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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________to_____________
Commission File Number: 001-13581
NOBLE INTERNATIONAL, LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 38-3139487
----------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
28213 Van Dyke Road, Warren, MI 48093
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(586) 751-5600
----------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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 (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the registrant's common stock, $.001
par value, outstanding as of April 27, 2004 was 8,949,800
NOBLE INTERNATIONAL, LTD.
FORM 10-Q INDEX
This report contains statements (including certain projections and
business trends) accompanied by such phrases as "assumes," "anticipates,"
"believes," "expects," "estimates," "projects," "will" and other similar
expressions, that are "forward looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Statements regarding future operating
performance, new programs expected to be launched and other future prospects and
developments are based upon current expectations and involve certain risks and
uncertainties that could cause actual results and developments to differ
materially. Potential risks and uncertainties include such factors as demand for
the company's products, pricing, the company's growth strategy, including its
ability to consummate and successfully integrate future acquisitions, industry
cyclicality and seasonality, the company's ability to continuously improve
production technologies, activities of competitors and other risks detailed in
the company's Annual Report on Form 10-K for the year ended December 31, 2003
and other filings with the Securities and Exchange Commission. These forward
looking statements are made only as of the date hereof.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION................................................................................ 3
Item 1: Financial Statements.............................................................................. 3
Consolidated Balance Sheets as of December 31,2003 and March 31,2004 (unaudited)....................... 3
Consolidated Statements of Income (unaudited) for the Three Month Periods Ended March
31,2003 and 2004.................................................................................... 4
Consolidated Statements of Cash Flows (unaudited) for the Three Month Periods Ended March
31,2003 and 2004.................................................................................... 5
Consolidated Statements of Comprehensive Income (unaudited) for the Three Month Periods Ended March
31,2003 and 2004.................................................................................... 6
Notes to Consolidated Financial Statements (unaudited)................................................. 7
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations............. 11
Item 3: Quantitative and Qualitative Disclosures about Market Risk........................................ 15
Item 4: Controls and Procedures........................................................................... 16
PART II - OTHER INFORMATION.................................................................................. 17
Item 1: Legal Proceedings................................................................................. 17
Item 2: Changes in Securities and Use of Proceeds......................................................... 17
Item 3: Defaults Upon Senior Securities................................................................... 17
Item 4: Submission of Matters to a Vote of Security Holders............................................... 17
Item 5: Other Information................................................................................. 17
Item 6: Exhibits and Reports on Form 8-K.................................................................. 17
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
NOBLE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
DECEMBER 31 MARCH 31
2003 2004
----------- ----------
Unaudited
ASSETS
Current Assets:
Cash and cash equivalents $ 715 $ 1,770
Accounts receivable, trade, net 34,030 55,041
Note receivable 1,799 1,778
Inventories 14,543 20,604
Income taxes refundable 5,920 --
Prepaid expenses 3,909 1,600
----------- ----------
Total Current Assets 60,916 80,793
Property, Plant & Equipment, net 47,119 48,959
Other Assets:
Goodwill, net 11,839 21,056
Covenants not to compete, net 183 133
Other assets, net 12,890 13,688
----------- ----------
Total Other Assets 24,912 34,877
Assets Held for Sale 10,036 4,328
----------- ----------
TOTAL ASSETS $ 142,983 $ 168,957
=========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 29,517 $ 51,197
Accrued liabilities 4,967 4,976
Income taxes payable -- 1,515
Current maturities of long-term debt 9,999 1,217
Deferred income taxes 54 54
----------- ----------
Total Current Liabilities 44,537 58,959
Long-Term Liabilities:
Deferred income taxes 3,860 3,858
Convertible subordinated debentures 7,026 41,242
Long-term debt, excluding current maturities 35,974 1,507
----------- ----------
Total Long-Term Liabilities 46,860 46,607
Liabilities Held for Sale 775 --
STOCKHOLDERS' EQUITY
Common stock 9 9
Additional paid-in capital 38,161 48,406
Retained earnings 12,490 14,902
Accumulated comprehensive income, net 151 74
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 50,811 63,391
----------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 142,983 $ 168,957
=========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
3
NOBLE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except share and per share data)
THREE MONTHS ENDED
MARCH 31
2003 2004
----------- ----------
Net sales $ 39,625 $ 81,604
Cost of sales 33,610 71,449
----------- ----------
Gross margin 6,015 10,155
Selling, general and administrative expenses 2,968 4,252
----------- ----------
Operating profit 3,047 5,903
Interest income 154 96
Interest expense (321) (1,117)
Other, net (2) 128
----------- ----------
Earnings from continuing operations before income taxes 2,878 5,010
Income tax expense 959 1,702
----------- ----------
Earnings on common shares from continuing operations 1,919 3,308
Discontinued operations:
(Loss) from discontinued operations (692) (121)
Gain (loss) on sale of discontinued operations (677) 121
----------- ----------
Net earnings on common shares $ 550 $ 3,308
=========== ==========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Earnings per share from continuing operations $ 0.25 $ 0.37
(Loss) from discontinued operations (0.09) (0.01)
Gain (Loss) on sale of discontinued operations (0.09) 0.01
----------- ----------
Basic earnings per common share $ 0.07 $ 0.37
=========== ==========
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Earnings per share from continuing operations $ 0.24 $ 0.36
(Loss) from discontinued operations (0.08) (0.01)
Gain (Loss) on sale of discontinued operations (0.08) 0.01
----------- ----------
Diluted earnings per common share $ 0.08 $ 0.36
=========== ==========
Dividends declared and paid $ 0.08 $ 0.10
=========== ==========
Basic weighted average common shares outstanding 7,722,877 8,915,350
Diluted weighted average common shares outstanding 8,910,859 9,491,177
THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
4
NOBLE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
THREE MONTHS ENDED
MARCH 31
-----------------------
2003 2004
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Earnings on common shares from continuing operations $ 1,919 $ 3,308
Adjustments to reconcile earnings to net cash provided by operations
to net cash provided by (used in) operations
Interest expense 137 587
Depreciation of property, plant and equipment 1,562 2,307
Amortization of intangible assets 51 50
Deferred income taxes (723) (2)
Loss on sale of property and equipment 2 --
Stock compensation expense 14 18
Changes in assets and liabilities
Increase in accounts receivable (7,966) (15,969)
Increase in inventories (2,129) (3,540)
Decrease (increase) in prepaid expenses (608) 2,572
Decrease (increase) in other operating assets (7) 21
Increase in accounts payable 4,443 16,320
Increase in income taxes payable 6 7,436
Increase (decrease) in accrued liabilities 2,106 (330)
----------- ----------
Net cash provided by (used in) continuing operations (1,193) 12,778
Net cash used in discontinued operations (3,384) (567)
----------- ----------
Net cash provided by (used in) operating activities (4,577) 12,211
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (3,017) (1,253)
Proceeds from sale of discontinued operations 2,000 5,500
Acquisition of business, net of cash acquired -- (13,605)
Proceeds from Notes Receivable on sale of discontinued operations -- 250
----------- ----------
Net cash used in investing activities (1,017) (9,108)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 56 893
Financing fees -- (1,735)
Proceeds from issuance of convertible subordinated debentures 40,000
Dividends paid on common stock (619) (896)
Redemption of convertible subordinated debentures -- (827)
Payments on long-term debt (6) (125)
Net borrowings (payments) on credit facility 6,072 (39,316)
----------- ----------
Net cash provided by (used in) financing activities 5,503 (2,006)
Effect of exchange rate changes on cash 93 (42)
----------- ----------
Net increase in cash 2 1,055
Cash and cash equivalents at beginning of period 1,154 715
----------- ----------
Cash and cash equivalents at end of period $ 1,156 $ 1,770
=========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for:
Interest $ 712 $ 737
Taxes 952 224
Fair value of assets acquired, including goodwill - 20,112
Liabilities assumed - (6,507)
Cash Paid - 13,605
5
NOBLE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
THREE MONTHS ENDED
MARCH 31
-----------------------
2003 2004
----------- ----------
Net earnings on common shares $ 550 $ 3,308
Other comprehensive income (loss), equity adjustment
from foreign currency translation, net 242 (77)
----------- ----------
Comprehensive income, net $ 792 $ 3,231
=========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
6
NOBLE INTERNATIONAL, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, the financial statements for interim reporting do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included and such adjustments are of a normal recurring nature. Results for
interim periods should not be considered indicative of results for a full year.
The December 31, 2003 consolidated balance sheet was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America. For
further information, refer to the consolidated financial statements and notes
thereto included in the company's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission for the period ended December 31, 2003.
Certain information for fiscal year 2003 related to discontinued
operations has been reclassified to conform to the current year presentation.
Discontinued operations include the Company's logistics and distribution
businesses for the three month period ended March 31, 2003 and 2004. The
accompanying consolidated financial statements as of March 31, 2004 and for the
year ended December 31, 2003, include Noble International, Ltd. and its
wholly-owned subsidiaries. The following chart outlines the wholly-owned
subsidiaries of the Company and their current status.
WHOLLY-OWNED SUBSIDIARIES OF NOBLE INTERNATIONAL LTD.
Subsidiary Acquired/Formed Status
---------- --------------- ----------------
Prototech Laser Welding, Inc. ("LWI") Acquired - 2004 Held
NMP Prototube, LLC ("Prototube") Acquired - 2003 Held
Noble Metal Processing, Inc. ("NMP") Acquired - 1997 Held
Utilase Production Processing, Inc. Acquired - 1997 Dissolved - 2003
Noble Land Holdings, Inc. ("Land Holdings") Formed - 1997 Held
Noble Manufacturing Group, Inc. (formerly Noble Techonologies, Inc.)
("NMG") Formed - 1998 Held
Noble Metal Processing Canada, Inc. ("NMPC") Acquired - 1997 Held
Noble Metal Processing - Kentucky, LLC ("NMPK") Formed - 2001 Held
Peco Manufacturing, Inc. ("Peco") Acquired - 2001 Sold - 2004
Pro Motorcar Products, Inc. ("PMP") Acquired - 2000 Sold - 2004
Pro Motorcar Distribution, Inc. ("PMD") Acquired - 2000 Sold - 2004
Monroe Engineering Products, Inc ("Monroe") Acquired - 1996 Sold - 2004
Noble Logistic Services, Inc. (formerly Assured Transportation & Delivery,
Inc. and Central Transportation & Delivery, Inc.) ("NLS-CA") Acquired - 2000 Sold - 2003
Noble Logistic Services Holdings, Inc. (formerly Dedicated Services
Holdings, Inc. ("NLS-TX") Acquired - 2000 Sold - 2003
The Company's continuing operating subsidiaries are organized into a
single reporting segment operating in the automotive supply business.
7
On January 21, 2004, the Company completed the acquisition of Prototech
Laser Welding, Inc. ("LWI") for approximately $13.6 million in cash and the
assumption of approximately $0.7 million in subordinated debt and up to an
additional $1.0 million payable if certain new business is awarded to Noble
within the next twelve months. LWI, based in Clinton Township, Michigan, is a
supplier of laser-welded blanks to General Motors. The Company has not completed
the allocation of the purchase price pursuant to purchase accounting
requirements for LWI as of March 31, 2004. Goodwill has been increased by $9.2
million subject to final allocation.
On July 31, 2003, the Company entered into a Fourth Amended and Restated
Credit Agreement with Comerica Bank. Pursuant to the amendment, the expiration
of the credit facility was extended to July 2006, the facility was increased to
$55.0 million from $48.0 million and two participating banks were added. The
amended credit facility is comprised of a $25.0 million revolving line of credit
with no borrowing base formula and a $30.0 million term loan. The term loan
requires quarterly principal payments of $1.1 million. The credit facility is
subject to customary financial and other covenants including, but not limited
to, limitations on consolidations, mergers and sales of assets, and bank
approval on acquisitions by the Company over $15.0 million. All other terms
remain substantially the same. At December 31, 2003, the Company had a $54.0
million credit facility (the "Credit Facility") with a syndicate of banks led by
Comerica Bank N.A. as agent, expiring in July 2006. In January 2004, the credit
facility was increased to $74.0 million primarily to facilitate the acquisition
of LWI.
On March 26, 2004, the Company issued $40.0 million in 4% unsecured
convertible subordinated notes (the "Notes") in a private placement. The Notes
have a three year term, maturing on March 31, 2007 and may be extended another
three years at the holders' option. The Notes are convertible at the holders'
option at anytime prior to maturity into shares of the Company's common stock at
$32 per share (subject to adjustment pursuant to the terms of the Notes). The
interest rate on the Notes is 4% and is fixed for the entire term. Proceeds from
the Notes are being used to reduce the Company's current bank borrowings,
including paying off the term loan balance and reducing amounts outstanding
under the $35.0 million revolving credit facility, which remains in place. The
holders of the Notes have a right to participate in dividends declared and paid
to the Company's common shareholders to the extent that such dividends exceed
$0.48 per share within the initial three year term on the Notes. Their
participation right is only on the amount, if any, in excess of $0.48 per share.
The holders are not entitled to participate in any dividends after the initial
three year term.
Basic earnings per share ("EPS") is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Calculation of diluted EPS assumes the exercise of
common stock options and warrants, when dilutive, and the impact of restricted
stock and the assumed conversion of convertible debt, when dilutive. The
following tables reconcile the numerator and denominator to calculate basic and
diluted EPS from continuing operations for the three month periods ended March
31, 2003 and 2004 (in thousands, except share and per share amounts; per share
amounts are subject to rounding).
8
Three months ended March 31
---------------------------------------------------------------------------------
2003 2004
-------------------------------------- ----------------------------------------
Net Earnings Shares Per share Net Earnings Shares Per share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
------------ ------------- --------- ------------ ------------- ---------
Basic earnings per common share
Earnings on common shares from
continuing operations $ 1,919 7,722,877 $ 0.25 $ 3,308 8,915,350 $ 0.37
Effect of dilutive securities:
Contingently issuable shares 16,540 -- 17,686 --
Convertible debentures 179 1,120,488 (0.01) 78 409,573 (0.01)
Stock Options -- 50,954 -- -- 148,568 --
----------- --------- --------- ------------ --------- ---------
Earnings on common shares from continuing
operations assuming dilution $ 2,098 8,910,859 $ 0.24 $ 3,386 9,491,177 $ 0.36
=========== ========= ========= ============ ========= =========
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standard ("SFAS") 123, Accounting for Stock-Based
Compensation, and SFAS 148, Accounting for Stock-Based Compensation - Transition
and Disclosure. As allowed by SFAS 123, the Company has elected to continue to
follow APB Opinion No. 25 in accounting for its stock option plans. Accordingly,
no compensation cost has been recognized under the Company's stock-based
compensation plan (the "Plan"). There were no options granted during the first
quarter of 2004. Had compensation cost been determined based on the fair value
at the grant dates for awards under the Plan utilizing the Black-Scholes option
pricing model, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below for the three month periods
ended March 31, 2003 and 2004 (in thousands, except per share data):
THREE MONTHS
ENDED MARCH 31
2003 2004
-------- --------
Net earnings on common shares from continuing operations
as reported $ 1,919 $ 3,308
Less: Total employee stock option expense under the
fair value method, net of related tax effects 46 42
-------- --------
Pro forma 1,873 3,266
Basic earnings per share from continuing operations
As reported $ 0.25 $ 0.37
Pro forma 0.24 0.37
Diluted earnings per share from continuing operations
As reported $ 0.24 $ 0.36
Pro forma 0.23 0.35
NOTE B -- INVENTORIES
Inventories at March 31, 2003 and 2004 consisted of the following (in
thousands):
DECEMBER 31 MARCH 31
2003 2004
----------- --------
Raw materials $ 5,242 $ 7,696
Work in process 5,067 7,642
Finished goods 4,234 5,267
----------- --------
Total Inventory $ 14,543 $ 20,604
=========== ========
9
NOTE C -- GEOGRAPHIC INFORMATION
The Company classifies continuing operations into one industry segment.
This segment is within the automotive industry. The tables following identify
the breakdown of the Company's net sales by country (which are classified based
upon country of production) and long-lived assets by country, which consist
primarily of fixed assets and goodwill (in thousands):
THREE MONTHS ENDED MARCH 31
NET SALES 2003 2004
------------ -------------
United States $ 31,022 $ 66,668
Canada 8,603 14,864
Australia -- 72
------------ -------------
$ 39,625 $ 81,604
============ =============
DECEMBER 31 MARCH 31
LONG-LIVED ASSETS 2003 2004
----------- --------
United States $ 55,225 $ 65,840
Canada 3,916 4,033
Australia -- 275
------------ ----------
$ 59,141 $ 70,148
============ ==========
NOTE D - RESTRUCTURING RESERVE
The Company adopted SFAS 146 on January 1, 2003. SFAS 146, Accounting
for Costs Associated with Exit or Disposal Activities, requires a company to
record a liability for costs associated with an exit activity, at fair value,
only when a liability is incurred. Accordingly, the Company recorded as an
expense in selling, general and administrative and in accrued liabilities a
pre-tax restructuring charge of $0.65 million in March 2003 related to
organizational changes and headcount reductions. As of March 31, 2004 payments
related to the reserve totaled $0.5 million; an adjustment to the accrual was
made in the amount of $0.09 million; and as of March 31, 2004 the outstanding
balance of the restructuring reserve was $0.1 million. The Company expects to
complete payment of the reserve by May 31, 2004.
NOTE E - DISCONTINUED OPERATIONS
On March 21, 2003, the Company completed the sale of its logistics
group for approximately $11.1 million in cash and notes as well as the
assumption of substantially all payables and liabilities. The transaction
included cash of $2.0 million at closing, two short-term notes totaling
approximately $5.1 million, a $1.5 million three-year amortizing note and a $2.5
million five-year amortizing note. The two long-term notes bear an annual
interest rate of 4.5% and will be repaid in equal monthly installments. The
notes are secured by the stock of the buyer in the entities purchased. On August
14, 2003 the Company and the issuer of the short-term notes amended the
repayment terms of the remaining balance on the short-term notes. The amended
terms provide for repayment of the short-term notes by July 31, 2004 and for
payment of interest on the outstanding balance at an annual rate of 7%. As of
March 31, 2004 the company has received approximately $6.2 million in proceeds
from the sale of the logistics business, including $2.0 million at closing and
$4.2 million in payments on the notes. As of March 31, 2004, the balance on the
short-term and long term notes was $4.9 million.
10
The results for the logistics group included in discontinued operations
for the three month periods ended March 31, 2003 and 2004 (in thousands) are as
follows:
2003 2004
Revenue $ 14,800 $ -
Loss from operations, (807) (121)
after-tax
Loss on sale, after-tax (677) -
The Company made the decision to exit the distribution (Monroe, PMP, PMD
and Peco) business in the fourth quarter of 2003 and has classified this
operation as discontinued. On January 28, 2004 the Company completed the sale of
the distribution business to an entity in which the Company's Chairman and
another officer have an interest for approximately $5.5 million in cash. An
independent committee of the board of directors of the Company was established
to evaluate, negotiate and complete the transaction. In addition, an independent
fairness opinion regarding the transaction was obtained.
The results for the distribution business included in discontinued
operations for the three month periods ended March 31, 2003 and 2004 (in
thousands) are as follows:
2003 2004
Revenue $ 1,224 $ -
Gain from operations, 115 -
after-tax
Gain on sale, after-tax - 121
NOTE F - COMMITMENTS AND CONTINGENCIES
The Company is not a party to any legal proceedings other than routine
litigation incidental to its business, none of which would have a material
adverse impact on the Company's financial position or results from operations.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Noble International Ltd., through its subsidiaries, is a full-service
provider of tailored laser welded blanks for the automotive industry. In the
fourth quarter of 2002 the Company made the strategic decision to exit the
logistics business and has classified this segment as discontinued. The sale of
the logistics segment was completed in March 2003 for approximately $11.1
million in cash and notes. In the fourth quarter of 2003, the Company made the
strategic decision to exit the distribution business and has classified this
segment as discontinued. The sale of the distribution business was completed in
January 2004 for approximately $5.5 million in cash to a related party. In
January 2004, the Company completed the acquisition of Prototech Laser Welding,
Inc. ("LWI") for approximately $13.6 million in cash and the assumption of
approximately $0.7 million in subordinated debt and up to an additional $1.0
million payable if certain new business is awarded to the Company within the
next twelve months. The Company has not completed the allocation of the purchase
price pursuant to purchase accounting requirements as of March 31, 2004.
Goodwill has been increased by $9.2 million, subject to final allocation. LWI,
based in Clinton Township, Michigan, is a supplier of laser-welded blanks to
General Motors Corporation.
11
RESULTS OF CONTINUING OPERATIONS
The following management's discussion and analysis of financial
condition and results of operations ("MD&A") should be read in conjunction with
the MD&A section included in our Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission, for the year ended December 31, 2003.
Net Sales. Net sales for the three months ended March 31, 2004 were
$81.6 million, an increase of $42.0 million, or 106%, compared to the same
period in 2003. The increase in revenues is attributable primarily to higher
production volumes on certain vehicles, higher steel content in sales, new
product launches and sales from the acquisition of LWI.
Cost of Sales. Cost of sales for the three-month period ended March 31,
2004 increased by $37.8 million to $71.4 million, an increase of 113% compared
to the same period in 2003. These increases were primarily the result of
increased sales, including increased steel content in sales. Cost of sales as a
percentage of sales increased to 87.6% in the three-month period ended March 31,
2004 from 84.8% in the same period in 2003. This increase in cost of sales as a
percentage of net sales is primarily the result of higher steel content in cost
of sales for the first quarter of 2004 compared to the first quarter of 2003.
Gross Margin. Gross margin increased by $4.1 million, or 69%, to $10.2
million for the three months ended March 31, 2004, from $6.0 million for the
comparable period in 2003. The increase in gross margin was primarily the result
of increased sales. Gross margin as a percentage of sales decreased from 15.2%
in the first quarter of 2003 to 12.4% for the first quarter of 2004 primarily as
a result of the increased steel content in sales and cost of sales compared to
total sales for the same period last year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (SG&A) increased by $1.3 million to $4.3 million for the
three-month period ended March 31, 2004 as compared to $3.0 million in the
comparable period in 2003. As a percentage of net sales, selling, general and
administrative expenses decreased to 5.2% for the three months ended March 31,
2004 from 7.5% for the same period in 2003. The increase in SG&A expenses is
driven primarily by the increase in sales and production activities of the
Company. Included in SG&A expenses in the first quarter of 2004 is bad debt
expense of $0.3 million primarily related to the bankruptcy of a Canadian steel
company. Included in the SG&A expenses for the three-month period ended March
31, 2003 is a restructuring charge of $0.65 million.
Operating Profit. As a result of the foregoing factors, operating
profit increased $2.9 million, or 94%, to $5.9 million for the three-month
period ended March 31, 2004 from $3.0 million for the same period in 2003.
Operating profit as a percentage of net sales decreased to 7.2% for the three
month period ended March 31, 2004 from 7.7% in the same period of 2003. The
decrease as a percentage of net sales is driven primarily by the increased steel
content in sales for the first quarter of 2004 compared to the first quarter of
2003.
Interest Income. Interest income decreased by $0.1 million, or 48.3% to
$0.1 million for the three-month period ended March 31, 2004 from $0.2 million
for the same period in 2003. The decrease in interest income was primarily due
to lower balances on interest bearing assets.
12
Interest Expense. Interest expense increased by $0.8 million to $1.1
million for the three-month period ended March 31, 2004 from $0.3 million for
the comparable period of 2003. During the first quarter of 2004, the Company
recorded an expense of $0.4 million as a result of the write-off of deferred
financing fees related to the repayment of the term loan portion of the
Company's credit facility. For the first quarter of 2003, a portion of interest
expense was allocated to discontinued operations.
Other, net. Other, net for the three-month period ended March 31, 2004
increased $0.2 million compared to the three month period ended March 31, 2003.
The increase is primarily the result of dividend income.
Income Tax Expense. Income tax expense for the three-month period ended
March 31, 2004 increased 78%, or $0.8 million, to $1.7 million, an effective tax
rate of 34%, from $1.0 million, an effective tax rate of 33.3%, for the
comparable period in 2003. The increase in income tax expense is due primarily
to increased earnings.
Earnings on Common Shares from Continuing Operations. As a result of
the foregoing factors, earnings on common shares from continuing operations
increased for the three-month period ended March 31, 2004 to $3.3 million from
$1.9 million for the comparable period of the prior year, an increase of 73%.
Net Earnings on Common Shares. Net earnings on common shares increased
by $2.8 million to $3.3 million for the three-month period ended March 31, 2004
compared to the same period in 2003. Included in discontinued operations for the
first quarter of 2004 is a loss from the logistics business of $0.1 million and
a gain from the sale of the distribution business of $0.1 million. The 2003
quarter net earnings included a loss from discontinued operations related to the
logistics business of $0.7 million, a loss on the sale of the logistics business
of $0.7 million and a gain from discontinued operations related to the
distribution business of $0.1 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements have historically been satisfied through
a combination of cash flow from operations, equity and debt financings. Working
capital needs and capital equipment requirements in the continuing operations
have increased as a result of the growth of the Company and are expected to
continue to increase. Anticipated increases in required working capital and
capital equipment expenditures are expected to be met from cash flow from
operations, equipment financing and borrowings under the Company's credit
facility. As of March 31, 2004, the Company had a working capital surplus of
approximately $21.8 million. The Company completed the sale of its distribution
business in January 2004 which resulted in cash proceeds of $5.5 million at
closing. In addition, the Company completed the acquisition of LWI in January of
2004 for $13.6 million in cash and the assumption of $0.7 million in debt and up
to an additional $1.0 million payable if certain new business is awarded to the
Company. During the first quarter of 2004 the Company received approximately
$6.1 million in a tax refund. Availability under the Company's revolving credit
facility was approximately $33.9 million as of March 31, 2004.
On March 26, 2004, the Company issued $40 million in 4% unsecured
convertible subordinated notes (the "Notes") in a private placement. The Notes
have a three year term, maturing on March 31, 2007 and may be extended another
three years at the holder's option. The Notes are convertible at the holders'
option at anytime prior to maturity into shares of the Company's common stock at
$32 per share (subject to adjustment pursuant to the terms of the Notes). The
interest rate on the Notes is 4% and is fixed for the entire term. Proceeds from
the Notes are being used to reduce the Company's current bank borrowings,
including paying off the term loan balance and reducing amounts outstanding
under the $35 million revolving credit facility. The holders of the Notes have a
right to participate in dividends declared and paid to the Company's common
shareholders to the extent that such dividends exceed $0.48 per share within the
initial three year term on the Notes. Their participation right is only on the
amount, if any, in excess of $0.48 per share. The holders are not entitled to
participate in any dividends after the initial three year term.
13
During the first quarter of 2004, holders of approximately $9.5 million
in the Company's 1998 6% subordinated debentures ("1998 Debentures") exercised
their option to convert their 1998 Debentures into the Company's common stock.
On February 2, 2004 the Company made a mandatory retirement payment pursuant to
the terms of the 1998 Debentures of $0.8 million. The balance of 1998 Debentures
outstanding after the conversions and the mandatory retirement payment was
approximately $2.2 million. Subsequent to March 31, 2004, the holders of an
additional $0.4 million of the 1998 Debentures exercised their option to convert
into common stock of the Company, leaving a balance outstanding of $1.6 million
as of April 30, 2004.
The Company generated cash from continuing operations of $12.8 million
for the three-month period ended March 31, 2004. Net cash generated by
continuing operating activities was primarily the result of net earnings, plus
non-cash expenses such as depreciation expense, increases in accounts payable
and income taxes payable, and decreases in prepaid expenses. This cash generated
was partially offset by increases in accounts receivable and inventories as
well as a decrease in accrued liabilities. The increase in accounts receivable,
inventory and accounts payable of $16.0 million, $3.5 million, and $16.3
million, respectively, for the three-month period ended March 31, 2004, is
related primarily to the newly launched production programs as well as increased
volume in current programs and the acquisition in January 2004 of LWI. Income
taxes payable includes income taxes payable and refundable and during the first
quarter of 2004 the Company received a tax refund of $6.1 million and accrued
income tax expense of $1.5 million.
The Company used cash in investing activities of $9.1 million for the
three-month period ended March 31, 2004. This was primarily the result of the
purchase of fixed assets of $1.3 million, the acquisition of LWI for $14.0
million ($13.6 million net of cash acquired) offset by $5.5 million received in
cash from the sale of the distribution business.
The Company used $2.0 million in cash flow from financing activities for
the three-month period ended March 31, 2004, primarily from the repayment of
borrowings under the Company's credit facilities, payment of financing fees, and
the mandatory retirement payment on the 1998 Debentures, offset by the issuance
of $40.0 million in 4% convertible subordinated notes. In addition, the Company
paid dividends of $0.9 million during the three months ended March 31, 2004.
As of March 31, 2004 the Company maintained a $35.0 million secured
Credit Facility with Comerica Bank N.A. and two other banks with an expiration
date of January 2006. The Credit Facility consists of a $35.0 million revolving
loan with no borrowing base formula. The term loan portion of the credit
facility was paid off using the proceeds of the issuance of the $40.0 million 4%
convertible subordinated notes. The balance at March 31, 2004 was $0.7 million
and availability under the line of credit was approximately $33.9 million, net
of approximately $0.4 million in outstanding letters of credit. The Credit
Facility is secured by assets of the Company and its subsidiaries and provides
for the issuance of up to $5 million in standby or documentary letters of
credit. The Credit Facility may be utilized for general corporate purposes,
including working capital and acquisition financing, and provides the Company
with borrowing options for multi-currency loans. Borrowing options include a
Eurocurrency rate, or a base rate. Advances under the facility bore interest at
an average effective rate of 4.4% for the three-month period ended March 31,
2004. As a result of the repayment of the term loan portion of the credit
facility, the Company recorded a write-off of approximately $0.4 million in
deferred financing fees. The unamortized balance of origination costs is $2.1
million at March 31, 2004 and is included in other assets. The Credit Facility
is subject to customary financial and other covenants including, but not limited
to, limitations on consolidations, mergers, and sales of assets, and bank
approval on acquisitions over $15.0 million. Subsequent to March 31, 2004 the
Company has been negotiating with the bank group regarding the credit facility
and amending certain terms of the revolving line of credit, including certain
financial covenants and the Company expects to complete an amendment during the
second quarter of 2004.
14
The Company has from time to time in prior years been in violation of
certain of its financial debt ratio covenants and covenants relating to the
issuance of preferred stock and the payment of preferred and common stock
dividends, requiring it to obtain waivers of default from its lenders. At March
31, 2004, the Company was in compliance with all of its financial covenants
under the Credit Facility.
The liquidity provided by the Company's Credit Facility combined with
cash flow from continuing operations is expected to be sufficient to meet
currently anticipated working capital and capital expenditure needs and for
existing debt service for at least 12 months. There can be no assurance,
however, that the funds will not be expended due to changes in economic
conditions or other unforeseen circumstances, requiring the Company to obtain
additional financing prior to the end of such twelve-month period. In addition,
as part of its business strategy, the Company continues to evaluate and may
pursue future growth through opportunistic acquisitions of assets or companies
involved in the automotive component industry, which acquisitions may involve
the expenditure of significant funds. Depending upon the nature, size, and
timing of future acquisitions, the Company may be required to obtain additional
debt or equity financing. There can be no assurance, however, that additional
financing will be available to the Company, when and if needed, on acceptable
terms or at all.
For the period ended March 31, 2004, the Company guaranteed $3.0
million of SET Enterprises, Inc. ("SET") senior debt in connection with its sale
of businesses to SET. On July 31, 2003 SET acquired MSP, a division of SCOA. As
a result of the transaction, the Company reduced its previous guarantee of SET's
$10.0 million senior debt to $3.0 million for a period of one year, after which
the guarantee will be eliminated provided SET is in compliance with its credit
agreement. The Company would be required to perform under the guarantee if SET
was unable to repay or renegotiate its credit facility. The maximum amount the
Company would be required to pay is $3.0 million. The Company does not currently
carry a liability for this guarantee. The guarantee is unsecured and the Company
would be entitled to the proceeds from any liquidation after the senior debt
lender had been paid in full. As of March 31, 2004, the Company had not been
notified by SET or SET's lender of any default that would require performance
under the guarantee.
INFLATION
Inflation generally affects the Company by increasing the interest
expense of floating rate indebtedness and by increasing the cost of labor,
equipment and raw materials. The Company does not believe that inflation has had
a material effect on its business over the past two years.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of foreign currency fluctuations.
International revenues from the Company's foreign subsidiaries were
approximately 18.3% of total revenues for the three-month period ended March 31,
2004. The Company's primary foreign currency exposure is to the Canadian Dollar.
During the first quarter of 2004, the Company started an operation in Australia.
The Company manages its exposure to foreign currency assets and earnings
primarily by funding certain foreign currency denominated assets with
liabilities in the same currency and, as such, certain balance sheet exposures
are naturally offset.
As of March 31, 2004 only 8.8% of the Company's long-lived assets were
based in its foreign subsidiaries. These assets 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' equity. Accordingly, the Company's consolidated stockholders'
equity will fluctuate depending on the weakening or strengthening of the U.S.
dollar against the respective foreign currency.
The Company's financial results are affected by changes in U.S. and
foreign interest rates. The Company does not hold financial instruments that are
subject to market risk (interest rate risk and foreign exchange risk). There has
been no material change to the Company's exposure to market risk since December
31, 2003.
15
ITEM 4: CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. The Company's President and Chief
Executive Officer and the Chief Financial Officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures, as defined in
the Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as of March 31, 2004,
have concluded that as of March 31, 2004, the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company and its subsidiaries required to be disclosed by the
Company in the reports it files with the SEC under the Securities Exchange Act
of 1934 would be made known to them by others within the Company, particularly
during the period in which this Form 10-Q Quarterly Report was being prepared.
Changes in Internal Controls over Financial Reporting. There have been
no changes in the Company's internal control over financial reporting 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.
16
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not applicable.
ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Not applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
31.1 Certification by the President and Chief Executive Officer
pursuant to Rule 13a-14 (a) of the Securities and Exchange
Act of 1934, as amended.
31.2 Certification by the Chief Financial Officer pursuant to Rule
13a-14 (a) of the Securities and Exchange Act of 1934, as
amended.
32.1 Certification of Periodic Financial Report by the President
and Chief Executive Officer and the Chief Financial Officer
pursuant to 18 USC Section 1350, as created by Section 906 of
Sarbanes-Oxley Act of 2002.
(b) The following reports on Form 8-K were filed during the three month period
ended March 31, 2004:
(i) Report on Form 8-K filed on January 20, 2004, concerning the
acquisition of Prototec Laser Welding, Inc. ("LWI").
(ii) Report on Form 8-K filed on February 11, 2004, concerning the
financial results of the Company for the year ended December
31, 2003.
(iii) Report on Form 8-K filed on March 26, 2004, concerning the
Company's issuance of $40 million in 4% convertible
subordinated notes.
17
SIGNATURES
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.
NOBLE INTERNATIONAL, LTD.
Dated: May 11, 2004 By: /s/ Jay J. Hansen
-----------------------------
Jay J. Hansen,
Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
31.1 Certification by the President and Chief Executive Officer pursuant to Rule 13a-14 (a) of the
Securities and Exchange Act of 1934, as amended.
31.2 Certification by the Chief Financial Officer pursuant to Rule 13a-14 (a) of the Securities and
Exchange Act of 1934, as amended.
32.1 Certification of Periodic Financial Report by the President and Chief Executive Officer and
the Chief Financial Officer pursuant to 18 USC Section 1350, as created by Section 906 of
Sarbanes-Oxley Act of 2002.