FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ---- to -----
Commission file number 1-12733
TOWER AUTOMOTIVE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 41-1746238
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5211 CASCADE ROAD SE - SUITE 300 49546
GRAND RAPIDS, MICHIGAN (Zip Code)
(Address of principal executive offices)
(616) 802-1600
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock, par value
$.01 per share, at October 31, 2003 was 56,305,931 shares.
TOWER AUTOMOTIVE, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (unaudited) at September
30, 2003 and December 31, 2002
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months Ended September 30, 2003 and 2002
Condensed Consolidated Statements of Operations (unaudited)
for the Nine Months Ended September 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Market Risk" section of Item 2
Item 4. Disclosure Controls and Procedures
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
2
ITEM 1 - FINANCIAL INFORMATION
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, UNAUDITED)
September 30, December 31,
2003 2002
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 135,257 $ 13,699
Accounts receivable 315,504 249,341
Inventories 123,361 133,074
Deferred income taxes, net 16,903 20,634
Prepaid tooling and other 197,763 100,433
----------- -----------
Total current assets 788,788 517,181
----------- -----------
Property, plant and equipment, net 978,801 1,073,619
Investments in joint ventures 266,945 260,898
Deferred income taxes, net 164,363 105,699
Goodwill 488,734 472,967
Other assets, net 165,273 127,521
----------- -----------
$ 2,852,904 $ 2,557,885
=========== ===========
Liabilities and Stockholders' Investment
Current liabilities:
Current maturities of long-term debt, capital lease
obligations and convertible subordinated notes $ 308,680 $ 120,470
Accounts payable 583,834 417,727
Accrued liabilities 284,197 284,450
----------- -----------
Total current liabilities 1,176,711 822,647
----------- -----------
Long-term debt, net of current maturities 996,577 535,220
Obligations under capital leases, net of current maturities . 29,233 29,731
Convertible subordinated notes -- 199,984
Other noncurrent liabilities 221,944 199,477
----------- -----------
Total noncurrent liabilities 1,247,754 964,412
----------- -----------
Mandatorily redeemable trust convertible preferred securities -- 258,750
Stockholders' investment:
Preferred stock -- --
Common stock 661 659
Additional paid-in capital 686,979 683,072
Retained deficit (148,815) (57,174)
Deferred compensation plans (10,036) (10,746)
Accumulated other comprehensive loss (40,490) (43,875)
Treasury stock (59,860) (59,860)
----------- -----------
Total stockholders' investment 428,439 512,076
----------- -----------
$ 2,852,904 $ 2,557,885
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
Three Months Ended September 30,
--------------------------------
2003 2002
--------- ---------
Revenues $ 623,013 $ 653,841
Cost of sales 587,167 587,467
--------- ---------
Gross profit 35,846 66,374
Selling, general and administrative expenses 41,770 35,347
Restructuring and asset impairment charge 124,555 --
--------- ---------
Operating income (loss) (130,479) 31,027
Interest expense, net 27,268 17,366
--------- ---------
Income (loss) before provision for income taxes,
equity in earnings of joint ventures and minority
interest (157,747) 13,661
Provision (benefit) for income taxes (53,634) 4,797
--------- ---------
Income (loss) before equity in earnings of joint
ventures and minority interest (104,113) 8,864
Equity in earnings of joint ventures, net of tax 4,393 4,061
Minority interest, net of tax (1,070) (3,380)
--------- ---------
Net income (loss) $(100,790) $ 9,545
========= =========
Basic earnings (loss) per common share $ (1.78) $ 0.15
========= =========
Weighted average number of basic shares outstanding 56,720 65,525
========= =========
Diluted earnings (loss) per common share $ (1.78) $ 0.15
========= =========
Weighted average number of diluted shares 56,720 65,612
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
Nine Months Ended September 30,
-------------------------------
2003 2002
------------ ------------
Revenues $ 2,098,770 $ 2,072,820
Cost of sales 1,909,952 1,844,743
------------ ------------
Gross profit 188,818 228,077
Selling, general and administrative expenses 115,581 105,709
Restructuring and asset impairment charge 147,621 75,407
------------ ------------
Operating income (loss) (74,384) 46,961
Interest expense, net 62,120 52,573
Other income -- (900)
------------ ------------
Loss before benefit for income taxes, equity in earnings of joint
ventures, minority interest and cumulative effect of accounting
change (136,504) (4,712)
Benefit for income taxes (46,412) (1,635)
------------ ------------
Loss before equity in earnings of joint ventures,
minority interest and cumulative effect of accounting (90,092) (3,077)
change
Equity in earnings of joint ventures, net of tax 8,181 12,723
Minority interest, net of tax (9,730) (11,727)
------------ ------------
Loss before cumulative effect of accounting change (91,641) (2,081)
Cumulative effect of change in accounting principle, net of
tax -- (112,786)
------------ ------------
Net loss $ (91,641) $ (114,867)
============ ============
Basic loss per common share:
Loss before cumulative effect of change in
accounting principle $ (1.62) $ (0.04)
Cumulative effect of change in accounting principle -- (1.97)
------------ ------------
Net loss $ (1.62) $ (2.01)
============ ============
Weighted average number of basic shares outstanding 56,490 57,206
============ ============
Diluted loss per common share:
Loss before cumulative effect of change in
accounting principle $ (1.62) $ (0.04)
Cumulative effect of change in accounting principle -- (1.97)
------------ ------------
Net loss $ (1.62) $ (2.01)
============ ============
Weighted average number of diluted shares outstanding 56,490 57,206
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS - UNAUDITED)
Nine Months Ended September 30,
-------------------------------
2003 2002
----------- -----------
OPERATING ACTIVITIES:
Net loss $ (91,641) $ (114,867)
Adjustments to reconcile net loss to net cash
provided by operating activities -
Cumulative effect of change in accounting principle -- 112,786
Non-cash restructuring and asset impairment charge 145,724 75,407
Customer recovery related to program cancellation 15,600 --
Depreciation 119,639 102,208
Deferred income tax benefit (50,259) (12,661)
Gain on sale of plant -- (3,839)
Equity in earnings of joint ventures, net (8,181) (12,723)
Change in working capital and other operating items 9,260 (127,206)
----------- -----------
Net cash provided by operating activities 140,142 19,105
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures, net (180,126) (108,364)
Acquisitions, including joint ventures interests, earnout
payments and dividends 3,506 (35,888)
Proceeds from sale of fixed assets -- 50,313
----------- -----------
Net cash used in investing activities (176,620) (93,939)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings 1,548,797 1,585,606
Repayment of debt (1,391,411) (1,713,995)
Net proceeds from issuance of stock 650 224,751
Payments for repurchase of common stock -- (17,371)
----------- -----------
Net cash provided by financing activities 158,036 78,991
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 121,558 4,157
CASH AND CASH EQUIVALENTS:
Beginning of period 13,699 21,767
----------- -----------
End of period $ 135,257 $ 25,924
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 57,742 $ 54,750
=========== ===========
Income taxes (refunded) paid $ (270) $ 1,301
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by Tower Automotive, Inc. (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. The information furnished in the condensed consolidated
financial statements includes normal recurring adjustments and reflects
all adjustments which are, in the opinion of management, necessary for
a fair presentation of such financial statements. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
Although the Company believes that the disclosures are adequate to make
the information presented not misleading, it is suggested that these
condensed consolidated financial statements be read in conjunction with
the audited financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31,
2002.
Revenues and operating results for the nine months ended September 30,
2003 are not necessarily indicative of the results to be expected for
the full year.
Certain prior year amounts were reclassified to conform to current year
presentation.
2. INVENTORIES
Inventories are valued at the lower of first-in-first-out ("FIFO") cost
or market, and consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Raw materials $ 51,782 $ 64,777
Work in process 22,922 20,630
Finished goods 48,657 47,667
---------- ----------
$ 123,361 $ 133,074
========== ==========
3. STOCKHOLDERS' INVESTMENT
STOCK REPURCHASE:
During 2002, the Company repurchased approximately 9.8 million shares
at a total cost of $59.9 million to complete the total original
board-approved amount of $100 million. These shares are classified as
treasury stock in the Company's condensed consolidated balance sheets
and may be subsequently reissued for general corporate purposes.
EARNINGS PER SHARE:
Basic earnings per share were computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the
respective quarters. Diluted earnings per share for the three months
ended September 30, 2002 were determined on the assumptions that the
Edgewood notes were converted at the beginning of the period. The
Convertible Subordinated Notes and shares issuable upon conversion of
the Preferred Securities held by the Tower Automotive Capital Trust,
totaling approximately 16.2 million shares, were not included in the
computation of earnings per share for the three months ended September
30, 2002, due to their anti-dilutive effect. None of the common stock
equivalents totaling
7
approximately 16.8 million shares, 16.5 million shares, and 16.2
million shares were included in the computation of earnings per share
for the three months ended September 30, 2003, the nine months ended
September 30, 2003 and the nine months ended September 30, 2002,
respectively due to their anti-dilutive effect (in thousands, except
for per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income (loss) - basic and diluted $ (100,790) $ 9,545 $ (91,641) $ (114,867)
========== ========== ========== ==========
Weighted average number of common shares
outstanding 56,720 65,525 56,490 57,206
Dilutive effect of outstanding stock options
and warrants after application of the
treasury stock method -- 71 -- --
Dilutive effect of Edgewood notes, assuming
conversion -- 16 -- --
---------- ---------- ---------- ----------
Weighted average number of diluted shares
outstanding 56,720 65,612 56,490 57,206
========== ========== ========== ==========
Basic earnings (loss) per share $ (1.78) $ 0.15 $ (1.62) $ (2.01)
========== ========== ========== ==========
Diluted earnings (loss) per share $ (1.78) $ 0.15 $ (1.62) $ (2.01)
========== ========== ========== ==========
STOCK-BASED COMPENSATION:
The Company accounts for stock options under the provisions of
Accounting Principles Board Opinion ("APB") No. 25, under which no
compensation expense is recognized when the stock options are granted
to colleagues and directors at fair market value as of the grant date.
The Company may also grant stock options to outside consultants. The
fair value of these option grants are expensed over the period services
are rendered based on the Black-Scholes valuation model.
The Company has three stock option plans: the 1994 Stock Option Plan,
the Long Term Incentive Plan, and the Independent Director Stock Option
Plan and three stock purchase plans: the Employee Stock Purchase Plan,
the Key Leadership Deferred Income Stock Purchase Plan and the Director
Deferred Income Stock Purchase Plan. Had compensation cost for these
plans been determined as required under SFAS No. 123, "Accounting for
Stock-Based Compensation," amended by SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure," the Company's
pro forma net income (loss) and pro forma earnings (loss) per share
would have been as follows (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income (loss)
As Reported $ (100,790) $ 9,545 $ (91,641) $ (114,867)
Pro Forma $ (101,782) $ 8,618 $ (95,324) $ (117,755)
Basic earnings (loss) per share
As Reported $ (1.78) $ 0.15 $ (1.62) $ (2.01)
Pro Forma $ (1.79) $ 0.13 $ (1.69) $ (2.06)
Diluted earnings (loss) per share
As Reported $ (1.78) $ 0.15 $ (1.62) $ (2.01)
Pro Forma $ (1.79) $ 0.13 $ (1.69) $ (2.06)
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk free interest rates of 2.91 percent
in 2003 and 5.02 percent in 2002; expected life of seven years for 2003
and 2002; expected volatility of 58 percent for 2003 and 2002; and
expected dividends of zero for 2003 and 2002.
8
4. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ------------
Revolving credit facility $ -- $ 177,303
Term credit facility 240,000 125,000
Due to Tower Automotive Capital Trust 258,750 --
Senior Euro notes 174,840 157,440
Senior notes (net of discount of $7,082) 250,918 --
Industrial development revenue bonds 43,765 43,765
Edgewood notes -- 50
Other foreign subsidiary indebtedness 127,537 123,518
Other 33 18,422
------------ ------------
1,095,843 645,498
Less-current maturities (99,266) (110,278)
------------ ------------
Total long-term debt $ 996,577 $ 535,220
============ ============
In June 2003, R. J. Tower Corporation (the "Issuer"), a wholly-owned
subsidiary of the Company, completed a senior note offering with a face
amount of $258 million and a 12 percent interest rate. The notes were
discounted upon issuance to yield 12.5 percent payable semi-annually.
The notes rank equally with all of the Company's other senior unsecured
and unsubordinated debt and mature on June 1, 2013.
In June 2003, the Company completed an amendment to its senior credit
facility (the "Credit Agreement") to reduce the borrowing capacity of
the facility and provide for amended financial covenants in order to
enhance overall liquidity. The amendment reduced the former $725
million facility to a $600 million facility. The term portion of the
facility increased from $125 million to $240 million, and the revolver
portion decreased from $600 million to $360 million. The Company had
previously amended, in June 2002, its prior credit agreement which
voluntarily reduced its borrowing facility from $1.15 billion to $725
million. The amount available to borrow under the revolver portion of
the credit facility is restricted by $44 million of permanent letters
of credit, and is also restricted by $200 million to provide
flexibility for the Company to redeem its $200 million convertible
subordinated notes (due August 1, 2004), in the event it elects to do
so without refinancing the convertible notes in another manner. The
Credit Agreement also includes a multi-currency borrowing feature that
allows the Company to borrow up to $316 million in certain freely
tradable offshore currencies, and letters of credit sublimits of $250
million. As of September 30, 2003, there were no revolver borrowings
outstanding. Interest on the Credit Agreement is at the financial
institutions' reference rate, LIBOR, or the Eurodollar rate plus a
margin ranging from 100 to 325 basis points depending on the ratio of
the consolidated funded debt for restricted subsidiaries of the Company
to its total EBITDA. The weighted average interest rate for such
borrowings was 5.0 percent for the nine months ended September 30, 2003
(including the effect of the interest rate swap contract discussed
below). The Credit Agreement has a final maturity of 2006.
As a result of the permanent reductions of borrowing capacity under the
June 2003 and June 2002 amendments, the Company recorded $0.4 million
and $2.0 million non-cash charges during the second quarters of 2003
and 2002, respectively for the write-off of deferred financing costs
associated with the credit facilities.
The Credit Agreement requires the Company to meet certain financial
tests, including but not limited to a minimum interest coverage and
maximum leverage ratio. The Credit Agreement limits the Company's
ability to pay dividends. As of September 30, 2003, the Company was in
compliance with all debt covenants and anticipates achieving covenant
compliance for the remainder of 2003.
In July 2000, R. J. Tower Corporation (the "Issuer"), a wholly-owned
subsidiary of the Company, issued Euro-denominated senior unsecured
notes in the amount of (euro)150 million ($174.8 million at September
30, 2003). The notes bear interest at a rate
9
of 9.25 percent, payable semi-annually. The notes rank equally with all
of the Company's other senior unsecured and unsubordinated debt and
mature on August 1, 2010.
During the third quarter of 2003, the Company elected to adopt the
current provisions of FASB Interpretation Number (FIN) 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB
No. 51" (see additional discussion in note 12) as it relates to its
mandatorily redeemable convertible trust preferred securities prior to
the required effective date. Under FIN 46, the Tower Automotive Capital
Trust which was previously consolidated by the Company is no longer
consolidated. As a result, the Company no longer presents the
mandatorily redeemable convertible trust preferred securities as
mezzanine financing, but instead records a debt obligation for the
proceeds which are owed to the Trust by the Company. Interest is
recorded at 6 -3/4 percent on the amount owed by the Company to the
Trust, which is equal to the amount that was previously presented as
minority interest (net of tax) for the dividends on the preferred
stock. Pursuant to the guidance in FIN 46, the Company has elected not
to reclassify the presentation in prior periods. The $258 million trust
convertible preferred securities held by the Trust were issued in June
1998 at a dividend rate of 6 -3/4 percent and are redeemable, in whole
or in part, after June 30, 2001 but before June 30, 2018. The preferred
securities are also convertible at the option of the holder into common
stock of Tower at an equivalent conversion price of $30.713 per share.
In July 1997, the Company issued $200 million unsecured convertible
subordinated notes which bear interest at 5 percent and are due on
August 1, 2004, and therefore, have been classified as a component of
current maturities in the current liability section of the condensed
consolidated balance sheet as of September 30, 2003. The notes are
convertible into common stock of the Company at a conversion price of
$25.88 per share.
During September 2000, the Company entered into an interest rate swap
contract to hedge against interest rate exposure on approximately $160
million of its floating rate indebtedness under its Credit Agreement.
The contracts have the effect of converting the floating rate interest
to a fixed rate of approximately 6.9 percent, plus any applicable
margin required under the revolving credit facility. The interest rate
swap contract was executed to balance the Company's fixed-rate and
floating-rate debt portfolios and expires in September 2005.
The Company has designated the swap as a cash flow hedge. Accordingly,
gains and losses are recorded in accumulated other comprehensive income
(loss), net of income taxes. As of September 30, 2003, there is $10.4
million (net of tax) recorded in accumulated other comprehensive loss
related to the cash flow hedge. Derivative liabilities relating to the
interest rate swap agreement totaling $16.7 million have been recorded
in accrued liabilities in the condensed consolidated balance sheet as
of September 30, 2003. The fair value of the interest rate swap
agreement is based upon the difference between the contractual rates
and the present value of the expected future cash flows on the hedged
interest rate.
5. ACCOUNTS RECEIVABLE SECURITIZATION
At September 30, 2003, the Company had sold $89.5 million of net
accounts receivable pursuant to its accounts receivable securitization
program in exchange for $15.8 million of cash and retained a
subordinated interest in the receivables sold of $73.7 million. The
receivables sold represented amounts owed to the Company from customers
as of August 30, 2003. The majority of such receivables were collected
in September 2003 and as a result, the Company's retained interest in
accounts receivable is not significant as of September 30, 2003 and is
not presented separately from accounts receivable. As of September 30,
2003, the Company recorded a liability to the funding agent of $15.8
million, which represents receivables for which the Company has
received collections from customers and is required to be submitted to
the funding agent. Settlement of amounts due to the funding agent, as
well as the cost of funding at an annual rate of approximately 2.37
percent, occurs during the month subsequent to the sale of the
receivables.
6. ACQUISITIONS
The Company's acquisitions have been accounted for using the purchase
method of accounting and, accordingly, the assets acquired and
liabilities assumed have been recorded at the fair value as of the date
of the acquisitions. The excess of the purchase price over the fair
value of the assets acquired and liabilities assumed has been recorded
as goodwill.
The Company is committed under certain existing agreements, assumed in
connection with prior acquisitions, to supply product to its customers
at selling prices that are not sufficient to cover the direct costs to
produce those parts. The Company is obligated to supply these products
for the life of the related vehicles, which is typically three to ten
years. Accordingly, the Company recognizes losses at the time these
losses are probable and reasonably estimable at an amount equal to the
minimum amount
10
necessary to fulfill its obligations to its customers. The reserves
established in connection with these recognized losses are reversed as
the product is shipped to the customers.
In conjunction with its acquisitions, the Company has established
reserves for certain costs associated with facility shutdown and
consolidation activities and for provisions for acquired loss
contracts. A rollforward of these reserves is as follows (in millions):
FACILITY
SHUTDOWN LOSS
COSTS CONTRACTS
-------- ---------
Balance at December 31, 2002 $ 4.5 $ 6.1
Utilization (0.3) (2.3)
------ ------
Balance at September 30, 2003 $ 4.2 $ 3.8
====== ======
As of September 30, 2003, all of the identified facilities have been
shutdown, but the Company continues to incur costs related to
maintenance, taxes and other costs related to buildings that are held
for sale. The Company's acquisition reserves have been utilized as
originally intended and management believes the liabilities recorded
for shutdown and consolidation activities are adequate but not
excessive as of September 30, 2003.
7. INVESTMENTS IN JOINT VENTURES
On September 21, 2000, the Company acquired a 17 percent equity
interest in Yorozu Corporation ("Yorozu"), a supplier of suspension
modules and structural parts to the Asian and North American automotive
markets, from Nissan Motor Co. Ltd. ("Nissan"). On February 20, 2001,
the Company exercised its option to increase its holdings in Yorozu by
13.8 percent through the purchase of additional Yorozu shares. Yorozu
is based in Japan and is publicly traded on the first tier of the Tokyo
Stock Exchange. Its principal customers include Nissan, Auto Alliance,
General Motors, Ford, and Honda. The Company paid Nissan approximately
$68 million over two and one half years for its 30.8 percent interest.
As of September 30, 2003, the traded market value of shares held in
Yorozu was $43.0 million and the Company's recorded investment in
Yorozu was $65.6 million, as compared with a traded market value of
$22.4 million and investment in Yorozu of $60.4 million at the original
dates of the investment. The Company has determined that the investment
in Yorozu has not suffered an other than temporary decline in market
value. This determination is based on the long-term strategic nature of
the investment, which supported the Company's original investment
decision, and the fact that the Company believes that there is a
significant value premium associated with owning a large block of
voting equity in a Japanese public company.
The Company is a 40 percent partner in Metalsa S. de R.L. ("Metalsa")
with Promotora de Empresas Zano, S.A. de C.V. ("Proeza"). Metalsa is
the largest supplier of vehicle frames and structures in Mexico. In
addition, the parties have entered into a technology sharing
arrangement that enables both companies to utilize the latest available
product and process technology. Metalsa is headquartered in Monterrey,
Mexico and has manufacturing facilities in Monterrey and San Luis
Potosi, Mexico and Roanoke, Virginia. Metalsa's customers include
DaimlerChrysler, General Motors, Ford, and Nissan. In connection with
the original agreement, the Company paid $120 million to Proeza, with
an additional amount of up to $45 million payable based upon net
earnings of Metalsa for the years 1998, 1999 and 2000. Based upon
Metalsa's 1998 and 1999 net earnings, the Company paid Proeza $9.0
million and $7.9 million of additional consideration during 1999 and
2000, respectively. Based upon Metalsa's 2000 net earnings, the Company
paid $9.7 million of additional consideration during 2002.
8. DIVESTITURE
On February 1, 2002, the Company sold its Iwahri, Korea plant to a
Hyundai affiliate for net proceeds of $4.0 million after fees and debt
assumed by the purchaser and realized a gain on sale of the plant of
$3.8 million in the first quarter of 2002 that was classified as other
income. The net proceeds were used to repay outstanding subsidiary
indebtedness. The results of operations of the Iwahri plant, which
assembles the Kia Sportage lower vehicle module, are not significant to
the operating results of the Company as a whole, and therefore, pro
forma financial information has not been provided as the results would
not be materially different. The Company continues to manufacture body
structure components in Korea, including those components used in the
Kia Sportage module.
11
9. SEGMENT INFORMATION
The Company produces a broad range of assemblies and modules for
vehicle body structures and suspension systems for the global
automotive industry. These operations have similar characteristics
including the nature of products, production processes and customers,
and produce lower vehicle structures, body structures (including Class
A surfaces), suspension components, and suspension and powertrain
modules for the automotive industry. Management reviews the operating
results of the Company and makes decisions based upon two operating
segments: United States/Canada and International.
Financial information by segment is as follows (in thousands):
UNITED STATES/
CANADA INTERNATIONAL TOTAL
-------------- ------------- ------------
THREE MONTHS ENDED SEPTEMBER 30, 2003:
Revenues $ 449,265 $ 173,748 $ 623,013
Operating income (loss) (132,906) 2,427 (130,479)
Restructuring and asset impairment charge 124,555 -- 124,555
Total assets 1,997,385 855,519 2,852,904
THREE MONTHS ENDED SEPTEMBER 30, 2002:
Revenues $ 491,913 $ 161,928 $ 653,841
Operating income 17,983 13,044 31,027
Total assets 1,697,077 764,164 2,461,241
NINE MONTHS ENDED SEPTEMBER 30, 2003:
Revenues $ 1,512,829 $ 585,941 $ 2,098,770
Operating income (loss) (115,602) 41,218 (74,384)
Restructuring and asset impairment charge 147,621 -- 147,621
Total assets 1,997,385 855,519 2,852,904
NINE MONTHS ENDED SEPTEMBER 30, 2002:
Revenues $ 1,589,902 $ 482,918 $ 2,072,820
Operating income 16,011 30,950 46,961
Restructuring and asset impairment charge 71,738 3,669 75,407
Cumulative effect of change in accounting
principle -- (112,786) (112,786)
Total assets 1,697,077 764,164 2,461,241
The change in the carrying amount of goodwill for the nine months ended
September 30, 2003, by operating segment, is as follows (in thousands):
UNITED STATES/
CANADA INTERNATIONAL TOTAL
-------------- ------------- --------
Balance at December 31, 2002 $336,653 $136,314 $472,967
Currency translation adjustment 1,334 14,433 15,767
-------- -------- --------
Balance at September 30, 2003 $337,987 $150,747 $488,734
======== ======== ========
10. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
NON-RESTRUCTURING ASSET IMPAIRMENTS
During the third quarter of 2003, the Company evaluated the current
operating plans and current and forecasted business for three of its
frame assembly plants. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets", the Company determined that there were
indicators of impairment present for each of the facilities based upon
the potential for new business and evaluation of pricing. Cash flow
projections were prepared which indicated that there were not
sufficient cash flows projected
12
to support the carrying value of the long-lived assets at these
facilities and they were written down to their fair value based upon
discounted cash flows. The asset write-offs consisted of property and
equipment totaling $122.7 million and are included in the $124.6
million restructuring and asset impairment charge line item in the
condensed consolidated statement of operations for the three months
ended September 30, 2003. The non-restructuring related asset
impairment charges recorded during the third quarter 2003 are within
the United States/Canada reportable segment. The additional $1.9
million charge recorded in the restructuring and asset impairment line
during the quarter ended September 30, 2003 related to cash charges,
primarily severance, associated with the 2003 restructuring plan
discussed below.
MILWAUKEE RANGER (2003 PLAN):
On May 27, 2003, the Company announced that it would transfer the
production of high-volume frame assemblies for the Ford Ranger from its
Milwaukee facility to its Bellevue I facility in Bellevue, Ohio. The
relocation of the Milwaukee Ranger production line is expected to be
completed by June 2004 and the Company expects to realize annual cash
savings, related primarily to reduced labor costs, of approximately $10
million following the full completion of the move. As a result of the
2003 Plan, the Company has recorded a $25.0 million pre-tax
restructuring and asset impairment charges through September 30, 2003.
These charges reflect estimated qualifying "exit costs" comprising cash
charges of $4.7 million, pension and other post-retirement benefit plan
curtailment costs of $7.7 million and non-cash asset impairment charges
of $12.6 million. In connection with this activity, the Company expects
to incur total restructuring charges of approximately $40 million as
the costs are incurred in accordance with SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." The Company expects
to recognize the remaining charges of approximately $15 million of
additional severance costs in future periods as the affected colleagues
reach the end of their respective employment periods. The costs
incurred to date as well as the costs expected to be incurred relating
to the 2003 Plan are within the United States/Canada reportable
segment. The 2003 Plan will result in a reduction of approximately 250
colleagues, with the eliminations commencing in the fourth quarter of
2003. The estimated restructuring charge does not cover certain aspects
of the 2003 Plan, including movement of equipment and colleague
relocation and training. These costs will be recognized in future
periods as incurred.
The accrual for the 2003 Plan is included in accrued liabilities in the
accompanying condensed consolidated balance sheet as of September 30,
2003. The table below summarizes the accrued operational realignment
and other charges related to the 2003 Plan through September 30, 2003
(in millions):
ASSET SEVERANCE AND
IMPAIRMENT OUTPLACEMENT OTHER EXIT
COSTS COSTS COSTS TOTAL
---------- ------------- ---------- ------
Provision $ 12.6 $ 2.8 $ 7.7 $ 23.1
Additional provision -- 1.9 -- 1.9
Cash usage -- (3.1) -- (3.1)
Non-cash charges (12.6) -- (7.7) (20.3)
------- ------ ------- ------
Balance at September 30, 2003 $ -- $ 1.6 $ -- $ 1.6
======= ====== ======= ======
During the second quarter of 2003, the Company charged $7.7 million of
other exit costs from the 2003 Plan restructuring reserves for expected
curtailment cost against the pension liability accrual.
MILWAUKEE PRESS OPERATIONS (2002 PLAN):
On January 31, 2002, the Company announced that it would discontinue
the remaining stamping and ancillary processes performed at its
Milwaukee Press Operations and relocate the remaining work to other
Tower locations or Tier II suppliers. The Company substantially
completed the transfer process in 2002. As a result of these efforts
(the "2002 Plan"), the Company recorded a restructuring charge in the
first quarter of 2002 totaling $75.4 million, which reflects the
estimated qualifying "exit costs" to be incurred during the 12 months
subsequent to the establishment of the 2002 Plan. During the fourth
quarter of 2002, due to a favorable settlement of anticipated other
exit costs and an assessment of remaining costs, the Company
subsequently reduced the estimates associated with the 2002 and 2001
Plans by $14.3 million, resulting in a net restructuring charge of
$61.1 million for 2002.
The 2002 Plan charge includes costs associated with asset impairments,
severance and outplacement costs related to colleague terminations and
certain other exit costs. These activities resulted in a reduction of
approximately 500 colleagues.
13
The accrual for the 2002 Plan is included in accrued liabilities in the
accompanying condensed consolidated balance sheet as of September 30,
2003. The table below summarizes the accrued operational realignment
and other charges related to the 2002 Plan through September 30, 2003
(in millions):
SEVERANCE AND
OUTPLACEMENT OTHER EXIT
COSTS COSTS TOTAL
------------- ---------- -----
Balance at December 31, 2002 $ 3.5 $ 1.0 $ 4.5
Cash usage (1.8) (1.0) (2.8)
Revision of estimate associated with
2002 plan (0.7) -- (0.7)
------ ------ -----
Balance at September 30, 2003 $ 1.0 $ -- $ 1.0
====== ====== =====
The Company anticipates utilizing the remaining 2002 Plan restructuring
reserves as originally intended, with the ultimate disposition
occurring during the year ending December 31, 2003.
SEBEWAING AND MILWAUKEE PRESS OPERATIONS (2001 PLAN):
In October 2001, the Company's board of directors approved a
restructuring of the enterprise that included the closing of the
Sebewaing, Michigan facility. In addition, in December 2001, the
Company's board of directors approved a restructuring plan that related
to the consolidation of technical activities and a reduction of other
salaried colleagues in conjunction with a reorganization of the
Company's U.S. and Canada operations and the relocation of some
component manufacturing from the Company's Milwaukee Press Operations
to other Tower locations. As a result of the 2001 Plan, the Company
recorded a restructuring charge in the fourth quarter of 2001 of $178.1
million, which reflects the estimated qualifying "exit costs" to be
incurred during the 12 months subsequent to the establishment of the
2001 Plan. This total reflected a provision of $184.0 million, net of
certain revisions in the estimate of the 2000 Plan of $5.9 million,
which were reversed in 2001.
The 2001 Plan charge includes costs associated with asset impairments,
severance and outplacement costs related to colleague terminations and
certain other exit costs. These activities resulted in a reduction of
more than 700 colleagues in the Company's technical and administrative
centers in Novi, Rochester Hills, and Grand Rapids, Michigan;
Milwaukee, Wisconsin; and its U.S. and Canada manufacturing locations.
The accrual for the 2001 Plan is included in accrued liabilities in the
accompanying condensed consolidated balance sheet as of September 30,
2003. The table below summarizes the accrued operational realignment
and other charges related to the 2001 Plan through September 30, 2003
(in millions):
SEVERANCE AND
OUTPLACEMENT OTHER EXIT
COSTS COSTS TOTAL
------------- ---------- -----
Balance at December 31, 2002 $ 1.0 $ 8.3 $ 9.3
Cash usage (1.0) (4.2) (5.2)
Revision of estimate associated with
2001 plan -- 0.7 0.7
-------- ------ -----
Balance at September 30, 2003 $ -- $ 4.8 $ 4.8
======== ====== =====
The remaining other exit costs relate primarily to the present value of
operating lease payments that the Company is obligated to pay through
2010.
14
11. COMPREHENSIVE INCOME (LOSS)
The following table presents comprehensive income (loss) for the three
months and the nine months ended September 30, 2003 and 2002, respectively
(in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income (loss) $ (100,790) $ 9,545 $ (91,641) $ (114,867)
Change in cumulative
translation adjustment 2,310 (4,849) 12,455 13,735
Unrealized gain (loss) on
qualifying cash flow hedges 1,601 (3,600) 2,413 (4,780)
Minimum pension liability -- -- (11,485) --
---------- ---------- ---------- ----------
Comprehensive income (loss) $ (96,879) $ 1,096 $ (88,258) $ (105,912)
========== ========== ========== ==========
12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." Among other provisions, this Statement
eliminates the requirement that gains and losses from extinguishment of
debt be classified as extraordinary items. SFAS No. 145 became
effective for the Company on January 1, 2003. Upon adoption of SFAS No.
145, the Company now reclassifies losses on extinguishments of debt
that were classified as extraordinary items in prior periods when such
prior periods are presented.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement requires
that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, rather than when
a company commits to an exit plan as was previously required. SFAS No.
146 is effective for exit or disposal activities that are initiated
after December 31, 2002. The new standard resulted in the Company
recognizing liabilities related to certain restructuring activities at
the time the liability is incurred rather than the past method of
recognizing the liability upon the announcement of the plan and
communication to colleagues.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure." SFAS No. 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used
on reported results. SFAS 148 is effective for financial statements for
fiscal years ending after December 15, 2002. The Company has included
the additional disclosures about its method of stock-based compensation
in Note 3.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No 149 is
generally effective for contracts entered into or modified after June
30, 2003. The adoption of SFAS No. 149 did not have a material impact
on the Company's results of operations or financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This Statement requires that certain financial instruments
previously accounted for as equity under previous guidance be
classified as liabilities in statements of financial position. Such
financial instruments include (i) mandatorily redeemable shares that
the issuer is obligated to buy back in exchange for cash or other
assets, (ii) instruments, including put options and forward purchase
contracts, that require the issuer to buy back some of its shares in
exchange for cash or other assets and (iii) obligations that can be
settled with shares, the monetary value of which is fixed, tied solely
or
15
predominantly to a variable such as a market index, or varies inversely
with the value of the issuer's shares. SFAS No. 150 became effective
for all financial instruments entered into or modified after May 31,
2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 on
July 1, 2003, did not have a material impact on the Company's results
of operations or financial condition.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others." FIN 45 elaborates on the disclosures to be
made by a guarantor about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The
recognition and measurement provisions of FIN 45 are effective for all
guarantees issued or modified after December 31, 2002. The Company
currently does not have any guarantees requiring disclosure under FIN
45.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51." FIN 46 addresses
consolidation by business enterprises of certain variable interest
entities. FIN 46 is effective for variable interests created after
January 31, 2003 and to variable interest entities in which an
enterprise obtains an interest after that date. For variable interest
entities in which the Company holds a variable interest that it
acquired before February 1, 2003, the Interpretation applies in the
fourth quarter of 2003. The Company has elected to adopt the provisions
of FIN 46 early (July 1, 2003) as it relates to the securities issued
by the Tower Automotive Capital Trust. The Company has determined that,
under FIN 46, the trust which issued its mandatorily redeemable
convertible preferred securities will no longer be consolidated by the
Company. For the quarter ended September 30, 2003, the Company has
modified its presentation of the securities by recording an amount due
to the trust of $258.8 million as debt, and recording interest expense
on the related obligation (previously recorded as minority interest,
net of tax). Pursuant to the transition guidance in FIN 46, the Company
has elected to adopt FIN 46 on a prospective basis. As a result, prior
periods have not been reclassified to the new presentation. The Company
does not anticipate any further impact from FIN 46, but will monitor
interpretations as they are issued, prior to fully adopting FIN 46 in
the fourth quarter of 2003.
13. CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
The following consolidating financial information presents balance
sheets, statements of operations and cash flow information related to
the Company's business. Each Guarantor, as defined, is a direct or
indirect wholly-owned subsidiary of the Company and has fully and
unconditionally guaranteed the 9.25 percent senior unsecured Euro notes
issued by R. J. Tower Corporation in 2000 and the 12 percent senior
unsecured notes issued by R.J. Tower Corporation in 2003, on a joint
and several basis. Tower Automotive, Inc. (the parent company) has also
fully and unconditionally guaranteed the notes and is reflected as the
Parent Guarantor in the consolidating financial information. The
Non-Guarantor Restricted Companies are the Company's foreign
subsidiaries except for Seojin Industrial Company Limited, which is
reflected as the Non-Guarantor Unrestricted Company in the
consolidating financial information. Separate financial statements and
other disclosures concerning the Guarantors have not been presented
because management believes that such information is not material to
investors.
16
TOWER AUTOMOTIVE INC.
CONSOLIDATING BALANCE SHEETS AT SEPTEMBER 30, 2003
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES
------------- ------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ - $ 109,219 $ 23,924
Accounts receivable - - 212,229 88,807
Inventories - - 71,407 38,346
Deferred income taxes, net - - 12,255 4,648
Prepaid tooling and other - - 133,609 52,984
------------- ------------- ------------- -------------
Total current assets - - 538,719 208,709
------------- ------------- ------------- -------------
Property, plant and equipment, net - - 617,040 232,227
Investments in joint ventures 266,595 - - 350
Investment in subsidiaries 636,724 428,439 - -
Deferred income taxes, net - 21,716 136,889 (2,956)
Goodwill - - 328,432 160,302
Other assets, net 14,810 7,424 73,735 40,104
------------- ------------- ------------- -------------
$ 918,129 $ 457,579 $ 1,694,815 $ 638,736
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt,
capital lease obligations, and
convertible subordinated notes $ - $ 199,984 $ 384 $ 19,304
Accounts payable - - 450,076 99,712
Accrued liabilities 13,770 1,667 174,860 86,315
------------- ------------- ------------- -------------
Total current liabilities 13,770 201,651 625,320 205,331
------------- ------------- ------------- -------------
Long-term debt, net of current maturities 665,781 258,750 43,765 18,771
Obligations under capital leases, net of
current maturities - - 115 18,576
Due to/(from) affiliates (242,079) (439,520) 597,586 66,218
Other noncurrent liabilities - 8,259 167,566 35,764
------------- ------------- ------------- -------------
Total noncurrent liabilities 423,702 (172,511) 809,032 139,329
------------- ------------- ------------- -------------
Stockholders' investment 480,657 428,439 260,463 294,076
------------- ------------- ------------- -------------
$ 918,129 $ 457,579 $ 1,694,815 $ 638,736
============= ============= ============= =============
NON-GUARANTOR
UNRESTRICTED
COMPANIES ELIMINATIONS CONSOLIDATED
------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,114 $ - $ 135,257
Accounts receivable 14,468 - 315,504
Inventories 13,608 - 123,361
Deferred income taxes, net - - 16,903
Prepaid tooling and other 11,170 - 197,763
------------- ------------- -------------
Total current assets 41,360 - 788,788
------------- ------------- -------------
Property, plant and equipment, net 129,534 - 978,801
Investments in joint ventures - - 266,945
Investment in subsidiaries - (1,065,163) -
Deferred income taxes, net 8,714 - 164,363
Goodwill - - 488,734
Other assets, net 29,200 - 165,273
------------- ------------- -------------
$ 208,808 $ (1,065,163) $ 2,852,904
============= ============= =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt,
capital lease obligations, and
convertible subordinated notes $ 89,008 $ - $ 308,680
Accounts payable 34,046 - 583,834
Accrued liabilities 7,585 - 284,197
------------- ------------- -------------
Total current liabilities 130,639 - 1,176,711
------------- ------------- -------------
Long-term debt, net of current maturities 9,510 - 996,577
Obligations under capital leases, net of
current maturities 10,542 - 29,233
Due to/(from) affiliates 17,795 - -
Other noncurrent liabilities 10,355 - 221,944
------------- ------------- -------------
Total noncurrent liabilities 48,202 - 1,247,754
------------- ------------- -------------
Stockholders' investment 29,967 (1,065,163) 428,439
------------- ------------- -------------
$ 208,808 $ (1,065,163) $ 2,852,904
============= ============= =============
-17-
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2003
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES
----------- --------- --------- -------------
Revenues $ - $ - $ 424,695 $ 144,617
Cost of sales - - 404,682 129,119
----------- --------- --------- -------------
Gross profit - - 20,013 15,498
Selling, general and administrative expenses - - 30,395 9,789
Restructuring and asset impairment charge - - 123,559 996
----------- --------- --------- -------------
Operating income (loss) - - (133,941) 4,713
Interest expense (income), net 18,487 6,866 (927) 1,036
----------- --------- --------- -------------
Income (loss) before provision for
income taxes, equity in earnings of
joint ventures and minority interest (18,487) (6,866) (133,014) 3,677
Provision (benefit) for income taxes (6,286) (2,335) (45,224) 1,250
----------- --------- --------- -------------
Income (loss) before equity in
earnings of joint ventures and
minority interest (12,201) (4,531) (87,790) 2,427
Equity earnings in joint ventures and
subsidiaries, net (84,058) (96,259) - -
Minority interest, net - - - (1,070)
----------- --------- --------- -------------
Net income (loss) $ (96,259) $(100,790) $ (87,790) $ 1,357
=========== ========= ========= =============
NON-GUARANTOR
UNRESTRICTED
COMPANIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------
Revenues $ 53,701 $ - $ 623,013
Cost of sales 53,366 - 587,167
------------- ------------ ------------
Gross profit 335 - 35,846
Selling, general and administrative expenses 1,586 - 41,770
Restructuring and asset impairment charge - - 124,555
------------- ------------ ------------
Operating income (loss) (1,251) - (130,479)
Interest expense (income), net 1,806 - 27,268
------------- ------------ ------------
Income (loss) before provision for
income taxes, equity in earnings of
joint ventures and minority interest (3,057) - (157,747)
Provision (benefit) for income taxes (1,039) - (53,634)
------------- ------------ ------------
Income (loss) before equity in
earnings of joint ventures and
minority interest (2,018) - (104,113)
Equity earnings in joint ventures and
subsidiaries, net - 184,710 4,393
Minority interest, net - - (1,070)
------------- ------------ ------------
Net income (loss) $ (2,018) $ 184,710 $ (100,790)
============= ============ ============
-18-
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES
----------- --------- ----------- -------------
Revenues $ - $ - $ 1,416,477 $ 472,713
Cost of sales - - 1,307,712 406,868
----------- --------- ----------- -------------
Gross profit - - 108,765 65,845
Selling, general and administrative expenses - - 82,926 27,986
Restructuring and asset impairment charge - - 146,391 1,230
----------- --------- ----------- -------------
Operating income (loss) - - (120,552) 36,629
Interest expense (income), net 41,812 20,598 (9,426) 3,554
----------- --------- ----------- -------------
Income (loss) before provision for
income taxes, equity in earnings of
joint ventures and minority interest (41,812) (20,598) (111,126) 33,075
Provision (benefit) for income taxes (14,216) (7,003) (37,785) 11,246
----------- --------- ----------- -------------
Income (loss) before equity in
earnings of joint ventures and
minority interest (27,596) (13,595) (73,341) 21,829
Equity earnings in joint ventures and
subsidiaries, net (44,686) (72,282) - -
Minority interest, net - (5,764) - (3,966)
----------- --------- ----------- -------------
Net income (loss) $ (72,282) $ (91,641) $ (73,341) $ 17,863
=========== ========= =========== =============
NON-GUARANTOR
UNRESTRICTED
COMPANIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------
Revenues $ 209,580 $ - $ 2,098,770
Cost of sales 195,372 - 1,909,952
------------- ------------ ------------
Gross profit 14,208 - 188,818
Selling, general and administrative expenses 4,669 - 115,581
Restructuring and asset impairment charge - - 147,621
------------- ------------ ------------
Operating income (loss) 9,539 - (74,384)
Interest expense (income), net 5,582 - 62,120
------------- ------------ ------------
Income (loss) before provision for
income taxes, equity in earnings of
joint ventures and minority interest 3,957 - (136,504)
Provision (benefit) for income taxes 1,346 - (46,412)
------------- ------------ ------------
Income (loss) before equity in
earnings of joint ventures and
minority interest 2,611 - (90,092)
Equity earnings in joint ventures and
subsidiaries, net - 125,149 8,181
Minority interest, net - - (9,730)
------------- ------------ ------------
Net income (loss) $ 2,611 $ 125,149 $ (91,641)
============= ============ ============
-19-
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2003
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES
----------- --------- ----------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ (72,282) $ (91,641) $ (73,341) $ 17,863
Adjustments required to reconcile net income
to net cash provided by (used in)
operating activities
Non-cash restructuring
and asset impairment charge - - 144,494 1,230
Customer recovery related to
program cancellation - - 15,600 -
Depreciation - - 76,550 35,002
Deferred income tax provision
(benefit) - - (52,151) 1,508
Equity in earnings of joint ventures,
net (8,181) - - -
Changes in working capital and
other operating items (248,025) (5,469) 291,471 36,206
----------- --------- ----------- -------------
Net cash provided by (used in)
operating activities (328,488) (97,110) 402,623 91,809
----------- --------- ----------- -------------
INVESTING ACTIVITIES:
Capital expenditures, net - - (133,689) (26,429)
Acquisitions and other, net 114,704 96,460 (155,559) -
----------- --------- ----------- -------------
Net cash provided by (used in)
investing activities 114,704 96,460 (289,248) (26,429)
----------- --------- ----------- -------------
FINANCING ACTIVITIES:
Proceeds from borrowings 1,530,241 - 1,832 12,457
Repayment of debt (1,316,457) - (5,988) (63,104)
Net proceeds from issuance of stock - 650 - -
----------- --------- ----------- -------------
Net cash provided by (used for)
financing activities 213,784 650 (4,156) (50,647)
----------- --------- ----------- -------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS - - 109,219 14,733
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD - - - 9,191
----------- --------- ----------- -------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ - $ - $ 109,219 $ 23,924
=========== ========= =========== =============
NON-GUARANTOR
UNRESTRICTED
COMPANIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 2,611 $ 125,149 $ (91,641)
Adjustments required to reconcile net income
to net cash provided by (used in)
operating activities
Non-cash restructuring
and asset impairment charge - - 145,724
Customer recovery related to
program cancellation - - 15,600
Depreciation 8,087 - 119,639
Deferred income tax provision
(benefit) 384 - (50,259)
Equity in earnings of joint ventures,
net - - (8,181)
Changes in working capital and
other operating items 8,127 (73,050) 9,260
------------- ------------ ------------
Net cash provided by (used in)
operating activities 19,209 52,099 140,142
------------- ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures, net (20,008) - (180,126)
Acquisitions and other, net - (52,099) 3,506
------------- ------------ ------------
Net cash provided by (used in)
investing activities (20,008) (52,099) (176,620)
------------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings 4,267 - 1,548,797
Repayment of debt (5,862) - (1,391,411)
Net proceeds from issuance of stock - - 650
------------- ------------ ------------
Net cash provided by (used for)
financing activities (1,595) - 158,036
------------- ------------ ------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (2,394) - 121,558
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,508 - 13,699
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 2,114 $ - $ 135,257
============= ============ ============
-20-
TOWER AUTOMOTIVE INC.
CONSOLIDATING BALANCE SHEETS AT DECEMBER 31, 2002
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES
----------- --------- ----------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ - $ - $ 9,191
Accounts receivable - - 151,774 84,224
Inventories - - 82,765 40,051
Deferred income taxes, net - - 12,255 8,379
Prepaid tooling and other - - 55,453 41,699
----------- --------- ----------- -------------
Total current assets - - 302,247 183,544
----------- --------- ----------- -------------
Property, plant and equipment, net - - 709,127 217,503
Investments in joint ventures 260,898 - - -
Investment in subsidiaries 404,864 512,076 - -
Deferred income taxes, net - - 99,313 (2,712)
Goodwill - - 328,308 144,659
Other assets, net 1,501 27,144 60,839 27,690
----------- --------- ----------- -------------
$ 667,263 $ 539,220 $ 1,499,834 $ 570,684
=========== ========= =========== =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term
debt and capital lease obligations $ 8,352 $ - $ 4,274 $ 18,932
Accounts payable - - 285,585 91,803
Accrued liabilities 6,963 5,889 183,876 80,703
----------- --------- ----------- -------------
Total current liabilities 15,315 5,889 473,735 191,438
----------- --------- ----------- -------------
Long-term debt, net of current maturities 428,651 - 43,765 51,398
Obligations under capital leases, net of
current maturities - - 370 21,050
Convertible subordinated notes - 199,984 - -
Due to/(from) affiliates (337,294) (443,582) 757,808 21,905
Other noncurrent liabilities - 6,103 157,230 21,993
----------- --------- ----------- -------------
Total noncurrent liabilities 91,357 (237,495) 959,173 116,346
----------- --------- ----------- -------------
Mandatorily redeemable trust
convertible preferred securities - 258,750 - -
Stockholders' investment 560,591 512,076 66,926 262,900
----------- --------- ----------- -------------
$ 667,263 $ 539,220 $ 1,499,834 $ 570,684
=========== ========= =========== =============
NON-GUARANTOR
UNRESTRICTED
COMPANIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,508 $ - $ 13,699
Accounts receivable 13,343 - 249,341
Inventories 10,258 - 133,074
Deferred income taxes, net - - 20,634
Prepaid tooling and other 3,281 - 100,433
------------- ------------ ------------
Total current assets 31,390 - 517,181
------------- ------------ ------------
Property, plant and equipment, net 146,989 - 1,073,619
Investments in joint ventures - - 260,898
Investment in subsidiaries - (916,940) -
Deferred income taxes, net 9,098 - 105,699
Goodwill - - 472,967
Other assets, net 10,347 - 127,521
------------- ------------ ------------
$ 197,824 $ (916,940) $ 2,557,885
============= ============ ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term
debt and capital lease obligations $ 88,912 $ - $ 120,470
Accounts payable 40,339 - 417,727
Accrued liabilities 7,019 - 284,450
------------- ------------ ------------
Total current liabilities 136,270 - 822,647
------------- ------------ ------------
Long-term debt, net of current maturities 11,406 - 535,220
Obligations under capital leases, net of
current maturities 8,311 - 29,731
Convertible subordinated notes - - 199,984
Due to/(from) affiliates 1,163 - -
Other noncurrent liabilities 14,151 - 199,477
------------- ------------ ------------
Total noncurrent liabilities 35,031 - 964,412
------------- ------------ ------------
Mandatorily redeemable trust
convertible preferred securities - - 258,750
Stockholders' investment 26,523 (916,940) 512,076
------------- ------------ ------------
$ 197,824 $ (916,940) $ 2,557,885
============= ============ ============
-21-
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2002
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES
----------- --------- ----------- -------------
Revenues $ - $ - $ 464,484 $ 123,622
Cost of sales - - 421,542 104,866
----------- --------- ----------- -------------
Gross profit - - 42,942 18,756
Selling, general and administrative expenses - - 27,072 8,065
----------- --------- ----------- -------------
Operating income - - 15,870 10,691
Interest expense, net 10,518 2,828 1,201 1,060
----------- --------- ----------- -------------
Income (loss) before provision for
income taxes, equity in earnings of
joint ventures and minority interest (10,518) (2,828) 14,669 9,631
Provision (benefit) for income taxes (3,681) (990) 5,149 3,372
----------- --------- ----------- -------------
Income (loss) before equity in
earnings of joint ventures and
minority interest (6,837) (1,838) 9,520 6,259
Equity earnings in joint ventures and
subsidiaries, net 21,058 14,221 - -
Minority interest, net - (2,838) - (1,299)
----------- --------- ----------- -------------
Net income $ 14,221 $ 9,545 $ 9,520 $ 4,960
=========== ========= =========== =============
NON-GUARANTOR
UNRESTRICTED
COMPANIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------
Revenues $ 65,735 $ - $ 653,841
Cost of sales 61,059 - 587,467
------------- ------------ ------------
Gross profit 4,676 - 66,374
Selling, general and administrative expenses 210 - 35,347
------------- ------------ ------------
Operating income 4,466 - 31,027
Interest expense, net 1,759 - 17,366
------------- ------------ ------------
Income (loss) before provision for
income taxes, equity in earnings of 2,707 - 13,661
joint ventures and minority interest
Provision (benefit) for income taxes 947 - 4,797
------------- ------------ ------------
Income (loss) before equity in
earnings of joint ventures and
minority interest 1,760 - 8,864
Equity earnings in joint ventures and
subsidiaries, net - (31,218) 4,061
Minority interest, net 757 - (3,380)
------------- ------------ ------------
Net income $ 2,517 $ (31,218) $ 9,545
============= ============ ============
-22-
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2002
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES
----------- --------- ----------- -------------
Revenues $ - $ - $ 1,480,305 $ 401,458
Cost of sales - - 1,329,710 339,652
----------- --------- ----------- -------------
Gross profit - - 150,595 61,806
Selling, general and administrative expenses - - 76,185 22,895
Restructuring and asset impairment charge - - 71,757 3,650
----------- --------- ----------- -------------
Operating income - - 2,653 35,261
Interest expense (income), net 35,992 8,472 (218) 2,896
Other (income) expense 1,993 - 946 -
----------- --------- ----------- -------------
Income (loss) before provision for
income taxes, equity in earnings of
joint ventures and minority interest (37,985) (8,472) 1,925 32,365
Provision (benefit) for income taxes (13,294) (2,965) 690 11,326
----------- --------- ----------- -------------
Income (loss) before equity in
earnings of joint ventures and
minority interest (24,691) (5,507) 1,235 21,039
Equity earnings in joint ventures and
subsidiaries, net (76,154) (100,845) - -
Minority interest, net - (8,515) - (3,267)
----------- --------- ----------- -------------
Income (loss) before cumulative
effect of change in accounting
principle (100,845) (114,867) 1,235 17,772
Cumulative effect of change in accounting
principle, net - - - (83,108)
----------- --------- ----------- -------------
Net income (loss) $ (100,845) $(114,867) $ 1,235 $ (65,336)
=========== ========= =========== =============
NON-GUARANTOR
UNRESTRICTED
COMPANIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------
Revenues $ 191,057 $ - $ 2,072,820
Cost of sales 175,381 - 1,844,743
------------- ------------ ------------
Gross profit 15,676 - 228,077
Selling, general and administrative expenses 6,629 - 105,709
Restructuring and asset impairment charge - - 75,407
------------- ------------ ------------
Operating income 9,047 - 46,961
Interest expense (income), net 5,431 - 52,573
Other (income) expense (3,839) - (900)
------------- ------------ ------------
Income (loss) before provision for
income taxes, equity in earnings of
joint ventures and minority interest 7,455 - (4,712)
Provision (benefit) for income taxes 2,608 - (1,635)
------------- ------------ ------------
Income (loss) before equity in
earnings of joint ventures and
minority interest 4,847 - (3,077)
Equity earnings in joint ventures and
subsidiaries, net - 189,722 12,723
Minority interest, net 55 - (11,727)
------------- ------------ ------------
Income (loss) before cumulative
effect of change in accounting
principle 4,902 189,722 (2,081)
Cumulative effect of change in accounting
principle, net (29,678) - (112,786)
------------- ------------ ------------
Net income (loss) $ (24,776) $ 189,722 $ (114,867)
============= ============ ============
-23-
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2002
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-GUARANTOR
R. J. TOWER PARENT GUARANTOR RESTRICTED
CORPORATION GUARANTOR COMPANIES COMPANIES
----------- --------- ----------- -------------
OPERATING ACTIVITIES:
Net income (loss) $ (100,845) $(114,867) $ 1,235 $ (65,336)
Adjustments required to reconcile net income
(loss) to net cash provided by (used in)
operating activities
Cumulative effect of change in
accounting principle - - - 83,108
Restructuring and asset
impairment charge - - 71,757 3,650
Depreciation - 973 74,495 23,336
Deferred income tax provision
(benefit) - - (13,781) 1,120
Gain on sale of plant - - - -
Equity in earnings of joint ventures,
net (12,723) - - -
Changes in working capital and
other operating items 256,388 4,366 (261,983) (25,229)
----------- --------- ----------- -------------
Net cash provided by (used in)
operating activities 142,820 (109,528) (128,277) 20,649
----------- --------- ----------- -------------
INVESTING ACTIVITIES:
Capital expenditures, net - - (48,255) (42,281)
Acquisitions and other, net 15,816 (97,852) 130,945 -
Proceeds from sale of fixed assets - - 50,313 -
----------- --------- ----------- -------------
Net cash provided by (used in)
investing activities 15,816 (97,852) 133,003 (42,281)
----------- --------- ----------- -------------
FINANCING ACTIVITIES:
Proceeds from borrowings 1,484,888 - 93 86,793
Repayment of debt (1,643,524) - (3,091) (61,074)
Net proceeds from issuance of stock - 224,751 - -
Payments for repurchase of common stock - (17,371) - -
----------- --------- ----------- -------------
Net cash provided by (used for)
financing activities (158,636) 207,380 (2,998) 25,719
----------- --------- ----------- -------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS - - 1,728 4,087
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD - - 2,444 15,146
----------- --------- ----------- -------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ - $ - $ 4,172 $ 19,233
=========== ========= =========== =============
NON-GUARANTOR
UNRESTRICTED
COMPANIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ (24,776) $ 189,722 $ (114,867)
Adjustments required to reconcile net income
(loss) to net cash provided by (used in)
operating activities
Cumulative effect of change in
accounting principle 29,678 - 112,786
Restructuring and asset
impairment charge - - 75,407
Depreciation 3,404 - 102,208
Deferred income tax provision
(benefit) - - (12,661)
Gain on sale of plant (3,839) - (3,839)
Equity in earnings of joint ventures,
net - - (12,723)
Changes in working capital and
other operating items 173 (100,921) (127,206)
------------- ------------ ------------
Net cash provided by (used in)
operating activities 4,640 88,801 19,105
------------- ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures, net (17,828) - (108,364)
Acquisitions and other, net 4,004 (88,801) (35,888)
Proceeds from sale of fixed assets - - 50,313
------------- ------------ ------------
Net cash provided by (used in)
investing activities (13,824) (88,801) (93,939)
------------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings 13,832 - 1,585,606
Repayment of debt (6,306) - (1,713,995)
Net proceeds from issuance of stock - - 224,751
Payments for repurchase of common stock - - (17,371)
------------- ------------ ------------
Net cash provided by (used for)
financing activities 7,526 - 78,991
------------- ------------ ------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (1,658) - 4,157
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,177 - 21,767
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 2,519 $ - $ 25,924
============= ============ ============
-24-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2002
Revenues. Revenues for the three months ended September 30, 2003 were $623.0
million, a 4.7 percent decrease, compared to $653.8 million for the three months
ended September 30, 2002. The decrease of $30.8 million comprises net volume
declines of $36.3 million, primarily in the following platforms: Dodge
Dakota/Durango series and Ford Explorer, Taurus, and Expedition, and the
Hyundai/Kia labor disruptions, offset by volume increases primarily in the Dodge
Ram, Ford F-Series and Lincoln SUV and GM Cadillac CTS and various Volkswagen
platforms. The net volume decline of $36.3 million comprises a $38.6 million
decrease in the Company's value-added revenue platforms and a non-value-added
module assembly revenue increase of $2.3 million. In addition, the foreign
exchange rate effect in Europe and Asia increased revenues by $12.3 million in
the third quarter of 2003, offset by a decline in revenues of $6.8 million
attributable to pricing and economic conditions.
Cost of Sales. Cost of sales as a percent of revenues for the three months ended
September 30, 2003 was 94.2 percent compared to 89.8 percent for the three
months ended September 30, 2002. Gross profit decreased $30.6 million from $66.4
million in the 2002 period to $35.8 million in the 2003 period and is
attributable to the combined effects of: (i) $15.4 million decline in gross
profit on value-added revenue decreases of $38.6 million (of which $3.9 million
is related to the Hyundai/Kia labor disruptions which reduced sales by $12.9
million), (ii) $6.8 million in negative profit effect of pricing and cost
economics, (iii) $12.9 million of launch costs related primarily to new programs
launched for Volvo, Ford, Nissan and GM, offset by (iv) $4.5 million in
operational performance improvements in the 2003 period. As stated above, the
Company's module assembly revenues increased by $2.3 million in the 2003 period
over the 2002 period which do not contribute significantly to an increase in
gross profits.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $41.8 million, or 6.7 percent of revenues,
for the three months ended September 30, 2003 compared to $35.3 million, or 5.4
percent of revenues, for the three months ended September 30, 2002. The $6.5
million increase in expense is due to increased compensation expenses related to
executive leadership retirement and recruitment of $4.4 million and increased
legal and professional costs of $2.1 million.
Interest Expense, net. Interest expense (net of interest income) for the three
months ended September 30, 2003 was $27.3 million compared to $17.4 million for
the three months ended September 30, 2002. The $9.9 million increase in net
interest expense is attributable to $8.0 million of interest related to the $258
million senior notes, $4.5 million related to the Trust Preferred Securities
which was previously recorded as minority interest, an increase of $0.2 million
due to higher short term rates, and a decrease of $0.1 in interest income offset
by lower interest expense of $1.4 million on decreased revolver borrowings and
increased capitalized interest on construction projects in the 2003 period of
$1.5 million.
Income Taxes. The effective income tax rate was 34.0 percent and 35.0 percent
for the third quarters of 2003 and 2002, respectively. The effective tax rate
reflects the actual rates in the tax jurisdictions in which the Company
operates, adjusted for permanent differences.
Equity in Earnings of Joint Ventures, net. Equity in earnings of joint ventures,
net of tax, was $4.4 million and $4.1 million for the three months ended
September 30, 2003 and 2002, respectively. These amounts represent the Company's
share of the earnings from its joint venture interests in Metalsa, Yorozu, and
DTA Development. The Company's share of Metalsa's joint venture earnings has
increased quarter over quarter by $0.1 million and Yorozu's joint venture
earnings has increased quarter over quarter by $0.2 million.
-25-
Minority Interest, net. Minority interest, net of tax, was $1.1 million and $3.4
million for the three months ended September 30, 2003 and 2002, respectively.
Minority interest in the 2003 period represents the minority interest held by
the 40 percent joint venture partners in Tower Golden Ring. Minority interest in
the 2002 period represents dividends, net of income tax benefits, on the 6 3/4%
Trust Preferred Securities and the minority interest held by the 40 percent
joint venture partners in Tower Golden Ring. The decrease is due to the adoption
of FIN 46 (see "Recently Issued Accounting Pronouncements") during the third
quarter of 2003, which requires the dividends previously recorded as minority
interest to be classified as interest expense.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2003 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Revenues. Revenues for the nine months ended September 30, 2003 were $2,098.8
million, a 1.3 percent increase, compared to $2,072.8 million for the prior
period. The increase of $26.0 comprises positive foreign exchange rate effect in
Europe and Asia of $54.1 million in the first nine months of 2003, offset by a
decline in revenues of $12.3 million attributable to the sale of the Iwahri,
Korea plant which occurred during the first quarter of 2002 and $8.0 million
attributable to pricing and economic conditions. In addition, net volume
decreases of $7.8 million occurred primarily in the following platforms: Dodge
Dakota/Durango series, Chrysler LH and Concord platforms and the Ford Explorer
and Taurus platforms offset by volume increases primarily in the Dodge Ram, GM
Cadillac CTS, Ford F-Series and Lincoln SUV and various Volkswagen and
Hyundai/Kia platforms. The net volume decrease of $7.8 million comprises a $22.3
million decrease in the Company's value-added revenue platforms, offset by a
non-value-added module assembly revenue increase of $14.5 million.
Cost of Sales. Cost of sales as a percent of revenues for the nine months ended
September 30, 2003 was 91.0 percent compared to 89.0 percent for the prior
period. Gross profit decreased $39.3 million from $228.1 million in the 2002
period to $188.8 million in the 2003 period and is attributable to the combined
effects of: (i) $16.7 million in negative profit effect of pricing and cost
economics, (ii) $16.7 million of launch costs related primarily to new programs
launched for Volvo, Ford, Nissan and GM (iii) lease expense of $4.7 million not
present in the 2002 period, (iv) $13.3 million decline in gross profit on
value-added revenue decreases of $22.3 million, offset by (v) $4.3 million in
positive foreign exchange rate effect on gross profit and (vi) $7.8 million in
operational performance improvements in the 2003 period. As stated above, the
Company's module assembly revenues increased by $14.5 million in the 2003 period
over the 2002 period which do not contribute significantly to an increase in
gross profits.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $115.6 million, or 5.5 percent of revenues, for the
nine months ended September 30, 2003 compared to $105.7 million, or 5.1 percent
of revenues, for the prior period. The $9.9 million increase in expense is due
primarily to increased compensation expenses of $5.8 million, primarily related
to executive leadership retirement and recruitment costs of $4.4 million,
increased legal and professional costs of $2.1 million and increased program
management costs of $2.0 million related to engineering and support activities.
Interest Expense, net. Interest expense (net of interest income) for the nine
months ended September 30, 2003 was $62.1 million compared to $52.6 million for
the prior period. The $9.5 million increase in net interest expense is
attributable to (i) increased interest of $9.6 million related to the $258
million senior notes (ii) $4.5 million related to the Trust Preferred Securities
which was previously recorded as minority interest, and (iii) an increase of
$0.3 million due to higher short term rates, offset by (iv) decreased interest
costs of $2.7 million due to decreased revolver borrowings during the first nine
months of 2003 compared to the first nine months of 2002 and (v) increased
capitalized interest on construction projects in the 2003 period of $2.2
million.
Income Taxes. The effective income tax rate was 34.0 percent and 34.7 percent
for the nine months ended September 30, 2003 and 2002, respectively. The
effective tax rate reflects the actual rates in the tax jurisdictions in which
the Company operates, adjusted for permanent differences.
Equity in Earnings of Joint Ventures, net. Equity in earnings of joint ventures,
net of tax, was $8.2 million and $12.7 million for the nine months ended
September 30, 2003 and 2002, respectively. These amounts represent the Company's
share of the earnings from its joint venture interests in Metalsa, Yorozu, and
DTA
-26-
Development. The Company's share of joint venture earnings in Metalsa has
decreased by $5.0 million and increased by $0.3 million and $0.2 million for
Yorozu and DTA, respectively.
Minority Interest, net. Minority interest, net of tax, was $9.7 million and
$11.7 million for the nine months ended September 30, 2003 and 2002,
respectively. Minority interest in the 2003 period represents the minority
interest held by the 40 percent joint venture partners in Tower Golden Ring and
dividends, net of income tax benefits, on the Preferred Securities, through June
2003. Minority interest in the 2002 period represents dividends, net of income
tax benefits, on the Preferred Securities and the minority interest held by the
40 percent joint venture partners in Tower Golden Ring. The decrease is due to
the adoption of FIN 46 (see "Recently Issued Accounting Pronouncements") during
the third quarter of 2003, which requires the dividends previously recorded as
minority interest to be classified as interest expense.
Cumulative Effect of a Change in Accounting Principle, net. The Company adopted
SFAS No. 142 relating to the accounting for goodwill and other intangible assets
as of January 1, 2002. Under SFAS No. 142, the Company designated four reporting
units: 1) United States/Canada, 2) Europe, 3) Asia and 4) South America/Mexico.
As a result of the Company completing its formal valuation procedures under SFAS
No. 142, utilizing a combination of valuation techniques including the
discounted cash flow approach and the market multiple approach, the Company
recorded a transitional impairment loss of $112.8 million as a cumulative effect
of a change in accounting principle in the first quarter of 2002, representing
the write-off of all of the Company's existing goodwill in the reporting units
of Asia ($29.7 million) and South America/Mexico ($83.1 million). There was no
tax impact upon adoption of SFAS No. 142 since the Company recorded a $24.2
million tax valuation allowance for the deductible portion of the goodwill
written off in the reporting unit of South America/Mexico given the uncertainty
of realization and the lack of income in the reporting unit. The Asia goodwill
was not deductible for tax purposes.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGE
The Company's growth through acquisitions coincided with an extended period of
high automotive production that resulted in higher levels of utilization of the
Company's acquired resources and capacity and contributed to periods of strong
operating results. During the second half of 2000, the Company focused its
efforts on reducing the capacity of the enterprise and improving the efficiency
of its continuing operations. Beginning in the fourth quarter of 2000, the
Company: (i) divested its non-core heavy truck business, (ii) consolidated its
manufacturing operations by closing manufacturing locations in Kalamazoo,
Michigan; Sebewaing, Michigan; and certain operations in Milwaukee, Wisconsin,
(iii) reduced redundant overhead through a consolidation of its technical
activities and a reduction of other salaried colleagues, (iv) reorganized the
management of its U.S. and Canada region, (v) discontinued remaining stamping
and ancillary processes performed at its Milwaukee Press Operations and
relocated remaining work to other locations or Tier II suppliers, and (vi)
transferred production of high-volume frame assemblies for the Ford Ranger from
its Milwaukee facility to its Bellevue I facility in Bellevue, Ohio. These
actions were accomplished through four restructuring events. The first
restructuring was initiated in October 2000 (the "2000 Plan"), the second
restructuring was initiated in October 2001 (the "2001 Plan"), the third
restructuring was initiated in January 2002 (the "2002 Plan"), and the fourth
restructuring was initiated in May 2003 (the "2003 Plan"). There are cash costs
remaining to be paid in connection with the 2001 Plan, 2002 Plan, and 2003 Plan;
these plans are described in further detail below.
The Company announced in October 2003 additional plans to consolidate its North
American operations and management, reconfigure its Grand Rapids, MI corporate
activities and close its Rochester Hills, MI prototype tooling facility.
Qualified restructuring costs relating to these activities will begin to be
recognized by the Company commencing in the fourth quarter of 2003.
Under the 2003 Plan, the Company expects to realize annual cash savings of
approximately $10 million beginning in 2004. Under the 2002 Plan, the Company
has realized cash savings of approximately $14 million during the first nine
months of 2003 and expects to realize an additional $2 million of cash savings
through the remainder of 2003. Under the 2001 Plan, the Company has realized
cash savings of approximately $18 million during the first nine months of 2003
and expects to realize an additional $6 million of cash savings through the
remainder of 2003. These cash savings from permanent payroll reductions are
expected to be realized annually.
-27-
NON-RESTRUCTURING ASSET IMPAIRMENTS
During the third quarter of 2003, the Company evaluated the current operating
plans and current and forecasted business for three of its frame assembly
plants. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets", the
Company determined that there were indicators of impairment present for each of
the facilities based upon the potential for new business and evaluation of
pricing. Cash flow projections were prepared which indicated that there were not
sufficient cash flows projected to support the carrying value of the long-lived
assets at these facilities and they were written down to their fair value based
upon discounted cash flows. The asset write-offs consisted of property and
equipment totaling $122.7 million and are included in the $124.6 million
restructuring and asset impairment charge line item in the condensed
consolidated statement of operations for the three months ended September 30,
2003. The non-restructuring related asset impairment charges recorded during the
third quarter 2003 are within the United States/Canada reportable segment. The
additional $1.9 million charge recorded in the restructuring and asset
impairment line during the quarter ended September 30, 2003 related to cash
charges, primarily severance, associated with the 2003 restructuring plan
discussed below.
MILWAUKEE RANGER (2003 PLAN):
On May 27, 2003, the Company announced that it would transfer the production of
high-volume frame assemblies for the Ford Ranger from its Milwaukee facility to
its Bellevue I facility in Bellevue, Ohio. The relocation of the Milwaukee
Ranger production line is expected to be completed by June 2004 and the Company
expects to realize annual cash savings, related primarily to reduced labor
costs, of approximately $10 million following the full completion of the move.
As a result of the 2003 Plan, the Company has recorded a $25.0 million pre-tax
restructuring and asset impairment charges through September 30, 2003. These
charges reflect estimated qualifying "exit costs" comprising cash charges of
$4.7 million, pension and other post-retirement benefit plan curtailment costs
of $7.7 million and non-cash asset impairment charges of $12.6 million. In
connection with this activity, the Company expects to incur total restructuring
charges of approximately $40 million as the costs are incurred in accordance
with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The Company expects to recognize the remaining charges of
approximately $15 million of additional severance costs in future periods as the
affected colleagues reach the end of their respective employment periods. The
costs incurred to date as well as the costs expected to be incurred relating to
the 2003 Plan are within the United States/Canada reportable segment. The 2003
Plan will result in a reduction of approximately 250 colleagues, with the
eliminations commencing in the fourth quarter of 2003. The estimated
restructuring charge does not cover certain aspects of the 2003 Plan, including
movement of equipment and colleague relocation and training. These costs will be
recognized in future periods as incurred.
The accrual for the 2003 Plan is included in accrued liabilities in the
accompanying condensed consolidated balance sheet as of September 30, 2003. The
table below summarizes the accrued operational realignment and other charges
related to the 2003 Plan through September 30, 2003 (in millions):
ASSET SEVERANCE AND
IMPAIRMENT OUTPLACEMENT OTHER EXIT
COSTS COSTS COSTS TOTAL
---------- ------------- ---------- ------
Provision $ 12.6 $ 2.8 $ 7.7 $ 23.1
Additional provision -- 1.9 -- 1.9
Cash usage -- (3.1) -- (3.1)
Non-cash charges (12.6) -- (7.7) (20.3)
------ ------ ------ ------
Balance at September 30, 2003 $ -- $ 1.6 $ -- $ 1.6
====== ====== ====== ======
During the second quarter of 2003, the Company charged $7.7 million of other
exit costs from the 2003 Plan restructuring reserves for expected curtailment
cost against the pension liability accrual.
-28-
MILWAUKEE PRESS OPERATIONS (2002 PLAN):
On January 31, 2002, the Company announced that it would discontinue the
remaining stamping and ancillary processes performed at its Milwaukee Press
Operations and relocate the remaining work to other Tower locations or Tier II
suppliers. The Company substantially completed the transfer process in 2002. As
a result of these efforts (the "2002 Plan"), the Company recorded a
restructuring charge in the first quarter of 2002 totaling $75.4 million, which
reflects the estimated qualifying "exit costs" to be incurred during the 12
months subsequent to the establishment of the 2002 Plan. During the fourth
quarter of 2002, due to a favorable settlement of anticipated other exit costs
and an assessment of remaining costs, the Company subsequently reduced the
estimates associated with the 2002 and 2001 Plans by $14.3 million, resulting in
a net restructuring charge of $61.1 million for 2002.
The 2002 Plan charge includes costs associated with asset impairments, severance
and outplacement costs related to colleague terminations and certain other exit
costs. These activities resulted in a reduction of approximately 500 colleagues.
The accrual for the 2002 Plan is included in accrued liabilities in the
accompanying condensed consolidated balance sheet as of September 30, 2003. The
table below summarizes the accrued operational realignment and other charges
related to the 2002 Plan through September 30, 2003 (in millions):
SEVERANCE AND
OUTPLACEMENT OTHER EXIT
COSTS COSTS TOTAL
------------ ---------- -----
Balance at December 31, 2002 $ 3.5 $ 1.0 $ 4.5
Cash usage (1.8) (1.0) (2.8)
Revision of estimate associated with
2002 plan (0.7) -- (0.7)
-------- -------- -----
Balance at September 30, 2003 $ 1.0 $ -- $ 1.0
======== ======== =====
The Company anticipates utilizing the remaining 2002 Plan restructuring reserves
as originally intended, with the ultimate disposition occurring during the year
ending December 31, 2003.
SEBEWAING AND MILWAUKEE PRESS OPERATIONS (2001 PLAN):
In October 2001, the Company's board of directors approved a restructuring of
the enterprise that included the closing of the Sebewaing, Michigan facility. In
addition, in December 2001, the Company's board of directors approved a
restructuring plan that related to the consolidation of technical activities and
a reduction of other salaried colleagues in conjunction with a reorganization of
the Company's U.S. and Canada operations and the relocation of some component
manufacturing from the Company's Milwaukee Press Operations to other Tower
locations. As a result of the 2001 Plan, the Company recorded a restructuring
charge in the fourth quarter of 2001 of $178.1 million, which reflects the
estimated qualifying "exit costs" to be incurred during the 12 months subsequent
to the establishment of the 2001 Plan. This total reflected a provision of
$184.0 million, net of certain revisions in the estimate of the 2000 Plan of
$5.9 million, which were reversed in 2001.
The 2001 Plan charge includes costs associated with asset impairments, severance
and outplacement costs related to colleague terminations and certain other exit
costs. These activities resulted in a reduction of more than 700 colleagues in
the Company's technical and administrative centers in Novi, Rochester Hills, and
Grand Rapids, Michigan; Milwaukee, Wisconsin; and its U.S. and Canada
manufacturing locations.
-29-
The accrual for the 2001 Plan is included in accrued liabilities in the
accompanying condensed consolidated balance sheet as of September 30, 2003. The
table below summarizes the accrued operational realignment and other charges
related to the 2001 Plan through September 30, 2003 (in millions):
SEVERANCE AND
OUTPLACEMENT OTHER EXIT
COSTS COSTS TOTAL
------------ ---------- -----
Balance at December 31, 2002 $ 1.0 $ 8.3 $ 9.3
Cash usage (1.0) (4.2) (5.2)
Revision of estimate associated
with 2001 plan -- 0.7 0.7
-------- ------ -----
Balance at September 30, 2003 $ -- $ 4.8 $ 4.8
======== ====== =====
The remaining other exit costs relate primarily to the present value of
operating lease payments that the Company is obligated to pay through 2010.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CASH
The Company's principal sources of cash are cash flow from operations,
commercial borrowings and capital markets activities. During the nine months
ended September 30, 2003, the Company generated $140.1 million of cash from
operations. This compares with $19.1 million generated during the same period in
2002. Net income before depreciation, deferred income taxes, gain on sale of
plant, equity in joint venture earnings, non-cash restructuring and asset
impairment charges, and cumulative effect of change in accounting principle was
$115.2 million and $146.3 million for the 2003 and 2002 periods, respectively.
In the 2003 period, operating cash flow was increased by $15.6 million by a
customer recovery related to program cancellation. Operating cash flow was
reduced by $11.1 million in 2003 and $30.6 million in 2002 for cash
restructuring payments, and was increased by net tax refunds of $0.3 million and
decreased by net tax payments of $1.3 million in the 2003 and 2002 periods,
respectively. Operating cash flow was also reduced in the 2003 and 2002 periods
by $20.8 million and $28.0 million, respectively, for required pension
contributions. Expected pension contribution funding requirements of the Company
for the remainder of 2003 are approximately $6 million. In total, working
capital and other operating items increased operating cash flow by $9.3 million
during 2003 and decreased cash flow by $127.2 million during 2002.
In April 2002, the Company entered into a sale-leaseback transaction involving
seven of its manufacturing facilities contributing $50.3 million to the cash
flow of the 2002 period. Under the terms of the sale-leaseback agreement with
investment banking firm W.P. Carey and Company, LLC, the facilities will be
leased to the Company under an 18-year term. The lease requires quarterly
payments of approximately $1.6 million through 2020 and is accounted for as an
operating lease.
The issuance of common stock under the underwritten primary offering of 17.25
million shares completed in May 2002 contributed $222.4 million to the cash flow
of the 2002 period. The issuance of stock from the Company's colleague stock
purchase plan and option plans contributed an additional $0.7 million and $2.4
million to cash flow for the 2003 and 2002 periods, respectively. Repurchases of
common stock used $17.4 million in cash in the 2002 period.
In June 2003, R.J. Tower Corporation (the "Issuer"), a wholly-owned subsidiary
of the Company, completed a senior note offering with a face amount of $258
million and a 12 percent interest rate. The notes were discounted upon issuance
to yield 12.5 percent, payable semi-annually. The notes are recorded in the
Company's condensed consolidated balance sheet net of discount of $7.1 million
as of September 30, 2003. The notes rank equally with all of the Company's other
senior unsecured and unsubordinated debt and mature on June 1, 2013.
-30-
In June 2003, the Company completed an amendment to its senior credit facility
(the "Credit Agreement") to reduce the borrowing capacity of the facility and
provide for amended financial covenants in order to enhance overall liquidity.
The amendment reduced the former $725 million facility to a $600 million
facility. The term portion of the facility increased from $125 million to $240
million, and the revolver portion decreased from $600 million to $360 million.
The amount available to borrow under the revolver portion of the credit facility
is restricted by $44 million of permanent letters of credit, and is also
restricted by $200 million to provide flexibility for the Company to redeem its
$200 million convertible subordinated notes (due August 1, 2004), in the event
it elects to do so without refinancing the convertible notes in another manner.
The Credit Agreement also includes a multi-currency borrowing feature that
allows the Company to borrow up to $316 million in certain freely tradable
offshore currencies, and letters of credit sublimits of $250 million. As of
September 30, 2003, there were no revolver borrowings outstanding. Interest on
the Credit Agreement is at the financial institutions' reference rate, LIBOR, or
the Eurodollar rate plus a margin ranging from 100 to 325 basis points depending
on the ratio of the consolidated funded debt for restricted subsidiaries of the
Company to its total EBITDA. The weighted average interest rate for such
borrowings was 5.0 percent for the nine months ended September 30, 2003
(including the effect of the interest rate swap contract discussed below). The
Credit Agreement has a final maturity of 2006.
At September 30, 2003, the Company had no borrowings under its revolving credit
facility of $360 million. In order to borrow under the revolving facility, the
Company must meet certain covenant ratio requirements, including but not limited
to a minimum interest coverage and maximum leverage ratio. Under the most
restrictive covenants, the amount of unused availability under the revolving
facility was $71.5 million at September 30, 2003, compared to unused
availability of $221.4 million at September 30, 2002. However, due to the
restrictions discussed above, availability due to revolver capacity limits is
reduced to $53.0 million at September 30, 2003. The revolver availability
combined with the Company's cash balances of $135.3 million and $25.9 million as
of September 30, 2003 and 2002, respectively, produced total available liquidity
of $188.3 million and $247.3 million for those same periods. The $59.0 million
decrease in available liquidity between the periods resulted from the increase
in indebtedness (as defined in the credit agreement) and reduced revolver
capacity under the amended credit agreement, offset by an increase in trailing
four quarter EBITDA (as defined in the credit agreement) and an increase in cash
between the periods. The covenant conditions contained in the credit agreement
also limit the Company's ability to pay dividends. As of September 30, 2003, the
Company was in compliance with all debt covenants and anticipates achieving
covenant compliance for the remainder of 2003.
In July 2000, R. J. Tower Corporation (the "Issuer"), a wholly-owned subsidiary
of the Company, issued Euro-denominated senior unsecured notes in the amount of
(euro)150 million ($174.8 million at September 30, 2003). The notes bear
interest at a rate of 9.25 percent, payable semi-annually. The notes rank
equally with all of the Company's other senior unsecured and unsubordinated debt
and mature on August 1, 2010.
During September 2000, the Company entered into an interest rate swap contract
to hedge against interest rate exposure on approximately $160 million of its
floating rate indebtedness under the Credit Agreement. The contracts have the
effect of converting the floating rate interest to a fixed rate of approximately
6.9 percent, plus any applicable margin required under the revolving credit
facility. The interest rate swap contract was executed to balance the Company's
fixed-rate and floating-rate debt portfolios and expires in September 2005.
USES OF CASH
The Company's principal uses of cash are debt repayment, capital expenditures
and acquisitions and investments in joint ventures. Net cash used in investing
activities was $176.6 million during the nine months ended September 30, 2003,
as compared to $93.9 million in the prior period. Dividends received from
investments in joint ventures increased investing cash flows by $3.5 million in
the 2003 period. Earnout payments offset by net proceeds received from the sale
of a plant, reduced investing cash flows by
-31-
$35.9 million in the 2002 period. The Company is reviewing the merits of
acquiring, from its joint venture partner, the remaining 34 percent interest in
Seojin. Seojin is currently owed a note receivable of approximately $8 million
from this minority interest partner, which became due in March 2003. The
minority interest partner's shares in Seojin are pledged as collateral for the
note receivable. In order to enforce the collateral agreement, the Company must
purchase the remaining shares from its joint venture partner, the terms of which
are being negotiated. The Company believes that Seojin has adequate financing
resources under its local revolving debt facilities, which are not covered under
the Company's Credit Agreement, or can secure new local financing, if necessary,
in order to fund any additional purchase of shares. If the Company were to
acquire these remaining shares, the Company would own 100 percent of Seojin.
Net capital expenditures were $180.1 million and $108.4 million during the nine
months ended September 30, 2003 and 2002, respectively. Capital expenditures in
2003 include significant investments to support major product launches. The
Company estimates its 2003 capital expenditures will be approximately $240
million, compared to previous estimates of approximately $200 million. This
increase is primarily associated with additional spending at the Company's new
facility in Ford's supplier park in Chicago. Where appropriate, the Company may
lease rather than purchase such equipment, which would have the effect of
reducing this anticipated level of capital expenditures. The Company leases
certain equipment utilized in its operations under operating lease agreements.
The Company intends to continue to utilize operating lease financing on occasion
when the effective interest rate equals or is lower than the Company's financing
costs and the lease terms match the expected life of the respective program.
Annual operating lease payments under the Company's lease agreements range from
$51 million to $62 million for the next five years.
Net cash provided by financing activities totaled $158.0 million and $79.0
million for the nine months ended September 30, 2003 and 2002, respectively. Net
increased borrowings were $157.4 million for the 2003 period, and net repayments
of debt were $128.4 million for the comparable 2002 period.
WORKING CAPITAL
The Company maintained significant negative levels of working capital of $387.9
million and $305.5 million as of September 30, 2003 and December 31, 2002,
respectively, as a result of its continuing focus on minimizing the cash flow
cycle. The $82.4 million net decrease in working capital in 2003 was due to the
combined effects of a $9.7 million decrease in inventory, a $188.2 increase in
current maturities primarily due to the reclassification of the $200 million
Convertible Subordinated Notes to current maturities, and a $165.9 million net
increase in accounts payable and accrued liabilities resulting primarily from
the increase in tooling payables at September 30, 2003, and a $3.7 million
decrease in the current net deferred tax asset, offset by a $121.6 million
increase in cash primarily attributable to net proceeds of approximately $244
million related to the senior note offering completed in June 2003, a $66.2
million timing related increase in accounts receivable and a $97.3 million
timing-related increase in prepaid tooling and other current assets. The
Company's management of its accounts receivable includes participation in
specific receivable programs with key customers that allow for accelerated
collection of receivables, subject to interest charges ranging from 4.6 percent
to 6.0 percent at an annualized rate. The Company expects to continue its focus
on maintaining a large negative working capital position through the efforts
discussed above and continued focus on minimizing the length of the cash flow
cycle.
The Company believes that funds generated by operations together with the
available borrowing capacity under its credit agreement, should provide
sufficient liquidity and capital resources to pursue its business strategy for
the foreseeable future, with respect to working capital, capital expenditures,
and other operating needs. The Company anticipates that it will meet its
liquidity requirements through the prudent use of its cash resources, effective
management of operating working capital and capital expenditures and also
employing other potential financing and strategic alternatives, as required.
Certain assumptions underlie this belief, including among others, that there
will be no material adverse developments in the Company's business, the
automotive market in general, or the Company's anticipated activities and costs
associated with its new program launches scheduled for the next twelve months.
-32-
EFFECTS OF INFLATION
Inflation generally affects the Company by increasing the interest expense of
floating-rate indebtedness and by increasing the cost of labor, equipment and
raw materials. However, because selling prices generally cannot be increased
until a model changeover, the effects of inflation must be offset by
productivity improvements and volume from new business awards.
MARKET RISK
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company's policy is to not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company periodically enters into financial instruments to manage and reduce
the impact of changes in interest rates.
Interest rate swaps are entered into as a hedge of underlying debt instruments
to change the effective characteristics of the interest rate without actually
changing the debt instrument. Therefore, these interest rate swap agreements
convert outstanding floating rate debt to fixed rate debt for a period of time.
For fixed rate debt, interest rate changes affect the fair market value but do
not impact earnings or cash flows. Conversely for floating rate debt, interest
rate changes generally do not affect the fair market value but do impact future
earnings and cash flows, assuming other factors are held constant.
At September 30, 2003, Tower Automotive had total debt and obligations under
capital leases of $1.3 billion. The debt is composed of fixed rate debt of
$1,044.5 million and floating rate debt of $290.0 million. The pre-tax earnings
and cash flow impact for the next year resulting from a one percentage point
increase in interest rates on variable rate debt would be approximately $2.9
million, holding other variables constant. A one percentage point increase in
interest rates would not materially impact the fair value of the fixed rate
debt.
A portion of Tower Automotive's revenues were derived from manufacturing
operations in Europe, Asia and South America. The results of operations and
financial position of the Company's foreign operations are principally measured
in its respective currency and translated into U.S. dollars. The effects of
foreign currency fluctuations in Europe, Asia and South America are somewhat
mitigated by the fact that expenses are generally incurred in the same currency
in which revenues are generated. The reported income of these subsidiaries will
be higher or lower depending on a weakening or strengthening of the U.S. dollar
against the respective foreign currency.
A portion of Tower Automotive's assets are based in its foreign operations and
are translated into U.S. dollars at foreign currency exchange rates in effect as
of the end of each period, with the effect of such translation reflected as a
separate component of stockholders' investment. Accordingly, the Company's
consolidated stockholders' investment will fluctuate depending upon the
weakening or strengthening of the U.S. dollar against the respective foreign
currency.
The Company's strategy for management of currency risk relies primarily upon
conducting its operations in a country's respective currency and may, from time
to time, also involve hedging programs intended to reduce the Company's exposure
to currency fluctuations. Management believes the effect of a 100 basis point
movement in foreign currency rates versus the dollar would not have materially
affected the Company's financial position or results of operations for the
periods presented.
-33-
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other provisions, this Statement eliminates the requirement that gains and
losses from extinguishment of debt be classified as extraordinary items. SFAS
No. 145 became effective for the Company on January 1, 2003. Upon adoption of
SFAS No. 145, the Company now reclassifies losses on extinguishments of debt
that were classified as extraordinary items in prior periods when such prior
periods are presented.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred, rather than when a company commits to an exit plan as was
previously required. SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. The new standard resulted in the
Company recognizing liabilities related to certain restructuring activities at
the time the liability is incurred rather than the past method of recognizing
the liability upon the announcement of the plan and communication to colleagues.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS 148 is effective for financial statements for fiscal years ending
after December 15, 2002. The Company has included the additional disclosures
about its method of stock-based compensation in Note 3.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No 149 is generally effective for contracts
entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did
not have a material impact on the Company's results of operations or financial
condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
requires that certain financial instruments previously accounted for as equity
under previous guidance be classified as liabilities in statements of financial
position. Such financial instruments include (i) mandatorily redeemable shares
that the issuer is obligated to buy back in exchange for cash or other assets,
(ii) instruments, including put options and forward purchase contracts, that
require the issuer to buy back some of its shares in exchange for cash or other
assets and (iii) obligations that can be settled with shares, the monetary value
of which is fixed, tied solely or predominantly to a variable such as a market
index, or varies inversely with the value of the issuer's shares. SFAS No. 150
became effective for all financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS No. 150 on July 1,
2003, did not have a material impact on the Company's results of operations or
financial condition.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The recognition and
-34-
measurement provisions of FIN 45 are effective for all guarantees issued or
modified after December 31, 2002. The Company currently does not have any
guarantees requiring disclosure under FIN 45.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51." FIN 46 addresses consolidation by
business enterprises of certain variable interest entities. FIN 46 is effective
for variable interests created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. For
variable interest entities in which the Company holds a variable interest that
it acquired before February 1, 2003, the Interpretation applies in the fourth
quarter of 2003. The Company has elected to adopt the provisions of FIN 46 early
(July 1, 2003) as it relates to the securities issued by the Tower Automotive
Capital Trust. The Company has determined that, under FIN 46, the trust which
issued its mandatorily redeemable convertible preferred securities will no
longer be consolidated by the Company. For the quarter ended September 30, 2003,
the Company has modified its presentation of the securities by recording an
amount due to the trust of $258.8 million as debt, and recording interest
expense on the related obligation (previously recorded as minority interest, net
of tax). Pursuant to the transition guidance in FIN 46, the Company has elected
to adopt FIN 46 on a prospective basis. As a result, prior periods have not been
reclassified to the new presentation. The Company does not anticipate any
further impact from FIN 46, but will monitor interpretations as they are issued,
prior to fully adopting the Statement in the fourth quarter of 2003.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this Form
10-Q or incorporated by reference herein, are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). When used in this Form 10-Q, the words "anticipate," "believe,"
"estimate," "expect," "intends", "project", "plan" and similar expressions, as
they relate to the Company, are intended to identify forward-looking statements.
Such forward-looking statements are based on the beliefs of the Company's
management as well as on assumptions made by and information currently available
to the Company at the time such statements were made. Various economic and
competitive factors could cause actual results to differ materially from those
discussed in such forward-looking statements, including factors which are
outside the control of the Company, such as risks relating to: (i) the degree to
which the Company is leveraged and the ability to generate sufficient cash flow
from operations to meet future liquidity needs; (ii) the Company's reliance on
major customers and selected vehicle platforms; (iii) the cyclicality and
seasonality of the automotive market; (iv) the failure to realize the benefits
of recent acquisitions and joint ventures; (v) the Company's ability to obtain
new business on new and redesigned models; (vi) the Company's ability to achieve
the anticipated volume of production from new and planned supply programs; (vii)
the general economic or business conditions affecting the automotive industry
(which is dependent on consumer spending), either nationally or regionally,
being less favorable than expected; (viii) the Company's failure to develop or
successfully introduce new products; (ix) increased competition in the
automotive components supply market; (x) unforeseen problems associated with
international sales, including gains and losses from foreign currency exchange;
(xi) implementation of or changes in the laws, regulations or policies governing
the automotive industry that could negatively affect the automotive components
supply industry; (xii) changes in general economic conditions in the United
States and Europe; and (xiii) various other factors beyond the Company's
control. All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on behalf of the Company are expressly
qualified in their entirety by such cautionary statements.
-35-
ITEM 4: DISCLOSURE CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
With the participation of management, the Company's chief executive officer and
chief financial officer, after evaluating the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a --
15(e) and 15d -- 15(e)) have concluded that as of September 30, 2003, the
Company's disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within those entities in
connection with the Company's filing of its Quarterly Report on Form 10-Q for
the nine months ended September 30, 2003.
CHANGES IN INTERNAL CONTROLS
During the period covered by this report, there were no changes in the Company's
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
-36-
PART II. OTHER INFORMATION
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings:
None.
Item 2. Change in Securities and Use of Proceeds:
None.
Item 3. Defaults Upon Senior Securities:
None.
Item 4. Submission of Matters to a Vote of Security Holders:
None.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 31.1 - Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 - Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 - Certification of the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 - Certification of the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) During the quarter for which this report is filed, the Company
filed the following Form 8-K Current Reports with the Securities
and Exchange Commission:
1. The Company's Current Report on Form 8-K dated July 22,
2003, under Item 9 (Commission File No. 1-12733).
2. The Company's Current Report on Form 8-K dated July 29,
2003, under Item 9 (Commission File No. 1-12733).
3. The Company's Current Report on Form 8-K dated August 13,
2003, under Item 9 (Commission File No. 1-12733).
-37-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOWER AUTOMOTIVE, INC.
Date: November 12, 2003 By /s/ Kathy J. Johnston
------------------------------------
Kathy J. Johnston
Vice President
(principal accounting and financial officer)
-38-