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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 SEPTEMBER 30, 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
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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 October 31, 2004 was 9,285,195.
1
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 ("SEC"). 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
September 30, 2004 (unaudited) .................................... 3
Consolidated Statements of Income (unaudited) for the Three and
Nine Month Periods Ended September 30, 2003 and 2004 ............. 4
Consolidated Statements of Cash Flows (unaudited) for the Three
and Nine Month Periods Ended September 30, 2003 and 2004 ......... 5
Consolidated Statements of Comprehensive Income (unaudited) for the
Three and Nine Month Periods Ended September 30, 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 ..................................... 15
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .... 20
ITEM 4: DISCLOSURE CONTROLS AND PROCEDURES ............................ 20
PART II - OTHER INFORMATION ................................................ 21
ITEM 1: LEGAL PROCEEDINGS ............................................. 21
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS ..................... 21
ITEM 3: DEFAULTS UPON SENIOR SECURITIES ............................... 21
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........... 21
ITEM 5: OTHER INFORMATION ............................................. 21
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K .............................. 21
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)
UNAUDITED
DECEMBER 31 SEPTEMBER 30
2003 2004
----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 715 $ 3,932
Accounts receivable, trade, net 34,030 64,742
Note receivable 2,799 1,000
Inventories 14,543 20,259
Income taxes refundable 5,920 --
Other current assets 3,909 2,813
--------- ---------
Total Current Assets 61,916 92,746
Property, plant & equipment 70,059 80,227
Accumulated depreciation (22,940) (29,374)
--------- ---------
Property, Plant & Equipment, net 47,119 50,853
Other Assets:
Goodwill 11,839 20,200
Other intangible assets, net 183 2,003
Other assets, net 11,890 11,885
--------- ---------
Total Other Assets 23,912 34,088
Assets Held for Sale 10,036 3,760
--------- ---------
TOTAL ASSETS $ 142,983 $ 181,447
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 29,517 $ 56,137
Accrued liabilities 4,967 4,106
Income taxes payable -- 4,308
Current maturities of long-term debt 9,999 440
Conversion option derivative liability -- 627
Deferred income taxes 54 54
--------- ---------
Total Current Liabilities 44,537 65,672
Long-Term Liabilities:
Deferred income taxes 3,860 3,864
Convertible subordinated debentures, net of discount 7,026 37,045
Long-term debt, excluding current maturities 35,974 5
--------- ---------
Total Long-Term Liabilities 46,860 40,914
Liabilities Held for Sale 775 --
STOCKHOLDERS' EQUITY
Common stock 9 9
Additional paid-in capital 38,161 51,908
Retained earnings 12,490 22,061
Accumulated comprehensive income, net 151 883
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 50,811 74,861
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 142,983 $ 181,447
========= =========
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2003 2004 2003 2004
------------ ------------ ------------ ------------
Net sales $ 48,041 $ 75,101 $ 127,702 $ 244,097
Cost of sales 41,358 67,324 108,446 216,381
------------ ------------ ------------ ------------
Gross margin 6,683 7,777 19,256 27,716
Selling, general and administrative expenses 2,785 3,520 8,423 11,412
------------ ------------ ------------ ------------
Operating profit 3,898 4,257 10,833 16,304
Interest income 140 99 504 262
Interest expense (740) (787) (1,737) (2,794)
Change in fair value of conversion option derivative liability -- 2,323 -- 2,918
Other, net 516 (172) 786 171
------------ ------------ ------------ ------------
Earnings from continuing operations before income taxes 3,814 5,720 10,386 16,861
Income tax expense 1,099 859 3,324 4,552
------------ ------------ ------------ ------------
Earnings on common shares from continuing operations 2,715 4,861 7,062 12,309
Discontinued operations:
Gain (loss) from discontinued operations 79 -- (913) (121)
Gain (loss) on sale of discontinued operations -- -- (677) 121
------------ ------------ ------------ ------------
Net earnings on common shares $ 2,794 $ 4,861 $ 5,472 $ 12,309
============ ============ ============ ============
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Earnings per share from continuing operations $ 0.35 $ 0.52 $ 0.92 $ 1.25
Gain (loss) from discontinued operations 0.01 -- (0.12) (0.01)
Gain (loss) on sale of discontinued operations -- -- (0.09) 0.01
------------ ------------ ------------ ------------
Basic earnings per common share $ 0.36 $ 0.52 $ 0.71 $ 1.25
============ ============ ============ ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Earnings per share from continuing operations $ 0.32 $ 0.30 $ 0.85 $ 1.05
Gain (loss) from discontinued operations 0.01 -- (0.10) (0.01)
Gain (loss) on sale of discontinued operations -- -- (0.08) 0.01
------------ ------------ ------------ ------------
Diluted earnings per common share $ 0.33 $ 0.30 $ 0.67 $ 1.05
============ ============ ============ ============
Dividends declared and paid $ 0.08 $ 0.10 $ 0.24 $ 0.30
============ ============ ============ ============
Basic weighted average common shares outstanding 7,779,872 9,240,779 7,744,315 9,095,003
Diluted weighted average common shares outstanding 9,056,065 10,649,086 8,963,453 10,267,813
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)
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------
2003 2004
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Earnings on common shares from continuing operations $ 7,062 $ 12,309
Adjustments to reconcile earnings
to net cash provided by (used in) operations
Interest expense 421 1,505
Depreciation of property, plant and equipment 4,843 7,041
Amortization of intangible assets 150 216
Deferred income taxes (1,102) --
Loss on sale of property and equipment 2 137
Change in fair value of conversion option derivative liability -- (2,918)
Stock compensation expense 62 205
Changes in assets and liabilities
Increase in accounts receivable (12,557) (25,088)
Increase in inventories (5,100) (2,989)
Decrease (increase) in prepaid expenses (2,129) 1,362
Decrease in other operating assets 35 10
Increase in accounts payable 6,344 20,920
Increase in income taxes payable 2,725 10,210
Increase (decrease) in accrued liabilities 374 (2,807)
-------- --------
Net cash provided by continuing operations 1,130 20,113
Net cash (used in) provided by discontinued operations (2,553) 46
-------- --------
Net cash (used in) provided by operating activities (1,423) 20,159
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (7,734) (7,490)
Proceeds from sale of discontinued operations 5,677 5,455
Acquisition of business, net of cash acquired -- (13,605)
Proceeds from Notes Receivable on sale of discontinued operations -- 2,549
-------- --------
Net cash used in investing activities (2,057) (13,091)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 515 2,193
Financing fees (328) (1,758)
Proceeds from issuance of convertible subordinated debentures -- 40,000
Dividends paid on common stock (1,864) (2,738)
Redemption of convertible subordinated debentures -- (826)
Payments on long-term debt (270) (936)
Net borrowings (payments) on credit facility 4,862 (40,008)
-------- --------
Net cash provided by (used in) financing activities 2,915 (4,073)
Effect of exchange rate changes on cash 218 222
-------- --------
Net increase (decrease) in cash (347) 3,217
Cash and cash equivalents at beginning of period 1,154 715
-------- --------
Cash and cash equivalents at end of period $ 807 $ 3,932
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid for:
Interest $ 2,214 $ 1,721
Taxes $ 1,561 642
Fair value of assets acquired, including goodwill -- 21,399
Liabilities assumed -- (7,794)
Cash paid, net -- 13,605
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
5
NOBLE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- --------------------
2003 2004 2003 2004
------- ------- ------- -------
Net earnings on common shares $ 2,794 $ 4,861 $ 5,472 $12,309
Other comprehensive income (loss), equity adjustment
from foreign currency translation, net (66) 793 600 732
------- ------- ------- -------
Comprehensive income, net $ 2,728 $ 5,654 $ 6,072 $13,041
======= ======= ======= =======
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
SEC 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 and nine month periods ended September 30, 2003 and for
the distribution business for the nine month period ended September 30, 2004.
The accompanying consolidated financial statements as of September 30, 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
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Noble Metal Processing - Australia Pty. Formed - 2004 Active
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Prototech Laser Welding, Inc. ("LWI") Acquired - 2004 Active
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NMP Prototube, LLC ("Prototube") Acquired - 2003 Active
---------------------------------------------------------------------------------------------------------------------
Noble Metal Processing, Inc. ("NMP") Acquired - 1997 Active
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Noble Land Holdings, Inc. ("Land Holdings") Formed - 1997 Active
---------------------------------------------------------------------------------------------------------------------
Noble Manufacturing Group, Inc. (formerly Noble Techonologies, Inc.)
("NMG") Formed - 1998 Active
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Noble Metal Processing Canada, Inc. ("NMPC") Acquired - 1997 Active
---------------------------------------------------------------------------------------------------------------------
Noble Metal Processing - Kentucky, LLC ("NMPK") Formed - 2001 Active
---------------------------------------------------------------------------------------------------------------------
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 Assets Sold - 2003
---------------------------------------------------------------------------------------------------------------------
Noble Logistic Services Holdings, Inc. (formerly Dedicated Services
Holdings, Inc. ("NLS-TX") Acquired - 2000 Sold - 2003
---------------------------------------------------------------------------------------------------------------------
Noble Components & Systems, Inc. Formed - 1998 Inactive
---------------------------------------------------------------------------------------------------------------------
Noble Logistics Services, Inc. ("NLS-MI") Formed - 2000 Inactive
---------------------------------------------------------------------------------------------------------------------
7
The Company's continuing operating subsidiaries are organized into a
single reporting segment operating in the automotive supply business.
In January 2004, the Company acquired Prototech Laser Welding, Inc.
("LWI") for approximately $13.6 million in cash and the assumption of
approximately $0.7 million in subordinated debt. A contingency payment of up to
an additional $1.0 million is payable if certain new business is awarded to the
Company by January 2006. Any payment made pursuant to this contingency will be
recorded to Goodwill at the time of recognition. Results of operations for LWI
are included in Noble financial statements beginning January 2004. The unaudited
pro forma combined historical results for the nine months ended September 30,
2003, as if the Company had acquired LWI at the beginning of 2003, are estimated
to be (in thousands, except per share amounts):
NINE MONTHS
ENDED
PRO FORMA INFORMATION SEPT 30, 2003
-------------
Net sales $ 144,639
Earnings on common shares from continuing operations $ 6,500
Basis earnings per share from continuing operations $ 0.64
Diluted earnings per share from continuing operations $ 0.61
The pro forma information includes an adjustment for the effect of the
amortization of the intangible asset recognized in the acquisition and other
accounting adjustments recognized in recording the combination. This pro forma
information is not necessarily indicative of future operating results.
As of September 30, 2004, the Company has completed the allocation of the
purchase price for LWI pursuant to purchase accounting requirements. An
intangible asset apart from Goodwill of $2.1 million was recognized related to
the fair value of the customer contracts acquired with LWI. The table below
summarizes the purchase price allocation (in thousands of dollars):
Current Assets $ 7,758
Fixed Assets, net 3,208
Intangible Asset 2,073
Goodwill 8,361
Current Liabilities (7,104)
Long-Term Liabilities (691)
Purchase Price, net of cash acquired $ 13,605
During the second quarter of 2004, the Company entered into an amendment
to its Fourth Amended and Restated Credit Agreement ("Credit Facility") which
provided, among other things, an extension of the maturity date for the Credit
Facility to April 1, 2009, a reduction in the number of banks participating in
the Credit Facility from three to one, as well as adjustments to several
financial and other covenants. Subsequent to the amendment to the Credit
Facility, the Company maintains a $35 million revolving credit facility with
Comerica Bank which had no outstanding borrowings as of September 30, 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 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 Note). The
interest rate on the Notes is 4% and is fixed for the entire term. Proceeds from
the Notes were 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 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 (in any twelve
8
month period) within the initial three year term on the Notes. The holders'
participation rights are 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.
The terms of the conversion option were evaluated by the Company to
determine if it gave rise to an embedded derivative instrument that would need
to be accounted for separately in accordance with Statement of Financial
Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and
Hedging Activities" and Emerging Issues Task Force ("EITF") 00-19, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock." The Company concluded that certain provisions which are
contingent upon a change in control of the Company and allow for a net cash
settlement of the conversion option qualified as an embedded derivative and did
not meet the scope exceptions of SFAS 133. Therefore, the Company was required
to bifurcate the conversion option and establish the fair value of the embedded
derivative separate from the debt instrument and record it as a derivative
liability. At issuance of the Notes, the holders' conversion right had an
estimated initial fair value of $3.5 million, which was recorded as a discount
to the Notes and a derivative liability on the consolidated balance sheet. The
discount on the Notes will be accreted to par value over the term of the Notes
through quarterly non-cash charges to interest expense over the initial three
year term. The derivative liability associated with the conversion option will
be adjusted quarterly for changes in fair value over the term of the Notes with
the corresponding charge or credit to other expense or income. The estimated
fair value of the holder's conversion option was determined using a convertible
bond valuation model which utilizes assumptions including: The historical stock
price volatility; risk-free interest rate; credit spreads; remaining maturity;
and the current stock price.
As a result of the participation right related to the Notes, in accordance
with EITF 03-6: "Participating Securities and the Two Class Method under SFAS
128, Earnings Per Share" for purposes of calculating basic earnings per share,
undistributed earnings are allocated to common stock and the Notes holders based
upon the assumption that all of the earnings for the period are distributed. If
earnings for a given period exceed $0.48 per share, undistributed earnings in
excess of $0.48 per share are allocated to the Notes holders according to the
terms of the Notes. Accordingly, for the three and nine month period ended
September 30, 2004, basic earnings per share ("EPS") is computed based upon net
earnings calculated as detailed in following schedule (in thousands of dollars):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, 2004 ENDED SEPTEMBER 30, 2004
------------------------ ------------------------
Net earnings on common shares as reported $ 4,861 $12,309
Net earnings allocated to participating securities 51 960
------- -------
Net earnings on common shares after allocation to
participating securities $ 4,810 $11,349
======= =======
Basic earnings per share 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 and nine month periods ended September 30,
2003 and 2004 (in thousands, except share and per share amounts; per share
amounts are subject to rounding).
Pursuant to an amendment to the Notes entered into by the Company and the
holders of the Notes during the fourth quarter of 2004, the holders of the Notes
are no longer able to participate in dividends. In addition, there is a covenant
restricting the Company from paying dividends or distributions on its common
stock in excess of $0.48 per share in any twelve month period until March 2007.
This amendment eliminates the
9
requirement to use the two class method for calculating basic earnings per share
for future periods relating to the Notes.
THREE MONTHS ENDED SEPTEMBER 30
----------------------------------------------------------------------------------------------
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 $ 2,715 7,779,872 $ 0.35 $ 4,810 9,240,779 $ 0.52
Effect of dilutive securities:
Contingently issuable shares -- 28,737 -- -- 18,755 --
Convertible debentures 181 1,120,489 (0.02) (1,663) 1,323,078 (0.22)
Net earnings allocated to
participating securities -- -- -- 51 -- --
Stock Options -- 126,967 (0.01) -- 66,474 --
---------- ---------- ---------- ---------- ---------- ----------
Earnings on common shares from
continuing operations assuming
dilution $ 2,896 9,056,065 $ 0.32 $ 3,198 10,649,086 $ 0.30
========== ========== ========== ========== ========== ==========
NINE MONTHS ENDED SEPTEMBER 30
----------------------------------------------------------------------------------------------
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 $ 7,062 7,744,315 $ 0.92 $ 11,349 9,095,003 $ 1.25
Effect of dilutive securities:
Contingently issuable shares -- 24,368 -- -- 18,235 $ --
Convertible debentures 540 1,120,489 (0.06) (1,509) 1,043,268 $ (0.28)
Net earnings allocated to
participating securities -- -- -- 960 -- $ 0.10
Stock Options -- 74,281 (0.01) -- 111,307 $ (0.02)
---------- ---------- ---------- ---------- ---------- ----------
Earnings on common shares from
continuing operations assuming
dilution $ 7,602 8,963,453 $ 0.85 $ 10,800 10,267,813 $ 1.05
========== ========== ========== ========== ========== ==========
The diluted EPS net earnings adjustments related to convertible debentures
are as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
2003 2004 2003 2004
------- ------- ------- -------
Interest on convertible debentures, net of tax $ 181 $ 365 $ 540 $ 819
Amortization of debt discount -- 295 -- 590
Gain on value of convertible option derivative liability -- (2,323) -- (2,918)
------- ------- ------- -------
$ 181 $(1,663) $ 540 $(1,509)
======= ======= ======= =======
The Company has adopted the disclosure-only provisions of 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 nine months 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 and nine month periods ended September 30, 2003
and 2004 (in thousands, except per share data):
10
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
2003 2004 2003 2004
---------- ---------- ---------- ----------
Net earnings on common shares from continuing operations
as reported $ 2,715 $ 4,861 $ 7,062 $ 12,309
Less: Total employee stock option expense under the
fair value method, net of related tax effects 51 42 153 127
---------- ---------- ---------- ----------
Pro forma 2,664 4,819 6,909 12,182
Basic earnings per share from continuing operations
As reported $ 0.35 $ 0.52 $ 0.92 $ 1.25
Pro forma 0.34 0.52 0.89 1.23
Diluted earnings per share from continuing operations
As reported $ 0.32 $ 0.30 $ 0.85 $ 1.05
Pro forma 0.31 0.30 0.83 1.04
NOTE B -- GOODWILL AND OTHER INTANGIBLE ASSETS
NMP PROTOTUBE LWI TOTAL
PURCHASE PURCHASE PURCHASE GOODWILL
-------- --------- -------- --------
Goodwill, December 31, 2003 $ 11,463 $ 376 $ -- $ 11,839
Purchase of LWI -- -- 8,361 8,361
-------- -------- -------- --------
Goodwill, September 30, 2004 $ 11,463 $ 376 8,361 $ 20,200
======== ======== ======== ========
Consistent with SFAS 141, "Business Combinations," in conjunction with the
purchase of LWI, an intangible asset apart from Goodwill was recognized related
to the fair value of the customer contracts acquired with the purchase of LWI. A
fair value of $2.1 million was determined for these contracts at the time of
acquisition using a discounted cash flow model. This intangible asset is being
amortized over ten years. Goodwill recognized pursuant to the LWI acquisition is
amortized and deductible over fifteen years for tax purposes.
Total amortization expense for all intangible assets for the three month
and nine month periods ending September 30, 2003 was $0.05 million and $0.15
million, respectively. Total amortization expense for all intangible assets for
the three and nine month periods ended September 30, 2004 was $0.1 million and
$0.25 million, respectively. Components of other intangible assets, net (in
thousands) are as follows:
11
DECEMBER 31, 2003 SEPTEMBER 30, 2004
----------------------------------- -----------------------------------
GROSS ACCUM GROSS ACCUM
VALUE AMORT NET VALUE VALUE AMORT NET VALUE
------- ------- --------- ------- ------- ---------
Value of customer contracts - LWI acquisition $ -- $ -- $ -- $ 2,073 $ (103) $ 1,970
Covenants not to compete 1,400 (1,217) 183 1,400 (1,367) 33
------- ------- ------- ------- ------- -------
Other Intangible Assets, net $ 1,400 $(1,217) $ 183 $ 3,473 $(1,470) $ 2,003
======= ======= ======= ======= ======= =======
NOTE C -- INVENTORIES
Inventories at December 31, 2003 and September 30, 2004 consisted of the
following (in thousands):
DECEMBER 31 SEPTEMBER 30
2003 2004
------------ ------------
Raw materials $ 5,242 $ 7,548
Work in process 5,067 7,422
Finished goods 4,234 5,289
---------- ----------
Total Inventory $ 14,543 $ 20,259
========== ==========
NOTE D -- GEOGRAPHIC INFORMATION
The Company classifies continuing operations into one industry segment.
This segment is within the automotive industry. The following tables 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 intangible assets including goodwill (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
NET SALES 2003 2004 2003 2004
-------- -------- -------- --------
United States $ 40,002 $ 53,267 $101,264 $186,075
Canada 8,039 21,720 26,438 57,718
Australia -- 114 -- 304
-------- -------- -------- --------
$ 48,041 $ 75,101 $127,702 $244,097
======== ======== ======== ========
DECEMBER 31 SEPTEMBER 30
LONG-LIVED ASSETS 2003 2004
-------- --------
United States $ 55,225 $ 66,898
Canada 3,916 5,690
Australia -- 468
-------- --------
$ 59,141 $ 73,056
======== ========
12
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 short-term notes were repaid in full during the third
quarter of 2004. The two long-term notes bear an annual interest rate of 4.5%
and will be repaid in equal monthly installments. As of September 30, 2004 the
Company has received approximately $6.5 million in proceeds from the sale of the
logistics business. As of September 30, 2004, the balance on the long term notes
was $2.6 million.
The results for the logistics group included in discontinued operations
for the three and nine month periods ended September 30, 2003 and 2004 (in
thousands) are as follows:
THREE MONTHS ENDED
SEPTEMBER 30
2003 2004
-------- --------
Revenue $ -- $ --
(Loss) from operations, after-tax $ -- $ --
(Loss) on sale, after-tax $ -- $ --
NINE MONTHS ENDED
SEPTEMBER 30
2003 2004
-------- --------
Revenue $ 14,800 $ --
(Loss) from operations, after-tax $ (1,182) $ (121)
(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 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 and nine month periods ended September 30, 2003 and
2004 (in thousands) are as follows:
13
THREE MONTHS ENDED
SEPTEMBER 30
2003 2004
-------- --------
Revenue $ 1,191 $ --
Earnings from operations, after-tax $ 79 $ --
Gain on sale, after-tax $ -- $ --
NINE MONTHS ENDED
SEPTEMBER 30
2003 2004
-------- --------
Revenue $ 3,575 $ --
Earnings from operations, after-tax $ 269 $ --
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.
14
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 by January
2006. The Company has completed the allocation of the purchase price pursuant to
purchase accounting requirements as of September 30, 2004. An intangible asset
apart from Goodwill was recognized related to the value of the customer
contracts acquired with the purchase of LWI in the amount of $2.1 million.
Goodwill recorded at September 30, 2004 related to the LWI acquisition was $8.4
million.
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 SEC, for
the year ended December 31, 2003.
Net Sales. Net sales for the three months ended September 30, 2004 were
$75.1 million, an increase of $27.1 million or 56% compared to the same period
in 2003. Net sales for the nine months ended September 30, 2004 were $244.1
million, an increase of $116.4 million or 91% compared to the same period in
2003. These increases in revenues are 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 September
30, 2004 increased by $26.0 million to $67.3 million, an increase of 63%
compared to the same period in 2003. Cost of sales for the nine month period
ended September 30, 2004 increased by $107.9 million to $216.4 million, an
increase of 100% 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 89.6% in the three
month period ended September 30, 2004 from 86.1% in the same period in 2003.
Cost of sales as a percentage of sales increased to 88.6% in the nine month
period ended September 30, 2004 from 84.9% 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 nine months of 2004
compared to the first nine months of 2003.
Gross Margin. Gross margin increased by $1.1 million, or 16%, to $7.8
million for the three months ended September 30, 2004, from $6.7 million for the
comparable period in 2003. Gross margin increased by $8.5 million, or 44%, to
$27.7 million for the nine months ended September 30, 2004, from $19.3 million
for the comparable period in 2003. The increase in gross margin was primarily
the result of increased sales. For the three and nine month periods ended
September 30, 2004, gross margin as a percentage of sales (10.3% and 11.3%,
respectively) decreased compared to the three and nine month periods ended
September 30, 2003 (13.9% and 15.1%, respectively). Gross margin as a percentage
of sales has decreased primarily as a result of the increased steel content in
sales and cost of sales compared to total sales for the same periods in 2003.
15
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (SG&A) increased by $0.7 million to $3.5 million for the
three-month period ended September 30, 2004 as compared to $2.8 million in the
comparable period in 2003. SG&A increased by $3.0 million to $11.4 million for
the nine month period ended September 30, 2004 as compared to $8.4 million in
the comparable period in 2003. For the three and nine month periods ended
September 30, 2004, SG&A as a percentage of sales (4.7% and 4.7%, respectively)
decreased compared to the three and nine month periods ended September 30, 2003
(5.8% and 6.6%, respectively). The dollar value increase in SG&A is driven
primarily by the increase in sales and production activities of the Company.
Included in SG&A in the first nine months of 2004 is bad debt expense of $0.3
million primarily related to the bankruptcy of a Canadian steel company.
Included in SG&A for the nine month period ended September 30, 2003 is a
restructuring charge of $0.65 million.
Operating Profit. As a result of the foregoing factors, operating profit
increased $0.4 million, or 9%, to $4.3 million for the three month period ended
September 30, 2004 from $3.9 million for the same period in 2003. Operating
profit increased $5.5 million, or 51%, to $16.3 million for the nine month
period ended September 30, 2004 from $10.8 million for the same period in 2003.
For the three and nine month periods ended September 30, 2004, operating profit
as a percentage of net sales (5.7% and 6.7%, respectively) decreased compared to
the three and nine month periods ended September 30, 2003 (8.1% and 8.5%,
respectively). The decrease as a percentage of net sales is driven primarily by
the increased steel content in sales for the first nine months of 2004 compared
to the first nine months of 2003.
Interest Income. Interest income was $0.1 million for both three-month
periods ended September 30, 2003 and 2004. Interest income decreased by $0.2
million, or 48% to $0.3 million for the nine month period ended September 30,
2004 from $0.5 million for the same period in 2004. The decrease in interest
income was primarily due to lower balances on interest bearing assets.
Interest Expense. Interest expense increased by $0.1 million to $0.8
million for the three month period ended September 30, 2004 from $0.7 million
for the comparable period of 2003. Interest expense increased $1.1 million to
$2.8 million for the nine month period ended September 30, 2004 from $1.7
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. During the second and third quarters of 2004, the
Company recorded expenses of $0.6 million related to the amortization of the
debt discount associated with the convertible subordinated notes. For the first
quarter of 2003, a portion of interest expense was allocated to discontinued
operations.
Other, net. Other, net of $0.5 million and $0.8 million for the three and
nine months ended September 30, 2003, respectively, includes the receipt of
insurance proceeds, the recovery of costs previously expensed, the recording of
an investment in stock, the write-down of an investment and dividend income.
Other, net expense of $0.2 million and income of $0.2 million for the three and
nine months ended September 30, 2004, respectively, includes dividend income
offset by a loss for the disposal of fixed assets and the write-down of assets
held for sale.
Change in Fair Value of Conversion Option Derivative Liability. Pursuant
to SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," the
Company has bifurcated the conversion option and established the fair value of
the embedded derivative separate from the debt instrument and recorded it as a
derivative liability. At issuance of the convertible subordinated notes, the
estimated initial fair value of embedded derivative liability was $3.5 million,
which was recorded as a discount to the convertible subordinated notes and a
derivative liability on the consolidated balance sheet. This derivative
liability is adjusted quarterly for changes in fair value with the corresponding
charge or credit to other expense or income. During the three month period ended
September 30, 2004, the Company recognized a $2.3 million gain based upon the
change in the fair value of the embedded derivative liability. During the nine
month period ended September 30, 2004, the Company recognized a $2.9 million
gain based upon the change in the fair value of the embedded derivative
liability.
16
Income Tax Expense. Income tax expense for the three month period ended
September 30, 2004 was $0.9 million for an effective tax rate of 15.0%. Income
tax expense for the nine month period ended September 30, 2004 was $4.5 million
for an effective tax rate of 27.0%. The effective tax rates for the periods
ended September 30, 2004 are lower than the statutory tax rate of 34% due
primarily to the determination that any gains on the change in value of the
embedded derivative liability are not taxable and the associated debt discount
amortization expense is not deductible for tax purposes.
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 September 30, 2004 to $4.9 million
from $2.7 million for the comparable period of the prior year, an increase of
79%. Earnings on common shares from continuing operations increased for the nine
month period ended September 30, 2004 to $12.3 million from $7.1 million for the
comparable period of the prior year, an increase of 74%.
Net Earnings on Common Shares. Net earnings on common shares increased by
$2.1 million to $4.9 million for the three month period ended September 30, 2004
compared to the same period in 2003. Included in discontinued operations in the
third quarter of 2003 are earnings of $0.1 million from the distribution
business. Net earnings on common shares increased by $6.8 million to $12.3
million for the nine month period ended September 30, 2004 compared to the same
period in 2003. Included in discontinued operations for the first nine months of
2003 is a $1.9 million loss from the logistics business offset by earnings of
$0.3 million from the distribution business.
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 and borrowings under the Company's credit facility. As of September
30, 2004, the Company had a working capital surplus of $26.1 million.
Availability under the Company's revolving credit facility was approximately
$34.7 million as of September 30, 2004.
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 Note). The
interest rate on the Notes is 4% and is fixed for the entire term. Proceeds from
the Notes were 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. 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 (in any
twelve month period) within the initial three year term on the Notes. The
holders' participation rights are 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. Pursuant to an amendment to the Notes entered into
by the Company and the holders of the Notes, the holders of the Notes are no
longer able to participate in dividends. In addition, there is a covenant
restricting the Company from paying dividends or distributions on its common
stock in excess of $0.48 per share in any twelve month period until March 2007.
This amendment eliminates the requirement to use the two class method for
calculating basic earnings per share for future periods relating to the Notes.
The terms of the Notes include a right of the holders of the Notes to
convert the Notes into the Company's common stock at $32 per share. This right
was evaluated by the Company to determine if it
17
gave rise to an embedded derivative instrument that would need to be accounted
for separately in accordance with Statement of Financial Accounting Standards
("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities" and
Emerging Issues Task Force ("EITF") 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock." The
Company concluded that certain provisions which are contingent upon a change in
control of the Company and allow for a net cash settlement of the conversion
option qualified as an embedded derivative and did not meet the scope exceptions
of SFAS 133. Therefore, the Company was required to bifurcate the conversion
option and establish the fair value of the embedded derivative separate from the
debt instrument and record it as a derivative liability. At issuance of the
Notes, the holders' conversion right had an estimated initial fair value of $3.5
million, which was recorded as a discount to the Notes and a derivative
liability on the consolidated balance sheet. The discount on the Notes will be
accreted to par value over the term of the Notes through quarterly non-cash
charges to interest expense over the initial three year term. The derivative
liability associated with the conversion option will be adjusted quarterly for
changes in fair value over the term of the Notes with the corresponding charge
or credit to other expense or income. The estimated fair value of the holder's
conversion option was determined using a convertible bond valuation model which
utilizes assumptions including: The historical stock price volatility; risk-free
interest rate; credit spreads; remaining maturity; and the current stock price.
During the first nine months of 2004, holders of approximately $11.5
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 is approximately $0.2 million at September 30, 2004. The
Company called the remaining balance of the 1998 Debentures and expects the
remaining balance will be redeemed in the fourth quarter of 2004.
The Company generated cash from continuing operations of $20.1 million for
the nine month period ended September 30, 2004. Net cash generated by continuing
operating activities was primarily the result of net earnings less non-cash
income related to the change in value of the embedded derivative liability, plus
non-cash expenses such as depreciation expense and non-cash interest 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, and the decrease in accrued liabilities. The
increases in accounts receivable, inventory and accounts payable of $25.1
million, $3.0 million, and $20.9 million, respectively, for the nine month
period ended September 30, 2004, are related primarily to the newly launched
production programs as well as increased volume in current programs and the
acquisition in January 2004 of LWI. During the first nine months of 2004, income
tax payable increased $10.2 million due the receipt of cash related to a tax
refund of $6.1 million as well as by additional accrued income taxes.
The Company used cash in investing activities of $13.1 million for the
nine month period ended September 30, 2004. This was primarily the result of the
purchase of fixed assets of $7.5 million, the acquisition of LWI for $13.6
million offset by $5.5 million received in cash from the sale of the
distribution business and $2.5 million received from notes receivable related to
the sale of the logistics business.
The Company used $4.1 million in cash flow from financing activities for
the nine month period ended September 30, 2004, primarily from the payment of
financing fees ($1.8 million), the mandatory retirement payment on the 1998
Debentures ($0.8 million), and the payment of cash dividends ($2.7 million)
offset by the receipt of cash related to the issuance of common stock ($2.2
million), primarily pursuant to the exercise of stock options.
As of September 30, 2004 the Company maintained a $35.0 million secured
credit facility with Comerica Bank N.A. ("Comerica") with a maturity date of
April 2009 ("Credit Facility"). During the second quarter of 2004 the Credit
Facility was amended to, among other things, extend the maturity to April 2009,
reduce the number of participating banks from three to one, and adjust several
financial and other covenants. The Credit Facility consists of a $35.0 million
revolving loan with no borrowing base
18
formula. The term loan portion of the Credit Facility was paid off using the
proceeds from the issuance of the $40.0 million 4% convertible subordinated
notes. There were no outstanding borrowings on the revolving loan at September
30, 2004. Availability under the Credit Facility was approximately $34.7
million, net of approximately $0.3 million in outstanding letters of credit at
September 30, 2004. 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 Credit
Facility bore interest at an average effective rate of 4.4% for the nine month
period ended September 30, 2004. These borrowings were primarily in the first
quarter of 2004 as the Company had no outstanding borrowings under the Credit
Facility at September 30, 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 in the first quarter of
2004. The unamortized balance of origination costs is $0.5 million at September
30, 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
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
September 30, 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 nine month period ended September 30, 2004, the Company guaranteed
$3.0 million of SET Enterprises, Inc. ("SET") senior debt in connection with its
sale of businesses to SET. During the third quarter of 2004, the Company agreed
to extend its guarantee for one year. 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
September 30, 2004, the Company had not been notified by SET or SET's lender of
any default that would require performance under the guarantee. As of September
30, 2004, SET was in violation of certain of its financial covenants pursuant to
its credit agreement. SET and its lender have negotiated a renewal of SET's
credit facility , including the establishment of new financial covenants.
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.
19
SARBANES-OXLEY COMPLIANCE
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with the
Company's Annual Report on Form 10-K for the fiscal year ending December 31,
2004, the Company will be required to furnish a report by management on the
Company's internal control over financial reporting. On October 29, 2004, the
Company, through its audit committee, received a letter from its independent
auditor stating that there is a risk that the Company may not be able to
complete its internal control assessment in a manner that allows sufficient time
to remediate any control deficiencies identified as a result of their audit.
Management believes that the Company will timely complete the requirements of
Section 404 as of December 31, 2004 and that the Company's internal controls
over financial reporting is effective, but timely completion is not guaranteed
nor is there any assurance at the date of this report that unremediated
deficiencies or weaknesses will not be identified upon audit.
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 23.8% of total revenues for the nine-month period ended September
30, 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 September 30, 2004 8.4% 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.
ITEM 4: CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. The Company maintains disclosure
controls and procedures designed to ensure that information that is required to
be disclosed in its filings with the Securities and Exchange Commission is
recorded, processed, summarized and reported on a timely basis. The Company's
management, with the participation of the President and Chief Executive Officer
and the Chief Financial Officer, has reviewed and evaluated 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 September 30, 2004, and have
concluded that as of September 30, 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 Quarterly Report on Form 10-Q 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 September 30, 2004 that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
20
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not applicable.
ITEM 2: CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
During the fourth quarter of 2004, the Company and holders of its $40
million convertible subordinated notes entered into an amendment pursuant to
which the holders of the Notes are no longer able to participate in dividends.
In addition, there is a covenant restricting the Company from paying dividends
or distributions on its common stock in excess of $0.48 per share in any twelve
month period until March 2007. This amendment eliminates the requirement to use
the two class method for calculating basic earnings per share for future periods
relating to the Notes.
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
----------- -----------
4.1 Letter Amendment to $40 million Convertible Subordinated
Notes.
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 September 30, 2004:
(i) Report on Form 8-K filed on July 27, 2004, concerning the financial
results of the Company for the quarter ended June 30, 2004.
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: November 10, 2004 By: /s/ Jay J. Hansen
-----------------------------------------
Jay J. Hansen,
Chief Financial Officer
21
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
4.1 Letter Amendment to $40 million Convertible Subordinated
Notes.
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.