Dura posts "disappointing" Q1 numbers, but says operations restructuring moving along

By Paul Deckelman

New York, April 27 - Dura Automotive Systems Inc. had what its chief financial officer called a "very disappointing" 2006 first quarter, with its net loss widening from year-earlier levels as sales fell sharply. That caused the junk bonds and shares of the Rochester Hills, Mich.-based supplier of automotive control systems and recreational vehicle manufacturer to nosedive in busy trading on Thursday.

Even so, CFO Keith R. Marchiando and Dura's chairman and chief executive officer Larry Denton told analysts on a conference call following the release of the results that the company was continuing with its previously announced global restructuring of its operations that includes the possible closure of between five and 10 plants in the United States and overseas, as well as the separate possible sale of three German plants.

And the Dura executives said that their company is in good shape, liquidity-wise as a result of having recently enlarged its $150 million senior secured second-lien term loan facility due 2011 by $75 million, a transaction which closed in March.

"While we were comfortable with our liquidity position at [the 2005] year end," Marchiando declared on the conference call, "the continued strain on the industry during the quarter and our conservative strategy regarding liquidity, led us to increasing our liquidity."

As of the end of 2005, Dura had liquidity of $227 million, consisting of $102 million of cash on hand, plus the $161 million year-end borrowing base under its $175 million asset-based revolving credit facility due 2010, minus $18 million of outstanding revolver borrowings and a like amount of letters-of-credit debt.

"We believed that we had more than enough liquidity at year-end to operate our business and execute the restructuring plan," the CFO said. "However, given the recent [negative] developments in the automotive supplier base," such as the March 3 Chapter 11 filing of Toledo, Ohio-based components manufacturer Dana Corp., "we are confident that we made a prudent decision to further enhance our liquidity this quarter."

Marchiando said that during the fiscal first quarter ended April 2, Dura's cash position improved by some $26 million, rising to $127.922 million from $101.889 million a year earlier. Its total liquidity at the end of the quarter stood at $284 million, consisting of the quarter's end borrowing base under the revolver of $174 million, plus the nearly $128 million in cash on hand, less $18 million of outstanding letters of credit. Dura had no revolver borrowings outstanding as of the quarter's end.

"The $284 million liquidity number is the key," he asserted, noting that it represented a deterioration of only about $15 million from the total peak liquidity of around $300 million that the company had after it closed the term loan add-on in early March, even though "we burned through $47 million of cash during the quarter," excluding the proceeds of the add-on. Marchaindo explained that some of the company's cash expenditures during the quarter were "an investment in working capital, and the increase in the accounts receivable and inventory leads to an increase in our borrowing base, [which] in turn increases our availability under our revolver."

'Focused' on restructuring

He said that Dura "remains focused on executing our restructuring plan during these difficult industry times, to ensure the long-term success of the company."

Dura's liquidity position at the end of the first quarter, he added, "will provide us the financial flexibility required to complete the restructuring plan successfully, and within our established timeframe."

Denton told the conference call that he is "confident that we will be able to meet our goals" that Dura laid out when it announced the ambitious global restructuring program on Feb. 9.

Over the next two years, Dura aims to transfer at least 50% of its production to what it calls "best-in-cost facilities". While such factories might be located in areas with lower labor costs, such as Dura's plants in Mexico or Eastern Europe - and Dura has already begun moving some U.S. production to Mexico and some German production to facilities in Eastern Europe - the strategy does not simply entail a wholesale labor cost-based shift of production. Other factors might make it desirable to keep some individual manufacturing operations in what might be termed higher-cost countries such as the United States and Western Europe, despite their higher labor costs, such as production logistics and their costs, the closeness of the factory to the eventual customer, which determines the shipping costs of items produced there, and the relative efficiency of possible factories.

Dura plans to relocate about 2,000 positions worldwide to lower labor cost countries, split evenly between North America and Europe. So far, about 125 U.S. positions have been shifted to Mexico and 55 from Germany to the Czech Republic.

Denton said that between five and 10 facilities are to be closed, with the first announcements of specific plant closings expected in the third quarter. He noted that since 2000, "we've closed or exited 20 facilities," giving Dura management ample experience on smoothly executing more such shutdowns as it pursues its global restructuring strategy.

Besides transferring the manufacturing of many of its products to more economically viable facilities, Dura looks to lower its materials costs by at least 4% annually, by greater sourcing of materials and components from low-cost countries.

And he said that Dura was continuing to evaluate the fate of three German facilities currently on the auction block. Dura aims to sell them if the right offer comes along - it has the investment banking firm of W.Y. Campbell & Co. out beating the bushes for potential buyers and otherwise evaluating strategic alternatives for those businesses. But the company has said that it would only consider the sale of one or more of the plants if the offer made economic sense, and could just as easily hang onto the plants and keep them operating.

"We are off to a good start on the restructuring plan," Marchiando said, "and we are on target to achieve our goal to complete the project by year-end 2007."

The early progress that Dura has been making on its plan was about the only bright sport for Dura during the quarter. The CFO pointed out that "from an industry standpoint, GM [General Motors Corp.] and Ford [Motor Co.] continue to lose market share in North America, and although we continue to decrease our reliance on the Big Three, they remain a key factor in our financial performance."

Net loss of $7 million

Dura had a net loss for the quarter of $7 million (38 cents per share), widening from its year-earlier net loss of $4.8 million (26 cents per share). The company's adjusted loss from continuing operations for the quarter, which excludes facility consolidation charges and cumulative effect of accounting changes, totaled $6.3 million (34 cents per share), increasing from $3.7 million (20 cents per share) of year-earlier red ink.

Revenues fell to $584.4 million from $620 million in the year-earlier quarter. Marchiando cited the effects of lost business, including the loss of orders for Dura's GMT 800 seat adjuster, in favor of the GMT 900 made by a rival manufacturer.

In the company's recreational vehicle business, a surge in orders for towable trailers placed with Dura by the Federal Emergency Management Administration - which has shipped the vehicles to Louisiana and Mississippi for use in the Hurricane Katrina relief efforts - helped to bolster that segment of the company's operations. But Denton and Marchaindo acknowledged that such business was short-term at best and already starting to taper off from peak levels seen last fall - and also said that higher interest rates from a year ago and continued high gasoline prices were undermining sales of class A motor homes to the consumer market.

Marchiando also observed that Dura's net interest expense for the quarter was $26 million, up a bit more than $1 million from a year earlier. He blamed the 190 basis-point increase in the Libor rate over the past year, which significantly affects Dura since more than half of its debt - 52% to be precise - moves up and down with the prevailing interest rates.

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