10-Q 1 k82332e10vq.txt QUARTERLY REPORT FOR PERIOD END DECEMBER 21, 2004 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 21, 2003 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 [ ] No [X] 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 23, 2004: 600 Total pages: 25 Listing of exhibits: 20 1 LDM TECHNOLOGIES, INC. INDEX

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

Note: The balance sheet at September 28, 2003 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 21, 2003 and December 22, 2002 are not necessarily indicative of the results that may be expected for the year ending September 26, 2004. 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 28, 2003. The Company closed its quarters ended December 21, 2003 and December 22, 2002 one week early to allow for the Christmas holiday and automotive shutdown. Both quarters contain 12 weeks. During fiscal year 2003, the Financial Accounting Standards Board ("FASB") issued FASB Statement 150, Accounting for Certain instruments with Characteristics of Both Liabilities and Equity, and FASB Interpretation 46 (Revised December 2003), Consolidation of Variable Interest Entities. FASB Statement 150 requires that financial instruments, including common stock, that are issued in the form of shares that are mandatorily redeemable on a fixed or determinable date or upon an event certain to occur be classified as liabilities. FASB Statement 150 is required to be adopted in the second quarter of fiscal 2004 by the Company. As described in Note 11 to the Company's consolidated financial statements in its Form 10-k for fiscal year ended September 28, 2003, upon the death of either of the Company's shareholders, the Company is required to purchase the stock of such shareholder. Under the current capital structure, upon adoption of FASB Statement 150, the Company's stockholders' equity would be reclassified within the liability section of the balance sheet as "shares subject to mandatory redemption." FASB Interpretation 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership or contractual or other financial interests in the entity. Currently, entities are generally consolidated by enterprise when the enterprise has a significant controlling financial interest through ownership of a majority voting interest in the entity. For transactions in place prior to January 1, 2004, FASB Interpretation 46 is required to be adopted by the Company no later than the beginning of the first annual period beginning after December 15, 2004 (beginning of the Company's fiscal 2006 year). The Company is in the process of evaluating the effects of FASB Interpretation 46. Based upon the in process review, the Company believes that its existing lease with a related party for the McAllen facility (see Note 8 to the Company's consolidated financial statements in its Form 10-K for its fiscal year ended September 28, 2003) and its 49% equity interest in, as well as a subordinated note from, DBM Technologies, LLC (see Note 12 of the Company's 10-K for fiscal year ended September 28, 2003) are within the scope of FASB Interpretation 46. As currently structured, such entities would likely require consolidation by the Company upon adoption of FASB Interpretation 46. As of December 31, 2003, DBM Technologies, LLC had third party assets and liabilities of approximately $23.4 million and $23.9 million, respectively. As of December 21, 2003, the Company's non-cancellable lease payments for the McAllen facility approximated $2.0 million. For transactions subsequent to December 31, 2003 the effects of FASB Interpretation 46 apply immediately. 6 LDM TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements 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 28, 2003. 3. Derivative Financial Instruments The Company's fair values of the swap and the collar (see Note 1 to the Company's consolidated financial statements in its Form 10-K for the fiscal year ended September 28, 2003) 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 $3.6 million, which is included as a component of accrued liabilities. The change in fair value for the three months ended December 21, 2003, and three months ended December 22, 2002 resulted in income of $74 thousand and $449 thousand, respectively, which has been included as a component of other income (expense), net. 4. Income Taxes The effective tax rate for the first quarter of 2004 was 41.9% compared to 41.5% for the first quarter 2003. 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. 5. Accumulated Comprehensive Income The Company's investment in Sunningdale Precision Industries Ltd. ("Sunningdale") is treated as an available for sale security, with unrealized gains or losses in market value recorded as other comprehensive income (loss) in LDM's stockholders' equity. As of December 21, 2003, the unrealized pretax gain on the available for sale security was $4,200 ($2,750 net of tax). Other comprehensive loss for the quarter ended December 21, 2003 was $1,100 million ($660 net of tax). 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 one of the Company's shareholders. The leased facility is approximately 73,000 square feet in size 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. For the first quarter in fiscal years 2004 and 2003, the Company paid rentals for the same facility of approximately $75 thousand. 7 LDM TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements The Company and its two shareholders are parties 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 $1.3 million. The Company is prohibited from assigning, pledging or borrowing against these life insurance policies without the consent of the insured shareholder. 7. Event Subsequent to September 28, 2003 On December 18, 2003, the shareholders of the Company entered into a definitive agreement to sell all of their shares of the Company to Plastech Engineered Products, Inc. The consummation of the transaction is subject to regulatory approval and other customary closing conditions. The transaction is anticipated to close in February 2004. 8. 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 Notes 6 and 7 to the Company's consolidated financial statements in its Form 10-K for fiscal year ended September 28, 2003, are obligations of LDM Technologies, Inc. The obligations are guaranteed fully, unconditionally and jointly and severally by LDM Canada, a wholly owned subsidiary, and certain holding company subsidiaries. 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 21, 2003 (Unaudited) (dollars in thousands)

9 LDM TECHNOLOGIES, INC. Condensed Consolidating Balance Sheet as of September 28, 2003 (Unaudited) (dollars in thousands)

10 LDM TECHNOLOGIES, INC. Condensed Consolidating Statement of Operations for Three Months ended December 21, 2003 (Unaudited) (dollars in thousands)

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

12 LDM TECHNOLOGIES, INC. Condensed Consolidating Statement of Cash Flows for Three Months Ended December 21, 2003 (Unaudited) (dollars in thousands)

13 LDM TECHNOLOGIES, INC. Condensed Consolidating Statement of Cash Flows for Three Months Ended December 22, 2002 (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. DEFINITIVE SALE AGREEMENT WITH PLASTECH On December 18, 2003, the shareholders of the Company entered into a definitive agreement to sell all of their shares of the Company to Plastech Engineered Products, Inc. The consummation of the transaction is subject to regulatory approval and other customary closing conditions. The transaction is anticipated to close in February 2004. 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 28, 2003. 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 21, 2003 and represented approximately 21.7% 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 adopted 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 15 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 21, 2003, the Company had net deferred tax liabilities, after valuation allowances, of $2.3 million. Deferred tax assets in Canada relate primarily to net operating loss carryforwards (NOL's) for which the Company has recognized a valuation allowance of $2.1 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 21, 2003 and September 28, 2003 was $0.5 million. PENDING ACCOUNTING PRONOUNCEMENTS During fiscal year 2003, the Financial Accounting Standards Board ("FASB") issued FASB Statement 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, and FASB Interpretation 46 (Revised December 2003), Consolidation of Variable Interest Entities. FASB Statement 150 requires that financial instruments, including common stock, that are issued in the form of shares that are mandatorily redeemable on a fixed or determinable date or upon an event certain to occur be classified as liabilities. FASB Statement 150 is required to be adopted in the second quarter of fiscal 2004 by the Company. As described in Note 11 to the Company's consolidated financial statements in its Form 10-K for fiscal year ended September 28, 2003, upon the death of either of the Company's shareholders, the Company is required to purchase the stock of such shareholder. Under the current capital structure, upon adoption of FASB Statement 150, the Company's stockholders' equity would be reclassified within the liability section of the balance sheet as "shares subject to mandatory redemption." FASB Interpretation 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership or contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise when the enterprise has a controlling financial interest through ownership of a majority voting interest in the entity. For transactions in place prior to January 1, 2004, FASB Interpretation 46 is required to be adopted by the Company no later than the beginning of the first annual period beginning after December 15, 2004 (beginning of the Company's fiscal 2006 year). The Company is in the process of evaluating the effects of FASB Interpretation 46. Based upon the in process review, the Company believes that its existing lease with a related party for the McAllen facility (see Note 8 to the Company's consolidated financial statements in its Form 10-K for fiscal year ended September 28, 2003) and its 49% equity interest in, as well as a subordinated note from, DBM Technologies, LLC (see Note 12 to the Company's consolidated financial statements in its Form 10-K for fiscal year ended September 28, 2003) are within the scope of FASB Interpretation 46. As currently structured, such entities likely require consolidation by the Company upon adoption of FASB Interpretation 46. As of December 21, 2003, DBM Technologies, LLC had third 16 party assets and liabilities of approximately $23.4 million and $23.9 million, respectively. As of December 21, 2003, the Company's non-cancellable lease payments for the McAllen facility approximated $2.0 million. For transactions subsequent to December 31, 2003 the effects of FASB Interpretation 46 apply immediately. RESULTS OF OPERATIONS The Company closed its quarters ended December 21, 2003 and December 22, 2002 one week early to allow for the Christmas holiday and automotive shutdown. Both quarters contain 12 weeks. QUARTER ENDED DECEMBER 21, 2003 COMPARED TO THE QUARTER ENDED DECEMBER 22, 2002 Net sales for the quarter ended December 21, 2003 ("first quarter 2004") were $105.7 million, a decrease of $2.6 million or 2.4% from the quarter ended December 22, 2002 ("first quarter 2003"). The decrease in net sales is due to reduced requirements from the Company's customers. Gross margin was $19.1 million or 18.0% of net sales for the first quarter 2004 compared to $18.4 million or 17.0% of net sales for the first quarter 2003. The gross margin improvement is due to continued process improvements and elimination of unused capacity at the Company's manufacturing facilities. Selling, General and Administrative (SG&A) expense for the first quarter 2004 was $10.3 million, or 9.7% of net sales compared to $9.7 million, or 9.0% of net sales for the first quarter of 2003. Expense has increased due to continued investment in advanced product design and engineering resources. Interest expense for the first quarter 2004 was $3.4 million compared to $3.5 million for the first quarter 2003. The decrease in interest expense is due to scheduled debt repayments and lower average borrowings outstanding on the Company's line of credit. Income taxes: The effective tax rate for the first quarter of 2004 was 41.9% compared to 41.5% for the first quarter 2003. 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. 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 21, 2003, the Company had $126.1 million of long-term debt outstanding, $15.8 million of revolving loans and current maturities of long-term debt outstanding, and $34.4 million of borrowing availability under its revolving credit facility. Cash provided by operating activities in first quarter 2004 was $8.4 million compared to $20.0 million in first quarter 2003. The decrease 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. The swing in cash payments relates to one customer. Payment terms related to this customer were revised from receiving funds on the 28th of each month to the 2nd of the subsequent month. Capital expenditures for first quarter 2004 were $1.0 million compared to $2.0 million for first quarter 2003. The Company believes its capital expenditures will be approximately $12 million in fiscal year 2004. The majority of the Company's fiscal year 2004 capital expenditures will be used to refresh current equipment and facilitate new programs launching in fiscal year 2004. 17 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. This payment, paid in January 2004, was $1.8 million. The following information summarizes the Company's significant contractual cash obligations and other commercial commitments at December 21, 2003:

Refer also to the discussion regarding the pending effects of FASB Statement 150 and shares subject to mandatory redemption. 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 28, 2003. Item 4: DISCLOSURE CONTROLS AND PROCEDURES As of December 21, 2003, 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 reports 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. 18 Item 5: Other Information On December 18, 2003, the shareholders of the Company entered into a definitive agreement to sell all of their shares of the Company to Plastech Engineered Products, Inc. The consummation of the transaction is subject to regulatory approval and other customary closing conditions. The transaction is anticipated to close in February 2004. 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: January 27, 2004 19 Item 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits EXHIBIT NO. EXHIBIT DESCRIPTION 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K The registrant filed a report on Form 8-K dated December 22, 2003 related to a definitive agreement entered into to purchase all of the Company's outstanding stock with Plastech Engineered Products, Inc. 20 10-Q EXHIBIT INDEX EXHIBIT NO: DESCRIPTION EX-31.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 EX-31.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 EX-32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 21

LDM TECHNOLOGIES INC 10-Q