UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
or
Commission File Number 333-100351
TRIMAS CORPORATION
(Exact name of registrant as specified in its charter)
39400 Woodward Avenue, Suite 130 Bloomfield Hills, Michigan 48304
(Address of principal executive offices, including zip code)
(248) 631-5450
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 6-2 of the Exchange Act). Yes [ ] No [X].
As of November 10, 2003, the number of outstanding shares of the Registrant's common stock, $.01 par value, was 20,010,000 shares.
TriMas Corporation
Index
Forward-Looking Statements
This report contains forward-looking statements about our financial condition, results of operations and business. You can find many of these statements by looking for words such as "may," "expect," "anticipate," "believe," "estimate" and similar words used in this report.
These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. We caution readers not to place undue reliance on the statements, which speak only as of the date of this report.
The cautionary statements set forth above should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. We do not undertake any obligation to review or confirm analysts' expectations or estimates or to release publicly any revisions to any forward-looking statement to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
Risks and uncertainties that could cause actual results to vary materially from those anticipated in the forward-looking statements contained in this report include general economic conditions in the markets in which we operate and industry-based and other factors more specific to us such as:
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We disclose important factors that could cause our actual results to differ materially from our expectations under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report. These cautionary statements qualify all forward-looking statements attributed to us or persons acting on our behalf. When we indicate that an event, condition or circumstance could or would have an adverse effect on us, we mean to include effects upon our business, financial and other conditions, results of operations and ability to make payments required under our debt agreements.
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Part I. Financial Information
Item 1. Financial Statements
TriMas CorporationBalance SheetsSeptember 30, 2003 and December 31, 2002(unaudited — dollars in thousands)
The accompanying notes are an integral part of these financial statements.
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TriMas CorporationCombined Statement of OperationsFor the Three and Nine Months Ended September 30, 2003 and September 29, 2002(Unaudited — in thousands, except for per share amounts)
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TriMas CorporationCombined Statement of Cash FlowsFor the Nine Months Ended September 30, 2003 and September 29, 2002(Unaudited — in thousands)
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TriMas CorporationStatement of Shareholders' Equity andMetaldyne Corporation Net Investment and AdvancesFor the Nine Months Ended September 30, 2003(Unaudited — in thousands)
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Notes to Finanical Statements(Unaudited)
1. Basis of Presentation
TriMas Corporation ("TriMas" or the "Company"), through its subsidiaries, is a global manufacturer of products for commercial, industrial and consumer markets. The Company is principally engaged in four business segments with diverse products and market channels. Cequent Transportation Accessories produces vehicle hitches and receivers, sway controls, weight distribution and fifth wheel hitches, hitch mounted accessories, roof racks, trailer couplers, winches, jacks, trailer brakes and lights and other vehicle and trailer accessories and components that are distributed through independent installers and retail outlets. Rieke Packaging Systems is a leading source of closures and dispensing systems for steel and plastic industrial and consumer packaging applications. The Fastening Systems group produces a wide range of large and small diameter standard and custom-designed ferrous, nonferrous and special alloy fasteners used in automotive and industrial applications, and highly engineered specialty fasteners for the global aerospace industry. The Industrial Specialties group produces flame-retardant facings and jacketing and insulation tapes used in conjunction with fiberglass insulation, pressure-sensitive specialty tape products; high-pressure and low-pressure cylinders for the transportation, storage and dispensing of compressed gases; metallic and nonmetallic industrial gaskets; specialty precision tools such as center drills, cutters, end mills, reamers, master gears, gages and punches; specialty engines and service parts; and specialty ordnance components and weapon systems.
On May 9, 2003, the Company acquired a fasteners manufacturing business ("Fittings") from Metaldyne Corporation ("Metaldyne") for approximately $22.7 million on a debt free basis. The acquired business is a leading manufacturer of specialized fittings and cold-headed parts used in automotive and industrial applications. The transaction was funded by a combination of borrowings under the Company's revolving credit facility and a cash equity contribution by Heartland. The acquired business had 2002 revenues of approximately $16.7 million. Because the Company and Metaldyne are under common control, this transaction was accounted for as a reorganization of entities under common control and, accordingly, the Company did not establish a new basis of accounting in the assets or liabilities of Fittings. The Company's reported results from prior periods have been restated to include the financial results of Fittings. Additional adjustments to paid-in-capital may be recorded in subsequent periods to reflect finalization of certain estimated amounts at the transaction date.
Prior to June 6, 2002, and the common stock issuance related to financing transactions discussed in Note 2, the accompanying financial statements represented the combined assets and liabilities and results of operations of certain subsidiaries and divisions of subsidiaries of Metaldyne which comprised TriMas. The combined financial statements include all revenues and costs directly attributed to the Company as well as an estimate of direct and indirect Metaldyne corporate administrative costs attributed to TriMas, based on a management fee allocation that approximated 1% of net sales. This allocation of costs is based on estimates that management believes are reasonable in the circumstances. However, the charges included herein are not necessarily indicative of the amounts that would have been reported if the Company had operated as an unaffiliated company.
The accompanying financial statements include the accounts of the Company and its subsidiaries and in the opinion of management, contain all adjustments, including adjustments of a normal and recurring nature, necessary for a fair presentation of financial position and results of operations. Certain prior year items have been reclassified to conform to the current year presentation. Results of operations for interim periods are not necessarily indicative of results for the full year. The accompanying financial statements and notes thereto should be read in conjunction with the Company's 2002 Annual Report on Form 10-K.
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Notes to Finanical Statements (continued)(Unaudited)
2. Recapitalization
On June 6, 2002, the Company, Metaldyne and Heartland entered into a stock purchase agreement under which Heartland and other co-investors invested $265 million in the Company to acquire approximately 66% of the Company's common stock on a fully diluted basis. Under the terms of the stock purchase agreement, Metaldyne retained shares of the Company's common stock valued at $120 million and received a warrant to purchase 750,000 shares of common stock at par value of $.01 per share, valued at $15 million. At September 30, 2003, this warrant had not been exercised. The common stock and warrants were valued based upon the cash equity investment made by Heartland and the other investors. At September 30, 2003, Metaldyne owned 25.5% of the Company's common stock on a fully diluted basis.
Because the Company and Metaldyne are under common control, the June 6, 2002 and related transactions were accounted for as a reorganization of entities under common control and, accordingly, the Company did not establish a new basis of accounting in its assets or liabilities. Additional adjustments to paid-in capital related to Metaldyne's investment in the Company may be recorded in subsequent periods to reflect finalization of certain estimated amounts at the transaction closing date.
3. Acquisitions
On January 30, 2003, the Company acquired all of the capital stock of HammerBlow Acquisition Corp. ("HammerBlow"), from 2000 Riverside Capital Appreciation Fund, L.P., and other stockholders of HammerBlow. The total consideration paid was $145.2 million (including the Company's previous investment of $9.0 million). Of this amount, $7.2 million, net of the purchase price, was deferred and is payable in January 2004. HammerBlow is a manufacturer and distributor of towing, trailer, and other vehicle accessories throughout North America and the purchase includes The HammerBlow Corporation, Hidden Hitch, Tekonsha Towing Systems ("Tekonsha") and Sure Pull Towing Systems ("SurePull"). HammerBlow acquired Tekonsha and SurePull from Dana Corporation on November 21, 2002.
On February 21, 2003, the Company acquired Highland Group Industries ("Highland") from the shareholders and option holders of Highland and FNL Management Corp. The total consideration paid was $73.5 million. Highland is a market-leading supplier of cargo management products and a full line supplier of vehicle protection products, specializing in products that help people safely load, anchor, secure, tow, carry, trailer, and organize cargo, as well as protect the vehicle and its cargo area.
The acquisitions of HammerBlow and Highland are included as part of the business unit operations of Cequent Transportation Accessories and provide additional opportunities to leverage new product extensions and innovations in our towing and trailer products businesses with customers in new markets through enhanced brand awareness and distribution, particularly in the end consumer retail channel.
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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition dates. The Company is in the process of finalizing third-party valuations of certain intangible assets and determining costs of restructuring plans associated with these businesses. The allocation of the purchase price is subject to refinement of these estimates and consists of the following:
The estimated fair values of inventories acquired were increased $4.0 million from historical amounts, of which approximately $1.7 million and $2.3 million of this amount was included in cost of sales during the quarters ended June 30, 2003 and March 30, 2003, respectively. Based on preliminary estimates, of the $79.0 million of acquired other intangible assets, $40.9 million was assigned to Customer Relationships with a useful life of 15 years, $34.6 million was assigned to Trademarks with a useful life of 40 years and the remaining $3.5 million was assigned to Technology and Other with useful lives ranging from 7 - 10 years. The $109.1 million of goodwill is assigned to the Cequent Transportation Accessories segment.
The results of these acquisitions are included in the Company's September 30, 2003 financial statements from the respective dates of acquisition. The following selected unaudited pro forma combined results of operations for the Company, HammerBlow and Highland have been prepared assuming that the acquisitions occurred at the beginning of the respective periods. The selected unaudited pro forma combined results are based on the historical information for TriMas and Highland and pro forma combined results of operations for HammerBlow assuming that the acquisition of Tekonsha and SurePull occurred at the beginning of the respective periods. The pro forma financial information is not necessarily indicative of the combined results of operations that would have been attained had the acquisitions taken place at the beginning of 2003 and 2002, nor are they indicative of future results. The expense associated with the step-up in basis of inventory has been excluded as it is not a recurring expense.
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4. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended September 30, 2003 are as follows:
The gross carrying amounts and accumulated amortization for the Company's acquired other intangible assets as of September 30, 2003 and December 31, 2002 are summarized below. The Company amortizes these assets over periods ranging from 5 to 40 years.
Amortization expense related to intangibles was approximately $13.3 million and $10.6 million for the nine months ended September 30, 2003 and 2002, respectively, and is included in cost of sales in the accompanying statement of operations. Estimated amortization expense for the next five fiscal years beginning after December 31, 2002 is as follows: 2003 — $17.8 million; 2004 — $18.2 million; 2005 — $18.1 million; 2006 — $16.7 million; and 2007 — $15.9 million.
5. Restructurings
As more fully described below, the Company has adopted the following restructuring plans at certain of its business units during 2003.
During the second quarter of 2003, in conjunction with the acquisition of Fittings, the Company adopted a plan to close one additional manufacturing facility within its Fastening Systems group and consolidate those operations into Fastening Systems' remaining three manufacturing facilities. This action will result in the elimination of approximately 100 positions, of which approximately 50 have been eliminated as of September 30, 2003. The plan is expected to be completed in 2004. The Company has recorded charges of approximately $2.9 million related to the consolidation, of which approximately $0.9 million relates to the curtailment of a defined benefit pension plan for certain union-hourly employees and $2.0 million relates to a reserve for severance obligations. As of September 30, 2003, severance costs of approximately $0.6 million had been charged against this portion of the reserve.
Also during the second quarter of 2003, the Company's Industrial Specialties Group adopted a plan to centralize certain gasket applications and distribution activities within a single facility. In addition, the group will rationalize the back office general and administrative support within certain of its branch service centers. These actions will result in the elimination of approximately 70 positions, of which approximately 40 have been eliminated as of September 30, 2003. The plan is expected to be completed in 2004. The Company has established a reserve for severance obligations of approximately
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$1.0 million in connection with this plan. As of September 30, 2003, costs of approximately $0.3 million had been charged against this reserve.
During the first quarter of 2003, the Company established a preliminary estimate of $5.2 million in restructuring costs associated with its acquisitions of HammerBlow and Highland, of which approximately $1.4 million related to facility closure costs and $3.8 million related to severance obligations. As of September 30, 2003, costs of approximately $0.3 million had been charged against this reserve.
In addition to the new restructuring plans in 2003, the Company continues implementation activities of its restructuring plan adopted in connection with the acquisition of Metaldyne by Heartland in November 2000. In connection with this November 2000 restructuring plan, approximately 580 jobs were to be eliminated as a result of these restructuring actions. Approximately 410, 60 and 100 have been eliminated in the Cequent Transportation Accessories, Rieke Packaging Systems and Fastening Systems groups, respectively, as of September 30, 2003, and the Company expects the remaining actions to be completed in 2004. The following table summarizes the current activity in connection with the November 2000 plan.
6. Accounts Receivable Securitization
As part of the June 2002 financing transactions, TriMas established a receivables securitization facility and organized TSPC, Inc. ("TSPC"), a wholly-owned subsidiary, to sell trade accounts receivable of substantially all domestic business operations. Prior to June 2002, TriMas sold certain of its accounts receivable to MTSPC, Inc. ("MTSPC"), a wholly-owned subsidiary of Metaldyne. TSPC from time to time may sell an undivided fractional ownership interest in the pool of receivables up to approximately $125 million to a third party multi-seller receivables funding company. The net proceeds of sale are less than the face amount of accounts receivable sold by an amount that approximates the purchaser's financing costs, which amounted to a total of $1.1 million and $0.9 million for the nine months ended September 30, 2003 and 2002, respectively. At September 30, 2003 and December 31, 2002, no receivables were sold under this arrangement and the Company had $51.1 million available but not utilized as of the balance sheet date. The discount rate at September 30, 2003 was 2.1%. The usage fee under the facility is 1.5%. In addition, the Company is required to pay a fee of 0.5% on the unused portion of the facility. This facility expires in June 2005.
7. Inventories
Inventories consist of following components:
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8. Property and Equipment, Net
Property and equipment consists of the following components:
9. Long-Term Debt
The Company's long-term debt at September 30, 2003, net of the unamortized discount of $2.5 million and unamortized premium of $0.8 million from the face value of the Company's 9 7/8% senior subordinated notes, is as follows:
On June 6, 2003, the Company amended and restated its credit facility ("Credit Facility") to modify certain financial covenants, increase the term loan facility from $260 million to $335 million and reduce the incremental term loan capacity by $75 million to $125 million. The Credit Facility, as amended, provides for this uncommitted $125 million incremental term loan facility for one or more permitted acquisitions. In connection with the amendment and restatement, the Company capitalized debt issuance costs of approximately $1.9 million, which will be amortized using the interest method over the life of the Credit Facility.
The amended and restated Credit Facility consists of a $335 million senior term loan which matures December 31, 2009 and is payable in quarterly installments of $0.7 million. The Credit Facility also includes a senior revolving credit facility with a total principal commitment of $150 million, including up to $100 million for one or more permitted acquisitions, which matures December 31, 2007. The Credit Facility allows the Company to issue letters of credit, not to exceed $40 million in aggregate, against revolving credit facility commitments. The Company had letters of credit of approximately $25.2 million and $23.5 million issued and outstanding at September 30, 2003 and December 31, 2002, respectively.
Borrowings under the Credit Facility bear interest at the Company's option at either a base rate used by JPMorgan Chase Bank, plus an applicable margin, or a Eurodollar rate on deposits for one, two, three or six month periods (or nine or twelve month periods if, at the time of the borrowing, all lenders agree to make such a duration available), plus an applicable margin. The applicable margin on borrowings is subject to change, depending on the Company's leverage ratio, as defined, and is 2.25% on base rate loans and 3.25% on Eurodollar loans at September 30, 2003. The effective interest rate on Credit Facility borrowings was 4.47% at September 30, 2003 and 4.44% at December 31, 2002.
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The Credit Facility contains negative and affirmative covenants and other requirements affecting the Company and its subsidiaries, including among others: restrictions on incurrence of debt, except for permitted acquisitions and subordinated indebtedness, liens, mergers, investments, loans, advances, guarantee obligations, acquisitions, asset dispositions, sale-leaseback transactions greater than $75 million if sold at fair market value, hedging agreements, dividends and other restricted junior payments, stock repurchases, transactions with affiliates, restrictive agreements and amendments to charters, by-laws, and other material documents. The Credit Facility also requires the Company and its subsidiaries to meet certain restrictive financial covenants and ratios computed quarterly, including a leverage ratio (total consolidated indebtedness plus outstanding amounts under the accounts receivable securitization facility over consolidated EBITDA, as defined), interest expense coverage ratio (EBITDA over cash interest expense, as defined) and a capital expenditures covenant. The Company was in compliance with its covenants at September 30, 2003.
The Notes indenture contains negative and affirmative covenants and other requirements that are comparable to those contained in the Credit Facility. At September 30, 2003, the Company was in compliance with all such covenant requirements.
The Company paid cash for interest of approximately $33.0 million and $2.2 million for the nine months ended September 30, 2003 and 2002, respectively. For the period from January 1, 2002 to June 6, 2002, interest expense allocated to TriMas was paid by Metaldyne.
10. Leases
TriMas leases certain equipment and plant facilities under non-cancelable operating leases. Rental expense totaled approximately $11.9 million and $5.4 million in the nine months ended September 30, 2003 and 2002, respectively.
In each of the first three quarters of 2003, the Company entered into sale-leaseback arrangements with third-party lenders for certain of its machinery and equipment and facilities. These leases are accounted for as operating leases. The Company has an eight year lease term with respect to machinery and equipment which requires annual lease payments of approximately $8.4 million. The Company has a fifteen year lease term with respect to its leaseback of three facilities which require annual lease payments of approximately $1.7 million. The proceeds from these transactions were applied against outstanding balances under the Company's revolving credit facility. In connection with these sale-leaseback transactions, the Company recognized losses in the first and second quarters of 2003 of approximately $18.1 million and a deferred gain of approximately $4.6 million in the third quarter of 2003. The losses are included in other, net in the accompanying statement of operations while the deferred gain is included in other long-term liabilities in the accompanying balance sheet.
11. Commitments and Contingencies
A civil suit was filed in the United States District Court for the Central District of California in April 1983 by the United States of America and the State of California under the Federal Superfund law against over 30 defendants, including a subsidiary of the Company, for alleged release into the environment of hazardous substances disposed of at the Stringfellow Disposal Site in California. The plaintiffs have requested, among other things, that the defendants clean up the contamination at that site. A consent decree was entered into by the plaintiffs and the defendants, including the Company's subsidiary, providing that the consenting parties perform partial remediation at the site. The State of California has agreed to take over clean-up of the site, as well as responsibility for governmental entities' past response costs.
Another civil suit was filed in the United States District Court for the Central District of California in December 1988 by the United States of America and the State of California against
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more than 180 defendants, including a subsidiary of the Company, for alleged release into the environment of hazardous substances disposed of at the Operating Industries, Inc. site in California. This site served for many years as a depository for municipal and industrial waste. The plaintiffs have requested, among other things, that the defendants clean up the contamination at that site. Consent decrees have been entered into by the plaintiffs and a group of defendants, including TriMas, providing that the consenting parties perform certain remedial work at the site and reimburse the plaintiffs for certain past costs incurred by the plaintiffs at the site. We estimate that the Company's share of the clean-up will not exceed $500,000, for which the Company has received insurance proceeds.
As of November 3, 2003, the Company is party to approximately 691 pending cases involving approximately 31,233 claimants alleging personal injury from exposure to asbestos containing materials formerly used in gaskets (both encapsulated and otherwise) manufactured or distributed by certain of our subsidiaries for use primarily in the petrochemical refining and exploration industries. The Company manufactured three types of gaskets and has ceased the use of asbestos in its products. The Company believes that many of the pending cases relate to locations at which none of our gaskets were distributed or used. In addition, TriMas acquired various companies to distribute the Company's products and also had distributed gaskets of other manufacturers prior to acquisition. Total settlement costs (exclusive of defense costs) for all such cases, some of which were filed over 12 years ago, have been approximately $2.3 million. The Company does not have significant primary insurance to cover its settlement and defense costs. The Company believes that significant coverage under excess insurance policies of former owners is available, but the Company is in the process of reconstructing the documentation for these policies, and such insurance may not be available. Based upon the Company's experience to date and other available information (including the availability of excess insurance), the Company does not believe that these cases will have a material adverse effect on its financial condition or future results of operations. However, the Company may be subjected to significant additional claims in the future, the cost of settling cases in which product identification can be made may increase, and the Company may be subjected to further claims in respect of the former activities of its acquired gasket distributors.
The Company has provided reserves based upon its present knowledge and, subject to future legal and factual developments, does not believe that the ultimate outcome of any of these litigations will have a material adverse effect on its consolidated financial position and future results of operations and cash flow. However, there can be no assurance that future legal and factual developments will not result in a material adverse impact on our financial condition and future results of operations.
The Company is subject to other claims and litigation in the ordinary course of business, but does not believe that any such claim or litigation will have a material adverse effect on the Company's financial position or results of operations.
12. Related Parties
Metaldyne Corporation
Prior to June 6, 2002, the Company was wholly-owned by Metaldyne and participated in joint activities including employee benefits programs, legal, treasury, information technology and other general corporate activities.
In connection with the June 6, 2002 transactions, TriMas assumed certain liabilities and obligations of Metaldyne, mainly comprised of contractual obligations to former TriMas employees, tax related matters, benefit plan liabilities and reimbursements to Metaldyne for normal course payments to be made on TriMas' behalf. The amount of these liabilities and obligations were
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$15.3 million and $21.9 million as of September 30, 2003 and December 31, 2002, respectively. These amounts are payable at various dates over the next two years and are included in Due to Metaldyne in the accompanying consolidated balance sheets.
In April 2003, TriMas repurchased one million shares of its common stock from Metaldyne at $20 per share, the same price as it was valued on June 6, 2002.
For 2003, the Company is also party to a corporate services agreement with Metaldyne. Under the terms of the agreement, TriMas pays Metaldyne a service fee of $2.5 million in exchange for human resources, information technology, internal audit, tax, legal and other general corporate services and remittance of certain third-party charges on TriMas' behalf.
Heartland Industrial Partners
The Company is party to an advisory services agreement with Heartland at an annual fee of $4.0 million plus expenses. During the nine months ended September 30, 2003, the Company incurred $3.4 million in connection with this agreement and this amount is included in selling, general and administrative expense in the accompanying consolidated statement of operations.
Also in the quarter ended March 30, 2003, TriMas paid Heartland approximately $2.1 million in advisory services in connection with the acquisitions of HammerBlow and Highland. Such fees have been capitalized as transaction costs as a component of total consideration paid and allocated to the fair value of assets acquired and liabilities assumed in the respective acquisitions.
13. Segment Information
TriMas' reportable operating segments are business units that provide unique products and services. Each operating segment is independently managed, requires different technology and marketing strategies and has separate financial information evaluated regularly by the Company's chief operating decision maker in determining resource allocation and assessing performance. During the first quarter of 2003, the Company re-aligned its operating segments and appointed a group president for its Fastening Systems group. Prior period segment information has been revised to conform to the current structure and presentation. TriMas has four operating segments involving the manufacture and sale of the following products:
Cequent Transportation Accessories— Vehicle hitches and receivers, sway controls, weight distribution and fifth wheel hitches, hitch mounted accessories, roof racks, trailer couplers, winches, jacks, trailer brakes and lights and other vehicle and trailer accessories.
Rieke Packaging Systems — Closures and dispensing systems for steel and plastic industrial and consumer packaging applications.
Fastening Systems — Large and small diameter standard and custom-designed ferrous, nonferrous and special alloy fasteners, specialized fittings and cold-headed parts used in automotive and industrial applications, and highly engineered specialty fasteners for the domestic and international aerospace industry.
Industrial Specialties — Flame-retardant facings and jacketing and insulation tapes used in conjunction with fiberglass insulation, pressure-sensitive specialty tape products, high-pressure and low-pressure cylinders for the transportation, storage and dispensing of compressed gases, metallic and nonmetallic industrial gaskets, specialty precision tools such as center drills, cutters, end mills, reamers, master gears, gages and punches, specialty engines and service parts and specialty ordnance components and weapon systems.
The Company uses Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") as an indicator of operating performance and as a measure of cash generating capability. EBITDA is
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one of the primary measures used by management to evaluate performance. Legacy stock award expense represents a contractual obligation resulting from the November 2000 acquisition of Metaldyne by Heartland which will be fully paid in January 2004.
Segment activity is as follows:
14. Stock Options
In September 2003, the Compensation Committee of the Company's Board of Directors approved the form of the stock option agreements and the list of individuals eligible to receive certain grants under the TriMas Corporation 2002 Long Term Equity Incentive Plan (the "Plan"), which provides for the issuance of equity-based incentives in various forms. A total of 2,220,000 stock options have been approved for issuance under this Plan. As of September 30, 2003, the Company has 1,778,361 stock options outstanding, each of which may be used to purchase one share of the Company's common stock. The options have a ten-year life and an exercise price of $20. Eighty percent of the options vest ratably over three years, while the remaining twenty percent vest based upon certain earnings targets, as defined in the Plan.
During 2001, certain TriMas employees were granted a total of 336,763 Metaldyne stock options under the Metaldyne Long Term Equity Incentive Plan. Of this amount, 81,640 options vested while the remaining 255,123 options were canceled in connection with the June 6, 2002 transactions. In
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connection with the June 6, 2002 stock purchase agreement, each vested Metaldyne option was to be converted into one option to purchase TriMas common stock. As of September 30, 2003, all 81,640 Metaldyne stock options issued to TriMas employees have been converted into TriMas stock options under the Plan.
The Company has elected to apply the provisions of Accounting Principles Board Opinion No. 25. Accordingly, no stock option compensation expense is included in the determination of net income in the combined statement of operations. The weighted average fair value on the measurement date for the options was $2.25. Had stock option compensation expense been determined pursuant to the methodology of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company would have recorded an after-tax compensation charge of approximately $0.7 million in the quarter ended September 30, 2003.
The fair value of the options was estimated at the measurement date using the minimum value method, and assumed no dividends or volatility, a risk-free interest rate of 3.0% and an expected option life of 4 years.
The following table illustrates the effect on net income and earnings per share if the Company had adopted the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
15. Earnings per Share
The Company reports earnings per share in accordance with SFAS No. 128, "Earnings per Share." The Company has calculated basic and diluted earnings per share for all periods presented except for the nine months ended September 30, 2002, during which time the Company was a division of Metaldyne for more than five months. The weighted-average number of shares outstanding was 20.0 million, 19.3 million and 20.0 million for the three months ended September 30, 2003 and September 29, 2002 and the nine months ended September 30, 2003, respectively. All 1,778,361 stock options and 750,000 common stock warrants have been excluded from the earnings per share calculations as they would have been antidilutive.
16. Impact of Newly Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation ("FIN") 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51."
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FIN 46 requires primary beneficiaries in a variable interest entity to consolidate the entity even if the primary beneficiary does not have a majority voting interest. This consolidation requirement is effective immediately for any variable interest entity created on or after January 31, 2003, and after June 30, 2003 for entities created before January 31, 2003. In addition, FIN 46 requires disclosure of information regarding guarantees or loss exposures related to a variable interest entity created prior to January 31, 2003 in financial statements issued after January 31, 2003. The adoption of this statement did not have any effect on the Company's results of operations or financial condition.
In May 2003, the FASB SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 provides guidance for how a company should classify and measure certain financial instruments that have characteristics of both liabilities and equity. SFAS No. 150 is effective immediately for any qualifying financial instruments issued after May 31, 2003 and becomes effective for such pre-existing financial instruments in the third quarter of 2003. The adoption of SFAS No. 150 did not have an impact on the Company's financial condition or results of operations.
16. Supplemental Guarantor Condensed Combining and Consolidating Financial Information
Under an indenture dated June 6, 2002, TriMas Corporation, the parent company ("Parent"), issued 9 7/8% Senior Subordinated Notes due 2012 in a total principal amount of $437.8 million (face value). These Notes are guaranteed by substantially all of the Company's domestic subsidiaries ("Guarantor Subsidiaries"). All of the Guarantor Subsidiaries are 100% owned by the Parent and their guarantee is full, unconditional, joint and several. The Company's non-domestic subsidiaries and TSPC, Inc. have not guaranteed the Notes ("Non-Guarantor Subsidiaries"). The Guarantor Subsidiaries have also guaranteed amounts outstanding under the Company's Credit Facility.
The accompanying supplemental guarantor condensed, combining or consolidating financial information is presented on the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for the Company's share in the subsidiaries' cumulative results of operations, capital contributions and distributions and other changes in equity. Elimination entries relate primarily to the elimination of investments in subsidiaries and associated intercompany balances and transactions.
Prior to June 6, 2002, the Parent held equity investments directly in certain of the Company's wholly-owned Non-Guarantor Subsidiaries, and equity in these investees is included in the Parent column of the accompanying condensed combining financial information for all periods presented. Subsequent to June 6, 2002, all investments in non-domestic subsidiaries are held directly at TriMas Company LLC, a wholly-owned subsidiary of TriMas Corporation and Guarantor Subsidiaries, and equity in non-domestic subsidiary investees for all periods subsequent to June 30, 2002 is included in the Guarantor column of the accompanying consolidating financial information. In addition, the results of Fittings are included with the results of the Guarantor Subsidiaries for each of the periods in which supplemental guarantor financial information is presented.
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Notes to Financial Statements (continued)(Unaudited)
Supplemental GuarantorCondensed Financial StatementsConsolidating Balance Sheet(in thousands)
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Supplemental GuarantorCondensed Financial StatementsCombining Balance Sheet(in thousands)
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Supplemental GuarantorCondensed Financial StatementsCombining Statement of Operations(in thousands)
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Supplemental GuarantorCondensed Financial StatementsCombining Statement of Cash Flows(in thousands)
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We are an industrial manufacturer of highly engineered products serving niche markets in a diverse range of commercial, industrial and consumer applications. Effective January 1, 2003, TriMas reorganized its business operations and formed a Fastening Systems segment consisting of our industrial fasteners businesses that were previously part of Industrial Specialties. As a result, prior period financial information has been reclassified to conform to this presentation. We have four operating groups or segments: Cequent Transportation Accessories, Rieke Packaging Systems, Fastening Systems and Industrial Specialties.
Segment Information
The following table summarizes financial information of our four operating segments.
Supplemental Financial Analysis
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Results of Operations
Three Months Ended September 30, 2003 Compared with Three Months Ended September 29, 2002
Including $44.2 million in sales from the HammerBlow and Highland entities acquired during 2003, net sales for the three months ended September 30, 2003 increased approximately 27.1% compared to the same period of the prior year. Excluding the impact of these acquisitions, the Company's net sales increased $6.1 million or 3.3%. Net sales within Cequent Transportation Accessories increased $45.5 million or 62.4%. Of this amount, $44.2 million was due to the impact of the aforementioned acquisitions of HammerBlow and Highland. Excluding the impact of these acquisitions, sales in Cequent's legacy business increased 1.9% due to improved delivery performance and market conditions . Net sales of Rieke Packaging Systems increased $1.2 million or 4.5% primarily due to the benefit of new product sales, although year over year sales growth in the quarter slowed compared to the first half of 2003. Overall, net sales of Fastening Systems decreased 5.1%, as stronger market demand for our aerospace fasteners was more than offset by continued weakness in demand for our industrial fastener products in general distribution channels. Net sales within Industrial Specialties increased $5.3 million or 10.9%, compared to the prior year. This increase in sales was attributed to improved demand for our products in the commercial construction, energy and petrochemical, general industrial and defense markets.
Operating profit margins approximated 9.2% and 4.1% for the quarter ended September 2003 and 2002, respectively. Operating profit for the three months ended September 30, 2003 was $21.7 million, an increase of $14.0 million compared to the same period of the prior year. Within Cequent Transportation Accessories, excluding the $6.7 million positive impact attributed to the acquisitions of HammerBlow and Highland, operating profit declined a slight $0.7 million within Cequent's legacy business, but on a relative basis improved compared to the first half of 2003. Improved operating profits ($1.1 million) attributed to slightly higher sales, lower restructuring charges and increased efficiencies at our Goshen, Indiana and Reynosa, Mexico operations, were more than offset by increased lease costs and higher depreciation charges. Rieke Packaging Systems operating profit was slightly higher between periods as a result of a marginal increase in sales between years. However, operating margins in the quarter declined compared to the first half of 2003 as a result of lower sales volume and slower than anticipated customer product launches. Within Fastening Systems, although sales declined $1.9 million, operating profit increased approximately $6.6 million from a loss of $5.4 million to $1.2 million operating profit. Results in the prior year were negatively impacted by $7.1 million of other charges principally related to the write-down of excess and obsolete inventory. In the current year, higher operating profit due to improved margins ($2.9 million), were more than offset by increased lease costs of $1.1 million and $2.3 million of other charges associated with the group's restructuring its industrial fasteners manufacturing facilities. Industrial Specialties operating profit increased $3.7 million due to the aforementioned 10.9% increase in sales ($0.7 million), higher operating margins of $3.6 million resulting from improved efficiencies, lower restructuring costs and reduced depreciation charges, offset by increased lease costs of $0.6 million.
Selling, general and administrative costs were approximately $38.2 million, or 16.2% of net sales, for the three months ended September 30, 2003 as compared with $30.3 million, or 16.3% of net sales, in the prior year. The increase of $7.9 million is primarily due to the $7.4 million impact of acquired operations and increased costs associated with our separation from Metaldyne.
For the three months ended September 30, 2003, interest expense increased $3.7 million due to the issuance of $85.0 million senior subordinated notes in December 2002 and additional term loan borrowings of $75 million in June 2003.
Net income for the three months ended September 30, 2003 was $3.7 million as compared to net loss of $4.0 million for the three months ended September 30, 2002. The increase is mainly due to the impact of the HammerBlow and Highland acquisitions. The third quarter of 2002 also included certain one-time charges related to restructuring activities and our separation from Metaldyne in June 2002.
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Nine Months Ended September 30, 2003 Compared with Nine Months Ended September 29, 2002
Including $118.7 million in sales from the HammerBlow and Highland entities acquired during 2003, net sales for the nine months ended September 30, 2003 increased approximately 20.0% compared to the nine months ended September 29, 2002. Excluding the impact of these acquisitions, the Company's net sales decreased $1.3 million or 0.2%. Net sales within Cequent Transportation Accessories increased $107.1 million or 45.4%. Of this amounts, $118.7 million was due to the impact of the aforementioned acquisitions of HammerBlow and Highland. Excluding the impact of these acquisitions, sales in Cequent's legacy business decreased 4.9% due to weakness in demand in the first half of 2003 in the overall market for towing and trailer accessories, principally in the RV and marine markets and retail distribution markets through mass merchandisers and independent retail outlets. In the third quarter 2003, net sales increased 1.9% due to improved delivery performance and market conditions. Rieke Packaging Systems net sales increased 12.1% primarily due to the benefit of sales of new products, although the sales growth rate slowed during the third quarter relative to the first half of 2003 due to softness in the market for industrial closures and slower product launches of some consumer products. Fastening Systems net sales decreased 6.6%, as we have continued to see weakness in demand for our fastener products in the general distribution and industrial products channels. Industrial Specialties net sales increased 5.0%. The increase in sales in the Industrial Specialties group was due to improved demand for our products across the commercial construction, energy and petrochemical, general industrial and defense markets primarily in the second and third quarters of 2003.
Operating profit margins approximated 8.7% and 10.5% for the nine months ended September 30, 2003 and September 29, 2002, respectively. Excluding the impact of the acquisition of HammerBlow and Highland, the Company's operating profit margin for the nine months ended September 30, 2003 approximated 7.9% and operating profit was $61.2 million, a decrease of $0.1 million compared to the prior year. Within Cequent Transportation Accessories, excluding the $14.6 million positive impact attributed to the acquisitions of HammerBlow and Highland, operating profit declined $11.6 million within Cequent's legacy businesses. Approximately $9.5 million of this decrease is attributed to lower margins due to incremental costs and operational inefficiencies associated with the ramp-up of our Goshen, Indiana manufacturing facility and the expansion of operations in Reynosa, Mexico during the first half of 2003. We also completed the closure of our Elkhart, Indiana and Canton, Michigan facilities in the second quarter of 2003. Cequent also incurred higher lease costs of $2.1 million compared to the prior year. Rieke Packaging Systems' operating profit increased $1.8 million, as a result of $9.9 million of increased sales, offset by slightly lower margins earned overall due to product mix, new product launch support costs and increased lease expense. Within Fastening Systems, although sales declined $7.5 million, operating profit increased approximately $1.0 million, from $0.7 million to $1.7. Results in the prior year were negatively impacted by $7.1 million of charges principally related to the write-down of excess and obsolete inventory. In the current year, operating profit was negatively impacted by incremental other charges of $4.1 million associated with the group's restructuring its industrial fasteners manufacturing facilities and increased lease costs of $2.0 million. Industrial Specialties operating profit increased $2.3 million. This increase was due primarily to improved operating margins (10.8% compared to 9.8% in the prior year) which contributed $1.5 million in operating profit and the aforementioned 5.0% increase in sales which contributed $0.8 million.
Selling, general and administrative costs were approximately $113.6 million, or 16.1% of net sales, for the nine months ended September 30, 2003, as compared with $86.8 million, or 14.8% of net sales, in the prior year. The increase is primarily due to the impact of acquired operations ($21.1 million) and increased costs associated with our separation from Metaldyne.
For the nine months ended September 30, 2003, interest expense increased a net $3.2 million as increased interest in the current year due to the issuance of $85.0 million senior subordinated notes in December 2002 and additional term loan borrowings of $75 million in June 2003 was partially offset by interest expense allocated to the Company by Metaldyne during the first five months of 2002. Other, net expense for the nine months ended September 30, 2003, increased 13.7 million. The
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Company recorded a $18.2 million net loss from the sale of fixed assets, primarily in connection with sale and leaseback transactions for certain manufacturing equipment and facilities..
Net loss for the nine months ended September 30, 2003 was $4.8 million as compared to a net loss of $30.1 million for the nine months ended September 30, 2002. The results for the nine months ended September 30, 2002 include a charge of $36.6 million for the cumulative effect on prior years of a change in recognition and measurement of goodwill impairment.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended September 30, 2003 was approximately $35.1 million as compared to cash used in operating activities of approximately $20.1 million for the comparable period a year ago. Working capital used in operations increased $9.8 million between years, primarily due to increased sales levels resulting from the acquisition of HammerBlow and Highland. Capital expenditures were $18.4 million for the nine months ended September 30, 2003, as compared with $20.6 million for the comparable period in 2002.
Our credit facility, as amended and restated on June 6, 2003, includes a $150 million revolving credit facility and a $335 million term loan facility. Up to $100 million of our revolving credit facility is available to be used for one or more permitted acquisitions. The credit facility also provides for an uncommitted $125 million incremental term loan facility for one or more permitted acquisitions. Amounts drawn on our revolving credit facility fluctuate daily based upon our working capital and other ordinary course needs. Availability under our revolving credit facility depends upon, among other things, compliance with the agreement's financial covenants. Another important source of liquidity is our $125 million accounts receivable securitization facility, under which we have the ability to sell eligible accounts receivable to a third-party multi-seller receivables funding company. At September 30, 2003, the Company had no amounts outstanding under the accounts receivable facility and $51.1 million available, but not utilized. At September 30, 2003, the Company had $10.8 million of available cash and could incur up to $54.6 million of additional senior indebtedness under our revolving credit facility and/or accounts receivables facility to fund operations and up to $151.1 million to fund acquisitions, subject to certain limitations.
Principal payments required on the term loan are: $0.7 million due each calendar quarter ending June 2003 through June 30, 2009, $134.0 million due on September 30, 2009 and $141.8 million due on December 31, 2009.
In the first quarter of 2003, the Company completed the acquisition of HammerBlow Acquisition Corp. ("HammerBlow") and Highland Group Industries ("Highland"). The Company made an initial $9.0 million investment in HammerBlow in November 2002. The incremental combined acquisition price for HammerBlow and Highland of approximately $209.7 million (before realization of proceeds from completed asset sales) was funded with $63.3 million of net proceeds from the issuance of our senior subordinated notes, $30.0 million of cash equity received from Heartland, the issuance of a $7.5 million deferred note payable due January 2004, and the balance satisfied from borrowings under our revolving credit agreement and accounts receivable securitization facility.
On May 9, 2003, the Company completed the acquisition of a fasteners business ("Fittings") from Metaldyne for approximately $22.7 million on a debt-free basis. Fittings is a leading manufacturer of specialized fittings and cold-headed parts used in automotive and industrial applications. The transaction was funded by a combination of borrowings under the Company's revolving credit facility and a $5.0 million cash equity contribution by Heartland. Fittings had 2002 revenues of approximately $16.7 million.
We have other cash commitments related to leases. We have engaged in a number of sale-leaseback transactions. In January 2002, we entered into sale-leaseback transactions with respect to nine real properties for gross proceeds of approximately $20.9 million, which were used to repay advances from Metaldyne. We account for these lease transactions as operating leases and annual rent expense related to these lease transactions is approximately $2.5 million. During the year ended December 31, 2002, we entered into operating leases for three additional facilities and annual rent
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expense related to these lease transactions is approximately $1.5 million. During the fourth quarter we also entered into sale-leaseback transactions with respect to certain manufacturing equipment. We realized proceeds of approximately $5.7 million. Annual rent expense related to these transactions is approximately $0.9 million. In March 2003, the Company completed a sale and lease back of certain personal property that resulted in net cash proceeds of approximately $28.0 million. The proceeds were used to repay outstanding balances under our revolving credit facility. Annual rent expense related to this lease transaction will approximate $4.4 million. In March 2003, we also completed the sale and subsequent leaseback with respect to two real properties for gross proceeds of approximately $7.8 million. Annual rent expense related to these transactions will approximate $0.9 million. In June 2003, the Company completed another sale and subsequent lease back of certain personal property that resulted in net cash proceeds of approximately $25.9 million. The proceeds were used to repay outstanding balances under our revolving credit facility. Annual rent expense related to these lease transactions will approximate $4.0 million. In September 2003, the Company completed a sale and leaseback of real property for gross proceeds of approximately $8.2 million, which were used to repay balances outstanding under our revolving credit facility. Annual rent expense related to this transaction will approximate $0.8 million. In connection with the Fittings acquisition, we agreed to sublease from Metaldyne the facility where the acquired business is currently located. Annual rent expense related to this sublease is expected to be $0.2 million. We expect to continue to utilize leasing as a financing strategy in the future to meet capital expenditure needs and to reduce debt levels.
In addition to the foregoing contractual commitments, we have also agreed to assume certain obligations resulting from the November 2000 acquisition of Metaldyne by Heartland. At that time, Metaldyne made restricted stock grants to employees with terms that allow eligible employees to elect to receive cash at stipulated amounts in lieu of shares as the restricted stock grants vest. We have agreed to be responsible for the cash costs of those elections to the extent they relate to our current and former employees and to our allocable share of current and former Metaldyne corporate level employees in accordance with the agreement. Under these arrangements, the approximate stipulated dollar value of the shares for which we are responsible that have vested or will vest, are as follows: $4.2 million on January 14, 2002, $7.6 million on January 14, 2003 and $8.5 million on January 14, 2004. To the extent that cash elections are not made, the employees will be entitled to retain their shares in Metaldyne, but we may decide at any time to work with Metaldyne to replace all or a portion of the restricted stock grants and related obligations at Metaldyne with new restricted stock grants and similar obligations.
Our exposure to interest rate risk results from the floating rates on our $335.0 million senior term loan and our $150 million revolving credit facility, under which we had $292.5 million outstanding under the senior term loan and no amounts outstanding under the revolving credit facility at September 30, 2003. Borrowings under our credit facility bear interest, at various rates, as more fully described in Note 9 to the accompanying financial statements as of September 30, 2003. Based on current amounts outstanding, a 1% increase or decrease in the per annum interest rate for the term loan and revolving credit facility would change interest expense by $2.9 million annually.
We conduct business in several locations throughout the world and are subject to market risk due to changes in the value of foreign currencies. We do not currently use derivative financial instruments to manage these risks. The functional currencies of our foreign subsidiaries are generally the local currency in the country of domicile. We manage these operating activities at the local level and revenues and costs are generally denominated in such local currencies.
As a result of the financing transactions entered into on June 6, 2002, the additional issuance of $85 million aggregate principal amount of senior subordinated notes, and recent acquisitions, we are highly leveraged. In addition to normal capital expenditures, we may incur significant amounts of additional debt and further burden cash flow in pursuit of our internal growth and acquisition strategies.
The terms of our credit facility as amended and restated require the Company and its subsidiaries to meet certain restrictive financial covenants and ratios computed quarterly, including a leverage ratio (total consolidated indebtedness plus outstanding amounts under the accounts receivable securitization
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facility over consolidated EBITDA, as defined), interest expense ratio (EBITDA over cash interest expense, as defined) and a capital expenditures covenant, the most restrictive of which is the leverage ratio. Our permitted leverage ratio was 5.00 to 1.00 at September 30, 2003. The permitted leverage ratio becomes more restrictive in future periods, declining to 4.75 to 1.00 at December 31, 2003, 4.00 to 1.00 at December 31, 2004 and 3.25 to 1.00 at December 31, 2005 and thereafter. The Company was in compliance with its covenants at September 30, 2003.
We believe that our liquidity and capital resources, including anticipated cash flows from operations, will be sufficient to meet debt service, capital expenditure and other short-term and long-term obligations needs for the foreseeable future, but we are subject to unforeseeable events and risks.
Off-Balance Sheet Arrangements
In connection with the transactions, we entered into an agreement to sell, on an ongoing basis, the trade accounts receivable of certain business operations to a wholly-owned, bankruptcy-remote, special purpose subsidiary, TSPC, Inc. ("TSPC"). TSPC, subject to certain conditions, may from time to time sell an undivided fractional ownership interest in the pool of domestic receivables, up to approximately $125 million, to a third party multi-seller receivables funding company, or conduit. Upon sale of receivables, the Company retains a subordinated interest in the receivables. Under the terms of the agreement, new receivables can be added to the pool as collections reduce previously sold receivables. The facility is anticipated to be an important source of liquidity in 2003 and subsequent years. At September 30, 2003, we had no amounts outstanding and $51.1 million available under the facility.
The facility is subject to customary termination events, including, but not limited to, breach of representations or warranties, the existence of any event that materially adversely affects the collectibility of receivables or performance by a seller and certain events of bankruptcy or insolvency. The proceeds of sale are less than the face amount of accounts receivable sold by an amount that approximates the purchaser's financing costs. The agreement expires on June 6, 2005. If we are unable to renew or replace this facility, it could materially adversely affect our liquidity.
Cash Obligations
Under various agreements, we are obligated to make future cash payments in fixed amounts. These include payments under our long-term debt agreements, rent payments required under operating lease agreements for 15 facilities and certain capital equipment, severance obligations related to our cost savings plans and our allocable share of certain compensation and benefit obligations due to Metaldyne. The following table summarizes our expected fixed cash obligations over various future periods related to these items.
As of September 30, 2003, we are contingently liable for stand-by letters of credit totaling $25.2 million issued on our behalf by financial institutions under our revolving credit facility. These letters of credit are used for a variety of purposes, including certain operating leases and meeting various states' requirements in order to self-insure workers' compensation claims, including incurred but not reported claims.
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Critical Accounting Policies
The following discussion of accounting policies is intended to supplement the accounting policies presented in Note 3 to our 2002 audited financial statements. The expenses and accrued liabilities or allowances related to certain of these policies are based on our best estimates at the time of original entry in our accounting records. Adjustments are recorded when actual experience differs from the expected experience underlying the estimates. We make frequent comparisons of actual versus expected experience to mitigate the likelihood of material adjustments.
Accounting Basis for Transactions. Prior to June 6, 2002, the Company was owned by Metaldyne. On November 28, 2000, Metaldyne was acquired by an investor group led by Heartland. The pre-acquisition basis of accounting for periods prior to November 28, 2000 is reflected on the historical basis of accounting and all periods subsequent to November 28, 2000 are reflected on a purchase accounting basis and are therefore not comparable. On June 6, 2002, Metaldyne issued approximately 66% of our fully diluted common stock to an investor group led by Heartland. As a result of the transactions, we did not establish a new basis of accounting as Heartland is the controlling shareholder for both the Company and Metaldyne and the transactions were accounted for as a reorganization of entities under common control. Our combined financial information includes allocations and estimates of direct and indirect Metaldyne corporate administrative costs attributable to us, which are deemed by management to be reasonable but are not necessarily reflective of those costs to us on an ongoing basis.
Receivables. Receivables are presented net of allowances for doubtful accounts. We monitor our exposure for credit losses and maintain adequate allowances for doubtful accounts. We do not believe that significant credit risk exists. Trade accounts receivable of substantially all domestic business operations may be sold, on an ongoing basis, to TSPC, Inc., a wholly-owned subsidiary of the Company.
Depreciation and Amortization. Depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows: buildings and buildings/land improvements, 2.5% to 10% and machinery and equipment, 6.7% to 33.3%. Capitalized debt issuance costs are amortized over the underlying terms of the related debt securities. Customer relationship intangibles are amortized over periods ranging from 6-40 years, trademarks/trade names are amortized over a 40-year period, while technology and other intangibles are amortized over periods ranging from 5-30 years.
Goodwill and Other Intangibles. The Company tests goodwill for impairment on an annual basis, unless a change in business conditions occurs which requires a more frequent evaluation, by comparison of estimated fair value to carrying value. In assessing the recoverability of goodwill, the Company estimates fair value using the present value of expected future cash flows and other valuation measures. The Company also tests its other intangibles for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that their carrying amount may not be recoverable. The factors considered by management in performing this assessment include current operating results, business prospects, market trends, potential product obsolescence, competitive activities and other economic factors.
Pension and Postretirement Benefits Other than Pensions. Annual net periodic expense and benefit liabilities under our defined benefit plans are determined on an actuarial basis. Assumptions used in the actuarial calculations have a significant impact on plan obligations and expense. Annually, we review the actual experience compared to the more significant assumptions used and make adjustments to the assumptions, if warranted. The healthcare trend rates are reviewed with the actuaries based upon the results of their review of claims experience. Discount rates are based upon an expected benefit payments duration analysis and the equivalent average yield rate for high-quality fixed-income investments. Pension benefits are funded through deposits with trustees and the expected long-term rate of return on fund assets is based upon actual historical returns modified for known changes in the market and any expected change in investment policy. Postretirement benefits are not funded and our policy is to pay these benefits as they become due. Certain accounting guidance, including the guidance applicable to pensions, does not require immediate recognition of the effects of
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a deviation between actual and assumed experience or the revision of an estimate. This approach allows the favorable and unfavorable effects that fall within an acceptable range to be netted.
Other Loss Reserves. We have numerous other loss exposures, such as environmental claims, product liability, litigation, realizability of deferred tax assets, and accounts receivable. Establishing loss reserves for these matters requires the use of estimates and judgment in regard to risk exposure and ultimate liability. We estimate losses under the programs using consistent and appropriate methods; however, changes to our assumptions could materially affect our recorded liabilities for loss. Where available, we utilize published credit ratings for our debtors to assist us in determining the amount of required reserves.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, we are exposed to market risk associated with fluctuations in foreign exchange rates. We are also subject to interest risk as it relates to long-term debt. See Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for details about our primary market risks, and the objectives and strategies used to manage these risks.
Item 4. Controls and Procedures
An evaluation was carried out by management with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, except as described in (b) below, as of the end of the period covered by this report, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.
During the last fiscal quarter to which this report relates, we have initiated implementation of corrective actions to address two material control weaknesses previously disclosed that have materially improved and are reasonably likely to materially improve our internal control over financial reporting. The material weaknesses previously disclosed relate to internal accounting controls over: (1) the Company's closing, consolidation and financial monitoring processes, and; (2) use of standardized accounting policies and procedures appropriate to each business unit's activities. Recently added financial management staff have begun to : (a) implement closing and consolidation process improvements, including performance of additional monitoring activities and more timely preparation of account reconciliations; and (b) formally document and communicate the application and use of the Company's critical accounting policies and related procedures to appropriate business unit financial personnel.
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Part II. Other InformationTriMas Corporation
Item 1. Legal Proceedings.
A civil suit was filed in the United States District Court for the Central District of California in April 1983 by the United States of America and the State of California under the Federal Superfund law against over 30 defendants, including a subsidiary of ours, for alleged release into the environment of hazardous substances disposed of at the Stringfellow Disposal Site in California. The plaintiffs have requested, among other things, that the defendants clean up the contamination at that site. A consent decree has been entered into by the plaintiffs and the defendants, including us, providing that the consenting parties perform partial remediation at the site. The State of California has agreed to take over clean-up of the site, as well as responsibility for governmental entities' past response costs. We estimate that we will have no share of the clean-up expense at this site. The plaintiffs had sought other relief such as reimbursement of response costs and injunctive relief from the defendants under CERCLA and other similar state law theories, but the consent decree governs the remedy. Another civil suit was filed in the United States District Court for the Central District of California in December 1988 by the United States of America and the State against more than 180 defendants, including us, for alleged release into the environment of hazardous substances disposed of at the Operating Industries, Inc. site in California. This site served for many years as a depository for municipal and industrial waste. The plaintiffs have requested, among other things, that the defendants clean up the contamination at that site. Consent decrees have been entered into by the plaintiffs and a group of the defendants, including us, providing that the consenting parties perform certain remedial work at the site and reimburse the plaintiffs for certain past costs incurred by the plaintiffs at the site. We estimate that our share of the clean-up will not exceed $500,000, for which we have received insurance proceeds. Plaintiffs had sought other relief such as damages arising out of claims for negligence, trespass, public and private nuisance, and other causes of action, but the consent decree governs the remedy. While based upon our present knowledge and subject to future legal and factual developments, we do not believe that any of these litigations will have a material adverse effect on our consolidated financial position, results of operations or cash flow, future legal and factual developments may result in materially adverse expenditures.
As of November 3, 2003, we were a party to approximately 691 pending cases involving an aggregate of approximately 31,233 claimants alleging personal injury from exposure to asbestos containing materials formerly used in gaskets (both encapsulated and otherwise) manufactured or distributed by certain of our subsidiaries for use in the petrochemical refining and exploration industries. In addition, we acquired various companies to distribute our products that had distributed gaskets of other manufacturers prior to acquisition. We believe that many of our pending cases relate to locations at which none of our gaskets were distributed or used. Total settlement costs (exclusive of defense costs) for all such cases, some of which were filed over 12 years ago, have been approximately $2.3 million. We do not have significant primary insurance to cover our settlement and defense costs. We believe that significant coverage under excess insurance policies of former owners is available to us, but we are in the process of reconstructing the documentation for these policies, and such insurance may not be available. Based upon our experience to date and other available information (including the availability of excess insurance), we do not believe that these cases will have a material adverse effect on our financial condition or future results of operations. However, we may be subjected to significant additional claims in the future, the cost of settling cases in which product identification can be made may increase, and we may be subjected to further claims in respect of the former activities of our acquired gasket distributors.
We are subject to other claims and litigation in the ordinary course of our business, but do not believe that any such claim or litigation will have a material adverse effect on our financial position or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
None of our securities, which were not registered under the Securities Act, have been issued or sold by us since June 30, 2003, except as follows:
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The issuance of the securities described above was exempt from registration under the Securities Act in reliance on Section 4(2) of such Securities Act as transactions by an issuer not involving any public offering. The recipient of securities in each such transaction represented his intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates issued in such transactions. The recipients had adequate access to information about us at the time of his investment decision.
Items 3, 4 and 5.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(b) Reports on Form 8-K:
The Company filed an amendment on July 16, 2003 to its Current Report dated June 20, 2003, amending certain disclosures regarding its change in Certifying Accountants.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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