10-Q 1 k74481e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED 12/22/02 SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 22, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 333-21819 LDM TECHNOLOGIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MICHIGAN 38-2690171 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (248) 858-2800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X] Number of shares of common stock outstanding as of January 31, 2003: 600 Total pages: 23 Listing of exhibits: 19 1 LDM TECHNOLOGIES, INC. INDEX

2 LDM TECHNOLOGIES, INC. Condensed Consolidated Balance Sheets (dollars in thousands)

Note: The balance sheet at September 29, 2002 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. 3 LDM TECHNOLOGIES, INC. Condensed Consolidated Statements of Operations (dollars in thousands)

See notes to condensed consolidated financial statements. 4 LDM TECHNOLOGIES, INC. Condensed Consolidated Statements of Cash Flows (dollars in thousands)

See notes to condensed consolidated financial statements. 5 LDM TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month periods ending December 22, 2002 and December 23, 2001 are not necessarily indicative of the results that may be expected for the year ending September 28, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 29, 2002. The Company closed its quarters ended December 22, 2002 and December 23, 2001 one week early to allow for the Christmas holiday and automotive shutdown. Both quarters contain 12 weeks. 2. Commitments and Contingencies There have been no significant changes in commitments and contingencies from the matters described in footnote 11 of the Company's consolidated financial statements as of and for the fiscal year ended September 29, 2002. 3. Reclassification The Company incurs certain expenditures at its plant locations. In the past, these expenditures have been classified as selling, general and administrative expenses. The Company believes that these expenditures are more accurately characterized as cost of sales expenses as they directly support manufacturing activities within the manufacturing facilities. As a result, for the three month period ending December 23, 2001, these expenses have been reclassified from selling, general and administrative expenses to cost of sales. There was no impact to net earnings or equity resulting from this reclassification. 6 LDM TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements 4. Derivative Financial Instruments The Company's fair values of the swap and the collar (refer to footnote 1 of the Company's consolidated financial statements as of and for the fiscal year ended September 29, 2002) are reported on the balance sheet with changes in fair value reported in the statement of operations in accordance with Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities," as amended ("FAS 133"). The Company has reflected the fair value of these derivatives as a liability of $2.7 million which is included as a component of accrued liabilities. The change in fair value for the three months ended December 22, 2002, and three months ended December 23, 2001 resulted in income of $449 thousand and expense of $438 thousand, respectively, which has been included as a component of other income (expense), net. 5. Income Taxes The effective tax rate for the first quarter of 2003 was 41.5% compared to 17.7% for the first quarter 2002. The interim effective rates are estimated based upon fiscal year operating forecasts. The effective tax rates differ from statutory rates due to certain nondeductible expenses. 6. Related Party Transactions During fiscal year 2002, the Company acquired certain assets and the booked business of Security Plastics West, Ltd., located in McAllen, Texas. As part of the transaction the Company is leasing the building and real estate in McAllen from a company majority owned by the Company's two shareholders. The leased facility is 73,000 square feet and annual rentals approximate $300 thousand. The lease has an initial term of 8 years with an option to renew at the end of the initial lease term. In fiscal year 2002, the Company paid rentals for the McAllen manufacturing facility of approximately $190 thousand. To date in fiscal year 2003, the Company paid rentals for the same facility of approximately $75 thousand. The Company and its two shareholders are party to a binding stock redemption agreement which may be terminated by mutual agreement of the parties. Upon the death of either shareholder, the Company is required to purchase and the shareholder's estate is required to sell all of the shareholder's stock at a price equal to $25 million, subject to subsequent adjustment. This amount payable includes the proceeds of the life insurance policies owned by the Company on the shareholder's life. Any shortfall between the insurance proceeds and the amount payable to the shareholder's estate will require funding by the Company, subject to restrictions in the Company's loan agreements. The Company maintains life insurance policies of $17.0 million on the life of Mr. Nash and $25.0 million on the life of Mr. Balous, the Company's two shareholders. The annual premiums for such policies of insurance are approximately $1.5 million. The Company is prohibited from assigning, pledging or borrowing against these life insurance policies without the consent of the insured shareholder. 7 LDM TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements 7. Supplemental Guarantor Information The 10 3/4% Senior Subordinated Notes due 2007, the Senior Credit Facility, the standby letters of credit with respect to the Multi-Option Adjustable Rate Notes, the Variable Rate Demand Limited Obligation Revenue Bonds and the Senior Term Loan, as more fully described in footnotes 6 and 7 of the Company's 10-K for its fiscal year ended September 29, 2002, filed December 6, 2002, are obligations of LDM Technologies, Inc. The obligations are guaranteed fully, unconditionally and jointly and severally by LDM Canada and certain holding companies. Supplemental consolidating financial information of LDM Technologies, Inc. and LDM Canada (including the related holding company guarantors) is presented below. Investments in subsidiaries are presented on the equity method of accounting. Separate financial statements of the guarantors are not provided because management has concluded that the summarized financial information below provides sufficient information to allow investors to separately determine the nature of the assets held by and the operations of LDM Technologies, Inc., and the guarantor subsidiaries. 8 LDM TECHNOLOGIES, INC. Condensed Consolidating Balance Sheet as of December 22, 2002 (Unaudited) (dollars in thousands)

9 LDM TECHNOLOGIES, INC. Condensed Consolidating Balance Sheet as of September 29, 2002 (Unaudited) (dollars in thousands)

10 LDM TECHNOLOGIES, INC. Condensed Consolidating Statement of Operations for Three Months ended December 22, 2002 (Unaudited) (dollars in thousands)

11 LDM TECHNOLOGIES, INC. Condensed Consolidating Statement of Operations for Three Months ended December 23, 2001 (Unaudited) (dollars in thousands)

12 LDM TECHNOLOGIES, INC. Condensed Consolidating Statement of Cash Flows for Three Months Ended December 22, 2002 (Unaudited) (dollars in thousands)

13 LDM TECHNOLOGIES, INC. Condensed Consolidating Statement of Cash Flows for Three Months Ended December 23, 2001 (Unaudited) (dollars in thousands)

14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "anticipate," "believe," "estimate" and "expect" and similar expressions are generally intended to identify forward-looking statements. Readers are cautioned that any forward-looking statements, including statements regarding the intent, belief or current expectations of the Company or its management, are not guarantees of future performance and involve risks and uncertainties, and that the actual results may differ materially from those in the forward-looking statements as a result of various factors including, but not limited to: (i) general economic conditions in the markets in which the Company operates or will operate; (ii) fluctuations in worldwide or regional automobile and light and heavy truck production; (iii) labor disputes involving the Company or its significant customers or suppliers; (iv) changes in practices and/or policies of the Company's significant customers toward outsourcing automotive components and systems; (v) foreign currency and exchange fluctuations; and (vi) other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. The Company does not intend to update these forward-looking statements. CRITICAL ACCOUNTING POLICIES The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. The Company's significant accounting policies are more fully described in Note 1 of the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 29, 2002. Certain of the accounting policies require the application of significant judgment by management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. GOODWILL Goodwill totaled $50.2 million at December 22, 2002 and represented approximately 20.4% of total assets. The majority of the goodwill resulted from the acquisitions of Molmec, Inc. and Huron Plastics Group, Inc. which were completed in fiscal year 1997 and fiscal year 1998, respectively. Effective October 1, 2001, the Company elected to early adopt Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under the new standard, goodwill is no longer amortized but is subject to annual impairment tests in accordance with the Statement. Under Statement No. 142 the Company estimates the fair value of each of its reporting units with goodwill. Estimated fair value was based upon discounted cash flows. The results of the Company's Statement No. 142 analysis indicate that no reduction in goodwill is required. Statement No. 142 requires the Company to perform impairment tests of goodwill on an annual basis (or more frequently if impairment indicators exist). INCOME TAXES The Company provides an estimate of actual current tax due together with an assessment of temporary differences resulting from the treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the balance sheets. Based on known and projected earnings information and any available tax planning strategies, the Company then assesses the likelihood that the deferred tax assets will be recovered. To the extent that the Company believes recovery is not likely, a valuation allowance is established. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. At December 22, 2002, the Company had net deferred tax assets, after valuation allowances, of $0.8 million. 15 Deferred tax assets in Canada relate primarily to net operating loss carryforwards (NOL's) for which the Company has recognized a valuation allowance of $1.2 million. In the United States realization of the deferred tax assets is dependent upon future taxable income. Based on consideration of historical and future earnings before income taxes, the Company believes it is more likely than not that the deferred tax assets, beyond those specifically reserved, will be realized. The Company evaluates its deferred taxes and related valuation allowances quarterly. If at any time the Company believes that current or future taxable income will not support the basis for recognizing the benefit of the deferred tax assets, valuation allowances are provided accordingly. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. This estimated allowance is based primarily on management's evaluation of customer productivity reimbursement programs and historical experience. The allowance amount at December 22, 2002 and September 29, 2002 was $0.5 million. RESULTS OF OPERATIONS The Company closed its quarters ended December 22, 2002 and December 23, 2001 one week early to allow for the Christmas holiday and automotive shutdown. Both quarters contain 12 weeks. QUARTER ENDED DECEMBER 22, 2002 COMPARED TO THE QUARTER ENDED DECEMBER 23, 2001 Net sales for the quarter ended December 22, 2002 ("first quarter 2003") were $108.3 million, an increase of $12.9 million or 13.5% from the quarter ended December 23, 2001 ("first quarter 2002"). The increase in net sales is primarily due to the launch of new products from the Company's facility in Romulus, Michigan in March and August of 2002. The Romulus facility reported $23.6 million in net sales for the first quarter of 2003. Gross margin was $18.4 million or 17.0% of net sales for the first quarter 2003 compared with $12.5 million or 13.1% of net sales for the first quarter 2002. The gross margin improvement is due to the fiscal 2003 sales generated at the Romulus facility to absorb fixed costs generated by the facility. Selling, General and Administrative (SG&A) expense for the first quarter 2003 was $9.7 million, or 9.0% of net sales compared to $8.2 million, or 8.6% of net sales for the first quarter of 2002. Expense has increased due to the reinstatement of certain employee benefits as the Company has returned to profitability. Interest expense for the first quarter 2003 was $3.5 million compared to $3.8 million for the first quarter 2002. The decrease in interest expense is due to scheduled debt repayments, a decrease in variable interest rates and lower average borrowings outstanding on the Company's line of credit. The effective tax rate for the first quarter of 2003 was 41.5% compared to 17.7% for the first quarter 2002. The interim effective rates are estimated based upon fiscal year operating forecasts. The effective tax rates differ from statutory rates due to certain nondeductible expenses. At December 22, 2002, the Company had net deferred tax assets of $832 thousand. The Company evaluates the necessity for a valuation allowance on deferred tax assets by taxing jurisdiction. Deferred tax assets in the United States and Canada relate primarily to net operating loss carryforwards (NOL's). In Canada, the Company has recognized a valuation allowance of $1.2 million. 16 In the United States realization of the deferred tax assets is dependent upon future taxable income. Based on consideration of historical and future earnings before income taxes, the Company believes it is more likely than not that the deferred tax assets, beyond those specifically reserved, will be realized. The Company evaluates its deferred taxes and related valuation allowances quarterly. If at any time the Company believes that current or future taxable income will not support the basis for recognizing the benefit of the deferred tax assets, valuation allowances are provided accordingly. LIQUIDITY AND CAPITAL RESOURCES The Company's principal capital requirements are to fund working capital needs, to meet required debt obligations, and to fund capital expenditures for facility maintenance and expansion. The Company believes its future cash flow from operations, combined with its revolving credit availability will be sufficient to meet its planned debt service, capital requirements, and internal growth opportunities. As of December 22, 2002, the Company had $136.8 million of long-term debt outstanding, $15.2 million of revolving loans and current maturities of long-term debt outstanding, and $41.4 million of borrowing availability under its revolving credit facility. Cash provided by operating activities in first quarter 2003 was $20.0 million compared to $4.9 million in the first quarter 2002. The increase is due to the timing of accounts receivable reimbursement in first quarter 2003. Approximately $15 million in customer payments, expected to be received in late September 2002, were received instead in early October 2002. Capital expenditures for first quarter 2003 were $2.0 million compared to $1.4 million for first quarter 2002. The Company believes its capital expenditures will be approximately $16 million in fiscal year 2003. The majority of the Company's fiscal year 2003 capital expenditures will be used to refresh current equipment and facilitate new programs launching in fiscal year 2003. Long-term debt has decreased due to scheduled principal repayments of senior term debt, including an excess cash flow payment. This payment is due January 1st of every year if excess cash flow exists as defined by the senior term loan agreement. As a result of excess cash flow generated in fiscal year 2002, the Company made an additional senior term loan payment of $2.8 million in January 2003. The following information summarizes the Company's significant contractual cash obligations and other commercial commitments at December 22, 2002:

17 The Company's liquidity is affected by both the cyclical nature of its business and the level of net sales to its major customers. The Company's ability to meet its working capital and capital expenditure requirements and debt obligations will depend on its future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond its control. However, the Company believes that its existing borrowing ability and cash flow from operations will be sufficient to meet its liquidity requirements in the foreseeable future. Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the Company's exposure to market risk since September 29, 2002. Item 4: DISCLOSURE CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, an evaluation was performed under the supervision and with the participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures are effective in causing the material information required to be disclosed by the Company in the reports that it files or submits under the Securities Act of 1934 to be recorded, processed, summarized and reported, to the extent applicable, within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LDM TECHNOLOGIES, INC. By: /s/ Gary E. Borushko --------------------------- Gary E. Borushko Chief Financial Officer By: /s/ Bradley N. Frederick --------------------------- Bradley N. Frederick V.P. of Finance Chief Accounting Officer Dated: February 4, 2003 18 Item 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NO. EXHIBIT DESCRIPTION 99.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K The registrant filed no reports on Form 8-K during the quarter for which this Report is filed. 19 CERTIFICATION I, Alan C. Johnson certify that: 1. I have reviewed this quarterly report on Form 10-Q of LDM Technologies, Inc. ("the registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a.) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b.) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c.) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the registrant's board of directors: a.) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The Company's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ A.C. Johnson --------------------------- Alan C. Johnson Chief Executive Officer February 4, 2003 20 CERTIFICATION I, Gary E. Borushko certify that: 1. I have reviewed this quarterly report on Form 10-Q of LDM Technologies, Inc. ("the registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the registrant's board of directors: a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The Company's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ G.E. Borushko ---------------------------- Gary E. Borushko Chief Financial Officer February 4, 2003 21 10-Q EXHIBIT INDEX EXHIBIT NO. DESCRIPTION EX-99.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-99.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

LDM TECHNOLOGIES INC 10-Q