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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
Commission File No.: 001-13581
NOBLE INTERNATIONAL, LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3139487
(State of incorporation) (I.R.S. Employer
Identification No.)
28213 VAN DYKE AVENUE
WARREN, MICHIGAN 48093
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (586) 751-5600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, $.001 PAR VALUE NASDAQ NATIONAL MARKET
-------------------
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes [ ] No [X]
The aggregate market value of the shares of common stock, $.001 par
value ("Common Stock") held by non-affiliates of the registrant as of June 30,
2003 was approximately $41.1 million based upon the closing price for the Common
Stock on the NASDAQ on such date.
The number of shares of the registrant's Common Stock outstanding as of
March 5, 2004 was 8,940,467.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referred to herein) from the
Registrant's Proxy Statement for its 2004 Annual Meeting to be held May 5, 2004
(the "2004 Proxy Statement").
The matters discussed in this Annual Report on Form 10-K contain
certain forward-looking statements. For this purpose, any statements contained
in this Report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, words such as "may,"
"will," expect," "believe," "anticipate," "estimate," or "continue," the
negative or other variations thereof, or comparable terminology, are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, and actual results may differ materially
depending on a variety of factors, including continued market demand for the
types of products and services produced and sold by the Company, change in
worldwide economic and political conditions and associated impact on interest
and foreign exchange rates, the level of sales by original equipment
manufacturers of vehicles for which the Company supplies parts, the successful
integration of companies acquired by the Company, and changes in consumer debt
levels.
TABLE OF CONTENTS
PART I........................................................................................................... 3
Item 1. Business...................................................................................... 3
Item 2. Properties.................................................................................... 13
Item 3. Legal Proceedings............................................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders........................................... 14
PART II.......................................................................................................... 14
Item 5. Market for the Company's Common Equity and Related Stockholder Matters........................ 14
Item 6. Selected Financial Data....................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 25
Item 8. Financial Statements and Supplementary Data................................................... 26
Noble International, Ltd. and Subsidiaries Notes to Consolidated Financial Statements
Fiscal Years 2001, 2002 and 2003................................................................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 60
Item 9A. Controls and Procedures...................................................................... 60
PART III......................................................................................................... 61
Item 10. Directors and Executive Officers of the Registrant........................................... 61
Item 11. Executive Compensation....................................................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 61
Item 13. Certain Relationships and Related Transactions............................................... 61
Item 14. Principal Accountant's Fees and Services..................................................... 61
PART IV.......................................................................................................... 62
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 62
Schedule II - Valuation and Qualifying Accounts......................................................... 62
SIGNATURES.............................................................................................. 65
2
PART I
ITEM 1. BUSINESS
GENERAL
Noble International Ltd., through its subsidiaries, is a full-service
provider of tailored laser welded blanks for the automotive industry. Noble's
laser-welded blanks are manufactured from two or more blanks of varying
thickness and sizes welded together utilizing automated laser assemblies, and
are used by original equipment manufacturers or their suppliers in automobile
body components such as doors, fenders, bodyside panels, and pillars.
Noble operates four locations in Michigan, Kentucky and Canada. During
the first quarter of 2004, the Company opened a facility in Australia. Executive
offices are located at 28213 Van Dyke Ave, Warren, MI 48093, tel. (586)
751-5600. Noble's common stock is traded on the NASDAQ National Market under the
symbol NOBL. Additional information about the company, including SEC filings,
can be found on its web site, www.nobleintl.com.
Noble's fiscal year is the same as the calendar year. Thus any
reference to a fiscal year in this Report should be understood to mean the
period from January 1 to December 31 of that year.
HISTORY AND BUSINESS DEVELOPMENT
Noble International, Ltd. ("Noble") was incorporated on October 3, 1993
in the State of Michigan. On June 29, 1999 Noble reincorporated in the State of
Delaware. Since its formation in 1993, Noble has completed over two dozen
significant acquisitions and divestitures (the "Acquisitions"). As used in this
Annual Report (the "Report"), the term "Company" refers to Noble and its
subsidiaries and their combined operations, after consummation of all the
Acquisitions.
In 1996, the Company completed the acquisitions of Noble Component
Technologies, Inc. ("NCT"), Monroe Engineering Products, Inc. ("Monroe"), and
Cass River Coatings, Inc. ("Vassar").
In 1997, the Company completed the acquisitions of Skandy Corp.
("Skandy"), Utilase Production Processing, Inc. ("UPP"), Noble Metal Forming,
Inc. ("NMF"), and Noble Metal Processing, Inc. ("NMP"). In November 1997, the
Company completed an initial public offering of 3.3 million shares of common
stock resulting in gross proceeds of $29.7 million (the "Offering").
In 1998, the Company completed the acquisitions of Tiercon Plastics,
Inc. ("TPI"), Tiercon Coatings, Inc. ("TCI"), and Noble Metal
Processing-Midwest, Inc. ("NMPM").
In 1999, TPI and TCI were combined with and into Tiercon Industries,
Inc. ("Tiercon"). TPI and TCI continued to operate as separate divisions of
Tiercon. On August 31, 1999 the Company purchased certain assets of Jebco
Manufacturing, Inc. ("Jebco").
In 2000, the Company completed the sale of Noble Canada, Inc. ("Noble
Canada") including Tiercon (the "Tiercon Sale"). As part of the Tiercon Sale the
Company sold Vassar and NCT. The Tiercon Sale comprised all of the operating
companies classified as the Company's plastics and coatings division.
In 2000, the Company completed the acquisition of Noble Logistics
Services, Inc. ("NLS-TX"), (formerly known as DSI Holdings, Inc. ("DSI")). In
addition, in 2000, the Company completed the acquisition of Noble Logistic
Services, Inc. ("NLS-CA"), (formerly known as Assured Transportation & Delivery,
Inc. ("ATD") and its affiliate, Central Transportation & Delivery, Inc.
("CTD")).
In 2000, the Company completed the acquisition of Pro Motorcar
Products, Inc. ("PMP") and its affiliated distribution company, Pro Motorcar
Distribution, Inc. ("PMD").
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On February 16, 2001, the Company acquired a 49% interest in S.E.T.
Steel, Inc. ("SET") for $3.0 million (the "SET Acquisition"). SET is a Qualified
Minority Business Enterprise, providing metal processing services to original
equipment manufacturers ("OEMs"). Contemporaneously with the SET Acquisition,
the Company, through its wholly owned subsidiary Noble Manufacturing Group, Inc.
("NMG") (formerly known as Noble Technologies, Inc.), sold all of the capital
stock of NMPM and NMF to SET for $27.2 million (the "SET Sale"). On February 16,
2001, the Company received a note for $27.2 million due June 14, 2001. On June
28, 2001, SET completed bank financing of its purchase of NMF and NMPM and
repaid the $27.2 million note to the Company with $24.7 million in cash and a
$4.0 million, 12% subordinated note due in 2003. In addition, the Company
guaranteed $10.0 million of SET's senior debt. During the quarter ended
September 30, 2001, SET repurchased the Company's 49% interest for $3.0 million.
The Company received a $3.0 million, 12% subordinated note due in 2003. On April
1, 2002, the Company converted its $7.6 million note receivable, including
interest, from SET Enterprises, Inc. ("SET") into preferred stock of SET. The
preferred stock was non-voting and was redeemable at the Company's option in
2007. The Company agreed to convert the subordinated promissory note to
preferred stock in order to assist SET in obtaining capital without appreciably
decreasing the Company's repayment rights or jeopardize SET's minority status.
Management believes that continued support of SET furthers the joint strategic
objectives of the two companies. On August 1, 2003 SET completed its acquisition
of Michigan Steel Processing, Inc. ("MSP"), a subsidiary of Sumitomo Corporation
of America ("SCOA"). As part of the transaction, SCOA contributed 100% of the
common stock of MSP in exchange for 45% of the common stock of SET. In addition,
the Company reduced its guarantee of SET's senior debt from $10.0 million to
$3.0 million for a period of one year, after which the guarantee may be
eliminated. The Company exchanged its $7.6 million non-convertible, non-voting
redeemable preferred stock investment in SET for $7.6 million in Series A
non-convertible, non-voting preferred stock which provides an 8% annual
dividend, and is non-redeemable by the Company. The Series A preferred stock is
redeemable by SET at its option. In connection with the transaction, the Company
was issued 4% of the outstanding common stock of SET. The excess of the
estimated fair values of the preferred and common stock received over the
carrying value of the redeemable preferred stock has been recorded on the
Company's books as a component of other income in the statement of operations
for approximately $0.3 million.
On June 8, 2001, the Company acquired a 51% interest in SCO Logistics,
Inc. ("SCOL"). SCOL is a provider of logistics management services to the bulk
chemical industry. On October 1, 2001 the Company sold its interest in SCOL to
the management of SCOL for $0.35 million.
On December 18, 2001, the Company, through its wholly owned subsidiary
NMG, purchased 81% of the outstanding capital stock of Noble Construction
Equipment, Inc. ("NCE") (formerly known as Construction Equipment Direct, Inc.
("CED")), for $0.35 million in cash and stock valued at $0.35 million along with
a call right to purchase the balance of the stock. On December 19, 2001, NCE
purchased certain assets and assumed certain liabilities of Eagle-Picher
Industries, Inc.'s construction equipment division for approximately $6.1
million in cash. On December 21, 2001, NMG exercised its call option and
acquired the balance of the stock of NCE.
On October 4, 2002, the Company completed a secondary offering of
925,000 shares of its $0.001 par value common stock. The net proceeds of $8.6
million were used to reduce the Company's long-term debt.
On December 31, 2002, the Company, through its wholly-owned subsidiary
NMG, completed the sale of NCE for $14.0 million in cash. The transaction
resulted in a gain of $0.174 million, net of tax. The proceeds were used to
reduce the Company's long-term debt. The Company completed the transaction with
an entity in which the Company's Chairman and certain other officers have an
interest. An independent committee of the board of directors of the Company was
established to evaluate, negotiate, and completed the transaction. In addition,
an independent fairness opinion regarding the transaction was obtained.
4
On March 21, 2003, the Company completed the sale of its logistics
group for approximately $11.1 million in cash and notes as well as the
assumption of substantially all payables and liabilities. The transaction
included cash of $2.0 million at closing, two short-term notes totaling
approximately $5.1 million, a $1.5 million three-year amortizing note and a $2.5
million five-year amortizing note. The two long-term notes bear an annual
interest rate of 4.5% and will be repaid in equal monthly installments. On
August 14, 2003 the Company and the buyer amended the repayment terms of the
remaining balance on the short-term notes. The amended terms provide for
repayment of the short-term notes by July 31, 2004 and for payment of interest
on the outstanding balance at an annual rate of 7%.
On October 17, 2003, the Company acquired substantially all of the
assets of Prototube, LLC ("Prototube") from Weil Engineering GmbH ("Weil") and
Global Business Support, LLC ("GBS") for $0.1 million in cash plus the
assumption of $1.2 million in liabilities. Prototube manufactures a variety of
products with applications in the aerospace, automotive, housing, oil and other
industries. Its products are roll formed or stamped from flat steel or a laser
welded blank, then, utilizing a proprietary technology, they are formed into a
tube and laser welded. Prototube's production process allows parts to be
produced in several different shapes including round, rectangular and oval from
various types and thicknesses of steel, as well as aluminum. In addition to
multiple thicknesses of metal, Prototube can create multi-diameter products and
join curved surfaces together by adjusting the output power of the laser.
The Company made the decision to exit the distribution (Monroe, PMP,
PMD and Peco Manufacturing, Inc. "Peco") business in the fourth quarter of 2003
and has classified this operation as discontinued. On January 28, 2004 the
Company completed the sale of the distribution business to an entity in which
the Company's Chairman and another officer have an interest for approximately
$5.5 million in cash. An independent committee of the board of directors of the
Company was established to evaluate, negotiate and complete the transaction. In
addition, an independent fairness opinion regarding the transaction was
obtained.
As of December 31, 2003 the Company's continuing operating subsidiaries
are organized into a single reporting segment operating in the automotive supply
business. This segment includes NMP, Noble Metal Processing - Kentucky, LLC
("NMPK"), Noble Metal Processing - Canada, Inc. ("NMPC") and Prototube.
On January 21, 2004, the Company completed the acquisition of Prototech
Laser Welding, Inc. ("LWI") for approximately $14.0 million in cash and the
assumption of approximately $0.7 million in subordinated debt and up to an
additional $1.0 million payable if certain new business is awarded to Noble
within the next twelve months. LWI, based in Clinton Township, Michigan, is a
supplier of laser-welded blanks (LWB) to General Motors.
NARRATIVE DESCRIPTION OF INDUSTRY SEGMENTS
CONTINUING OPERATIONS
Automotive
As of December 31, 2003, the Company's continuing operations conduct
business in a single industry segment through NMP, Prototube, NMPC and NMPK,
(and subsequent to December 31, 2003, LWI). The Company is a supplier of
automotive components and value-added services to the automotive industry.
Customers include Original Equipment Manufacturers ("OEMs"), such as General
Motors ("GM"), DaimlerChrysler AG ("DCX"), Ford Motor Company ("Ford"), BMW of
North America LLC ("BMW"), Toyota Motor Corporation ("Toyota"), American Honda
Motor Company, Inc. ("Honda") and Nissan North America, Inc. ("Nissan"), as well
as other companies which are suppliers to OEMs ("Tier I suppliers"), such as
Tower Automotive, Inc., AK Steel, and Thyssen Steel Group Automotive, among
5
others. The Company, as a Tier I and Tier II supplier, provides prototype
design, engineering, laser welding of tailored blanks, tailor welded tubes and
other laser welding and cutting services of automotive components. The
Company's manufacturing facilities have been awarded both QS-9000 and ISO 14001
certifications.
The process of laser welding involves the concentration of a beam of
light, producing energy densities of 16 to 20 million watts per square inch, at
the point where two metal pieces are to be joined. Laser welding allows rapid
weld speeds with low heat input, thus minimizing topical distortion of the metal
and resulting in ductile and formable welds that have mechanical properties
comparable to, or in some cases superior to, the metal being welded. Laser welds
provide improved performance as well as visual aesthetics and allow significant
automation of the welding process.
Laser welding of blanks offers significant advantages over other blank
welding technologies, including cost, weight and safety benefits. The Company
has developed a technology and production process that the Company believes
permits it to produce laser welded blanks more quickly and with higher quality
and tolerance levels than its competitors. In 1995 and 2000, the UltraLight
Steel Auto Body Consortium, a worldwide industry association of steel producers,
commissioned a study which concluded that laser welded tailored blanks will play
a significant role in car manufacturing in the next decade as the automotive
industry is further challenged to produce lighter cars for better fuel economy,
with enhanced safety features and lower manufacturing costs. In addition, the
studies identified 21 potential applications for laser welding of tailored
blanks per vehicle. The Company has identified nine additional potential
applications.
DISCONTINUED OPERATIONS
Heavy Equipment
NCE designed, engineered, manufactured and assembled all terrain fork
trucks, truck mounted fork trucks, wheeled tractor scrapers and pull scrapers.
These products are then sold to an established system of dealers throughout the
United States, or are contract-built for customers like Caterpillar Inc. and
Terex Corporation. All of the products are made to order based on the customer's
specifications.
The Company made the strategic decision to exit this segment in the
fourth quarter of 2002 in order to focus on its core automotive operations. NCE
was sold in December 2002 for $14.0 million in cash. The Company completed the
transaction with an entity in which the Company's Chairman and another officer
have an interest. An independent committee of the board of directors of the
Company was established to evaluate, negotiate, and complete the transaction. An
independent fairness opinion regarding the transaction was obtained.
Logistics
NLS provided same day package delivery solutions to a wide variety of
industries. Services included both dedicated contract services and scheduled
routed services.
In the fourth quarter of 2002, the Company made the strategic decision
to exit the logistics business segment in order to focus on its core automotive
segment and has classified this operation as discontinued. On March 21, 2003 the
Company completed the sale of the logistics segment for approximately $11.1
million in cash and notes. The Company obtained an independent fairness opinion
regarding the transaction.
Distribution
The Company, through Monroe, PMP and PMD, distributes tooling
components, including adjustable handles, hand wheels, plastic knobs, levers,
handles, hydraulic clamps, drills, jigs and permanent magnets to various
customers. Monroe's primary tooling component product line is Kipp(R)
6
brand standard and heavy duty adjustable handles, representing approximately
one-half of its tooling component sales. Monroe also distributes Elesa(R) brand
high tensile plastic hand wheels, knobs, handles and levers, representing
approximately one-quarter of tooling component sales. Although most tooling
component products are sold off the shelf, Monroe does perform some light
machining of parts for custom orders.
Monroe is a distributor for Kipp(R) products and holds the U.S. patent
rights to Kipp(R) adjustable handles. Monroe also holds non-exclusive rights to
distribute Elesa(R), Boutet and Brauer products throughout North America.
PMP and PMD manufacture and distribute products used in the paint and
coatings industry as well as proprietary products such as paint measurement
gauges, portable tint meter gauges, and UV curing lamps.
In the fourth quarter of 2003, the Company made the strategic decision
to exit the distribution business segment in order to focus on its core
automotive segment and has classified this operation as discontinued. On January
28, 2004, the Company completed the sale of the distribution business (Monroe,
PMP, PMD, and Peco) for approximately $5.5 million in cash. The Company sold the
business to an entity in which the Company's Chairman and another officer have
an interest. An independent committee of the board of directors was formed to
evaluate, negotiate and complete the sale of this business. In addition, an
independent fairness opinion regarding the fairness of the transaction was
obtained.
DESIGN AND ENGINEERING
The development of new automobile models or the redesign of existing
models generally begins two to five years prior to the marketing of such models
to the public. The Company's engineering staff typically works with OEM and Tier
I engineers early in the development phase to design specific automotive body
components for the new or redesigned models. The Company also provides other
value-added services, such as prototyping, to its automotive customers.
Internally, the Company's engineering and research staff designs and
integrates proprietary laser welding systems using latest design techniques.
These systems are for exclusive use by the Company and are not marketed or sold
to third parties. Continued strategic investment in process technology is
essential for the Company to remain competitive in the markets it serves, and
the Company plans to continue to make appropriate levels of research and
development expenditures.
MARKETING
The Company's sales and engineering staff is located in direct
proximity to major customers. Typically, OEMs and Tier I suppliers conduct a
competitive bid process to select laser welders for the parts that they will
include in their end products. The Company's direct sales force, marketing and
technical personnel work closely with OEM engineers to satisfy the OEMs'
specific requirements. In addition, the Company's technical personnel will spend
a significant amount of time assisting OEM engineers in product planning and
integration of laser welded components in future automotive models.
RAW MATERIALS
The raw materials required for the Company's automotive operations
include rolled and coated steel and gases such as carbon dioxide and argon. The
Company obtains its raw materials and purchased parts from a variety of
suppliers. The Company does not believe that it is dependent upon any of its
suppliers, despite concentration of purchasing of certain materials from a few
sources, as other suppliers of the same or similar materials are readily
available. The Company typically purchases its raw materials on a purchase order
basis as needed and has generally been able to obtain adequate supplies of raw
materials for its operations. The majority of the steel is purchased through
OEMs' steel buying programs. Under these programs the Company purchases the
steel from specific suppliers at the steel
7
price the customers negotiated with the steel suppliers. Although the Company
does take ownership of the steel, the steel price risk is borne by the customer.
Further, a portion of the automotive operations involves the toll processing of
materials supplied by another Tier I customer, typically a steel manufacturer.
Under these arrangements the Company charges a specified fee for operations
performed without acquiring ownership of the steel.
PATENTS AND TRADEMARKS
The Company owns a number of patents and trademarks related to its
products and methods of manufacturing. The loss of any single patent or group of
patents would not have a material adverse effect on the Company's business. The
Company also has proprietary technology and equipment that constitute trade
secrets, which it has chosen not to register in order to avoid public disclosure
thereof. The Company relies upon patent and trademark law, trade secret
protection and confidentiality or license agreements with its employees,
customers and third parties to protect its proprietary rights.
SEASONALITY
The Company's automotive operations business is largely dependent upon
the automotive industry, which is highly cyclical and is dependent on consumer
spending. In addition, the automotive component supply industry is somewhat
seasonal. Increased revenues and operating income are generally experienced
during the second calendar quarter as a result of the automotive industry's
spring selling season, the peak sales and production period of the year. Revenue
and operating income generally decreases during July and December of each year
as a result of changeovers in production lines for new model years as well as
scheduled OEM plant shutdowns for vacations and holidays.
The Company's historical results of operations have generally not
reflected typical cyclical or seasonal fluctuations in revenues and operating
income. The acquisitions and dispositions completed by the Company have resulted
in a growth trend which may have masked the effect of typical seasonal
fluctuations. There can be no assurance that the Company's business will
continue its historical growth trend, or that it will conform to industry norms
for seasonality in future periods.
CUSTOMERS
In 2003, automotive industry customers accounted for substantially all
of the Company's consolidated net sales from continuing operations. Three
customers accounted for 37%, 18% and 17% of consolidated net sales from
continuing operations, respectively, in 2003. For the year ended December 31,
2002 two customers accounted for 41% and 25%, respectively, of net sales from
continuing operations. For the year ended December 31, 2001 one customer
accounted for 19% of net sales from continuing operations.
COMPETITION
The automotive component supply and tooling component industries are
highly competitive. In the automotive segment the Company's primary competitors
are TWB Company, Shiloh Industries Inc. and PowerLasers Ltd. Competition in this
segment is based on many factors, including engineering, product design, process
capability, quality, cost, delivery and responsiveness. The Company believes
that its performance record places it in a strong competitive position, although
there can be no assurance that it can continue to compete successfully against
existing or future competitors in each of the markets in which it competes.
ENVIRONMENTAL MATTERS
Within the automotive component supply operations, the Company is
subject to environmental laws and regulations concerning emissions to the air,
discharges to waterways, and generation, handling, storage, transportation,
treatment and disposal of waste materials. The Company is also subject to other
Federal and state laws and regulations regarding health and safety matters. Each
of the Company's
8
production facilities has permits and licenses allowing and regulating air
emissions and water discharges. The Company believes that it is currently in
compliance with applicable environmental and health and safety laws and
regulations.
EMPLOYEES
As of December 31, 2003, the Company employed 578 people in its
continuing operations. This total included 416 production employees,
approximately 50 independent production contractors, and 112 managerial,
research and administrative personnel. The Company believes that its relations
with its employees are satisfactory. One NMP plant elected to be represented by
the International Union, United Automobile, Aerospace, and Agricultural
Implement Workers of America ("UAW") in 1999 and a collective bargaining
agreement was entered into in September 2000 which expired in December 2003. In
January, 2004, the Company entered into a new five year collective bargaining
agreement with the UAW which expires in December 2008. The plant has not been
subject to a strike, lockout or other major work stoppage.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
International operations are subject to certain additional risks
inherent in conducting business outside the United States, such as changes in
currency exchange rates, price and currency exchange controls, import
restrictions, nationalization, expropriation and other governmental action.
RISK FACTORS
The following factors are important and should be considered carefully
in connection with any evaluation of the Company's business, financial
condition, results of operations and prospects. Additionally, the following
factors could cause the Company's actual results to differ materially from those
reflected in any forward-looking statements of the Company. The factors
identified here do not represent an exhaustive list of potential risks involved
in our business that are beyond the Company's control.
Outstanding Indebtedness. In order to finance its operations, including
costs related to the consummation of various acquisitions, the Company has
incurred substantial indebtedness. The Company's credit facilities are secured
by substantially all of its assets as well as the assets of its subsidiaries. In
addition to certain financial covenants, the Company's credit facilities
restrict its ability to incur additional indebtedness or pledge assets. As of
the date of this report, the Company is in compliance with all of the terms of
its credit facilities. There can be no assurance, however, that the Company will
be able to comply with the terms of its credit facilities in the future. At
December 31, 2003, the Company has a $54 million credit facility (the "Credit
Facility") with a syndicate of banks led by Comerica Bank N.A. as agent,
expiring in July 2006. In January 2004, the credit facility was increased to $74
million primarily to facilitate the acquisition of LWI (refer to Note F).
On March 26 2004, the Company issued $40 million in 4% unsecured
convertible subordinated notes (the "Note") in a private placement. The Note has
a three year term, maturing on March 31, 2007 and may be extended another three
years at the holder's option. The Note is convertible at the holder's option at
anytime prior to maturity into shares of the Company's common stock at $32 per
share (subject to adjustment pursuant to the terms of the Note). The interest
rate on the Note is 4% and is fixed for the entire term. Proceeds from the Note
are being used to reduce the Company's current bank borrowings, including paying
off the term loan balance and reducing amounts outstanding under the $35 million
revolving credit facility, which remains in place.
Debt Service Obligations. The Company's business is subject to all of
the risks associated with substantial leverage, including the risk that
available cash may not be adequate to make required payments. The Company's
ability to satisfy outstanding debt obligations from cash flow will be dependent
upon its future performance and will be subject to financial, business and other
factors, many of which may be beyond its control. In the event that the Company
does not have sufficient cash
9
resources to satisfy its repayment obligations, it would be in default, which
would have a material adverse effect on its business. To the extent that the
Company is required to use cash resources to satisfy interest payments to the
holders of outstanding debt obligations, it will have fewer resources available
for other purposes.
Reliance on Major Customers. Sales to the automotive industry accounted
for all of the Company's sales from continuing operations in 2003. In addition,
the Company's automotive sales are highly concentrated among a few major OEMs
and automotive suppliers. Thus, the loss of any significant customer could have
a material adverse effect on the Company's business. As is typical in the
automotive supply industry, the Company has no long-term contracts with any of
its customers. The Company's customers provide annual estimates of their
requirements; however, sales are made on a short-term purchase order basis.
There is substantial and continuing pressure from the major OEMs and Tier I
suppliers to reduce costs, including the cost of products purchased from outside
suppliers. If in the future the Company is unable to generate sufficient
production cost savings to offset price reductions, its gross margins could be
adversely affected.
Risks Relating to Acquisitions. The automotive component supply
industry is undergoing consolidation as OEMs seek to reduce both their costs and
their supplier base. Future acquisitions may be made in order to enable the
Company to expand into new geographic markets, add new customers, provide new
products, expand manufacturing and service capabilities and increase automotive
model penetration with existing customers. There can be no assurance that the
Company will be successful in identifying appropriate acquisition candidates or
in successfully combining operations with such candidates if they are
identified. It should be noted that any acquisitions could involve the dilutive
issuance of equity securities or the incurrence of debt. In addition,
acquisitions involve numerous other risks, including difficulties in
assimilation of the acquired company's operations following consummation of the
acquisition, the diversion of management's attention from other business
concerns, risks of producing products we have limited experience with, the
potential loss of key customers of the acquired company, and the ability of
pre-acquisition due diligence to identify all possible issues that may arise
with respect to products of the acquired company. All these acquisition risks
could materially and adversely affect the financial performance of the Company.
Failure to Obtain Business on New and Redesigned Model Introductions.
The Company's automotive product lines are subject to change as its customers,
including both OEMs and Tier I suppliers, introduce new or redesigned products.
The Company competes for new business both at the beginning of the development
phase of new vehicle models, which generally begins two to five years prior to
the marketing of such models to the public, and upon the redesign of existing
models. The Company's sales would be adversely affected if the Company fails to
obtain business on new models, or fails to retain or increase business on
redesigned existing models, or if the Company's customers do not successfully
introduce new products incorporating the Company's products, or if market demand
for these new products does not develop as anticipated.
Dependence on Continuous Improvement of Production Technologies. The
Company's ability to continue to meet customer demands within its automotive
operations with respect to performance, cost, quality and service will depend,
in part, upon its ability to remain technologically competitive with its
production processes. New automotive products are increasingly complex, require
increased welding precision, use of various materials and have to be run at
higher production speeds and with lower scrap ratios in order to reduce costs.
The investment of significant additional capital or other resources may be
required to meet this continuing challenge. If the Company is unable to improve
its production technologies, it will lose business and possibly be forced to
exit from the particular market.
Design and Engineering Resources. Within the automotive industry, OEMs
and Tier I suppliers require their suppliers to provide design and engineering
input during the product development process. The direct costs of design and
engineering are generally borne by the Company's customers. However, the Company
bears the indirect cost associated with the allocation of limited design and
engineering
10
resources to such product development projects. Despite the Company's up-front
dedication of design and engineering resources, its customers are under no
obligation to order the subject components or systems from the Company following
their development. In addition, when the Company deems it strategically
advisable, it may also bear the direct up-front design and engineering costs as
well. There can be no assurance that the Company's dedication of design and
engineering resources, or up-front design and engineering expenditures, will not
have a material adverse effect on the Company's financial condition or results
of operations.
Industry Cyclicality and Seasonality. The automotive industry is highly
cyclical and dependent on consumer spending. Economic factors adversely
affecting automotive production and consumer spending could adversely impact the
Company's business. In addition, the automotive component supply industry is
somewhat seasonal. The Company's need for continued significant expenditures for
capital equipment purchases, equipment development and ongoing manufacturing
improvement and support, among other factors, make it difficult for us to reduce
operating expenses in a particular period if our net sales forecasts for such
period are not met, because a substantial component of our operating expenses
are fixed costs. Generally, revenue and operating income increase during the
second calendar quarter of each year as a result of the automotive industry's
spring selling season, which is the peak sales and production period of the
year. Revenue and operating income generally decrease during July and December
of each year as a result of changeovers in production lines for new model years
as well as scheduled OEM plant shutdowns for vacations and holidays.
The Company's historical results of operations have generally not
reflected typical cyclical or seasonal fluctuations in revenues and operating
income. The acquisitions and divestitures completed by the Company have resulted
in a growth trend through successive periods which has masked the effect of
typical seasonal fluctuations. There can be no assurance that the Company's
business will continue its historical growth trend, that it will continue to be
profitable or that it will conform to industry norms for seasonality in future
periods.
Risk of Labor Interruptions. Within the automotive supply industry
substantially all of the hourly employees of the OEMs and many Tier I suppliers
are represented by labor unions, and work pursuant to collective bargaining
agreements. The failure of any of the Company's significant customers to reach
agreement with a labor union on a timely basis, resulting in either a work
stoppage or strike, could have a material adverse effect on the Company's
business. During 1999, production workers at the Company's NMP facility in
Michigan elected to be represented by the UAW. A three year collective
bargaining agreement was entered into in September 2000 and expired in December
2003. In January 2004, the Company entered into a new five year collective
bargaining agreement, which expires in December 2008, with the UAW at its NMP
facility in Michigan. Although this plant has never been subject to a strike,
lockout or other major work stoppage, any such incident would have a material
adverse effect on the Company's operating income.
Product Liability Exposure. Within the automotive operations, the
Company faces an inherent business risk of exposure to product liability claims
if the failure of one of its products results in personal injury or death. There
can be no assurance that material product liability losses will not occur in the
future. In addition, if any of the Company's products prove to be defective, the
Company may be required to participate in a recall involving such products. The
Company maintains insurance against product liability claims, but there can be
no assurance that such coverage will be adequate or will continue to be
available to the Company on acceptable terms or at all. A successful claim
brought against the Company in excess of available insurance coverage or a
requirement to participate in any product recall could have a material adverse
effect on its business.
Impact of Environmental Regulation. The Company is subject to the
requirements of federal, state and local environmental and occupational health
and safety laws and regulations. Although the Company has made and will continue
to make expenditures to comply with environmental requirements, these
requirements are constantly evolving, and it is impossible to predict whether
compliance with these laws and regulations may have a material adverse effect on
the Company in the future. If a release of
11
hazardous substances occurs on or from the Company's properties or from any of
its disposals at offsite disposal locations, or if contamination is discovered
at any of the Company's current or former properties, it may be held liable, and
the amount of such liability could be material.
Dependence on Key Personnel. The Company's operations are dependent
upon its ability to attract and retain qualified employees in the areas of
engineering, operations and management, and are greatly influenced by the
efforts and abilities of Robert J. Skandalaris, Chairman and Christopher L.
Morin, President and Chief Executive Officer, as well as its other executive
officers. The Company has employment agreements with Mr. Skandalaris, Mr. Morin
and several other officers. The Company does not maintain key-person life
insurance on its executives.
Control by Existing Stockholders. Robert J. Skandalaris owns and/or
controls approximately 24% of the outstanding Common Stock. As a result, Mr.
Skandalaris is able to exert significant influence over the outcome of all
matters submitted to a vote of the Company's stockholders, including the
election of directors, amendments to the Company's Certificates of Incorporation
and approval of significant corporate transactions. Such consolidation of voting
power could also have the effect of delaying, deterring or preventing a change
in control that might be beneficial to other stockholders.
Anti-Takeover Provisions. Certain provisions of the Company's
Certificate of Incorporation and Bylaws may inhibit changes in control of the
Company not approved by the Board of Directors. These provisions include: (i) a
prohibition on stockholder action through written consents; (ii) a requirement
that special meetings of stockholders be called only by the Board of Directors;
(iii) advance notice requirements for stockholder proposals and nominations;
(iv) limitations on the ability of stockholders to amend, alter or repeal the
Bylaws; and (v) the authority of the Board of Directors to issue, without
stockholder approval, preferred stock with such terms as the Board of Directors
may determine. The Company will also be afforded the protections of Section 203
of the Delaware General Corporation Law, which could have similar effects.
Risks Associated With International Operations. The Company operates a
production facility in Ontario, Canada, and has opened a facility during the
first quarter of 2004 in Australia. The Company's business strategy may include
the continued expansion of international operations. As the Company expands its
international operations, it will increasingly be subject to the risks
associated with such operations, including: (i) fluctuations in currency
exchange rates; (ii) compliance with local laws and other regulatory
requirements; (iii) restrictions on the repatriation of funds; (iv) inflationary
conditions; (v) political and economic instability; (vi) war or other
hostilities; (vii) overlap of tax structures; and (viii) expropriation or
nationalization of assets. The inability to effectively manage these and other
risks could adversely affect the Company's business.
Shares Eligible for Future Sale. The Company cannot predict the effect
that future sales of Common Stock will have on the market price of the Common
Stock. Sales of substantial amounts of Common Stock, or the perception that such
sales could occur, could adversely affect the market price of the Common Stock.
Approximately 22,233 of the shares of Common Stock currently issued and
outstanding are "restricted securities" as that term is defined under Rule 144
under the Securities Act of 1933 and may not be sold unless they are registered
or unless an exemption from registration, such as the exemption provided by Rule
144, is available. All of these restricted securities are currently eligible for
resale pursuant to Rule 144, subject in most cases to the volume and manner of
sale limitations prescribed by Rule 144.
Possible Volatility of Trading Price. The trading price of the Common
Stock could be subject to significant fluctuations in response to, among other
factors, variations in operating results, developments in the automotive
industry, general economic conditions, fluctuations in interest rates and
changes in securities analysts' recommendations regarding the Company's
securities. Such volatility may adversely affect the market price of our Common
Stock.
12
The Failure of SET could materially adversely affect our financial
condition. In February 2001, the Company sold two of its non-core subsidiaries
to SET Enterprises, Inc., a qualified minority business enterprise providing
metal processing services to the automotive OEMs. The Company currently holds
$7.6 million in face value of 8% Series A non-convertible, non-voting preferred
stock of SET. The Company provides a guarantee of $3.0 million of SET's senior
debt, which is scheduled to mature in August 2004, incurred in connection with
its purchase of the Company's subsidiaries, and the Company holds approximately
4% of SET's common stock. Due to the amounts invested in the Company's
relationship with SET, the failure of SET's business could materially adversely
affect the Company's financial condition if it resulted in its inability to
recover its investment in preferred stock and common stock, and SET's inability
to pay dividends, the Company's accounts receivable, and to pay its senior debt
resulting in our requirement to perform under our guarantee.
ITEM 2. PROPERTIES
As of December 31, 2003, the Company's continuing operations consisted
of its automotive business, which operated four production facilities in the
United States and one facility in Canada. These facilities are used for multiple
purposes and range in size from 5,000 square feet to 524,000 square feet, with
an aggregate of approximately 743,000 square feet. These production facilities
are leased under operating leases with expiration dates ranging from 2005 to
2016.
The Company owns two properties totaling approximately 240,000 square
feet that it has classified as held for sale.
None of the Company's facilities, other than those that are currently
held for sale, is materially underutilized. Management believes that all of the
Company's property and equipment, owned or leased, is in good, working
condition, is well maintained and provides sufficient capacity to meet the
Company's current and expected manufacturing and distribution needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings, other than routine
litigation incidental to its business, none of which is material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted for a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
13
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market
under the symbol NOBL. Prior to June 30, 1998 the common stock traded on AMEX
under the symbol NIL. The following table sets forth the range of high and low
sales prices for the common stock for each period indicated:
HIGH LOW
------ ------
2002
First Quarter $14.50 $ 7.91
Second Quarter 16.00 10.45
Third Quarter 11.69 8.65
Fourth Quarter 11.10 6.41
2003
First Quarter $ 8.89 $ 5.61
Second Quarter 8.78 5.84
Third Quarter 12.14 8.60
Fourth Quarter 23.22 11.11
As of March 15, 2004 there were approximately 74 record holders and
approximately 2,350 beneficial owners of the Company's common stock.
The information required to be furnished pursuant to this item with
respect to compensation plans under which equity securities of the Company are
authorized for issuance will be set forth under the caption "Executive
Compensation and Other Information" in the 2004 Proxy Statement, and is
incorporated herein by reference.
Dividends
During the fiscal years ending December 31, 2002 and 2003, the Company
paid $2.247 million and $2.501 million in dividends, respectively. The dividend
payments were made pursuant to resolutions of the Board of Directors in February
2002, May 2002, and May 2003 to pay regular quarterly cash dividends of $0.08
per share. In February 2004, the Company's Board of Directors approved a
resolution to increase the quarterly cash dividend to $0.10 per share. There
are currently no restrictions on the Company's ability to pay its regular
quarterly cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for each of the five
fiscal years in the period ended December 31, 2003 is derived from the audited
financial statements of the Company and should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere herein or
in prior filings. See "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations." Numbers from the following
consolidated statement of operations are in millions and are subject to
rounding.
14
1999 2000 2001 2002 2003
-----------------------------------------------------------------------------
(Dollars in millions, except share and per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS:
Net sales $ 81.3 $ 83.7 $ 70.8 $ 120.8 $ 183.8
Cost of sales 54.8 62.8 55.6 102.9 156.9
------------- ------------- ------------- ------------- -------------
Gross Margin 26.5 20.9 15.2 17.9 26.9
Selling, general and administrative 14.6 17.3 7.6 10.3 12.3
------------- ------------- ------------- ------------- -------------
Operating profit 11.9 3.6 7.6 7.6 14.6
Interest income - - 1.6 0.9 0.6
Interest expense (1.6) (1.7) (2.1) (0.8) (2.4)
Litigation settlement - - - (1.1) 0.1
Other, net 0.3 0.3 1.6 (0.9) 0.9
------------- ------------- ------------- ------------- -------------
Earnings from continuing operations before
income taxes and extraordinary items 10.6 2.2 8.7 5.7 13.8
Income tax expense 4.0 0.9 2.7 1.6 4.7
------------- ------------- ------------- ------------- -------------
Earnings from continuing operations before
extraordinary items 6.6 1.3 6.0 4.1 9.1
Earnings (loss) from discontinued operations 0.2 (0.2) (1.9) (17.4) (3.2)
Gain (loss) on sale of discontinued operations - 10.0 - 0.1 (0.7)
------------- ------------- ------------- ------------- -------------
Earnings(loss) before extraordinary items 6.8 11.1 4.1 (13.2) 5.2
Extraordinary items (1) (2) (3) - (0.3) 1.5 0.3 -
------------- ------------- ------------- ------------- -------------
Net earnings (loss) $ 6.8 $ 10.8 $ 5.6 $ (12.9) $ 5.2
============= ============= ============= ============= =============
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Earnings per common share from continuing
operations before extraordinary items $ 0.92 $ 0.18 $ 0.90 $ 0.57 $ 1.17
Earnings (loss) per common share from
discontinued operations before extraordinary
items 0.03 1.39 (0.28) (2.46) (0.50)
Extraordinary items (1) (2) (3) - (0.04) 0.24 0.05 -
------------- ------------- ------------- ------------- -------------
Basic earnings (loss) per common share $ 0.94 $ 1.52 $ 0.85 $ (1.84) $ 0.67
============= ============= ============= ============= =============
Basic weighted average common shares outstanding 7,192,328 7,112,311 6,626,212 6,995,153 7,779,472
============= ============= ============= ============= =============
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Earnings per common share from continuing
operations before extraordinary items $ 0.84 $ 0.17 $ 0.86 $ 0.57 $ 1.09
Earnings (loss) per common share from
discontinued operations before extraordinary
items 0.03 1.37 (0.24) (2.41) (0.43)
Extraordinary items (1) (2) (3) - (0.04) 0.20 0.04 -
------------- ------------- ------------- ------------- -------------
Diluted earnings (loss) per common share $ 0.87 $ 1.49 $ 0.82 $ (1.80) $ 0.66
------------- ------------- ------------- ------------- -------------
Diluted weighted average shares outstanding 8,530,981 7,234,786 7,776,451 7,158,982 9,044,376
============= ============= ============= ============= =============
OTHER FINANCIAL INFORMATION
CASH FLOW PROVIDED BY (USED IN):
Continuing operations $ 9.4 $ 11.2 $ (0.0) $ 8.1 $ 9.2
Discontinued operations (22.3) (2.3) 0.4 (4.1) (2.5)
Investing activities (16.1) 47.6 9.6 5.3 (3.6)
Financing activities 28.8 (56.1) (9.9) (8.9) (3.8)
CONSOLIDATED BALANCE SHEET:
Total assets 174.8 145.1 156.9 130.0 143.0
Net assets held for sale 71.9 38.3 45.1 18.1 9.3
Working capital (deficiency) 70.4 9.1 (38.7) 6.0 16.4
Total debt 118.1 73.7 71.3 57.6 53.0
Stockholders' equity 39.9 43.8 47.4 42.1 50.8
RECONCILATION OF EBITDA TO EARNINGS FROM
CONTINUING OPERATIONS (4):
Net Income from Continuing Operations $ 6.6 $ 1.3 $ 6.0 $ 4.1 $ 9.1
Income tax expense 4.0 0.9 2.7 1.6 4.7
Interest expense 1.6 1.7 2.1 0.8 2.4
Depreciation 4.7 5.5 4.5 5.7 7.0
Amortization 1.0 1.4 0.9 0.2 0.2
------------- ------------- ------------- ------------- -------------
EBITDA from Continuing Operations $ 17.9 $ 10.8 $ 16.2 $ 12.3 $ 23.4
============= ============= ============= ============= =============
15
(1) In 2000, an extraordinary loss was recorded as a result of the buyback of
6% convertible debentures. The convertible debentures had a face amount of
$6.376 million and were repaid at an agreed amount of $6.411 million. In
addition, approximately $0.3 million in financing costs relating to the
convertible debentures were written off.
(2) An after-tax extraordinary gain of $1.6 million was recorded in 2001 in
connection with the Company's acquisition by NCE of certain assets of
Eagle-Picher, Inc.'s construction equipment division. This gain was the
result of the implementation of Financial Accounting Standards Board
("FASB") Statement No. 141, "Business Combinations" which requires the
excess of the fair value of acquired net assets over the cost associated
with an acquisition be recognized as an extraordinary gain in the period
in which the transaction occurs. In December 2002 this segment was sold
for $14.0 million.
(3) In 2002, the Company closed the purchase price allocation period regarding
the acquisition of NCE and recognized a $0.315 million after-tax
extraordinary gain on the transaction resulting from certain post-closing
working capital adjustments that reduced the purchase price.
(4) EBITDA from continuing operations represents income from continuing
operations before income taxes, plus interest expense and depreciation and
amortization expense. EBITDA is not presented as, and should not be
considered, an alternative measure of operating results or cash flows from
operations (as determined in accordance with generally accepted accounting
principles), but is presented because it is a widely accepted financial
indicator of a company's ability to incur and service debt. While commonly
used, however, EBITDA is not identically calculated by companies
presenting EBITDA and is, therefore, not necessarily an accurate means of
comparison, and may not be comparable to similarly titled measures
disclosed by the Company's competitors. Management believes that EBITDA is
useful to both management and investors in their analysis of the Company's
ability to service and repay its debt. Further, management uses EBITDA for
planning and forecasting in future periods.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis of financial
condition and results of continuing operations should be read in conjunction
with the Company's consolidated financial statements and notes, and other
information thereto included elsewhere in this Report.
GENERAL
Noble International Ltd., through its subsidiaries, is a full-service
provider of tailored laser welded blanks for the automotive industry. On
December 31, 2002 the Company completed the sale of its heavy equipment segment
for $14.0 million in cash to a related party. This segment has been classified
as discontinued for fiscal years 2002 and prior. In the fourth quarter of 2002
the Company made the strategic decision to exit the logistics business and has
classified this segment as discontinued for fiscal years 2003 and prior. The
sale of the logistics segment was completed in March 2003 for approximately
$11.1 million in cash and notes. In the fourth quarter of 2003, the Company made
the strategic decision to exit the distribution business and has classified this
segment as discontinued in fiscal years 2003 and prior. The sale of the
distribution business was completed in January 2004 for approximately $5.5
million in cash to a related party. The Company's fiscal year is equivalent to
the calendar year. The following discussion relates to the Company's continuing
operations.
The Company is a leading supplier of automotive components and
value-added services to the automotive industry. Customers include Original
Equipment Manufacturers ("OEMs"), such as General Motors Corporation ("GM"),
DaimlerChrysler AG ("DCX"), Ford Motor Company ("Ford"), BMW of North America
LLC ("BMW"), Toyota Motor Corporation ("Toyota"), American Honda Motor Company,
Inc. ("Honda") and Nissan North America, Inc. ("Nissan"), as well as other
companies which are suppliers to OEMs ("Tier I suppliers"), such as Tower
Automotive, Inc., AK Steel, and Thyssen Steel Group Automotive, among others.
The Company, as a Tier I and Tier II supplier, provides prototype design,
16
engineering, laser welding of tailored blanks and other laser welding and
cutting services of automotive components. The Company's manufacturing
facilities have been awarded both QS-9000 and ISO 14001 certifications.
RESULTS OF OPERATIONS
To facilitate analysis, the following table sets forth certain
financial data for the Company:
(In thousands of dollars)
- -------------------------------------------------------------------------
2001 2002 2003
- -------------------------------------------------------------------------
Net sales $ 70,769 $120,800 $ 183,759
Cost of sales 55,608 102,904 156,909
-------- -------- ---------
Gross margin 15,161 17,896 26,850
Selling, general and
administrative expenses 7,527 10,268 12,235
-------- -------- ---------
Operating profit 7,634 7,628 14,615
Interest income 1,586 978 596
Interest expense (2,157) (836) (2,419)
Litigation settlement - (1,098) 73
Other, net 1,617 (935) 942
-------- -------- ---------
Earnings from continuing
operations before taxes 8,680 5,737 13,807
Income tax expense 2,698 1,666 4,673
-------- -------- ---------
Earnings from operations
before extraordinary items 5,982 4,071 9,134
(Loss) from discontinued
operations (1,887) (17,405) (3,221)
Gain (loss) on sale of - 174 (677)
discontinued operations
-------- -------- ---------
Earnings (loss) before 4,095 (13,160) 5,236
extraordinary items
Extraordinary items 1,567 315 -
-------- -------- ---------
Net earnings (loss) 5,662 (12,845) 5,236
Preferred stock dividends 27 10 -
-------- -------- ---------
Net earnings (loss) on common
shares $ 5,635 $(12,855) $ 5,236
-------- -------- ---------
As a percentage of sales:
Gross margin from
continuing operations 21.4% 14.8% 14.6%
Operating profit from
continuing operations 10.8% 6.3% 8.0%
Fiscal 2003 vs. Fiscal 2002
Net Sales. Net sales from continuing operations increased by $63.0
million, or 52.1%, to $183.8 million for the year ended December 31, 2003 from
$120.8 million for the year ended December 31, 2002. The increase in sales is
attributable to increased revenue from the automotive laser welded flat blank
business. These increases were primarily the result of the increased volumes on
several of the automotive platforms on which the Company has business as well as
sales from new business launched during 2003, the full year impact of business
launched during 2002 and the utilization of laser-welded components on more
vehicle models and platforms. In addition, revenue was positively impacted by an
increase in steel sales as the number of programs for which the Company
purchases and sells the steel used in the laser welding process increased in
2003 compared to 2002.
Cost of Sales. Cost of sales from continuing operations increased by
$54.0 million, or 52.5%, to $156.9 million for the year ended December 31, 2003
from $102.9 million for the year ended December 31, 2002. This increase in cost
of sales was primarily attributable to increased production volume related to
the increased sales in 2003 compared to 2002. As a percentage of net sales, cost
of sales increased slightly to 85.4% in fiscal 2003 from 85.2% in 2002. This
increase as a percentage of sales is primarily
17
attributable to the increase in the purchase of steel as a percentage of overall
cost of sales and is related to the increase in steel sales as a percentage of
total sales as the Company continued its transition to a full service supplier
from a toll processor. This increase in costs was partially offset by
productivity improvements in the Company's manufacturing operations.
Gross Margin. Gross margin from continuing operations increased $9.0
million, or 50.0%, to $26.9 million for the year ended December 31, 2003 from
$17.9 million for the year ended December 31, 2002. As a percentage of sales,
gross margin declined slightly to 14.6% in fiscal 2003 compared to 14.8% in
2002. This decline is primarily attributable to the increase in steel sales as a
percentage of overall sales as a result of the increase in the mix of products
and programs for which the Company is required to buy the steel in addition to
providing value-added laser welding and related services compared to products
and programs for which value-added laser welding and related services only are
provided. The steel portion of sales are made at a significantly lower margin
than value-added laser welding and other related value-added services. The
impact of the lower margin from increased steel sales was partially offset by
productivity improvements in the manufacturing operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (SG&A) from continuing operations increased by $2.0
million, or 19.2%, to $12.2 million for the year ended December 31, 2003 from
$10.3 million for the year ended December 31, 2002. As a percentage of sales,
SG&A declined from 8.5% in fiscal 2002 to 6.7% in 2003. The decrease as a
percent of sales was primarily due to expense containment, leveraging of fixed
costs in SG&A, as well as the increase in steel sales without a corresponding
increase in SG&A expense. In fiscal 2001, the Company recorded $0.1 million for
bad debt expense. In fiscal 2002, the bankruptcy of National Steel resulted in
the Company recording bad debt expense of approximately $1.2 million related to
accounts receivable with National Steel and in fiscal 2003, the Company recorded
bad debt expense of $0.5 million primarily as a result of the bankruptcy of
Rouge Industries and its subsidiaries including Rouge Steel.
Operating Profit. As a result of the foregoing factors, operating
profit from continuing operations increased $7.0 million, or 91.6%, to $14.6
million for the year ended December 31, 2003 from $7.6 million for the year
ended December 31, 2002. As a percentage of sales, operating profit increased to
8.0% in fiscal 2003 from 6.3% in fiscal 2002. The increase, as stated earlier,
was primarily the result of productivity improvements in the manufacturing
operations, expense containment in SG&A, partially offset by lower operating
margin from increased steel sales as a proportion of total sales for fiscal
2003.
Interest Expense. Interest expense from continuing operations increased
$1.6 million to $2.4 million for the year ended December 31, 2003 from $0.8
million for the year ended December 31, 2002. The higher interest expense in
fiscal 2003 was primarily due to approximately $2.4 million of interest expense
associated with discontinued operations classified in the loss from discontinued
operations in 2002. The proceeds from sale of the discontinued operations did
not reduce all of the debt associated with those operations and as a result, a
portion of this interest expense is reflected in interest expense from
continuing operations in 2003. This was partially offset by lower average
borrowings in 2003 compared to 2002.
Interest Income. Interest income from continuing operations decreased
$0.4 million in fiscal 2003 to $0.6 million from $1.0 million in fiscal 2002.
The decrease was due primarily to lower notes receivable balances related to the
sale of NMF and NMPM, partially offset by the interest income from the notes
related to the sale of the logistics business in 2003.
Litigation settlement. In fiscal 2002 the Company recorded a $1.1
million charge related to litigation. The Company recorded a charge as a result
of tax-related litigation associated with the Company's acquisition of its
automotive operations in 1997. Through arbitration, the seller was awarded
approximately $1.1 million. The Company filed an appeal of the decision and
ultimately settled the matter prior to the completion of the appeal process for
$1.0 million, resulting in a $0.1 million recovery in 2003.
18
Other, net. Other income and expense, net increased by $1.8 million,
from an expense of $0.9 million in fiscal 2002 to income of $0.9 million in
fiscal 2003. Other income in 2003 primarily included insurance proceeds ($0.2
million), the recovery of costs previously expensed ($0.4 million), income from
the recording of the Company's receipt of 4% of SET common stock ($0.3 million),
the writedown of other assets ($0.3 million), and dividend income ($0.2
million). Included in other expense for 2002 is the write-down of certain
real-estate assets held for sale of $0.9 million.
Income Tax Expense. Income tax expense related to continuing operations
increased $3.0 million, to $4.7 million for the year ended December 31, 2003
from $1.7 million in 2002. This increase was primarily due to higher earnings
from continuing operations before income taxes. The 2002 income tax expense
amount includes a valuation allowance of $0.5 million against available tax
credit carry forward.
Earning from Continuing Operations before Extraordinary items. As a
result of the foregoing factors, net earnings from continuing operations before
extraordinary item increased $5.1 million, or 124%, to $9.1 million for the year
ended December 31, 2003 from $4.1 million for the year ended December 31, 2002.
Extraordinary Item. In fiscal 2002, the Company closed the purchase
price allocation period regarding the acquisition of NCE and recognized a $0.3
million after-tax extraordinary gain on the transaction resulting from certain
post-closing working capital adjustments. On December 31, 2002 the Company
completed the sale of NCE for $14.0 million.
Fiscal 2002 vs. Fiscal 2001
Net Sales. Net sales from continuing operations increased by $50.0
million, or 70.7%, to $120.8 million for the year ended December 31, 2002 from
$70.8 million for the year ended December 31, 2001. These increases were
primarily the result of the increased volumes on several of the automotive
platforms on which the Company has business as well as sales from new business
launched during the year and the full year impact of new business launched
during 2001 and the utilization of laser-welded components on more vehicle
models and platforms. In addition, revenue was positively impacted by an
increase in steel sales as the number of programs for which the Company
purchases and sells the steel used in the laser welding process increased in
2002 compared to 2001.
Cost of Sales. Cost of sales from continuing operations increased by
$47.3 million, or 85.1%, to $102.9 million for the year ended December 31, 2002
from $55.6 million for the year ended December 31, 2001. This increase in cost
of sales was primarily attributable to increased production volume related to
the increased sales in 2002 compared to 2001. As a percentage of net sales, cost
of sales increased to 85.2% in fiscal 2002 from 78.6% in 2001. This increase as
a percentage of sales is primarily attributable to the increase in the purchase
of steel as a percentage of overall cost of sales and is related to the increase
in steel sales as a percentage of total sales as the Company transitioned to a
full service supplier from a toll processor.
Gross Margin. Gross margin from continuing operations increased $2.7
million, or 18.0%, to $17.9 million for the year ended December 31, 2002 from
$15.2 million for the year ended December 31, 2001. As a percentage of sales,
gross margin decreased from 21.4% in fiscal 2001 to 14.8% in 2002. The increase
in gross margin from continuing operations was primarily the result of higher
net sales. As a percentage of sales, the gross margin decline was primarily the
result of increased steel sales as a proportion of total sales which has
significantly lower margins than the laser welding processing and other related
value-added services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (SG&A) from continuing operations increased by $2.7
million, or 36.4%, to $10.3 million for the year ended December 31, 2002 from
$7.5 million for the year ended December 31, 2001. As a percentage of sales,
SG&A declined from 10.6% in fiscal 2001 to 8.5% in 2002. The decrease as a
percent of sales was primarily due to expense containment within the operations
as well as the inclusion of approximately
19
$0.7 million of goodwill amortization in 2001. In addition, the Company recorded
$1.2 million of bad debt expense in 2002 related to accounts receivable with
National Steel as a result of the National Steel bankruptcy. In fiscal 2001, the
Company expensed $0.1 million in bad debt expense.
Operating Profit. As a result of the foregoing factors, operating
profit from continuing operations was $7.6 million for the year ended December
31, 2002 compared to a similar amount for the year ended December 31, 2001. As a
percentage of sales, operating profit declined to 6.3% in fiscal 2002 from 10.8%
in fiscal 2001. The decline, as stated earlier, was primarily the result of
lower operating margin from steel sales, the higher proportion of steel sales in
net sales for fiscal 2002 and bad debt expense.
Interest Expense. Interest expense from continuing operations decreased
$1.3 million, or 61.2%, to $0.8 million for the year ended December 31, 2002
from $2.2 million for the year ended December 31, 2001. The higher interest
expense in fiscal 2001 was primarily due to higher interest rates and
borrowings.
Interest Income. Interest income from continuing operations decreased
$0.6 million in fiscal 2002 to $1.0 million from $1.6 million in fiscal 2001.
The decrease was due to lower interest rates as well as lower notes receivable
balances related to the sale of NMF and NMPM.
Litigation Settlement. In fiscal 2002 the Company recorded a $1.1
million charge related to litigation. The Company recorded a charge as a result
of tax-related litigation associated with the Company's acquisition of its
automotive operations in 1997. Through arbitration, the seller was awarded
approximately $1.1 million.
Other, net. Other income and expense from continuing operations
declined by $2.5 million, from $1.6 million income in fiscal 2001 to an expense
of $0.9 million in fiscal 2002. Other income in 2001 was higher due to a
one-time fee related to the arrangement of financing for SET. Included in other
expense for 2002 is the write-down of certain real-estate assets held for sale
of $0.9 million.
Income Tax Expense. Income tax expense related to continuing operations
decreased $1.0 million, or 38.3%, to $1.7 million for the year ended December
31, 2002 from $2.7 million in 2001. This decrease was primarily due to lower
earnings from continuing operations before income taxes and a $1.1 million tax
expense in 2001 related to the sale of assets. The 2002 income tax expense
amount includes a valuation allowance of $0.5 million against available tax
credit carry forwards.
Earnings from Continuing Operations before Extraordinary Items. As a
result of the foregoing factors, net earnings from continuing operations before
extraordinary items decreased $1.9 million, or 31.9%, to $4.1 million for the
year ended December 31, 2002 from $6.0 million for the year ended December 31,
2001.
Extraordinary Item. In fiscal 2002, the Company closed the purchase
price allocation period regarding the acquisition of NCE and recognized a $0.3
million after-tax extraordinary gain on the transaction resulting from certain
post-closing working capital adjustments. An after tax extraordinary gain of
$1.6 million was recorded (representing the excess of the fair value of acquired
net assets over the cost associated with the acquisition) in 2001 in connection
with the Company's acquisition of NCE. On December 31, 2002 the Company
completed the sale of NCE for $14.0 million.
Liquidity and Capital Resources
The Company's cash requirements have historically been satisfied
through a combination of cash flow from operations, equity and debt financings
and loans from stockholders. Working capital needs and capital equipment
requirements in the continuing operations have increased as a result of the
growth of the Company and are expected to continue to increase as a result of
anticipated growth. Anticipated increases in required working capital and
capital equipment expenditures are expected to be met from cash flow from
operations, equipment financing and borrowings under a credit facility. As of
December 31, 2003, the Company had a net working capital surplus of
approximately $16.4 million.
20
The Company generated cash from continuing operations of $9.2 million
for the year ended December 31, 2003. Net cash generated from continuing
operating activities was primarily the result of net earnings, plus non-cash
expense such as depreciation expense and increases in accounts payable and
accrued liabilities. This was partially offset by increases in accounts
receivable, inventories and prepaid expenses. The increases in accounts
receivable, inventories, and accounts payable are primarily the result of
increase in sales and related production activities. The significant decrease in
the deferred income taxes of $8.4 million is partially offset by the increase in
refundable income taxes of $5.7 million and is primarily the result of the loss
from the discontinued logistics operations and its subsequent sale. Discontinued
operations used cash in the amount of $2.5 million for fiscal 2003.
The Company used cash from investing activities of $3.6 million for the
year ended December 31, 2003. This was primarily the result of the purchase of
fixed assets of $9.8 million offset by proceeds from the sale of the logistics
business of $6.2 million, including $2 million in cash at closing and $4.2
million in the collection of notes receivable.
The Company used $3.8 million of cash flow in financing activities for
the year ended December 31, 2003, primarily for repayment of subordinated debt
as discussed below. The Company had net borrowings on its credit facility of
$1.6 million, redeemed $3.5 million in junior subordinated debentures; paid
dividends of $2.5 million and received proceeds from the issuance of common
stock of $1.2 million
The Company maintains a secured Credit Facility with a syndicate of
banks led by Comerica Bank N.A. The amount of the facility was $53.9 million on
December 31, 2003, and has an expiration date of July 2006. As of December 31,
2003 the Credit Facility had a balance of $40.0 million. The Credit Facility
consists of two loans. The first is a $25.0 million revolving loan with no
borrowing base formula. Availability under the revolving loan at December 31,
2003 was $13.9 million. The second loan is a term loan of $28.9 million. The
Company made quarterly principal payments of $1.1 million on the term loan. The
Credit Facility is secured by assets of the Company and its subsidiaries and
provides for the issuance of up to $5 million in standby or documentary letters
of credit. The Credit Facility may be utilized for general corporate purposes,
including working capital and acquisition financing, and provides the Company
with borrowing options for multi-currency loans. Borrowing options include a
Eurocurrency rate, or a base rate. Advances under the facility bore interest at
an effective average rate of approximately 4.0% and 4.4% as of December 31, 2002
and 2003, respectively. Costs of originating the Credit Facility of $1.3 million
are being amortized over three years. The unamortized balance of origination
costs is $0.9 million at December 31, 2003 and is included in other assets. The
Credit Facility is subject to customary financial and other covenants including,
but not limited to, limitations on consolidations, mergers, and sales of assets,
and bank approval on acquisitions over $15 million.
The Company has from time to time, been in violation of certain of its
financial debt ratio covenants and covenants relating to the issuance of
preferred stock and the payment of preferred and common stock dividends,
requiring it to obtain waivers of default from its lenders. At December 31, 2003
the Company is in compliance with all of its financial debt covenants under the
Credit Facility.
In January 2004, the Company amended its credit facility to increase
the facility to $74.0 million. The revolving loan was increased to $35.0 million
with no borrowing base formula and the term loan was increased to $39.0 million.
The Company makes quarterly payments of principal under the term loan of $1.4
million. The amendment and increase in the credit facility was primarily to
facilitate the acquisition of LWI. LWI was purchased for $14.0 million in cash
and the assumption of $0.7 million in subordinated notes payable with up to an
additional $1.0 million payable if certain new business is awarded to the
Company within twelve months. Subsequent to the acquisition of LWI, the Company
completed the sale of its distribution business for approximately $5.5 million
in cash and received approximately $6.1 million in a tax refund, both of which
were applied to reduce borrowings under the credit facility.
21
On March 26, 2004, the Company issued $40 million in 4% unsecured
convertible subordinated notes (the "Note") in a private placement. The Note has
a three year term, maturing on March 31, 2007 and may be extended another three
years at the holder's option. The Note is convertible at the holder's option at
anytime prior to maturity into shares of the Company's common stock at $32 per
share (subject to adjustment pursuant to the terms of the Note). The interest
rate on the Note is 4% and is fixed for the entire term. Proceeds from the Note
are being used to reduce the Company's current bank borrowings, including paying
off the term loan balance and reducing amounts outstanding under the $35 million
revolving credit facility, which remains in place.
The Company guarantees $3.0 million of SET's senior debt in connection
with its sale of NMF and NMPM to SET. The Company would be required to perform
under the guarantee if SET was unable to repay or renegotiate its credit
facility. The Company expects the guarantee to be eliminated upon the maturity
of SET's credit facility in August 2004, provided SET is in compliance with the
terms of its credit facility. As of December 31, 2003, the Company had not been
notified by SET or SET's lender of any default that would require performance
under the guarantee. The maximum amount the Company would be required to pay is
$3.0 million. The Company does not currently carry a liability for this
guarantee. The guarantee is unsecured and the Company would be entitled to the
proceeds from any liquidation after the senior debt lender had been paid in
full.
On July 31, 1998 and concluding August 10, 1998 the Company closed a
private offering of 6% Convertible Subordinated Debentures (the "Debentures")
for gross proceeds of $20.76 million. The proceeds were used to reduce the
amount of outstanding advances under the Credit Facility. The Debentures mature
on July 31, 2005 and interest is payable on January 31 and July 31 of each year;
provided, however, that for the first three years, in lieu of cash interest,
additional Debentures were issued. During the years ended December 31, 1999,
2000, and 2001 the Company issued $1.2 million, $1.1 million and $1.0 million,
respectively, in additional Debentures as payment of interest. The Debentures
are unsecured obligations of the Company which may be redeemed by the Company
during the twelve months beginning July 31, 2002 at 102.5% of the principal
amount (plus accrued interest) and at 101.5% and 100.5% during each 12 month
period following. Commencing November 30, 1998, the Debentures became
convertible into Common Stock at $14.3125 per share (subject to adjustment).
Beginning January 31, 2004 and on each July 31 and January 31 thereafter, the
Company is required to redeem for cash 25% of the outstanding principal amount
of the Debentures through the maturity date. During 2001, the Company redeemed
$1.1 million of Debentures for $0.35 million in cash and 50,000 shares of the
Company's Common Stock. Offering costs of $1.114 million on the original
issuance are being amortized over seven years. The unamortized balance of
offering costs is $0.2 million at December 31, 2003 and is included in other
assets. During 2003, the holders of approximately $3.5 million in subordinated
Debentures exercised their option to convert their subordinated Debentures into
the Company's common stock. The balance of subordinated Debentures outstanding
at December 31, 2003 was $12.5 million. Subsequent to December 31, 2003 holders
of an additional approximately $9.5 million in subordinated Debentures exercised
their option to convert their subordinated Debentures into the Company's common
stock. On February 2, 2004 the Company made a mandatory retirement payment
pursuant to the terms of the subordinated debenture of $0.8 million. The balance
of subordinated Debentures outstanding after the conversions and the mandatory
retirement payment was approximately $2.2 million.
On December 16, 1998 and concluding December 22, 1998 the Company
closed a private offering of Junior Subordinated Notes (the "Junior Notes"),
together with 105,000 warrants to purchase shares of Common Stock of the Company
at an exercise price of $10.00 per share expiring on the maturity date, for
gross proceeds of $3.5 million with $.141 million, or $1.34 per share,
attributable to the warrants. The proceeds were used to reduce the Credit
Facility. The Junior Notes have not been registered under the Securities Act of
1933 and were sold to qualified investors as part of a private offering pursuant
to Regulation D of a maximum of $10 million in principal amount of Junior Notes.
The Junior Notes are
22
unsecured obligations of the Company, which may be redeemed by the Company upon
five days prior notice without penalty or premium. The Junior Notes matured on
December 16, 2003 and were redeemed in full. The Company has no warrants
outstanding as of December 31, 2003.
On April 22, 2002, the Company completed a sale and leaseback
transaction of its Shelbyville, KY facility to the Company's Chairman. The sale
price was $6.2 million which was equal to the book value of the property. The
proceeds of the transaction were used to reduce the Company's debt under its
current credit facility. The lease has a term of five years and provides for
monthly rent of $0.07 million. The sale price and rent amount were determined by
the estimated fair value of the property and estimated prevailing lease rates
for similar properties. Although the Company did not obtain an independent
valuation of the property or the terms of the transaction, it believes the terms
of the sale and leaseback were at least as favorable to Noble as terms that
could have been obtained from an unaffiliated third party. The Company has
accounted for this lease as an operating lease.
The liquidity provided by the Company's existing and anticipated credit
facilities, combined with cash flow from continuing operations is expected to be
sufficient to meet currently anticipated working capital and capital expenditure
needs and for existing debt service for at least 12 months. There can be no
assurance, however, that such funds will not be expended prior thereto due to
changes in economic conditions or other unforeseen circumstances, requiring the
Company to obtain additional financing prior to the end of such twelve-month
period. In addition, the Company continues to evaluate, as part of its business
strategy, and may pursue future growth through opportunistic acquisitions of
assets or companies which may involve the expenditure of significant funds.
Depending upon the nature, size and timing of future acquisitions, the Company
may be required to obtain additional debt or equity financing. There can be no
assurance, however, that additional financing will be available to the Company,
when and if needed, on acceptable terms or at all.
Off Balance Sheet Arrangements
The Company's off balance sheet financing consists primarily of
operating leases for equipment and property. These leases have terms ranging
from a month-to-month basis to thirteen years. In 2003, lease expense was
approximately $3.7 million. From 2003 through 2007 and thereafter the Company
will make contractual minimum lease payments as well as short and long-term debt
payments as follows (in thousands):
FUTURE MATURITIES AND CONTRACTUAL OBLIGATIONS
Less Than Over 5
Total 1 Year 1-3 Years 4-5 Years Years
------- ------ ---------- ---------- -------
Long-term debt (including lines of credit) $52,999 $9,999 $ 43,000 $ - $ -
Operating leases for equipment and property $38,664 $3,843 $ 6,695 $ 5,745 $22,381
Purchase obligations $ 518 $ 518 $ - $ - $ -
Purchase obligations include primarily commitments for capital
expenditures. We have not included information on our recurring purchases of
materials used in our manufacturing operations. These amounts are generally
consistent from year to year, closely reflect our levels of production and are
not long term in nature (less than three months).
The Company also expects to receive minimum rental income of
approximately $1.2 million per year for the period 2004 through 2012 related to
the sublease of a portion of one of the Company's manufacturing facilities to
SET.
Critical Accounting Policies
A summary of the critical accounting policies consistently applied in
the preparation of the accompanying financial statements follow below.
23
Property, Plant and Equipment. The Company's automotive operations are
highly capital intensive. Property, plant and equipment are stated at cost.
Depreciation is provided for using the straight line method over the estimated
useful lives of the assets which range from 5 to 39 years for buildings and
improvements and 3 to 10 years for machinery and equipment. Expenditures for
maintenance and repairs are charged to expense as incurred. The Company
capitalizes interest cost associated with construction in progress. Capitalized
interest costs in 2002 and 2003 were $0.3 million and $0.5 million,
respectively. The Company periodically reviews the realization of long-lived
assets, based on an evaluation of remaining useful lives and the current and
expected future profitability and cash flows related to such assets. Land is
carried at acquisition cost.
Valuation of deferred tax assets. Because the Company operates in
different geographic locations, including several state and local tax
jurisdictions, the nature of the Company's tax provisions and the evaluation of
the Company's ability to use all recognized deferred tax assets are complex. In
assessing the ability to realize such deferred tax assets, the Company reviews
the scheduled reversal of deferred tax liabilities, the projections of taxable
income in future periods and the effectiveness of various tax planning
strategies in making assessments. The consideration of these matters requires
significant management judgment in determining deferred tax asset valuation
allowances. While it is believed that the appropriate valuations of deferred tax
assets has been made, unforeseen changes in tax legislation, regulatory
activities, operating results, financing strategies, organization structure and
other related matters may result in material changes in the Company's deferred
tax asset valuation allowances.
Goodwill. Goodwill is the excess of cost over the fair value of net
assets acquired in business combinations and through December 31, 2001 was
amortized over a 20-year period on the straight-line method. On January 1, 2002
the Company implemented Statement of Financial Accounting Standards ("SFAS") No.
142 "Goodwill and Other Intangible Assets." Under SFAS 142 goodwill and other
intangible assets are no longer amortized. As required under SFAS 142,
management will regularly evaluate the carrying value of businesses and
determine if any impairment exists. As part of the evaluation, the Company
estimates the fair value of the reporting unit to determine whether or not
impairment has occurred. At adoption and at June 2002 and June 2003, the Company
determined that goodwill was not impaired. As of December 31, 2002 and 2003, the
Company had an unamortized goodwill balance from continuing operations of $11.5
million and $11.8 million, respectively. The change in goodwill reflects
approximately $0.3 million in purchased goodwill related to the acquisition of
Prototube. In the fourth quarter of 2002 and 2003, the Company made the
strategic decision to exit its logistics and distribution businesses,
respectively, and as a result their operations have been included in
discontinued operations. In connection therewith, the Company, based upon the
anticipated proceeds from the sale of those businesses, incurred goodwill
impairment charges of approximately $19.9 million and $2.0 million related to
the logistics and distribution businesses, respectively. In March 2003, the
Company completed the sale of the logistics operations for approximately $11.1
million in cash and notes. On January 28, 2004 the Company completed the sale of
the distribution business for approximately $5.5 million in cash.
Allowance for Doubtful Accounts. The Company maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. Management makes these estimates based on
an analysis of accounts receivable using available information on our customers'
financial status and payment histories. Historically, with the exception of $1.2
million of bad debt expense recorded in 2002 related to the National Steel
bankruptcy and $0.4 million in 2003 related to the Rouge Steel bankruptcy, bad
debt losses have not been significant or have not differed materially from the
Company's estimates. The balance in the allowance for doubtful accounts at
December 31, 2003 and 2002 was $0.1 million and $0, respectively.
24
Inflation
Inflation generally affects the Company by increasing the interest
expense of floating rate indebtedness and by increasing the cost of labor, fuel,
equipment and raw materials. The Company does not believe that inflation has had
any material effect on its business over the past three years.
Impact of New Accounting Pronouncements
FASB Statement No. 150. In May 2003, the FASB issued Statement No. 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." FASB Statement No. 150 affects the accounting for
mandatorily redeemable shares, options and forward purchase contracts that
require the issuer to repurchase shares and certain obligations that can be
settled in shares. FASB Statement No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period after June 15, 2003. The
adoption of this statement did not have any material impact on the results of
operations of financial position of the Company at December 31, 2003.
FIN No. 46. In January 2003, FASB issued Interpretation 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." FIN
No. 46 requires that the primary beneficiary of a variable interest entity
consolidate the entity even if the primary beneficiary does not have a majority
voting interest. The adoption of this interpretation did not have any impact on
our results of operations or financial position at December 31, 2003.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of foreign currency fluctuations.
International revenues from the Company's foreign subsidiaries were
approximately 19% of total revenues from continuing operations for fiscal 2003.
The Company's primary foreign currency exposure is the Canadian Dollar. The
Company manages its exposures to foreign currency assets and earnings primarily
by funding certain foreign currency denominated assets with liabilities in the
same currency and, as such, certain exposures are naturally offset. Refer to
Note N of Notes to the Consolidated Financial Statements.
The Company's financial results are affected by changes in U.S. and
foreign interest rates due primarily to the Company's Credit Facility containing
a variable interest rate. The Company does not hold any other financial
instruments that are subject to market risk (interest rate risk and foreign
exchange rate risk).
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Noble International, Ltd. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Noble
International, Ltd. (a Delaware corporation) and Subsidiaries (the "Company") as
of December 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders' equity, comprehensive income (loss) and cash flows for
each of the three years in the period ended December 31, 2003. Our audits also
included the consolidated financial statement schedule listed in the Index at
Item 15(a). These consolidated financial statements and consolidated financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Noble International, Ltd.
and Subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years ended in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, in
2002 the Company changed its method of accounting for the impairment and
disposal of long-lived assets to conform to Statement of Financial Accounting
Standards No. 144. Also, as discussed in Note A to the consolidated financial
statements, in 2002, the Company changed its method of accounting for goodwill
to conform to Statement of Financial Accounting Standards No. 142.
DELOITTE & TOUCHE LLP
Detroit, Michigan
March 29, 2004
26
NOBLE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
YEARS ENDED DECEMBER 31,
2002 2003
------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,154 $ 715
Accounts receivable, trade, net 22,474 34,030
Note Receivable - 1,799
Inventories 7,119 14,543
Deferred income taxes 6,217 -
Income taxes refundable 250 5,920
Prepaid expenses 2,513 3,909
--------- ---------
Total Current Assets 39,727 60,916
Property, Plant & Equipment, net 47,026 47,119
Other Assets:
Goodwill, net 11,463 11,839
Covenants not to compete, net of accumulated amortization of $1,017 and
$1,217 for 2002 and 2003, respectively 383 183
Other assets, net 10,016 12,890
--------- ---------
Total Other Assets 21,862 24,912
Assets Held for Sale 21,335 10,036
--------- ---------
TOTAL ASSETS $ 129,950 $ 142,983
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 19,677 $ 29,517
Accrued liabilities 5,652 4,967
Current maturities of long-term debt 8,386 9,999
Deferred income taxes - 54
--------- ---------
Total Current Liabilities 33,715 44,537
Long-Term Liabilities:
Deferred income taxes 1,717 3,860
Convertible subordinated debentures 16,037 7,026
Long-term debt, excluding current maturities 33,192 35,974
--------- ---------
Total Long-Term Liabilities 50,946 46,860
Liabilities Held for Sale 3,228 775
Commitments and Contingencies (Note G)
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, authorized 20,000,000 shares, issued
8,576,397 and 9,013,277 shares in 2002 and 2003, respectively 9 9
Additional paid-in capital 32,874 38,161
Retained earnings 9,755 12,490
Accumulated other comprehensive income (loss), net (577) 151
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 42,061 50,811
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 129,950 $ 142,983
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS
27
NOBLE INTERNATIONAL, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
2001 2002 2003
---------------------------------------------
Net sales $ 70,769 $ 120,800 $ 183,759
Cost of sales 55,608 102,904 156,909
----------- ----------- -----------
Gross margin 15,161 17,896 26,850
Selling, general and administrative expenses 7,527 10,268 12,235
----------- ----------- -----------
Operating profit 7,634 7,628 14,615
Interest income 1,586 978 596
Interest expense (2,157) (836) (2,419)
Litigation settlement - (1,098) 73
Other, net 1,617 (935) 942
----------- ----------- -----------
Earnings from continuing operations before income taxes
and extraordinary items 8,680 5,737 13,807
Income tax expense 2,698 1,666 4,673
----------- ----------- -----------
Earnings from continuing operations before extraordinary items 5,982 4,071 9,134
Preferred stock dividends 27 10 -
----------- ----------- -----------
Earnings on common shares from continuing operations
before extraordinary items 5,955 4,061 9,134
Discontinued Operations:
(Loss) from discontinued operations, net of income taxes of $(554),
$(8,338) and $(571) for 2001, 2002 and 2003, respectively (1,887) (17,405) (3,221)
Gain (loss) on sale of discontinued operations, net of income taxes
of $90 and $(349) for 2002 and 2003, respectively - 174 (677)
----------- ----------- -----------
Earnings (loss) on common shares before extraordinary items 4,068 (13,170) 5,236
Extraordinary item - gain on acquisition, net of income taxes
of $807 and $198 for 2001 and 2002, respectively 1,567 315 -
----------- ----------- -----------
Net earnings (loss) on common shares $ 5,635 $ (12,855) $ 5,236
=========== =========== ===========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Earnings from continuing operations before extraordinary items $ 0.90 $ 0.57 $ 1.17
(Loss) from discontinued operations (0.28) (2.46) (0.50)
Extraordinary items 0.24 0.05 -
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Basic earnings (loss) per common share $ 0.85 $ (1.84) $ 0.67
=========== =========== ===========
Basic weighted average common shares outstanding 6,626,212 6,995,153 7,779,472
=========== =========== ===========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Earnings from continuing operations before extraordinary items $ 0.86 $ 0.57 $ 1.09
(Loss) from discontinued operations (0.24) (2.41) (0.43)
Extraordinary items