Dura to revamp operations, eyes eventual 9% notes refinancing

By Paul Deckelman

New York, Feb. 9 - Dura Automotive Systems Inc. - seeking to adjust in the face of continued challenging conditions in the vehicle manufacturing industry - on Thursday unveiled plans for an ambitious global restructuring of its operations that includes the possible sale of three German plants and the possible closure of between five and 10 more sites in the United States or overseas.

Over the next two years, the Rochester Hills, Mich.-based manufacturer of automotive components for original equipment manufacturers and of recreational vehicles, says it aims to transfer at least 50% of its production to what it calls "best-in-cost facilities." Such factories might be located in lower-cost countries, such as Dura's plants in Mexico or Eastern Europe - or they might not be, depending on such other factors besides labor costs as production logistics and their costs, the closeness of the factory to the eventual customer, and the relative efficiency of possible factories.

"Some of it [the production to be transferred] will go to lower-cost countries," the company's chairman and chief executive officer, Larry Denton, told analysts on a conference call following the announcement of the restructuring and the company's release of fourth-quarter and 2005 full-year results, "and some is not." For instance, he said, it would make more economic sense to have large items, such as vehicle doors, made "literally within just miles" of the customer base, rather than produce them in a lower-cost area a continent away and have to incur sizable shipping costs.

Lower costs sought

Nonetheless, chief financial officer Keith R. Marchiando said on the conference call that Dura would reap the benefits of a lower average global wage rate as a result of the roughly 2,000 positions that will be relocated, as well as "significant savings" from capacity utilization rates as the manufacturing operations are consolidated.

He called the restructuring initiative "a real opportunity for us to get as efficient as we can."

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 by Dura "working with our existing and potential suppliers to ensure that Dura will meet its annual savings target."

Marchiando said that the restructuring effort would cost the company about $100 million over the next two year, with most of that going for personnel severance costs - about 2,000 positions will be relocated - facilities closure costs, the costs of moving production and some capital expenditures.

Cash, facilities sufficient

He said that the company would be able to fund the restructuring from its cash on hand and its availability under its existing credit facilities, and would not require any additional financing.

The CFO said that although Dura would be a net user of cash during the restructuring period, its existing $227 million of total liquidity as of the end of the fourth quarter on Dec. 31 would be "more than sufficient" to fund the costs of the restructuring, plus the company's other ongoing operating cash needs. The restructuring would "not in any way" be dependent upon the proceeds from any sale of the German assets, located in the cities of Lage, Lippstadt and Rotenburg, or any other transaction, he said.

Dura hired the investment banking firm of W.Y. Campbell & Co. to help it in weighing strategic alternatives for the German properties; although these could include the sale of one or more of them, Denton said that Dura would only consider their sale if its review of the various options shows a positive return for the company.

Denton said the restructuring drive was the largest initiative Dura had ever taken on and was made necessary by the challenging, changing face of the automotive industry, which saw Dura's two biggest customers, General Motors Corp. and Ford Motor Co., losing market share and cutting back on their orders for components from Dura and other equipment manufacturers.

'Not satisfied' with results

Despite the company's best efforts in 2005, "in the end, we did not achieve all of our internal goals we had established," Denton declared. "Therefore, we are not satisfied with our financial results."

Dura's fourth-quarter net income grew to $10.3 million, or 54 cents per share, versus $1.9 million, or 10 cents per share, a year earlier, even as revenues declined to $564.4 million in the quarter from $582.8 million a year earlier. However, on a continuing operations basis - which excludes facility consolidation charges, a gain on retirement of debt and the favorable settlement of certain environmental matters - earnings fell to $900,000, or 5 cents per share, from $4.8 million, or 26 cents per share, a year earlier.

For the full year, Dura had net income of $1.8 million, or 10 cents per share, well down from 2004's $11.7 million, or 62 cents per share, as revenues fell to $2.3 billion from $2.5 billion a year earlier. The company swung into the red on a continuing operations basis, posting an adjusted loss, excluding certain items, of $6.4 billion, or 34 cents per share - a sharp deterioration from its year-earlier adjusted income from continuing ops of $29.4 million, or $1.56 per share.

"Looking forward over the next 24 to 36 months, it is likely that many of the same economic factors will continue to impact our industry," Denton continued, "and drive further changes to the traditional business model." The global cost restructuring plan, he said, would allow Dura "to enhance our profitability and return to financial health."

Refinancing eyed

Marchiando said that the company's "next critical financial milestone" would be the refinancing of over $500 million of its 9% senior subordinated notes due 2009 issued by its Dura Operating Corp. subsidiary in April 1999. He said that successful execution of the company's operational refinancing and its procurement initiatives "over the next 700 days," or before the end of 2007, "will position us to meet the refinancing milestone through a combination of cash paydown, debt-for-debt [exchanges] and potentially, some sort of equity financing."

The company - which originally issued $456.15 million of dollar-denominated 9% notes and a €100 million mirror tranche in 1999, has already taken out some of the bonds; the CEO said that in line with its previously announced strategic goal of debt reduction, it used $31 million of cash during the fourth quarter to buy back $49 million principal amount of the bonds on the open market at a steep discount, taking advantage of the near-distressed levels at which the 9s were trading to buy them at an average price of 62 cents on the dollar. Dura realized a net gain of $18 million on the bond purchases.

Debt reduction a goal

In answer to an analyst's inquiry during the question-and-answer portion of the call as to whether it made sense for the company to be buying up debt not due until 2009 at a time when it "just laid out a program that's going to drain an awful lot of cash" from company coffers, Marchiando answered that when company leadership last year began evaluating options for what it would do over the next four years, until the 9% bonds come due on May 1, 2009, it was decided that "we needed to show some concerted effort at debt reduction." While the company had been reducing its net debt "somewhat" successfully, he said, that had slowed down over the last several years - while there had never been any consideration given to reducing Dura's overall gross debt.

"We looked at the liquidity we had put in place in May of last year," when Dura entered into a $175 million asset-based revolving credit facility due 2010 and a $150 million term loan due 2011, "and we knew that we had to address our cost position [of debt] in total."

He said that the company's management team and its board members sat down and "we looked at the available funds that we had under our liquidity package, looked at what it took to run the company on a month-to-month, quarter-to-quarter basis, ... and made two strategic decisions - one to address our gross debt amount, and the other to address our cost position."

Marchiando told another analyst who asked about further open-market bond repurchases that the 9% notes which were bought back during the fourth quarter were repurchased under the restricted-payments basket of their indenture, which stood at about $55 million at the end of the third quarter, in late September. That allowance has since then "gone down a little bit. So certainly, from a limitations standpoint, that's one limitation," he said. Any such further repurchases would be "a small amount."

Liquidity said sufficient

Dura does have the ability, under its second-lien loan covenants to go up to a ceiling of $450 million of credit facility debt, from the current $325 million, as well as another $50 million of permitted "all other debt" under its bond indentures, that could be used for such things as capital leases, although Marchiando said it would require the consent of the company's asset-backed and second-lien lenders; however, he reiterated "there is no need to raise more capital," since the company's liquidity is sufficient.

The year-end liquidity of $227 million consisted of $102 million of cash on hand, plus the $161 million year-end borrowing base under the $175 million revolver, less $18 million of outstanding revolver borrowings and a like amount of letters-of-credit debt. The year-end cash position was down $90 million from the $192 million of balance-sheet cash at the end of 2004.

Marchaindo said that net interest expense for the fourth quarter was $26 million, a $3 million increase over a year earlier, due to the nearly 200 basis point increase in the Libor over the past year, since some 49% of Dura's debt is calculated at a variable rate. The CFO said that a 100 bps change in the base rate, up or down, affects the company's interest expense by $6 million annually, or $1.5 million per quarter.

He said cash interest costs for the quarter were $46 million, since one of the two semiannual payments on the company's 9% bonds is made on Nov. 1, while the coupon on its $400 million of 8 5/8% senior notes due 2012 is paid on Oct. 15. Cash interest for the year was $95 million.

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