2004 $ 1.9 $ 2.2
============ ============
As of March 31, 2004, all of the identified facilities have been shutdown, but
the Company continues to incur costs related to maintenance, taxes and other
costs related to the buildings. The Company's acquisition reserves have been
utilized as originally intended and management believes that the liabilities
recorded for shutdown and consolidation activities are adequate as of March 31,
2004.
6. ACCOUNTS RECEIVABLE SECURITIZATION
In June 2001, the Company entered into a financing agreement whereby its
domestic operating units sold eligible customer receivables on an ongoing basis
to a fully consolidated financing entity. In February 2004, the financing
agreement was terminated. During the first quarter of 2004, no customer
receivables were sold.
7. INVESTMENTS IN JOINT VENTURES
In March 2004, the Company sold its 30.76% ownership interest in Yorozu
Corporation ("Yorozu") to Yorozu, through a share buy-back transaction on the
Tokyo Stock Exchange. Yorozu is a supplier of suspension modules and structural
parts to the Asian and North American automotive markets. The Company received
proceeds of approximately $51.7 million through this sale. The consideration for
the sale was based on the prevailing price of Yorozu, as traded on the Tokyo
Stock Exchange. The Company recognized a gain on the sale of $9.7 million. The
proceeds of this divestiture were utilized for tooling purchases and other
capital expenditures.
8
On February 10, 2004, the Company announced that a decision had been finalized
by DaimlerChrysler to move the current production of the frame assembly for the
Dodge Ram light truck from the Company's Milwaukee, Wisconsin facility to the
Company's 40% owned joint venture partner, Metalsa, located in Monterrey,
Mexico. The current Dodge Ram frame program produced in the Milwaukee facility
was expected to run through 2009. The production move to Mexico is planned for
mid-2005. The Company is in the process of determining the expected net economic
impact, if any, of DaimlerChrysler's decision to move the Dodge Ram frame line
on its future consolidated results. The Company is also currently in
negotiations with DaimlerChrysler regarding a settlement pertaining to costs
associated with the move and/or replacement programs.
8. INCOME TAXES
The Company recognized income tax expense of approximately $0.5 million and $7.8
million, respectively, for the three months ended March 31, 2004 and 2003. The
associated effective tax rates were 76.1% and 34.0%, respectively. The
relatively high effective tax rate for the 2004 period was due to the high
proportion of non-deductible items in relation to pre-tax income.
9. RETIREMENT PLANS
The following table provides the components of net periodic pension benefit cost
and other post retirement benefit cost for the quarters ended March 31, (in
thousands):
PENSION BENEFITS OTHER BENEFITS
2004 2003 2004 2003
---------- ---------- ---------- ----------
Service cost $ 2,140 $ 1,629 $ 94 $ 167
Interest cost 3,626 3,487 1,935 2,078
Expected return on plan assets (3,045) (2,438) - -
Amortization of transition assets (1) (8) - -
Amortization of prior service cost 1,054 595 - -
Amortization of net losses 941 1,109 1,495 892
---------- ---------- ---------- ----------
Net periodic benefit cost $ 4,715 $ 4,374 $ 3,524 $ 3,137
========== ========== ========== ==========
The reversal of the pension curtailment loss of $6.3 million associated with the
Company's decision to not move the Ford Ranger frame assembly is not reflected
in the table above but is reflected in the Company's statement of operations for
the three months ended March 31, 2004 as a restructuring charge reversal. (See
Note 11 to the Condensed Consolidated Financial Statements).
The Company previously disclosed in its consolidated financial statements for
the year ended December 31, 2003 that it expects its minimum pension funding
requirements to be $38 million during 2004. During the three months ended March
31, 2004, the Company made contributions of $5.9 million to its pension plans.
The Company presently anticipates contributing an additional $25.8 million to
fund its pension plans in 2004 for a total of $31.7 million based upon the
Company's most recent estimate.
The Company contributed $6.8 million and $6.2 million during the three months
ended March 31, 2004 and 2003, respectively, to its defined contribution
employee savings plans.
The Company presently anticipates that the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 will not have a material impact on net
periodic benefit cost.
10. SEGMENT INFORMATION
The Company produces a broad range of assemblies and modules for vehicle body
structures and suspension systems for the global automotive industry. These
operations have similar characteristics including the nature of products,
production processes and customers, and produce lower vehicle structures, body
structures (including Class A
9
surfaces), suspension components, and suspension and powertrain modules for the
automotive industry. Management reviews the operating results of the Company and
makes decisions based upon two operating segments: United States/Canada and
International.
Financial information by segment is as follows (in thousands):
UNITED STATES/
CANADA INTERNATIONAL TOTAL
-------------- ------------- ------------
THREE MONTHS ENDED MARCH 31, 2004:
Revenues $ 533,881 $ 247,355 $ 781,236
Operating income 15,357 16,741 32,098
Total assets $ 1,886,526 $ 980,789 $ 2,867,315
THREE MONTHS ENDED MARCH 31, 2003:
Revenues $ 532,062 $ 200,516 $ 732,578
Operating income 21,839 18,009 39,848
Total assets $ 1,883,351 $ 765,634 $ 2,648,985
The change in the carrying amount of goodwill for the three months ended March
31, 2004, by operating segment, is as follows (in thousands):
UNITED STATES/
CANADA INTERNATIONAL TOTAL
-------------- ------------- ------------
Balance at December 31, 2003 $ 336,468 $ 162,195 $ 498,663
Currency translation adjustment (131) (3,323) (3,454)
------------ ------------ ------------
Balance at March 31, 2004 $ 336,337 $ 158,872 $ 495,209
============ ============ ============
11. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
MILWAUKEE RANGER AND NORTH AMERICA/CORPORATE OFFICE CONSOLIDATION ACTIVITIES
(2003 PLAN):
In October 2003, the Company announced plans to consolidate its Novi, Michigan
North America oversight and Grand Rapids, Michigan corporate office activities
and close its Rochester Hills, Michigan prototype tooling and technical center
facility. Qualifying exit costs (in accordance with SFAS No. 146 "Accounting for
Costs Associated with Exit or Disposal Activities") relating to these activities
were recognized by the Company in the fourth quarter of 2003 totaling $3.7
million, comprised of cash charges of $2.1 million and non-cash asset impairment
charges of $1.6 million. These costs incurred to date as well as any additional
costs expected to be incurred relating to these activities are within the United
States/ Canada segment. The Company does not anticipate any significant
additional expenses related to this restructuring activity.
On May 27, 2003, the Company announced that it would transfer the production of
high-volume frame assemblies for the Ford Ranger from its Milwaukee, Wisconsin
facility to its Bellevue, Ohio facility. During 2003, the Company recorded $25.0
million pre-tax restructuring and asset impairment charges relating to this
event. These charges reflect estimated qualifying "exit costs" comprising cash
charges of $6.1 million, pension and other post-retirement benefit plan
curtailment costs of $6.3 million and non-cash asset impairment charges of $12.6
million, all within the United States/Canada segment. These charges did not
cover certain aspects of the 2003 Plan, including movement of equipment and
colleague relocation and training, which are recognized in future periods as
incurred. On December 5, 2003, the Company announced that it had decided not to
proceed with the relocation of the Ford Ranger line based on revised economic
factors from the original May 2003 decision principally due to concessions
received from the Milwaukee labor unions and a need for management to focus on
its 2004 new product launch schedule. Because the Company's measurement date for
pension and post-retirement benefits is September 30, the decision to continue
Ranger frame production in Milwaukee made in December 2003 resulted in a
reversal of the curtailment loss on a three-month lag in the first quarter of
2004. The remaining charges related to the original decision to move the Ranger
frame production have been incurred.
10
During the three months ended March 31, 2004, the Company recognized
restructuring charges pertaining to previously announced plans of $0.7 million.
The accrual for the 2003 Plan is included in accrued liabilities in the
accompanying condensed consolidated balance sheets as of March 31, 2004 and
December 31, 2003. The table below summarizes the accrual for the 2003 Plan
through March 31, 2004 (in millions):
SEVERANCE AND
OUTPLACEMENT COSTS
------------------
Balance at December 31, 2003 $ 2.0
Cash usage (0.4)
------------------
Balance at March 31, 2004 $ 1.6
==================
12. COMPREHENSIVE INCOME
The following table presents comprehensive income (in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------------------
2004 2003
------------ ------------
Net income $ 12,018 $ 11,572
Change in cumulative translation adjustment (7,678) 2,373
Unrealized gain on qualifying cash flow hedges, net of tax 746 511
------------ ------------
Comprehensive income $ 5,086 $ 14,456
============ ============
13. COMMITMENTS AND CONTINGENCIES
LITIGATION:
The Company is party to certain claims arising in the ordinary course of
business. In the opinion of management, based upon the advice of legal counsel,
the outcomes of such claims are impossible to ascertain or are not expected to
be material to the Company's financial position, results of operations or cash
flows.
14. CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION:
The following consolidating financial information presents balance sheets,
statements of operations and cash flow information related to the Company's
business. Each Guarantor, as defined, is a direct or indirect wholly-owned
subsidiary of the Company and has fully and unconditionally guaranteed the 9.25%
senior unsecured Euro notes issued by R. J. Tower Corporation in 2000 and the
12% senior unsecured notes issued by R.J. Tower Corporation in 2003, on a joint
and several basis. Tower Automotive, Inc. (the parent company) has also fully
and unconditionally guaranteed the notes and is reflected as the Parent
Guarantor in the consolidating financial information. The Non-Guarantor
Restricted Companies are the Company's foreign subsidiaries except for Seojin
Industrial Company Limited, which is reflected as the Non-Guarantor Unrestricted
Company in the consolidating financial information. Separate financial
statements and other disclosures concerning the Guarantors have not been
presented because management believes that such information is not material to
investors.
11
TOWER AUTOMOTIVE INC.
CONSOLIDATING BALANCE SHEETS AT MARCH 31, 2004
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES
------------- ------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 40,113 $ - $ 501 $ 37,529
Accounts receivable 2,871 - 181,197 172,817
Inventories - - 66,277 48,186
Deferred income taxes, net 14,249 - - 1,578
Prepaid tooling and other 4,182 - 109,714 36,745
------------- ------------- ------------- -------------
Total current assets 61,415 - 357,689 296,855
------------- ------------- ------------- -------------
Property, plant and equipment, net 1,380 - 650,361 294,276
Investments in joint ventures 204,257 - - -
Investment in subsidiaries 514,907 420,329 - -
Deferred income taxes, net 94,619 21,716 27,351 2,740
Goodwill - - 326,310 168,899
Other assets, net 21,268 6,772 75,633 29,187
------------- ------------- ------------- -------------
$ 897,846 $ 448,817 $ 1,437,344 $ 791,957
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 12,500 $ - $ 3,621 $ 29,785
Convertible subordinated notes - 199,984 - -
Accounts payable 2,327 - 384,920 149,642
Accrued liabilities 50,307 1,667 123,357 60,454
------------- ------------- ------------- -------------
Total current liabilities 65,134 201,651 511,898 239,881
------------- ------------- ------------- -------------
Long-term debt, net of current maturities 662,754 258,750 65,015 14,483
Obligations under capital leases, net of
current maturities - - - 37,380
Due to/(from) affiliates (356,699) (431,913) 605,216 186,449
Other noncurrent liabilities 89,646 - 89,600 33,602
------------- ------------- ------------- -------------
Total noncurrent liabilities 395,701 (173,163) 759,831 271,914
------------- ------------- ------------- -------------
Stockholders' investment 437,011 420,329 165,615 280,162
------------- ------------- ------------- -------------
$ 897,846 $ 448,817 $ 1,437,344 $ 791,957
============= ============= ============= =============
NON-GUARANTOR
UNRESTRICTED
COMPANIES ELIMINATIONS CONSOLIDATED
------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 203 $ - $ 78,346
Accounts receivable 17,204 - 374,089
Inventories 12,626 - 127,089
Deferred income taxes, net (532) - 15,295
Prepaid tooling and other 9,469 - 160,110
------------- ------------- -------------
Total current assets 38,970 - 754,929
------------- ------------- -------------
Property, plant and equipment, net 171,305 - 1,117,322
Investments in joint ventures - - 204,257
Investment in subsidiaries - (935,236) -
Deferred income taxes, net (1,914) - 144,512
Goodwill - - 495,209
Other assets, net 18,226 - 151,086
------------- ------------- -------------
$ 226,587 $ (935,236) $ 2,867,315
============= ============= =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 74,689 $ - $ 120,595
Convertible subordinated notes - - 199,984
Accounts payable 42,422 - 579,311
Accrued liabilities 8,211 - 243,996
------------- ------------- -------------
Total current liabilities 125,322 - 1,143,886
------------- ------------- -------------
Long-term debt, net of current maturities 41,568 - 1,042,570
Obligations under capital leases, net of
current maturities 2,171 - 39,551
Due to/(from) affiliates (3,053) - -
Other noncurrent liabilities 8,131 - 220,979
------------- ------------- -------------
Total noncurrent liabilities 48,817 - 1,303,100
------------- ------------- -------------
Stockholders' investment 52,448 (935,236) 420,329
------------- ------------- -------------
$ 226,587 $ (935,236) $ 2,867,315
============= ============= =============
12
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES
------------- ------------- ------------- -------------
Revenues $ - $ - $ 524,823 $ 189,125
Cost of sales (2,739) - 495,377 166,503
------------- ------------- ------------- -------------
Gross profit 2,739 - 29,446 22,622
Selling, general and administrative expenses (8,415) - 30,382 9,595
Restructuring charge reversal 217 - (5,824) -
------------- ------------- ------------- -------------
Operating income 10,937 - 4,888 13,027
Interest expense (income), net 21,250 7,191 (519) 1,581
------------- ------------- ------------- -------------
Income (loss) before provision for
income taxes (10,313) (7,191) 5,407 11,446
Provision (benefit) for income taxes (3,242) (2,445) 1,838 3,892
------------- ------------- ------------- -------------
Income (loss) before equity in
earnings of joint ventures, gain on
sale of joint venture and minority
interest (7,071) (4,746) 3,569 7,554
Equity earnings in joint ventures and
subsidiaries, net 14,103 16,764 - -
Gain on sale of joint venture investment, net 9,732 - - -
Minority interest, net - - - (1,311)
------------- ------------- ------------- -------------
Net income (loss) $ 16,764 $ 12,018 $ 3,569 $ 6,243
============= ============= ============= =============
NON-GUARANTOR
UNRESTRICTED
COMPANIES ELIMINATIONS CONSOLIDATED
------------- ------------- -------------
Revenues $ 67,288 $ - $ 781,236
Cost of sales 61,450 - 720,591
------------- ------------- -------------
Gross profit 5,838 - 60,645
Selling, general and administrative expenses 2,592 - 34,154
Restructuring charge reversal - - (5,607)
------------- ------------- -------------
Operating income 3,246 - 32,098
Interest expense (income), net 1,967 - 31,470
------------- ------------- -------------
Income (loss) before provision for
income taxes 1,279 - 628
Provision (benefit) for income taxes 435 - 478
------------- ------------- -------------
Income (loss) before equity in
earnings of joint ventures, gain on sale
of joint venture and minority interest 844 - 150
Equity earnings in joint ventures and
subsidiaries, net - (27,420) 3,447
Gain on sale of joint venture investment, net - - 9,732
Minority interest, net - - (1,311)
------------- ------------- -------------
Net income (loss) $ 844 $ (27,420) $ 12,018
============= ============= =============
13
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2004
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES
------------- ------------- ------------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ 16,764 $ 12,018 $ 3,569 $ 6,243
Adjustments required to reconcile net income
to net cash provided by (used in)
operating activities
Non-cash restructuring charge reversal - - (6,276) -
Depreciation 65 - 23,917 10,185
Deferred income tax provision
(benefit) (2,217) - (279) (1,858)
Gain on sale of joint venture
investment (9,732) - - -
Equity in earnings of joint ventures,
net (3,447) - - -
Changes in working capital and
other operating items (5,338) (2,499) (105,026) 4,381
------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities (3,905) 9,519 (84,095) 18,951
------------- ------------- ------------- -------------
INVESTING ACTIVITIES:
Capital expenditures, net (608) - (32,875) (16,031)
Divestitures and Other 44,626 (9,519) - -
Acquisitions - - - -
------------- ------------- ------------- -------------
Net cash provided by (used in)
investing activities 44,018 (9,519) (32,875) (16,031)
------------- ------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from borrowings - - - 3,378
Repayment of debt - - (881) (9,188)
------------- ------------- ------------- -------------
Net cash provided by (used for)
financing activities - - (881) (5,810)
------------- ------------- ------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 40,113 - (117,851) (2,890)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD - - 118,352 40,419
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 40,113 $ - $ 501 $ 37,529
============= ============= ============= =============
NON-GUARANTOR
UNRESTRICTED
COMPANIES ELIMINATIONS CONSOLIDATED
------------- ------------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ 844 $ (27,420) $ 12,018
Adjustments required to reconcile net income
to net cash provided by (used in)
operating activities
Non-cash restructuring charge reversal - - (6,276)
Depreciation 4,190 - 38,357
Deferred income tax provision
(benefit) 250 - (4,104)
Gain on sale of joint venture
investment - - (9,732)
Equity in earnings of joint ventures,
net - - (3,447)
Changes in working capital and
other operating items 10,850 7,932 (89,700)
------------- ------------- -------------
Net cash provided by (used in)
operating activities 16,134 (19,488) (62,884)
------------- ------------- -------------
INVESTING ACTIVITIES:
Capital expenditures, net (3,672) - (53,186)
Divestitures and Other - 19,488 54,595
Acquisitions (21,299) - (21,299)
------------- ------------- -------------
Net cash provided by (used in)
investing activities (24,971) 19,488 (19,890)
------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from borrowings 11,252 - 14,630
Repayment of debt (4,340) - (14,409)
------------- ------------- -------------
Net cash provided by (used for)
financing activities 6,912 - 221
------------- ------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,925) - (82,553)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,128 - 160,899
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 203 $ - $ 78,346
============= ============= =============
14
TOWER AUTOMOTIVE INC.
CONSOLIDATING BALANCE SHEETS AT DECEMBER 31, 2003
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES
------------- ------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ - $ 118,352 $ 40,419
Accounts receivable - - 177,177 129,633
Inventories - - 73,760 44,876
Deferred income taxes, net - - 14,250 5,866
Prepaid tooling and other - - 39,849 41,445
------------- ------------- ------------- -------------
Total current assets - - 423,388 262,239
------------- ------------- ------------- -------------
Property, plant and equipment, net - - 642,240 288,430
Investments in joint ventures 247,756 - - 377
Investment in subsidiaries 411,267 413,510 - -
Deferred income taxes, net - 21,716 119,857 (3,406)
Goodwill - - 326,309 172,354
Other assets, net 14,881 7,096 82,162 37,574
------------- ------------- ------------- -------------
$ 673,904 $ 442,322 $ 1,593,956 $ 757,568
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term
debt and capital lease obligations $ - $ - $ 3,622 $ 32,916
Convertible subordinated notes - 199,984 - -
Accounts payable - - 399,319 114,333
Accrued liabilities 11,124 4,166 161,788 64,044
------------- ------------- ------------- -------------
Total current liabilities 11,124 204,150 564,729 211,293
------------- ------------- ------------- -------------
Long-term debt, net of current maturities 679,177 258,750 65,871 16,202
Obligations under capital leases, net of
current maturities - - - 40,054
Due to/(from) affiliates (479,789) (434,088) 758,417 147,123
Other noncurrent liabilities - - 180,827 34,431
------------- ------------- ------------- -------------
Total noncurrent liabilities 199,388 (175,338) 1,005,115 237,810
------------- ------------- ------------- -------------
Stockholders' investment 463,392 413,510 24,112 308,465
------------- ------------- ------------- -------------
$ 673,904 $ 442,322 $ 1,593,956 $ 757,568
============= ============= ============= =============
NON-GUARANTOR
UNRESTRICTED
COMPANIES ELIMINATIONS CONSOLIDATED
------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,128 $ - $ 160,899
Accounts receivable 18,789 - 325,599
Inventories 11,368 - 130,004
Deferred income taxes, net - - 20,116
Prepaid tooling and other 10,368 - 91,662
------------- ------------- -------------
Total current assets 42,653 - 728,280
------------- ------------- -------------
Property, plant and equipment, net 125,203 - 1,055,873
Investments in joint ventures - - 248,133
Investment in subsidiaries - (824,777) -
Deferred income taxes, net 8,777 - 146,944
Goodwill - - 498,663
Other assets, net 26,803 - 168,516
------------- ------------- -------------
$ 203,436 $ (824,777) $ 2,846,409
============= ============= =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term
debt and capital lease obligations $ 63,059 $ - $ 99,597
Convertible subordinated notes - - 199,984
Accounts payable 42,384 - 556,036
Accrued liabilities 8,862 - 249,984
------------- ------------- -------------
Total current liabilities 114,305 - 1,105,601
------------- ------------- -------------
Long-term debt, net of current maturities 40,859 - 1,060,859
Obligations under capital leases, net of
current maturities 2,744 - 42,798
Due to/(from) affiliates 8,337 - -
Other noncurrent liabilities 8,383 - 223,641
------------- ------------- -------------
Total noncurrent liabilities 60,323 - 1,327,298
------------- ------------- -------------
Stockholders' investment 28,808 (824,777) 413,510
------------- ------------- -------------
$ 203,436 $ (824,777) $ 2,846,409
============= ============= =============
15
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES
------------- ------------- ------------- -------------
Revenues $ - $ - $ 500,763 $ 154,825
Cost of sales - - 456,979 131,054
------------- ------------- ------------- -------------
Gross profit - - 43,784 23,771
Selling, general and administrative expenses - - 24,245 8,892
------------- ------------- ------------- -------------
Operating income - - 19,539 14,879
Interest expense (income), net 12,026 6,866 (5,401) 1,421
------------- ------------- ------------- -------------
Income (loss) before provision for
income taxes (12,026) (6,866) 24,940 13,458
Provision (benefit) for income taxes (4,089) (2,334) 8,480 4,575
------------- ------------- ------------- -------------
Income (loss) before equity in
earnings of joint ventures and
minority interest (7,937) (4,532) 16,460 8,883
Equity earnings in joint ventures and
subsidiaries, net 26,923 18,986 - -
Minority interest, net - (2,882) - (1,422)
------------- ------------- ------------- -------------
Net income $ 18,986 $ 11,572 $ 16,460 $ 7,461
============= ============= ============= =============
NON-GUARANTOR
UNRESTRICTED
COMPANIES ELIMINATIONS CONSOLIDATED
------------- ------------- -------------
Revenues $ 76,990 $ - $ 732,578
Cost of sales 70,021 - 658,054
------------- ------------- -------------
Gross profit 6,969 - 74,524
Selling, general and administrative expenses 1,539 - 34,676
------------- ------------- -------------
Operating income 5,430 - 39,848
Interest expense (income), net 1,857 - 16,769
------------- ------------- -------------
Income (loss) before provision for
income taxes 3,573 - 23,079
Provision (benefit) for income taxes 1,215 - 7,847
------------- ------------- -------------
Income (loss) before equity in
earnings of joint ventures and
minority interest 2,358 - 15,232
Equity earnings in joint ventures and
subsidiaries, net - (45,265) 644
Minority interest, net - - (4,304)
------------- ------------- -------------
Net income $ 2,358 $ (45,265) $ 11,572
============= ============= =============
16
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2003
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES
------------- ------------- ------------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ 18,986 $ 11,572 $ 16,460 $ 7,461
Adjustments required to reconcile net income
(loss) to net cash provided by (used in)
operating activities
Depreciation - - 28,173 6,771
Deferred income tax provision
(benefit) - - 7,328 897
Equity in earnings of joint ventures,
net (644) - - -
Changes in working capital and
other operating items 6,967 (3,984) (93,169) 18,552
------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities 25,309 7,588 (41,208) 33,681
------------- ------------- ------------- -------------
INVESTING ACTIVITIES:
Capital expenditures, net - - (34,409) (4,491)
Divestitures and other, net (93,897) (7,891) 76,329 2,398
------------- ------------- ------------- -------------
Net cash provided by (used in)
investing activities (93,897) (7,891) 41,920 (2,093)
------------- ------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from borrowings 690,726 - 6 2,599
Repayment of debt (622,138) - (718) (28,054)
Net proceeds from issuance of stock - 303 - -
------------- ------------- ------------- -------------
Net cash provided by (used for)
financing activities 68,588 303 (712) (25,455)
------------- ------------- ------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS - - - 6,133
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD - - - 9,191
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ - $ - $ 15,324
============= ============= ============= =============
NON-GUARANTOR
UNRESTRICTED
COMPANIES ELIMINATIONS CONSOLIDATED
------------- ------------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ 2,358 $ (45,265) $ 11,572
Adjustments required to reconcile net income
(loss) to net cash provided by (used in)
operating activities
Depreciation 4,107 - 39,051
Deferred income tax provision
(benefit) 49 - 8,274
Equity in earnings of joint ventures,
net - - (644)
Changes in working capital and
other operating items (4,368) 18,972 (57,030)
------------- ------------- -------------
Net cash provided by (used in)
operating activities 2,146 (26,293) 1,223
------------- ------------- -------------
INVESTING ACTIVITIES:
Capital expenditures, net (2,300) - (41,200)
Divestitures and other, net - 26,293 3,232
------------- ------------- -------------
Net cash provided by (used in)
investing activities (2,300) 26,293 (37,968)
------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from borrowings 6,315 - 699,646
Repayment of debt (7,221) - (658,131)
Net proceeds from issuance of stock - - 303
------------- ------------- -------------
Net cash provided by (used for)
financing activities (906) - 41,818
------------- ------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,060) - 5,073
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,508 - 13,699
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,448 $ - $ 18,772
============= ============= =============
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company produces a broad range of assemblies and modules for vehicle frames,
upper body structures and suspension systems for the global automotive industry.
Including wholly owned subsidiaries and investments in joint ventures, the
Company has production and engineering facilities in the United States, Canada,
Italy, Germany Belgium, Poland, France, Spain, Brazil, India, Slovakia, Korea,
Japan, China and Mexico.
The Company's products are manufactured utilizing steel and various purchased
assemblies, primarily manufactured utilizing steel. The price of steel has
increased significantly during the first quarter of 2004 compared to recent
historical periods due to a shortage of certain raw materials necessary to
produce steel and increased global demand, primarily in China. The Company
purchases a substantial portion of its steel from its customers through the
customers' resale programs. For these purchases, the Company has not been
impacted by increased steel prices. The remainder of the Company's steel
purchasing requirements is met through contracts with steel producers and market
purchases. The Company's purchase price under such steel contracts and market
purchases have rapidly increased during the first quarter of 2004 as compared to
historical periods. We expect the effect of the increase in steel prices will be
more pronounced in the second and third quarters of this year as the steel
utilized in the first quarter was principally purchased prior to the recent
heights of steel prices. The Company's agreements with its customers generally
do not permit the Company to increase selling prices for increases in prices of
raw material inputs. The Company is pursuing several initiatives to mitigate the
impact of such raw material price increases on its results of operations. Such
initiatives include pursuing selling price increases from customers and reducing
other operating costs, among other initiatives. The Company can provide no
assurances that it will not be materially impacted in the future by such raw
material price increases.
On February 10, 2004, the Company announced that a decision had been finalized
by DaimlerChrysler to move the current production of the frame assembly for the
Dodge Ram light truck from the Company's Milwaukee, Wisconsin facility to the
Company's 40% owned joint venture partner, Metalsa located in Monterrey, Mexico.
The current Dodge Ram frame program produced in the Milwaukee facility was
expected to run through 2009. The production move to Mexico is planned for
mid-2005. The Company is in the process of determining the expected net economic
impact, if any, of DaimlerChrysler's decision to move the Dodge Ram frame line
on its future consolidated results. The Company is also currently in
negotiations with DaimlerChrysler regarding a settlement pertaining to costs
associated with the move and/or replacement programs.
For a more detailed description of other factors that have had or may in the
future have, a significant impact on the Company's business, please refer to
"Forward Looking Statements", "Market Risks" and "Opportunities" contained in
this Management's Discussion and Analysis for insight on opportunities,
challenges and risks, such as those presented by known material trends and
uncertainties, on which the Company's management is most focused for both the
short term and long term, as well as the actions they are taking to address
these opportunities, challenges and risks.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2003
REVENUES. Revenues for the first quarter of 2004 increased by $48.6 million, or
6.6%, to $781.2 million from $732.6 million during the first quarter of 2003.
Increased volume and product mix increased revenue by $34.4 million and foreign
exchange effects increased revenues by $19.5 million. These increases were
partially offset by net selling price reductions of $5.3 million.
GROSS PROFIT AND GROSS MARGIN. Gross margin for the first quarter of 2004 was
7.8% compared to 10.2% for the first quarter of 2003. Gross profit declined by
$13.9 million, or 18.6%, to $60.6 million during the 2004 period compared to
$74.5 million during the 2003 period. The decrease in gross margin and gross
profit were primarily attributable to increased costs associated with the
Company's product launch activities during the 2004 quarter of $10.8 million,
customer selling price reductions of $5.6 million and higher operating expenses
of $8.5 million, which includes the effects of higher health care costs ($1.6
million), higher material costs, primarily steel ($0.7 million) and general
economic conditions (i.e. general labor rate increases, higher energy costs,
etc.) pertaining to the Company ($6.8 million). These declines were partially
offset by operating efficiencies of $6.0 million, favorable foreign currency
effects of $1.0 million and volume and product mix effects of $4.6 million.
18
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses declined by $0.5 million, or 1.5%, to $34.2 million
during the first quarter of 2004 from $34.7 million during the first quarter of
2003. Selling, general and administrative expenses represented 4.4% of revenues
during the 2004 period compared to 4.7% during the 2003 period. The decline is
attributable to lower expenses resulting from the Company's 2003 Restructuring
Plan involving the Company's corporate consolidation activities.
OPERATING INCOME. Operating income declined by $7.8 million, or 19.4%, to $32.1
million during the first quarter of 2004 from $39.9 million during the first
quarter of 2003. This decline was caused by the decrease in gross profit
mentioned above. This decline was partially offset by net restructuring income
of $5.6 million. Such net restructuring income consists of the reversal of the
pension curtailment loss of $6.3 million associated with the Company's decision
to not move the Ford Ranger frame assembly, as previously disclosed, offset by
$0.7 million of cash restructuring costs associated with the Company's corporate
and North American operations consolidation (See Note 11 to Condensed
Consolidated Financial Statements).
INTEREST EXPENSE. Interest expense, net increased by $14.7 million, or 87.7%, to
$31.5 million for the first quarter of 2004 from $16.8 million for the first
quarter of 2003. The increase was attributable to: (i) increased interest of
$7.9 million related to the senior notes issued in June 2003; (ii) $4.4 million
related to the Trust Preferred Securities which was recorded as minority
interest in the first quarter of 2003; and (iii) $2.4 million pertaining to
increased borrowings and interest rates.
PROVISION FOR INCOME TAXES. The Company's effective income tax rate was 76.1%
for the first quarter of 2004, compared to 34.0% for the first quarter of 2003.
The relatively high effective tax rate for the 2004 period was due to the high
proportion of non-deductible items in relation to pre-tax income.
EQUITY IN EARNINGS OF JOINT VENTURES, NET. Equity in earnings of joint ventures,
net of tax increased by $2.8 million to $3.4 million during the three months
ended March 31, 2004 from $0.6 million during the three months ended March 31,
2003. The increase primarily resulted form improved performance at Yorozu in
2004, prior to the date of sale of Yorozu (March 11, 2004), compared to 2003.
GAIN ON SALE OF JOINT VENTURE. The gain on sale of joint venture in the amount
of $9.7 million for the first quarter of 2004 represents the Company's sale of
its 30.76% ownership interest in Yorozu (See Note 7 to Condensed Consolidated
Financial Statements).
MINORITY INTEREST, NET. Minority interest, net declined by $3.0 million during
the first quarter of 2004 to $1.3 million from $4.3 million during the first
quarter of 2003. The 2003 period included dividends, net of income tax benefits,
on the Trust Preferred Securities in the amount of $2.9 million, which are now
classified as interest expense (See Note 4 to Condensed Consolidated Financial
Statements).
NET INCOME. Net income for the first quarter of 2004, amounted to $12.0 million,
or $0.21 per basic and diluted share, compared to $11.6 million, or $0.21 per
basic and diluted share, for the first quarter of 2003. Net income for 2004
reflected a restructuring charge reversal, net of tax of $3.7 million and a
divestiture gain, net of tax of $9.7 million.
RESTRUCTURING AND ASSET IMPAIRMENT
In October 2003, the Company announced plans to consolidate its Novi, Michigan
North America oversight and Grand Rapids, Michigan corporate office activities
and close its Rochester Hills, Michigan prototype tooling and technical center
facility. In the fourth quarter of 2003, charges relating to these activities
were recognized by the Company totaling $3.7 million, comprised of cash charges
of $2.1 million and non-cash asset impairment charges of $1.6 million. These
costs incurred to date as well as any additional costs expected to be incurred
relating to these activities are within the United States/ Canada segment. The
Company does not anticipate any significant additional expenses related to this
restructuring activity.
On May 27, 2003, the Company announced that it would transfer the production of
high-volume frame assemblies for the Ford Ranger from its Milwaukee facility to
its Bellevue, Ohio facility. During 2003, the Company recorded
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$25.0 million pre-tax restructuring and asset impairment charges relating to
this event. These charges reflect estimated qualifying "exit costs" comprising
cash charges of $6.1 million, pension and other post-retirement benefit plan
curtailment costs of $6.3 million and non-cash asset impairment charges of $12.6
million, all within the United States/Canada segment. These charges did not
cover certain aspects of the 2003 Plan, including movement of equipment and
colleague relocation and training, which are being recognized as incurred. On
December 5, 2003, the Company announced that it had decided not to proceed with
the relocation of the Ford Ranger line based on revised economic factors from
the original May 2003 decision principally due to concessions received from the
Milwaukee labor unions and a need for management to focus on its 2004 new
product launch schedule. Because the Company's measurement date for pension and
post-retirement benefits is September 30, the decision to continue Ranger frame
production in Milwaukee made in December 2003 resulted in a reversal of the
curtailment loss on a three-month lag in the first quarter of 2004, as discussed
above.
The remaining charges related to the original decision to move the Ranger frame
production have been incurred.
The Company anticipates cash restructuring costs of $1.0 to $2.0 million per
quarter for the remainder of 2004 relating to previously announced plans.
The Company has historically executed various restructuring plans and may
execute additional plans in the future to respond to customer sourcing
decisions, to realign manufacturing capacity to prevailing global automotive
production and to improve the utilization of remaining facilities.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2004, the Company's cash requirements were met
through operations and commercial borrowings. At March 31, 2004, the Company had
available liquidity in the amount of $101.3 million, which consisted of cash on
hand of $78.3 million and $23.0 million available through its revolving credit
facility.
Net cash utilized in operating activities amounted to $62.9 million during the
first quarter of 2004 compared to net cash provided by operating activities of
$1.2 million during the first quarter of 2003. The amount utilized during the
2004 period primarily resulted from higher accounts receivable and prepaid
tooling. Accounts receivable and prepaid tooling increased $48.5 million and
$67.2 million, respectively, from December 31, 2003. This impact was partially
offset by an increase in accounts payable and other accruals aggregating $17.3
million. The increase in accounts receivable resulted from higher revenues
during the 2004 quarter. The increase in prepaid tooling primarily resulted from
the Company's significant launch activities. The increase in accounts payable
and other accruals reflected the Company's higher business activity level.
Net cash utilized in investing activities amounted to $19.9 million during the
first quarter of 2004 compared to net cash utilized of $38.0 million in the
first quarter of 2003. The utilization for the 2004 period resulted from capital
expenditures, net amounting to $53.2 million and the acquisition of the
remaining 34% interest in Seojin from the Company's joint venture partner for
$21.3 million. The impact of these items were partially offset by proceeds of
$51.7 million from the sale of Yorozu. Capital expenditures for 2004 are
expected to be approximately $240.0 million ($195 million net of anticipated
lease proceeds).
Net cash provided by financing activities amounted to $0.2 million during the
first quarter of 2004 compared to net cash provided of $41.8 million for the
first quarter of 2003. The 2004 period reflected significantly lower borrowing
activity in comparison to the 2003 period. During the first quarter of 2004, the
Company had proceeds from borrowings amounting to $14.6 million compared to
borrowings of $699.6 million during the corresponding period of 2003.
At March 31, 2004, the Company had negative working capital of $389.0 million,
as a result of its continuing focus on minimizing the cash flow cycle.
The Company believes that funds generated by operations, together with cash on
hand and available borrowing capacity should provide sufficient liquidity and
capital resources to pursue its business strategy for the foreseeable future
with respect to working capital, capital expenditures and other operating needs.
The Company anticipates that it will meet its liquidity requirements through the
prudent use of its cash resources, effective management of working capital and
capital expenditures and also employing other potential financing and strategic
alternatives, as required. Certain assumptions underlie this belief, including
among others, that there will be no material adverse developments in the
Company's business, the automotive market in general, or the Company's
anticipated activities and costs associated with its new program launches
scheduled for the next twelve months.
The Company is pursuing a refinancing plan with financial institutions that, if
consummated, would improve the Company's financial flexibility by extending debt
maturities and increasing available liquidity. As currently
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envisioned by the Company, the refinancing plan would include a new senior
secured credit facility as well as a private offering of convertible senior
debentures which, when taken together, would provide sufficient proceeds to
repay the Company's existing credit facilities; refinance the Company's 5%
Convertible Subordinated Notes due August 1, 2004; and build additional
liquidity for the Company. The primary objectives of this refinancing are to
reduce the Company's near term debt service requirements and to provide the
financial flexibility appropriate for the Company's operations and upcoming
product launch activities. The Company expects that the refinancing will be
completed prior to the end of the second quarter of 2004. However, there are no
assurances that the refinancing plan will be consummated.
MARKET RISK
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company's policy is to not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company periodically enters into financial instruments to manage and reduce
the impact of changes in interest rates.
Interest rate swaps are entered into as a hedge of underlying debt instruments
to change the effective characteristics of the interest rate without actually
changing the debt instrument. Therefore, these interest rate swap agreements
convert outstanding floating rate debt to fixed rate debt for a period of time.
For fixed rate debt, interest rate changes affect the fair market value but do
not impact earnings or cash flows. Conversely for floating rate debt, interest
rate changes generally do not affect the fair market value but do impact future
earnings and cash flows, assuming other factors are held constant.
At March 31, 2004, the Company had total debt and obligations under capital
leases of $1,402.7 million. The debt is composed of fixed rate debt of $1,054.5
million and floating rate debt of $348.2 million. The pre-tax earnings and cash
flow impact for the next year resulting from a one percentage point increase in
interest rates on variable rate debt would be approximately $3.5 million,
holding other variables constant. A one percentage point increase in interest
rates would not materially impact the fair value of the fixed rate debt.
A portion of the Company's revenues were derived from manufacturing operations
in Europe, Asia and South America. The results of operations and financial
position of the Company's foreign operations are principally measured in their
respective currency and translated into U.S. dollars. The effects of foreign
currency fluctuations in Europe, Asia and South America are somewhat mitigated
by the fact that expenses are generally incurred in the same currency in which
revenues are generated. The reported income of these subsidiaries will be higher
or lower depending on a weakening or strengthening of the U.S. dollar against
the respective foreign currency.
A portion of the Company's assets are based in its foreign operations and are
translated into U.S. dollars at foreign currency exchange rates in effect as of
the end of each period, with the effect of such translation reflected as a
separate component of stockholders' investment. Accordingly, the Company's
consolidated stockholders' investment will fluctuate depending upon the
weakening or strengthening of the U.S. dollar against the respective foreign
currency.
The Company's strategy for management of currency risk relies primarily upon
conducting its operations in a country's respective currency and may, from time
to time, also involve hedging programs intended to reduce the Company's exposure
to currency fluctuations. Management believes the effect of a 100 basis point
movement in foreign currency rates versus the dollar would not have materially
affected the Company's financial position or results of operations for the
periods presented.
OPPORTUNITIES
The Company's recent growth in Europe and Asia along with foreign transplant
operations in the U.S. has reduced its reliance on Ford and DaimlerChrysler,
increased penetration into certain existing customers and added new customers
such as Fiat, BMW, Volkswagen, Nissan and Hyundai/Kia. The Company expects this
trend to continue as a result of its anticipated organic growth outside the
U.S., from recent awards to supply foreign transplant operations in the U.S. and
its efforts to diversify its customer base.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this Form
10-Q or incorporated by reference herein, are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). When used in this Form 10-Q, the words "anticipate," "believe,"
"estimate," "expect," "intends", "project", "plan" and similar expressions, as
they relate to the Company, are intended to identify forward-looking statements.
Such forward-looking statements are based on the beliefs of the Company's
management as well as on assumptions made by and information currently available
to the Company at the time such statements were made. Various economic and
competitive factors could cause actual results to differ materially from those
discussed in such forward-looking statements, including factors which are
outside the control of the Company, such as risks relating to: (i) the degree to
which the Company is leveraged and the ability to generate sufficient cash flow
from operations to meet future liquidity needs; (ii) the Company's reliance on
major customers and selected vehicle platforms; (iii) the cyclicality and
seasonality of the automotive market; (iv) the failure to realize the benefits
of recent acquisitions and joint ventures; (v) the Company's ability to obtain
new business on new and redesigned models; (vi) the Company's ability to achieve
the anticipated volume of production from new and planned supply programs; (vii)
the general economic or business conditions affecting the automotive industry
(which is dependent on consumer spending), either nationally or regionally,
being less favorable than expected; (viii) the Company's failure to develop or
successfully introduce new products; (ix) increased competition in the
automotive components supply market; (x) unforeseen problems associated with
international sales, including gains and losses from foreign currency exchange;
(xi) implementation of or changes in the laws, regulations or policies governing
the automotive industry that could negatively affect the automotive components
supply industry; (xii) changes in general economic conditions in the United
States and Europe; and (xiii) various other factors beyond the Company's
control. All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on behalf of the Company are expressly
qualified in their entirety by such cautionary statements.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief Executive
Officer and the Company's Chief Financial Officer have reviewed and evaluated
the effectiveness of the Company's disclosure controls and procedures as defined
in the Securities Exchange Act of 1934 Rule 13a-14( c ) as of March 31, 2004 and
have concluded that such disclosure controls and procedures are effective to
ensure that information required to be disclosed in the periodic reports filed
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission's rules and
regulations.
CHANGES IN INTERNAL CONTROLS. No changes in the Company's internal controls over
financial reporting occurred during the quarter ended March 31, 2004 that have
materially affected or are reasonably likely to materially affect the Company's
internal controls over financial reporting.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 31.1 - Rule 15d-14(a) certification of the Chief Executive
Officer.
Exhibit 31.2 - Rule 15d-14(a) certification of the Chief Financial
Officer.
Exhibit 32.1 - Section 1350 certification of the Chief Executive
Officer.
Exhibit 32.2 - Section 1350 certification of the Chief Financial
Officer.
(b) During the quarter for which this report is filed, the Company
filed the following Form 8-K Current Reports with the Securities
and Exchange Commission:
1. The Company's Current Report on Form 8-K dated February 10,
2004, under Items 5 and 7 (Commission File No. 1-12733).
2. The Company's Current Report on Form 8-K dated February 12,
2004, under Items 7 and 12 (Commission File No. 1-12733).
3. The Company's Current Report on Form 8-K dated March 1, 2004,
under Items 5 and 7 (Commission File No. 1-12733).
4. The Company's Current Report on Form 8-K dated March 8, 2004,
under Items 5 and 7 (Commission File No. 1-12733).
5. The Company's Current Report on Form 8-K dated March 11, 2004,
under Items 5 and 7 (Commission File No. 1-12733).
6. The Company's Current Report on Form 8-K dated March 26, 2004,
under Items 2 and 7 (Commission File No. 1-12733).
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOWER AUTOMOTIVE, INC.
Date: May 10, 2004 By /s/ James A. Mallak
--------------------------------------------
James A. Mallak
Chief Financial Officer and Treasurer
(principal accounting and financial officer)
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EXHIBIT INDEX
31.1 Rule 15d-14(a) Certification of Chief Executive Officer
31.2 Rule 15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer