-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WE1o8BayU3/dRgIi6zVv77XFuRgRLDcpE8C4agW1c8lRXR/MmgUviXdvwqqB8Bv/ 2FIlFrkvRRJrjzpJBVfu4g== 0000950124-06-004516.txt : 20060814 0000950124-06-004516.hdr.sgml : 20060814 20060814132251 ACCESSION NUMBER: 0000950124-06-004516 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060814 DATE AS OF CHANGE: 20060814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUTOCAM CORP/MI CENTRAL INDEX KEY: 0000879235 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 382790152 STATE OF INCORPORATION: MI FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-42670 FILM NUMBER: 061028569 BUSINESS ADDRESS: STREET 1: 4070 EAST PARIS AVE CITY: KENTWOOD STATE: MI ZIP: 49512 BUSINESS PHONE: 6166980707 MAIL ADDRESS: STREET 1: 4070 EAST PARIS AVENUE SE CITY: KENTWOOD STATE: MI ZIP: 49512 10-Q 1 k07813e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2006 ================================================================================ 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, 2006 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one) Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (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 11, 2006 - ---------------------------- ------------------------------ COMMON STOCK, $.01 PAR VALUE 100 SHARES
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PAGE NO. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets 2 Condensed Consolidated Statements of Operations and Comprehensive Loss 3 Condensed Consolidated Statements of Cash Flows 4 Notes to Condensed 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 24 PART II - OTHER INFORMATION Item 1. Legal Proceedings 25 Item 1A. Risk Factors 25 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25 Item 3. Defaults Upon Senior Securities 25 Item 4. Submission of Matters to a Vote of Security Holders 25 Item 5. Other Information 25 Item 6. Exhibits 25 Signatures 26 Exhibit 31.1 - CEO Certification Exhibit 31.2 - CFO Certification Exhibit 32.1 - CEO and CFO Certification
Forward-Looking Statements This report includes "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended (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, 2005 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 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, JUNE 30, Amounts in thousands, except share information 2005 2006 ----------- --------- Assets Current assets: Cash and equivalents $ 14,733 $ 2,341 Accounts receivable, net of allowances of $627 and $689, respectively 46,989 62,203 Inventories 40,927 45,727 Prepaid expenses and other current assets 5,249 3,861 --------- --------- Total current assets 107,898 114,132 Property, plant and equipment, net 163,059 178,922 Goodwill 224,024 134,536 Deferred taxes 17,431 17,584 Other long-term assets 19,351 25,085 --------- --------- Total Assets $ 531,763 $ 470,259 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Current maturities of long-term obligations $ 8,582 $ 14,037 Accounts payable 46,014 49,072 Accrued liabilities: Compensation 15,325 18,766 Other 1,989 1,276 --------- --------- Total current liabilities 71,910 83,151 --------- --------- Long-term obligations, net of current maturities 282,659 303,862 Deferred taxes 42,696 44,831 Other long-term liabilities 7,893 6,577 Shareholders' equity: Common stock - $.01 par value; 100 shares authorized, issued and outstanding as of December 31, 2005 and June 30, 2006 Additional paid-in capital 162,140 162,453 Accumulated other comprehensive income 4,098 14,088 Accumulated deficit (39,633) (144,703) --------- --------- Total shareholders' equity 126,605 31,838 --------- --------- Total Liabilities and Shareholders' Equity $ 531,763 $ 470,259 ========= =========
See notes to condensed consolidated financial statements. 2 TITAN HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- --------------------------- Amounts in thousands 2005 2006 2005 2006 --------- --------- --------- --------- Sales $ 87,554 $ 96,556 $ 176,341 $ 194,542 Cost of sales 74,619 85,430 151,112 172,805 Goodwill impairment 96,801 96,801 --------- --------- --------- --------- Gross profit (loss) 12,935 (85,675) 25,229 (75,064) Selling, general and administrative expenses 5,373 6,712 10,823 13,767 --------- --------- --------- --------- Income (loss) from operations 7,562 (92,387) 14,406 (88,831) Interest expense, net 6,180 7,960 12,195 15,616 Other expenses, net 528 1,764 1,284 2,622 --------- --------- --------- --------- Income (loss) before tax provision 854 (102,111) 927 (107,069) Tax provision 435 (1,415) 186 (2,113) Equity in loss of joint venture 67 124 --------- --------- --------- --------- Net Income (Loss) $ 419 ($ 100,763) $ 741 ($ 105,080) ========= ========= ========= ========= Statements of Comprehensive Loss: Net income (loss) $ 419 ($ 100,763) $ 741 ($ 105,080) Other comprehensive income (losses): Foreign currency translation adjustments (6,079) 4,867 (13,416) 9,491 Net interest rate agreement gains, net of tax 499 499 --------- --------- --------- --------- Comprehensive Loss ($ 5,660) ($ 95,397) ($ 12,675) ($ 95,090) ========= ========= ========= =========
See notes to condensed consolidated financial statements. 3 TITAN HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- Amounts in thousands 2005 2006 -------- --------- Net cash provided by (used in) operating activities $ 8,444 ($ 7,938) Cash flows from investing activities: Expenditures for property, plant and equipment (8,548) (14,072) Equipment deposits paid and to be refunded (1,739) (2,572) Acquisitions, net of cash (9,902) (7,163) Other 142 (219) -------- -------- Net cash used in investing activities (20,047) (24,026) -------- -------- Cash flows from financing activities: Borrowings on lines of credit, net 6,682 21,757 Shareholder contributions 10,028 Other (3,915) (2,143) -------- -------- Net cash provided by financing activities 12,795 19,614 -------- -------- Effect of exchange rate changes on cash and equivalents 61 (42) -------- -------- Increase (decrease) in cash and equivalents 1,253 (12,392) Cash and equivalents at beginning of period 2,117 14,733 -------- -------- Cash and Equivalents at End of Period $ 3,370 $ 2,341 ======== ========
See notes to condensed consolidated financial statements. 4 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 (UNAUDITED) 1. Basis of Presentation and Significant Accounting Policies The accompanying unaudited interim condensed 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. 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 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. References throughout this document to "we," "our" or "us" refer to the Company. In the opinion of our management, the Financial Statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly such information in accordance with GAAP. Goodwill -- In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," we evaluate for indicators of impairment the carrying value of our goodwill at least on an annual basis and on an interim basis if indicators of potential impairment arise between annual evaluations. Our European segment experienced unfavorable operating results during the three and six months ended June 30, 2006, primarily as a result of cost overruns on three product launches, lower production volumes on key profitable programs, excessive labor costs and increased customer pricing pressure. Based on these interim indicators, we completed an interim assessment of the carrying amount of goodwill in our European reporting unit in accordance with SFAS No. 142. The assessment of the carrying amount of our European reporting unit's goodwill indicated that impairment had occurred, and as a result we recorded against our second quarter 2006 results a goodwill impairment loss of $96,801. The fair value of the reporting unit was estimated using a cash flow valuation model. This charge does not result in current or future cash expenditures. We will perform an assessment of the carrying amount of goodwill in our other reporting units in conjunction with our annual assessment in accordance with SFAS No. 142. Stock-based compensation -- On January 1, 2006, we applied Statement of Financial Accounting Standard ("SFAS") No. 123(R), "Share-Based Payment," which requires compensation costs related to share-based payment transactions to be recognized in the financial statements. Compensation cost subsequent to January 1, 2006 was measured based on the grant date fair value of the equity or liability instruments issued and is 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 Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. We recognized stock based compensation expense of $156 for the three months ended June 30, 2006 and $313 in the six months ended June 30, 2006. Had stock-based employee compensation cost of our stock option plans been treated prior to January 1, 2006 consistent with the provisions of SFAS No. 123(R), our net income would have changed to the pro forma amount set forth below: 5
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, 2005 2005 ------------ ---------- As reported $ 419 $ 741 Compensation expense, net of related tax effects (154) (308) ----- ----- Pro forma $ 265 $ 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%; volatility rates, 10.98%-12.01%; and expected life of options, 10 years. Pension Plans -- We sponsor defined benefit pension plans for substantially all employees of our French subsidiaries. Set forth below are the components of net periodic benefit cost for the plans of our French subsidiaries, Frank & Pignard, SA, ("F&P") and Bouverat Industries, SA ("Bouverat"):
THREE MONTHS ENDED JUNE 30, --------------------------- -------------------------- 2005 2006 --------------------------- -------------------------- F&P PLAN BOUVERAT PLAN F&P PLAN BOUVERAT PLAN -------- ------------- -------- ------------- Service and interest costs $ 38 $ 30 $ 79 $ 5 Expected return on plan assets (8) (6) ------------------- ------------------- Net periodic benefit cost $ 38 $ 22 $ 79 ($ 1) =================== ===================
SIX MONTHS ENDED JUNE 30, ------------------------- --------------------------- 2005 2006 ------------------------- --------------------------- F&P PLAN BOUVERAT PLAN F&P PLAN BOUVERAT PLAN -------- ------------- -------- ------------- Service and interest costs $ 76 $ 60 $158 $ 10 Expected return on plan assets (16) (12) ------------------- ------------------- Net periodic benefit cost $ 76 $ 44 $158 ($ 3) =================== ===================
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income Taxes," which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of adopting this interpretation. 2. INVENTORIES Set forth below are the components of Inventories:
DECEMBER 31, JUNE 30, 2005 2006 ----------- -------- Raw materials $12,657 $13,442 Production supplies 7,512 9,762 Work in-process 14,916 17,082 Finished goods 5,842 5,238 ------- ------- Total Inventories $40,927 $45,524 ======= =======
6 3. PROPERTY, PLANT AND EQUIPMENT, NET Set forth below are the components of Property, Plant and Equipment, Net:
DECEMBER 31, JUNE 30, 2005 2006 ------------- --------- Buildings and land $ 10,156 $ 11,951 Machinery and equipment 160,631 183,982 Furniture and fixtures 11,402 12,287 ------------- --------- Total 182,189 208,220 Accumulated depreciation (19,130) (29,298) ------------- --------- Total Property, Plant and Equipment, Net $ 163,059 $ 178,922 -============ =========
4. LONG-TERM OBLIGATIONS Set forth below are the components of Long-Term Obligations (percentages represent interest rates as of June 30, 2006):
DECEMBER 31, JUNE 30, 2005 2006 ------------ --------- Senior credit facility: U.S. dollar term note, 7.938-9.125% $ 19,988 $ 19,988 Eurocurrency term note, 7.061% 42,532 43,639 Multi-currency revolving line of credit, 10.25% 7,000 Eurocurrency revolving line of credit, 6.561% 10,170 Second lien term note: U.S. dollar-denominated portion, 13.5% 60,023 60,476 Euro-denominated portion, 12.313% 14,951 16,230 Senior subordinated notes, 10.875% 137,355 137,510 Other 16,392 22,886 ------------ --------- Total long-term obligations 291,241 317,899 Current portion (8,582) (14,037) ------------ --------- Long-term portion $ 282,659 $ 303,862 ============ =========
In connection with the Merger, Titan and certain, but not all, of the subsidiaries of Autocam fully and unconditionally guaranteed the senior subordinated notes. We manage interest rate risk on a portion of our variable interest rate indebtedness through the use of an interest rate swap, which fixed the interest rate on $50,000 of such indebtedness at London Interbank Offered Rate (LIBOR) of 5.14% for five years. Based on the fair market value of the interest rate swap at June 30, 2006, we recorded a gain of $499 (net of related income tax of $257) in Accumulated Other Comprehensive Income on our Condensed Consolidated Balance Sheets and recognized a derivative instrument asset of $756, which is reflected in Other Long-Term Assets on our Condensed Consolidated Balance Sheets. 7 5. FINANCIAL INFORMATION FOR GUARANTOR AND NON-GUARANTOR SUBSIDIARIES The following table sets forth the guarantor and non-guarantor subsidiaries of Autocam with respect to the senior subordinated 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 Poland Sp. z o.o. Autocam South Carolina, Inc. Wuxi Kent Precision Automotive Components Co., Ltd.
Subsequent to the issuance of the consolidated financial statements for the three and six months ended June 30, 2005, we determined that the previously presented condensed combining financial data for the three and six months ended June 30, 2005 did not reflect the investment in subsidiaries of Titan and Autocam under the equity method for purposes of the supplemental combining presentation. The current presentation has been restated to reflect all investments in subsidiaries under the equity method. Net income (losses) of the subsidiaries accounted for under the equity method are therefore reflected in their parents' investment accounts. The principle elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. The changes in presentation did not effect our consolidated financial position or consolidated results of operations, nor did the changes adversely impact our compliance with debt covenants or ratios. Set forth below are schedules that reconcile the amounts as previously reported in our condensed combining statements of operations for the three and six months ended June 30, 2005 to the corresponding restated amounts.
TITAN (PARENT SUBSIDIARIES COMPANY ------------------------ ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED ------------- -------- --------- ------------- ------------ -------- THREE MONTHS ENDED JUNE 30, 2005: Net income (loss) as previously reported $ 49 $ (1,189) $ 854 $ 705 $ 419 Net income as restated 419 370 854 705 $ (1,929) 419 SIX MONTHS ENDED JUNE 30, 2005: Net income (loss) as previously reported $ (10) $ (2,188) $ 1,573 $ 1,366 $ 741 Net income as restated 741 751 1,573 1,366 $ (3,690) 741
8 Information regarding the guarantors and non-guarantors are as follows:
TITAN (PARENT SUBSIDIARIES COMBINING STATEMENT OF OPERATIONS (RESTATED) COMPANY ------------------------ THREE MONTHS ENDED JUNE 30, 2005 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED - -------------------------------------------- ------- -------- --------- ------------- ------------ -------- 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, 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 Equity in net income of subsidiaries (370) (1,559) 1,929 --------------------------------------------------------------------- Net Income $ 419 $ 370 $ 854 $ 705 $ (1,929) $ 419 ======================================================================
TITAN (PARENT SUBSIDIARIES COMBINING STATEMENT OF OPERATIONS COMPANY ------------------------ THREE MONTHS ENDED JUNE 30, 2006 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED - -------------------------------------------- ---------- ------------ --------- ------------- ------------ ---------- Sales $ 36,605 $ 11,813 $ 51,821 $ (3,683) $ 96,556 Cost of sales 31,457 8,505 49,151 (3,683) 85,430 Goodwill impairment 96,801 96,801 ---------------------------------------------------------------- Gross profit (loss) 5,148 3,308 (94,131) (85,675) Selling, general and administrative expenses 1,711 807 4,194 6,712 ---------------------------------------------------------------- Income (loss) from operations 3,437 2,501 (98,325) (92,387) Interest expense, net 4,924 438 2,598 7,960 Other expense, net 568 1,196 1,764 ---------------------------------------------------------------- Income (loss) before tax provision (2,055) 2,063 (102,119) (102,111) Tax provision (795) 708 (1,328) (1,415) Equity in loss of joint venture 67 67 Equity in net loss of subsidiaries $ 100,763 99,436 (200,199) ----------------------------------------------------------------------------- Net Income (Loss) $ (100,763) $ (100,763) $ 1,355 $ (100,791) $ 200,199 $ (100,763) =============================================================================
9
TITAN (PARENT SUBSIDIARIES COMBINING STATEMENT OF OPERATIONS (RESTATED) COMPANY ------------------------ SIX MONTHS ENDED JUNE 30, 2005 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED - -------------------------------------------- ------- ------- --------- ------------- ------------ -------- 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, 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 Equity in net income of subsidiaries (751) (2,939) 3,690 ------------------------------------------------------------------ Net Income $ 741 $ 751 $ 1,573 $ 1,366 $ (3,690) $ 741 ==================================================================
TITAN (PARENT SUBSIDIARIES COMBINING STATEMENT OF OPERATIONS COMPANY ------------------------ SIX MONTHS ENDED JUNE 30, 2006 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED - -------------------------------------------- ---------- ------------ --------- ------------- ------------ ---------- Sales $ 77,403 $ 21,281 $103,397 $ (7,539) $ 194,542 Cost of sales 67,268 15,672 97,404 (7,539) 172,805 Goodwill impairment 96,801 96,801 ----------------------------------------------------------------- Gross profit (loss) 10,135 5,609 (90,808) (75,064) Selling, general and administrative expenses 3,894 1,563 8,310 13,767 ----------------------------------------------------------------- Income (loss) from operations 6,241 4,046 (99,118) (88,831) Interest expense, net 9,840 819 4,957 15,616 Other expense, net 906 1,716 2,622 ----------------------------------------------------------------- Income (loss) before tax provision (4,505) 3,227 (105,791) (107,069) Tax provision (1,099) 1,102 (2,116) (2,113) Equity in loss of joint venture 124 124 Equity in net loss of subsidiaries $ 105,080 101,550 (206,630) ----------------------------------------------------------------------------- Net Income (Loss) $ (105,080) $ (105,080) $ 2,125 $ (103,675) $ 206,630 $ (105,080) =============================================================================
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TITAN CONDENSED COMBINING STATEMENT (PARENT SUBSIDIARIES OF CASH FLOWS COMPANY ------------------------- SIX MONTHS ENDED JUNE 30, 2005 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR COMBINED - --------------------------------------------------- -------- -------- --------- ------------- -------- 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 (121) (9,781) (9,902) Borrowings on lines of credit, net 7,000 (318) 6,682 Intercompany transactions (10,012) (99) 10,111 Shareholder contributions 10,028 10,028 Other (1,855) 3 (3,599) (5,451) ---------------------------------------------- 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 ==============================================
TITAN CONDENSED COMBINING STATEMENT (PARENT SUBSIDIARIES OF CASH FLOWS COMPANY ------------------------ SIX MONTHS ENDED JUNE 30, 2006 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR COMBINED - ----------------------------------------------------- ------- -------- --------- ------------- -------- Net cash provided by (used in) operating activities $ (5,660) $ 2,047 $ (4,325) $ (7,938) Expenditures for property, plant and equipment (4,624) (1,641) (7,807) (14,072) Equipment deposits refunded (paid and to be refunded) 239 (65) (2,746) (2,572) Acquisitions, net of cash (7,022) (141) (7,163) Borrowings on lines of credit, net 7,000 14,757 21,757 Other (1,969) (352) (83) (2,404) -------------------------------------------- Net decrease in cash and equivalents (12,036) (11) (345) (12,392) Cash and equivalents at beginning of period 13,265 14 1,454 14,733 -------------------------------------------- Cash and Equivalents at End of Period $ 1,229 $ 3 $ 1,109 $ 2,341 ============================================
11
TITAN (PARENT SUBSIDIARIES CONDENSED COMBINING BALANCE SHEET COMPANY ------------------------ DECEMBER 31, 2005 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED - ------------------------------------------ ------------- -------- --------- ------------- ------------ ------------ Assets Current assets: Cash and equivalents $ 13,264 $15 $ 1,454 $ 14,733 Accounts receivable, net 18,693 2,426 28,896 $ (3,026) 46,989 Inventories 11,709 3,954 24,009 1,255 40,927 Prepaid expenses and other current assets 1,428 393 3,428 5,249 -------------------------------------------------------------- Total current assets 45,094 6,788 57,787 (1,771) 107,898 Property, plant and equipment, net 31,933 7,745 122,616 765 163,059 Goodwill $ 116,507 135 5,242 102,210 (70) 224,024 Investments in affiliates 5,969 121,200 (13,479) (181,817) 68,683 556 Deferred taxes 15,457 1,974 17,431 Other long-term assets 12,659 254 5,010 872 18,795 ----------------------------------------------------------------------------- Total assets $ 122,476 $226,478 $ 6,550 $ 107,780 $ 68,479 $ 531,763 ============================================================================= Liabilities and Shareholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations $ 44 $ 8,538 $ 8,582 Accounts payable $ 12,213 731 34,104 $ (1,034) 46,014 Accrued liabilities $ (19) 3,564 970 12,784 15 17,314 ----------------------------------------------------------------------------- Total current liabilities (19) 15,777 1,745 55,426 (1,019) 71,910 ----------------------------------------------------------------------------- Long-term obligations, net of current 232,316 165 50,178 282,659 maturities Deferred taxes and other 18,546 668 31,375 50,589 Shareholders' equity (deficit): Capital stock 162,140 162,140 Accumulated other comprehensive income (564) 4,662 4,098 Retained earnings (accumulated deficit) (39,645) (39,597) 3,972 (33,861) 69,498 (39,633) ----------------------------------------------------------------------------- Total shareholders' equity (deficit) 122,495 (40,161) 3,972 (29,199) 69,498 126,605 ----------------------------------------------------------------------------- Total liabilities and shareholders' equity (deficit) $ 122,476 $226,478 $ 6,550 $ 107,780 $ 68,479 $ 531,763 =============================================================================
12
TITAN (PARENT SUBSIDIARIES CONDENSED COMBINING BALANCE SHEET COMPANY ------------------------ JUNE 30, 2006 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED - ------------------------------------------ ------------- ---------- --------- ------------- ------------ ---------- Assets Current assets: Cash and equivalents $ 1,229 $ 3 $ 1,109 $ 2,341 Accounts receivable, net 27,522 2,610 37,833 $ (5,762) 62,203 Inventories 12,987 4,597 27,038 1,105 45,727 Prepaid expenses and other current assets 1,364 110 2,387 3,861 -------------------------------------------------------------- Total current assets 43,102 7,320 68,367 (4,657) 114,132 Property, plant and equipment, net 36,817 8,657 129,929 3,519 178,922 Goodwill $ 116,437 5,434 12,665 134,536 Investments in affiliates (99,022) 26,120 (13,704) (184,350) 272,218 1,262 Deferred taxes 15,457 2,127 17,584 Other long-term assets 14,558 660 8,605 23,823 ----------------------------------------------------------------------------- Total assets $ 17,415 $ 136,054 $ 8,367 $ 37,343 $ 271,080 $ 470,259 ============================================================================= Liabilities and Shareholders, Equity (Deficit) Current liabilities: Current maturities of long-term obligations $ 54 $ 13,983 $ 14,037 Accounts payable $ 16,337 1,375 36,656 $ (5,296) 49,072 Accrued liabilities 2,551 613 16,630 248 20,042 -------------------------------------------------------------- Total current liabilities 18,888 2,042 67,269 (5,048) 83,151 -------------------------------------------------------------- Long-term obligations, net of current 241,204 161 62,497 303,862 maturities Deferred taxes and other 18,500 67 32,841 51,408 Shareholders' equity (deficit): Capital stock $ 162,140 313 162,453 Accumulated other comprehensive income 1,821 12,267 14,088 Retained earnings (accumulated deficit) (144,725) (144,672) 6,097 (137,531) 276,128 (144,703) ----------------------------------------------------------------------------- Total shareholders' equity (deficit) 17,415 (142,538) 6,097 (125,264) 276,128 31,838 ----------------------------------------------------------------------------- Total liabilities and shareholders' equity (deficit) $ 17,415 $ 136,054 $ 8,367 $ 37,343 $ 271,080 $ 470,259 =============================================================================
6. BUSINESS SEGMENT INFORMATION We have four operating segments: North America, Europe, South America and Asia. The North American segment provides precision-machined components to the transportation and medical devices industries, while the European, South American and Asian segments provide precision-machined components primarily to the transportation industry. We have assigned specific business units to a segment based on their geographical location. Each of our segments is individually managed and have separate financial results reviewed by our 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. We evaluate segment performance primarily based on income from operations and the efficient use of assets. The totals set forth below are inclusive of all adjustments needed to reconcile to the data provided in the Consolidated Financial Statements and related notes for the three and six months ended June 30, 2005 and 2006 and as of December 31, 2005 and June 30, 2006: 13
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- -------------------- 2005 2006 2005 2006 -------- ---------- -------- ---------- Sales to Unaffiliated Customers from Company Facilities Located in: North America $38,255 $ 48,007 $ 75,757 $ 97,807 Europe 41,089 39,951 85,187 80,773 South America 8,210 8,533 15,397 15,897 Asia 65 65 ------------------- -------------------- Total $87,554 $ 96,556 $176,341 $ 194,542 =================== ==================== Net Income (Loss) of Company Facilities Located in: North America $ (288) $ 28 $ (627) $ (1,405) Europe (262) (100,850) (420) (103,791) South America 969 296 1,788 415 Asia (237) (299) ------------------- -------------------- Total $ 419 $ (100,763) $ 741 $ (105,080) =================== ==================== Depreciation and Amortization on Assets Located in: North America $ 1,278 $ 1,753 $ 2,459 $ 3,473 Europe 2,759 2,951 5,640 5,737 South America 296 420 562 820 Asia 13 18 ------------------- -------------------- Total $ 4,333 $ 5,137 $ 8,661 $ 10,048 =================== ==================== Net Interest Expense of Company Facilities Located in: North America $ 4,375 $ 5,362 $ 8,619 $ 10,659 Europe 1,666 2,502 3,294 4,713 South America 139 99 282 249 Asia (3) (5) ------------------- -------------------- Total $ 6,180 $ 7,960 $ 12,195 $ 15,616 =================== ==================== Tax Provision of Company Facilities Located in: North America $ (184) $ (87) $ (355) $ 3 Europe 150 (1,487) (355) (2,337) South America 469 159 896 221 ------------------- -------------------- Total $ 435 $ (1,415) $ 186 $ (2,113) =================== ==================== Expenditures for Property, Plant and Equipment of Facilities Located in: North America $ 1,476 $ 3,523 $ 2,899 $ 6,265 Europe 1,566 2,591 4,034 5,186 South America 653 871 1,615 2,328 Asia 133 293 ------------------- -------------------- Total $ 3,695 $ 7,118 $ 8,548 $ 14,072 =================== ====================
DECEMBER 31, JUNE 30, 2005 2006 ------------ --------- Total Assets of Company Facilities Located in: North America $ 241,735 $ 249,008 Europe 249,199 174,960 South America 38,927 44,128 Asia 1,902 2,163 ----------------------- Total $ 531,763 $ 470,259 =======================
14 7. SUPPLEMENTAL CASH FLOW INFORMATION Set forth below is a reconciliation of net income (loss) to net cash provided by (used in) operating activities:
SIX MONTHS ENDED JUNE 30, -------------------- 2005 2006 -------- ---------- Net income (loss) $ 741 $ (105,080) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 8,661 10,048 Goodwill impairment 96,801 Deferred taxes 960 (571) Stock-based compensation cost 313 Realized gains and losses and other, net 17 423 Changes in assets and liabilities that provided (used) cash: Accounts receivable 2,362 (8,102) Inventories (2,669) (559) Prepaid expenses and other current assets 1,095 76 Other long-term assets (1,213) 278 Accounts payable (3,046) (1,661) Accrued liabilities 605 1,814 Deferred taxes and other 931 (1,718) -------- ---------- Net Cash Provided by (Used in) Operating Activities $ 8,444 $ (7,938) ======== ==========
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 included in this report. 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. Autocam Corporation is a Michigan corporation and is a wholly-owned subsidiary of Titan Holdings, Inc., a Delaware corporation, which in turn is a wholly-owned subsidiary of Micron Holdings, Inc., a Delaware corporation. In this Item 2 of this report, unless the context otherwise requires - - "Parent" refers to Micron Holdings, Inc., or "Micron", the parent company of Titan, - - "Holdings" refers to Titan Holdings, Inc., or "Titan", - - "we," "our" or "us" refer to Holdings together with its consolidated subsidiaries, and - - "Autocam" refers to Autocam Corporation, a wholly-owned subsidiary of Holdings. In this Item 2 and in Item 3 of this report, any references to 2006 refer to the three or six months ended June 30, 2006 and any references to 2005 refer to the three or six months ended June 30, 2005. OVERVIEW We are headquartered in Kentwood, Michigan, and 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 penetration include steering, fuel delivery, electric motors, braking, and air bag 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. These Tier I suppliers include Autoliv, Delphi Corporation, Robert Bosch GmbH, Siemens VDO, TRW Automotive, Inc. and ZF Friedrichshafen AG. We believe our manufacturing space is sufficient to meet the needs of our customers' current programs. We focus primarily on higher value-added categories of strategically targeted markets. The products we manufacture demand expertise typically exceeding the capabilities of many of our competitors. We produce complex products in high volumes where required tolerances are in the single-digit micron range with quality levels very often approaching zero defects. A number of factors influenced our results of operations, including the following: - - In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," we evaluate for indicators of impairment the carrying value of our goodwill at least on an annual basis and on an interim basis if indicators of potential impairment arise between annual evaluations. Our European segment experienced unfavorable operating results during the three and six months ended June 30, 2006, primarily as a result of cost overruns on three product launches, lower production volumes on key profitable programs, excessive labor costs and increased customer pricing pressure. Based on these interim indicators, we completed an interim assessment of the carrying amount of goodwill in our European reporting unit in accordance with SFAS No. 142. The assessment of the carrying amount of our European reporting unit's goodwill indicated that impairment had occurred, and as a result we recorded against our second quarter 2006 results a goodwill impairment loss of $96,801. The fair value of the reporting unit was estimated using a cash flow valuation model. This charge does not result in current or future cash expenditures. We will perform an assessment of the carrying amount of goodwill in our other reporting units in conjunction with our annual assessment in accordance with SFAS No. 142. 16 - - 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 declined significantly in recent years. - - A significant portion of our sales and profits resulted from transactions denominated in foreign currencies (primarily the euro and the Brazilian real). 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 those foreign currencies in the three and six months ended June 30, 2006 relative to the same period in the prior year 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 or Brazilian real):
THREE MONTHS ENDED JUNE 30, --------------------------------------------------- EURO BRAZILIAN REAL ------------------------ ------------------------ 2005 2006 2005 2006 ------------- -------- ------------- -------- Average (1) 1.26 1.26 0.40 0.46
SIX MONTHS ENDED JUNE 30, --------------------------------------------------- EURO BRAZILIAN REAL ------------------------ ------------------------ 2005 2006 2005 2006 ------------- -------- ------------- -------- Average (1) 1.29 1.23 0.39 0.46
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, 2005 2006 2005 2006 ------------- -------- ------------- -------- EURO BRAZILIAN REAL ------------------------ ------------------------ End of period 1.18 1.27 0.43 0.45
---------- (1) The average rate represents the average of all monthly average exchange rates within the respective periods weighted by reported sales denominated in euros or Brazilian reais. - - 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 despite these constant pressures. - - Effective June 15, 2005, Autocam's 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 devices product offerings. - - On January 3, 2006, Autocam purchased certain assets and assumed certain liabilities of ATS Automation Tooling Systems, Inc.'s Precision Metals Division ("ATS") pursuant to an asset purchase agreement, dated December 12, 2005. The purchase price of $7.4 million was primarily financed indirectly through equity contributions from the shareholders of Micron. The acquisition was completed primarily for the purpose of expanding our electric motor product offerings and customer base. 17 RESULTS OF OPERATIONS THE FOLLOWING TABLE SETS FORTH OUR CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS EXPRESSED AS A PERCENTAGE OF SALES:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2005 2006 2005 2006 ------ -------- ------ ------ Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 85.2% 88.5% 85.7% 88.8% Goodwill impairment 0.0% 100.3% 0.0% 49.8% ------ -------- ------ ------ Gross profit (loss) 14.8% -88.8% 14.3% -38.6% Selling, general and administrative expenses 6.1% 7.0% 6.1% 7.1% ------ -------- ------ ------ Income (loss) from operations 8.7% -95.8% 8.2% -45.7% Interest expense, net 7.1% 8.2% 6.9% 8.0% Other expenses, net 0.6% 1.8% 0.7% 1.3% ------ -------- ------ ------ Income (loss) before tax provision 1.0% -105.8% 0.6% -55.0% Tax provision 0.5% -1.5% 0.1% -1.1% Equity in loss of joint venture 0.0% 0.1% 0.0% 0.1% ------ -------- ------ ------ Net Income (Loss) 0.5% -104.4% 0.5% -54.0% ====== ======== ====== ======
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30, 2005 Sales Sales increased $9.0 million, or 10.3%, to $96.6 million in 2006 from $87.6 million in 2005. The fluctuation in the exchange rates between the USD and the functional currencies of our foreign operations caused a $0.8 million increase in sales when comparing 2005 to 2006. On a constant currency basis, sales in 2006 increased $8.2 million from 2005 levels principally due to the following factors: - - Factors resulting in an increase in Sales: 1. Sales of electric motor and braking components resulting from the ATS acquisition totaled $6.0 million in 2006; 2. Sales of medical device components increased due to incremental sales resulting from the Sager acquisition ($3.5 million) and incremental sales to an existing medical devices customer ($0.7 million); 3. Sales of fuel components to an existing North American customer increased $0.9 million due to increased demand for diesel engines; 4. Our European operations were awarded new steering business by a new customer late in the calendar year of 2005, which resulted in $0.9 million in sales in 2006; and 5. Our North American operations were awarded business for a new fuel program from an existing customer, benefited from incremental sales to this same customer of new generation fuel program components while continuing to produce components for the old generation program, and benefited from increased unit pricing on certain mature products sold to this customer, which, together, accounted for a $0.5 million increase in sales when comparing 2006 to 2005. 18 - - Factors partially offsetting the increase in Sales: 1. Our European operations were desourced in 2001 by a customer for steering components resulting in a reduction in sales when comparing 2006 to 2005 of $2.0 million as the last program for this customer is nearing completion; 2. We granted unit price reductions to our customers totaling $1.6 million in 2006; and 3. The relative strength of the Brazilian real against the USD and the euro has resulted in certain customers shifting their manufacturing capacity to other locations (e.g., Europe) that utilize other local suppliers resulting in a comparative reduction in sales by our Brazilian operations. Gross Profit (Loss) Gross profit decreased $98.6 million to a loss of $85.7 million, or negative 88.8% of sales, in 2006 from $12.9 million, or 14.8% of sales, in 2005. The decline in gross profit can generally be attributed to the following factors: - - We recorded a goodwill impairment loss of $96.8 million in 2006. No such charge was recorded in 2005; - - Our European operations experienced manufacturing inefficiencies associated with the ramp up of production for three significant programs during 2006. We experienced labor inefficiencies and higher scrap rates, and increased outsource costs as additional capacity was required to meet customer needs; - - Unit price reductions of $1.6 million granted to our customers between 2005 and 2006; and - - The 12% devaluation of the USD versus the Brazilian real when comparing 2006 to 2005 negatively impacted our gross profit percentage because a significant portion of our sales are invoiced in USD, but our costs are almost exclusively incurred in Brazilian reais. These negative factors were partially offset by the beneficial impact of successful cost improvement initiatives in our North American operations, which allowed for the elimination of outsourcing operations on some components. Selling, General and Administrative Selling, general and administrative expenses increased $1.3 million to $6.7 million, or 7.0% of sales, in 2006 from $5.4 million, or 6.1% of sales, in 2005. The 2006 results include $0.9 million in incremental expenses for our new facilities in Boston, Massachusetts, Kitchener, Ontario, Kammiena Gora, Poland and Wuxi, China. In addition, the 2006 results reflect $0.2 million in compensation costs related to share-based payment transactions required by Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment," recognized in our financial statements beginning January 1, 2006. Interest Expense, Net Net interest expense increased $1.8 million to $8.0 million in 2006 from $6.2 million in 2005. Our 2006 interest expense reflects increased debt levels since 2005. In addition, interest rates incurred on borrowings under our senior credit facility averaged 449 basis points more in 2006 when compared to 2005. Other Expense, Net Net other expense increased $1.2 million to $1.8 million in 2006 from $0.5 million in 2005. Our 2006 other expense reflects a $0.7 million increase in losses on the disposal of fixed assets in Europe as compared to 2005. Tax Provision In 2006, we recorded an income tax benefit of $1.4 million. This amount is less than the benefit that would have been recorded at the United States Federal statutory rate of 35% due to the following factors: 19 - - The goodwill impairment charge is not deductible for income tax purposes, and therefore no offsetting tax benefit has been recorded; and - - Our ability to record an income tax benefit was limited by our ability to realize this benefit through either a net operating loss carryback or the elimination of tax liabilities that arise in the future (offset to a deferred tax liability). SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005 Sales Sales increased $18.2 million, or 10.3%, to $194.5 million in 2006 from $176.3 million in 2005. The fluctuation in the exchange rates between the USD and the functional currencies of our foreign operations caused a $1.9 million decrease in sales when comparing 2005 to 2006. On a constant currency basis, sales in 2006 increased $20.1 million from 2005 levels principally due to the following factors: - - Factors resulting in an increase in Sales: 1. Sales of electric motor and braking components resulting from the ATS acquisition totaled $12.6 million in 2006; 2. Sales of medical device components increased due to incremental sales resulting from the Sager acquisition ($7.4 million) and incremental sales to an existing medical devices customer ($1.0 million); 3. Our European operations were awarded new steering business by a new customer and an existing customer late in the calendar year of 2005, which accounted for a $3.3 million increase in sales when comparing 2006 to 2005; 4. Our North American operations were awarded business for a new fuel program from an existing customer, benefited from incremental sales to this same customer of new generation fuel program components while continuing to produce components for the old generation program, and benefited from increased unit pricing on certain mature products sold to this customer, which, together, accounted for a $1.5 million increase in sales when comparing 2006 to 2005; and 5. Sales of fuel components to an existing North American customer increased $1.4 million due to increased demand for diesel engines. - - Factors partially offsetting the increase in Sales: 1. Our European operations were desourced in 2001 by a customer for steering components resulting in a reduction in sales when comparing 2006 to 2005 of $4.3 million as the last program for this customer is nearing completion; 2. We granted unit price reductions to our customers totaling $3.2 million in 2006; and 3. The relative strength of the Brazilian real against the USD and the euro has resulted in certain customers shifting their manufacturing capacity to other locations (e.g., Europe) that utilize other local suppliers resulting in a comparative reduction in sales by our Brazilian operations. Gross Profit (Loss) Gross profit decreased $100.3 million to a loss of $75.1 million, or negative 38.6% of sales, in 2006 from $25.2 million, or 14.3% of sales, in 2005. The decline in gross profit can generally be attributed to the following factors: - - We recorded a goodwill impairment loss of $96.8 million in 2006. No such charge was recorded in 2005; - - Our European operations experienced manufacturing inefficiencies associated with the ramp up of production for three significant programs during 2006. We experienced labor inefficiencies and higher scrap rates, and increased outsource costs as additional capacity was required to meet customer needs; - - Unit price reductions of $3.2 million granted to our customers between 2005 and 2006; and 20 - - The 15% devaluation of the USD versus the Brazilian real when comparing 2006 to 2005 negatively impacted our gross profit percentage because a significant portion of our sales are invoiced in USD, but our costs are almost exclusively incurred in Brazilian reais. Selling, General and Administrative Selling, general and administrative expenses increased $2.9 million to $13.8 million, or 7.1% of sales, in 2006 from $10.8 million, or 6.1% of sales, in 2005 due primarily to the following factors: - - The 2006 results include $1.9 million in incremental expenses for our new facilities in Boston, Massachusetts, Kitchener, Ontario, Kammiena Gora, Poland and Wuxi, China; - - European severance and professional fees expenses incurred in connection with the implementation of cost improvement initiatives were $0.5 million during 2006 and no such charges were recorded in 2005; and - - The 2006 results reflect $0.3 million in compensation costs related to share-based payment transactions required by Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment," recognized in our financial statements beginning January 1, 2006. Interest Expense, Net Net interest expense increased $3.4 million to $15.6 million in 2006 from $12.2 million in 2005. Our 2006 interest expense reflects increased debt levels since 2005. In addition, interest rates incurred on borrowings under our senior credit facility averaged 474 basis points more in 2006 when compared to 2005. Other Expense, Net Net other expense increased $1.3 million to $2.6 million in 2006 from $1.3 million in 2005. Our 2006 other expense reflects a $0.6 million increase in losses on the disposal of fixed assets in Europe as compared to 2005. Tax Provision In 2006, we recorded an income tax benefit of $2.1 million. This amount is less than the benefit that would have been recorded at the United States Federal statutory rate of 35% due to the following factors: - - The goodwill impairment charge is not deductible for income tax purposes, and therefore no offsetting tax benefit has been recorded; and - - Our ability to record an income tax benefit was limited by our ability to realize this benefit through either a net operating loss carryback or the elimination of tax liabilities that arise in the future (offset to a deferred tax liability). LIQUIDITY AND CAPITAL RESOURCES Our short-term liquidity needs include required debt service and day-to-day operating expenses like 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. In addition, we filed a formal social plan in July 2006 to effect permanent reductions in our French workforce, and as a result, we will likely incur significant severance-related costs throughout 2007. The magnitude of such costs will be negotiated during the implementation of the social plan. Capital expenditures for calendar year 2006 are expected to be $24.5 million, of which $14.1 million was spent in the six months ended June 30, 2006. 21 Our principal sources of cash to fund short- and long-term liquidity needs consist of cash generated by operations and borrowings under our revolving credit facilities. Our European segment experienced unfavorable operating results during the three and six months ended June 30, 2006, primarily as a result of cost overruns on three product launches, lower production volumes on key profitable programs, excessive labor costs and increased customer pricing pressure. Cost reduction initiatives such as headcount reductions (including reductions in connection with the formal social plan referenced above), reductions in salaries of employees, dispositions and manufacturing efficiency initiatives are underway or planned to address these negative developments. Our senior credit facilities contain financial covenants based on first lien and senior leverage ratios and our second lien credit facility contain a financial covenant based on a senior leverage ratio. The financial covenants under both our senior credit facilities and second lien credit facility are tested at each calendar quarter-end. We were in compliance with all of the covenants in our senior credit facilities and second lien credit facility as of June 30, 2006. Based on current projections, if we are unsuccessful in fully implementing the cost improvement initiatives outlined above, we may be unable to maintain compliance with the financial covenants in our senior credit facilities and second lien credit facility as early as the quarter ending September 30, 2006. If we are unable to maintain compliance with the financial covenants in our senior credit facilities and/or second lien credit facility, the senior and/or second lien lenders have the ability to exercise all of their remedies upon an event of default, including requiring the amounts outstanding under the senior credit facilities and/or the second lien credit facility to become due. If the amounts outstanding under the senior credit facilities and second-lien credit facility were to become due and we failed to pay such amounts, we could trigger cross-default provisions in the indenture applicable to our senior subordinated notes. In the event that we are unable to maintain compliance with the covenants in our senior credit facilities and/or second lien credit facility, we will seek to engage in discussions with our senior and second lien lenders to further amend our senior credit facilities and second lien credit facility to provide covenant relief; however we cannot assure you that we will be successful in doing so. If these discussions were unsuccessful, we would explore a variety of other options, including but not limited to attempting to secure other sources of capital for our operations and other strategic alternatives for preserving the value of the Company. In addition, if we are not in compliance with the financial covenants under our senior credit facilities and second lien credit facility, our revolving credit facilities would no longer be available to us to fund our operations without the consent of our senior lenders. During the first six months of 2006, we borrowed $17.2 million under our revolving credit facilities to partially fund our liquidity needs as cash generated from operations was insufficient to meet our requirements. In the event our revolving credit facilities are unavailable to us, we may be unable to meet our liquidity needs from cash currently on hand and cash flow generated from operations in the quarter ending December 31, 2006. While we would seek to obtain additional sources of liquidity, if our revolving credit facilities were unavailable to us, covenants contained in our senior credit facilities, second lien credit facility and the indenture governing our senior subordinated notes may significantly constrain our ability to incur additional indebtedness. Six Months Ended June 30, 2006 Cash used in operating activities of $7.9 million in 2006 reflects net income excluding non-cash and other reconciling items of $2.0 million and an increase in net working capital of $9.9 million from December 31, 2005 to June 30, 2006 due primarily to an increase in accounts receivable of $8.1 million. Sales in all operating segments were higher during the latter part of the second quarter of 2006 than the latter part of the fourth quarter of 2005. In addition, payment terms from a number of our European and South American customers lengthened in the second quarter of 2006 relative to the fourth quarter of 2005. Finally, factored European accounts receivable decreased $0.3 million from December 31, 2005 to June 30, 2006. 22 Cash used in investing activities of $24.0 million in 2006 principally consisted of $14.1 million for the purchase of production equipment and $7.2 million for business acquisitions as described above and $2.6 million in deposits paid of equipment expected to be subject to operating leases. Once such lease agreements are executed, these deposit payments are expected to be refunded. Cash provided by financing activities of $19.6 million in 2006 mainly consisted of $21.8 million in net borrowings under lines of credit partially offset by $1.8 million in scheduled principal payments on our indebtedness. FOREIGN OPERATIONS During the three months ended June 30, 2006, our operations located in the United States exported $4.2 million of product to customers located in foreign countries, and our foreign operations shipped $55.8 million of product to customers from their facilities. During the six months ended June 30, 2006, our operations located in the United States exported $8.4 million of product to customers located in foreign countries, and our foreign operations shipped $112.0 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 On January 1, 2006, we applied the SFAS No. 123(R), which requires compensation costs related to share-based payment transactions to be recognized in the financial statements. Compensation cost subsequent to January 1, 2006 was measured based on the grant date fair value of the equity or liability instruments issued and is 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 Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. We recognized stock based compensation expense of $0.2 million in the three months ended June 30, 2006 and $0.3 million in the six months ended June 30, 2006. In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income Taxes," which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes." This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of adopting this interpretation. CRITICAL ACCOUNTING POLICIES No material changes have been made to our critical accounting policies during 2006. Item 3. Quantitative and Qualitative Disclosures about Market Risk FOREIGN CURRENCY EXCHANGE RATES We have in the past 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, 2005 or June 30, 2006. 23 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 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 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 or euro. As such, results of operations with regard to these sales are directly influenced by fluctuations in the exchange rates between the Brazilian real and the USD or euro. The effects of foreign currency exchange rate fluctuations are somewhat mitigated on the remainder of this subsidiary's sales by the fact that these sales and related expenses are generally incurred in Brazilian reais and the reported income will be higher or lower depending on fluctuations in the exchange rates between the USD or euro and the Brazilian real. The financial position and results of operations of our division in Canada are measured in Canadian dollars and translated into USD. With respect to approximately 80% of this division's sales, expenses are generally incurred in Canadian dollars, but sales are invoiced in USD. As such, results of operations with regard to these sales are directly influenced by fluctuations in the exchange rates between the Canadian dollar and the USD. The effects of foreign currency exchange rate fluctuations are somewhat mitigated on the remainder of this division's sales by the fact that these sales and related expenses are generally incurred in Canadian dollars and the reported income will be higher or lower depending on fluctuations in the exchange rates between the USD and the Canadian dollar. Our consolidated net assets as of June 30, 2006 include amounts based in foreign countries and were translated into USD at the exchange rates in effect at that date. Accordingly, our consolidated net assets will fluctuate depending on the exchange rates between the USD and the functional currencies of our foreign operations as a result of currency translation adjustments. INTEREST RATES We are exposed to interest rate risk on a portion of our outstanding indebtedness. Our senior credit facilities and our second lien credit facility bear interest at variable rates. Effective April 1, 2006, through the purchase of an interest rate swap contract, we fixed the interest rate on $50.0 million of our variable-interest-rate indebtedness at London Interbank Offered Rate (LIBOR) of 5.14% for five years. There is no swap contract relating to the remaining $120.0 million of our variable interest rate indebtedness. Item 4. Controls and Procedures We maintain controls and procedures designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") 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. 24 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. PART II - OTHER INFORMATION Item 1. Legal Proceedings None. Item 1A. Risk Factors No material changes. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits
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 and 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.
25 SIGNATURES Autocam Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AUTOCAM CORPORATION Date: August 14, 2006 /s/ John C. Kennedy ------------------------------------ John C. Kennedy President and Chief Executive Officer (Principal Executive Officer) 26 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 and 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.
EX-31.1 2 k07813exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER BY RULE 13A-14(A) OR 15D-14(A) EXHIBIT 31.1 I, John C. Kennedy, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Autocam Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Autocam Corporation as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2006 /s/ John C. Kennedy -------------------------------------- John C. Kennedy President and Chief Executive Officer (Principal Executive Officer) EX-31.2 3 k07813exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER BY RULE 13A-14(A) OR 15D-14(A) EXHIBIT 31.2 I, Warren A. Veltman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Autocam Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Autocam Corporation as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2006 /s/ Warren A. Veltman -------------------------------------- Warren A. Veltman Chief Financial Officer (Principal Financial and Accounting Officer) EX-32.1 4 k07813exv32w1.txt CERTIFICATION OF CEO AND CFO BY 18 U.S.C. SECTION 1350 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Form 10-Q of Autocam Corporation (the "Company") for the quarterly period ended June 30, 2006, as delivered on the date hereof (the "Report"), we, John C. Kennedy, President and Chief Executive Officer of the Company, and Warren Veltman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 14, 2006 /s/ John C. Kennedy --------------------------------------- John C. Kennedy President and Chief Executive Officer (Principal Executive Officer) /s/ Warren A. Veltman --------------------------------------- Warren A. Veltman Chief Financial Officer (Principal Financial and Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----