# Cooper-Standard Holdings Inc.: Form 10-Q for the period ended Sep 30, 2011

- Company: [Cooper-Standard Holdings Inc.](/companies/cps.md) (CIK 1320461)
- Form: 10-Q
- Filed: 2011-11-10
- Accepted by EDGAR: Nov 10, 2011, 15:26 ET
- Period: 2011-09-30
- Accession: 0001193125-11-306765
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1320461/000119312511306765/d233538d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1320461/000119312511306765/

## Management's discussion and analysis

As filed, 41,544 characters.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) presents information related to the condensed consolidated results of operations of the Company, including the impact of restructuring costs on the Company’s results, a discussion of the past results and future outlook of each of the Company’s segments, and information concerning both the liquidity and capital resources of the Company. The following discussion and analysis, which should be read in conjunction with our condensed consolidated financial statements and the notes included elsewhere in this report, contains certain forward-looking statements relating to anticipated future financial condition and operating results of the Company and its current business plans. In the future, the financial condition and operating results of the Company could differ materially from those discussed herein and its current business plans could be altered in response to market conditions and other factors beyond the Company’s control. Important factors that could cause or contribute to such differences or changes include those discussed elsewhere in this report (see “Forward-Looking Statements”) and in our most recently filed Annual Report on Form 10-K/A (see Item 1A. Risk Factors).

### Business Environment and Outlook

Our business is directly affected by the automotive build rates in North America and Europe. It is also becoming increasingly impacted by build rates in Brazil and Asia Pacific. New vehicle demand is driven by macro-economic and other factors, such as interest rates, manufacturer and dealer sales incentives, fuel prices, consumer confidence, employment levels, income growth trends, and government and tax incentives. IHS Automotive’s October 2011 expected annualized light vehicle production volumes for 2011 are 13 million units in North America, while Europe’s volumes are expected to be 20.1 million units.

According to IHS Automotive, actual North American light vehicle production volumes for the three months ended September 30, 2011 were 3.2 million compared to 3 million for the three months ended September 30, 2010, an increase of approximately 5.7%. European light vehicle production volumes for the three months ended September 30, 2011 were 4.5 million compared to 4.3 million for the three months ended September 30, 2010, an increase of approximately 5.2%. According to IHS Automotive, actual North American light vehicle production volumes for the nine months ended September 30, 2011 were 9.6 million compared to 9 million for the nine months ended September 30, 2010, an increase of approximately 7.6%, and European light vehicle production volumes for the nine months ended September 30, 2011 were 15.2 million compared to 14.1 million for the nine months ended September 30, 2010, an increase of approximately 7.8%. According to IHS Automotive, North America and Europe light vehicle production volumes in the fourth quarter of 2011 are estimated at 3.3 million and 4.9 million units, respectively, which is a 0.3 million unit increase for North America and a 0.1 million unit decrease for Europe, compared to the fourth quarter of 2010.

Competition in the automotive supplier industry is intense and has increased in recent years as OEMs have demonstrated a preference for stronger relationships with fewer suppliers. There are typically three or more significant competitors and numerous smaller competitors for most of the products we produce. Globalization and the importance of servicing customers around the world will continue to shape the success of suppliers going forward.

OEMs have shifted some research and development, design and testing responsibility to suppliers, while at the same time shortening new product cycle times. To remain competitive, suppliers must have state-of-the-art engineering and design capabilities and must be able to continuously improve their engineering, design and manufacturing processes to effectively service the customer. Suppliers are increasingly expected to collaborate on, or assume the product design and development of, key automotive components, and to provide innovative solutions to meet evolving technologies aimed at improved emissions and fuel economy.

We continue to experience increases in the costs of certain raw materials. We have implemented strategies with both our suppliers and our customers to help manage spikes in raw material prices. These actions include material substitutions, leveraging our global purchases and securing price recoveries from our customers. Global optimization also includes using benchmarks and selective sourcing from low cost regions. We have also made process improvements to ensure the most efficient use of materials through scrap reduction, as well as standardization of material specification to maximize leverage over a higher volume purchase.

The primary raw materials for our business include synthetic rubber, carbon black, natural rubber, fabricated metal-based components, process oil and plastic components.

Pricing pressure has continued as competition for market share has reduced the overall profitability of the industry and resulted in continued pressure on suppliers for price concessions. Consolidations and market share shifts among vehicle manufacturers continues to put additional pressures on the supply chain. These pricing and market pressures, along with the reduced production volumes, will continue to drive our focus on reducing our overall cost structure through lean initiatives, capital redeployment, restructuring and other cost management processes.

Our business has also been impacted by our acquisition of USi and the joint venture agreement with FMEA. Our sales have increased as a result of these two acquisitions, but we continue to incur additional costs as we integrate and restructure these businesses. In evaluating these businesses, management considers EBITDA and Adjusted EBITDA as key indicators of operating performance. The following table shows combined gross margin for the acquisitions and reconciles EBITDA and Adjusted EBITDA for the acquisitions to their net loss, which is the most directly comparable financial measure in accordance with U.S. GAAP (dollars in millions):

|  | Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 |
| --- | ---: | ---: |
| Sales | $51.1 | $100.2 |
| Cost of products sold | 51.6 | 96.9 |
| Gross margin | $(0.5) | $3.3 |
| Net loss | $(3.2) | $(20.7) |
| Provision (benefit) for income tax expense | 0.2 | (0.2) |
| Interest expense (income) | (0.4) | 0.3 |
| Depreciation and amortization | 2.1 | 3.4 |
| EBITDA | $(1.3) | $(17.2) |
| Restructuring | 0.2 | 35.9 |
| Noncontrolling interest restructuring | (1.3) | (19.0) |
| Acquisition costs | 0.2 | 0.5 |
| Inventory write-up | — | 0.7 |
| Adjusted EBITDA | $(2.2) | $0.9 |

### Results of Operations

As a result of our emergence from Chapter 11 bankruptcy proceedings on May 27, 2010, and the adoption of fresh-start accounting on May 31, 2010, in accordance with ASC 852, “*Reorganizations,”* Cooper Standard Holdings Inc. is considered a new entity for financial reporting purposes. Accordingly, our financial statements for the third quarter 2011 separately present the 2010 Predecessor Period and the 2010 Successor Period. Although the 2010 Predecessor Period and the 2010 Successor Period are distinct reporting periods, the effects of emergence and fresh-start accounting did not have a material impact on the comparability of our results of operations between the periods, except as discussed below (dollar amounts in thousands except per share amounts).

|  | Successor Three Months Ended September 30, 2010 | Three Months Ended September 30, 2011 | Predecessor Five Months Ended May 31, 2010 | Successor Four Months Ended September 30, 2010 | Nine Months Ended September 30, 2011 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Sales | $585,650 | $708,544 | $1,009,128 | $801,292 | $2,157,776 |
| Cost of products sold | 483,559 | 599,985 | 832,201 | 665,434 | 1,804,743 |
| Gross profit | 102,091 | 108,559 | 176,927 | 135,858 | 353,033 |
| Selling, administration & engineering expenses | 68,584 | 64,403 | 92,166 | 91,629 | 190,856 |
| Amortization of intangibles | 3,842 | 3,911 | 319 | 5,106 | 11,745 |
| Restructuring | 818 | 6,539 | 5,893 | 1,200 | 48,124 |
| Operating profit | 28,847 | 33,706 | 78,549 | 37,923 | 102,308 |
| Interest expense, net of interest income | (10,664) | (9,603) | (44,505) | (14,195) | (30,158) |
| Equity earnings | 1,815 | 843 | 3,613 | 2,549 | 3,480 |
| Reorganization items, net | — | — | 303,453 | — | — |
| Other income (expense), net | 5,454 | (8,884) | (21,156) | 5,024 | 6,191 |
| Income before income taxes | 25,452 | 16,062 | 319,954 | 31,301 | 81,821 |
| Provision for income tax expense | 4,443 | 7,963 | 39,940 | 5,352 | 26,782 |
| Consolidated net income | 21,009 | 8,099 | 280,014 | 25,949 | 55,039 |
| Net (income) loss attributable to noncontrolling interests | (176) | 7,559 | (322) | (186) | 24,576 |
| Net income attributable to Cooper-Standard Holdings Inc. | $20,833 | $15,658 | $279,692 | $25,763 | $79,615 |
| Net income available to Cooper-Standard Holdings Inc. common stockholders | $15,116 | $11,080 |  | $18,328 | $59,315 |
| Basic net income per share attributable to Cooper-Standard Holdings Inc. | $0.86 | $0.63 |  | $1.05 | $3.37 |
| Diluted net income per share attributable to Cooper-Standard Holdings Inc. | $0.83 | $0.58 |  | $1.00 | $3.08 |

29

### Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010

*Sales.* Sales increased to $708.5 million for the three months ended September 30, 2011 from $585.7 million for the three months ended September 30, 2010, an increase of $122.8 million, or 21%. The improvement is a result of an increase in volumes and favorable foreign exchange of $33.7 million. In addition, the USi acquisition and the joint venture agreement with FMEA provided $51.1 million of incremental sales.

*Gross Profit.* Gross profit increased $6.5 million from $102.1 million for the three months ended September 30, 2010 to $108.6 million for the three months ended September 30, 2011. This increase was primarily driven by increased volumes in most regions and the favorable impact of our lean savings. These positive items were partially offset by higher raw material costs and costs associated with the FMEA joint venture and the USi acquisition as we continue to integrate and restructure these businesses. As a percentage of sales, gross profit decreased to 15.3% of sales for the three months ended September 30, 2011 as compared to 17.4% of sales for the three months ended September 30, 2010.

*Selling, Administration and Engineering.* Selling, administration and engineering expense for the three months ended September 30, 2011 was $64.4 million or 9.1% of sales compared to $68.6 million or 11.7% of sales for the three months ended September 30, 2010. Selling, administration and engineering expense for the three months ended September 30, 2011 was favorably impacted by certain lower compensation expenses.

*Restructuring.* Restructuring charges increased $5.7 million to $6.5 million for the three months ended September 30, 2011 compared to $0.8 million for the three months ended September 30, 2010, primarily related to reorganization of our French body sealing operations in relationship to the joint venture agreement with FMEA, the closure of a facility in North America, the establishment of a centralized shared services function in Europe and the transfer of certain sealing business from one of our German facilities to other sealing operations in Europe.

*Interest Expense, Net.* Net interest expense of $9.6 million and $10.7 million for the three months ended September 30, 2011 and 2010, respectively resulted primarily from interest and debt issue amortization recorded on the Senior Notes.

*Other Income (Expense).* Other expense for the three months ended September 30, 2011 was $8.9 million, which consisted primarily of unrealized losses related to forward contracts of $5.5 million and foreign currency losses of $2.8 million. Other income for the three months ended September 30, 2010 was $5.5 million which consisted primarily of foreign currency gains.

*Provision for Income Tax Expense.* For the three months ended September 30, 2011, we recorded an income tax provision of $8 million on earnings before income taxes of $16.1 million. This compares to an income tax provision of $4.4 million on earnings before income taxes of $25.5 million for the same period in 2010. Income tax expense for the three months ended September 30, 2011 differs from statutory rates due to income taxes on foreign earnings taxed at rates lower than the U.S. statutory rate, income in jurisdictions with no tax expense due to valuation allowance release, the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions to the extent not offset by other categories of income, tax credits, income tax incentives, withholding taxes, and other permanent items. Further, our current and future provision for income taxes will be significantly impacted by the recognition of valuation allowances in certain countries, particularly the United States. We intend to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. Accordingly, income taxes are impacted by the U.S. valuation allowance and the mix of earnings among jurisdictions.

### Nine Months Ended September 30, 2011, Four Months Ended September 30, 2010 and Five Months Ended May 31, 2010

*Sales.* Sales for the nine months ended September 30, 2011 were $2,157.8 million. Sales were favorably impacted by an increase in volumes and favorable foreign exchange of $80.6 million. In addition, the USi acquisition and the joint venture with FMEA provided $100.2 million of incremental sales. Sales of $801.3 million for the four months ended September 30, 2010 were favorably impacted by a significant increase in volumes, partially offset by unfavorable foreign exchange of $18 million. Sales of $1,009.1 million for the five months ended May 31, 2010 were favorably impacted by a significant increase in volumes and favorable foreign exchange of $52.5 million, partially offset by customer price concessions.

*Gross Profit.* Gross profit for the nine months ended September 30, 2011 was $353 million or 16.4% of sales. Gross profit and gross profit margin for the period were favorably impacted by an increase in volumes in most regions and the favorable impact of our lean savings. These positive items were partially offset by higher raw material costs and costs associated with the FMEA joint venture and the USi acquisition as we continue to integrate and restructure these businesses. Gross profit for the four months ended September 30, 2010 and the five months ended May 31, 2010 were $135.9 million and $176.9 million, respectively. Gross profit as a percentage of sales was 17% for the four months ended September 30, 2010 and 17.5% for the five months ended May 31, 2010. Gross profit and gross profit margin for these two periods were favorably impacted by a significant increase in volumes in most regions and our lean savings, partially offset by the restoration of certain employee pay and benefits and slightly higher raw material costs. The four months ended September 30, 2010 was also impacted by the liquidation of the fair value adjustment to inventory of $8.1 million, which was recognized in cost of sales as the inventory was sold.

*Selling, Administration and Engineering.* Selling, administration and engineering expense for the nine months ended September 30, 2011 was $190.9 million or 8.8% of sales. Selling, administration and engineering expense for the nine months ended September 30, 2011 was favorably impacted by certain lower compensation expenses. Selling, administration and engineering expense for the four months ended September 30, 2010 and the five months ended May 31, 2010 was $91.6 million and $92.2 million or 11.4% and 9.1% of sales, respectively. Both periods were primarily impacted by the restoration of certain employee pay and benefits.

*Amortization of Intangibles.* Amortization of intangibles was $11.7 million for the nine months ended September 30, 2011, $5.1 million for the four months ended September 30, 2010 and $0.3 million for the five months ended May 31, 2010. The amortization of intangibles increased for the Successor period as a result of intangible assets recognized in connection with the adoption of fresh-start accounting in 2010.

*Restructuring.* Restructuring charges were $48.1 million for the nine months ended September 30, 2011, primarily related to the reorganization of our French body sealing operations in relationship to the joint venture agreement with FMEA, the closure of a facility in North America, the establishment of a centralized shared services function in Europe and the transfer of certain sealing business from one of our German facilities to other sealing operations in Europe. Restructuring charges were $1.2 million for the four months ended September 30, 2010 and $5.9 million for the five months ended May 31, 2010. Restructuring charges for both periods were primarily related to the continuation of initiatives that were announced in 2009 related to the reorganization or closure of operating facilities in South America, Europe and Asia Pacific and an initiative announced in the second quarter of 2010 for the closure of a facility and the consolidation of two facilities located in Mexico.

*Interest Expense, Net.* Net interest expense of $30.2 million for the nine months ended September 30, 2011 resulted primarily from interest and debt issue amortization recorded on the Senior Notes. Net interest expense of $14.2 million for the four months ended September 30, 2010 is primarily interest on our Senior Notes. The net interest expense of $44.5 million for the five months ended May 31, 2010 includes $28 million of interest on certain prepetition debt obligations for the period of August 3, 2009 through May 27, 2010 and interest on the DIP facility. The interest on the prepetition debt obligation was recorded when our Plan of Reorganization was approved by the claimholders.

*Reorganization Items and Fresh-Start Accounting Adjustments, net.* In the five months ended May 31, 2010, we recognized a gain of $163.6 million for reorganization items as a result of the bankruptcy proceedings. This gain reflects the cancellation of certain prepetition obligations, partially offset by the recognition of professional fees incurred as a direct result of the bankruptcy proceedings. In addition, we recognized a gain of $139.9 million related to the valuation of our net assets upon emergence from Chapter 11 bankruptcy proceedings pursuant to the provisions of fresh-start accounting.

*Other Income (Expense).* Other income for the nine months ended September 30, 2011 was $6.2 million which relates to a gain on the partial sale of ownership in our NISCO joint venture of $11.4 million and foreign currency gains of $1.5 million, partially offset by unrealized losses related to forward contracts of $5.5 million and loss on sale of receivables and miscellaneous expense of $1.2 million. Other income for the four months ended September 30, 2010 was $5 million, which consisted primarily of foreign currency gains. Other expense for the five months ended May, 31 2010 was $21.2 million, which consisted primarily of foreign currency losses.

*Provision for Income Tax Expense.* For the nine months ended September 30, 2011, we recorded an income tax provision of $26.8 million on earnings before income taxes of $81.8 million. This compares to an income tax provision of $5.4 million on earnings before income taxes of $31.3 million for the four months ended September 30, 2010 and an income tax provision of $39.9 million on earnings before income tax of $320 million for the five months ended May 31, 2010. Income tax expense for the nine months ended September 30, 2011 differs from statutory rates due to income taxes on foreign earnings taxed at rates lower than the U.S. statutory rate, income in jurisdictions with no tax expense due to valuation allowance release, the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions to the extent not offset by other categories of income, tax credits, income tax incentives, withholding taxes, and other permanent items. Further, our current and future provision for income taxes will be significantly impacted by the recognition of valuation allowances in certain countries, particularly the United States. We intend to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. Accordingly, income taxes are impacted by the U.S. valuation allowance and the mix of earnings among jurisdictions.

### Segment Results of Operations

The following table presents sales and segment profit (loss) for each of the reportable segments for the three months ended September 30, 2011 and 2010, the nine months ended September 30, 2011, the four months ended September 30, 2010 and the five month ended May 31, 2010:

| Sales to external customers | Successor Three Months Ended September 30, 2010 | 2011 |
| --- | ---: | ---: |
| North America | $316,585 | $348,507 |
| International | 269,065 | 360,037 |
| Consolidated | $585,650 | $708,544 |
| Segment profit (loss) |  |  |
| North America | $29,122 | $31,850 |
| International | (3,670) | (15,788) |
| Income before income taxes | $25,452 | $16,062 |

| Sales to external customers | Predecessor Five Months Ended May 31, 2010 | Successor Four Months Ended September 30, 2010 | Nine Months Ended September 30, 2011 |
| --- | ---: | ---: | ---: |
| North America | $508,738 | $432,981 | $1,073,655 |
| International | 500,390 | 368,311 | 1,084,121 |
| Consolidated | $1,009,128 | $801,292 | $2,157,776 |
| Segment profit (loss) |  |  |  |
| North America | $233,526 | $37,255 | $131,880 |
| International | 86,428 | (5,954) | (50,059) |
| Income before income taxes | $319,954 | $31,301 | $81,821 |

### Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010

*North America.* Sales for the three months ended September 30, 2011 increased $31.9 million, or 10.1%, compared to the three months ended September 30, 2010, primarily due to an increase in sales volume and favorable foreign exchange of $4.7 million. Segment profit for the three months ended September 30, 2011 increased by $2.7 million compared to the three months ended September 30, 2010. Segment profit was favorably impacted by an increase in volume, favorable impact of our lean savings and foreign exchange, partially offset by higher raw material costs and increased staffing.

*International.* Sales for the three months ended September 30, 2011 increased $91 million, or 33.8%, compared to the three months ended September 30, 2010, primarily due to an increase in sales volume, the joint venture agreement with FMEA and favorable foreign exchange of $29 million. Segment loss for the three months ended September 30, 2011 increased by $12.1 million compared to the three months ended September 30, 2010. Segment loss was negatively impacted by the restructuring and integration costs associated with the joint venture agreement with FMEA, higher raw material costs, increased staffing and higher depreciation, partially offset by improved volumes in Europe and Asia Pacific and our lean savings.

### Nine Months Ended September 30, 2011, Four Months Ended September 30, 2010 and Five Months Ended May 31, 2010

*North America.* Sales for the nine months ended September 30, 2011 were $1,073.7 million. Sales were favorably impacted by an increase in sales volume and favorable foreign exchange of $16.9 million. Segment profit for the nine months ended September 30, 2011 was $131.9 million, which was favorably impacted by an increase in volumes, favorable impact of our lean savings, partially offset by higher raw material costs and increased staffing.

Sales were $433 million and $508.7 million for the four months ended September 30, 2010 and the five months ended May 31, 2010, respectively. Both periods were favorably impacted by an increase in volumes and favorable foreign exchange of $6.3 million for the four months ended September 30, 2010 and $19.3 million for the five months ended May 31, 2010. Segment profit was $37.3 million and $233.5 million for the four months ended September 30, 2010 and for the five months ended May 31, 2010, respectively. Both periods were favorably impacted by an increase in volumes and our lean savings, partially offset by the restoration of certain employee pay and benefits, and slightly higher raw material costs. In addition, segment profit for the four months ended September 30, 2010 was impacted by higher depreciation and amortization resulting from the adoption of fresh-start accounting and segment profit for the five months ended May 31, 2010 was favorably impacted by a gain of $208.6 million related to the reorganization and fresh-start accounting adjustments and negatively impacted by recognition of interest on certain prepetition debt obligations for the period of August 3, 2009 through May 27, 2010, which was recorded when our Plan of Reorganization was approved by the claimholders.

*International.* Sales for the nine months ended September 30, 2011 were $1,084.1 million. Sales were favorably impacted by an increase in volume, the joint venture agreement with FMEA and foreign exchange of $63.7 million. Segment loss for the nine months ended September 30, 2011 was $50.1 million, which was negatively impacted by the restructuring and integration costs associated with the joint venture agreement with FMEA, increased staffing, higher raw material costs and higher depreciation and amortization resulting from the adoption of fresh-start accounting in the Successor period, partially offset by improved volumes and our lean savings.

Sales for the four months ended September 30, 2010 were $368.3 million. Sales were favorably impacted by a significant increase in volumes, partially offset by unfavorable foreign exchange of $24.3 million. Sales for the five months ended May 31, 2010 were $500.4 million. Sales were favorably impacted by a significant increase in volumes and favorable foreign exchange of $33.2 million. Segment loss for the four months ended September 30, 2010 was $6 million, which was negatively impacted by higher raw material costs, restoration of certain employee pay and benefits and unfavorable foreign exchange partially offset by the improved volumes and our lean savings. Segment profit for the five months ended May 31, 2010 was $86.4 million. As a result of the reorganization and fresh-start accounting adjustments, a gain of $94.9 million was recognized in the International segment. Segment profit was favorably impacted by improved volumes and our lean savings, and unfavorably impacted by the restoration of certain employee pay and benefits and slightly higher raw material costs.

### Restructuring

We continually evaluate alternatives in an effort to align our business with the changing needs of our customers and lower the operating cost of our Company. This may include the realignment of our existing manufacturing capacity, facility closures, or similar actions. See the Note 4. “Restructuring” to Condensed Consolidated Financial Statements for discussion of restructuring activities during the nine months ended September 30, 2011.

### Liquidity and Capital Resources

### Short and Long-Term Liquidity Considerations and Risks

We intend to fund our ongoing capital and working capital requirements through a combination of cash flows from operations and borrowings under our Senior ABL Facility. We anticipate that funds generated by operations and funds available under our Senior ABL Facility will be sufficient to meet working capital requirements for the next 12 months. For additional information, see Note 6. “Debt” to the condensed consolidated financial statements.

Based on our current and anticipated levels of operations and the condition in our markets and industry, we believe that our cash on hand, cash flow from operations and availability under our Senior ABL Facility will enable us to meet our working capital, capital expenditures, debt service and other funding requirements for the foreseeable future. However, our ability to fund our working capital needs, debt payments and other obligations, and to comply with the financial covenants, including borrowing base limitations, under our Senior ABL Facility, depends on our future operating performance and cash flow and many factors outside of our control, including the costs of raw materials, the state of the overall automotive industry and financial and economic conditions and other factors. Any future acquisitions, joint ventures or other similar transactions will likely require additional capital and there can be no assurance that any such capital will be available to us on acceptable terms, if at all.

### Cash Flows

*Operating Activities.* Net cash provided by operations was $45.8 million for the nine months ended September 30, 2011, which included $100.4 million of use of operating assets and liabilities. The use of operating assets and liabilities was primarily a result of increased accounts receivables and inventories, partially offset by increased accounts payable due to increased volumes. Net cash provided by operations was $80.3 million for the four months ended September 30, 2010, which included $13.4 million of changes in operating assets and liabilities. Net cash used in operations was $75.4 million for the five months ended May 31, 2010, which was a result of an increase in our working capital requirements due to the significant increase in volumes and $37.2 million of interest payments on our prepetition debt obligations and DIP facility.

*Investing Activities.* Net cash used in investing activities was $33.5 million for the nine months ended September 30, 2011, which consisted primarily of $70.3 million of capital spending and $10.5 million for an investment in an affiliate, partially offset by $30.9 million of cash acquired as part of the joint venture with FMEA, net of the acquisition of USi Inc and proceeds of $16 million from the partial sale of a joint venture. Net cash used in investing activities was $23.4 million for the four months ended September 30, 2010, which primarily consisted of capital spending. Net cash used in investing activities was $19.1 million for the five months ended May 31, 2010, which consisted of $22.9 million of capital spending offset by proceeds from sale of assets of $3.9 million. We anticipate that we will spend approximately $100 to $110 million on capital expenditures in 2011.

*Financing Activities.* Net cash used in financing activities totaled $13.1 million for the nine months ended September 30, 2011, which consisted primarily of a decrease in short-term debt and payments on long-term debt of $7.5 million and payment of cash dividends of $5.4 million. Net cash provided by financing activities totaled $0.3 million for the four months ended September 30, 2010, which consisted primarily of an increase in short-term debt, partially offset by dividends paid and payments on long-term debt. Net cash used in financing activities totaled $112.6 million for the five months ended May 31, 2010, which primarily resulted from activities related to our emergence from bankruptcy. Payments for settlement of our prepetition debt, DIP facility, debt issuance costs and back stop fees totaled $914.6 million. These payments were offset by cash proceeds from the rights offering conducted pursuant to our Plan of Reorganization of $355 million and our senior notes offering of $450 million.

### Non-GAAP Financial Measures

In evaluating our business, management considers EBITDA and Adjusted EBITDA as key indicators of our operating performance. Our management also uses EBITDA and Adjusted EBITDA:

- because similar measures are utilized in the calculation of the financial covenants and ratios contained in our financing arrangements;
- in developing our internal budgets and forecasts;
- as a significant factor in evaluating our management for compensation purposes;
- in evaluating potential acquisitions;
- in comparing our current operating results with corresponding historical periods and with the operational performance of other companies in our industry; and
- in presentations to the members of our board of directors to enable our board of directors to have the same measurement basis of operating performance as is used by management in their assessments of performance and in forecasting and budgeting for our company.

In addition, we believe EBITDA and Adjusted EBITDA and similar measures are widely used by investors, securities analysts and other interested parties in evaluating our performance. We define Adjusted EBITDA as net income (loss) plus provision for income tax expense (benefit), interest expense, net of interest income, depreciation and amortization or EBITDA, as adjusted for items that management does not consider to be reflective of our core operating performance. These adjustments include restructuring costs, impairment charges, non-cash fair value adjustments, acquisition related costs, professional fees and expenses associated with our reorganization, non-cash stock based compensation and non-cash gains and losses from certain foreign currency transactions and translation.

We calculate EBITDA and Adjusted EBITDA by adjusting net income (loss) to eliminate the impact of a number of items we do not consider indicative of our ongoing operating performance. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. EBITDA and Adjusted EBITDA are not financial measurements recognized under U.S. GAAP, and when analyzing our operating performance, investors should use EBITDA and Adjusted EBITDA in addition to, and not as alternatives for, net income (loss), operating income, or any other performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. EBITDA and Adjusted EBITDA have limitations as analytical tools, and they should not be considered in isolation or as substitutes for analysis of our results of operations as reported under U.S. GAAP. These limitations include:

- they do not reflect our cash expenditures or future requirements for capital expenditure or contractual commitments;
- they do not reflect changes in, or cash requirements for, our working capital needs;
- they do not reflect interest expense or cash requirements necessary to service interest or principal payments under our Senior Notes and Senior ABL Facility;
- they do not reflect certain tax payments that may represent a reduction in cash available to us;
- although depreciation and amortization are non-cash charges, the assets being depreciated or amortized may have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and
- other companies, including companies in our industry, may calculate these measures differently and, as the number of differences in the way companies calculate these measures increases, the degree of their usefulness as a comparative measure correspondingly decreases.

In addition, in evaluating Adjusted EBITDA, it should be noted that in the future we may incur expenses similar to the adjustments in the below presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

The following table provides a reconciliation of EBITDA and Adjusted EBITDA to net income, which is the most directly comparable financial measure in accordance with U.S. GAAP (dollars in millions):

|  | Predecessor Five Months Ended May 31, 2010 | Successor Three Months Ended September 30, 2010 | Four Months Ended September 30, 2010 | Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net income | $279.7 | $20.8 | $25.8 | $15.7 | $79.6 |
| Provision for income tax expense | 39.9 | 4.4 | 5.4 | 8.0 | 26.8 |
| Interest expense, net of interest income | 44.5 | 10.7 | 14.2 | 9.6 | 30.2 |
| Depreciation and amortization | 35.7 | 28.1 | 36.9 | 31.7 | 92.0 |
| EBITDA | $399.8 | $64.0 | $82.3 | $65.0 | $228.6 |
| Reorganization and fresh-start accounting adjustments (1) | (303.4) | — | — | — | — |
| Restructuring (2) | 5.9 | 0.8 | 1.2 | 6.5 | 48.1 |
| Noncontrolling interest restructuring (3) | — | — | — | (1.3) | (19.0) |
| Foreign exchange gains/losses (4) | 17.2 | — | (0.1) | — | — |
| Inventory write-up (5) | — | — | 8.1 | — | 0.7 |
| Net gain on partial sale of joint venture (6) | — | — | — | — | (11.4) |
| Stock-based compensation (7) | 0.2 | 2.7 | 3.6 | 3.0 | 8.3 |
| Acquisition costs (8) | — | — | — | 0.2 | 2.2 |
| Other | 0.3 | (0.3) | (0.3) | — | — |
| Adjusted EBITDA | $120.0 | $67.2 | $94.8 | $73.4 | $257.5 |

(1) Reorganization and bankruptcy-related expense, including professional fees.

(2) Includes non-cash restructuring.

(3) Proportionate share of restructuring costs related to FMEA joint venture.

(4) Foreign exchange gains and losses on prepetition debt and various intercompany loans.

(5) Write-up of inventory to fair value at the Effective Date and at the date of acquisition of USi Inc. and the FMEA joint venture, net of noncontrolling interest.

(6) Net gain on partial sale of ownership percentage in joint venture.

(7) Non-cash stock amortization expense and non-cash stock option expense for grants issued at emergence from bankruptcy.

(8) Costs incurred in relationship to the FMEA joint venture agreement.

### Recent Accounting Pronouncements

See Note 1 to the condensed consolidated financial statements included elsewhere in this Form 10-Q.

### Forward-Looking Statements

This report includes what the Company believes are “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends, and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” or future or conditional verbs, such as “will,” “should,” “could,” or “may,” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management’s examination of historical operating trends and data, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, we cannot assure you that these expectations, beliefs, and projections will be achieved.

The risks, uncertainties, and other important factors that could cause our actual results to differ materially from the forward-looking statements contained in this report include, among others: the ability to maintain contracts and suppliers and customer relationships; limitations on flexibility in operating our business contained in our debt agreements; our dependence on the automotive industry; availability and cost of raw materials; our exposure to natural disasters; our dependence on certain major customers; competition in the automotive industry; sovereign and other risks related to our conducting operations outside the United States; the uncertainty of our ability to achieve expected cost reduction savings; our exposure to product liability and warranty claims; labor conditions; our vulnerability to changes in interest rates; our ability to meet customers’ needs for new and improved products in a timely manner; our ability to attract and retain key personnel; potential conflicts of interest between our owners and us; our legal rights to our intellectual property portfolio; our pension plans; environmental and other regulations; and other risks listed in our filings with the SEC. See Item 1A. Risk Factors, in our 2010 Annual Report on Form 10-K/A and Item 1A. Risk Factors in Part II of our Form 10-Q for the quarterly period ended March 31, 2011 for additional information regarding these and other risks and uncertainties. There may be other factors that may cause our actual results to differ materially from the forward-looking statements.

All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. We undertake no obligation to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.

## Market risk

As filed, 199 characters.

There have been no material changes to the quantitative and qualitative information about the Company’s market risk from those previously disclosed in the Company’s 2010 Annual Report on Form 10-K/A.

## Controls and procedures

As filed, 1,136 characters.

The Company has evaluated, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Report. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. However, based on that evaluation, the Company’s Chief Executive Officer along with the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Report.

There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 715 characters.

In addition to other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our 2010 Annual Report on Form 10-K/A (the “Form 10-K/A”) and Part II, Item 1A. Risk Factors in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011 (the “3-31 Form 10-Q”) which could materially impact our business, financial condition or future results. Risks disclosed in the Form 10-K/A and the 3-31 Form 10-Q are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may materially adversely impact our business, financial condition or operating results.

Filed Nov 10, 2011.
Source: SEC EDGAR, the filing index for accession 0001193125-11-306765. Last ingested by Listed: Nov 10, 2026, 02:27 ET. No prices; not investment advice.