# Cooper-Standard Holdings Inc.: Form 10-Q for the period ended Sep 30, 2012

- Company: [Cooper-Standard Holdings Inc.](/companies/cps.md) (CIK 1320461)
- Form: 10-Q
- Filed: 2012-11-08
- Accepted by EDGAR: Nov 8, 2012, 09:01 ET
- Period: 2012-09-30
- Accession: 0001193125-12-459148
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1320461/000119312512459148/d398757d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1320461/000119312512459148/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-07-01 to 2012-09-30 | $684.0m | us-gaap:SalesRevenueGoodsNet |
| Revenue | 9 months, 2012-01-01 to 2012-09-30 | $2.18bn | us-gaap:SalesRevenueGoodsNet |
| Cost of revenue | 3 months, 2012-07-01 to 2012-09-30 | $581.0m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2012-01-01 to 2012-09-30 | $1.84bn | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2012-07-01 to 2012-09-30 | $103.1m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2012-01-01 to 2012-09-30 | $339.2m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2012-07-01 to 2012-09-30 | $65.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2012-01-01 to 2012-09-30 | $206.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-07-01 to 2012-09-30 | $23.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2012-01-01 to 2012-09-30 | $105.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2012-07-01 to 2012-09-30 | $5.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2012-01-01 to 2012-09-30 | −$32.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-07-01 to 2012-09-30 | $11.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2012-01-01 to 2012-09-30 | $112.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-07-01 to 2012-09-30 | $0.44 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2012-01-01 to 2012-09-30 | $4.63 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-07-01 to 2012-09-30 | $0.46 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2012-01-01 to 2012-09-30 | $4.93 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2012-07-01 to 2012-09-30 | 18,293,767 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2012-01-01 to 2012-09-30 | 18,707,199 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2012-01-01 to 2012-09-30 | −$22.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2012-01-01 to 2012-09-30 | $91.5m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2012-01-01 to 2012-09-30 | $5.1m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2012-01-01 to 2012-09-30 | $20.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2012-09-30 | $217.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-09-30 | $998.6m | us-gaap:AssetsCurrent |
| Total assets | at 2012-09-30 | $2.03bn | us-gaap:Assets |
| Current liabilities | at 2012-09-30 | $461.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-09-30 | $1.20bn | us-gaap:Liabilities |
| Current portion of debt | at 2012-09-30 | $30.2m | us-gaap:DebtCurrent |
| Shareholders' equity | at 2012-09-30 | $681.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,319 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 (see Item 1A. Risk Factors).

### General

On October 1, 2012, the Board of Directors appointed Jeffrey S. Edwards to the position of President and Chief Executive Officer of the Company and its principal operating subsidiary, Cooper-Standard Automotive Inc., effective October 15, 2012. On October 1, 2012, James S. McElya announced that he would be retiring from his position as Chief Executive Officer of the Company, effective October 15, 2012. Mr. McElya is expected to continue to fulfill his current term on the Company’s Board of Directors, serving as Non-Executive Chairman.

### 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. The expected annualized light vehicle production volumes for 2012 are 15.1 million units in North America and 19 million units in Europe, according to IHS Automotive in September 2012.

According to IHS Automotive, actual North American light vehicle production volumes for the three months ended September 30, 2012 were 3.6 million units compared to 3.2 million units for the three months ended September 30, 2011, an increase of approximately 12.2%, and European light vehicle production volumes for the three months ended September 30, 2012 were 4.2 million units compared to 4.5 million units for the three months ended September 30, 2011, a decrease of approximately 7.8%. According to IHS Automotive, actual North American light vehicle production volumes for the nine months ended September 30, 2012 were 11.5 million units compared to 9.7 million units for the nine months ended September 30, 2011, an increase of approximately 19%, and European light vehicle production volumes for the nine months ended September 30, 2012 were 14.4 million units compared to 15.2 million units for the nine months ended September 30, 2011, a decrease of approximately 4.8%. According to IHS Automotive, North America and Europe light vehicle production volumes in the fourth quarter of 2012 are estimated at 3.6 million units and 4.5 million units, respectively, which is an expected 0.2 million unit increase for North America and a 0.5 million unit decrease for Europe, compared to the actual production volumes for the fourth quarter of 2011.

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.

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 will continue to drive our focus on reducing our overall cost structure through lean initiatives, capital redeployment, restructuring and other cost management processes.

During the fourth quarter of 2012, the Company began performing its annual goodwill impairment testing. As a result of the current macroeconomic environment and challenging conditions, which may continue, an impairment charge not to exceed $2.9 million may be recorded in the fourth quarter of 2012 for our South America reporting unit.

In March 2012, an explosion at a supplier’s chemical plant in Germany shut down the facility and interrupted production. The facility not only made one-third of the global output of PA-12 resin used in automotive fuel and brake components and other general industry products, but also made one-half of the world’s CDT which is a key ingredient in the production of PA-12 resin. We do use PA-12 resin in our products and we have been working with customers and suppliers on developing and approving alternative materials.

Cooper Standard put a global team in place immediately following the shutdown of the chemical plant to find solutions to ensure uninterrupted supply of product to our customers. The team was able to fast track alternative materials, gain necessary approvals and bring these alternatives to market. We have been able to meet all of our customers’ needs to date and anticipate the global supply of PA-12 to return to normalized levels in the fourth quarter of 2012.

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 addition, the joint venture agreement with FMEA has been negatively impacted by the challenging business conditions in Europe. In evaluating these businesses, management considers EBITDA and Adjusted EBITDA as key indicators of operating performance. The following table shows combined gross profit for the acquisitions and reconciles EBITDA and Adjusted EBITDA for the acquisitions to their net income (loss), which is the most directly comparable financial measure in accordance with U.S. GAAP (dollars in millions):

|  | Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2012 |
| --- | ---: | ---: |
| Sales | $47.0 | $152.1 |
| Cost of products sold | 42.3 | 140.5 |
| Gross profit | $4.7 | $11.6 |
| Net income (loss) | $0.4 | $(2.5) |
| Provision for income tax expense | 0.2 | 0.7 |
| Interest expense | 0.1 | 0.3 |
| Depreciation and amortization | 2.0 | 5.9 |
| EBITDA | $2.7 | $4.4 |
| Noncontrolling interest restructuring | (0.2) | (0.5) |
| Adjusted EBITDA | $2.5 | $3.9 |

26

### Results of Operations

(dollar amounts in thousands)

|  | Three Months Ended September 30, 2011 | 2012 | Nine Months Ended September 30, 2011 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Sales | $708,544 | $684,029 | $2,157,776 | $2,183,794 |
| Cost of products sold | 599,985 | 580,956 | 1,804,743 | 1,844,616 |
| Gross profit | 108,559 | 103,073 | 353,033 | 339,178 |
| Selling, administration & engineering expenses | 64,403 | 65,421 | 190,856 | 206,432 |
| Amortization of intangibles | 3,911 | 3,866 | 11,745 | 11,590 |
| Restructuring | 6,539 | 10,171 | 48,124 | 15,758 |
| Operating profit | 33,706 | 23,615 | 102,308 | 105,398 |
| Interest expense, net of interest income | (9,603) | (11,325) | (30,158) | (33,326) |
| Equity earnings | 843 | 2,342 | 3,480 | 5,891 |
| Other income (expense), net | (8,884) | 1,118 | 6,191 | (449) |
| Income before income taxes | 16,062 | 15,750 | 81,821 | 77,514 |
| Provision (benefit) for income tax expense | 7,963 | 5,392 | 26,782 | (32,772) |
| Consolidated net income | 8,099 | 10,358 | 55,039 | 110,286 |
| Net loss attributable to noncontrolling interests | 7,559 | 1,266 | 24,576 | 2,441 |
| Net income attributable to Cooper-Standard Holdings Inc. | $15,658 | $11,624 | $79,615 | $112,727 |

### Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011

*Sales.* Sales were $684 million for the three months ended September 30, 2012 compared to $708.5 million for the three months ended September 30, 2011, a decrease of $24.5 million, or 3.5%. Sales were negatively impacted by unfavorable foreign exchange of $42.5 million and decreased volumes in the International segment. These unfavorable items were partially offset by increased volumes in North America.

*Cost of Products Sold.* Cost of products sold is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization and other direct operating expenses. Cost of products sold was $581 million for the three months ended September 30, 2012 compared to $600 million for the three months ended September 30, 2011, a decrease of $19 million or 3.2%. Raw materials comprise the largest component of our cost of products sold and represented 50% of total cost of products sold for the three months ended September 30, 2011 and 2012. The period was favorably impacted by lean savings and foreign exchange partially offset by higher material costs and increases in other fixed and variable costs as a result of increases in North American production volumes.

*Gross Profit.* Gross profit for the three months ended September 30, 2012 was $103.1 million compared to $108.6 million for the three months ended September 30, 2011, a decrease of $5.5 million, or 5.1%. As a percentage of sales, gross profit was 15.3% and 15.1% of sales for the three months ended September 30, 2011 and 2012, respectively. The decrease was driven primarily by higher material costs, increases in other expenses associated with launch and expansion activities and unfavorable foreign exchange. In addition, the gross profit margins associated with our 2011 acquisitions are lagging behind our base business. These items were partially offset by the favorable impact of increased volumes in North America and lean savings.

*Selling, Administration and Engineering.* Selling, administration and engineering expense for the three months ended September 30, 2012 was $65.4 million or 9.6% of sales compared to $64.4 million or 9.1% of sales for the three months ended September 30, 2011. Selling, administration and engineering expense for the three months ended September 30, 2012 was impacted by increased staffing as we increase our research and development and engineering resources to support our growth initiatives around the world.

*Restructuring.* Restructuring charges of $10.2 million for the three months ended September 30, 2012 consisted primarily of costs associated with European initiatives announced during 2012. Restructuring charges of $6.5 million for the three months ended September 30, 2011 consisted primarily of costs associated with the reorganization of our French body sealing operations, the closure of a North America facility and the decision to establish a centralized shared services function in Europe.

*Interest Expense, Net.* Net interest expense of $11.3 million for the three months ended September 30, 2012 resulted primarily from interest and debt issuance amortization recorded on the Senior Notes. Net interest expense of $9.6 million for the three months ended September 30, 2011 consisted primarily of interest and debt issuance amortization recorded on the Senior Notes, partially offset by interest income of $1.6 million.

*Other Income (Expense), Net.* Other income for the three months ended September 30, 2012 was $1.1 million, which consisted of unrealized gains related to forward contracts of $1.5 million, foreign currency losses of $0.2 million and loss on sale of receivables of $0.2 million. 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, foreign currency losses of $2.8 million, and loss on sale of receivables of $0.4 million.

*Provision for Income Tax Expense*. For the three months ended September 30, 2012, an income tax provision of $5.4 million on earnings before income taxes of $15.8 million was recorded. This compares to an income tax provision of $8 million on earnings before income taxes of $16.1 million for the same period of 2011. Income tax expense for the three months ended September 30, 2012 differs from statutory rates due to income in jurisdictions with no tax expense due to valuation allowance release, income taxes on foreign earnings taxed at rates lower than the U.S. statutory rate, 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.

### Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011

*Sales.* Sales were $2,183.8 million for the nine months ended September 30, 2012 compared to $2,157.8 million for the nine months ended September 30, 2011, an increase of $26 million, or 1.2%. Sales were favorably impacted by an increase in volumes in North America as well as the USi acquisition and the joint venture with FMEA which were completed March, 2011 and May, 2011, respectively. These favorable items were partially offset by unfavorable foreign exchange of $118.6 million and decreased volumes in the International segment.

*Cost of Products Sold.* Cost of products sold is primarily comprised of material, labor, manufacturing overhead, depreciation and amortization and other direct operating expenses. Cost of products sold was $1,844.6 million for the nine months ended September 30, 2012 compared to $1,804.7 million for the nine months ended September 30, 2011, an increase of $39.9 million or 2.2%. Raw materials comprise the largest component of our cost of products sold and represented 51% of total cost of products sold for the nine months ended September 30, 2011 and 2012. The period was impacted by higher material costs, increases in other fixed and variable costs as a result of increases in North American production volumes, and higher labor costs due to the additional hires to support the increase in North American volumes. In addition, cost of products sold for the nine months ended September 30, 2012 was impacted by the USi acquisition and the joint venture with FMEA, which were completed March, 2011 and May, 2011, respectively. These items were partially offset by lean savings and favorable foreign exchange.

*Gross Profit.* Gross profit for the nine months ended September 30, 2012 was $339.2 million compared to $353 million for the nine months ended September 30, 2011. As a percentage of sales, gross profit was 16.4% and 15.5% of sales for the nine months ended September 30, 2011 and 2012, respectively. The decrease was driven primarily by higher material costs, increases in other expenses associated with launch and expansion activities and unfavorable foreign exchange. In addition, the gross profit margins associated with our 2011 acquisitions are lagging behind our base business. These items were partially offset by the favorable impact of increased volumes in North America and lean savings.

*Selling, Administration and Engineering.* Selling, administration and engineering expense for the nine months ended September 30, 2012 was $206.4 million or 9.5% of sales compared to $190.9 million or 8.8% of sales for the nine months ended September 30, 2011. Selling, administration and engineering expense for the nine months ended September 30, 2012 was impacted by increased staffing and compensation expenses as we increase our research and development and engineering resources to support our growth initiatives around the world. In addition, the nine months ended September 30, 2012 was impacted by the USi acquisition and the joint venture with FMEA, which were completed March, 2011 and May, 2011, respectively.

*Restructuring.* Restructuring charges of $15.8 million for the nine months ended September 30, 2012 consisted primarily of costs associated with European initiatives announced during 2012. Restructuring charges of $48.1 million for the nine months ended September 30, 2011 consisted primarily of costs associated with the reorganization of our French body sealing operations, the closure of a North America facility and the decision to establish a centralized shared services function in Europe.

*Interest Expense, Net.* Net interest expense of $33.3 million for the nine months ended September 30, 2012, resulted primarily from interest and debt issuance amortization recorded on the Senior Notes. Net interest expense of $30.2 million for the nine months ended September 30, 2011 consisted primarily of interest and debt issuance amortization recorded on the Senior Notes, partially offset by interest income of $1.6 million.

*Other Income (Expense), Net.* Other expense for the nine months ended September 30, 2012 was $0.5 million, which consisted of $4.5 million of foreign currency losses and $0.7 million of loss on sale of receivables, partially offset by $3.8 million of gains related to forward contracts and $0.9 million of other miscellaneous income. Other income for the nine months ended September 30, 2011 was $6.2 million, which consisted of 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.

*Provision (Benefit) for Income Tax Expense.* For the nine months ended September 30, 2012, an income tax benefit of ($32.8) million on earnings before income taxes of $77.5 million was recorded. This compares to an income tax provision of $26.8 million on earnings before income taxes of $81.8 million for the same period of 2011. Income tax benefit for the nine months ended September 30, 2012 differs from statutory rates due to the benefit resulting from the reversal of the valuation allowance on net deferred tax assets in the U.S., income in jurisdictions with no tax expense due to valuation allowance release, income taxes on foreign earnings taxed at rates lower than the U.S. statutory rate, 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.

In the United States, we have been in a cumulative loss position in recent years. However, that position changed to a three year cumulative income position during the second quarter of 2012. This position, along with management’s analysis of all other available evidence, resulted in the conclusion that the net deferred tax asset in the United States is more likely than not to be realized. As such, the valuation allowance previously recorded against the net deferred tax assets in the United States has been reversed.

During 2012, we expect to record a tax benefit of approximately ($67.8) million related to reductions in our U.S. valuation allowance against net deferred tax assets, which is comprised of two items: 1) a net benefit of ($19.5) million included in the estimated annual effective tax rate resulting from forecasted net income in the U.S. with no corresponding tax expense due to utilization of valuation allowances, and 2) a benefit of ($48.3) million resulting from changes in determinations relating to the potential realization of deferred tax assets and the resulting reversal of a valuation allowance on net deferred tax assets in the United States recorded discretely.

### Segment Results of Operations

The following table presents sales and segment profit (loss) for each of the reportable segments for the three and nine months ended September 30, 2011 and 2012:

*(Dollar amounts in thousands)*

| Sales to external customers | Three Months Ended September 30, 2011 | 2012 | Nine Months Ended September 30, 2011 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| North America | $348,507 | $363,859 | $1,073,655 | $1,139,273 |
| International | 360,037 | 320,170 | 1,084,121 | 1,044,521 |
| Consolidated | $708,544 | $684,029 | $2,157,776 | $2,183,794 |
| Segment profit (loss) |  |  |  |  |
| North America | $31,850 | $32,790 | $131,880 | $113,922 |
| International | (15,788) | (17,040) | (50,059) | (36,408) |
| Income before income taxes | $16,062 | $15,750 | $81,821 | $77,514 |

### Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011

*North America.* Sales for the three months ended September 30, 2012 increased $15.4 million, or 4.4%, primarily due to an increase in sales volume, partially offset by unfavorable foreign exchange of $3.5 million. Segment profit for the three months ended September 30, 2012 increased by $0.9 million, primarily due to the favorable impact of our lean savings and increased sales volume, partially offset by higher raw material costs and increased staffing.

*International.* Sales for the three months ended September 30, 2012 decreased $39.9 million, or 11.1%, primarily due to unfavorable foreign exchange of $39 million and decreased volumes. Segment loss increased by $1.3 million, primarily due to higher raw material costs, unfavorable foreign exchange and decreased volumes, partially offset by the favorable impact of our lean savings.

### Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011

*North America.* Sales for the nine months ended September 30, 2012 increased $65.6 million, or 6.1%, primarily due to an increase in sales volume, offset by unfavorable foreign exchange of $16.5 million. Segment profit for the nine months ended September 30, 2012 decreased by $18 million, primarily due to higher raw material costs, increased staffing and a gain of $11.4 million recognized in 2011 for the partial sale of ownership in our NISCO joint venture, partially offset by the favorable impact of lean savings and increased sales volume.

*International.* Sales for the nine months ended September 30, 2012 decreased $39.6 million, or 3.7%, compared to the nine months ended September 30, 2011, primarily due to unfavorable foreign exchange of $102.1 million and decreased production volumes, partially offset by sales from our joint venture with FMEA. Segment loss improved by $13.7 million, primarily due to restructuring costs that were recorded in 2011 for the joint venture agreement with FMEA and the favorable impact of lean savings, partially offset by higher raw material costs, unfavorable foreign exchange and decreased volumes.

### 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, cash on hand and borrowings under our Senior ABL Facility. We anticipate that funds generated by operations, cash on hand 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 used in operations was $22 million for the nine months ended September 30, 2012, which included $187.4 million of cash used that related to changes in operating assets and liabilities. The use of cash related to operating assets and liabilities was primarily a result of increased accounts receivables of $110.6 million due primarily to increased demand for our products. In addition, pension contributions of $29.8 million were made during the nine months ended September 30, 2012. Net cash provided by operations was $45.8 million for the nine months ended September 30, 2011, which included $100.4 million of cash used that related to changes in operating assets and liabilities.

*Investing Activities.* Net cash used in investing activities was $83.6 million for the nine months ended September 30, 2012, which consisted primarily of $91.5 million of capital spending, offset by proceeds of $9 million for the sale of fixed assets. Net cash used by 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. We anticipate that we will spend approximately $120 million to $130 million on capital expenditures in 2012.

*Financing Activities.* Net cash used in financing activities totaled $37.8 million for the nine months ended September 30, 2012, which consisted primarily of repurchase of preferred stock of $4.9 million, repurchase of common stock of $20.6 million, a decrease in short-term debt and payments on long-term debt aggregating $7.1 million, and payment of cash dividends of $5.1 million. 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 aggregating $7.5 million and payment of cash dividends of $5.4 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, 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. generally accepted accounting principles (“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 comparable financial measure in accordance with U.S. GAAP (dollars in millions):

|  | Three Months Ended September 30, 2011 | 2012 | Nine Months Ended September 30, 2011 | 2012 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $15.7 | $11.6 | $79.6 | $112.7 |
| Provision (benefit) for income tax expense | 8.0 | 5.4 | 26.8 | (32.8) |
| Interest expense, net of interest income | 9.6 | 11.3 | 30.2 | 33.3 |
| Depreciation and amortization | 31.7 | 29.1 | 92.0 | 91.2 |
| EBITDA | $65.0 | $57.4 | $228.6 | $204.4 |
| Restructuring (1) | 6.5 | 10.2 | 48.1 | 15.8 |
| Noncontrolling interest restructuring (2) | (1.3) | (0.2) | (19.0) | (0.5) |
| Net gain on partial sale of joint venture (3) | — | — | (11.4) | — |
| Stock-based compensation (4) | 3.0 | 2.4 | 8.3 | 7.4 |
| Inventory write-up (5) | — | — | 0.7 | — |
| Acquisition costs (6) | 0.2 | — | 2.2 | — |
| Adjusted EBITDA | $73.4 | $69.8 | $257.5 | $227.1 |

(1) Includes non-cash restructuring.

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

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

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

(5) Write-up of inventory to fair value for the USi, Inc. and the FMEA joint venture, net of noncontrolling interest.

(6) Costs incurred in relation 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 Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of U.S. federal securities laws, and we intend that such forward-looking statements be subject to the safe harbor created thereby. We make forward-looking statements in this Quarterly Report on Form 10-Q and may make such statements in future filings with the SEC. We may also make forward-looking statements in our press releases or other public or stockholder communications. 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 and, in particular, appear under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,” and “Business Environment and Outlook.” 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, no assurances can be made that these expectations, beliefs, and projections will be achieved. Forward-looking statements are not guarantees of future performance and are subject to significant risks and uncertainties that may cause actual results or achievements to be materially different from the future results or achievements expressed or implied by the forward-looking statements.

The risks, uncertainties, and other important factors that could cause our actual results to differ materially from the forward-looking statements in this report include, among others: the Company’s dependence on the automotive industry; further restructuring of the Company’s customers; availability and cost of raw materials; pricing pressures and volume requirements of the Company’s customers; the ability to meet significant increase in customer demand; increased costs negatively impacting the Company’s profitability; competition in the automotive industry; sovereign and other risks related to conducting operations outside the United States; foreign currency fluctuations; the Company’s ability to achieve benefits from its joint venture operations not operated for the Company’s sole benefit; the Company’s exposure to the uncertainty of political disruptions and increased violence in Mexico; the uncertainty of the Company’s ability to achieve expected cost reduction savings; the Company’s dependence on certain major customers and platforms; the Company’s exposure to product liability and warranty claims; labor conditions; the Company’s ability to attract and retain key personnel; the Company’s ability to meet customers’ needs for new and improved products in a timely manner; the Company’s ability to select and integrate attractive business acquisitions; the Company’s legal rights to its intellectual property portfolio; environmental and other regulations; the outcome of legal proceedings the Company is or may become party to; volatility in the Company’s expected annual effective tax rate; impact of the Company’s capital structure on its financial condition and ability to obtain financing in the future; the Company’s ability to generate cash to meet its debt and other cash obligations; the Company’s pension plans; any impairment of a significant amount of the Company’s goodwill or other intangible asset; potential conflicts of interest between the Company’s owners and the Company; limitations on flexibility in operating the Company’s business contained in its debt agreements; the Company’s exposure to natural disasters; and other risks listed in our filings with the SEC. See Item 1A. Risk Factors, in our 2011 Annual Report on Form 10-K 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, 197 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 2011 Annual Report on Form 10-K.

## Controls and procedures

As filed, 884 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 13a-15(e) and 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.

## Risk factors

As filed, 545 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 2011 Annual Report on Form 10-K (the “Form 10-K”) which could materially impact our business, financial condition or future results. Risks disclosed in the Form 10-K 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 8, 2012.
Source: SEC EDGAR, the filing index for accession 0001193125-12-459148. Last ingested by Listed: Nov 10, 2026, 02:27 ET. No prices; not investment advice.