10-Q 1 k10033e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED SEPTEMBER 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 SEPTEMBER 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 November 10, 2006 COMMON STOCK, $.01 PAR VALUE 100 SHARES INDEX
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 19 Item 3. Quantitative and Qualitative Disclosures about Market Risk 28 Item 4. Controls and Procedures 29 PART II - OTHER INFORMATION Item 1. Legal Proceedings 29 Item 1A. Risk Factors 29 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29 Item 3. Defaults Upon Senior Securities 29 Item 4. Submission of Matters to a Vote of Security Holders 29 Item 5. Other Information 29 Item 6. Exhibits 30 Signatures 31
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; - our ability to negotiate with our creditors should we not be able to make payments due to them; - 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 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, SEPTEMBER 30, Amounts in thousands, except share information 2005 2006 ---------------------------------------------- ------------ ------------- Assets Current assets: Cash and equivalents $ 14,733 $ 1,820 Accounts receivable, net of allowances of $627 and $731, respectively 46,989 56,504 Inventories 40,927 47,175 Prepaid expenses and other current assets 5,249 6,114 -------- --------- Total current assets 107,898 111,613 Property, plant and equipment, net 163,059 179,662 Goodwill 224,024 134,693 Deferred taxes 17,431 17,575 Other long-term assets 19,351 27,543 -------- --------- Total Assets $531,763 $ 471,086 ======== ========= Liabilities and Shareholders' Equity Current liabilities: Current maturities of long-term obligations $ 8,582 $ 10,690 Accounts payable 46,014 49,252 Accrued liabilities: Compensation 15,325 18,548 Other 1,989 8,316 -------- --------- Total current liabilities 71,910 86,806 -------- --------- Long-term obligations, net of current maturities 282,659 309,143 Deferred taxes 42,696 42,123 Other long-term liabilities 7,893 6,917 Shareholders' equity: Common stock - $.01 par value; 100 shares authorized, issued and outstanding as of December 31, 2005 and September 30, 2006 Additional paid-in capital 162,140 162,610 Accumulated other comprehensive income 4,098 13,754 Accumulated deficit (39,633) (150,267) -------- --------- Total shareholders' equity 126,605 26,097 -------- --------- Total Liabilities and Shareholders' Equity $531,763 $ 471,086 ======== =========
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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ---------------------- Amounts in thousands 2005 2006 2005 2006 -------------------- --------- -------- --------- ---------- Sales $ 85,416 $ 88,360 $ 261,757 $ 282,902 Cost of sales 76,965 80,451 228,190 253,899 Goodwill impairment 33,000 33,000 96,801 --------- -------- --------- ---------- Gross profit (loss) (24,549) 7,909 567 (67,798) Selling, general and administrative expenses 4,768 6,021 15,591 19,788 --------- -------- --------- ---------- Income (loss) from operations (29,317) 1,888 (15,024) (87,586) Interest expense, net 6,329 8,778 18,524 24,394 Other expenses, net 800 803 1,971 2,782 --------- -------- --------- ---------- Loss before tax provision (36,446) (7,693) (35,519) (114,762) Tax provision (832) (2,256) (646) (4,369) Equity in loss of joint venture 117 241 --------- -------- --------- ---------- Net Loss ($35,614) ($5,554) ($34,873) ($110,634) ========= ======== ========= ========== Statements of Comprehensive Loss: Net loss ($35,614) ($5,554) ($34,873) ($110,634) Other comprehensive income (losses): Foreign currency translation adjustments 1,276 362 (12,140) 9,853 Net interest rate agreement losses, net of tax (696) (197) --------- -------- --------- ---------- Comprehensive Loss ($34,338) ($5,888) ($47,013) ($100,978) ========= ======== ========= ==========
See notes to condensed consolidated financial statements. 3 TITAN HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------- Amounts in thousands 2005 2006 -------------------- -------- -------- Net cash provided by (used in) operating activities $ 12,223 ($1,672) Cash flows from investing activities: Expenditures for property, plant and equipment (13,450) (24,177) Acquisitions, net of cash (9,919) (8,794) Other (1,513) 280 -------- -------- Net cash used in investing activities (24,882) (32,691) -------- -------- Cash flows from financing activities: Borrowings on lines of credit, net 7,430 24,438 Shareholder contributions 10,028 Principal payments of long-term obligations (5,119) (2,800) Other (579) (160) -------- -------- Net cash provided by financing activities 11,760 21,478 -------- -------- Effect of exchange rate changes on cash and equivalents 63 (28) -------- -------- Decreases in cash and equivalents (836) (12,913) Cash and equivalents at beginning of period 2,117 14,733 -------- -------- Cash and Equivalents at End of Period $ 1,281 $ 1,820 ======== ========
See notes to condensed consolidated financial statements. 4 TITAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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. Assets Held For Sale -- Included within Prepaid Expenses and Other Current Assets as of September 30, 2006 is $1,153 of real property located in France that is being held for sale. 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 first half of 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 during the quarter ended June 30, 2006. 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 discounted cash flow valuation model. This charge does not result in current or future cash expenditures. There was no goodwill impairment recorded during our third quarter of 2006. 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. Set forth below is a summary of the changes in our goodwill balances by segment in 2006:
NORTH SOUTH AMERICA EUROPE AMERICA TOTAL -------- ------- ------- -------- Balance at January 1, 2006 $121,814 $90,273 $11,937 $224,024 Acquisition activity 57 57 Impairment charge (96,801) (96,801) Translation and other 6,528 885 7,413 -------- ------- -------- Balance at September 30, 2006 $121,871 $12,822 $134,693 ======== ======= ========
5 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 September 30, 2006 and $470 in the nine months ended September 30, 2006. Had stock-based employee compensation cost of our stock option plans been treated consistent with the provisions of SFAS No. 123(R) prior to January 1, 2006, our net income would have changed to the pro forma amounts set forth below:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2005 2005 ------------- ------------- As reported ($35,614) ($34,873) Compensation expense, net of related tax effects (100) (300) -------- -------- Pro forma ($35,714) ($35,173) ======== ========
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 SEPTEMBER 30, --------------------------------------------------- 2005 2006 ------------------------ ------------------------ F&P PLAN BOUVERAT PLAN F&P PLAN BOUVERAT PLAN -------- ------------- -------- ------------- Service and interest costs $37 $29 $79 $5 Expected return on plan assets (8) (6) --- --- --- --- Net periodic benefit cost $37 $21 $79 ($1) === === === ===
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------------------- 2005 2006 ------------------------ ------------------------ F&P PLAN BOUVERAT PLAN F&P PLAN BOUVERAT PLAN -------- ------------- -------- ------------- Service and interest costs $111 $ 87 $237 $ 14 Expected return on plan assets (24) (18) ---- ---- ---- ---- Net periodic benefit cost $111 $ 63 $237 ($4) ==== ==== ==== ====
6 Accounting Pronouncements - 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. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions of SFAS No. 157 should be applied prospectively. We are assessing the potential impact on our consolidated financial statements of adopting this standard. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," which amends SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 132R "Employers' Disclosures about Pensions and Other Postretirement Benefits (revised 2003)." SFAS No. 158 requires companies to recognize an asset or liability for the overfunded or underfunded status of their benefit plans in their financial statements. SFAS No. 158 also requires the measurement date for plan assets and liabilities to coincide with the sponsor's year end. The standard provides two transition alternatives related to the change in measurement date provisions. The recognition of an asset and liability related to the funded status provision is effective for fiscal years ending after December 15, 2006 and the change in measurement date provisions is effective for fiscal years ending after December 15, 2008. The actual impact of the recognition provisions of SFAS No. 158 will not be known until year-end valuations are available and the deferred tax assets are assessed for realizability, but we do not expect the implementation of this standard to have a material impact on our financial results. In September 2006, the United States Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 108, "Quantifying Financial Misstatements," which expresses views regarding the process of quantifying financial statement misstatements and will require us to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the "rollover" (current year income statement perspective) and "iron curtain" (year-end balance sheet perspective) approaches. The financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. SAB No. 108 is effective for financial statements for the first fiscal year ending after November 15, 2006. We do not expect this guidance to have a material effect on our financial condition and results of operations. 7 2. INVENTORIES Set forth below are the components of Inventories:
DECEMBER 31, SEPTEMBER 30, 2005 2006 ------------ ------------- Raw materials $12,657 $13,136 Production supplies 7,512 10,327 Work in-process 14,916 17,790 Finished goods 5,842 5,922 ------- ------- Total Inventories $40,927 $47,175 ======= =======
3. PROPERTY, PLANT AND EQUIPMENT, NET Set forth below are the components of Property, Plant and Equipment, Net:
DECEMBER 31, SEPTEMBER 30, 2005 2006 ------------ ------------- Buildings and land $ 10,156 $ 11,065 Machinery and equipment 160,631 189,190 Furniture and fixtures 11,402 12,598 -------- -------- Total 182,189 212,853 Accumulated depreciation (19,130) (33,191) -------- -------- Total Property, Plant and Equipment, Net $163,059 $179,662 ======== ========
8 4. LONG-TERM OBLIGATIONS Set forth below are the components of Long-Term Obligations (percentages represent interest rates as of September 30, 2006):
DECEMBER 31, SEPTEMBER 30, 2005 2006 ------------ ------------- Senior credit facility: U.S. dollar term note, 8.875-9.125% $ 19,988 $ 19,988 Eurocurrency term note, 7.376% 42,532 45,644 Multi-currency revolving line of credit, 8.87-10.75% 14,260 Eurocurrency revolving line of credit, 6.742-6.876% 8,862 Second lien term note: U.S. dollar-denominated portion, 13.875% 60,023 60,708 Euro-denominated portion, 12.938% 14,951 16,225 Senior subordinated notes, 10.875% 137,355 137,588 Other 16,392 16,558 -------- -------- Total long-term obligations 291,241 319,833 Current portion (8,582) (10,690) -------- -------- Long-term portion $282,659 $309,143 ======== ========
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 as of September 30, 2006, we recorded a loss of $696 (net of related income tax of $359) for the three months ended September 30, 2006 and a loss of $197 (net of related income tax of $101) for the nine months ended September 30, 2006 in Accumulated Other Comprehensive Income on our Condensed Consolidated Balance Sheets and recognized a derivative instrument liability of $298, which is reflected in Other Long-Term Liabilities on our Condensed Consolidated Balance Sheet as of September 30, 2006. As of September 30 2006, we borrowed $23,122 under our revolving credit facilities to fund our liquidity needs as cash generated from operations was insufficient to meet our requirements. We had $17,261 of remaining availability under our revolving credit facilities at September 30, 2006, and our senior credit facilities permit us to factor without recourse an additional $9,507 of trade receivables. Subsequent to September 30, 2006, we borrowed $15,784 of funds available under our revolving credit facilities, and as of November 13, 2006, we had cash holdings of $13,113. As there is $1,244 of remaining borrowing availability under our revolving credit facilities as of November 13, 2006, our short-term liquidity needs must be met primarily from cash on hand and cash generated from operations, and these sources could be insufficient to meet our debt service and day-to-day operating expenses during the fourth quarter. There are interest payments due on our senior subordinated notes on December 15, 2006 and on the senior credit facilities and second lien credit facility on December 29, 2006. Failure to make these payments within the applicable 30-day grace period in the case of the senior subordinated notes and the applicable 5-day grace period under the senior credit facilities and second lien credit facility would constitute events of default under these notes and credit facilities. 9 Our senior credit facilities and second lien credit facility contain financial covenants that are tested at each calendar quarter-end. We were in compliance with all of the financial covenants in our senior credit facilities and second lien credit facility as of September 30, 2006. However, based on current projections, we believe it is unlikely we will be in compliance with the financial covenants in our senior credit facilities and second lien credit facility as of December 31, 2006. We are exploring a variety of options to improve our near-term liquidity, including, but not limited to, reducing our investment in working capital, selling idle equipment and potentially securing other sources of capital for our operations. We intend to engage in discussions with our senior and second lien lenders to seek to further amend our senior credit facilities and our second lien credit facility to provide for covenant relief. We also intend to engage in restructuring discussions with holders of our senior subordinated notes. We cannot assure you that we will be successful in reaching agreements with our lenders or in accomplishing the initiatives described above. If we are not successful, upon an event of default, the senior and second lien lenders will have the ability to exercise all of their rights, including requiring the amounts outstanding under the senior credit facilities and the second lien credit facility to become due and payable. In that event, all of our indebtedness under our credit facilities would be required to be reclassified as current liabilities on our balance sheet. In sum, we continue to evaluate our options, including the possibility of implementing a restructuring or reorganizing pursuant to applicable law. 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 nine months ended September 30, 2005, we determined that the previously presented condensed combining financial data for the three and nine months ended September 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. 10 Set forth below are schedules that reconcile the amounts as previously reported in our condensed combining statements of operations for the three and nine months ended September 30, 2005 to the corresponding restated amounts.
TITAN (PARENT SUBSIDIARIES COMPANY ------------------------ ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED ------------- -------- --------- ------------- ------------ --------- THREE MONTHS ENDED SEPTEMBER 30, 2005: Net income (loss) as previously reported ($1,351) $ 892 ($35,155) ($35,614) Net income (loss) as restated ($35,614) (35,614) 892 (35,155) $69,877 (35,614) NINE MONTHS ENDED SEPTEMBER 30, 2005: Net income (loss) as previously reported ($10) ($3,539) $2,465 ($33,789) ($34,873) Net income (loss) as restated (34,873) (34,863) 2,465 (33,789) $66,187 (34,873)
Information regarding the guarantors and non-guarantors are as follows:
COMBINING STATEMENT OF TITAN (PARENT SUBSIDIARIES OPERATIONS (RESTATED) COMPANY ------------------------ THREE MONTHS ENDED SEPTEMBER 30, 2005 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED ------------------------------------- ------------- --------- --------- ------------- ------------ --------- Sales $ 34,058 $8,559 $ 45,094 ($2,295) $ 85,416 Cost of sales 29,431 6,328 43,501 (2,295) 76,965 Goodwill impairment 33,000 33,000 --------- ------ -------- -------- --------- Gross profit (loss) 4,627 2,231 (31,407) (24,549) Selling, general and administrative expenses 1,774 510 2,484 4,768 --------- ------ -------- --------- Income (loss) from operations 2,853 1,721 (33,891) (29,317) Interest expense, net 4,163 380 1,786 6,329 Other expense, net 394 406 800 --------- ------ -------- --------- Income (loss) before tax provision (1,704) 1,341 (36,083) (36,446) Tax provision (353) 449 (928) (832) Equity in net loss of subsidiaries $35,614 34,263 (69,877) -------- --------- ------ -------- -------- --------- Net Income (Loss) ($35,614) ($35,614) $ 892 ($35,155) $ 69,877 ($35,614) ======== ========= ====== ======== ======== =========
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TITAN (PARENT SUBSIDIARIES COMBINING STATEMENT OF OPERATIONS COMPANY ------------------------ THREE MONTHS ENDED SEPTEMBER 30, 2006 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED ------------------------------------- ------------- -------- --------- ------------- ------------ --------- Sales $ 31,490 $12,613 $ 48,071 ($3,814) $ 88,360 Cost of sales 26,290 10,351 47,624 (3,814) 80,451 -------- ------- -------- ------- -------- Gross profit 5,200 2,262 447 7,909 Selling, general and administrative expenses 1,528 763 3,730 6,021 -------- ------- -------- -------- Income (loss) from operations 3,672 1,499 (3,283) 1,888 Interest expense, net 5,102 505 3,171 8,778 Other expense, net 381 422 803 -------- ------- -------- -------- Income (loss) before tax provision (1,811) 994 (6,876) (7,693) Tax provision (352) 298 (2,202) (2,256) Equity in loss of joint venture 117 117 Equity in net loss of subsidiaries $ 5,554 3,978 (9,532) -------- -------- ------- --------- ------- -------- Net Income (Loss) ($5,554) ($5,554) $ 696 ($4,674) $ 9,532 ($5,554) ======== ======== ======= ========= ======= ========
COMBINING TITAN (PARENT SUBSIDIARIES STATEMENT OF OPERATIONS (RESTATED) COMPANY ------------------------ NINE MONTHS ENDED SEPTEMBER 30, 2005 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED ------------------------------------- ------------- --------- --------- ------------- ------------ --------- Sales $ 99,387 $19,853 $ 150,223 ($7,706) $ 261,757 Cost of sales 85,520 14,111 136,265 (7,706) 228,190 Goodwill impairment 33,000 33,000 --------- ------- --------- --------- --------- Gross profit (loss) 13,867 5,742 (19,042) 567 Selling, general and administrative expenses 5,450 1,245 8,896 15,591 --------- ------- --------- --------- Income (loss) from operations 8,417 4,497 (27,938) (15,024) Interest expense, net 12,405 757 5,362 18,524 Other expense, net $ 15 1,080 876 1,971 --------- --------- ------- --------- --------- Income (loss) before tax provision (15) (5,068) 3,740 (34,176) (35,519) Tax provision (5) (1,529) 1,275 (387) (646) Equity in net loss of subsidiaries 34,863 31,324 (66,187) --------- --------- ------- --------- --------- --------- Net Income (Loss) ($34,873) ($34,863) $ 2,465 ($33,789) $ 66,187 ($34,873) ========= ========= ======= ========= ========= =========
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TITAN (PARENT SUBSIDIARIES COMBINING STATEMENT OF OPERATIONS COMPANY ------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2006 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED ------------------------------------ ---------- ---------- --------- ------------- ------------ ---------- Sales $ 108,893 $33,894 $ 151,468 ($11,353) $ 282,902 Cost of sales 93,537 26,023 145,692 (11,353) 253,899 Goodwill impairment 96,801 96,801 ---------- ------- ---------- --------- ---------- Gross profit (loss) 15,356 7,871 (91,025) (67,798) Selling, general and administrative expenses 5,422 2,326 12,040 19,788 ---------- ------- ---------- ---------- Income (loss) from operations 9,934 5,545 (103,065) (87,586) Interest expense, net 14,942 1,324 8,128 24,394 Other expense, net 1,308 1,474 2,782 ---------- ------- ---------- ---------- Income (loss) before tax provision (6,316) 4,221 (112,667) (114,762) Tax provision (1,451) 1,400 (4,318) (4,369) Equity in loss of joint venture 241 241 Equity in net loss of subsidiaries $ 110,634 105,528 (216,162) ---------- ---------- ------- ---------- --------- ---------- Net Income (Loss) ($110,634) ($110,634) $ 2,821 ($108,349) $ 216,162 ($110,634) ========== ========== ======= ========== ========= ==========
TITAN CONDENSED COMBINING STATEMENT (PARENT SUBSIDIARIES OF CASH FLOWS COMPANY ------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2005 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR COMBINED ------------------------------------ --------- --------- --------- ------------- -------- Net cash provided by (used in) operating activities ($15) ($860) ($440) $13,538 $ 12,223 Expenditures for property, plant and equipment (4,570) (165) (8,715) (13,450) Acquisitions, net of cash (17) (9,902) (9,919) Borrowings (repayments) on lines of credit, net 8,000 (570) 7,430 Cash flows to (from) affiliates (10,013) (719) 10,732 Principal payments of long-term obligations (276) (4,843) (5,119) Shareholder contributions 10,028 10,028 Other (1,789) (32) (208) (2,029) ------- ------- ------- -------- Net increase (decrease) in cash and equivalents (231) 193 (798) (836) Cash and equivalents at beginning of period 1,087 2 1,028 2,117 ------- ------- ------- -------- Cash and Equivalents at End of Period $ 856 $ 195 $ 230 $ 1,281 ======= ======= ======= ========
13
TITAN CONDENSED COMBINING STATEMENT (PARENT SUBSIDIARIES OF CASH FLOWS COMPANY ------------------------- NINE MONTHS ENDED SEPTEMBER 30, 2006 ONLY) AUTOCAM GUARANTOR NON-GUARANTOR COMBINED ------------------------------------ --------- --------- --------- ------------- -------- Net cash provided by (used in) operating activities ($227) $ 1,828 ($3,273) ($1,672) Expenditures for property, plant and equipment (7,003) (2,270) (14,904) (24,177) Acquisitions, net of cash (8,653) (141) (8,794) Borrowings on lines of credit, net 14,260 10,178 24,438 Cash flows from (to) affiliates (10,738) 455 10,362 79 Principal payments of long-term obligations (2,800) (2,800) Other (469) (22) 504 13 -------- ------- -------- -------- Net decrease in cash and equivalents (12,830) (9) (74) (12,913) Cash and equivalents at beginning of period 13,265 14 1,454 14,733 -------- ------- -------- -------- Cash and Equivalents at End of Period $ 435 $ 5 $ 1,380 $ 1,820 ======== ======= ======== ========
14
SUBSIDIARIES CONDENSED COMBINING BALANCE SHEET TITAN (PARENT ------------------------- DECEMBER 31, 2005 COMPANY 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 maturities 232,316 165 50,178 282,659 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 ======== ======== ======== ========= ======== ========
15
SUBSIDIARIES CONDENSED COMBINING BALANCE SHEET TITAN (PARENT ------------------------- SEPTEMBER 30, 2006 COMPANY ONLY) AUTOCAM GUARANTOR NON-GUARANTOR ELIMINATIONS COMBINED --------------------------------- ------------- --------- --------- ------------- ------------ --------- Assets Current assets: Cash and equivalents $ 435 $ 5 $ 1,380 $ 1,820 Accounts receivable, net 24,937 2,546 35,327 ($6,306) 56,504 Inventories 12,318 5,827 27,430 1,600 47,175 Prepaid expenses and other current assets 1,830 281 4,003 6,114 --------- -------- --------- -------- --------- Total current assets 39,520 8,659 68,140 (4,706) 111,613 Property, plant and equipment, net 35,029 13,359 127,809 3,465 179,662 Goodwill $ 116,437 5,434 12,822 134,693 Investments in affiliates (104,576) 38,302 (18,994) (194,774) 281,549 1,507 Deferred taxes 15,457 2,118 17,575 Other long-term assets 12,930 758 12,348 26,036 --------- --------- -------- --------- -------- --------- Total assets $ 11,861 $ 141,238 $ 9,216 $ 28,463 $280,308 $ 471,086 ========= ========= ======== ========= ======== ========= Liabilities and Shareholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations $ 55 $ 10,635 $ 10,690 Accounts payable $ 15,448 1,552 37,604 ($5,352) 49,252 Accrued liabilities 7,429 618 18,817 26,864 --------- -------- --------- -------- --------- Total current liabilities 22,877 2,225 67,056 (5,352) 86,806 --------- -------- --------- -------- --------- Long-term obligations, net of current maturities 248,769 147 60,227 309,143 Deferred taxes and other 18,321 51 30,668 49,040 Shareholders' equity (deficit): Capital stock $ 162,140 470 162,610 Accumulated other comprehensive income 1,037 12,717 13,754 Retained earnings (accumulated deficit) (150,279) (150,236) 6,793 (142,205) 285,660 (150,267) --------- --------- -------- --------- -------- --------- Total shareholders' equity (deficit) 11,861 (148,729) 6,793 (129,488) 285,660 26,097 --------- --------- -------- --------- -------- --------- Total liabilities and shareholders' equity (deficit) $ 11,861 $ 141,238 $ 9,216 $ 28,463 $280,308 $ 471,086 ========= ========= ======== ========= ======== =========
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 nine months ended September 30, 2005 and 2006 and as of December 31, 2005 and September 30, 2006: 16
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ---------------------- 2005 2006 2005 2006 --------- -------- --------- ---------- Sales to Unaffiliated Customers from Company Facilities Located in: North America $ 42,172 $ 43,227 $ 117,929 $ 141,130 Europe 35,615 34,756 120,802 115,529 South America 7,629 10,195 23,026 25,996 Asia 182 247 --------- -------- --------- ---------- Total $ 85,416 $ 88,360 $ 261,757 $ 282,902 ========= ======== ========= ========== Net Income (Loss) of Company Facilities Located in: North America ($459) ($880) ($1,086) ($2,285) Europe (35,800) (5,180) (36,220) (108,971) South America 645 561 2,433 976 Asia (55) (354) --------- -------- --------- ---------- Total ($35,614) ($5,554) ($34,873) ($110,634) ========= ======== ========= ========== Depreciation and Amortization on Assets Located in: North America $ 1,411 $ 1,796 $ 3,870 $ 5,269 Europe 2,707 3,023 8,347 8,760 South America 327 438 889 1,258 Asia 23 41 --------- -------- --------- ---------- Total $ 4,445 $ 5,280 $ 13,106 $ 15,328 ========= ======== ========= ========== Net Interest Expense of Company Facilities Located in: North America $ 4,543 $ 5,607 $ 13,162 $ 16,266 Europe 1,648 3,064 4,942 7,777 South America 138 109 420 358 Asia (2) (7) --------- -------- --------- ---------- Total $ 6,329 $ 8,778 $ 18,524 $ 24,394 ========= ======== ========= ========== Tax Provision of Company Facilities Located in: North America $ 96 ($54) ($259) ($51) Europe (1,255) (2,480) (1,610) (4,817) South America 327 278 1,223 499 --------- -------- --------- ---------- Total ($832) ($2,256) ($646) ($4,369) ========= ======== ========= ========== Expenditures for Property, Plant and Equipment of Facilities Located in: North America $ 1,836 $ 3,008 $ 4,735 $ 9,273 Europe 1,743 5,871 5,777 11,057 South America 1,323 1,175 2,938 3,503 Asia 51 344 --------- -------- --------- ---------- Total $ 4,902 $ 10,105 $ 13,450 $ 24,177 ========= ======== ========= ==========
DECEMBER 31, SEPTEMBER 30, 2005 2006 ------------ ------------- Total Assets of Company Facilities Located in: North America $241,735 $246,938 Europe 249,199 175,553 South America 38,927 46,065 Asia 1,902 2,530 -------- -------- Total $531,763 $471,086 ======== ========
17 7. SUPPLEMENTAL CASH FLOW INFORMATION Set forth below is a reconciliation of net loss to net cash provided by (used in) operating activities:
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 2005 2006 --------- --------- Net loss ($34,873) ($110,634) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 13,106 15,328 Goodwill impairment 33,000 96,801 Deferred taxes 1,208 (2,854) Stock-based compensation cost 470 Realized gains and losses and other, net 320 723 Changes in assets and liabilities that provided (used) cash: Accounts receivable 2,889 (1,836) Inventories (2,284) (2,035) Prepaid expenses and other current assets 289 (1,068) Other long-term assets (1,027) 326 Accounts payable (2,534) (2,933) Accrued liabilities 1,615 7,746 Deferred taxes and other 514 (1,706) --------- --------- Net Cash Provided by (Used in) Operating Activities $ 12,223 ($1,672) ========= =========
8. SUBSEQUENT EVENT In October 2006, we completed negotiation on a formal social plan to effect permanent reductions in our French workforce. If such plan is implemented as approved, the payment of severance-related liabilities throughout 2007 is estimated to total $9,000. We have no obligation to launch the social plan, and continue to evaluate the timing of employee terminations. 18 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 condensed 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 nine months ended September 30, 2006 and any references to 2005 refer to the three or nine months ended September 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 discounted cash flow valuation model. This charge does not result in current or future cash expenditures. There was no goodwill impairment recorded during our third quarter of 2006. 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. 19 - 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 as the majority of the products we make are used on light vehicles produced by those companies. 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 net operating results are derived 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 nine months ended September 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 SEPTEMBER 30, -------------------------------- EURO BRAZILIAN REAL ----------- -------------- 2005 2006 2005 2006 ---- ---- ---- ---- Average (1) 1.22 1.27 0.43 0.46
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- EURO BRAZILIAN REAL ----------- -------------- 2005 2006 2005 2006 ---- ---- ---- ---- Average (1) 1.27 1.24 0.40 0.46
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 2005 2006 2005 2006 ------------ ------------- ------------ ------------- EURO BRAZILIAN REAL ---------------------------- ---------------------------- End of period 1.18 1.27 0.43 0.46
---------- (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 are generally able to significantly offset the negative impact of 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 $9.6 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. 20 RESULTS OF OPERATIONS The following table sets forth our Condensed Consolidated Statements of Operations expressed as a percentage of sales:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 2005 2006 2005 2006 ----- ---- ----- ------ Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 90.1% 91.0% 87.2% 89.7% Goodwill impairment 38.6% 12.6% 34.2% ----- ----- ----- ------ Gross profit (loss) -28.7% 9.0% 0.2% -23.9% Selling, general and administrative expenses 5.6% 6.8% 6.0% 7.0% ----- ----- ----- ------ Income (loss) from operations -34.3% 2.2% -5.8% -30.9% Interest expense, net 7.4% 9.9% 7.1% 8.6% Other expenses, net 0.9% 0.9% 0.8% 1.0% ----- ----- ----- ------ Loss before tax provision -42.6% -8.6% -13.7% -40.5% Tax provision -1.0% -2.6% -0.2% -1.5% Equity in loss of joint venture 0.1% 0.1% ----- ----- ----- ------ Net Loss -41.6% -6.1% -13.5% -39.1% ===== ===== ===== ======
THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2005 Sales Sales increased $2.9 million, or 3.4%, to $88.4 million in 2006 from $85.4 million in 2005. The fluctuation in the exchange rates between the USD and the functional currencies of our foreign operations accounted for $1.9 million of the increase in sales when comparing 2005 to 2006. On a constant currency basis, sales in 2006 increased $1.0 million from 2005 levels principally due to the following factors: - Factors contributing to an increase in Sales: 1. Sales of electric motor and braking components resulting from the ATS acquisition completed in January 2006 totaled $3.4 million in 2006; 2. Our North American operations were awarded new medical devices business by an existing customer, which resulted in $1.6 million in sales in 2006; and 3. Our European operations were awarded new fuel business from an existing customer, which resulted in $1.5 million in incremental sales in 2006. - Factors partially offsetting the increase in Sales: 1. Weakness in demand from an original equipment manufacturer of one of our major European customers resulted in a reduction in sales to that customer of $4.3 million in 2006 as compared to 2005; and 2. We granted unit price reductions to our customers totaling $1.6 million in 2006. 21 Gross Profit (Loss) Gross profit increased $32.5 million to $7.9 million, or 9.0% of sales, in 2006 from a loss of $24.5 million, or negative 28.7% of sales, in 2005. The improvement in gross profit can generally be attributed to the fact that we recorded a goodwill impairment loss of $33.0 million in 2005, and no such charge was recorded during the three months ended September 30, 2006. The following factors caused a decline in gross profit: - 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 - Our South American operations experienced higher than normal material and perishable tooling scrap rates during the ramp up of production of new programs during 2006. These negative factors were partially offset by the following: - The impact of successfully completing cost containment initiatives in our North American operations, including reducing premium freight, indirect labor, incentive bonuses and travel and entertainment costs; and - Our European operations incurred $1.1 million of severance and other costs associated with a plant closing in 2005. This plant closing also resulted in lower indirect labor and fixed burden costs in 2006. Selling, General and Administrative Selling, general and administrative expenses increased $1.3 million to $6.0 million, or 6.8% of sales, in 2006 from $4.8 million, or 5.6% of sales, in 2005 due primarily to the following factors: - Our European operations incurred $0.5 million in severance costs and outside consulting fees in connection with the formal social plan discussed in Liquidity and Capital Resources below; - The 2006 results include $0.3 million in incremental expenses for our new facilities in Kitchener, Ontario (closed in July 2006), Kammiena Gora, Poland and Wuxi, China; and - 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 $2.5 million to $8.8 million in 2006 from $6.3 million in 2005. Our 2006 interest expense reflects increased debt levels when compared to 2005. In addition, interest rates incurred on borrowings under our senior credit facilities and our second lien credit facility averaged 457 basis points more in 2006 when compared to 2005. Tax Provision In 2006, we recorded an income tax benefit of $2.3 million, and in 2005, we recorded an income tax benefit of $0.8 million. These amounts are less than the benefits that would have been recorded at the United States Federal statutory rate of 35% due to the following factors: - The goodwill impairment charge reflected in 2005 was not deductible for income tax purposes, and therefore no offsetting tax benefit was recorded; and 22 - Our ability to record income tax benefits in both periods was limited by our ability to realize these benefits through either a net operating loss carryback or the elimination of tax liabilities that arise in the future (offset to a deferred tax liability). NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2005 Sales Sales increased $21.1 million, or 8.1%, to $282.9 million in 2006 from $261.8 million in 2005, none of which was attributable to fluctuation in the exchange rates between the USD and the functional currencies of our foreign operations. The following factors contributed to an increase in Sales: - Sales of electric motor and braking components resulting from the ATS acquisition completed in January 2006 totaled $16.0 million in 2006; - Sales of medical device components increased due to incremental sales resulting from the effect of the Sager acquisition over the entire period ($7.8 million) and incremental sales to an existing medical devices customer ($2.6 million); - Our North American operations were awarded business for a new fuel program from an existing customer. We benefited from incremental sales to this same customer of new generation fuel program components while pricing on certain mature products sold to this customer were increased, which, together, accounted for a $2.8 million increase in sales when comparing 2006 to 2005; and - Our European operations were awarded new fuel business from an existing customer, which resulted in $2.7 million in incremental sales in 2006. Factors partially offsetting the increase in Sales: - Weakness in demand from an original equipment manufacturer of one of our major European customers resulted in a reduction in sales to that customer of $7.9 million in 2006 as compared to 2005; - 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 $5.9 million as the last program for this customer is now complete; - We granted unit price reductions to our customers totaling $4.8 million in 2006; and - 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 $68.4 million to a loss of $67.8 million, or negative 23.9% of sales, in 2006 from $0.6 million, or 0.2% of sales, in 2005. The decline in gross profit can generally be attributed to the fact that we recorded a goodwill impairment loss of $96.8 million in 2006 as compared to a goodwill impairment loss of $33.0 million in 2005. The following factors caused a decline in gross profit: - 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 $4.8 million granted to our customers between 2005 and 2006; and - Our South American operations experienced higher than normal material and perishable tooling scrap rates during the ramp up of production of five new programs during 2006. 23 These negative factors were partially offset by the following: - The beneficial impact of successfully completing cost improvement initiatives in our North American operations; and - Our European operations incurred significant severance and other costs associated with a plant closing in 2005. This plant closing also resulted in lower indirect labor and fixed burden costs in 2006. Selling, General and Administrative Selling, general and administrative expenses increased $4.2 million to $19.8 million, or 7.0% of sales, in 2006 from $15.6 million, or 6.0% of sales, in 2005 due primarily to the following factors: - The 2006 results include $2.1 million in incremental expenses for our new facilities in Boston, Massachusetts, Kitchener, Ontario, Kammiena Gora, Poland and Wuxi, China; - Our European operations incurred $1.0 million in severance costs and outside consulting fees in connection with the formal social plan discussed in Liquidity and Capital Resources below, and we increased executive and human resources management support and incurred added travel-related expenses for technical support from our North American operations; and - The 2006 results reflect $0.5 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 $5.9 million to $24.4 million in 2006 from $18.5 million in 2005. Our 2006 interest expense reflects increased debt levels when compared to 2005. In addition, interest rates incurred on borrowings under our senior credit facilities and our second lien credit facility averaged 454 basis points more in 2006 when compared to 2005. Tax Provision In 2006, we recorded an income tax benefit of $4.4 million, and in 2005, we recorded an income tax benefit of $0.6 million. These amounts are less than the benefits that would have been recorded at the United States Federal statutory rate of 35% due to the following factors: - The goodwill impairment charges reflected in 2005 and 2006 are not deductible for income tax purposes, and therefore no offsetting tax benefits were recorded; and - Our ability to record income tax benefits in both periods was limited by our ability to realize these benefits through either a net operating loss carryback or the elimination of tax liabilities that arise in the future (offset to a deferred tax liability). 24 LIQUIDITY AND CAPITAL RESOURCES Our short-term liquidity needs include required debt service and day-to-day operating expenses such as 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, in order to improve long-term liquidity, we have negotiated a formal social plan to effect permanent reductions in our French workforce. If such plan is implemented as approved, the payment of severance-related liabilities throughout 2007 is estimated to total $9.0 million. We have no obligation to launch the social plan, and continue to evaluate the timing of employee terminations. Capital expenditures for calendar year 2006 are expected to be $28.1 million, of which $24.2 million was spent in the nine months ended September 30, 2006. Current expectations exceed those previously reported as we no longer anticipate that we will be able to lease certain equipment under operating lease arrangements. Our principal sources of cash to fund short- and long-term liquidity needs consist of cash generated by operations, borrowings under our revolving credit facilities and a receivables factoring program. Our European segment experienced unfavorable operating results during the three and nine months ended September 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 implementation of the social plan referenced above), reductions in salaries of employees and manufacturing efficiency initiatives are underway or planned to address these negative developments. In addition, announced production cuts by North American original equipment manufacturers are expected to adversely impact our results of operations in the fourth quarter of 2006. As of September 30, 2006, we borrowed $23.1 million under our revolving credit facilities to fund our liquidity needs as cash generated from operations was insufficient to meet our requirements. We had $17.3 million of remaining availability under our revolving credit facilities at September 30, 2006, and our senior credit facilities permit us to factor without recourse an additional $9.5 million of trade receivables. Subsequent to September 30, 2006, we borrowed $15.8 million of funds available under our revolving credit facilities, and as of November 13, 2006, we had cash holdings of $13.1 million. As there is $1.2 million of remaining borrowing availability under our revolving credit facilities as of November 13, 2006, our short-term liquidity needs must be met primarily from cash on hand and cash generated from operations, and these sources could be insufficient to meet our debt service and day-to-day operating expenses during the fourth quarter. There are interest payments due on our senior subordinated notes on December 15, 2006 and on the senior credit facilities and second lien credit facility on December 29, 2006. Failure to make these payments within the applicable 30-day grace period in the case of the senior subordinated notes and the applicable 5-day grace period under the senior credit facilities and second lien credit facility would constitute events of default under these notes and credit facilities. Our senior credit facilities and second lien credit facility contain financial covenants that are tested at each calendar quarter-end. We were in compliance with all of the financial covenants in our senior credit facilities and second lien credit facility as of September 30, 2006. However, based on current projections, we believe it is unlikely we will be in compliance with the financial covenants in our senior credit facilities and second lien credit facility as of December 31, 2006. 25 We are exploring a variety of options to improve our near-term liquidity, including, but not limited to, reducing our investment in working capital, selling idle equipment and potentially securing other sources of capital for our operations. We intend to engage in discussions with our senior and second lien lenders to seek to further amend our senior credit facilities and our second lien credit facility to provide for covenant relief. We also intend to engage in restructuring discussions with holders of our senior subordinated notes. We cannot assure you that we will be successful in reaching agreements with our lenders or in accomplishing the initiatives discussed above. If we are not successful, upon an event of default, the senior and second lien lenders will have the ability to exercise all of their rights, including requiring the amounts outstanding under the senior credit facilities and the second lien credit facility to become due and payable. In that event, all of our indebtedness under our credit facilities would be required to be reclassified as current liabilities on our balance sheet. In sum, we continue to evaluate our options, including the possibility of implementing a restructuring or reorganizing pursuant to applicable law. Nine Months Ended September 30, 2006 Cash used in operating activities of $1.7 million in 2006 reflects a net loss excluding non-cash and other reconciling items of $0.2 million and an increase in net working capital of $1.5 million from December 31, 2005 to September 30, 2006. An increase in the commitment to working capital is typical of our business during the nine months ended September 30. Cash used in investing activities of $32.7 million in 2006 principally consisted of $24.2 million for the purchase of production equipment and $8.8 million for acquisitions of the Sager and ATS businesses described above. Cash provided by financing activities of $21.5 million in 2006 mainly consisted of $24.4 million in net borrowings under lines of credit partially offset by $2.8 million in scheduled principal payments on our indebtedness. FOREIGN OPERATIONS During the three months ended September 30, 2006, our operations located in the United States exported $5.6 million of product to customers located in foreign countries, and our foreign operations shipped $47.8 million of product to customers from their facilities. During the nine months ended September 30, 2006, our operations located in the United States exported $14.0 million of product to customers located in foreign countries, and our foreign operations shipped $159.8 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 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 September 30, 2006 and $0.5 million in the nine months ended September 30, 2006. 26 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. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The provisions of SFAS No. 157 should be applied prospectively. We are assessing the potential impact on our consolidated financial statements of adopting this standard. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," which amends SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 132R "Employers' Disclosures about Pensions and Other Postretirement Benefits (revised 2003)." SFAS No. 158 requires companies to recognize an asset or liability for the overfunded or underfunded status of their benefit plans in their financial statements. SFAS No. 158 also requires the measurement date for plan assets and liabilities to coincide with the sponsor's year end. The standard provides two transition alternatives related to the change in measurement date provisions. The recognition of an asset and liability related to the funded status provision is effective for fiscal years ending after December 15, 2006 and the change in measurement date provisions is effective for fiscal years ending after December 15, 2008. The actual impact of the recognition provisions of SFAS No. 158 will not be known until year-end valuations are available and the deferred tax assets are assessed for realizability, but we do not expect the implementation of this standard to have a material impact on our financial results. In September 2006, the United States Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 108, "Quantifying Financial Misstatements," which expresses views regarding the process of quantifying financial statement misstatements and will require us to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the "rollover" (current year income statement perspective) and "iron curtain" (year-end balance sheet perspective) approaches. The financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. SAB No. 108 is effective for financial statements for the first fiscal year ending after November 15, 2006. We do not expect this guidance to have a material effect on our financial condition and results of operations. CRITICAL ACCOUNTING POLICIES No material changes have been made to our critical accounting policies during 2006. 27 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 September 30, 2006. 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. These operations ceased production in July 2006. Our consolidated net assets as of September 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 $122.7 million of our variable interest rate indebtedness. Based on the fair market value of the interest rate swap as of September 30, 2006, we recorded a loss of $696 (net of related income tax of $359) for the three months ended September 30, 2006 and a loss of $197 (net of related income tax of $101) for the nine months ended September 30, 2006 in Accumulated Other Comprehensive Income on our Condensed Consolidated Balance Sheets and recognized a derivative instrument liability of $298, which is reflected in Other Long-Term Liabilities on our Condensed Consolidated Balance Sheet as of September 30, 2006. 28 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. 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 On November 11, 2006, we received the resignation of Mr. Richard J, Lacks, Jr. as a director effective on that date. Mr. Lacks has served as a member of our board of directors since October 2004. 29 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.
30 SIGNATURES Autocam Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AUTOCAM CORPORATION Date: November 14, 2006 /s/ John C. Kennedy ---------------------------------------- John C. Kennedy President and Chief Executive Officer (Principal Executive Officer) 31