Item 1. Business
General
As used herein, the term “Company” shall mean Hayes Lemmerz International, Inc. and its direct and indirect subsidiaries on a combined basis. Any reference to a fiscal year of the Company shall mean the Company’s fiscal year commencing February 1 of a calendar year and ending January 31 of the next calendar year. Thus, for example, “fiscal 2000” refers to the fiscal year which commenced on February 1, 2000 and ended on January 31, 2001.
The Company is a leading supplier of suspension module components to the global automotive and commercial highway markets with a presence in 17 countries. The Company’s products for the suspension module include wheels, wheel-end attachments, aluminum structural components and automotive brake components. The Company is the world’s largest manufacturer of automotive wheels. The Company is also the largest independent manufacturer of wheel-end attachments and aluminum structural components in North America and a leading producer of automotive brake products in North America. In addition to suspension module components, the Company also designs and manufactures wheels and brake components for commercial highway vehicles, and powertrain components, engine components and aluminum non-structural components for the automotive, heating and general equipment industries.
The Company’s principal customers are General Motors, Ford, DaimlerChrysler (the three of which comprised approximately 52% of the Company’s fiscal 2000 net sales), BMW, Volkswagen, Nissan and Honda. Other customers include Toyota, Isuzu, Renault, Fiat, Porsche, Audi, Volvo, Citroën, Peugeot, Skoda, Mazda, Mitsubishi and Suzuki. The Company also has over 300 commercial highway vehicle customers in North America, Europe and Asia, including Trailmobile, Dana/ Mack, DaimlerChrysler, Iveco, Strick, Great Dane Trailers, Freightliner, PACCAR, Volvo, General Motors, Renault, Western Star, Schmitz Cargobull and Köegal.
Suspension module components, consisting of wheels, wheel-end attachments, aluminum structural components and automotive brake components, account for approximately 82% of the Company’s sales. The commercial highway segment accounts for approximately 8% of the Company’s sales, powertrain components account for approximately 6% of the Company’s sales and other aluminum products for the automotive, heating equipment and general machinery industries account for the remaining 4% of the Company’s sales.
The Company has been active in expanding its presence and developing strategic alliances around the world. The Company has a worldwide network of 52 facilities (including six joint venture facilities) in the United States, Germany, Italy, Spain, the Netherlands, Belgium, the Czech Republic, Turkey, Brazil, South Africa, Mexico, Canada, Venezuela, Portugal, Thailand and India. The Company also provides sales, engineering and customer service throughout the world. The Company has advanced research and development facilities in the United States, Germany, Belgium, Italy and Brazil and a sales and engineering office in Japan. The Company also has technical alliances in Thailand and Colombia.
The Company offers its customers a wide range of wheels for passenger cars and light trucks. The Company designs and manufactures steel wheels, which are generally low-cost, high volume production items that consist of two separate pieces (a rim and a center) welded together. The Company also designs and manufactures lightweight steel wheels (which are approximately 15% lighter than traditional steel wheels) and more expensive stylized full face steel wheels, with a clear, color or chrome finish. Aluminum wheels are generally lighter in weight, more readily stylized and more expensive than steel wheels, and can be one-piece cast aluminum wheels, fabricated aluminum wheels or two-piece wheels (a fabricated aluminum rim and a cast aluminum center) welded together (“FFC®”). The Company’s fabricated aluminum wheels are similar in design to fabricated steel wheels. Though not as highly styled as cast aluminum wheels, they are lighter in weight than both fabricated steel wheels and one-piece cast aluminum wheels. The Company believes that its breadth of product offerings and manufacturing capabilities enhances its ability to support a full vehicle platform with any wheel design.
The Company is also a leader in the design, manufacture and delivery of numerous other suspension module components, including: (i) wheel-end attachments and assemblies such as steering knuckles, spindles, hub carriers and suspension arms; and (ii) aluminum structural components such as crossmembers, subframes, engine cradles and axle assemblies. The Company believes that it is the largest independent supplier in North America of wheel-end attachments and assemblies, and aluminum structural components to original equipment manufacturers (“OEMs”) of passenger cars and light trucks.
The Company also designs and manufactures automotive brake components, which are another important suspension module component, consisting primarily of composite metal drums, full cast drums and cast iron hubs for drum-type brakes and cast iron rotors for disc brakes. The Company’s brake components have been incorporated into anti-lock brake systems offered by its OEM customers. In addition to the OEM market for automotive brake components, the Company has a significant presence in the service market for brake rotors.
In the commercial highway vehicle market, the Company sells wheels, rims and brake products to truck manufacturers (including replacement parts sold through original equipment servicers) and aftermarket distributors. These products are installed principally on trucks, trailers and buses. In the commercial highway market, sales to truck manufacturers are attributable to either having the product designated as standard equipment by the original manufacturer or obtaining fleet specifications where purchasers of commercial highway vehicles specify the component parts to be utilized on vehicles manufactured for their fleets.
OEMs typically specify the features of each component in the suspension module for a particular model. Some components, such as wheels, whether steel or aluminum, often will be offered as standard or optional equipment. Suspension components, such as wheel-end attachments and structural components, usually are offered only as standard equipment. Among the features specified by OEMs are weight, strength, styling and pricing requirements. OEMs will ordinarily designate one supplier of a particular component for a vehicle model, particularly with suspension components. In other cases, such as wheels where standard and optional equipment is often offered, a particular vehicle model may utilize more than one supplier.
A supplier of a particular component design is typically specified by an OEM more than two years before the time of initial production. A potential supplier must first develop a design based on weight, strength, styling and engineering specifications provided by the OEM. After a comprehensive engineering and feasibility review, the OEM then designates a specific supplier for a particular component that meets the OEMs’ cost, quality, weight, strength, styling and engineering specifications for particular vehicle models. The duration of the designation is dependent upon the life cycle of the vehicle model. Suppliers that design, engineer, manufacture and conduct quality control testing are generally referred to as Tier 1 suppliers. The Company believes that because of its world-class engineering capabilities and full product line, early involvement in the design and engineering of new suspension module components as a Tier 1 supplier affords it a competitive advantage in securing new business and provides customers a significant cost reduction through coordination of design, development and manufacturing processes. As a result of the lengthy approval and launch process, combined with the continued designation of a particular supplier for the life of the vehicle model, increases or decreases in sales to a particular OEM and corresponding changes in market share normally occur over an extended period of time.
The Company competes for sales of its products on the basis of cost, delivery, quality and service. Approximately 52% of the Company’s fiscal 2000 total sales consist of sales to General Motors, Ford and DaimlerChrysler. As a result, the loss of a significant portion of the Company’s sales to any of these OEMs could have a material adverse impact on the Company. The Company has been doing business with each of these OEMs for many years, and sales are composed of a number of different products and of different models or types of the same products and are made to individual divisions of such OEMs. In addition, the Company supplies products to those customers in both North America and Europe which reduces the Company’s reliance on any single market.
While the Company’s business is not seasonal in the traditional sense, July (in North America), August (in Europe) and December are usually lower volume months. This is because OEMs typically perform model
changeovers or take vacation shutdowns during the summer and assembly plants are typically closed for a period from shortly before Christmas to after New Year’s Day.
Raw materials and component parts used in the Company’s manufacturing operations are those commonly used in such operations and adequate supplies are available. The Company is generally not dependent on long-term supply contracts and has available to it alternate sources for its raw materials and component parts.
Company History
The Company’s business originated with Hayes Wheel, founded in 1908 by Clarence Hayes, and K.H. Wheel Company, founded in 1909 by John Kelsey and John Herbert, which produced wooden-spoked wheels for automobiles such as Henry Ford’s Model T. These companies merged in 1927 to form Kelsey-Hayes Wheel Corporation, which was reorganized in 1933 into Kelsey-Hayes Wheel Company. In 1992, the non-wheel businesses and assets of the Company, particularly its automotive brake systems business and assets, were transferred to, and certain liabilities related thereto were assumed by, a wholly owned subsidiary of the Company, Kelsey-Hayes Company (“Kelsey-Hayes”), the capital stock of which was then transferred by the Company to its sole stockholder as an extraordinary dividend and the Company consummated an initial public offering of its common stock.
On July 2, 1996, the Company consummated a series of transactions (the “Motor Wheel Transactions”) pursuant to which: (i) Motor Wheel Corporation (“Motor Wheel”) became a wholly owned subsidiary of the Company; (ii) the Company’s common stock was recapitalized with each share of common stock then outstanding being exchanged for 1/10th share of Common Stock and $28.80 in cash (the “Recapitalization”); and (iii) Joseph Littlejohn & Levy Fund II, L.P. (“JLL Fund II”) and certain other investors acquired ownership of approximately 76.6% of the Common Stock. On June 30, 1997, the Company acquired Lemmerz Holding GmbH (“Lemmerz”) (the “Lemmerz Acquisition”). Lemmerz was founded in 1919 at its current site in Königswinter, Germany and was the leading full-line wheel supplier in Europe. On November 12, 1997, following stockholder approval, the Company changed its name to “Hayes Lemmerz International, Inc.”
Following the Lemmerz Acquisition, the Company continued the expansion of its business with six acquisitions in fiscal 1997 and 1998 of wheel and brake manufacturers in the United States, Mexico, Brazil, South Africa and India. These acquisitions enhanced the Company’s global network of wheel and brake component manufacturing operations and increased its presence in a number of high growth markets.
In fiscal 1999, the Company acquired CMI International, Inc. (“CMI”) for $605 million in cash. CMI was a leading full service supplier of wheel-end attachments, aluminum structural components and powertrain components to the automotive industry. The Company also acquired an aluminum wheel manufacturer in Thailand and a machining supplier in the Netherlands.
In fiscal 2000, the Company acquired the assets of the Schenk aluminum foundry located in Maulbronn, Germany. Through this acquisition, the Company intends to expand its worldwide production of suspension components.
Industry
Modules
OEMs are changing their sourcing methods toward modules and away from individual components as part of the broader automotive industry strategy to shorten lead times, improve inventory management and enhance the quality of subsystems. The Company has the capability to design and engineer the complete wheel-to-wheel suspension module and currently has the ability to manufacture approximately 60% of the suspension module. Of the components in the suspension module, the Company has achieved its leading position in the automotive wheel market through both organic growth and growth by acquisition. The Company also has important market positions in key suspension module components, including wheel-end attachments and aluminum structural components, as well as comprehensive suspension module design and engineering capabilities.
The Company’s strategy is to build its market positions in suspension module components, leveraging off its leading market and customer positions in wheels. With both the necessary technical capabilities and product breadth, the Company is well-positioned to accelerate its growth in key suspension module components and be a leading single-source supplier of suspension modules. With the expanding focus from wheels to the suspension module, the Company has dramatically expanded the markets in which it operates.
Global Sourcing
OEMs are developing global car platforms in order to reduce development lead times and improve their overall cost structures. An important step for OEMs in achieving improved efficiency through the use of global platforms is being able to source components from a single supplier everywhere in the world. The Company has recognized the need to be able to supply its customers on a worldwide basis and has increased its capabilities in developing and established markets to meet its customers’ needs.
As a result of the various acquisitions in fiscal 1997 through fiscal 2000, the Company has established a leading global presence and currently operates 26 facilities in North America, 20 facilities in Europe, and six additional facilities in the rest of the world (including interests in joint ventures). The Company believes its worldwide presence has been an important factor in the award of several contracts to date and expects to realize further benefits as OEMs execute their global car and platform strategies. The Company’s breadth of products and ability to meet different price points add to these competencies by streamlining OEMs’ purchasing and facilitating their ability to meet the divergent needs of each market.
Outsourcing
In an effort to improve quality and reduce capital outlays, production costs, overhead and inventory levels, OEMs have been active in outsourcing significant portions of the design, engineering and manufacturing of automotive components not deemed strategic, and, increasingly, systems and modules to Tier 1 suppliers. Many components, including wheels and brakes, are not strategic to the OEMs.
OEM suppliers have been proactive in adapting to this trend, as evidenced by the significant consolidation of the OEM supplier base and the increasing role of Tier 1 suppliers as full service integrators. The Company has been particularly active in this area and has used its design and engineering expertise to forge strong relationships by becoming an integral part of OEM in-house design teams. These relationships have led to the Company being the recipient of significant outsourcing awards in wheels and suspension components.
Technical, Research, Testing and Related Capabilities
As OEMs increase outsourcing the design, engineering and manufacturing of automotive components, systems and modules to Tier 1 suppliers, greater emphasis is being placed on the technical and research capabilities of suppliers. The Company has a research and development center adjacent to its Northville, Michigan world headquarters and a technical center located in Ferndale, Michigan. The Company also has design, engineering, and research and development capabilities at its Königswinter, Germany; Dello, Italy; Hoboken, Belgium; Johannesburg, South Africa; Saraburi, Thailand and São Paulo, Brazil facilities. The Company believes that it is a leader in advanced research for suspension modules and related wheel and brake technology. The Company has also developed a number of innovative non-wheel cast aluminum products for passenger cars, heavy trucks, heating equipment and the general machinery industries.
Most programs that the Company has been selected to supply require the Company to fully design, engineer, prototype and test those components, assemblies and modules. The Company utilizes numerous software programs to ensure customer compatibility. The Company has direct computer links to many customers and provides customers with engineering and manufacturing support. The Company also utilizes finite element techniques in designing products for mechanical strength, fatigue and impact resistance and prediction of noise, vibration and harshness. Similar evaluations are conducted with respect to manufacturing in areas such as mold filling, solidification, die heating and cooling, and fixturing for machining.
The Company presently uses a number of rapid prototyping technologies that result in customers receiving products for evaluation more quickly and at lower cost, and provide the ability to make many rapid changes to ensure that designs are optimized. The Company also performs a variety of tests to ensure that products meet or exceed customer specifications while simultaneously providing updates to engineering and design models.
The Company constructs a portion of its tooling in-house, ensuring that product designs are compatible with manufacturing processes, leading to overall improvements in part manufacturability and quality. Internally produced tooling often results in cost-saving design improvements, more efficient maintenance and reduced spare parts inventory. Customer confidentiality of product programs is ensured with the manufacture of both tools and prototypes internally at the Company. In addition, since a single math database is used and tools are produced using computer-based machines, design integrity is maintained and tool accuracy and repeatability is ensured.
Aluminum Penetration
OEMs are continuing to focus on weight reduction in order to achieve improved government-imposed fuel economy standards for passenger cars and light trucks and are at the same time working to improve ride and handling through the use of more rigid suspension module components. Aluminum is lighter and more rigid than fabricated steel and allows for greater design flexibility. The combination of these trends is driving increased penetration of aluminum products as replacements for fabricated steel components around the suspension module. Independent industry sources are predicting aluminum content per vehicle to grow significantly over the next several years, primarily as a result of increased penetration of aluminum around the suspension module.
Aluminum wheel penetration (new vehicle installations) in North America has increased from approximately 3% in 1980 to approximately 53% in 2000. The Company estimates that such penetration will continue to increase over the next several years because aluminum wheels are increasingly favored by OEMs for their aesthetic characteristics, design flexibility and product innovations, including fabricated aluminum wheels and FFC® aluminum wheels. The Company has developed a proprietary high-volume application of its FFC® technology, which simultaneously addresses OEMs’ need for more sophisticated wheel styling, lighter weight and greater fuel efficiency. Aluminum wheel penetration in Europe in 2000 was approximately 31% and continues to display a similar growth pattern as that experienced in North America. The Company is well-positioned to continue to increase sales of its aluminum wheels given the new, but rapidly growing, fabricated aluminum wheel and FFC® wheel designs where the Company is the only significant manufacturer.
Management estimates that aluminum penetration in crossmembers and subframes in North America will double by 2003 from its current level of approximately 12%, and aluminum penetration in wheel-end attachments will increase during the same period from its current level of approximately 22%. The Company was the first company to apply high-volume manufacturing of aluminum structural components with its contract for the Chrysler NS Minivan. The Company now supplies aluminum suspension module components to most major OEMs, including DaimlerChrysler, General Motors and Ford. The Company is also one of a few companies with the ability to supply aluminum crossmembers, which are one-piece cast components. These aluminum crossmembers replace conventional steel crossmembers which are typically fabricated from several stamped steel parts welded together. This improved design not only simplifies the manufacturing process, but also improves the handling of the vehicle. The Company believes that it is a leader in the design, engineering and manufacturing of aluminum suspension components that will allow it to capitalize on the trend of increased aluminum content per vehicle.
Product Innovations
The Company is dedicated to the continued development of new and improved suspension components and related products either through its own world-class engineering capabilities or joint ventures with other parties. These new designs include full face styled steel wheels, lightweight steel wheels, lightweight fabricated aluminum wheels, FFC® wheels, clad-covered wheels and Centrifuse® brake drums.
Supported by computer-aided design and manufacturing, as well as finite-element analysis tools, the Company investigates specific product designs for lighter-weight products that help reduce overall vehicle weight and provide more attractive styling variations. To ensure that new, lighter-weight products are sufficiently durable to meet vehicle requirements, the Company performs fatigue tests that put prototype products through the equivalent of thousands of miles of road use before they reach the manufacturing stage. To ensure longevity of the wheels, salt-spray and other environmental tests are conducted on coated wheels. The Company performs similar tests on other components in the suspension module.
The Company owns numerous patents and trademarks and has patent licenses from others relating to its products and manufacturing methods. The Company also grants patent and trademark licenses to others throughout the world and receives royalties under most of these licenses. While the Company does not consider any particular patent or group of patents to be essential to its business as a whole, it considers its patents to be significant to the conduct of its business in certain product areas. In addition, the Company relies on proprietary data and processes, including trade secrets and know-how, and depends, to some extent, on such information remaining confidential.
Quality Awards
In an effort to increase the quality of the vehicles they produce, OEMs continue to increase the quality demands on their component suppliers. Each OEM has a structured program and rating system for quality and grants awards to suppliers. Examples include Ford’s Q-l Total Quality Excellence Award, General Motors’ Mark of Excellence, DaimlerChrysler’s QE and Pentastar Awards and Toyota’s Target-Value-Quality Award. Once a supplier receives a quality award, the supplier retains the award level, subject to continuing favorable review by the OEM. The Company endeavors to meet and exceed the quality demands of the OEMs. Most of the Company’s manufacturing facilities have received such quality awards.
The automotive industry has adopted standards for quality ratings commonly known as QS 9000 or ISO 9001, as to which all of the OEMs require compliance. The Company’s Gainesville, Georgia location was the first wheel plant in North America to qualify for this rating. Nearly all of the Company’s worldwide facilities have received QS 9000 and/or ISO 9001 registration in compliance with all of its customers’ requirements.
Cast Aluminum Wheels
The Company’s cast aluminum wheels are produced and sold in North America, Europe, South America, South Africa and Asia.
North America
The Company has five cast aluminum manufacturing facilities in North America, which are located in Howell, Michigan; Gainesville, Georgia; Huntington, Indiana; La Mirada, California; and Somerset, Kentucky. The Company also owns a 40% interest in a joint venture which has an aluminum wheel facility in Chihuahua, Mexico. At these facilities, the Company designs, manufactures and distributes a full-line of cast aluminum wheels to OEMs in the passenger car and light truck segments of the automotive industry. In fiscal 2000, the Company was a leading supplier of cast aluminum wheels purchased in North America. With the exception of a limited number of cast aluminum wheels manufactured by Ford in New Zealand and aluminum wheels manufactured by Toyota, there is no significant OEM manufacturing of cast aluminum wheels. In 2000, the Company believes approximately 53% of passenger cars and light trucks in North America used cast aluminum wheels.
Customers. In fiscal 2000, approximately 87% of the Company’s total North American cast aluminum wheel production was sold to DaimlerChrysler, General Motors and Ford for use on vehicles produced in North America. The Company exported approximately 3% of its cast aluminum wheels to Nissan and Isuzu in Japan and sold approximately 10% to Japanese transplants in the United States. The Company owns 100% of Hayes Lemmerz Japan Limited, a Japanese corporation that provides sales, engineering and service support for the Company in the Japanese wheel market.
Manufacturing. In manufacturing cast aluminum wheels, the Company uses both gravity casting and low pressure casting technologies. The Company continues to emphasize cost control and product quality in its manufacturing processes and facilities.
The Company manufactures one-piece and two-piece aluminum wheels. One-piece aluminum wheels comprise the majority of the Company’s current sales. The Company introduced its first high volume FFC® two-piece aluminum wheel in 1998. This two-piece design offers OEMs even greater weight savings without sacrificing styling flexibility.
Competition. The Company believes that its capabilities as a cost-effective supplier of cast aluminum wheels meeting OEM requirements enable it to compete effectively with other aluminum wheel manufacturers. The Company’s primary competitor in the North American cast aluminum wheel market is Superior Industries International, Inc. Other competitors include Amcast Industrial, American Racing Equipment, Alcoa and several foreign suppliers operating in the United States.
Europe
The Company has five cast aluminum manufacturing facilities in Europe, which are located in Barcelona, Spain; Dello, Italy; Campiglione Fenile, Italy; Hoboken, Belgium; and Ostrava, Czech Republic. At these facilities, the Company designs, manufactures and distributes a full line of cast aluminum wheels to OEMs in the passenger car and light truck segments of the European automotive industry.
Customers. In fiscal 2000, the Company was a leading supplier of cast aluminum wheels in the European market. Substantially all of the Company’s European cast aluminum wheels were sold to BMW, DaimlerChrysler, Ford, General Motors, Fiat, Volkswagen, Porsche, Peugeot, Renault, Nissan and Volvo. In 2000, the Company believes approximately 31% of passenger cars and light trucks in Europe used cast aluminum wheels.
Manufacturing. The Company utilizes low pressure casting technologies in Europe. Engineering, research and development for the Company’s European cast aluminum wheel operations is currently performed at the Company’s Dello, Italy; Hoboken, Belgium; and Johannesburg, South Africa facilities.
The Company maintains substantial capabilities in Europe to style and design cast aluminum wheels for sale to particular OEMs. The Company offers its OEM customers various Company-generated styles and sizes each year. The Company has also established direct computer links with several customer locations in Europe to streamline the design and approval process and reduce product development lead-time. In Europe, the Company believes that its interaction with its customers through computer-aided design offers a competitive advantage. In addition, the Company is actively introducing its new weight and cost saving technologies to the European car makers.
Competition. The cast aluminum wheel market in Europe remains more fragmented than in North America, with numerous producers possessing varying levels of financial resources and market positions. The current installation rate of cast aluminum wheels in Europe is significantly lower than in North America. As a result of anticipated consolidations of small local manufacturers across the European community and the expected increasing demand for cast aluminum wheels among consumers and OEMs in Europe, the Company believes that, over the next several years, the number of cast aluminum wheel manufacturers in Europe is likely to decline and the remaining producers will increase their market shares. As a result of its position in Europe and its advanced engineering and technology, the Company believes that it is well positioned to meet these changes in the European market.
The Company’s primary competitors in the European cast aluminum wheel market for passenger cars are Ronal, Amcast Speedline and Alloy Wheel International.
South America, South Africa and Asia
The Company has one cast aluminum manufacturing facility in South America, which is located near São Paulo, Brazil, one cast aluminum wheel manufacturing facility in South Africa, which is located near
Johannesburg, South Africa, and one cast aluminum wheel manufacturing facility in Asia, which is located near Bangkok, Thailand. At these facilities, the Company designs, manufactures and distributes a full-line of cast aluminum wheels to OEMs in the passenger car and light truck segments of the South American, South African and Asian automotive industries.
Customers. The largest customers for the Company’s South American cast aluminum wheels were Ford, General Motors, Volkswagen and Renault. The largest customers for the Company’s South African cast aluminum wheels were BMW, DaimlerChrysler, Dotz and Volkswagen. The largest customers for the Company’s Asian cast aluminum wheels were Toyota, Isuzu and Mitsubishi.
Manufacturing. Engineering, research and development for the Company’s South American, South African and Asian cast aluminum wheel operations is currently performed at the Company’s facilities located in Dello, Italy and Hoboken, Belgium.
Competition. The Company’s primary competitors in the South American cast aluminum wheel market for passenger cars are Italmagnesio and Mangels. The Company’s primary competitor in the South African cast aluminum wheel market for passenger cars is Tiger Wheels. The Company’s primary competitor in the Asian cast aluminum wheel market for passenger cars is Enkei.
Fabricated Wheels
The Company’s fabricated wheels are produced and sold in North America, Europe and South America.
North America
At its manufacturing facilities in Sedalia, Missouri and Bowling Green, Kentucky, the Company designs, manufactures and distributes a full line of fabricated steel and fabricated aluminum wheels for sale to OEMs in the passenger car and light truck segments of the automotive industry. The Company also owns a 40% interest in a joint venture which designs, manufactures and distributes fabricated steel wheels from a facility in Mexico City, Mexico. Having commenced production in the early 1900s, the Company has manufactured more steel wheels in North America than any other manufacturer.
The Company’s fabricated wheel products, including fabricated steel wheels, fabricated aluminum wheels, chrome steel wheels, full face steel wheels, and clad-covered wheels, have been well received by its customers. The Company believes that new contracts obtained in 2000 relating to these products have positioned this group for significant future growth. Currently, the Company produces fabricated aluminum wheels for Ford, General Motors, DaimlerChrysler and Toyota, including a full face, styled version for the Ford truck.
The Company believes that the North American steel wheel market will remain significant because OEMs will continue to specify less costly steel wheels for more moderately priced passenger cars and light trucks and for most spare wheels. The rate of installation of steel or aluminum wheels for any model year may be affected by OEM promotion programs. The Company continues to explore other avenues of growth for steel wheels, including further penetration into that portion of the market currently served by OEM wheel manufacturers.
Customers. The Company estimates that it is the largest supplier of steel wheels in North America for fiscal 2000. Approximately 88% of the Company’s North American steel wheels were sold to General Motors, Ford and DaimlerChrysler in fiscal 2000.
Manufacturing. The Company’s fabricated steel and fabricated aluminum wheels are manufactured by a continuous in-line process, thus enhancing quality standardization and reducing work-in-process inventory. Although tooling is relatively expensive for steel wheels, a particular style is likely to be run for a customer in high volume over a long period, lowering the unit production cost.
Competition. The Company’s primary competitors in the North American steel wheel market for passenger cars and light trucks are ArvinMeritor, Accuride, Topy and Central Manufacturing Company.
Europe
In Europe, the Company has four fabricated wheel manufacturing facilities, which are located in Königswinter, Germany; Manresa, Spain; Manisa, Turkey; and Ostrava, Czech Republic, where it designs, manufactures and distributes a full-line of fabricated steel wheels for sale to both OEMs and the aftermarket of the automotive industry throughout Europe.
Customers. The Company was a leading supplier of fabricated wheels manufactured in Europe in 2000. The Company’s principal customers include Volkswagen, Audi, Skoda, General Motors, Vauxhall, Opel, DaimlerChrysler, Mitsubishi, Ford, Landrover, Volvo, BMW, PSA, Seat, Renault, Toyota, Nissan, Suzuki and Kromag. In Eastern Europe, the Company’s principal customer is Skoda, the national automobile manufacturer of the Czech Republic, for which the Company is the sole supplier of steel wheels.
Manufacturing. The Company’s Königswinter, Germany facility has state-of-the-art, automated production equipment and extensive research and development facilities. The Company’s lightweight steel wheel, which is approximately 15% lighter than a traditional steel wheel, was developed and is manufactured at the Königswinter facility. The Company’s Manresa, Spain facility has developed a specialty niche in wheels for light trucks, recreational vehicles and vans. The Manisa, Turkey facility produces wheels for the Turkish market and exports both OEM and aftermarket wheels to Western Europe. It benefits from lower labor rates and has enough available manufacturing space to double the plant’s manufacturing capacity from 1.5 million to 3.0 million wheels. The Company’s Ostrava, Czech Republic facility has completed a new paint facility and installed new steel wheel assembly lines. This equipment is state-of-the-art and was required to meet the volume and quality demands of the Company’s European customers.
Competition. The Company’s principal competitors for the sale of passenger car and light truck steel wheels in Europe include Michelin Kronprinz, Gianetti-Fergat, Ford and Volkswagen.
South America
In South America, the Company has one fabricated wheel manufacturing facility, which is located near São Paulo, Brazil, where it designs, manufactures and distributes a full-line of fabricated steel wheels for sale to both OEMs and the aftermarket of the automotive industry throughout Brazil and Argentina.
Customers. The Company’s principal customers in Brazil and Argentina include Ford, General Motors, DaimlerChrysler, Volkswagen, PSA and Renault.
Manufacturing. The Company’s Brazilian steel wheel manufacturing facility has its own research and development facility and its operations are being converted to state-of-the-art, automated production equipment.
Competition. The Company’s principal competitor for the sale of passenger car and light truck steel wheels in Brazil and Argentina is ArvinMeritor.
Suspension Components
The Company’s suspension components are produced and sold in North America. The Company has four suspension component manufacturing facilities in North America, which are located in Bristol, Indiana; Cadillac, Michigan; Montague, Michigan; and Southfield, Michigan. The Company has completed construction of a new aluminum foundry in Montague, Michigan to meet increased customer demand for aluminum suspension components. In addition, in fiscal 2000, the Company acquired the assets of the Schenk aluminum foundry located in Maulbronn, Germany. Through this acquisition, the Company intends to expand its worldwide production of suspension components.
The Company’s suspension components consist of: (1) wheel-end attachments and assemblies; and (2) aluminum structural components.
Wheel-End Attachments and Assemblies
The Company produces aluminum and iron knuckles, spindles and spindle assemblies, iron hub carriers, axle flanges for the corner of the vehicle and control arms. The Company is a major supplier of steering knuckles and spindles to Ford and General Motors. In the North American market, wheel attachments are made from iron, aluminum and steel. As weight reduction initiatives continue and casting technologies improve, aluminum’s market share is expected to grow. However, aluminum is not expected to replace iron completely due to strength requirements on certain vehicle platforms. As a result of its ability to produce both iron and aluminum components, the Company believes that it is well positioned to take advantage of the market trends for these components.
Customers. The Company is a leading supplier to North American OEMs in wheel-end attachments and assemblies. The Company’s leadership in this segment also extends to certain product niches within the category.
Manufacturing. In North America, the Company designs, manufacturers and distributes aluminum and iron knuckles, spindles and spindle assemblies, iron hub carriers and axle flanges. The Company’s factories utilize various materials and casting processes to produce to specific product requirements including weight, performance, safety and cost.
The Company also manufactures ductile iron and aluminum casted wheel-end attachments and assemblies. The Company casts aluminum using green and resin-bonded sand, permanent mold, and squeeze and semi-solid processes.
Competition. The Company is a leading supplier of wheel-end attachments and assemblies. Excluding OEM production, the Company’s principal competitor is Carpenter. Other competitors include Metaldyne, Intat and Hitachi. Given the fragmented nature of the market, the Company’s competitors are significantly less visible across the major product areas and OEMs.
Aluminum Structural Components
The Company also manufactures structural aluminum subframes and crossmembers. Competing metals and processes include stamped steel, hydro-formed steel, and extruded aluminum. Aluminum’s market share of this segment is expected to grow, primarily due to desired weight reductions and ride characteristics. The Company believes that it is well positioned to benefit from this expected increase in penetration of aluminum.
Customers. The Company developed a one-piece cast aluminum crossmember for the 1995 Chrysler NS Minivan, the first high-volume application of such product. Since then, the Company has grown the market for aluminum crossmembers. Its customers today include General Motors, Ford and DaimlerChrysler.
Manufacturing. In North America, the Company designs, manufacturers and distributes structural aluminum subframes and crossmembers. As this market segment continues to experience significant growth, the Company is planning to substantially increase its manufacturing capacity.
Competition. Given the level of manufacturing expertise required to produce aluminum structural components, there are only four participants in this segment. The Company believes that it is a leading supplier of aluminum structured components and that Alcoa is also a significant manufacturer of aluminum structural components in the marketplace.
Automotive Brake Components
The Company has two automotive brake facilities in North America, which are located in Homer, Michigan and Monterrey, Mexico. At these facilities, the Company designs, manufactures and distributes automotive brake components consisting primarily of composite metal drums and full cast drums for drum-type brakes and cast iron rotors for disc brakes.
Customers. In fiscal 2000, the Company’s OEM customers for its automotive brake components were DaimlerChrysler, Ford and Nissan. In addition, the Company sold its remaining automotive brake components, on a Tier 2 basis, to Continental Teves, TRW, Visteon and Delphi Automotive.
Manufacturing. The Company’s automotive brake components are considered to be among the highest quality components in the industry with parts per million quality statistics significantly better than industry averages. The Company continues to use its technological superiority to develop innovative new component designs addressing weight and warranty issues, including such products as ULTRA QTM, aluminum and cool-running rotors.
Competition. The principal competitors of the Company for the sale of automotive brake components include Delphi, TRW, Bosch, Aisin Seiki and Rassini. The Company believes that Delphi, TRW and Bosch supply brake drums and rotors as well as anti-lock brake systems, while Aisin Seiki and Rassini are suppliers of brake rotors and drums.
Commercial Highway Products
The Company’s commercial highway vehicle wheels and brakes are produced and sold in North America, Europe, South America and Asia.
North America
The Company has three manufacturing facilities in North America which produce components for the commercial highway market. These facilities are located in Akron, Ohio (wheels and rims); Berea, Kentucky (brake components); and Mexico City, Mexico (brake components, cast spoke wheels and rims).
Customers. The Company’s largest customers for commercial highway wheels and rims include Trailmobile, Monon, Strick and Great Dane Trailers, while its largest customers for commercial highway brake components include Freightliner, LLC, PACCAR Inc. and Volvo of North America. Of the Company’s commercial highway net sales for fiscal 2000, approximately 60% were to truck and trailer manufacturers and original equipment servicers (“OES”), and 40% were to warehouse distributors.
Manufacturing. The Company manufactures disc wheels and demountable rims for commercial highway vehicles. The Company also manufactures two-piece, take-apart wheels for certain special applications, including the High Mobility Multiple Purpose Wheeled Vehicle (the “Hummer”) produced by AM General Corporation. The Company manufactures brake components for commercial highway vehicles consisting of conventional cast iron brake drums and Centrifuse® brake drums. These different types of brake drums can also be assembled together with iron or aluminum hubs and sold as a unit. The Centrifuse® drums are manufactured using a proprietary process to fuse iron to a steel jacket to combine the advantages of iron and steel to produce a lighter and stronger brake drum. The Company has achieved a significant market share for this product, which is supplied to truck manufacturers almost exclusively as a result of fleet specifications.
Competition. The Company competes for sales of commercial highway wheels, rims and brake components on the basis of cost, delivery, quality and service. The Company spends a considerable amount of effort obtaining fleet specifications where purchasers of commercial highway vehicles specify to the truck manufacturers the components to be used. The principal competitors of the Company for the sale of commercial highway wheels and rims include Accuride and Alcoa. The Company believes that Accuride supplies steel wheels, while Alcoa supplies forged aluminum wheels. The principal competitors of the Company for the sale of commercial highway hubs and drums are Gunite, Webb and ArvinMeritor.
Europe
The Company manufactures steel truck and trailer wheels for sale to manufacturers of commercial highway vehicles in Europe at its Königswinter, Germany facility. In addition, the Company produces wheels for the forklift truck market at its Ostrava, Czech Republic facility. Recently, the Company underlined its leadership in product and process technology by launching the first truck wheel with an outside valve hole.
Management believes there is a growing need for this product due to the increase in penetration of disc brakes on heavy trucks.
Customers. The Company is a leading supplier of heavy truck steel wheels sold in Western Europe in 2000. The Company’s principal customers for steel wheels for commercial highway vehicles include DaimlerChrysler, Renault, Western Star, Schmitz Cargobull, Köegal, Volvo, PACCAR and Iveco.
Manufacturing. The Company believes that the Company’s Königswinter, Germany facility has the most technologically advanced truck wheel manufacturing line in the world. At this facility, the Company produces a variety of tubeless and tube-type wheels for commercial highway vehicles.
Competition. The Company’s principal competitors for the sale of commercial highway wheels in Europe include Michelin Kronprinz and Gianetti.
South America and Asia
The Company manufactures steel truck and trailer wheels for sale to manufacturers of commercial highway vehicles in South America at its São Paulo, Brazil facility and in Asia at its Pune, India facility. With the installation of a flow forming machine for truck discs, the Pune, India facility is able to increase its export business.
Customers. The Company is a leading supplier of heavy truck steel wheels sold in South America. The Company’s principal customers for steel wheels for commercial highway vehicles in South America include Ford, DaimlerChrysler, Volvo, Volkswagen and Roudon. The Company also supplied heavy truck steel wheels in India in 2000. The Company’s largest customers for steel wheels for commercial highway vehicles in India include Bharat Forge, Telco and Volvo (India).
Manufacturing. At the São Paulo and Pune facilities, the Company produces a variety of tubeless and tube-type wheels for commercial highway vehicles.
Competition. The Company’s principal competitor for the sale of commercial highway wheels in South America is FNV and the Company’s principal competitor for the sale of commercial highway wheels in India is Wheels of India.
Powertrain Components
The Company’s powertrain and engine components are produced and sold in North America. The Company has three powertrain and engine component manufacturing facilities in North America, which are located in Wabash, Indiana; Petersburg, Michigan; and Nuevo Laredo, Mexico. At these facilities, the Company designs, manufacturers and distributes a variety of powertrain and engine components, including aluminum and polymer intake manifolds, aluminum cylinder heads, water pumps, brackets and ductile iron exhaust manifolds.
Customers. The Company supplies the vast majority of its powertrain and engine components (comprised primarily of intake and exhaust manifolds) to Ford, DaimlerChrysler and General Motors. In addition the Company supplies those same products to Japanese transplants including Honda, Nissan and Toyota and other major suppliers such as Visteon and Cummins Engine.
Manufacturing. The Company, which has specialized in complex design manifolds, is one of the largest lost core producers worldwide. More recently, the Company has developed technologies that the Company believes will ensure the Company’s position in the overall manifold market. Welded technologies are used to produce less complex polymer manifolds utilizing multiple pieces. While the Company currently manufactures a limited number of welded components, the Company is actively developing proprietary processes that management believes are superior to other current welding technologies. The Company believes that this will enable it to capture future growth in this market segment.
Competition. The Company is a leading independent manufacturer of aluminum intake manifolds in North America. The Company’s primary competitor in aluminum intake manifolds is Fort Wayne Foundry.
The remainder of the market for intake manifolds is highly fragmented and comprises a combination of small independent suppliers and minor positions of large suppliers such as Delphi, Siemens and Solvay. Approximately one-half of the intake manifolds produced in North America are made from aluminum, with the remainder from polymers. Given the Company’s ability to manufacture both aluminum and polymer components, the Company believes that it will remain a leading supplier of these products.
Other Products
The Company has three non-wheel aluminum operations, collectively called Metaalgieterij Giesen B.V. (“MGG”). MGG is comprised of three facilities, two of which utilize sand-cast, low pressure and high-pressure aluminum casting processes and two of which have machining operations. The sand casting process uses specially designed patterns to create sand molds into which molten aluminum is poured. Sand casting allows MGG to produce complicated pieces in small quantities. The complexity and low volume makes it too costly to manufacture these items using permanent mold casting, such as is used to produce cast aluminum wheels. MGG manufactures a variety of products, including heat exchangers used in gas-fired boilers, intake manifolds and aluminum housings for automotive and heavy truck applications, and a variety of aluminum products for the general machinery and electronics industries. From these facilities the Company is a leading supplier of the cast aluminum heat exchangers for use in gas-fired boilers for the commercial and residential markets in Europe. The Company expects this market to significantly increase over the next five years.
In North America, the Company’s aftermarket division sells passenger car, light truck and trailer wheels and other automotive products, such as brake controllers. The Company maintains warehouses in Dallas, Texas and Howell, Michigan for this purpose. In the aftermarket, the Company competes with a multitude of manufacturers depending upon the product and market. The Company also designs and builds specialized manufacturing equipment for metal casting, machining and assembly facilities.
The Company also operates four tire and wheel assembly operations in Europe. These facilities are located in Brussels, Belgium; Königswinter and Bremen, Germany; and Ostrava, Czech Republic. The Company also owns a 49% interest in a joint venture which has a tire and wheel facility in Portugal. From these facilities, the Company supplies balanced tire and wheel assemblies to customers on a just-in-time basis. The Company believes that this is a potential growth market as OEMs continue to outsource non-strategic processes.
Investments
Joint Ventures
The Company has been active in developing strategic alliances around the world through joint ventures to further expand its customer base, improve product range and increase production capabilities and efficiencies. The Company also plans to further enhance its presence in emerging markets. The Company’s expanded worldwide manufacturing and strategic joint venture presence significantly strengthens its ability to meet the global sourcing needs of its customers. Over the past several years, the Company has expanded its emerging market presence by increasing ownership and/ or acquiring outright joint ventures in Brazil, South Africa, India and Thailand. In addition, the Company continues to own minority interests as detailed below:
In addition, the Company has technical assistance agreements with ATP, a wheel manufacturer in Thailand, and with Colombiana de Frenos S.A., a steel and aluminum wheel manufacturer in Colombia.
Environmental Compliance
The Company, like most other manufacturing companies, is subject to and is required from time to time to take action at its facilities to comply with federal, state, local and foreign laws and regulations relating to pollution control and protection of the environment. In this regard, the Company maintains an ongoing compliance program to anticipate and, if necessary, correct environmental problems. The Company periodically incurs capital expenditures in order to upgrade its pollution control mechanisms and to comply with applicable laws. The Company currently has 16 facilities registered or recommended for registration under ISO 14001 and is working to obtain ISO 14001 Registration at all manufacturing facilities worldwide. The Company believes it is in material compliance with applicable federal, state, local and foreign laws and regulations relating to pollution control and protection of the environment. See “Item 3. Legal Proceedings.”
Employees
At April 15, 2001, the Company had approximately 15,000 employees. Of the Company’s employees in the United States, approximately 6% were represented by the UAW or USW. Collective bargaining agreements with the UAW or USW affecting these employees expire at various times through 2002 and 2003. As is common in many European jurisdictions, substantially all of the Company’s employees in Europe are covered by country-wide collective bargaining agreements. These agreements expire at various times through 2001. Additional agreements are often made with the facility Works Council on an individual basis covering miscellaneous topics of local concern. There are no Company-wide or industry-wide bargaining units in the United States. The Company considers its employee relations to be satisfactory.
Item 2.
Item 2. Properties
The Company has its world headquarters in Northville, Michigan. The Company operates 26 facilities in North America with approximately 5.3 million square feet in the aggregate. Within Europe, the Company operates 20 manufacturing facilities with approximately 6.0 million square feet in the aggregate. In South America, Asia and South Africa, the Company operates six manufacturing facilities with approximately 2.0 million square feet in the aggregate. The Company believes that its plants are adequate and suitable for the manufacturing of products for the markets in which it sells. Moreover, the Company believes that it maintains adequate production capacity at its manufacturing facilities to meet current demand for all of its products.
Item 3.
Item 3. Legal Proceedings
In the ordinary course of its business, the Company is a party to judicial and administrative proceedings involving its operations and products, which may include allegations as to manufacturing quality, design and safety. After reviewing the proceedings that are currently pending (including the probable outcomes, reasonably anticipated costs and expenses, availability and limits of insurance and established reserves for uninsured liabilities), management believes that the outcome of these proceedings will not have a material adverse effect on the financial condition of the Company.
Under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”), the Company currently has potential environmental liability arising out of both its wheel and non-wheel businesses at 16 Superfund sites (the “Sites”). Of the Sites, five Sites were related to the operations of Motor Wheel prior to the divestiture of that business by The Goodyear Tire & Rubber Co. (“Goodyear”). In connection with the 1986 purchase of Motor Wheel by MWC Holdings, Inc. (“Holdings”), Goodyear agreed to retain all liabilities relating to these Sites and to indemnify and hold Holdings harmless with respect thereto. Goodyear has acknowledged this responsibility and is presently representing the interests of the Company with respect to all matters relating to these five Sites.
As a result of activities which took place at the Company’s Howell, Michigan facility prior to its acquisition by the Company, the State of Michigan is performing, under CERCLA, a remedial
investigation/feasibility study of PCB contamination at this Site, and in the adjacent South Branch of the Shiawasee River. Under the terms of a consent judgment entered into in 1981 by Cast Forge, Inc. (“Cast Forge”) (the previous owner of this Site) and the State of Michigan, any additional PCB cleanup which may be required is the financial responsibility of the State of Michigan, and not of Cast Forge or its successors or assigns (including the Company). The federal Environmental Protection Agency (the “EPA”) has concurred in the consent judgment.
The Company is working with various government agencies and the other parties identified by the applicable agency as “potentially responsible parties” to resolve its liability with respect to six Sites. The Company’s potential liability at each of these Sites is not currently anticipated to be material.
The Company has potential environmental liability at the four remaining Sites arising out of businesses presently operated by Kelsey-Hayes. Kelsey-Hayes has assumed and agreed to indemnify the Company with respect to any liabilities associated with these Sites. Kelsey-Hayes has acknowledged this responsibility and is presently representing the interests of the Company with respect to these sites.
Kelsey-Hayes, and in certain cases the Company, may remain liable with respect to environmental cleanup costs in connection with certain divested businesses, relating to aerospace, heavy-duty truck components and farm implements, under Federal and state laws and under agreements with purchasers of these divested businesses. The Company believes, however, that such costs in the aggregate will not have a material adverse effect on the consolidated operations or financial condition of the Company and, in any event, Kelsey-Hayes has assumed and agreed to indemnify the Company with respect to any liabilities arising out of or associated with these divested businesses.
In addition to the Sites, the Company also has potential environmental liability at two state-listed sites in Michigan. Of these, one is covered under the indemnification agreement with Goodyear described above. The Company is presently working with the Michigan Department of Environmental Quality to resolve its liability with respect to the remaining state-listed site, for which no significant costs are anticipated.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity and Related 	Stockholder Matters
The Company had 28,455,995 shares of Common Stock outstanding and 105 record holders as of April 23, 2001. The Company’s shares are traded on The New York Stock Exchange (“NYSE”) under the symbol “HAZ.” Set forth below are the high and low closing prices for the Company’s Common Stock as reported on the NYSE for each quarterly period during the last two fiscal years.
Since the Motor Wheel Transactions and the Recapitalization, the Company has not paid dividends on its Common Stock and does not intend to pay dividends in the foreseeable future.
Item 6.
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data with respect to the Company for the five fiscal years ended January 31, 2001. The information set forth below should be read in conjunction with the Company’s Consolidated Financial Statements and Notes to Consolidated Financial Statements filed herewith, beginning at page.
(1)
Includes non-recurring charge of 	$87.8 million pre-tax ($50.9 million after tax) for 	the year ended January 31, 2001 as discussed below. 	
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Sales of the Company’s wheels, wheel-end attachments, aluminum structural components and brake components produced in North America are directly affected by the overall level of passenger car, light truck and commercial highway vehicle production of North American OEMs, while sales of its wheels and automotive castings in Europe are directly affected by the overall vehicle production in Europe. The North American and European automotive industries are sensitive to the overall strength of their respective economies.
Fiscal 2000 Compared to Fiscal 1999
Non-Recurring Charge
During the third quarter of fiscal 2000, the Company recorded a non-recurring charge of $87.8 million related to restructuring activities initiated in response to continued softening in the heavy truck and light
vehicle markets. This non-recurring charge is recorded in the Consolidated Statement of Operations in the following categories:
The long-lived asset impairment relates principally to excess and obsolete machinery and equipment removed from service due to the softening market conditions. Such assets were written down to fair value based on the expected proceeds from the disposal of such machinery and equipment. Inventory and other current asset write-offs were recorded to reduce the carrying value of excess and obsolete inventory, customer tooling, and accounts receivable.
As a result of these current market conditions and the resulting restructuring initiative, the Company implemented a workforce reduction program. The charge of $6.7 million recorded in the third quarter, which relates to 387 employees, is expected to be paid over the next 12-18 months. At January 31, 2001, $5.0 million was unpaid and is included in accounts payable and accrued liabilities in the Consolidated Balance Sheet.
Net Sales
The Company’s net sales for fiscal 2000 were $2,171.3 million, a decrease of 5.4% as compared to net sales of $2,296.4 million for fiscal 1999. The decrease was principally due to decreases in heavy truck and light vehicle production in North America. This decrease was partially offset by higher sales in the European Wheel Group despite the weakening of the Euro against the dollar by approximately 13%.
Gross Profit
The Company’s gross profit for fiscal 2000 decreased to $306.6 million or 14.1% of net sales, as compared to $407.2 million or 17.7% of net sales for fiscal 1999. This decrease reflects decreases in heavy truck and light vehicle production in North America and inefficiencies related to changes in production schedules during the third and fourth quarter of fiscal 2000. In addition, gross margin was negatively impacted by the write off of $5.0 million in excess and obsolete inventories in the third quarter of fiscal 2000 as previously described.
Marketing, General and Administrative
Marketing, general and administrative expenses were $98.1 million or 4.5% of net sales for fiscal 2000, as compared to $92.4 million or 4.0% of net sales for fiscal 1999. The majority of the increase was attributable to the non-recurring charge described above.
Engineering and Product Development
Engineering and product development costs were $16.6 million or 0.8% of net sales for fiscal 2000, as compared to $20.6 million or 0.9% of net sales for fiscal 1999, principally reflecting the timing of recovery of costs from customers.
Equity in (earnings) losses of unconsolidated subsidiaries
Equity in (earnings) losses of unconsolidated subsidiaries was $1.7 million in losses for fiscal 2000, as compared to $1.2 million in earnings for fiscal 1999. The losses for fiscal 2000 are due to various operating issues associated with the Company’s interest in Reynolds-Lemmerz Industries, Canada, and market conditions impacting the Company’s interests in joint ventures in Mexico and Portugal.
Interest expense, net
Net interest expense was $163.3 million for fiscal 2000, as compared to $153.3 million for fiscal 1999. This increase is due to the increase in borrowings and interest rates.
Fiscal 1999 Compared to Fiscal 1998
Net Sales
The Company’s net sales for fiscal 1999 were $2,296.4 million, an increase of 37.3% as compared to net sales of $1,672.9 million for fiscal 1998. This increase was due to the additional sales contributed as a result of the acquisition of CMI, which was effective February 3, 1999 (the “CMI Acquisition”), the additional sales contributed by the acquisitions completed by the Company in 1999 (the “1999 Acquisitions”) and higher sales in the North American Automotive Wheel group. These sales increases were partially offset by lower selling prices, due to the pass through of lower aluminum costs, and the maxi-devaluation of the Brazilian economy.
Gross Profit
The Company’s gross profit for fiscal 2000 increased to $407.2 million or 17.7% of net sales, as compared to $289.8 million or 17.3% of net sales for fiscal 1998. This increase in margin was attributable to the increased revenues and improved productivity in the majority of the Company’s businesses.
Marketing, General and Administrative
Marketing, general and administrative expenses were $92.4 million or 4.0% of net sales for fiscal 1999, as compared to $71.0 million or 4.2% of net sales for fiscal 1998. The improvement in expenses as a percent of sales was attributable to synergies realized as a result of the CMI Acquisition and the 1999 Acquisitions.
Engineering and Product Development
Engineering and product development costs were $20.6 million or 0.9% of net sales for fiscal 1999, as compared to $20.2 million or 1.2% of net sales for fiscal 1999. Despite the increase in costs attributable to the CMI Acquisition and the 1999 Acquisitions, engineering and product development costs as a percent of sales improved over the prior fiscal year.
Amortization of intangible assets
Amortization of intangibles increased by $12.1 million to $28.7 million for fiscal 1999. This increase is attributable to the increased goodwill recognized as a result of the CMI Acquisition and the 1999 Acquisitions.
Interest expense, net
Net interest expense was $153.3 million for fiscal 1999, an increase of $58.4 million over fiscal 1998. This increase was due to the increase in debt as a result of the CMI Acquisition and the 1999 Acquisitions.
Capital Resources and Liquidity
The Company’s operations used $8.3 million in cash for fiscal 2000, compared to providing $250.9 million in cash for fiscal 1999. This decrease results principally from the decrease in net income as well as the increase in inventory and the decrease in accounts payable due to production slowdowns during the fourth quarter of fiscal 2000 and, to a lesser extent, changes in supplier terms.
Capital expenditures for fiscal 2000 were $157.1 million. These expenditures were primarily for additional machinery and equipment to improve productivity and reduce costs, to meet demand for new vehicle platforms and to meet expected requirements for the Company’s products. The Company anticipates that
capital expenditures for fiscal 2001 will be approximately $125.0 million relating primarily to maintenance and cost reduction programs and to meet demand for new vehicle platforms.
On February 3, 1999, the Company entered into a third amended and restated credit agreement (the “Credit Agreement”). Pursuant to the Credit Agreement, a syndicate of lenders agreed to lend the Company up to $450 million in the form of a senior secured term loan facility and up to $650 million in the form of a senior secured revolving credit facility. Such term loan and revolving credit facilities are guaranteed by the Company and all of its existing and future material domestic subsidiaries. Such term loan and revolving facilities are secured by a first priority lien in substantially all of the properties and assets of the Company and its material domestic subsidiaries, now owned or acquired later, including a pledge of all of the shares of certain of the Company’s existing and future domestic subsidiaries and 65% of the shares of certain of the Company’s existing and future foreign subsidiaries. As of January 31, 2001, there was $385.3 million outstanding under the term loan facilities which represents the total amount available under the facility. At January 31, 2001, there was $313.3 million outstanding under the revolving credit facility and $336.7 million available.
On July 12, 2000, the Company entered into a first amendment to the Credit Agreement. Pursuant to such first amendment, the Company was permitted to repurchase shares of its common stock and the limitation on capital expenditures was deleted. The changes in the first amendment have been superseded by subsequent amendments to the Credit Agreement. On December 8, 2000, the Company entered into a second amendment to the Credit Agreement. Pursuant to such second amendment, financial covenants regarding the leverage ratio, the interest coverage ratio and the fixed charge coverage ratio were modified and a financial covenant regarding the senior leverage ratio was added. In addition, an annual limit on capital expenditures was added, the stock repurchase authority was deleted, a cumulative limit on acquisitions was deleted and the interest rate was increased based on changes in the leverage ratio. On March 9, 2001, the Company entered into a third amendment to the Credit Agreement. Pursuant to such third amendment, financial covenants regarding the leverage ratio were amended and the interest rate was increased based on changes in the leverage ratio. On April 20, 2001, the Company entered into a fourth amendment to the Credit Agreement. Pursuant to such fourth amendment, financial covenants regarding the leverage ratio, the interest coverage ratio, the fixed charge coverage ratio and the senior leverage ratio were amended. In addition, certain limits on indebtedness under the revolving credit facility were deleted, the covenant on use of proceeds from asset sales was amended, the capital expenditure limits were amended and monthly reporting was added. The text of the fourth amendment is filed as an exhibit to this Form 10-K.
In April 1998, the Company entered into a three-year agreement pursuant to which the Company and certain of its subsidiaries sold, and will continue to sell on an ongoing basis, a portion of their accounts receivables to a special purpose entity (“Funding Co.”), which is wholly owned by the Company. Accordingly, the Company and such subsidiaries, irrevocably and without recourse, transferred and will transfer substantially all of their U.S. dollar denominated trade accounts receivable to Funding Co. Funding Co. then sold and will sell such trade accounts receivable to an independent issuer of receivable-backed commercial paper. The Company has collection and administrative responsibilities with respect to all the receivables which are sold. Receivables sold at January 31, 2001 total $71.6 million.
This trade securitization agreement expires May 1, 2001. The Company intends to replace the current agreement with another trade securitization program. To the extent a replacement agreement has not been secured when the current agreement expires, the Company plans to finance outstanding receivables with amounts available under its revolving credit facility.
During the second quarter of fiscal 2000, the Board of Directors approved the repurchase of up to an aggregate of $30.0 million of the Company’s outstanding common stock. The Company repurchased approximately 1.9 million shares of its common stock for an aggregate purchase price of approximately $26.3 million during fiscal 2000.
At January 31, 2001, management believes that the Company was in compliance with the various covenants under the amended agreements pursuant to which it has borrowed or may borrow money.
Management expects that the Company will remain in compliance with these covenants in all material respects through the period ending January 31, 2002.
The Company’s liquidity needs arise primarily from principal and interest payments under the outstanding indebtedness, and from the funding of capital expenditures. Principal and interest payments under the Credit Agreement and interest payments on the Company’s 9 1/8% Series B Senior Subordinated Notes due 2007 in the original principal amount of $400 million (the “9 1/8% Notes”), the Company’s 11% Senior Subordinated Notes due 2006 in the original principal amount of $250 million (the “11% Notes”) and the Company’s 8 1/4% Series B Senior Subordinated Notes due 2008 in the original principal amount of $250 million (the “8 1/4% Notes”), will represent significant liquidity requirements for the Company. The loans under the Credit Agreement bear interest at floating rates based upon the interest rate option elected by the Company.
The Company believes that cash generated from operations, together with amounts available under the Credit Agreement and any other available financing sources, will be adequate to permit the Company to meet its debt service obligations, capital expenditure program requirements, ongoing operating costs and working capital needs through the first quarter of fiscal 2002 and thereafter, although no assurance can be given in this regard. The Company’s future operating performance and ability to service or refinance the 11% Notes, the 9 1/8% Notes and the 8 1/4% Notes, which notes rank pari passu with each other, and to repay, extend or refinance the Third Amended Credit Agreement will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company’s control.
Market Risks
In the normal course of business the Company is exposed to market risks arising from changes in foreign exchange rates, interest rates and raw material prices. The Company selectively uses derivative financial instruments to manage these risks, but does not enter into any derivative financial instruments for trading purposes.
Foreign Exchange
The Company has global operations and thus makes investments and enters into transactions in various foreign currencies. In order to minimize the risks associated with global diversification, the Company first seeks to internally net foreign exchange exposures, and uses derivative financial instruments to hedge any remaining net exposure. The Company uses forward foreign currency exchange contracts on a limited basis to reduce the earnings and cash flow impact of non-functional currency denominated transactions. The gains and losses from these hedging instruments generally offset the gains or losses from the hedged items and are recognized in the same period the hedged items are settled. In addition, the Company has entered into seven cross currency interest rate swaps to hedge a portion of its investments in Europe. The currency effects of these swaps are reflected in the cumulative translation adjustments component of other accumulated comprehensive income, where they offset the gain or loss associated with the investments in Europe.
The Company periodically analyzes the impact of foreign exchange fluctuations on earnings and has determined that, at January 31, 2001, a 10% increase or decrease in foreign exchange rates would not have a material effect on earnings.
Interest Rates
The Company generally manages its risk associated with interest rate movements through the use of a combination of variable and fixed rate debt, and certain specific interest rate cap agreements. At January 31, 2001, approximately 47% of the Company’s debt was variable rate debt. The Company believes that a 10% increase or decrease in the interest rate on variable rate debt could affect earnings by approximately $7.9 million.
Commodities
The Company relies upon the supply of certain raw materials in its production process and has entered into firm purchase commitments for aluminum and steel. The Company manages the exposures associated with these commitments primarily through the terms of its supply and procurement contracts. Additionally, the Company uses forward contracts to hedge against changes in certain specific commodity prices of the purchase commitments outstanding.
Other Matters
The Company does not believe that sales of its products are materially affected by inflation, although there can be no assurance that such an effect will not occur in the future. In accordance with industry practice, the costs or benefits of fluctuations in aluminum prices are passed through to customers. In the United States, the Company adjusts the sales prices of its aluminum wheels every three months, if necessary, to reflect fully any increase or decrease in the price of aluminum. As a result, the Company’s net sales of aluminum wheels are adjusted, although gross profit per wheel is not materially affected. Aluminum prices steadily increased during fiscal 2000. From time to time, the Company enters into futures contracts or purchase commitments solely to hedge against possible aluminum price changes that may occur between the dates of aluminum wheel price adjustments. Pricing and purchasing practices are similar in Europe, but opportunities to recover increased material costs from customers are more limited than in the United States.
The value of the Company’s consolidated assets and liabilities located outside the United States (which are translated at period end exchange rates) and income and expenses (which are translated using average rates prevailing during the period) have been affected by the translation values, particularly the Euro (as defined under “Euro Conversion”) and the Brazilian Real. Such translation adjustments are reported as a separate component of stockholders’ equity. Foreign exchange rate fluctuations could have an increased impact on the Company’s reported results of operations. However, due to the self-sustaining nature of the Company’s foreign operations (which maintain their own credit facilities, enter into borrowings and swap agreements and incur costs in their respective local currencies), the Company believes it can effectively manage the effect of these currency fluctuations. In addition, in order to further hedge against such currency rate fluctuations, the Company has entered into certain foreign currency swap arrangements.
The Company’s net sales are continually affected by pressure from its major customers to reduce prices. The Company’s emphasis on reduction of production costs, increased productivity and improvement of production facilities has enabled the Company to respond to this pressure.
New Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125.” This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain financial statement disclosures. SFAS 140 is effective for transactions occurring after March 31, 2001. The new disclosure requirements are effective for fiscal years ending after December 15, 2000. Adoption of this replacement standard is not anticipated to have a material effect on the Company’s financial position or results of operations when adopted.
In June 1998, June 1999 and June 2000, the FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133” and SFAS 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No. 133.” These Statements establish accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. These Statements require that changes in a derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged
item in the income statement or as part of accumulated other comprehensive income, and requires that a Company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. This accounting is effective for fiscal years beginning after June 15, 2000. The Company will adopt this standard on February 1, 2001 and adoption will not have a material impact on the Company’s financial position or results of operations.
Euro Conversion
On January 1, 2000, certain member countries of the European Union irrevocably fixed the conversion rates between their national currencies and a common currency, the “Euro,” which became the legal currency on that date. The participating countries’ former national currencies continue to exist as denominations of the Euro until January 1, 2002. The Company has established a steering committee that is monitoring the business implications of conversion to the Euro, including the need to adapt internal systems to accommodate Euro-denominated transactions. While the Company is still in various stages of assessments and implementation, the Company does not expect the conversion to the Euro to have a material affect on its financial condition or results of operations.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The response to this Item is set forth above in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Market Risks.”
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data
The response to this Item is submitted in the Company’s Consolidated Financial Statements and Notes to Consolidated Financial Statements filed herewith, beginning at page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information responsive to this Item regarding the directors of the Company is contained in the Company’s definitive Proxy Statement on Schedule 14A for its Annual Meeting of Stockholders to be held on June 14, 2001 (the “Proxy Statement”), under the captions “Proposals - Election of Directors” and “Board of Directors - Directors Continuing in Office,” which information is incorporated herein by reference.
The following table sets out the names and ages of each of the executive officers of the Company, their present positions, the date on which they were appointed to such positions and their business experience during the past five years. All positions shown are with the Company or its subsidiaries unless otherwise indicated. All executive officers are elected by the Board of Directors of the Company and serve at its pleasure. There are no family relationships among any of the executive officers and there is no arrangement or understanding between any of the executive officers and any other person pursuant to which he was selected as an officer.
Item 11.
Item 11. Executive Compensation
The response to this Item is contained in the Proxy Statement under the captions “Board of Directors - Director Compensation” and “Appendix C - Executive Compensation,” which information is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The response to this Item is contained in the Proxy Statement under the caption “Appendix B - Stockholdings,” which information is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The Board of Directors of the Company has adopted a resolution providing that the Company will not enter into any transaction with or pay any fee to an affiliate or associate (as such terms are defined under Rule 12b-2 under the Exchange Act) of the Company (other than any subsidiary or associate of the Company in which no direct or indirect parent Company of the Company has any interest otherwise than through the Company), unless (i) the transaction or fee is as fair to the Company as would be the case if such transaction or fee had been negotiated on an arm’s-length basis with an unaffiliated third party and (ii) the transaction or fee (if the value or cost thereof to the Company is $10 million or more) is approved by a majority of the Company’s directors who are not employees of or otherwise associated with significant shareholders of the Company.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following documents are filed as part of this report:
(a) 1. Financial Statements
The following financial statements of the registrant are filed herewith as part of this report:
(1) Independent Auditors’ Report
(2) Consolidated Statements of Operations for the years ended January 31, 2001, 2000 and 1999
(3) Consolidated Balance Sheets at January 31, 2001 and 2000
(4)
	Consolidated Statements of Changes in Stockholders’ Equity 	and Comprehensive Income (Loss) for the years ended 	January 31, 2001, 2000 and 1999
(5) Consolidated Statements of Cash Flows for the years ended January 31, 2001, 2000 and 1999
(6) Notes to Consolidated Financial Statements
2. Financial Statement Schedules for fiscal 2000, 1999 and 1998
Schedule II Valuation and Qualifying Accounts. All other schedules are omitted because the information required to be contained therein is disclosed elsewhere in the financial statements or the amounts involved are not sufficient to require submission or the schedule is otherwise not required to be submitted.
3. Exhibits
LEGEND FOR EXHIBITS
(A)
	Incorporated by reference from the Company’s Registration 	Statement No. 33-53780 on Form S-l, filed with the 	SEC on October 27, 1992, as amended.
(B)
	Incorporated by reference from the Company’s Annual Report 	on Form 10-K for the fiscal Year Ended January 31, 	1993, filed with the SEC.
(C)
	Incorporated by reference from the Company’s Quarterly 	Report on Form 10-Q for the quarter ended October 31, 	1993, filed with the SEC.
(D)
	Incorporated by reference from the Company’s Current Report 	on Form 8-K, dated March 28, 1996, filed with the SEC.
(E)
	Incorporated by reference from the Company’s Current Report 	on Form 8-K, dated July 2, 1996, filed with the SEC.
(F)
	Incorporated by reference from the Company’s Annual Report 	on Form 10-K for the Fiscal Year Ended January 31, 	1997, filed with the SEC.
(G)
	Incorporated by reference from the Company’s Current Report 	on Form 8-K, dated June 6, 1997, filed with the SEC.
(H)
	Incorporated by reference from the Company’s Current Report 	on Form 8-K, dated June 30, 1997, filed with the SEC.
(I)
	Incorporated by reference from the Company’s Registration 	Statement No. 333-34319 on Form S-4, filed with the 	SEC on August 24, 1997, as amended.
(J)
	Incorporated by reference from the Company’s Registration 	Statement on Form 8-A, filed with the SEC on 	November 14, 1997.
(K)
	Incorporated by reference from the Company’s Annual Report 	on Form 10-K for the Fiscal Year Ended January 31, 	1998, filed with the SEC.
(L)
	Incorporated by reference from the Company’s Quarterly 	Report on Form 10-Q for the quarter ended October 31, 	1998, filed with the SEC.
(M)
	Incorporated by reference from the Company’s Current Report 	on Form 8-K, dated February 3, 1999, filed with the 	SEC.
(N)
	Incorporated by reference from the Company’s Quarterly 	Report on Form 10-Q for the quarter ended October 31, 	2000, filed with the SEC.
(O)
	Incorporated by reference from the Company’s Current Report 	on Form 8-K, dated March 16, 2001, filed with the SEC.
(P)
	Filed herewith.
*
	Denotes a compensatory plan, contract or arrangement.
The Company will furnish to any stockholder a copy of the above exhibits upon the written request of such stockholder and the payment to the Company of the reasonable expenses incurred by the Company in furnishing such copy.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K with the SEC during the fiscal quarter ended January 31, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of April, 2001.
HAYES LEMMERZ INTERNATIONAL, INC.
By:
	/s/ WILLIAM D. SHOVERS
	William D. Shovers
	Vice President- Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated:
HAYES LEMMERZ INTERNATIONAL, INC.
Page
	Independent Auditors’ Report
	Consolidated Statements of Operations
	Consolidated Balance Sheets
	Consolidated Statements of Changes in Stockholders’ Equity 	and Comprehensive Income (Loss)
	Consolidated Statements of Cash Flows
	Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders
Hayes Lemmerz International, Inc.
We have audited the accompanying consolidated balance sheets of Hayes Lemmerz International, Inc. and subsidiaries as of January 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three year period ended January 31, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements 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 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hayes Lemmerz International, Inc. and subsidiaries as of January 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three year period ended January 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
Detroit, Michigan
February 26, 2001, except Note 8,
which is dated April 25, 2001
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions of dollars, except per share amounts)
See accompanying notes to consolidated financial statements.
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Millions of dollars, except share amounts)
See accompanying notes to consolidated financial statements.
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
Years Ended January 31, 2001, 2000, 1999
(Millions of dollars, except share amounts)
See accompanying notes to consolidated financial statements.
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
See accompanying notes to consolidated financial statements.
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended January 31, 2001, 2000 and 1999
(1) Organization
Description of Business
Unless otherwise indicated, references to “Company” mean Hayes Lemmerz International, Inc. and its subsidiaries and references to fiscal year means the Company’s year ended January 31 of the following year (e.g., “fiscal 2000” refers to the period beginning February 1, 2000 and ending January 31, 2001, “fiscal 1999” refers to the period beginning February 1, 1999 and ending January 31, 2000 and “fiscal 1998” refers to the period beginning February 1, 1998 and ending January 31, 1999).
The Company designs, engineers and manufactures suspension module components, principally for original equipment manufacturers (“OEMs”) of passenger cars, light trucks and commercial highway vehicles worldwide. The Company’s products include one-piece cast aluminum wheels, fabricated aluminum wheels, fabricated steel wheels, full face cast aluminum wheels, clad covered wheels, wheel-end attachments, aluminum structural components, intake and exhaust manifolds, and brake drums, hubs and rotors.
Acquisitions
On September 2, 2000, the Company acquired the assets of the Schenk aluminum foundry located in Maulbronn, Germany. The purchase price for land, building, equipment and inventory was $6.4 million in cash. Through this acquisition, the Company intends to expand its worldwide production of suspension components.
In fiscal 2000, the Company purchased an additional 25% interest in NF Die (Proprietary) Ltd., Alrode, South Africa, an aluminum wheel manufacturer. The purchase price of $7.2 million in cash increased the Company’s interest in NF Die from 51% to 76%.
On February 3, 1999, the Company completed the acquisition of CMI International, Inc. (“CMI”), a premier independent supplier of cast aluminum, iron and advanced polymer components to the automotive industry. The purchase price for CMI was $605 million in cash, of which approximately $129 million was used to repay CMI’s outstanding indebtedness existing at the time of the acquisition, and of which approximately $476 million was paid to the shareholders of CMI. The cash portion of the consideration, the refinancing of the existing debt of CMI and the fees and expenses of the acquisition of CMI were financed with the proceeds of the Company’s senior secured credit facilities and the issuance by the Company of $250 million in aggregate principal amount of 8 1/4% senior subordinated notes due 2008 (the “8 1/4% Notes”).
The acquisition of CMI was accounted for by the purchase method of accounting with the results of CMI included in the consolidated statement of operations from the acquisition date. The fair value of assets acquired, including goodwill, was $693.0 million and liabilities assumed was $88.0 million. Goodwill and other intangibles of $354.1 are being amortized over a 40-year life on a straight-line basis.
On July 30, 1999, the Company completed the sale of its equity interests in A-CMI and A-CMI Scandinavia Casting Center ANS, two joint ventures formerly owned by CMI. The equity interests were purchased by Alcoa Inc., CMI’s partner in these joint ventures, for net proceeds of $36.4 million.
Additionally, during fiscal 1999 the Company acquired a controlling interest in two entities for a combined purchase price of $14.6 million.
During fiscal 1998, the Company acquired controlling interests in five businesses for an aggregate purchase price of $79.3 million and these acquisitions generated $94.2 million of goodwill.
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company’s investments in joint ventures are accounted for under the equity method. Financial position and results of operations for these joint venture entities as of, and for the twelve months ended January 31, 2001, 2000 and 1999, respectively, were not material to the consolidated financial statements of the Company.
Revenue Recognition
Sales are recorded when products are shipped to customers.
Inventories
Inventories are stated at the lower of cost or market, with cost determined principally by the first in, first out (FIFO) or average cost method. Cost includes the cost of materials, direct labor and the applicable share of manufacturing overhead.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is generally provided on a straight-line basis at rates which are designed to write off the assets over their estimated useful lives, principally as follows:
Expenditures for maintenance, repairs and minor replacements of $82.6 million, $78.4 million and $59.0 million for the years ended January 31, 2001, 2000 and 1999, respectively, were charged to expense as incurred.
The Company reviews the carrying value of property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the undiscounted future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair values less costs to sell (see note 11).
Special Tooling
Expenditures made to meet special tooling requirements are capitalized. Special tooling which is reimbursable by the customer is classified as either a current asset or noncurrent asset, depending upon the expected time of reimbursement. Special tooling which is not reimbursable by the customer is classified as a noncurrent asset and is charged to expense on a straight line basis over a five year period or the estimated useful life, whichever is shorter.
Intangibles
Goodwill arising from business acquisitions is amortized using the straight-line method over 40 years. Patents and other intangibles are amortized over their estimated lives. The Company reviews the carrying value of goodwill and other intangibles for impairment whenever events or changes in circumstances indicate
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
that the carrying amount may not be recoverable. An impairment would be determined based on a comparison of the undiscounted future operating cash flows anticipated to be generated during the remaining life of the goodwill and other intangibles to the carrying value. Measurement of any impairment loss would be based on discounted operating cash flows.
Research and Development Costs
Research and development costs are expensed as incurred. Amounts expensed during the years ended January 31, 2001, 2000 and 1999, were approximately $14.3 million, $14.1 million and $7.5 million, respectively.
Financial Instruments
The carrying amounts of cash and cash equivalents, receivables, and accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The carrying amount of bank borrowings, variable rate long-term debt, and other liabilities approximate market value, as interest rates vary with market rates. The fair value of fixed rate debt is discussed in Note 8.
In accordance with industry practice, the costs or benefits of fluctuations in aluminum prices are passed through to customers. Futures contracts and purchase commitments are entered into by the Company, from time to time, to hedge its exposure to future increases in aluminum prices that may occur between the dates of aluminum wheel price adjustments. Outstanding contracts represent future commitments and are not included in the consolidated balance sheet. Substantially all of such contracts mature within a period of three months. Gains or losses resulting from the liquidation of futures contracts are recognized in the income statement currently as part of costs of goods sold.
From time to time, the Company enters into interest rate hedge agreements with the objective of managing interest costs and exposure to changing interest rates. Premiums paid for these agreements are amortized to interest expense over the term of the agreement. The unamortized costs of the agreements are included in other assets and approximate fair value. The notional amounts under these agreements do not represent amounts exchanged by the parties and are not a measure of the Company’s exposure to credit or market risks. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the agreements. Notional amounts are not included in the consolidated balance sheet.
The Company has global operations and enters into forward exchange contracts to hedge certain of its foreign currency commitments. Gains and losses from changes in exchange rates on these contracts are deferred and recognized in income when the hedged transaction is settled. The Company also uses cross-currency interest rate swap agreements to hedge a portion of the Company’s net investments in foreign subsidiaries. Related foreign exchange gains and losses on the notional principal amount are included in accumulated other comprehensive income. At January 31, 2001, the Company held $275 million notional amount of cross-currency interest rate swaps, the fair value of which approximates carrying value.
Foreign Currency Translation
Translation of assets and liabilities of subsidiaries denominated in foreign currencies are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments are reflected in the accumulated other comprehensive income section of Stockholders’ Equity. Foreign currency gains and losses resulting from transactions in foreign currencies are included in results of operations.
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
Taxes on Income
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
No provision is necessary for future United States taxes on the undistributed portion of the Company’s equity in earnings of foreign affiliates, since it is anticipated that the unremitted earnings will be permanently invested for growth and expansion.
Statement of Cash Flows
For purposes of reporting cash flows, the Company considers all investments with an original maturity of three months or less to be cash equivalents. The following is additional information to the Consolidated Statements of Cash Flows (millions of dollars):
Stock-Based Compensation
The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. The Company follows the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation,” and discloses pro forma net income and pro forma earnings per share as if employee stock option grants were treated as compensation expense using the fair-value-based method defined in SFAS No. 123.
Earnings per Share
Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the diluted weighted average shares outstanding. Diluted weighted average shares assume the exercise of stock options and warrants.
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
Shares outstanding for the years ended January 31, 2001, 2000 and 1999, were as follows (millions of shares):
Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive income. Comprehensive income is defined as all changes in a Company’s net assets except changes resulting from transactions with shareholders. It differs from net income in that certain items currently recorded to equity would be a part of comprehensive income.
The components of accumulated other comprehensive income (loss) were as follows (millions of dollars):
Reclassifications
Certain prior period amounts have been reclassified to conform to the current year presentation.
Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.
Generally assets and liabilities which are subject to estimation and judgment include asset valuation reserves, pension and post retirement costs, restructuring reserves, self insurance accruals and environmental remediation accruals. Management does not believe that the ultimate settlement of any such assets or liabilities will materially affect the Company’s financial position or future results of operations.
(3) Inventories
The major classes of inventory are as follows (millions of dollars):
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
(4) Property, Plant and Equipment
The major classes of property, plant and equipment are as follows (millions of dollars):
(5) Goodwill and Other Assets
Goodwill and other assets consist of the following (millions of dollars):
Goodwill and other intangibles are presented net of accumulated amortization of $122.0 million and $93.8 million at January 31, 2001 and 2000, respectively.
(6) Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following (millions of dollars):
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
(7) Taxes on Income
The components of pre-tax income (loss) are as follows (millions of dollars):
The (benefit) provision for taxes on income is summarized as follows (millions of dollars):
A reconciliation of taxes computed at the statutory 35% rate to the actual provision (benefit) for taxes on income follows (millions of dollars):
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
Deferred tax assets (liabilities) result from differences in the basis of assets and liabilities for tax and financial statement purposes. The cumulative tax effect of the major items follows (millions of dollars):
The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized principally due to the unlikelihood of fully utilizing available net operating loss carry forwards which expire through the year 2012.
The Company has domestic operating loss carryforwards of approximately $236.0 million expiring in years 2005 through 2022, foreign net operating loss carryforwards of approximately $97.1 million which may be carried forward indefinitely, and alternative minimum and other tax credits of approximately $11.0 million.
(8) Bank Borrowings and Long-term Debt
Bank borrowings consist of short-term notes of the Company’s foreign subsidiaries, bearing interest at rates ranging from 5.0% to 8.75%.
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
Long-term debt consists of the following (millions of dollars):
During the first quarter of fiscal 1999, the Company entered into a third amended and restated credit agreement (the “Credit Agreement”) which provides for a $450 million term loan facility and a $650 million revolving credit facility. These facilities are guaranteed by the Company and its domestic subsidiaries and are secured by a first priority lien on substantially all of the properties and assets of the Company. As of January 31, 2001, $336.7 million was available under the revolving credit facility. The outstanding balance on the term loans represents the total amount available under the facility.
The Credit Agreement and certain foreign bank borrowings contain financial covenants, the most restrictive of which include interest coverage ratios, fixed charge coverage ratios, leverage ratios and capital spending limitations. The Company was in compliance with the amended covenants at January 31, 2001.
On July 12, 2000, the Company entered into a first amendment to the Credit Agreement. Pursuant to such first amendment, the Company was permitted to repurchase shares of its common stock and the limitation on capital expenditures was deleted. The changes in the first amendment have been superseded by subsequent amendments to the Credit Agreement. On December 8, 2000, the Company entered into a second amendment to the Credit Agreement. Pursuant to such second amendment, financial covenants regarding the leverage ratio, the interest coverage ratio and the fixed charge coverage ratio were modified and a financial covenant regarding the senior leverage ratio was added. In addition, an annual limit on capital expenditures was added, the stock repurchase authority was deleted, a cumulative limit on acquisitions was deleted and the interest rate was increased based on changes in the leverage ratio. On March 9, 2001, the Company entered into a third amendment to the Credit Agreement. Pursuant to such third amendment, financial covenants regarding the leverage ratio were amended and the interest rate was increased based on changes in the leverage ratio. On April 20, 2001, the Company entered into a fourth amendment to the Credit Agreement. Pursuant to such fourth amendment, financial covenants regarding the leverage ratio, the interest coverage ratio, the fixed charge coverage ratio and the senior leverage ratio were amended. In addition, certain limits on indebtedness under the revolving credit facility were deleted, the covenant on use of proceeds from asset sales was amended, the capital expenditure limits were amended and monthly reporting was added.
Borrowings under the Credit Agreement bear interest at one of the following rates as selected by the Company: (i) the rate per annum equal to the British Bankers’ Association London interbank offered rates (“LIBOR” and “DMBO” in the case of U.S. Dollar and Deutsche Mark debt, respectively) plus the applicable margin or (ii) the CIBC Alternate Base Rate (“ABR”), plus the applicable margin. The CIBC
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
ABR is defined as the highest of (i) the CIBC prime rate or (ii) the Federal Funds rate plus 1/2% or (iii) a certificate of deposit-based rate plus 1%. The weighted average interest rate on borrowings under the Credit Agreement was 8.3% at January 31, 2001. In addition, the Company pays a commitment fee on the unused portion of the revolving credit facility which was at a rate of 0.5% at January 31, 2001.
In connection with the early repayment of certain term loan facilities in fiscal 1998, the Company recorded an extraordinary loss of $14.4 million ($8.3 million, net of tax) for the write-off of unamortized deferred financing costs associated with the term debt which was repaid.
In April 1998, the Company entered into a three-year trade securitization agreement pursuant to which the Company and certain of its subsidiaries sold, and will continue to sell on an ongoing basis, a portion of their accounts receivable to a special purpose entity (“Funding Co.”), which is wholly owned by the Company. Accordingly, the Company and such subsidiaries, irrevocably and without recourse, transferred and will transfer substantially all of their U.S. dollar denominated trade accounts receivable to Funding Co. Funding Co. then sold and will sell such trade accounts receivable to an independent issuer of receivable-backed paper. The Company has no retained interest in the receivables sold. The Company has collection and administrative responsibilities with respect to all receivables which were and will be sold and does not receive fees from this servicing arrangement.
The total amount of receivables sold under the agreement was $71.6 million and $163.0 million at January 31, 2001 and 2000, respectively. These amounts have been excluded from receivables in the accompanying balance sheets.
This trade securitization agreement expires May 1, 2001. The Company intends to replace the current agreement with another trade securitization program. To the extent a replacement agreement has not been secured when the current agreement expires, the Company plans to finance outstanding receivables with amounts available under its revolving credit facility.
On December 15, 1998, in connection with, the acquisition of CMI, the Company issued the 8 1/4% Notes, which are redeemable at the Company’s option at specified prices, in whole or in part, at any time on or after December 15, 2003. The 8 1/4% Notes are guaranteed by certain of the Company’s domestic subsidiaries but are subordinated to the Credit Agreement. As of January 31, 2001, the fair value of these notes was $162.5 million.
In connection with previous acquisitions, the Company has issued senior subordinated notes which are guaranteed by certain of the Company’s domestic subsidiaries but are subordinated to the Credit Agreement. These notes become redeemable at the Company’s option and at specific prices five years before the respective due dates of the notes. The fair value of these notes at January 31, 2001 was $479.0 million.
Principal repayments on long-term debt and bank borrowings during the next five years ending January 31 are as follows (millions of dollars); 2002 - $87.3; 2003 - $107.9; 2004 - $129.0; 2005 - $143.5; 2006 - $316.5; and thereafter $924.1.
(9) Leases
The Company leases certain production facilities and equipment under agreements expiring from 2002 to 2006 and later years. The following is a schedule of future minimum rental payments required under operating
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
leases that have initial or remaining non-cancelable lease terms in excess of one year as of January 31, 2001 (millions of dollars):
Rent expense was $31.2 million, $26.3 million and $21.5 million for the years ended January 31, 2001, 2000 and 1999, respectively.
(10) Pension Plans and Postretirement Benefits Other Than Pensions
The Company sponsors several defined benefit pension plans (“Pension Benefits”) and health care and life insurance benefits (“Other Benefits”) for certain employees around the world. The Company funds the Pension Benefits based upon the funding requirements of federal and international laws and regulations in advance of benefit payments and the Other Benefits as benefits are provided to the employees.
In accordance with SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” the following tables provide a reconciliation of the change in benefit obligation, the change in plan assets and the net amount recognized in the consolidated balance sheets (based on an October 31 measurement date, in millions) as of January 31:
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
The projected benefit obligation, accumulated projected benefit obligation (“APBO”) and fair value of plan assets for the benefit plans with accumulated benefit obligations in excess of plan assets for the North American plans were $146.4 million, $102.3 million and $170.5 million, respectively, as of January 31, 2001, and $160.5 million, $118.4 million and $165.9 million, respectively, as of January 31, 2000. The components of net periodic benefit costs included in operating results for the years ended January 31, are as follows (millions of dollars):
Effective January 1, 1995 and January 1, 1999, the Company modified the defined benefit Salaried Pension Plan and all hourly pension plans, respectively, to freeze credited service and future compensation increases and remove salary caps that had been instituted in 1991. In conjunction with this change, the Company increased the basic contribution of the existing salary defined contribution plan.
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
The actuarial assumptions used in determining the funded status information and net periodic benefit cost information shown above were as follows:
At January 31, 2001, the assumed annual health care cost trend rate used in measuring the APBO approximated 5.5%. Increasing the assumed cost trend rate by 1% each year would have increased the APBO and service/interest cost components by approximately $6.6 million and $0.6 million, respectively, for fiscal 2000. Decreasing the assumed cost trend rate by 1% each year would have decreased the APBO and service/interest cost components by approximately $5.8 million and $0.5 million, respectively, for fiscal 2000.
The Company also has contributory employee retirement savings plans covering substantially all of its employees. The employer contribution is determined at the discretion of the Company and totaled approximately $9.7 million, $7.7 million and $6.4 million for the years ended January 31, 2001, 2000 and 1999, respectively.
(11) Non-Recurring Charges
During the third quarter of fiscal 2000, the Company recorded a non-recurring charge of $87.8 million related to restructuring activities initiated in response to continued softening in the heavy truck and light vehicle markets. This non-recurring charge is recorded in the Consolidated Statement of Operations in the following categories:
The long-lived asset impairment relates principally to excess and obsolete machinery and equipment removed from service due to the aforementioned softening market conditions. Such assets were written down to fair value based on the expected proceeds from the disposal of such machinery and equipment. Inventory and other current asset write-offs were recorded to reduce the carrying value of excess and obsolete inventory, customer tooling, and accounts receivable.
As a result of these current market conditions and the resulting restructuring initiative, the Company implemented a workforce reduction program. The charge of $6.7 million recorded in the third quarter, which relates to 387 employees, is expected to be paid over the next 12-18 months. At January 31, 2001, $5.0 million was unpaid and is included in accounts payable and accrued liabilities in the Consolidated Balance Sheet.
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
(12) Contingencies
Various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company, including those pertaining to environmental, product liability, patent infringement, and employee benefit matters. While the amounts claimed may be substantial, the ultimate liability cannot now be determined because of the considerable uncertainties that exist. Therefore, it is possible that results of operations or liquidity in a particular period could be materially affected by certain contingencies. However, based on facts currently available, management believes that the disposition of matters that are pending or asserted will not have a material adverse effect on the financial position of the Company.
Approximately 6% of the Company’s domestic employees are covered under collective bargaining agreements. These agreements expire at various times through 2003. As is common in many European jurisdictions, substantially all of the Company’s employees in Europe are covered by country-wide collective bargaining agreements. In Europe, bargaining agreements are often made on a local basis and expire at various times throughout 2001. Based on management’s experience, negotiation of new contracts is anticipated without work stoppages.
(13) Investments in Unconsolidated Affiliates
As of January 31, 2001, the Company held the following investments which are accounted for under the equity method:
(i) a 49% interest in Hayes Wheels de Venezuela, C.A., a fabricated wheel manufacturer in Venezuela;
(ii) a 40% interest in Hayes Wheels de Mexico, S.A. de C.V., a cast aluminum and fabricated wheel manufacturer in Mexico;
(iii) a 49% interest in Continental Lemmerz (Portugal) - Componente para Automoveis, Lda., a tire and wheel assembly operation in Portugal;
(iv) a 25% interest in Reynolds-Lemmerz Industries, a cast aluminum wheel manufacturer in Canada; and
(v) a 25% interest in Jantas Jant Sanayi ve Ticaret A.S., a commercial highway steel wheel manufacturer in Turkey.
The aggregate financial position and results of operations for these entities as of, and for the twelve months ended January 31, 2001, 2000 and 1999, respectively, were not material to the consolidated financial statements of the Company.
(14) Stock Option Plan
In 1992, the Company adopted the Hayes Lemmerz International, Inc. 1992 Stock Incentive Plan (the “1992 Plan”), under which 1,000,000 shares of Common Stock were available for issuance with respect to awards granted to officers, management and other key employees of the Company. At January 31, 2001, 276,700 options were exercisable at a price of $10.00, 143,000 options were exercisable at a price of $19.94 and 7,500 options were exercisable at a price of $19.69. At January 31, 2001, there were no shares available for issuance under this plan.
During 1996, the Company established the Hayes Lemmerz International, Inc. 1996 Stock Option Plan (the “1996 Plan”), under which 3,000,000 shares of Common Stock were made available for issuance with respect to stock option awards granted to officers, management and other key employees of and consultants to the Company. This plan was amended at the August 3, 2000 Stockholders’ meeting to include an additional 500,000 shares available for issuance. Option grants under the 1996 Plan are approved by the Compensation
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
Committee of the Board of Directors and are subject to such terms and conditions as are established by the Compensation Committee at the time it approves such grants. The exercise prices of options granted under the 1996 Plan in fiscal 1998, fiscal 1999 and fiscal 2000 ranged from $13.1875 to $40 per share, which exercise prices represented the Common Stock’s fair market value on the date of each grant. All the options granted during fiscal 1998 and 1999 which, as of January 31, 2001, were outstanding under the 1996 Plan are divided into tranches (each, a “Tranche”) of an equal number of options. The options in each such Tranche vest when both a time condition and a price condition tied to the price of the Company’s Common Stock have been met. In addition, notwithstanding such conditions to vesting, the options currently outstanding under the 1996 Plan become exercisable on certain dates (which dates are currently in all cases at least six years after the option grant date) if the employee to whom they were granted is then still an employee of the Company. The fiscal 2000 option grants become exercisable at the rate of 25% annually on June 15, 2001 and each June 15th thereafter until 2004 if the employee to whom they were granted is then still an employee of the company. At January 31, 2001, 891,542 options were exercisable at a price of $16.00 per share and 53,000 options were exercisable at a price of $32.00 per share.
In connection with the Lemmerz Acquisition, the Company granted to a former shareholder of Lemmerz an option to acquire 250,000 shares of common stock with an exercise price of $16 per share. This option becomes exercisable at the rate of 20% annually on June 30, 1998 and each June 30th thereafter until 2002.
Information with respect to all stock options is summarized below:
The Company applies APB Opinion 25 and related Interpretations in accounting for stock options. If compensation cost had been determined based on the fair value at the grant dates consistent with the method prescribed in SFAS No. 123, the Company’s net income and earnings per share would have been adjusted to the pro forma amounts below:
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
The fair value of stock options granted in fiscal 2000, fiscal 1999 and fiscal 1998 was estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average fair values and related assumptions were:
Dividend yield for all grants was assumed to be insignificant.
At January 31, 2001, warrants to purchase 2.6 million shares of common stock were outstanding. Each warrant allows the holder thereof to acquire one share of common stock for a purchase price of $24.00. The warrants are exercisable from July 2, 2000 through July 2, 2003.
(15) Segment Reporting
The Company has adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” which introduced the “management approach” for segment reporting. This approach reflects management’s organization of business segments and is consistent with how the Company and its key decision-makers assess operating performance, make operating decisions and allocate resources. This approach also considers the existence of managers responsible for each business segment and how information is presented to the Company’s Board of Directors. The statement requires disclosures for each segment that are similar to those currently required and geographic data by country.
The Company is organized based primarily on markets served and products produced. Under this organization structure, the Company’s operating segments have been aggregated into three reportable segments: Automotive Wheels, Cast Components and Other. The Other category includes Commercial Highway products, the corporate office and elimination of intercompany activities, none of which meet the requirements of being classified as an operating segment.
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies described in Note 2. The Company evaluates the performance of its operating segments based primarily on sales, operating profit and cash flow.
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
The following table presents revenues and other financial information by business segment for the year ended January 31, (in millions):
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
The following table presents revenues and net property, plant and equipment for each of the geographic areas in which the Company operates (in millions):
A large percentage of the Company’s revenues are from three automotive manufacturers. The following is a summary of the percentage of revenues from these major customers for the fiscal years ended January 31:
(16) Selected Quarterly Financial Data (Unaudited)
The following represents the Company’s quarterly results (millions of dollars, except share amounts):
[Additional columns below]
[Continued from above table, first column(s) repeated]
(17) Guarantor and Nonguarantor Financial Statements
The senior subordinated notes referred to in Note 8 are guaranteed by certain of the Company’s domestic subsidiaries. Certain other domestic subsidiaries and the foreign subsidiaries (the “Non-Guarantor Subsidiaries”) do not guarantee the senior subordinated notes.
The following condensed consolidating financial information presents:
	(1) Condensed consolidating financial statements as of 	January 31, 2001 and 2000 and for the twelve month periods 	ended January 31, 2001, 2000 and 1999, of (a) Hayes 	Lemmerz International, Inc., the parent (b) the 	guarantor subsidiaries, (c) the nonguarantor subsidiaries 	and (d) the Company on a consolidated basis, and
	(2) Elimination entries necessary to consolidate Hayes 	Lemmerz International, Inc., the parent, with guarantor and 	nonguarantor subsidiaries.
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
The condensed consolidating financial statements are presented on the equity method. Under this method, the investments in subsidiaries are recorded at cost and adjusted for the Company’s share of the subsidiaries’ cumulative results of operations, capital contributions, distributions and other equity changes. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
CONDENSED CONSOLIDATING BALANCE SHEET
As of January 31, 2001
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
CONDENSED CONSOLIDATING BALANCE SHEET
As of January 31, 2000
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the year ended January 31, 2001
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the year ended January 31, 2000
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the year ended January 31, 1999
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
As of January 31, 2001
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
As of January 31, 2000
HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Years ended January 31, 2001, 2000 and 1999
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
As of January 31, 1999
RESPONSIBILITIES FOR CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and Stockholders
Hayes Lemmerz International, Inc.
The consolidated financial statements of Hayes Lemmerz International, Inc. and subsidiaries were prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and, as such include amounts based on judgements of management. Financial information elsewhere in this Report is consistent with that in the financial statements.
Management is further responsible for maintaining a system of internal accounting controls, designed to provide reasonable assurance that the books and records reflect the transactions of the companies and that its established policies and procedures are carefully followed. From a stockholder’s point of view, perhaps the most important feature in the system of control is that it is continually reviewed for its effectiveness, the careful selection and training of qualified personnel, and a program of internal audit. KPMG LLP, an independent auditing firm, is engaged to audit the consolidated financial statements of Hayes Lemmerz International, Inc. and its subsidiaries and issue reports thereon. The audit is conducted in accordance with generally accepted auditing standards which includes reviews of various aspects of the control system and makes test checks of compliance.
The Board of Directors, through the Audit Committee (which is comprised entirely of non-employee Directors), is responsible for assuring that management fulfills its responsibilities in the preparation of the consolidated financial statements. The Committee selects the independent auditors annually in advance of the Annual Meeting of Stockholders and submits the selection for ratification at the Meeting. In addition, the Committee reviews the scope of the audits and the accounting principles being applied in financial reporting. The independent auditors, representatives of management, and the internal auditors meet regularly (separately and jointly) with the Committee to review the activities of each to ensure that each is properly discharging its responsibilities.
It is management’s conclusion that the system of internal accounting controls at January 31, 2001 provides reasonable assurance that the books and records reflect the transactions of the companies and that its established policies and procedures are complied with. To ensure complete independence, KPMG LLP has full and free access to meet with the Audit Committee, without management representatives present, to discuss the results of the audit, the adequacy of internal accounting controls, and the quality of the financial reporting.
/s/ R. CUCUZ
Chief Executive Officer
/s/ W.D. SHOVERS
Chief Financial Officer
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders
Hayes Lemmerz International, Inc.:
Under date of February 26, 2001 except Note 8 which is dated April 25, 2001, we reported on the consolidated balance sheets of Hayes Lemmerz International, Inc. and subsidiaries as of January 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended January 31, 2001, which are included in the annual report on Form 10-K of Hayes Lemmerz International, Inc. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule in Form 10-K. The financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statement schedule based on our audits.
In our opinion, such 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.
Detroit, Michigan
February 26, 2001
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In millions)
EXHIBIT INDEX
LEGEND FOR EXHIBITS
(A)
	Incorporated by reference from the Company’s Registration 	Statement No. 33-53780 on Form S-l, filed with the 	SEC on October 27, 1992, as amended.
(B)
	Incorporated by reference from the Company’s Annual Report 	on Form 10-K for the fiscal Year Ended January 31, 	1993, filed with the SEC.
(C)
	Incorporated by reference from the Company’s Quarterly 	Report on Form 10-Q for the quarter ended October 31, 	1993, filed with the SEC.
(D)
	Incorporated by reference from the Company’s Current Report 	on Form 8-K, dated March 28, 1996, filed with the SEC.
(E)
	Incorporated by reference from the Company’s Current Report 	on Form 8-K, dated July 2, 1996, filed with the SEC.
(F)
	Incorporated by reference from the Company’s Annual Report 	on Form 10-K for the Fiscal Year Ended January 31, 	1997, filed with the SEC.
(G)
	Incorporated by reference from the Company’s Current Report 	on Form 8-K, dated June 6, 1997, filed with the SEC.
(H)
	Incorporated by reference from the Company’s Current Report 	on Form 8-K, dated June 30, 1997, filed with the SEC.
(I)
	Incorporated by reference from the Company’s Registration 	Statement No. 333-34319 on Form S-4, filed with the 	SEC on August 24, 1997, as amended.
(J)
	Incorporated by reference from the Company’s Registration 	Statement on Form 8-A, filed with the SEC on 	November 14, 1997.
(K)
	Incorporated by reference from the Company’s Annual Report 	on Form 10-K for the Fiscal Year Ended January 31, 	1998, filed with the SEC.
(L)
	Incorporated by reference from the Company’s Quarterly 	Report on Form 10-Q for the quarter ended October 31, 	1998, filed with the SEC.
(M)
	Incorporated by reference from the Company’s Current Report 	on Form 8-K, dated February 3, 1999, filed with the 	SEC.
(N)
	Incorporated by reference from the Company’s Quarterly 	Report on Form 10-Q for the quarter ended October 31, 	2000, filed with the SEC.
(O)
	Incorporated by reference from the Company’s Current Report 	on Form 8-K, dated March 16, 2001, filed with the SEC.
(P)
	Filed herewith.
*
	Denotes a compensatory plan, contract or arrangement.