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COOPER-STANDARD HOLDINGS INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This Management's Discussion and Analysis of Financial Condition and Results of Operations 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" below) and in our 2013 Annual Report (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 South America 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. Details on light vehicle production in certain regions for the three and nine months ended September 30, 2013 and 2014 are provided in the following table: Three Months Ended September 30, Nine Months Ended September 30, (In millions of units) 2013(1,2) 2014(1) % Change 2013(1,2) 2014(1) % Change North America 3.9 4.2 8.2% 12.2 12.8 5.4% Europe 4.6 4.5 (0.6)% 14.5 15.1 3.7% South America 1.2 1.0 (20.5)% 3.5 2.9 (18.0)% Asia Pacific 10.3 10.8 4.7% 31.4 33.2 5.5% (1) Production data based on IHS Automotive, September 2014. (2) Production data for 2013 has been updated to reflect actual production levels. The expected annualized light vehicle production volumes for 2014, compared to the actual production volumes for 2013 are provided in the following table: (In millions of units) 2013(1,2) 2014(1) % Change North America 16.2 17.0 5.2% Europe 19.5 20.0 2.4% South America 4.5 3.8 (15.6)% Asia Pacific 43.0 44.9 4.5% (1) Production data based on IHS Automotive, September 2014. (2) Production data for 2013 has been updated to reflect actual production levels. The expected light vehicle production volume for the fourth quarter of 2014, compared to the actual production volumes for the fourth quarter of 2013 are provided in the following table: (In millions of units) Q4 2013(1) Q4 2014(1) % Change North America 4.0 4.2 4.4 % Europe 5.0 4.9 (1.3 )% South America 1.1 1.0 (7.6 )% Asia Pacific 11.5 11.7 1.7 % (1) Production data based on IHS Automotive, September 2014. 22 -------------------------------------------------------------------------------- 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, fuel economy, fit and finish and overall performance. Consolidations and market share shifts among vehicle manufacturers continues to put additional pressures on the supply chain. At the same time, the introduction of multiple new vehicle platforms across most OEMs, coupled with volume recovery in some regions, has put increased pressure on the supply chain's capital and capacity. We expect to continue to add necessary infrastructure to support our customers' new vehicle launch needs and transfer capacity to low cost regions to both address pricing pressure and provide local support to customers in emerging markets. Results of Operations Three Months Ended September 30, Nine Months Ended September 30, 2013 2014 2013 2014 (dollar amounts in thousands) Sales $ 764,057 $ 780,954 $ 2,296,341 $ 2,476,113 Cost of products sold 649,028 669,701 1,928,735 2,084,492 Gross profit 115,029 111,253 367,606 391,621 Selling, administration & engineering expenses 72,968 67,365 220,807 228,609 Amortization of intangibles 3,785 3,892 11,534 12,325 Restructuring 1,907 4,845 7,755 11,690 Other operating profit - (18,385 ) - (18,385 ) Operating profit 36,369 53,536 127,510 157,382 Interest expense, net of interest income (15,171 ) (9,405 ) (39,953 ) (35,332 ) Equity earnings 2,595 1,094 8,693 4,075 Other income (expense), net 960 (4,129 ) (5,385 ) (32,932 ) Income before income taxes 24,753 41,096 90,865 93,193 Income tax expense 4,467 18,866 24,560 35,354 Net income 20,286 22,230 66,305 57,839 Net (income) loss attributable to noncontrolling interests 310 436 2,424 (2,244 ) Net income attributable to Cooper-Standard Holdings Inc. $ 20,596 $ 22,666 $ 68,729 $ 55,595 Three Months Ended September 30, 2014 Compared with Three Months Ended September 30, 2013 Sales. Sales were $781.0 million for the three months ended September 30, 2014 compared to $764.1 million for the three months ended September 30, 2013, an increase of $16.9 million, or 2.2%. Sales were favorably impacted by increased volumes in North America, Europe and Asia Pacific and incremental sales related to the Jyco acquisition, which was completed July 31, 2013. These items were partially offset by reduced volumes in South America, customer price concessions, the sale of our thermal and emissions product line and unfavorable foreign exchange of $3.1 million. 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 $669.7 million for the three months ended September 30, 2014 compared to $649.0 million for the three months ended September 30, 2013, an increase of $20.7 million, or 3.2%. Raw materials comprise the largest component of our cost of products sold and represented approximately 49% and 48% of total cost of products sold for the three months ended September 30, 2014 and 2013, 23 -------------------------------------------------------------------------------- respectively. The period was impacted by increased volumes primarily in North America, Europe and Asia Pacific, higher staffing costs and other operating expenses and the Jyco acquisition. These items were partially offset by continuous improvement savings. Gross Profit. Gross profit for the three months ended September 30, 2014 was $111.3 million compared to $115.0 million for the three months ended September 30, 2013, a decrease of $3.8 million, or 3.3%. The decrease in gross profit was driven primarily by customer price concessions and higher staffing costs, unfavorable foreign exchange and other operating expenses, partially offset by the favorable impact of continuous improvement savings. As a percentage of sales, gross profit was 15.1% and 14.2% of sales for the three months ended September 30, 2013 and 2014, respectively. Selling, Administration and Engineering. Selling, administration and engineering expense for the three months ended September 30, 2014 was $67.4 million, or 8.6% of sales, compared to $73.0 million, or 9.6% of sales, for the three months ended September 30, 2013. Selling, administration and engineering expense for the three months ended September 30, 2014 was favorably impacted by certain lower compensation expenses. Restructuring. Restructuring charges were $4.8 million for the three months ended September 30, 2014 compared to $1.9 million for the three months ended September 30, 2013. The increase is due primarily to additional expenses incurred related to our European restructuring initiatives. Other Operating Profit. Other operating profit for the three months ended September 30, 2014 was $18.4 million, compared to $0 for the three months ended September 30, 2013. The change is the result of the gain on the sale of our thermal and emissions product line in the third quarter of 2014. Interest Expense, Net. Net interest expense of $9.4 million for the three months ended September 30, 2014 resulted primarily from interest and debt issue amortization recorded on the Term Loan. Net interest expense of $15.2 million for the three months ended September 30, 2013 consisted primarily of interest and debt issue amortization recorded on the Senior Notes and Senior PIK Toggle Notes. Other Income (Expense), Net. Other expense for the three months ended September 30, 2014 was $4.1 million, which consisted primarily of foreign currency losses of $4.8 million and a loss on sale of receivables of $0.5 million, partially offset by other miscellaneous income of $1.2 million. Other income for the three months ended September 30, 2013 was $1.0 million, which consisted primarily of foreign currency gains of $0.8 million, gains related to forward contracts of $0.4 million, and other miscellaneous income of $0.2 million, partially offset by loss on sale of receivables of $0.4 million. Income Tax Expense. For the three months ended September 30, 2014, we recorded an income tax expense of $18.9 million on earnings before income taxes of $41.1 million. This compares to an income tax expense of $4.5 million on earnings before income taxes of $24.8 million for the same period of 2013. The effective tax rate for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 is higher primarily as a result of a discrete tax expense recorded for an uncertain tax position in one of the Company's foreign subsidiaries in the three months ended September 30, 2014. The income tax rate for the three months ended September 30, 2014 varies from statutory rates due to the impact of discrete items in the quarter, uncertain tax positions, 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, income taxes on foreign earnings taxed at rates lower than the U.S. statutory rate, tax credits, income tax incentives, and other permanent items. Further, the Company's current and future provision for income taxes may be impacted by the recognition of valuation allowances in certain countries. The Company intends to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. Nine Months Ended September 30, 2014 Compared with Nine Months Ended September 30, 2013 Sales. Sales were $2,476.1 million for the nine months ended September 30, 2014 compared to $2,296.3 million for the nine months ended September 30, 2013, an increase of $179.8 million, or 7.8%. Sales were favorably impacted by increased volumes in North America, Europe and Asia Pacific and incremental sales related to the Jyco acquisition. These items were partially offset by customer price concessions and the sale of our thermal and emissions product line. 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 $2,084.5 million for the nine months ended September 30, 2014 compared to $1,928.7 million for the nine months ended September 30, 2013, an increase of $155.8 million, or 8.1%. Raw materials comprise the largest component of our cost of products sold and represented 49% of total cost of products sold for the nine months ended September 30, 2014 and 2013. The period was impacted by increased 24 -------------------------------------------------------------------------------- volumes in North America, Europe and Asia Pacific, higher staffing costs and other operating expenses and the Jyco acquisition. These items were partially offset by continuous improvement savings. Gross Profit. Gross profit for the nine months ended September 30, 2014 was $391.6 million compared to $367.6 million for the nine months ended September 30, 2013. The increase was driven by the favorable impact of continuous improvement savings and increased volumes primarily in North America and Europe, partially offset by customer price concessions, higher staffing costs and other operating expenses. As a percentage of sales, gross profit was 16.0% and 15.8% of sales for the nine months ended September 30, 2013 and 2014, respectively. Selling, Administration and Engineering. Selling, administration and engineering expense for the nine months ended September 30, 2014 was $228.6 million, or 9.2% of sales, compared to $220.8 million, or 9.6% of sales, for the nine months ended September 30, 2013. Selling, administration and engineering expense for the nine months ended September 30, 2014 was impacted by increased staffing expenses as we increase our research and development and engineering resources to support our growth initiatives around the world and improve our business processes, partially offset by certain lower compensation expenses. Restructuring. Restructuring charges were $11.7 million for the nine months ended September 30, 2014 compared to $7.8 million for the nine months ended September 30, 2013. The increase is due primarily to the timing of our various restructuring initiatives and additional costs associated with our European restructuring initiatives. Other Operating Profit. Other operating profit for the nine months ended September 30, 2014 was $18.4 million, compared to $0 for the nine months ended September 30, 2013. The change is the result of the gain on the sale of our thermal and emissions product line in the third quarter of 2014. Interest Expense, Net. Net interest expense of $35.3 million for the nine months ended September 30, 2014 resulted primarily from interest and debt issue amortization recorded on the Term Loan, Senior Notes and Senior PIK Toggle Notes. Net interest expense of $40.0 million for the nine months ended September 30, 2013 resulted primarily from interest and debt issue amortization recorded on the Senior Notes and Senior PIK Toggle Notes. Other Income (Expense), Net. Other expense for the nine months ended September 30, 2014 was $32.9 million, which consisted primarily of a $30.5 million loss on extinguishment of debt, $4.0 million of foreign currency losses and $1.4 million of loss on sale of receivables, partially offset by a $1.9 million gain on sale of investment and $1.2 million of other miscellaneous income. Other expense for the nine months ended September 30, 2013 was $5.4 million, which consisted primarily of $6.4 million of foreign currency losses, $0.1 million of losses related to forward contracts, and $1.2 million of loss on sale of receivables, partially offset by $2.3 million of other miscellaneous income. Income Tax Expense. For the nine months ended September 30, 2014, we recorded an income tax expense of $35.4 million on earnings before income taxes of $93.2 million. This compares to an income tax expense of $24.6 million on earnings before income taxes of $90.9 million for the same period of 2013. The effective tax rate for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 is higher due to a discrete tax expense for an uncertain tax position in one of the Company's foreign subsidiaries, and the U.S. research and development tax credit not being reenacted for 2014; therefore it is not reflected as a benefit in the 2014 effective tax rate. The income tax rate for the nine months ended September 30, 2014 varies from statutory rates due to the impact of discrete items in the quarter, uncertain tax positions, 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, income taxes on foreign earnings taxed at rates lower than the U.S. statutory rate, tax credits, income tax incentives, and other permanent items. Further, the Company's current and future provision for income taxes may be impacted by the recognition of valuation allowances in certain countries. The Company intends to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. 25-------------------------------------------------------------------------------- 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, 2013 and 2014: Three Months Ended September 30, Nine Months Ended September 30, 2013 2014 2013 2014 (dollar amounts in thousands) Sales to external customers North America $ 408,615 $ 413,486 $ 1,191,521 $ 1,298,278 Europe 258,028 265,182 806,182 879,081 South America 43,069 39,967 138,746 121,139 Asia Pacific 54,345 62,319 159,892 177,615 Consolidated $ 764,057 $ 780,954 $ 2,296,341 $ 2,476,113 Segment profit (loss) North America $ 31,726 $ 45,516 $ 103,158 $ 120,445 Europe (7,500 ) 5,497 (14,784 ) (10,548 ) South America (1,838 ) (11,115 ) (5,760 ) (17,931 ) Asia Pacific 2,365 1,198 8,251 1,227 Income before income taxes $ 24,753 $ 41,096 $ 90,865 $ 93,193 Three Months Ended September 30, 2014 Compared with Three Months Ended September 30, 2013 North America. Sales for the three months ended September 30, 2014 increased $4.9 million, or 1.2%, primarily due to an increase in sales volume, partially offset by customer price concessions, the sale of our thermal and emissions product line and unfavorable foreign exchange of $3.4 million. In addition, sales were favorably impacted by the Jyco acquisition which was completed July 31, 2013. Segment profit for the three months ended September 30, 2014 increased by $13.8 million, primarily due to the favorable impact of continuous improvement savings and certain lower compensation costs, partially offset by higher staffing costs, other operating expenses and customer price concessions. Europe. Sales for the three months ended September 30, 2014 increased $7.2 million, or 2.8%, primarily due to an increase in sales volume, partially offset by unfavorable foreign exchange of $0.7 million, customer price concessions, and the sale of our thermal and emissions product line. Segment profit increased by $13.0 million, primarily due to increased sales volume, certain lower compensation costs and the favorable impact of continuous improvement savings, partially offset by higher staffing costs, unfavorable foreign exchange, other operating expenses and customer price concessions. South America. Sales for the three months ended September 30, 2014 decreased $3.1 million, or 7.2%, primarily due to a decrease in sales volume. Segment loss for the three months ended September 30, 2014 increased by $9.3 million, primarily due to a decrease in sales volume, unfavorable foreign exchange and higher other operating expenses, partially offset by the favorable impact of continuous improvement savings. Asia Pacific. Sales for the three months ended September 30, 2014 increased $8.0 million, or 14.7%, primarily due to the Jyco acquisition which was completed July 31, 2013, favorable foreign exchange of $0.9 million and increased sales volume, partially offset by customer price concessions. Segment profit for the three months ended September 30, 2014 decreased $1.2 million, primarily due to higher staffing costs and customer price concessions, partially offset by the favorable impact of continuous improvement savings and the Jyco acquisition. Nine Months Ended September 30, 2014 Compared with Nine Months Ended September 30, 2013 North America. Sales for the nine months ended September 30, 2014 increased $106.8 million, or 9.0%, primarily due to an increase in sales volume, partially offset by customer price concessions and unfavorable foreign exchange of $15.7 million. In addition, sales were favorably impacted by the Jyco acquisition which was completed July 31, 2013. Segment profit for the nine months ended September 30, 2014 increased by $17.3 million, primarily due to increased sales volume, certain lower 26 -------------------------------------------------------------------------------- compensation costs and the favorable impact of continuous improvement savings, partially offset by the loss on the extinguishment of debt, higher staffing and other operating expenses and customer price concessions. Europe. Sales for the nine months ended September 30, 2014 increased $72.9 million, or 9.0%, primarily due to an increase in sales volume and favorable foreign exchange of $25.2 million, partially offset by customer price concessions and the sale of our thermal and emissions product line. Segment loss for the nine months ended September 30, 2014 improved by $4.2 million, primarily due to increased sales volume, certain lower compensation costs and the favorable impact of continuous improvement savings, partially offset by the loss on the extinguishment of debt, higher staffing costs and other operating expenses and customer price concessions. South America. Sales for the nine months ended September 30, 2014 decreased $17.6 million, or 12.7%, primarily due to a decrease in sales volume and unfavorable foreign exchange of $8.2 million. Segment loss for the nine months ended September 30, 2014 increased by $12.2 million, primarily due to the loss on the extinguishment of debt, a decrease in sales volume and higher other operating expenses, partially offset by the favorable impact of continuous improvement savings. Asia Pacific. Sales for the nine months ended September 30, 2014 increased $17.7 million, or 11.1%, primarily due to the Jyco acquisition which was completed July 31, 2013, and increased sales volume, partially offset by customer price concessions and unfavorable foreign exchange of $1.1 million. Segment profit for the nine months ended September 30, 2014 decreased by $7.0 million, primarily due to the loss on the extinguishment of debt, higher staffing costs and customer price concessions, partially offset by the favorable impact of continuous improvement savings and the Jyco acquisition. 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, in addition to certain receivable 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 5. "Debt" to the condensed consolidated financial statements for additional information. 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 next 12 months. 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 $88.7 million for the nine months ended September 30, 2014, which included $83.5 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 and inventories and decreased accounts payable and pension benefits, partially offset by increased payroll liabilities. Net cash provided by operations was $17.6 million for the nine months ended September 30, 2013, which included $152.5 million of cash used that related to changes in operating assets and liabilities. Investing Activities. Net cash used in investing activities was $106.9 million for the nine months ended September 30, 2014, which consisted primarily of $154.3 million of capital spending and a $5.0 million deposit on acquisition of business, offset by proceeds of $44.9 million from the sale of our thermal and emissions product line, a $1.0 million return on equity investments, proceeds of $3.2 million from the sale of investment, and proceeds of $3.4 million for the sale of fixed assets and other. Net cash used in investing activities was $140.6 million for the nine months ended September 30, 2013, which consisted primarily of $132.8 million of capital spending and $13.5 million for the Jyco acquisition, offset by a $2.1 million return on equity investments and proceeds of $3.6 million from the sale of fixed assets and other. We anticipate that we will spend approximately $195 million to $205 million on capital expenditures in 2014. Financing Activities. Net cash provided by financing activities totaled $66.8 million for the nine months ended September 30, 2014, which consisted primarily of $737.5 million related to the proceeds from issuance of long-term debt, $8.5 million related to the exercise of stock warrants and increase in long-term debt of $6.6 million, partially offset by the repurchase of 27 -------------------------------------------------------------------------------- Senior Notes and the Senior PIK Toggle Notes of $675.6 million, increase in short term debt of $3.7 million, payments on long-term debt of $2.2 million and taxes withheld and paid on employees' share based awards of $4.2 million. Net cash used in financing activities totaled $26.1 million for the nine months ended September 30, 2013, which consisted primarily of repurchase of common stock of $217.5 million, payments on long-term debt of $3.8 million, purchase of noncontrolling interest of $1.9 million, payment of cash dividends on our 7% preferred stock of $4.7 million and taxes withheld and paid on employees' share based awards of $5.9 million, partially offset by proceeds of $194.4 million from the issuance of Senior PIK Toggle Notes and $11.3 million related to the exercise of stock warrants. 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 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, 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. 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, 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 Term Loan 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. 28 -------------------------------------------------------------------------------- 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: Three Months Ended September 30, Nine Months Ended September 30, 2013 2014 2013 2014 (dollar amounts in millions) Net income attributable to Cooper-Standard Holdings Inc. $ 20.6 $ 22.7 $ 68.7 $ 55.6 Income tax expense 4.5 18.9 24.6 35.4 Interest expense, net of interest income 15.2 9.4 40.0 35.3 Depreciation and amortization 25.2 28.0 83.2 84.7 EBITDA $ 65.5 $ 79.0 $ 216.5 $ 211.0 Loss on extinguishment of debt (1) - - - 30.5 Gain on divestiture (2) - (17.9 ) - (17.9 ) Restructuring (3) 1.9 4.7 6.9 11.5 Stock-based compensation (4) 1.1 - 4.3 2.8 Acquisition costs 0.7 0.4 0.7 0.4 Other 0.3 0.4 0.3 1.1 Adjusted EBITDA $ 69.5 $ 66.6 $ 228.7 $ 239.4 (1) Loss on extinguishment of debt relating to the repurchase of our Senior Notes and Senior PIK Toggle Notes. (2) Gain on sale of thermal and emissions product line. (3) Includes non-cash restructuring and is net of noncontrolling interest. (4) Non-cash stock amortization expense and non-cash stock option expense for grants issued at emergence from bankruptcy. Recent Accounting Pronouncements See Note 1. "Overview" 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: cyclicality of the automotive industry with the possibility of further material contractions in automotive sales and production affecting the viability of our customers and financial condition of our customers; global economic uncertainty, particularly in Europe; loss of large customers or significant platforms; our 29 -------------------------------------------------------------------------------- ability to generate sufficient cash to service our indebtedness, and obtain future financing; operating and financial restrictions imposed on us by our credit agreements; our underfunded pension plans; supply shortages; escalating pricing pressures and decline of volume requirements from our customers; our ability to meet significant increases in demand; availability and increasing volatility in cost of raw materials or manufactured components; our ability to continue to compete successfully in the highly competitive automotive parts industry; risks associated with our non-U.S. operations; foreign currency exchange rate fluctuations; our ability to control the operations of joint ventures for our benefit; the effectiveness of our continuous improvement program and other cost savings plans; a disruption in our information technology systems; product liability and warranty and recall claims that may be brought against us; work stoppages or other labor conditions; natural disasters; our ability to meet our customers' needs for new and improved products in a timely manner or cost-effective basis; the possibility that our acquisition strategy may not be successful; our legal rights to our intellectual property portfolio; environmental and other regulations; the possible volatility of our annual effective tax rate; significant changes in discount rates and the actual return on pension assets; the possibility of future impairment charges to our goodwill and long-lived assets; and the interests of our major stockholders may conflict with our interests. See Item 1A. Risk Factors, in our 2013 Annual Report 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk 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 2013 Annual Report. Item 4. Controls and Procedures 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 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, 2014 that have materially affected, or are reasonably likely to affect, the Company's internal control over financial reporting. 30-------------------------------------------------------------------------------- |