Thursday, February 3, 2005

Ligocki

Tower falls into bankruptcy

Novi auto supplier collapses amid soaring steel costs and car production cuts.

By Brett Clanton / The Detroit News

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Tower Automotive Inc., the world's largest manufacturer of vehicle frames, filed for bankruptcy protection Wednesday, making it the latest auto parts supplier succumbing to the economic pressures plaguing the U.S. auto industry.

Novi-based Tower, with 1,100 Metro Detroit employees and 12,000 worldwide, said it has struggled to cope with vehicle production cuts, rising steel prices and a shift away from prepayment policies by some of its customers that left the company strapped for cash. The filing came after Tower missed a Feb. 1 deadline for an interest payment on some of its debt.

Tower will use the reorganization to reduce debt and improve cash flow. The company isn't planning to lay off workers or close facilities. Operations are "solid, performing well and will continue in the ordinary course," the company said in a statement.

But some analysts said a protracted bankruptcy could lead to interruptions in shipments to automakers, or could make the supplier ripe for takeover in an industry that is rapidly consolidating.

Tower's announcement follows bankruptcy filings last year by other local auto parts makers, including Oxford Automotive Inc. and Intermet Corp., both based in Troy.

"If you take a look at the pressure the supplier industry is under today, it's severe," said Steve D'Arcy, a partner with PricewaterhouseCoopers' automotive practice in Detroit.

Tower is one of the 20 largest auto suppliers in North America, with $3 billion in annual sales. Its bankruptcy filing signals just how difficult industry conditions have become.

The company said short-term actions had improved liquidity, but recent setbacks forced it to consider long-term solutions, including bankruptcy.

"We have been focused on launching our significant new business backlog while taking actions necessary to improve profitability and restore long-term financial strength to Tower so we can continue to grow and meet our customers' needs," CEO Kathleen Ligocki said in the statement.

Ligocki arrived at Tower in 2003 to lead a turnaround, but the former Ford executive has confronted many obstacles.

Big Three automakers, which account for about two-thirds of Tower's business, have pushed for price cuts to offset the costs of a post-September 11 rebate war and declining U.S. market share.

At the same time, the price of steel, a major ingredient in vehicle frames, has skyrocketed in the face of rising world demand and tightening supply. And GM and Ford, both major Tower customers, have announced production cuts in recent months as sales have declined.

"If you have been too heavily tied to Ford and GM, you have probably had problems," said Bruce Belzowski, an analyst with the University of Michigan's Office for the Study of Automotive Transportation.

In addition, some automakers last fall terminated an early-pay program for parts, which had helped suppliers keep more cash on hand for operations. Now, suppliers receive payment on delivery or shortly thereafter.

The payment change was especially damaging to Tower, which burned through its cash reserve in recent months to pay off debt and to offset steel price increases.

In January, the company said it would use $57 million of its cash reserve this quarter, a move that signaled to investors that Tower's liquidity problems were worse than previously thought. The announcement sent the supplier's stock plunging to its lowest level since 1994. The New York Stock Exchange suspended trading of Tower shares Wednesday because of the bankruptcy, and later moved to delist the shares, which had fallen below the exchange's $1 threshold. Tower closed Tuesday at 77 cents.

"The company seems to be running out of options," Shelly Lombard of Gimme Credit, an independent rating agency in New York City, said in a January report on Tower.

For the first nine months of 2004, Tower reported a net loss of $11 million on revenue of $2.3 billion. It was expected to report fourth-quarter earnings in the coming weeks, and had prepared investors for lower results.

Tower's Chapter 11 petition, filed in U.S. Bankruptcy Court in New York, included more than 20 subsidiaries, but does not affect the company's international operations in Europe, Asia, Brazil and Canada. The court documents list $789.9 million in assets and $1.31 billion in debt.

The filing led Standard & Poor's Rating Services to lower Tower's corporate credit ratings and other debt ratings to D. A lower credit rating makes it harder for a company to borrow money.

Still, S&P analyst Daniel DiSenso predicted Tower would emerge from bankruptcy intact. "Given the importance of Tower to its customers, it is likely that it will be reorganized," he said in a report on Wednesday.

In a separate report, J.P. Morgan analyst Himanshu Patel said Tower should be able to make good on parts contracts in the near term, but said the company's plants could be acquired and resold by automakers to other suppliers if the reorganization is not successful.

Some automakers who do business with Tower don't believe that will be necessary.

"We have a strong relationship with Tower Automotive," said Joe Koenig, a Ford spokesman. "We are working with them, we are aware of their situation, and we anticipate no disruptions in the supply of parts to Ford from Tower."

DaimlerChrysler AG's Chrysler Group also expects no interruptions. "We're not looking for back-up plans at this time," said spokesman Ed Saenz.

Tower's Ligocki said the company will be helped by $1.4 billion in new business launching throughout the year.

Subject to court approval, the supplier has also arranged for $725 million in financing from J.P Morgan to keep the business afloat during the reorganization, which it hopes will be completed in 12 months to 18 months.

You can reach Brett Clanton at (313) 222-2612 or bclanton@detnews.com.