Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

or

FOR THE TRANSITION PERIOD FROM              TO             .

COMMISSION FILE NO. 1-13683

DELCO REMY INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

(765) 778-6499

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.    Yes  x    No  ¨

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).    Yes  ¨    No  x

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT’S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

Table of Contents

Delco Remy International, Inc. and Subsidiaries

INDEX

2

Table of Contents

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Delco Remy International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

See notes to the condensed consolidated financial statements.

3

Table of Contents

Delco Remy International, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

See notes to the condensed consolidated financial statements.

4

Table of Contents

Delco Remy International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See notes to the condensed consolidated financial statements.

5

Table of Contents

DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AMOUNTS IN THOUSANDS, EXCEPT AS INDICATED

Quarters Ended March 31, 2004 and 2003

(Unaudited)

1. Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements in this Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. The unaudited, condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

Operating results for the three-month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the full year. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. The Company has not materially changed its significant accounting policies from those disclosed in its Form 10-K for the year ended December 31, 2003. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2003.

2. Additional Balance Sheet Information

Inventories

The components of inventory were as follows:

6

Table of Contents

Warranty

The Company provides an allowance for the estimated future cost of product warranties and other defective product returns based on management’s estimate of product failure rates and customer eligibility. If these factors differ from management’s estimates, revisions to the estimated warranty liability may be required. The specific terms and conditions of the warranties vary depending upon the customer and the product sold. Changes to the Company’s warranty liability, excluding discontinued operations, are summarized as follows:

3. Acquisitions

The Company made no acquisition payments during the three months ended March 31, 2004.

During the three months ended March 31, 2003 the Company made payments totaling $3,064 under contractual put agreements to purchase additional shares from the minority shareholders of World Wide Automotive, L.L.C. (“World Wide”), which was acquired in 1997. These payments increased the Company’s ownership percentage of World Wide from 94.0% to 97.2%. At December 31, 2003, the Company owned 100% of World Wide. The Company made payments totaling $1,314 under contractual put agreements to purchase additional shares from the minority shareholder of Power Investments, Inc., which was acquired in 1996. These payments increased the Company’s ownership percentage of Power from 93.4% to 95.1%. At December 31, 2003, the Company owned 100% of Power. The Company also made payments of $459 on notes issued in connection with the acquisition of certain parts of the Delphi Corporation (“Delphi”) alternator business in the fourth quarter of 2002. Also during the three months ended March 31, 2003, the Company completed the acquisition of 51% of Hubei Delphi Automotive Generators Company, Ltd., a manufacturer of automotive and heavy duty generators for the original equipment market and aftermarket based in China, for $3,600 in cash. Net assets acquired were $8,100 ($3,800 net of minority interest), including cash of $3,600.

4. Accounts Receivable Programs

The Company participates in two programs that accelerate the collection of accounts receivable. Under one program, the Company sells the accounts of certain of its aftermarket customers to a bank, on a non-recourse basis, at a discount. At March 31, 2004 and 2003, the amount of receivables under this program was approximately $30,900 and $3,900, respectively. The second program is an early pay plan under which a third party acts as paying agent for one of the Company’s customers. The accounts are paid, at a discounted rate, in five to seven days after shipment instead of the regular terms. This program is also without recourse. The amount covered by this plan at March 31, 2004 and 2003 was approximately $14,800 and $9,600, respectively.

7

Table of Contents

5. Discontinued Operations

During the first quarter of 2003, the Company successfully completed the sale of Tractech, Inc. and Kraftube, Inc. In connection with the sale, the Company recorded an estimated gain on the sale of $2,417. The operating results, balance sheets and cash flows of these businesses were classified as discontinued operations effective in the first quarter of 2003.

In the first quarter of 2003, the Company completed plans to exit its contract remanufacturing operation for gas engines in Beaumont, Texas. The operating results, balance sheets and cash flows of this business were classified as discontinued operations effective in the first quarter of 2003.

In the second quarter of 2002, the Company completed plans to exit its retail aftermarket gas engine business. In connection with the discontinuance of the business, a charge of $28,248 was recorded in 2002 to write down the relevant assets to their estimated realizable value. An additional charge of $2,824 was recorded in 2002 for the estimated cost of employee termination benefits and closure of facilities.

Selected financial information for discontinued operations for the three months ended March 31 is as follows:

6. Restructuring Charges

The Company’s restructuring activities are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 146, Accounting for Costs Associated with Exit or Disposed Activities (“SFAS No. 146”).

Continuing Operations

In the first quarter of 2004, the Company completed plans for the closure and consolidation of certain manufacturing and distribution facilities at its operations in Mexico.

In 2003, the Company completed plans for the following restructuring actions and transfers of production to lower-cost facilities:

8

Table of Contents

A total charge of $1,095 was recorded in the first quarter of 2004 relative to the 2004 and 2003 actions. This charge consisted of $676 for the cost of voluntary and involuntary employee separation programs and other miscellaneous costs of $419.

A total charge of $49,508 was recorded in 2003 for the estimated cost of the 2003 actions. This charge consisted of $14,837 for the estimated cost of various voluntary and involuntary employee separation programs associated with the resulting workforce reductions of approximately 750 employees; $29,317 for the impairment of fixed assets and capital leases; $9,066 for the impairment of operating leases; a post-employment benefit curtailment gain of $7,216; a pension plan curtailment charge of $1,835; and other miscellaneous costs of $1,669.

Relative to the employee termination programs established in 2003 and 2004, $1,253 was paid in the first quarter of 2004, $8,437 was paid in 2003, and $5,091 and $732 are expected to paid in the last nine months of 2004 and in 2005, respectively. The Company currently expects to record additional charges of $2,000 to $4,000 in connection with these actions in the last nine months of 2004.

In 2002, the Company recorded a net restructuring credit of $4,375 consisting of a $4,916 post-employment benefit curtailment gain and a $541 pension curtailment charge related to the closure and realignment of certain manufacturing operations announced in 2001 as discussed below.

In 2001, the Company recorded a restructuring charge of $30,098 in conjunction with plans for the closure and realignment of certain manufacturing facilities and administrative functions in the U.S., Canada and Europe. This charge consisted of $23,328 for the estimated cost of various voluntary and involuntary employee separation programs associated with workforce reductions of approximately 800 production and administrative employees and asset impairment and other miscellaneous costs totaling $6,770. Relative to the employee termination programs established in 2001, $4,737, $4,802, $12,709 and $1,080 was paid in the first quarter of 2004, and in 2003, 2002 and 2001, respectively.

The following table summarizes the activity in the restructuring accrual of continuing operations in the first quarter of 2004:

Discontinued Operations

The restructuring charges, payments and liabilities relative to discontinued operations are classified as discontinued operations in the Company’s consolidated financial statements.

9

Table of Contents

In 2003, the Company recorded restructuring charges in its discontinued operations of $389, consisting of $190 of employee termination benefits, which were paid in 2003, and $199 of asset impairment and other costs.

In 2002, the Company recorded restructuring charges in its discontinued operations of $2,824, consisting of $1,053 of employee termination benefits and $1,771 of asset impairment and other costs. Relative to the employee termination programs established in 2002, $736 and $317 were paid in 2003 and 2002, respectively.

In 2001, the Company recorded restructuring charges in its discontinued operations of $9,251, consisting of $3,399 of employee termination benefits and $5,852 of asset impairment and other costs. Cash payments for termination programs established in 2001 of $199, $2,225 and $975 were made in 2003, 2002 and 2001, respectively.

The following table summarizes the activity in the restructuring accrual of discontinued operations in the first quarter of 2004 which relates to exit/impairment costs:

7. Long-Term Debt

On April 23, 2004, subsequent to the balance sheet date, the Company issued $125,000 principal amount of Second Priority Senior Secured Floating Rate Notes due 2009 (the “Floating Rate Notes”), bearing an interest rate of LIBOR plus 4.00%, and $150,000 principal amount of 9 ³/8% Senior Subordinated Notes due 2012 (the “9 ³/8% Senior Subordinated Notes”). The notes were issued in a private placement to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The net proceeds of the issuance of these notes were used to pay down existing indebtedness under the Company’s senior credit facility, including repayment of the $60,000 term loan and relevant prepayment premium, and to finance the redemption of the Company’s outstanding 10 ⁵/8% senior subordinated notes due 2006 issued on August 1, 1996, including the call premium and accrued interest. The 10 ⁵/8 % notes were called for redemption in their entirety on April 23, 2004 at a redemption price of 101.771% of their face amount plus accrued but unpaid interest up to, but not including, the redemption date of May 24, 2004.

The Floating Rate Notes mature on April 15, 2009. Interest is due each January 15, April 15, July 15 and October 15, commencing July 15, 2004. The Floating Rate Notes will be guaranteed by substantially all of the Company’s domestic subsidiaries (the “Guarantors”). The Floating Rate Notes and the related guarantees will be senior obligations secured by a second-priority lien, subject to certain exceptions and permitted liens, on all of the Company’s and the Guarantors’ existing and future property and assets that secure the Company’s obligations under its existing credit facilities. In the event of enforcement of the lien securing the Floating Rate Notes and the related guarantees, the proceeds thereof will first be applied to repay obligations secured by the first-priority liens, including the Company’s obligations under its senior credit facilities.

10

Table of Contents

The 9 ³/8% Senior Subordinated Notes mature on April 15, 2012. Interest is due each April 15 and October 15, commencing October 15, 2004. The 9 ³/8% Senior Subordinated Notes will be guaranteed by the Guarantors on a senior subordinated basis and, with the related guarantees, will be unsecured senior subordinated obligations, ranking junior to all the Company’s senior debt, including borrowings under its credit facilities, the Floating Rate Notes and the Company’s outstanding 8 ⁵/8% Senior Notes due in 2007.

In connection with the above offering, the Company amended its senior credit facilities to reflect the extinguishment of the $60,000 term loan, provide for borrowings of up to $120,000 under its asset based revolving credit facility, and extend the maturity date from March 31, 2006 to June 30, 2007.

8. Employee Benefit Plans

Agreements with GM

In connection with the Company’s separation from General Motors, the Company and GM agreed to allocate the responsibility for employee pension benefits and post-retirement health care and life insurance on a pro-rata basis between Delco Remy America, Inc., a wholly-owned subsidiary (“DRA”) and GM. The allocation is primarily determined upon years of service with DRA and aggregate years of service with DRA and GM. Effective August 1, 1994, DRA established hourly and salaried pension and post-retirement health care and life insurance plans which are similar to the respective GM plans.

Pension and Post-Retirement Health Care and Life Insurance Plans

DRA has defined benefit pension plans covering substantially all employees. The plan covering salaried employees provides benefits that are based upon years of service and final estimated average compensation. Benefits for hourly employees are based on stated amounts for each year of service. DRA’s funding policy is to contribute amounts to provide the plans with sufficient assets to meet future benefit payment requirements consistent with actuarial determinations of the funding requirements of federal laws. Plan assets are primarily invested in mutual funds, which invest in both debt and equity instruments.

DRA maintains hourly and salaried benefit plans that provide post-retirement health care and life insurance to retirees and eligible dependents. The benefits are payable for life, although DRA retains the right to modify or terminate the plans providing these benefits. The salaried plan has cost sharing features such as deductibles and co-payments. Salaried employees who were not GM employees prior to 1992 are not eligible for the above-described post-retirement benefits. It is DRA’s policy to fund these benefits as claims are incurred.

11

Table of Contents

The components of expense for the plans as of March 31 are as follows:

Cash Flows

The Company contributed $699 in the first quarter of 2004 and plans to contribute between approximately $3,800 and $5,000 to its pension plans for all of 2004. The post-retirement health care plan is funded as benefits are paid.

9. Income Taxes

Income tax expense of $1,437 in the first quarter of 2004 consisted of provisions for domestic state and local taxes of $203 and taxes in various foreign jurisdictions of $1,234. Income tax expense of $5,260 in the first quarter of 2003 consisted of provisions in foreign jurisdictions of $2,380 and $2,880 of withholding tax on intercompany dividends. In accordance with SFAS No. 109, Accounting for Income Taxes, the Company established a valuation allowance for domestic U.S. deferred tax assets in 2003, which resulted in no domestic U.S. tax provision on first quarter 2004 domestic income.

10. Accumulated Other Comprehensive Income (Loss)

The Company’s other comprehensive income (loss) consists of unrealized net gains and losses on the translation of the assets and liabilities of its foreign operations, currency instruments and minimum pension liability adjustments. The before tax income, related income tax effect and accumulated balance for the first quarter of 2004 are as follows:

12

Table of Contents

The Company’s total comprehensive income (loss) was as follows:

11. Commitments and Contingencies

The Company is party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business, including those relating to commercial transactions, product liability, safety, health, taxes, environmental and other matters. The Company believes that the ultimate liability, if any, in excess of amounts already provided for in the financial statements or covered by insurance on the disposition of these matters will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.

Delco Remy Mexico, S. de R.L. de C.V. Arbitration

Remy Mexico Holdings, S. de R.L. de C.V. (“RMH”), the Company’s indirect subsidiary, and GCID Autopartes, S.A. de C.V. (“GCID”), are parties to a series of agreements, including a partnership agreement. The partnership agreement created Delco Remy Mexico, S. de R.L. de C.V. (“DRM”), which operates certain manufacturing facilities in Mexico. GCID is the minority partner with a 24% ownership interest. An affiliate of the Company’s and RMH, Remy Componentes, S. de R.L. de C.V. (“RC”), is party to a services agreement with an affiliate of GCID relating to the partnership, which, among other things, requires the payment of fees in connection with the provision of employees to the partnership. An affiliate of GCID is the partnership’s landlord.

RMH and GCID signed a letter of intent on or about May 3, 2000, whereby GCID agreed to terminate certain of the agreements with RMH and to sell its partnership interest to RMH in exchange for a $13,000 termination payment by RMH to GCID, but the transaction was never finalized. In June 2001, GCID declared RMH in default under the partnership agreement, alleging that RMH had failed to conduct the business of the partnership in accordance with that agreement. In August 2001, GCID instituted an arbitration proceeding before the American Arbitration Association against RMH and later added RC and the Company’s wholly-owned subsidiary, Delco Remy America, Inc. (together with RMH and RC, the “Named Parties”). GCID and its affiliates sought damages for the alleged (i) breaches of the partnership agreement, including a requirement under the partnership that RMH buy out GCID’s partnership interest; (ii) breaches of fiduciary duty; (iii) breaches of various other contracts between and among the various parties; and (iv) tortious interference with contractual relations. DRM and RC believed that the lease agreement terminated as of September 27, 2003 and shortly thereafter began the process of relocating all operations to another facility in San Luis Potosi, Mexico.

The arbitration panel issued an interim decision on March 10, 2004. Based on the interim decision, (i) the Company currently estimates that the total net payments for GCID’s minority partnership interest, the award for past service fees, and other claims, including interest and costs, will be approximately $18,000, subject to the finalization of the award by the arbitrators; (ii) the lease agreement with GCID’s affiliate is terminated as of September 27, 2003, and DRM and RC can complete the relocation of the operations to another facility; and (iii) DRM is permitted to hire the

13

Table of Contents

employees previously provided by GCID’s affiliate under the services agreement. The Company expects that the arbitration panel will issue a final decision in the second quarter of 2004.

UAW Litigation

On April 16, 2003, the International Union, United Automobile, Aerospace and Agriculture Implement Workers of America (“UAW”) and its Local Union 662 filed suit against the Company and Delco Remy America, Inc. (“DRA”) in Federal District Court in the Southern District of Indiana, Indianapolis Division. The lawsuit was filed under Section 301 of the Labor Management Relations Act, 29 U.S.C. Sec. 185, seeking enforcement of an expired Supplemental Unemployment Benefits Plan (the “SUB Plan”). The plaintiffs allege that the SUB Plan provides supplemental unemployment benefits for 52 weeks and separation pay in an amount exceeding $20,000 for employees who were terminated as a result of the closure of DRA’s Anderson, Indiana production facilities at the end of March 2003. The plaintiffs also seek to enforce terminated provisions of a Health Care Program which the plaintiffs allege provides the terminated employees with 25 months of continued hospital, surgical, medical, hearing aid, prescription drug, mental health, substance abuse and vision insurance coverage. The terminated employees were represented by the UAW and its Local Union 662 under various agreements, which expired on March 31, 2003. The lawsuit was filed shortly after the UAW membership failed to ratify DRA’s last, best and final offer for a Shutdown Agreement. The UAW filed an amended complaint on July 8, 2003 to which the Company filed an answer on July 24, 2003. The magistrate has approved a case management plan, and the trial is currently expected to begin in October 2004. The Company denies the material allegations of the complaint, denies any wrongdoing and intends to defend itself vigorously, but is unable to predict whether the proceedings will have a material adverse effect on it.

Remy Reman Facilities

The Remy Reman facilities in Mississippi identified certain possible violations of state air laws and notified the state environmental agency under the state voluntary audit disclosure rules. The Mississippi Department of Environmental Quality (“MDEQ”) issued Notices of Violation regarding two of the facilities and MDEQ and the subsidiaries have agreed to a resolution where by the subsidiaries would enter into Agreed Orders requiring the subsidiaries to pay approximately $60 in penalties and spend approximately $110 in supplemental environmental projects.

World Wide Facility

In April 2003, the Virginia Department of Environmental Quality issued a warning letter with respect to possible violations voluntarily disclosed to them with respect to the World Wide facility in Virginia. The necessary permit application was submitted, the permit was issued, and no further corrective action is necessary. Because the violation has been corrected and, based on the state’s enforcement practice manual, the Company does not believe that the state environmental agency intends to pursue enforcement or penalty actions for the past violations. However, if any such claim were pursued, the Company does not believe that the costs of such matters, if any, will have a material adverse effect on its results of operations, business or financial condition.

Other

The Company will also be required to make additional payments in connection with its acquisitions of M & M Knopf Auto Parts, L.L.C., DRM, Delco Remy Korea Limited and portions of the Delphi Automotive generator business. The Company expects that the net amount of these additional payments, including the DRM arbitration panel interim award, will be in the range of $38,000 to $41,000 payable in 2004. The Company also expects to make payments in connection with the acquisition of Delphi Corporation’s light vehicle alternator business of approximately $2,000 in 2005.

14

Table of Contents

12. Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries

The Company conducts a significant portion of its business through its subsidiaries. The Company’s 8 ⁵/8% Senior Notes Due 2007, 10 ⁵/8 % Senior Subordinated Notes Due 2006 and 11% Senior Subordinated Notes Due 2009 are fully and unconditionally guaranteed, jointly and severally, by certain direct and indirect subsidiaries of the Company (the “Subsidiary Guarantors”). Certain of the Company’s subsidiaries do not guarantee the notes (the “Non-Guarantor Subsidiaries”). The claims of creditors of Non-Guarantor Subsidiaries have priority over the rights of the Company to receive dividends or distributions from such subsidiaries.

Presented below is condensed consolidating financial information for the Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at March 31, 2004 and December 31, 2003 and for the three month periods ended March 31, 2004 and 2003.

The equity method has been used by the Company with respect to investments in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented.

The following table sets forth the Subsidiary Guarantors and direct Non-Guarantor Subsidiaries:

15

Table of Contents

DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheet

16

Table of Contents

DELCO REMY INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidating Balance Sheet