FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 1-12733
TOWER AUTOMOTIVE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 41-1746238
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4508 IDS CENTER 55402
MINNEAPOLIS, MINNESOTA (Zip Code)
(Address of principal executive offices)
(612) 342-2310
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's common stock, par value
$.01 per share, at October 15, 1998 was 46,239,438 shares adjusted for the
two-for-one stock split issued to stockholders of record on June 30, 1998.
TOWER AUTOMOTIVE, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations (unaudited) for
the Three Months Ended September 30, 1998 and 1997
Condensed Consolidated Statements of Operations (unaudited) for
the Nine Months Ended September 30, 1998 and 1997
Condensed Consolidated Balance Sheets at September 30, 1998
(unaudited) and December 31, 1997
Condensed Consolidated Statements of Cash Flows (unaudited) for
the Nine Months Ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
-2-
ITEM 1 - FINANCIAL INFORMATION
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except per Share Amounts - Unaudited)
Three Months Ended Sept. 30,
----------------------------
1998 1997
------------- ----------
Revenues $ 444,851 $ 349,507
Cost of sales 377,862 302,318
------------- ----------
Gross profit 66,989 47,189
Selling, general and administrative expenses 24,003 17,190
Amortization expense 3,461 2,583
------------- ----------
Operating income 39,525 27,416
Interest expense, net 8,620 7,706
------------- ----------
Income before provision for income taxes 30,905 19,710
Provision for income taxes 12,362 7,882
------------- ----------
Income before equity in earnings of joint
ventures and minority interest 18,543 11,828
Equity in earnings of joint ventures 2,342 --
Minority interest - dividends on trust
preferred securities, net (2,619) --
------------- ----------
Net income $ 18,266 $ 11,828
------------- ----------
------------- ----------
Basic earnings per share $ 0.40 $ 0.26
------------- ----------
------------- ----------
Diluted earnings per share $ 0.36 $ 0.25
------------- ----------
------------- ----------
The accompanying notes are an integral part
of these condensed consolidated statements.
-3-
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except per Share Amounts - Unaudited)
Nine Months Ended Sept. 30,
---------------------------
1998 1997
------------ ----------
Revenues $ 1,367,854 $ 801,896
Cost of sales 1,166,822 689,566
------------ ----------
Gross profit 201,032 112,330
Selling, general and administrative expenses 65,968 38,364
Amortization expense 10,034 5,247
------------ ----------
Operating income 125,030 68,719
Interest expense, net 33,230 15,852
------------ ----------
Income before provision for income taxes 91,800 52,867
Provision for income taxes 36,722 21,140
------------ ----------
Income before equity in earnings of joint
ventures and minority interest 55,078 31,727
Equity in earnings of joint ventures 9,013 --
Minority interest - dividends on trust
preferred securities, net (3,259) --
------------ ----------
Income before extraordinary item 60,832 31,727
Extraordinary loss on early extinguishment of
debt, net of income taxes -- 2,434
------------ ----------
Net income $ 60,832 $ 29,293
------------ ----------
------------ ----------
Basic earnings per share:
Income before extraordinary item $ 1.32 $ 0.81
Extraordinary item -- (0.06)
------------ ----------
Net income $ 1.32 $ 0.75
------------ ----------
------------ ----------
Diluted earnings per share:
Income before extraordinary item $ 1.18 $ 0.78
Extraordinary item -- (0.05)
------------ ----------
Net income $ 1.18 $ 0.73
------------ ----------
------------ ----------
The accompanying notes are an integral part
of these condensed consolidated statements.
-4-
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
Sept. 30, December 31,
Assets 1998 1997
- ----------------------------------------------- ------------ ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 163 $ --
Accounts receivable 287,206 219,256
Inventories 84,119 73,809
Prepaid tooling and other 105,615 78,217
------------ ------------
Total current assets 477,103 371,282
------------ ------------
Property, plant and equipment, net 778,052 698,511
Restricted cash 2,648 7,902
Deferred income taxes 12,253 14,108
Investments in joint ventures 205,772 147,188
Goodwill and other assets, net 473,468 441,097
------------ ------------
$ 1,949,296 $ 1,680,088
------------ ------------
------------ ------------
Liabilities and Stockholders' Investment
- -----------------------------------------------
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 7,209 $ 5,004
Accounts payable 216,018 143,902
Accrued liabilities 132,625 81,784
------------ ------------
Total current liabilities 355,852 230,690
------------ ------------
Long-term debt, net of current maturities 351,047 513,653
Obligations under capital leases, net of current
maturities 26,891 30,281
Convertible subordinated notes 200,000 200,000
Other noncurrent liabilities 178,088 190,185
------------ ------------
Total non-current liabilities 756,026 934,119
------------ ------------
Mandatorily redeemable trust convertible preferred
securities 258,750 --
Stockholders' investment:
Preferred stock -- --
Common stock 462 460
Warrants to acquire common stock 2,000 2,000
Additional paid-in capital 425,980 423,425
Retained earnings 150,226 89,394
------------ ------------
Total stockholders' investment 578,668 515,279
------------ ------------
$ 1,949,296 $ 1,680,088
------------ ------------
------------ ------------
The accompanying notes are an integral part
of these condensed consolidated balance sheets.
-5-
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands - Unaudited)
Nine Months Ended Sept. 30,
--------------------------
1998 1997
---------- ----------
OPERATING ACTIVITIES:
Net income $ 60,832 $ 29,293
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 64,925 30,044
Extraordinary loss on extinguishment of debt -- 2,434
Changes in other operating items (2,353) (5,189)
---------- ----------
Net cash provided by operating activities 123,404 56,582
---------- ----------
INVESTING ACTIVITIES:
Acquisitions and investment in joint venture (116,827) (782,447)
Net proceeds from sale of Hinge Business 35,631 --
Capital expenditures, net (122,308) (81,742)
Change in restricted cash 5,254 3,037
---------- ----------
Net cash used in investing activities (198,250) (861,152)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from borrowings 786,231 602,989
Repayment of debt (965,198) (304,429)
Proceeds from issuance of convertible debt -- 194,150
Proceeds from issuance of stock 2,094 285,796
Cash portion of extraordinary loss on extinguishment of debt -- (3,010)
Proceeds from issuance of preferred securities 251,350 --
Other, net 532 188
---------- ----------
Net cash provided by financing activities 75,009 775,750
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 163 (28,820)
CASH AND CASH EQUIVALENTS:
Beginning of period -- 39,596
---------- ----------
End of period $ 163 $ 10,776
---------- ----------
---------- ----------
The accompanying notes are an integral part
of these condensed consolidated statements.
-6-
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements have been
prepared by Tower Automotive, Inc. (the "Company"), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission.
The information furnished in the condensed consolidated financial
statements includes normal recurring adjustments and reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of such financial statements. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although the
Company believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these condensed consolidated
financial statements be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
Revenues and operating results for the three and nine months ended
September 30, 1998 are not necessarily indicative of the results to be
expected for the full year.
2. Inventories consisted of the following (in thousands):
Sept. 30, Dec. 31,
1998 1997
--------- ---------
Raw materials $ 26,317 $ 14,601
Work in process 30,323 38,763
Finished goods 27,479 20,445
--------- ---------
$ 84,119 $ 73,809
--------- ---------
--------- ---------
3. On June 9, 1998, Tower Automotive Capital Trust (the "Issuer"), a wholly
owned statutory business trust of the Company, completed the offering of
$258.8 million of its 6 3/4% Trust Convertible Preferred Securities
("Preferred Securities"), resulting in net proceeds of approximately $251.3
million. The Preferred Securities are redeemable, in whole or in part, on
or after June 30, 2001 and all Preferred Securities must be redeemed no
later than June 30, 2018. The Preferred Securities are convertible, at the
option of the holder, into common stock of the Company at a rate of 1.6280
shares of common stock for each Preferred Security, which is equivalent to
a conversion price of $30.713 per share. The net proceeds of the offering
were used to repay outstanding indebtedness. Minority interest reflected
in the accompanying condensed consolidated statements of operations
represents dividends on the Preferred Securities at a rate of 6 3/4%, net
of income tax benefits at the Company's incremental tax rate of 40%.
No separate financial statements of the Issuer have been included herein.
The Company does not consider that such financial statements would be
material to holders of Preferred Securities because (i) all of the voting
securities of the Issuer are owned, directly or indirectly, by the Company,
a reporting company under the Exchange Act, (ii) the Issuer has no
independent operations and exists for the sole purpose of issuing
securities representing undivided beneficial interests in the assets of the
Issuer and investing the proceeds thereof in
-7-
6 3/4% Convertible Subordinated Debentures due June 30, 2018 issued by
the Company and (iii) the obligations of the Issuer under the Preferred
Securities are fully and unconditionally guaranteed by the Company.
4. On May 19, 1998, the Company's Board of Directors approved a two-for-one
stock split, which was effected as a stock dividend. On July 15, 1998,
stockholders were issued one additional share of common stock for each
share of common stock held on the record date of June 30, 1998. All
references to the number of common shares and per share amounts have been
adjusted to reflect the stock split on a retroactive basis.
5. Basic earnings per share were computed by dividing net income by the
weighted average number of common shares outstanding during the respective
quarters. Diluted earnings per share were determined on the assumptions:
(i) the Edgewood notes were converted at the beginning of the respective
periods, (ii) the Convertible Subordinated Notes were converted upon
issuance on July 29, 1997, and (iii) the Preferred Securities were
converted upon issuance on June 9, 1998 as follows (in thousands, except
per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Net income $ 18,266 $ 11,828 $ 60,832 $ 29,293
Interest expense on Edgewood notes,
net of tax 14 22 45 92
Interest expense on Convertible
Subordinated Notes, net of tax 1,627 1,128 4,881 1,128
Dividends on Preferred Securities,
net of tax 2,619 -- 3,259 --
--------- --------- --------- ---------
Net income applicable to common
stockholders -- diluted $ 22,526 $ 12,978 $ 69,017 $ 30,513
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of
common shares outstanding 46,236 45,724 46,174 38,974
Dilutive effect of outstanding stock
options and warrants after application
of the treasury stock method 427 508 499 522
Dilutive effect of Edgewood notes,
assuming conversion 539 808 549 814
Dilutive effect of Convertible
Subordinated Notes,
assuming conversion 7,728 5,152 7,728 1,718
Dilutive effect of Preferred Securities,
assuming conversion 8,425 -- 3,495 --
--------- --------- --------- ---------
Diluted shares outstanding 63,355 52,192 58,445 42,028
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic earnings per share $ 0.40 $ 0.26 $ 1.32 $ 0.75
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted earnings per share $ 0.36 $ 0.25 $ 1.18 $ 0.73
--------- --------- --------- ---------
--------- --------- --------- ---------
-8-
The Company adopted SFAS No. 128, "Earnings per Share," effective December
15, 1997. As a result, the Company's reported earnings per share ("EPS")
for the nine months ended September 30, 1997 have been restated as follows:
Basic Diluted
------- -------
EPS as previously reported $ 0.73 $ 0.73
Effect of SFAS No. 128 0.02 --
------- -------
EPS as restated $ 0.75 $ 0.73
------- -------
------- -------
6. Long-term debt consisted of the following (in thousands):
Sept. 30, December 31,
1998 1997
--------- ------------
Revolving credit facility $ 293,021 $ 465,599
Industrial development revenue bonds 43,765 43,765
Edgewood notes 1,636 1,824
Other 15,387 3,187
--------- ---------
353,809 514,375
Less-current maturities (2,762) (722)
--------- ---------
Total long-term debt $ 351,047 $ 513,653
--------- ---------
--------- ---------
On April 18, 1997, the Company entered into a revolving credit facility
that provides for borrowings of up to $750 million on an unsecured basis,
with a letter of credit sublimit of $75 million. In addition, under the
terms of the credit facility, the equivalent of up to $85 million in
borrowings can be denominated in foreign currency. As of September 30,
1998, approximately $80.1 million of the outstanding borrowings are
denominated in Italian lira. The amount available under the revolving
credit facility reduces to $675 million in April 2000, $600 million in
April 2001 and $500 million in April 2002. The credit facility has a final
maturity of April 2003. Interest on the revolving credit facility is at
the prime rate or LIBOR plus a margin ranging from 17 to 50 basis points
depending upon the ratio of the consolidated indebtedness of the Company to
its total capitalization. The weighted average interest rate for such
borrowings was 6.7% at September 30, 1998. The credit facility requires
the Company to meet certain financial covenants, including but not limited
to a minimum interest coverage, maximum debt to capital, maximum leverage
and maximum senior leverage ratio. The Company was in compliance with all
covenants as of September 30, 1998.
On July 29, 1997, the Company completed the sale of $200 million of 5%
Convertible Subordinated Notes (the "Notes") pursuant to a private
placement. The Notes are due on August 1, 2004 and are convertible into
the Company's Common Stock at a conversion price of $25.88 per share. The
Notes are unsecured and may not be redeemed until August 1, 2000, except in
the event of a change in control. Proceeds from the Notes were used to
repay outstanding indebtedness under the revolving credit facility.
-9-
7. On April 18, 1997, the Company completed the following transactions:
(a) Issued 17,000,000 shares of Common Stock in a public offering at an
offering price of $17.50 per share (the "Offering"). Net proceeds to
the Company, after underwriting discounts and offering expenses, were
approximately $285 million.
(b) Repaid outstanding senior notes with a principal balance of $65
million plus accrued interest. In connection with the repayment, the
Company paid prepayment penalties and wrote off deferred financing
costs which resulted in an extraordinary loss, net of income taxes, of
approximately $2.4 million.
(c) Acquired and assumed substantially all of the assets and liabilities
of Automotive Products Company ("APC"), a division of A.O. Smith
Corporation. The aggregate purchase price consisted of approximately
$700 million in cash and was financed with the proceeds from the
Offering and borrowings under the credit facility. APC, which has 15
facilities, designs and manufactures frames, frame components, engine
cradles, suspension components and modules for the North American
automotive and heavy truck industries. This acquisition has been
accounted for using the purchase method of accounting and,
accordingly, APC's assets and liabilities have been recorded at fair
value as of the acquisition date, with the excess purchase price
recorded as goodwill. Additional purchase liabilities recorded
included approximately $19.1 million for costs associated with the
shutdown and consolidation of certain acquired facilities and $8.9
million for general and payroll related costs primarily for planned
employee termination activities. At September 30, 1998, liabilities
of approximately $18.5 million for facility-related costs and $4.1
million in excess payroll costs remained on the condensed consolidated
balance sheet.
On May 9, 1997, the Company acquired Societa Industria Meccanica e
Stampaggio S.p.A. ("SIMES"). SIMES designs and manufactures structural
metal components in two facilities in Italy, principally for Fiat. The
purchase price consisted of $50.7 million in cash, plus an additional $3
million based upon the future operating performance of SIMES. The results
of operations of SIMES are not significant to the operating results of the
Company as a whole and have, therefore, been excluded from the pro forma
results.
On October 9, 1997, the Company completed an agreement to become a partner
in Metalsa S. de R.L. ("Metalsa") with Promotora de Empresas Zano, S.A. de
C.V. ("Proeza"). Metalsa is the largest supplier of vehicle frames and
structures in Mexico. Under the terms of the agreement, the Company
acquired a 40% equity interest in Metalsa. In addition, the parties have
entered into a technology sharing arrangement that will enable both
companies to utilize the latest available product and process technology.
Metalsa is headquartered in Monterrey, Mexico and has manufacturing
facilities in Monterrey and San Luis Potosi, Mexico. Metalsa's customers
include Chrysler, General Motors, Ford, Nissan and Mercedes. In connection
with this agreement, the Company paid $120 million to Proeza, with an
additional amount of up to $45 million payable based upon future net
earnings of Metalsa.
-10-
On March 11, 1998, the Company acquired a 40 percent equity interest in
Metalurgica Caterina S.A. ("Caterina"), a supplier of structural stampings
and assemblies to the Brazilian automotive market. In addition, the
Company also has the right to acquire the remaining 60 percent of the
equity of Caterina in the future. The Company paid approximately $48
million for its initial equity interest. This investment added Volkswagen
and Mercedes as new customers.
Effective July 1, 1998, the Company acquired IMAR, s.r.l. ("IMAR") and
OSLAMT S.p.A. ("OSLAMT"). IMAR designs and manufactures structural parts
and assemblies from two facilities in Italy, primarily for Fiat. OSLAMT
designs and manufactures tools and assemblies for the automotive market
from its facility in Turin, Italy. The purchase price consisted of
approximately $32.5 million in cash plus the assumption of approximately
$17 million of indebtedness with an additional amount of up to $15 million
payable if IMAR achieves certain operating targets following the
acquisition. The results of operations of IMAR and OSLAMT are not
significant to the operating results of the Company as a whole and have,
therefore, been excluded from the pro forma results.
On August 31, 1998, the Company sold its hinge business (the "Hinge
Business") to Dura Automotive Systems, Inc. for net proceeds of
approximately $35.6 million which approximated the book value of the net
assets sold. The net proceeds were used to repay outstanding indebtedness
under the revolving credit facility. The results of operations of the
Hinge Business are not significant to the operating results of the Company
as a whole and have, therefore, been excluded from the pro forma
adjustments.
Following are unaudited pro forma condensed results of operations for the
nine months ended September 30, 1997 as if the following were completed at
the beginning of the period: (i) the acquisition of APC; (ii) the
refinancing of the old credit agreement and the redemption of outstanding
senior notes; (iii) the Offering; (iv) the sale of the Notes; and (v) the
issuance of the Preferred Securities. The results of operations of APC for
the period prior to its acquisition date, which are included in the
unaudited pro forma financial information, reflect pretax charges of $66.7
million relating to losses to be incurred on certain future contracts,
valuation reserves related to capitalized tooling and other assets and the
recognition of obligations to certain APC customers (in thousands, except
per share data):
Revenues $1,086,870
----------
----------
Operating income $ 38,741
----------
----------
Net income $ 1,318
----------
----------
Shares outstanding
Basic 45,584
----------
----------
Diluted 63,059
----------
----------
Net income per share
Basic $ 0.03
----------
----------
Diluted $ 0.09
----------
----------
The unaudited pro forma financial information does not purport to represent
what the Company's results of operations would actually have been if such
transactions had occurred on such dates.
-11-
8. Effective October 1997, the Company is party to interest rate swap
contracts to hedge against interest rate exposures on certain floating-rate
indebtedness. These contracts, which expire in November 2002, have the
effect of converting the floating-rate interest related to a notional
amount of $300 million of borrowings outstanding under the revolving credit
facility into fixed-rate interest of approximately 6.75%. These interest
rate swap contracts were entered into in order to balance the Company's
fixed-rate and floating-rate debt portfolios. Under these interest rate
swaps, the Company agrees with the other party to exchange, at specified
intervals, the difference between fixed-rate and floating-rate interest
amounts calculated by reference to an agreed notional principal amount.
While the Company is exposed to credit loss on its interest rate swap in
the event of nonperformance by the counterparty to such swap, management
believes that such nonperformance is unlikely to occur given the financial
resources of the counterparty.
9. Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement established standards for reporting
and display of comprehensive income and its components. 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. For the Company, comprehensive income represents net income
adjusted for foreign currency translation adjustments. Comprehensive
income was approximately $60.7 million and $29.3 million for the nine
months ended September 30, 1998 and 1997, respectively.
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
requires disclosure of business and geographic segments in the consolidated
financial statements of the Company. The Company will adopt SFAS No. 131
in 1998 and is currently analyzing the impact it will have on the
disclosures in its financial statements.
The FASB has also issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," effective for fiscal years
beginning after December 31, 1997. SFAS No. 132 revises certain of the
disclosure requirements, but does not change the measurement or recognition
of those plans. The adoption of SFAS No. 132 will result in revised and
additional disclosures, but will have no effect on the financial position,
results of operations, or liquidity of the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for the years beginning
after June 15, 1999. SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge criteria are met.
Special accounting for qualifying hedges allow a derivative's gains or
losses to offset related results on the hedged item in the income statement
and requires that a company must formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. The
Company has not yet quantified the impact of adopting SFAS No. 133 and has
not yet determined the timing or method of adoption.
-12-
10. Supplemental cash flow information (in thousands):
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
--------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Cash paid for -
Interest $ 10,913 $ 9,540 $ 33,519 $ 15,514
Income taxes 455 2,910 5,663 9,990
-13-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1997
REVENUES -- Revenues for the three months ended September 30, 1998 were $444.9
million, compared to $349.5 million for the three months ended September 30,
1997. The increase is due to incremental new business of approximately $123.5
million, including business relating to the Ford F-Series and Explorer, Dodge
Durango, Dakota and Ram Club Cab pick-ups, Honda Accord and the Chrysler LH line
offset by a decline in production of approximately $12.5 million on certain
models served by the Company, including the Ford Windstar and Villager. The
General Motors strike had the effect of reducing revenues by approximately $15.4
million during the quarter.
COST OF SALES -- Cost of sales as a percentage of revenues for the three
months ended September 30, 1998 was 84.9% compared to 86.5% for the three months
ended September 30, 1997. The increase in gross margin was due to operating
efficiencies and productivity initiatives of approximately $4.4 million
implemented particularly at certain of the Company's business units acquired in
1997 from A.O. Smith Corporation. These initiatives included reductions in
interplant freight, reduced overtime and improved efficiency and increased
uptime and throughput at the APC locations. The balance of the improvement of
$2.5 million was a result of increased production volumes on light truck, sport
utility and other models served by the Company.
S, G & A EXPENSES -- Selling, general and administrative expenses increased to
$24.0 million, or 5.4% of revenues, for the three months ended September 30,
1998 compared to $17.2 million, or 4.9% of revenues, for the three months ended
September 30, 1997. Approximately $3.5 million of the increase relates to a
charge taken during the three months ended September 30, 1998 to mark to market
an interest rate agreement. The remaining increase was due primarily to
incremental costs associated with the Company's acquisitions of IMAR, s.r.l.
("IMAR") and OSLAMT S.p.A. ("OSLAMT") in July 1998 as well as increased
engineering and program development costs related to new business.
AMORTIZATION EXPENSE -- Amortization expense for the three months ended
September 30, 1998 was $3.5 million compared to $2.6 million for the three
months ended September 30, 1997. The increase was due to amortization related
to the costs associated with (i) the July 1997 sale of $200 million of 5%
Convertible Subordinated Notes (the "Notes"), (ii) the June 1998 offering of
$258.8 million of 6 3/4% Trust Convertible Preferred Securities ("Preferred
Securities") and incremental goodwill amortization related to the acquisitions
of IMAR and OSLAMT.
INTEREST EXPENSE -- Interest expense for the three-month period ended
September 30, 1998 was $8.6 million compared to $7.7 million for the three
months ended September 30, 1997. Interest expense was affected by (i) increased
borrowings incurred to fund the Company's joint venture interests in Metalsa S.
de R.L. ("Metalsa") in October 1997 and Metalurgica Caterina S.A. ("Caterina")
in March 1998, (ii) increased borrowings incurred to fund the Company's
acquisition of IMAR and OSLAMT in July 1998, (iii) the proceeds from the July
1997 sale of the Notes and (iv) the proceeds from the June 1998 offering of
Preferred Securities.
-14-
INCOME TAXES -- The effective income tax rate was 40% for the three months
ended September 30, 1998 and 1997. The effective rates differed from the
statutory rates primarily as a result of state taxes and non-deductible goodwill
amortization.
EQUITY IN EARNINGS OF JOINT VENTURES -- Equity in earnings of joint ventures
for the three months ended September 30, 1998 represents the Company's share of
the earnings from its joint venture interests in Metalsa and Caterina.
MINORITY INTEREST -- Minority interest for the three months ended September
30, 1998 represents dividends, net of income tax benefits, on the Preferred
Securities.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES -- Revenues for the nine months ended September 30, 1998 were $1.4
billion, a 70.6% increase compared to $801.9 million for the nine months ended
September 30, 1997. The increase is due to the acquisitions of APC, SIMES, IMAR
and OSLAMT, which totaled approximately $336.6 million, and new business awards,
which totaled approximately $266.8 million, including business relating to the
Ford Ranger, Explorer F-Series and Econoline, Dodge Durango, Dakota and Ram Club
Cab pick-ups, Honda Accord and the Chrysler LH line. These increases were
offset by a decline in production of certain models served by the Company of
approximately $12.7 million. In addition, the General Motors strike had the
effect of reducing revenues by approximately $24.7 million during 1998.
COST OF SALES -- Cost of sales as a percentage of revenues for the nine months
ended September 30, 1998 was 85.3% compared to 86.0% for the nine months ended
September 30, 1997. The increase in gross margin was due to operating
efficiencies and productivity initiatives of approximately $12.1 million
implemented particularly at certain of the Company's business units acquired
from A.O. Smith Corporation in 1997 as well as increased production volumes on
models served by the Company. These increases were partially offset by a higher
proportion of components purchased from outside suppliers as a result of the APC
acquisition and launch costs associated with new business totaling approximately
$.5 million.
S, G & A EXPENSES -- Selling, general and administrative expenses increased to
$66.0 million, or 4.8% of revenues, for the nine months ended September 30, 1998
compared to $38.4 million, or 4.8% of revenues, for the nine months ended
September 30, 1997. The increased expense was due primarily to incremental
costs associated with the Company's acquisitions of APC, SIMES, IMAR and OSLAMT
as well as increased engineering and program development costs related to new
business.
AMORTIZATION EXPENSE -- Amortization expense for the nine months ended September
30, 1998 was $10.0 million compared to $5.2 million for the nine months ended
September 30, 1997. The increase was due to amortization related to the costs
associated with (i) the July 1997 sale of the Notes, (ii) the June 1998 offering
Preferred Securities and incremental goodwill amortization related to the
acquisitions of IMAR and OSLAMT.
INTEREST EXPENSE -- Interest expense for the nine-month period ended September
30, 1998 was $33.2 million compared to $15.9 million for the nine months ended
September 30, 1997. Interest expense was affected by (i) increased borrowings
incurred to fund the acquisitions of APC, SIMES, IMAR and OSLAMT, and the
Company's joint venture interests in Metalsa and
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Caterina, (ii) more favorable terms related to the Company's borrowings under
the credit agreement entered into in April 1997, (iii) the proceeds from the
April 1997 offering of 17,000,000 shares of Common Stock at $17.50 per share
(the "Offering"), (iv) the proceeds from the July 1997 sale of the Notes and
(v) the proceeds from the June 1998 offering of Preferred Securities.
INCOME TAXES -- The effective income tax rate was 40% for the nine months
ended September 30, 1998 and 1997. The effective rates differed from the
statutory rates primarily as a result of state taxes and non-deductible goodwill
amortization.
EQUITY IN EARNINGS OF JOINT VENTURES -- Equity in earnings of joint ventures
for the nine months ended September 30, 1998 represents the Company's share of
the earnings from its joint venture interests in Metalsa and Caterina.
MINORITY INTEREST -- Minority interest for the nine months ended September 30,
1998 represents dividends, net of income tax benefits, on the Preferred
Securities.
LIQUIDITY AND CAPITAL RESOURCES
In April 1997, the Company entered into a revolving credit facility that
provides for borrowings of up to $750 million on an unsecured basis, with a
letter of credit sublimit of $75 million. In addition, under the terms of the
credit facility, the equivalent of up to $85 million in borrowings can be
denominated in foreign currency. As of September 30, 1998, approximately $80.1
million of the $293.0 million outstanding borrowings under the revolving credit
facility are denominated in Italian lira. The amount available under the
revolving credit facility reduces to $675 million in April 2000, $600 million in
April 2001 and $500 million in April 2002. The credit facility has a final
maturity of April 2003. Interest on the credit facility is at the prime rate or
LIBOR plus a margin ranging from 17 to 50 basis points depending upon the ratio
of the consolidated indebtedness of the Company to its total capitalization.
The weighted average interest rate for such borrowings was 6.7% at September 30,
1998.
The debt agreements described above contain various restrictive covenants which,
among other matters, require the Company to maintain certain financial ratios,
including but not limited to minimum interest coverage, maximum debt to capital,
maximum leverage and maximum senior leverage. The agreements also limit
additional indebtedness, capital expenditures and cash dividends. The Company
was in compliance with all debt covenants as of September 30, 1998.
On April 18, 1997, the Company acquired APC, a division of A.O. Smith
Corporation. The aggregate purchase price was approximately $700 million and
was financed with the proceeds from the Offering and borrowings under the credit
facility. APC, which has 15 facilities, designs and manufactures frames, frame
components, engine cradles, suspension components and modules for the North
American automotive and heavy truck industries. This acquisition has been
accounted for using the purchase method of accounting and, accordingly, APC's
assets and liabilities have been recorded at fair value as of the acquisition
date, with the excess purchase price recorded as goodwill. Additional purchase
liabilities recorded included approximately $19.1 million for costs associated
with the shutdown and consolidation of certain acquired facilities and $8.9
million for general and payroll related costs primarily for planned employee
termination activities. At September 30, 1998, liabilities of approximately
$18.5 million for facility-related costs and $4.1 million in excess payroll
costs remained on the condensed consolidated balance sheet.
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The Company financed the cash portion of the May 1996 acquisition of MSTI
through the issuance of two series of senior notes having an aggregate principal
amount of $65 million. The senior notes were retired in connection with the
Offering and the new revolving credit facility described above. In connection
with the retirement, the Company paid prepayment penalties and wrote off
deferred financing costs which resulted in an extraordinary loss, net of income
taxes, of approximately $2.4 million.
On May 9, 1997, the Company acquired SIMES, headquartered in Turin, Italy.
SIMES designs and manufactures structural metal components in two facilities in
Italy, principally for Fiat. The purchase price was approximately $50.7 million
and was financed with borrowings under the Company's revolving credit facility.
The Company may pay an additional $3 million in the future if certain operating
targets are met by SIMES.
In July 1997, the Company completed the sale of the Notes pursuant to a private
placement. The Notes are due on August 1, 2004 and are convertible into the
Company's Common Stock at a conversion price of $25.88 per share. The Notes are
unsecured and may not be redeemed until August 1, 2000, except in the event of a
change in control. Proceeds from the Notes were used to repay outstanding
indebtedness under the revolving credit facility.
On October 9, 1997, the Company completed an agreement to become a partner in
Metalsa with Promotora de Empresas Zano, S.A. de C.V. ("Proeza"). Metalsa is
the largest supplier of vehicle frames and structures in Mexico. Under the
terms of the agreement, the Company acquired a 40 percent equity interest in
Metalsa. In addition, the parties have entered into a technology sharing
arrangement that will enable both companies to utilize the latest available
product and process technology. Metalsa is headquartered in Monterrey, Mexico
and has manufacturing facilities in Monterrey and San Luis Potosi, Mexico.
Metalsa's customers include Chrysler, General Motors, Ford, Nissan and Mercedes.
In connection with this agreement, the Company paid $120 million to Proeza, with
an additional amount of up to $45 million payable based upon the net earnings of
Metalsa in 1998, 1999 and 2000. The investment in Metalsa was financed with
proceeds from borrowings under the Company's revolving credit facility.
Effective October 1997, the Company is party to interest rate swap contracts to
hedge against interest rate exposures on certain floating-rate indebtedness.
These contracts, which expire in November 2002, have the effect of converting
the floating-rate interest related to a notional amount of $300 million of
borrowings outstanding under the revolving credit facility into fixed-rate
interest of approximately 6.75%. These interest rate swap contracts were
entered into in order to balance the Company's fixed-rate and floating-rate debt
portfolios. Under these interest rate swaps, the Company agrees with the other
party to exchange, at specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an agreed notional
principal amount
On March 11, 1998, the Company acquired a 40 percent equity interest in
Caterina, a supplier of structural stampings and assemblies to the Brazilian
automotive market. In addition, the Company also has the right to acquire the
remaining 60 percent of the equity of Caterina in the future. The Company paid
approximately $48 million for its initial equity interest. This investment
added Volkswagen and Mercedes as new customers.
On May 19, 1998, the Company's Board of Directors approved a two-for-one stock
split, which was effected as a stock dividend. On July 15, 1998, stockholders
were issued one additional
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share of common stock for each share of common stock held on the record date
of June 30, 1998. All references to the number of common shares and per
share amounts have been adjusted to reflect the stock split on a retroactive
basis.
On June 9, 1998, Tower Automotive Capital Trust (the "Issuer"), a wholly owned
statutory business trust of the Company, completed the offering of $258.8
million of its 63/4% Trust Convertible Preferred Securities ("Preferred
Securities"), resulting in net proceeds of approximately $251.3 million. The
Preferred Securities are redeemable, in whole or in part, on or after June 30,
2001 and all Preferred Securities must be redeemed no later than June 30, 2018.
The Preferred Securities are convertible, at the option of the holder, into
common stock of the Company at a rate of 1.6280 shares of common stock for each
Preferred Security, which is equivalent to a conversion price of $30.713 per
share. The net proceeds of the offering were used to repay outstanding
indebtedness. Minority interest reflected in the accompanying condensed
consolidated statements of operations represents dividends on the Preferred
Securities at a rate of 63/4%, net of income tax benefits at the Company's
incremental tax rate of 40%.
Effective July 1, 1998, the Company acquired IMAR, s.r.l. ("IMAR") and OSLAMT
S.p.A. ("OSLAMT"). IMAR designs and manufactures structural parts and
assemblies from two facilities in Italy, primarily for Fiat. OSLAMT designs and
manufactures tools and assemblies for the automotive market from its facility in
Turin, Italy. The purchase price consisted of approximately $32.5 million in
cash plus the assumption of approximately $17 million of indebtedness with an
additional amount of up to $15 million payable if IMAR achieves certain
operating targets following the acquisition.
On August 31, 1998, the Company sold its hinge business (the "Hinge Business")
to Dura Automotive Systems, Inc. for net proceeds of approximately $35.6 million
which approximated the book value of the net assets sold. The net proceeds were
used to repay outstanding indebtedness under the revolving credit facility.
During the nine months ended September 30, 1998, the Company generated $123.4
million of cash from operations as compared to $56.6 million 1997. Cash
provided by net income, depreciation and amortization of $125.8 million in 1998
and $59.3 million 1997, was partially offset by an increase in working capital
requirements of $2.3 million and $5.2 million, respectively.
Net cash used in investing activities was $198.3 million during the nine months
ended September 30, 1998 as compared to $861.2 million in 1997. Net capital
expenditures totaled $122.3 million in 1998 primarily for equipment and
dedicated tooling purchases related to new or replacement programs with an
additional $116.8 million spent for the acquisitions of IMAR and OSLAMT and the
investment in Caterina. These cash uses were offset by $35.6 million in
proceeds from the sale of the Hinge Business. This compares with net capital
expenditures of $81.7 million and $782.4 million spent on the acquisitions of
APC and SIMES and the investment in Metalsa for the nine months ended September
30, 1997.
Net cash provided by financing activities totaled $75.0 million for the nine
months ended September 30, 1998 compared with $775.8 million in 1997.
Approximately $72.4 million of cash was provided through net borrowings and
proceeds from the issuance of the Preferred Securities in June 1998.
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At September 30, 1998, the Company had unused borrowing capacity of $299.1
million, under its most restrictive debt covenant. The Company believes the
borrowing availability under its credit agreement, together with funds generated
by operations, should provide liquidity and capital resources to pursue its
business strategy for the foreseeable future, with respect to working capital,
capital expenditures, and other operating needs. The Company estimates its 1999
capital expenditures will approximate $140 million. Under present conditions,
management does not believe access to funds will restrict its ability to pursue
its acquisition strategy.
EFFECTS OF INFLATION
Inflation generally affects the Company by increasing the interest expense of
floating-rate indebtedness and by increasing the cost of labor, equipment and
raw materials. Management believes that inflation has not significantly
effected the Company's business over the past 12 months. However, because
selling prices generally cannot be increased until a model changeover, the
effects of inflation must be offset by productivity improvements and volume from
new business awards.
YEAR 2000
The Company is currently working to resolve the potential impact of the year
2000 on the processing of time-sensitive information by the Company's
computerized information systems. Any of the Company's programs that have
time-sensitive software may recognize the year "00" as 1900 rather than the
year 2000. This could result in miscalculations, classification errors or
system failures.
While the Company's various operations are at different stages of Year 2000
readiness, the Company has nearly completed its global product review. Based
on the information available to date, the Company does not anticipate any
significant readiness problems with respect to its products.
Most of the Company's facilities have completed the inventory and assessment
of their internal information technology ("IT") and non-IT systems (including
business, operating and factory floor systems) and are working on
remediation, as appropriate, for these systems. Those facilities that have
not yet completed this process are expected to be finished by the end of
1998. The remediation may include repair, replacement, upgrading, or
retirement of specific systems and components, with priorities based on a
business risk assessment. The Company expects that remediation activities
for its internal systems will be completed during the second quarter of 1999,
and contingency plans, as needed, before the end of the year.
The most reasonable likely worst case scenario that the Company currently
anticipates with respect to Year 2000 is the failure of some of its
suppliers, including utilities suppliers, to be ready. This could cause a
temporary interruption of materials or services that the Company needs to
make its products, which could result in delayed shipments to customers and
lost sales and profits for the Company. As the critical supplier assessments
are completed, the Company will develop contingency plans, as necessary, to
address the risks which are identified. Although such plans have not been
developed yet, they might include resourcing materials or building inventory
banks.
The Company has spent approximately $1.0 million on Year 2000 activities to
date and anticipates that it will incur additional future costs not to exceed
$5.0 million in total in addressing Year 2000 issues.
The outcome of the Company's Year 2000 program is subject to a number of
risks and uncertainties, some of which (such as the availability of qualified
computer personnel and the Year 2000 responses of third parties) are beyond
its control. Therefore, there can be no assurances that the Company will not
incur material remediation costs beyond the above anticipated future costs,
or that the Company's business, financial condition, or results of operations
will not be significantly impacted if Year 2000 problems with its systems, or
with the products or systems of other parties with whom it does business, are
not resolved in a timely manner.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has released SFAS No. 131,
"Disclosures about Segments of an Enterprise and related Information," effective
for fiscal years beginning after December 15, 1997. SFAS No. 131 requires
disclosure of business and geographic segments in the consolidated financial
statements of the Company. The Company will adopt SFAS No. 131 in 1998 and is
currently analyzing the impact it will have on the disclosures in its financial
statements.
The FASB has also issued SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits," effective for fiscal years beginning
after December 31, 1997. SFAS No. 132 revises certain of the disclosure
requirements, but does not change the measurement or recognition of those
plans. The adoption of SFAS No. 132 will result in
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revised and additional disclosures, but will have no effect on the financial
position, results of operations, or liquidity of the Company.
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for the years beginning after
September 15, 1999. SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133 requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge criteria are met. Special accounting for qualifying
hedges allow a derivative's gains or losses to offset related results on the
hedged item in the income statement and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. The Company has not yet quantified the impact of adopting
SFAS No. 133 and has not yet determined the timing or method of adoption.
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 the Company, are intended to identify
forward-looking statements. Such forward-looking statements are based on the
beliefs of the Company's management as well as on assumptions made by and
information currently available to the Company at the time such statements
were made. Various economic and competitive factors could cause actual
results to differ materially from those discussed in such forward-looking
statements, including factors which are outside the control of the Company,
such as risks relating to: (i) the degree to which the Company is leveraged;
(ii) the Company's reliance on major customers and selected models; (iii) the
cyclicality and seasonality of the automotive market; (iv) the failure to
realize the benefits of recent acquisitions and joint ventures; (v) obtaining
new business on new and redesigned models; (vi) the Company's ability to
continue to implement its acquisition strategy; and (vii) the highly
competitive nature of the automotive supply industry. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on behalf of the Company are expressly qualified in their entirety by
such cautionary statements.
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PART II. OTHER INFORMATION
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings:
None
Item 2. Change in Securities:
None
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other Information:
None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
12.1 Statement and Computation of Ratio of Earnings to Fixed
Charges.
27.1 Financial Data Schedule.
(b) During the quarter for which this report is filed, the Company
filed the following Form 8-K Current Reports with the Securities
and Exchange Commission:
1. The Company's Current Report on Form 8-K, dated October 16,
1998 (Commission File No. 1-12733).
2. The Company's Current Report on Form 8-K, dated April 18,
1997, as amended by the Company's Amendment No. 1 to Form
8-K/A, filed with the Commission on October 19, 1998
(Commission File No. 1-12733).
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOWER AUTOMOTIVE, INC.
Date: November 13, 1998 By /s/ Anthony A. Barone
-----------------------------
Anthony A. Barone
Vice President, Chief Financial
Officer
(principal accounting and financial
officer)
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