UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended March 31, 2003 | ||
| or | ||
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o
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TRANSITION REPORT PURSUANT TO SECTION 13
or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to | ||
Commission file number 1-10218
Collins & Aikman Corporation
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DELAWARE
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13-3489233 | |
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(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
250 Stephenson Highway
(248) 824-2500
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 þ No o.
As of March 31, 2003, the number of outstanding shares of the Registrant’s common stock, $.01 par value, was 83,630,087 shares.
WEBSITE ACCESS TO COMPANY’S REPORTS:
Collins and Aikman’s internet website address is www.collinsaikman.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendment to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through the Company’s website and as soon as reasonably practicable after the reports are electronically filed with, or furnished to the Securities and Exchange Commission.
| Item 1. | Financial Statements |
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
| Quarter Ended | |||||||||
| March 31, | March 31, | ||||||||
| 2003 | 2002 | ||||||||
| (Footnote 2) | |||||||||
| (Unaudited) | |||||||||
| (in millions, except for | |||||||||
| per share data) | |||||||||
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Net sales
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$ | 1,035.1 | $ | 914.8 | |||||
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Cost of goods sold
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928.1 | 783.7 | |||||||
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Gross profit
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107.0 | 131.1 | |||||||
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Selling, general and administrative expenses
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71.5 | 67.6 | |||||||
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Restructuring charge
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— | 9.1 | |||||||
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Impairment of long-lived assets
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18.1 | — | |||||||
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Operating income
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17.4 | 54.4 | |||||||
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Interest expense, net
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36.5 | 37.3 | |||||||
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Loss on sale of receivables
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0.9 | 1.1 | |||||||
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Subsidiary preferred stock dividends
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6.5 | 9.3 | |||||||
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Subsidiary preferred stock accretion
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2.1 | 1.9 | |||||||
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Other expense (income), net
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(1.0 | ) | 4.6 | ||||||
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Income (loss) from continuing operations before
income taxes
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(27.6 | ) | 0.2 | ||||||
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Income tax expense
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1.1 | 6.9 | |||||||
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Loss from continuing operations before cumulative
effect of a change in accounting principle
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(28.7 | ) | (6.7 | ) | |||||
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Cumulative effect of change in accounting
principle, net of income taxes of $0
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— | (11.7 | ) | ||||||
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Net loss
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$ | (28.7 | ) | $ | (18.4 | ) | |||
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Net loss per basic and diluted common share:
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Continuing operations
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$ | (0.34 | ) | $ | (0.10 | ) | |||
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Cumulative effect of a change in accounting
principle
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— | (0.17 | ) | ||||||
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Net loss
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$ | (0.34 | ) | $ | (0.27 | ) | |||
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Average common shares outstanding:
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Basic and diluted
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83.6 | 67.2 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
1
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
| March 31, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
| (Unaudited) | ||||||||||
| (in millions, | ||||||||||
| except per share data) | ||||||||||
| ASSETS | ||||||||||
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Current Assets:
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Cash and cash equivalents
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$ | 32.3 | $ | 81.3 | ||||||
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Accounts and other receivables, net
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408.4 | 373.0 | ||||||||
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Inventories
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174.8 | 171.6 | ||||||||
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Other
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192.5 | 177.4 | ||||||||
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Total current assets
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808.0 | 803.3 | ||||||||
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Property, plant and equipment, net
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749.3 | 737.8 | ||||||||
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Deferred tax assets
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167.6 | 165.0 | ||||||||
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Goodwill
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1,295.1 | 1,265.5 | ||||||||
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Intangible assets, net
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70.0 | 85.3 | ||||||||
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Other assets
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105.9 | 100.2 | ||||||||
| $ | 3,195.9 | $ | 3,157.1 | |||||||
| LIABILITIES AND COMMON STOCKHOLDERS’ EQUITY | ||||||||||
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Current Liabilities:
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Short-term borrowings
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$ | 4.0 | $ | 10.5 | ||||||
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Current maturities of long-term debt
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24.3 | 23.5 | ||||||||
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Accounts payable
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628.2 | 580.5 | ||||||||
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Accrued expenses
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341.4 | 314.9 | ||||||||
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Total current liabilities
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997.9 | 929.4 | ||||||||
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Long-term debt and capital lease obligations
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1,248.3 | 1,255.2 | ||||||||
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Other, including pensions and post-retirement
benefit obligation
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428.1 | 438.4 | ||||||||
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Commitments and contingencies
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Minority interest in consolidated subsidiary
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8.0 | 12.7 | ||||||||
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Mandatorily redeemable preferred stock of
subsidiary
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132.5 | 123.9 | ||||||||
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Common stock ($.01 par value, 300.0 shares
authorized, 83.6 shares issued and outstanding at
March 31, 2003 and December 31, 2002)
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0.8 | 0.8 | ||||||||
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Other paid-in capital
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1,282.3 | 1,282.3 | ||||||||
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Accumulated deficit
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(801.3 | ) | (772.6 | ) | ||||||
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Accumulated other comprehensive loss
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(100.7 | ) | (113.0 | ) | ||||||
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Total common stockholders’ equity
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$ | 381.1 | $ | 397.5 | ||||||
| $ | 3,195.9 | $ | 3,157.1 | |||||||
The accompanying notes are an integral part of the consolidated financial statements.
2
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
| Quarter Ended | ||||||||||
| March 31, | ||||||||||
| 2003 | 2002 | |||||||||
| (Unaudited) | ||||||||||
| (in millions) | ||||||||||
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OPERATING ACTIVITIES
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Net loss
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$ | (28.7 | ) | $ | (18.4 | ) | ||||
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Adjustments to derive cash flow operating
activities:
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Cumulative effect of change in accounting
principle
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— | 11.7 | ||||||||
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Impairment of fixed assets
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7.7 | — | ||||||||
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Impairment of long lived assets
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10.4 | — | ||||||||
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Deferred income tax (benefit) expense
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(2.6 | ) | 3.7 | |||||||
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Subsidiary preferred stock requirements
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8.6 | 11.2 | ||||||||
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Depreciation
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26.6 | 26.7 | ||||||||
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Amortization of other assets
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6.8 | 3.8 | ||||||||
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Decrease in accounts and other receivables
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(17.3 | ) | (1.4 | ) | ||||||
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Reduction of participating interests in accounts
receivable, net of redemptions
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(5.0 | ) | (79.9 | ) | ||||||
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Increase in inventories
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(0.8 | ) | (11.2 | ) | ||||||
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Increase in accounts payable
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36.6 | 63.0 | ||||||||
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Increase in interest payable
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26.3 | 41.3 | ||||||||
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Changes in other assets
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(42.3 | ) | 16.5 | |||||||
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Changes in other liabilities
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3.0 | 7.2 | ||||||||
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Net cash provided by operating activities
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29.3 | 74.2 | ||||||||
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INVESTING ACTIVITIES
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Additions to property, plant and equipment
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(35.4 | ) | (27.4 | ) | ||||||
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Sales of property, plant and equipment
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3.1 | — | ||||||||
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Payments for acquisitions and related costs
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(33.0 | ) | (22.6 | ) | ||||||
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Net cash used in investing activities
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(65.3 | ) | (50.0 | ) | ||||||
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FINANCING ACTIVITIES
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Issuance of long-term debt
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0.3 | 1.3 | ||||||||
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Repayment of long-term debt
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(6.5 | ) | (4.6 | ) | ||||||
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Decrease of short-term borrowings
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(6.8 | ) | (2.7 | ) | ||||||
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Net cash used in financing activities
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(13.0 | ) | (6.0 | ) | ||||||
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Increase (decrease) in cash and cash
equivalents
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(49.0 | ) | 18.2 | |||||||
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Cash and cash equivalents at beginning of period
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81.3 | 73.9 | ||||||||
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Cash and cash equivalents at end of period
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$ | 32.3 | $ | 92.1 | ||||||
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Supplementary information:
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Taxes paid
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$ | 3.6 | $ | 4.3 | ||||||
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Interest paid
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$ | 5.9 | $ | 6.1 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
3
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
1. Organization
Collins & Aikman Corporation (the “Company”) is a Delaware corporation, headquartered in Troy, Michigan. The Company conducts all of its operating activities through its wholly owned Collins & Aikman Products Co. (“Products”) subsidiary. The Company is a global leader in design, engineering and manufacturing of automotive interior components, including instrument panels, fully assembled cockpit modules, floor and acoustic systems, automotive fabric, interior trim and convertible top systems. The Company changed the composition of its reportable segments beginning January 1, 2003 and restated prior period segment data to be comparable. The Company operates through four segments: Trim and Cockpit Systems, Flooring and Acoustics Systems, Automotive Fabrics and Specialty Systems.
2. Basis of Presentation
a. Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. In the opinion of management, the accompanying condensed consolidated financial statements reflect 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 2003 presentation. Results of operations for interim periods are not necessarily indicative of results for the full year. The accompanying consolidated financial statements and footnotes should be read in conjunction with the Company’s 2002 Annual Report on Form 10-K.
b. Reverse Stock Split
On May 28, 2002, the Company effected a one-for-2.5 reverse stock split of common stock. All shares and per share data have been adjusted retroactively for all periods presented to reflect the stock split.
c. Employee Stock Options
Employee Stock Options: Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure amended SFAS No. 123, “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based employee compensation and amended the required disclosures. SFAS No. 123 encourages companies to adopt the fair value method for compensation expense recognition related to employee stock options. The accounting requirements of Accounting Principles Board Opinion (APB) No. 25 “Accounting for Stock Issued to Employees” use the intrinsic value method in determining compensation expense, which represents the excess of the market price of the stock over the exercise price on the measurement date. The Company has elected to continue to utilize the accounting provisions of APB No. 25 for stock options, and is required to provide pro forma disclosures of net income and earnings per share had the Company adopted the fair value method for recognition purposes. The following
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
tabular information is presented as if the Company had adopted SFAS No. 123 and restated its results: (in millions, except per share amounts).
| Quarter Ended | ||||||||||
| March 31, | March 31, | |||||||||
| 2003 | 2002 | |||||||||
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Net (loss):
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As reported
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$ | (28.7 | ) | $ | (18.4 | ) | ||||
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Total employee stock based compensation expense
determined under fair value based method for all awards, net of
tax
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(1.5 | ) | (0.9 | ) | ||||||
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Pro forma, net (loss)
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$ | (30.2 | ) | $ | (19.3 | ) | ||||
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Basic and diluted loss per share(a):
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As reported
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$ | (0.34 | ) | $ | (0.27 | ) | ||||
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Pro forma
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$ | (0.36 | ) | $ | (0.29 | ) | ||||
| (a) | Adjusted to reflect the impact of the reverse stock split. |
During the first quarter 2003 the Company repriced 3,559,256 options with an exercise price of $10.00 to an exercise price of $8.00. In accordance with SFAS No. 123 the repriced options were revalued to determine additional compensation cost that resulted from the difference in the fair value of the options prior to repricing and subsequent to repricing. As a result of the repricing the options increased in value by $611,000. The additional value will be allocated to compensation expense over the remaining vesting period on a net of tax basis. These options have a weighted average expected life of approximately 6 years. The assumptions used in valuing the repriced options are as follows: expected volatility ranged from 77.5% to 118%; expected lives ranged from 1 year to 6 years; the risk free interest rate ranged from 1.20% to 3.72% in 2003; and a zero expected dividend rate.
Additionally, as a result of repricing the Company’s stock options, the options are treated as variable-based awards in accordance with APB No. 25. Since these options are considered to be variable-based awards, the Company will incur future compensation expense if the stock price exceeds the $8.00 exercise price established by repricing.
d. Impact of Prior Period Adjustments
During the Company’s review of its financial information in the third quarter 2002, an error in the mathematical computation of foreign currency exchange gains was discovered. The first quarter 2002 financial
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
statements reflect the correction of the error as a prior period adjustment. The impact of the adjustment on the previously reported prior period financial statements follows:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2002 | March 31, | |||||||
| (As Previously | 2002 | |||||||
| Reported) | (Adjusted) | |||||||
| (in millions, except | ||||||||
| per share data) | ||||||||
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Net sales
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$ | 914.8 | $ | 914.8 | ||||
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Cost of goods sold
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783.7 | 783.7 | ||||||
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Gross profit
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131.1 | 131.1 | ||||||
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Selling, general and administrative expenses
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67.6 | 67.6 | ||||||
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Restructuring charges and impairment of long
lived assets
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9.1 | 9.1 | ||||||
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Operating income
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54.4 | 54.4 | ||||||
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Other, net
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55.9 | 54.2 | ||||||
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Income (loss) from continuing operations before
income taxes
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(1.5 | ) | 0.2 | |||||
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Income tax expense
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5.9 | 6.9 | ||||||
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Income (loss) from continuing operations before
extraordinary items
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(7.4 | ) | (6.7 | ) | ||||
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Income from discontinued operations, net of
income taxes
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— | — | ||||||
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Cumulative effect of change in accounting
principle, net of income taxes(A)
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(11.7 | ) | (11.7 | ) | ||||
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Net income (loss)
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$ | (19.1 | ) | $ | (18.4 | ) | ||
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Earnings per share data:
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Net loss
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$ | (19.1 | ) | $ | (18.4 | ) | ||
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Loss on redemption of subsidiary preferred stock
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— | — | ||||||
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Net loss available to common shareholders
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$ | (19.1 | ) | $ | (18.4 | ) | ||
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Net loss per basic and diluted common share
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$ | (0.28 | ) | $ | (0.27 | ) | ||
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Average basic and diluted common shares
outstanding:
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67.2 | 67.2 | ||||||
| March 31, | ||||||||
| 2002 | March 31, | |||||||
| (As Previously | 2002 | |||||||
| Reported) | (Adjusted) | |||||||
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Accumulated deficit(A)
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$ | (701.9 | ) | $ | (701.2 | ) | ||
| (A) | Includes effect of $11.7 million (having no tax impact) cumulative effect of change in accounting principle recorded in June 2002, and accounted for as if it occurred on January 1, 2002. |
e. New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements.” This interpretation provides guidance on the identification of
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
variable interest entities, some of which may require consolidation based on factors beyond a majority voting interest. A variable interest entity is defined in FIN 46 as an entity in which either the equity investors (if any) do not have a controlling financial interest or the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company is currently unaware of any entities that exist that would qualify as a variable interest entity, but has not yet completed its analysis.
3. Acquisitions and Goodwill
| a. Acquisitions |
On January 2, 2003 the Company announced that it acquired Delphi Corp.’s plastic injection molding plant and related equipment in Logroño, Spain for $18 million. The 300,000 sq. ft. Logroño facility includes 24 injection molders and one Class-A paint line.
On January 17, 2003, the Company acquired the remaining 50% interest in an Italian automotive joint venture from Textron Inc., a related party, for $15 million, which also terminated a $28 million put-option by Textron that was exercisable in December 2004. During the first quarter the Company incurred fixed asset impairments of $7.7 million relating to the 50% interest owned previously.
b. Goodwill
During the second quarter of 2002, the Company completed the implementation of SFAS No. 142, “Goodwill and Other Intangible Assets”. Under SFAS No. 142, goodwill is no longer amortized. Instead, goodwill and indefinite-lived intangible assets are tested for impairment in accordance with the provisions of SFAS No. 142. The Company employed a discounted cash flow analysis and a market comparable approach in conducting its impairment tests. The Company completed its initial impairment test in the second quarter 2002 and recorded an impairment loss of $11.7 million (having no tax impact), or $0.17 per average basic and diluted share relating to the UK Plastics business in the Trim and Cockpit Systems segment. The impairment loss was reported as a cumulative effect of a change in accounting principle and, therefore, was accounted for as if it occurred on January 1, 2002. In addition, as required under SFAS No. 142 the Company subsequently completed an annual impairment test of goodwill and recorded no additional impairment. The Company completed this test again as of November 1, which indicated that the fair value of the reporting units exceeded the carrying values. Fair value was determined based upon the discounted cash flows of the reporting units while the market comparable approach consisted of an earnings multiple of forecasted EBITDA (operating income less — interest, taxes, depreciation and amortization) and a control premium on equity. Future cash flows and EBITDA are affected by future operating performance, which will be impacted by economic conditions, car builds, financial, business and other factors, many of which are beyond the Company’s control.
The Company completed the preparation of its first quarter 2003 financial statements. The results of which were below forecasts utilized in testing for goodwill impairment for the year ended December 31, 2002. During the second quarter 2003, the conditions in the markets in which the Company operates continued to deteriorate and customer production schedules continued to decline. As a result of these factors, the Company is currently revising its operating and financial plans for 2003 downward from its previous forecast. As a result of these events, the Company plans to conduct an impairment test (outside of the annual testing date of November 1st) during the second quarter 2003. If the results of the first step of the goodwill impairment test indicate a deficiency in the enterprise fair value compared to book value, the second step of the goodwill impairment test will be completed as required by SFAS No. 142, to determine the amount of goodwill impaired, if any. As noted in the Company’s 2002 Annual Report on Form 10-K, the enterprise fair value of the plastics reporting unit can be significantly impacted by an adverse change in assumptions. The carrying amount of the goodwill allocated to the Company’s Trim and Cockpits System segment is approximately
7