HAYZ Hayes Lemmerz International (MM)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission file number: 000-50303

Hayes Lemmerz International, Inc.

(Exact name of Registrant as Specified in its Charter)

 

 

Registrant’s telephone number, including area code:
(734) 737-5000

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

Securities Registered Pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o      No  þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o      No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o      No  þ

 

The aggregate market value of the registrant’s common stock held by non-affiliates was $235 million based on the reported last sale price of common stock on July 31, 2008, which is the last business day of the registrant’s most recently completed second fiscal quarter. For purposes of this calculation, shares held by affiliates are limited to shares beneficially owned by the registrant’s current officers and directors, which represented approximately 1% of all shares as of April 30, 2009.

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distributions of securities under a plan confirmed by a court.  Yes  þ      No  o

 

As of May 6, 2009, the number of shares of common stock outstanding of Hayes Lemmerz International, Inc. was 101,819,597 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

HAYES LEMMERZ INTERNATIONAL, INC.

 

FORM 10-K ANNUAL REPORT

 

TABLE OF CONTENTS

 

FORWARD-LOOKING STATEMENTS

 

Unless otherwise indicated, references to “we,” “us,” or “our” mean Hayes Lemmerz International, Inc., a Delaware corporation, and our subsidiaries. References to fiscal year means the 12-month period commencing on February 1st of that year and ending January 31st of the following year (e.g., fiscal 2008 means the period beginning February 1, 2008, and ending January 31, 2009). This report contains forward looking statements with respect to our financial condition, results of operations, and business. All statements other than statements of historical fact made in this Annual Report on Form 10-K are forward-looking. Such forward-looking statements include, among others, those statements including the words “expect,” “anticipate,” “intend,” “believe,” and similar language. These forward looking statements involve certain risks and uncertainties. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others: (1) competitive pressure in our industry; (2) fluctuations in the price of steel, aluminum, and other raw materials and our ability to maintain credit terms with our suppliers; (3) changes in general economic conditions; (4) our dependence on the automotive industry (which has historically been cyclical) and on a small number of major customers for the majority of our sales; (5) pricing pressure from automotive industry customers and the potential for re-sourcing of business to lower-cost providers; (6) changes in the financial markets or our debt ratings affecting our financial structure and our ability to borrow money or find alternative sources of additional liquidity; (7) the uncertainties inherent in international operations and foreign currency fluctuations; (8) the impact of a Chapter 11 bankruptcy filing on our business; and (9) the risks described in Section 1A, “Risk Factors.” You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We have no duty to update the forward looking statements in this Annual Report on Form 10-K and we do not intend to provide such updates.

 

 

Unless otherwise indicated, references to “we,” “us,” or “our” mean Hayes Lemmerz International, Inc., a Delaware corporation, and our subsidiaries. References to a fiscal year means the 12-month period commencing on February 1st of that year and ending on January 31st of the following year (i.e., “fiscal 2008” refers to the period beginning February 1, 2008 and ending January 31, 2009, “fiscal 2007” refers to the period beginning February 1, 2007 and ending January 31, 2008, and “fiscal 2006” refers to the period beginning February 1, 2006 and ending January 31, 2007).

 

Business Overview and Development

 

Originally founded in 1908, we are a leading worldwide producer of aluminum and steel wheels for passenger cars and light trucks and of steel wheels for commercial trucks and trailers. We are also a supplier of automotive powertrain components. We have global operations with 23 facilities, including business and sales offices and manufacturing facilities located in 12 countries around the world. We sell our products to every major North American, Japanese, and European manufacturers of passenger cars and light trucks and to commercial highway vehicle customers throughout the world.

 

Since 2003, we have taken a number of steps to strengthen our competitive position by expanding our operations in low cost countries, divesting non-core assets, rationalizing production capacity, and focusing on improving our operating performance.

 

In fiscal 2008 we divested our aluminum wheel operations in Hoboken, Belgium. In fiscal 2007 we divested our North American suspension operations in Bristol, Indiana and Montague, Michigan and our aluminum components operations in Tegelen and Nieuw Bergen, The Netherlands and Antwerp, Belgium. We also divested our automotive brake operations in Homer, Michigan and Monterrey, Mexico and our powertrain components facility in Wabash, Indiana. In fiscal 2006 we divested our machining operations in Southfield, Michigan and announced the closure of our technical center in Ferndale, Michigan. In fiscal 2005 we sold a ductile iron foundry in Cadillac, Michigan, a facility in Au Gres, Michigan that designed and manufactured factory equipment, and a business that sold electronic brake controllers for towing vehicles. Also in fiscal 2005 we divested our operations in Berea, Kentucky; Chattanooga, Tennessee; and Mexico City, Mexico (Hub and Drum business), which manufactured hubs and brake drums for commercial highway vehicles.

 

In November 2005 we acquired an additional 20% interest in Jantas Aluminyum Jant Sanayi ve Ticaret, A.S., a Turkish aluminum wheel joint venture in which we held a 40% interest, which was then merged into Hayes Lemmerz — Inci Jant Sanayi A.S., in which we also hold a 60% interest. In January 2004 we acquired 100% of a cast aluminum wheel plant in Chihuahua, Mexico formerly operated as part of a joint venture in which we were a minority investor. In November 2003 we acquired a 60% interest in Hayes Lemmerz Jantas Jant Sanayi ve Ticaret A.S., a Turkish steel wheel joint venture in which we were a minority investor. In fiscal 2002 we acquired the remaining interest in our South African cast aluminum wheel joint venture in which we previously held a 76% interest. In addition to these acquisitions in low cost countries, we have also invested in our existing facilities in Brazil, India, Thailand, and the Czech Republic.

 

We closed our facilities in Gainesville, Georgia in fiscal 2008; Huntington, Indiana in fiscal 2006; La Mirada, California and Campiglione, Italy in fiscal 2005; Howell, Michigan in fiscal 2004; and Bowling Green, Kentucky in fiscal 2003. Production at these facilities was transferred to other facilities with excess capacity. We have also focused on continuing to improve operating performance by implementing lean manufacturing and Six Sigma initiatives, centralizing certain accounting, finance, information technology, and other functions, streamlining marketing and general and administrative overhead, and improving internal controls.

 

Going Concern Matters

 

Our independent registered public accounting firm has included in its report on our consolidated financial statements as of and for the year ended January 31, 2009 an explanatory paragraph indicating substantial doubt

about our ability to continue as a going concern. In addition, in January 2009, we favorably modified the leverage ratio and interest coverage ratio covenants under our New Credit Facilities for the fourth quarter of fiscal 2008 and for each quarter of fiscal 2009 (see Note 8, Bank Borrowings, Other Notes, and Long-Term Debt, to the consolidated financial statements included herein). Absent the amendment, we would have been in default of our covenants as of January 31, 2009. In addition, we expect that we will not be in compliance with the covenants in future quarters. In accordance with Emerging Issues Task Force 86-30 (EITF 86-30), “Classification of Obligations When a Violation Is Waived by the Creditor,” we reclassified our debt to current as of January 31, 2009. The lenders under our New Credit Facility have, however, waived defaults under our New Credit Facilities that result from our receipt of such a going concern explanatory paragraph. Our ability to continue as a going concern is dependent upon, among other things, our ability to recapitalize the Company and restructure our outstanding indebtedness pursuant to a voluntary bankruptcy filing under Chapter 11 of the U.S. Bankruptcy Code (Chapter 11).

 

To that end, we are currently engaged in continuing discussions with the representatives of the lenders under our New Credit Facility, the holders of our Notes, and others regarding a recapitalization of the Company and restructuring of our existing indebtedness through Chapter 11 proceeding, and we have retained legal and financial advisors to assist us in this regard. A majority of the lenders under our New Credit Facility have, subject to approval of the bankruptcy court in which we file petitions under Chapter 11, agreed to provide us with debtor-in-possession financing (DIP Financing) in an aggregate amount of up to $100 million ($80 million of which is committed pursuant to the terms and conditions of a commitment letter). A Chapter 11 filing will result in a default under our New Credit Facility, our Notes, and certain of our other debt obligations, and those debts will become automatically due and payable, subject to an automatic stay of any action to collect, assert, or recover a claim against us under applicable bankruptcy law.

 

We believe that our currently outstanding common stock will have no value and will be cancelled under any plan of reorganization we may propose under Chapter 11. We also believe that the holders of our Notes are unlikely to receive more than a de minimis distribution on account of their interests in the Notes and that such interests could be cancelled under any plan of reorganization we may propose under Chapter 11. The proposed DIP Financing contemplates a plan of reorganization in which the lenders of the DIP Financing will be able to convert their loans under the DIP Financing into substantially all of the equity interests in the newly reorganized entity. There can be no assurance, however, that any agreement regarding a recapitalization and restructuring of the Company under Chapter 11 will be obtained on acceptable terms with the necessary parties. Should the bankruptcy court not approve our proposed DIP Financing, or should we be unable to develop, propose, and implement a successful plan of reorganization, we may be forced to discontinue operations and liquidate the Company.

 

Segment Information

 

We are organized based primarily on markets served and products produced. Under this organizational structure, our operating segments have been aggregated into two reportable segments: Automotive Wheels and Other. The Automotive Wheels segment includes results from our operations that primarily design and manufacture fabricated steel and cast aluminum wheels for original equipment manufacturers in the global passenger car, light vehicle, and heavy duty truck markets. The Other segment includes the results of our powertrain components facility in Nuevo Laredo, Mexico and financial results related to the corporate office and the elimination of certain intercompany activities.

 

For financial information about each segment, see Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 18, Segment Information to the consolidated financial statements included herein.

 

Automotive Wheels Products

 

Our Automotive Wheels segment includes three principal classes of products: cast aluminum wheels for passenger cars and light trucks, fabricated steel and aluminum wheels for passenger cars and light trucks, and fabricated steel wheels for commercial trucks and trailers.

Cast Aluminum Wheels for Passenger Cars and Light Trucks

 

We design, manufacture, and distribute a full line of cast aluminum wheels to automotive original equipment manufacturers (OEMs) in North America, Europe, South America, South Africa, and Asia. We manufacture aluminum wheels with bright finishes such as GemTech ^® machining, clads, and premium paints. Cast aluminum wheel sales for passenger car and light trucks were $602.9 million or 31.7% of total revenues for the fiscal year ended January 31, 2009.

 

Europe.   We are one of the leading suppliers of cast aluminum wheels to the passenger car and light truck markets in Europe, where we also design, manufacture, and distribute a full line of cast aluminum wheels. In Europe, our OEM customers demand a wide variety of styles and sizes of cast aluminum wheels and we maintain substantial capabilities to meet this demand.

 

Customers.   Substantially all of our European cast aluminum wheels are sold to BMW, Daimler, Fiat, Ford, General Motors, Honda, Nissan/Renault, Peugeot, Porsche, Toyota, and Volkswagen.

 

Competition.   Our primary competitors in the European cast aluminum wheel market for passenger cars are Ronal GmbH, Borbet Leichtmetallräder and CMS. The European cast aluminum wheel market is more fragmented than that of North America, with numerous producers possessing varying levels of financial resources and market positions.

 

Manufacturing.   We have four cast aluminum wheel manufacturing facilities in Europe, which are located in Barcelona, Spain; Dello, Italy; Ostrava, Czech Republic; and Manisa, Turkey. We utilize low pressure casting technologies to manufacture aluminum wheels in our European facilities. Engineering, research, and development for our European cast aluminum wheel operations are performed at our Dello, Italy facility.

 

North America.   We also supply cast aluminum wheels to the passenger car and light truck markets in North America where we design, manufacture, and distribute a full line of cast aluminum wheels.

 

Customers.   In fiscal 2008 we sold the majority of our North American cast aluminum wheel production to Chrysler, Ford, Honda, Nissan, and Toyota for use on vehicles produced in North America.

 

Competition.   Our primary competitors in the North American cast aluminum wheel market are Superior Industries International, Inc., Enkei International, Inc., Dicastal, and other suppliers operating in North America and exports from countries such as China.

 

Manufacturing.   We currently have one cast aluminum manufacturing facility in North America located in Chihuahua, Mexico. Engineering, research, and development for our North American cast aluminum operations are performed at our Northville, Michigan facility.

 

South America, South Africa, and Asia.   We also design, manufacture, and distribute a full line of cast aluminum wheels to OEMs in South America, South Africa, and Asia. We operate an office in Japan that provides sales, engineering, and service support for the Japanese wheel market.

 

Customers.   Our largest customers for South American cast aluminum wheels are Ford, Honda, Nissan/Renault, and Toyota. The largest customers for our South African cast aluminum wheels are BMW, Daimler, Toyota, and Volkswagen. The largest customers for our Asian cast aluminum wheels are Nissan and Toyota.

 

Competition.   Our primary competitors in the South American cast aluminum wheel market for passenger cars are Italspeed S.A. and Mangels Industrial S.A. Our primary competitor in the South African cast aluminum wheel market for passenger cars is Borbet. Our primary competitor in the Asian cast aluminum wheel market for passenger cars is Enkei International, Inc.

 

Manufacturing.   In these markets we have cast aluminum wheel manufacturing facilities located near Sao Paulo, Brazil; Johannesburg, South Africa; and Bangkok, Thailand. Engineering, research, and development for our South American, South African, and Asian cast aluminum wheel operations is currently performed at our facilities located in Dello, Italy and Johannesburg, South Africa.

Fabricated Wheels for Passenger Cars and Light Trucks

 

We design, manufacture, and distribute fabricated wheels for passenger cars and light trucks in North America, Europe, Asia and South America. Our fabricated wheel products include steel wheels that can be made in drop-center, bead seat attached and full-face designs, in a variety of finishes, including chrome and clads. Fabricated wheel sales for passenger car and light trucks were $678.8 million or 35.6% of total revenues for the fiscal year ended January 31, 2009.

 

Europe.   We design, manufacture, and distribute a full line of fabricated steel wheels to both OEMs and the automotive aftermarket throughout Europe. We are the leading supplier of fabricated steel wheels manufactured in Europe.

 

Customers.   Our principal customers in Europe include Alcar, Daimler, Ford, General Motors, Hyundai, Kia, Porsche, PSA, Renault/Nissan, Toyota, and Volkswagen Group.

 

Competition.   Our principal competitors for the sale of fabricated steel wheels in Europe include Mefro and Magnetto. Ford and Volkswagen also have in house production capabilities.

 

Manufacturing.   We have four fabricated steel wheel manufacturing facilities in Europe, located in Königswinter, Germany; Manresa, Spain; Manisa, Turkey; and Ostrava, Czech Republic. Our Manresa, Spain facility produces wheels for light trucks, recreational vehicles, and vans. Our Manisa, Turkey facility produces wheels for the Turkish market and also exports both OEM and aftermarket wheels to Western Europe. Engineering, research, and development for our European fabricated wheel operations are performed at our facility in Königswinter, Germany.

 

North America.   We design, manufacture, and distribute a full line of fabricated wheels in North America where we are the largest supplier of fabricated steel wheels.

 

Customers.   We sell substantially all of our North American fabricated steel wheels to Chrysler, Ford, General Motors and Nissan.

 

Competition.   Our primary competitors in the North American steel wheel market for passenger cars and light trucks are ArvinMeritor, Inc., Topy Industries Ltd., and Central Manufacturing Company.

 

Manufacturing.   We manufacture fabricated steel wheels in North America at our facility in Sedalia, Missouri. Engineering, research, and development for our North American fabricated wheel operations are performed at our Northville, Michigan facility.

 

South America and Asia.   We design, manufacture, and distribute a full line of fabricated steel wheels to both OEMs and the automotive aftermarket throughout Brazil, Argentina and India. We also import wheels manufactured in Brazil for sale in North America.

 

Customers.   Our principal customers in Brazil and Argentina include Ford, General Motors, PSA, Nissan/Renault, and Volkswagen. Our principal customer in India is Fiat.

 

Competition.   Our principal competitor for the sale of fabricated steel wheels in Brazil and Argentina is ArvinMeritor, Inc. Our principal competitors for the sale of fabricated steel wheels in India include Steel Strips and Wheels India.

 

Manufacturing.   We have one fabricated steel wheel manufacturing facility in South America located near Sao Paulo, Brazil. This facility has its own engineering, research, and development facility. In addition to serving the local market, this facility exports fabricated steel wheels to North America. We have one fabricated steel wheel manufacturing facility in India located in Pune, India, launched at the end of 2008.

 

Commercial Highway Wheels

 

We design, manufacture, and distribute wheels for commercial highway vehicles in North America, Europe, South America, and Asia. Commercial highway wheel sales were $536.8 million or 28.2% of total revenues for the fiscal year ended January 31, 2009.

Europe.   We design, manufacture, and distribute steel truck and trailer wheels for sale to manufacturers of commercial highway vehicles in Europe at our facility in Königswinter, Germany and Jantas facility in Manisa, Turkey. In addition, we produce wheels for the forklift truck market at our Ostrava, Czech Republic facility.

 

Customers.   Our principal customers for steel wheels for commercial highway vehicles are Daimler, Ford, Iveco, Man, Paccar, Renault/Nissan, Scania, and Volvo.

 

Competition.   Our principal competitors for the sale of commercial highway wheels in Europe are Mefro and Magnetto.

 

Manufacturing.   In Europe, we manufacture steel truck and trailer wheels at our Königswinter, Germany facility where we produce a variety of wheels for commercial highway vehicles and perform engineering, research, and development for our European commercial highway operations. We also manufacture steel truck and trailer wheels at our facility in Manisa, Turkey.

 

North America.   We manufacture disc wheels and demountable rims for sale to manufacturers of commercial highway vehicles in North America. We also manufacture two-piece, take-apart wheels for certain special applications, including the military’s High Mobility Multiple Purpose Wheeled Vehicle (Humvee).

 

Customers.   Our largest customers for commercial highway wheels and rims include Daimler, AM General, Volvo, Hyundai, and Utility Trailer. Our commercial highway wheel and rim sales are to truck and trailer OEMs, original equipment servicers, and aftermarket distributors.

 

Competition.   Our principal competitor for the sale of commercial highway steel wheels and rims is Accuride Corp.

 

Manufacturing.   Wheels and rims for the commercial highway market are produced at our facility in Akron, Ohio. Engineering, research, and development for our commercial highway operations are performed at our Northville, Michigan facility.

 

South America and Asia.   We design, manufacture, and distribute steel truck and trailer wheels to OEMs in South America and Asia.

 

Customers.   Our principal customers for steel wheels for commercial highway vehicles in South America are Daimler and Ford, Our largest customers for steel wheels for commercial highway vehicles in Asia are Tata and Volvo.

 

Competition.   Our principal competitor for the sale of commercial highway wheels in South America is Maxion. Our principal competitor for the sale of commercial highway wheels in Asia is Wheels India.

 

Manufacturing.   We manufacture steel truck and trailer wheels in South America at our Sao Paulo, Brazil facility and in Asia at our Pune, India facility.

 

Other Products

 

The Other segment includes our powertrain components products. We design, manufacture, and distribute a variety of aluminum and polymer powertrain components including engine intake manifolds, engine covers, water crossovers, and ductile iron exhaust manifolds. Our powertrain and engine components are primarily produced and sold in North America.

 

Customers.   We sell most of our powertrain components to Chrysler, Ford, and General Motors. We also sell powertrain components to other Tier 1 suppliers such as General Products, Detroit Diesel, Bosch, Magna, Delphi, & Eaton.

 

Competition.   Our primary competitors in aluminum intake manifolds are Fort Wayne Foundry, Bocar, and DMI. Key competitors in polymer intake manifolds include Mahle, Mann+Hummel Group, Montaplast GmbH, Delphi, and Mark IV Industries.

Manufacturing.   Our powertrain component manufacturing facility is located in Nuevo Laredo, Mexico. We conduct engineering, research, and development for our powertrain components operations at our Northville, Michigan facility.

 

Material Source and Supply

 

We purchase most of the raw materials (such as steel and aluminum) and semi-processed or finished items (such as castings) used in the products of both the Automotive Wheels and Other segments from suppliers located within the geographic regions of our operating units. In many cases, these materials are available from several qualified sources in quantities sufficient for our needs. However, shortages of a particular material or part occasionally occur and metal markets can experience significant pricing and supply volatility. In addition, particularly with respect to semi-processed or finished items, changing suppliers may require the approval of our customers, which can involve significant time and expense.

 

In recent periods there has been significant volatility in the global prices of steel, which have had and may continue to have an impact on the business of both the Automotive Wheels and Other segments. We have been able to largely offset the impact of steel cost increases through higher scrap sales recoveries and by passing some of these costs through to certain of our customers, although we may not be able to continue to do so in the future. The full impact of steel prices is uncertain given the volatility in the global steel market.

 

Aluminum costs have also been volatile in recent periods. However, our contracts with customers generally provide that the prices of the products are based on established aluminum price indices. This generally allows us to largely pass along the increased costs of aluminum to our customers. Conversely, our prices to our customers would decrease should the costs of aluminum decrease.

 

To enable us to better manage our supply chain, we purchase key materials through a centralized materials and logistics function.

 

A Chapter 11 proceeding could result in the loss of a significant amount of trade credit from our suppliers or a refusal to ship products without advance payment.

 

Intellectual Property

 

We believe we are an industry leader in product and process technology. We own significant intellectual property including numerous U.S. and foreign patents, trade secrets, trademarks, and copyrights. The protection of this intellectual property is important to our business. Our policy is to seek statutory protection for all significant intellectual property embodied in patents and trademarks. We rely on a combination of patents, trade secrets, trademarks, and copyrights to provide protection in this regard. From time to time, we grant licenses under our patents and technology and receive licenses under patents and technology of others.

 

Although intellectual property is important to our business operations and in the aggregate constitutes a valuable asset, we do not believe that any single patent, trade secret, trademark, copyright, or group thereof is critical to the success of the business.

 

Seasonality

 

Although our business is not seasonal in the traditional sense, July (in North America), August (in Europe), and December are usually lower sales months because OEMs typically perform model changeovers or take vacation shutdowns during the summer, and assembly plants typically are closed for a period from shortly before the year-end holiday season until after New Year’s Day.

 

Working Capital

 

The most significant elements of our working capital are cash and cash equivalents, inventory, accounts receivable, and accounts payable. We, and the automotive supply industry, generally operate on a “just in time” basis and typically do not maintain large inventories of raw materials, work-in-process, or finished goods. Materials are ordered and finished products are produced based on customer orders. Payment terms on accounts receivable

and accounts payable vary by country and typically range from 30 to 60 days in the U.S. and 30 to 90 days elsewhere. We maintain accounts receivable securitization or financing programs in several countries where we have operations to enable us to more quickly convert a portion of our receivables into cash.

 

Customer Dependence

 

In fiscal 2008, our most significant customers were Ford and General Motors, which accounted for approximately 29% of our fiscal 2008 net sales on a worldwide basis, while sales to these customers in the U.S. accounted for approximately 12% of total sales in fiscal 2008. Other significant customers include Daimler, Renault/Nissan, Toyota, and Volkswagen. A Chapter 11 proceeding, particularly if the bankruptcy court does not approve our proposed DIP Financing, could result in the loss of a significant amount of sales and accounts receivables with our key customers.

 

Ford and General Motors are currently facing significant financial difficulties, which could result in significantly reduced sales and accounts receivables with these customers. The loss of a major portion of sales to any of our significant customers, including Ford and General Motors, could have a material adverse impact on our business. We have been doing business with each of our significant customers for many years, and sales are composed of a number of different product lines and of different part numbers within product lines and are made to individual divisions of such customers. In addition, we supply products to many of these customers in multiple geographic locations, which reduces our reliance on any single market.

 

Backlog

 

Generally, our products are not on a backlog status. Products are produced from readily available materials, have a relatively short manufacturing cycle, and have short customer lead times. Each operating unit maintains its own inventories and production schedules.

 

Competition

 

The major domestic and foreign markets for our products are highly competitive. Competition is based primarily on price, quality, delivery, technology, and overall customer service. Competitors typically vary among each of our products and geographic markets. The significant competitors for each of our product lines are discussed above under “Automotive Wheels Products” and “Other Products.”

 

Research and Development

 

We engage in ongoing engineering, research, and development activities to improve the reliability, performance, and cost-effectiveness of our existing products and to design and develop new products for existing and new applications. Our spending on engineering, research, and development programs was $12.4 million for the fiscal year ended January 31, 2009, $9.6 million for the fiscal year ended January 31, 2008, and $4.4 million for the fiscal year ended January 31, 2007.

 

Environmental Compliance

 

We believe we are in material compliance with all environmental laws, ordinances, and regulations. All of our manufacturing facilities worldwide have implemented comprehensive environmental management systems and are registered under ISO 14001. We do not anticipate any material capital expenditures for environmental compliance or any adverse effect on our earnings or competitive position as a result of environmental matters.

 

Employees

 

At March 31, 2009, we had approximately 6,400 employees. We consider our relations with our employees to be good.

Financial Information about Geographic Areas

 

We currently have operations in 12 countries including the U.S., Germany, Italy, Spain, Czech Republic, Turkey, Brazil, South Africa, Mexico, Thailand, India, and Japan. We operate four facilities in the U.S. and 19 facilities in foreign countries. Of our foreign operations, 18 facilities are part of the Automotive Wheels segment and one is part of the Other segment.

 

As we do not prepare consolidated financial statements by country, providing a breakdown of long-lived assets by geographic areas in which we operate is impracticable. The following table sets forth revenues from external customers attributable to the U.S. and other foreign countries from which we derive revenues and is based on external sales by plant location (dollars in millions):

 

 

Our Automotive Wheels segment is substantially dependent upon foreign operations. In fiscal 2008 approximately 84% of the net sales of the Automotive Wheels segment were from foreign operations. For a discussion of the risks attributable to foreign operations, see Item 1A, Risk Factors, “We have significant international operations that subject us to risks not faced by domestic competitors.”

 

Available Information

 

Our internet website address is www.hayes-lemmerz.com . Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after those reports are electronically filed with, or furnished to, the SEC.

 

 

Risks Related to our Ability to Continue as a Going Concern

 

Our independent registered public accounting firm has included an explanatory paragraph with respect to our ability to continue as a going concern in its report on our consolidated financial statements for the year ended January 31, 2009.

 

Our independent registered public accounting firm has included in its report on our consolidated financial statements as of and for the year ended January 31, 2009 an explanatory paragraph indicating substantial doubt about our ability to continue as a going concern. In addition, in January 2009, we favorably modified the leverage ratio and interest coverage ratio covenants under our New Credit Facilities for the fourth quarter of fiscal 2008 and for each quarter of fiscal 2009. Absent the amendment, we would have been in default of our covenants as of January 31, 2009. In addition, we expect that we will not be in compliance with the covenants in future quarters. In accordance with EITF 86-30, we reclassified our debt to current as of January 31, 2009. The lenders under our New Credit Facility have waived defaults under our senior credit facility that result from our receipt of this going concern explanatory paragraph. However, we currently do not have sufficient funds to continue as a going concern through May 2009 and are engaged in discussions with representatives of the lenders under our New Credit Facility, the holders of our Notes, and others regarding a recapitalization of the Company and restructuring of our existing indebtedness through a Chapter 11 proceeding. The presence of the going concern explanatory paragraph and any

bankruptcy proceedings may adversely affect our relationship with third parties with whom we do business, including our customers, vendors, and employees, which could have a material adverse effect on our business, results of operations, financial condition, and prospects. In addition, if the bankruptcy court does not approve our proposed DIP Financing and any plan of reorganization we propose, or if we cannot reach an acceptable agreement with our creditors to recapitalize the Company and propose and implement a successful plan of reorganization, we may be unable to continue as a going concern, and we may be forced to discontinue operations and liquidate the Company.

 

If we are unable to successfully recapitalize the Company and restructure our indebtedness under Chapter 11, we may be forced to liquidate the Company.

 

We are currently engaged in discussions with the representatives of the lenders under our New Credit Facility, the holders of our Notes, and others regarding a recapitalization of the Company and restructuring of our existing indebtedness through a Chapter 11 proceeding. A majority of the lenders under our New Credit Facility have, subject to approval of the bankruptcy court in which we file petitions under Chapter 11, agreed to provide us with DIP Financing in an aggregate amount of up to $100 million ($80 million of which is committed pursuant to the terms and conditions of a commitment letter). There can be no assurance that the amounts of cash from operations, together with amounts available under the proposed DIP Financing, will be sufficient to fund our operations. In the event that cash flows and available borrowings under the proposed DIP Financing are not sufficient to meet our liquidity requirements, we may be required to seek additional financing. There can be no assurance that such additional financing will be available or, if available, will be offered on acceptable terms. Failure to secure any necessary additional financing would adversely affect our operations and may even force us to discontinue operations.

 

We expect to file for bankruptcy protection, and, if we do, our business and operations will be subject to various risks.

 

A bankruptcy filing by us or any of our subsidiaries would subject our business and operations to various risks, including the following:

 

 

 

In addition, we believe that our currently outstanding common stock will have no value and will be cancelled under any plan of reorganization we may propose under Chapter 11. We also believe that the holders of our Notes are unlikely to receive more than a de minimis distribution on account of their interests in the Notes and that such interests could be cancelled under any plan of reorganization we may propose under Chapter 11. There can be no assurance, however, that any agreement regarding the recapitalization and restructuring of the Company under Chapter 11 will be obtained on acceptable terms with the necessary parties. Should the bankruptcy court not approve our proposed DIP Financing, or should we be unable to develop, propose, and implement a successful plan of reorganization, we may be forced to discontinue operations and liquidate the Company.

 

Our continuation as a going concern would be dependent upon, among other things, our ability to obtain approval of the proposed DIP Financing and to develop, obtain confirmation or approval of, and implement a comprehensive restructuring plan; generate cash from operations, maintain adequate cash on hand and obtain sufficient other financing during any Chapter 11 proceedings and thereafter; resolve ongoing issues with creditors and other third parties; and return to profitability. Even assuming a successful emergence from any Chapter 11 proceedings, there could be no assurance as to the long-term viability of all or any part of our business. In addition, a long period of operating under Chapter 11 of the Bankruptcy Code may exacerbate the potential harm to our business and further restrict our ability to pursue certain business strategies or require us to take actions that we otherwise would not. These challenges are in addition to business, operational, and competitive challenges that we would normally face even absent any Chapter 11 proceedings.

 

During the pendency of any Chapter 11 proceedings, our financial results may be unstable and may not reflect historical trends.

 

During the pendency of any Chapter 11 proceedings to which we may be subject, our financial results may fluctuate as they reflect asset impairments, asset dispositions, restructuring activities, contract terminations and rejections, and claims assessments. As a result, our historical financial performance may not be indicative of our financial performance following the date on which we file voluntary petitions under Chapter 11. Further, we may sell or otherwise dispose of assets or businesses and liquidate or settle liabilities, with court approval, for amounts other than those reflected in our historical financial statements. Any such sale or disposition and any comprehensive restructuring plan could materially change the amounts and classifications reported in our historical consolidated financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of a comprehensive restructuring plan.

 

Risks Related to our Business and the Automotive Industry

 

Our business depends on the automotive industry, and reductions in the demand for new vehicles will adversely affect our business.

 

Most of our sales are to automotive and commercial vehicle original equipment manufacturers (OEMs). Therefore, our financial performance is subject to conditions in the automotive industry, which are cyclical and generally depend on conditions in the U.S. and global economies. In North America and elsewhere, the automotive industry is currently characterized by significant overcapacity, fierce competition, rapidly declining sales and production volumes, and high fixed costs. General Motors has indicated that there is substantial doubt about its ability to continue as a going concern, and Chrysler has sought protection under federal bankruptcy laws. During the second half of fiscal 2008, the weakening of the U.S. and global economies and limited availability of commercial and consumer credit resulted in significant reductions in consumer and capital spending and in the demand for automobiles, light trucks, and commercial vehicles. These conditions have led to decreased production by our customers, which in turn have adversely affected our sales and financial performance during the fiscal year. Demand for new vehicles may be adversely affected by other factors that are beyond our control, such as interest rates, the availability of credit and levels of disposable income. Our sales are also affected by our customers’ inventory levels and production schedules. Because of the present uncertainty in the economy, some of our

customers have been reducing their forecasts for new vehicle production in future periods. Decreases in demand for new vehicles or in new vehicle production may have a significant negative impact on our business. Because we have high fixed production costs, relatively small declines in our customers’ production could significantly reduce our profitability. A prolonged downturn in the North American or European automotive industries or a significant change in product mix due to consumer demand could require us to further slow production in, or shut down, plants or incur impairment charges.

 

We depend on a small number of significant customers.

 

We derived approximately 29% of our fiscal 2008 sales from direct sales to Ford and General Motors and their subsidiaries globally and 12% of our fiscal 2008 sales from sales to these OEM’s in the U.S.. In addition, our five largest customers (Ford, General Motors, Renault/Nissan, Daimler, and Toyota) and their subsidiaries accounted for approximately 54% of our global sales in fiscal 2008. Ford and General Motors are currently facing significant financial difficulties, which could result in significantly reduced sales and receivables with these customers. Our sales also depend on the particular vehicle platforms that include our products. If production of those vehicle platforms were to be decreased or discontinued, our sales would be reduced.

 

A Chapter 11 proceeding, particularly if the bankruptcy court does not approve our proposed DIP Financing, could result in the loss of a significant amount of sales and accounts receivables with our key customers. The loss of a significant portion of sales to any of our significant customers could have a material adverse effect on our business. In addition, certain of our customers are currently facing significant financial challenges and may file for bankruptcy protection in the future. This could result in adverse changes in these customers’ production levels, pricing, and payment terms and could limit our ability to collect receivables, which could harm our business or results of operations.

 

Our customers’ cost cutting efforts and purchasing practices may adversely impact our business.

 

Our customers are continually seeking to lower their costs of manufacturing, particularly in light of their current financial challenges. These cost reductions may reduce the amount we receive for sales of our products and may include relocation of our customers’ operations to countries with lower production costs. Customers might find it less costly to manufacture themselves at relocated facilities or to rely on foreign suppliers with lower production costs, whether or not the customers’ production is relocated, either of which may have a significant negative impact on our business. Changes in our customers’ purchasing policies or payment practices could also have an adverse effect on our business.

 

We operate in the highly competitive automotive supply industry.

 

The automotive supply industry is highly competitive, both domestically and internationally, with a large number of suppliers competing to provide products to a relatively small number of OEMs. Competition is based primarily on price, quality, timely delivery, and overall customer service. Many of our competitors are larger and have greater financial and other resources than we do. Further consolidation in the industry may result in fewer, larger suppliers who benefit from purchasing and distribution economies of scale. We may not be able to compete successfully with these or other companies.

 

Furthermore, the rapidly evolving nature of the automotive industry may attract new entrants, particularly in low cost countries such as China. We may not be able to offer our products at prices competitive with those of competitors in low-cost countries and pricing pressure created by such competitors could reduce our sales and margins. These factors have led to a re-sourcing of certain future business to foreign competitors in the past and may continue to do so in the future. In addition, any of our competitors may develop superior products, produce similar products at a lower cost than we do, or adapt more quickly to new technologies or evolving customer requirements. As a result, our products may not be able to compete successfully. A number of our competitors have been forced to seek bankruptcy protection partially as a result of highly competitive market conditions in our industry.

We may be unable to maintain trade credit with our suppliers.

 

We currently maintain trade credit with certain of our key suppliers and utilize such credit to purchase significant amounts of raw material and other supplies with payment terms and our ability to continue to do so is critical to our ability to maintain adequate liquidity. As conditions in the automotive supply industry have become less favorable, credit insurance, which is used by suppliers to manage their payment risk in connection with providing payment terms, has become significantly more expensive or unavailable. As a result, key suppliers have been seeking to shorten trade credit terms, reduce credit limits, or require cash in advance for payment. If we commence a Chapter 11 proceeding, our key suppliers may seek to further restrict or eliminate our ability to obtain trade credit, or they may require payment on more restricted terms, particularly if we are unable to obtain court approval of our proposed DIP Financing. If a significant number of our key suppliers were to shorten or eliminate our trade credit, our inability to finance large purchases of key supplies and raw materials would increase our costs and negatively impact our liquidity and cash flow, which could have a material adverse effect on our business, results of operations, or financial condition and on our ability to successfully restructure our existing indebtedness.

 

Increased cost of supplies and raw materials could affect our financial health.

 

Our business is subject to the risk of price increases and periodic delays in the delivery of raw materials and supplies. The availability and price of these commodities are subject to market forces largely beyond our control. Fluctuations in prices or availability of these raw materials or supplies will affect our profitability and could have a material adverse effect on our business, results of operations, or financial condition. In addition, if any of our suppliers seek bankruptcy relief or otherwise cannot continue their business as anticipated, the availability or price of raw materials could be adversely affected.

 

In recent periods there has been significant volatility in the global prices of steel, aluminum, and natural gas, which have had an impact on our business. Continued volatility in the price of steel, aluminum, natural gas, or other key materials and supplies may have a material adverse effect on our business, results of operations, or financial condition. Although we have been able to pass some of the supply and raw material cost increases onto our customers in the past, current competitive and marketing pressures may prevent us from doing so in the future. In addition, our customers are not contractually obligated to accept certain of these price increases and, in light of current market conditions, they may be less likely to accept the increases currently and in the future than they have been in the past. Moreover, we sometimes use fixed-forward contracts to hedge against fluctuations in the prices of certain commodities, which could result in our paying greater than market prices for these commodities. Where we pass through the costs of raw materials to our customers, customer pricing will decrease as raw material market prices decrease, regardless of the cost of our fixed forward contracts. For example, we generally enter into fixed-forward contracts for aluminum based on volume projections from our customers that coincide with the applicable pass through pricing adjustment periods. In recent periods, customer volumes have decreased significantly relative to their projections while at the same time market prices for aluminum have fallen sharply. As a result, we have fixed-forward contracts for aluminum based on projected volumes at prices that are well above current market levels, while the amount of the cost we can pass through to the customer has decreased to reflect the lower market cost. This potential inability to pass on price increases to our customers could adversely affect our operating margins and cash flow and result in lower operating income and profitability.

 

The financial distress of our suppliers could harm our results of operations.

 

The conditions in the automotive industry have adversely affected our supplier base. Continued financial distress among our supply base could lead to commercial disputes, write offs and possibly supply chain interruptions. The continuation or worsening of conditions in the supply base could have a material adverse effect on our business, financial condition, or results of operations.

We have significant international operations that subject us to risks not faced by domestic competitors.

 

Approximately 82% of our consolidated net sales in fiscal 2008 were from operations outside the U.S.. We expect sales from our international operations to continue to represent a substantial and growing portion of our business. Risks inherent in international operations include the following:

 

 

Any of these factors could have a material adverse effect on our business, cash flows, financial condition, and results of operations.

 

Unexpected equipment failures, delays in deliveries, or catastrophic loss at any of our manufacturing facilities could lead to production curtailments or shutdowns.

 

Equipment failure, interruption of supply, labor disputes, or other causes could significantly reduce production of our products, which would reduce our sales and earnings for the affected period. In addition, we generally produce our products on a “just in time” basis and do not hold large inventories. If production is interrupted at any of our manufacturing facilities, even if only temporarily or as a result of events that are beyond our control, delivery times could be severely affected. Any significant delay in deliveries to our customers could lead to returns or cancellations and cause us to lose future sales, as well as expose us to claims for damages. Our manufacturing facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions, or violent weather conditions. We have in the past and may in the future experience plant shutdowns or periods of reduced production as a result of equipment failure, power outages, and delays in deliveries, or catastrophic loss, which could have a material adverse effect on our results of operations or financial condition.

We may not be able to successfully implement our planned operational improvements or realize the benefits of those plans already implemented.

 

As part of our ongoing focus on being a low-cost provider of high quality products, we continually analyze our business to further improve our operations and identify cost-cutting measures. If we do not identify and implement operational improvements or if implemented improvements do not generate the expected benefits, we may be unable to offer products at a competitive price and generate sufficient operating funds to service our debt or make necessary capital expenditures. If that were to happen, alternative sources of financing may not be available to us on commercially reasonable terms or at all.

 

We may not be able to timely or successfully launch new products.

 

In order to effectively compete in the automotive supply industry, we must be able to launch new products to meet our customers’ demand. As a result of our currently liquidity situation and covenants limiting the amount of our capital expenditures, we may not be able to make the investments needed to launch production of new products. We may not be able to install and obtain customer approval of the equipment needed to produce products for new programs in time for the start of production. In addition, transitioning our manufacturing facilities and resources to full production under new product programs may impact production rates or other operational efficiency measures. Moreover, our customers may delay or cancel the launch of new product programs or actual production may be below planned quantities. Our failure to successfully launch new products, or a failure by our customers to successfully launch new programs in the quantities anticipated, could adversely affect our results.

 

Our success will depend on our ability to attract and retain qualified employees.

 

Our successes depend in part on our ability to attract, hire, train, and retain qualified engineering, managerial, technical, sales, and marketing personnel. We face significant competition for these types of employees. Our current financial condition creates uncertainty that may lead to an increase in unwanted attrition and may affect our ability to attract and retain qualified new employees. Additionally, as conditions in the automotive industry decline and we implement measures to improve our cost structure, employee morale may suffer. We may be unsuccessful in attracting and retaining the personnel we require and key personnel may leave and compete against us. We may be unsuccessful in replacing key managers who either resign or retire. The loss of any member of our senior management team or other experienced, senior employees could impair our ability to execute our business plan, including the restructuring of our indebtedness, cause us to lose customers and reduce our sales, or lead to the loss of other key employees. In any such event, our financial condition, results of operations, and cash flows could be adversely affected.

 

We might fail to adequately protect our intellectual property or third parties might assert that our technologies infringe on their intellectual property.

 

We rely on a combination of patents, trade secrets, trademarks and copyrights to protect our intellectual property, but this protection might be inadequate. For example, our pending or future patent applications might not be approved or, if allowed, they might not be of sufficient strength or scope. Conversely, third parties might assert that our technologies infringe their proprietary rights. We are currently involved in litigation in which the plaintiff has asserted that we have infringed on its patents. This litigation, and possible future litigation, could result in substantial costs and diversion of our efforts and could adversely affect our business, whether or not we are ultimately successful. For more information on this litigation, see the section entitled “Legal Proceedings.”

 

Our products may be rendered obsolete or less attractive by changes in regulatory requirements or competitive technologies.

 

Changes in legislative, regulatory or industry requirements or in competitive technologies may render certain of our products obsolete or less attractive. Our ability to anticipate changes in technology and regulatory standards and to successfully develop and introduce new and enhanced products on a timely basis will be a significant factor in our ability to remain competitive. Certain of our products may become obsolete and we may not be able to achieve the technological advances necessary for us to remain competitive. We are also subject to the risks generally

associated with new product introductions and applications, including lack of market acceptance, delays in product development, and failure of products to operate properly.

 

A high percentage of our customers’ employees and certain of our employees are unionized or covered by collective bargaining agreements.

 

Many employees of our major customers and certain of our employees are unionized. Certain of our employees in the U.S. are represented by the United Steel Workers Union, all of whom are employed at our facility in Akron, Ohio. Our current contract with the United Steel Workers Union expires in fiscal 2010. As is common in Mexico and many European jurisdictions, substantially all of our employees in Europe and Mexico are covered by country-wide collective bargaining agreements, which are subject to negotiations on an annual basis. Although we believe that our relations with our employees are good, a dispute between us and our employees could have a material adverse effect on our business. In addition, significant percentages of the workforces at certain of our major customers and their suppliers are unionized. Strikes or labor disputes at a major customer or one of their key suppliers could result in reduced production of vehicles incorporating our products. This would reduce demand for our products and could have a material adverse effect on our sales and results of operations during the affected periods.

 

We are subject to potential exposure to environmental liabilities.

 

We are subject to various foreign, federal, state, and local environmental laws, ordinances, and regulations, including those governing discharges into the air and water, the storage, handling and disposal of solid and hazardous wastes, the remediation of contaminated soil and groundwater, and the health and safety of our employees. We are also required to obtain permits from governmental authorities for certain operations. We may not be in complete compliance with these permits at all times. If we fail to comply with these permits, we could be fined or otherwise sanctioned by regulators and the fine or sanction could be material. The nature of our operations and the history of industrial uses at some of our facilities expose us to the risk of environmental liabilities that could have a material adverse effect on our business. For example, we may be liable for the costs of removal or remediation of contamination that may be present on our property, even if we did not know about or cause the contamination and even if the practices that resulted in the contamination were legal when they occurred.

 

We may suffer future asset impairments and other restructuring charges, including write downs of goodwill or intangible assets.

 

We record asset impairment losses when we determine that our estimates of the future undiscounted cash flows from an operation will not be sufficient to recover the carrying value of that facility’s building, fixed assets, and production tooling. During fiscal 2008 we recorded asset impairment losses, other restructuring charges, and facility exit costs of $22.2 million and goodwill and other intangible asset impairments of $238 million and we may incur significant similar losses and charges in the future. In connection with our emergence from Chapter 11 in 2003 and the application of fresh start accounting, we recorded significant increases in goodwill and intangible assets. At January 31, 2009 we had approximately $112.4 million in other intangible assets recorded on our Consolidated Balance Sheets. We are required to evaluate annually whether our goodwill and other intangible assets have been impaired or are not recoverable. Future market conditions may indicate that these assets are not recoverable based on changes in forecasts of future business performance and the estimated useful life of these assets, and this may trigger further write-downs of these assets. Any future write-off of a significant portion of our intangible assets would have an adverse effect on our financial condition and results of operations.

 

The nature of our business exposes us to product liability, recall, and warranty claims and other legal proceedings.

 

We are subject to litigation in the ordinary course of our business. The risk of product liability, recall, and warranty claims are inherent in the design, manufacture, and sale of automotive products, the failure of which could result in property damage, personal injury, or death. Although we currently maintain what we believe to be suitable and adequate product liability insurance, we may not be able to maintain this insurance on acceptable terms and this insurance may not provide adequate protection against potential liabilities. In addition, we may be required to participate in a recall involving our products. Such a recall would not be covered by our insurance. Furthermore, our

customers can initiate a recall of our products without our agreement and offset their costs of the recall against payments due to us for other products. A successful product liability claim in excess of available insurance coverage or a requirement to participate in a product recall could have a material adverse effect on our business. In addition, we are involved in other legal proceedings, which could adversely affect our cash flows, financial condition, or results of operations.

 

Our pension and other postretirement employee benefits expense could materially increase.

 

Certain of our current and former employees participate in defined benefit pension plans. The plans are currently underfunded. Declines in interest rates or the market values of the securities held by the plans, or certain other changes, could materially increase the amount by which the plans are underfunded, affect the level and timing of required contributions, and significantly increase our pension expenses and reduce profitability. The value of the securities held by the plans have decreased significantly during the past fiscal year, significantly increasing the amount by which the plans are underfunded. We also sponsor other postretirement employee benefit plans that cover certain current and former employees and eligible dependents. We fund these obligations on a pay-as-you-go basis. Increases in the expected cost of the benefits, particularly health care, in excess of our assumptions could increase our actuarially determined liability and related expense along with future cash outlays.

 

Risks Related to Our Capital Structure

 

We have substantial levels of debt and debt service that divert a significant amount of cash from our business operations.

 

We have substantial levels of debt, including debt under our New Credit Facility and Notes and other debt instruments. As of January 31, 2009 we had approximately $731.5 million of total indebtedness, which includes our debt, letters of credit, and bank guarantees, and our cash and cash equivalents were approximately $107.5 million. A Chapter 11 filing will result in a default under our New Credit Facilities, our Notes, and certain of our other debt obligations, and those debts will become automatically due and payable, subject to an automatic stay of any action to collect, assert, or recover a claim against us under applicable bankruptcy law. In addition to the debt under our New Credit Facility and under the Notes, we may incur significant additional debt in the future, including the proposed DIP Financing. The degree to which we are leveraged could have important consequences, including:

 

 

We may be unable to refinance, extend, or otherwise restructure our indebtedness.

 

We are currently engaged in discussions with representatives of the lenders under our New Credit Facilities, the holders of our Notes, and others regarding a recapitalization of the Company and restructuring of our existing indebtedness through a Chapter 11 proceeding. A majority of the lenders under our New Credit Facilities have, subject to approval of the bankruptcy court in which we file petitions under Chapter 11, agreed to provide us with DIP Financing in an aggregate amount of up to $100 million ($80 million of which is committed pursuant to the terms and conditions of a commitment letter). There can be no assurance, however, that any agreement regarding a recapitalization and restructuring of the Company under Chapter 11 will be obtained on acceptable terms with the necessary parties. Should the bankruptcy court not approve our proposed DIP Financing, or should we be unable to develop, propose, and implement a successful plan of reorganization, we may be forced to discontinue operations and liquidate the Company.

Restrictions and covenants in the indenture governing the Notes and the New Credit Facility limit our ability to take certain actions, and we may be unable to comply with these obligations.

 

Our New Credit Facility, the indenture under which the Notes have been issued, and our other debt agreements contain a number of significant covenants that affect our ability to operate our business, including, among other things, covenants that restrict our ability, and the ability of our subsidiaries, to:

 

 

In addition, our New Credit Facility requires us to satisfy certain financial covenants. These covenants may prevent us from accessing any revolving credit line and may limit our liquidity. Compliance with the covenants could cause us to conduct our business, or to forgo opportunities, in such a manner as to materially harm our business.

 

If we are unable to comply with the covenants under any of our debt instruments, there would be an event of default that could result in acceleration of our debt and potentially in our bankruptcy. Additionally, a default resulting from our failure to comply with such covenants or the applicable borrowing conditions would preclude us from borrowing additional funds. While the lenders under our New Credit Facility waived defaults under the New Credit Facility that result from our receipt of the going concern explanatory paragraph of our consolidated financial statements, there can be no assurance that they will waive any other possible defaults.

 

A Chapter 11 filing will result in a default under our New Credit Facilities, our Notes, and certain of our other debt obligations, and those debts will become automatically due and payable, subject to an automatic stay of any action to collect, assert, or recover a claim against us under applicable bankruptcy law. In addition, the proposed DIP Financing contains certain highly restrictive covenants that require us, among other things, to maintain our corporate existence, make certain payments, perform our obligations under existing agreements, purchase insurance, and provide financial records. The proposed DIP Financing also limits or prohibits our ability to incur indebtedness, make prepayments on or purchase indebtedness in whole or in part, pay dividends, make investments, lease properties, create liens, consolidate or merge with another entity (or allow one of our subsidiaries to do so), sell assets, and acquire facilities or other businesses. There can be no assurance that we will be able to comply with these and other restrictive covenants in the proposed DIP Financing. Furthermore, any advances under the proposed DIP Financing are at the discretion of the lenders under the DIP Financing, and these lenders may decide not to provide additional financing.

 

We do not generate sufficient cash flow to operate our business and fund required capital expenditures, and we will accordingly need additional financing in the future, which we may be unable to obtain.

 

Our business requires us to make significant capital expenditures to acquire equipment needed to produce products for new customer programs, maintain existing equipment, and implement technologies to reduce production costs in response to customer pricing pressure. In addition, lower sales or unanticipated expenses could give rise to additional financing requirements. We currently do not generate sufficient cash flow from operations to fund future capital expenditure requirements and operate our business. As a result, we will need to

successfully restructure our current debt in a Chapter 11 proceeding. To successfully recapitalize the Company and restructure our indebtedness, we will need the proposed DIP Financing to be approved by the bankruptcy court in which we may file petitions under Chapter 11. If available borrowings under the DIP Facility are not sufficient to meet our cash requirements, we may be required to obtain additional financing or take other steps to reduce expenses or generate cash. There can, however, be no assurance that additional financing will be available or, if it is available, that it will be offered on acceptable terms. If we file for protection under Chapter 11 of the Bankruptcy Code, our access to additional financing will likely be very limited. If adequate funds are not available on acceptable terms, and if we are unable to develop, propose, and implement a successful plan of reorganization, we will not be able to continue as a going concern and will be forced to liquidate the Company.

 

Our exposure to variable interest rates and foreign currency fluctuations may negatively affect our results.

 

A portion of our debt, including our borrowings under our New Credit Facility, bears interest at variable rates. Any increase in the interest rates will increase our expenses and reduce funds available for our operations and future business opportunities. Increases in interest rates will also increase the risks resulting from our significant debt levels. Due to the increase in our operations outside the U.S., we have experienced increased foreign currency exchange gains and losses in the ordinary course of our business. Fluctuations in exchange rates may have a material impact on our financial condition, since Euro-denominated debt is converted into U.S. dollars for financial reporting, and cash flows generated in other currencies will be used, in part, to service the dollar-denominated portion of our debt. This fluctuation could result in an increase in our overall leverage and could result in less cash flow available for our operations, capital expenditures, and repayment of our obligations. In addition, fluctuations in foreign currency exchange rates may affect the value of our foreign assets as reported in U.S. dollars and may adversely affect reported earnings and, accordingly, the comparability of period-to-period results of operations. Changes in currency exchange rates may affect the relative prices at which we and foreign competitors sell products in the same market. In addition, changes in the value of the relevant currencies may affect the cost of certain items required in our operations. Although we attempt to hedge against fluctuations in interest rates or exchange rates, such fluctuations may have a material adverse effect on our financial condition or results of operations, or cause significant fluctuations in quarterly and annual results.

 

Our credit rating may be downgraded in the future.

 

Our debt is rated by nationally recognized statistical rating organizations. Our debt ratings were recently downgraded and such ratings will likely be further downgraded upon commencement of Chapter 11 proceedings. While these actions do not affect our current cost of borrowing, they could significantly affect our ability to obtain or maintain trade credit with suppliers, reduce our access to the debt markets and increase the cost of incurring additional debt. There can be no assurance that we will be able to maintain our current credit ratings. Should we be unable to maintain our current credit ratings, we could experience a reduction in credit terms, an increase in our borrowing costs or difficulty accessing capital markets. Such a development could adversely affect our financial condition and results of operations.

 

 

None.

 

 

We operate 6 facilities in North America, 10 facilities in Europe, and 7 facilities in South America, Asia, and South Africa. We believe that our plants are adequate and suitable for the manufacturing of products for the markets in which we sell. Our properties in Czech Republic, Germany, Mexico, Spain, and the U.S. are subject to mortgages or deeds of trust granted to Citibank North America, Inc. to secure our obligations under the New Credit Facility.

The following table summarizes our operating facilities:

 

 

 

We were party to a license agreement with Kuhl Wheels, LLC (Kuhl), whereby Kuhl granted us an exclusive patent license concerning “high vent” steel wheel technology known as the Kuhl Wheel (Kuhl Wheel), which agreement was terminated as of January 10, 2003 pursuant to a stipulation between us and Kuhl in connection with our bankruptcy proceeding. The original license agreement (as amended, the License Agreement), dated May 11, 1999, granted us a non-exclusive license for the Kuhl Wheel technology. The License Agreement was subsequently amended to provide us with an exclusive worldwide license. On January 14, 2003 we filed a Complaint for Declaratory and Injunctive Relief against Kuhl and its affiliate, Epilogics Group, in the U.S. District Court for the Eastern District of Michigan. We commenced such action seeking a declaration of non-infringement of two U.S. patents and injunctive relief to prevent Epilogics Group and Kuhl from asserting claims of patent infringement against us, and disclosing and using our technologies, trade secrets, and confidential information to develop, market, license, manufacture, or sell automotive wheels. We subsequently dismissed our claims regarding Kuhl’s alleged use of our technologies. We filed summary judgment motions seeking rulings that we do not infringe Kuhl’s patents, that Kuhl’s patents are invalid, and finding in our favor on Kuhl’s non-patent claims in the case. On November 30, 2007 the court awarded summary judgment in our favor on non-infringement of Kuhl’s patents and on Kuhl’s non-patent claims. Kuhl appealed to the Federal Circuit Court of Appeals, which, on February 24, 2009, upheld the district court’s ruling. The deadline for Kuhl to have filed a petition for rehearing has passed.

 

We are the defendant in a patent infringement matter filed in 1997 in the U.S. District Court for the Eastern District of Michigan. Lacks Incorporated (Lacks) alleged that we infringed on three patents held by Lacks relating to chrome-plated plastic cladding for wheels. Prior to fiscal 2000, the Federal District Court dismissed all claims relating to two of the three patents that Lacks claimed were infringed and dismissed many of the claims relating to the third patent. The remaining claims relating to the third patent were submitted to a special master. In January 2001 the special master issued a report finding that Lacks’ third patent was invalid and recommending that Lacks’

remaining claims be dismissed; the trial court accepted these recommendations. Lacks appealed this matter to the Federal Circuit Court. The Federal Circuit Court vacated the trial court’s ruling that the third patent was invalid and remanded the matter back to the trial court for further proceedings. Discovery on the remanded claims is ongoing. In July 2003 Lacks filed an administrative claim in the Bankruptcy Court for $12 million relating to the alleged patent infringement. On August 15, 2007 the special master issued a report finding that the remaining claims at issue in the third patent are invalid and recommending that the trial court grant judgment for us and against Lacks. On November 20, 2007 the trial court accepted the special master’s recommendation. On November 29, 2007 Lacks filed a notice with the trial court that it is appealing the trial court’s ruling to the Federal Circuit Court of Appeals.

 

The nature of our business subjects us to litigation in the ordinary course of our business. In addition, we are from time to time involved in other legal proceedings. Although claims made against us prior to May 12, 2003, the date on which the Plan of Reorganization was confirmed, except as described in the immediately following paragraph, were discharged and are entitled only to the treatment provided in the Plan of Reorganization or in connection with settlement agreements that were approved by the Bankruptcy Court prior to our emergence from bankruptcy, we cannot guarantee that any remaining or future claims will not have a significant negative impact on our results of operations and profitability. In addition, certain claims made after the date of our bankruptcy filing may not have been discharged in the bankruptcy proceeding.

 

Claims made against us prior to the date of the bankruptcy filing or the confirmation date may not have been discharged if the claimant had no notice of the bankruptcy filing or various deadlines in the Plan of Reorganization. Although certain parties have informally claimed that their claims were not discharged, we are not presently aware of any party that is seeking to enforce claims that we believe were discharged or a judicial determination that their claims were not discharged by the Plan of Reorganization. In addition, in other bankruptcy cases, states have challenged whether their claims could be discharged in a federal bankruptcy proceeding if they never made an appearance in the case. This issue has not been finally settled by the U.S. Supreme Court. Therefore, we can give no assurance that our emergence from bankruptcy resulted in a discharge of all claims against us with respect to periods prior to the date we filed for bankruptcy protection. Any such claim not discharged could have a material adverse effect on our financial condition and profitability; however, we are not presently aware of any such claims. Moreover, our European operations and certain other foreign operations did not file for bankruptcy protection, and claims against them are not affected by our bankruptcy filing.

 

In the ordinary course of our business, we are a party to other judicial and administrative proceedings involving our operations and products, which may include allegations as to manufacturing quality, design, and safety. We carry insurance coverage in such amounts in excess of our self-insured retention as we believe to be reasonable under the circumstances and which may or may not cover any or all of our liabilities in respect of claims and lawsuits. After reviewing the proceedings that are currently pending (including the probable outcomes, reasonably anticipated costs and expenses, availability and limits of insurance rights under indemnification agreements, and established reserves for uninsured liabilities), we believe that the outcome of these proceedings will not have a material adverse effect on the financial condition or ongoing results of our operations.

 

We are exposed to potential product liability and warranty risks that are inherent in the design, manufacture and sale of automotive products, the failure of which could result in property damage, personal injury, or death. Accordingly, individual or class action suits alleging product liability or warranty claims could result. Although we currently maintain what we believe to be suitable and adequate product liability insurance in excess of our self-insured amounts, there can be no assurance that we will be able to maintain such insurance on acceptable terms or that such insurance will provide adequate protection against potential liabilities. In addition, we may be required to participate in a recall involving such products, for which we maintain only limited insurance. A successful claim brought against us in excess of available insurance coverage, if any, or a requirement to participate in any product recall, could have a material adverse effect on our results of operations or financial condition.

 

Under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (CERCLA), we currently have potential environmental liability arising out of both of our wheel and non-wheel businesses at 17 Superfund sites (Sites). Five of the 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 our interests with respect to all matters relating to these five Sites.

 

As a result of activities that took place at our Howell, Michigan facility prior to our acquisition of it, the U.S. Environmental Protection Agency (EPA) recently performed under CERCLA, remediation of PCB’s from soils on our property and sediments in the adjacent south branch of the Shiawassee River. The Michigan Department of Environmental Quality has indicated it intends to perform additional remediation of these soils and river sediments. 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 remediation of the PCBs is the financial responsibility of the State of Michigan and not of Cast Forge or its successors or assigns (including us). The EPA concurred in the consent judgment.

 

We are working with various government agencies and the other parties identified by the applicable agency as “potentially responsible parties” to resolve our liability with respect to nine Sites. Our potential liability at each of these Sites is not currently anticipated to be material.

 

We have potential environmental liability at the two remaining Sites arising out of businesses presently operated by Kelsey-Hayes. Kelsey-Hayes has assumed and agreed to indemnify us with respect to any liabilities associated with these Sites. Kelsey-Hayes has acknowledged this responsibility and is presently representing our interests with respect to these sites.

 

Kelsey-Hayes and, in certain cases, we 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. We believe, however, that such costs in the aggregate will not have a material adverse effect on our consolidated operations or financial condition and, in any event, Kelsey-Hayes has assumed and agreed to indemnify us with respect to any liabilities arising out of or associated with these divested businesses.

 

In addition to the Sites, we also have potential environmental liability at two state-listed sites in Michigan and one in California. One of the Michigan sites is covered under the indemnification agreement with Goodyear described above. We are presently working with the Michigan Department of Environmental Quality to resolve our liability with respect to the second Michigan site, for which no significant costs are anticipated. The California site is a former wheel manufacturing site operated by Kelsey-Hayes in the early 1980’s. We are working with two other responsible parties and with the State of California on the investigation and remediation of this site.

 

 

None.

PART II

 

 

We had 101,819,597 shares of common stock outstanding and 68 record holders as of April 30, 2009. Our common stock trades under the symbol “HAYZ” on the NASDAQ Global Market. On May 4, 2009, we received a letter from the NASDAQ Stock Market indicating that we no longer complied with the continued listing requirements set forth in NASDAQ Listing Rule 5250(c)(1). The letter was issued as a result of our failure to timely file our Annual Report on Form 10-K for the fiscal year ended January 31, 2009. Pursuant to the notification letter, we are required to submit a plan to regain compliance with NASDAQ’s filing requirements for continued listing within 60 calendars days of the date of the notification letter. However, we expect our common stock to be delisted from the NASDAQ Global Market following the filing of a Chapter 11 proceeding and therefore do not anticipate that we will submit a compliance plan to the NASDAQ Stock Market.

 

The range of sale prices for our common stock as reported by the NASDAQ Global Market from February 1, 2008 through January 31, 2009 ranged from a high of $4.05 per share on June 3, 2008 to a low of $0.07 per share on

January 27, 2009. The range of sale prices for our common stock as reported by the NASDAQ Global Market from February 1, 2007 through January 31, 2008 ranged from a high of $7.98 per share on April 4, 2007 to a low of $3.05 per share on January 31, 2008.

 

The following table sets forth, for the fiscal quarters indicated, the high and low sale prices per share as reported by the NASDAQ Global Market from February 1, 2007 through January 31, 2009:

 

 

Although the foregoing prices have been obtained from sources we believe to be reliable, we cannot assure you as to the accuracy of such prices or as to whether other prices higher or lower than those set forth above have been quoted. In addition, such prices reflect interdealer prices that may not include retail mark-up, mark down, or commission and may not necessarily represent actual transactions.

 

We did not pay cash dividends on our common stock in fiscal 2008 or fiscal 2007 and do not intend to pay dividends on our common stock in the foreseeable future. We are prohibited from paying cash dividends on our common stock by the terms of our New Credit Facility.

The following graph shows the change in our cumulative total stockholder return for the period from June 9, 2003, the date upon which market data for shares of our common stock became available following our emergence from bankruptcy on June 3, 2003, through the end of our fiscal year ended January 31, 2009, based upon the market price of our common stock, compared with the cumulative total return on the NASDAQ National Market and publicly traded peer group companies in the automotive industry. The graph assumes a total initial investment of $100 as of June 9, 2003, and shows a total return that assumes reinvestment of dividends, if any, and is based on market capitalization at the beginning of each period. The peer group consists of American Axle & Manufacturing Holdings Inc.; ArvinMeritor Inc.; Autoliv, Inc.; BorgWarner Inc.; Lear Corp.; Standard Motor Products Inc.; Superior Industries International Inc.; Tenneco Inc.; and Visteon Corp. The performance on the following graph is not necessarily indicative of future stock price performance.

 

 

 

The following table sets forth our selected consolidated financial data for the last five fiscal years ended January 31, 2009. The information set forth below should be read in conjunction with our consolidated financial statements, related notes thereto, and the other information included elsewhere herein. For a discussion of events that may materially affect the comparability of the information reflected in the summary financial data, see Item 1. Business — Business Overview and Development. The data reflected in the summary financial information may not be indicative of future results due to the uncertainties described in Item 1A. Risk Factors.

 

 

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements, related notes thereto, and the other information included elsewhere herein.

 

Executive Summary

 

Company Overview

 

Originally founded in 1908, we are a leading worldwide producer of aluminum and steel wheels for passenger cars and light trucks and of steel wheels for commercial trucks and trailers. We are also a supplier of automotive powertrain components. We have global operations with 23 facilities, including business and sales offices, manufacturing facilities, and technical centers, located in 12 countries around the world. We sell our products to the major manufacturers of passenger cars and light trucks and to commercial highway vehicle customers throughout the world.

Sales of our wheels and powertrain 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 our wheels 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.

 

We are organized based primarily on markets served and products produced. Under this organizational structure, our operating segments have been aggregated into two reportable segments: Automotive Wheels and Other. The Automotive Wheels segment includes results from our operations that primarily design and manufacture fabricated steel and cast aluminum wheels for original equipment manufacturers in the global passenger car, light vehicle, and heavy duty truck markets. The Other segment includes the results of our powertrain components facility in Nuevo Laredo, Mexico and financial results related to the corporate office and the elimination of certain intercompany activities.

 

In fiscal 2008 we had sales of $1.9 billion, with approximately 82% of our net sales for that period derived from international markets. In fiscal 2007 we had sales of $2.1 billion, with approximately 80% of our net sales for that period derived from international markets.

 

We are currently reviewing strategic and financing alternatives available to us in light of the deteriorating condition of the automotive industry and our financial condition, and we have retained legal and financial advisors to assist us in this regard. We are engaged in continuing discussions with the lenders under our New Credit Facility, the holders of our Notes, and others regarding a restructuring of our capital structure. Such a restructuring would likely affect the terms of our New Credit Facility, our other debt obligations, including our Notes, and our common stock and may be affected through negotiated modifications to the agreements related to our debt obligations or through other forms of restructurings, including under court supervision pursuant to a voluntary bankruptcy filing under Chapter 11. There can be no assurance, however, that an agreement regarding any such restructuring will be obtained on acceptable terms with the necessary parties.

Results of Operations

 

Consolidated Results — Comparison of Fiscal 2008 to Fiscal 2007

 

The following table presents selected information about our consolidated results of operations for the fiscal years indicated (dollars in millions):

 

 

N/C — Not calculable

 

Net sales

 

Our net sales decreased 10.5% or $222.4 million to $1,904.3 million during fiscal 2008 from $2,126.7 million during fiscal 2007. Lower volumes in the latter half of the year, partially offset by favorable mix, were the primary reason for the decrease, resulting in a reduction of sales of $273 million. Volumes have decreased due to ongoing trends and conditions facing North American and European vehicle manufacturers, which have been negatively impacted due to the global credit crisis, troubled capital markets, volatile commodity prices, and plunging consumer confidence. We expect the trend in lower volumes to continue during fiscal 2009. The lower sales volumes and favorable mix were partially offset by favorable foreign currency exchange rates relative to the US Dollar of $86 million. The prior year includes sales of $61 million as compared to current year sales of $19 million from our Hoboken, Belgium aluminum wheel facility, which we sold during the second quarter of fiscal 2008. The prior year sales also include $28 million of sales from our Wabash, Indiana powertrain facility, which was sold during the second quarter of fiscal 2007. The remainder of the sales variance from the prior year is primarily due to fluctuations in aluminum and steel costs.

 

Gross profit

 

Our gross profit decreased 10.3% or $21.6 million from $209.0 million in fiscal 2007 to $187.4 million in fiscal 2008. Volume reductions, partially offset by favorable mix, caused a decline in gross profit of $67 million. Favorable foreign currency exchange rates relative to the US Dollar improved gross profit by $13 million. Higher utility costs impacted gross profit by $16 million, but was offset by reductions in direct material spending,

manufacturing efficiencies, and pension and retiree medical expenses. We made improvements to gross profit of $12 million due to the closure of the Gainesville, Georgia facility during fiscal 2008, the sale of the Hoboken, Belgium aluminum wheel facility in the second quarter of fiscal 2008, and the sale of the Wabash, Indiana powertrain facility in the second quarter of fiscal 2007. The remainder of the variance is primarily due to fluctuations in aluminum and steel costs from year to year.

 

Marketing, general, and administrative

 

Our marketing, general, and administrative expenses decreased 5.4% or $8.3 million from $153.5 million in fiscal 2007 to $145.2 million in fiscal 2008. The decrease is primarily attributable to lower employee costs, which were the result of headcount reductions in order to respond to the declining market conditions in the automotive industry during the last half of fiscal 2008. Foreign currency fluctuations increased marketing, general, and administrative expenses by $8 million, but were mostly offset by reductions in outside services and property taxes, rents, and insurance costs.

 

Asset impairments and other restructuring charges

 

Asset impairment charges decreased from the prior year by $63.3 million, from $85.5 million during fiscal 2007 to $22.2 million during fiscal 2008.

 

The expense for fiscal 2008 includes $9 million of severance expense, which was primarily the result of headcount reductions globally in order to align production with the reduction in volumes due to the downturn in the automotive industry during the last half of fiscal 2008. We also recorded additional facility closure and impairment costs of $6 million for our Gainesville, Georgia facility. The Gainesville facility was classified as an asset held for sale as of January 31, 2009. We have a definitive agreement with Punch Property International NV for the sale of the facility. Punch Property International NV has not completed the purchase of the property as contemplated by the agreement and we have commenced litigation seeking specific performance of the agreement and damages. Additional impairments of $3 million were recorded to reduce the balances of our Howell, Michigan and Huntington, Indiana facilities to fair market value due to declining market conditions, and continuing closure costs for these facilities were $1 million in fiscal 2008. The Howell facility was removed from the asset held for sale classification as of January 31, 2009 in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144) as we are not confident that the property will sell within one year. We are currently marketing the Huntington facility and it is classified as held for sale as of January 31, 2009.

 

The prior year expense included $11 million of impairments that were recorded for our Hoboken, Belgium aluminum wheel facility, which we sold in fiscal 2008, as well as impairments and restructuring costs of $32 million for our Nuevo Laredo, Mexico powertrain facility. The Nuevo Laredo was classified as an asset held for sale as of January 31, 2008, however negotiations with an interested buyer have failed due to the buyer’s inability to secure financing. Our Nuevo Laredo, Mexico powertrain components facility was reclassified as held and used as of January 31, 2009. Impairments of $18 million were also recorded in the prior year for our Chihuahua, Mexico aluminum wheel facility. We also recorded $20 million of impairments for our Gainesville, Georgia aluminum wheel facility. The remainder of the impairment and restructuring costs in the prior year relate to continuing closure costs for our Huntington, Indiana; Howell, Michigan; Ferndale, Michigan facilities, which were closed prior to fiscal 2007.

 

Goodwill and other intangible assets impairment

 

During the period from November 1, 2008 through January 31, 2009, there was a significant adverse change in the business climate as expected volumes in the short and medium-term declined significantly. As a result of this triggering event, we tested our goodwill and other non-amortized intangible assets for impairment as of January 31, 2009 in addition to the work performed based on November 1, 2008 balances per SFAS 142, “Goodwill and Other Intangible Assets” (SFAS - 142). Based on our testing, we recorded an impairment of $238 million for the year ended January 31, 2009, of which $211 million relates to goodwill and $27 million relates to trade names. As of January 31, 2009, our goodwill balance was $0 and trade names was $16 million.

Other Expense (income), net

 

Other expense (income) increased from the prior year by $25.1 million from $1.5 million of income in fiscal 2007 to $23.6 million of expense in fiscal 2008. We recorded a loss on the sale of our Hoboken, Belgium facility of $36 million during fiscal 2008 as compared to a loss on the sale of our Wabash, Indiana facility of $11 million during fiscal 2007. The remainder of the items recorded to other expense (income) includes license and royalty income, gains or losses on tooling sales, realized exchange gains or losses, export incentives, and other miscellaneous items that are not considered part of cost of goods sold. None of these items individually or in the aggregate were considered material.

 

Interest expense, net

 

Interest expense decreased from the prior year by $1.1 million from $62.2 million in fiscal 2007 to $61.1 million in fiscal 2008. Included in the interest expense is a $5.6 million expense to reclassify unrealized losses from accumulated other comprehensive income related to our interest rate swaps as well as a loss of $3.2 million on the settlement of an interest rate swap in January 2009. The remainder of the variance in interest expense was driven by the restructuring of our debt during fiscal 2007, which reduced both overall debt levels and interest rates, partially offset by higher short-term interest rates and the impact of foreign exchange rates relative to the U.S. dollar on interest payable on our Euro-denominated debt.

 

Other non-operating expense

 

During fiscal 2008 we recognized $3.2 million of other non-operating expense as compared to $8.5 million in the prior year. The fiscal 2008 expense includes realized foreign currency losses of $1.7 million in fiscal 2008 as compared to $2.4 million in fiscal 2007. The fiscal 2008 expense includes a $1.4 million increase in the liability recognized for a put option agreement with the minority shareholders at our Kalyani, India joint venture, as compared to an increase in the liability of $4.1 million in the previous year. The fiscal 2007 expense also includes $5.5 million of realized foreign currency exchange loss on the net investment hedge resulting from the liquidation of HLI Netherlands BV.

 

Income taxes

 

Income tax expense was $30.7 million for fiscal 2008 and $29.9 million for fiscal 2007. The income tax rate varies from the U.S. statutory income tax rate of 35% due primarily to losses in the U.S. without recognition of a corresponding income tax benefit, as well as effective income tax rates in certain foreign jurisdictions that are different than the U.S. statutory rates. Accordingly, our worldwide tax expense may not bear a normal relationship to earnings before taxes on income.

 

Discontinued operations

 

Discontinued operations consist of our Automotive Brake Components division (Brakes business), which was sold in November 2007; MGG Group B.V. (MGG Group), which was sold in June 2007; and our suspension components business (Suspension business), which we sold in early fiscal 2007.

 

The current year loss is primarily due to amounts settled for certain disputes arising out of the share purchase agreement with MGG Group. We recorded $0.8 million of income tax benefit for our Brakes Business due to the allocation of tax expense associated with provision to return adjustment. The prior year includes income from our Brakes business of $18 million, and losses from our MGG Group and Suspension business of $27 million and $4 million, respectively.

 

Net loss

 

Due to factors mentioned above, net loss during fiscal 2008 was $371.7 million as compared to $194.4 million during fiscal 2007.

Segment Results — Comparison of Fiscal 2008 to Fiscal 2007

 

Automotive Wheels

 

The following table presents net sales, (loss) earnings from operations, and other information for the Automotive Wheels segment for the fiscal years indicated (dollars in millions):

 

 

Net sales

 

Net sales in our Automotive Wheels segment decreased by $203.5 million from $2,051.9 million during fiscal 2007 to $1,848.4 million during fiscal 2008. Lower volumes, partially offset by favorable mix, accounted for $281 million of the decrease, but was partially offset by $86 million of favorable foreign exchange rates relative to the U.S. dollar. Higher metal pass-through pricing increased sales $36 million. The sale of the Hoboken, Belgium facility also resulted in a decrease of $42 million of sales.

 

Asset impairments and other restructuring charges

 

The expense for fiscal 2008 includes $238 million of goodwill and other intangible assets impairment. During the period from November 1, 2008 through January 31, 2009, there was a significant adverse change in the business climate as expected volumes in the short and medium-term declined significantly. As a result of this triggering event, we tested our goodwill and other long term assets for impairment as of January 31, 2009 in addition to the work performed based on November 1, 2008 balances per SFAS 142. Based on our testing, we recorded an impairment of $211 million for goodwill and $27 million for trade names. We also recorded $8.7 million of severance expense, which was primarily the result of headcount reductions globally in order to align production with the reduction in volumes due to the downturn in the automotive industry during the last half of fiscal 2008. We also recorded additional facility closure and asset impairment costs of $5.9 million for our Gainesville, Georgia facility. The Gainesville facility was classified as an asset held for sale as of January 31, 2009. We have a definitive agreement with Punch Property International NV for the sale of the facility. Punch Property International NV has not completed the purchase of the property as contemplated by the agreement and we have commenced litigation seeking specific performance of the agreement and damages. Impairments of $2.6 million were recorded to reduce the balances of our Howell, Michigan and Huntington, Indiana facilities to fair market value due to declining market conditions, and continuing closure costs for these facilities were $1.2 million in fiscal 2008. The Howell, Michigan facility was removed from the asset held for sale classification as of January 31, 2009 in accordance with SFAS 144 as we are not confident that the property will sell within one year. We are currently marketing the Huntington facility and it is classified as held for sale as of January 31, 2009. Additional impairments of $1.4 million were recorded for our aluminum wheel facilities in Chihuahua, Mexico and Hoboken, Belgium. We also recorded an impairment for machinery and equipment of $1.3 million at our Manresa, Spain facility for flow-forming equipment that was no longer in use.

 

The expense for fiscal 2007 includes $11 million of impairments that were recorded for our Hoboken, Belgium aluminum wheel facility, which we sold in fiscal 2008. Impairments of $18 million were also recorded in the prior year for our Chihuahua, Mexico aluminum wheel facility. We also recorded $20 million of impairments for our Gainesville, Georgia aluminum wheel facility. Continuing closure costs of $3.3 million were recorded for our Huntington, Indiana; Howell, Michigan; and Ferndale, Michigan technical center, which were closed prior to fiscal 2007.

(Loss) earnings from operations

 

We recorded a loss from operations of $262.3 million during fiscal 2008 as compared to earnings from operations of $36.7 million during fiscal 2007. The unfavorable variance of $299 million includes an impairment of $238 million for the year ended January 31, 2009 based on the results of our SFAS 142 intangible assets impairment testing; the impairment consisted of $211 million for goodwill and $27 million for trade names. As of January 31, 2009, our goodwill balance was $0 and trade names was $16 million. In the current year, we also recorded a loss of $36 million for the sale of our Hoboken, Belgium aluminum wheel facility, partially offset by improvements to earnings of $12 million due to the sale of the Hoboken facility and closure of the Gainesville, Georgia facility. Reduced volumes, mix, and pricing resulted in lower earnings of $76 million, partially offset by lower asset impairment and restructuring charges of $32 million. Intercompany royalty and trademark fees decreased earnings from operations by $18 million, which is eliminated in the consolidated financial statements. The impact of foreign exchange rate relative to the U.S. dollar decreased earnings from operations by $4.6 million.

 

Other

 

The following table presents net sales, earnings (loss) from operations, and other information for the Other segment for the fiscal years indicated (dollars in millions):

 

 

Net sales

 

Net sales in our Other segment decreased $18.9 million from $74.8 million during fiscal 2007 to $55.9 million during fiscal 2008. The sale of the Wabash, Indiana powertrain facility in fiscal 2007 resulted in a decrease in sales of $28 million in fiscal 2008 as compared to the prior year. Sales were $8 million higher due to a new program in the current year for intake manifold sales for the GMC Acadia, which are produced at our powertrain plant in Nuevo Laredo, Mexico.

 

Asset impairments and other restructuring charges

 

Asset impairment losses and other restructuring charges during fiscal 2008 were $1.1 million, which consisted primarily of $0.4 million of continuing facility closure costs related to our technical center in Ferndale, Michigan and $0.7 million of severance relate to our corporate offices in Northville, Michigan and our powertrain facility in Nuevo Laredo, Mexico.

 

Asset impairment losses and other restructuring charges during fiscal 2007 were $32.7 million, which included impairments and restructuring costs of $32 million for our Nuevo Laredo, Mexico powertrain facility. This facility was classified as an asset held for sale as of January 31, 2008, however negotiations with an interested buyer have failed due to the buyer’s inability to secure financing. This facility was reclassified as held and used as of January 31, 2009. The remainder of facility closure costs and severance expense relate to our technical center in Ferndale, Michigan and our corporate offices in Northville, Michigan.

 

Earnings (loss) from operations

 

Earnings from operations increased $85.4 million from a loss of $75.4 million in fiscal 2007 to earnings of $10.0 million in fiscal 2008. The sale of the Wabash, Indiana facility improved earnings during fiscal 2008 by

approximately $14 million as did lower depreciation of $4 million. Lower asset impairment and restructuring charges also improved earnings by approximately $32 million. Lower employee costs, primarily related to headcount reductions, improved earnings by $7 million. A decrease in the use of outside services improved earnings by $6 million. Intercompany royalty and trademark fees increased earnings from operation by $18 million during fiscal 2008, which are eliminated in the consolidated financial statements.

 

Results of Operations

 

Consolidated Results — Comparison of Fiscal 2007 to Fiscal 2006

 

The following table presents selected information about our consolidated results of operations for the fiscal years indicated (dollars in millions):

 

 

Net sales

 

Our net sales increased 18.4% or $329.9 million to $2,126.7 million during fiscal 2007 from $1,796.8 million during fiscal 2006. Higher volumes increased sales by $94 million and resulted primarily from an increase in international wheels demand, partially offset by a decrease in domestic volumes. Favorable fluctuations in foreign exchange rates relative to the U.S. dollar and the impact of higher metal pass-through pricing increased sales by $139 million and $60 million, respectively. Favorable product mix increased sales by $79 million, partially offset by lower pricing. Sales decreased by $36 million due to the sale of our Wabash, Indiana powertrain facility in July 2007.

 

Gross profit

 

Our gross profit increased 31.4% or $50.0 million from $159.0 million in fiscal 2006 to $209.0 million in fiscal 2007. Higher volumes and favorable product mix increased gross profit by $23 million, while favorable foreign exchange rate fluctuations and lower U.S. pension and retiree medical expenses increased gross profit by $18 million. The sale of the Wabash, Indiana facility, which had been experiencing ongoing losses, improved gross profit by approximately $8 million compared to fiscal 2006.

Marketing, general, and administrative

 

Our marketing, general, and administrative expenses increased 22.5% or $28.2 million from $125.3 million in fiscal 2006 to $153.5 million in fiscal 2007. Approximately $8 million of the increase was due to foreign exchange fluctuations. In addition, expenses were $10 million higher due to the effects of the equitable adjustments on stock based compensation (see Note 15, Stock Based Benefit Plans, to the consolidated financial statements included herein) and the settlement of a lawsuit with certain of our former directors. The remainder of the increase was due to higher fees for professional services, primarily fees incurred related to the capital restructuring, and increased employee expenses.

 

Asset impairments and other restructuring charges

 

The fiscal 2007 expense includes $11 million of impairments that were recorded for our Hoboken, Belgium aluminum wheel facility, which we sold in fiscal 2008, as well as impairments and restructuring costs of $32 million for our Nuevo Laredo, Mexico powertrain facility. The Nuevo Laredo was classified as an asset held for sale as of January 31, 2008, however negotiations with an interested buyer have failed due to the buyer’s inability to secure financing. As of January 31, 2009 our Nuevo Laredo, Mexico powertrain components facility was reclassified as held and used. Impairments of $18 million were also recorded for our Chihuahua, Mexico aluminum wheel facility. We also recorded $20 million of impairments for our Gainesville, Georgia aluminum wheel facility. The remainder of the impairment and restructuring costs relate to continuing closure costs for our Huntington, Indiana; Howell, Michigan; and Ferndale, Michigan facilities, which were closed prior to fiscal 2007.

 

During fiscal 2006 we recorded facility closure, employee restructuring, and asset impairment charges of $32.8 million. In the Automotive Wheels segment we recorded expense of $24.5 million, which included continuing facility closure costs of $3.6 million related to our facilities located in Huntington, Indiana; Howell, Michigan; La Mirada, California; and Bowling Green, Kentucky. Impairments of $16.8 million were also recorded for our Huntington, Indiana; Howell, Michigan; and Hoboken, Belgium facilities. Severance charges of $4.1 million were related to our Huntington, Indiana; Dello, Italy; and Hoboken, Belgium facilities. The asset impairment losses and other restructuring charges for the Other segment were $8.3 million, which consisted of facility and machinery and equipment impairments of $4.7 million for our Wabash, Indiana facility as well as $0.5 million of impairments at our corporate offices in Northville, Michigan. The Other segment expense also included severance charges of $3.1 million including $1.2 million for a reduction-in-force at our Ferndale, Michigan technical center, other restructuring charges of $1.1 million at our Nuevo Laredo, Mexico facility, and severance of $0.8 million at our corporate offices.

 

Other income, net

 

Other income, net decreased by $12.3 million from $13.8 million in fiscal 2006 to $1.5 million in fiscal 2007. This change is largely due to the loss on sale of our Wabash, Indiana facility of $11.0 million recorded during fiscal 2007. Excluding the loss on the sale of the Wabash, Indiana facility, the other income included license and royalty income, gains or losses on tooling sales, realized exchange gains or losses, export incentives, and other miscellaneous items that are not considered part of cost of goods sold. None of these items individually or in the aggregate were considered material.

 

Interest expense, net

 

Interest expense decreased by $13.0 million, from $75.2 million in fiscal 2006 to $62.2 million in fiscal 2007. The decrease was driven by the restructuring of our debt during fiscal 2007, which reduced both overall debt levels and interest rates, partially offset by higher short-term interest rates and the impact of foreign exchange rates relative to the U.S. dollar on interest payable on our Euro-denominated debt. As of January 31, 2008 our variable rate and fixed rate debt were 38% and 62% of total debt, respectively.

 

Other non-operating expense

 

During fiscal 2007 we recognized $8.5 million of other non-operating expense. This includes $5.5 million of realized foreign currency exchange loss on a net investment hedge resulting from the liquidation of HLI

Netherlands BV, $4.1 million due to a liability recognized for a put option agreement with the minority shareholders at our Pune, India joint venture, partially offset by $1.1 million at our Brazil aluminum plant for a realized foreign currency exchange gain.

 

Income taxes

 

Income tax expense was $29.9 million for fiscal 2007 and $40.2 million for fiscal 2006. The income tax rate varies from the U.S. statutory income tax rate of 35% due primarily to losses in the U.S. without recognition of a corresponding income tax benefit, as well as effective income tax rates in certain foreign jurisdictions that are different than the U.S. statutory rates. Accordingly, our worldwide tax expense may not bear a normal relationship to earnings before taxes on income.

 

Discontinued operations

 

The loss from discontinued operations in fiscal 2007 was $12.6 million, an improvement of $32.8 million over the fiscal 2006 loss of $45.4 million, primarily due to lower operating losses from businesses sold during fiscal 2007. Fiscal 2007 includes income of $18 million for our Brakes business, offset by $32 million of losses for the MGG Group and Suspension business. Also included in fiscal 2007 discontinued operations were $0.7 million of adjustments recorded to income for our Hub and Drum operations, which were sold in fiscal 2005. In fiscal 2006, the Brakes business had income of $8 million and MGG Group and Suspension business had losses totaling $53 million.

 

Net loss

 

Due to factors mentioned above, net loss during fiscal 2007 was $194.4 million as compared to $166.9 million during fiscal 2006.

 

Segment Results — Comparison of Fiscal 2007 to Fiscal 2006

 

Automotive Wheels

 

The following table presents net sales, earnings from operations, and other information for the Automotive Wheels segment for the fiscal years indicated (dollars in millions):

 

 

Net sales

 

Net sales in our Automotive Wheels segment improved by $380.0 million from $1,671.9 million during fiscal 2006 to $2,051.9 million during fiscal 2007. Volumes at our international locations accounted for approximately $113 million of the increase. In addition, foreign exchange rates relative to the U.S. dollar increased sales approximately $139 million. Higher metal pass-through pricing increased sales $60 million. The remainder of the increase in sales was due to favorable product mix, partially offset by lower pricing.

 

Asset impairments and other restructuring charges

 

Asset impairment losses and other restructuring charges during fiscal 2007 were $52.8 million, which included facility closure costs of $3.3 million related to our facilities located in Huntington, Indiana; Howell, Michigan; and

La Mirada, California. Impairments of $49.5 million were recorded for our Gainesville, Georgia; Chihuahua, Mexico; Hoboken, Belgium; and Sao Paulo, Brazil facilities.

 

The asset impairment losses and other restructuring charges during fiscal 2006 were $24.5 million, which included continuing facility closure costs of $3.6 million related to our facilities located in Huntington, Indiana; Howell, Michigan; La Mirada, California; and Bowling Green, Kentucky. Impairments of $16.8 million were also recorded for our Huntington, Indiana and Howell, Michigan facilities and Hoboken, Belgium facility. Severance charges of $4.1 million were related to our Huntington, Indiana; Dello, Italy; and Hoboken, Belgium facilities.

 

Earnings from operations

 

Earnings from operations decreased by $16.6 million from $53.3 million during fiscal 2006 to $36.7 million during fiscal 2007. Higher unit volumes, favorable product mix, and price changes, net of higher metal costs, increased earnings by approximately $35 million. Favorable foreign exchange rates of $15 million were offset by higher manufacturing costs. In addition, higher asset impairments of $28 million and increased marketing, general, and administrative expenses of $23 million also reduced earnings in fiscal 2007.

 

Other

 

The following table presents net sales, loss from operations, and other information for the Other segment for the fiscal years indicated (dollars in millions):

 

 

Net sales

 

Net sales in our Other segment decreased $50.1 million from $124.9 million during fiscal 2006 to $74.8 million during fiscal 2007. The sale of the Wabash, Indiana facility in fiscal 2007 resulted in a decrease of sales of $36 million as compared to fiscal 2006. The remainder of the decrease is primarily due to lower volumes at our powertrain facility in Nuevo Laredo, Mexico.

 

Asset impairments and other restructuring charges

 

Asset impairment losses and other restructuring charges during fiscal 2007 were $32.7 million, which included $0.3 million of facility closure costs related to our technical center in Ferndale, Michigan as well as impairments of $31.3 million and severance of $0.6 million for our Nuevo Laredo, Mexico powertrain facility. The remainder of the impairment and severance expense was primarily related to our corporate offices.

 

The asset impairment losses and other restructuring charges during fiscal 2006 were $8.3 million. Facility and machinery and equipment impairments of $4.7 million were recorded for our Wabash, Indiana facility and $0.5 million of impairments were recorded at our corporate offices in Northville, Michigan. The severance charges of $3.1 million including $1.2 million for a reduction-in-force at our Ferndale, Michigan technical center, other restructuring charges of $1.1 million at our Nuevo Laredo, Mexico facility, and severance of $0.8 million at our corporate offices.

Loss from operations

 

Loss from operations increased $26.6 million from $48.8 million in fiscal 2006 to $75.4 million in fiscal 2007. The sale of the Wabash, Indiana facility improved earnings during fiscal 2007 by approximately $5 million as did lower depreciation of $4 million. In addition, asset impairments and other restructuring charges were $24 million higher as compared to fiscal 2006 and fiscal 2007 includes $12 million of losses recorded on the sale of Wabash, Indiana facility as compared to no losses recorded in fiscal 2006.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

The principal sources of liquidity for our operating, capital expenditure, debt service, restructuring, and reorganization requirements are expected to be (i) cash flows from continuing operations, (ii) cash and cash equivalents on hand, and (iii) proceeds related to our trade receivable securitization and financing programs. Availability under our domestic trade receivable securitization program has been significantly reduced due to the inability to finance receivables from Ford and General Motors. Total availability has been capped at $5.0 million and no additional advances will be made under this program. Our foreign receivable financing programs provide the other parties with significant discretion to discontinue financing receivables from certain customers, which could reduce availability under these facilities as well, particularly in light of our receipt of a going concern explanatory paragraph from our auditors. All of our accounts receivable facilities were fully utilized as of January 31, 2009. In addition, we may need to repay amounts currently borrowed under certain these facilities, which would further reduce our liquidity. As of January 31, 2009 the Revolving Credit Facility was fully drawn, and any repayments under the Revolving Credit Facility are prohibited unless we have achieved EBITDA of at least $200 million for the twelve months preceding the date of the repayment. In light of the continuing deterioration in the global economy and the automotive industry in particular, these sources of liquidity are not sufficient to meet our likely requirements and may not continue to be available.

 

Our current sources of liquidity are not sufficient to fund our operations through May 2009. As a result of current conditions in the automotive industry and our recurring operating losses, negative cash flows, and need for additional financing, the independent auditor’s report relating to our consolidated financial statements for the year ended January 31, 2009 contains an explanatory paragraph regarding our ability to continue as a going concern. While the lenders under our New Credit Facility waived defaults under our New Credit Facility that result from our receipt of such a going concern explanatory paragraph, we will need to reach an acceptable agreement with our creditors regarding a recapitalization of the Company and restructuring of our indebtedness in a Chapter 11 proceeding.

 

A majority of the lenders under our New Credit Facility have, subject to approval of the bankruptcy court in which we file petitions under Chapter 11, agreed to provide us with DIP Financing in an aggregate amount of up to $100 million ($80 million of which is committed pursuant to the terms and conditions of a commitment letter). A Chapter 11 filing will result in a default under our New Credit Facility, our Notes, and certain of our other debt obligations, and those debts will become automatically due and payable, subject to an automatic stay of any action to collect, assert, or recover a claim against us under applicable bankruptcy law.

 

We believe that our currently outstanding common stock will have no value and will be cancelled under any plan of reorganization we may propose under Chapter 11. We also believe that the holders of our Notes are unlikely to receive more than a de minimis distribution on account of their interests in the Notes and that such interests could be cancelled under any plan of reorganization we may propose under Chapter 11. There can be no assurance, however, that any agreement regarding the recapitalization and restructuring of the Company under Chapter 11 will be obtained on acceptable terms with the necessary parties. Should the bankruptcy court not approve our proposed DIP Financing, or should we be unable to develop, propose, and implement a successful plan of reorganization, we would not be able to continue as a going concern.

Capital Resources

 

We had a domestic accounts receivable securitization facility with a normal program limit of $25 million during fiscal 2008 and fiscal 2007. Due to concentration limits and restrictions on financing certain receivables, the

majority of the program limit was not available. There were $6.0 million of borrowings under the program as of January 31, 2009, which was the maximum amount then available under this facility, and no borrowing under the program as of January 31, 2008. The program limit was reduced to $5.0 million in April 2009 and no future advances will be made under the program. If the borrowing base falls below $5.0 million, amounts currently advanced in excess of the borrowing base will need to be repaid. The facility will be terminated upon the filing of a Chapter 11 proceeding.

 

We have an accounts receivable financing program in Germany with a local financial institution. The program limit was €25 million as of January 31, 2009 and €20 million as of January 31, 2008. Borrowings under this program of approximately €19.7 million or $25.3 million at January 31, 2009, which was the maximum amount available under this facility, and €20.0 million or $29.6 million at January 31, 2008, are included in short term bank borrowings. The financial institution providing this program has expressed an intention to discontinue the program in October 2009. We are currently seeking alternative programs to replace this facility.

 

We also have an accounts receivable factoring program in the Czech Republic with a local financial institution. The program limit is 480 million Czech Crown or approximately $22 million and $28 million as of January 31, 2009 and January 31, 2008, respectively. As of January 31, 2009 and January 31, 2008, approximately 246.4 million Czech Crown or $11.4 million and 344.0 million Czech Crown or $19.7 million, respectively, was factored under this program. The transactions are accounted for as sales of receivables under the provisions of SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (SFAS 140) and the receivables are removed from the Consolidated Balance Sheets.

 

At January 31, 2009 we had commitments for capital expenditures of approximately $4.5 million and we anticipate capital expenditures during fiscal 2009 to range between $23 million and $33 million. The purposes of such commitments for capital expenditures include completion of a new commercial truck wheel line in Brazil and maintenance of existing facilities and equipment. We anticipate funding our capital expenditures primarily from cash flows from operations and, in the event of a Chapter 11 filing, any available DIP Financing.

 

Cash Flows

 

Operating Activities:   Cash used for operating activities from our continuing operations were $62.4 million in fiscal 2008 as compared to cash provided of $107.7 million in the prior year. The $170.1 million unfavorable variance in cash flows from operations is primarily due to higher use of cash from working capital of $130 million and lower gross profits of $21.6 million due to reductions in volumes. In the prior year, accounts payable was positively affected by improved vendor terms, including special year end terms, which resulted from the improved liquidity due to the rights offering and debt refinancing during the second quarter, and payment timing in January 2007. The variance for special payment terms and timing of payments resulted in lower cash flows from operations of $79 million in fiscal 2008 as compared to the prior year. Operating cash flows from our accounts receivable securitization program in the U.S. increased by $38 million as our year end receivable balances on the amounts securitized were lower as compared to the prior year, primarily due to the lower sales volumes. The remainder of the unfavorable cash flow from working capital was due to a lag in adjusting our working capital to the lower volumes experienced in the fourth quarter of fiscal 2008 due to the length of the supply chain.

 

Investing Activities:   Cash used for investing activities was $104.2 million in fiscal 2008 as compared to $100.1 million in fiscal 2007. Our capital expenditures decreased by $22.2 million in fiscal 2008 as compared to fiscal 2007. We also had negative cash flows on the sale of businesses in the current year, primarily due to a contribution of $27 million as part of the sale of our Hoboken, Belgium facility in June 2008.

 

Financing Activities:   Cash provided by financing activities was $125.0 million in fiscal 2008, compared to $15.5 million in fiscal 2007. In the prior year, we received net proceeds from our stock rights offering of $185.4 million, partially offset by debt restructuring of $135.5 million. In the prior year, we also paid $9.0 million for the call premium on the redemption of our Senior Notes. We had positive cash flows in fiscal 2008 of $19.8 million due to increased short term bank borrowings as well as borrowings of $125 million in the current year from our Revolver. Bank fees were $12 million lower during fiscal 2008 as compared to the prior year, as fees were higher in the prior year primarily due to our debt restructuring.

Credit Ratings

 

The following table represents our credit rating as of January 31, 2009:

 

 

In February 2009 Fitch downgraded our corporate rating from B− to CCC; bank debt rating from B+/RR2 to B−/RR3; and New Senior Notes rating from CCC/RR6 to C/RR6. In April 2009, Fitch further downgraded our corporate rating from CCC to C and bank debt rating from B−/RR3 to CC/RR3.

 

In February 2009 S&P downgraded our corporate rating from B− to CCC+; bank debt rating from B+ to B−; and New Senior Notes rating from CCC+ to CCC−. In May 2009, S&P further downgraded our corporate rating from CCC+ to CC; bank debt rating from B− to CCC−; and New Senior Notes rating from CCC− to C.

 

In April 2009 Moody’s downgraded our corporate rating from Caa1 to Caa3, bank debt rating from B3 to Caa2, and New Senior Notes rating from Caa3 to Ca.

 

It is likely that our credit ratings will be further downgraded upon the commencement of Chapter 11 proceedings.

 

Off Balance Sheet Arrangements

 

We have a domestic accounts receivable securitization facility with an interest rate equal to LIBOR plus 2.25% or Prime plus 1.25% The facility limit was reduced to $5.0 million in April 2009 and no future advances will be made under the program beyond the current $5.0 million advanced. If the borrowing base falls below $5.0 million, amounts currently advanced in excess of the borrowing base will need to be repaid. The facility will be terminated upon the filing of a Chapter 11 proceeding.

 

Pursuant to the securitization facility, certain of our consolidated subsidiaries sell substantially all U.S. short term trade receivables to a non-consolidated special purpose entity (SPE I) at face value and no gains or losses are recognized in connection with the sales. The purchase price for the receivables sold to SPE I is paid in a combination of cash and short term notes. The short term notes appear in other receivables on our Consolidated Balance Sheets and represent the difference between the face amount of accounts receivables sold and the cash received for the sales. SPE I resells the receivables to a non-consolidated qualifying special purpose entity (SPE II) at an annualized discount of 2.4% to 4.4%. SPE II pays the purchase price for the receivables with cash received from borrowings and equity in SPE II for the excess of the purchase price of the receivables over the cash payment. SPE II pledges the receivables to secure borrowings from commercial lenders. This debt is not included in our consolidated financial statements.

 

Collections for the receivables are serviced by HLI Opco and deposited into an account controlled by the program agent. The servicing fees payable to HLI Opco are set off against interest and other fees payable to the program agent and lenders. The program agent uses the proceeds to pay off the short term borrowings from commercial lenders and returns the excess collections to SPE II, which in turn pays down the short term note issued to SPE I. SPE I then pays down the short term notes issued to the consolidated subsidiaries.

 

The securitization transactions are accounted for as sales of the receivables under the provisions of SFAS 140 and are removed from the Consolidated Balance Sheets. The proceeds received are included in cash flows from operating activities in the Consolidated Statements of Cash Flows. Costs associated with the receivables facility are recorded as other expense in the Consolidated Statements of Operations.

 

As of January 31, 2009 and 2008 the outstanding balances of receivables sold to special purpose entities were $21.4 million and $48.3 million, respectively. Our net retained interests as of January 31, 2009 and 2008 were $15.4 million and $48.3 million, respectively, which are disclosed as Other Receivables on the Consolidated Balance Sheets and in cash flows from operating activities in the Consolidated Statements of Cash Flows. There were $6.0 million in advances from lenders as of January 31, 2009 and no advances as of January 31, 2008.

Contractual Obligations

 

The following table identifies our significant contractual obligations as of January 31, 2009 (dollars in millions):

 

 

Other Cash Requirements

 

We anticipate the following approximate significant cash requirements in fiscal 2009 (dollars in millions):

 

 

Other Matters

 

Inflation

 

We do not believe that sales of our products are materially affected by inflation, although such an effect may occur in the future. In accordance with industry practice, the costs or benefits of fluctuations in aluminum prices are generally passed through to customers. In addition, we have successfully negotiated to pass through a portion of fluctuations in steel costs to customers. We adjust the sales prices from time to time, if necessary, to fully reflect any increase or decrease in the price of aluminum or, to the extent applicable, steel. As a result, our net sales are adjusted, although gross profit is not materially affected. From time to time, we enter into futures contracts or purchase commitments solely to hedge against possible price changes that may occur between the dates of price adjustments. We also occasionally enter into forward purchase commitments to mitigate fluctuations in natural gas prices.

 

Critical Accounting Estimates

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Considerable judgment is often involved in making these determinations; the use of different assumptions could result in significantly different results. We believe our assumptions and estimates are reasonable and appropriate; however, actual results could differ from those estimates.

 

Impairment testing

 

Impairment testing requires the use of numerous assumptions for future sales, profitability, and cash flows. Forecasts for future periods involve projections for factors including growth by region, pricing, product mix, foreign exchange rate levels, raw material prices, and manufacturing efficiencies. These forecasts are developed using internal and external sources, and are reviewed by management for reasonableness. Due to divestitures of non-core businesses, all intangible assets and the vast majority of fixed assets are contained within the Global Wheels segment.

We utilized a five-year forecast of our operations for our impairment testing, which included lower sales and gross profits during fiscal 2009 due to current declines in the automotive industry, with growth expected each year from fiscal 2010 through fiscal 2013. Our compound annual growth rate is expected to be approximately 6% from fiscal 2010 through fiscal 2013, and gross profit compound growth rates are expected to be approximately 21% over the same period of time. The increased profitability will be driven by improved cost structure due to the volume recovery after fiscal 2009, capacity rationalizations undertaken over the past few years, primarily in North America and Western Europe, and investments in leading-cost regions. Cash flows for Global Wheels are anticipated to increase over the period as capital requirements for expansions diminish and operating cash flows improve due to operating efficiencies. Net income improvement over the next five years will be driven by the aforementioned gross profit increases, significantly lower restructuring requirements, and tax initiatives to reduce tax expense.

 

Because we have high fixed production costs, relatively small declines in our customers’ production could significantly impact our profitability and cash flows. Due to prior and ongoing capacity rationalizations and divestitures, we have substantially reduced our reliance on the North American market and do not anticipate significant valuation issues resulting from declining market share of our largest North American customers. Sustained reductions in global customer demand, however, would necessitate review of our expectations for potential impacts on asset values.

 

Asset impairment losses and other restructuring charges

 

Our Consolidated Statements of Operations included herein reflect an element of operating expenses described as asset impairments and other restructuring charges. We periodically evaluate whether events and circumstances have occurred that indicate that the remaining useful life of any of our long lived assets may warrant revision or that the remaining balance might not be recoverable. When factors indicate that the long lived assets should be evaluated for possible impairment, we use an estimate of the future undiscounted cash flows generated by the underlying assets to determine if a write-down is required. If the future undiscounted cash flows generated by the underlying assets are less than the book value of the assets, a write-down is required and we adjust the book value of the impaired long-lived assets to their estimated fair values. Fair value is determined through third party appraisals or discounted cash flow calculations. The related charges are recorded as asset impairment or, in the case of certain exit costs in connection with a plant closure or restructuring, a restructuring or other charge in the Consolidated Statements of Operations.

 

Goodwill and other intangible assets impairment testing

 

Goodwill and other indefinite-lived intangible assets are tested for impairment annually as of November 1st of each fiscal year, or more frequently should circumstances change or events occur that would more likely than not reduce the fair value of a reporting unit below its carrying amount, as provided for in SFAS 142. To conduct our impairment testing, we compare the fair value of our reporting units to the related net book value. If the fair value of a reporting unit exceeds its net book value, goodwill is considered not to be impaired. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. Other definite-lived intangible assets are amortized on a straight line basis over their estimated lives.

 

We utilize an income approach to estimate the fair value of each of our reporting units. The income approach is based on projected debt-free cash flow, which is discounted to the present value using discount factors that consider the timing and risk of cash flows. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. This approach also mitigates the impact of cyclical downturns that occur in the industry. Fair value is estimated using recent automotive industry and specific platform production volume projections, which are based on both third-party and internally-developed forecasts, as well as commercial, wage and benefit, inflation, and discount rate assumptions. Other significant assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures, and changes in future working capital requirements. While there are inherent uncertainties related to the assumptions used and to management’s application of these assumptions to this analysis, we believe that the income approach provides a reasonable estimate of the fair value of our reporting units.

During the period from November 1, 2008 through January 31, 2009, there was a significant adverse change in the business climate as expected volumes in the short and medium-term declined significantly. As a result of this triggering event, we tested our goodwill and other non-amortized intangible assets for impairment as of January 31, 2009 in addition to the work performed based on November 1, 2008 balances. Based on our testing, we recorded an impairment of $238 million for the year ended January 31, 2009, which $211 million is related to goodwill and $27 million is related to trade names. As of January 31, 2009 we had no goodwill and $16 million of trade names.

 

Pension and postretirement benefits other than pensions

 

Annual net periodic expense and benefit liabilities under our defined benefit plans are determined on an actuarial basis. Assumptions used in the actuarial calculations have a significant impact on plan obligations and expense. Each January, we review the actual experience compared to the more significant assumptions used and make adjustments to the assumptions, if warranted. The healthcare trend rates are reviewed with the actuaries based upon the results of their review of claims experience. Discount rates are based upon an expected benefit payments duration analysis and the equivalent average yield rate for high-quality fixed-income investments.

 

Pension benefits, other than in Germany, are funded through deposits with trustees and the expected long-term rate of return on fund assets is based upon actual historical returns modified for known changes in the market and any expected change in investment policy. German pension benefits and other postretirement benefits are not funded and our policy is to pay these benefits as they become due.

 

Effective January 31, 2007, we adopted SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158). SFAS 158 requires an employer to recognize the over funded or under funded status of defined benefit pension and postretirement plans (other than a multi employer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This Statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. During the first quarter of fiscal 2008, we recorded $1.2 million as a decrease of beginning retained earnings and $0.6 million as a decrease of accumulated other comprehensive income due to the change in measurement date.

 

The adoption resulted in the recognition of income for fiscal 2006 of $36.2 million in other comprehensive income, net of tax effect of $0.7 million, and a corresponding reduction in pension liability of $36.9 million as of January 31, 2007.

 

Income Taxes

 

In accordance with the provisions of FASB SFAS 109, “Accounting for Income Taxes,” we account for income taxes using the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax bases and financial reporting bases of our assets and liabilities. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some or a portion of the deferred tax assets will not be realized. A valuation allowance is provided for deferred income tax assets when, in our judgment, based upon currently available information and other factors, it is more likely than not that a portion of such deferred income tax assets will not be realized. The determination of the need for a valuation allowance is based on an on-going evaluation of current information including, among other things, estimates of future earnings in different tax jurisdictions and the expected timing of deferred income tax asset reversals. We believe that the determination to record a valuation allowance to reduce deferred income tax assets is a critical accounting estimate because it is based on an estimate of future taxable income in the U.S. and certain other jurisdictions, which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material.

 

Effective February 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. Our policy is to report interest related to unrecognized tax benefits in interest expense and penalties, if any, related to unrecognized tax benefits in income tax expense in our Consolidated Statements of Operations. The initial adoption of FIN 48 did not have a material impact on our financial statements.

New Accounting Pronouncements

 

In December 2008, the FASB issued FASB Staff Position (FSP) SFAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP SFAS 132(R)-1). FSP SFAS 132(R)-1 provides enhanced disclosures with regard to assets held by postretirement plans, including how investment allocations are made, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using Level 3 inputs, as defined in SFAS 157, “Fair Value Measurements” (SFAS 157) and an understanding of significant concentrations of risk within plan assets. FSP SFAS 132(R)-1 is effective for fiscal years ending after December 15, 2009, with early application permitted. We are currently assessing the potential impacts, if any, on our consolidated financial statements.

 

In March 2008 the FASB issued SFAS 161, “ Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (SFAS 161). This standard requires enhanced disclosures about an entity’s derivative and hedging activities. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 and only requires disclosures for earlier periods presented for comparative purposes beginning in the first year after the year of initial adoption. We do not anticipate that the adoption of SFAS 161 will have a significant impact on our financial condition or results of operations.

 

In December 2007 the FASB issued SFAS 141R, “ Business Combinations” (SFAS 141R). This standard establishes principles and requirements for how the acquirer recognizes and measures the acquired identifiable assets, assumed liabilities, noncontrolling interest in the acquiree, and acquired goodwill or gain from a bargain purchase. SFAS 141R also determines what information the acquirer must disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. We do not anticipate that the adoption of SFAS 141R will have a significant impact on our financial condition or results of operations.

 

In December 2007 the FASB issued SFAS 160, “ Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 ” (SFAS 160). This standard establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for us as of February 1, 2009 with early adoption prohibited. SFAS 160 shall be applied prospectively as of the beginning of the fiscal year in which this standard is initially applied. The presentation and disclosure requirements of this standard shall be applied retrospectively for all periods presented and will impact how we present and disclose noncontrolling interests and income from noncontrolling interests in our financial statements.

 

In September 2006 the FASB issued SFAS 157, “Fair Value Measurements” . SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. We adopted the provisions of SFAS 157 with our fiscal year beginning February 1, 2008. The adoption of SFAS 157 did not have a significant impact on our consolidated financial statements. In February 2008, the FASB issued FASB Staff Position (FSP) 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). This FSP delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The effective date for nonfinancial assets and nonfinancial liabilities has been delayed by one year to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. We do not anticipate that the adoption of FSP 157-2 will have a significant impact on our financial condition and results of operations.

 

Market Risks

 

In the normal course of business we are exposed to market risks arising from changes in foreign exchange rates, interest rates, raw material, and utility prices. We selectively use derivative financial instruments to manage these risks, but do not enter into any derivative financial instruments for trading purposes.

 

Foreign Exchange

 

We have global operations and thus make investments and enter into transactions in various foreign currencies. In order to minimize the risks associated with foreign currency fluctuations, we first seek to internally net foreign exchange exposures, and may use derivative financial instruments to hedge any remaining net exposure. We use 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.

 

The value of our consolidated assets and liabilities located outside the U.S. (translated at period-end exchange rates) and income and expenses (translated using average rates prevailing during the period), generally denominated in the Euro, Czech Crown, and the Brazilian Real, are affected by the translation into our reporting currency (the U.S. dollar). Such translation adjustments are reported as a separate component of stockholders’ equity. In future periods, foreign exchange rate fluctuations could have an increased impact on our reported results of operations. However, due to the self-sustaining nature of our foreign operations, we believe we can effectively manage the effect of these currency fluctuations. In addition, in order to further hedge against such currency rate fluctuations, we have, from time to time, entered into certain foreign currency swap arrangements.

 

In January 2006 we entered into a foreign currency swap agreement in Euros with a total notional value of $50 million to hedge our net investment in certain of our foreign subsidiaries. During the first quarter of fiscal 2007 the foreign currency swap agreement was effective. During the second quarter of 2007 we terminated the swap due to our debt restructuring. During the fourth quarter of fiscal 2007 we recognized the loss associated with the swap due to the liquidation of the related foreign subsidiaries.

 

At January 31, 2009 and January 31, 2008 approximately €407 million or $524 million and €410 million or $607 million, respectively, of our debt was denominated in Euros. A hypothetical 10% adverse movement in the foreign currency exchange rate on our Euro denominated debt would affect earnings by approximately $5.2 million on an annual basis.

 

Interest Rates

 

We generally manage our risk associated with interest rate movements through the use of a combination of variable and fixed rate debt. We have from time to time entered into interest rate swap arrangements to further hedge against interest rate fluctuations.

 

In January 2006 we entered into an interest rate swap agreement with a total notional value of $50 million to hedge the variability of interest payments associated with our variable-rate term debt. The swap agreement was expected to settle in January 2009, and qualified for cash flow hedge accounting treatment. During the first quarter of fiscal 2007 the swap was effective. During the second quarter of 2007 we terminated the swap due to our debt restructuring and recognized the loss associated with the swap.

 

During the second quarter of fiscal 2007 we entered into interest rate swaps with total notional amount of €70 million. The swaps became effective on August 28, 2007 and mature on August 28, 2012. The fair value of the interest rate swaps was $3.3 million as of January 31, 2009.

 

During the third quarter of fiscal 2007 we entered into interest rate swaps with total notional amount of €50 million. The swaps became effective on September 30, 2007 and mature on September 30, 2012. The fair value of the interest rate swaps was $2.3 million as of January 31, 2009.

During the first quarter of fiscal 2008 we entered into interest rate swaps with total notional amount of €50 million. The swaps became effective on February 28, 2008 and were to mature on February 28, 2012. During the fourth quarter of fiscal 2008 we terminated the swap and recognized a loss of $3.2 million, which was included in interest expense in our Consolidated Statements of Operations.

 

Subsequent to January 31, 2009, our swaps will no longer be effective and any losses will be recognized in the Consolidated Statements of Operations as interest expense.

 

At January 31, 2009 and January 31, 2008 approximately $325 million and $234 million, respectively, of our debt was variable rate debt after considering the impact of the swaps. A hypothetical 10% adverse movement in the interest rate on variable rate debt would affect interest expense by approximately $2.8 million on an annual basis.

 

Commodities

 

We rely on the supply of certain raw materials and other inputs in our production process, including aluminum, steel, and natural gas. We manage the exposure associated with these commitments primarily through the terms of our supply and procurement contracts. In recent periods there has been significant volatility in the global prices of steel, aluminum, and natural gas, which have had an impact on our business. We typically use forward-fixed contracts to hedge against changes in commodity prices for a majority of our outstanding purchase commitments. We also enter into forward purchase commitments for natural gas to mitigate market fluctuations in natural gas prices. The use of fixed-forward contracts could result in our paying greater than market prices for these commodities.

 

In accordance with industry practice, we generally pass through fluctuations in the price of aluminum to our customers. We generally enter into fixed-forward contracts for aluminum based on volume projections from our customers that coincide with the applicable pass-through pricing adjustment periods. In recent periods, customer volumes have decreased significantly relative to their projections, while at the same time market prices for aluminum have fallen sharply. As a result, we have fixed-forward contracts for aluminum based on projected volumes at prices that are well above current market levels, while the amount of the cost we can pass through to the customer has decreased to reflect the lower market cost of aluminum. This potential inability to pass on price increases to our customers could adversely affect our operating margins and cash flow, and result in lower operating income and profitability. The full impact of these fixed-forward contracts will depend on the fixed-forward contract price relative to the market prices for aluminum that are used to determine customer pricing,

 

We have also been successful in negotiating with some of our customers to pass through a portion of fluctuations in the price of steel. If our costs for steel increase, we will attempt to mitigate the impact of the higher material costs through pricing actions with our customers, although those actions may not be sufficient to offset increased costs. In addition, our customers are not contractually obligated to accept certain of these price increases, and in light of current market conditions, they may be less likely to accept the increases currently and in the future than they have been in the past.

 

HAYES LEMMERZ INTERNATIONAL, INC.

 

INDEX TO FINANCIAL STATEMENTS

 

 

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 (the Company) as of January 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended January 31, 2009. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in Item 15. We also have audited the Company’s internal control over financial reporting as of January 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting Item 9A(b). Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (U.S.). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company is

engaged in discussions with the lenders of their credit facility, holders of their senior notes and others regarding restructuring of the debt. If the Company does not reach an acceptable agreement with their creditors and obtain additional sources of liquidity, it is unlikely they will be able to make scheduled interest payments on their debt or satisfy other conditions and requirements under their debt obligations. These factors, together with continued operating losses and the impact of adverse industry conditions, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1, Description of Business. The accompanying consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty.

 

As discussed in Note 20 to the consolidated financial statements, the Company restated its financial statements for the years ended January 31, 2008 and 2007.

 

As discussed in Note 2 to the consolidated financial statements, effective January 31, 2007, the Company adopted the balance sheet provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans — an amendment of FASB No. 87, 88, 106 and 132(R) and on February 1, 2008 adopted the measurement provisions. As discussed in Note 2 to the consolidated financial statements, effective February 1, 2007, the Company changed its method of accounting for income taxes pursuant to FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 .

 

 

Detroit, Michigan

May 4, 2009

HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

See accompanying notes to consolidated financial statements.

HAYES LEMMERZ INTERNATIONAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS