10-Q 1 file001.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 COMMISSION FILE NUMBER 1-12068 METALDYNE CORPORATION -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 38-2513957 -------------------------------------------------------------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 47603 HALYARD DRIVE, PLYMOUTH, MICHIGAN 48170-2429 -------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (734) 207-6200 -------------------------------------------------------------------------------- (TELEPHONE NUMBER) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICAL DATE. SHARES OUTSTANDING AT CLASS OCTOBER 31, 2001 ----- ---------------- COMMON STOCK, PAR VALUE $1 PER SHARE 45,498,410 METALDYNE CORPORATION INDEX PAGE NO. Part I. Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheet - September 30, 2001 and December 31, 2000 1 Consolidated Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2001 and 2000 2 Consolidated Condensed Statement of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 3 Notes to Consolidated Condensed Financial Statements 4-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-16 Item 3. Quantitative and Qualitative Disclosure about Market Risk 17 Part II. Other Information and Signature 17-18 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS METALDYNE CORPORATION CONSOLIDATED CONDENSED BALANCE SHEET SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 (DOLLARS IN THOUSANDS) SEPTEMBER 30, DECEMBER 31, ASSETS 2001 2000 ------------ ---------- Current assets: Cash and cash investments $ 21,140 $ 26,320 Receivables 153,070 121,160 Inventories 174,630 199,490 Deferred and refundable income taxes 24,060 38,010 Prepaid expenses and other assets 44,320 48,540 ---------- ---------- Total current assets 417,220 433,520 Equity and other investments in affiliates 26,050 27,760 Property and equipment, net 894,550 901,300 Excess of cost over net assets of acquired companies 998,520 906,990 Notes receivable and other assets 91,970 93,920 ----------- ---------- Total assets $2,428,310 $2,363,490 ========== ========== LIABILITIES Current liabilities: Accounts payable $ 182,400 $ 155,020 Accrued liabilities 121,920 146,640 Current maturities, long-term debt 44,240 46,350 ---------- ---------- Total current liabilities 348,560 348,010 Subordinated debentures 305,000 305,000 Other long-term debt 1,185,140 1,180,940 Deferred income taxes 126,620 124,680 Other long-term liabilities 97,940 108,920 ---------- ---------- Total liabilities 2,063,260 2,067,550 ---------- ---------- Redeemable stock, 545,154 shares Outstanding 53,380 33,370 Redeemable restricted common stock 45,370 43,420 Less: Restricted unamortized stock awards (24,370) (33,820) ---------- ---------- Total redeemable stock 74,380 42,970 ---------- ---------- SHAREHOLDERS' EQUITY Preferred stock (non-redeemable), $1 par: Authorized: 25 million; Outstanding: None -- -- Common stock, $1 par: Authorized: 250 million; Outstanding: 42.8 million and 38.7 million 42,840 38,670 Paid-in capital 61,510 -- Retained earnings 239,360 254,690 Accumulated other comprehensive loss (53,040) (40,390) ---------- ---------- Total shareholders' equity 290,670 252,970 ---------- ---------- Total liabilities, redeemable stock and shareholders' equity $2,428,310 $2,363,490 ========== ========== The accompanying notes are an integral part of the consolidated condensed financial statements. 1 METALDYNE CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 --------------------- ------------------------ 2001 2000 2001 2000 --------- --------- --------- ---------- Net sales $ 514,290 $ 393,770 $1,643,200 $1,295,480 Cost of sales (411,670) (298,360) (1,311,290) (966,590) --------- --------- ---------- ---------- Gross profit 102,620 95,410 331,910 328,890 Selling, general and administrative expenses (74,130) (49,970) (210,590) (163,130) Gain (loss) on disposition of businesses -- 2,800 ( 6,020) 2,800 --------- --------- ---------- ---------- Operating profit 28,490 48,240 115,300 168,560 --------- --------- ---------- ---------- Other income (expense), net: Interest expense (28,220) (20,720) (99,880) (64,500) Equity income(loss) from affiliates, net (690) (520) (1,710) 9,170 Other, net (4,780) 2,420 (21,640) 2,120 --------- --------- ---------- ---------- (33,690) (18,820) (123,230) (53,210) --------- --------- ---------- ---------- Income(loss) before income taxes (5,200) 29,420 (7,930) 115,350 Income taxes 310 11,560 3,260 45,490 --------- --------- ---------- ---------- Net income(loss) (5,510) 17,860 (11,190) 69,860 Preferred stock dividend requirements 1,800 -- 4,140 -- ---------- -------- ---------- ---------- Earnings (loss) attributable to common stock $ (7,310) $ 17,860 $ (15,330) $ 69,860 ========= ========= ========== ========== Basic earnings (loss) per share $(.17) $ .44 $(.36) $1.71 ===== ===== ===== ===== Diluted earnings (loss) per share $(.17) $ .37 $(.36) $1.39 ===== ===== ===== ===== Cash dividends declared per share $ -- $ .08 $ -- $ .24 ===== ===== ===== ===== Cash dividends paid per share $ -- $ .08 $ -- $ .24 ===== ===== ===== =====
The accompanying notes are an integral part of the consolidated condensed financial statements. 2 METALDYNE CORPORATION CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 2001 2000 ----------- ----------- CASH FROM (USED FOR): OPERATIONS: Net cash from earnings $ 101,850 $ 147,150 Decrease in inventories 31,320 9,570 (Increase) in receivables (25,600) (23,670) Proceeds from accounts receivable sale, net 27,610 48,260 Increase (decrease) in accounts payable and accrued liabilities (53,600) 22,740 Decrease in prepaid expenses and other current assets 38,080 20,460 Other, net 800 (6,760) ---------- --------- Net cash from operating activities 120,460 217,750 ---------- --------- FINANCING: Payment of debt (36,710) (154,450) Increase in debt 38,800 31,620 Payment of dividends (2,770) (10,700) Proceeds from interest rate swap settlement -- 15,820 Other, net 460 (5,100) ---------- --------- Net cash (used for) financing activities (220) (122,810) ---------- --------- INVESTMENTS: Proceeds from sale and sale/leaseback of fixed assets 42,110 -- Capital expenditures (82,330) (78,790) Cash received from sale of businesses, net -- 3,200 Acquisition of businesses, net of cash acquired (83,320) (21,090) Other, net (1,880) 11,350 ---------- --------- Net cash (used for) investing activities (125,420) (85,330) ---------- --------- CASH AND CASH INVESTMENTS: Increase (decrease) for the nine months (5,180) 9,610 At January 1 26,320 4,490 ---------- --------- At September 30 $ 21,140 $ 14,100 ========== ========= SUPPLEMENTAL CASH FLOW INFORMATION: Net cash paid during the period for: Interest $ 95,170 $ 57,170 ========= ========= Income taxes $ (9,500) $ (900) ========= ==========
The accompanying notes are an integral part of the consolidated condensed financial statements. 3 METALDYNE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. Metaldyne Corporation (the "Company" or "Metaldyne") is a leading global diversified industrial manufacturer of highly engineered products for the transportation, industrial and consumer markets. We operate through two business groups - Metal Forming, which accounts for approximately two-thirds of our sales, and Diversified Industrial Products, which accounts for the remaining one-third of our sales. Products include metal formed and precision-engineered components and modular systems used in vehicle engine, chassis and steering components, transmission and drivetrain applications, specialty fasteners, towing systems, packaging and sealing products and other industrial products. The Company serves a broad range of over 150 automotive and industrial customers. In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments, which are normal and recurring in nature, necessary to present fairly its financial position as at September 30, 2001 and the results of operations for the three and nine months ended September 30, 2001 and 2000 and cash flows for the nine months ended September 30, 2001 and 2000. Certain amounts for the period ended September 30, 2000 have been reclassified to conform to the presentation adopted in 2001. The results of operations for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results for the full year. 2. On June 22, 2001, the Company purchased from its controlling shareholder, Heartland Industrial Partners ("Heartland"), Global Metal Technologies, Inc. ("GMTI"). GMTI is a fully integrated technology leader in aluminum die-casting with leading market positions in transmission, engine, chassis and steering components. In exchange for all of the shares held by Heartland in GMTI, the Company issued common shares valued at approximately $45.4 million, which was equal to Heartland's investment in GMTI on the date of transfer. Also as part of the transaction the Company issued common shares valued at $20 million and $18.5 million of redeemable Class B preferred stock in exchange for interests in GMTI held by its former shareholders. The redeemable Class B preferred shares issued are mandatorily redeemable on June 15, 2013. The series B preferred stockholders are entitled to receive, when, as and if declared by the Company's Board of Directors, cumulative semi-annual cash dividends at a rate of 11.5 percent per annum. In addition to securities issued, Metaldyne paid approximately $83 million, net of cash acquired, for the acquisition of GMTI. This acquisition was financed through a combination of borrowings under the Company's Term Loan C facility, revolving credit facility and proceeds from the sale of accounts receivable pursuant to the accounts receivable facility. GMTI was originally acquired by the Company's controlling shareholder, Heartland, on January 4, 2001 for a cash purchase price of $25 million, plus debt assumed. This transaction resulted in approximately $100 million of goodwill, which is being amortized over a period of 40 years. The purchase price allocations are preliminary, and as such are estimates. Such allocations could change upon the completion of asset valuations, which are on-going as of the date of this filing. Our June 22, 2001 acquisition of GMTI has been accounted for in a manner similar to a pooling of interests since these businesses were under common control. Our results of operations for 2001 have been adjusted to include GMTI from January 4, 2001 forward. The impact on previously reported amounts for the first quarter include sales of approximately $50 million and a loss before taxes of approximately $5 million. 4 METALDYNE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 3. In June 1998, the Financial Accounting Standards Board ("FASB") issued the Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires that all derivatives be recognized as either assets or liabilities in the consolidated balance sheet and be measured at fair value, and changes in the fair value be recorded in earnings, unless they are designated as hedges of an underlying transaction. The Company adopted this standard, as amended by SFAS 137 and 138, effective January 1, 2001. The adoption of this standard did not have a material impact on the financial position or results of operations of the Company. During the first quarter of 2001, the Company entered into interest rate protection agreements with various financial institutions to hedge a portion of its interest rate risk related to its term loan borrowings under its Credit Facility. These agreements include two interest rate collars with a term of three years, a total notional amount of $200 million and an interest rate cap and floor of 7% and approximately 4.5%,respectively, and four interest rate caps at 7% with a total notional amount of $376 million. The agreements have been designated as cash flow hedging instruments and the effect of marking these contracts to fair value has been recorded in other comprehensive income as presented in Note 10. It is the policy of the Company not to enter into derivative instruments for speculative purposes. 4. In September 2000, the FASB issued the Statement of Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities - a replacement of FASB Statement No. 125." The new standard carries forward some of the provisions of SFAS 125, but modifies the method of accounting for securitizations and other transfers of financial assets and collateral, in addition to requiring additional disclosures. SFAS 140 is effective for reporting periods after March 31, 2001, with the exception of certain collateral and disclosure provisions, which are effective for fiscal years ending after December 15, 2000. The Company adopted SFAS 140 at December 31, 2000. The adoption of SFAS 140 did not have a material impact on the financial position or results of operations of the Company. In 2000, the Company entered into an arrangement to sell, on an ongoing basis, the trade accounts receivable of substantially all domestic business operations to MTSPC, Inc. ("MTSPC") a wholly owned subsidiary of the Company. MTSPC from time to time may sell an undivided fractional ownership interest in the pool of receivables up to approximately $225 million to a third party multi-seller receivables funding company. The net proceeds of sale are less than the face amount of accounts receivable sold by an amount that approximates the purchaser's financing costs which amounted to a total of $8.1 million in 2001 and is included in other expense in the income statement. At September 30, 2001, a total of approximately $178 million of receivables were sold and the Company retained a subordinated interest of approximately $76 million, which was included in the receivables balance in the consolidated balance sheet. The proceeds from the sale of accounts receivable, net for the nine months ended September 30, 2001 was $27.6 million. The retained subordinated interest is discounted at a rate that approximates fair value given the short-term nature of the receivables balance. 5 METALDYNE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 5. As a result of the recapitalization in November 2000, the acquisition of Simpson Industries in December 2000 and the creation of a new executive management team and Board of Directors, the Company developed and implemented in 2001 a new operating and internal reporting structure. During the second quarter of 2001, the Company acquired GMTI and further realigned its operating and internal reporting structure. Accordingly, the segment information for the prior year and 2001 has been restated to conform to the current structure. The Company has defined a segment as a component, with business activity resulting in revenue and expense, which has separate financial information evaluated regularly by the Company's chief operating decision maker in determining resource allocation and assessing performance. The Company operates in two operating groups - Metal Forming and Diversified Industrial Products. The Metal Forming Group consists of one operating segment which manufactures a broad range of engineered metal products used primarily in automotive applications and which combines capabilities in engineering, design, machining and assembly. The Metal Forming Group's sales are primarily to light vehicle OEMs and component assemblers. The Metal Forming Group's products include cold, warm and hot forged products, powdered metal products, tubular fabricated products and light metal castings used in engines, transmissions and drivetrains. Our Diversified Industrial Products Group is comprised of three operating segments: TRANSPORTATION ACCESSORIES: Manufactures towing and related accessories. The towing and accessories products include trailer hitches, hitch mounted accessories, jacks, couplers and winches, roof racks and related electrical products. SPECIALTY FASTENERS: Manufactures standard and custom-designed ferrous, nonferrous and special alloy fasteners for the building construction, farm implement, medium-and heavy-duty truck, appliance, aerospace, electronics and other industries. Specialty fasteners are sold through our own sales personnel and independent sales representatives to both distributors and manufacturers in these industries. INDUSTRIAL PRODUCTS: Manufactures closures and dispensing products, gaskets, insulation products, compressed gas cylinders and precision cutting tools for a wide variety of customers in the chemical, refining, container, construction and other industries. 6 METALDYNE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) Segment activity for the three and nine months ended September 30, 2001 and 2000 are as follows:
Three Months Ended Nine Months Ended September 30 September 30 --------------------- ------------------------ 2001 2000 2001 2000 -------- -------- ---------- ---------- SALES Metal Forming Group $337,210 $202,100 $1,072,110 $659,610 -------- -------- ---------- ---------- Transportation Accessories 63,590 65,630 212,010 230,560 Industrial Products 78,480 79,520 244,600 250,870 Specialty Fasteners 35,010 46,520 114,480 154,440 -------- -------- ---------- ---------- Diversified Industrial Group 177,080 191,670 571,090 635,870 -------- -------- ---------- ---------- Total $514,290 $393,770 $1,643,200 $1,295,480 ======== ======== ========== ========== EBITDA Metal Forming Group $ 50,130 $38,250 $ 164,970 $ 123,650 -------- -------- ---------- ---------- Transportation Accessories 7,610 9,110 34,310 42,640 Industrial Products 12,590 18,150 45,370 56,070 Specialty Fasteners 6,690 8,410 15,920 26,840 -------- -------- ---------- ---------- Diversified Industrial Group 26,890 35,670 95,600 125,550 -------- -------- ---------- ---------- Total $ 77,020 $ 73,920 $ 260,570 $ 249,200 ======== ======== ========== ========== OPERATING PROFIT Total EBITDA for reportable segments $ 77,020 $ 73,920 $ 260,570 $ 249,200 Depreciation and amortization in operating profit (32,060) (20,450) (97,450) (64,180) Gain (charge) on disposition of businesses 2,800 (6,020) 2,800 Other adjustments (16,470) (8,030) (41,800) (19,260) -------- -------- ---------- ---------- Total operating profit $ 28,490 $ 48,240 $115,300 $ 168,560 ======== ======== ========== ==========
OTHER ADJUSTMENTS Other adjustments are general corporate costs and costs and expenses not allocated to segments for internal reporting purposes. In 2001, these include one-time costs associated with the integration of an acquisition, severance of $3 million and approximately $15.3 million of costs in respect of newly acquired Simpson Industries operations which are not allocated to the specific segment for internal reporting purposes. 7 METALDYNE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) 6. The following are reconciliations of the numerators and denominators used in the computations of basic and diluted earnings (loss) per share: Three Months Ended Nine Months Ended September 30 September 30 ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- ------- Weighted average number of shares outstanding 42,840 40,930 42,840 40,970 ======== ======== ======== ======= Net income(loss) $ (5,510) $ 17,860 $(11,190) $69,860 Less: Preferred stock requirements 1,800 --- 4,140 -- -------- -------- -------- ------ Earnings (loss) used for basic earnings per share computation $ (7,310) $ 17,860 $(15,330) $69,860 ======== ======== ======== ======= Basic earnings (loss) per share $ (.17) $ .44 $ (.36) $ 1.71 ======== ======== ========= ======= Total shares used for basic earnings per share computation 42,840 40,930 42,840 40,970 Dilutive securities: Stock options --- 400 -- 370 Convertible debentures --- 9,840 -- 9,840 Contingently issuable shares --- 4,030 -- 4,100 -------- -------- -------- ------- Total shares used for diluted earnings per share computation 42,840 55,200 42,840 55,280 ======== ======== ======== ======= Earnings (loss) used for basic earnings per share computation $(7,310) $ 17,860 $(15,330) $69,860 Add back of debenture interest --- 2,340 -- 7,020 -------- -------- -------- ------- Earnings (loss)used for diluted earnings per share computation $(7,310) $ 20,200 $(15,330) $76,880 ======= ======== ======== ======= Diluted earnings (loss) per share $ (.17) $ .37 $ (.36) $ 1.39 ======= ======== ======== ======= Diluted earnings per share reflect the potential dilution that would occur if securities or other contracts to issue common stock were converted or exercised into common stock. Contingently issuable shares, approximately 2.6 million restricted common shares, did not have a dilutive effect on earnings per share for the period ended September 30, 2001. 7. In December 2000, the Company acquired Simpson Industries, Inc. The acquisition was accounted for as a purchase with excess purchase price over the estimated fair value of net assets acquired of approximately $150 million amortized over 40 years. The purchase price allocations are preliminary, and as such are estimates. Such allocations could change upon the completion of asset valuations, which are on-going as of the date of this filing. 8 METALDYNE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) As described in Note 2, the Company acquired GMTI which has been accounted for in a manner similar to a pooling of interest since it was acquired from Heartland Industrial Partners, the Company's controlling shareholder and the controlling shareholder of GMTI. The following pro forma results of operations reflect these transactions as if they had occurred on January 1, 2000. The pro forma data does not purport to be indicative of the results that would actually have been reported if the transactions had occurred on such date (unaudited, in thousands). Three Months Ended Nine Months Ended September 30, 2000 September 30, 2000 ------------------ -------------------- Net sales $565,810 $1,872,010 Operating profit $ 53,830 $ 203,310 Net income $ 14,250 $ 72,410 8. Inventories by component are as follows (in thousands): September 30, December 31, 2001 2000 -------- -------- Finished goods $ 77,400 $ 90,790 Work in process 44,370 46,390 Raw materials 52,860 62,310 -------- -------- $174,630 $199,490 ======== ======== 9. Property and equipment, net reflects accumulated depreciation of $417 million and $367 million as at September 30, 2001 and December 31, 2000, respectively. 10. The Company's total comprehensive income for the period was as follows (in thousands):
Three Months Ended Nine Months Ended September 30 September 30 ------------------ -------------------- 2001 2000 2001 2000 -------- ------- -------- ------- Net income(loss) $(5,510) $17,860 $(11,190) $69,860 Foreign currency translation gain (loss) 10,320 (9,580) (5,940) (17,840) Interest rate agreements (5,710) -- (6,710) -- ------- ------- -------- ------- Total comprehensive gain (loss) $ (900) $ 8,280 $(23,840) $ 52,020 ======= ======= ======== ========
The majority of other comprehensive gain (loss) relates to foreign currency translation and interest rate arrangements. 9 METALDYNE CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONCLUDED) 11. In June 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which are effective July 1, 2001 and January 1, 2002, respectively, for the Company. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under SFAS 142, amortization of goodwill, including goodwill recorded in past business combinations, will discontinue upon adoption of this standard. In addition, goodwill recorded as a result of business combinations completed during the six-month period ending December 31, 2001 will not be amortized. The Company has recognized goodwill amortization expense of approximately $21 million for the nine months ended September 30, 2001. All goodwill and intangible assets will be tested for impairment in accordance with the provisions of the Statement. The Company is currently reviewing the provisions of SFAS 141 and 142 and assessing the impact of adoption. 12. The Company announced the closure of its heat treating facility in the second quarter 2001 resulting in a pre-tax charge of approximately $6 million principally related to the impairment of long-lived assets and severance costs. Accrued costs for severance related to the recapitalization of the Company at January 1,2001 were approximately $13 million. Payments and adjustments to accrued estimates approximated $3 million and the ending accrual was approximately $10 million. 13. In June and August, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143") and No. 144 "Accounting for the Impairment or Disposal of Long Lived Assets" ("SFAS 144") which are effective January 1, 2003 and January 1, 2002, respectively for the Company. SFAS 143 requires that an existing legal obligation associated with the retirement of a tangible long-lived asset be recognize as a liability when incurred and the amount of the liability be initially measured at fair value. Under SFAS 144, a single accounting method was established for long-lived assets to be disposed of. SFAS 144 requires the Company to recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and the loss is the difference between carrying amount and fair value. The Company is currently reviewing the provisions of SFAS 143 and 144 and assessing the impact of adoption. 10 METALDYNE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company has established Earnings Before Interest Taxes Depreciation and Amortization ("EBITDA") as an indicator of our operating performance and as a measure of our cash generating ability. EBITDA does not represent and should not be considered as an alternative to net income, operating income, net cash provided by operating activities or any other measure for determining operating performance or liquidity that is calculated in accordance with generally accepted accounting principles. Further, EBITDA, as we calculate it, may not be comparable to calculations of similarly titled measures by other companies. On June 22, 2001 we completed the acquisition of Global Metal Technologies, Inc. ("GMTI"). GMTI is a fully integrated technology leader in aluminum die-casting with leading market positions in transmission, engine, chassis and steering components and is also the largest independent thin walled casting company in North America. The acquisition of GMTI has been accounted for in a manner similar to a pooling of interests since it was acquired from Heartland Industrial Partners, our controlling shareholder and the controlling shareholder of GMTI. The results of operations for 2001 include GMTI from January 4, 2001. Prior years have not been restated. The combination with Simpson Industries and the acquisition of GMTI has resulted in a number of corporate initiatives aimed at integrating the combined entity around a new strategic direction. The activities include combining operating entities in both the Specialty Fastener and Transportation Accessories segments, closure of non-core operations and staffing reductions. Additionally, we have undertaken several projects aimed at integrating the three companies financial and information technology systems. These actions while expected to offer future benefits, resulted in one-time costs of approximately $9 million in the third quarter of 2001 and $17 million for the nine months ended September 30, 2001 including approximately $6 million in the second quarter related to a facility closure. QUARTER ENDED SEPTEMBER 30, 2001 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2000 Metaldyne sales for the third quarter of 2001 increased 31% to approximately $514 million as compared with approximately $394 million for the same period last year. This increase was due to our acquisition of Simpson Industries in December 2000 and the aforementioned acquisition of GMTI. These two acquisitions accounted for $150 million of sales in the third quarter. The increase was partially offset by a sales decline of approximately $15 million related to our other Metal Formed Products, which was principally the result of lower levels of domestic vehicle production and the mix of light truck versus passenger car production. In addition, the Transportation Accessories, Specialty Fastener and Industrial Products segments experienced a sales decline of approximately $14 million related to softness in their respective markets. 11 METALDYNE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Gross profit increased to approximately $103 million for the quarter ended September 30, 2001 as compared to $95 million for the quarter ended September 30, 2000. This increase was the result of the acquisition of Simpson Industries and GMTI which contributed approximately $23 million of gross profit offset by an approximate decrease of $15 million related to other Metal Forming, Transportation Accessories, Specialty Fasteners and Industrial Products segments. The gross profit margin decreased from 24.2% in the year ago quarter to 20% in the quarter ended September 30, 2001. This decrease was partially caused by the inclusion of GMTI and Simpson Industries, which had lower margins as a percent of 2001 sales than the margins of Metaldyne in the year ago quarter. In addition, the decrease in sales volume in most of the Company's businesses resulted in a larger percentage impact on margins (gross margin, operating margin and EBITDA margin), as a result of fixed costs not decreasing proportionately with sales. This effect is referred to below as the contribution margin effect. EBITDA for our Metal Forming Group segment was approximately $50 million in third quarter 2001 as compared to approximately $38 million in 2000. The change is principally the result of an approximate $17 million increase in segment EBITDA from the Simpson Industries and GMTI acquisitions and a $5 million decline in Metal Forming as a result of lower sales volume. EBITDA for the Transportation Accessories segment was approximately $7.7 million in third quarter 2001 as compared to approximately $9.1 million in 2000. The decrease in EBITDA is principally the result of approximately $1.8 million of severance and relocation costs related to the combining of operating locations in the Transportation segment. EBITDA for the Specialty Fasteners segment was approximately $6.7 million in the third quarter 2001 as compared to approximately $8.4 million in 2000. This decrease is principally the result of a 25% sales decline and approximately $.9 million of costs and expenses related to corporate initiatives to streamline operations. EBITDA for the Industrial Products segment declined to approximately $13 million in the third quarter of 2001 as compared to approximately $18 million in third quarter 2000. This decrease in EBITDA is a result of a change in product mix as compared with the prior year and approximately $1.7 million of severance costs related to streamlining operations. Selling, general and administrative costs as a percent of sales was 14.4% in the third quarter 2001 as compared with 12.7% in the same period last year. Selling, general and administrative expenses were approximately $74 million as compared to $50 million in the comparable 2000 period. The increase reflects the impact of the Simpson Industries and GMTI acquisitions. Selling, general and administrative expenses were negatively impacted in the quarter by severance costs and increased spending relative to new business programs. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2000 Metaldyne sales for the nine months ended September 30, 2001 increased 27% to $1.6 billion as compared with $1.3 billion in 2000. This increase was due to our acquisition of Simpson Industries and GMTI which accounted for approximately $484 million of sales in the first nine months of 2001. This increase was partially offset by a sales decline of $72 million related to our Metal Forming Group, which was principally the result of lower levels of domestic vehicle production and the mix of light-truck versus passenger car production. In addition, the Transportation Accessories, Specialty Fasteners and Industrial Products segments experienced a sales decline of approximately $65 million including approximately $7 million related to a plant closure in 2000 in the Specialty Fasteners segment. 12 METALDYNE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Gross profit increased to $332 million for the nine months ended September 30, 2001 as compared with $329 million for the comparable period in 2000. The acquisition of Simpson Industries and GMTI contributed approximately $61 million. This increase was largely offset by a decline in gross profit related to other Metal Forming, Transportation Accessories, Specialty Fasteners and Industrial Products related to softness in their respective markets. The gross profit margin decreased from 25.4% in the nine months ended September 30, 2000 to 20.2% in the nine months ended September 30, 2001. This decrease was partially caused by the inclusion of Simpson Industries and GMTI, which have lower margins as a percent of 2001 sales than the margins of Metaldyne one year ago. In addition, the decrease in sales volume in most of the Company's businesses resulted in a larger percentage impact on margins. EBITDA for our Metal Forming Group segment was approximately $165 million for the nine months ended September 30, 2001 as compared to approximately $124 million in 2000. The change is comprised of an approximate $59 million increase in segment EBITDA from the Simpson Industries and GMTI acquisitions and an approximate $18 million decline principally as a result of the $72 million decline in sales noted above. The EBITDA decline approximated the contribution margin effect of the sales decline. EBITDA for the Transportation Accessories segment was approximately $34 million in the nine month period for 2001 as compared to approximately $42.6 million in 2000. The decrease is the result of a $19 million sales decline. The decrease in EBITDA approximated the contribution margin effect of the sales decline, as the Transportation Accessories segment has a higher contribution margin than the Metal Forming Group segment. EBITDA for the Specialty Fasteners segment was approximately $16 million for the nine months ended September 30, 2001 compared to $27 million for the same nine-month period in 2000. This decrease is the result of the $40 million reduction in sales and approximates the contribution margin effect of the sales decline and costs and expenses of approximately $2 million associated with corporate initiatives to streamline operations. EBITDA for the Industrial Products segment declined by 19% to approximately $45 million for the nine months ended September 30, 2001 compared with 2000. This decrease in EBITDA is a result of the sales decline of 2% in this segment and a change in product mix as compared to the prior year. Selling, general and administrative costs as a percent of sales were 12.8% for the nine months ended September 30, 2001 as compared with 12.6% for the nine months ended September 30, 2000. Selling, general and administrative expenses were approximately $211 million for the nine month period ended September 30, 2001 as compared to approximately $163 million in 2000. The increase is principally the result of the Simpson Industries and GMTI acquisitions. Selling, general and administrative expenses were negatively impacted for the nine months ended September 30, 2001 by severance costs and increased spending relative to new business programs. For the quarter and for the nine months ended September 30, 2001, interest expense was $28 million and $100 million, respectively. Interest expense for the comparable quarter and nine months in 2000 was approximately $21 million and $65 million, respectively. The increase in interest expense is the result of debt incurred to finance the recapitalization of the Company in November 2000 and the acquisition of Simpson Industries and GMTI. 13 METALDYNE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Other expense for the quarter and nine months ended September 30, 2001 was approximately $5 million and $23 million, respectively, as compared to other income of approximately $2 million and $11 million, respectively, for the comparable period in 2000. The change was principally the result of expenses in connection with the receivables securitization and the elimination of equity income from affiliates due to the sale of all our equity affiliates, except one, in connection with the recapitalization and higher amortization of deferred financing expense. The provision for income taxes in the third quarter was $.3 million as compared to $11.6 million for the quarter ended September 30, 2000. The provision for the nine months ended September 30, 2001 is $3.3 million as compared to $45.5 million for the comparable period in 2000. The September 30, 2001 provision was computed under the discrete method of accounting due to the variance between the third quarter earnings and the projected earnings for the year. The tax provision in both periods reflects the impact of non-deductible goodwill from acquisitions, with the impact of this item more pronounced in the current year due to the lower level of pre-tax income. The expense is also impacted by foreign operations which contribute a higher proportion of pre-tax income in the current year than in 2000 which is taxed at higher rates than the U.S. Statutory rates. LIQUIDITY AND FINANCIAL CONDITION Cash provided by operating activities for the first nine months of 2001 was $120 million as compared with $218 million in 2000. Capital expenditures were $82 million for the first nine months of 2001 as compared with $79 million in 2000. The reduction in net income for the nine months ended September 30, 2001 was the principal reason for the reduction in net cash from earnings in 2001 compared to the prior year. Receivables increased more in 2001 than in the comparable period of 2000, principally as the result of the inclusion of Simpson Industries and GMTI sales in the current quarter. This increase was partially offset by the sale of additional receivables pursuant to a receivables securitization in 2001. Inventories decreased from the comparable period in 2000 as a result of the Company's continued emphasis on inventory management and the utilization of Just-In-Time and other inventory management techniques. Prepaid expenses and accrued liabilities were each impacted by the payment of approximately $14 million in 2001 relating to options cancelled as part of the recapitalization in which the required cash was escrowed and included in prepaid assets at December 31, 2000, and the corresponding liability included in accrued liabilities. Cash flow also benefited from the collection of approximately $15 million of tax refunds in the first nine months of 2001 compared to approximately $10 million of tax refunds in the comparable period ended September 30, 2000. Capital expenditures increased slightly by approximately $3 million compared to 2000, principally due to the inclusion of capital expenditures of the Simpson Industries and GMTI operations offset by a reduction in capital expenditures as a result of general economic conditions. The Company achieved a net reduction in debt from March 31, 2001 of approximately $22 million net of $58 million in borrowings related to GMTI acquisition. 14 METALDYNE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) As a result of the recapitalization and the Simpson Industries and GMTI acquisitions, we are highly leveraged and we have significantly increased our interest expense relative to historical levels. We will need to dedicate significant portions of cash flow to debt service obligations. As a result of economic conditions the Company's capital expenditures will approximate $110 million for 2001. This decline from earlier projections is the result of customers, principally automotive original equipment manufacturers, delaying product launches until 2002. We may incur material amounts of additional debt and further burden cash flow in pursuit of acquisition strategies. Capital expenditures in calendar year 2000 were approximately $107 million. We believe that our liquidity and capital resources including anticipated cash flow from operations will be sufficient to meet debt service, capital expenditure and other short-term and long-term obligations and needs, but we are subject to unforeseeable events and the risk that we are not successful in implementing our business strategies. We will also seek to extend the average maturities of debt through the issuance of long-term debt securities to the extent market conditions permit us to increase our financial flexibility and ability to pursue our business strategies. MARKET TRENDS Our sales for use in the OEM segments of the automotive industry accounted for approximately one-half of our annual 2000 net sales. The automotive industry is highly cyclical, is dependent on consumer spending, interest rates and consumer confidence and is subject to, among other things, general economic conditions and the impact of international trade. There are signs of increasing weakness in the economy generally. In addition, recently reported results from North American automotive manufacturers reflect the impact of incentive programs which are not expected to continue. The elimination of these programs could result in lower demand in the fourth quarter and 2002. In addition, a portion of net sales are derived from sales of our products manufactured for SUV's and light trucks, which have recently reversed their positive sales trends of the past several years. There can be no assurance that sales of these vehicles will not continue to decline or that pricing pressure from customers or competitors will not have an impact on future performance. FORWARD-LOOKING STATEMENTS This discussion and other sections of this report contain statements reflecting the Company's views about its future performance and constitute "forward-looking statements." These views involve risks and uncertainties that are difficult to predict and may cause the Company's actual results to differ significantly from the results discussed in such forward-looking statements. Readers should consider that various factors may affect our ability to attain the projected performance, including: o Leverage; Ability to Service Debt - We may not be able to manage our business as we might otherwise do so due to our high degree of leverage. o Liquidity and Capital Resources - If we are unable to raise junior capital, our liquidity and business strategies will be adversely impacted. o Challenges of Acquisition Strategy - We may not be able to identify attractive acquisition candidates, successfully integrate our acquired operations or realize the intended benefits of our acquisitions. o Substantial Capital Expenditure Requirements - If we are unable to meet future capital requirements, our business will be adversely affected. o Substantial Restrictions and covenants - Restrictions in our credit facility limit our ability to take certain actions. 15 METALDYNE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) o Dependence on Automotive Industry and Industry Cyclicality - The industries in which we operate are dependent upon the economy and are cyclical. o Dependence on Third-Party Suppliers and Manufacturers - The loss of a substantial number of our suppliers could affect our financial health. o Our Industries are Highly Competitive - Recent trends among our customers will increase competitive pressures in our businesses. o Dependence on Key Personnel and Relationships - We depend on the services of certain key individuals and relationships, the loss of which would materially harm us. o Labor Relations - A portion of our workforce is unionized. o Labor Stoppages Affecting OEMs - Slowdowns, strikes or similar actions could have a material adverse effect on our results of operations. o International Sales - A growing portion of our revenue may be derived from international sources, which presents separate uncertainty for us. o Product Liability - Our businesses expose us to product liability risks that could materially and adversely impact us. o Environmental Matters - We have been and may be subject in the future to potential exposure to environmental liabilities. o Government Regulation - Fastener Quality Act. o Control by Principal Stockholder - We are controlled by Heartland Industrial Partners, whose interests in our business may be different than yours. o Terms of Shareholders Agreement - Provisions of a shareholders agreement impose significant operating and financial restrictions on our business. All statements, other than statements of historical fact included in this quarterly report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this quarterly report, the words, "will," "believe," "anticipate," "intend," "estimate," "expect," "project" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this quarterly report. You should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this quarterly report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. 16 METALDYNE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONCLUDED) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET ABOUT RISK In the normal course of business, we are exposed to market risk associated with fluctuations in foreign exchange rates. We are also subject to interest risk as it relates to long-term debt. See footnote 3 for a discussion of interest rate risk and the objectives and strategies used to manage these risks. PART II. OTHER INFORMATION METALDYNE CORPORATION Items 1, 2, 3, 4 and 5 are not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: Exhibit 12 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (b) REPORTS ON FORM 8-K: None. 17 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. METALDYNE CORPORATION ---------------------------------- (REGISTRANT) DATE: BY: /s/WILLIAM M. LOWE, JR. ---------------------------- ---------------------------------- William M. Lowe, Jr. Executive Vice President and Chief Financial Officer Chief Accounting Officer and Authorized Signatory 18 METALDYNE CORPORATION EXHIBIT INDEX EXHIBIT Exhibit 12 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 19