Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 2002
COMMISSION FILE NUMBER 1-12068
METALDYNE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 38-2513957
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
47659 HALYARD DRIVE, PLYMOUTH, MICHIGAN 48170-2429
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(734) 207-6200
--------------
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICAL DATE.
SHARES OUTSTANDING AT
CLASS JULY 31, 2002
----- -------------
Common stock, par value $1 per share.......... 44,643,637
================================================================================
METALDYNE CORPORATION
INDEX
PAGE NO.
---------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - June 30, 2002
and December 31, 2001 .............................................. 1
Consolidated Condensed Statements of Operations for the Three and
Six Months Ended June 30, 2002 and 2001 ............................ 2
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 ............................ 3
Notes to Consolidated Condensed Financial Statements ............... 4-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 14-26
Item 3. Quantitative and Qualitative Disclosure about Market Risk .......... 26
Part II. Other Information and Signature ..................................... 27-28
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METALDYNE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) DECEMBER 31,
JUNE 30, 2002 2001
ASSETS --------------- -------------
Current assets:
Cash and cash investments ............................................... $ 10,760 $ --
Receivables, net ........................................................ 232,070 104,160
Inventories ............................................................. 74,050 162,660
Deferred and refundable income taxes .................................... 4,060 13,630
Prepaid expenses and other assets ....................................... 56,250 29,330
---------- ----------
Total current assets .................................................. $ 377,190 309,780
Restricted cash .......................................................... 77,000 --
Equity and other investments in affiliates ............................... 186,160 17,130
Property and equipment, net .............................................. 662,880 921,440
Excess of cost over net assets of acquired companies ..................... 522,270 1,038,810
Intangibles and other assets ............................................. 298,130 666,530
---------- ----------
Total assets ......................................................... $2,123,630 $2,953,690
========== ==========
LIABILITIES
Current liabilities:
Accounts payable ........................................................ $ 167,100 $ 169,160
Accrued liabilities ..................................................... 82,360 188,840
Current maturities, long-term debt ...................................... 4,350 42,700
---------- ----------
Total current liabilities ............................................. $ 253,810 $ 400,700
Long-term debt ........................................................... 418,140 1,096,060
Subordinated debentures .................................................. 407,910 262,860
Deferred income taxes .................................................... 168,510 337,760
Other long-term liabilities .............................................. 117,200 146,420
---------- ----------
Total liabilities .................................................... $1,365,570 $2,243,800
---------- ----------
Redeemable preferred stock, 545,154 shares outstanding ................... 58,670 55,160
Redeemable restricted common stock, 1.7 million and 2.6 million shares
outstanding respectively ................................................ 32,640 32,760
Less: Restricted unamortized stock awards ................................ (4,690) (12,060)
---------- ----------
Total redeemable stock ............................................... $ 86,620 75,860
---------- ----------
SHAREHOLDERS' EQUITY
Preferred stock (non-redeemable), $1 par:
Authorized 25 million; Outstanding: None ................................ -- --
Common stock, $1 par:
Authorized: 250 million; Outstanding: 42.6 million ...................... 42,650 42,570
Paid-in capital .......................................................... 681,050 679,670
Accumulated deficit ...................................................... (85,090) (76,440)
Accumulated other comprehensive income (loss) ............................ 32,830 (11,770)
---------- ----------
Total shareholders' equity ........................................... 671,440 634,030
---------- ----------
Total liabilities, redeemable stock and shareholders' equity ......... $2,123,630 $2,953,690
========== ==========
The accompanying notes are an integral part of the consolidated condensed
financial statements.
1
METALDYNE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------- -----------------------------
(UNAUDITED) (UNAUDITED)
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales ............................................... $ 530,460 $ 572,780 $1,090,330 $1,128,910
Cost of sales ........................................... (424,110) (454,230) (872,530) (904,020)
---------- ---------- ---------- ----------
Gross profit ......................................... 106,350 118,550 217,800 224,890
Selling, general and administrative expenses ............ (59,270) (67,580) (125,670) (138,870)
Legacy restricted stock award expense ................... (1,080) (1,760) (3,160) (3,530)
---------- ---------- ---------- ----------
Operating profit ..................................... 46,000 49,210 88,970 82,490
Other expense, net:
Interest expense ....................................... (28,500) (37,570) (56,620) (80,140)
Loss on interest rate arrangements upon early
retirement of term loans ............................. (7,550) -- (7,550) --
Equity gain (loss) from affiliates, net ................ 2,780 (440) 2,330 (1,020)
Other, net ............................................. (7,270) (9,120) (12,300) (15,230)
---------- ---------- ---------- ----------
Other expense, net ................................... (40,540) (47,130) (74,140) (96,390)
---------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary item ..................................... 5,460 2,080 14,830 (13,900)
Income taxes (credit) ................................... (17,720) 2,790 (14,210) (620)
---------- ---------- ---------- ----------
Income (loss) before extraordinary item ................. 23,180 (710) 29,040 (13,280)
Extraordinary loss on repurchase of debentures
and early retirement of term loans, net of taxes
of $21,920 ............................................. (34,290) -- (34,290) --
---------- ---------- ---------- ----------
Net loss ................................................ (11,110) (710) (5,250) (13,280)
Preferred stock dividends ............................... 1,700 1,170 3,400 2,340
---------- ---------- ---------- ----------
Loss attributable to common stock ...................... $ (12,810) $ (1,880) $ (8,650) $ (15,620)
========== ========== ========== ==========
Basic earnings (loss) per share:
Before extraordinary loss less preferred stock ......... $ .50 $ (.04) $ .60 $ (.37)
Extraordinary loss ..................................... (.80) -- (.80) --
---------- ---------- ---------- ----------
Net loss attributable to common stock .................. $ (.30) $ (.04) $ (.20) $ (.37)
========== ========== ========== ==========
Diluted earnings (loss) per share:
Before extraordinary loss less preferred stock ......... $ .48 $ (.04) $ .58 $ (.37)
Extraordinary loss ..................................... (.77) -- (.77) --
---------- ---------- ---------- ----------
Net loss attributable to common stock .................. $ (.29) $ (.04) $ (.19) $ (.37)
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated condensed
financial statements.
2
METALDYNE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30
-------------------------------
(UNAUDITED)
2002 2001
--------------- -------------
OPERATING ACTIVITIES:
Income before extraordinary item ............................................. $ 29,040 $ (13,280)
Adjustments to arrive at cash provided by (used for) operating activities:
Depreciation and amortization in operating profit .......................... 58,930 82,320
Legacy stock award expense ................................................. 3,160 3,530
Debt fee amortization ...................................................... 3,410 3,600
Deferred income taxes ...................................................... 3,040 (5,230)
Non-cash interest expense (interest accretion) ............................. 8,900 8,350
Loss on interest rate arrangements upon early retirement of debt ........... 7,550 --
Tax refund receivable ...................................................... (20,000) --
Other, net ................................................................. 860 2,600
Changes in current assets and liabilities:
Accounts receivable ....................................................... (71,230) (56,140)
Net proceeds from and repayments of accounts receivable sale .............. (167,360) 44,730
Inventory ................................................................. (3,400) 26,390
Prepaid expenses and other current assets ................................. (3,090) 31,470
Accounts payable and accrued expenses ..................................... 32,440 (14,690)
------------ ----------
Total change in current assets and liabilities .......................... (212,640) 31,760
------------ ----------
Net cash provided by (used for) operating activities ......................... (117,750) 113,650
------------ ----------
INVESTING ACTIVITIES:
Capital expenditures ......................................................... (57,210) (64,790)
Acquisition of business, net of cash received ................................ -- (83,320)
Disposition of business ...................................................... 840,000 --
Proceeds from sale/leaseback of fixed assets ................................. 33,370 36,440
Other, net ................................................................... (500) (3,580)
------------ ----------
Net cash provided by (used for) investing activities ......................... 815,660 (115,250)
------------ ----------
FINANCING ACTIVITIES:
Proceeds from borrowings ..................................................... 925,400 69,490
Principal payments on borrowings ............................................. (1,519,950) (76,780)
Restricted cash related to the convertible subordinated notes ................ (77,000) --
Capitalization of debt refinancing fees ...................................... (11,590) --
Issuance of common stock ..................................................... 1,270 --
Penalties on early extinguishment of debt .................................... (6,480) --
Other, net ................................................................... 1,200 (2,010)
------------ ----------
Net cash used for financing activities ....................................... (687,150) (9,300)
------------ ----------
Net increase (decrease) in cash ............................................... 10,760 (10,900)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................ -- 26,320
------------ ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................... $ 10,760 $ 15,420
============ ==========
Supplementary cash flow information:
Cash paid (refunded) for income taxes, net ................................... 9,200 (9,750)
Cash paid for interest ....................................................... 65,420 72,710
The accompanying notes are an integral part of the consolidated condensed
financial statements.
3
METALDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND OTHER INFORMATION
We ("Metaldyne" or the "Company") are a leading global manufacturer of highly
engineered metal components for the global light vehicle market. Our products
include metal-formed and precision-engineered components and modular systems
used in vehicle transmission, engine and chassis applications.
In the opinion of Company management, the unaudited financial statements
contain all adjustments, including adjustments of a normal recurring nature,
necessary to present fairly the financial position, results of operations and
cash flows for the periods presented. These statements should be read in
conjunction with the Company's financial statements included in the Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 (the "2001
Form 10K"). The results of operations for the six-month period ended June 30,
2002 are not necessarily indicative of the results for the full year.
The Company's fiscal year ends on the Sunday nearest December 31. The
Company's fiscal quarters end on the Sundays nearest March 31, June 30, and
September 30. All year and quarter references relate to the Company's fiscal
year and fiscal quarters unless otherwise stated.
As described in Note 1 to our financial statements included in our 2001 Form
10K, we had a change in accounting basis relating to our November 2000
Recapitalization. The three months and six months ended June 30, 2001
financial information included herein, reflect the retroactively adopted
effect of this change in accounting basis.
Certain prior period amounts have been reclassified to conform with
current period presentation.
2. DISPOSITION OF BUSINESS
On June 6, 2002, the Company sold TriMas Corporation ("TriMas") common stock
to Heartland Industrial Partners, L.P. ("Heartland") and other investors
amounting to approximately 66% of the fully diluted common equity of TriMas.
The Company retained approximately 34% of the fully diluted common equity of
TriMas in the form of common stock and a presently exercisable warrant to
purchase shares of TriMas common stock at a nominal exercise price. Pursuant
to the terms of a stock purchase agreement, Heartland and the other investors
invested approximately $265 million in cash in TriMas to acquire the 66%
interest. In connection with the investment, TriMas entered into a senior
credit facility and a receivables facility and issued senior subordinated
notes due 2012. TriMas used borrowings under the senior credit facility and
proceeds from the issuance of the notes to repay borrowings made by its
subsidiaries under the Company's credit agreement, to repay certain debt that
its owed to the Company and to repurchase TriMas originated receivables
balances under the Company's receivables facility. In addition, prior to the
closing, TriMas declared and paid a cash dividend to the Company equal to the
difference between $840 million and the aggregate amount of such debt
repayment and receivables repurchase. Consequently, as a result of the
investment and the other transactions, the Company (1) received $840 million
in the form of cash, debt reduction and reduced receivables facility balances
and (2) received or retained common stock and a warrant in TriMas
representing the Company's 34% retained interest.
As Heartland is the Company's controlling shareholder, this transaction was
accounted for as a reorganization of entities under common control and
accordingly no gain or loss has been recognized. The equity investment in
TriMas recorded at June 30, 2002 may be adjusted to reflect finalization of
certain estimates on the date of closing.
4
METALDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The assets and liabilities of TriMas at June 6, 2002 consisted of the
following (of which the Company retained a 34% interest):
Current assets ....................... $ 249,970
Property and equipment, net .......... 240,480
Goodwill ............................. 527,820
Intangibles and other assets ......... 320,300
----------
Total assets ......................... $1,338,570
Current liabilities .................. $ 148,330
Non-current liabilities .............. 611,100
----------
Total liabilities .................... $ 759,430
Net assets ........................... $ 579,140
==========
TriMas is included in the Company's financial results through the date of
this transaction. Going forward, the Company will account for its 34%
retained interest in TriMas under the equity method of accounting. The
combined results of operations for the six months ended June 30, 2002 for
Saturn Electronics & Engineering, Inc. and the one month ended June 30, 2002
for TriMas and financial position of TriMas and Saturn, the Company's
equity-basis investments in affiliated companies, are summarized below at
June 30, 2002:
Results of Operations information:
Net Sales ....................... $250,600
Gross Profit .................... 65,450
Net Income ..................... 6,850
Financial position information:
Current assets .................. $ 338,650
Non-current assets .............. 1,211,300
Current liabilities ............. 277,460
Non-current liabilities ......... 833,960
Net assets ...................... $ 438,540
The purpose of the TriMas divestiture was to allow the Company to repay some
of its debt maturing in 2003, defer some of its credit facility amortization
by repaying term debt with the proceeds in forward order of maturity, enhance
its liquidity and allow it to focus on its core automotive businesses while
retaining an interest in TriMas. As a result of the transaction, after
payment of expenses, the Company or TriMas repaid approximately $496 million
of term debt under Metaldyne's senior credit facility, repurchased
approximately $128 million of its 4.5% convertible subordinated debentures
due 2003, and reduced outstanding balances under the Company's receivables
facility by approximately $136 million (of which approximately $86 million
relates to the elimination of the TriMas receivables base). Using additional
proceeds from the TriMas transaction, the Company recently announced a tender
offer to purchase up to approximately $78 million aggregate principal amount
of its 4.5% convertible subordinated debentures due 2003. Upon completion of
this offering, we expect to incur an approximate $8 million extraordinary
loss on the extinguishment of this debt. Approximately $77 million of the
proceeds has been designated as restricted at June 30, 2002 (this represents
excess available cash from the TriMas divestiture to satisfy the above tender
offer). The Company expects to complete this tender offer in the third
quarter, and expects the remaining outstanding face value of these 4.5%
subordinated notes to approximate $100 million after that time.
5
METALDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DEBT REFINANCING
On June 20, 2002, the Company entered into two arrangements to refinance its
long-term debt. In the first arrangement, the Company issued $250 million of
11% senior subordinated notes due 2012 in a private placement under Rule 144A
of the Securities Act of 1933, as amended.
In connection with the 11% senior subordinated notes offering described
above, the Company also amended and restated its credit facility to replace
its original tranche A, B and C term loans with a new $400 million tranche D
term loan payable in semi-annual installments of $0.5 million with the
remaining outstanding balance due December 31, 2009. In addition to the term
loan, the credit facility also includes a revolving credit facility with a
total principal amount commitment of $250 million. Both the senior revolving
credit facility and the senior term loan facility mature December 31, 2009.
The obligations under the credit facility are collateralized by substantially
all of the Company's assets and are guaranteed by substantially all of the
Company's domestic subsidiaries.
In conjunction with the above senior subordinated debt offering and the
amended credit agreement, the Company repaid the outstanding balance on its
tranche A, B and C term loan facilities. The Company's long-term debt is
summarized below.
(In millions)
JUNE 30, DECEMBER 31,
2002 2001
---------- -------------
Senior credit facilities:
Tranche A term loan facility ............................... -- $ 449
Tranche B term loan facility ............................... -- 478
Tranche C term loan facility ............................... -- 185
Tranche D term loan facility ............................... 400 --
Revolving credit facility .................................. -- --
---- ------
Total senior credit facility ................................ $400 $1,112
11% senior subordinated notes, due 2012 .................... 250 --
4.5% convertible subordinated debentures, due 2003 ......... 158 263
Other debt ................................................. 22 27
---- ------
Total debt .................................................. 830 1,402
Less current maturities ..................................... (4) (43)
------ ------
Long-term debt .............................................. 826 $1,359
Cash and cash equivalents ................................... 11 --
Restricted cash ............................................. 77 --
----- ------
Net long-term debt .......................................... $738 $1,359
===== ======
As a result of the refinancing described above, the Company cancelled its
$100 million subordinated loan commitment from Masco Corporation. This
commitment had been established for use in the event that funds were not
otherwise available to satisfy principal obligations under the 4.5%
convertible subordinated debentures at maturity. As a result of the large
prepayment of this obligation, the commitment from Masco Corporation was
deemed unnecessary.
Borrowings under the credit facility will bear interest, at our option, at
either:
o A base rate used by JPMorgan Chase Bank, plus an applicable margin; or
o A eurocurrency rate on deposits for one, two, three or nine month periods
(or nine or twelve month periods if, at the time of the borrowing, all
lenders agree to make such a duration available), plus the applicable
margin.
6
METALDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The applicable margin on loans is subject to change depending on the
Company's leverage ratio and is presently 2.75% on base rate loans and 3.75%
on eurocurrency loans.
The credit facility contains negative and affirmative covenants and
requirements affecting us and our subsidiaries, including, among other
things, restrictions on incurring new debt, capital expenditures, investments
and asset sales, and maintenance of certain financial ratios. The Company was
in compliance with these covenants at June 30, 2002.
In connection with the Company's early retirement and refinancing of its
prior credit facility, it incurred one-time charges totaling $63.6 million,
including prepayment penalties, write-offs of capitalized debt issuance
costs, a write-off of the unamortized discount on the 4.5% subordinated
debenture and losses realized on interest rate arrangements associated with
the term loans. A loss of $7.5 million is reflected as a "Loss on interest
rate arrangements upon early retirement of term loans" in the Company's
consolidated statement of operations for the six months ended June 30, 2002
(see Note 4). The remaining $56.1 million of costs are reflected, net of the
associated tax benefit of $21.9 million, as an "Extraordinary loss on
repurchase of debentures and early retirement of term loans" in the Company's
consolidated statement of operations.
The Company capitalized $9.1 million and $2.4 million of debt issuance costs
associated with the 11% senior subordinated notes due 2012 and the amended
and restated credit facility, respectively. These debt issuance costs consist
primarily of legal fees and facility fees paid to the lenders. The $9.1
million and $2.4 million of costs are being amortized based on the effective
interest method over the 10-year term of the 11% senior subordinated notes
due 2012 and the 7 1/2-year term of the term loan agreement, respectively.
The unamortized balances of $9.1 million related to the senior subordinated
notes and $2.4 million related to the amended and restated credit facility
are included in "Other assets" in the Company's consolidated balance sheet as
of June 30, 2002
4. DERIVATIVE FINANCIAL INSTRUMENTS
The Company manages its exposure to changes in interest rates through the use
of interest rate protection agreements. These interest rate derivatives are
designated as cash flow hedges. The effective portion of each derivative's
gain or loss is initially reported as a component of other comprehensive
income and subsequently reclassified into earnings when the forecasted
transaction affects earnings. The Company does not use derivatives for
speculative purposes.
The Company has entered into interest rate protection agreements with various
financial institutions to hedge a portion of its interest rate risk related
to the term loan borrowings under its credit facility. These agreements
include two interest rate collars with a term of three years, a total
notional amount of $200 million, and a three month LIBOR interest rate cap
and floor of 7% and approximately 4.5%, respectively. The agreements also
include four interest rate caps at a three month LIBOR interest rate of 7%
with a total notional amount of $348 million. As a result of the Company's
early retirement of its term loans in June 2002 (see Note 3), a cumulative
non-cash loss of $7.5 million was recorded in the second quarter and is
reflected as a "Loss on interest rate arrangements upon early retirement of
term loans" in the Company's consolidated statement of operations for the six
months ended June 30, 2002. The two interest rate collars and two of the
interest rate caps totaling $200 million were immediately redesignated to the
Company's new tranche D term note in June 2002, resulting in a cumulative
unrealized gain of $1 million as of June 30, 2002 which is included in other
comprehensive income in the Company's consolidated balance sheet. The
remaining two interest rate caps totaling $148 million no longer qualify for
hedge accounting. Therefore, any unrealized gain or loss is recorded as other
income or expense in the consolidated statement of operations beginning June
20, 2002.
7
METALDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACCOUNTS RECEIVABLE SECURITIZATION
The Company has entered into an arrangement to sell, on an ongoing basis, the
trade accounts receivable of substantially all domestic business operations
to MTSPC, Inc. ("MTSPC"), a wholly owned subsidiary of the Company. MTSPC
from time to time may sell an undivided fractional ownership interest in the
pool of receivables up to approximately $225 million to a third party
multi-seller receivables funding company. The net proceeds of sale are less
than the face amount of accounts receivable sold by an amount that
approximates the purchaser's financing costs, which amounted to a total of
$3.3 million for the six months ended June 30, 2002, and is included in other
expense in the Company's consolidated statement of operations. At June 30,
2002, the Company's funding under the facility was zero with $102 million
available but not utilized. At December 31, 2001, the Company funded
approximately $167 million under the facility. The discount rate at June 19,
2002 was 2.85% compared to 3.02% at December 31, 2001. The usage fee under
the facility is 1.5%. In addition, the Company is required to pay a fee of
0.5% on the unused portion of the facility.
6. NEW ACCOUNTING PRONOUNCEMENTS
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" and ceased
the amortization of goodwill. At June 30, 2002, our unamortized goodwill
balance was approximately $522 million. The Company's Step 1 test as required
by FAS 142 indicated a carrying value in excess of fair value relating to the
TriMas reporting units at January 1, 2002. The Company will be completing the
more detailed Step 2 analysis and recording the required adjustment, if any,
by the end of fiscal 2002.
Additionally we have completed our assessment for the Automotive Group which
has indicated that the fair value of these units exceed their corresponding
carrying value which we have determined based upon the discounted estimated
future cash flows of the reporting units.
The following table summarizes the effect on net loss and basic and diluted
loss per share as a result of excluding amortization expense related to
goodwill that is no longer being amortized for the three and six months ended
June 30, 2001. The three and six months ended June 30, 2002 are included for
comparison purposes.
(In thousands)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
-------------------------- ----------------------------
2002 2001 2002 2001
------------ ----------- ------------ -------------
Income (loss) before extraordinary item ................ $ 23,180 $ (710) $ 29,040 $ (13,280)
Loss on early extinguishment of debt, net of income
taxes ................................................. (34,290) -- (34,290) --
--------- ------- --------- ---------
Net loss ............................................... (11,110) (710) (5,250) (13,280)
--------- ------- --------- ---------
Add back: goodwill amortization ........................ -- 11,650 -- 19,110
--------- ------- --------- ---------
Net income (loss), as adjusted ......................... (11,110) 10,940 (5,250) 5,830
Less: Preferred stock dividends ........................ 1,700 1,170 3,400 2,340
--------- ------- --------- ---------
Net income (loss) attributable to common stock, as
adjusted .............................................. $ (12,810) $ 9,770 $ (8,650) $ 3,490
========= ======= ========= =========
Basic earnings (loss) per share, as adjusted ........... $ (0.30) $ (0.23) $ (0.20) $ 0.08
========= ======= ========= =========
Diluted earnings (loss) per share, as adjusted ......... $ (0.29) $ (0.23) $ (0.19) $ 0.08
========= ======= ========= =========
Except for the divestiture of TriMas, there has been no significant change in
amortizable intangible assets disclosed in the Company's 2001 Form 10K.
Amortization expense of $17 million was reported during the six months ended
June 30, 2002.
8
METALDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
The Financial Accounting Standards Board approved the issuance of SFAS No.
143, "Accounting for Asset Retirement Obligations" in June 2001, which is
effective January 1, 2003. SFAS No. 143 requires that an existing legal
obligation associated with the retirement of a tangible long-lived asset be
recognized as a liability when incurred and the amount of the liability be
initially measured at fair value. The Company is currently reviewing the
provisions of SFAS No. 143 and assessing the impact of adoption.
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG LIVED ASSETS
On January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment
or Disposal of Long Lived Assets." Under SFAS No. 144, a single accounting
method was established for long-lived assets to be disposed. SFAS No. 144
requires the Company to recognize an impairment loss only if the carrying
amount of a long-lived asset is not recoverable from its undiscounted cash
flows and the loss is the difference between the carrying amount and fair
value. The adoption of this Statement did not have any impact on the
financial position and results of operations of the Company.
ACCOUNTING FOR EXTRAORDINARY ITEMS, INTANGIBLE ASSETS AND LEASES
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." With the rescission of SFAS
No. 4 and 64, only gains and losses from extinguishments of debt that meet
the criteria of APB Opinion No. 30 would be classified as extraordinary
items. This statement also rescinds SFAS No. 44, "Accounting for Intangible
Assets of Motor Carriers." This statement amends SFAS No. 13, "Accounting
for Leases," to eliminate the inconsistency between the required accounting
for sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. SFAS No.
145 is effective for fiscal years beginning after May 15, 2002. The Company
is currently reviewing the provisions of this Statement and will adopt it
effective with the Company's 2003 fiscal year end.
9
METALDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EARNINGS PER SHARE
The following are reconciliations of the numerators and denominators used
in the computations of basic and diluted earnings per common share:
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ -------------
Weighted average number of shares outstanding ......... 42,650 42,550 42,650 42,550
========= ======== ========= =========
Income (loss) before extraordinary item ............... $ 23,180 $ (710) $ 29,040 $ (13,280)
Loss on early extinguishment of debt, net of income
taxes ................................................ (34,290) -- (34,290) --
--------- -------- --------- ---------
Net loss .............................................. (11,110) (710) (5,250) (13,280)
Less: Preferred stock dividends ....................... 1,700 1,170 3,400 2,340
--------- -------- --------- ---------
Loss used for basic and diluted earnings per share
computation .......................................... $ (12,810) $ (1,880) $ (8,650) $ (15,620)
========= ======== ========= =========
Basic earnings (loss) per share:
Before extraordinary loss less preferred stock ....... $ 0.50 $ (0.04) $ 0.60 $ (0.37)
Extraordinary loss ................................... ( .80) -- (0.80) --
--------- -------- --------- ---------
Net loss attributable to common stock ................ $ (0.30) $ (0.04) $ (0.20) $ (0.37)
========= ======== ========= =========
Total shares used for basic earnings per share
computation .......................................... 42,650 42,550 42,650 42,550
Contingently issuable shares .......................... 1,760 -- 1,760 --
--------- -------- --------- ---------
Total shares used for diluted earnings per share
computation .......................................... 44,410 42,550 44,410 42,550
========= ======== ========= =========
Diluted earnings (loss) per share:
Before extraordinary loss less preferred stock ....... $ 0.48 $ (0.04) $ 0.58 $ (0.37)
Extraordinary loss ................................... ( 0.77) -- (0.77) --
--------- -------- --------- ---------
Net loss attributable to common stock ................ $ (0.29) $ (0.04) $ (0.19) $ (0.37)
========= ======== ========= =========
Diluted earnings per share reflect the potential dilution that would occur
if securities or other contracts to issue common stock were exercised or
converted into common stock. Excluded from the calculation of diluted
earnings per share are 2,490,000 of stock options as they had no dilutive
effect at June 30, 2002 and 2001.
8. IMPACT OF NEW TAX REGULATION
During the quarter ended June 30, 2002, the Company completed its analysis of
the impact related to the U.S. Department of Treasury recently issued new
regulation replacing the loss disallowance rules applicable to the sale of
stock of a subsidiary member of a consolidated tax group. These regulations
permit us to utilize a previously disallowed tax capital loss that primarily
resulted from the sale of a subsidiary in 2000. Accordingly, we recorded a
tax benefit of $20 million in the three months ended June 30, 2002. We expect
our effective tax rate for the remaining two quarters of fiscal 2002, to be
approximately 39% of earnings before income taxes and extraordinary losses.
10
METALDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INVENTORIES
Inventories by component are as follows:
(In Thousands)
JUNE 30, 2002 DECEMBER 31, 2001
--------------- ------------------
Finished goods .......... $21,030 $ 81,540
Work in process ......... 30,050 41,060
Raw materials ........... 22,970 40,060
------- --------
$74,050 $162,660
======= ========
10. PROPERTY AND EQUIPMENT, NET
Property and equipment, net reflects accumulated depreciation of $106
million and $90 million as of June 30, 2002 and December 31, 2001,
respectively.
In December 2001 and January 2002, the Company entered into sale-leaseback
transactions with respect to equipment and approximately 20 parcels of
real property with total net proceeds of approximately $56 million.
Proceeds of approximately $23 million and $33 million were received in
December 2001 and January 2002, respectively.
11. COMPREHENSIVE INCOME
The Company's total comprehensive income for the period was as follows:
(In Thousands)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------- ----------------------------
2002 2001 2002 2001
------------ ---------- ------------ -------------
Income (loss) before extraordinary item ... $ 23,180 $ (710) $ 29,040 $ (13,280)
Loss on early extinguishment of debt,
net of income taxes ..................... (34,290) -- (34,290) --
--------- -------- --------- ---------
Net loss .................................. (11,110) (710) (5,250) (13,280)
Other comprehensive income (loss):
Impact of TriMas disposition on
foreign currency translation ........... (1,910) -- (1,910) --
Foreign currency translation
adjustment ............................. 47,630 7,290 39,660 (6,190)
Interest rate agreements ................ 5,200 (1,000) 6,850 (1,000)
--------- -------- --------- ---------
Total other comprehensive income
(loss) .................................. 50,920 6,290 44,600 (7,190)
--------- -------- --------- ---------
Total comprehensive income (loss) ......... $ 39,810 $ 5,580 $ 39,350 $ (20,470)
========= ======== ========= =========
12. COMMITMENTS AND CONTINGENCIES
The commitments and contingencies disclosed in our 2001 Form 10k relate to
potential obligations of our former TriMas subsidiary. As a result of the
June 2002 disposition of this business, these potential obligations are
the responsibility of TriMas and are no longer commitments and
contingencies of Metaldyne.
The Company is subject to claims and litigation in the ordinary course of
our business, but does not believe that any such claim or litigation will
have a material adverse effect on our financial position or results of
operation.
11
METALDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. ACQUISITION RELATED INTEGRATION ACTIONS
In 2001, the Company began to implement plans to integrate the three
acquired legacy companies into the Company's new vision, align the
business units under our new operating structure and leadership team, and
reformulate our cost structure to be more competitive in the marketplace.
To facilitate these initiatives, we terminated hundreds of employees and
closed unprofitable businesses and plants. The majority of these actions
were completed in 2001, but some are ongoing as of June 30, 2002. At June
30, 2002, in addition to the amounts shown in the table below, the Company
had an approximate $10 million accrual related to severance agreements
with former Company management. The amounts reflected represent total
estimated cash payments. The following table summarizes the recent
activity for the purchase accounting adjustments established relating to
the three acquisitions.
As discussed in Note 2, the Company completed a divestiture of its former
TriMas subsidiary on June 6, 2002.
(IN THOUSANDS)
UTILIZED
ACCRUAL AT ----------------------- OBLIGATIONS ACCRUAL AT
12/31/01 CASH NON-CASH ASSUMED BY TRIMAS 6/30/02
------------ ------------ ---------- ------------------ -----------
Severance ................... $22,910 $ (1,350) -- $ (13,310) $ 8,250
Other closure costs ......... 6,850 (70) -- (3,390) 3,390
------- -------- -- --------- -------
Total ....................... $29,760 $ (1,420) -- $ (16,700) $11,640
======= ======== == ========= =======
14. SEGMENT INFORMATION
The Company has defined a segment as a component, with business activity
resulting in revenue and expense that has separate financial information
evaluated regularly by the Company's chief operating decision maker in
determining resource allocation and assessing performance. The Company
operates in three segments: Chassis, Driveline and Engine.
The Company has established Earnings Before Interest Taxes Depreciation
and Amortization ("EBITDA") as an indicator of our operating performance
and as a measure of our cash generating capabilities. The Company defines
EBITDA as operating profit plus depreciation and amortization plus legacy
stock award expense (contractual obligation from November 2000
acquisition, which will runoff completely by 2003).
In the second quarter of 2002, the Company modified its organizational
structure. As a result, the Company is now comprised of three reportable
segments: Chassis, Driveline and Engine. Accordingly, the Company has
restated sales for all prior periods to reflect this change. However,
EBITDA cannot be meaningfully restated to reflect the new segment
structure, and is therefore presented in total for the entire Company for
periods prior to 2002. EBITDA is presented using the Company's modified
segment structure beginning in 2002.
As discussed in Note 2, the Company completed a divestiture of a portion
of its TriMas Group on June 6, 2002. The TriMas Group is presented at the
group level, rather than by segment, for all periods presented.
CHASSIS -- Manufactures components, modules and systems used in a variety
of engineered chassis applications, including fittings, wheel-ends, axle
shafts, knuckles and mini-corner assemblies. This segment utilizes a
variety of processes including hot, warm and cold forging, powder metal
forging and machinery and assembly.
DRIVELINE -- Manufactures components, modules and systems, including
precision shafts, hydraulic controls, hot and cold forgings and integrated
program management used in a broad range of transmission applications.
These applications include transmission and transfer case shafts,
transmission valve bodies, cold extrusion and Hatebur hot forgings.
12
METALDYNE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ENGINE -- Manufactures a broad range of engine components, modules and
systems, including sintered metal, powder metal, forged and tubular
fabricated products used for a variety of applications. These applications
include balance shaft modules and front cover assemblies.
Segment activity for the three months ended June 30, 2002 and 2001 is as
follows:
(in Thousands)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
--------------------------- -----------------------------
SALES 2002 2001 2002 2001
----- ------------ ------------ ------------- -------------
Automotive Group
Chassis ............................................ $ 47,510 $ 42,180 $ 89,090 $ 81,800
Driveline .......................................... 217,940 214,570 421,270 417,620
Engine ............................................. 127,370 120,980 251,390 235,480
--------- --------- ---------- ----------
Automotive Group ................................. 392,820 377,730 761,750 734,900
TriMas Group ........................................ 137,640 195,050 328,580 394,010
--------- --------- ---------- ----------
Total Sales ...................................... $ 530,460 $ 572,780 $1,090,330 $1,128,910
========= ========= ========== ==========
EBITDA
------
Automotive Group ....................................
Chassis ............................................ $ 5,630 $ 9,710
Driveline .......................................... 28,450 51,650
Engine ............................................. 18,730 36,270
--------- --------- ---------- ----------
Automotive Group ................................. 52,810 $ 56,420 97,630 $ 97,520
TriMas Group ........................................ 26,240 35,530 62,420 71,970
--------- --------- ---------- ----------
Corporate/unallocated/centralized resources ......... (4,110) (2,050) (8,990) (6,140)
--------- --------- ---------- ----------
Total EBITDA ........................................ 74,940 89,900 151,060 163,350
Depreciation & amortization ......................... (27,860) (38,930) (58,930) (77,330)
Legacy stock award expense .......................... (1,080) (1,760) (3,160) (3,530)
--------- --------- ---------- ----------
Operating profit .................................... $ 46,000 $ 49,210 $ 88,970 $ 82,490
========= ========= ========== ==========
15. SUBSEQUENT EVENTS
On July 18, 2002, the Company and DaimlerChrysler Corporation announced
their intention to form a joint venture to operate the New Castle
Machining Forge facility presently owned by DaimlerChrysler in New Castle,
Indiana. It is presently contemplated that formation of the joint venture
would involve an initial cash investment by the Company of approximately
$20-30 million for a minority investment and a contribution of assets by
DaimlerChrysler.
The DaimlerChrysler New Castle Machining Forge operation manufactures
suspension components, as well as engine and transmission components for
Chrysler, Jeep and Dodge vehicles, and employs approximately 1,350
salaried and hourly workers.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EBITDA (EARNINGS BEFORE INTEREST TAXES DEPRECIATION AND AMORTIZATION)
The Company has established Earnings Before Interest Taxes Depreciation and
Amortization ("EBITDA") as an indicator of our operating performance and as a
measure of our cash generating capabilities. The Company defines EBITDA as
operating profit plus depreciation and amortization plus legacy stock award
expense (contractual obligation from November 2000 acquisition, which will
runoff completely by 2003).
EBITDA does not represent and should not be considered as an alternative to net
income, operating income, net cash provided by operating activities or any
other measure for determining operating performance or liquidity that is
calculated in accordance with generally accepted accounting principles.
Further, EBITDA, as we calculate it, may not be comparable to calculations of
similarly titled measures by other companies.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2002 VERSUS JUNE 30, 2001
THREE MONTHS ENDED JUNE 30
---------------------------
(IN THOUSANDS)
---------------------------
SALES 2002 2001
----- ------------ ------------
Automotive Group
Chassis ............................................ $ 47,510 $ 42,180
Driveline .......................................... 217,940 214,570
Engine ............................................. 127,370 120,980
--------- ---------
Automotive Group ................................. 392,820 377,730
TriMas Group ........................................ 137,640 195,050
--------- ---------
Total Sales ...................................... $ 530,460 $ 572,780
========= =========
EBITDA
------
Automotive Group
Chassis ............................................ $ 5,630
Driveline .......................................... 28,450
Engine ............................................. 18,730
--------- ---------
Automotive Group ................................. 52,810 $ 56,420
TriMas Group ........................................ 26,240 35,530
--------- ---------
Corporate/unallocated/centralized resources ......... (4,110) (2,050)
--------- ---------
Total EBITDA ........................................ 74,940 89,900
Depreciation & amortization ......................... (27,860) (38,930)
Legacy stock award expense .......................... (1,080) (1,760)
--------- ---------
Operating profit .................................... $ 46,000 $ 49,210
========= =========
Sales for the three months ended June 30, 2002 were approximately $531 million
versus $573 million for the same period in 2001. Accounting for more than 100%
of this approximate $42 million decrease is TriMas, as its reported sales
decreased by $57 million for the three months ended June 30, 2002 versus 2001.
As a result of our June 6, 2002 divestiture of TriMas, TriMas' financial
performance is no longer included in the Company's consolidated results. Thus,
the decline in TriMas results is explained by only two months of its
performance being included in the current quarter versus a full three months of
performance in the comparable period last year. Excluding TriMas, the Company's
sales increased by $15 million, primarily driven by increases in North American
vehicle production.
14
EBITDA for the three months ended June 30, 2002 was $75 million compared with
$90 million for the same period in 2001. Accounting for the majority of the
decrease is the divestiture of TriMas. Excluding TriMas results, EBITDA
declined $5.7 million for the three months ended June 30, 2002 versus the same
period in 2001, primarily as a result of an additional $4.5 million in
operating lease payments, and a one-time $2.4 million expense reimbursement
experienced in the second quarter of 2001.
Selling, general and administrative expenses were approximately $59 million or
11% of sales for the three months ended June 30, 2002 versus $68 million or
11.8% of sales for the same period in 2001. This decrease is principally due to
the elimination of $11.9 million of goodwill amortization offset by an
additional $4.5 million in operating lease expense associated with the
sale-leaseback transactions.
Interest expense was approximately $28.5 million and $37.6 million for the
three months ended June 30, 2002 and 2001, respectively. This decrease is
primarily due to a reduction in interest expense resulting from a lower debt
balance in 2002 and a 3% reduction in the LIBOR rate for the comparable periods
in 2002 and 2001. The Company also recorded a $7.5 million non-cash loss on
interest rate arrangements in connection with the early retirement of its term
loans in the second quarter of 2002. This loss is reflected as a "Loss on
interest rate arrangements upon early retirement of term loans" in our
consolidated statement of operations for the three and six months ended June
30, 2002. Other, net expenses decreased by $1.8 million, from $9.1 million to
$7.3 million for the comparable periods of 2002 and 2001.
The provision for income taxes for the three months ended June 30, 2002 was a
benefit of approximately $17.7 million as compared to an expense of $2.8
million for the same period in 2001. During 2002, the U.S. Department of
Treasury issued new regulation that replaces the loss disallowance rules
applicable to the sale of stock of a subsidiary member of a consolidated tax
group. These regulations permit us to utilize a previously disallowed tax
capital loss that primarily resulted from the sale of a subsidiary in 2000.
Accordingly, we recorded a tax benefit of $20 million, or $0.45 per diluted
share in the three months ended June 30, 2002.
Net income before the extraordinary item was approximately $23.2 million for
the three months ended June 30, 2002, versus a loss of approximately $0.7
million for the comparable period in 2001, or a $23.9 million increase.
Additionally, excluding the loss on interest rate arrangements upon the early
retirement of the term loans ($7.5 million, or $4.6 million net of tax) and the
one--time tax benefit of $20 million discussed above, our income before
extraordinary items attributable to common stock for the period would have
approximated $6.1 million, or a basic and diluted earnings per share of $0.14,
respectively.
In addition to the approximate $7.5 million loss on interest rate arrangements
upon the early retirement of the term loans, we also incurred one-time charges
totaling $56.1 million related to the early retirement of debt and refinancing
of our prior credit facility, including prepayment penalties, write-offs of
capitalized debt issuance costs, and a write-off of the unamortized discount on
the 4.5% convertible subordinated debentures due 2003. These additional costs
are reflected, net of the associated tax benefit of $21.9 million, as an
"Extraordinary loss on repurchase of debentures and early retirement of term
loans" in our consolidated statement of operations for the three and six months
ended June 30, 2002. We are currently reviewing the provisions of SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections," and its impact on our disclosure of this
extraordinary loss upon its adoption in 2003.
SEGMENT INFORMATION
In the second quarter of 2002, the Company modified its organizational
structure. As a result, the Company is now comprised of three reportable
segments: Chassis, Driveline and Engine. Accordingly, the Company has restated
sales for all prior periods to reflect this change. However, EBITDA cannot be
meaningfully restated to reflect the new segment structure, and is therefore
presented in total for the entire Company for periods prior to 2002. EBITDA is
presented using the Company's modified segment structure beginning in 2002.
Sales for the Automotive Group were approximately $15 million higher for the
three months ended June 30, 2002 than for the same period in 2001. The primary
driver of this increase was an approximate
15
7% increase in North American vehicle production during the period. Partially
offsetting this increase was an unfavorable product mix among three of our
largest customers and a flat production environment in Europe.
Our Chassis and Engine segments grew over 12% and 5%, respectively in revenues
for the three months ended June 30, 2002 versus 2001, primarily driven by the
overall increase in North American vehicle production and new product launches.
Our Driveline segment increased slightly by approximately 2% versus the prior
period, primarily driven by the loss of two customer contracts in late 2001
offset by the increase in the vehicle production. The Driveline segment is
rapidly working to replace this capacity, and has received contracts beginning
in 2003 that are expected to increase future sales above 2001 levels.
EBITDA for the Automotive Group declined by approximately $3.6 million versus
the same period in 2001. The primary driver of the decline is an increase in
operating lease expense of $4.1 million related to sale and leaseback
activities completed in the second half of 2001 and first quarter of 2002.
Offsetting the EBITDA on increased revenue for the period were costs associated
with the build-up of our design and engineering capabilities to support future
program awards; and unfavorable price increases in our aluminum purchases.
Due to the recent divestiture of TriMas on June 6, 2002, we will no longer
include a separate discussion of TriMas operating performance.
CORPORATE & OTHER UNALLOCATED
Corporate and other unallocated expense was essentially flat after excluding a
one-time $2.4 million expense reimbursement in 2001.
SIX MONTHS ENDED JUNE 30, 2002 VERSUS JUNE 30, 2001
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30
-----------------------------
SALES 2002 2001
----- ------------- -------------
Automotive Group
Chassis ............................................ $ 89,090 $ 81,800
Driveline .......................................... 421,270 417,620
Engine ............................................. 251,390 235,480
---------- ----------
Automotive Group ................................. 761,750 734,900
TriMas Group ........................................ 328,580 394,010
---------- ----------
Total Sales ...................................... $1,090,330 $1,128,910
========== ==========
EBITDA
------
Automotive Group
Chassis ............................................ $ 9,710
Driveline .......................................... 51,650
Engine ............................................. 36,270
---------- ----------
Automotive Group ................................. 97,630 $ 97,520
TriMas Group ........................................ 62,420 71,970
---------- ----------
Corporate/unallocated/centralized resources ......... (8,990) (6,140)
---------- ----------
Total EBITDA ........................................ 151,060 163,350
Depreciation & amortization ......................... (58,930) (77,330)
Legacy stock award expense .......................... (3,160) (3,530)
---------- ----------
Operating profit .................................... $ 88,970 $ 82,490
========== ==========
16
Sales for the six months ended June 30, 2002 were approximately $1,091 million
versus $1,129 million for the same period in 2001, or a decrease of $38
million. As discussed above, our June 6, 2002 divestiture of TriMas resulted in
its financial performance no longer being included in the Company's
consolidated results. Thus, the decline of $65 million in TriMas' sales is
explained by only five months of its performance being included in the period
versus a full six months of performance in the comparable period last year.
Excluding TriMas, the Company's sales increased by $27 million, primarily
driven by increases in North American vehicle production during the first half
of 2002 versus 2001.
EBITDA declined for the period from approximately $163 million in 2001 to $151
million in 2002, a net decrease of $12 million. Accounting for the majority of
the decrease is the divestiture of our TriMas operations. Excluding TriMas
results, EBITDA declined by $2.7 million for the first six months of 2002
versus 2001. Offsetting the increased sales in the period were $8.9 million in
additional operating lease payments, and a one-time $2.4 million expense
reimbursement experienced in the second quarter of 2001.
Selling, general and administrative expenses were approximately $126 million or
11.5% of sales for the six months ended June 30, 2002 versus $139 million or
12.3% of sales for the same period in 2001. This decrease of $13 million is
principally due to the elimination of approximately $19.6 million of goodwill
amortization offset by an additional $8.9 million in operating lease expense
associated with the sale-leaseback transactions for the six months ended June
30, 2002 versus 2001.
Interest expense was approximately $56.6 million and $80.1 million for the six
months ended June 30, 2002 and 2001, respectively. This decrease is primarily
due to a reduction in interest resulting from a lower debt balance in 2002 and
a 3% reduction in the LIBOR rate for the comparable periods in 2002 and 2001.
As discussed above, we also recorded a $7.5 million loss on interest rate
arrangements in connection with the early retirement of its term loans in the
second quarter of 2002. Other, net expenses decreased by $2.9 million, from
$15.2 million to $12.3 million for the comparable periods of 2002 and 2001.
The provision for income taxes for the six months ended June 30, 2002 is a
benefit of approximately $14.2 million as compared to a credit of $0.6 million
for the comparable period in 2001. The effective tax rate for the six months
ended June 30, 2002 is 1%. During 2002 the U.S. Department of Treasury issued
new regulations that replaces the loss disallowance rules applicable to the
sale of stock of a subsidiary member of a consolidated tax group. These
regulations permit us to utilize a previously disallowed tax capital loss that
primarily resulted from the sale of a subsidiary in 2000. Accordingly, we
recorded a tax benefit of $20 million or $0.45 per diluted share in the six
months ended June 30, 2002. Without the capital loss carryback, the rate would
have been approximately 39%. The effective tax rate for 2001 reflects largely
the add-back of amortization of nondeductible goodwill and the taxation of
income in foreign jurisdictions at rates greater than the United States
statutory rate. Excluding these items, our effective tax rate for the six
months ended June 30, 2001 would have been approximately 40%.
Net income before the extraordinary item was $29.0 million for the six months
ended June 30, 2002, versus a loss of $13.3 million for the comparable period
in 2001, or a $42.3 million increase. Additionally, excluding the loss on
interest rate arrangements upon the early retirement of the term loans ($7.5
million or $4.6 million net of tax) and the one-time tax benefit of $20 million
discussed above, our net income before extraordinary item attributable to
common stock for the period would have approximated $10.2 million, or a basic
and diluted earnings per share of $0.24 and $0.23, respectively.
SEGMENT INFORMATION
Sales for the Automotive Group were approximately $27 million higher for the
six months ended June 30, 2002 than for the same period in 2001, due primarily
to an increase in North American vehicle production, offset by a decline in the
European economy and vehicle production environment, and a slight unfavorable
selling mix in our domestic business.
Sales for our Chassis and Engine segments increased 8.9% and 6.8%,
respectively, for the six months ended June 30, 2002 versus the same period in
2001, primarily driven by the overall increase in North American vehicle
production and new product launches. Our Driveline segment increased slightly
by
17
0.9% versus the prior period, primarily driven by the loss of two customer
contracts in late 2001 offset by the increase in vehicle production. The
Driveline segment is rapidly working to replace this capacity, and has received
contracts beginning in 2003 that are expected to increase future sales above
2001 levels.
EBITDA for the Automotive Group declined by approximately $0.1 million versus
the same period in 2001. Offsetting the $27 million increase in sales was an
increase in operating lease expense of $7.9 million related to sale and
leaseback activities completed in the second half of 2001 and first quarter of
2002.
CORPORATE & OTHER UNALLOCATED
Corporate and other unallocated expense was essentially flat after excluding a
one-time $2.4 million expense reimbursement in 2001.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. We had approximately $87.8 million of cash and cash equivalents,
including restricted cash of $77 million, at June 30, 2002. Additionally, we
had approximately $209 million of additional liquidity available from our
revolving credit facility and accounts receivable securitization facility. Both
of these facilities were unutilized at quarter end.
OUR PRINCIPAL SOURCES OF LIQUIDITY. Our principal sources of liquidity are cash
flow from operations, our revolving credit facility and our accounts receivable
facility. We have significant unutilized capacity under our revolving credit
facility and accounts receivable facility that may be utilized for
acquisitions, investments or unanticipated capital expenditure needs. We
anticipate that our capital expenditure requirements for fiscal 2002 will be
approximately $128 million. We believe that our liquidity and capital resources
including anticipated cash flow from operations will be sufficient to meet debt
service, capital expenditure and other short-term and long-term obligations and
needs, but we are subject to unforeseeable events and the risk that we are not
successful in implementing our business strategies.
TRIMAS DISPOSITION. On June 6, 2002, we issued TriMas common stock to Heartland
and other investors amounting to approximately 66% of the fully diluted common
equity of TriMas. Consequently, we (1) received $840 million in the form of
cash, debt reduction and reduced receivables facility balances and (2) received
or retained common stock and a warrant in TriMas representing the Company's 34%
retained interest.
As a result of the transaction, after payment of expenses, the Company or
TriMas repaid approximately $496 million of term debt under our senior credit
facility, repurchased approximately $128 million of its 4.5% convertible
subordinated debentures due 2003, and reduced outstanding balances under our
receivables facility by approximately $136 million (of which approximately $86
million relates to the elimination of the TriMas receivables base). Using
additional proceeds from the TriMas transaction, we recently announced a tender
offer to purchase up to approximately $78 million aggregate principal amount of
our 4.5% convertible subordinated debentures due 2003. Upon completion of this
offering, we expect to incur an approximate $8 million extraordinary loss on
the extinguishment of this debt. We expect to complete this tender offer in the
third quarter, and the remaining face value of these 4.5% convertible
subordinated notes to approximate $100 million at that time.
DEBT CAPITALIZATION AND AVAILABLE FINANCING SOURCES. On June 20, 2002, we
entered into two arrangements to refinance our long-term debt. In the first
arrangement, we issued $250 million of 11% senior subordinated notes due 2012
in a private sale under Rule 144A of the Securities Act.
In connection with the 11% senior subordinated notes offering described above,
the Company also amended and restated its credit facility to replace its
original tranche A, B and C term loans with a new $400 million tranche D term
loan payable in semi-annual installments of $0.5 million with the remaining
outstanding balance due December 31, 2009. In addition to the term loan, the
credit facility also includes a revolving credit facility with a total
principal amount commitment of $250 million. Both the senior revolving credit
facility and the senior term loan facility mature December 31, 2009. The
obligations under the credit facility are collateralized by substantially all
of the Company's assets and are guaranteed by substantially all of the
Company's domestic subsidiaries.
18
In conjunction with the 11% senior subordinated notes offering and the amended
and restated credit agreement described above, we repaid the outstanding
balance on our tranche A, B and C term loan facilities. The Company's long-term
debt is summarized below.
(IN MILLIONS)
JUNE 30, DECEMBER 31,
2002 2001
---------- -------------
Senior credit facilities:
Tranche A term loan facility ............................... -- $ 449
Tranche B term loan facility ............................... -- 478
Tranche C term loan facility ............................... -- 185
Tranche D term loan facility ............................... 400 --
Revolving credit facility .................................. -- --
----- ------
Total senior credit facility ................................ $400 $1,112
11% Senior subordinated notes, due 2012 .................... 250 --
4.5% Convertible subordinated debentures, due 2003 ......... 158 263
Other debt ................................................. 22 27
----- ------
Total debt .................................................. 830 1,402
Less current maturities ..................................... (4) (43)
----- ------
Long-term debt .............................................. 826 $1,359
Cash and cash equivalents ................................... 11 --
Restricted cash ............................................. 77 --
----- ------
Net long-term debt .......................................... $738 $1,359
===== ======
As a result of the refinancing described above, we cancelled the $100 million
subordinated loan commitment from Masco Corporation. This commitment had been
established for use in the event that funds were not otherwise available to
satisfy principal obligations under the 4.5% convertible subordinated
debentures at maturity. As a result of the large prepayment of this obligation,
the commitment from Masco Corporation was deemed unnecessary. Until the
remaining 4.5% convertible subordinated debentures are repaid, availability up
to $100 million on our working capital revolver loan will be restricted. This
restriction, however, will be tied to the outstanding unpaid balance as future
repurchases are made.
At June 30, 2002, we were contingently liable for standby letters of credit
totaling $43 million issued on our behalf by financial institutions. These
letters of credit are used for a variety of purposes, including meeting various
states' requirements in order to self-insure workers' compensation claims,
including incurred but not reported claims.
EFFECTS OF TRIMAS DISPOSITION AND REFINANCING. As a result of the TriMas
disposition and subsequent debt refinancing, our capital structure has been
significantly modified. We experienced the following debt reduction,
amortization and liquidity enhancements as a direct result of these actions:
o Our senior indebtedness has been reduced 64% since December 31, 2001.
o The weighted average life of our outstanding debt has been extended from
approximately 4 years to 7 years. This will better enable the Company to
invest in the necessary capital to support our growth plan over the next
several years.
o Our outstanding receivables facility balance was zero at June 30, 2002,
leaving us with approximately $102 million available under our
receivables facility in addition to our $107 million of unutilized
revolving credit facility (net of letter of credit usage and $100 million
of blocked availability for retirement of our 4.5% subordinated
debentures).
o Our outstanding principal amount of 4.5% convertible subordinated
debentures due 2003 will be reduced by approximately $205 million to
approximately $100 million. Note that as of June 30,
19
2002, the principal amount remaining on these debentures approximated
$177 million ($158 million, net of discount), but using our available
cash we have initiated a modified dutch auction tender to replace and
retire approximately $78 million in aggregate face principal amount. We
expect to complete this repurchase in the third quarter of 2002.
CASH FLOWS.
Operating activities -- Operating activities used $117.8 million of cash for
the first six months of 2002 compared with a source of cash of $113.7 million
in the same period of 2001. Excluding the activities related to the sale of
receivables, operating activities provided $49.6 million of cash for the first
six months of 2002 as compared to generating cash of $68.9 million for the
comparable period of 2001. This change is due primarily to the increase usage
in working capital. For the first six months of 2002, changes in working
capital were a use of cash of $212.6 million versus a source of cash of $31.8
million for the first six months of 2001. The table below depicts an estimate
of our operating cash flow adjusting for the TriMas disposition funded with
Metaldyne cash flow.
Estimated "Normalized" Operating Cash Flow for Metaldyne
Operating Cash Flow per Statement ....................................... $ (117.8)
Adjustments to operating cash flow:
Net repayment of accounts receivable securitization (1) .............. 167.4
Accounts receivable build at TriMas prior to disposition (2) ......... 39.0
--------
Adjusted operating cash flow ............................................ $ 88.6
========
(1) Represents the net paydown of our accounts receivable securitization
program in 2002.
(2) Represents the increase in accounts receivable at TriMas from
December 31, 2001 to June 6, 2002 funded with Metaldyne cash flow.
Investing activities -- Investing activities resulted in a source of cash of
$815.7 million for the first six months of 2002 as compared with a use of cash
of $115.3 million for the same period of 2001. This increase is primarily the
result of proceeds from the disposition of TriMas. Investing activities were
also positively affected by the proceeds from the sale-leaseback transactions
occurring in 2002. In December 2001 and January 2002, the Company entered into
sale-leaseback transactions with respect to equipment and approximately 20 real
properties with total proceeds of approximately $56 million. Proceeds of $23
million and $33 million were received in December 2001 and January 2002,
respectively. Capital expenditures were $57 million for the first six months of
2002 as compared with $65 million in 2001.
Financing activities -- Financing activities were a use of cash of $687.2
million for the first six months 2002 as compared to a $9.3 million use of cash
for the same period of 2001. This decrease is primarily the result of principal
repayments on both the Company's term loan debt and convertible subordinated
notes offset by the related debt refinancing. On June 20, 2002, the Company
issued $250 million of senior subordinated notes with an interest rate of 11%
per annum and amended and restated its November 2000 credit facility. The
amended credit facility consists of a senior revolving credit facility of up to
$250 million and a $400 million senior term loan facility. In conjunction with
the debt refinancing, the Company incurred approximately $11.6 million in
refinancing fees. The cash held in part to repay a portion of the 4.5%
convertible subordinated debt has been restricted as to its use and is properly
reflected as an outflow of cash for the period presented. All of the Company's
leases are accounted for as operating leases and the associated rent expense is
included in our financial results on an as-incurred basis.
OUR RECEIVABLES FACILITY. In November 2000, we entered into an agreement to
sell, on an ongoing basis, the trade accounts receivable of certain business
operations to a bankruptcy-remote, special purposes subsidiary, or MTSPC,
wholly owned by us. MTSPC has sold and, subject to certain conditions, may from
time to time sell an undivided fractional ownership interest in the pool of
domestic receivables, up to approximately $225 million, to a third party
multi-seller receivables funding company, or conduit. Upon sale to the conduit,
MTSPC holds a subordinated retained interest in the receivables. Under the
terms of
20
the agreement, new receivables are added to the pool as collections reduce
previously sold receivables. We service, administer and collect the receivables
on behalf of MTSPC and the conduit.
The facility is subject to customary termination events, including, but not
limited to, breach of representations or warranties, the existence of any event
that materially adversely affects the collectibility of receivables or
performance by a seller and certain events of bankruptcy or insolvency. At June
30, 2002, no amount of our $225 million receivables facility was utilized. The
proceeds of sale are less than the face amount of accounts receivable sold by
an amount that approximates the purchaser's financing costs. The agreement
expires, November 2005. If we are unable to renew or replace this facility, it
could adversely affect our liquidity and capital resources.
INTEREST RATE HEDGING ARRANGEMENTS. During the first quarter of 2001, we
entered into interest rate protection agreements with various financial
institutions to hedge a portion of our interest rate risk related to the term
loan borrowings under our credit facility. These agreements include two
interest rate collars with a term of three years, a total notional amount of
$200 million and a three month LIBOR interest rate cap and floor of 7% and
4.5%, respectively, and four interest rate caps at a three month LIBOR interest
rate of 7% with a total notional amount of $348 million. As a result of our
early retirement of our term loans in June 2002, we recorded a cumulative
non-cash loss of $7.5 million, which is included in our consolidated statement
of operations as of June 30, 2002. The two interest rate collars and two of the
interest rate caps totaling $200 million were immediately redesignated to our
new tranche D term note in June 2002, resulting in a cumulative unrealized gain
of $1 million as of June 30, 2002, which is included in other comprehensive
income. The remaining two interest rate caps totaling $148 million no longer
qualify for hedge accounting. Therefore, the unrealized gain or loss is
recorded as other income or expense in the consolidated statement of operations
beginning June 20, 2002. This amount is immaterial for the period through June
30, 2002.
CERTAIN OTHER COMMITMENTS. We have other cash commitments not relating to debt
as well, such as those in respect of leases, preferred stock and restricted
stock awards.
In November 2000, a group of investors led by Heartland and CSFB Private Equity
acquired control of Metaldyne. Immediately following the November 2000
acquisition, we made restricted stock awards to certain employees of shares of
our common stock. Under their terms, 25% of those shares became free of
restriction, or vested upon the closing of the November 2000 acquisition and
one quarter of the shares were due to vest on each January 14, 2002, 2003, and
2004. Holders of restricted stock are entitled to elect cash in lieu of 40% of
their restricted stock which vested at closing and 100% of their restricted
stock on each of the other dates with the shares valued at $16.90 per share,
together with cash accruing at approximately 6% per annum; to the extent that
cash is not elected, additional common stock valued at $16.90 per share is
issuable in lieu of the 6% accretion. As a result of the elections made for the
January 14, 2002 payment and restrictions under our credit facility, we paid
approximately $6 million in cash to vested holders of restricted stock and we
accrued and paid 12% on approximately $8.3 million in June 2002 as to which
cash elections were made but cash was not permitted to be paid under the terms
of our credit facility prior to its restatement. We are entitled to
reimbursement of certain amounts from TriMas, representing approximately 50% of
our obligations. Assuming restricted stock award holders elect to receive the
maximum cash in 2003 and 2004, we estimate that our additional cash obligations
will aggregate approximately $31.6 million (without giving effect to TriMas'
reimbursement obligation).
We also have outstanding $58.7 million in aggregate liquidation value of series
A and series B preferred stock in respect of which we have the option to pay
cash dividends, subject to the terms of our debt instruments, at rates of 13%
and 11.5% respectively per annum initially and to effect a mandatory redemption
in December 2012 and June 2013. In the event of a change in control or certain
qualified equity offerings, we may be required to make an offer to repurchase
our outstanding preferred stock. We may not be permitted to do so and may lack
the financial resources to satisfy these obligations. Consequently, upon these
events, it may become necessary to recapitalize our company or secure consents.
We have engaged in a number of sale-leaseback transactions. At the time of the
GMTI acquisition in June 2001, GMTI entered into sale-leasebacks with respect
to certain manufacturing equipment and three
21
real properties for proceeds of approximately $35 million and reduced the debt
that we assumed as part of the acquisition by that amount. In June 2001, we
entered into an approximate $25 million sale-leaseback related to manufacturing
assembly equipment. In December 2001 and January 2002, we entered into
additional sale-leaseback transactions with respect to equipment and
approximately 20 real properties for net proceeds of approximately $56 million
and used the proceeds to repay a portion of our term debt under our credit
facility. All of these leases are accounted for as operating leases and the
associated rent expense is included in our financial results on an as-incurred
basis. Of the $56 million in proceeds, approximately $21 million were from the
sale of TriMas properties.
SATURN-RELATED OBLIGATIONS. In the November 2000 acquisition, our shares were
converted into the right to receive $16.90 in cash plus additional cash amounts
based upon the net proceeds of the disposition of the stock of Saturn
Electronics & Engineering Inc. held by Metaldyne. Although no disposition of
the stock of Saturn was made prior to the merger or has been made to date,
former holders of our common stock as of the merger will be entitled to amounts
based upon the net proceeds, if any, from any future disposition of that stock
if and when a disposition is completed. The amount which will be paid to such
former stockholders will equal the proceeds in excess of $18 million and less
than or equal to $40 million, any proceeds in excess of $55.7 million and less
than or equal to $56.7 million as well as 60% of any such proceeds in excess of
$56.7 million. All other amounts of the proceeds will be retained by us.
OUTLOOK
Automotive production was up 5% in the first six months of 2002 versus the
comparable period in the prior year. We are optimistic that production
schedules will remain firm; however, we are cautious that this stability will
be somewhat offset by continued softness in other major automotive markets.
Our principal use of funds from operating activities and borrowings for the
next several years are expected to fund interest and principal payments on our
indebtedness, growth related capital expenditures and working capital
increases, strategic acquisitions and lease expense. Management believes cash
flow from operations, debt financings and refinancings that occurred in June
2002 provide adequate sources of liquidity for the Company.
CONTRACTUAL CASH OBLIGATIONS
Under various agreements, we are obligated to make future cash payments in
fixed amounts. These include payments under our long-term debt agreements, rent
payments required under lease agreements and various severance obligations
related to our recent acquisitions. The following table summarizes our fixed
cash obligations over various future periods as of June 30, 2002.
(IN MILLIONS)
PAYMENTS DUE BY PERIODS
LESS THAN 1-3 3-5 AFTER
TOTAL ONE YEAR YEARS YEARS 5 YEARS
--------- ----------- ------- ------- --------
Long-term debt .................... $ 400 $ 1 $ 2 $ 2 $395
11% Senior subordinated notes ..... 250 -- -- -- 250
4.5% Convertible subordinated
debentures ....................... 177 -- 177 -- --
Other debt ........................ 16 2 6 8 --
Capital lease obligations ......... 6 4 2 -- --
Operating lease obligations ....... 218 31 57 42 88
Severance ......................... 20 11 9 -- --
------ --- ---- --- ----
Total contractual obligations ..... $1,087 $49 $253 $52 $733
====== === ==== === ====
Note: Operating lease expense is deducted to arrive at EBITDA.
CRITICAL ACCOUNTING POLICIES
The following discussion of accounting policies is intended to supplement the
accounting policies presented as Note 2 to our 2001 financial statements
included in the 2001 Form 10k. The expenses and
22
accrued liabilities or allowances related to certain of these policies are
initially based on our best estimates at the time of original entry in our
accounting records. Adjustments are recorded when our actual experience differs
from the expected experience underlying the estimates. We make frequent
comparisons of actual versus expected experience to mitigate the likelihood of
material adjustments.
New Accounting Pronouncements. In June 2001, the Financial Accounting Standards
Board approved Statements of Financial Accounting Standards No. 141 "Business
Combinations" ("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets"
("SFAS 142") which are effective for us on July 1, 2001 and January 1, 2002,
respectively. SFAS 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. Under SFAS 142,
amortization of goodwill, including goodwill recorded in past business
combinations, will discontinue upon adoption of this standard. In addition,
goodwill recorded as a result of business combinations completed during the
six-month period ended December 31, 2001 will not be amortized.
Under FAS 142, the Company ceased the amortization of goodwill. The Company's
Step 1 test as required by FAS 142 indicated a carrying value in excess of fair
value relating to the TriMas reporting units at January 1, 2002. The Company
will be completing the more detailed Step 2 analysis and recording the required
adjustment, if any, by the end of fiscal 2002.
Additionally we have completed our assessment for the Automotive group which
has indicated that the fair value of these units exceed their corresponding
carrying value which we have determined based upon the discounted estimated
future cash flows of the reporting units. The final analysis for SFAS No. 142
will be completed by the end of fiscal 2002.
The Financial Accounting Standards Board approved the issuance of SFAS No. 143,
"Accounting for Asset Retirement Obligations" in June 2001, which is effective
January 1, 2003. SFAS No. 143 requires that an existing legal obligation
associated with the retirement of a tangible long-lived asset be recognized as
a liability when incurred and the amount of the liability be initially measured
at fair value. The Company is currently reviewing the provisions of SFAS No.
143 and assessing the impact of adoption.
On January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long Lived Assets." Under SFAS No. 144, a single accounting method
was established for long-lived assets to be disposed. SFAS No. 144 requires the
Company to recognize an impairment loss only if the carrying amount of a
long-lived asset is not recoverable from its undiscounted cash flows and the
loss is the difference between the carrying amount and fair value. The adoption
of this Statement did not have any impact on the financial position or results
of operations of the Company.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." With the rescission of SFAS No. 4 and 64,
only gains and losses from extinguishments of debt that meet the criteria of
APB Opinion No. 30 would be classified as extraordinary items. This statement
also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." This statement amends SFAS No. 13, "Accounting for Leases," to
eliminate the inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS No.
145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings or describe their applicability under
changed conditions. SFAS No. 145 is effective for fiscal years beginning after
May 15, 2002. The Company is currently reviewing the provisions of this
Statement and will adopt it effective with the Company's 2003 fiscal year end.
Derivative Financial Instruments. We have entered into interest rate protection
agreements to limit the effect of changes in the interest rates on any floating
rate debt. Instruments used as hedges must be effective at reducing the risks
associated with the underlying exposure and must be designated as a hedge at
the inception of the contract. Changes in the fair value of such instruments
are recognized in the balance sheet as a component of accumulated other
comprehensive income in shareholders' equity.
Effective January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Pursuant to this
23
statement, all derivative instruments are recognized as assets or liabilities
on the balance sheet and measured at fair value. Changes in fair value are
recognized currently in earnings unless the instrument qualifies for hedge
accounting. Under hedge accounting, changes are recorded as a component of
other comprehensive income to the extent the hedge is considered effective.
Receivables. Receivables are presented net of allowances for doubtful accounts.
We conduct a significant amount of business with a number of individual
customers in the transportation industry. We monitor our exposure for credit
losses and maintain adequate allowances for doubtful accounts; we do not
believe that significant credit risk exists. Trade accounts receivable of
substantially all domestic business operations are sold, on an ongoing basis,
to MTSPC, Inc., a wholly owned subsidiary of the Company.
Depreciation and Amortization. Depreciation is computed principally using the
straight-line method over the estimated useful lives of the assets. Annual
depreciation rates are as follows: buildings and land improvements, 21/2 to
10%, and machinery and equipment, 6 2/3 to 33 1/3%. The excess of cost over net
assets of acquired companies (goodwill) is no longer amortized. Annually,
management assesses whether there has been an impairment of the excess of cost
over net assets of acquired companies by comparing anticipated undiscounted
future cash flows from operating activities with the carrying amount of the
excess of cost over net assets of acquired companies. The factors considered by
management in performing this assessment include current operating results,
business prospects, market trends, potential product obsolescence, competitive
activities and other economic factors.
Pension and Postretirement Benefits Other than Pensions. Annual net periodic
expense and benefit liabilities under our defined benefit plans are determined
on an actuarial basis. Assumptions used in the actuarial calculations have a
significant impact on plan obligations and expense. Each September, we review
the actual experience compared to the more significant assumptions used and
make adjustments to the assumptions, if warranted. The healthcare trend rates
are reviewed with the actuaries based upon the results of their review of
claims experience. Discount rates are based upon an expected benefit payments
duration analysis and the equivalent average yield rate for high-quality
fixed-income investments. Pension benefits are funded through deposits with
trustees and the expected long-term rate of return on fund assets is based upon
actual historical returns modified for known changes in the market and any
expected change in investment policy. Postretirement benefits are not funded
and our policy is to pay these benefits as they become due.
Certain accounting guidance, including the guidance applicable to pensions,
does not require immediate recognition of the effects of a deviation between
actual and assumed experience or the revision of an estimate. This approach
allows the favorable and unfavorable effects that fall within an acceptable
range to be netted. Although this netting occurs outside the basic financial
statements, disclosure of the net amount is disclosed as an unrecognized gain
or loss in the footnotes to our financial statements.
Other Loss Reserves. We have numerous other loss exposures, such as
environmental claims, product liability, litigation, recoverability of deferred
income tax benefits, and accounts receivable. Establishing loss reserves for
these matters requires the use of estimates and judgment in regards to risk
exposure and ultimate liability. We estimate losses under the programs using
consistent and appropriate methods; however, changes to our assumptions could
materially affect our recorded liabilities for loss. Where available we utilize
published credit ratings for our debtors to assist us in determining the amount
of required reserves.
MARKET TRENDS
Our sales for use in the OEM segments of the automotive industry accounted for
approximately 32% of our annual 2001 net sales. The automotive industry is
highly cyclical, is dependent on consumer spending, interest rates and consumer
confidence and is subject to, among other things, general economic conditions
and the impact of international trade. There are signs that the economy is
generally improving; however, there can be no assurance that sales of these
vehicles will not decline or that pricing pressure from customers or
competitors will not have an impact on future performance.
24
FORWARD-LOOKING STATEMENTS
This discussion and other sections of this report contain statements reflecting
the Company's views about its future performance and constitute
"forward-looking statements." These views involve risks and uncertainties that
are difficult to predict and may cause the Company's actual results to differ
significantly from the results discussed in such forward-looking statements.
Readers should consider that various factors may affect our ability to attain
the projected performance, including:
Leverage; Ability to Service Debt -- We may not be able to manage our business
as we might otherwise do so due to our high degree of leverage.
Challenges of Acquisition Strategy -- We intend to actively pursue
acquisitions, but we may not be able to identify attractive acquisition
candidates, successfully integrate our acquired operations or realize the
intended benefits of our acquisitions.
Substantial Capital Expenditure Requirements -- If we are unable to meet future
capital requirements, our business may be adversely affected.
Substantial Restrictions and Covenants -- Restrictions in our credit facility
and under the indenture governing the notes limit our ability to take certain
actions.
Dependence on Automotive Industry and Industry Cyclicality -- The industries in
which we operate depend upon general economic conditions and are highly
cyclical.
Dependence on Third-Party Suppliers and Manufacturers -- Increases in our raw
material or energy costs or the loss of a substantial number of our suppliers
could affect our financial health.
Changing Technology -- Our products are subject to changing technology, which
could place us at a competitive disadvantage relative to alternative products
introduced by competitors.
Customer Concentration -- Our base of customers is concentrated and the loss of
business from a major customer, the discontinuance of particular vehicle models
or a change in auto consumer preferences or regulations could materially
adversely affect us.
Our Industries are Highly Competitive -- Recent trends among our customers will
increase competitive pressures in our businesses.
Dependence on Key Personnel and Relationships -- We depend on the services of
key individuals and relationships, the loss of which would materially harm us.
Labor Relations -- A portion of our workforce is unionized.
Labor Stoppages -- We may be subject to work stoppages at our facilities or
those of our principal customers, which could seriously impact the
profitability of our business.
International Sales -- A growing portion of our revenue may be derived from
international sources, which exposes us to certain risks.
o Product Liability -- We may incur material losses and costs as a result
of product liability and warranty claims that may be brought against us.
o Outsourcing Trend -- Our strategy may not succeed if anticipated
outsourcing fails to occur due to union considerations.
o Environmental Matters -- Our business may be materially and adversely
affected by compliance obligations and liabilities under environmental
laws and regulations.
o Control by Principal Stockholder -- We are controlled by Heartland,
whose interests in our business may be different than yours.
o Terms of Shareholders Agreement -- Provisions of the shareholders
agreement impose significant operating and financial restrictions on our
business.
All statements, other than statements of historical fact included in this
quarterly report, regarding our strategy, future operations, financial
position, estimated revenues and losses, projected costs, prospects,
25
plans and objectives of management are forward-looking statements. When used in
this quarterly report, the words, "will," "believe," "anticipate," "intend,"
"estimate," "expect," "project" and similar expressions are intended to
identify forward-looking statements, although not all forward-looking
statements contain such identifying words. All forward-looking statements speak
only as of the date of this quarterly report. You should not place undue
reliance on these forward-looking statements. Although we believe that our
plans, intentions and expectations reflected in or suggested by the
forward-looking statements we make in this quarterly report are reasonable, we
can give no assurance that these plans, intentions or expectations will be
achieved. We undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET ABOUT RISK
In the normal course of business, we are exposed to market risk associated with
fluctuations in foreign exchange rates. We are also subject to interest risk as
it relates to long-term debt. See footnote 6 for a discussion of interest rate
risk and the objectives and strategies used to manage these risks.
26
PART II. OTHER INFORMATION
METALDYNE CORPORATION
Items 1, 2, 3, 4 and 5 are not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Exhibit 10 Amended and Restated Credit Agreement
Exhibit 12 Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) REPORTS ON FORM 8-K:
A report Form 8-K/A dated June 22, 2002 reported under Item 2,
"Acquisition or Disposition of Assets," the disposition of its TriMas
Corporation subsidiary as of June 6, 2002. The Form 8-K/A amended a
previously filed 8-K Report to provide the required financial
statements and pro forma financial information that were not
available at the time of the initial filing of the 8-K Report.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
METALDYNE CORPORATION
---------------------
(REGISTRANT)
DATE: August 14, 2002 BY: /s/William M. Lowe, Jr.
-----------------------
William M. Lowe, Jr.
Executive Vice President and
Chief Financial Officer
Chief Accounting Officer and
Authorized Signatory
28
METALDYNE CORPORATION
EXHIBIT INDEX
EXHIBIT
Exhibit 10 Amended and Restated Credit Agreement
Exhibit 12 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
29