Cooper-Standard Holdings Inc.: Form 10-Q for the period ended Sep 30, 2020

This management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition. Our historical results may not indicate, and should not be relied upon as an indication of, our future performance. Our forward-looking statements reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. See “Forward-Looking Statements” below for a discussion of risks associated with reliance on forward-looking statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed below and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the U.S. Securities and Exchange Commission (“2019 Annual Report”), including Item 1A. “Risk Factors.” The following should be read in conjunction with our 2019 Annual Report and the other information included herein. Our discussion of trends and conditions supplements and updates such discussion included in our 2019 Annual Report. References in this quarterly report on Form 10-Q (the “Report”) to “we,” “our,” or the “Company” refer to Cooper-Standard Holdings Inc., together with its consolidated subsidiaries.

Executive Overview

Our Business

We design, manufacture and sell sealing, fuel and brake delivery, and fluid transfer systems for use primarily in passenger vehicles and light trucks manufactured by global automotive original equipment manufacturers (“OEMs”). We are primarily a “Tier 1” supplier, with approximately 83% of our sales in 2019 made directly to major OEMs. We operate our business along the following reportable segments: North America, Europe, Asia Pacific and South America. All other business activities are reported in Corporate, eliminations and other.

During the first quarter of 2019 and in prior periods, we also operated an anti-vibration systems (“AVS”) product line. On April 1, 2019, we completed the divestiture of our AVS product line.

Recent Trends and Conditions

General Economic Conditions and Outlook

The global automotive industry is susceptible to uncertain economic conditions that could adversely impact new vehicle demand and production. Business conditions may vary significantly from period to period or region to region. The global COVID-19 pandemic created an unusually high degree of economic disruption and uncertainty during the first nine months of 2020. Although most automotive manufacturing operations continued production during the third quarter, many industries remain significantly impacted by policies, regulations, risks and concerns surrounding the novel coronavirus, which is continuing to drive significant uncertainty for the broader economic outlook and for the automotive industry around the world. Economists at the International Monetary Fund (IMF) believe global economic activity is likely to remain subdued until perceived health risks abate. They are now expecting the global economy to contract by approximately 4.4% in 2020.

In North America, economic conditions and consumer confidence have improved compared to the second quarter but continue to be negatively impacted by concerns over the COVID-19 pandemic and related government-imposed restrictions. Uncertainty related to the outcome of the presidential election in the United States will also likely weigh on consumer confidence in the region through the fourth quarter of 2020.

The United States government has taken historic measures to provide fiscal stimulus to the economy in an effort to sustain businesses, limit job losses and preempt deeper declines in consumer confidence during the pandemic. Further stimulus actions are being considered. Despite these efforts, IMF economists now expect economic contraction of approximately 4.7% for the North America region in 2020.

In the European region, the IMF is projecting economic contraction of approximately 8.3% for 2020. Current and potential future impacts of the COVID-19 pandemic will continue to weigh on the economies of the region. Due to the pandemic, certain European governments mandated closures of broad segments of the economy in the first half of the year. Partial re-opening of the closed sectors has occurred at varying times and rates across the region. More recently, however, a resurgence of COVID-19 cases is causing some governments to consider further shutdown actions. While automotive manufacturers have resumed production, on-going health risks, geopolitical concerns and the implementation of new environmental regulations in the automotive industry will likely continue to impact vehicle demand and economic growth.

In the Asia Pacific region, the IMF expects China’s economic growth rate to slow to just 1.8% in 2020. The post-COVID-19 economic recovery in the country is continuing, driven, in part, by a new infrastructure initiative that is focused on accelerating the digital transformation of the country’s industries. The retail sector has also been improving in the third quarter, pointing to improved consumer confidence. Finally, the manufacturers purchasing managers index (PMI) reached a nine-year high in September, suggesting a strong industrial growth environment through the remainder of the year.

In South America, the IMF estimates that the Brazilian economy will contract by approximately 5.8% in 2020 as compared to 2019. Economic activity rebounded in the third quarter but not sufficiently to offset the sharp decline in the second quarter that was driven by the COVID-19 pandemic. The Brazilian government has extended certain economic assistance programs to the end of the year to help support consumers. This spending will add to the country’s already high national debt level and could lead to lower consumer confidence and foreign investment in the region going forward. We remain cautious for the mid to long-term outlook given the long history of political instability and economic volatility in the region.

Raw Materials

Our business is susceptible to inflationary pressures with respect to raw materials which may place operational and profitability burdens on the entire supply chain. Costs related to raw materials, such as steel, aluminum, and oil and oil-derived commodities, continue to be volatile. In addition, we continue to expect commodity cost volatility to have an impact on future earnings and operating cash flows. As such, on an ongoing basis, we work with our customers and suppliers to mitigate both inflationary pressures and our material-related cost exposures.

Production Levels

Our business is directly affected by the automotive vehicle production rates in North America, Europe, Asia Pacific and South America. Beginning in the first quarter of 2020, as a result of COVID-19, we experienced the shutdown of effectively all of our facilities in Asia Pacific coinciding with the shutdown of our customer facilities in that region. Facility shutdowns then occurred in March 2020 for a majority of our facilities in North America, Europe and South America.

Production resumed in Asia Pacific by the end of the first quarter of 2020, albeit at a lower capacity, and has steadily increased in production capacity throughout the year. For our North America and Europe facilities, production resumed in May 2020 at a lower capacity and has increased through the subsequent months. Finally, for our South America facilities, production resumed in the second quarter, but has increased more slowly compared to the other regions. We are collaborating closely with our customers as production volume continues to increase and approach pre-COVID-19 levels, while also adhering to enhanced safety standards and measures to protect our employees.

Light vehicle production in certain regions for the three and nine months ended September 30, 2020 and 2019 was as follows:

(In millions of units)

(1) Production data based on IHS Automotive, October 2020.

The COVID-19 pandemic has emerged as the biggest risk factor facing the automotive industry. In the first half of the year, total vehicle production decreased substantially across the globe. Plant shutdowns have greatly slowed production and have been accompanied by decreased demand for vehicles, as new vehicle sales are highly dependent on strong consumer confidence and low unemployment. While the outlook for the fourth quarter of 2020 and the full year 2021 remains uncertain, the global economy has begun to rebound from the impacts of the pandemic. Lower unemployment rates, improving consumer confidence and lower than normal light vehicle inventory levels could all have a positive impact on light vehicle production going forward.

Results of Operations

(dollar amounts in thousands)

Three Months Ended September 30, 2020 Compared with Three Months Ended September 30, 2019

Sales

Sales for the three months ended September 30, 2020 decreased 7.6%, compared to the three months ended September 30, 2019. The decline was driven by the decrease in vehicle production volume and the divestiture of our European rubber fluid transfer and specialty sealing businesses and Indian operations.

(dollar amounts in thousands)

* Net of customer price reductions

Gross Profit

(dollar amounts in thousands)

* Net of customer price reductions

** Includes the net impact of divestitures

Cost of products sold is primarily comprised of material, labor, manufacturing overhead, freight, depreciation, warranty costs and other direct operating expenses. The Company’s material cost of products sold was approximately 49% and 50% of total cost of products sold for the three months ended September 30, 2020 and 2019, respectively. The change in the cost of products sold was driven by vehicle volume and mix, the divestiture of our European rubber fluid transfer and specialty sealing businesses and Indian operations, continuous improvement and lean manufacturing, material cost reductions, commodity price fluctuations, foreign exchange and wage inflation.

Gross profit for the three months ended September 30, 2020 increased $4.3 million or 5.3% compared to the three months ended September 30, 2019. The increase was driven by net favorable operational performance, restructuring savings and material cost reductions. These items were partially offset by wage inflation, employee incentives and foreign exchange.

Selling, Administration and Engineering Expense. Selling, administration and engineering expense includes administrative expenses as well as product engineering and design and development costs. Sales, administration and engineering expense for the three months ended September 30, 2020 was 8.8% of sales compared to 8.5% for the three months ended September 30, 2019. The increase in rate was driven by the decline in total sales. Selling, administration and engineering expenses were lower by $3.0 million. The decrease in amount was primarily due to savings generated from salaried headcount initiatives including net divestitures and lower travel expenses, partially offset by general inflation and higher variable employee compensation expenses.

Gain on Sale of Business, Net. The gain on sale of business of $2.3 million for the three months ended September 30, 2020 related to the net effect of our 2020 divestitures, which included the European fluid transfer and specialty sealing business, Indian operations, the deconsolidation of a joint venture in our Asia Pacific region, and the finalized adjustments related to the sale of our AVS product line. The gain on sale of business for the three months ended September 30, 2019 included a $1.7 million adjustment, decreasing the amount of the gain recognized on the sale of the AVS business in the second quarter of 2019, primarily due to working capital adjustments.

Amortization of Intangibles. Intangible amortization for the three months ended September 30, 2020 decreased $2.6 million compared to the three months ended September 30, 2019. The decrease was primarily driven by a customer relationship intangible asset in the North America region that was fully amortized during the second quarter of 2020.

Restructuring. Restructuring charges for the three months ended September 30, 2020 increased $0.6 million compared to the three months ended September 30, 2019. The increase was driven by higher restructuring charges in North America, primarily related to plant closures.

Impairment Charges. Non-cash impairment charges for the three months ended September 30, 2020 decreased $1.9 million compared to the three months ended September 30, 2019, primarily related to tooling machinery and equipment charges due to the termination of certain customer programs in the Asia Pacific region in the third quarter of 2019.

Interest Expense, Net. Net interest expense for the three months ended September 30, 2020 increased $7.6 million compared to the three months ended September 30, 2019, primarily due to higher outstanding debt balances including our recently issued Senior Secured Notes.

Other Income (Expense), Net. Other income for the three months ended September 30, 2020 increased $3.3 million compared to the three months ended September 30, 2019, primarily due to higher foreign currency gains.

Income Tax (Benefit) Expense. Income tax benefit for the three months ended September 30, 2020 was $2.4 million on earnings before income taxes of $4.3 million. This compares to an income tax expense of $0.7 million on losses before income taxes of $5.7 million for the three months ended September 30, 2019. The effective tax rate for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 differed primarily due to the geographic mix of pre-tax losses, the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions, as well as benefits recorded as a result of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) net operating loss (“NOL”) carry back provision that allows NOLs generated to be carried back up to five years at the tax rates in effect during those periods, rather than carried forward at current federal tax rates of 21%. We have included a $19.8 million benefit in the estimated annual effective tax rate for this CARES Act provision which was used to calculate the income tax benefit recorded in the three months ended September 30, 2020.

Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019

Sales

Sales for the nine months ended September 30, 2020 decreased 29.5%, compared to the nine months ended September 30, 2019. The decline was mainly driven by the decrease in vehicle production volume due to government imposed global shutdowns related to the COVID-19 pandemic, net divestitures, foreign exchange and customer price reductions.

(dollar amounts in thousands)

* Net of customer price reductions

Gross Profit

(dollar amounts in thousands)

* Net of customer price reductions

** Includes the net impact of divestitures

Cost of products sold is primarily comprised of material, labor, manufacturing overhead, freight, depreciation, warranty costs and other direct operating expenses. The Company’s material cost of products sold was approximately 45% and 51% of total cost of products sold for the nine months ended September 30, 2020 and 2019, respectively. The change in the cost of products sold was driven by government imposed global shutdowns related to the COVID-19 pandemic, the sale of our AVS product line, the divestiture of our European rubber fluid transfer and specialty sealing businesses and Indian operations, continuous improvement and lean manufacturing, material cost reductions, commodity price fluctuations, foreign exchange, and wage inflation.

Gross profit for the nine months ended September 30, 2020 decreased 77.1% compared to the nine months ended September 30, 2019. The decrease was driven by the decline in vehicle production volume due to government imposed global shutdowns related to the COVID-19 pandemic, customer price reductions, employee incentives and wage inflation. These items were partially offset by net favorable operational performance, restructuring savings, foreign exchange and material cost reductions.

Selling, Administration and Engineering Expense. Selling, administration and engineering expense includes administrative expenses as well as product engineering and design and development costs. Sales, administration and engineering expense for the nine months ended September 30, 2020 was 11.9% of sales compared to 9.4% for the nine months ended September 30, 2019. This increase in rate was primarily due to the significant decline in total sales. The decrease in amount was primarily due to savings generated from salaried headcount initiatives, net divestitures and lower travel expenses, partially offset by general inflation and higher variable employee compensation expenses.

Gain on Sale of Business, Net. The gain on sale of business of $2.3 million for the nine months ended September 30, 2020 related to the net effect of our 2020 divestitures, which included certain European businesses and our Indian operations, the deconsolidation of a joint venture in our Asia Pacific region, and the finalized adjustments related to the sale of our AVS product line. The gain on sale of business of $188.2 million for the nine months ended September 30, 2019 related to the sale of our AVS product line within our North America, Europe and Asia Pacific segments.

Amortization of Intangibles. Intangible amortization for the nine months ended September 30, 2020 decreased $3.5 million compared to the nine months ended September 30, 2019. The decrease was primarily driven by a customer relationship intangible asset in the North America region that was fully amortized during the second quarter of 2020.

Restructuring. Restructuring charges for the nine months ended September 30, 2020 decreased $6.0 million compared to the nine months ended September 30, 2019. The decrease was a result of lower restructuring charges in Europe, Asia Pacific and Corporate and other.

Impairment Charges. Non-cash impairment charges for the nine months ended September 30, 2020 increased $83.6 million compared to the nine months ended September 30, 2019. The increase primarily related to reducing the carrying value of the divested assets to fair value less costs to sell. Fair value was determined using a market approach, estimated based on expected proceeds.

Interest Expense, Net. Net interest expense for the nine months ended September 30, 2020 increased $7.1 million compared to the nine months ended September 30, 2019, primarily due to higher outstanding debt balances including our recently issued Senior Secured Notes.

Other Expense, Net. Other expense for the nine months ended September 30, 2020 increased $2.3 million compared to the nine months ended September 30, 2019, primarily due to higher foreign currency losses, partially offset by lower benefit related costs.

Income Tax (Benefit) Expense. Income tax benefit for the nine months ended September 30, 2020 was $55.5 million on losses before income taxes of $297.2 million. This compares to income tax expense of $47.0 million on earnings before income taxes of $179.9 million for the nine months ended September 30, 2019. The effective tax rate for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 differed primarily due to the geographic mix of pre-tax losses driven by the impairment charge on divested entities, the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions, as well as benefits recorded as a result of the CARES Act net operating loss carry back provision. We have included a $19.8 million benefit in the estimated annual effective tax rate for this CARES Act provision which was used to calculate the income tax benefit recorded in the nine months ended September 30, 2020. Additionally, a discrete expense of $13.4 million for the initial recognition of valuation allowances against net deferred tax assets in certain foreign jurisdictions was recorded in the nine months ended September 30, 2020.

Segment Results of Operations

Our business is organized into the following reportable segments: North America, Europe, Asia Pacific and South America. All other business activities are reported in Corporate, eliminations and other. The Company uses Segment adjusted EBITDA as the measure of earnings to assess the performance of each segment and determine the resources to be allocated to the segments. We have defined adjusted EBITDA as net income before interest, taxes, depreciation, amortization, restructuring expense, and special items.

The following tables present sales and segment adjusted EBITDA for each of the reportable segments.

Three Months Ended September 30, 2020 Compared with Three Months Ended September 30, 2019

Sales

(dollar amounts in thousands)

* Net of customer price reductions

• Volume and mix, net of customer price reductions, is driven by the regional mix of vehicles in Europe, North America and China.
• The impact of foreign currency exchange primarily relates to the Euro and Brazilian Real.

Segment adjusted EBITDA

(dollar amounts in thousands)

* Net of customer price reductions

• Volume and mix, net of customer price reductions, is driven by the regional mix of vehicles in Europe, North America and China.
• The impact of foreign currency exchange is driven by the Chinese Renminbi, Brazilian Real, Euro, Polish Zloty, and Czech Koruna.
• The Cost (Increases) / Decreases category above includes:
• Reduction in compensation-related expenses due to salaried headcount initiatives, purchasing savings through lean initiatives, and restructuring savings;
• Wage and variable employee compensation increases;
• The non-recurrence of prior year one-time impact of commercial settlements in Asia Pacific;
• Net manufacturing efficiencies of $10 million, primarily driven by our North America and Asia Pacific segments.

Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019

Sales

(dollar amounts in thousands)

* Net of customer price reductions

• Volume and mix, net of customer price reductions, is mainly driven by the impact of the decline in vehicle production volume driven by government imposed global shutdowns related to the COVID-19 pandemic.
• The impact of foreign currency exchange primarily relates to the Brazilian Real, Chinese Renminbi, Canadian Dollar and Mexican Peso.

Segment adjusted EBITDA

(dollar amounts in thousands)

* Net of customer price reductions

• Volume and mix, net of customer price reductions primarily includes the impact of the decline in vehicle production volume as driven by government imposed global shutdowns related to the COVID-19 pandemic.
• The impact of foreign currency exchange is driven by the Brazilian Real, Euro, Chinese Renminbi, Brazilian Real, Euro, Polish Zloty, and Czech Koruna.
• The Cost (Increases) / Decreases category above includes:
• Reduction in compensation-related expenses, due to salaried headcount initiatives, purchasing savings through lean initiatives, and restructuring savings;
• Commodity cost fluctuations, wage increases and variable employee compensation increases;
• The non-recurrence of prior year one-time impact of commercial settlements in Asia Pacific;
• Net manufacturing efficiencies of $45 million, weakened by the impact of COVID-19, primarily driven by our European, North America and Asia Pacific segments.

Liquidity and Capital Resources

Short and Long-Term Liquidity Considerations and Risks

We intend to fund our ongoing working capital, capital expenditures, debt service and other funding requirements through a combination of cash flows from operations, cash on hand, borrowings under our senior asset-based revolving credit facility (“ABL Facility”) and receivables factoring. The Company utilizes intercompany loans and equity contributions to fund its worldwide operations. There may be country-specific regulations which may restrict or result in increased costs in the repatriation of these funds. See Note 10. “Debt” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for additional information.

We continue to take aggressive action to preserve cash and enhance liquidity, including significantly decreasing our capital expenditures. Based on those actions and current projections for increasing OEM customer production, we believe that our cash flows from operations, cash on hand, borrowings under our ABL Facility and receivables factoring will enable us to meet our ongoing working capital, capital expenditures, debt service and other funding requirements for the next twelve months, despite the challenges presented by the COVID-19 pandemic. We continuously monitor and forecast our liquidity situation, take the necessary actions to preserve our liquidity and evaluate other financial alternatives that may be available to us should the need arise. 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 ABL Facility, depend on our future operating performance and cash flows 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, including the impact of COVID-19, and other factors.

Cash Flows

Operating Activities. Net cash used in operations was $26.5 million for the nine months ended September 30, 2020, compared to net cash provided by operations of $29.9 million for the nine months ended September 30, 2019. The net outflow was primarily due to decreased cash earnings, partially offset by working capital improvements.

Investing Activities. Net cash used in investing activities was $89.5 million for the nine months ended September 30, 2020, compared to net cash provided by investing activities of $113.9 million for the nine months ended September 30, 2019. Significant decreases in capital expenditures occurred throughout 2020, in order to preserve liquidity in response to the COVID-19 pandemic. Additionally, lower capital expenditures are expected in the fourth quarter of 2020. Cash provided by investing activities in 2019 consisted primarily of gross proceeds of $243.4 million from the sale of our AVS product line, partially offset by capital spending.

Financing Activities. Net cash provided by financing activities totaled $225.1 million for the nine months ended September 30, 2020, compared to net cash used in financing activities of $78.3 million for the nine months ended September 30, 2019. The inflow was primarily due to proceeds from issuance of the Senior Secured Notes during the nine months ended September 30, 2020. There were no share repurchases during the nine months ended September 30, 2020. Cash used for share repurchases was $36.6 million for the nine months ended September 30, 2019.

Share Repurchase Program

In June 2018, our Board of Directors approved a new common stock repurchase program (the “2018 Program”) authorizing us to repurchase, in the aggregate, up to $150.0 million of our outstanding common stock. Under the 2018 Program, repurchases may be made on the open market, through private transactions, accelerated share repurchases, round lot or block transactions on the New York Stock Exchange or otherwise, as determined by us and in accordance with prevailing market conditions and federal securities laws and regulations. We expect to fund any future repurchases from cash on hand and future cash flows from operations. The specific timing and amount of any future repurchase will vary based on market and business conditions and other factors. We are not obligated to acquire a particular amount of securities, and the 2018 Program may be discontinued at any time at our discretion. As of September 30, 2020, we had approximately $98.7 million of repurchase authorization remaining under the 2018 Program. We currently have no plans to repurchase shares in the foreseeable future.

We did not make any repurchases during the nine months ended September 30, 2020.

2019 Repurchases

In May 2019, we entered into an accelerated share repurchase (“ASR”) agreement with a third-party financial institution to repurchase our common stock pursuant to the 2018 Program. Under the ASR agreement, we made an up-front payment of $30.0 million and received an initial delivery of 626,305 shares of our common stock in the second quarter of 2019. The repurchase was completed in the third quarter of 2019 when we received final delivery of an additional 72,875 shares. A total of 699,180 shares were repurchased at a weighted average purchase price of $42.91 per share.

In addition to the repurchase under the ASR agreement, during the nine months ended September 30, 2019, we repurchased 85,000 shares at an average purchase price of $69.85 per share, excluding commissions, for a total cost of $5.9 million.

Non-GAAP Financial Measures

In evaluating our business, management considers EBITDA and Adjusted EBITDA to be 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 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, but are not limited to, restructuring costs, impairment charges, non-cash fair value adjustments and acquisition-related costs.

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 as a supplement to, and not as alternatives for, net income (loss), operating income, or any other performance measure derived in accordance with U.S. GAAP, nor 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 ABL Facility, Term Loan Facility, Senior Notes and Senior Secured Notes;
• 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 special items.

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

(dollar amounts in thousands)

(1) Project costs recorded in selling, administration and engineering expense related to divestitures in 2020 and acquisitions and divestiture costs in 2019.

(2) Non-cash impairment charges of $947 related to fixed assets, net of approximately $293 attributable to our noncontrolling interests for the nine months ended September 30, 2020.

(3) Lease termination costs no longer recorded as restructuring charges in accordance with ASC 842.

(4) Gain on sale of business primarily related to divestitures in 2020. In the third quarter of 2019, there were working capital adjustments to the net gain on sale of business, which related to the divestiture of the AVS product line in 2019.

Contingencies and Environmental Matters

The information concerning contingencies, including environmental contingencies and the amount currently held in reserve for environmental matters, contained in Note 21. “Commitments and Contingencies” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report, is incorporated herein by reference.

Recently Issued Accounting Pronouncements

See Note 2. “New Accounting Pronouncements” to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report.

Critical Accounting Estimates

There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2020.

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. Our use of words “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “outlook”, “guidance”, “forecast,” or future or conditional verbs, such as “will,” “should,” “could,” “would,” or “may,” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements 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. 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. Among other items, such factors may include: the impact, and expected continued impact, of the recent COVID-19 outbreak on our financial condition and results of operations; significant risks to our liquidity presented by the COVID-19 pandemic risk; prolonged or material contractions in automotive sales and production volumes; our inability to realize sales represented by awarded business; escalating pricing pressures; loss of large customers or significant platforms; our ability to successfully compete in the automotive parts industry; availability and increasing volatility in costs of manufactured components and raw materials; disruption in our supply base; competitive threats and commercial risks associated with our diversification strategy through Advanced Technology Group; possible variability of our working capital requirements; risks associated with our international operations, including changes in laws, regulations, and policies governing the terms of foreign trade such as increased trade restrictions and tariffs; foreign currency exchange rate fluctuations; our ability to control the operations of our joint ventures for our sole benefit; our substantial amount of indebtedness; our ability to obtain adequate financing sources in the future; operating and financial restrictions imposed on us under our debt instruments; the underfunding of our pension plans; significant changes in discount rates and the actual return on pension assets; effectiveness of continuous improvement programs and other cost savings plans; manufacturing facility closings or consolidation; our ability to execute new program launches; our ability to meet customers’ needs for new and improved products; the possibility that our acquisitions and divestitures may not be successful; product liability, warranty and recall claims brought against us; laws and regulations, including environmental, health and safety laws and regulations; legal proceedings, claims or investigations against us; work stoppages or other labor disruptions; the ability of our intellectual property to withstand legal challenges; cyber-attacks, data privacy concerns, other disruptions in, or the inability to implement upgrades to, our information technology systems; the possible volatility of our annual effective tax rate; changes in our assumptions as a result of IRS issuing guidance on the Tax Cuts and Jobs Act; the possibility of a failure to maintain effective controls and procedures; the possibility of future impairment charges to our goodwill and long-lived assets; our dependence on our subsidiaries for cash to satisfy our obligations.

You should not place undue reliance on these forward-looking statements. Our forward-looking statements speak only as of the date of this quarterly report on Form 10-Q, and we undertake no obligation to publicly update or otherwise revise any forward-looking statement, whether as a result of new information, future events or otherwise, except where we are expressly required to do so by law.

This quarterly report on Form 10-Q also contains estimates and other information that is based on industry publications, surveys, and forecasts. This information involves a number of assumptions and limitations, and we have not independently verified the accuracy or completeness of the information.

Except for the broad effects of COVID-19 on the global economy and major financial markets, which has and could continue to cause interest rates, currency exchange rates and commodity prices to fluctuate, 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 2019 Annual Report.

Evaluation of Disclosure Controls and Procedures

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) 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. 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 at a reasonable assurance level as of the end of the period covered by this Report.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

There have been no material changes to the risk factors we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, other than as updated in Part II, “Item 1A. Risk Factors,” in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2020 and June 30, 2020.