<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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 August 4, 2000 was 47,406,799 shares.
<PAGE> 2
TOWER AUTOMOTIVE, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations (unaudited) for
the Three Months Ended June 30, 2000 and 1999
Condensed Consolidated Statements of Operations (unaudited) for
the Six Months Ended June 30, 2000 and 1999
Condensed Consolidated Balance Sheets at June 30, 2000
(unaudited) and December 31, 1999
Condensed Consolidated Statements of Cash Flows (unaudited) for
the Six Months Ended June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Market Risk " section of Item 2
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
2
<PAGE> 3
ITEM 1 - FINANCIAL INFORMATION
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 681,020 $ 530,680
Cost of sales 566,649 443,651
--------- ---------
Gross profit 114,371 87,029
Selling, general and administrative expenses 33,431 24,584
Amortization expense 5,118 3,741
--------- ---------
Operating income 75,822 58,704
Interest expense, net 13,534 7,262
--------- ---------
Income before provision for income taxes 62,288 51,442
Provision for income taxes 24,916 20,577
--------- ---------
Income before equity in earnings of joint
ventures and minority interest 37,372 30,865
Equity in earnings of joint ventures 4,540 4,382
Minority interest--dividends on trust preferred, net (2,619) (2,619)
--------- ---------
Net income $ 39,293 $ 32,628
========= =========
Basic earnings per share $ 0.83 $ 0.69
========= =========
Diluted earnings per share $ 0.68 $ 0.58
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statements.
3
<PAGE> 4
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues $ 1,366,384 $ 1,029,252
Cost of sales 1,140,291 862,776
----------- -----------
Gross profit 226,093 166,476
Selling, general and administrative expenses 68,087 47,004
Amortization expense 10,217 7,191
----------- -----------
Operating income 147,789 112,281
Interest expense, net 26,731 14,529
----------- -----------
Income before provision for income taxes 121,058 97,752
Provision for income taxes 48,424 39,101
----------- -----------
Income before equity in earnings of joint
ventures and minority interest 72,634 58,651
Equity in earnings of joint ventures 9,020 7,295
Minority interest - dividends on trust preferred, net (5,238) (5,242)
----------- -----------
Net income $ 76,416 $ 60,704
=========== ===========
Basic earnings per share $ 1.62 $ 1.30
=========== ===========
Diluted earnings per share $ 1.32 $ 1.08
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statements.
4
<PAGE> 5
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
-------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,386 $ 3,617
Accounts receivable, net 413,947 353,351
Inventories, net 115,404 110,897
Prepaid tooling and other 81,584 90,191
----------- -----------
Total current assets 620,321 558,056
----------- -----------
Property, plant and equipment, net 1,170,166 1,075,861
Investments in joint ventures 316,620 290,705
Goodwill and other assets, net 708,404 627,928
----------- -----------
$ 2,815,511 $ 2,552,550
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
--------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt and capital lease
obligations $ 21,367 $ 13,876
Accounts payable 290,244 276,673
Accrued liabilities 131,835 140,567
----------- -----------
Total current liabilities 443,446 431,116
----------- -----------
Long-term debt, net of current maturities 847,091 699,678
Obligations under capital leases, net of current maturities 18,830 21,543
Convertible subordinated notes 200,000 200,000
Deferred income taxes 74,016 50,736
Other noncurrent liabilities 162,719 163,592
----------- -----------
Total non-current liabilities 1,302,656 1,135,549
----------- -----------
Mandatorily redeemable trust convertible preferred securities 258,750 258,750
Stockholders' investment:
Preferred stock -- --
Common stock 474 469
Additional paid-in capital 451,521 437,210
Retained earnings 370,938 294,522
Warrants to acquire common stock -- 2,000
Deferred income stock plan (8,942) (4,484)
Accumulated other comprehensive loss - cumulative
translation adjustment (3,332) (2,582)
----------- -----------
Total stockholders' investment 810,659 727,135
----------- -----------
$ 2,815,511 $ 2,552,550
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
TOWER AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS - UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 76,416 $ 60,704
Adjustments to reconcile net income to net cash provided by
Operating activities -
Depreciation and amortization 76,542 49,585
Deferred income tax provision 21,387 --
Changes in other operating items (47,954) (44,064)
----------- -----------
Net cash provided by operating activities 126,391 66,225
----------- -----------
INVESTING ACTIVITIES:
Acquisitions and investment in joint venture (153,331) (10,622)
Capital expenditures, net (94,733) (106,630)
Change in restricted cash -- 2,677
----------- -----------
Net cash used in investing activities (248,064) (114,575)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from borrowings 1,565,574 857,426
Repayment of debt (1,443,439) (820,083)
Proceeds from issuance of stock 5,307 8,450
----------- -----------
Net cash provided by financing activities 127,442 45,793
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,769 (2,557)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,617 3,434
----------- -----------
End of period $ 9,386 $ 877
=========== ===========
NON-CASH FINANCING ACTIVITIES:
Deferred Income Stock Plan $ 4,458 $ 4,484
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statements.
6
<PAGE> 7
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 Form 10-K for the
year ended December 31, 1999.
Revenues and operating results for the three and six months ended June 30,
2000 are not necessarily indicative of the results to be expected for the
full year.
2. Inventories consisted of the following (in thousands):
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
Raw materials $ 38,525 $ 47,231
Work in process 45,253 34,143
Finished goods 31,626 29,523
-------- --------
$115,404 $110,897
======== ========
3. Basic earnings per share were computed by dividing net income by the
weighted average number of common shares outstanding during the respective
quarters. Diluted earnings per share 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 at the
beginning of the respective periods, and (iii) the Preferred Securities
were converted at the beginning of the respective periods (in thousands,
except per share data):
7
<PAGE> 8
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 39,293 $ 32,628 $ 76,416 $ 60,704
Interest expense on Edgewood notes,
net of tax 8 9 16 20
Interest expense on Convertible
Subordinated Notes, net of tax 1,626 1,627 3,252 3,254
Dividends on Preferred Securities,
net of tax 2,619 2,619 5,238 5,242
------------ ------------ ------------ ------------
Net income applicable to common
stockholders -- diluted $ 43,546 $ 36,883 $ 84,922 $ 69,220
============ ============ ============ ============
Weighted average number of
common shares outstanding 47,250 46,965 47,107 46,766
Dilutive effect of outstanding stock
options and warrants after
application of the treasury stock
method 166 705 220 687
Dilutive effect of Edgewood notes,
assuming conversion 289 319 289 360
Dilutive effect of Convertible
Subordinated Notes,
assuming conversion 7,730 7,730 7,730 7,730
Dilutive effect of Preferred Securities,
assuming conversion 8,424 8,424 8,424 8,424
Dilutive effect of Deferred income
stock plan, assuming conversion 500 -- 373 --
------------ ------------ ------------ ------------
Diluted shares outstanding 64,359 64,143 64,143 63,967
============ ============ ============ ============
Basic earnings per share $ 0.83 $ 0.69 $ 1.62 $ 1.30
============ ============ ============ ============
Diluted earnings per share $ 0.68 $ 0.58 $ 1.32 $ 1.08
============ ============ ============ ============
</TABLE>
4. Long-term debt consisted of the following (in thousands):
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
Revolving credit facility $ 434,588 $ 321,679
Term credit facility 320,482 324,210
Industrial development revenue bonds 43,765 43,765
Edgewood notes 878 878
Other 63,873 11,644
--------- ---------
863,586 702,176
Less-current maturities (16,495) (2,498)
--------- ---------
Total long-term debt $ 847,091 $ 699,678
========= =========
The Company has a Credit Agreement, which includes a revolving credit
facility that provides for borrowings of up to $675 million on an unsecured
basis with a letter of credit sublimit of $75 million. In addition, under
the terms of the revolving credit facility, the equivalent of up to $85
million in borrowings can be denominated in foreign currency. As of June
30, 2000, approximately $78 million of the outstanding borrowings are
denominated in Italian lira. The amount available under the revolving
credit facility reduces to $600 million in April 2001 and $500 million in
April 2002. The Credit Agreement has a final maturity of April 2003.
Interest
8
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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 7.1% for the three months
ended June 30, 1999.
On August 23, 1999, the Company amended and restated its Credit Agreement
to include an additional term loan facility of $325 million. In addition,
under the terms of the term loan facility, the equivalent of up to $120
million in borrowings can be denominated in foreign currency. As of June
30, 2000, approximately $120 million of the outstanding borrowings are
denominated in Euro. The term loan facility matures in eight equal
repayments beginning September 2002 with final maturity in June 2004.
Interest on the term loan facility is at the prime rate or LIBOR plus a
margin ranging from 0 to 200 basis points depending on the Company's ratio
of consolidated indebtedness to its total capitalization. The weighted
average interest rates for the term loan facility dollar borrowings and
Euro borrowings were 7.4% and 5.1%, respectively, for the three months
ended June 30, 2000. The proceeds from the term facility were used to repay
outstanding indebtedness under the revolving facility incurred in
connection with the acquisition of Active in July 1999.
The Credit Agreement requires the Company to meet certain financial tests,
including but not limited to a minimum interest coverage, maximum
debt/capital, maximum leverage and maximum senior leverage ratio. As of
June 30, 2000 the Company was in compliance with all debt covenants.
During June of 1999, the Company terminated its position in interest rate
swaps in the notional amount of $300 million, resulting in a gain of $0.5
million. The swaps were held as a hedge to convert floating rate
indebtedness to fixed rate indebtedness without changing the underlying
debt instrument. The Company believes that over the life of the revolving
credit facility, interest rates will continue to remain stable, decreasing
the effectiveness of the interest swap, and therefore, terminated the
hedge.
5. On July 29, 1999, the Company acquired all of the outstanding stock of
Active Tool and Manufacturing Company, Inc. and its affiliate Active
Products Corporation (collectively, "Active") for total consideration of
approximately $315 million. Active, which has five facilities, designs and
produces a variety of large unexposed structural stampings, exposed surface
panels, and modules to the North American automotive industry. Active's
main customers include DaimlerChrysler, Ford, General Motors, and Saturn.
Products offered by Active include body sides, pickup box sides, fenders,
floor pan assemblies, door panels, pillars, and heat shields. The
acquisition of Active enhances the Company's ability to manufacture large
and complex structures, as well as exposed surface panels. The acquisition
was financed with proceeds from the Company's revolving credit facility.
Effective January 1, 2000, the Company acquired all of the outstanding
shares of Dr. Meleghy GmbH & Co. KG Werkzeugbau und Presswerk, Bergisch
Gladbach ("Dr. Meleghy") for approximately $86.4 million. Dr. Meleghy
designs and produces structural stampings, assemblies, exposed surface
panels and modules to the European automotive industry. Dr. Meleghy also
designs and manufactures tools and dies for use in their production and for
the external market. Dr. Meleghy operates three facilities in Germany and
one facility in both Hungary and Poland. Dr. Meleghy's main customers
include DaimlerChrysler, Audi, Volkswagen, Ford, Opel and BMW. Products
offered by Dr. Meleghy include body side panels, floor pan assemblies and
miscellaneous structural stampings. The Company may pay an additional $38
million if certain operating targets are met. The acquisition was financed
with proceeds from the Company's revolving credit facility.
On May 3, 2000, the Company acquired all of the outstanding common stock of
Algoods, Inc. ("Algoods") for total consideration of approximately $33
million. Algoods manufactures aluminum heat shields and impact discs for
the North American automotive industry from aluminum mini-mill and
manufacturing operations located in Toronto, Canada. Its primary customer
is DaimlerChrysler. The acquisition of Algoods represents a significant
investment in processing technology for lightweight materials which
complements the Company's existing heat shield capabilities and provides
opportunities for application in other lightweight vehicle structural
products. The acquisition was funded with proceeds from the Company's
revolving credit facility.
The acquisitions discussed above have been accounted for using the purchase
method of accounting and, accordingly, the assets acquired and liabilities
assumed have been recorded at the fair value as of the date of the
acquisitions. The assets and liabilities of Active, Dr. Meleghy, and
Algoods have been recorded based on preliminary estimates of fair value as
of the date of acquisition. The excess of the purchase price over the fair
value of the assets acquired and liabilities assumed has been recorded as
goodwill. The Company is further evaluating the fair value of certain
assets acquired and liabilities assumed in connection with the Active, Dr.
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<PAGE> 10
Meleghy, and Algoods acquisitions and as a result, will likely result in
adjustments to the preliminary allocation of the purchase price.
In conjunction with its acquisitions, the Company has established reserves
for certain costs associated with facility shutdown and consolidation
activities and for general and payroll related costs primarily for planned
employee termination activities. As of December 31, 1999, approximately
$13.8 million and $6.4 million were recorded for facility shutdown and
payroll related costs, respectively. Costs incurred and charged to such
reserves amounted to $3.8 million for facility shutdown costs and $2.5
million for payroll related termination costs for the six months ended June
30, 2000. At June 30, 2000, liabilities of approximately $10.0 million for
costs associated with facility shutdown and consolidation activities and
$3.9 million of costs for planned employee termination activities remained.
The timing of facility shutdown and consolidation activities has been
adjusted to reflect customer concerns with supply interruption. These
reserves have been utilized as originally intended and management believes
the liabilities recorded for shutdown and consolidation activities are
adequate but not excessive as of June 30, 2000.
6. On October 14, 1999, the Company loaned $30.0 million to J. L. French
Automotive Castings, Inc. ("J.L. French") in exchange for a convertible
subordinated promissory note due October 14, 2009. The note bears interest
at 7.5% annually with interest payable on the last day of each calendar
quarter beginning December 31, 1999. The Company can convert, at its
option, any portion of the outstanding principal of the note into Class A
Common Stock of J. L. French at a preset agreed upon conversion price. On
May 24, 2000, the Company made an additional investment of $11.0 million in
exchange for a 3.4% equity interest in J. L. French.
7. On October 29, 1999, the Company invested $21 million for new shares
representing a 49% equity interest in Seojin Industrial Company Limited
("Seojin"). Seojin is a supplier of frames, modules and structural
components to the Korean automotive industry. The equity interest was
financed with proceeds from the Company's revolving credit facility. In
addition, the Company advanced $19 million to Seojin in exchange for
variable rate convertible bonds denominated in Korean Won (the "Bonds") due
October 30, 2009. The Bonds are unsecured and rank equally with all other
present and future obligations of Seojin. The Bonds bear interest at the
one year LIBOR plus a margin of 200 basis points. The initial interest rate
was set as of October 30, 1999. The rate is reset annually on the
anniversary date of the Bonds. At June 30, 2000, the interest rate on the
Bonds was 8.25%. Interest on the Bonds is payable annually beginning
October 30, 2000 and each October 30 thereafter until maturity. The Company
has the right to convert the Bonds into common stock of Seojin any time on
or after October 30, 2000. The conversion rate is based upon a
predetermined formula that would increase the Company's equity interest to
approximately 66%.
8. The Company is a 40% partner in Metalsa S. de R.L. ("Metalsa") with
Promotora de Empresas Zano, S.A. de C.V. ("Proeza"). The partnership
agreement provides additional amounts of up to $45 million payable based
upon net earnings of Metalsa during 1998, 1999, and 2000. Based upon
Metalsa's 1998 net earnings, the Company paid Proeza approximately $9.0
million in additional consideration during the second quarter of 1999.
Based upon Metalsa's 1999 net earnings, the Company paid Proeza
approximately $7.9 million in additional consideration during the first
quarter of 2000.
9. Supplemental cash flow information (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash paid for -
Interest $ 14,800 $ 8,479 $ 32,273 $ 22,606
Income taxes 9,815 4,450 16,277 5,208
</TABLE>
10
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10. Comprehensive income, defined as changes in the stockholders' investment of
the Company, (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $39,293 $32,628 $76,416 $60,704
Change in cumulative
translation adjustment 204 1,789 (750) (1,019)
------- ------- ------- -------
Comprehensive income $39,497 $34,417 $75,666 $59,685
======= ======= ======= =======
</TABLE>
11. In connection with the Company's acquisition of MascoTech Stamping
Technologies, Inc. in June 1996, the Company issued warrants to acquire
400,000 shares of the Company's Common Stock at an exercise price of $9 per
share to MascoTech, Inc. ("MascoTech"). On May 5, 2000, MascoTech exercised
the all of the warrants outstanding under this agreement.
12. SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended by SFAS No. 137, becomes effective for the years
beginning after June 15, 2000. 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 137.
13. On July 6, 2000, the Company acquired the remaining 60% equity interest in
Metalurgica Caterina, S. A. ("Caterina") for approximately $42 million.
Caterina is a supplier of structural stampings and assemblies to Brazilian
automotive market, including Volkswagen and Mercedes-Benz. The acquisition
was funded with proceeds from the Company's revolving credit facility.
14. On July 25, 2000, the Company issued Euro-denominated senior unsecured
notes in the amount of Euro 150 million. The notes bear interest at a rate
of 9.25%, payable semi-annually. The notes rank equally with all of the
Company's other unsecured and unsubordinated debt. The proceeds of this
offering will be used to repay existing indebtedness. The net proceeds
after issuance costs were used to repay a portion of the Company's existing
Euro-denominated indebtedness under its existing credit facility. The notes
mature on August 1, 2010.
15. On July 25, 2000, the Company replaced its existing $675 million credit
agreement with a new six-year $1.15 billion senior unsecured credit
agreement. The new credit agreement includes a non-amortizing revolving
facility of $825 million along with an amortizing term loan of $325
million. The new facility also includes a multi-currency borrowing feature
that allows the Company to borrow up to $500 million in certain freely
tradeable offshore currencies, and letter of credit sublimits of $100
million. Interest on the new credit facility is at the prime rate or the
Eurodollar rate plus a margin ranging from 0 to 200 basis points depending
on the ratio of the consolidated funded debt of the Company to its total
EBITDA. The new credit agreement has a final maturity of 2006.
11
<PAGE> 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2000 to the three months ended
June 30, 1999
Revenues -- Revenues for the second quarter of 2000 were $681.0 million,
compared to $530.7 million for the prior period. The increase is due to
incremental new business of approximately $15.0 million, including business
relating to the Lincoln LS/Jaguar S-Type, Ford Explorer, Dodge Dakota, Ram Van
and Ram Pickup, and the acquisitions of Active, Dr. Meleghy, and Algoods of
$135.3 million.
Cost of Sales -- Cost of sales as a percentage of revenues for the second
quarter of 2000 was 83.2% compared to 83.6% for the prior period. The
improvement in gross profit was primarily due to higher gross margins on
acquired sales along with increased production volumes and product mix on light
truck, sport utility and other models served by the Company.
S, G & A Expenses -- Selling, general and administrative expenses increased to
$33.4 million, or 4.9% of revenues, for the second quarter of 2000 compared to
$24.6 million, or 4.6% of revenues for the prior period. The increased expense
was due primarily to incremental costs associated with the Company's
acquisitions of Active, Dr. Meleghy, and Algoods of $7.0 million and increased
engineering and program development costs related to new business of
approximately $1.3 million. The realization of a gain on the cash settlement of
amounts due under the interest rate swap agreement during June 1999 had the
effect of reducing 1999 expense by $0.5 million.
Amortization Expense -- Amortization expense for the second quarter of 2000 was
$5.1 million compared to $3.7 million for the prior period. The increase was due
to incremental goodwill amortization relating to the acquisitions of Active, Dr.
Meleghy, and Algoods.
Interest Expense -- Interest expense for the second quarter of 2000 was $13.5
million compared to $7.3 million for the prior period. Interest expense was
affected by increased borrowings to fund the Company's acquisition of Active,
Dr. Meleghy, and Algoods.
Income Taxes -- The effective income tax rate was 40% for the second quarter of
2000 and 1999. 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 second quarter of 2000 and 1999 represents the Company's share of the
earnings from its joint venture interests in Metalsa, Caterina, Tower Golden
Ring and Seojin.
Minority Interest -- Minority interest for the second quarter of 2000 and 1999
represents dividends, net of income tax benefits, on the Preferred Securities.
Comparison of the six months ended June 30, 2000 to the six months ended
June 30, 1999
Revenues -- Revenues for the six months ended June 30, 2000 were $1,366.4
million, compared to $1,029.3 million for the six months ended June 30, 1999.
The increase is due to net new business of approximately $52.9 million,
including new business relating primarily to the Ford Explorer, Excursion, Focus
and Lincoln LS/Jaguar S-Type lines, Dodge Dakota, Ram Van, Ram Pickup and the
Chrysler LH, and the acquisitions of Active, Dr. Meleghy, and Algoods of $284.2
million.
Cost of Sales -- Cost of sales as a percentage of revenues for the six months
ended June 30, 2000 was 83.5% compared to 83.8% for the six months ended June
30, 1999. The improvement in gross profit was due to higher gross margins on
acquired sales along with increased production volumes and product mix on light
truck, sport utility and other models served by the Company.
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<PAGE> 13
S, G & A Expenses -- Selling, general and administrative expenses increased to
$68.1 million, or 5.0% of revenues, for the six months ended June 30, 2000
compared to $47.0 million, or 4.6% of revenues, for the six months ended June
30, 1999. The increased expense was due to incremental costs associated with the
Company's acquisitions of Active, Dr. Meleghy, and Algoods of $13.8 million and
increased engineering and program development costs related to new business of
approximately $5.4 million. The realization of gains on the cash settlement of
amounts due under the interest rate swap and lock agreements during the first
six months of 1999 had the effect of reducing the 1999 expense by $1.9 million.
Amortization Expense -- Amortization expense for the six months ended June 30,
2000 was $10.2 million compared to $7.2 million for the six months ended June
30, 1999. The increase was due to the incremental goodwill amortization relating
to the acquisitions of Active, Dr. Meleghy, and Algoods.
Interest Expense -- Interest expense for the six months ended June 30, 2000 was
$26.7 million compared to $14.5 million for the six months ended June 30, 1999.
Interest expense was affected by increased borrowings to fund the Company's
acquisitions of Active, Dr. Meleghy, and Algoods.
Income Taxes -- The effective income tax rate was 40% for the six months ended
June 30, 2000 and 1999. 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 first six months of 2000 and 1999 represents the Company's share of the
earnings from its joint venture interests in Metalsa, Caterina, Tower Golden
Ring and Seojin.
Minority Interest -- Minority interest for the first six months of 2000 and 1999
represents dividends, net of income tax benefits, on the Preferred Securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a credit agreement, which includes a revolving credit facility
that provides for borrowings of up to $675 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 June 30, 2000 approximately $78 million
of the outstanding borrowings under the revolving credit facility are
denominated in Italian lira. The amount available under the revolving credit
facility reduces to $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 7.1% for the three months ended June 30, 2000.
On August 23, 1999, the Company amended and restated its Credit Agreement to
include an additional term loan facility of $325 million. In addition, under the
terms of the term loan facility, the equivalent of up to $120 million in
borrowings can be denominated in foreign currency. As of June 30, 2000,
approximately $120 million of the outstanding borrowings are denominated in
Euro. The term loan facility matures in eight equal repayments beginning
September 2002 with final maturity in June 2004. Interest on the term loan
facility is at the prime rate or LIBOR plus a margin ranging from 0 to 200 basis
points depending on the Company's ratio of consolidated indebtedness to its
total capitalization. The weighted average interest rates for the term loan
facility dollar borrowings and Euro borrowings were 7.4% and 5.1%, respectively,
for the three months ended June 30, 2000. The proceeds from the term facility
were used to repay outstanding indebtedness under the revolving facility
incurred in connection with the acquisition of Active in July 1999.
The Credit Agreement requires the Company to meet certain financial tests,
including but not limited to minimum interest coverage, maximum debt/capital,
maximum leverage and maximum senior leverage ratio. As of June 30, 2000, the
Company was in compliance with all debt covenants.
On July 25, 2000, the Company replaced its existing $675 million credit
agreement with a new six-year $1.15 billion senior unsecured credit agreement.
The new credit agreement includes a non-amortizing revolving facility of $825
million along with an amortizing term loan of $325 million. The new facility
also includes a multi-currency borrowing feature that allows the Company to
borrow up to $500 million in certain freely tradeable offshore
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currencies, and letter of credit sublimits of $100 million. Interest on the new
credit facility is at the prime rate or the Eurodollar rate plus a margin
ranging from 0 to 200 basis points depending on the ratio of the consolidated
funded debt of the Company to its total EBITDA. The new credit agreement has a
final maturity of 2006.
On July 25, 2000, the Company issued Euro-denominated senior unsecured notes in
the amount of Euro 150 million. The notes bear interest at a rate of 9.25%,
payable semi-annually. The notes rank equally with all of the Company's other
unsecured and unsubordinated debt. The proceeds of this offering will be used to
repay existing indebtedness. The net proceeds after issuance costs were used to
repay a portion of the Company's existing Euro-denominated indebtedness under
its existing credit facility. The notes mature on August 1, 2010.
During the first six months of 2000, the Company generated $126.4 million of
cash from operations. This compares with $66.2 million provided during the same
period in 1999. Cash provided by net income, depreciation, amortization, and
deferred income tax provision was $174.3 million in 2000 and $110.3 million in
1999 was partially offset by cyclical increases in working capital of $47.9
million and $44.1 million, respectively.
Net cash used in investing activities was $248.1 million during the first six
months of 2000 as compared to $114.5 million in the prior period. For the first
six months of 2000, acquisitions and investments in joint ventures were
approximately $128.7 million and $24.6 million, respectively. This compares with
investments in joint ventures of $10.6 million in the 1999 period. Net capital
expenditures totaled $94.7 million and $106.6 million for the comparable 2000
and 1999 periods, respectively.
Net cash provided by financing activities totaled $127.4 million for the first
six months of 2000 compared with $45.8 million in the prior period.
At June 30, 2000 the Company had unused borrowing capacity under its then
existing credit agreement of $219 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 2000 capital expenditures will
approximate $225 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 affected
the Company's business over the past 12 months. However, because selling prices
generally cannot be increased until a model changeover, the effects of inflation
must be offset by productivity improvements and volume from new business awards.
MARKET RISK
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company's policy is not to enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company enters into financial instruments to manage and reduce the impact of
changes in interest rates.
At June 30, 2000, the Company had total debt and obligations under capital
leases of $1.1 billion. The debt is comprised of fixed rate debt of $200 million
and floating rate debt of $887 million. The pre-tax earnings and cash flows
impact for the next year resulting from a one percentage point increase in
interest rates on variable rate debt would be approximately $8.9 million,
holding other variables constant. A one percentage point increase in interest
rates would not materially impact the fair value of the fixed rate debt.
During June of 1999, the Company terminated its position in interest rate swaps
in the notional amount of $300 million, resulting in a gain of $0.5 million. The
swaps were held as a hedge to convert floating rate indebtedness to fixed rate
indebtedness without changing the underlying debt instrument. The Company
believes that over the life of the revolving credit facility, interest rates
will continue to remain stable, decreasing the effectiveness of the interest
swap, and therefore, terminated the hedge.
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A portion of Tower Automotive's revenues was derived from manufacturing
operations in Europe. The results of operations and financial position of the
Company's operations in Europe are principally measured in its respective
currency and translated into U.S. dollars. The effects of foreign currency
fluctuations in Europe are somewhat mitigated by the fact that expenses are
generally incurred in the same currency in which revenues are generated. The
reported income of these subsidiaries will be higher or lower depending on a
weakening or strengthening of the U.S. dollar against the respective foreign
currency.
A portion of Tower Automotive's assets is based in its foreign operations and is
translated into U.S. dollars at foreign currency exchange rates in effect as of
the end of each period, with the effect of such translation reflected as a
separate component of stockholders' investment. Accordingly, the Company's
consolidated stockholders' investment will fluctuate depending upon the
weakening or strengthening of the U.S. dollar against the respective foreign
currency.
The Company's strategy for management of currency risk relies primarily upon
conducting its operations in a country's respective currency and may, from time
to time, engage in hedging programs intended to reduce the Company's exposure to
currency fluctuations. As of June 30, 2000, the Company held no foreign currency
hedge positions. Management believes the effect of a one percent change in
foreign currency rates would not materially affect the Company's financial
position or results of operations for the periods presented.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as
amended by SFAS No. 137, becomes effective for the years beginning after June
15, 2000. 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 137.
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 acing 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:
The registrant held its Annual Meeting of Stockholders on May 18, 2000.
Proxies for the meeting were solicited pursuant to Regulation 14. There
was no solicitation in opposition to management's nominees for
directors as listed in the Proxy Statement and all such nominees (S.A.
Johnson, Dugald K. Campbell, Kim B. Clark, Jurgen M. Geissinger, F.J.
Loughrey, James R. Lozelle, Scott D. Rued and Enrique Zambrano) were
elected. Of the 43,499,640 shares voted, at least 43,301,068 shares
granted authority to vote for these directors and no more than 198,572
abstaining votes were cast.
The Tower Automotive, Inc. Director Deferred Stock Purchase Plan was
approved by the stockholders. A total of 40,577,484 affirmative votes,
2,215,793 negative votes and 706,363 abstaining votes were cast.
The retention of Arthur Andersen LLP as independent public accountants
of the Company was approved by the stockholders. A total of 43,406,272
affirmative votes, 51,112 negative votes and 42,256 abstaining votes
were cast.
Item 5. Other Information:
None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
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 April 24, 2000
(Commission File No. 1-12733).
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOWER AUTOMOTIVE, INC.
Date: August 11, 2000 By /s/ Anthony A. Barone
---------------------------------------
Anthony A. Barone
Vice President, Chief Financial Officer
(principal accounting and financial
officer)
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