10-Q 1 k89578e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED 09/30/04 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 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 333-119215 AUTOCAM CORPORATION -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Michigan 38-2790152 ------------------------------------------------ ----------------------- (STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER ORGANIZATION) IDENTIFICATION NO.) 4070 East Paris Avenue Southeast Kentwood, Michigan 49512 ---------------------------------------------- ----------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (616) 698-0707 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ ] NO [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 12, 2004 ------------------------------ ------------------------------------ COMMON STOCK, $10 PAR VALUE 14,340,000 SHARES INDEX
PAGE NO. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 2003 and September 30, 2004 1 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2003 and 2004 2 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2004 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk 24 Item 4. Disclosure Controls and Procedures 25 PART II - OTHER INFORMATION Item 1. Legal Proceedings 25 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 25 Item 3. Defaults Upon Senior Securities 25 Item 4. Submission of Matters to a Vote of Securities Holders 25 Item 5. Other Information 25 Item 6. Exhibits and Reports on Form 8-K - Certifications 26 Signatures 27
Exhibit 31.1 - CEO Certification Exhibit 31.2 - CFO Certification Exhibit 32.1 - CEO Certification Exhibit 32.2 - CFO Certification PART I - FINANCIAL INFORMATION Item 1. Financial Statements TITAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, SEPTEMBER 30, 2003 2004 ---- ---- (predecessor) (successor) Amounts in thousands, except share information Assets Current assets: Cash and equivalents $ 1,075 $ 2,075 Accounts receivable, net of allowances of $484 and $420, respectively 55,484 60,013 Inventories 25,802 31,190 Prepaid expenses and other current assets 3,090 3,583 -------- -------- Total current assets 85,451 96,861 Property, plant and equipment, net 173,580 155,679 Goodwill 139,446 253,557 Other long-term assets 10,598 16,668 -------- -------- Total Assets $409,075 $522,765 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Current maturities of long-term obligations $ 29,748 $ 7,117 Accounts payable 47,246 41,493 Accrued liabilities 15,017 22,410 -------- -------- Total current liabilities 92,011 71,020 -------- -------- Long-term obligations, net of current maturities 104,140 260,758 Deferred taxes and other 50,596 42,681 Shareholders' equity: Series A preferred stock - $.01 par value; 600,000 shares authorized; 579,112 shares issued and outstanding as of December 31, 2003 6 Series B preferred stock - $.01 par value; 400,000 shares authorized; 110,364 shares issued and outstanding as of December 31, 2003 1 Common stock - $.01 par value; 8,000,000 shares authorized; 6,480,895 shares issued and outstanding as of December 31, 2003 65 Common stock - $10 par value; 20,000,000 shares authorized; 14,340,000 shares issued and outstanding as of September 30, 2004 143,400 Additional paid-in capital 137,824 Accumulated other comprehensive income 2,178 5,046 Retained earnings (accumulated deficit) 22,254 (140) -------- -------- Total shareholders' equity 162,328 148,306 -------- -------- Total Liabilities and Shareholders' Equity $409,075 $522,765 ======== ========
See notes to consolidated financial statements. 1 TITAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SIX MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2003 2003 2004 2004 ---- ---- ---- ---- (predecessor) (successor) ---------------------------------------------------------- Amounts in thousands Sales $73,154 $239,983 $ 184,489 $80,249 Cost of sales 64,216 207,086 153,426 68,348 -------- -------- --------- -------- Gross profit 8,938 32,897 31,063 11,901 Selling, general and administrative expenses 4,356 13,079 17,337 5,244 -------- -------- --------- -------- Income from operations 4,582 19,818 13,726 6,657 Interest expense, net 2,234 7,161 4,666 5,705 Other expenses, net 2,298 4,095 3,672 681 -------- -------- --------- -------- Income before tax provision 50 8,562 5,388 271 Tax provision 166 3,672 3,211 411 -------- -------- --------- -------- Net Income (Loss) ($ 116) $ 4,890 $ 2,177 ($ 140) ======== ======== ========= ======== Statements of Comprehensive Income (Loss): Net income (loss) ($ 116) $ 4,890 $ 2,177 ($ 140) Other comprehensive income (loss): Foreign currency translation adjustments 24 3,496 (1,138) 5,046 Amortization of interest rate agreements 67 202 135 -------- -------- --------- -------- Comprehensive Income (Loss) ($ 25) $ 8,588 $ 1,174 $ 4,906 ======== ======== ========= ========
See notes to consolidated financial statements. 2 TITAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SIX MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2003 2004 2004 ---- ---- ---- (predecessor) (successor) ---------------------------------------- Amounts in thousands Net cash provided by (used in) operating activities $ 28,009 $ 10,694 ($ 409) Cash flows from investing activities: Expenditures for property, plant and equipment (16,634) (10,676) (5,487) Proceeds from sale of property, plant and equipment 6,018 808 333 Other (1,434) (339) 307 ------------ ------------ ------------ Net cash used in investing activities (12,050) (10,207) (4,847) ------------ ------------ ------------ Cash flows from financing activities: Borrowings (repayments) on lines of credit, net (1,146) (3,531) 2,000 Proceeds from issuance of long-term obligations 549 247,248 270 Principal payments of long-term obligations (19,712) (109,940) (1,529) Payments to shareholders and option holders (232,663) Shareholder contributions 115,400 Debt issue costs (10,855) (675) ------------ ------------ ------------ Net cash provided by (used in) financing activities (20,309) 5,659 66 ------------ ------------ ------------ Effect of exchange rate changes on cash and equivalents (22) (18) 62 ------------ ------------ ------------ Increase (decrease) in cash and equivalents (4,372) 6,128 (5,128) Cash and equivalents at beginning of period 4,996 1,075 7,203 ------------ ------------ ------------ Cash and Equivalents at End of Period $ 624 $ 7,203 $ 2,075 ============ ============ ============
See notes to consolidated financial statements. 3 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 (UNAUDITED) 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited interim consolidated financial statements (the "Financial Statements") include the accounts of Titan Holdings, Inc. ("Titan") and its subsidiaries (together, the "Company"), which includes Autocam Corporation ("Autocam"), a wholly-owned subisidary. The Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all the information and footnotes normally included in the annual consolidated financial statements prepared in accordance with GAAP. All significant intercompany accounts and transactions have been eliminated in consolidation. All currency amounts within these footnotes are expressed in thousands of U.S. dollars unless otherwise noted. In the opinion of management, the Financial Statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly such information in accordance with generally accepted accounting principles. On June 21, 2004, Micron Merger Corporation, a newly formed entity and wholly-owned subsidiary of Micron Holdings, Inc. ("Micron"), merged with and into Titan with Titan continuing as the surviving corporation (the "Acquisition"). As a result, Titan became a wholly-owned subsidiary of Micron. The total amount of consideration paid in the Acquisition, including amounts related to the repayment of indebtedness, the redemption of the outstanding preferred stock of Titan, payments to common shareholders of Titan and the payment of transaction costs incurred by Titan, was $395,000. The Acquisition was financed with the net proceeds from the issuance of $140,000 of senior subordinated notes of the Company, which are guaranteed by Titan (the "Notes"), borrowings under the Company's new senior credit facilities of $114,000 and combined common equity contributions of $143,400 by GS Capital Partners 2000, L.P. ("GSCP 2000"), other private equity funds affiliated with GSCP 2000, Transportation Resource Partners LP ("TRP"), other investment vehicles affiliated with TRP, and certain of the Company's management. Successor periods - Represents the consolidated financial position and consolidated results of operations and cash flows of the Company reflecting the basis of accounting after purchasing accounting for the Acquisition. Predecessor periods - Represents the consolidated financial position and results of operations and cash flows of the Company reflecting the historical basis of accounting without any application of purchase accounting for the Acquisition. Stock-based compensation -- The Company applies Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its stock-based compensation plan. This plan was terminated in connection with the Acquisition. Under APB No. 25, no stock-based employee compensation cost is reflected in the results of operations as all options granted under this plan had an exercise price equal to the estimated market value of the underlying common stock on the date of the grant. Had stock-based employee compensation cost of the Company's stock option plan been determined based upon the fair value at the grant dates for awards under this plan consistent with the method of Statement of Financial Accounting Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure, the Company's net income (loss) would have changed to the pro forma amounts indicated below: 4 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SEPTEMBER 30, 2004 (UNAUDITED) 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - CONCLUDED
THREE MONTHS NINE MONTHS SIX MONTHS ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, JUNE 30, 2003 2003 2004 ---- ---- ---- (predecessor) ---------------------------------------------------------------- As reported ($ 116) $ 4,890 $ 2,177 Compensation expense, net of related tax effects (140) (420) (280) -------- --------- -------- Pro forma ($ 256) $ 4,470 $ 1,897 ======== ========= ========
The fair value value approach was used to value all option grants, with the following weighted-average assumptions: risk-free interest rate, 4%-4.88%; and expected life of options, 10 years. Guarantees -- The Company guarantees the performance under certain equipment leases of an unrelated vendor that provides services to the Company within one of the Company's European production facilities. The cost associated with those services is reflected in Cost of Sales. The obligations under these leases end at various times between May 2004 and February 2009. At December 31, 2003 and September 30, 2004, the Company's maximum liability under these guarantees was $6,494 and $5,252, respectively, which were not recorded in the Financial Statements. In the event of default by the vendor, the Company would become primarily responsible for the lease obligations and assume control of the equipment subject to the lease which has a fair market value in excess of the present value of the future minimum lease payments. 2. BUSINESS COMBINATION The Acquisition described in Note 1 was accounted for as a purchase, and accordingly, the purchase price was allocated to assets acquired and liabilities assumed based upon their preliminary relative fair market values. Cost in excess of the fair value of the net assets acquired (goodwill) was $249,371, allocated among the Company's operating segments as follows: North America - $116,227, Europe - $124,486 and South America - $8,658. Goodwill deductible for tax purposes will be approximately $4,200. The results of operations and cash flows of Titan (as Predecessor company) have been reported through June 30, 2004. Set forth below are unaudited pro forma statements of operations information for the nine months ended September 30, 2003 and the six months ended June 30, 2004, which are based upon the historical Consolidated Statements of Operations of the Company for those periods after giving effect to the Acquisition as if such transaction had occurred at the beginning of each period presented. These pro forma results are based upon assumptions considered appropriate by Company management and include adjustments as considered necessary in the circumstances. Such adjustments include interest expense that would have been incurred to finance the purchase, depreciation expense based on the fair market value of the property and equipment acquired and the corresponding tax effects of each. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of results which would have actually been reported had the Acquisition taken place at the beginning of each period presented or which may be reported in the future. 5 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SEPTEMBER 30, 2004 (UNAUDITED) 2. BUSINESS COMBINATION - CONCLUDED
NINE MONTHS SIX MONTHS ENDED ENDED SEPTEMBER 30, JUNE 30, 2003 2004 ---- ---- Sales $239,983 $184,489 Net income 309 6,649
3. INVENTORIES Set forth below are the components of Inventories:
DECEMBER 31, SEPTEMBER 30, 2003 2004 ---- ---- (predecessor) (successor) Raw materials $ 7,664 $ 9,358 Production supplies 4,836 5,987 Work in-process 9,336 11,631 Finished goods 3,966 4,214 ---------- ---------- Total Inventories $ 25,802 $ 31,190 ========== ==========
4. PROPERTY, PLANT AND EQUIPMENT, NET Set forth below are the components of Property, Plant and Equipment, Net:
DECEMBER 31, SEPTEMBER 30, 2003 2004 ---- ---- (predecessor) (successor) Buildings and land $ 14,222 $ 9,771 Machinery and equipment 210,273 139,990 Furniture and fixtures 8,444 9,134 ---------- ---------- Total 232,939 158,895 Accumulated depreciation (59,359) (3,216) ---------- ---------- Total Property, Plant and Equipment, Net $ 173,580 $ 155,679 ========== ==========
6 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SEPTEMBER 30, 2004 (UNAUDITED) 4. PROPERTY, PLANT AND EQUIPMENT, NET - CONCLUDED In connection with the Acquisition, the Company restated the historical cost of its property, plant and equipment to fair market appraised values and eliminated all historical accumulated depreciation. 5. LONG-TERM OBLIGATIONS Set forth below are the components of Long-Term Obligations (percentages represent interest rates as of September 30, 2004):
DECEMBER 31, SEPTEMBER 30, 2003 2004 ---- ---- (predecessor) (successor) New Senior Credit Facility: USD term note, 5.0% $ 32,918 Euro term note, 5.12% 76,832 Multi-currency revolving line of credit, 5.0% 13,000 Old senior credit facility retired in connection with the Acquisition $ 124,082 ---------- ---------- Total senior credit facility 124,082 122,750 Senior subordinated notes, 10.875%, net of original issue discount 136,954 Capital leases, from 2.14% to 8.13% 6,793 5,523 Other 3,013 2,648 ---------- ---------- Total long-term obligations 133,888 267,875 Current portion (29,748) (7,117) ---------- ---------- Long-term portion $ 104,140 $ 260,758 ========== ==========
At the time of the Acquisition, Autocam refinanced its former senior credit facility with proceeds from the financings from the Acquisition. In connection therewith, Titan and certain, but not all, of the subsidiaries of Autocam fully and unconditionally guaranteed the Notes. The following table sets forth the guarantor and non-guarantor subsidiaries of Autocam with respect to the Notes:
GUARANTOR SUBSIDIARIES NON-GUARANTOR SUBSIDIARIES ---------------------- -------------------------- Autocam-Pax, Inc. Autocam-Har, Inc. Autocam Acquisition, Inc. Autocam France, SARL Autocam Laser Technologies, Inc. Frank & Pignard, SA Autocam International Ltd. Bouverat Industries, SA Autocam Europe, B.V. Autocam do Brasil Usinagem Ltda. Autocam International Sales Corporation Autocam Foreign Sales Corporation Autocam Greenville, Inc. Autocam South Carolina, Inc.
7 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SEPTEMBER 30, 2004 (UNAUDITED) 5. LONG-TERM OBLIGATIONS - CONTINUED Information regarding the guarantors and non-guarantors are as follows:
TITAN COMBINING STATEMENT OF OPERATIONS (PARENT SUBSIDIARIES THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPANY --------------------------- (predecessor) ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED ------------------------------------- ----- -------- --------- ------------- ------------ -------- Sales $27,636 $ 4,521 $42,247 ($ 1,250) $73,154 Cost of sales 24,662 3,676 37,128 (1,250) 64,216 -------- -------- ------- -------- Gross profit 2,974 845 5,119 8,938 Selling, general and administrative expenses 1,634 303 2,419 4,356 -------- -------- ------- -------- Income from operations 1,340 542 2,700 4,582 Interest expense, net 592 151 1,491 2,234 Other expense (income), net $ 9 1,894 (1) 396 2,298 ------- -------- -------- ------- -------- Income (loss) before tax provision (9) (1,146) 392 813 50 Tax provision (3) (389) 133 425 166 ------- -------- -------- ------- -------- Net Income (Loss) ($ 6) ($ 757) $ 259 $ 388 ($ 116) ======= ======== ======== ======= ========
TITAN COMBINING STATEMENT OF OPERATIONS (PARENT SUBSIDIARIES NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPANY --------------------------- (predecessor) ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED ------------------------------------ ----- ------- --------- ------------- ------------ -------- Sales $88,961 $ 12,666 $142,023 ($ 3,667) $239,983 Cost of sales 76,859 10,263 123,631 (3,667) 207,086 ------- -------- -------- -------- Gross profit 12,102 2,403 18,392 32,897 Selling, general and administrative expenses 4,470 950 7,659 13,079 ------- -------- -------- -------- Income from operations 7,632 1,453 10,733 19,818 Interest expense, net 1,705 442 5,014 7,161 Other expense (income), net $ 28 2,530 (2) 1,539 4,095 ------- ------- -------- -------- -------- Income (loss) before tax provision (28) 3,397 1,013 4,180 8,562 Tax provision (10) 1,182 345 2,155 3,672 ------- ------- -------- -------- -------- Net Income (Loss) ($ 18) $ 2,215 $ 668 $ 2,025 $ 4,890 ======= ======= ======== ======== ========
8 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SEPTEMBER 30, 2004 (UNAUDITED) 5. LONG-TERM OBLIGATIONS - CONTINUED
TITAN COMBINING STATEMENT OF OPERATIONS (PARENT SUBSIDIARIES SIX MONTHS ENDED JUNE 30, 2004 COMPANY --------------------------- (predecessor) ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED --------------------------------- ----- ------- --------- ------------- ------------ -------- Sales $64,212 $ 11,061 $112,477 ($ 3,261) $184,489 Cost of sales 55,053 7,848 93,786 (3,261) 153,426 ------- -------- -------- -------- Gross profit 9,159 3,213 18,691 31,063 Selling, general and administrative expenses $ 6,438 5,214 591 5,094 17,337 -------- ------- -------- -------- -------- Income (loss) from operations (6,438) 3,945 2,622 13,597 13,726 Interest expense, net 1,472 291 2,903 4,666 Other expense, net 19 2,358 21 1,274 3,672 -------- ------- -------- -------- -------- Income (loss) before tax provision (6,457) 115 2,310 9,420 5,388 Tax provision (2,195) 38 801 4,567 3,211 -------- ------- -------- -------- -------- Net Income (Loss) ($ 4,262) $ 77 $ 1,509 $ 4,853 $ 2,177 ======== ======= ======== ======== ========
TITAN COMBINING STATEMENT OF OPERATIONS (PARENT SUBSIDIARIES THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPANY --------------------------- (successor) ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED ------------------------------------- ----- -------- --------- ------------- ------------ -------- Sales $28,807 $4,342 $48,936 ($ 1,836) $ 80,249 Cost of sales 25,322 3,393 41,469 (1,836) 68,348 -------- ------ ------- --------- Gross profit 3,485 949 7,467 11,901 Selling, general and administrative expenses 2,453 293 2,498 5,244 -------- ------ ------- --------- Income from operations 1,032 656 4,969 6,657 Interest expense, net 4,096 150 1,459 5,705 Other expense, net $ 9 358 314 681 ---- -------- ------ ------- --------- Income (loss) before tax provision (9) (3,422) 506 3,196 271 Tax provision (3) (1,166) 177 1,403 411 ---- -------- ------ ------- --------- Net Income (Loss) ($ 6) ($ 2,256) $ 329 $ 1,793 ($ 140) ==== ======== ====== ======= =========
9 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SEPTEMBER 30, 2004 (UNAUDITED) 5. LONG-TERM OBLIGATIONS - CONTINUED
CONDENSED COMBINING STATEMENT TITAN OF CASH FLOWS (PARENT SUBSIDIARIES NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPANY --------------------------- (predecessor) ONLY) AUTOCAM GUARANTOR NON-GUARANTOR COMBINED ------------------------------------ ----- ------- --------- ------------- -------- Net cash provided by (used in) operating activities ($10) $ 6,510 $1,382 $20,127 $ 28,009 Expenditures for property, plant and equipment (6,897) (1,356) (8,381) (16,634) Proceeds from sale of property, plant and equipment 5,897 1 120 6,018 Borrowings (repayments) on lines of credit, net 5,000 (6,146) (1,146) Principal payments of long-term obligations (8,493) (11,219) (19,712) Other (2,304) (27) 1,424 (907) ----- ------- ------ ------- -------- Net increase (decrease) in cash and equivalents (10) (287) (4,075) (4,372) Cash and equivalents at beginning of period 10 376 2 4,608 4,996 ----- ------- ------ ------- -------- Cash and Equivalents at End of Period $ 89 $ 2 $ 533 $ 624 ===== ======= ====== ======= ========
CONDENSED COMBINING STATEMENT TITAN OF CASH FLOWS (PARENT SUBSIDIARIES SIX MONTHS ENDED JUNE 30, 2004 COMPANY --------------------------- (predecessor) ONLY) AUTOCAM GUARANTOR NON-GUARANTOR COMBINED ------------------------------ ----- ------- --------- ------------- -------- Net cash provided by (used in) operating activities ($ 6,457) $ 2,206 $ 207 $ 14,738 $ 10,694 Expenditures for property, plant and equipment (3,880) (205) (6,591) (10,676) Borrowings (repayments) on lines of credit, net (1,280) 21,829 (24,080) (3,531) Proceeds from issuance of long-term obligations 169,888 77,360 247,248 Principal payments of long-term obligations (51,268) (58,672) (109,940) Payments to shareholders and option holders (232,663) (232,663) Shareholder contributions 115,400 115,400 Dividends received (paid) 125,000 (125,000) Debt issue costs (10,855) (10,855) Other (145) 596 451 --------- -------- ----- -------- ---------- Net increase in cash and equivalents 2,775 2 3,351 6,128 Cash and equivalents at beginning of period 750 2 323 1,075 --------- -------- ----- -------- ---------- Cash and Equivalents at End of Period $ 3,525 $ 4 $ 3,674 $ 7,203 ========= ======== ===== ======== ==========
10 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SEPTEMBER 30, 2004 (UNAUDITED) 5. LONG - TERM OBLIGATIONS - CONTINUED
CONDENSED COMBINING STATEMENT TITAN OF CASH FLOWS (PARENT SUBSIDIARIES THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPANY ---------------------------- (successor) ONLY) AUTOCAM GUARANTOR NON-GUARANTOR COMBINED ------------------------------------- ----- ------- --------- ------------- -------- Net cash provided by (used in) operating activities ($ 4,574) $ 782 $ 3,383 ($ 409) Expenditures for property, plant and equipment (815) (783) (3,889) (5,487) Borrowings on lines of credit, net 2,000 2,000 Proceeds from issuance of long-term obligations 270 270 Principal payments of long-term obligations (82) (1,447) (1,529) Debt issue costs (675) (675) Other 737 (35) 702 -------- ----- --------- -------- Net decrease in cash and equivalents (3,409) (1) (1,718) (5,128) Cash and equivalents at beginning of period 3,525 4 3,674 7,203 -------- ----- --------- -------- Cash and Equivalents at End of Period $116 $ 3 $ 1,956 $ 2,075 ======== ===== ========= ========
11 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SEPTEMBER 30, 2004 (UNAUDITED)
TITAN CONDENSED COMBINING BALANCE SHEET (PARENT SUBSIDIARIES DECEMBER 31, 2003 COMPANY --------------------------- (predecessor) ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED --------------------------------- ----- ------- --------- ------------- ------------ -------- Assets Current assets: Cash and equivalents $ 750 $ 2 $ 323 $ 1,075 Accounts receivable, net 13,524 1,757 40,203 55,484 Inventories 8,052 1,060 16,690 25,802 Prepaid expenses and other current assets 1,616 52 1,422 3,090 -------- -------- -------- -------- Total current assets 23,942 2,871 58,638 85,451 Property, plant and equipment, net 40,899 8,945 123,602 $ 134 173,580 Goodwill $122,521 2,688 14,237 139,446 Intercompany receivables (payables) 40,513 (5,863) (33,437) (1,213) Investment in subsidiaries 9,136 (15,014) (1,806) 9,831 (2,147) Other long-term assets 7,106 106 3,386 10,598 --------- -------- -------- -------- -------- -------- Total Assets $131,657 $100,134 $ 4,253 $176,257 ($ 3,226) $409,075 ========= ======== ======== ======== ======== ======== Liabilities and Shareholders' Equity Current liabilities: Current maturities of long-term obligations $ 4,656 $ 25,092 $ 29,748 Accounts payable 8,255 $ 290 38,906 ($ 205) 47,246 Accrued liabilities ($ 5) 3,062 238 11,722 15,017 --------- -------- -------- -------- -------- -------- Total current liabilities (5) 15,973 528 75,720 (205) 92,011 --------- -------- -------- -------- -------- -------- Long-term obligations, net of current maturities 50,612 54,555 (1,027) 104,140 Deferred taxes and other 15,304 35,292 50,596 Shareholders' equity: Capital stock 137,896 1,994 (1,994) 137,896 Accumulated other comprehensive income (loss) 6,812 (4,634) 2,178 Retained earnings (accumulated deficit) (6,234) 11,433 3,725 13,330 22,254 --------- -------- -------- -------- -------- -------- Total shareholders' equity 131,662 18,245 3,725 10,690 (1,994) 162,328 --------- -------- -------- -------- -------- -------- Total Liabilities and Shareholders' Equity $131,657 $100,134 $ 4,253 $176,257 ($ 3,226) $409,075 ========= ======== ======== ======== ======== ========
12 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SEPTEMBER 30, 2004 (UNAUDITED) 5. LONG - TERM OBLIGATIONS - CONCLUDED
TITAN CONDENSED COMBINING BALANCE SHEET (PARENT SUBSIDIARIES SEPTEMBER 30, 2004 COMPANY -------------------------- (successor) ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED --------------------------------- ----- ------- --------- ------------- ------------ -------- Assets Current assets: Cash and equivalents $ 117 $ 2 $ 1,956 $ 2,075 Accounts receivable, net 20,813 2,199 37,001 60,013 Inventories 9,279 1,351 20,560 31,190 Prepaid expenses and other current assets 1,987 132 1,464 3,583 -------- -------- -------- -------- Total current assets 32,196 3,684 60,981 96,861 Property, plant and equipment, net 28,462 5,595 121,203 $ 419 155,679 Goodwill $116,299 137,258 253,557 Intercompany receivables (payables) 29,896 (4,978) (24,602) (316) Investment in subsidiaries 27,063 100,631 (3,458) (123,815) (421) Other long-term assets 1 11,192 99 5,376 16,668 -------- -------- -------- -------- -------- -------- Total Assets $143,363 $202,377 $ 942 $176,401 ($ 318) $522,765 ======== ======== ======== ======== ======== ======== Liabilities and Shareholders' Equity Current liabilities: Current maturities of long-term obligations $ 330 $ 6,787 $ 7,117 Accounts payable 7,982 $ 305 33,521 ($ 315) 41,493 Accrued liabilities $ (28) 5,257 308 16,876 (3) 22,410 -------- -------- -------- -------- -------- -------- Total current liabilities (28) 13,569 613 57,184 (318) 71,020 -------- -------- -------- -------- -------- -------- Long-term obligations, net of current maturities 182,570 78,188 260,758 Deferred taxes and other 7,972 34,709 42,681 Shareholders' equity: Capital stock 143,400 143,400 Accumulated other comprehensive income 519 4,525 5,046 Retained earnings (accumulated deficit) (9) (2,253) 329 1,795 (140) -------- -------- -------- -------- -------- -------- Total shareholders' equity 143,391 (1,734) 329 6,320 148,306 -------- -------- -------- -------- -------- -------- Total Liabilities and Shareholders' Equity $143,363 $202,377 $ 942 $176,401 ($ 318) $522,765 ======== ======== ======== ======== ======== ========
13 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SEPTEMBER 30, 2004 (UNAUDITED) 6. BUSINESS SEGMENT INFORMATION The Company has three operating segments: North America, Europe and South America. The North American segment provides precision-machined components primarily to the transportation and medical devices industries, while the European and South American segments provide precision-machined components primarily to the transportation industry. The Company has a small operation in China that is grouped with its European operations for business segmentation purposes. The Company has assigned specific business units to a segment based principally on their geographical location. Each of the Company's segments is individually managed and have separate financial results reviewed by the Company's chief executive and operating decision-makers. These results are used by those individuals both in evaluating the performance of, and in allocating current and future resources to, each of the segments. The Company evaluates segment performance primarily based on income from operations and the efficient use of assets. Set forth below is business segment information for the three and nine months ended September 30, 2003, the six months ended June 30, 2004 and the three months ended September 30, 2004 and as of December 31, 2003 and September 30, 2004:
THREE MONTHS NINE MONTHS SIX MONTHS THREE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2003 2003 2004 2004 ---- ---- ---- ---- (predecessor) (successor) ----------------------------------------- Sales to Unaffiliated Customers from Company Facilities Located in: North America $32,125 $105,429 $ 75,031 $32,987 Europe 37,889 124,942 100,429 40,641 South America 3,140 9,612 9,029 6,621 -------- -------- --------- -------- Total $73,154 $239,983 $184,489 $80,249 ======== ======== ========= ======== Net Income (Loss) of Company Facilities Located in: North America ($ 504) $ 1,262 ($ 2,678) ($ 1,933) Europe 210 2,971 3,732 747 South America 178 657 1,123 1,046 -------- -------- --------- -------- Total ($ 116) $ 4,890 $ 2,177 ($ 140) ======== ======== ========= ======== Depreciation and Amortization on Assets Located in: North America $ 2,143 $ 6,102 $ 6,232 $ 948 Europe 2,826 8,174 6,190 2,491 South America 213 638 532 199 -------- -------- --------- -------- Total $ 5,182 $ 14,914 $ 12,954 $ 3,638 ======== ======== ========= ======== Net Interest Expense of Company Facilities Located in: North America $ 743 $ 2,297 $ 1,763 $ 4,246 Europe 1,434 4,700 2,699 1,356 South America 57 164 204 103 -------- -------- --------- -------- Total $ 2,234 $ 7,161 $ 4,666 $ 5,705 ======== ======== ========= ========
14 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED SEPTEMBER 30, 2004 (UNAUDITED) 6. BUSINESS SEGMENT INFORMATION - CONCLUDED
THREE MONTHS NINE MONTHS SIX MONTHS THREE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2003 2003 2004 2004 ---- ---- ---- ---- (predecessor) (successor) ----------------------------------------- Tax Provision of Company Facilities Located in: North America ($ 259) $ 691 ($ 1,356) ($ 992) Europe 338 2,703 4,068 899 South America 87 278 499 504 --------- -------- --------- --------- Total $ 166 $ 3,672 $ 3,211 $ 411 ========= ======== ========= ========= Expenditures for Property, Plant and Equipment of Facilities Located in: North America $ 1,875 $ 8,253 $ 4,085 $ 1,598 Europe 2,473 6,663 5,434 2,926 South America 1,142 1,718 1,157 963 --------- -------- --------- --------- Total $ 5,490 $ 16,634 $ 10,676 $ 5,487 ========= ======== ========= =========
DECEMBER 31, SEPTEMBER 30, 2003 2004 ---- ---- (predecessor) (successor) Total Assets of Company Facilities Located in: North America $ 209,080 $ 197,949 Europe 183,193 296,805 South America 16,802 28,011 ------------ ------------ Total $ 409,075 $ 522,765 ============ ============
15 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED SEPTEMBER 30, 2004 (UNAUDITED) 7. SUPPLEMENTAL CASH FLOW INFORMATION Set forth below is a reconciliation of net income (loss) to net cash provided by (used in) operating activities:
NINE MONTHS SIX MONTHS THREE MONTHS ENDED ENDED ENDED SEPTEMBER 30, JUNE 30, SEPTEMBER 30, 2003 2004 2004 ---- ---- ---- (predecessor) (successor) ------------------------- Net income (loss) $ 4,890 $ 2,177 ($ 140) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 14,914 12,954 3,638 Deferred taxes 2,026 395 311 Realized gains and losses and other, net 2,407 2,627 (287) Changes in assets and liabilities that provided (used) cash: Accounts receivable 4,719 (9,243) 4,563 Inventories 1,555 (2,899) (2,566) Prepaid expenses and other current assets (303) (44) (442) Other long-term assets (72) (1,192) 461 Accounts payable (3,854) 1,687 (6,986) Accrued liabilities 1,606 6,962 1,305 Deferred taxes and other 121 (2,730) (266) -------- -------- -------- Net Cash Provided by (Used in) Operating Activities $ 28,009 $ 10,694 ($ 409) ======== ======== ========
8. STOCK OPTION PLAN Micron's Board of Directors has reserved 1,430,000 shares of common stock for issuance to employees under the 2004 Stock Option Plan (the "Option Plan"). No options were granted under the Option Plan as of September 30, 2004; however, on October 12, 2004, options to purchase 929,500 shares were granted at $10 per share. Options are not exercisable prior to twelve months from or ten years after the grant date. Certain options granted vest at a rate of twenty-five percent annually over a four-year period, while others vest based on Micron shareholders' ability to meet certain levels of return on their investment in Micron. The options granted on October 12, 2004 vest retroactive to June 21, 2004. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with and is qualified in its entirety by reference to our consolidated financial statements and accompanying notes. Except for historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties. Future results could differ materially from those discussed below. OVERVIEW Titan Holdings, Inc. ("Titan") is a holding company headquartered in Kentwood, Michigan and a wholly-owned subsidiary of Micron Holdings, Inc. ("Micron"). Its sole and wholly-owned subsidiary, Autocam Corporation ("Autocam") and Autocam's subsidiaries, are a leading independent manufacturer of extremely close tolerance precision-machined, metal alloy components, sub-assemblies and assemblies, primarily for performance and safety critical automotive applications. Those applications in which we have significant market penetration include fuel injection, power steering, braking, electric motors and airbag systems. We provide these products from our facilities in North America, Europe, South America and Asia to some of the world's largest Tier I suppliers to the automotive industry. References throughout this document to "we," "our" or "us" refer to Titan together with its consolidated subsidiaries. Our business and results of operations during the third quarter and nine months of 2004 were affected by the following significant events: - On June 21, 2004, Micron Merger Corporation ("Merger"), a newly formed entity and wholly-owned subsidiary of Micron, merged with and into Titan with Titan continuing as the surviving corporation (the "Acquisition"). As a result, Titan became a wholly-owned subsidiary of Micron. The total amount of consideration paid in the Acquisition, including amounts related to the repayment of indebtedness, the redemption of the outstanding preferred stock of Titan, payments to common shareholders of Titan and the payment of transaction costs incurred by Titan, was $395.0 million. The Acquisition was financed with the net proceeds from the issuance by Autocam of $140.0 million of senior subordinated notes of the Company, which are guaranteed by Titan (the "Notes"), borrowings of $114 million under the Company's new senior credit facilities and combined common equity contributions of $143.4 million by GS Capital Partners 2000, L.P. ("GSCP 2000"), other private equity funds affiliated with GSCP 2000, Transportation Resource Partners LP ("TRP"), other investment vehicles affiliated with TRP, and our president. - A significant portion of our sales and profits resulted from transactions denominated in euros. Those sales and profits have been translated into U.S. Dollars ("USD") for financial reporting purposes. As a result, the value of the USD compared to the euro in the three and nine months ended September 30, 2004 relative to the same periods in the prior years positively impacted our reported results. The following table sets forth, for the periods indicated, the period end and period average exchange rates used in translating the financial statements (expressed as USD per one euro):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, ------------------ ----------------- 2003 2003 2004 2003 2004 ---- ---- ---- ---- ---- Average(1) 1.1276 1.2239 1.1103 1.2263 End of Period 1.2552 1.2409 1.2409
------------------ (1) The average rate represents the average of all monthly average exchange rates within the respective periods weighted by reported sales denominated in euros. 17 OVERVIEW - CONCLUDED - We are routinely exposed to pressure by our customers to offer unit price reductions, which is typical of our industry. Through continuous improvement and increased efficiencies in our manufacturing and administrative processes we have achieved improvements in margins over time in spite of these constant pressures. - In April 2003, we sold and leased back our Kentwood and Marshall, Michigan facilities for $5.8 million, using the proceeds of that sale to prepay some of our USD-denominated term indebtedness. Annual lease expense under these agreements is $.6 million. - In June 2003, we closed our Chicago, Illinois production facility, moving all existing production to our Michigan facilities. Through the re-engineering of manufacturing processes and elimination of redundancies, we were able to reduce headcount in North America by 6% when comparing the nine-month period ended September 30, 2004 with the same period in 2003. - In 2003, we successfully consolidated power steering production lines formerly contained within three of our French facilities into one facility. Significant costs, including premium freight, outsourcing, labor and machinery repairs, were incurred on a one-time basis to affect this reorganization. This reorganization has and is expected to continue to provide benefits in the future, primarily in the area of lower labor costs through headcount reductions and improved efficiency. RESULTS OF OPERATIONS The following table sets forth our Consolidated Statements of Operations expressed as a percentage of sales:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------------ 2003(1) 2004(2) 2003(1) 2004(3) ------- ------- ------- ------- Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 87.8% 85.2% 86.3% 83.8% ----- ----- ----- ----- Gross profit 12.2% 14.8% 13.7% 16.2% Selling, general and administrative expenses 6.0% 6.5% 5.4% 8.5% ----- ----- ----- ----- Income from operations 6.2% 8.3% 8.3% 7.7% Interest expense, net 3.1% 7.1% 3.0% 3.9% Other expenses, net 3.1% 0.8% 1.7% 1.6% ----- ----- ----- ----- Income before tax provision 0.0% 0.4% 3.6% 2.2% Tax provision 0.2% 0.5% 1.5% 1.4% ----- ----- ----- ----- Net Income (Loss) -0.2% -0.1% 2.1% 0.8% ===== ===== ===== =====
------------------------ (1) Represents the consolidated results of operations of the Company reflecting the historical basis of accounting without any application of purchase accounting for the Acquisition. (2) Represents the consolidated results of operations of the Company reflecting the basis of accounting after purchasing accounting for the Acquisition. (3) Represents the combined consolidated results of operations of the Company reflecting the historical basis of accounting without any application of purchase accounting for the Acquisition for the six months ended June 30, 2004 and reflecting the basis of accounting after purchasing accounting for the Acquisition for the three months ended September 30, 2004. 18 THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004 Sales Sales increased $7 million, or 9.7%, to $80.2 million for the three months ended September 30, 2004 from $73.2 million for the three months ended September 30, 2003. Of this increase, $3.3 million was attributable to the devaluation of the USD relative to the euro. Excluding the effect of foreign currency translation and unit price reductions mentioned below, sales for the quarter increased $4.9 million over the quarter ended September 30, 2003, principally attributable to the following factors: - Increased shipments of electric power-assisted steering products to two European customers during 2004. - Sales of components manufactured by our South American operations have grown in the third quarter of 2004 relative to the same period in 2003 as lower labor costs in those facilities (relative to those in our European and North American facilities and those of our competitors) have afforded us additional demand for high value-added components from our customers. These positive developments more than offset the negative impact of unit price reductions of $1.2 million during the third quarter of 2004 and decreasing sales to a European power steering systems customer that desourced us on some products. Gross Profit Gross profit increased $3 million to $11.9 million, or 14.8% of sales, for the three months ended September 30, 2004 from $8.9 million, or 12.2% of sales, for the three months ended September 30, 2003. The gross profit percentage improvement can generally be attributed to the following factors: - We have achieved headcount reductions in North America as a result of various continuous process improvement initiatives and in Europe as a result of the power steering production line reorganization described above. Together, these initiatives resulted in an increase in gross profit margin of 2.6 percentage points. - In connection with the Acquisition, we restated the historical cost of our property, plant and equipment to fair market appraised values, which, in the aggregate, was lower than the net book value on the date prior to the Acquisition. In doing so, depreciation expense was $1.6 million less in the third quarter of 2004 as compared to the third quarter of 2003. These positive factors were partially offset by the negative impact on gross profit of the unit price reductions described above and steel price increases. Selling, General and Administrative Selling, general and administrative expenses increased $.8 million to $5.2 million, or 6.5% of sales, for the three months ended September 30, 2004 from $4.4 million, or 6% of sales, for the three months ended September 30, 2003. The 2004 results include $.7 million in expenses associated with the foregiveness of receivables formerly due from executive managers under a split-dollar life insurance program. 19 Interest Expense, Net Net interest expense increased $3.5 million to $5.7 million for the three months ended September 30, 2004 from $2.2 million for the three months ended September 30, 2003. Interest expense on increased debt levels incurred as a result of the Acquisition more than offset the favorable impact of principal reductions through regularly scheduled payments and lower interest rates under our new senior credit facility, which averaged 60 to 80 basis points less during the quarter ended September 30, 2004 when compared to interest rates under our former senior credit facility during the three months ended September 30, 2003. Other Expense, Net Net other expense decreased $1.6 million to $.7 million for the three months ended September 30, 2004 from $2.3 million for the three months ended September 30, 2003. The 2003 results include the $1.7 million anticipated loss on the sale of excess equipment scheduled for liquidation in connection with our Chicago, Illinois facility closure as described above. Tax Provision For the three months ended September 30, 2004, we recorded an income tax provision of $.4 million, for an effective tax rate of 151.7%. Our effective tax rate was more than the United States statutory rate of 34% due primarily to the French income tax provision, which includes legal profit sharing contribution expense of $.4 million. Under French law the legal profit sharing contribution is assessed on income before taxes, and therefore is treated by us as a component of our tax provision. NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004 Sales Sales increased $24.7 million, or 10.3%, to $264.7 million for the nine months ended September 30, 2004 from $240 million for the nine months ended September 30, 2003. Of this increase, $13.2 million was attributable to the devaluation of the USD relative to the euro. Excluding the effect of foreign currency translation and unit price reductions mentioned below, sales for the nine-month period increased $15.1 million over the nine months ended September 30, 2003, principally attributable to the following factors: - Increased shipments of electric power-assisted steering products to two European customers during 2004. - During the latter part of 2003, we began shipping diesel injection components to two North American customers seeking to increase their penetration of the North American diesel injection market. The benefit derived from this development was partially offset by premium pricing earned in the second quarter of 2003 on one of the new product lines during the transition from prototype to production volumes. - Sales of components manufactured by our South American operations have grown in 2004 relative to 2003 as lower labor costs in those facilities (relative to those in our European and North American facilities and those of our competitors) have afforded us additional demand for high value-added components from our customers. These positive developments more than offset the negative impact of unit price reductions of $3.6 million during the first nine months of 2004 and decreasing sales to a European power steering systems customer and a European fuel systems customer, both of which desourced us on some products. 20 Gross Profit Gross profit increased $10.1 million to $43 million, or 16.2% of sales, for the nine months ended September 30, 2004 from $32.9 million, or 13.7% of sales, for the nine months ended September 30, 2003. The gross profit percentage improvement can generally be attributed to the following factors: - We have achieved headcount reductions in North America as a result of the Chicago, Illinois facility closure as described above and various other continuous process improvement initiatives, and in Europe as a result of the power steering production line reorganization described above. Together, these initiatives resulted in an increase in gross profit margin of 1.5 percentage points. - We incurred equipment move, severance and other costs during the nine months ended September 30, 2003 in connection with the Chicago, Illinois facility closure of $1.1 million. Such costs were not repeated in the nine-month period ended September 30, 2004. These positive factors were partially offset by the negative impact on gross profit of the unit price reductions, steel price increases and additional building lease expense derived from the sale and leaseback of the production facilities as described above. Selling, General and Administrative Selling, general and administrative expenses increased $9.5 million to $22.6 million, or 8.5% of sales, for the nine months ended September 30, 2004 from $13.1 million, or 5.4% of sales, for the nine months ended September 30, 2003. The 2004 results include $8.2 million in costs associated with the Acquisition, consisting principally of investment banking fees, management bonuses, and legal and accounting fees, and $.7 million in executive manager receivables foregiven under a split-dollar life insurance program. Interest Expense, Net Net interest expense increased $3.2 million to $10.4 million for the nine months ended September 30, 2004 from $7.2 million for the nine months ended September 30, 2003. Interest expense on increased debt levels incurred as a result of the Acquisition more than offset the favorable impact of principal reductions through regularly scheduled payments and repayments from the proceeds of the sale and leaseback of the production facilities as described above. In addition, interest rates incurred on borrowings under our new senior credit facility averaged 20 to 50 basis points less during the nine months ended September 30, 2004 when compared to interest rates incurred on borrowings under our former senior credit facility during the nine months ended September 30, 2003. Other Expense, Net Net other expense increased $.3 million to $4.4 million for the nine months ended September 30, 2004 from $4.1 million for the nine months ended September 30, 2003. The 2004 results include the accelerated write-off of $1.9 million in unamortized debt issue costs associated with our former senior credit facility, which was refinanced in connection with the Acquisition. This more than offsets the $1.7 million negative impact on our 2003 results of the loss reserve recorded on excess equipment from our Chicago, Illinois facility that was sold as described above. Tax Provision For the nine months ended September 30, 2004, we recorded an income tax provision of $3.6 million, for an effective tax rate of 64%. Our effective tax rate was more than the United States statutory rate of 34% due primarily to the French income tax provision, which includes legal profit sharing contribution expense of $1.6 million. In addition, French statutory income tax rate is 35.4% of income before taxes. 21 LIQUIDITY AND CAPITAL RESOURCES Our short-term liquidity needs include required debt service and day-to-day operating expenses including working capital requirements and the funding of capital expenditures. Long-term liquidity requirements include capital expenditures for new programs and maintenance of existing equipment and debt service. Capital expenditures for 2004 are expected to be $20-22 million, of which $16.2 million was spent in the nine months ended September 30, 2004. Our principal sources of cash to fund short- and long-term liquidity needs consist of cash generated by operations and borrowing under our revolving credit facilities. In connection with the Acquisition, we entered into a new senior credit facilities agreement with a syndication of banks consisting of the following components: - A $33 million term loan to Autocam; - A (euro)62.7 million term loan to Autocam's wholly-owned subsidiary, Autocam France SARL (equivalent to $76.8 million as of September 30, 2004); - A multi-currency revolving credit facility of $36.1 million ($23.1 million in availability as of September 30, 2004) against which borrowings may be made by Autocam in USD or euros; and - A euro revolving credit facility of (euro) 11.6 million available to Autocam France SARL (fully available as of September 30, 2004). The indenture governing the Notes and the agreement governing the senior credit facilities contain a number of covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The senior credit facilities require us to meet a number of financial ratio tests, including interest coverage and total leverage ratios. The senior credit facilities also limit the amount of capital expenditures we may make. Our management believes that cash from operations and, if required, borrowings under the revolving credit facilities of the senior credit facilities will be sufficient for cash requirements through at least September 2005. Nine Months Ended September 30, 2004 Cash provided by operating activities of $10.3 million during the nine months ended September 30, 2004 reflects net income, excluding non-cash and other reconciling items of $21.7 million, and an increase in net working capital of $11.4 million due primarily to the following factors: - Inventories increased $5.5 million due primarily to the growth in our business as described above. In addition, the value of raw material inventories has risen consistent with the rise in steel and perishable tooling prices. Finally, machinery spare parts inventories have increased consistent with the addition of new types of equipment. - Accounts receivable increased $4.7 million. A significant customer discontinued an accelerated payment program in May 2004, which had the effect of increasing accounts receivable by $3.2 million, and payment terms from a number of other North American customers have lengthened over the course of 2004. In addition, sales by our South American operations were up significantly when comparing the latter part of 2003 to the latter part of the nine-month period ended September 30, 2004. Finally, factored European accounts receivable decreased $.8 million from December 31, 2003 to September 30, 2004. All of these factors more than offset the impact on accounts receivable caused by lower summer European sales. 22 Cash used in investing activities of $15.1 million during the nine months ended September 30, 2004 included capital expenditures primarily for production equipment of $16.2 million, less $1.1 million in proceeds from the sale of production equipment. Cash provided by financing activities of $5.7 million during the nine months ended September 30, 2004 included the following: - Proceeds from issuance of the Notes and term note borrowings at the closing of the Acquisition under our new senior credit facility of $246 million, less debt issue costs paid of $11.5 million; - Shareholder contributions received in connection with the Acquisition of $115.4 million; - Proceeds from the issuance of equipment notes payable of $1.4 million; - Payments made to former shareholders and option holders of Titan of $232.7 million; - Payments made to retire the term notes of our old senior credit facility in existence at the closing of the Acquisition of $89.9 million; - Scheduled term note principal payments of our old senior credit facility, capital lease obligations and equipment notes payable of $20 million; - Scheduled term note principal payments of our new senior credit facility, capital lease obligations and equipment notes payable of $1.5 million; - Net repayments under the old and new revolving credit facilities of $1.5 million. Nine Months Ended September 30, 2003 Cash provided by operating activities of $28 million during the nine months ended September 30, 2003 reflects net income, excluding non-cash and other reconciling items of $24.2 million, and a decrease in net working capital of $3.8 million due primarly to the impact on accounts receivable caused by lower summer European sales.. Cash used in investing activities of $12.1 million during the nine months ended September 30, 2003 included capital expenditures primarily for production equipment of $16.6 million and proceeds from the sale of production equipment and the facilities described above of $6 million. Cash used in financing activities of $20.3 million during the nine months ended September 30, 2003 included the following: - Principal payments on borrowings under our former senior credit facility of $19.7 million, including the unscheduled payment of $5.8 million in April from funds received in the sale and leaseback transaction described above; and - Net repayments under the former revolving credit facilities of $1.1 million. Contingent Liabilities and Other Commitments We have guaranteed the performance of some equipment leases of an unrelated vendor that provides services to us within one of our European production facilities. Our maximum liability under these leases was $5.3 million as of September 30, 2004. 23 FOREIGN OPERATIONS During the three months ended September 30, 2004, our North American operations exported $4.2 million of product to customers located in foreign countries, and our foreign operations shipped $48.9 million of product to customers from their facilities. During the nine months ended September 30, 2004, our North American operations exported $16.6 million of product to customers located in foreign countries, and our foreign operations shipped $161.4 million of product to customers from their facilities. As a result, we are subject to the risks of doing business abroad, including currency exchange rate fluctuations, limits on repatriation of funds, compliance with foreign laws and other economic and political uncertainties. ACCOUNTING PRONOUNCEMENTS SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, was revised in December 2003. It requires additional disclosures about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and enhanced disclosures of management's assumptions related to discount rates, investment returns and salary assumptions. This statement is effective for us for the year ending December 31, 2004. CRITICAL ACCOUNTING POLICIES No material changes have been made to our critical accounting policies during 2004. Item 3 . Quantitative and Qualitative Disclosures about Market Risk We manage certain foreign currency exchange risk in relation to equipment purchases through the limited use of foreign currency futures contracts to reduce the impact of changes in foreign currency rates on firm commitments to purchase equipment. No such contracts related to equipment purchases were outstanding at September 30, 2004 or December 31, 2003. We typically derive 50-60% of our sales from foreign manufacturing operations. The financial position and results of operations of our subsidiaries in France are measured in euros based on functional currency and translated into USD. The effects of foreign currency fluctuations in France are somewhat mitigated by the fact that sales and expenses are generally incurred in euros, and the reported net income thereon will be higher or lower depending on a weakening or strengthening of the USD as compared to the euro. The financial position and results of operations of our subsidiary in Brazil are measured in Brazilian reais and translated into USD. With respect to approximately 40% of this subsidiary's sales, expenses are generally incurred in Brazilian reais, but sales are invoiced in USD. As such, results of operations with regard to these sales are directly influenced by a weakening or strengthening of the Brazilian real as compared to the USD. The effects of foreign currency fluctuations are somewhat mitigated on the remainder of this subsidiary's sales by the fact that the sales and related expenses are generally incurred in Brazilian reais and reported income will be higher or lower depending on a weakening or strengthening of the USD as compared to the Brazilian real. 24 Item 4. Disclosure Controls and Procedures Our management carried out an evaluation with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined under rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the last fiscal quarter. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the Securities and Exchange Commission's rules and forms is recorded, processed, summarized and reported, within the time periods specified in the rules and forms. In connection with the rules, we currently are in process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. There were no changes in our internal control over financial reporting identified in connection with our evaluation of our disclosure controls and procedures that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Securities Holders None. Item 5. Other Information None. 25 Item 6. Exhibits and Reports on Form 8-K
EXHIBIT NUMBER DESCRIPTION ------- ----------- 31.1 Certification of Chief Executive Officer in the form prescribed by Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. 31.2 Certification of Chief Financial Officer in the form prescribed by Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. 32.1 Certification of Chief Executive Officer in the form prescribed by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer in the form prescribed by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
26 SIGNATURES Autocam Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AUTOCAM CORPORATION November 12, 2004 /s/ John C. Kennedy ------------------------------------ ------------------------------ Date John C. Kennedy President 27 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------------------------------------------------------------------- 31.1 Certification of Chief Executive Officer in the form prescribed by Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. 31.2 Certification of Chief Financial Officer in the form prescribed by Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. 32.1 Certification of Chief Executive Officer in the form prescribed by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer in the form prescribed by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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