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 October 2, 2005
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 0-21139
DURA AUTOMOTIVE SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 38-3185711
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2791 RESEARCH DRIVE 48309
ROCHESTER HILLS, MICHIGAN (Zip Code)
(Address of principal executive offices)
(248) 299-7500
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
The number of shares outstanding of the Registrant's Class A common stock, par
value $.01 per share, at November 1, 2005 was 18,774,948 shares.
DURA AUTOMOTIVE SYSTEMS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended October 2, 2005 and October 3,
2004 (unaudited)
Condensed Consolidated Balance Sheets at October 2, 2005
(unaudited) and December 31, 2004
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended October 2, 2005 and October 3, 2004 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
-2-
ITEM 1: FINANCIAL INFORMATION
DURA AUTOMOTIVE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS-UNAUDITED)
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
October 2, 2005 October 3, 2004 October 2, 2005 October 3, 2004
--------------- --------------- --------------- ---------------
Revenues $535,922 $616,363 $1,779,735 $1,909,742
Cost of sales 484,717 552,459 1,589,594 1,692,490
-------- -------- ---------- ----------
Gross profit 51,205 63,904 190,141 217,252
Selling, general and administrative expenses 35,843 38,606 119,041 117,333
Facility consolidation, asset impairments and
other charges 1,860 5,061 6,150 18,087
Amortization expense 101 103 317 334
-------- -------- ---------- ----------
Operating income 13,401 20,134 64,633 81,498
Interest expense, net 24,513 23,907 74,390 66,695
Loss on early extinguishment of debt -- -- 3,349 --
-------- -------- ---------- ----------
Income (loss) from continuing operations
before provision for income taxes and
minority interest (11,112) (3,773) (13,106) 14,803
Provision (benefit) for income taxes (4,638) (1,094) (4,864) 4,293
-------- -------- ---------- ----------
Income (loss) from continuing operations
and before minority interest (6,474) (2,679) (8,242) 10,510
Minority interests in income (110) -- (110) --
-------- -------- ---------- ----------
Income (loss) from continuing operations (6,584) (2,679) (8,352) 10,510
Loss from discontinued operations, net -- (18) (106) (699)
-------- -------- ---------- ----------
Net income/(loss) $ (6,584) $ (2,697) $ (8,458) $ 9,811
======== ======== ========== ==========
Basic earnings (loss) per share:
Income from continuing operations $ (0.35) $ (0.15) $ (0.45) $ 0.57
Discontinued operations -- -- -- (0.04)
-------- -------- ---------- ----------
Net income/(loss) $ (0.35) $ (0.15) $ (0.45) $ 0.53
======== ======== ========== ==========
Basic shares outstanding 18,711 18,578 18,689 18,468
======== ======== ========== ==========
Diluted earnings (loss) per share:
Income from continuing operations $ (0.35) $ (0.15) $ (0.45) $ 0.56
Discontinued operations -- -- -- (0.04)
-------- -------- ---------- ----------
Net income/(loss) $ (0.35) $ (0.15) $ (0.45) $ 0.52
======== ======== ========== ==========
Diluted shares outstanding 18,711 18,578 18,689 18,881
======== ======== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
statements.
-3-
DURA AUTOMOTIVE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
October 2, December 31,
2005 2004
----------- ------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 93,670 $ 191,568
Accounts receivable, net 356,809 273,956
Inventories 136,836 149,834
Current portion of derivative instruments -- 7,746
Other current assets 104,437 92,016
---------- ----------
Total current assets 691,752 715,120
---------- ----------
Property, plant and equipment, net 448,373 487,106
Goodwill, net 865,424 903,584
Noncurrent portion of derivative instruments -- 10,601
Deferred income taxes and other assets, net 100,148 107,510
---------- ----------
$2,105,697 $2,223,921
========== ==========
Liabilities and Stockholders' Investment
Current liabilities:
Accounts payable $ 256,739 $ 270,341
Accrued liabilities 182,942 187,254
Current maturities of long-term debt 1,294 2,968
---------- ----------
Total current liabilities 440,975 460,563
---------- ----------
Long-term debt, net of current maturities 1,123,360 1,158,714
Mandatorily redeemable convertible trust
preferred securities 55,250 55,250
Other noncurrent liabilities 139,723 141,903
Stockholders' investment:
Common stock - Class A 187 186
Additional paid-in capital 352,148 351,571
Treasury stock at cost (1,962) (2,513)
Accumulated deficit (101,800) (93,342)
Accumulated other comprehensive income 97,816 151,589
---------- ----------
Total stockholders' investment 346,389 407,491
---------- ----------
$2,105,697 $2,223,921
========== ==========
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
-4-
DURA AUTOMOTIVE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS - UNAUDITED)
Nine Months Ended
---------------------------------
October 2, 2005 October 3, 2004
--------------- ---------------
OPERATING ACTIVITIES:
Income (loss) from continuing operations $ (8,352) $ 10,510
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities -
Depreciation and amortization 61,779 64,758
Deferred financing fees 6,270 2,648
Deferred income taxes 1,169 (6)
Equity in losses of affiliates and minority interest 110 --
Changes in other operating items (113,910) (17,000)
--------- --------
Net cash (used in) provided by operating activities (52,934) 60,910
--------- --------
INVESTING ACTIVITIES:
Acquisitions, net -- (13,327)
Capital expenditures and other (48,971) (43,963)
--------- --------
Net cash used in investing activities (48,971) (57,290)
--------- --------
FINANCING ACTIVITIES:
Long-term borrowings 150,000 568
Repayments of long-term borrowings (147,281) (18,539)
Debt issuance costs (7,348) --
Deferred gain on termination of interest rate swap 11,374 --
Proceeds from issuance of common stock and
exercise of stock options 560 1,948
Other, net (39) (613)
--------- --------
Net cash provided by (used in) financing activities 7,266 (16,636)
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (3,153) 7,382
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS FROM
CONTINUING OPERATIONS (97,792) (5,634)
NET OPERATING CASH FLOW USED IN
DISCONTINUED OPERATIONS (106) (699)
CASH AND CASH EQUIVALENTS:
Beginning of period 191,568 181,268
--------- --------
End of period $ 93,670 $174,935
========= ========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest, net of capitalized interest $ 49,184 $ 45,069
Cash paid for income taxes $ 10,564 $ 8,165
The accompanying notes are an integral part of these condensed
consolidated statements.
-5-
DURA AUTOMOTIVE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
DURA Automotive Systems, Inc. (a Delaware Corporation) and subsidiaries
("DURA") ("Company") designs and manufactures components and systems for the
global automotive and recreation and specialty vehicle industries. DURA has
manufacturing and product development facilities located in the United States,
Brazil, Canada, China, Czech Republic, France, Germany, Mexico, Portugal,
Romania, Slovakia, Spain and the United Kingdom. DURA also has a presence in
Japan and India through alliances or technical licenses.
We have prepared the condensed consolidated financial statements of DURA,
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 our opinion, necessary for a fair presentation of the
results of operations and statements of financial position for the interim
periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. We believe that the disclosures
are adequate to make the information presented not misleading when read in
conjunction with the financial statements and the notes thereto included in our
Annual Report on Form 10-K, as filed with the Securities and Exchange Commission
for the period ended December 31, 2004.
Revenues and operating results for the nine months ended October 2, 2005
are not necessarily indicative of the results to be expected for the full year.
Certain 2004 amounts have been reclassified to conform to the 2005
presentation.
2. INVENTORIES
Inventories consisted of the following (in thousands):
October 2, December 31,
2005 2004
---------- ------------
Raw materials $ 70,301 $ 71,881
Work-in-process 28,722 30,192
Finished goods 37,813 47,761
-------- --------
$136,836 $149,834
======== ========
3. STOCKHOLDERS' INVESTMENT
Earnings Per Share
Basic earnings per share were computed by dividing net income by the
weighted average number of Class A and Class B common shares outstanding during
the period. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, the dilutive impact of the outstanding common stock options
was computed using the Treasury Stock Method. The impact of the outstanding
common stock options was antidilutive for the three months ended October 2, 2005
and October 3, 2004 and in the nine
-6-
months ended October 2, 2005. The Mandatorily Redeemable Convertible Trust
Preferred Securities dilution (convertible into 1,289,000 shares) was computed
using the If-converted method. These Preferred Securities were antidilutive in
the periods presented.
The computations of earnings (loss) per share for the presented periods are as
follows: (in thousands, except per share amounts):
Three months ended Nine months ended
----------------------- -----------------------
October 2, October 3, October 2, October 3,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income (loss) applicable to common
stockholders - diluted $(6,584) $(2,697) $(8,458) $ 9,811
Weighted average number of Class A
common shares outstanding 18,711 18,578 18,689 17,808
Weighted average number of Class B
common shares outstanding -- -- -- 660
------- ------- ------- -------
18,711 18,578 18,689 18,468
Dilutive effect of outstanding stock options
after application of the treasury stock method -- -- -- 413
Dilutive effect of mandatorily redeemable
convertible preferred securities, assuming
conversion -- -- -- --
------- ------- ------- -------
Diluted shares outstanding 18,711 18,578 18,689 18,881
======= ======= ======= =======
Basic earnings (loss) per share $ (0.35) $ (0.15) $ (0.45) $ 0.53
======= ======= ======= =======
Diluted earnings (loss) per share $ (0.35) $ (0.15) $ (0.45) $ 0.52
======= ======= ======= =======
Potential diluted common shares of 195,558 and 139,118 relating to
outstanding stock options were excluded from the computation of diluted loss per
share for the three months ended October 2, 2005 and October 3, 2004,
respectively, as inclusion would have been anti-dilutive. For the nine months
ended October 2, 2005, 133,760 of potentially diluted shares were excluded from
the computation for the same reason.
-7-
Stock-Based Compensation Plans
DURA currently accounts for its stock-based compensation plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees", under which no
compensation cost has been recognized during the three and nine months ended
October 2, 2005 and October 3, 2004. The exercise prices of all issued options
are equal to the market value of DURA's stock on date granted. Had compensation
cost for these plans been determined as required under SFAS No. 123(R),
"Accounting for Stock-Based Compensation", DURA's pro forma net income and pro
forma earnings per share would have been as follows (in thousands, except per
share amounts):
Three months ended Nine months ended
----------------------- -----------------------
October 2, October 3, October 2, October 3,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income (loss)
As Reported - Basic $(6,584) $(2,697) $ (8,458) $9,811
Pro Forma $(7,528) $(3,765) $(11,085) $6,950
As Reported - Diluted $(6,584) $(2,697) $ (8,458) $9,811
Pro Forma $(7,528) $(3,765) $(11,085) $6,950
Basic earnings (loss) per share
As Reported $ (0.35) $ (0.15) $ (0.45) $ 0.53
Pro Forma $ (0.40) $ (0.20) $ (0.59) $ 0.38
Diluted earnings (loss) per share
As Reported $ (0.35) $ (0.15) $ (0.45) $ 0.52
Pro Forma $ (0.40) $ (0.20) $ (0.59) $ 0.37
The effect of the stock issued under the Employee Stock Purchase Plan was
not material for 2005 and 2004. The fair value of each option grant is estimated
on the date of the grant using the Black-Scholes option-pricing model with the
principal following weighted average assumptions: risk-free interest rate of
3.69 percent and 3.7 percent, expected life of four years and an average
expected volatility of 64 percent and 74 percent for the nine months ended
October 2, 2005 and October 3, 2004, respectively.
The FASB revised SFAS No. 123 in December 2004 and issued SFAS No. 123(R).
This Statement supercedes APB No. 25, which resulted in no stock-based employee
compensation cost related to stock options if the options granted had an
exercise price equal to the market value of the underlying common stock on the
date of grant. SFAS No. 123(R) requires recognition of employee services
provided in exchange for a share-based payment based on the grant date fair
market value. In April 2005, the SEC delayed the effective date of SFAS No.
123(R) to fiscal years beginning after June 15, 2005. As a result, DURA is
required to adopt SFAS No. 123(R) as of January 1, 2006. As of the effective
date, this Statement applies to all new awards issued as well as awards
modified, repurchased, or cancelled. Additionally, for stock-based awards issued
prior to the effective date, compensation cost attributable to future services
will be recognized as the remaining service is rendered. DURA may also elect to
restate prior periods by applying a modified retrospective method to periods
prior to the effective date.
On October 27, 2005, the Compensation Committee (Committee) of the Board of
Directors approved the acceleration of all out-of-the-money unvested stock
options on October 27, 2005. The Committee prescribed that the October 27,
2005's closing price of DURA's Class A Common Stock as quoted on The Nasdaq
Stock Market ("Nasdaq") be used to determine which outstanding unvested stock
options are out-
-8-
of-the-money. With the prescribed closing quoted stock price being $3.28 per
share, all outstanding unvested stock options (2.7 million) issued by the
Company became fully vested.
The acceleration of the out-of-the money options was undertaken to avoid
future compensation expense that would be required to be recognized when DURA
adopts SFAS 123(R) on January 1, 2006. Future SFAS 123(R) pre-tax expense
avoided by this acceleration for the next three calendar years is approximately
$4.7 million in 2006, $3.3 million in 2007 and $1.7 million in 2008.
4. DISCONTINUED OPERATIONS
During the fourth quarter of 2002, DURA adopted a plan to divest its
Mechanical Assemblies Europe business, as it believed this business would not
assist in reaching its strategic growth and profitability targets for the
future. The Mechanical Assemblies Europe business generated annualized revenues
of approximately $111.9 million from facilities in Grenoble and Boynes, France;
and Woodley, Nottingham and Stourport, UK. In March 2003, DURA completed the
divestiture of its Mechanical Assemblies Europe business to Magal Engineering
and members of the local management group, located in Woodley, England. The
Mechanical Assemblies Europe divestiture was treated as a discontinued operation
under SFAS No. 144. During the year ended December 31, 2004, net negative
adjustments totaling $0.7 million were recorded resulting from the less
favorable settlement than anticipated, of retained liabilities.
At October 2, 2005, DURA had remaining reserves related to the divestiture
of the Mechanical Assemblies Europe business of $17.2 million, primarily related
to the facilities retained by DURA, principally lease costs, and are anticipated
to be completed in 2021. Also included in the $17.2 million is $3.0 million of
acquisition integration reserves related to facility closures. During the
quarter ended October 2, 2005 the reserve decreased by approximately $0.3
million due to the impact of foreign currency exchange rates and increased by
approximately $0.3 million primarily due to an increase in the long-term lease
commitments accretion expense. Costs incurred and charged to the reserve during
2005 included $0.9 million related to facility closure and other costs.
5. FACILITY CONSOLIDATION, ASSET IMPAIRMENTS, AND OTHER CHARGES
Facility Consolidation
As a part of DURA's ongoing cost reduction and capacity utilization
efforts, we have taken numerous actions to improve our cost structure. Such
costs include employee termination benefits, asset impairment charges and other
incremental costs, including equipment and personnel relocation costs. These
costs are reflected as facility consolidation, asset impairments and other
charges in the consolidated statement of operations and were accounted for in
accordance with SFAS No. 112, "Employers' Accounting for Postemployment
Benefits", SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", and SFAS No. 146, "Accounting for Costs Associated with Exit
or Disposal Activities".
In connection with the streamlining of operations during the first nine
months of 2005, the Company recorded facility consolidation, asset impairment
and other charges of $6.2 million, consisting of severance costs of $3.1 million
and facility closure and other costs of $3.1 million. The Company expects to
incur additional charges of approximately $2.2 million through December 31, 2006
for such actions.
Major ongoing and 2005 completed restructuring actions are as follows:
- During the third quarter of 2005, in order to improve capacity
utilization, DURA announced a plan to streamline an Einbeck, Germany,
manufacturing operation. This action is substantially completed and
resulted in a total severance cost of $0.3 million;
-9-
- During the second quarter of 2005, in order to improve capacity
utilization, DURA announced a plan to streamline a Plettenberg,
Germany, manufacturing operation during 2005 and 2006. In the third
quarter we received approval for this action from the appropriate
Workers' Council and Union. Full identification of the actual
employees has not been completed, and accordingly we are not able to
fully estimate the severance to be incurred, as it will be based on
numerous factors depending on each individual's circumstances. The
completion of this action is expected to be completed by the first
quarter of 2006, and could result in a total severance costs of $3.3
million, of which $1.3 million has already been incurred;
- During the first quarter of 2005, DURA announced a plan to migrate to
one enterprise resource planning system and centralize many of its
functional operations to better align with current business levels.
These actions are ongoing as we continue to migrate our domestic
operations. We are anticipating total severance costs could be as high
as $2 million domestically, of which $1.2 million has been incurred so
far in 2005. We have not formalized the total impact to our
international operations, since meaningful migration and
centralization will not begin until mid 2006 and are estimated to be
completed sometime in 2007. We do expect that upwards of 200
individuals could be impacted. We have not yet identified specifically
which individuals or group of individuals will be impacted, or in
which international locations they reside. Therefore we are not able
to estimate the termination liability impact at this time. We do
expect however that the international termination costs for this
action will exceed the related estimate for our domestic operations;
- DURA in 2004 closed its Bondoufle, France, sales and engineering
facility and relocated to Velizy, France, which is located near its
French OEM customers. This action resulted in total restructuring
charges of approximately $0.2 million;
- DURA announced in 2004 a plan to consolidate certain of its Body &
Glass Division product lines in Europe. This action is complete and
resulted in total charges of approximately $3.3 million;
- DURA announced in 2004 a plan to exit its Rockford, Illinois, facility
and combine the business with other DURA operations and relocate its
Atwood Mobile Products division headquarters from Rockford, Illinois,
to Elkhart, Indiana. This action is complete and resulted in total
charges of approximately $9.2 million, ($0.9 million in 2005);
- DURA announced in 2004 a plan to exit its Brookfield, Missouri,
facility and combine the business with other DURA operations. This
action is complete and resulted in total charges of approximately $3.4
million, ($0.9 million in 2005); and
- DURA in 2004 exited its Pikeville, Tennessee, facility and combined
the business with other DURA operations. This action is complete and
resulted in total charges of approximately $2.9 million.
Asset Impairments
For the nine months ended October 2, 2005, and October 3, 2004, Dura
recorded $1.3 million and $7.1 million, respectively, of asset impairment
charges related to prior facility consolidation actions. These charges are
reflected as facility consolidation, asset impairments and other charges in the
condensed consolidated statements of operations and were accounted for in
accordance with SFAS No. 144.
A rollforward of the accruals for facility consolidation, asset impairments
and other charges by quarter for the nine months ended October 2, 2005 follows
(in thousands):
-10-
Employee Asset Facility
termination impairment closure and
benefits charges other costs Total
----------- ---------- ----------- -------
Balance December 31, 2004 $ 5,306 $ -- $ 522 $ 5,828
Adjustments/Charges 1,046 136 484 1,666
Cash utilizations (3,478) -- (55) (3,533)
Non-cash utilizations/other -- (136) -- (136)
------- ------- ------- -------
Balance April 3, 2005 2,874 -- 951 3,825
------- ------- ------- -------
Adjustments/Charges 1,144 1,129 351 2,624
Cash utilizations (1,728) -- (483) (2,211)
Non-cash utilizations/other -- (1,129) -- (1,129)
------- ------- ------- -------
Balance July 3, 2005 2,290 -- 819 3,109
------- ------- ------- -------
Adjustments/Charges 880 -- 980 1,860
Cash utilizations (876) -- (1,052) (1,928)
Non-cash utilizations/other (416) -- -- (416)
------- ------- ------- -------
Balance October 2, 2005 $ 1,878 $ -- $ 747 $ 2,625
======= ======= ======= =======
6. ACQUISITION INTEGRATIONS
DURA has developed and implemented the majority of the facility
consolidation plans designed to integrate the operations of past acquisitions.
As of October 2, 2005, purchase liabilities recorded in conjunction with the
acquisitions included approximately $1.3 million for costs associated with the
shutdown and consolidation of certain acquired facilities and $0.8 million for
severance and other related costs. Costs incurred and charged to these reserves
during 2005 amounted to $1.1 million related to the consolidation of certain
acquired facilities and $0.2 million related to severance. The employee
terminations and facility closures were completed by December 31, 2004, except
for contractual obligations consisting principally of facility lease payments,
which will continue through 2005.
-11-
7. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
October 2, December 31,
2005 2004
---------- ------------
2005 Credit Agreement:
Second Lien term loan $ 150,000 $ --
2003 Credit Agreement:
Tranche C term loan -- 146,250
Senior notes 400,000 400,000
Subordinated notes 575,068 589,469
Mandatorily redeemable convertible
trust preferred securities 55,250 55,250
Senior notes - hedging mark-to-market
value adjustment (6,190) 18,347
Other 5,776 7,616
---------- ----------
1,179,904 1,216,932
Less current maturities (1,294) (2,968)
---------- ----------
Total long-term debt $1,178,610 $1,213,964
========== ==========
In April 2002, DURA completed the offering of $350.0 million 8 5/8 percent
senior unsecured notes ("2002 Senior Notes"), due April 2012. The interest on
the 2002 Senior Notes is payable semi-annually beginning October 15, 2002. DURA
also entered into a fixed to floating interest rate swap (notional amount of
$325.0 million) with various financial institutions that more closely mirrors
the cost of its bank debt.
In November 2003, DURA completed the 2003 Senior Notes offering of $50.0
million. The interest on the 2003 Senior Notes is payable semi-annually
beginning April 15, 2004. In conjunction with this transaction, we amended and
restated its revolving credit facility ("2003 Credit Agreement"). The 2003
Credit Agreement provided for $175.0 million of revolving credit, available
until October 2008.
In February 2005, DURA amended its 2003 Credit Agreement to, among other
things, adjust the total leverage, senior leverage and interest coverage ratios
that it was required to maintain over the next six quarters beginning April 3,
2005. As part of that amendment, we repaid $35.0 million of the tranche C term
loan.
In May 2005, DURA entered into new senior secured credit facilities with an
aggregate borrowing capacity of approximately $325 million, consisting of a
five-year $175 million asset-based revolving credit facility ("2005 Credit
Agreement") and a six-year $150 million senior secured second lien term loan.
Interest under these facilities is based on LIBOR. The senior secured second
lien term loan is due and payable in its entirety in May 2011. Proceeds of
$144.0 million, net of transaction costs for the new revolver and the senior
secured second lien term loan were used to repay the existing $111 million
Tranche C term loan facility and general corporate purposes. The revolver is an
asset-backed revolving credit facility, which is supported by a borrowing base
that is calculated monthly. Availability under the revolver is determined by
advances against eligible accounts receivables, eligible inventory balances and
certain fixed assets. The revolver is secured by certain U.S. and Canadian
assets and a 65 percent pledge of the stock ownership of our foreign
subsidiaries. The senior secured second lien term loan is secured by all of the
U.S. assets and a 65 percent pledge of the stock ownership of our foreign
subsidiaries. In connection with the termination of our 2003 Credit Agreement,
approximately $3.3 million of related debt issuance costs was written off and is
reflected in interest expense. At October 2, 2005, we had no borrowings
-12-
outstanding under the $175 million revolving credit facility. On October 2,
2005, available borrowing under these senior secured credit facilities was $157
million, as we have used part of the facility for standby letters of credit in
the amount of $18 million.
DURA has $575.4 million of 9 percent Subordinated Notes, due May 2009
outstanding as of October 2, 2005. The interest on the Subordinated Notes is
payable semiannually. These notes are collateralized by guarantees of certain
subsidiaries.
We utilize uncommitted overdraft facilities to satisfy the short-term
working capital requirements of its foreign subsidiaries. We currently have
approximately $14.4 million of foreign denominated bank overdraft facilities
available.
Included in interest expense, net, in the consolidated statements of
operations is approximately $0.7 million and $0.9 million of interest income
earned on cash balances in the quarters ended October 2, 2005, and October 3,
2004, respectively; and $2.0 million and $2.1 million for the nine months ended
October 2, 2005, and October 3, 2004, respectively.
8. BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized, but reviewed for
impairment annually, or more frequently if impairment indicators arise.
During the second quarter of 2005, we performed our annual evaluation using
both a discounted cash flow methodology and a market multiple approach. Based on
the results of this evaluation, we determined that no further impairment beyond
that recorded in prior years is currently required. A separate evaluation was
conducted for each of our current reporting units: Control Systems; Body &
Glass; Mobile Products; and Other Operating Companies.
Separable intangible assets that are not deemed to have indefinite lives
will continue to be amortized over their useful lives. Other intangible assets
at October 2, 2005 are approximately $17.7 million, primarily consisting of
non-amortizable trademarks and amortizable license agreements. The amortization
of other intangible assets was not significant in 2005 and 2004.
9. DERIVATIVES AND HEDGING ACTIVITIES
DURA 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. We do not enter into derivatives or other
financial instruments for trading or speculative purposes. We do enter into
financial instruments to manage and reduce the impact of changes in foreign
currency exchange rates and interest rates. The counter parties to these
financial instruments are major financial institutions.
On May 12, 2005, DURA terminated its fixed to floating interest rate swap
contracts having an aggregated notional amount of $400 million, which we
established in conjunction with the 2002 Senior Notes and 2003 Senior Notes
offerings, respectively. DURA realized a cash net gain of $11.4 million upon
their settlement. This gain is being amortized over the remaining life of the
2003 and 2002 notes. At October 2, 2005, the deferred gain is approximately
$10.8 million and is classified in other noncurrent liabilities. On May 16,
2005, DURA entered into a new set of fixed to floating interest rate swap
contracts, expiring in April 2012 and also having an aggregate notional amount
of $400 million with
-13-
various financial institutions, replacing those that were terminated. At October
2, 2005, these outstanding interest rate swap contracts effectively converted
$400 million of our Senior Notes into floating rate obligations. DURA receives
payments at a fixed rate (8.625%), while it makes payments at variable rates
(7.38% at October 2, 2005). The net interest paid or received is included in
interest expense. DURA designated these swap contracts as fair value hedges at
their inception. At October 2, 2005, the fair value of the interest rate swap
contracts was a liability of approximately $6.2 million, representing the
estimated loss that would accrue if we were to terminate the agreements, and is
included in noncurrent liabilities with a corresponding decrease to debt in the
accompanying condensed consolidated October 2, 2005 balance sheet.
From time to time, DURA also uses forward exchange contracts to hedge its
foreign currency exposure related to certain intercompany transactions. There
were no contracts outstanding at October 2, 2005.
10. COMPREHENSIVE INCOME
Comprehensive income reflects the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. Comprehensive income represents net income adjusted for
foreign currency translation adjustments, minimum pension liability and the
deferred gain/ loss on derivative instruments utilized to hedge interest and
foreign exchange exposures. Comprehensive income for the periods is as follows
(in thousands):
Three months ended Nine months ended
----------------------- -----------------------
October 2, October 3, October 2, October 3,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income (loss) $(6,584) $(2,697) $ (8,458) $ 9,811
Other comprehensive income:
Foreign currency
translation adjustment 3,241 18,127 (54,048) 9,863
Minimum pension liability (124) (46) 275 25
Derivative instruments -- 117 -- 264
------- ------- -------- -------
Comprehensive income (loss) $(3,467) $15,501 $(62,231) $19,963
======= ======= ======== =======
11. WARRANTY AND ENVIRONMENTAL
DURA faces an inherent business risk of exposure to product liability and
warranty claims in the event that its products fail to perform as agreed upon
and such failure of its products results, or is alleged to result, in bodily
injury and/or property damage. OEMs are increasingly requiring their outside
suppliers to guarantee or warrant their products, and bear the costs of repair
and replacement of such products under new vehicle warranties. Depending on the
terms under which we supply products to an OEM, an OEM may hold us responsible
for some or all of the repair or replacement costs of defective products under
new vehicle warranties, when the product supplied did not perform as
represented. In addition, we are subject to the requirements of federal, state,
local and foreign environmental and occupational health and safety laws and
regulations. Some of our operations generate hazardous substances. Like all
manufacturers, if a release of hazardous substances occurs or has occurred at or
from any of our current or former properties or at a landfill or another
location where we have disposed of wastes, DURA may be held liable for the
contamination, and the amount of such liability could be material. DURA's policy
is to record reserves for customer warranty and environmental costs on a case by
case basis at the time it believes such amount is
-14-
probable and estimable and to review these determinations on a quarterly basis
or more frequently, as additional information is obtained. We have established
reserves for issues that are probable and estimable in amounts management
believes are adequate to cover reasonable adverse judgments. DURA determines its
warranty and environmental reserves based on identified claims and the estimated
ultimate projected claim cost. The final amounts determined to be due related to
these matters could differ significantly from recorded estimates. DURA no longer
carries insurance for recall matters, as the cost and availability for such
insurance, in the opinion of management, is cost prohibitive or not available.
The following presents a summary of our warranty and environmental position (in
thousands):
WARRANTY ENVIRONMENTAL
-------- -------------
Balance at December 31, 2004 $ 8,937 $17,159
Reductions for payments made (1,944) (262)
Additional reserves recorded 2,535 16
Changes in pre-existing reserves (357) (8,251)
------- -------
Balance at October 2, 2005 $ 9,171 $ 8,662
======= =======
Effective June 30, 2005, DURA was released from a potential environmental
exposure relating to a former manufacturing facility whose lease expired on that
date. Accordingly, we reversed the remaining environmental exposure accrual to
cost of sales resulting in a favorable $8.2 million impact for the nine months
ended October 2, 2005.
12. NEW AND PROPOSED ACCOUNTING PRONOUNCEMENTS
The Emerging Issues Task Force ("EITF") has recently released EITF Issue
No. 05-05, "Accounting for Early Retirement or Postemployment Programs with
Specific Features (such as Terms Specified in Altersteilzeit Early Retirement
Arrangements)". Altersteilzeit (ATZ) in Germany is an early retirement program
designed to create an incentive for employees, within a certain age group, to
leave their employers before the legal retirement age. Although established by
law, the actual arrangement between employers and employees is negotiated. EITF
Issue 05-05 will require, as of the beginning of 2006, DURA to accrue special
retirement benefits. We are currently reviewing the impact, if any, to DURA, but
do not believe it will be material. Related liabilities have been accrued in
accordance with local regulations.
The FASB issued on July 15, 2005, for comment an exposure draft of a
proposed interpretation to SFAS No. 109 on the accounting for uncertain tax
positions that seeks to reduce widespread diversity in accounting for income
taxes. The exposure draft requires that a tax position meet a "probable
recognition threshold" for the benefit of the uncertain tax position to be
recognized in the financial statements. This threshold is to be met assuming
that the tax authorities will examine the uncertain tax position. The exposure
draft contains guidance with respect to the measurement of the benefit that is
recognized for an uncertain tax position, when that benefit should be
derecognized and other matters. The proposed initial effective date for this
interpretation has been withdrawn by the FASB as they consider further
deliberations on the comments they received, which could result in modifications
to the proposed interpretation. Until a more defined proposed interpretation is
issued, we cannot determine the potential impact of this proposed interpretation
on our recording of deferred tax assets.
13. DEFINED BENEFIT PLANS AND POST-RETIREMENT BENEFITS
DURA sponsors 17 defined benefit plans that cover certain hourly and
salaried employees in the United States, Canada and certain European countries.
DURA's policy is to make annual contributions to the plans to fund the normal
cost as required by local regulations. In addition, we have eight postretirement
medical benefit plans for certain employee groups and have recorded a liability
for its estimated obligation
-15-
under these plans. During 2005, a postretirement medical plan was terminated
that related to former employees of a closed facility, which had been
voluntarily extended beyond its initial term by DURA. A gain was realized on
this termination and is reflected in the following tables.
The components of net periodic benefit costs are as follows (in thousands):
Postretirement Benefits
Pension Benefits Other than Pensions
Three Months Ended Three Months Ended
--------------------------------- ---------------------------------
October 2, 2005 October 3, 2004 October 2, 2005 October 3, 2004
--------------- --------------- --------------- ---------------
Service cost $ 543 $ 586 $158 $ 161
Interest cost 2,066 2,131 301 449
Expected return on plan assets (1,652) (1,589) -- --
Amendments/curtailments -- 339 -- (109)
Amortization of prior service cost 269 519 -- (2)
Recognized actuarial loss 371 43 (2) 60
------- ------- ---- -----
Net periodic benefit cost $ 1,597 $ 2,029 $457 $ 559
======= ======= ==== =====
Postretirement Benefits
Pension Benefits Other than Pensions
Nine Months Ended Nine Months Ended
--------------- --------------- --------------- ---------------
October 2, 2005 October 3, 2004 October 2, 2005 October 3, 2004
--------------- --------------- --------------- ---------------
Service cost $ 1,675 $ 1,758 $ 528 $ 483
Interest cost 6,236 6,393 1,101 1,347
Expected return on plan assets (4,947) (4,767) -- --
Amendments/curtailments -- 1,017 (3,441) (327)
Amortization of prior service cost 858 1,557 -- (6)
Recognized actuarial loss 1,108 129 136 180
------- ------- ------- ------
Net periodic benefit cost $ 4,930 $ 6,087 $(1,676) $1,677
======= ======= ======= ======
DURA previously disclosed in its financial statements for the year ended
December 31, 2004, that it expected to contribute $7.3 million to its pension
plans and $2.9 million to its post-retirement medical benefit plans in 2005. As
of October 2, 2005, $6.3 million and $1.5 million of contributions have been
made to the pension and postretirement benefit plans, respectively. DURA
anticipates contributing an additional $1.6 million to its pension plans and
$0.4 million to its post-retirement medical benefit plans in 2005 for total
estimated contributions during 2005 of $9.8 million.
14. INCOME TAXES
The effective income tax rates for the third quarter and first nine months
of 2005 differs from the U.S. federal statutory rate primarily as a result of
lower foreign tax rates, the effects of state taxes and the provision of a
valuation allowances on certain losses in foreign jurisdictions.
-16-
American Jobs Creation Act of 2004
In October 2004, the American Jobs Creation Act of 2004 ("the Act") was
signed into law. The Act creates a temporary incentive for U.S. corporations to
repatriate earnings from foreign subsidiaries by providing an 85% dividends
received deduction for certain dividends from controlled foreign corporations to
the extent the dividends exceed a base amount and are invested in the United
States pursuant to a domestic reinvestment plan. The temporary incentive is
available to DURA in 2005.
The deduction is subject to a number of limitations and the U.S Treasury
Department is still in the process of providing clarifying guidance on key
elements of the repatriation provision. On July 21 identical Bills were
introduced in the House and the Senate to make retroactive technical corrections
to the Act including technical corrections to the repatriation provision. DURA
is not contemplating any repatriation at this time.
15. CONDENSED CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
The following condensed consolidating financial information presents
balance sheets, statements of operations and of cash flows related to DURA'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
percent senior subordinated notes issued by Dura Operating Corp., on a joint and
several basis. Separate financial statements and other disclosures concerning
the Guarantors have not been presented because management believes that such
information is not material to investors. The Non-Guarantor Companies in the
following information represent DURA's international operations.
-17-
15. CONDENSED CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION:
(Continued)
DURA AUTOMOTIVE SYSTEMS, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS AS OF OCTOBER 2, 2005
(AMOUNTS IN THOUSANDS - UNAUDITED)
DURA NON-
OPERATING GUARANTOR GUARANTOR
CORP. COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
---------- --------- ---------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 21,698 $ (881) $ 72,853 $ -- $ 93,670
Accounts receivable, net 48,301 115,648 192,860 -- 356,809
Inventories 11,249 54,162 71,425 -- 136,836
Other current assets 23,381 16,592 64,464 -- 104,437
Due from affiliates 182,566 39,258 9,494 (231,318) --
---------- -------- ---------- ----------- ----------
Total current assets 287,195 224,779 411,096 (231,318) 691,752
---------- -------- ---------- ----------- ----------
Property, plant and equipment, net 52,688 109,260 286,425 -- 448,373
Investment in subsidiaries 828,860 28,799 190,586 (1,048,245) --
Notes receivable from affiliates 437,389 419,634 22,439 (879,462) --
Goodwill, net 380,907 128,773 355,744 -- 865,424
Noncurrent portion of derivative
instruments -- -- -- -- --
Other assets, net 69,980 8,396 21,772 -- 100,148
---------- -------- ---------- ----------- ----------
Total Assets $2,057,019 $919,641 $1,288,062 $(2,159,025) $2,105,697
========== ======== ========== =========== ==========
Liabilities and Stockholders'
Investment
Current liabilities:
Accounts payable $ 36,895 $ 79,263 $ 140,581 $ -- $ 256,739
Accrued liabilities 63,641 19,222 100,079 -- 182,942
Current maturities of long-term debt -- -- 1,294 -- 1,294
Due to affiliates 42,196 181,396 7,726 (231,318) --
---------- -------- ---------- ----------- ----------
Total current liabilities 142,732 279,881 249,680 (231,318) 440,975
---------- -------- ---------- ----------- ----------
Long-term debt, net of current
maturities 150,000 -- 4,482 -- 154,482
Subordinated notes 975,068 -- -- -- 975,068
Mandatorily redeemable convertible
trust preferred securities 55,250 -- -- -- 55,250
Senior notes - hedging mark-to-market
value adjustment (6,190) -- -- -- (6,190)
Other noncurrent liabilities 68,232 9,587 61,904 -- 139,723
Notes payable to affiliates 417,075 179,035 283,352 (879,462) --
---------- -------- ---------- ----------- ----------
Total liabilities 1,802,167 468,503 599,418 (1,110,780) 1,759,308
---------- -------- ---------- ----------- ----------
Stockholders' investment 267,185 451,138 578,495 (1,048,245) 248,573
Accumulated other comprehensive income (12,333) -- 110,149 -- 97,816
---------- -------- ---------- ----------- ----------
Total Liabilities and
Stockholders' Investment $2,057,019 $919,641 $1,288,062 $(2,159,025) $2,105,697
========== ======== ========== =========== ==========
-18-
15. CONDENSED CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION:
(Continued)
DURA AUTOMOTIVE SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED OCTOBER 2, 2005
(AMOUNTS IN THOUSANDS - UNAUDITED)
DURA NON-
OPERATING GUARANTOR GUARANTOR
CORP. COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- ------------ ------------
Revenues $ 62,155 $201,824 $279,050 $ (7,107) $535,922
Cost of sales 52,699 175,368 263,757 (7,107) 484,717
-------- -------- -------- -------- --------
Gross profit 9,456 26,456 15,293 -- 51,205
Selling, general and administrative expenses 13,467 7,863 14,513 -- 35,843
Facility consolidation, asset impairments and
other charges (299) 1,049 1,110 -- 1,860
Amortization expense 56 45 -- -- 101
-------- -------- -------- -------- --------
Operating income (3,768) 17,499 (330) -- 13,401
Interest expense (income), net 21,711 397 2,405 -- 24,513
Loss on early extinguishment of debt -- -- -- -- --
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before provision for income taxes and
minority interest (25,479) 17,102 (2,735) -- (11,112)
Provision (benefit) for income taxes (1,901) 471 (3,208) -- (4,638)
Equity in earnings (losses) of affiliates, net 15,669 -- 2,187 (17,966) (110)
Dividends from affiliates (1,325) -- -- 1,325 --
-------- -------- -------- -------- --------
Net income (loss) $ (6,584) $ 16,631 $ 2,660 $(19,291) $ (6,584)
======== ======== ======== ======== ========
-19-
15. CONDENSED CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION:
(Continued)
DURA AUTOMOTIVE SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE NINE MONTHS
ENDED OCTOBER 2, 2005
(AMOUNTS IN THOUSANDS - UNAUDITED)
DURA NON-
OPERATING GUARANTOR GUARANTOR
CORP. COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- ------------ ------------
Revenues $ 211,534 $649,294 $940,338 $(21,431) $1,779,735
Cost of sales 194,716 560,899 855,410 (21,431) 1,589,594
--------- -------- -------- -------- ----------
Gross profit 16,818 88,395 84,928 -- 190,141
Selling, general and administrative
expenses 47,574 23,363 48,104 -- 119,041
Facility consolidation, asset impairments and
other charges 1,059 2,883 2,208 -- 6,150
Amortization expense 167 136 14 -- 317
--------- -------- -------- -------- ----------
Operating income (31,982) 62,013 34,602 -- 64,633
Interest expense (income), net 65,082 1,961 7,347 -- 74,390
Loss on early extinguishment of debt 3,349 -- -- -- 3,349
--------- -------- -------- -------- ----------
Income (loss) from continuing operations
before provision for income taxes and
minority interest (100,413) 60,052 27,255 -- (13,106)
Provision (benefit) for income taxes (45,187) 27,440 12,883 -- (4,864)
Equity in earnings (losses) of affiliates, net 42,407 -- 7,429 (49,946) (110)
Dividends from affiliates (4,361) -- -- 4,361 --
--------- -------- -------- -------- ----------
Income from continuing operations (8,458) 32,612 21,801 (54,307) (8,352)
Loss from discontinued operations -- -- (106) -- (106)
--------- -------- -------- -------- ----------
Net income (loss) $ (8,458) $ 32,612 $ 21,695 $(54,307) $ (8,458)
========= ======== ======== ======== ==========
-20-
15. CONDENSED CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION:
(Continued)
DURA AUTOMOTIVE SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS
ENDED OCTOBER 2, 2005
(AMOUNTS IN THOUSANDS - UNAUDITED)
DURA NON-
OPERATING GUARANTOR GUARANTOR
CORP. COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- ------------ ------------
OPERATING ACTIVITIES:
Income (loss) from continuing operations $ (8,458) $ 32,613 $ 21,800 $(54,307) $ (8,352)
Adjustments to reconcile income (loss)
from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 6,689 15,395 39,695 -- 61,779
Amortization of deferred financing fees 6,270 -- -- -- 6,270
Deferred income taxes (11,632) 14,573 (1,772) -- 1,169
Equity in earnings of affiliates and
minority interest (42,407) -- (7,429) 49,946 110
Changes in other operating items 8,359 (24,049) (98,220) -- (113,910)
--------- -------- --------- -------- ---------
Net cash (used in) provided by operating
activities (41,179) 38,532 (45,926) (4,361) (52,934)
--------- -------- --------- -------- ---------
INVESTING ACTIVITIES:
Acquisitions, net -- -- -- -- --
Capital expenditures and other (9,867) (9,742) (29,362) -- (48,971)
--------- -------- --------- -------- ---------
Net cash used in investing activities (9,867) (9,742) (29,362) -- (48,971)
--------- -------- --------- -------- ---------
FINANCING ACTIVITIES:
Long-term borrowings 150,008 -- (8) -- 150,000
Repayments of long-term borrowings (146,262) (3) (1,016) -- (147,281)
Other, net (39) -- -- (39)
Debt financing (to) from affiliates 57,925 (26,010) (31,915) -- --
Proceeds from issuance of common stock
and exercise of stock options 560 -- -- -- 560
Debt issuance costs (7,348) -- -- -- (7,348)
Deferred gain on termination of interest rate swap 11,374 -- -- -- 11,374
Dividends paid -- (5,284) 923 4,361 --
--------- -------- --------- -------- ---------
Net cash provided by (used in) financing
activities 66,218 (31,297) (32,016) 4,361 7,266
EFFECT OF EXCHANGE RATE
CHANGES ON CASH 3,582 -- (6,735) -- (3,153)
--------- -------- --------- -------- ---------
NET CHANGE IN CASH AND CASH
EQUIVALENTS FROM CONTINUING
OPERATIONS 18,754 (2,507) (114,039) -- (97,792)
NET OPERATING CASH FLOW USED IN
DISCONTINUED OPERATIONS -- -- (106) -- (106)
CASH AND CASH EQUIVALENTS:
Beginning of period 2,944 1,626 186,998 -- 191,568
--------- -------- --------- -------- ---------
End of period $ 21,698 $ (881) $ 72,853 $ -- $ 93,670
========= ======== ========= ======== =========
-21-
15. CONDENSED CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION:
(Continued)
DURA AUTOMOTIVE SYSTEMS, INC.
CONDENSED CONSOLIDATING BALANCE SHEETS AS OF DECEMBER 31, 2004
(AMOUNTS IN THOUSANDS)
DURA NON-
OPERATING GUARANTOR GUARANTOR
CORP. COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
---------- --------- ---------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 2,944 $ 1,626 $ 186,998 $ -- $ 191,568
Accounts receivable, net 27,455 82,504 163,997 -- 273,956
Inventories 12,735 60,326 76,773 -- 149,834
Current poriton of derivative
instruments 7,746 -- -- -- 7,746
Other current assets 14,485 19,868 57,663 -- 92,016
Due from affiliates 181,728 39,261 7,599 (228,588) --
---------- -------- ---------- ----------- ----------
Total current assets 247,093 203,585 493,030 (228,588) 715,120
---------- -------- ---------- ----------- ----------
Property, plant and equipment, net 52,560 115,582 318,964 -- 487,106
Investment in subsidiaries 761,450 28,799 74,338 (864,587) --
Notes receivable from affiliates 384,563 235,563 26,188 (646,314) --
Goodwill, net 380,907 128,773 393,904 -- 903,584
Noncurrent portion of derivative
instruments 10,601 -- -- -- 10,601
Other assets, net 61,918 15,668 29,924 -- 107,510
---------- -------- ---------- ----------- ----------
Total Assets $1,899,092 $727,970 $1,336,348 $(1,739,489) $2,223,921
========== ======== ========== =========== ==========
Liabilities and Stockholders'
Investment
Current liabilities:
Accounts payable $ 45,103 $ 70,663 $ 154,575 $ -- $ 270,341
Accrued liabilities 57,888 22,412 106,954 -- 187,254
Current maturities of long-term debt 1,500 3 1,465 -- 2,968
Due to affiliates 41,586 150,935 36,067 (228,588) --
---------- -------- ---------- ----------- ----------
Total current liabilities 146,077 244,013 299,061 (228,588) 460,563
---------- -------- ---------- ----------- ----------
Long-term debt, net of current
maturities 144,750 3 6,145 -- 150,898
Senior notes 400,000 -- -- -- 400,000
Subordinated notes 589,469 -- -- -- 589,469
Mandatorily redeemable convertible trust
preferred securities 55,250 55,250
Senior notes - hedging mark-to-market
value adjustment 18,347 -- -- -- 18,347
Other noncurrent liabilities 57,083 18,450 66,370 -- 141,903
Notes payable to affiliates 236,752 158,282 251,280 (646,314) --
---------- -------- ---------- ----------- ----------
Total liabilities 1,647,728 420,748 622,856 (874,902) 1,816,430
---------- -------- ---------- ----------- ----------
Stockholders' investment 263,392 307,222 549,875 (864,587) 255,902
Accumulated other comprehensive income (12,028) -- 163,617 -- 151,589
---------- -------- ---------- ----------- ----------
Total Liabilities and
Stockholders' Investment $1,899,092 $727,970 $1,336,348 $(1,739,489) $2,223,921
========== ======== ========== =========== ==========
-22-
15. CONDENSED CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION:
(Continued)
DURA AUTOMOTIVE SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED OCTOBER 3, 2004
(AMOUNTS IN THOUSANDS - UNAUDITED)
DURA NON-
OPERATING GUARANTOR GUARANTOR
CORP. COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- ------------ ------------
Revenues $ 81,504 $243,649 $303,473 $(12,262) $616,364
Cost of sales 78,460 214,448 271,814 (12,262) 552,460
-------- -------- -------- -------- --------
Gross profit 3,044 29,201 31,659 -- 63,904
Selling, general and administrative
expenses 14,916 8,096 15,595 -- 38,607
Facility consolidation, asset impairments and
other charges 44 2,560 2,456 -- 5,060
Amortization expense 48 45 10 -- 103
-------- -------- -------- -------- --------
Operating income (loss) (11,964) 18,500 13,598 -- 20,134
Interest expense (income), net 18,467 2,928 2,512 -- 23,907
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before provision for income taxes and
minority interest (30,431) 15,572 11,086 -- (3,773)
Provision (benefit) for income taxes (3,967) 1,626 1,247 -- (1,094)
Equity in earnings of affiliates, net (22,554) -- 1,561 20,993 --
Dividends from affiliates (1,213) (561) (562) 2,336 --
-------- -------- -------- -------- --------
Income (loss) from continuing operations (2,697) 14,507 8,840 (23,329) (2,679)
Loss from discontinued operations -- -- (18) -- (18)
-------- -------- -------- -------- --------
Net income (loss) $ (2,697) $ 14,507 $ 8,822 $(23,329) $ (2,697)
======== ======== ======== ======== ========
-23-
15. CONDENSED CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION:
(Continued)
DURA AUTOMOTIVE SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED
OCTOBER 3, 2004
(AMOUNTS IN THOUSANDS - UNAUDITED)
DURA NON-
OPERATING GUARANTOR GUARANTOR
CORP. COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- ------------ ------------
Revenues $252,157 $752,285 $944,690 $(39,390) $1,909,742
Cost of sales 235,168 650,851 845,861 (39,390) 1,692,490
-------- -------- -------- -------- ----------
Gross profit 16,989 101,434 98,829 -- 217,252
Selling, general and administrative
expenses 46,704 23,679 46,950 -- 117,333
Facility consolidation, asset impairments and
other charges 83 13,734 4,270 -- 18,087
Amortization expense 167 136 31 -- 334
-------- -------- -------- -------- ----------
Operating income (loss) (29,965) 63,885 47,578 -- 81,498
Interest expense (income), net 53,579 5,279 7,837 -- 66,695
-------- -------- -------- -------- ----------
Income (loss) from continuing operations
before provision for income taxes and
minority interest (83,544) 58,606 39,741 -- 14,803
Provision (benefit) for income taxes (15,647) 11,819 8,121 -- 4,293
Equity in earnings of affiliates, net (73,973) -- 248 73,725 --
Dividends from affiliates (3,735) -- -- 3,735 --
-------- -------- -------- -------- ----------
Income (loss) from continuing operations 9,811 46,787 31,372 (77,460) 10,510
Loss from discontinued operations -- -- (699) -- (699)
-------- -------- -------- -------- ----------
Net income (loss) $ 9,811 $ 46,787 $ 30,673 $(77,460) $ 9,811
======== ======== ======== ======== ==========
-24-
15. CONDENSED CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION:
(Continued)
DURA AUTOMOTIVE SYSTEMS, INC.
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
OCTOBER 3, 2004
(AMOUNTS IN THOUSANDS - UNAUDITED)
DURA NON-
OPERATING GUARANTOR GUARANTOR
CORP. COMPANIES COMPANIES ELIMINATIONS CONSOLIDATED
--------- --------- --------- ------------ ------------
OPERATING ACTIVITIES:
Income (loss) from continuing operations $ 9,811 $ 46,787 $ 31,372 $(77,460) $ 10,510
Adjustments to reconcile income (loss)
from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 7,461 17,304 39,993 -- 64,758
Amortization of deferred financing fees 2,648 -- -- 2,648
Deferred income taxes 14,573 (14,573) (6) -- (6)
Equity in earnings of affiliates and
minority interest (73,975) -- 250 73,725 --
Changes in other operating items 81,197 (10,580) (87,617) -- (17,000)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities 41,715 38,938 (16,008) (3,735) 60,910
-------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Acquisitions, net -- -- (13,327) -- (13,327)
Capital expenditures, net (5,692) (9,108) (29,163) -- (43,963)
-------- -------- -------- -------- --------
Net cash used in investing activities (5,692) (9,108) (42,490) -- (57,290)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Long-term borrowings -- -- 568 -- 568
Repayments of long-term borrowings (8,522) (28) (9,989) -- (18,539)
Purchase of treasury shares and other (61) (61)
Debt financing (to) from affiliates (34,346) (25,047) 59,393 -- --
Proceeds from issuance of common stock
and exercise of stock options 1,948 -- -- -- 1,948
Other, net (552) -- -- -- (552)
Dividends paid -- (3,735) -- 3,735 --
-------- -------- -------- -------- --------
Net cash (used in) provided by financing
activities (41,533) (28,810) 49,972 3,735 (16,636)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (1,425) -- 8,807 -- 7,382
-------- -------- -------- -------- --------
NET CHANGE IN CASH AND CASH
EQUIVALENTS FROM CONTINUING
OPERATIONS (6,935) 1,020 281 -- (5,634)
NET OPERATING CASH FLOW USED IN
DISCONTINUED OPERATIONS -- -- (699) -- (699)
CASH AND CASH EQUIVALENTS:
Beginning of period 32,216 1,126 147,926 -- 181,268
-------- -------- -------- -------- --------
End of period $ 25,281 $ 2,146 $147,508 $ -- $174,935
======== ======== ======== ======== ========
-25-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
During the third quarter of 2005, the North American auto industry
continued to run significantly below 2004 levels on many of the top selling
models that Dura Automotive Systems, Inc. (DURA) serve in the light truck
segment. Big three volumes are down by over 500,000 units so far this year. Ford
and General Motors volumes were down over 8% and the GMT800 platform was down
over 13% versus the third quarter of 2004. Regarding the GMT800 volumes and the
ramp up of the GMT900 platforms in 2006 and 2007, DURA has an extremely
diversified distribution of revenues on hundreds of car and light truck models
around the world; but like other companies, we do have a handful of platforms
that have higher volumes and revenues than the average. The GMT800 platform is
one of these. In 2006 we will see a decrease in dollars per vehicle on the
combined GMT800 and GMT900 vehicles of approximately $80. That will impact
revenues throughout 2006 and partially into 2007 until new programs begin
production to replace this business.
In the recreation vehicle markets, the industry association continues to
forecast another strong year of shipments; however the shift in sales mix from
motorhomes to towables continues to be significant. Class A motorhome shipments
were down approximately 18% for the quarter. In the fourth quarter, DURA expects
these Class A sales declines to be offset by new FEMA shipments of larger
towable trailers for the rebuilding efforts of hurricane Katrina.
Adding to this in Europe, DURA also experienced softened production volumes
on many of the leading car models, where production was down 4% versus last
year's period. We continually re-evaluate each of our core businesses and
initiatives to ensure that the anticipated returns are consistent with improved
shareholder value.
Significant actions taken to counter the more immediate reductions in
production volumes and the impact of higher raw material costs, as well as
components of our future strategy are:
- One common goal across all of operations is to make certain that
we are the lowest cost, highest quality producer of each of our
products worldwide. To maintain this competitive advantage, we
continue to look for opportunities to rationalize facilities and
establish manufacturing in low cost regions. In the past three
years we have closed or exited approximately twenty facilities
consistent with our strategy. In the same period we have added
four new facilities in low cost regions.
- Our review process this year has identified further
rationalization opportunities that will lead to improved value
for our customers and for shareholders.
- In the area of selling, general and administrative expenses, we
took action earlier this year to eliminate the management bonus
plans and performance-based 401k discretionary contributions. We
also froze wages for salaried employees. Longer term we will see
the benefits of centralization initiatives for our finance, HR
and purchasing groups, as we complete the transition to a shared
service model.
- We believe we have very flexible cost positions in the North
American business. We have very low legacy costs and our
employees already contribute on average 41% of health care costs.
That puts us in a very competitive, sustainable position and we
will continue to work to find opportunities to maintain this
advantage.
- Cost reductions through VA/VE and productivity improvements are
another area we focus on to reduce costs both internally and with
our supply base. We have been successful at executing these
opportunities in the past, and have a very aggressive plan in
place for 2006 and beyond.
-26-
- Customer pricing is another important area of focus for DURA.
While it is essential that we offer customers the best value on
each new program, it is equally important that our profitability
remain healthy through the products life. In 2005's second
quarter, we announced the completion of steel pricing
negotiations with all our customers. This was a worldwide cost
cutting and price recovery process. We will continue to identify
additional recovery solutions for other raw material increases
that jeopardize profitability.
The automotive industry continues to present tremendous challenges, but DURA
believes it has a strong plan that will ensure sustainability and long-term
growth. We are confident that we will remain a very substantial player in the
supply base.
RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition
and results of operations (MD&A) should be read in conjunction with the MD&A
included in our Annual Report on Form 10-K for the year ended December 31, 2004.
Revenues
Revenues for the three months ended October 2, 2005, were $535.9 million, a
decrease of $80.4 million, or 13.1 percent, from $616.4 million for the three
months ended October 3, 2004. This revenue reduction is the combined effect of
five less business days in the quarter and significant reductions in domestic
OEM requirements, particularly Ford and GM. Further declines in European
production and motor homes in our RV business also contributed to lower
revenues.
North American light vehicle production was up 1 percent in total in 2005's
third quarter versus a year ago; however, the Big 3 were down 4 percent.
European production volumes were also down 4 percent for the quarter. In
addition to the volume reductions during the quarter, DURA was negatively
affected by unfavorable platform mix as certain of our customers and larger
programs were down more than the broader industry. In the RV industry, volumes
were down 1 percent in total as compared to the prior year, however, Class A
motorized vehicles, a key segment to DURA, was down 18 percent.
Revenues for the nine months ended October 2, 2005, were $1,779.7 million,
a decrease of $130.0 million, or 6.8 percent, from $1,909.7 million for the nine
months ended October 3, 2004. Reduced worldwide vehicle production volume,
primarily in North America, and product platform mix changes were the major
causes of reduced revenues in 2005. This reduction was offset moderately by the
strengthening of the Euro and partial steel price recovery.
Domestic revenues were $273.4 million in 2005's third quarter compared to
$326.4 million a year earlier. Revenues of our foreign operations were $262.5
million in the third quarter of 2005 compared with $290.0 million in 2004. For
the nine months, domestic revenues were $887.3 million in 2005 compared with
$1,010.4 million in 2004; and foreign revenues were $892.4.0 million in 2005
compared with $899.3 million in 2004.
DURA's significant Euro denominated operations were favorably impacted by
the Euro strengthening against the U.S. dollar in the first nine months of 2005.
This favorable exchange rate change resulted in increased U.S. dollar revenues
in 2005 of approximately $9 million increase in the third quarter and
approximately $51 million for the first nine months, as compared with the same
periods last year. The fluctuation of the Euro exchange rate to the U.S. dollar
also significantly impacts our consolidated debt levels. At October 2, 2005,
approximately $126.2 million of debt is denominated in Euro or other foreign
currencies.
-27-
Cost of Sales
Cost of sales for the three months ended October 2, 2005, were $484.7
million, a decrease of $67.7 million, or 12.3 percent, from $552.5 million for
the three months ended October 3, 2004. Cost of sales as a percentage of
revenues for the third quarter of 2005 was 90.4 percent, which is comparable to
the 89.6 percent in the third quarter of 2004. Steel spot prices increased
during the quarter; however, since we locked into six month contracts at the end
of June, we were not impacted by these increases. Steel cost reduction and
selling price recovery had a positive impact on our margins versus the prior
year of approximately $3 million. Cost of sales dollar amount decreased from a
year ago mainly due to lower variable costs associated with the lower production
volume and five less business days in the quarter. The increase in cost of sales
as a percentage of sales is primarily due to fixed costs spread across lower
production volumes in 2005 than in 2004.
Cost of sales for the nine months ended October 2, 2005, was $1,589.6
million, a decrease of $102.9 million, or 6.1 percent, from $1,692.5 million for
the nine months ended October 3, 2004. Cost of sales as a percentage of revenues
for the first nine months of 2005 increased to 88.9 percent (before the
favorable impact of the resolution of an environmental issue) compared to 88.6
percent in the first nine months of 2004. These minor increases in percentage of
sales are mainly attributable to lower production volumes impacting fixed cost
absorption. During the first nine months of 2005, cost of sales was favorably
impacted by an $8.2 million resolution of an environmental issue.
Effective June 30, 2005, DURA was released from a potential environmental
exposure relating to a former manufacturing facility whose lease expired on that
date. Accordingly, we reversed the remaining environmental exposure accrual to
cost of sales resulting in a favorable $8.2 million impact for the nine months
ended October 2, 2005.
Selling, General, and Administrative
Selling, general, and administrative expenses for 2005's third quarter were
$35.8 million, a decrease of $2.8 million, or 7.2 percent, from the $38.6
million for the same period last year. The decrease resulted primarily from
previous cost reduction actions resulting in lower personnel related costs.
Besides reduction in selling, general and administrative personnel, DURA froze
certain salary increases and eliminated its voluntary U.S. 401k contribution. As
a percentage of third quarter revenue, selling, general and administrative
expenses increased to 6.7 percent for 2005 compared to 6.3 percent in 2004.
Selling, general, and administrative expenses for the nine months ended
October 2, 2005, were $119.0 million, an increase of $1.7 million, or 1.5
percent, from $117.3 million for the nine months ended October 3, 2004. As a
percentage of revenue, selling, general and administrative expenses increased to
6.7 percent for 2005 compared to 6.1 percent in the first nine months of 2004.
The increase is primarily due to investment in prototypes and related
engineering development costs supporting new programs net of the aforementioned
personnel related cost reductions.
DURA's goal continues to be to consolidate certain selling, general and
administrative functions and streamlining of others resulting in lower future
costs.
Facility consolidation, asset impairments and other charges
Facility Consolidation
As a part of DURA's ongoing cost reduction and capacity utilization
efforts, we have taken numerous actions to improve our cost structure. Such
costs include employee termination benefits, asset impairment
-28-
charges and other incremental costs, including equipment and personnel
relocation costs. These costs are reflected as facility consolidation, asset
impairments and other charges in the consolidated statement of operations and
were accounted for in accordance with SFAS No. 112, "Employers' Accounting for
Postemployment Benefits", SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", and SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities".
In connection with the streamlining of operations during the first nine
months of 2005, the Company recorded facility consolidation, asset impairment
and other charges of $6.2 million, consisting of severance costs of $3.1 million
and facility closure and other costs of $3.1 million. The company expects to
incur additional charges of approximately $2.2 million through December 31, 2006
for such actions.
Major ongoing and 2005 completed restructuring actions are as follows:
- During the third quarter of 2005, in order to improve capacity
utilization, Dura announced a plan to streamline an Einbeck, Germany,
manufacturing operation. This action is substantially completed and
resulted in a total severance cost of $0.3 million;
- During the second quarter of 2005, in order to improve capacity
utilization, DURA announced a plan to streamline a Plettenberg,
Germany, manufacturing operation during 2005 and 2006. In the third
quarter we received approval for this action from the appropriate
Workers' Council and Union. Full identification of the actual
employees has not been completed, and accordingly we are not able to
fully estimate the severance to be incurred, as it will be based on
numerous factors depending on each individual's circumstances. The
completion of this action is expected to be completed by the first
quarter of 2006, and could result in a total severance costs of $3.3
million, of which has $1.3 million has already been incurred;
- During the first quarter of 2005, DURA announced a plan to migrate to
one enterprise resource planning system and centralize many of its
functional operations to better align with current business levels.
These actions are ongoing as we continue to migrate our domestic
operations. We are anticipating total severance costs could be as high
as $2 million domestically, of which $1.2 million has been incurred so
far in 2005. We have not formalized the total impact to our
international operations, since meaningful migration and
centralization will not begin until mid 2006 and are estimated to be
completed sometime in 2007. We do expect that upwards of 200
individuals could be impacted. We have not yet identified specifically
which individuals or group of individuals will be impacted, or in
which international locations they reside. Therefore we are not able
to estimate the termination liability impact at this time. We do
expect however that the international termination costs for this
action will exceed the related estimate for our domestic operations;
- Dura in 2004 closed its Bondoufle, France, sales and engineering
facility and relocated to Velizy, France, which is located near its
French OEM customers. This action resulted in total restructuring
charges of approximately $0.2 million;
- Dura announced in 2004 a plan to consolidate certain of its Body &
Glass Division product lines in Europe. This action is complete and
resulted in total charges of approximately $3.3 million;
- Dura announced in 2004 a plan to exit its Rockford, Illinois, facility
and combine the business with other Dura operations and relocate its
Atwood Mobile Products division headquarters from Rockford, Illinois,
to Elkhart, Indiana. This action is complete and resulted in total
charges of approximately $9.2 million, ($0.9 million in 2005);
- Dura announced in 2004 a plan to exit its Brookfield, Missouri,
facility and combine the business
-29-
with other Dura operations. This action is complete and resulted in
total charges of approximately $3.4 million, ($0.9 million in 2005);
and
- Dura in 2004 exited its Pikeville, Tennessee, facility and combined
the business with other Dura operations. This action is complete and
resulted in total charges of approximately $2.9 million.
Asset Impairments
For the nine months ended October 2, 2005, and October 3, 2004, Dura
recorded $1.3 million and $7.1 million, respectively, of asset impairment
charges related to prior facility consolidation actions. These charges are
reflected as facility consolidation, asset impairments and other charges in the
condensed consolidated statements of operations and were accounted for in
accordance with SFAS No. 144.
A rollforward of the accruals for facility consolidation, asset impairment
and other charges by quarter for the nine months ended October 2, 2005 follows
(in thousands):
Employee Asset Facility
termination impairment closure and
benefits charges other costs Total
----------- ---------- ----------- -------
Balance December 31, 2004 $ 5,306 $ -- $ 522 $ 5,828
Adjustments/Charges 1,046 136 484 1,666
Cash utilizations (3,478) -- (55) (3,533)
Non-cash utilizations/other -- (136) -- (136)
------- ------- ------- -------
Balance April 3, 2005 2,874 -- 951 3,825
------- ------- ------- -------
Adjustments/Charges 1,144 1,129 351 2,624
Cash utilizations (1,728) -- (483) (2,211)
Non-cash utilizations/other -- (1,129) -- (1,129)
------- ------- ------- -------
Balance July 3, 2005 2,290 -- 819 3,109
------- ------- ------- -------
Adjustments/Charges 880 -- 980 1,860
Cash utilizations (876) -- (1,052) (1,928)
Non-cash utilizations/other (416) -- -- (416)
------- ------- ------- -------
Balance October 2, 2005 $ 1,878 $ -- $ 747 $ 2,625
======= ======= ======= =======
Interest Expense
Interest expense for the third quarter of 2005 was $24.5 million, an
increase of $0.6 million, or 2.5 percent from $23.9 million in 2004's third
quarter. Interest expense for the nine months ended October 2, 2005 was $74.4
million, an increase of $7.7 million, or 11.5 percent, from $66.7 million for
the nine months ended October 3, 2004. The increases resulted from increased
borrowings and increased interest rates.
Loss on early extinguishment of debt
The loss for the first nine months of 2005 represents the write-off of debt
issuance costs in connection with the termination of the 2003 credit agreement.
-30-
Income Taxes
The effective income tax rates for the third quarter and first nine months
of 2005 differs from the U.S. federal statutory rate primarily as a result of
lower foreign tax rates, the effects of state taxes and the provision of a
valuation allowances on certain losses in foreign jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2005, DURA used cash from operations of
$52.9 million, compared to generating cash from operations of $60.9 million in
the same period last year. Cash generated from operations before changes in
working capital items was $61.0 million for the first nine months of 2005 a
decrease from the $77.9 million for 2004 as a result of a net loss in 2005
versus net income in 2004. Non-cash working capital used cash of $113.9 million
in the first nine months of 2005 compared to $17.0 million in 2004. The
increased cash usage for working capital resulted primarily resulted from
increased accounts receivable including the termination by a major customer of
its accelerated payment program and delayed payment by several major customers
at quarter end. Two days after quarter end, we received approximately $30
million of such delayed payments.
Net cash used in investing activities was $49.0 million for the first nine
months of 2005 compared to $57.3 million used in 2004. In the first nine months
of 2004, $13.3 million was used for acquisitions, $12.6 million was used for the
final purchase option for the Reiche acquisition, and $0.7 million was used for
a purchase price adjustment for the Creation Group acquisition. In the first
nine months of 2005, $4.3 million was used for an investment in property, plant
and equipment of a Chinese joint venture. Net capital expenditures totaled $44.7
million for the first nine months of 2005, which is line with 2004's $44.0
million. The capital expenditures were primarily for equipment and dedicated
tooling purchases related to new or replacement programs.
Net cash generated in financing activities totaled $7.3 million for the
first nine months of 2005 compared to using cash of $16.6 million in 2004.
Approximately $11.4 million of this amount represents the cash proceeds of the
deferred gain on termination of interest rate swaps.
In February 2005, DURA amended its 2003 Credit Agreement to, among other
things, adjust the total leverage, senior leverage and interest coverage ratios
that it was required to maintain over the next six quarters beginning April 3,
2005. DURA repaid $35.0 million of the Tranche C term loan, in conjunction with
this amendment.
In May 2005, DURA entered into new senior secured credit facilities with an
aggregate borrowing capacity of approximately $325 million, consisting of a
five-year $175 million asset-based revolving credit facility ("2005 Credit
Agreement") and a six-year $150 million senior secured second lien term loan.
Interest under these facilities is based on LIBOR. The senior secured second
lien term loan is due and payable in its entirety in May 2011. Proceeds of
$144.0 million, net of transaction costs for the new revolver and the senior
secured second lien term loan were used to repay 's existing $111 million term
loan C facility and general corporate purposes. The revolver is an asset-backed
revolving credit facility, which is supported by a borrowing base that is
calculated monthly. Availability under the revolver is determined by advances
against eligible accounts receivables, eligible inventory balances and certain
fixed assets. On October 2, 2005, our liquidity under the new senior secured
credit facilities was $250.5 million at October 2, 2005, which includes cash of
$93.7 million. The revolver is secured by certain U.S. and Canadian assets and a
65 percent pledge of the stock of our foreign subsidiaries. The senior secured
second lien term loan is secured by all of the U.S. assets and a 65 percent
pledge of the stock of certain of foreign subsidiaries. In connection with the
termination of the 2003 Credit Agreement, we wrote-off debt issuance costs of
-31-
approximately $3.3 million during the second quarter of 2005. At October 2,
2005, we had no borrowings outstanding under the revolving credit facility.
DURA is limited as to its ability to declare or make certain dividend
payments or other distributions of assets under its 2005 Credit Agreement,
Senior Notes and Subordinated Notes. Certain distributions relating to items
such as a company stock purchase program, tax sharing arrangements, as required
under our Preferred Securities, are permitted.
We also utilize uncommitted overdraft facilities to satisfy the short-term
working capital requirements of its foreign subsidiaries. Currently we have
overdraft facilities available from banks of approximately $14.4 million.
Included in interest expense, net, in the consolidated statements of
operations is approximately $0.7 million and $0.9 million of interest income
earned on cash balances in the quarters ended October 2, 2005 and October 3,
2004, respectively and $2.0 million and $2.1 million for the nine months ended
October 2, 2005 and October 3, 2004, respectively.
DURA's principal source of liquidity is cash flow generated from operations
and borrowings under its unused $175 million revolving credit facility. We
believe that such funds will be sufficient to meet our liquidity needs for at
least the next twelve months. Our principal use of liquidity will be to meet
debt service requirements, finance capital expenditures and to provide working
capital availability. We expect capital expenditures in 2005 to approximate $70
million. These capital expenditures will be used primarily for equipment and
dedicated tooling purchases and facility improvements. The expected capital
expenditures are below the estimated annual depreciation expense of $82 million
in 2005.
Our ability to service our indebtedness will depend on our and the
automotive industry's future performance, which will be affected by prevailing
economic conditions and financial, business, regulatory and other factors.
Certain of these factors are beyond our control. DURA believes that, based upon
current levels of operations, it will be able to meet its debt service
obligations when due. Significant assumptions underlie this belief, including,
among other things, that we will continue to be successful in implementing our
business strategy and that there will be no material adverse developments in our
business, liquidity or capital requirements. If we cannot generate sufficient
cash flow from operations to service our indebtedness and to meet its other
obligations and commitments, DURA might be required to refinance its debt or to
dispose of assets to obtain funds for such purpose. There is no assurance that
refinancing or asset dispositions could be affected on a timely basis or on
satisfactory terms, if at all, or would be permitted by the terms of the New
Credit Agreement. In the event that DURA is unable to refinance its various debt
facilities or raise funds through asset sales, sales of equity or otherwise, our
ability to pay principal of, and interest on, its debt would be impaired. Future
operating results will significantly influence our ability to reduce borrowings
and attract additional financing, through either stock or debt offerings.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
DURA typically experiences decreased revenues and operating income during
the third calendar quarter of each year due to production shutdowns at OEMs for
model changeovers and vacations. The recreational vehicle market is seasonal in
that sales in the fourth quarter are normally at reduced levels.
-32-
EFFECTS OF INFLATION
Inflation potentially affects us in two principal ways: first, a
significant portion of our debt is tied to prevailing short-term interest rates,
which may change as a result of inflation rates, translating into changes in
interest expense; and secondly, general inflation can impact material purchases,
labor and other costs, and most importantly, the ability of our customers to
produce vehicles at attractive customer prices. In many cases, DURA has limited
ability to pass through inflation-related cost increases due to the competitive
nature of the markets that we serve. In the past few years, however, inflation
has not been a significant factor.
FOREIGN CURRENCY TRANSACTIONS
A significant portion of DURA's revenues during the three and nine months
ended October 2, 2005, were derived from manufacturing operations in Europe,
Canada, China and Latin America. The results of operations and the financial
position of our operations in these countries are principally measured in their
respective currencies and translated into U.S. dollars. The effects of foreign
currency fluctuations in such countries are somewhat mitigated by the fact that
cost of sales and other expenses are generally incurred in the same currencies
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 currencies.
DURA's significant Euro denominated operations were favorably impacted by
the Euro strengthening against the U.S. dollar in the first nine months of 2005.
This favorable exchange rate change resulted in increased U.S. dollar revenues
in 2005 of approximately $9 million increase in the third quarter and
approximately $51 million for the first nine months, as compared with the same
periods last year. The fluctuation of the Euro exchange rate to the U.S. dollar
also significantly impacts our consolidated debt levels. At October 2, 2005,
approximately $126.2 million of debt is denominated in Euro or other foreign
currencies.
A significant portion of our assets at October 2, 2005, 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, DURA's consolidated stockholders' investment will fluctuate
depending upon the weakening or strengthening of the U.S. dollar against the
respective foreign currencies.
DURA's strategy for management of currency risk relies primarily upon
conducting its operations in such countries' respective currencies and may, from
time to time, engage in hedging programs intended to reduce 's exposure to
currency fluctuations.
NEW ACCOUNTING PRONOUNCEMENTS
The FASB revised SFAS No. 123 in December 2004 and issued SFAS No. 123(R).
This Statement supercedes APB No. 25, which resulted in no stock-based employee
compensation cost related to stock options if the options granted had an
exercise price equal to the market value of the underlying common stock on the
date of grant. SFAS No. 123(R) requires recognition of employee services
provided in exchange for a share-based payment based on the grant date fair
market value. In April 2005, the SEC delayed the effective date of SFAS No.
123(R) to fiscal years beginning after June 15, 2005. As a result, DURA is
required to adopt SFAS No. 123(R) as of January 1, 2006. As of the effective
date, this Statement applies to all new awards issued as well as awards
modified, repurchased, or cancelled. Additionally, for stock-based awards issued
prior to the effective date, compensation cost attributable to future services
will be recognized as the remaining service is rendered. DURA may also elect to
restate prior periods by applying a modified retrospective method to periods
prior to the effective date. See Note
-33-
3 for SFAS No. 123 required disclosures and the estimated impact of adoption of
SFAS 123(R) if it had been adopted as of the beginning of the periods presented
and for the potential impact on the next three year's compensation expense had
the current options not been fully vested on October 27, 2005.
The Emerging Issues Task Force ("EITF") has recently released EITF Issue
No. 05-05, "Accounting for Early Retirement or Postemployment Programs with
Specific Features (such as Terms Specified in Altersteilzeit Early Retirement
Arrangements)". Altersteilzeit (ATZ) in Germany is an early retirement program
designed to create an incentive for employees, within a certain age group, to
leave their employers before the legal retirement age. Although established by
law, the actual arrangement between employers and employees is negotiated. EITF
Issue 05-05 will require, as of the beginning of 2006, DURA to accrue special
retirement benefits. We are currently reviewing the impact, if any, to DURA, but
do not believe it will be material.
The FASB issued on July 15, 2005, for comment an exposure draft of a
proposed interpretation to SFAS 109 on the accounting for uncertain tax
positions, that seeks to reduce widespread diversity in accounting for income
taxes. The exposure draft requires that a tax position meet a "probable
recognition threshold" for the benefit of the uncertain tax position to be
recognized in the financial statements. This threshold is to be met assuming
that the tax authorities will examine the uncertain tax position. The exposure
draft contains guidance with respect to the measurement of the benefit that is
recognized for an uncertain tax position, when that benefit should be
derecognized, and other matters. The proposed initial effective date for this
interpretation has been withdrawn FASB as they consider further deliberations on
the comments they received, which could result in modifications to the proposed
interpretation. Until a more defined proposed interpretation is issued, we
cannot determine the potential impact of this proposed interpretation on our
recording of deferred tax assets. While still under review, we believe any
material tax position we have taken will meet the currently defined "probable
recognition threshold".
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. When used in this Form 10-Q, the words "anticipate",
"believe", "estimate", "expect", "intends", and similar expressions, as they
relate to, are intended to identify forward-looking statements. Such
forward-looking statements are based on the beliefs of DURA's management as well
as on assumptions made by and information currently available to us 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 our control, such as risks
relating to: (i) the degree to which we are leveraged; (ii) our 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) our ability to continue to implement our acquisition
consolidation and cost reduction strategies; and (vii) the highly competitive
nature of the automotive supply industry. All subsequent written and oral
forward-looking statements attributable to DURA or persons acting on behalf of
it are expressly qualified in their entirety by such cautionary statements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On May 12, 2005, DURA terminated its fixed to floating interest rate swap
contracts having an aggregated notional amount of $400 million, which we
established in conjunction with the 2002 Senior Notes and 2003 Senior Notes
offerings, respectively. DURA realized a cash net gain of $11.4 million upon
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their settlement. This gain is being amortized over the remaining life of the
2003 and 2002 notes. At October 2, 2005, the deferred gain is approximately
$10.8 million and is classified in other noncurrent liabilities. On May 16,
2005, DURA entered into a new set of fixed to floating interest rate swap
contracts, expiring in April 2012 and also having an aggregate notional amount
of $400 million with various financial institutions, replacing those that were
terminated. At October 2, 2005, these outstanding interest rate swap contracts
effectively converted $400 million of our Senior Notes into floating rate
obligations. DURA receives payments at a fixed rate (8.625%), while it makes
payments at variable rates (7.38% at October 2, 2005). The net interest paid or
received is included in interest expense. DURA designated these swap contracts
as fair value hedges at their inception. At October 2, 2005, the fair value of
the interest rate swap contracts was a liability of approximately $6.2 million,
representing the estimated loss that would accrue if we were to terminate the
agreements, and is included in noncurrent liabilities with a corresponding
decrease to debt in the accompanying condensed consolidated October 2, 2005
balance sheet.
From time to time, DURA also uses forward exchange contracts to hedge its
foreign currency exposure related to certain intercompany transactions. There
were no contracts outstanding at October 2, 2005.
There have been no other material changes to our exposures to market risk
since October 2, 2005.
ITEM 4: CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of October 2, 2005, an evaluation was carried out under the supervision
and with the participation of the company's management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based
upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that the design and operation of these disclosure controls and
procedures were effective to ensure that information required to be disclosed by
the company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in applicable rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING DURING THE QUARTER ENDED
OCTOBER 2, 2005
There were no significant changes in our internal control over financial
reporting that occurred during the Company's quarter ended October 2, 2005, that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
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PART II. OTHER INFORMATION
AUTOMOTIVE SYSTEMS, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings:
Other than as reported in 's 2004 Annual Report on Form 10-K under the
caption "Legal Proceedings," DURA is not currently a party to any material
pending legal proceedings, other than routine matters incidental to the
business of DURA.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
31.1 Certification by Lawrence A. Denton, President, Chief Executive
Officer and Director
31.2 Certification by Keith R. Marchiando, Vice President, Chief
Financial Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
During the three months ended October 2, 2005, for which this report
is filed, Dura Automotive Systems, Inc. filed the following report on
Form 8-K:
July 28, 2005, Form 8-K reporting under "Item 2.02 Results of
Operations and Financial Condition" disclosing earnings for the
three months ended July 3, 2005.
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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.
DURA AUTOMOTIVE SYSTEMS, INC.
Date: November 14, 2005 By /s/ Keith R. Marchiando
---------------------------------------
Keith R. Marchiando
Vice President, Chief Financial Officer
(Principal accounting and financial
officer)
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EXHIBIT INDEX
Exhibit 31.1 Certification by Lawrence A. Denton, President, Chief Executive
Officer and Director
Exhibit 31.2 Certification by Keith R. Marchiando, Vice President, Chief
Financial Officer
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002