10-Q 1 k96940e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2005 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 JUNE 30, 2005 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ________ to ________ ---------- COMMISSION FILE NUMBER 333-119215 AUTOCAM CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Michigan 38-2790152 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION)
4436 Broadmoor 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 [X] NO [ ] 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 August 15, 2005 ---------------------------- ------------------------------ COMMON STOCK, $.01 PAR VALUE 100 SHARES
INDEX
PAGE NO. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of December 31, 2004 and June 30, 2005 2 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2004 and 2005 3 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2005 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk 23 Item 4. Controls and Procedures 23 PART II - OTHER INFORMATION Item 6. Exhibits 24 Signatures 25
Exhibit 31.1 - CEO Certification Exhibit 31.2 - CFO Certification Exhibit 32.1 - CEO Certification Exhibit 32.2 - CFO Certification Forward-Looking Statements This report includes "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934 (the "Exchange Act") with respect to our financial condition, results of operations and business and our expectations or beliefs concerning future events. Statements that are predictive in nature that depend upon or refer to future events or conditions or that include words such as "believes," "expects," "anticipates," "estimates," "intends," "plans," "targets," "likely," "will," "would," "could" and similar expressions are forward-looking statements. All forward-looking statements involve risks and uncertainties. Many risks and uncertainties are inherent in our industry and markets. Others are more specific to our operations. The occurrence of the events described and the achievement of the expected results depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from the forward-looking statements contained in this report. Factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include: - risks associated with our substantial indebtedness, leverage and debt service; - the cyclical nature of the automotive industry; - performance of our business and future operating results; - general business and economic conditions, particularly an economic downturn; and - the factors discussed in our Form 10-K for the fiscal year ended December 31, 2004 in the section titled "Risk Factors." All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur. 1 PART I - FINANCIAL INFORMATION Item 1. Financial Statements TITAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, JUNE 30, Amounts in thousands, except share information 2004 2005 --------------------------------------------------------------------- ------------ -------- (successor) Assets Current assets: Cash and equivalents $ 2,117 $ 3,370 Accounts receivable, net of allowances of $618 and $791, respectively 58,360 53,573 Inventories 36,947 39,615 Prepaid expenses and other current assets 3,485 3,374 -------- -------- Total current assets 100,909 99,932 Property, plant and equipment, net 177,285 166,050 Goodwill 268,039 258,699 Other long-term assets 23,199 24,415 -------- -------- Total Assets $569,432 $549,096 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Current maturities of long-term obligations $ 12,942 $ 10,020 Accounts payable 46,688 38,569 Accrued liabilities 20,561 19,214 -------- -------- Total current liabilities 80,191 67,803 -------- -------- Long-term obligations, net of current maturities 275,839 272,101 Deferred taxes and other 48,042 46,479 Shareholders' equity: Common stock - $.01 par value; 100 shares authorized, issued and outstanding as of December 31, 2004 and June 30, 2005 Additional paid-in capital 145,112 155,140 Accumulated other comprehensive income 19,694 6,278 Retained earnings 554 1,295 -------- -------- Total shareholders' equity 165,360 162,713 -------- -------- Total Liabilities and Shareholders' Equity $569,432 $549,096 ======== ========
See notes to consolidated financial statements. 2 TITAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- Amounts in thousands 2004 2005 2004 2005 -------------------------------------------- ------------- ----------- ------------- ----------- (predecessor) (successor) (predecessor) (successor) Sales $ 91,633 $ 87,554 $184,489 $ 176,341 Cost of sales 76,811 74,619 153,426 151,112 -------- -------- -------- --------- Gross profit 14,822 12,935 31,063 25,229 Selling, general and administrative expenses 12,258 5,373 17,337 10,823 -------- -------- -------- --------- Income from operations 2,564 7,562 13,726 14,406 Interest expense, net 2,677 6,180 4,666 12,195 Other expenses, net 2,746 528 3,672 1,284 -------- -------- -------- --------- Income (loss) before tax provision (2,859) 854 5,388 927 Tax provision (171) 435 3,211 186 -------- -------- -------- --------- Net Income (Loss) ($2,688) $ 419 $ 2,177 $ 741 ======== ======== ======== ========= Statements of Comprehensive Income (Loss): Net income (loss) ($2,688) $ 419 $ 2,177 $ 741 Other comprehensive income (loss): Foreign currency translation adjustments (230) (6,079) (1,138) (13,416) Amortization of interest rate agreements 67 135 -------- -------- -------- --------- Comprehensive Income (Loss) ($2,851) ($5,660) $ 1,174 ($12,675) ======== ======== ======== =========
See notes to consolidated financial statements. 3 TITAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------------- Amounts in thousands 2004 2005 ------------------------------------------------------- ------------- ----------- (predecessor) (successor) Net cash provided by operating activities $ 10,694 $ 8,444 Cash flows from investing activities: Expenditures for property, plant and equipment (10,676) (8,548) Acquisitions, net of cash acquired (9,902) Other 469 (1,597) --------- -------- Net cash used in investing activities (10,207) (20,047) --------- -------- Cash flows from financing activities: Line of credit borrowings (repayments), net (3,531) 6,682 Proceeds from issuance of long-term obligations 247,248 363 Principal payments of long-term obligations (109,940) (3,072) Payments to shareholders and option holders (232,663) Shareholder contributions 115,400 10,028 Debt issue costs (10,855) (1,206) --------- -------- Net cash provided by financing activities 5,659 12,795 --------- -------- Effect of exchange rate changes on cash and equivalents (18) 61 --------- -------- Increase in cash and equivalents 6,128 1,253 Cash and equivalents at beginning of period 1,075 2,117 --------- -------- Cash and Equivalents at End of Period $ 7,203 $ 3,370 ========= ========
See notes to consolidated financial statements. 4 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 (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 subsidiary. 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 GAAP. 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 "Merger"). As a result, Titan became a wholly-owned subsidiary of Micron. The total amount of consideration paid in the Merger, 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 Merger 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 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 application of purchase accounting for the Merger. 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 Merger. 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 plans. Accordingly, no stock-based employee compensation cost is reflected in net income as all options granted under those plans 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 plans been determined based upon the fair value at the grant dates for awards under those plans consistent with the method of the Financial Accounting Standards Board's 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: 5
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- 2004 2005 2004 2005 ------------- ----------- ------------- ----------- (predecessor) (successor) (predecessor) (successor) As reported ($2,688) $ 419 $2,177 $ 741 Compensation expense, net of related tax effects (140) (154) (280) (308) ------- ----- ------ ----- Pro forma ($2,828) $ 265 $1,897 $ 433 ======= ===== ====== =====
The fair value approach was used to value all option grants, with the following weighted-average assumptions: risk-free interest rate, 4%-4.51%; and expected life of options, 10 years. Pension Plans -- The Company sponsors defined benefit pension plans for substantially all employees of its French subsidiaries. Set forth below are the components of net periodic benefit cost for the plans of the Company's French subsidiaries, Frank & Pignard, SA, ("F&P") and Bouverat Industries, SA ("Bouverat"):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------------------------------- --------------------------------------------------- 2004 2005 2004 2005 ------------------------ ------------------------ ------------------------ ------------------------ F&P PLAN BOUVERAT PLAN F&P PLAN BOUVERAT PLAN F&P PLAN BOUVERAT PLAN F&P PLAN BOUVERAT PLAN -------- ------------- -------- ------------- -------- ------------- -------- ------------- Service and interest costs $37 $29 $38 $30 $74 $ 58 $76 $ 60 Expected return on plan assets (8) (8) (16) (16) --- --- --- --- --- ---- --- ---- Net periodic benefit cost $37 $21 $38 $22 $74 $ 42 $76 $ 44 === === === === === ==== === ====
2. BUSINESS COMBINATION The Merger was accounted for as a purchase, and accordingly, the purchase price was allocated to assets acquired and liabilities assumed based upon their 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. The results of operations and cash flows of Titan (as predecessor company) have been reported during the six months ended June 30, 2004. Set forth below is unaudited pro forma statement of operations information for the six months ended June 30, 2004, which is based upon the historical Consolidated Statements of Operations of the Company after giving effect to the Merger as if such transaction had occurred at the beginning of such period. 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 Merger taken place at the beginning of such period or which may be reported in the future.
SIX MONTHS ENDED JUNE 30, 2004 ------------- Sales $184,489 Net income 6,649
6 Effective November 1, 2004, F&P acquired the stock of ATI, S.A.S., for $1,681 in cash and the assumption of $6,065 in debt, primarily consisting of capital lease obligations. The acquisition was accounted for as a purchase, and accordingly, the purchase price was allocated to assets acquired and liabilities assumed based upon their relative fair market values. Cost in excess of the fair value of the net assets acquired (goodwill) was $1,086. On June 15, 2005, Autocam Greenville, Inc., a wholly-owned subsidiary of Autocam, acquired the stock of Sager Precision Technologies, Inc. for $9,902 in cash and the assumption of $240 in capital lease obligations. In accordance with the purchase agreement, the Company has recognized a receivable from the seller of $275 representing a shortfall in working capital on June 15, 2005. Additional consideration will be paid to the seller if earnings before interest, taxes, depreciation and amortization exceed certain levels for the year ending June 30, 2006. The purchase price was primarily financed indirectly through equity contributions from the shareholders of Micron in the amount of $10,028. The acquisition was accounted for as a purchase, and accordingly, the purchase price was allocated to assets acquired and liabilities assumed based upon their relative fair market values. Cost in excess of the fair value of the net assets acquired (goodwill) was $5,092. 3. INVENTORIES Set forth below are the components of Inventories:
DECEMBER 31, JUNE 30, 2004 2005 ------------ -------- Raw materials $11,030 $11,587 Production supplies 7,188 7,169 Work in-process 12,979 14,055 Finished goods 5,750 6,804 ------- ------- Total Inventories $36,947 $39,615 ======= =======
4. PROPERTY, PLANT AND EQUIPMENT, NET Set forth below are the components of Property, Plant and Equipment, Net:
DECEMBER 31, JUNE 30, 2004 2005 ------------ -------- Buildings and land $ 10,838 $ 10,686 Machinery and equipment 161,407 157,627 Furniture and fixtures 11,041 10,858 -------- -------- Total 183,286 179,171 Accumulated depreciation (6,001) (13,121) -------- -------- Total Property, Plant and Equipment, Net $177,285 $166,050 ======== ========
7 5. LONG-TERM OBLIGATIONS Set forth below are the components of Long-Term Obligations (percentages represent interest rates as of June 30, 2005):
DECEMBER 31, JUNE 30, 2004 2005 ------------ -------- Senior Credit Facilities: USD term note, 6.75% $ 32,835 $ 32,670 Eurocurrency term note, 5.9% 83,269 72,026 Multi-currency revolving line of credit, 6.625%-8% 18,000 25,000 -------- -------- Total senior credit facilities 134,104 129,696 Senior subordinated notes, 10.875%, net of original issue discount 137,043 137,199 Capital leases, from 2.14% to 19.62% 12,659 10,088 Other 4,975 5,138 -------- -------- Total long-term obligations 288,781 282,121 Current portion (12,942) (10,020) -------- -------- Long-term portion $275,839 $272,101 ======== ========
On April 25, 2005, effective March 31, 2005, Autocam and its wholly owned subsidiary Autocam France, SARL entered into an amendment to its senior credit facilities agreement (the "Amendment"). Pursuant to the Amendment, among other things, the financial covenants related to interest coverage and leverage ratios (each as defined in the senior credit facilities agreement) were amended to make them less restrictive, a new senior leverage ratio (as defined in the Amendment) was established, the principal amortization on the Eurocurrency term note provided under the senior credit facilities agreement was restructured and the interest rate margins applicable to the loans provided under the senior credit facilities agreement were increased. In connection with the Merger, 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 as of June 30, 2005:
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.
8 Information regarding the guarantors and non-guarantors are as follows:
TITAN (PARENT SUBSIDIARIES COMBINING STATEMENT OF OPERATIONS COMPANY ------------------------- THREE MONTHS ENDED JUNE 30, 2004 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED -------------------------------------------- --------- -------- --------- ------------- ------------ -------- (predecessor) Sales $ 31,768 $5,572 $56,008 ($1,715) $ 91,633 Cost of sales 27,626 4,024 46,876 (1,715) 76,811 -------- ------ ------- -------- Gross profit 4,142 1,548 9,132 14,822 Selling, general and administrative expenses $ 6,438 3,319 296 2,205 12,258 -------- -------- ------ ------- -------- Income (loss) from operations (6,438) 823 1,252 6,927 2,564 Interest expense, net 1,083 146 1,448 2,677 Other expense, net 10 1,983 21 732 2,746 -------- -------- ------ ------- -------- Income (loss) before tax provision (6,448) (2,243) 1,085 4,747 (2,859) Tax provision (2,192) (763) 383 2,401 (171) -------- -------- ------ ------- -------- Net Income (Loss) ($4,256) ($1,480) $ 702 $ 2,346 ($2,688) ======== ======== ====== ======= ========
TITAN (PARENT SUBSIDIARIES COMBINING STATEMENT OF OPERATIONS COMPANY ------------------------- THREE MONTHS ENDED JUNE 30, 2005 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED -------------------------------------------- -------- -------- --------- ------------- ------------ -------- (successor) Sales $ 32,770 $5,972 $51,471 ($2,659) $87,554 Cost of sales 28,254 4,094 44,930 (2,659) 74,619 -------- ------ ------- ------- Gross profit 4,516 1,878 6,541 12,935 Selling, general and administrative expenses 1,806 392 3,175 5,373 -------- ------ ------- ------- Income from operations 2,710 1,486 3,366 7,562 Interest expense, net 4,178 197 1,805 6,180 Other expense (income), net ($44) 350 (15) 237 528 ----- -------- ------ ------- ------- Income (loss) before tax provision 44 (1,818) 1,304 1,324 854 Tax provision (5) (629) 450 619 435 ----- -------- ------ ------- ------- Net Income (Loss) $ 49 ($1,189) $ 854 $ 705 $ 419 ===== ======== ====== ======= =======
9
TITAN (PARENT SUBSIDIARIES COMBINING STATEMENT OF OPERATIONS COMPANY ------------------------- SIX MONTHS ENDED JUNE 30, 2004 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED -------------------------------------------- --------- -------- --------- ------------- ------------ -------- (predecessor) 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 (PARENT SUBSIDIARIES COMBINING STATEMENT OF OPERATIONS COMPANY ------------------------- SIX MONTHS ENDED JUNE 30, 2005 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED -------------------------------------------- ------- -------- --------- ------------- ------------ -------- (successor) Sales $ 65,329 $11,294 $105,129 ($5,411) $176,341 Cost of sales 56,050 7,798 92,675 (5,411) 151,112 -------- ------- -------- -------- Gross profit 9,279 3,496 12,454 25,229 Selling, general and administrative expenses 3,676 735 6,412 10,823 -------- ------- -------- -------- Income from operations 5,603 2,761 6,042 14,406 Interest expense, net 8,242 377 3,576 12,195 Other expense (income), net $ 15 725 (15) 559 1,284 ----- -------- ------- -------- -------- Income (loss) before tax provision (15) (3,364) 2,399 1,907 927 Tax provision (5) (1,176) 826 541 186 ----- -------- ------- -------- -------- Net Income (Loss) ($10) ($2,188) $ 1,573 $ 1,366 $ 741 ===== ======== ======= ======== ========
10
TITAN CONDENSED COMBINING STATEMENT (PARENT SUBSIDIARIES OF CASH FLOWS COMPANY ------------------------- SIX MONTHS ENDED JUNE 30, 2004 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR COMBINED --------------------------------------------------- -------- --------- --------- ------------- --------- (Predecessor) 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) Line of credit borrowings (repayments), net 20,549 (24,080) (3,531) Intercompany transactions (1,280) 1,280 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 ========= ===== ======== =========
TITAN CONDENSED COMBINING STATEMENT (PARENT SUBSIDIARIES OF CASH FLOWS COMPANY ------------------------- SIX MONTHS ENDED JUNE 30, 2005 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR COMBINED --------------------------------------------------- -------- -------- --------- ------------- -------- (successor) Net cash provided by (used in) operating activities ($16) ($2,627) ($134) $11,221 $ 8,444 Expenditures for property, plant and equipment (2,765) (134) (5,649) (8,548) Acquisitions, net of cash acquired (121) (9,781) (9,902) Line of credit borrowings (repayments), net 7,000 (318) 6,682 Intercompany transactions (10,012) (99) 10,111 Principal payments of long-term obligations (165) (2,907) (3,072) Shareholder contributions 10,028 10,028 Other (1,690) 3 (692) (2,379) -------- ------- ------- ------- Net increase (decrease) in cash and equivalents (467) 65 1,655 1,253 Cash and equivalents at beginning of period 1,087 2 1,028 2,117 -------- ------- ------- ------- Cash and Equivalents at End of Period $ 620 $ 67 $ 2,683 $ 3,370 ======== ======= ======= =======
11
TITAN (PARENT SUBSIDIARIES CONDENSED COMBINING BALANCE SHEET COMPANY ------------------------- DECEMBER 31, 2004 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED ---------------------------------------------------- -------- -------- --------- ------------- ------------ -------- (successor) Assets Current assets: Cash and equivalents $ 1,087 $ 2 $ 1,028 $ 2,117 Accounts receivable, net 20,329 1,700 37,202 ($871) 58,360 Inventories 10,314 1,501 25,132 36,947 Prepaid expenses and other current assets 1,148 78 2,259 3,485 -------- ------- --------- ----- -------- Total current assets 32,878 3,281 65,621 (871) 100,909 Property, plant and equipment, net 29,772 5,637 141,457 419 177,285 Goodwill $116,399 3 151,637 268,039 Intercompany receivables (payables) 31,102 (4,142) (26,847) (113) Investment in subsidiaries 28,661 99,034 (3,458) (123,815) (422) Other long-term assets 18,120 50 5,029 23,199 -------- -------- ------- --------- ----- -------- Total Assets $145,060 $210,909 $ 1,368 $ 213,082 ($987) $569,432 ======== ======== ======= ========= ===== ======== Liabilities and Shareholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations $ 330 $ 12,612 $ 12,942 Accounts payable 9,232 $ 184 38,256 ($984) 46,688 Accrued liabilities ($34) 4,005 369 16,224 (3) 20,561 -------- -------- ------- --------- ----- -------- Total current liabilities (34) 13,567 553 67,092 (987) 80,191 -------- -------- ------- --------- ----- -------- Long-term obligations, net of current maturities 187,548 88,291 275,839 Deferred taxes and other 11,097 36,945 48,042 Shareholders' equity (deficit): Capital stock 145,112 145,112 Accumulated other comprehensive income 2,483 17,211 19,694 Retained earnings (accumulated deficit) (18) (3,786) 815 3,543 554 -------- -------- ------- --------- ----- -------- Total shareholders' equity (deficit) 145,094 (1,303) 815 20,754 165,360 -------- -------- ------- --------- ----- -------- Total Liabilities and Shareholders' Equity (Deficit) $145,060 $210,909 $ 1,368 $ 213,082 ($987) $569,432 ======== ======== ======= ========= ===== ========
12
TITAN (PARENT SUBSIDIARIES CONDENSED COMBINING BALANCE SHEET COMPANY ------------------------- JUNE 30, 2005 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED ---------------------------------------------------- -------- -------- --------- ------------- ------------ -------- (successor) Assets Current assets: Cash and equivalents $ 620 $ 67 $ 2,683 $ 3,370 Accounts receivable, net 23,083 3,764 28,623 ($1,897) 53,573 Inventories 11,151 4,012 23,415 1,037 39,615 Prepaid expenses and other current assets 1,125 405 1,844 3,374 -------- -------- --------- ------- -------- Total current assets 35,979 8,248 56,565 (860) 99,932 Property, plant and equipment, net 30,907 8,038 126,262 843 166,050 Goodwill $116,507 56 5,092 137,044 258,699 Intercompany receivables (payables) 11,967 26,800 (13,477) (24,560) (730) Investment in subsidiaries 26,613 101,080 (3,458) (123,814) (421) Other long-term assets 19,125 218 5,072 24,415 -------- -------- -------- --------- ------- -------- Total Assets $155,087 $213,947 $ 4,661 $ 176,569 ($1,168) $549,096 ======== ======== ======== ========= ======= ======== Liabilities and Shareholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations $ 330 $ 48 $ 9,642 $ 10,020 Accounts payable 10,944 698 28,095 ($1,168) 38,569 Accrued liabilities ($19) 3,163 625 15,445 19,214 -------- -------- -------- --------- ------- -------- Total current liabilities (19) 14,437 1,371 53,182 (1,168) 67,803 -------- -------- -------- --------- ------- -------- Long-term obligations, net of current maturities 194,539 192 77,370 272,101 Deferred taxes and other 10,987 710 34,782 46,479 Shareholders' equity (deficit): Capital stock 155,140 155,140 Accumulated other comprehensive income (46) 6,324 6,278 Retained earnings (accumulated deficit) (34) (5,970) 2,388 4,911 1,295 -------- -------- -------- --------- -------- Total shareholders' equity (deficit) 155,106 (6,016) 2,388 11,235 162,713 -------- -------- -------- --------- ------- -------- Total Liabilities and Shareholders' Equity (Deficit) $155,087 $213,947 $ 4,661 $ 176,569 ($1,168) $549,096 ======== ======== ======== ========= ======= ========
13 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 six months ended June 30, 2004 and 2005 and as of December 31, 2004 and June 30, 2005:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- 2004 2005 2004 2005 ------------- ----------- ------------- ----------- (predecessor) (successor) (predecessor) (successor) Sales to Unaffiliated Customers from Company Facilities Located in: North America $ 37,201 $38,255 $ 75,031 $ 75,757 Europe 49,250 41,089 100,429 85,187 South America 5,182 8,210 9,029 15,397 -------- ------- -------- -------- Total $ 91,633 $87,554 $184,489 $176,341 ======== ======= ======== ======== Net Income (Loss) of Company Facilities Located in: North America ($5,036) ($288) ($2,678) ($627) Europe 1,603 (262) 3,732 (420) South America 745 969 1,123 1,788 -------- ------- -------- -------- Total ($2,688) $ 419 $ 2,177 $ 741 ======== ======= ======== ======== Depreciation and Amortization on Assets Located in: North America $ 2,085 $ 1,278 $ 6,232 $ 2,459 Europe 3,056 2,759 6,190 5,640 South America 267 296 532 562 -------- ------- -------- -------- Total $ 5,408 $ 4,333 $ 12,954 $ 8,661 ======== ======= ======== ======== Net Interest Expense of Company Facilities Located in: North America $ 1,229 $ 4,375 $ 1,763 $ 8,619 Europe 1,354 1,666 2,699 3,294 South America 94 139 204 282 -------- ------- -------- -------- Total $ 2,677 $ 6,180 $ 4,666 $ 12,195 ======== ======= ======== ======== Tax Provision of Company Facilities Located in: North America ($2,572) ($184) ($1,356) ($355) Europe 2,016 150 4,068 (355) South America 385 469 499 896 -------- ------- -------- -------- Total ($ 171) $ 435 $ 3,211 $ 186 ======== ======= ======== ======== Expenditures for Property, Plant and Equipment of Facilities Located in: North America $ 2,087 $ 1,476 $ 4,085 $ 2,899 Europe 2,634 1,566 5,434 4,034 South America 94 653 1,157 1,615 -------- ------- -------- -------- Total $ 4,815 $ 3,695 $ 10,676 $ 8,548 ======== ======= ======== ========
DECEMBER 31, JUNE 30, 2004 2005 ------------ -------- (successor) Total Assets of Company Facilities Located in: North America $205,690 $225,014 Europe 332,279 286,924 South America 31,463 37,158 -------- -------- Total $569,432 $549,096 ======== ========
14 7. SUPPLEMENTAL CASH FLOW INFORMATION Set forth below is a reconciliation of net income to net cash provided by operating activities:
SIX MONTHS ENDED JUNE 30, --------------------------- 2004 2005 ------------- ----------- (predecessor) (successor) Net income $ 2,177 $ 741 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,954 8,661 Deferred taxes 395 960 Realized gains and losses and other, net 2,627 17 Changes in assets and liabilities that provided (used) cash: Accounts receivable (9,243) 2,362 Inventories (2,899) (2,669) Prepaid expenses and other current assets (44) 1,095 Other long-term assets (1,192) (1,213) Accounts payable 1,687 (3,046) Accrued liabilities 6,962 605 Other long-term liabilities (2,730) 931 ------- ------- Net Cash Provided by Operating Activities $10,694 $ 8,444 ======= =======
15 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. You should read the explanation of the qualifications and limitations on these forward-looking statements on page 1 of this report. 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 and medical devices. Those automotive 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 three months ended June 30, 2005 and the six months ended June 30, 2005 as compared to the same periods in 2004 were affected by the following significant events: - On June 21, 2004, Micron Merger Corporation, a newly formed entity and wholly-owned subsidiary of Micron, merged with and into Titan with Titan continuing as the surviving corporation (the "Merger"). As a result, Titan became a wholly-owned subsidiary of Micron. The total amount of consideration paid in the Merger, 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 Merger was financed with the net proceeds from the issuance of $140.0 million of senior subordinated notes issued by us and guaranteed by Titan (the "Notes"), borrowings under senior credit facilities of $114.0 million 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 certain of our management. - Effective November 1, 2004, our wholly-owned subsidiary, Frank & Pignard, SA, acquired the stock of ATI, S.A.S. ("ATI"), for $1.7 million in cash and the assumption of $6.1 million in debt, primarily consisting of capital lease obligations. The acquisition was completed primarily for the purpose of eliminating costly outside processing of certain electric motor components. - Effective June 15, 2005, our wholly-owned subsidiary, Autocam Greenville, Inc., acquired the stock of Sager Precision Technologies, Inc. ("Sager") for $9.9 million in cash and the assumption of $0.2 million in capital lease obligations. The purchase price was primarily financed indirectly through equity contributions from the shareholders of Micron in the amount of $10.0 million. The acquisition was completed primarily for the purpose of expanding our medical product offerings. - Our business is directly impacted by light vehicle production levels, primarily in North America and Western Europe. We are also impacted by the relative North American market shares of the traditional Big Three automakers, DaimlerChrysler Corporation, Ford Motor Company and General Motors Corporation. Material changes in either of these factors can have a material impact on our sales and profit levels. Market shares of the traditional Big Three have been declining over the past several years. 16 - 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, or USD, for financial reporting purposes. As a result, the value of the USD compared to the euro in the three months ended June 30, 2005 and the six months ended June 30, 2005 relative to the same periods in 2004 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 SIX MONTHS ENDED JUNE 30, JUNE 30, DECEMBER 31, ------------------ ---------------- 2004 2004 2005 2004 2005 ------------ ------ ------ ------ ------ Average (1) 1.2058 1.2580 1.2272 1.2852 End of Period 1.3621 1.2092 1.2092
---------- (1) The average rate represents the average of all monthly average exchange rates within the respective periods weighted by reported sales denominated in euros. - 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 maintained margins over time in spite of these constant pressures. RESULTS OF OPERATIONS The following table sets forth our Consolidated Statements of Operations expressed as a percentage of sales:
THREE MONTHS ENDED SIX MONTHS ENDED June 30, June 30, ------------------- ------------------- 2004 (1) 2005 (2) 2004 (1) 2005 (2) -------- -------- -------- -------- Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 83.8% 85.2% 83.2% 85.7% ----- ----- ----- ----- Gross profit 16.2% 14.8% 16.8% 14.3% Selling, general and administrative expenses 13.4% 6.1% 9.4% 6.1% ----- ----- ----- ----- Income from operations 2.8% 8.7% 7.4% 8.2% Interest expense, net 2.9% 7.1% 2.5% 6.9% Other expenses, net 3.0% 0.6% 2.0% 0.7% ----- ----- ----- ----- Income before tax provision -3.1% 1.0% 2.9% 0.6% Tax provision -0.2% 0.5% 1.7% 0.1% ----- ----- ----- ----- Net Income -2.9% 0.5% 1.2% 0.5% ===== ===== ===== =====
---------- (1) Represents the consolidated results of operations of the Company reflecting the historical basis of accounting without any application of purchase accounting for the Merger. (2) Represents the consolidated results of operations of the Company reflecting the basis of accounting after the application of purchase accounting for the Merger. 17 THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2005 Sales Sales decreased $4.0 million, or 4.4%, to $87.6 million for the three months ended June 30, 2005 ("the 2005 period") from $91.6 million for the three months ended June 30, 2004 ("the 2004 period"). On a constant currency basis, sales decreased $7.6 million, which can be principally attributed to the following factors: - Factors resulting in a decrease in Sales: 1. Our European operations were desourced on programs for power steering, electric motor and fuel systems components resulting in a reduction in sales to these customers of $6.6 million when comparing the 2005 period to the 2004 period; 2. Lower sales to a North American fuel systems customer whose primary customers lost market share and produced less vehicles in the 2005 period as compared to the 2004 period; 3. Lower sales to a European fuel systems customer as production on the current injector program is replaced by production on a new injector program for whom we do not produce components; and 4. We granted unit price reductions to our customers totaling $1.5 million in the 2005 period. - Factors partially offsetting the decrease in Sales: 1. Our North American operations were awarded power steering business by two new customers for whom we began production in late 2004; and 2. Sales of components manufactured by our South American operations have grown $3.0 million in the 2005 period relative to 2004 period 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. Gross Profit Gross profit decreased $1.9 million to $12.9 million, or 14.8% of sales, for the 2005 period from $14.8 million, or 16.2% of sales, for the 2004 period. The gross profit percentage decline can generally be attributed to the following factors: - Factors resulting in a decrease in Gross Profit Margin: 1. The loss of sales volume as described above resulted in decreasing margins as existing equipment and facilities were underutilized; 2. Unit price reductions of $1.5 million granted to our customers between the 2004 and 2005 periods; 3. Cost improvement initiatives implemented in our European operations during the 2005 period resulted in equipment moves and repair costs that exceeded the normal levels experienced in the 2004 period; and 4. Steel prices and surcharges not recovered from our customers negatively impacted gross profit. - Factors partially offsetting the decrease in Gross Profit Margin: 1. Depreciation expense was $1.5 million less in the 2005 period as compared to the 2004 period as we adjusted the historical cost of our property, plant and equipment to fair market appraised values in connection with the Merger; and 18 2. Outsourcing costs were significantly reduced in the 2005 period relative to the 2004 period as capacity constraints in our European operations during the 2004 period resulted in the outsourcing of certain operations thereby increasing costs in that period. Such constraints were alleviated in the intervening period, thereby allowing for the elimination of such costs in the 2005 period. In addition, the acquisition of ATI as described above reduced outsourcing costs on certain electric motor components. Selling, General and Administrative Selling, general and administrative expenses decreased $6.9 million to $5.4 million, or 6.1% of sales, for the 2005 period from $12.3 million, or 13.4% of sales, for the 2004 period. The 2004 period results include $8.1 million in costs associated with the Merger, consisting principally of investment banking fees, management bonuses, and legal and accounting fees. In addition, the 2004 period results include the benefit of reducing the obligation under one of our European pension plans $0.5 million due to a change in French law. The 2005 results include added professional fee expenses associated with being a public registrant and added travel costs associated with providing technical support to our European operations as it works to implement cost improvement initiatives. Interest Expense, Net Net interest expense increased $3.5 million to $6.2 million for the 2005 period from $2.7 million for the 2004 period. Higher interest expense in the 2005 period relative to the 2004 period was caused primarily by increased debt levels incurred as a result of the Merger and higher interest rates under our senior credit facilities. Other Expenses, Net Net other expenses decreased $2.2 million to $0.5 million for the 2005 period from $2.7 million for the 2004 period. The 2004 period results include the write-off of $1.9 million in unamortized debt issue costs associated with our former bank agreement, which was refinanced in connection with the Merger. Tax Provision For the 2005 period, we recorded an income tax provision of $0.4 million. This amount is more than the amount that would be calculated using the United States statutory rate of 34.0% primarily due to the recording of legal profit sharing contribution expense by our European operations. 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. SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005 Sales Sales decreased $8.2 million, or 4.4%, to $176.3 million for the six months ended June 30, 2005 ("the 2005 period") from $184.5 million for the six months ended June 30, 2004 ("the 2004 period"). On a constant currency basis, sales decreased $14.7 million, which can be principally attributed to the following factors: - Factors resulting in a decrease in Sales: 1. Our European operations were desourced on programs for power steering, electric motor and fuel systems components resulting in a reduction in sales to these customers of $12.6 million when comparing the 2005 period to the 2004 period; 2. Lower sales to a North American fuel systems customer whose primary customers lost market share and produced less vehicles in the 2005 period as compared to the 2004 period; 3. Lower sales to a European fuel systems customer as production on the current injector program is replaced by production on a new injector program for whom we do not produce components; and 19 4. We granted unit price reductions to our customers totaling $3.0 million in the 2005 period. - Factors partially offsetting the decrease in Sales: 1. Our North American operations were awarded power steering business by two new customers for whom we began production in late 2004; and 2. Sales of components manufactured by our South American operations have grown $6.4 million in the 2005 period relative to 2004 period 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. Gross Profit Gross profit decreased $5.9 million to $25.2 million, or 14.3% of sales, for the 2005 period from $31.1 million, or 16.8% of sales, for the 2004 period. The gross profit percentage decline can generally be attributed to the following factors: - Factors resulting in a decrease in Gross Profit Margin: 1. The loss of sales volume as described above resulted in decreasing margins as existing equipment and facilities were underutilized; 2. Unit price reductions of $3.0 million granted to our customers between the 2004 and 2005 periods; 3. Cost improvement initiatives implemented in our European operations during the 2005 period resulted in equipment moves and repair costs that exceeded the normal levels experienced in the 2004 period; and 4. Steel prices and surcharges not recovered from our customers negatively impacted gross profit. - Factors partially offsetting the decrease in Gross Profit Margin: 1. Depreciation expense was $2.8 million less in the 2005 period as compared to the 2004 period as we adjusted the historical cost of our property, plant and equipment to fair market appraised values in connection with the Merger; and 2. Outsourcing costs were significantly reduced in the 2005 period relative to the 2004 period as capacity constraints in our European operations during the 2004 period resulted in the outsourcing of certain operations thereby increasing costs in that period. Such constraints were alleviated in the intervening period, thereby allowing for the elimination of such costs in the 2005 period. In addition, the acquisition of ATI as described above reduced outsourcing costs on certain electric motor components. Selling, General and Administrative Selling, general and administrative expenses decreased $6.5 million to $10.8 million, or 6.1% of sales, for the 2005 period from $17.3 million, or 9.4% of sales, for the 2004 period. The 2004 period results include $8.2 million in costs associated with the Merger, consisting principally of investment banking fees, management bonuses, and legal and accounting fees. In addition, the 2004 period results include the benefit of reducing the obligation under one of our European pension plans $0.5 million due to a change in French law. The 2005 results include added professional fee expenses associated with being a public registrant and added travel costs associated with providing technical support to our European operations as we work to implement cost improvement initiatives. Interest Expense, Net Net interest expense increased $7.5 million to $12.2 million for the 2005 period from $4.7 million for the 2004 period. Higher interest expense in the 2005 period relative to the 2004 period was caused primarily by increased debt levels incurred as a result of the Merger and higher interest rates under our senior credit facilities. 20 Other Expenses, Net Net other expenses decreased $2.4 million to $1.3 million for the 2005 period from $3.7 million for the 2004 period. The 2004 period results include the write-off of $1.9 million in unamortized debt issue costs associated with our former bank agreement, which was refinanced in connection with the Merger. Tax Provision For the 2005 period, we recorded an income tax provision of $0.2 million. This amount is less than the amount that would be calculated using the United States statutory rate of 34.0% primarily due to the recording of a reduction in legal profit sharing contribution expense caused by the loss before tax provision by our European operations. 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. 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 2005 are expected to be $22-24 million, of which $8.5 million was spent in the six months ended June 30, 2005. 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. The Sager acquisition was primarily financed indirectly through equity contributions from the shareholders of Micron in the amount of $10.0 million. 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. We amended our senior credit facilities on April 25, 2005, effective March 31, 2005. Our amended senior credit facilities require us to meet a number of financial ratio tests, including interest coverage and senior and total leverage ratios. Our amended senior credit facilities also limit the amount of capital expenditures we may make. As of June 30, 2005, we were in compliance with the covenants contained in the indenture governing the Notes and our amended senior credit facilities. The financial covenants in our amended senior credit facilities are less restrictive than the original agreement and were structured to provide us with flexibility sufficient for us to remain in compliance with such covenants throughout 2005. However, OEM and Tier I manufacturers' production schedules have been reduced over the past quarter, and continued reductions in their production schedules could impact our ability to maintain compliance with the covenants in our amended senior credit facilities as early as in the third quarter of 2005. If we are unable to maintain compliance with these covenants, we may have to seek to renegotiate these covenants with our senior lenders. If it becomes necessary to seek to renegotiate the terms of our amended senior credit facilities, there can be no assurances that we would reach an agreement that contained terms acceptable to us. If we are ultimately unsuccessful, the lenders would have the ability to exercise all of the remedies provided for in the amended senior credit facilities upon an event of default. 21 Six Months Ended June 30, 2005 Cash provided by operating activities of $8.4 million during the six months ended June 30, 2005 reflects net income, excluding non-cash and other reconciling items of $10.4 million, and an increase in net working capital of $2.0 million. The following working capital components changed significantly from December 31, 2004 to June 30, 2005: - Accounts receivable decreased $2.4 million. Factored European accounts receivable increased $3.5 million from December 31, 2004 to June 30, 2005. This partially offset by the negative impact on cash flow of a number of European and North American customers lengthening payment terms over the course of 2004 and the first half of 2005. - Inventories increased $2.7 million due primarily to the growth in our business during the latter part of the second quarter of 2005 compared to the latter part of the fourth quarter of 2004. 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 payable decreased $3.0 million. Production in our European operations during second quarter of 2005 was less than the fourth quarter of 2004. Cash used in investing activities of $20.0 million during the six months ended June 30, 2005 mainly consisted of the purchase price and professional fees spent to acquire Sager of $9.9 million and capital expenditures primarily for production equipment of $8.5 million. Cash provided by financing activities of $12.8 million during the six months ended June 30, 2005 mainly consisted of $10.0 million in shareholder contributions from the shareholders of Micron received to fund the purchase of Sager and $6.7 million in net borrowings under lines of credit with our banks offset by $3.1 million in scheduled payments on our senior credit facilities and other indebtedness. FOREIGN OPERATIONS During the three months ended June 30, 2005, our North American operations exported $4.2 million of product to customers located in foreign countries, and our foreign operations shipped $51.4 million of product to customers from their facilities. During the six months ended June 30, 2005, our North American operations exported $8.8 million of product to customers located in foreign countries, and our foreign operations shipped $105.1 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 In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), Share-Based Payment, which will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant date fair value of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the period that an employee provides services in exchange for the award. SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supercedes Accounting Principals Board Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) becomes effective at the beginning of our first quarter in 2006. We expect that the impact of adopting SFAS No. 123(R) will be consistent with the pro forma expense that has been previously disclosed, adjusted for future grants, cancellations and exercises of stock options in accordance with SFAS No. 123(R). 22 CRITICAL ACCOUNTING POLICIES No material changes have been made to our critical accounting policies during the first six months of 2005. Item 3. Quantitative and Qualitative Disclosures about Market Risk We have managed and may in the future 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 December 31, 2004 or June 30, 2005. We typically derive approximately 60% of our sales from foreign manufacturing operations. The financial position and results of operations of our subsidiaries in France are measured in euros 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 60% 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 these sales and related expenses associated therewith are generally incurred in Brazilian reais and the reported income thereon will be higher or lower depending on a weakening or strengthening of the USD as compared to the Brazilian real. Our consolidated net assets as of June 30, 2005 include 0.8% based in France and 6.1% based in Brazil, and were translated into USD at the exchange rates in effect at that date (2.3541 Brazilian reais per USD, and 1.2092 USD per euro). Accordingly, our consolidated net assets will fluctuate depending on the weakening or strengthening of the USD as compared to these currencies as a result of foreign currency translation adjustments. Item 4. Controls and Procedures We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our Chief Executive and Financial Officers, as appropriate, to allow timely decisions regarding required disclosures. As of the end of the period covered by this report, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). The evaluation was performed under the supervision and with the participation of our management, including our Chief Executive and Financial Officers. Based upon the evaluation, the Chief Executive and Financial Officers concluded that our disclosure controls and procedures were effective in ensuring that material information relating to us (including our consolidated subsidiaries) was made known to them by others within our consolidated group during the period in which this report was being prepared and that the information required to be included in the report has been recorded, processed, summarized and reported on a timely basis. During our most recent fiscal quarter, there have been no significant changes in our internal controls that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 23 PART II - OTHER INFORMATION Item 6. Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ("Sarbanes Oxley"). 31.2 Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley.
24 SIGNATURES Autocam Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AUTOCAM CORPORATION August 15, 2005 /s/ John C. Kennedy Date ---------------------------------------- John C. Kennedy President 25 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ("Sarbanes Oxley"). 31.2 Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley.
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