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 June 30, 2002
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
----- -----
The number of shares outstanding of the Registrant's common stock, par value
$.01 per share, at August 8, 2002 was 65,829,925 shares.
TOWER AUTOMOTIVE, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months Ended June 30, 2002 and 2001
Condensed Consolidated Statements of Operations (unaudited)
for the Six Months Ended June 30, 2002 and 2001
Condensed Consolidated Balance Sheets at June 30, 2002
(unaudited) and December 31, 2001
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Six Months Ended June 30, 2002 and 2001
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
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
-2-
ITEM 1 - FINANCIAL INFORMATION
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
Three Months Ended June 30,
--------------------------------
2002 2001
------------ -------------
Revenues $ 750,872 $ 642,407
Cost of sales 657,956 557,146
------------ -------------
Gross profit 92,916 85,261
Selling, general and administrative
expenses 37,367 35,020
Amortization expense 1,120 6,130
------------ -------------
Operating income 54,429 44,111
Interest expense, net 16,278 20,121
Other expense 2,939 --
------------ -------------
Income before provision for income
taxes, equity in earnings of joint
ventures and minority interest 35,212 23,990
Provision for income taxes 12,324 9,444
------------ -------------
Income before equity in earnings
of joint ventures and minority
interest 22,888 14,546
Equity in earnings of joint
ventures, net 4,277 4,790
Minority interest, net (4,274) (2,664)
------------ -------------
Net income $ 22,891 $ 16,672
============ =============
Basic earnings per common share $ 0.40 $ 0.38
============ =============
Basic shares outstanding 57,841 44,416
============ =============
Diluted earnings per common share $ 0.37 $ 0.35
============ =============
Diluted shares outstanding 74,130 60,816
============ =============
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)
Six Months Ended June 30,
--------------------------------
2002 2001
------------ -------------
Revenues $ 1,418,979 $ 1,270,783
Cost of sales 1,257,054 1,106,251
------------ -------------
Gross profit 161,925 164,532
Selling, general and administrative
expenses 70,274 70,319
Amortization expense 2,099 12,208
Restructuring and asset
impairment charge 75,407 --
------------ -------------
Operating income 14,145 82,005
Interest expense, net 33,418 39,843
Other expense 2,939 --
Gain on sale of plant (3,839) --
------------ -------------
Income (loss) before provision
for income taxes, equity in
earnings of joint ventures and
minority interest (18,373) 42,162
Provision (benefit) for income taxes (6,432) 16,472
------------ -------------
Income (loss) before equity in
earnings of joint ventures and
minority interest (11,941) 25,690
Equity in earnings of joint
ventures, net 8,662 9,171
Minority interest, net (8,347) (5,328)
------------ -------------
Income (loss) before cumulative
effect of change in accounting
principle (11,626) 29,533
Cumulative effect of change in
accounting principle (112,786) --
------------ -------------
Net income (loss) $ (124,412) $ 29,533
============ =============
Basic earnings (loss) per common share:
Income (loss) before
cumulative effect $ (0.22) $ 0.67
Cumulative effect of change in
accounting principle (2.13) --
------------ -------------
Net income (loss) $ (2.35) $ 0.67
============ =============
Basic shares outstanding 53,047 44,263
============ =============
Diluted earnings (loss) per
common share:
Income (loss) before cumulative
effect $ (0.22) $ 0.63
Cumulative effect of change in
accounting principle (2.13) --
------------ -------------
Net income (loss) $ (2.35) $ 0.63
============ =============
Diluted shares outstanding 53,047 60,737
============ =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-4-
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
June 30, December 31,
Assets 2002 2001
----------------------------------------- ------------ -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 28,647 $ 21,767
Accounts receivable 330,617 216,638
Inventories 104,180 112,536
Prepaid tooling and other 122,401 89,229
------------ -------------
Total current assets 585,845 440,170
------------ -------------
Property, plant and equipment, net 994,887 1,120,259
Investments in joint ventures 252,883 243,198
Deferred income taxes 77,186 61,461
Goodwill, net 467,038 567,080
Other assets, net 122,319 101,268
------------ -------------
$ 2,500,158 $ 2,533,436
============ =============
Liabilities and Stockholders' Investment
-----------------------------------------
Current liabilities:
Current maturities of long-term
debt and capital lease obligations $ 132,980 $ 172,083
Accounts payable 419,522 368,910
Accrued liabilities 282,155 278,962
------------ -------------
Total current liabilities 834,657 819,955
------------ -------------
Long-term debt, net of current maturities 434,230 601,084
Obligations under capital leases, net of
current maturities 11,955 4,620
Convertible subordinated notes 199,984 199,984
Other noncurrent liabilities 193,995 201,635
------------ -------------
Total noncurrent liabilities 840,164 1,007,323
------------ -------------
Mandatorily redeemable trust convertible
preferred securities 258,750 258,750
Stockholders' investment:
Preferred stock -- --
Common stock 658 481
Additional paid-in capital 680,955 456,627
Retained earnings (accumulated deficit) (83,980) 40,432
Deferred compensation plans (13,889) (15,571)
Accumulated other comprehensive loss (17,157) (34,561)
------------ -------------
Total stockholders' investment 566,587 447,408
------------ -------------
$ 2,500,158 $ 2,533,436
============ =============
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
-5-
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS - UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------------
2002 2001
------------ -------------
OPERATING ACTIVITIES:
Net income (loss) $ (124,412) $ 29,533
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities -
Cumulative effect of change in accounting principle 112,786 --
Restructuring and asset impairment charge 75,407 --
Depreciation and amortization 67,471 81,025
Deferred income tax provision (benefit) (15,090) 7,463
Deferred compensation plans 1,223 --
Gain on sale of plant (3,839) --
Equity in earnings of joint ventures, net (8,662) (9,171)
Change in working capital and other operating items (85,576) 182,389
------------ -------------
Net cash provided by operating activities 19,308 291,239
------------ -------------
INVESTING ACTIVITIES:
Acquisitions, divestitures and investment in joint ventures (38,039) (4,364)
Capital expenditures, net (69,042) (102,073)
Proceeds from sale of fixed assets 50,313 --
------------ -------------
Net cash used in investing activities (56,768) (106,437)
------------ -------------
FINANCING ACTIVITIES:
Proceeds from borrowings 986,256 1,181,978
Repayment of debt (1,166,819) (1,359,880)
Proceeds from issuance of stock 224,903 912
------------ -------------
Net cash provided by (used for) financing activities 44,340 (176,990)
------------ -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 6,880 7,812
CASH AND CASH EQUIVALENTS:
Beginning of period 21,767 3,373
------------ -------------
End of period $ 28,647 $ 11,185
============ =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 33,978 $ 38,982
============ =============
Income taxes paid $ 553 $ 3,281
============ =============
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. 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, 2001.
Revenues and operating results for the six months ended June 30, 2002 are
not necessarily indicative of the results to be expected for the full year.
Certain prior period amounts were reclassified to conform to current period
presentation.
2. Inventories consisted of the following (in thousands):
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Raw materials $50,451 $ 52,579
Work in process 16,382 24,636
Finished goods 37,347 35,321
-------- --------
$104,180 $112,536
======== ========
3. Basic earnings per share were computed by dividing net income by the
weighted average number of common shares outstanding during the respective
quarters. Diluted earnings per share for the three months ended June 30,
2002 and 2001, and the six months ended June 30, 2001 were determined on
these assumptions: (i) the Edgewood notes were converted at the beginning
of the period, (ii) the Convertible Subordinated Notes were converted at
the beginning of the period, and (iii) the Preferred Securities were
converted at the beginning of the period. None of the common stock
equivalents, totaling approximately 16.3 million shares, were included in
the computation of earnings per share for the six months ended June 30,
2002 due to their anti-dilutive effect (in thousands, except for per share
data):
-7-
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income (loss) $ 22,891 $ 16,672 $ (124,412) $29,533
Interest expense on Edgewood notes, net of -- 3 -- 10
tax
Interest expense on Convertible 3,305
Subordinated notes, net of tax 1,762 1,653 --
Dividends on Preferred Securities, net of tax 2,838 2,664 -- 5,328
----------- ----------- ----------- -----------
Net income (loss) applicable to common
stockholders -- diluted $ 27,491 $ 20,992 $ (124,412) $ 38,176
=========== =========== =========== ===========
Weighted average number of common shares
outstanding 57,841 44,416 53,047 44,263
Dilutive effect of outstanding stock
options and warrants after application of
the treasury stock method 119 121 -- 126
Dilutive effect of Edgewood notes, assuming
conversion 16 125 -- 194
Dilutive effect of Convertible Subordinated
Notes, assuming conversion 7,730 7,730 -- 7,730
Dilutive effect of Preferred Securities,
assuming conversion 8,424 8,424 -- 8,424
----------- ----------- ----------- -----------
Diluted shares outstanding 74,130 60,816 53,047 60,737
=========== =========== =========== ===========
Basic earnings (loss) per share $ 0.40 $ 0.38 $ (2.35) $ 0.67
=========== =========== =========== ===========
Diluted earnings (loss) per share $ 0.37 $ 0.35 $ (2.35) $ 0.63
=========== =========== =========== ===========
4. Long-term debt consisted of the following (in thousands):
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
Revolving credit facility $ 77,256 $ 100,608
Senior Euro notes 148,725 133,560
Term credit facility 125,000 325,000
Industrial development revenue bonds 43,765 43,765
Edgewood notes 50 50
Other foreign subsidiary indebtedness 139,240 136,987
Other 25,896 30,474
----------- -----------
559,932 770,444
Less-current maturities (125,702) (169,360)
----------- -----------
Total long-term debt $ 434,230 $ 601,084
=========== ===========
In June 2002, the Company completed an amendment to its senior credit
facility (the "Credit Agreement") that permanently reduces borrowings under
the facility and defers the start of the scheduled repayment of its
remaining borrowings until March 2005. The amendment reduces the former
$1.15 billion facility to a $725 million facility by voluntarily repaying
$200 million of the $325 million term loan portion of the facility with
proceeds from the Company's recent follow-on stock offering (see note 12),
and reducing capacity under the revolving credit facility from $825 million
to $600 million. The Credit Agreement also includes a multi-currency
borrowing feature that allows the Company to borrow up to $500 million in
certain freely tradable offshore currencies, and letter of credit sublimits
of $250 million. As of June 30, 2002, approximately $5.2 million of the
outstanding borrowings are denominated in Euro. Interest on the Credit
Agreement is at the financial institutions' reference rate, LIBOR, or the
Eurodollar rate plus a margin ranging from 0 to 200 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 6.1 percent for the six months ended June 30, 2002. The
Credit Agreement has a final maturity of 2006.
-8-
As a result of the permanent reduction of borrowing capacity under the
amendment, the Company recorded a $2.0 million non-cash charge in the
second quarter that was classified as other expense for the write-off of
deferred financing costs associated with the credit facility.
The Credit Agreement requires the Company to meet certain financial
covenants, including but not limited to a minimum interest coverage and
maximum leverage ratio. The Credit Agreement also limits the Company's
ability to pay dividends. As of June 30, 2002, the Company was in
compliance with all debt covenants.
In July 2000, R. J. Tower Corporation, a wholly owned subsidiary of the
Company, issued Euro-denominated senior unsecured notes in the amount of
Euro 150 million ($148.7 million at June 30, 2002). 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 unsecured and unsubordinated debt. The net
proceeds after issuance costs were used to repay a portion of the Company's
existing Euro-denominated indebtedness under its credit facility. The notes
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 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 Credit Agreement. 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 other comprehensive income/loss net of
income taxes. As of June 30, 2002, there is $9.5 million recorded in
accumulated other comprehensive loss related to the cash flow hedge.
Derivative liabilities relating to the interest rate swap agreement
totaling $15.2 million have been recorded in accrued liabilities on the
balance sheet as of June 30, 2002. 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. At June 30, 2002, the Company had sold $139.2 million of net accounts
receivable pursuant to its accounts receivable securitization program in
exchange for $33.7 million of cash and a retained subordinated interest in
the receivables sold of $105.5 million. The receivables sold represented
amounts owed to the Company from customers as of May 31, 2002. The majority
of such receivables were collected in June 2002 and as a result, the
Company's retained interest in accounts receivable is not significant as of
June 30, 2002 and is not presented separately from accounts receivable. As
of June 30, 2002, the Company recorded a liability to the funding agent of
$33.7 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 a rate of approximately 7.6 percent, occurs during
the month subsequent to the sale of the receivables.
6. Effective January 1, 2000, the Company acquired all of the outstanding
shares of Dr. Meleghy GmbH & Co. KG Werkzeugbau und Presswerk, Bergisch
Gladbach ("Dr. Meleghy") for approximately $86 million plus earnout
payments of $2.7 million paid in 2001 and $26.9 million paid in the first
quarter of 2002. Dr. Meleghy designs and produces structural stampings,
assemblies, exposed surface panels and modules to the European automotive
industry. Dr. Meleghy also designs and manufactures tools and dies for use
in their production and for the external market. Dr. Meleghy operates three
facilities in Germany and one facility in both Hungary and Poland. Dr.
Meleghy's main customers include DaimlerChrysler, Audi, Volkswagen, Ford,
Opel and BMW. Products offered by Dr. Meleghy include body side panels,
floor pan assemblies and miscellaneous structural stampings.
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.
-9-
The Company is committed under existing certain 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
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, for general and payroll related costs primarily for planned
employee termination activities, and for provisions for acquired loss
contracts. A rollforward of these reserves is as follows (in millions):
FACILITY PAYROLL
SHUTDOWN RELATED LOSS
COSTS COSTS CONTRACT
-------- -------- --------
Balance at December 31, 2001 $ 5.2 $ 1.1 $ 17.0
Revision of estimate -- -- (2.3)
Utilization (0.3) (1.1) (2.1)
-------- -------- --------
Balance at June 30, 2002 $ 4.9 $ -- $ 12.6
======== ======== ========
The timing of facility shutdown and consolidation activities has been
adjusted to reflect customer concerns with supply interruption. As of June
30, 2002, the 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. These 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
June 30, 2002. During the second quarter of 2002, the Company determined
that certain of its loss contracts would no longer be utilized, and
therefore, reversed $2.3 million of the loss contract reserves.
7. The Company has a 31 percent equity interest in Yorozu Corporation
("Yorozu") acquired from Nissan Motor Co. Ltd. ("Nissan"). Yorozu, based in
Japan, is publicly traded on the first tier of the Tokyo Stock Exchange and
is a supplier of suspension modules and structural parts to the Asian and
North American automotive markets with principal customers including
Nissan, Auto Alliance, General Motors, Ford and Honda. The Company will pay
Nissan approximately $68 million over two and one half years for its
original 17 percent interest acquired in September 2000 and its subsequent
13.8 percent interest it acquired in February 2001. As of June 30, 2002,
$25.8 million remains to be paid under these arrangements and is recorded
as indebtedness in the Company's balance sheet. As of June 30, 2002, the
traded market value of shares held in Yorozu was $18.6 million and the
Company's investment in Yorozu was $59.3 million. The Company periodically
assesses its investment in Yorozu to determine the proper carrying value
for the investment in its financial statements. The periodic assessment of
value takes into account market value of shares, operating performance, and
the Company's book or liquidation value in ascertaining whether an other
than temporary impairment has occurred in the investment. Based on this
assessment, the Company does not believe at this time that its investment
in Yorozu has suffered an other than temporary impairment.
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 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 during 1998, 1999, and 2000. Based upon Metalsa's 1998 and 1999 net
earnings, the Company paid Proeza $9.0 million and $7.9 million in
additional consideration during 1999 and 2000, respectively. Based upon
Metalsa's 2000 net earnings, the Company paid $8.6 million of additional
consideration during the first quarter of 2002.
-10-
8. On February 1, 2002, the Company sold its Iwahri, Korea plant to a Hyundai
affiliate for net proceeds of $4.2 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. 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 will continue to manufacture body
structure components in Korea, including those components used in the Kia
Sportage module.
9. 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 modular assemblies 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 JUNE 30, 2002:
Revenues $ 581,593 $ 169,279 $ 750,872
Operating income 39,968 14,461 54,429
Total assets 1,699,956 800,202 2,500,158
THREE MONTHS ENDED JUNE 30, 2001:
Revenues $ 491,833 $ 150,574 $ 642,407
Operating income 36,360 7,751 44,111
Total assets 2,568,806 389,260 2,958,066
SIX MONTHS ENDED JUNE 30, 2002:
Revenues $1,097,989 $ 320,990 $1,418,979
Operating income (loss) (3,483) 17,628 14,145
Restructuring and asset impairment charge 71,738 3,669 75,407
Cumulative effect of change in accounting
Principle -- 112,786 112,786
Total assets 1,699,956 800,202 2,500,158
SIX MONTHS ENDED JUNE 30, 2001:
Revenues $ 946,930 $ 323,853 $1,270,783
Operating income 62,179 19,826 82,005
Total assets 2,568,806 389,260 2,958,066
10. A summary of the Company's restructuring activities is as follows:
MILWAUKEE PRESS OPERATIONS:
On January 31, 2002, the Company announced that it would discontinue the
remaining stamping and ancillary processes currently performed at its
Milwaukee Press Operations and relocate the remaining work to other Tower
locations or Tier II suppliers. The Company expects to complete the
transfer process during the third quarter of 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 over the next 12 months
pertaining to the 2002 Plan.
-11-
The 2002 Plan charge includes costs associated with asset impairments,
severance and outplacement costs related to employee terminations and
certain other exit costs. These activities are anticipated to result in a
reduction of approximately 490 colleagues in the Company's Milwaukee,
Wisconsin manufacturing location. Through June 30, 2002, the Company had
eliminated approximately 130 colleagues pursuant to the 2002 Plan. The
estimated restructuring charge does not cover certain aspects of the 2002
Plan, including movement of equipment and employee relocation and training.
These costs will be recognized in future periods as incurred.
The asset impairments consist of long-lived assets, including fixed assets,
buildings and manufacturing equipment from the facilities the Company
intends to dispose of or discontinue. The carrying value of the long-lived
assets written off was $47.2 million. Fixed assets that will be disposed of
as part of the 2002 Plan were written down to their estimated residual
values. For assets that will be sold currently, the Company measured
impairment based on estimated proceeds on the sale of the facilities and
equipment. These asset impairments have arisen as a consequence of the
Company making the decision to exit these activities during the first
quarter of 2002.
As of June 30, 2002, the Company anticipates future cash payments of $12.9
million and other future obligations of $12.4 million under the 2002 Plan.
The accrual for operational realignment and other costs is included in
accrued liabilities in the accompanying consolidated balance sheet as of
June 30, 2002. The table below summarizes the accrued operational
realignment and other charges related to the 2002 Plan through June 30,
2002 (in millions):
SEVERANCE AND
ASSET OUTPLACEMENT OTHER EXIT
IMPAIRMENTS COSTS COSTS TOTAL
----------- ----------- ----------- -----------
Balance at December 31, 2001 $ -- $ -- $ -- $ --
First quarter 2002 provision 47.2 8.4 19.8 75.4
Cash charges -- (1.7) (1.2) (2.9)
Non-cash charges (47.2) -- -- (47.2)
----------- ----------- ----------- -----------
Balance at June 30, 2002 $ -- $ 6.7 $ 18.6 $ 25.3
=========== =========== =========== ===========
SEBEWAING AND MILWAUKEE PRESS OPERATIONS:
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 these realignment efforts (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 over the next
12 months pertaining to the 2001 Plan.
The 2001 Plan charge includes costs associated with asset impairments,
severance and outplacement costs related to employee terminations and
certain other exit costs. These activities are anticipated to result 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. Through June 30, 2002, the Company had eliminated approximately
670 colleagues pursuant to the 2001 Plan. The estimated restructuring
charge does not cover certain aspects of the 2001 Plan, including movement
of equipment and employee relocation and training. These costs are being
recognized as incurred.
As of June 30, 2002, the Company anticipates future cash payments of
approximately $24.8 million and other future obligations of $13.1 million
under the 2001 Plan.
-12-
The accrual for operational realignment and other costs, which was
established in the fourth quarter of 2001, is included in accrued
liabilities in the accompanying consolidated balance sheet as of June 30,
2002. The table below summarizes the accrued operational realignment and
accrued other charges related to the 2001 Plan through June 30, 2002 (in
millions):
SEVERANCE AND
OUTPLACEMENT OTHER EXIT
COSTS COSTS TOTAL
------------- ------------- -------------
Balance at December 31, 2001 $ 23.9 $ 31.4 $ 55.3
Cash charges (12.0) (5.4) (17.4)
------------- ------------- -------------
Balance at June 30, 2002 $ 11.9 $ 26.0 $ 37.9
============= ============= =============
11. The following table presents comprehensive income (loss) for the six months
ended June 30, 2002 and 2001 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income (loss) $ 22,891 $ 16,672 $ (124,412) $ 29,533
Change in cumulative
translation adjustment 19,153 1,428 18,584 (2,406)
Transition adjustment
relating to loss on
qualifying cash flow hedges -- -- -- (4,200)
Unrealized gain (loss) on
qualifying cash flow
hedges (2,608) 1,365 (1,180) (1,135)
------------- ------------- ------------- -------------
Comprehensive income (loss) $ 39,436 $ 19,465 $ (107,008) $ 21,792
============= ============= ============= =============
12. On May 13, 2002, the Company completed an underwritten primary offering of
17.25 million shares of Tower Automotive, Inc. common stock, which includes
the exercise of the underwriters' over-allotment option to acquire 2.25
million shares. The net proceeds from the offering were approximately
$222.9 million, based on an offering price of $13.75 per share. The Company
has used the net proceeds to repay borrowings under its Credit Agreement
(see note 4).
13. In April 2002, the Company entered into a sale-leaseback transaction
on seven of its business unit facilities in the United States. This
transaction resulted in net proceeds of $50.3 million after reflecting
prepaid lease payments retained by the lessor. The Company recorded a loss
on the sale of the buildings of $0.3 million in the second quarter 2002,
which is classified in other expense in the condensed consolidated
statement of operations. The lease requires quarterly payments of
approximately $1.6 million through 2020 and is accounted for as an
operating lease.
14. On June 29, 2001, the FASB issued SFAS No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Intangible Assets." Major provisions of
these Statements are as follows: all business combinations initiated after
June 30, 2001 must use the purchase method of accounting; the pooling of
interest method of accounting is prohibited except for transactions
initiated before July 1, 2001; intangible assets acquired in a business
combination must be recorded separately from goodwill if they arise from
contractual or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or liability; goodwill
and intangible assets with indefinite lives are not amortized but tested
for impairment annually, except in certain circumstances, and whenever
there is an impairment indicator; all acquired goodwill must
-13-
be assigned to reporting units for purposes of impairment testing;
effective January 1, 2002, goodwill is no longer subject to amortization.
The Company adopted the new rules on accounting for goodwill and other
intangible assets as of January 1, 2002. Application of the nonamortization
provisions of the Statements is expected to result in a reduction in
goodwill amortization expense of approximately $16 million in fiscal 2002,
after reflecting 2001 goodwill writedowns of $196.1 million.
Under SFAS 142, the Company designated four reportable units: United
States/Canada, Europe, Asia and South America/Mexico. Preliminary
procedures under SFAS 142 indicated an excess of book value over fair value
for the Asia and South America/Mexico reportable units. During the second
quarter 2002, the Company completed its formal valuation procedures under
SFAS 142, utilizing a combination of valuation techniques including the
discounted cash flow approach and the market multiple approach. As a result
of this valuation process as well as the application of the remaining
provision of SFAS 142, the Company recorded a transitional impairment loss
of $112.8 million, representing the write-off of all of the Company's
existing goodwill in the reportable units of Asia ($29.7 million) and South
America/Mexico ($83.1 million). The write-off was recorded as a cumulative
effect of a change in accounting principle in the Company's condensed
consolidated statements of operations for the six months ended June 30,
2002. There was no tax impact since the Company recorded a $24.2 million
tax valuation allowance for the deductible portion of the goodwill written
off in the reportable unit of South America/Mexico. The Company determined
that it was appropriate to record a valuation allowance against the entire
amount of the $24.2 million deferred tax asset recognized in adopting SFAS
142 given the uncertainty of realization and the lack of income in the
reportable unit. The Asia goodwill was not deductible for tax purposes.
The following table represents the impact of the transitional impairment
loss on the first quarter 2002 results as previously reported:
THREE MONTHS ENDED
MARCH 31, 2002
------------------------------
AS REPORTED AS ADJUSTED
------------- -------------
Loss before cumulative effect of change in accounting
principle $ (34,517) $ (34,517)
Cumulative effect of change in accounting principle -- (112,786)
------------- -------------
Net loss $ (34,517) $ (147,303)
============= =============
Basic loss per common share:
Loss before cumulative effect of change in accounting
principle $ (0.72) $ (0.72)
Cumulative effect of change in accounting principle -- (2.33)
------------- -------------
Net loss $ (0.72) $ (3.05)
============= =============
Basic shares outstanding 48,253 48,253
============= =============
Diluted loss per common share:
Loss before cumulative effect of change in accounting
principle $ (0.72) $ (0.72)
Cumulative effect of change in accounting principle -- (2.33)
------------- -------------
Net loss $ (0.72) $ (3.05)
============= =============
Diluted shares outstanding 48,253 48,253
============= =============
-14-
Under the adoption of SFAS No. 142, the Company discontinued the
amortization of goodwill. The following table presents a reconciliation of
net income and earnings per share adjusted for the exclusion of goodwill
amortization, net of tax (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Reported net income (loss) $ 22,891 $ 16,672 $ (124,412) $ 29,533
Add: Goodwill amortization, net of
tax -- 3,164 -- 6,387
------------- ------------- ------------- -------------
Adjusted net income (loss) $ 22,891 $ 19,836 $ (124,412) $ 35,920
============= ============= ============= =============
Reported basic earnings (loss) per
common share $ 0.40 $ 0.38 $ (2.35) $ 0.67
Add: Goodwill amortization, net of
tax -- 0.07 -- 0.14
------------- ------------- ------------- -------------
Adjusted basic earnings (loss) per
common share $ 0.40 $ 0.45 $ (2.35) $ 0.81
============= ============= ============= =============
Reported diluted earnings (loss) per
common share $ 0.37 $ 0.35 $ (2.35) $ 0.63
Add: Goodwill amortization, net of
tax -- 0.05 -- 0.11
------------- ------------- ------------- -------------
Adjusted diluted earnings (loss) per
common share $ 0.37 $ 0.40 $ (2.35) $ 0.74
============= ============= ============= =============
The change in the carrying amount of goodwill for the six months ended June
30, 2002, by operating segment, are as follows (in thousands):
UNITED STATES/
CANADA INTERNATIONAL TOTAL
------------- ------------- -------------
Balance at December 31, 2001 $ 337,527 $ 229,553 $ 567,080
Transitional impairment loss -- (112,786) (112,786)
Currency translation adjustment -- 12,744 12,744
------------- ------------- -------------
Balance at June 30, 2002 $ 337,527 $ 129,511 $ 467,038
============= ============= =============
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets," which is effective for fiscal years beginning after
December 15, 2001. The provisions of this Statement provide a single
accounting model for impairment of long-lived assets. The adoption of SFAS
No. 144 on January 1, 2002 did not have a material impact on the Company's
financial position or its results of operations.
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." The Statement rescinds SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an
amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." SFAS No. 145 recognizes that the use of
debt extinguishment can be a part of the risk management strategy of a
company and hence, the classification of all early extinguishment of debt
as an extraordinary item may no longer be appropriate. In addition, the
Statement amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions.
Provisions of this Statement, as they relate to Statement No. 13, are to be
effective for transactions occurring after May 15, 2002. Provisions, which
-15-
relate to Statement No. 4, are effective for fiscal years beginning after
May 15, 2002. SFAS No. 145 is not expected to materially impact the
Company's consolidated financial statements.
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial SFAS No. 146, "Accounting for Exit or Disposal Activities". SFAS
No. 146 will be effective for the Company for disposal activities initiated
after December 31, 2002. The Company is in the process of evaluating the
effect that adopting SFAS 146 will have on its financial statements.
15. 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 notes issued by R. J. Tower Corporation, on a
joint and several basis. Tower Automotive, Inc. (the parent company) has
also fully and unconditionally guaranteed the note and is reflected as the
Parent Guarantor in the consolidating financial information. The
Non-Guarantors include the Company's foreign subsidiaries. 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 JUNE 30, 2002
(AMOUNTS IN THOUSANDS - UNAUDITED)
R. J. TOWER PARENT GUARANTOR NON-GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------- ------------ ------------
ASSETS
----------------------------------------------------
Current assets:
Cash and cash equivalents $ -- $ -- $ 872 $ 27,775 $ -- $ 28,647
Accounts receivable, net -- -- 190,897 139,720 -- 330,617
Inventories, net -- -- 65,805 38,375 -- 104,180
Prepaid tooling and other -- -- 72,258 50,143 -- 122,401
----------- ----------- ----------- ----------- ----------- -----------
Total current assets -- -- 329,832 256,013 -- 585,845
----------- ----------- ----------- ----------- ----------- -----------
Property, plant and equipment, net -- -- 678,555 316,332 -- 994,887
Investments in joint ventures 250,749 -- 2,134 -- -- 252,883
Investment in subsidiaries 382,378 566,587 -- -- (948,965) --
Goodwill and other assets, net 6,798 9,054 459,048 191,643 -- 666,543
----------- ----------- ----------- ----------- ----------- -----------
$ 639,925 $ 575,641 $ 1,469,569 $ 763,988 $ (948,965) $ 2,500,158
=========== =========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
----------------------------------------------------
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 5,820 $ -- $ 5,427 $ 121,733 $ -- $ 132,980
Accounts payable -- -- 289,870 129,652 -- 419,522
Accrued liabilities 5,994 8,532 175,932 91,697 -- 282,155
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities 11,814 8,532 471,229 343,082 -- 834,657
----------- ----------- ----------- ----------- ----------- -----------
Long-term debt, net of current maturities 345,911 -- 43,765 44,554 -- 434,230
Obligations under capital leases, net of current
maturities -- -- 611 11,344 -- 11,955
Convertible subordinated notes -- 199,984 -- -- -- 199,984
Due to/(from) affiliates (300,537) (458,212) 719,324 39,425 -- --
Other noncurrent liabilities -- -- 142,238 51,757 -- 193,995
----------- ----------- ----------- ----------- ----------- -----------
Total noncurrent liabilities 45,374 (258,228) 905,938 147,080 -- 840,164
----------- ----------- ----------- ----------- ----------- -----------
Mandatorily redeemable trust convertible preferred
securities -- 258,750 -- -- -- 258,750
Stockholders' investment 583,744 566,587 106,874 275,504 (948,965) 583,744
Accumulated other comprehensive loss (1,007) -- (14,472) (1,678) -- (17,157)
----------- ----------- ----------- ----------- ----------- -----------
Total stockholders' investment 582,737 566,587 92,402 273,826 (948,965) 566,587
----------- ----------- ----------- ----------- ----------- -----------
$ 639,925 $ 575,641 $ 1,469,569 $ 763,988 $ (948,965) $ 2,500,158
=========== =========== =========== =========== =========== ===========
-17-
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-
R. J. TOWER PARENT GUARANTOR GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- --------- ------------ ------------
Revenues $ -- $ -- $ 536,617 $ 214,255 $ -- $ 750,872
Cost of sales -- -- 473,481 184,475 -- 657,956
--------- --------- --------- --------- --------- ---------
Gross profit -- -- 63,136 29,780 -- 92,916
Selling, general and administrative expenses -- -- 27,652 9,715 -- 37,367
Amortization expense 437 324 -- 359 -- 1,120
--------- --------- --------- --------- --------- ---------
Operating income (loss) (437) (324) 35,484 19,706 -- 54,429
Interest expense, net 13,125 2,499 (1,838) 2,492 -- 16,278
Other expense 1,993 -- 946 -- -- 2,939
--------- --------- --------- --------- --------- ---------
Income (loss) before provision for
income taxes, equity in earnings of
joint ventures and minority interest (15,555) (2,823) 36,376 17,214 -- 35,212
Provision (benefit) for income taxes (5,444) (988) 12,735 6,021 -- 12,324
--------- --------- --------- --------- --------- ---------
Income (loss) before equity in earnings
of joint ventures and minority interest (10,111) (1,835) 23,641 11,193 -- 22,888
Equity in earnings of joint ventures and 37,676 27,565 -- -- (60,964) 4,277
subsidiaries
Minority interest, net -- (2,839) -- (1,435) -- (4,274)
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 27,565 $ 22,891 $ 23,641 $ 9,758 $ (60,964) $ 22,891
========= ========= ========= ========= ========= =========
-18-
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-
R. J. TOWER PARENT GUARANTOR GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ -----------
Revenues $ -- $ -- $ 1,015,821 $ 403,158 $ -- $ 1,418,979
Cost of sales -- -- 908,167 348,887 -- 1,257,054
----------- ----------- ----------- ----------- ----------- -----------
Gross profit -- -- 107,654 54,271 -- 161,925
Selling, general and administrative expenses -- -- 49,113 21,161 -- 70,274
Amortization expense 868 645 -- 586 -- 2,099
Restructuring and asset impairment charge -- -- 71,757 3,650 -- 75,407
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) (868) (645) (13,216) 28,874 -- 14,145
Interest expense, net 24,606 4,999 (1,418) 5,231 -- 33,418
Other expense 1,993 __ 946 __ __ 2,939
Gain on sale of plant -- -- -- (3,839) -- (3,839)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before provision for
income taxes, equity in earnings of
joint ventures and minority interest (27,467) (5,644) (12,744) 27,482 -- (18,373)
Provision (benefit) for income taxes (9,613) (1,975) (4,459) 9,615 -- (6,432)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before equity in earnings
of joint ventures and minority interest (17,854) (3,669) (8,285) 17,867 -- (11,941)
Equity in earnings of joint ventures and (97,212) (115,066) -- -- 220,940 8,662
subsidiaries
Minority interest, net -- (5,677) -- (2,670) -- (8,347)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative effect
of change in accounting principle (115,066) (124,412) (8,285) 15,197 220,940 (11,626)
Cumulative effect of change in accounting principle -- -- -- (112,786) -- (112,786)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ (115,066) $ (124,412) $ (8,285) $ (97,589) $ 220,940 $ (124,412)
=========== =========== =========== =========== =========== ===========
-19-
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-
R. J. TOWER PARENT GUARANTOR GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ -----------
OPERATING ACTIVITIES:
Net income (loss) $ (115,066) $ (124,412) $ (8,285) $ (97,589) $ 220,940 $ (124,412)
Adjustments required to reconcile net income (loss)
to net cash provided by (used in)
operating activities
Cumulative effect of change in accounting
principle -- -- -- 112,786 -- 112,786
Restructuring and asset impairment charge -- -- 71,757 3,650 -- 75,407
Depreciation and amortization 868 645 49,173 16,785 -- 67,471
Deferred income tax provision (benefit) -- -- (16,434) 1,344 -- (15,090)
Deferred compensation plans -- -- 1,223 -- -- 1,223
Gain on sale of plant -- -- -- (3,839) -- (3,839)
Equity in earnings of joint ventures, net (8,662) -- -- -- -- (8,662)
Changes in working capital and other
operating items 266,049 4,366 (276,917) 21,443 (100,517) (85,576)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities 143,189 (119,401) (179,483) 54,580 120,423 19,308
----------- ----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Acquisitions and other, net 36,305 (105,502) 147,577 4,004 (120,423) (38,039)
Capital expenditures, net -- -- (15,281) (53,761) -- (69,042)
Proceeds from sale of fixed assets -- -- 50,313 -- -- 50,313
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities 36,305 (105,502) 182,609 (49,757) (120,423) (56,768)
----------- ----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings 899,858 -- 90 86,308 -- 986,256
Repayments of debt (1,081,745) -- (2,395) (82,679) -- (1,166,819)
Proceeds from the issuance of common stock -- 224,903 -- -- -- 224,903
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used for) financing
activities (181,887) 224,903 (2,305) 3,629 -- 44,340
----------- ----------- ----------- ----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,393) -- 821 8,452 -- 6,880
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,393 -- 51 19,323 -- 21,767
----------- ----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ -- $ -- $ 872 $ 27,775 $ -- $ 28,647
=========== =========== =========== =========== =========== ===========
-20-
TOWER AUTOMOTIVE INC.
CONSOLIDATING BALANCE SHEETS AT DECEMBER 31, 2001
(AMOUNTS IN THOUSANDS)
R. J. TOWER PARENT GUARANTOR NON-GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------- ------------ ------------
ASSETS
-------------------------------------------------
Current assets:
Cash and cash equivalents $ -- $ -- $ 2,444 $ 19,323 $ -- $ 21,767
Accounts receivable, net -- -- 140,402 76,236 -- 216,638
Inventories, net -- -- 72,003 40,533 -- 112,536
Prepaid tooling and other -- -- 52,238 36,991 -- 89,229
----------- ----------- ----------- ----------- ----------- -----------
Total current assets -- -- 267,087 173,083 -- 440,170
----------- ----------- ----------- ----------- ----------- -----------
Property, plant and equipment, net -- -- 824,437 295,822 -- 1,120,259
Investments in joint ventures 237,834 -- 4,177 1,187 -- 243,198
Investment in subsidiaries 744,808 447,408 -- -- (1,192,216) --
Goodwill and other assets, net 9,659 9,700 428,186 282,264 -- 729,809
----------- ----------- ----------- ----------- ----------- -----------
$ 992,301 $ 457,108 $ 1,523,887 $ 752,356 $(1,192,216) $ 2,533,436
=========== =========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
-------------------------------------------------
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 67,381 $ -- $ 2,723 $ 101,979 $ -- $ 172,083
Accounts payable -- -- 263,800 105,110 -- 368,910
Accrued liabilities 7,234 4,167 203,832 63,729 -- 278,962
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities 74,615 4,167 470,355 270,818 -- 819,955
----------- ----------- ----------- ----------- ----------- -----------
Long-term debt, net of current maturities 472,373 -- 44,765 83,946 -- 601,084
Obligations under capital leases, net of
current maturities -- -- 4,620 -- -- 4,620
Convertible subordinated notes -- 199,984 -- -- -- 199,984
Due to/(from) affiliates (27,392) (453,201) 428,037 52,556 -- --
Other noncurrent liabilities -- -- 150,639 50,996 -- 201,635
----------- ----------- ----------- ----------- ----------- -----------
Total noncurrent liabilities 444,981 (253,217) 628,061 187,498 -- 1,007,323
----------- ----------- ----------- ----------- ----------- -----------
Mandatorily redeemable trust convertible
preferred securities -- 258,750 -- -- -- 258,750
Stockholders' investment 481,969 447,408 439,943 304,865 (1,192,216) 481,969
Accumulated other comprehensive loss (9,264) -- (14,472) (10,825) -- (34,561)
----------- ----------- ----------- ----------- ----------- -----------
Total stockholders' investment 472,705 447,408 425,471 294,040 (1,192,216) 447,408
----------- ----------- ----------- ----------- ----------- -----------
$ 992,301 $ 457,108 $ 1,523,887 $ 752,356 $(1,192,216) $ 2,533,436
=========== =========== =========== =========== =========== ===========
-21-
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-
R. J. TOWER PARENT GUARANTOR GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ -----------
Revenues $ 19,946 $ -- $ 432,190 $ 190,271 $ -- $ 642,407
Cost of sales 3,390 -- 384,329 169,427 -- 557,146
--------- --------- --------- --------- --------- ---------
Gross profit 16,556 -- 47,861 20,844 -- 85,261
Selling, general and administrative expenses 1,172 -- 24,775 9,073 -- 35,020
Amortization expense 481 324 3,633 1,692 -- 6,130
--------- --------- --------- --------- --------- ---------
Operating income (loss) 14,903 (324) 19,453 10,079 -- 44,111
Interest expense, net 17,158 1,879 (2,628) 3,712 -- 20,121
--------- --------- --------- --------- --------- ---------
Income (loss) before provision for
income taxes, equity earnings of joint
ventures and minority interest (2,255) (2,203) 22,081 6,367 -- 23,990
Provision (benefit) for income taxes (879) (859) 8,611 2,571 -- 9,444
--------- --------- --------- --------- --------- ---------
Income (loss) before equity in earnings
of joint ventures and minority interest (1,376) (1,344) 13,470 3,796 -- 14,546
Equity in earnings of joint ventures and
subsidiaries 22,056 20,680 -- -- (37,946) 4,790
Minority interest, net -- (2,664) -- -- -- (2,664)
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 20,680 $ 16,672 $ 13,470 $ 3,796 $ (37,946) $ 16,672
========= ========= ========= ========= ========= =========
-22-
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-
R. J. TOWER PARENT GUARANTOR GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ -----------
Revenues $ 38,569 $ -- $ 832,066 $ 400,148 $ -- $ 1,270,783
Cost of sales 12,843 -- 739,452 353,956 -- 1,106,251
----------- ----------- ----------- ----------- ----------- -----------
Gross profit 25,726 -- 92,614 46,192 -- 164,532
Selling, general and administrative expenses 1,514 -- 50,506 18,299 -- 70,319
Amortization expense 1,014 645 7,250 3,299 -- 12,208
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) 23,198 (645) 34,858 24,594 -- 82,005
Interest expense, net 35,676 3,551 (6,340) 6,956 -- 39,843
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before provision for
income taxes, equity earnings of joint
ventures and minority interest (12,478) (4,196) 41,198 17,638 -- 42,162
Provision (benefit) for income taxes (4,866) (1,637) 16,067 6,908 -- 16,472
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before equity in earnings
of joint ventures and minority interest (7,612) (2,559) 25,131 10,730 -- 25,690
Equity in earnings of joint ventures and 45,032 37,420 -- -- (73,281) 9,171
subsidiaries
Minority interest, net -- (5,328) -- -- -- (5,328)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 37,420 $ 29,533 $ 25,131 $ 10,730 $ (73,281) $ 29,533
=========== =========== =========== =========== =========== ===========
-23-
TOWER AUTOMOTIVE INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001
(AMOUNTS IN THOUSANDS - UNAUDITED)
NON-
R. J. TOWER PARENT GUARANTOR GUARANTOR
CORPORATION GUARANTOR COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ------------ -----------
OPERATING ACTIVITIES:
Net income $ 37,420 $ 29,533 $ 25,131 $ 10,730 $ (73,281) $ 29,533
Adjustments required to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 3,010 645 59,823 17,547 -- 81,025
Deferred income tax provision 4,872 -- 3,601 (1,010) -- 7,463
Equity in earnings of joint ventures, net (9,171) -- -- -- -- (9,171)
Changes in other operating items 343,117 381 (8,614) (8,527) (143,968) 182,389
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities 379,248 30,559 79,941 18,740 (217,249) 291,239
----------- ----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Acquisitions and other, net (183,281) (31,471) (6,861) -- 217,249 (4,364)
Capital expenditures, net (3,802) -- (73,232) (25,039) -- (102,073)
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities (187,083) (31,471) (80,093) (25,039) 217,249 (106,437)
----------- ----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings 1,133,522 -- -- 48,456 -- 1,181,978
Repayments of debt (1,305,753) -- (1,314) (52,813) -- (1,359,880)
Proceeds from the issuance of common stock -- 912 -- -- -- 912
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used for) financing
activities (172,231) 912 (1,314) (4,357) -- (176,990)
----------- ----------- ----------- ----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 19,934 -- (1,466) (10,656) -- 7,812
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD (18,772) -- 1,575 20,570 -- 3,373
----------- ----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,162 $ -- $ 109 $ 9,914 $ -- $ 11,185
=========== =========== =========== =========== =========== ===========
-24-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2002 TO THE THREE MONTHS ENDED
JUNE 30, 2001
Revenues. Revenues for the second quarter of 2002 were $750.9 million, a 16.9
percent increase, compared to $642.4 million for the prior period. The increase
was comprised of volume increases of $109.0 million, primarily in the following
platforms: Dodge Ram Van, Cadillac CTS, Ford Explorer and Econoline, and Lincoln
LS/Jaguar S-Type as well as incremental revenues in the 2002 period of $11.4
million associated with the consolidation of Tower Golden Ring, which first
occurred in the third quarter of 2001. These increases were offset by a decline
in revenues of $11.9 million, which were attributable to the sale of the Iwahri,
Korea plant to an affiliate of Hyundai.
Cost of Sales. Cost of sales as a percent of revenues for the second quarter of
2002 was 87.6 percent compared to 86.7 percent for the prior period. Gross
profit margin declined in the 2002 period compared to the 2001 period despite
the revenue increase due to the effect of customer productivity price reductions
beginning in the first quarter of 2002 and changes in product mix on light
truck, sport utility and other models served by the Company. The decline in the
gross profit margin is also attributable to a decline in profitability on the
Ford Explorer and Dodge Ram pickup platforms, increased operating lease costs in
the 2002 period and operational inefficiencies associated with the production of
the new generation Ford Explorer frame.
S, G & A Expenses. Selling, general and administrative expenses were $37.4
million, or 5.0 percent of revenues, for the second quarter of 2002 compared to
$35.0 million, or 5.4 percent of revenues, for the prior period. This increase
was due primarily to $1.6 million in increased program management costs related
to new programs and $0.8 million of incremental costs associated with the
Company's consolidation of Tower Golden Ring.
Amortization Expense. Amortization expense for the second quarter of 2002 was
$1.1 million compared to $6.1 million for the prior period. The decrease was due
to the adoption of the requirements of SFAS No. 142, and as a result, beginning
January 1, 2002, the Company no longer records amortization expense of goodwill.
Goodwill amortization for the second quarter of 2001 was $5.2 million.
Interest Expense, net. Interest expense (net of interest income) for the second
quarter of 2002 was $16.3 million compared to $20.1 million for the prior
period. Interest expense decreased due to the (i) decreased borrowings during
the second quarter of 2002 compared to the second quarter of 2001 of $4.0
million, and (ii) decreased interest rates and decreased spreads associated with
the Credit Agreement of $2.0 million, offset by (iii) decreased capitalized
interest on construction projects in the 2002 period of $2.2 million.
Income Taxes. The effective income tax rate was 35.0 percent and 39.4 percent
for the second quarters of 2002 and 2001, 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 $4.3 million and $4.8 million for the three months ended June
30, 2002 and 2001, respectively. These amounts represent the Company's share of
the earnings from its joint venture interests in Metalsa, Yorozu, and DTA
Development, in the 2002 period and Metalsa, Tower Golden Ring, Yorozu, and DTA
Development in the 2001 period. The Company's share of joint venture earnings in
Metalsa and Yorozu has increased quarter over quarter by $2.5 million, which was
offset by a reduction in equity earnings of $3.0 million due to the
consolidation of Tower Golden Ring beginning in third quarter of 2001.
Minority Interest, net. Minority interest, net of tax, for the second quarter of
2002 represents dividends, net of income tax benefits, on the 6 3/4% Trust
Preferred Securities ("Preferred Securities"), the minority interest held by the
40 percent joint venture partners in Tower Golden Ring, and the minority
interest held by the 34 percent
-25-
joint venture partner in Seojin. Minority interest for second quarter of 2001
represents dividends, net of income tax benefits, on the Preferred Securities.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2002 TO THE SIX MONTHS ENDED JUNE
30, 2001
Revenues. Revenues for the six months ended June 30, 2002 were $1,419.0 million,
an 11.7 percent increase, compared to $1,270.8 million for the prior period. The
increase was comprised of volume increases of $166.4 million, primarily in the
following platforms: Dodge Ram Van, Cadillac CTS, Ford Explorer and Econoline,
and Lincoln LS/Jaguar S-Type as well as incremental revenues in the 2002 period
of $23.3 million associated with the consolidation of Tower Golden Ring, which
first occurred in the third quarter of 2001. These increases were offset by a
decline in revenues of $41.5 million, which were attributable to the sale of the
Iwahri, Korea plant to an affiliate of Hyundai.
Cost of Sales. Cost of sales as a percent of revenues for the six months ended
June 30, 2002 was 88.6 percent compared to 87.1 percent for the prior period.
Gross profit margin declined in the 2002 period compared to the 2001 period
despite the revenue increase due to the effect of customer productivity price
reductions beginning in the first quarter of 2002 and changes in product mix on
light truck, sport utility and other models served by the Company. The decline
in the gross profit margin is also attributable to a decline in profitability on
the Ford Explorer and Dodge Ram pickup platforms, increased operating lease
costs in the 2002 period and operational inefficiencies associated with the
production of the new generation Ford Explorer frame.
S, G & A Expenses. Selling, general and administrative expenses were $70.3
million, or 5.0 percent of revenues, for the six months ended June 30, 2002
compared to $70.3 million, or 5.5 percent of revenues, for the prior period. The
Company has experienced $3.3 million in decreased costs due to reductions in
headcount in the consolidation of the Company's engineering and support
activities, offset by $1.6 million in increased program management costs and
incremental costs of $1.7 million associated with the Company's consolidation of
Tower Golden Ring.
Amortization Expense. Amortization expense for the six months ended June 30,
2002 was $2.1 million compared to $12.2 million for the prior period. The
decrease was due to the adoption of the requirements of SFAS No. 142, and as a
result, beginning January 1, 2002, the Company no longer records amortization
expense of goodwill. Goodwill amortization for the six months ended June 30,
2001 was $10.5 million.
Interest Expense, net. Interest expense (net of interest income) for the six
months ended June 30, 2002 was $33.4 million compared to $39.8 million for the
prior period. Interest expense decreased due to the (i) decreased borrowings
during the first six months of 2002 compared to the first six months of 2001 of
$7.8 million, and (ii) decreased interest rates and decreased spreads associated
with the Credit Agreement of $4.8 million, offset by (iii) decreased capitalized
interest on construction projects in the 2002 period of $5.2 million and (iv)
decreased interest income in the 2002 period of $1.0 million.
Income Taxes. The effective income tax rate was 35.0 percent and 39.1 percent
for the second quarters of 2002 and 2001, 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 $8.7 million and $9.2 million for the six months ended June 30,
2002 and 2001, respectively. These amounts represent the Company's share of the
earnings from its joint venture interests in Metalsa, Yorozu, and DTA
Development, in the 2002 period and Metalsa, Tower Golden Ring, Yorozu, and DTA
Development in the 2001 period. The Company's share of joint venture earnings in
Metalsa and Yorozu has increased by $4.8 million, which was offset by a
reduction in equity earnings of $5.3 million due to the consolidation of Tower
Golden Ring beginning in third quarter of 2001.
Minority Interest, net. Minority interest, net of tax, for the six months ended
June 30, 2002 represents dividends, net of income tax benefits, on the Preferred
Securities, the minority interest held by the 40 percent joint venture partners
in Tower Golden Ring, and the minority interest held by the 34 percent joint
venture
-26-
partner in Seojin. Minority interest for six months ended June 30, 2001
represents dividends, net of income tax benefits, on the Preferred Securities.
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, as automotive production
declined from previous levels, the Company focused its efforts on reducing the
capacity of the enterprise and improving the efficiency of its continuing
operations. During the 18 month period beginning in the fourth quarter of 2000,
the Company: (i) divested itself of 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, and (iv)
reorganized the management of its U.S. and Canada region. These were
accomplished through three restructurings, described in more detail below. The
first restructuring was initiated in October 2000 (the "2000 Plan"), the second
restructuring was initiated in October 2001 (the "2001 Plan"), with the
discontinuance of the remaining stamping and ancillary processes currently
performed at the Company's Milwaukee Press Operations announced in January 2002
(the "2002 Plan").
The restructuring and asset impairment charges consist of both restructuring
charges and non-restructuring related asset impairments, major components of
which are discussed in the sections below. The following table summarizes the
principal components of these charges (in millions):
2002 PLAN 2001 PLAN 2000 PLAN
----------- ---------- ----------
RESTRUCTURING AND RELATED ASSET IMPAIRMENTS
Asset impairments $ 47.2 $ 127.4 $ 103.7
Severance and outplacement costs 8.4 24.6 25.2
Loss contracts -- -- 8.1
Other exit costs 19.8 26.1 4.3
----------- ---------- ----------
Total 75.4 178.1 141.3
OTHER GOODWILL AND ASSET IMPAIRMENTS
Goodwill writedown -- 108.6 --
Other asset impairments -- 50.7 --
Investment impairment -- 46.3 --
----------- ---------- ----------
Total -- 205.6 --
----------- ---------- ----------
TOTAL RESTRUCTURING AND ASSET IMPAIRMENT CHARGES $ 75.4 $ 383.7 $ 141.3
=========== ========== ==========
Non-cash charges $ 47.2 $ 333.0 $ 103.7
----------- ---------- ----------
Cash charges $ 28.2 $ 50.7 $ 37.6
----------- ---------- ----------
Under the 2000 Plan, the Company realized cash savings of approximately $32
million in 2001 as a result of reductions in payroll costs directly related to
restructuring activities. These cash savings from permanent payroll reductions
are expected to be realized annually. Under the 2001 Plan, the Company has
realized cash savings of approximately $10 million through June 30, 2002, and
expects to realize additional cash savings of approximately $24 million through
the remainder of 2002 attributable to permanent payroll reductions. Under the
2002 Plan, the Company has realized cash savings of approximately $2 million
through June 30, 2002, and expects to realize additional cash savings of
approximately $9 million through the remainder of 2002 attributable to permanent
payroll reductions with full realization of cash savings beginning in 2003.
-27-
MILWAUKEE PRESS OPERATIONS:
On January 31, 2002, the Company announced that it would discontinue the
remaining stamping and ancillary processes then performed at its Milwaukee Press
Operations and relocate the remaining work to other Tower locations or Tier II
suppliers. The Company expects to complete the transfer process during the third
quarter of 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
over the next 12 months pertaining to the 2002 Plan.
The 2002 Plan charge includes costs associated with asset impairments, severance
and outplacement costs related to employee terminations and certain other exit
costs. These activities are anticipated to result in a reduction of
approximately 490 colleagues in the Company's Milwaukee, Wisconsin manufacturing
location. Through June 30, 2002, the Company had eliminated approximately 130
colleagues pursuant to the 2002 Plan. The estimated restructuring charge does
not cover certain aspects of the 2002 Plan, including movement of equipment and
employee relocation and training. These costs will be recognized in future
periods as incurred.
The asset impairments consist of long-lived assets, including fixed assets,
buildings and manufacturing equipment from the facilities the Company intends to
dispose of or discontinue. The carrying value of the long-lived assets written
off was $47.2 million. Fixed assets that will be disposed of as part of the 2002
Plan were written down to their estimated residual values. For assets that will
be sold currently, the Company measured impairment based on estimated proceeds
on the sale of the facilities and equipment. These asset impairments have arisen
as a consequence of the Company making the decision to exit these activities
during the first quarter of 2002.
As of June 30, 2002, the Company anticipates future cash payments of $12.9
million and other future obligations of $12.4 million under the 2002 Plan.
The accrual for operational realignment and other costs is included in accrued
liabilities in the accompanying consolidated balance sheet as of June 30, 2002.
The table below summarizes the accrued operational realignment and other charges
through June 30, 2002 (in millions):
SEVERANCE AND
ASSET OUTPLACEMENT OTHER EXIT
IMPAIRMENTS COSTS COSTS TOTAL
----------- ------------- ---------- ----------
Balance at December 31, 2001 $ -- $ -- $ -- $ --
First quarter 2002 provision 47.2 8.4 19.8 75.4
Cash charges -- (1.7) (1.2) (2.9)
Non-cash charges (47.2) -- -- (47.2)
----------- ------------- ---------- ----------
Balance at June 30, 2002 $ -- $ 6.7 $ 18.6 $ 25.3
=========== ============= ========== ==========
SEBEWAING AND MILWAUKEE PRESS OPERATIONS:
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 these realignment efforts (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
over the next 12 months pertaining to the 2001 Plan.
The 2001 Plan charge includes costs associated with asset impairments, severance
and outplacement costs related to employee terminations and certain other exit
costs. These activities are anticipated to result 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. Through June 30, 2002, the Company had
eliminated approximately 670 colleagues pursuant to the
-28-
2001 Plan. The estimated restructuring charge does not cover certain aspects of
the 2001 Plan, including movement of equipment and employee relocation and
training. These costs are being recognized in future periods as incurred.
As of June 30, 2002, the Company anticipates future cash payments of $24.8
million and other future obligations of $13.1 million under the 2001 Plan.
The accrual for operational realignment and other costs, which was established
in the fourth quarter of 2001, is included in accrued liabilities in the
accompanying consolidated balance sheet as of June 30, 2002. The table below
summarizes the accrued operational realignment and other accrued charges through
June 30, 2002 (in millions):
SEVERANCE AND
OUTPLACEMENT OTHER EXIT
COSTS COSTS TOTAL
------------ ---------- ----------
Balance at December 31, 2001 $ 23.9 $ 31.4 $ 55.3
Cash charges (12.0) (5.4) (17.4)
------------ ---------- ----------
Balance at June 30, 2002 $ 11.9 $ 26.0 $ 37.9
============ ========== ==========
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 six months
ended June 30, 2002, the Company generated $19.3 million of cash from
operations. This compares with $291.2 million generated during the same period
in 2001. Net income before depreciation and amortization, deferred income taxes,
deferred compensation plans, gain on sale of plant, equity in joint venture
earnings, restructuring and asset impairment charges, and cumulative effect of
change in accounting principle was $104.9 million and $108.8 million for the
2002 and 2001 periods, respectively. Operating cash flow was reduced by $20.3
million in 2002 and $12.9 million in 2001 for cash restructuring payments, and
was decreased as a result of net tax payments of $0.6 million and $3.3 million
in the 2002 and 2001 periods, respectively. In total, working capital and other
operating items decreased operating cash flow by $85.6 million in the 2002
period and increased operating cash flow by $182.4 million during the 2001
period.
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 Company recorded a loss on the
sale of the buildings of $0.3 million in the second quarter 2002, which is
classified in other expense in the condensed consolidated statement of
operations. 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 $222.9 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 $2.0 million and $0.9
million to cash flow for the 2002 and 2001 periods, respectively.
In June 2002, the Company completed an amendment to its senior credit facility
(the "Credit Agreement") that permanently reduces borrowings under the facility
and defers the start of the scheduled repayment of its remaining borrowings
until March 2005. The amendment reduces the former $1.15 billion facility to a
$725 million facility by voluntarily repaying $200 million of the $325 million
term loan portion of the facility with proceeds from the Company's recent
follow-on stock offering, and reducing capacity under the revolving credit
facility from $825 million to $600 million. The Credit Agreement also includes a
multi-currency borrowing feature that allows the Company to borrow up to $500
million in certain freely tradable offshore currencies, and letter of credit
sublimits of $250 million. As of June 30, 2002, approximately $5.2
-29-
million of the outstanding borrowings are denominated in Euro. Interest on the
Credit Agreement is at the financial institutions' reference rate, LIBOR, or the
Eurodollar rate plus a margin ranging from 0 to 200 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 6.1 percent for the six months ended June 30, 2002. The Credit
Agreement has a final maturity of 2006.
At June 30, 2002, the Company had borrowed $77.3 million under its revolving
credit facility of $600 million. In order to borrow under the revolving
facility, the Company must meet certain covenant ratios. Based on these
covenants, the amount of unused availability under the revolving facility was
$288.3 million at June 30, 2002, compared to unused availability of $93.0
million at June 30, 2001. This increase in availability resulted from an
increase due to the reduction of indebtedness (as defined in the credit
agreement), offset in part by a decrease in trailing four quarter EBITDA and a
decrease in the total amount available for borrowing under the revolver facility
(due to the amendment completed in the second quarter of 2002) between the
periods. The credit agreement requires the Company to meet certain financial
covenants, including but not limited to a minimum interest coverage and maximum
leverage ratio. The covenant conditions contained in the credit agreement also
limit the Company's ability to pay dividends to the available borrowings under
the revolving facility. As of June 30, 2002, the Company was in compliance with
all debt covenants.
In 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 Credit Agreement. 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 $56.8 million during the six months ended June 30, 2002, as
compared to $106.4 million in the prior period. Net capital expenditures totaled
$69.0 million and $102.1 million for the comparable 2002 and 2001 periods,
respectively. Earnout payments and payments on notes payable made in connection
with previous acquisitions and investments in joint ventures, offset by net
proceeds received from the sale of a plant, reduced investment cash flows by
$38.1 million and $4.4 million for the 2002 and 2001 periods, respectively. Net
cash proceeds of $50.3 million from the sale of fixed assets under a
sale-leaseback transaction contributed to the 2002 investment activity cash
flows. Net cash provided by financing activities totaled $44.3 million for the
six months ended June 30, 2002 and net cash used for financing activities
totaled $177.0 million for the six months ended June 30, 2001. Proceeds from the
issuance of stock of $224.9 million and $0.9 million were offset by net
repayments of debt of $180.6 million and $177.9 million for the comparable 2002
and 2001 periods, respectively.
The Company estimates its full year gross 2002 capital expenditures will be
approximately $155 million. Where appropriate, the Company may lease rather than
purchase such equipment, which would have the effect of reducing this
anticipated level of capital expenditures.
WORKING CAPITAL
During the six months ended June 30, 2002, working capital increased by $131.0
million. This net increase is comprised of working capital increases due to a
$114.0 million increase in accounts receivable attributable to the significant
sales increase in June 2002 relative to December 2001, a $33.1 million
timing-related increase in tooling and other costs, a $6.9 million increase in
cash on hand, and a $39.1 million decrease in current maturities of long-term
debt and capital lease obligations; offset by working capital decreases due to a
$50.6 million increase in accounts payable related to the continued
renegotiation of terms with key suppliers, a $3.1 million increase in other
liabilities, and an $8.4 million decrease in inventory as a result of the
Company's continued emphasis of low inventory levels.
-30-
The Company expects to continue to maintain a low working capital position
through a continuation of the efforts discussed above and continued focus on
minimizing the length of the cash flow cycle. The Company believes that the
available borrowing capacity under its credit agreement, together with funds
generated by operations, 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.
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. Management believes that inflation has not significantly affected
the Company's business over the past 12 months. 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 effectively change the 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 June 30, 2002, Tower Automotive had total debt and obligations under capital
leases of $779.1 million. The debt is comprised of fixed rate debt of $508.7
million and floating rate debt of $270.4 million. The pre-tax earnings and cash
flows impact for the next year resulting from a one percentage point increase in
interest rates on variable rate debt would be approximately $2.7 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 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, engage in hedging programs intended to reduce the Company's exposure to
currency fluctuations. As of June 30, 2002, the Company held no foreign currency
hedge positions. Management believes the effect of a one percent appreciation or
depreciation in foreign currency rates would not materially affect the Company's
financial position or results of operations for the periods presented.
-31-
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Intangible Assets." Major provisions of these Statements are as follows: all
business combinations initiated after June 30, 2001 must use the purchase method
of accounting; the pooling of interest method of accounting is prohibited except
for transactions initiated before July 1, 2001; intangible assets acquired in a
business combination must be recorded separately from goodwill if they arise
from contractual or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged, either individually
or as part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized but tested for impairment
annually, except in certain circumstances, and whenever there is an impairment
indicator; all acquired goodwill must be assigned to reporting units for
purposes of impairment testing; effective January 1, 2002, goodwill is no longer
subject to amortization.
The Company adopted the new rules on accounting for goodwill and other
intangible assets as of January 1, 2002. Application of the nonamortization
provisions of the Statements is expected to result in a reduction in goodwill
amortization expense of approximately $16 million in fiscal 2002, after
reflecting 2001 goodwill writedowns of $196.1 million.
Under SFAS 142, the Company designated four reportable units: United
States/Canada, Europe, Asia and South America/Mexico. Preliminary procedures
under SFAS 142 indicated an excess of book value over fair value for the Asia
and South America/Mexico reportable units. During the second quarter 2002, the
Company completed its formal valuation procedures under SFAS 142, utilizing a
combination of valuation techniques including the discounted cash flow approach
and the market multiple approach. As a result of this valuation process as well
as the application of the remaining provision of SFAS 142, the Company recorded
a transitional impairment loss of $112.8 million, representing the write-off of
all of the Company's existing goodwill in the reportable units of Asia ($29.7
million) and South America/Mexico ($83.1 million). The write-off was recorded as
a cumulative effect of a change in accounting principle in the Company's
condensed consolidated statements of operations for the six months ended June
30, 2002. There was no tax impact since the Company recorded a $24.2 million tax
valuation allowance for the deductible portion of the goodwill written off in
the reportable unit of South America/Mexico. The Company determined that it was
appropriate to record a valuation allowance against the entire amount of the
$24.2 million deferred tax asset recognized in adopting SFAS 142 given the
uncertainty of realization and the lack of income in the reportable unit. The
Asia goodwill was not deductible for tax purposes.
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets," which is effective for fiscal years beginning after December
15, 2001. The provisions of this Statement provide a single accounting model for
impairment of long-lived assets. The adoption of SFAS No. 144 on January 1, 2002
did not have a material impact on the Company's financial position or its
results of operations.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections." The Statement rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," and an amendment of that
Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." SFAS No. 145 recognizes that the use of debt extinguishment can
be a part of the risk management strategy of a company and hence, the
classification of all early extinguishment of debt as an extraordinary item may
no longer be appropriate. In addition, the Statement amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. Provisions of this Statement, as they relate to
Statement No. 13, are to be effective for transactions occurring after May 15,
2002. Provisions, which relate to Statement No. 4, are effective for fiscal
years beginning after May 15, 2002. SFAS No. 145 is not expected to materially
impact the Company's consolidated financial statements.
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In July 2002, the Financial Accounting Standards Board issued Statement of
Financial SFAS No. 146, "Accounting for Exit or Disposal Activities". SFAS No.
146 will be effective for the Company for disposal activities initiated after
December 31, 2002. The Company is in the process of evaluating the effect that
adopting SFAS 146 will have on its financial statements.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this Form
10-Q, including without limitation the statements under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" 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" 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; (ii) the
Company's reliance on major customers and selected models; (iii) the cyclicality
and seasonality of the automotive market; (iv) the failure to realize the
benefits of recent acquisitions and joint ventures; (v) obtaining new business
on new and redesigned models; (vi) the Company's ability to continue to
implement its acquisition strategy; (vii) the highly competitive nature of the
automotive supply industry; (viii) the ability to achieve the anticipated volume
of production from new and planned supply programs; and (ix) such other factors
noted in this Form 10-Q with respect to the Company's businesses. 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.
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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:
The registrant held its Annual Meeting of Stockholders on May 15,
2002. All director nominees (S. A. Johnson, Dugald K. Campbell, Jurgen
M. Geissinger, Ali Jenab, F. J. Loughrey, James R. Lozelle, Georgia R.
Nelson, Scott D. Rued and Enrique Zambrano) were elected. Each of the
individuals nominated for election as a director received at least
42,400,499 votes representing 97.629% of the shares voted in the
election and received no more than 1,029,906 negative votes.
The Tower Automotive, Inc. Performance Cash Plan was approved by
the stockholders. A total of 41,302,635 affirmative votes, 2,047,692
negative votes and 80,078 abstaining votes were cast on this proposal.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Exhibit 99.2 - Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) 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 April 16,
2002, under Item 5 (Commission File No. 1-12733).
2. The Company's Current Report on Form 8-K dated June 20,
2002, under Item 4 (Commission File No. 1-12733).
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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: August 12, 2002 By /s/ Anthony A. Barone
-------------------------------------------
Anthony A. Barone
Vice President, Chief Financial Officer
(principal accounting and financial
officer)
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