S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on March 25, 2011

Registration No. 333-            

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

 

 

Remy International, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   3714   35-1909253

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

600 Corporation Drive

Pendleton, Indiana 46064

(765) 778-6499

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Fred Knechtel

Senior Vice President and Chief Financial Officer

Remy International, Inc.

600 Corporation Drive

Pendleton, Indiana 46064

(765) 778-6499

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Robert S. Rachofsky, Esq.

Dewey & LeBoeuf LLP

1301 Avenue of the Americas

New York, New York 10019

(212) 259-8000

 

Joseph A. Hall, Esq.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨             

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨             

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨             

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨

  Accelerated filer   ¨   Non-accelerated filer   x     Smaller reporting company  ¨
    (Do not check if a smaller reporting company)

 

 

Calculation of Registration Fee

 

 

Title of each class of

securities to be registered

  Proposed maximum
aggregate offering price(1)
 

Amount of

registration fee

Common stock, par value $0.0001 per share(2)

  $100,000,000.00   $11,610.00
 
 
(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2)   Includes shares of common stock that may be issued on exercise of a 30-day option granted to the underwriters to cover over-allotments, if any.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated March 25, 2011

Prospectus

             shares

LOGO

Common stock

Remy International, Inc. is selling              shares of common stock. The estimated initial public offering price is between $             and $             per share.

Before this offering, our common stock has not been listed on any national securities exchange. We intend to apply to list our common stock on the                          under the symbol “RMYI.”

 

                   
      Per share      Total  

Public offering price

   $                        $                    

Underwriting discounts and commissions

   $         $     

Proceeds to us, before expenses

   $         $     
   

We have granted the underwriters an option for a period of 30 days to purchase up to              additional shares of common stock.

Investing in our common stock involves a high degree of risk. See “Risk factors” beginning on page 11.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Delivery of the shares will be made on or about                     , 2011.

 

J.P. Morgan    BofA Merrill Lynch    UBS Investment Bank

                    , 2011


Table of Contents

Table of contents

 

Prospectus summary

     1   

Risk factors

     11   

Special note regarding forward-looking statements

     33   

Use of proceeds

     34   

Dividend policy

     34   

Capitalization

     35   

Dilution

     37   

Selected consolidated financial data

     39   

Management’s discussion and analysis of financial condition and results of operations

     41   

Business

     63   

Management

     85   

Executive compensation

     90   

Certain relationships and related party transactions

     115   

Principal stockholders

     119   

Description of capital stock

     120   

Shares eligible for future sale

     126   

Material U.S. federal income tax consequences to non-U.S. holders

     129   

Underwriting (Conflicts of interest)

     133   

Legal matters

     143   

Experts

     143   

Where you can find more information

     143   

Index to financial statements

     F-1   

Certain trademarks and other intellectual property

This prospectus includes trademarks, such as “Remy,” “Delco Remy” and “World Wide Automotive,” which are Remy International, Inc.’s registered trademarks, protected under applicable intellectual property laws and are our property or the property of our subsidiaries. This prospectus also contains trademarks, service marks, copyrights and trade names of other companies, which are the property of their respective owners. Solely for convenience, our trademarks and tradenames referred to in this prospectus may appear without the ® or ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and tradenames.

Market and industry data

We obtained the industry, market and competitive position data and information used throughout this prospectus from our own internal company surveys and management estimates, as well as from industry and general publications, research, surveys or studies conducted by third parties. While we believe that these publications, research, studies and surveys are reliable, neither we nor the underwriters have independently verified the data and information included in them, and neither we nor the underwriters make any representation or warranty as to the accuracy of that data and information.

 

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There is only a limited amount of independent data available about our industry, market and competitive position. As a result, some of the data and information referred to above is based on our good faith estimates, which we derived from our review of internal data and information, information that we obtain from customers and other third party sources. We believe these internal surveys and management estimates are reliable. However, no independent sources have verified these surveys and estimates.

The industry data and information that we present in this prospectus include estimates that involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors” and “Special note regarding forward-looking statements.”

 

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Prospectus summary

This summary highlights selected information appearing elsewhere in this prospectus and may not contain all of the information that is important to you. This prospectus includes information about the shares we are offering as well as information regarding our business and detailed financial data. You should read this prospectus in its entirety. You should carefully consider, among other things, the matters discussed in “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations.”

Unless the context requires otherwise, the words “Remy,” “we,” “company,” “us” and “our” refer to Remy International, Inc. and its subsidiaries.

Our company

We are a global market leader in the design, manufacture, remanufacture, marketing and distribution of non-discretionary, rotating electrical components for light and commercial vehicles for original equipment manufacturers, or OEMs, and the aftermarket. We sell our products worldwide primarily under our well-recognized “Delco Remy,” “Remy” and “World Wide Automotive” brand names, as well as our customers’ well-recognized private label brand names. For the year ended December 31, 2010, we generated net sales of $1.1 billion, net income attributable to Remy International, Inc. (before preferred stock dividends) of $16.9 million and adjusted EBITDA of $140.1 million, representing 12.7% of our 2010 net sales.

Our principal products include starter motors, alternators and hybrid electric motors. Our starters and alternators are used globally in light vehicle, commercial vehicle, industrial, construction and agricultural applications. We also design, develop and manufacture hybrid electric motors that are used in both light and commercial vehicles. These include both pure electric applications as well as hybrid applications, where our electric motors are combined with traditional gasoline or diesel propulsion systems. While the market for these systems is in early stages of development, our technology and capabilities are ideally suited for this growing product category.

We design and market products suited for both light and commercial vehicle applications. Our light vehicle products continue to evolve to meet the technological demands of increasing vehicle electrical loads, improved fuel efficiency, reduced weight and lowered electrical and mechanical noise. Commercial vehicle applications are generally more demanding and require highly engineered and durable starters and alternators.

We sell new starters, alternators and hybrid electric motors to U.S. and non-U.S. OEMs for factory installation on new vehicles. We sell remanufactured and new starters and alternators to aftermarket customers, mainly retailers in North America, warehouse distributors in North America and Europe and OEMs globally for the original equipment service, or OES, market. As a leading remanufacturer, we obtain used starters and alternators, which we refer to as cores, that we disassemble, clean, combine with new subcomponents and reassemble into saleable, finished products, which are tested to meet OEM requirements.

We have captured leading positions in many key markets by leveraging our global reach and established customer relationships. Based on production volume, we hold the number 1 position in the North American market for commercial vehicle starters and alternators and light vehicle

 

 

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aftermarket starters and alternators. We are the leading non-OEM producer of hybrid electric motors in North America. We maintain the number 3 position in the European aftermarket for remanufactured starters and alternators. We hold the number 1 position in South Korea for light vehicle starters, the number 2 position in South Korea for commercial vehicle starters and the number 3 position in China for light vehicle alternators, all of which are key growth markets.

 

LOGO

  LOGO   LOGO

We believe there are benefits to serving both original equipment, or OE, and aftermarket customers. Our OE business is driven primarily by new vehicle production. Aftermarket demand is more stable given that our aftermarket products are used for non-discretionary repairs. We believe aftermarket demand increases in periods of decreasing OEM sales volumes as customers look to extend the service lives of their existing vehicles by purchasing aftermarket replacement parts rather than new vehicles. This increased aftermarket demand partially mitigates the variability of our net sales. Our aftermarket and remanufacturing knowledge regarding product reliability allows us to regularly update and enhance new product specifications in our OE and new-build aftermarket businesses. Our expertise in OE product design allows us to bring components to the aftermarket quickly and efficiently, which enhances our brands, giving us a competitive advantage.

We operate a global, low-cost manufacturing and sourcing network capable of producing technology-driven products. Our 13 primary manufacturing and remanufacturing facilities are located in seven countries, including Brazil, China, Hungary, Mexico, South Korea and Tunisia. We have only two manufacturing facilities in the United States, which support a portion of our hybrid electric motor assembly and our locomotive remanufacturing operations. Neither of these two U.S. manufacturing facilities is unionized. Our low-cost strategy results in direct labor costs of less than 2% of net sales. Our global network of manufacturing facilities employs common tools and processes to drive efficiency improvements and reduce waste. We can shift capacity between operations to minimize costs to adapt to changes in demand, raw material costs and exchange and transportation rates. Because of our established presence and available capacity throughout the world, we are well-positioned for growth with minimal incremental investment.

 

 

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We sell our products globally through an extensive distribution and logistics network. We employ a direct sales force that develops and maintains sales relationships directly with global OEMs, OE dealer networks, commercial vehicle fleets, North American retailers and warehouse distributors around the world. We have a broad customer base, as illustrated below.

 

LOGO

  LOGO   LOGO

We enhance our technology and expand our product lines by investing in new product development and ongoing research. Our OE customers continue to increase their requirements for power, durability and reliability, as well as for increased fuel-efficiency and mechanical and electrical noise reduction. We have over 325 engineers focused on design, application and manufacturing. These engineers work in close collaboration with customers and have a thorough understanding of our product application. Our engineering efforts are designed to create value through innovation, new product features and aggressive cost control. Over the past three years, we have invested $52.1 million to support both product and manufacturing process improvements. Our 110 years of expertise in rotating electrical components led to the development of our hybrid electric motor capabilities, a natural extension of our products. We have invested approximately $55.8 million since 2001 in these efforts, including our industry-leading High Voltage Hairpin, or HVH, electric motor technology, light vehicle hybrid electric motor and the electric motors included in the Allison Transmission Hybrid Drive System. The U.S. Department of Energy, or the DOE, awarded us a grant in 2009, pursuant to which it agreed to match up to $60.2 million of eligible expenditures we make through 2012 for the commercialization of hybrid electric motor technology. Our prior experience in manufacturing process development has provided us with significant, proprietary know-how in hybrid electric motor manufacturing.

We are well-positioned for strong and stable growth, both organically and through opportunistic acquisitions, due to our balanced portfolio of products, strong brand names, focus on new technologies, strategic global footprint and market expertise. These strengths have contributed to our solid operating margins and cash flow profile. Since 2007, our margins have improved significantly as a result of our ongoing productivity initiatives, which included capacity and workforce realignments, the implementation of lean manufacturing principles and the expansion of global purchasing initiatives. Recently, we completed a series of financial transactions focused on improving the strength and flexibility of our capital structure, including a debt refinancing and stockholder rights offering. As a result of these transactions, we extended our debt maturities, reduced our future interest payments and accessed substantial liquidity to execute our strategic plans. Our strengthened balance sheet now provides us with greater ability to reinvest in our business and pursue growth opportunities.

 

 

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Our competitive strengths

We believe the following competitive strengths enable us to compete effectively in our industry:

Leading market position and strong brand recognition.    Based on production volume, we hold the number 1 position in the North American market for commercial vehicle starters and alternators and light vehicle aftermarket starters and alternators. We are the leading non-OEM producer of hybrid electric motors in North America. We maintain the number 3 position in the European aftermarket for remanufactured starters and alternators. We hold the number 1 position in South Korea for light vehicle starters, the number 2 position in South Korea for commercial vehicle starters and the number 3 position in China for light vehicle alternators, all of which are key growth markets. Our leading market position was established through 100 years of experience delivering superior service, quality and product innovation under our well-recognized brand names, “Delco Remy,” “Remy” and “World Wide Automotive.” In recent years, we have received a number of awards in recognition of our merits, including Daimler Master of Quality in 2009 and 2010, CAT SQEP Silver Status in 2010, Cummins Xian Excellent Customer Support in 2009 and 2010, MAN Commercial Excellence in 2010, MAN Latin America Supplier Award in 2009, Alliance Silver Supplier Award in 2010, Frost & Sullivan Company of the Year in 2010 and Bumper to Bumper Silver Status Award in 2009.

Well-balanced revenue base and end-market exposure.    We have a diverse portfolio of revenue sources with OE and aftermarket products that serve both light and commercial vehicle applications. Our five largest light vehicle OE platforms represented only 7% of our 2010 net sales. This balance can help us mitigate the inherent cyclicality of demand in any one channel or end-market. We offer our products on a diverse mix of OE vehicle platforms, reflecting the balanced portfolio approach of our business model and the breadth of our product capabilities. We believe our overall diversification provides us with an opportunity to participate in an economic recovery without being overly exposed to any single market.

Innovative, technology-driven product offerings.    We are committed to product and manufacturing innovation to improve quality, efficiency and cost for our customers. Our starters address customer requirements for high-power, durability and reliability, while our alternators address the growing demand for high-output, low-noise and high-efficiency performance. Recently, we developed several commercial-vehicle starters and alternators with superior efficiency for higher fuel economy, significantly improved reliability and higher output to support exhaust gas after-treatment required to reduce engine emissions. For automotive applications, we recently launched a lower-cost, high-performance starter and a series of quiet, high-efficiency alternators with reduced electrical and mechanical noise. We also continue to lead in the production of hybrid electric motors, providing high-output, custom designs for standardized platforms. Our HVH electric motor technology, which we continue to introduce into automotive, agricultural, military and specialty markets, is the industry leader in power density. Out technology position is reinforced by our intellectual property portfolio with over 300 issued and pending patents.

Leading non-OEM manufacturer of hybrid electric motors.    Our expansion into hybrid electric motors was a natural evolution of our capabilities in rotating electrical components. We have produced nearly 100,000 hybrid electric motor units for vehicles that are on the road today, including GM sport utility vehicles, or SUVs, Daimler’s Mercedes ML450, BMW X6 models and

 

 

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transit buses with Allison Transmission. This gives us the largest installed capacity of any non-OEM hybrid electric motor producer. With an emphasis on medium-duty and specialty applications, we have been investing in hybrid electric motors and manufacturing capabilities since 2001 when we initiated our first hybrid electric motor program for bus applications. Since 2001, we have invested approximately $55.8 million in product and manufacturing capabilities to become a leading provider of high-quality hybrid electric motors. Since 2006, we estimate that our products have demonstrated over 1 billion miles of proven reliability as measured by a near zero-defect performance. Our hybrid electric motors provide the highest power density and peak performance, outperforming models produced by major competitors. To support future growth, we have installed an annual manufacturing capacity of over 100,000 units and are the largest non-OEM producer in North America and one of the largest in the world. This installed capacity can support increased production volumes should market demand continue to grow. We believe the current market trends for hybrid electric motor demand will remain positive if fuel prices increase and governments continue to implement regulations that will drive demand.

Global, low-cost manufacturing, distribution and supply-chain.    We have restructured our manufacturing to eliminate under-utilized capacity and shifted from high-cost to low-cost regions throughout the world including Brazil, China, Hungary, Mexico, South Korea and Tunisia. Our efficient manufacturing capabilities lower costs and address OEMs’ engineering requirements. We are well-positioned for continued growth and protected by significant barriers to entry from suppliers who cannot support OEMs on a global scale. We conduct no manufacturing activity in the United States, with the exception of hybrid electric motors and our locomotive power assembly remanufacturing operations.

Strong operating margins and cash flow profile.    We believe our operating margins and cash flow from operations are strong relative to our industry peers. This provides financial flexibility and enables us to reinvest capital in our business for growth. In 2010, net cash provided by operating activities was $73.9 million. Our base business, other than our hybrid electric motors, requires low levels of capital expenditures of approximately 1% to 2% of our net sales.

Accomplished management team with track record of improving financial performance.    Our management team, led by industry veteran, CEO John H. Weber, has implemented a number of strategic, operational and financial restructuring initiatives to reposition us for potential profitable growth. Key accomplishments since the start of 2007 have included:

 

 

realigning our manufacturing to low-cost regions;

 

 

reducing headcount by 27% from 7,800 to 5,700;

 

 

executing the turnaround of our European operations;

 

 

winning numerous aftermarket customers in both Europe and North America;

 

 

securing global platform wins, including with GM, Hyundai, Daimler, Caterpillar and Allison Transmission;

 

 

developing an industry-leading hybrid electric motor platform; and

 

 

increasing our operating margins from (4.5)% in 2006 to 9.6% in 2010.

 

 

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Our strategy

It is our goal to be the leading global manufacturer and remanufacturer of starters and alternators, yielding superior financial returns. Further, we seek to be a leading participant in the growing production of hybrid electric motors. We believe the competitive strengths described above provide us with significant opportunities for future growth in our industry. Our strategies for capitalizing on these opportunities include the following:

Build upon market-leading positions in commercial vehicle products.    We seek to use our strength in producing durable, high-output starters and alternators for commercial vehicles to increase our market share and capitalize on the growing OE demand for these components over the next few years. We intend to use our know-how in rotating electrical components and strong customer relationships to continue to build our leading market share in the growing aftermarket for commercial vehicle parts. As the largest supplier of commercial vehicle OE and aftermarket starters and alternators to the North American market, we believe we are well-positioned to supply whichever customers ultimately become the global leaders in commercial vehicle hybrid electric motor applications.

Expand manufacturing for growth markets in Asia and South America.    We have a significant presence in high-growth markets such as China, South Korea and Brazil and are committed to further investment in these regions. We have both wholly owned and joint venture operations in China. China produces more commercial diesel engines and vehicles than any other country in the world. We are further investing in commercial vehicle production capacity in this market in response to the expanding demand for components used by on-road, construction, agriculture and off-road vehicles. We continue to build a strong position in South Korea, where we have developed our production capacity and engineering capabilities near Hyundai’s technical center. We are well-positioned in Brazil, a recognized industry base for growth in South America.

Continue to invest in hybrid electric motors for commercial vehicles.    We are committed to grow in the hybrid electric motor market. We are the leading non-OEM producer of hybrid electric motors in North America. We intend to focus primarily on commercial vehicle applications, which include trucks, buses, off-road equipment and military vehicles, where power density and peak power are the primary considerations. With an emphasis on medium-duty and specialty applications, we have over 50 vehicle projects in various stages of development. We signed an agreement with Allison Transmission to develop and produce a hybrid electric motor for medium-duty commercial vehicles by the end of 2012. We have created a competitive advantage through our manufacturing capacity and intellectual property portfolio.

Leverage benefits of having both an OE and aftermarket presence.    Our aftermarket business has access to the latest technology developed by our OE business. As a result, we are able to provide our aftermarket customers with new products faster than competitors. Our aftermarket presence provides our OE business with useful knowledge regarding long-term product performance and durability. We use this aftermarket knowledge to regularly update and enhance new product offerings in our OE business.

Provide value-added services that enhance customer performance.    We provide our aftermarket customers with valuable category management services that strengthen our customer relationships and provide both of us with a competitive advantage. Our Remy Optimized

 

 

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Inventory and Vendor Managed Inventory programs support customer growth and product category profitability. This service is enhanced by our knowledge of OEM product design and specifications. This service has become integral to several of our customers’ overall procurement practices. These services have enabled us to improve our customer retention and expand product sales.

Selectively pursue strategic partnerships and acquisitions.    We will selectively pursue strategic partnerships and acquisitions that leverage our core competencies. We believe there are significant opportunities in this fragmented industry. We have demonstrated our ability to rationalize and integrate operations and realize cost savings. We believe our balance sheet, combined with the proceeds from this offering, gives us the flexibility to support this strategy.

Risks associated with our business

Our business involves numerous risks, as discussed more fully in the section entitled “Risk factors” immediately following this prospectus summary. Our business could suffer as a result of any of the following, among others:

 

 

changes in general economic conditions, risks particular to the light and commercial vehicle industries and shortages, and volatility in the price, of oil;

 

 

increasing useful product lives of auto parts;

 

 

product liability and warranty claims, litigation and other disputes and claims;

 

 

changes in the cost and availability of raw materials and supplied components and disruptions in our supply chain;

 

 

the loss or the deteriorating financial condition of a major customer;

 

 

the substantial competition that we face;

 

 

work stoppages or other labor issues;

 

 

our inability to develop improved technology-based products or adapt to changing technology;

 

 

our inability to take advantage of, or successfully complete, potential acquisitions, business combinations and joint ventures;

 

 

the failure of the adoption of hybrid and electric vehicles;

 

 

our inability to protect our intellectual property and avoid infringing the intellectual property rights of others; and

 

 

our significant amounts of debt and the covenants and restrictions imposed by the instruments governing that debt.

Our corporate information

We were incorporated in Delaware in November 1993. We maintain our principal executive offices at 600 Corporation Drive, Pendleton, Indiana 46064, and our telephone number is (765) 778-6499. We maintain an Internet website at http://www.remyinc.com. We have not incorporated by reference into this prospectus the information in, or that can be accessed through, our website, and you should not consider it to be a part of this prospectus.

 

 

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The offering

 

Common stock offered by us

             shares

 

Over-allotment option

             shares

 

Common stock to be outstanding after this offering

             shares (or              shares if the over-allotment option is exercised in full)

 

Use of proceeds

We estimate that the net proceeds to us from this offering after expenses will be approximately $             million, or approximately $             million if the underwriters fully exercise their over-allotment option, assuming an initial public offering price of $             per share (the midpoint of the price range on the cover page of this prospectus). We intend to use the net proceeds to us from this offering for general corporate purposes, which may include debt reduction, acquisition of one or more companies or businesses and product and geographic expansion. See “Use of proceeds.”

 

Dividend policy

We do not currently pay dividends and do not anticipate paying any cash dividends in the foreseeable future.

 

Proposed symbol

RMYI

 

Risk factors

Investing in our common stock involves a high degree of risk. Before buying any shares, you should read the discussion of material risks of investing in our common stock in “Risk factors” beginning on page 8.

The number of shares of our common stock to be outstanding after this offering is based on 30,056,997 shares outstanding as of March 1, 2011 and excludes:

 

 

69,035 shares of our common stock underlying restricted stock units outstanding as of March 1, 2011;

 

 

1,294,313 shares of restricted common stock that are not classified as outstanding for financial reporting purposes but that will become outstanding for financial reporting purposes as the shares vest; and

 

 

4,415,456 shares of our common stock available for future grant under our Omnibus Equity Incentive Plan immediately after giving effect to an amendment made to that plan effective as of March 24, 2011.

Unless otherwise indicated, all information in this prospectus assumes that the underwriters do not exercise their over-allotment option.

 

 

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Summary consolidated financial data

The following summary consolidated financial data for the years ended December 31, 2008, 2009 and 2010, and as of December 31, 2010, is derived from our audited consolidated financial statements. This information is only a summary and should be read together with the consolidated financial statements, the related notes and other financial information included in this prospectus.

 

      Year ended December 31,  
     2010     2009     2008  
   
     (in thousands, except per share amounts)  

Consolidated Statement of Operations Data:

      

Net sales

   $ 1,103,799      $ 910,745      $ 1,100,805   

Cost of goods sold

     866,761        720,723        916,375   
        

Gross profit

     237,038        190,022        184,430   

Selling, general and administrative expenses

     127,405        101,827        109,683   

Reorganization items

                   2,762   

Intangible asset impairment charges

            4,000        1,500   

Restructuring and other charges

     3,963        7,583        15,325   
        

Operating income

     105,670        76,612        55,160   

Other income

                   2,223   

Interest expense

     46,739        49,534        54,938   

Loss on extinguishment of debt

     19,403                 
        

Income before income taxes

     39,528        27,078        2,445   

Income tax expense

     18,337        13,018        6,818   
        

Net income (loss)

     21,191        14,060        (4,373

Less: Net income attributable to noncontrolling interest

     4,273        3,272        1,403   
        

Net income (loss) attributable to Remy International, Inc.

     16,918        10,788        (5,776

Preferred stock dividends

     (30,571     (25,581     (23,145
        

Net loss attributable to common stockholders

   $ (13,653   $ (14,793   $ (28,921
        

Basic and diluted earnings (loss) per share:

      

Earnings (loss) per share

   $ (1.33   $ (1.46   $ (2.89
        

Weighted average shares outstanding

     10,278        10,130        10,004   
        

Adjusted EBITDA(1)

   $ 140,098      $ 121,174      $ 103,528   
                        
   

 

(1)   For a reconciliation of adjusted EBITDA to net income (loss) attributable to Remy International, Inc. (before preferred stock dividends), see “Management’s discussion and analysis of financial condition and results of operations—Adjusted EBITDA.”

The following table presents a summary of our consolidated balance sheet as of December 31, 2010:

 

 

on an actual basis; and

 

 

on an as adjusted basis to give effect to the issuance and sale, by us, of              shares of our common stock in this offering at an assumed initial public offering price of $             per share (the midpoint of the price range on the cover page of this prospectus), after deducting underwriting discounts and commissions and our estimated offering expenses.

 

 

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      As of December 31, 2010  
     Actual     As adjusted  
   
     (in thousands)  

Consolidated Balance Sheet Data:

    

Cash and cash equivalents(1)

   $ 37,514      $     

Working capital(1)

     81,762     

Total assets(1)

     969,156     

Long-term debt, net of current maturities

     317,769        317,769   

Post-retirement benefits other than pensions, net of current portion

     1,371        1,371   

Accrued pension benefits

     21,002        21,002   

Redeemable preferred stock

     166,116     

Accumulated deficit

     (14,453     (14,453

Total equity(1)

     77,473     
   

 

(1)   Each $1.00 increase (decrease) in the initial public offering price per share would increase (decrease) each of as adjusted cash and cash equivalents, working capital, total assets and total equity by approximately $             million, assuming that the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same and that the underwriters do not exercise their over-allotment option. Depending on market conditions and other considerations at the time we price this offering, we may sell a greater or lesser number of shares than the number set forth on the cover page of this prospectus. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) each of as adjusted cash and cash equivalents, working capital, total assets and total equity by approximately $             million, assuming the initial public offering price per share remains the same. This as adjusted information is illustrative only, and following the pricing of this offering, we will update this information based on the actual initial public offering price and other terms of this offering.

 

 

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Risk factors

Investing in our common stock involves a high degree of risk. In addition to the other information in this prospectus, you should carefully consider the risks described below before purchasing our common stock. If any of the following risks actually occurs, our business, results of operations or financial condition will likely suffer. As a result, the trading price of our common stock may decline, and you might lose part or all of your investment. Additional risks not currently known to us or that we currently deem immaterial may also adversely affect us.

Risks relating to our business

General economic conditions may have an adverse effect on our business, financial condition and results of operations.

The recent global financial crisis has impacted our business and our customers’ businesses in the United States and globally. During 2009, the United States experienced its lowest light vehicle production rate in over 25 years, and commercial vehicle production declined by 38%. In 2010, U.S. vehicle production improved, but was still less than the average for the period during 2000 to 2007. The light and commercial vehicle industries in Europe and Asia faced similar trends. Continued weakness or deteriorating conditions in the U.S. or global economy that result in reduction of vehicle production and sales by our customers may harm our business, financial condition and results of operations. Additionally, in a down-cycle economic environment, we may experience increased competitive pricing pressure and customer turnover.

Deteriorating economic conditions impact driving habits of both consumers and commercial operators, leading to a reduction in miles driven. If total miles driven decreases, demand for our aftermarket products could decline due to a reduction in the need for replacement parts.

Difficult economic conditions may cause changes to the business models, products, financial condition, consumer financing and rebate programs of the OEMs. This could reduce the number of vehicles produced and purchased, which would, in turn, reduce the demand for both our OEM and aftermarket products. Our contracts do not require our customers to purchase any minimum volume of our products.

Recent adverse economic conditions have generally reduced the availability of capital and increased the cost of financing. During 2010, we had factoring relationships with a number of banks. The balance of accounts receivables factored to these banks at December 31, 2010 was $178.4 million. As a result of adverse credit market conditions, these banks may not have the capacity or willingness to fund these factoring arrangements at the levels they have in the past, or at all, which could harm our liquidity. We may also have to pay suppliers in advance or on short credit terms, which would harm our liquidity or lead to production interruptions.

Risks specific to the light and commercial vehicle industries affect our business.

Our operations, and, in particular, our OE business, are inherently cyclical and depend on many industry-specific factors such as:

 

 

credit availability and interest rates;

 

fuel prices and availability;

 

consumer confidence, spending and preference;

 

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costs related to environmental hazards;

 

governmental incentives; and

 

political volatility.

Our business may also be adversely affected by regulatory requirements, trade agreements, our customers’ labor relations issues, reduced demand for our customers’ product programs that we currently support, the receipt of sales orders for new or redesigned products that replace our current product programs and other factors. The current political environment has led, and may lead in the future, to further federal, state and local government budget cuts. We have in the past received governmental grants that benefit our industry. A significant adverse change in any of these factors may reduce automotive production and sales by our customers, which would materially harm our business, financial condition and results of operations.

Inventory levels and our OE customers’ production levels also affect our OE sales. We cannot predict when our customers either increase or reduce inventory levels. This may result in variability in our sales and financial condition. Uncertainty regarding inventory levels may be exacerbated by our customers or governments initiating or terminating consumer financing programs.

Longer useful product life of parts may reduce aftermarket demand for some of our products.

In 2010, 39% of our net sales were to aftermarket customers and 9% of net sales were to OES customers. The average useful life of automotive parts has been steadily increasing in recent years due to improved quality and innovations in products and technologies. The longer product lives allow vehicle owners to replace parts of their vehicles less often. Additional increases in the average useful life of automotive parts are likely to reduce the demand for our aftermarket products, which could materially harm our business, financial condition and results of operations.

We may incur material losses and costs as a result of product liability and warranty claims, litigation and other disputes and claims.

We are exposed to warranty and product liability claims if our products fail to perform as expected. We have in the past been, and may in the future be, required to participate in a recall of those products. If public safety concerns are raised, we may have to participate in a recall even if our products are ultimately found not to be defective. Vehicle manufacturers have experienced increasing recall campaigns in recent years. Our customers and other OEMs are increasingly looking to us and other suppliers for contribution when faced with recalls and product liability claims. Some of our customers and other OEMs have recently extended the warranty protection for their products. If our customers demand higher warranty-related cost recoveries, or if our products fail to perform as expected, our business, financial condition and results of operations could materially suffer.

We may also be exposed to product liability claims, warranty claims and damage to our reputation if our products (including the parts of our products produced by third-party suppliers) actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury or property damage. For example, an alternator product produced by us and sold to various customers was recently alleged to cause thermal incidents in the vehicles in which it was installed. Although the faulty mechanism was produced by a third-party supplier, we are liable for the product under the terms of our sales agreement and applicable laws. We issued a recall for these products, and we elected to pay certain related costs for commercial reasons. Recalls may also cause us to lose additional business from our customers. Material product defect issues may subject us to recalls of those products and restrictions on bidding on

 

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new customer programs. For example, as a result of the recall described above, we were unable to bid on a new GM supply program. We have in the past incurred, and could in the future incur, material warranty or product liability losses and costs to defend these claims.

We are also involved in various legal proceedings incidental to our business. See “Business—Legal proceedings.” There can be no assurance as to the ultimate outcome of any of these legal proceedings, and future legal proceedings may materially harm our business, financial condition and results of operations.

Changes in the cost and availability of raw materials and supplied components could harm our financial performance.

We purchase raw materials and component parts from outside sources. The availability and prices of raw materials and component parts may change due to, among other things, new laws or regulations, increased demand from the automotive sector and the broader economy, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and worldwide price levels. In recent years, market conditions have caused significant increases in the price of some raw materials and component parts and, in some cases, reductions in short-term availability. We are especially susceptible to changes in the price and availability of copper, aluminum, steel and certain rare earth magnets. The price of these materials has fluctuated significantly in recent years. China, a major source of rare earth magnets, has recently reduced its export quotas for rare earth minerals. An increase in the price of these magnets, or a reduction in their supply, could harm our business.

Raw material price inflation and availability have placed significant operational and financial burdens on automotive suppliers at all levels, and are expected to continue for the foreseeable future. Our need to maintain a continuing supply of raw materials and components makes it difficult to resist price increases and surcharges imposed by our suppliers. Further, it is difficult to pass cost increases through to our customers, and, if passed through, recovery is typically delayed. Approximately [        ]% of copper, [        ]% of aluminum and [        ]% of steel pounds purchased are for customers with metals pass-through or sharing clauses within their contracts. Because the recognition of the cost/benefit and the price recovery/reduction do not occur in the same period, the impact of a change in commodity cost is not necessarily offset by the change in sales price in the same period. Accordingly, a change in the supply of, or price for, raw materials and components could materially harm our business, financial condition and results of operations.

Disruptions in our or our customers’ supply chain may harm our business.

We depend on a limited number of suppliers for certain key components and materials. In order to reduce costs, our industry has been rationalizing and consolidating its supply base. Suppliers may delay deliveries to us due to failures caused by production issues, and they may also deliver non-conforming products. Recently, several suppliers have ceased operations.

If one of our suppliers experiences a supply shortage or disruption, we may be unable to procure the components from another source to produce the affected products. The lack of a subcomponent necessary to manufacture one of our products could force us to cease production. Shortages and disruptions could be caused by many problems, such as closures of one of our suppliers’ plants or critical manufacturing lines due to strikes, mechanical breakdowns, electrical outages, fires, explosions or political upheaval, or logistical complications due to weather,

 

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natural disasters, mechanical failures or delayed customs processing. Also, we and our suppliers deliver products on a just-in-time basis, which is designed to maintain low inventory levels but increases the risk of supply disruptions.

Products delivered by our suppliers may fail to meet quality standards. Potential quality issues could force us to halt deliveries while we revalidate the affected products. When deliveries are not timely, we have to absorb the cost of identifying and solving the problem, as well as expeditiously producing replacement components or products. We may also incur costs associated with “catching up,” such as overtime and premium freight. Our customers may halt or delay their production for the same reason if one of their suppliers fails to deliver necessary components. This may cause our customers to suspend their orders or instruct us to suspend delivery of our products, which may harm our business, financial condition and results of operations. In turn, if we cause a customer to halt production, the customer may seek to recoup its losses and expenses from us, which could be significant or include consequential losses.

Shortages of and volatility in the price of oil may materially harm our business, financial condition and results of operations.

The price and availability of oil impacts our business in numerous ways. Oil prices have recently been very volatile. An increase in oil prices, or a shortage of oil, may reduce demand for vehicles or shift demand to smaller, more fuel-efficient vehicles, which provide lower profit margins. Also, an increase in oil prices may reduce the average number of miles driven. Lower vehicle demand or average number of miles driven would, in turn, reduce the demand for both our OE and aftermarket products. An increase in the price of oil could also increase the cost of the plastic components we use in our products. Conversely, lower fuel prices may negatively impact demand for hybrid-powered vehicles, which may also adversely affect our business. Accordingly, shortages and volatility in the price of oil may materially harm our business, financial condition and results of operations.

The loss or the deteriorating financial condition of a major customer could materially harm our business, financial condition and results of operations.

The majority of our sales are to automotive and heavy-duty OEMs, OEM dealer networks, automotive parts retail chains and warehouse distributors. We depend on a small number of customers with strong purchasing power. Our five largest customers represented 49% of our net sales for 2010. GM, our largest customer, accounted for 23% of our 2010 net sales.

One or more of our top customers may cease to require all or any portion of the products or services we currently provide or may develop alternative sources, including their own in-house operations, for those products or services. Customers may restructure, which could include significant capacity reductions or reorganization under bankruptcy laws. The loss of any of our major customers, reduction in their demand for our products or substantial restructuring activities by our major customers could materially harm our business, financial condition and results of operations. OE and OES customers accounted for 61% of our 2010 net sales.

GM and BMW have announced that they plan to start producing some hybrid electric motors in-house. GM has announced that the first electric motors designed and built by GM are scheduled to debut in 2013. Depending on the extent to which OE customers design and produce hybrid electric motors in-house, our hybrid electric business could materially suffer.

 

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We face substantial competition. Our failure to compete effectively could adversely affect our net sales and results of operations.

The automotive industry is highly competitive. We and most of our competitors are seeking to expand market share with new and existing customers. Our customers award business based on, among other things, price, quality, service, delivery, manufacturing and distribution capability, design and technology. Our competitors’ efforts to grow market share could exert downward pressure on our product pricing and margins. Overseas manufacturers, particularly those located in China, are increasing their operations and could become a significant competitive force in the future. If we are unable to differentiate our products or maintain low-cost manufacturing, we may lose market share or be forced to reduce prices, which would lower our margins. Our business may also suffer if we fail to meet customer requirements.

Some of our competitors may have advantages over us, which could affect our ability to compete effectively. For example, some of our competitors:

 

 

are divisions or subsidiaries of companies that are larger and have substantially greater financial resources than we do;

 

 

are affiliated with OEMs or have a “preferred status” as a result of special relationships with certain customers;

 

 

have economic advantages as compared to our business, such as patents and existing underutilized capacity; and

 

 

are domiciled in areas that we are targeting for growth.

OEMs and suppliers are developing strategies to reduce costs and gain a competitive advantage. These strategies include supply base consolidation and global sourcing. The consolidation trend among automotive parts suppliers is resulting in fewer, larger suppliers who benefit from purchasing and distribution economies of scale. If we cannot achieve cost savings and operational improvements sufficient to allow us to compete favorably in the future, our financial condition and results of operations could suffer due to a reduction of, or inability to increase, sales sufficient to offset other price increases.

Our competitors may foresee the course of market development more accurately than we do, develop products that are superior to our products, have the ability to produce similar products at a lower cost than we can or adapt more quickly than we do to new technologies or evolving regulatory, industry or customer requirements.

Work stoppages or other labor issues at our facilities or the facilities of our customers or suppliers could adversely affect our operations.

Some of our employees, a substantial number of the employees of our largest customers, the employees of our suppliers and the employees of other suppliers to the automotive industry are members of industrial trade unions and are employed under the terms of collective bargaining agreements. To our knowledge, 3,026 of our employees globally are represented by trade unions. Difficult conditions in the light and commercial vehicle industries and actions taken by us, our customers, our suppliers and other suppliers to address negative industry conditions may have the side effect of exacerbating labor relations problems, which could increase the possibility of work stoppages.

 

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We may not be able to negotiate acceptable contracts with unions, and our failure to do so may result in work stoppages. We have agreements with 11 unions in different countries. These agreements expire or are subject to renewal at various times. One or more of these unions could elect not to renew its contract with us. Also, work stoppages at our customers, our suppliers or other suppliers to the automotive industry could cause us to shut down our production facilities or prevent us from meeting our delivery obligations to our customers. The industry’s reliance on just-in-time delivery of components could also worsen the effects of any work stoppage. A work stoppage at one or more of our facilities, or the facilities of suppliers and our customers, could materially harm our business, financial condition and results of operations.

See “Business—Employees” for a summary of the information available to us regarding the union membership of our employees and the agreements we currently have with those unions.

Our success partly depends on our development of improved technology-based products and our ability to adapt to changing technology.

Some of our products are subject to changing technology or may become less desirable or be rendered obsolete by changes in legislative, regulatory or industry requirements. Our continued success depends on our ability to anticipate and adapt to these changes. We may be unable to achieve and maintain the technological advances, machinery and knowledge that may be necessary for us to remain competitive.

We may need to incur capital expenditures and invest in research and development and manufacturing in amounts exceeding our current expectations. We may decide to develop specific technologies and capabilities in anticipation of customers’ demands for new innovations and technologies. If this demand does not materialize, then we may be unable to recover the costs incurred to develop those particular technologies and capabilities. If we are unable to recover these costs, or if any development programs do not progress as expected, our business could materially suffer.

To compete, we must be able to launch new products to meet our customers’ demand in a timely manner. However, we may be unable to install and certify the equipment needed to manufacture products for new programs in time for the start of production. Transitioning our manufacturing facilities and resources to full production under new product programs may impact production rates and other operational efficiency measures at our facilities. Our customers may not launch new product programs on schedule. Our failure to successfully launch new products, a delay by our customers in introducing our new products or a failure by our customers to successfully launch new programs, could materially harm our business, financial condition and results of operations.

We are also subject to the risks generally associated with new product introductions and applications, including lack of market acceptance of our customers’ vehicles or of our products, delays in product development and failure of products to operate properly. Further, we may be unable to adequately protect our technological developments, which could prevent us from maintaining a sustainable competitive advantage.

A failure to attract and retain executive officers and key personnel could harm our ability to operate effectively.

Our ability to operate our business and implement our strategies effectively partly depends on the efforts of our executive officers and other key employees. Our future success will depend on, among other factors, our ability to attract and retain other qualified personnel in key areas,

 

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including engineering, sales and marketing, operations, information technology and finance. The loss of the services of any of our key employees or our failure to attract or retain other qualified personnel could materially harm our business, financial condition and results of operations.

We may be unable to take advantage of, or successfully complete, potential acquisitions, business combinations and joint ventures.

We may pursue acquisitions, business combinations or joint ventures that we believe present opportunities to enhance our market position, extend our technological and manufacturing capabilities or realize significant synergies, operating expense reductions or overhead cost savings. This strategy will partly depend on whether suitable acquisition targets or joint ventures are available on acceptable terms and our ability to finance the purchase price of acquisitions or the investment in joint ventures. We may also be unable to take advantage of potential acquisitions, business combinations or joint ventures because of regulatory or other concerns. For example, the agreements governing our indebtedness may restrict our ability to engage in certain mergers or similar transactions.

Acquisitions, business combinations and joint ventures may expose us to additional risks.

Any acquisition, business combination or joint venture that we engage in could present a variety of risks. These risks include the following:

 

 

the incurrence of debt or contingent liabilities and an increase in interest expense and amortization expenses related to intangible assets with definite lives;

 

 

our failure to discover liabilities of the acquired company for which we may be responsible as a successor owner or operator, despite any investigation we make before the acquisition;

 

 

the diversion of management’s attention from our core operations as they attend to any business integration issues that may arise;

 

 

the loss of key personnel of the acquired company or joint venture counterparty;

 

 

our becoming subject to material liabilities as a result of failure to negotiate adequate indemnification rights;

 

 

difficulties in combining the standards, processes, procedures and controls of the new business with those of our existing operations;

 

 

difficulties in coordinating new product and process development;

 

 

difficulties in integrating product technologies; and

 

 

increases in the scope, geographic diversity and complexity of our operations.

Our failure to integrate acquired businesses successfully into our existing businesses could cause us to incur unanticipated expenses and losses, which could materially harm our business, financial condition and results of operations.

We are party to a joint venture in China with Hubei Shendian Electric and may enter into additional joint ventures in the future. Our interests may not always be aligned with the interests of our joint venture partners. For example, our partners may negotiate on behalf of customers of the joint venture for sales terms that are not in the best interest of the joint venture. Our joint venture partner owns a business that could compete with the joint venture and our businesses. Accordingly, there may be a misalignment of incentives between us and our joint venture partners that could materially harm our business, financial condition and results of operations.

 

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Our lean manufacturing and other cost saving plans may not be effective.

Our operations strategy includes goals such as improving inventory management, customer delivery, plant and distribution facility consolidation and the integration of back-office functions across our businesses. If we are unable to realize anticipated benefits from these measures, our business, financial condition and results of operations may suffer. Moreover, the implementation of cost-saving plans and facilities integration may disrupt our operations and financial performance.

Our global operations subject us to risks and uncertainties.

We have business and technical offices and manufacturing facilities in many countries, including Brazil, China, Hungary, Mexico, South Korea and Tunisia, which may have less developed political and economic environments than the United States. International operations are subject to certain risks inherent in conducting business outside the United States, including the following:

 

 

general economic conditions in the countries in which we operate could have an adverse effect on our earnings from operations in those countries;

 

 

agreements may be difficult to enforce and receivables may be difficult to collect through a foreign country’s legal system;

 

 

foreign customers may have longer payment cycles;

 

 

foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade or investment (such as repatriation restrictions or requirements, exchange controls and antidumping duties);

 

 

intellectual property rights may be more difficult to enforce in foreign countries;

 

 

unexpected adverse changes in foreign laws or regulatory requirements may occur;

 

 

compliance with a variety of foreign laws and regulations may be difficult;

 

 

overlap of different tax structures may subject us to additional taxes;

 

 

changes in currency exchange rates;

 

 

export and import restrictions, including tariffs and embargoes;

 

 

shutdowns or delays at international borders;

 

 

more expansive rights of foreign labor unions;

 

 

nationalization, expropriation and other governmental action;

 

 

political and civil instability;

 

 

domestic or international terrorist events, wars and other hostilities;

 

 

laws governing international relations (including the Foreign Corrupt Practices Act and the U.S. Export Administration Act); and

 

 

global operations may strain our internal control over financial reporting or cause us to expend additional resources to keep those controls effective.

 

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If certain of the risks described were to occur, we may decide to shift some of our operations from one jurisdiction to another, which could result in added costs. If we acquire new businesses, we may be unable to effectively and quickly implement pre-existing controls and procedures intended to mitigate these uncertainties and risks. The longer supply chains resulting from global operations may also increase our working capital requirements. These uncertainties could materially harm our business, financial condition and results of operations. As we continue to expand our business globally, our success will partly depend on our ability to anticipate and effectively manage these and other risks.

We are exposed to domestic and foreign currency fluctuations that could harm our business, financial condition and results of operations.

As a result of our global presence, a significant portion of our net sales and expenses are denominated in currencies other than the U.S. dollar. We are accordingly subject to foreign currency risks and foreign exchange exposure. These risks and exposures include:

 

 

transaction exposure, which arises when the cost of a product originates in one currency and the product is sold in another currency;

 

 

translation exposure on our income statement, which arises when the income statements of our foreign subsidiaries are translated into U.S. dollars; and

 

 

translation exposure on our balance sheet, which arises when the balance sheets of our foreign subsidiaries are translated into U.S. dollars.

We source many of our parts, components and finished products from Mexico, Europe, North Africa and Asia. The cost of these products could fluctuate with changes in currency exchange rates. Changes in currency exchange rates could also affect product demand and require us to reduce our prices to remain competitive.

Forty percent of our net sales in 2010 were transacted outside the United States. Fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U.S. dollars of products and services provided by us in foreign markets where payment for our products and services is made in the local currency.

The financial crisis during 2008 and 2009 caused extreme and unprecedented volatility in foreign currency exchange rates. These fluctuations may occur again and may impact our financial results. We cannot predict when, or if, this volatility will cease or the extent of its impact on our future financial results. Accordingly, exchange rate fluctuations may therefore materially harm our business, financial condition and results of operations.

 

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Our future growth will be influenced by the adoption of hybrid and electric vehicles.

Our growth will be influenced by the adoption of hybrid and electric vehicles, and we are subject to the risk of any reduced demand for hybrid or electric vehicles. Hybrid electric motors accounted for 3% of our net sales in 2010. If customers do not adopt hybrid and electric vehicles, our business, financial condition and results of operations will be affected. The market for hybrid and electric vehicles is relatively new and rapidly evolving and is characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standards, frequent new vehicle announcements and changing customer demands and behaviors. Factors that may influence the adoption of hybrid and electric vehicles include:

 

 

perceptions about hybrid vehicle and electric vehicle quality, safety, design, performance and cost, especially if adverse events occur that are linked to the quality or safety of hybrid or electric vehicles;

 

 

the availability of vehicles using alternative technologies or fuel sources;

 

 

perceptions about, and the actual cost of purchasing and operating, vehicles using alternative technologies or fuel sources;

 

 

improvements in the fuel economy of the internal combustion engine;

 

 

the availability of service for hybrid and electric vehicles;

 

 

the environmental consciousness of customers;

 

 

volatility in the cost of oil, gasoline and diesel;

 

 

perceptions of the dependency of the United States on oil from unstable or hostile countries, and government regulations and economic incentives promoting fuel efficiency and alternate forms of energy;

 

 

the availability of tax and other governmental incentives to purchase and operate hybrid or electric vehicles or future regulation requiring increased use of non-polluting vehicles; and

 

 

macroeconomic factors.

Additionally, our customers may become subject to regulations that require them to alter the design of their hybrid or electric vehicles, which could negatively impact consumer interest in their vehicles, resulting in a decline in the demand for our products. The influence of any of the factors described above may cause current or potential customers to cease to purchase our products, which could materially harm our business, financial condition and results of operations.

Escalating pricing pressures from our customers and other customer requirements may harm our business, financial condition and results of operations.

The automotive industry has been characterized by significant pricing pressure from customers for many years. This trend is partly attributable to the strong purchasing power of major OEMs and aftermarket customers. Virtually all automakers and aftermarket customers have implemented aggressive price reduction initiatives and objectives each year with their suppliers, and we expect these actions to continue in the future. As our customers grow, including through consolidation, their ability to exert pricing pressure increases. Our customers often expect us to quote fixed prices or contractually obligate us to accept prices with annual price reductions. Price

 

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reductions have impacted our sales and profit margins and are expected to continue to do so in the future. Accordingly, our future profitability will partly depend on our ability to reduce costs. If we are unable to offset customer price reductions through improved operating efficiencies, new manufacturing processes, technological improvements, sourcing alternatives and other cost reduction initiatives, these price reductions may materially harm our business, financial condition and results of operations.

Our supply agreements with some of our customers require us to provide our products at predetermined prices. In some cases, these prices decline over the course of the contract. The costs that we incur to fulfill these contracts may vary substantially from our initial estimates. Unanticipated cost increases may occur as a result of several factors, including increases in the costs of labor, components or materials. Although in some cases we are permitted to pass on to our customers the cost increases associated with specific materials, cost increases that we cannot pass on to our customers could harm our business, financial condition, and results of operations.

Further, some aftermarket customers, including both large retail customers and smaller warehouse distributors, require us to provide financial assistance to offset their investment in inventory held for sale. This assistance may be in the form of extended payment terms, vendor-owned inventory or the supply of inventory without a core deposit. Participation in these initiatives requires us to invest our financial resources in accounts receivable or product residing on the customer’s shelf before its sale to the end user. As these demands increase in number and dollar volume, our business, financial condition and results of operations could suffer.

Circumstances over which we have no control may affect our ability to deliver products to customers and the cost of shipping and handling.

We rely on third parties to handle and transport components and raw materials to our facilities and finished products to our customers. Due to factors beyond our control, including changes in fuel prices, political events, border crossing difficulties, governmental regulation of transportation, changes in market rates, carrier availability, disruptions in transportation infrastructure and acts of God, we may not receive components and raw materials, and may not be able to transport our products to our customers, in a timely and cost-effective manner, which could materially harm our business, financial condition and results of operations.

Freight costs are strongly correlated to oil prices, have been volatile in the past and are likely to be volatile in the future. As we incur substantial freight costs to transport materials and components from our suppliers, and to deliver finished products to our customers, an increase in freight costs could increase our operating costs, which we may be unable to pass to our customers.

Assertions by or against us relating to intellectual property rights could materially harm our business.

Our industry is characterized by companies that hold large numbers of patents and other intellectual property rights and that vigorously pursue, protect and enforce intellectual property rights. We are aware of issued patents owned by third parties that may relate to technology used in our industry and to which we do not have licenses. From time to time, third parties may assert against us and our customers and distributors their patent and other intellectual property rights to technologies that are important to our business. For example, Tecnomatic S.p.A. recently filed a claim against us, alleging that we improperly secured proprietary technology developed by Technomatic S.p.A. See “Business—Legal proceedings—Remy, Inc. vs. Tecnomatic S.p.A.”

 

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Claims that our products or technology infringe third-party intellectual property rights, regardless of their merit or resolution, are frequently costly to defend or settle and divert the efforts and attention of our management and technical personnel. In addition, many of our supply agreements require us to indemnify our customers and distributors from third-party infringement claims, which have in the past required, and may in the future require, that we defend those claims and might require that we pay damages in the case of adverse rulings. Claims of this sort also could harm our relationships with our customers and might deter future customers from doing business with us. We may not prevail in these proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If any pending or future proceedings result in an adverse outcome, we could be required to:

 

 

cease the manufacture, use or sale of the infringing products or technology;

 

 

pay substantial damages for infringement;

 

 

expend significant resources to develop non-infringing products or technology;

 

 

license technology from the third-party claiming infringement, which we may not be able to do on commercially reasonable terms or at all;

 

 

enter into cross-licenses with our competitors, which could weaken our overall intellectual property portfolio;

 

 

lose the opportunity to license our technology to others or to collect royalty payments based on our intellectual property rights;

 

 

pay substantial damages to our customers or end users to discontinue use or replace infringing technology with non-infringing technology; or

 

 

relinquish rights associated with one or more of our patent claims, if our claims are held invalid or otherwise unenforceable.

Any of the foregoing results could have a material adverse effect on our business, financial condition and results of operations.

We use a significant amount of intellectual property in our business. If we are unable to protect our intellectual property, our business could suffer.

Our success partly depends on our ability to protect our intellectual property and other proprietary rights. To accomplish this, we rely on a combination of intellectual property rights, including patents, trademarks and trade secrets, as well as customary contractual protections with our customers, distributors, employees and consultants, and through security measures to protect our trade secrets. It is possible that:

 

 

our present or future patents, trademarks, trade secrets and other intellectual property rights will lapse or be invalidated, circumvented, challenged, abandoned or, in the case of third-party patents licensed or sub-licensed to us, be licensed to others;

 

 

our intellectual property rights may not provide any competitive advantages to us;

 

 

our pending or future patent applications may not be issued or may not have the coverage we originally sought; and

 

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our intellectual property rights may not be enforceable in jurisdictions where competition is intense or where legal protection may be weak.

Our competitors may develop technologies that are similar or superior to our proprietary technologies, duplicate our proprietary technologies or design around the patents we own or license. If we pursue litigation to assert our intellectual property rights, an adverse decision in the litigation could limit our ability to assert our intellectual property rights, limit the value of our technology or otherwise harm our business.

We are also a party to a number of patent and intellectual property license agreements. Some of these license agreements require us to make one-time or periodic payments to the counterparties. We may need to obtain additional licenses or renew existing license agreements in the future, which we may not be able to do on acceptable terms.

Our confidentiality agreements with our employees and others may not adequately prevent the disclosure of our trade secrets and other proprietary information.

We have devoted substantial resources to the development of our trade secrets and other proprietary information. In order to protect our trade secrets and other proprietary information, we rely in part on confidentiality agreements with our employees, partners, independent contractors and other advisors. These agreements may not effectively prevent the disclosure of our confidential information and may not provide an adequate remedy in the event of unauthorized disclosure. Others may also independently discover our trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our trade secret and other proprietary rights, and the failure to obtain or maintain trade secret protection could harm our competitive position.

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.

Our product agreements with certain customers include standard indemnification provisions under which we agree to indemnify customers for losses as a result of intellectual property infringement claims and, in some cases, for damages caused by us to property or persons. To the extent not covered by applicable insurance, a large indemnity payment could harm our business.

We have recorded a significant amount of goodwill and other intangible assets, which may become impaired in the future.

We have recorded a significant amount of goodwill and other identifiable intangible assets, including customer relationships, trademarks and developed technologies. Goodwill, which represents the excess of reorganization value over the fair value of the net assets of the businesses acquired, was $270.3 million as of December 31, 2010, or 27.9% of our total assets. Other intangible assets, net, were $119.1 million as of December 31, 2010, or 12.3% of our total assets.

Impairment of goodwill and other identifiable intangible assets may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products sold by our business, and a variety of other factors. The amount of any quantified impairment must be expensed immediately as a charge that is included in operating income. We are subject to financial statement risk if goodwill or other identifiable intangible assets become impaired.

 

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Unexpected changes in core availability or the market value of cores may harm our financial condition.

Cores are used starters or alternators that customers exchange when they purchase new products. If usable, we refurbish these cores into a remanufactured product that we sell to our aftermarket customers. If the availability of usable cores declines, we may have to purchase cores in the open market at values that may harm our business, financial condition and results of operations. If core market values decline below cost, then we would record a charge against our operating income for the devaluation of core inventory. This devaluation may harm our results of operations.

Environmental and health and safety liabilities and requirements could require us to incur material costs.

We are subject to various U.S. and foreign laws and regulations relating to environmental protection and worker health and safety, including those governing:

 

 

discharges of pollutants into the ground, air and water;

 

 

the generation, handling, use, storage, transportation, treatment and disposal of hazardous substances and waste materials; and

 

 

the investigation and cleanup of contaminated properties.

The nature of our operations exposes us to the risk of liabilities and claims with respect to environmental matters, including on-site and off-site treatment, storage and disposal of hazardous substances and wastes. For example, there are ongoing and planned investigation and remediation activities by us or third parties in connection with several of our properties, including those that we no longer own or operate. See “Business—Legal proceedings—Grissom Air Force Base environmental matter” for information about the Grissom Air Force Base site. We have given indemnities to subsequent owners for certain of our former operational sites, and we have separately received indemnification, subject to certain limitations, with respect to one of those sites. We could incur material costs in connection with these matters, including in connection with sites where we do not have indemnifications from third parties, where the indemnitor ceases to pay under its indemnity obligations or where the indemnities otherwise become inapplicable or unavailable.

Environmental and health-related requirements are complex, subject to change and have tended to become more and more stringent. Future developments could require us to make additional expenditures to modify or curtail our operations, install pollution control equipment or investigate and clean up contaminated sites. These developments may include:

 

 

the discovery of new information concerning past releases of hazardous substances or wastes;

 

 

the discovery or occurrence of compliance problems relating to our operations;

 

 

changes in existing environmental laws or regulations or their interpretation, or the enactment of new laws or regulations; and

 

 

more rigorous enforcement by regulatory authorities.

These events could cause us to incur various expenditures and could also subject us to fines or sanctions, obligations to investigate or remediate contamination or restore natural resources,

 

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liability for third party property damage or personal injury claims and the imposition of new permitting requirements and/or the modification or revocation of our existing operating permits, among other effects. These and other developments could materially harm our business, financial condition and results of operation. See “Business—Environmental regulation.”

The catastrophic loss of one of our manufacturing facilities could harm our business, financial condition and results of operations.

While we manufacture our products in several facilities and maintain insurance covering our facilities, including business interruption insurance, a catastrophic loss of the use of all or a portion of one of our manufacturing facilities due to accident, labor issues, weather conditions, natural disaster, civil unrest or otherwise, whether short or long-term, could materially harm our business, financial condition and results of operations.

Changes in tax legislation in local jurisdictions may have an impact on our overall effective tax rate, which, in turn, may harm our profitability.

Our overall effective tax rate is equal to our total tax expense as a percentage of our pre-tax income or loss before tax. However, tax expenses and benefits are determined separately for each of our taxpaying entities or groups of entities that is consolidated for tax purposes in each jurisdiction. Losses in these jurisdictions may provide no current financial statement tax benefit. As a result, changes in the mix of profits and losses between jurisdictions, among other factors, could have a significant impact on our overall effective tax rate. Further, legislative changes in tax legislation, such as changes in tax rates, transfer pricing regimes, the applicability of value added taxes and the imposition of new taxes, could have an adverse effect on profitability.

Risks relating to our indebtedness

We have significant amounts of debt and require significant cash flow to service our debt.

We have a significant amount of indebtedness, will continue to have a significant amount of indebtedness after the completion of this offering and may issue additional debt in the future. As of December 31, 2010, we had $339.5 million of outstanding debt including original issue discount, or OID. Our high levels of indebtedness could have important consequences, including:

 

 

adversely affecting our stock price;

 

requiring us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, which reduces the availability of cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes;

 

increasing our vulnerability to adverse general economic or industry conditions;

 

limiting our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;

 

making it more difficult for us to satisfy our obligations under our financing documents;

 

impairing our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions, general corporate purposes or other purposes;

 

placing us at a competitive disadvantage to our competitors who are not as highly leveraged; and

 

triggering an event of default under our credit facilities if we fail to comply with the related financial and other restrictive covenants.

 

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In order to adequately service our indebtedness, we require a significant amount of cash. Our future cash flow is subject to some factors that are beyond our control, and our future cash flow may not be sufficient to meet our obligations and commitments. If we are unable to generate sufficient cash flow from operations in the future to service our indebtedness and to meet our other commitments, we will be required to adopt one or more alternatives, such as delaying capital expenditures, refinancing or restructuring our indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. These actions may not be implemented on a timely basis or on satisfactory terms, or at all, and may not enable us to continue to satisfy our capital requirements. Restrictive covenants in our indebtedness may prohibit us from adopting any of these alternatives (with the failure to comply with these covenants resulting in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness). Our assets and cash flow may be insufficient to fully repay borrowings under our outstanding debt instruments, if accelerated upon an event of default. We may be unable to repay, refinance or restructure the payments of those debt instruments.

Despite our current indebtedness levels, we may still be able to incur substantial additional debt. This could exacerbate the risks associated with our substantial leverage.

We may incur additional indebtedness in the future or refinance existing debt before it matures. As of December 31, 2010, we had $339.5 million of outstanding debt including OID. We could also incur indebtedness under other existing as well as additional financing arrangements. If new debt or other liabilities are added to our current debt levels, the related risks that we now face could intensify.

Our debt instruments restrict our current and future operations.

The agreements governing our indebtedness impose significant operating and financial restrictions on us. These restrictions limit our ability and the ability of our subsidiaries to, among other things:

 

 

incur or guarantee additional debt, incur liens or issue certain equity;

 

declare or make distributions to our stockholders, repurchase equity or prepay certain debt;

 

make loans and certain investments;

 

make certain acquisitions of equity or assets;

 

enter into certain transactions with affiliates;

 

enter into mergers, acquisitions and other business combinations;

 

consolidate, transfer, sell or otherwise dispose of certain assets;

 

enter into sale and leaseback transactions;

 

enter into restrictive agreements;

 

make capital expenditures;

 

amend or modify organizational documents; and

 

engage in businesses other than the businesses we currently conduct.

In addition to the restrictions and covenants listed above, our debt instruments require us to comply with specified financial maintenance covenants. These restrictions or covenants could limit our ability to plan for or react to market conditions or meet certain capital needs and could otherwise restrict our corporate activities.

Any one or more of the risks discussed in this section, as well as events not yet contemplated, could result in our failing to meet the covenants and restrictions described above. Events beyond

 

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our control may affect our ability to comply with these covenants and restrictions, and an adverse development affecting our business could require us to seek waivers or amendments of these covenants or restrictions or alternative or additional sources of financing. We may be unable to obtain these waivers, amendments or alternatives on favorable terms, if at all.

A breach of any of the covenants or restrictions contained in any of our existing or future debt instruments, including our inability to comply with the financial maintenance covenants in these debt instruments, could result in an event of default under these debt instruments. An event of default could permit the agent or lenders under the debt instruments to discontinue lending, to accelerate the related debt, as well as any other debt to which a cross acceleration or cross default provision applies, and to institute enforcement proceedings against our assets that secure the extensions of credit under our outstanding indebtedness. The agent or lenders could terminate any commitments they had made to supply us with further funds. If the agent or lenders require immediate repayments, we may not be able to repay them in full. This could harm our financial results, liquidity, cash flow and our ability to service our indebtedness and could lead to our bankruptcy.

Substantially all of our domestic subsidiaries’ assets are pledged as collateral under our credit facilities.

Substantially all of our domestic subsidiaries’ assets are pledged as collateral for these borrowings. If we are unable to repay all secured borrowings when due, whether at maturity or if declared due and payable following a default, the agent or the lenders, as applicable, would have the right to proceed against the assets pledged to secure the indebtedness and may sell these assets in order to repay those borrowings, which could materially harm our business, financial condition and results of operations.

We operate as a holding company and depend on our subsidiaries for cash to satisfy the obligations of the holding company.

Remy International, Inc. is a holding company. Our subsidiaries conduct all of our operations and own substantially all of our assets. Our cash flow and our ability to meet our obligations depend on the cash flow of our subsidiaries. The payment of funds in the form of dividends, inter-company payments, tax sharing payments and other payments may in some instances be subject to restrictions under the terms of our subsidiaries’ financing arrangements.

Our variable rate indebtedness exposes us to interest rate risk, which could cause our debt costs to increase significantly.

A significant portion of our borrowings accrue interest at variable rates and expose us to interest rate risks. As of December 31, 2010, we had $321.3 million of outstanding debt on our Term B loan (excluding OID) and the Asset-Based Revolving Credit Facility under our primary lending agreements. A 1% increase in the current variable rate would have an immaterial impact on our interest expense because the rate would not rise above the LIBOR floor rate of 1.75% set under our primary lending agreements.

Our ability to borrow under our revolving credit facility is subject to fluctuations of our borrowing base and periodic appraisals of certain of our assets. An appraisal could result in the reduction of available borrowings under this facility, which would harm our liquidity.

The borrowings available under our revolving credit facility are subject to fluctuations in the calculation of a borrowing base, which is based on the value of our domestic accounts receivable and inventory. The administrative agent for this facility causes a third party to perform an

 

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appraisal of the assets included in the calculation of the borrowing base either on an semi-annual basis or more frequently if our availability under the facility is less than $23.75 million during any 12-month period. If certain material defaults under the facility have occurred and are continuing, then the administrative agent has the right to perform this appraisal as often as it deems necessary in its sole discretion. If an appraisal results in a significant reduction of the borrowing base, then a portion of the outstanding indebtedness under the facility could become immediately due and payable.

Risks relating to this offering

The market price for our common stock may be volatile, and you may not be able to sell our stock at a favorable price, if at all.

Immediately before this offering, there was no active public market for our common stock. An active public market for our common stock may not develop or be sustained after this offering. The trading price of our common stock after this offering may be higher or lower than the price you pay in this offering. If you purchase shares of common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay the price that we negotiated with the representatives of the underwriters. Many factors could cause the market price of our common stock to rise and fall, including the following:

 

 

announcements concerning our competitors, the automotive industry or the economy in general;

 

 

announcements by us or our competitors concerning significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures, capital commitments, performance, accounting practices or legal problems;

 

 

the gain or loss of customers;

 

 

introductions of new pricing policies by us or our competitors;

 

 

variations in our quarterly results;

 

 

acquisitions or strategic alliances by us or by our competitors;

 

 

recruitment or departure of key personnel;

 

 

any increased indebtedness we may incur in the future;

 

 

changes or proposed changes in laws or regulations affecting the automotive industry or enforcement of these laws and regulations, or announcements relating to these matters;

 

 

speculation or reports by the press or investment community with respect to us or our industry in general;

 

 

changes in the estimates of our operating performance or changes in recommendations by any securities analysts that follow our stock; and

 

 

market, political and economic conditions in our industry and the economy as a whole, including changes in the price of raw materials, energy and oil and changes in local conditions in the markets in which our customers, suppliers and facilities are located.

Accordingly, it may be difficult for you sell your shares of our common stock at a price that is attractive to you, if at all.

 

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Our directors, executive officers and principal stockholders will continue to have substantial control over us after this offering and will be able to influence corporate matters.

Upon completion of this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate, approximately [    ]% of our outstanding common stock. One significant stockholder will own approximately [    ]% of our outstanding common stock upon completion of this offering. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may delay or prevent a third party from acquiring control over us.

Future sales of our common stock by our stockholders could cause our stock price to decline.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering, or the perception that these sales will occur. Based on shares outstanding as of March 1, 2011, we will have             shares of common stock outstanding after this offering. Of these shares, the common stock sold in this offering will be freely tradable, except for any shares purchased by our “affiliates,” as defined in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. The remaining shares will become eligible for resale into public markets as described in the section entitled “Shares eligible for future sale.” Our directors and executive officers and certain of our significant stockholders have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock for a period of 180 days after the date of this prospectus, except with the prior written consent of the representatives for the underwriters. The 180-day restricted period referred to in the preceding sentence may be extended under the circumstances described in the section entitled “Underwriting.” After the expiration of the lock-up period, these shares may be sold in the public market, subject to prior registration or qualification for an exemption from registration, including, in the case of shares held by affiliates, compliance with Rule 144.

We have granted registration rights to some of our stockholders. If these holders exercise their registration rights, we must register, under the Securities Act, the offer and sale of shares of our common stock held by them. In the aggregate, as of [            ], these registration rights covered approximately [            ] shares of our common stock that were then outstanding. An exercise of these registration rights, or similar registration rights that may apply to securities we may issue in the future, could result in additional sales of our common stock in the market, which could cause of stock price to fall.

The exercise of registration rights, and the sale of shares into public markets by our stockholders, could also harm our ability to raise additional equity or other capital.

Purchasers in this offering will experience immediate and substantial dilution.

We expect the price of our shares in this offering to be substantially higher than the net tangible book value per share of our outstanding common stock before this offering. As a result, purchasers of our common stock in this offering will incur immediate and substantial dilution of approximately $             per share, based on an assumed public offering price of $             per share (the midpoint of the price range on the cover page of this prospectus) and our net tangible book value as of December 31, 2010. Assuming the sale by us of              shares of our common stock in

 

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this offering at an assumed initial public offering price of $             per share (the midpoint of the price range on the cover page of this prospectus), the investors in this offering will contribute approximately     % of the total gross amount invested through December 31, 2010 in our company, but will own only approximately     % of the shares of common stock outstanding immediately after this offering. The issuance of new stock could further dilute new investors. See “Dilution.”

Anti-takeover provisions contained in our certificate of incorporation and bylaws that will be in effect immediately after completion of this offering, as well as provisions of Delaware law, could impair a takeover attempt.

Our certificate of incorporation and bylaws that will be in effect immediately after completion of this offering, and Delaware law, contain provisions which could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors. For example, these corporate governance documents include provisions:

 

 

creating a classified board of directors whose members serve staggered three-year terms;

 

 

authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;

 

 

limiting the liability of, and providing indemnification to, our directors and officers;

 

 

prohibiting stockholder action by written consent in lieu of a meeting;

 

 

allowing only our board of directors, the chairperson of our board of directors or our chief executive officer to call special meetings; and

 

 

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors.

See “Description of capital stock—Anti-takeover effects of provisions of our amended and restated certificate of incorporation and bylaws and Delaware law.” These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or our management. Delaware law imposes conditions on certain business combination transactions with “interested stockholders.”

Provisions of our certificate of incorporation or bylaws or Delaware law that have the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock. These provisions could also affect the price that some investors are willing to pay for our common stock.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us changes his or her recommendation regarding our stock adversely, or provides more favorable relative recommendations about our competitors, then our stock price would likely decline. If any analyst who may cover us ceases to cover us or fails to regularly publish reports on us, then we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

 

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Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

We intend to use the net proceeds to us from this offering for general corporate purposes, which may include debt reduction, acquisition of one or more companies or businesses and product and geographic expansion. We will retain broad discretion over the use of proceeds from this offering. You may not agree with the way we decide to use these proceeds, and our use of the proceeds may not yield a significant return or any return at all for our stockholders.

Since we do not expect to pay any dividends for the foreseeable future, investors in this offering may be forced to sell their stock in order to obtain a return on their investment.

We do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future. Instead, we plan to retain any earnings to finance our operations and growth plans discussed elsewhere in this prospectus. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment. As a result, investors seeking cash dividends should not purchase our common stock.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members and executives.

As a public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We will incur costs associated with the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act and related rules implemented or to be implemented by the Securities and Exchange Commission, or SEC, and the requirements of the [            ].

The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect that laws and regulations affecting public companies will increase our legal and financial compliance costs and make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on our board committees or as our executive officers and may divert management’s attention. If we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock from the [            ], fines, sanctions and other regulatory action and potentially civil litigation.

If we do not timely satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the trading price of our common stock could be adversely affected.

After this offering, we will be subject to section 404 of the Sarbanes-Oxley Act of 2002 and the related rules of the SEC, which generally require our management and independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting. We expect that our management and, depending on the size of our public float, independent registered public accounting firm will have to provide the first of such reports with our annual report for the fiscal year ending December 31, 2012. To date, we have never conducted a review of our internal control for the purpose of providing the reports required by these rules.

 

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During the course of our review and testing, we may identify deficiencies and be unable to remediate them before we must provide the required reports. We have identified material weaknesses and significant deficiencies in our internal controls over financial reporting in the past and are currently working on remediating a significant deficiency relating to our income tax accounting. We may identify additional deficiencies or weaknesses again in the future.

We or our independent registered public accounting firm may not be able to conclude that we have effective internal control over financial reporting, which could harm our operating results, cause investors to lose confidence in our reported financial information and cause the trading price of our stock to fall.

 

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Special note regarding forward-looking statements

This prospectus contains forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “ongoing,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.

Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in the section entitled “Risk factors” in this prospectus. Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date of the document in which they are contained. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this prospectus or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this prospectus.

 

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Use of proceeds

We estimate that the net proceeds from the sale, by us, of the [            ] shares of common stock we are offering will be approximately $[            ] million, assuming an initial public offering price of $[            ] per share (the midpoint of the price range on the cover page of this prospectus) and after deducting underwriting discounts and commissions and our estimated offering expenses. If the underwriters fully exercise their over-allotment option, we estimate the net proceeds to us will be approximately $[            ] million.

Each $1.00 increase (decrease) in the initial public offering price per share would increase (decrease) the net proceeds to us from this offering, after deducting underwriting discounts and commissions and our estimated offering expenses, by approximately $[            ] million, assuming that the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same and that the underwriters do not exercise their over-allotment option. Depending on market conditions and other considerations at the time we price this offering, we may sell a greater or lesser number of shares than the number set forth on the cover page of this prospectus. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting underwriting discounts and commissions and our estimated offering expenses, by approximately $[            ] million, assuming the initial public offering price per share remains the same.

We intend to use the net proceeds of this offering for general corporate purposes, which may include debt reduction, acquisition of one or more companies or businesses and product and geographic expansion. We do not have agreements or commitments for any specific acquisitions at this time. Pending use of the net proceeds as described above, we intend to invest the net proceeds in money market funds and investment grade debt securities. Although we have identified some types of uses above, we have and reserve broad discretion in the application of the proceeds from this offering.

Dividend policy

We do not currently pay dividends and do not anticipate paying any cash dividends in the foreseeable future. Any future decision to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. Our ability to pay dividends is restricted by certain covenants contained in our credit facilities.

 

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Capitalization

The following table sets forth our capitalization as of December 31, 2010:

 

 

on an actual basis; and

 

 

on an as adjusted basis to give effect to:

 

   

the adoption of our amended and restated certificate of incorporation that will be in effect immediately after completion of this offering; and

 

   

the issuance and sale, by us, of             shares of our common stock in this offering at an assumed initial public offering price of $            per share (the midpoint of the price range on the cover page of this prospectus), after deducting underwriting discounts and commissions and our estimated offering expenses.

 

      As of December 31, 2010  
             Actual             As adjusted  
   
     (in thousands, except share and
per share data)
 

Long-term debt, net of current maturities

   $ 317,769      $ 317,769   

Redeemable preferred stock:

    

Class A shares, $0.0001 par value per share; 27,000 shares authorized, 27,000 shares outstanding, actual;             shares authorized,             shares outstanding, as adjusted

     51,581     

Class B shares, $0.0001 par value per share; 60,000 shares authorized, 60,000 shares outstanding, actual;             shares authorized,             shares outstanding, as adjusted

     114,535     
        
     483,885     

Remy International, Inc. stockholders’ equity:

    

Preferred stock, $0.0001 par value per share; no shares authorized, no shares issued and outstanding, actual;             shares authorized, no shares issued and outstanding, as adjusted

              

Common stock, $0.0001 par value per share; 130,000,000 shares authorized, 10,755,704 shares issued, 10,579,647 shares outstanding and 176,057 treasury shares, actual;             shares authorized,             shares issued,             shares outstanding and 176,057 treasury shares, as adjusted

     1     

Additional paid-in capital(1)

     103,932     

Accumulated deficit

     (14,453     (14,453

Accumulated other comprehensive loss

     (21,357     (21,357
        

Total Remy International, Inc. stockholders’ equity(1)

     68,123     
        

Total capitalization(1)

   $ 552,008      $     
        
   

 

(1)  

Each $1.00 increase (decrease) in the initial public offering price per share would increase (decrease) each of as adjusted additional paid in capital, total Remy International, Inc. stockholders’ equity and total capitalization by approximately $             million, assuming that the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same and that the underwriters do not exercise their over-allotment option. Depending on market conditions and other considerations at the time we price this offering, we may sell a greater or lesser number of shares than the number set forth on the cover page of this prospectus. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) each of as adjusted additional paid in capital, total Remy International, Inc. stockholders’ equity

 

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and total capitalization by approximately $             million, assuming the initial public offering price per share remains the same. This as adjusted information is illustrative only, and following the pricing of this offering, we will update this information based on the actual initial public offering price and other terms of this offering.

The table above should be read in conjunction with our consolidated financial statements and related notes included in this prospectus. This table excludes:

 

 

37,368 shares of our common stock underlying restricted stock units outstanding as of December 31, 2010;

 

 

244,836 shares of restricted common stock that are not classified as outstanding for financial reporting purposes but that will become outstanding for financial reporting purposes as the shares vest; and

 

 

4,415,456 shares of our common stock available for future grant under our Omnibus Equity Incentive Plan immediately after giving effect to an amendment made to that plan effective as of March 24, 2011.

 

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Dilution

If you invest in our common stock, you will experience dilution to the extent of the difference between the public offering price per share you pay in this offering and the net tangible book value per share of our common stock immediately after this offering. Our net tangible book value as of December 31, 2010 was $(321.3) million, or $(30.37) per share of common stock. Net tangible book value is equal to our total tangible assets minus total liabilities, preferred stock (including cumulative dividends payable on our preferred stock) and noncontrolling interests, and net tangible book value per share is equal to net tangible book value divided by the number of shares of common stock outstanding as of December 31, 2010.

After giving effect to the issuance and sale, by us, of             shares of common stock in this offering at an assumed initial public offering price of $            per share (the midpoint of the price range on the cover page of this prospectus), after deducting underwriting discounts and commissions and our estimated offering expenses, our as adjusted net tangible book value as of December 31, 2010 would have been approximately $            million, or approximately $            per share of common stock. This represents an immediate increase from actual net tangible book value of approximately $            per share to existing stockholders and an immediate dilution of approximately $            per share to new investors. The following table illustrates this calculation on a per share basis:

 

Assumed initial public offering price per share

           $                

Net tangible book value per share as of December 31, 2010

   $ (30.37  

Increase per share attributable to the issuance and sale of shares by us in this offering

    
          

As adjusted net tangible book value per share after this offering

    
          

Dilution per share to new investors

     $     
   

If the underwriters fully exercise their over-allotment option, as adjusted net tangible book value would increase to approximately $             per share, representing an increase to existing stockholders of approximately $            per share, and there would be an immediate dilution of approximately $            per share to new investors.

A $1.00 increase (decrease) in the initial public offering price per share would increase (decrease) our as adjusted net tangible book value by approximately $            million, or $            per share, and would decrease (increase) dilution to investors in this offering by $            per share, assuming that the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same and that the underwriters do not exercise their over-allotment option. Depending on market conditions and other considerations at the time we price this offering, we may sell a greater or lesser number of shares than the number set forth on the cover page of this prospectus. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) our as adjusted net tangible book value by approximately $            million, or $            per share, and would decrease (increase) dilution to investors in this offering by $            per share, assuming the initial public offering price per share remains the same. This as adjusted information is illustrative only, and following the pricing of this offering, we will adjust this information based on the actual initial public offering price and other terms of this offering.

 

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The following table summarizes, on an as adjusted basis as of December 31, 2010, the total number of shares of our common stock purchased from us and the total consideration and average price per share paid by existing stockholders and by new investors.

 

      Shares purchased
from us
     Total consideration to us     

Average
price

per share

 
     Number      %      Amount      %     
   

Existing stockholders

     10,579,647         %       $ 148,081,000         %       $ 14.00   

New investors

              
        

Total

        100.0%       $           100.0%      
   

This above table, and the bullet points immediately below, assume that our existing stockholders do not purchase any shares in this offering. If the underwriters fully exercise their over-allotment option, then the following will occur:

 

 

the as adjusted percentage of shares of our common stock held by existing stockholders will decrease to approximately     % of the total as adjusted number of shares of our common stock outstanding as of December 31, 2010; and

 

 

the as adjusted number of shares of our common stock held by new public investors will increase to             , or approximately     % of the total as adjusted number of shares of our common stock outstanding as of December 31, 2010.

The calculations above are based on 10,579,647 shares of common stock outstanding as of December 31, 2010 and excludes:

 

 

37,368 shares of our common stock underlying restricted stock units outstanding as of December 31, 2010; and

 

 

4,415,456 shares of our common stock available for future grant under our Omnibus Equity Incentive Plan immediately after giving effect to an amendment made to that plan effective as of March 24, 2011.

 

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Selected consolidated financial data

The following summary consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010, and the consolidated balance sheet data as of December 31, 2009 and 2010, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statement of operations data for the year ended December 31, 2006, the eleven months ended November 30, 2007 and the month ended December 31, 2007, and the consolidated balance sheet data as of December 31, 2006, 2007 and 2008, have been derived from our audited consolidated financial statements not included in this prospectus. This information is only a summary and should be read together with the discussion under “Management’s discussion and analysis of financial condition and results of operations” and with the consolidated financial statements, the related notes and other financial information included in this prospectus. The historical results presented below are not necessarily indicative of financial results for future periods.

On October 8, 2007, our predecessor, Remy Worldwide Holdings, Inc., and its domestic subsidiaries, filed voluntary petitions under a prepackaged arrangement for relief under Chapter 11 of the U.S. Bankruptcy Code. Upon emergence from Chapter 11 proceedings on December 6, 2007, we adopted fresh-start reporting in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification Topic 852, Reorganizations, or ASC 852. The effective date of the emergence was November 30, 2007, which resulted in a new reporting entity with no retained earnings or accumulated deficit. At that time, the recorded amounts of assets and liabilities were adjusted to reflect their estimated fair values. Accordingly, our financial data for periods or dates after November 30, 2007 are not comparable to our pre-emergence financial data because the post-emergence financial statements are for a new entity revalued in accordance with ASC 852.

 

     Successor            Predecessor         
    Year ended December 31,    

One month
ended
December 31,

2007

         

Eleven months
ended
November 30,

2007

   

Year ended
December 31,

2006

 
    2010     2009     2008          
   
    (in thousands, except per share data)  

Consolidated Statement of Operations Data:

               
 

Net sales

  $ 1,103,799      $ 910,745      $ 1,100,805      $ 78,090          $ 1,050,941      $ 1,193,084   

Cost of goods sold

    866,761        720,723        916,375        69,088            923,733        1,080,931   
                           

Gross profit

    237,038        190,022        184,430        9,002            127,208        112,153   

Selling, general and administrative expenses

    127,405        101,827        109,683        8,217            97,380        122,477   

Loss on sale of accounts receivable

                         745            8,277        8,197   

Pre-petition debt restructuring expenses

                                    34,481          

Reorganization items

                  2,762        1,097            (422,229       

Intangible asset impairment charges

           4,000        1,500                          28,606   

Restructuring and other charges

    3,963        7,583        15,325        404            1,815        6,266   
                           

Operating income (loss)

    105,670        76,612        55,160        (1,461         407,484        (53,393

Other income (expense)

                  2,223                   545          

Interest expense

    46,739        49,534        54,938        3,564            73,541        73,022   

Loss on extinguishment of debt

    19,403                                          
                           

 

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     Successor            Predecessor         
    Year ended December 31,    

One month
ended
December 31,

2007

         

Eleven months
ended
November 30,

2007

   

Year ended
December 31,

2006

 
                  2010                   2009                   2008          
   
    (in thousands, except per share data)  

Income (loss) from continuing operations before income taxes and income (loss) from unconsolidated subsidiaries

    39,528        27,078        2,445        (5,025         334,488        (126,415

Income tax expense (benefit)

    18,337        13,018        6,818        (594         9,293        126   

Impairment of investment in unconsolidated subsidiary

                                    2,559        3,849   

Loss (income) from unconsolidated subsidiaries

                                    23        (417
               

Net income (loss) from continuing operations

    21,191        14,060        (4,373     (4,431         322,613        (129,973

Net income from discontinued operations, net of tax

                                    89,977        7,833   
               

Net income (loss)

    21,191        14,060        (4,373     (4,431         412,590        (122,140

Less: Net income attributable to noncontrolling interest

    4,273        3,272        1,403        106            961        377   
               

Net income (loss) attributable to Remy International, Inc.

    16,918        10,788        (5,776     (4,537         411,629        (122,517

Preferred stock dividends

    (30,571     (25,581     (23,145     (1,519                  
               

Net income (loss) attributable to common stockholders

  $ (13,653   $ (14,793   $ (28,921   $ (6,056       $ 411,629      $ (122,517
               
 

Basic and diluted earnings (loss) per share:

               

Earnings (loss) per share

  $ (1.33   $ (1.46   $ (2.89   $ (0.61       $ 164.45      $ (48.95
               

Weighted average shares outstanding

    10,278        10,130        10,004        10,000            2,503        2,503   
               

 

     Successor            Predecessor  
    As of December 31,  
                  2010                   2009                   2008     2007           2006  
   
    (in thousands)  

Consolidated Balance Sheet Data:

           

Cash and cash equivalents

  $ 37,514      $ 30,171      $ 18,744      $ 24,726        $ 28,378   

Working capital (deficit)

    81,762        72,723        69,890        73,534          (643,448

Total assets

    969,156        927,255        929,217        1,005,775          842,828   

Long-term debt, net of current maturities

    317,769        337,905        345,133        339,524          17,649   

Post-retirement benefits other than pensions, net of current portion

    1,371        1,552        5,261        14,508          14,312   

Accrued pension benefits

    21,002        17,816        20,949        5,668          11,441   

Redeemable preferred stock

    166,116        135,545        109,964        86,819            

Accumulated deficit

    (14,453     (10,535     (10,313     (4,537       (750,637

Total equity (deficit)

    77,473        82,988        81,451        142,804 (1)        (414,946 )(1) 
           

 

(1)   Total equity (deficit) as of December 31, 2007 and 2006 excludes minority interest of $5.8 million and $4.7 million, respectively.

 

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Management’s discussion and analysis of financial condition and results of operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes contained elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under “Risk factors” and elsewhere in this prospectus.

General

We are a global market leader in the design, manufacture, remanufacture, marketing and distribution of non-discretionary, rotating electrical components for light and commercial vehicles for original equipment manufacturers, or OEMs, and the aftermarket. We sell our products worldwide primarily under our well-recognized “Delco Remy,” “Remy” and “World Wide Automotive” brand names, as well as our customers’ well-recognized private label brand names.

Our principal products for both light and commercial vehicles include:

 

 

new starters and alternators;

 

remanufactured starters and alternators; and

 

hybrid electric motors.

We sell our new starters and alternators and our hybrid electric motors to U.S. and non-U.S. OEMs for factory installation on new vehicles. We sell remanufactured and new starters and alternators to aftermarket customers, mainly retailers in North America, warehouse distributors in North America and Europe and OEMs globally for the original equipment service, or OES, market. We also sell a small volume of remanufactured locomotive power assemblies in North America and steering gear and brake calipers for light vehicles in Europe. We manage our business and operate in a single reportable business segment.

Business trends and conditions

The principal factors affecting our recent results of operations are described below.

General factors affecting customer demand

Original equipment market

The demand for components in the OE market is cyclical and depends on levels of new vehicle production. Production and sale of new vehicles, in turn, depend on the economy, consumer confidence, discounts and incentives offered by automakers and the availability of funds to finance purchases. The economy and the price of gasoline also affect the types of vehicles sold. In general, larger vehicles tend to be more profitable for manufacturers and auto parts suppliers.

In 2008, the worldwide automotive industry experienced a severe decline in demand, principally due to the global economic crisis. In response to the reduction in consumer demand, manufacturers reduced production volumes throughout the automotive industry, significantly

 

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impacting their revenues and those of their suppliers. As measured by IHS Global Insight, global industry production of light vehicles peaked at 71.0 million in 2007, dropped by 4.0% to 68.2 million in 2008 and further declined by 12.0% to 60.0 million in 2009. This decline was more pronounced in the more mature markets: for example, North American production levels declined from 15.0 million light vehicles in 2007 to 12.6 million (a 16.3% decline) in 2008 and 8.6 million in 2009 (a 31.9% decline). General Motors and Chrysler filed for bankruptcy protection in mid-2009. To some extent, government programs to incentivize the sale of new cars, such as the U.S. “Cash for Clunkers” program, slowed the decline in new production. These programs generally expired by the end of 2009. As the economy slowly began to recover, and manufacturers sought to rebuild depleted inventory levels, new light vehicle production increased to 74.2 million globally (a 23.6% increase) and 11.9 million in North America in 2010 (a 39.1% increase). Our net sales to OEM customers for light vehicles grew at a 40% rate in 2010 over 2009, or somewhat faster than the industry overall, due to market share gains.

IHS Global Insight projects that new light vehicle production will grow globally in 2011. Further, recent reports suggest that credit for new car buyers in the U.S. is becoming more available in 2011. However, the price of gas has lately increased due to events in the Middle East. We expect that increased volume from light vehicle models that are gaining market share will be largely offset by the phase-out of certain other models. As a result, we believe our OEM revenues from light vehicles will be essentially flat in 2011.

With respect to commercial vehicles, the decline in global production was even greater, from 3.0 million units in 2007 to 2.3 million units in 2009. North American production declined 48.5% from 421,379 units to 217,087 units and European production declined 62.3% from 717,879 units to 270,301 units over this period. In 2010, the recovery was also seen in commercial vehicles with North American production growing 16.8% from 217,087 units to 253,523 units while European production rose 46.3% from 270,301 units to 395,390 units over this period. Power Systems Research, or PSR, projects that this growth will continue in 2011. Our net sales to OEM customers for commercial vehicles rose at a slightly faster rate than the industry overall in 2010 due to market share gains, and we believe this trend is likely to continue in 2011.

Aftermarket

Aftermarket sales of starters and alternators for light vehicles do not follow the same cycles as OEM sales. Differing business cycles in the aftermarket and original equipment channels help us to mitigate the variability in our revenues. Aftermarket sales are principally affected by the strength of the economy and gas prices. In a weaker economy, drivers tend to keep their vehicles and repair them rather than buying new vehicles. Lower gas prices have historically tended to result in more miles driven, which increases the frequency with which auto repairs are needed. However, a weak economy may reduce miles driven. Miles driven in the U.S. dropped sharply in 2008 but have risen slowly since then. Further, government programs designed to encourage owners of older cars to trade them in for new cars can reduce the number of cars on the road that require repairs. Finally, improved durability of OE and aftermarket parts reduces the number of units sold in the aftermarket. According to Frost & Sullivan, the North American aftermarket for starters and alternators for light vehicles declined from 25.4 million units in 2007 to an estimated 23.4 million units in 2010, and is projected to decline further to 22.9 million units in 2011.

 

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Weather can also affect aftermarket sales of starters and alternators. Extreme cold can damage starters and extreme heat can increase alternator failures. In both cases, this extreme weather can stimulate sales of aftermarket starters and alternators. The relatively harsh winter experienced in the Midwest and Northeast United States in late 2010 and early 2011 appears to be having a positive effect on our aftermarket sales so far in 2011.

The aftermarket for light vehicle components is extremely competitive. Many retailers and warehouse distributors purchase starters and alternators from only one or two suppliers, under contracts that run for five years or less. When contracts are up for renewal, competitors tend to bid very aggressively to replace the incumbent supplier, although the cost of switching from the incumbent tends to mitigate this competition.

Our global units sold to aftermarket customers for light vehicles were flat despite the industry trend in 2008 through 2010 due to market share gains, but our net sales declined due to pricing pressures. We expect our net sales to such customers to grow slightly in 2011, despite competitive pressures and other external factors, such as the improving economy and higher gas prices.

Aftermarket demand for commercial vehicles is driven more by general economic activity as compared to light vehicles. Consumption demand and imports account for nearly 57% of commercial trucking activity. The key parameters driving on-highway demand are freight miles driven and fleet capacity utilization, which generally indicate truck usage and wear. Many fleets idled excess capacity during the economic downturn, which depressed aftermarket demand. Many parked trucks were put back in service by the end of 2010. This led to an increase in the truck population by 4.1% in North America over 2009. Vehicle utilization rates are forecast to return to historical rates, or about 87%, by 2013, compared to 81% in 2009 and 83% in 2010. While this activity may improve new truck sales, we believe it will also drive demand for replacement parts. We believe vehicle population will increase little through 2015 but average vehicle age will be at a 20-year high. We believe the older vehicle population, compounded by higher mileages and utilization, will result in higher replacement parts demand for alternators and starters.

Prices of materials

Overall commodity price inflation is an ongoing concern for our business and has been an operational and financial focus for us. During 2010, our operating results were negatively impacted by the increasing cost of certain commodities (principally copper, steel and aluminum) essential to our manufacture of new products. Further, as global industrial production levels rise, commodity inflationary pressures may increase, both in the automotive industry and in the broader economy. We continue to monitor commodity costs and work with our suppliers and customers to manage changes in such costs. We generally follow the North American industry practice of passing on to our original equipment customers a portion of the costs or benefits of fluctuation in copper, steel and aluminum prices (approximately [    ]% of copper, [    ]% of aluminum and [    ]% of steel pounds purchased are for customers with metals pass-through or sharing clauses within their contracts). Of the remaining portion of our copper exposure, we generally purchase hedges for a significant portion and also have a natural hedge in copper, aluminum and steel scrap recovered in our remanufacturing operations. In general, we do not hedge our aluminum and steel exposures.

In our remanufacturing operations, our principal inputs are cores, although we generally purchase only approximately 10% of the cores we use. When we have to purchase cores rather

 

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than receiving them in exchange for remanufactured units, we are affected by the cost of cores. The cost of cores fluctuates based on a number of factors, including supply and demand and the underlying value of the commodities they contain.

Foreign currencies

During 2010, approximately 40% of our net sales were transacted outside the United States. The functional currency of our foreign operations is generally the local currency, while our financial statements are presented in U.S. dollars. As a result, our operating results may be impacted by our buying, selling and financing in currencies other than the functional currency of our relevant operations, such as when we make goods in one country for sale in another. Further, the translation of foreign currencies back to the U.S. dollar may have a significant impact on our net sales and financial results. Foreign exchange has an unfavorable impact on net sales when the U.S. dollar is relatively strong as compared with foreign currencies and a favorable impact on net sales when the U.S. dollar is relatively weak as compared with foreign currencies. While we employ financial instruments to hedge certain exposures related to transactions from fluctuations in foreign currency exchange rates, these hedging actions do not entirely insulate us from currency effects and such programs may not always be available to us at economically reasonable costs. In general, a weakening of the U.S. dollar relative to other currencies will positively impact our profitability.

Cost reduction efforts

We constantly seek to reduce our operations costs. Since the appointment of our current CEO, John H. Weber, in 2006, we have reduced employee headcount by over 48% and closed a total of 14 facilities worldwide as we consolidated and streamlined operations. These reductions have occurred across all of our operations. We anticipated the global downturn in demand and accomplished a substantial part of the headcount reductions and streamlining of operations activities prior to the start of the global economic crisis. In 2008, we reduced headcount by 20%. In 2009, we reduced headcount by an additional 6%. As global new vehicle production picked up in 2010, we were able to increase our production without a proportionate increase in overhead, benefiting our earnings. Our ongoing initiatives are focused on increasing productivity, managing costs during periods of increasing production levels and maintaining discipline on capital expenditures and other discretionary spending.

Remy has established a firm foundation for profitability. We ensure our operations are properly configured and sized based on changing market conditions. The bulk of the necessary restructuring efforts have been completed.

Hybrid electric motors

We continue to invest for future growth as evidenced by our increasing capital and engineering investment in hybrid electric motors. During 2010, we invested a total of $25.9 million (including amounts capitalized) in our hybrid efforts, a substantial increase from the $8.2 million we invested in 2009. We expect to increase our investment in developing hybrid technology in 2011.

The United States Department of Energy awarded us a grant in 2009 pursuant to which it agreed to match up to $60.2 million of eligible expenditures we make through 2012 for the commercialization of hybrid electric motor technology. The grant will reimburse certain capital expenditures, labor, subcontract, and other allowable costs at a rate of 50% of the eligible

 

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amount expended during the three-year period from date of award. As of December 31, 2010, we had $48.4 million of the grant award remaining. When grant funds reimburse the cost of acquiring an asset, we record the proceeds as deferred revenue and recognize them in income on a straight-line basis over the useful life of the asset. When grant funds reimburse other eligible expenses, we recognize them in our income statement as an offset to the related expense.

Our hybrid electric motors net sales were $38.2 million compared to $42.7 million in 2009. Sales of products for our hybrid light-duty application were double the sales in 2009. This partially offset a decrease in hybrid heavy-duty bus sales and the wind-down of the Daimler/BMW European hybrid electric motor program. We were successful in increasing our potential new business pipeline, signing agreements with Allison Transmission for the development and production of a hybrid electric motor for use in medium-duty commercial vehicles by the end of 2012 and with a number of other customers for development and testing of possible deployment of our motors in their vehicles. Our goal for 2011 is to continue to develop new opportunities and to move to the production phase with additional customers.

Adjusted EBITDA

We use the term adjusted EBITDA in this prospectus. We define adjusted EBITDA as net income (loss) attributable to Remy International, Inc. before interest, taxes, depreciation, amortization, non-cash compensation expense, noncontrolling interest, restructuring charges, loss on extinguishment of debt, intangible asset impairment charges, reorganization items and other adjustments described in the reconciliations provided below. Adjusted EBITDA is not a measure of performance defined in accordance with GAAP. We use adjusted EBITDA as a supplement to our GAAP results in evaluating our business.

Adjusted EBITDA is included in this prospectus because it is one of the key factors upon which we assess performance. As an analytical tool, adjusted EBITDA assists us in comparing our performance over various reporting periods on a consistent basis because it excludes items that we do not believe reflect our ongoing operating performance.

We believe that adjusted EBITDA is useful to investors in evaluating our performance because EBITDA is a commonly used financial metric for measuring and comparing the operating performance of companies in our industry. We believe that the disclosure of adjusted EBITDA offers an additional financial metric that, when coupled with the GAAP results and the reconciliation to GAAP results, provides a more complete understanding of our results of operations and the factors and trends affecting our business.

In future periods, we will evaluate our performance based on adjusted EBITDA without adjustment for restructuring charges. We have completed the bulk of the work necessary to streamline our operations and rationalize our cost base, and, as a result, in future periods any restructuring charges are expected to be nominal. However, management has evaluated our performance to date using adjusted EBITDA defined to include an adjustment for restructuring charges, and continues to believe that such measure is a better way to evaluate our performance over the historical periods presented in this prospectus than a measure which does not adjust for such charges.

Adjusted EBITDA should not be considered as an alternative to net income (loss) as an indicator of our performance, as an alternative to net cash provided by operating activities as a measure of liquidity, or as an alternative to any other measure prescribed by GAAP. There are limitations to

 

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using non-GAAP measures such as adjusted EBITDA. Although we believe that adjusted EBITDA may make an evaluation of our operating performance more consistent because it removes items that do not reflect our ongoing operations, adjusted EBITDA excludes certain financial information that some may consider important in evaluating our performance. Other companies in our industry define adjusted EBITDA differently from us and, as a result, our measure is not comparable to similarly titled measures used by other companies in our industry. We compensate for these limitations by providing disclosure of the differences between adjusted EBITDA and GAAP results, including providing a reconciliation of adjusted EBITDA to GAAP results, to enable investors to perform their own analysis of our operating results.

The following table sets forth a reconciliation of adjusted EBITDA to its most directly comparable GAAP measure, net income (loss).

 

      Year ended December 31,  
     2010      2009      2008  
   
     (in thousands)  

Net income (loss) attributable to Remy International, Inc.

   $ 16,918       $ 10,788       $ (5,776
        

Adjustments:

        

Depreciation and amortization

     29,269         30,798         24,758   

Reorganization items

     —           —           2,762   

Intangible asset impairment charges

     —           4,000         1,500   

Restructuring and other charges

     3,963         7,583         15,325   

Other

     —           356         —     

Interest expense

     46,739         49,534         54,938   

Income tax expense

     18,337         13,018         6,818   

Net income attributable to noncontrolling interest

     4,273         3,272         1,403   

Non-cash compensation expense

     1,196         1,825         1,800   

Loss on extinguishment of debt

     19,403                   
        

Total adjustments

     123,180         110,386         1,903,304   
        

Adjusted EBITDA

   $ 140,098       $ 121,174       $ 103,528   
                          
   

Income taxes

We currently pay taxes in certain jurisdictions outside the United States. We do not currently pay taxes in certain jurisdictions, including the United States, either due to current operating losses or the use of tax loss carryforwards that are recorded in our consolidated financial statements as deferred income tax assets. As of December 31, 2010, we had U.S. tax loss carryforwards in the amount of $204.4 million, and foreign tax loss carryforwards in the amount of $63.5 million. Certain tax loss carryforwards are required to be utilized within a certain time period or the loss is forfeited. The tax loss carryforwards for the United States expire between 2023 and 2030, while the tax loss carryforwards for the foreign jurisdictions expire between 2011 and 2024. We have recorded a valuation allowance against the deferred tax assets related to these loss carryforwards. The use of tax loss carryforwards reduces future taxable income and cash taxes.

In addition to the time limitation on the use of the tax loss carryforwards, the U.S. carryforwards are subject to a limitation due to a change in control of the ownership of Remy upon our emergence from bankruptcy. Of the $204.4 million in carryforwards, $164.2 million is limited to use of $10.6 million in any one year. If the tax loss can not be fully utilized in any one year, it may be utilized in subsequent years. The remainder of the U.S. tax loss carryforwards does not have this limitation and are fully usable against the United States taxable income.

 

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Our effective tax rate for the year ended December 31, 2010 was 46.4%. This differs from the U.S. statutory rate mainly due to non-deductible expenses incurred in 2010, changes in valuation allowances, and accounting for uncertain tax positions. We anticipate our effective tax rate for 2011 will be below the U.S. statutory rate. Our effective rate may vary due to income earned in various jurisdictions and changes in valuation allowances.

Results of operations

Year ended December 31, 2010 compared to year ended December 31, 2009

The following table presents our consolidated results of operations for the years ended December 31, 2010 and 2009.

 

      Year ended
December 31,
    % Increase/  
     2010     2009     (decrease)  
   
     (in thousands)  

Net sales

   $ 1,103,799      $ 910,745        21.2%   

Cost of goods sold

     866,761        720,723        20.3%   
          

Gross profit

     237,038        190,022        24.7%   

Selling, general, and administrative expenses

     127,405        101,827        25.1%   

Intangible asset impairment charges

            4,000        (100.0)%   

Restructuring and other charges

     3,963        7,583        (47.7)%   
          

Operating income

     105,670        76,612        37.9%   

Interest expense

     46,739        49,534        (5.6)%   

Loss on extinguishment of debt

     19,403               *   
                  

Income before income taxes

     39,528        27,078        46.0%   

Income tax expense

     18,337        13,018        40.9%   
          

Net income

     21,191        14,060        50.7%   

Less net income attributable to noncontrolling interest

     4,273        3,272        30.6%   
          

Net income attributable to Remy International, Inc.

     16,918        10,788        56.8%   

Preferred stock dividends

     (30,571     (25,581     19.5%   
          

Net loss attributable to common stockholders

   $ (13,653   $ (14,793     (7.7)%   
                  
   
*   Not meaningful

Net sales

Net sales increased by $193.1 million, or 21.2%, to $1.1 billion for the year ended December 31, 2010, from $910.7 million for the year ended December 31, 2009. During the second quarter of 2009, we recognized a one-time sale of inventory in the amount of $35.5 million. Excluding this one-time sale in 2009, our 2010 net sales increased over 2009 by $228.5 million, or 26.1%.

Our 2010 net sales increase was mainly due to increased sales of new starters and alternators to OEMs as vehicle production continued to increase due to inventory replenishment in our relevant market segments, vehicle incentive programs, and the improving economy. Net sales of light vehicle products to OEMs were $395.5 million in 2010, a $138.9 million, or 54.1%, increase over $256.6 million in 2009. Net sales of commercial vehicle products to OEMs increased $92.3 million, or 61.4%, to $242.6 million in 2010 from $150.3 million in 2009. Our sales in these categories increased faster than the growth in new vehicle production due to market share gains by us with

 

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OEMs and by the vehicles for which we supply products. Our sales to OEMs included $38.2 million of hybrid electric motors in 2010, as compared to $42.7 million in 2009, due to a decrease in hybrid heavy-duty bus sales and the wind-down of a European hybrid electric motor customer program, which was partially offset by doubled sales of our products for hybrid light-duty application.

Net sales of light vehicle products to aftermarket customers were $305.9 million in 2010, a $32.4 million, or 9.6% decrease from $338.3 million in 2009. Although we gained market share, our net sales did not increase due to pricing pressures and a one-time event in 2009. Net sales of commercial vehicle products to such customers decreased $1.6 million, or 1.5%, to $104.3 million in 2010 from $105.9 million in 2009. Our sales in this category increased due to increasing demand and market share gains.

Net sales of other products to both OEMs and aftermarket customers were $17.3 million in 2010, a $0.3 million, or 2.2% increase from $17.0 million in 2009.

Foreign currency exchange (not reflected in the numbers above) had a net favorable impact on net sales of $11.8 million due mainly to the weakening of the U.S. dollar in relation to the Euro, the South Korean Won and the Brazilian Real.

Gross profit

Gross profit in 2010 increased by $47.0 million, or 24.7%, to $237.0 million for the year ended December 31, 2010 from $190.0 million for the year ended December 31, 2009. Gross profit as a percent of net sales, or gross margin, was 21.5% for the year ended December 31, 2010 compared to 20.9% for the year ended December 31, 2009. The increase in actual gross profit and gross profit as a percent of sales in 2010 over 2009 was due to higher sales volumes and increased productivity due to restructuring efforts implemented in previous years. Warranty expense incurred had a negative impact of $11.6 million in 2010. This increased expense was related to quality issues with supplier products and a change in estimate.

Our gross profit in 2009 benefitted from the one-time inventory sale described above and a one-time non-cash gain arising out of the GM bankruptcy. Excluding these one-time items, our gross profit increased $69.4 million, or 41.4%, in 2010.

Selling, general and administrative expenses

In 2010, selling, general and administrative expenses, or SG&A, increased $25.6 million, or 25.1%, from $101.8 million in 2009 to $127.4 million in 2010. SG&A as a percent of net sales increased from 11.2% in 2009 to 11.5% in 2010. The increase was primarily related to investment in growth opportunities, including hybrid development and commercialization, new starter and alternator product introductions and China and North America market strategy analysis. It also included the final accrual of our performance based deferred cash incentive plan established in connection with our 2007 emergence from bankruptcy.

Restructuring and other charges

Restructuring and other charges, including fixed asset impairments, decreased by $3.6 million, or 47.7%, to $4.0 million for the year ended December 31, 2010 compared to $7.6 million in 2009. Our restructuring efforts in 2010 were less extensive than in 2009 due to an improvement in general economic and industry conditions and the substantial realignments already completed in prior years. During 2010, our restructuring costs principally consisted of severance costs and a

 

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write-off of $2.3 million upon dissolving our former subsidiary in Poland. We have essentially completed the work necessary to streamline our operations and rationalize our cost base, and, as a result, in future periods any restructuring charges are expected to be nominal.

Interest expense, net

Interest expense decreased by $2.8 million, or 5.6%, to $46.7 million in 2010 from $49.5 million in 2009. The primary reasons for the decrease include our election of the cash interest option on our former third lien PIK term loan in 2010 and lower LIBOR and bank interest rates. These decreases were partially offset by expense related to our former interest rate swaps. Because the loans to which the interest rate swaps related were extinguished on December 17, 2010 in connection with the refinancing described below, we wrote off previously deferred losses on the swaps by recognizing $5.0 million as interest expense in the fourth quarter of 2010.

Loss on extinguishment of debt

We recognized a loss of $19.4 million in 2010 consisting of a call premium, bank fees and the write-off of capitalized debt issuance costs in connection with the refinancing of our former term loans and revolver. There was no such charge in 2009.

Income taxes

Tax expense increased by $5.3 million from $13.0 million in 2009 to $18.3 million in 2010. This increase was due to a combination of higher pre-tax income and reserves for uncertain tax positions.

Noncontrolling interests

Net income attributable to noncontrolling interests in 2010 was $4.3 million, an increase of $1.0 million, or 30.6%, over $3.3 million in 2009. This increase was due to the improved profitability of our Chinese joint venture.

Preferred stock dividends

Preferred stock dividends in 2010 were $30.6 million compared to $25.6 million in 2009, with the increase due to the continued accrual of unpaid dividends in 2010. All of our preferred stock was retired in January 2011.

Net loss attributable to common stockholders

Our net loss attributable to common stockholders in 2010 was $13.7 million as compared to $14.8 million in 2009, for the reasons described above.

 

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Year ended December 31, 2009 compared to year ended December 31, 2008

The following table presents our consolidated results of operations for the years ended December 31, 2009 and 2008.

 

      Year ended
December 31,
    % Increase/  
     2009     2008     (decrease)  
   
     (in thousands)  

Net sales

   $ 910,745      $ 1,100,805        (17.3)%   

Cost of goods sold

     720,723        916,375        (21.4)%   
          

Gross profit

     190,022        184,430        3.0%   

Selling, general, and administrative expenses

     101,827        109,683        (7.2)%   

Reorganization items

            2,762        (100.0)%   

Intangible asset impairment charges

     4,000        1,500        166.7%   

Restructuring and other charges

     7,583        15,325        (50.5)%   
          

Operating income

     76,612        55,160        38.9%   

Other income

            2,223        (100.0)%   

Interest expense

     49,534        54,938        (9.8)%   
          

Income before income taxes

     27,078        2,445        1007.5%   

Income tax expense

     13,018        6,818        90.9%   
          

Net income (loss)

     14,060        (4,373     *   

Less net income attributable to noncontrolling interest

     3,272        1,403        133.2%   
          

Net income (loss) attributable to Remy International, Inc.

     10,788        (5,776     *   

Preferred stock dividends

     (25,581     (23,145     10.5%   
          

Net loss attributable to common stockholders

   $ (14,793   $ (28,921     (48.9)%   
                  
   
*   Not meaningful

Net sales

Net sales for the year ended December 31, 2009 decreased by $190.1 million, or 17.3%, to $910.7 million in 2009 as compared to $1.1 billion in 2008. The decrease in net sales was driven primarily by lower sales to OEM customers as new vehicle production declined sharply due to the economic slowdown that began in the fourth quarter of 2008 in all of our major geographic regions. Excluding the one-time sale of inventory previously described, our net sales declined $225.5 million, or 20.5%, to $875.3 million in 2009.

Net sales of light vehicle products to OEMs were $256.6 million in 2009, a $115.3 million, or 31.0%, decrease from $371.9 million in 2008. Net sales of commercial vehicle products to OEMs decreased $73.3 million, or 32.8%, to $150.3 million in 2009 from $223.6 million in 2008. Our sales to OEMs included $42.7 million of hybrid electric motors in 2009 as compared to $43.4 million in 2008.

Net sales of light vehicle products to aftermarket customers were $338.3 million in 2009, compared to $237.9 million in 2008. Net sales of commercial vehicle products to such customers decreased $102.9 million, or 49.3%, to $105.9 million in 2009 from $208.8 million in 2008. Our sales in this category decreased due in part to a reduction in freight miles driven because of the weak economy.

 

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Net sales of other products to both OEMs and aftermarket customers were $17.0 million in 2009, a $1.6 million, or 10.5% increase from $15.4 million in 2008.

Foreign currency exchange (not reflected in the numbers above) also had a net unfavorable impact on sales of $25.2 million due to the relative strength of the dollar against other currencies (most notably the Euro).

Gross profit

Cost of goods sold decreased $195.7 million, or 21.4%, to $720.7 million for the year ended December 31, 2009 as compared to $916.4 million in 2008. Our gross margin was 20.9% in 2009 as compared to 16.8% in 2008. Excluding the one-time items described above, our gross margin was 19.1% in 2009. The 2009 result was better than the gross margin in 2008 mainly due to reduced production costs resulting from restructuring initiatives and overhead cost reduction, as well as improved material pricing.

Selling, general and administrative expenses

SG&A expenses decreased $7.9 million, or 7.2%, to $101.8 million in 2009 compared to $109.7 million in 2008. The decrease resulted mainly from continued cost reductions.

Restructuring and other charges

Restructuring charges in 2009 and 2008 were $7.6 million and $15.3 million respectively, a decrease of $7.7 million. This decrease was due to lower termination benefits, exit costs and impairment charges with respect to fixed assets. Our most significant restructuring actions occurred in 2008, including consolidations of facilities in Belgium, North America, Mexico and China. These consolidations continued on a smaller scale in 2009 principally in North America, the United Kingdom and Poland.

Intangible asset impairment charges

Intangible asset impairment charges of $4.0 million in 2009 and $1.5 million in 2008 both reflect the write-down of the value of certain trade names due to reductions in the revenue anticipated to be earned from products sold under those names.

Other income

Other income decreased by $2.2 million. Other income of $2.2 million was recognized in 2008 due to a gain on the sale of business assets and the non-cash extinguishment of a liability.

Interest expense

Interest expense decreased $5.4 million, or 9.8%, to $49.5 million in 2009 from $54.9 million in 2008. Lower interest rates in 2009 on our revolver, former term loans and foreign short-term debt led to the decrease.

Income taxes

Tax expense increased $6.2 million from $6.8 million in 2008 to $13.0 million in 2009 primarily due to an increase in pre-tax income, partially offset by a decrease in valuation allowances.

 

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Noncontrolling interests

Net income attributable to noncontrolling interests in 2009 was $3.3 million, an increase of $1.9 million, or 133.2%, over $1.4 million in 2008. This increase was due to the improved profitability of our Chinese joint venture.

Preferred stock dividends

Preferred stock dividends in 2009 were $25.6 million compared to $23.1 million in 2008, with the increase due to the accrual of unpaid dividends.

Net loss attributable to common stockholders

For the reasons described above, net loss attributable to common stockholders decreased to $14.8 million in 2009 from a loss of $28.9 million in 2008.

Liquidity and capital resources

Our cash requirements generally consist of working capital, capital expenditures, research and development programs, and debt service. We intend to use the net proceeds of this offering for general corporate purposes, which may include debt reduction, acquisition of one or more companies or businesses and product and geographic expansion.

Our primary sources of liquidity are cash flows generated from operations and the various borrowing and factoring arrangements described below, including our revolving credit facility and government grants. We actively manage our working capital and associated cash requirements and continually seek more effective use of cash.

We believe that cash generated from operations, together with the amounts available under financing arrangements discussed below, as well as cash on hand, will be adequate to meet our liquidity requirements for at least the next twelve months. If we make a large acquisition or engage in certain other strategic transactions, we would need to enter into additional borrowing arrangements or obtain additional equity capital. No assurance can be given that such funds would be available to us at such time.

As of December 31, 2010, we had cash and cash equivalents on hand of $37.5 million, an increase of $7.3 million over $30.2 million on hand at December 31, 2009. The latter amount represented an $11.4 million increase over the balance of $18.7 million at December 31, 2008.

Cash flows

The following table shows the components of our cash flows for the periods presented:

 

      Year ended December 31,  
     2010     2009     2008  
   
     (in thousands)  

Net cash provided by (used in):

      

Operating activities before changes in operating assets and liabilities

   $ 66,596      $ 60,153      $ 48,490   

Changes in operating assets and liabilities

     7,302        12,516        (36,480
        

Operating activities

     73,898        72,669        12,010   

Investing activities

     (15,013     (5,826     (13,861

Financing activities

     (51,669     (54,584     13,470   
   

 

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Cash flows—Operating activities

Cash provided by operating activities for the year ended December 31, 2010, was $73.9 million, as compared to $72.7 million for the year ended December 31, 2009. Cash provided by operating activities before changes in operating assets and liabilities increased by $6.4 million primarily due to increases in operating income and a reduction in cash payments for restructuring charges. The increases were significantly offset by cash interest paid on the third lien payment-in-kind notes during 2010. One-time items in 2009 increased cash provided by operating activities.

We manage our working capital by monitoring key metrics principally associated with inventory, accounts receivable and accounts payable. During 2010 and 2009, we generated positive cash flow from changes in operating assets and liabilities of $7.3 million and $12.5 million, respectively. The primary reason for the lower amount in 2010 was an increase in inventory levels at the end of 2010 in response to higher demand, resulting in higher accounts receivable and inventory balances at December 31, 2010 as compared to 2009.

Cash provided by operating activities for the year ended December 31, 2009 was $60.7 million higher than 2008. The primary driver for this increase was an increase in cash flow from changes in operating assets and liabilities of $49.0 million in 2009 as compared to 2008. During the fourth quarter of 2008, we were affected by the significant global economic downturn, resulting in a higher level of inventories on hand and a decrease in accounts receivable at the end of 2008. Our focus on working capital improvement and continued restructuring efforts during 2009 improved our operating results significantly. The increase in net income in 2009 over 2008 also contributed to the $11.7 million increase in cash flow from operating activities before changes in operating assets and liabilities.

Cash flows—Investing activities

Cash used by investing activities for the year ended December 31, 2010, was $15.0 million as compared to $5.8 million for the year ended December 31, 2009 and $13.9 million for the year ended December 31, 2008. During the year ended December 31, 2009, our capital expenditures were lower than our usual investing levels in response to the decrease in sales experienced at the end of 2008. As our sales and operating results rebounded in late 2009 and 2010, we were able to resume our usual investing activities during 2010.

The increase in cash used in 2010 was primarily a result of purchases of equipment and related engineering costs due to new product introductions, and investments in new technology. The increased use of cash in 2010 was partially offset by $4.1 million in funds provided under the DOE grant for investments in hybrid technology described earlier. We also received a $0.7 million grant from the Mexican government. The 2009 amount was net of $6.0 million in proceeds from the sale of assets in 2009 and the 2008 amount was net of $5.1 million in proceeds from the sale of assets in 2008.

Cash flows—Financing activities

Cash used by financing activities for the year ended December 31, 2010, was $51.7 million, as compared to $54.6 million for the year ended December 31, 2009. The principal activities in 2010 were the refinancing of our debt during the fourth quarter, including payment of associated fees and expenses, causing an increase in our revolver balance as of December 31, 2010.

 

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During 2008, financing activities provided cash of $13.5 million as compared to a use of cash of $54.6 million during 2009. This difference was primarily due to changes in short-term debt and revolver balances during those years.

Financing arrangements

By the end of January 2011, we had completed a series of transactions focused on improving the strength and flexibility of our capital structure. As a result of these transactions, we significantly extended and consolidated our debt maturities, reduced our future interest payments and eliminated substantial preferred stock obligations.

New revolving credit facility

On December 17, 2010, we entered into a new asset-based revolving credit facility, replacing our previous senior secured revolving credit facility. The new revolving credit facility bears interest, varying with the level of available borrowing, at our election at either (i) a base rate plus 1.00%—1.50% per annum or (ii) at an applicable LIBOR rate plus 2.00%—2.50% per annum. The base rate is defined as the greatest of (x) the weighted average of the overnight federal funds rate over the relevant period plus 0.50%; (y) the three-month LIBOR plus 1.00%; and (z) the “prime rate” announced by Wells Fargo from time to time. All amounts outstanding under the revolving credit facility must be repaid by December 17, 2015. The facility is secured by a first priority lien on our domestic accounts receivable and inventory and a second priority lien on the stock of our subsidiaries and substantially all our domestic assets other than accounts receivable and inventory. The new facility permits us to borrow an amount based on the amount of pledged collateral, subject to an overall limit of $95 million of borrowings. As of December 31, 2010, we had $21.3 million in outstanding borrowings, outstanding letters of credit of $4.8 million and $31.1 million of remaining availability under our revolving credit facility. As of December 31, 2010, the average interest rate on our revolver borrowings was 3.17%.

New term loan

In December 2010, we also entered into a new $300 million term B loan, which we refer to as our new term loan, with a syndicate of lenders. Our new term loan is secured by a first priority lien on the stock of our subsidiaries and substantially all our domestic assets other than accounts receivable and inventory pledged under our new revolving credit facility and a second priority lien on our domestic accounts receivable and inventory. The new term loan bears interest at a rate consisting of LIBOR (subject to a floor of 1.75%) plus 4.5% per annum, and matures on December 17, 2016. Principal payments in the amount of $0.8 million are due at the end of each calendar quarter with termination and final payment no later than December 17, 2016. At December 31, 2010, the interest rate on the new term loan, prior to the effect of the interest rate swaps described below, was 6.25%.

The new term loan contains various restrictive covenants, which include, among other things: (i) a maximum leverage ratio, decreasing over the term of the facility; (ii) a minimum interest coverage ratio, increasing over the term of the facility; (iii) limitations on capital expenditures; (iv) mandatory prepayments upon certain asset sales and debt issuances; (v) requirements for minimum liquidity; and (vi) limitations on the payment of dividends in excess of a specified amount. The new term loan also includes events of default customary for a facility of this type,

 

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including a cross-default provision under which the lenders may declare the loan in default if we (i) fail to make a payment when due under any debt having a principal amount greater than $5.0 million or (ii) breach any other covenant in any such debt as a result of which the holders of such debt are permitted to accelerate its maturity.

We used the proceeds from our new term loan, together with borrowings under our new revolving credit facility and cash on hand, to repay all outstanding amounts under our former term loans. Our former term loans are described in Note 11 to our consolidated financial statements included elsewhere herein.

In connection with our new term loan, we entered into interest rate swaps under which we pay interest at 3.345% on a notional amount of $150.0 million and receive interest on such amount at LIBOR. Such swaps mature on December 31, 2013. After giving effect to these swaps, the average borrowing rate on our new term loan as of December 31, 2010 was 7.05%.

Assuming the refinancing of our prior term loans had been completed as of December 31, 2009 and our new term loan and the related interest rate swaps had been in effect since that date, our interest expense in 2010 would have been $14.7 million lower than reflected in our results of operations for 2010.

Non-U.S. borrowing arrangements

In addition to the foregoing facilities, we also maintain local borrowing arrangements to fund the working capital requirements of our non-U.S. businesses. For our South Korean operations, we have revolving credit facilities with six South Korean banks with a total facility amount of $19.8 million, of which $13.2 million was borrowed at average interest rates of 4.98% at December 31, 2010. In Hungary, we have a revolving credit facility and a note payable with two separate banks for total credit facilities of $5.7 million, of which $5.0 million was borrowed at average interest rates of 5.59% at December 31, 2010. In Belgium we have revolving loans with two banks for a credit facility of $3.9 million, of which $0.2 million was borrowed at December 31, 2010 at average interest rates of 2.75%.

Factoring agreements

We have also entered into factoring agreements with various domestic and European financial institutions to sell our accounts receivable under nonrecourse agreements. These transactions are accounted for as a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivables to the buyers. We do not service any factored accounts after the factoring has occurred. We utilize factoring arrangements as an integral part of our financing. The aggregate gross amount factored under these facilities as of December 31, 2010, was $178.4 million. The cost of factoring such accounts receivable for the years ended December 31, 2010, 2009, and 2008, was $6.8 million, $7.7 million and $7.2 million, respectively. Any change in the availability of these factoring arrangements could have a material adverse effect on our financial condition.

Capital stock transactions

In January 2011, we completed a common stock rights offering in which eligible stockholders exercised rights to purchase 19,723,786 shares of common stock at a price of $11 per share. The

 

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total proceeds to us were $217.0 million, consisting of $123.4 million in cash proceeds and the delivery to us of 48,004 shares of our Series A and Series B preferred stock, having a total liquidation preference and accrued dividends of $93.5 million, which shares were exchanged for common stock in lieu of cash payment. The cash proceeds from the rights offering were used to pay the accrued dividends on the preferred stock that remained outstanding after the offering and to redeem the remaining preferred shares, with the remainder used to repay borrowings under our new revolving credit agreement and for general corporate purposes.

Contractual obligations

Our long-term contractual obligations as of December 31, 2010 are shown in the following table:

 

      Payments due by period  
Contractual obligations(1)    Total     Less than
1 year
     1 – 3 years      4 – 5 years     

More
than

5 years

 
   
     (in thousands)  

Long-term debt(2)

   $ 321,273      $ 3,000       $ 6,000       $ 27,273       $ 285,000   

Capital lease obligations

     2,843        347         600         587         1,309   

Customer obligations(3)

     15,967        9,506         3,203         3,256           

Operating leases

     18,417        4,328         6,856         4,316         2,917   

Pension and other post retirement Benefits funding

     14,909 (4)      3,536         7,060         4,313              (4) 

Other

     3,869        970         1,940         959           
        

Total contractual cash obligations

   $ 377,277      $ 21,687       $ 25,661       $ 40,704       $ 289,226   
                                           
   

 

(1)   Possible payments of $2.8 million related to unrecognized tax benefits are not included in the table because management cannot make reasonable reliable estimates of when cash settlement will occur, if ever. These unrecognized tax benefits are discussed in Note 17 to our consolidated financial statements included elsewhere in this prospectus.

 

(2)   Excludes OID.

 

(3)   Customer obligations relate to liabilities when we enter into new or amend existing customer contracts. These contracts designate us to be the exclusive supplier to the respective customer, product line or distribution center and require us to compensate these customers over several years for store support. We have also entered into arrangements with certain customers under which we purchased the cores held in their inventory. Credits to be issued to these customers for these arrangements are recorded at net present value and are reflected as customer obligations.

 

(4)   We sponsor defined benefit pension plans that cover a significant portion of our U.S. employees and certain U.K. employees. These plans for U.S. employees were frozen in 2006. Our funding policy is to contribute amounts to provide the plans with sufficient assets to meet future benefit payment requirements consistent with actuarial determinations of the funding requirements of federal laws. In 2011, we expect to contribute approximately $2.3 million to our U.S. pension plans and nothing to the U.K. pension plan. Estimated pension and other benefit payments are based on the current composition of pension plans and current actuarial assumptions. Pension funding will continue beyond year five. However, estimated pension funding is excluded from the table after year five. See Note 18 to our consolidated financial statements included elsewhere in this prospectus for the funding status of our pension plans and other postretirement benefit plans at December 31, 2010.

Contingencies

For information concerning various claims, lawsuits and administrative proceedings to which we are subject, see “Business—Legal proceedings.”

We also have liabilities recorded for various environmental matters. As of December 31, 2010, we had reserves for environmental matters of $1.4 million. We expect to pay approximately $0.7 million in 2011 in relation to these matters. See “Business—Environmental regulation.”

 

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Off-Balance sheet arrangements

We do not have any material off-balance sheet arrangements.

Accounting pronouncements

For a discussion of certain pending accounting pronouncements, see Note 2 to our consolidated financial statements included elsewhere in this prospectus.

Critical accounting policies and estimates

Our accounting policies, including those described below, require management to make significant estimates and assumptions using information available at the time the estimates are made. Actual amounts could differ significantly from these estimates. See Note 2 to our consolidated financial statements included elsewhere in this prospectus for a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. We believe the following are the critical accounting policies that currently affect our consolidated financial position and results of operations.

Accounting for remanufacturing operations

Core Assets

Remanufacturing is the process where failed or used components, commonly known as cores, are disassembled into subcomponents, cleaned, inspected, combined with new subcomponents and reassembled into saleable, finished products which are tested to meet OEM requirements. We receive cores from our customers and record this asset, core inventory, at the lower of cost or fair market value. The value of a core declines over its estimated useful life and is devalued accordingly. We also recognize assets for core rights of return for arrangements we have made with customers to purchase certain cores held in their inventory or, when the customer is not charged a deposit for the core, we have the right to receive a core from the customer in return for every remanufactured unit supplied to them. The core return right assets are recorded based on known units that are the subject of the arrangements and are valued based on the underlying core inventory values, determined as follows. Carrying values are evaluated by comparing current core prices obtained from core brokers to their carrying cost. The devaluation of core carrying value is reflected as a charge to cost of goods sold. In determining the estimate of core devaluation, we make assumptions regarding future demand for remanufactured product in the aftermarket. Core inventory that is deemed to be obsolete or in excess of current and future projected demand is written down and charged to cost of goods sold. If actual market conditions are less favorable than those projected, reductions in the value of inventory may be required. Core inventory and core return right assets were $35.1 million and $25.4 million, respectively, at December 31, 2010.

Core Liabilities

We record a liability for core return rights held by our customers based on core units expected to be returned to us. When we collect a core deposit from a customer at the time of sale, the deposit, reduced by the estimated value of the core to be returned, is recorded as a core liability on our consolidated balance sheet. We adjust the core liability based on customer return trends and consideration of current inventory values. Actual customer returns that exceed our estimates and reductions in core inventory values could each result in changes to our estimate of core liabilities. Core liabilities were $8.2 million at December 31, 2010.

 

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Valuation of long-lived assets

When events or circumstances indicate a potential impairment to the carrying value, we evaluate the carrying value of long-lived assets, including certain intangible assets, for recoverability through an undiscounted cash flow analysis. When such events or circumstances arise which indicate the long-lived asset is not recoverable, fair market value is determined by asset, or the appropriate grouping of assets, and is compared to the asset’s carrying value to determine if impairment exists. Asset impairments are recorded as a charge to operations, based on the amount by which the carrying value exceeds the fair market value.

Goodwill and intangible assets

Goodwill represents the excess of the reorganization value assigned by the Bankruptcy Court upon our emergence from bankruptcy on December 6, 2007, over the net assets’ fair value as determined in accordance with FASB Accounting Standards Codification, or ASC, ASC Topic 852, Reorganizations. The balance at December 31, 2010 was $270.3 million, or 27.9% of total consolidated assets. Indefinite-lived intangible assets, consisting of trade names, were stated at estimated fair value as a result of fresh-start reporting, and have a carrying value of $48.2 million as of December 31, 2010.

In accordance with ASC 350, Intangibles—Goodwill and Other, we perform impairment testing of goodwill and indefinite-lived intangible assets on at least an annual basis. To test goodwill for impairment, we estimate the fair value of each reporting unit and compare the fair value to the carrying value. If the carrying value exceeds the fair value, then a possible impairment of goodwill exists and requires further evaluation. Fair values are based on guideline company multiples and the cash flows projected in the reporting units’ strategic plans and long-range planning forecasts, discounted at a risk-adjusted rate of return. The projected profit margin assumptions included in the plans are based on the current cost structure, anticipated price givebacks provided to our customers and cost reductions/increases. If different assumptions were used in these plans, the related cash flows used in measuring fair value could be different and impairment of goodwill might be required to be recorded.

Based on the results of the annual impairment review in the fourth quarter of 2010, we determined that the fair value of each of our reporting units with goodwill significantly exceeded the carrying value of the assets. A hypothetical 10% decrease to the fair value of each our reporting units with goodwill would not have triggered an impairment of goodwill. Impairment of goodwill may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products sold by our business, and a variety of other factors. There have been no such indications of impairment since we performed our annual impairment review in the fourth quarter of 2010.

For our indefinite-lived intangible assets, our fair value analysis was based on a relief from royalty methodology utilizing the projected future revenues, and applying a royalty rate based on similar arm’s length licensing transactions for the related margins. In each of 2009 and 2008, we wrote down the value of a tradename by $4.0 million and $1.5 million, respectively, because of declines in expected future revenues to be generated under the name. As a result of a change in economic conditions, in 2010 we reassessed the useful life of this trade name which previously had an indefinite life. On December 31, 2010, we assigned a 10-year useful life to this trade name, which had a value at that date of $6.0 million.

 

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Definite-lived intangible assets have been stated at estimated fair value as a result of fresh-start reporting. The values of other intangible assets with determinable useful lives are amortized on a basis to reflect the pattern of economic benefit consumed. Certain amortization of intangibles associated with specific aftermarket customers is recorded as a reduction of sales.

See Note 7 to our consolidated financial statements included elsewhere in this prospectus for further information on goodwill and other intangible assets.

Warranty

We provide certain warranties relating to quality and performance of our products. An allowance for the estimated future cost of product warranties and other defective product returns is based on management’s estimates of product failure rates, customer eligibility and the costs of repair or exchange. The specific terms and conditions of the warranties vary depending upon the customer and the product sold. The allowance is recorded when revenues are recognized upon sale of the product. If product failure rates, our customers’ return policies regarding their customers’ returns or the cost of repair or exchange of returned items differ adversely from those assumed in management’s estimates, revisions to the estimated warranty liability may be required, which could have an adverse effect on our financial results and condition. We recorded a warranty provision of $58.2 million in our results of operations for 2010, and our balance in accrued warranty was $32.5 million as of December 31, 2010.

Valuation allowances on deferred income tax assets

We review the likelihood that we will realize the benefit of our deferred tax assets and therefore the need for valuation allowances on a quarterly basis, or more frequently if events indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset is considered, along with all other available positive and negative evidence. The factors considered in our determination of the probability of the realization of the deferred tax assets include historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If, based upon the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded. We believe it is more likely than not that the net deferred tax asset in the United States and certain foreign jurisdictions will not be realized in the future. Accordingly, we continue to maintain a valuation allowance related to the net deferred tax assets in the United States and certain foreign jurisdictions.

There is no corresponding income tax benefit recognized with respect to losses incurred and no corresponding income tax expense recognized with respect to earnings generated in jurisdictions with a valuation allowance. This causes variability in our effective tax rate. We intend to maintain the valuation allowance until it is more likely than not that the net deferred tax asset will be realized. If operating results improve or deteriorate on a sustained basis, our conclusions regarding the need for a valuation allowance could change, resulting in either the reversal or initial recognition of a valuation allowance in the future, which could have a significant impact on income tax expense in the period recognized and subsequent periods.

Failure to achieve forecasted taxable income may affect the ultimate realization of certain deferred tax assets arising from post emergence operations and pre-emergence net operating

 

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losses. Factors that may affect our ability to achieve sufficient forecasted taxable income include, but are not limited to, general economic conditions, increased competition or other market conditions, costs incurred or delays in product availability.

As part of the review in determining the need for a valuation allowance, we assess the potential release of existing valuation allowances. Based upon this assessment, we have concluded that there is more than a remote possibility that the existing valuation allowance on our net deferred tax assets could be released. As of December 31, 2010, we have recorded a valuation allowance of $133.8 million on deferred tax assets of $161.4 million. If such a release of the valuation allowance occurs, it will have a significant impact on net income in the quarter in which it is deemed appropriate to release the reserve.

Stock-based compensation

We recognize compensation expense for restricted stock awards over the requisite service period based on the grant date fair value. In the past, there has not been an active, viable market for our common stock. Accordingly, we have used a calculated per share value to determine the value of our restricted stock awards. Our calculation makes certain assumptions related to risk-free interest rates and volatility, which are significant factors used to determine each award’s fair value and the amount of compensation expense recognized. These assumptions may differ significantly between grant dates because of changes in the actual results of these inputs that occur over time.

If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the awards, we may have to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards to directors or employees or we assume unvested equity awards in connection with acquisitions.

We granted restricted stock awards in 2007, 2008 and 2011 with grant prices between $3.00 and $11.55 per share. No single event caused the valuation of our common stock to increase or decrease from December 6, 2007 to January 4, 2011. Rather it has been a combination of the factors described below that led to the changes in the fair value of the underlying common stock.

We granted 1,054,544 shares of restricted stock and 30,000 restricted stock units on January 4, 2011. Our board of directors determined the fair value of our common stock to be $11 per share as of January 4, 2011. In January 2011, we completed a common stock rights offering in which eligible shareholders exercised rights to purchase 19,725,156 shares of common stock at a price of $11 per share. We based this valuation primarily on the $11 per share price offered in this rights offering. Since the shares sold in this rights offering were not freely tradable at issuance, the offering price includes a discount for lack of marketability, and we determined that this price approximates fair value as of the grant date.

Quantitative and qualitative disclosures about market risks

Our primary market risk arises from fluctuations in foreign currency exchange rates, interest rates and commodity prices. We manage foreign currency exchange rate risk, interest rate risk and commodity price risk by using various derivative instruments. We do not use these instruments

 

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for speculative or trading purposes. If we did not use derivative instruments, our exposure to these risks would be higher. We are exposed to credit loss in the event of nonperformance by the counterparties to these derivative financial instruments. We attempt to manage this exposure by entering into agreements directly with a number of major financial institutions that meet our credit standards and that we expect will fully satisfy their obligations under the contracts. However, given recent disruptions in the financial markets, including the bankruptcy, insolvency or restructuring of some financial institutions, the financial institutions with whom we contract may not be able to fully satisfy their contractual obligations.

Foreign currency exchange rate risk

We use derivative financial instruments to manage foreign currency exchange rate risks. We use forward contracts and, to a lesser extent, option collar transactions to protect our cash flow from adverse movements in exchange rates. We review foreign currency exposures monthly, and we consider any natural offsets before entering into a derivative financial instrument. See Note 4 to our consolidated financial statements for further information on outstanding foreign currency contracts as of December 31, 2010 and 2009.

Interest rate risk

We are subject to interest rate risk in connection with the issuance of variable-rate debt. To manage interest costs and as required by our loan covenants, we use interest rate swap agreements to exchange variable-rate interest payment obligations for fixed rates for a period of three years. Our exposure to interest rate risk arises primarily from changes in LIBOR. As of December 31, 2010, approximately 99.1% of our total debt was at variable interest rates (or 55.8%, when considering the effect of the interest rate swaps), as compared to 99.2% (or 58.0%, when considering the effect of the interest rate swaps) as of December 31, 2009.

Commodity price risk

Our production processes depend on the supply of certain components whose raw materials are exposed to price fluctuations on the open market. We enter into commodity price forward contracts primarily to manage the volatility associated with forecasted purchases. We monitor our commodity price risk exposures regularly in an effort to maximize the overall effectiveness of these forward contracts. The principal raw material whose price we hedge is copper. We use forward contracts to mitigate commodity price risk associated with raw materials, generally related to purchases we forecast for up to twelve months in the future. We also purchase certain commodities during the normal course of business.

 

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Sensitivity analysis

We use a sensitivity analysis model to calculate the fair value, cash flows or statement of operations impact that a hypothetical 10% change in market rates would have on our debt and derivative instruments. For derivative instruments, we use applicable forward rates in effect as of December 31, 2010 to calculate the fair value or cash flow impact resulting from this hypothetical change in market rates. The analyses also do not reflect any potential change in the level of variable rate borrowings or derivative instruments outstanding that could take place if these hypothetical conditions prevailed. The results of the sensitivity model calculations follow:

 

     

Assuming a 10%
increase in

rates

   

Assuming a 10%
decrease in

rates

   

Change in

 
   
     (in thousands)  
Market Risk       

Foreign Currency Rate Sensitivity:

      

Forwards(1)

      

Short US$

   $ (3,573   $ 4,367        Fair Value   

Short EURO

   $ 1,789      $ (2,187     Fair Value   

Option Collars(1)

      

Short US$

   $      $ 2        Earnings   

Debt(2)

      

Foreign currency denominated

   $ (1,833   $ 1,833        Fair Value   

Interest Rate Sensitivity:

      

Debt

      

Variable rate

   $ (441   $ 442        Fair Value   

Swaps

      

Pay fixed/receive variable

     *        *        Earnings   

Commodity Price Sensitivity:

      

Forward contracts

   $ 4,784      $ (4,784     Fair Value   
   

 

(1)   Calculated using underlying positions assuming a 10% change in the value of the U.S. dollar vs. foreign currencies.

 

(2)   Calculated using a 10% change in the value of the foreign currency.
*   A hypothetical change in interest rates of 10% from the current spot rate would have an immaterial impact as increases or decreases in the swap liability would be offset by a corresponding increase or decrease in the asset value of our interest rate floor of 1.75%.

 

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Business

Overview

We are a global market leader in the design, manufacture, remanufacture, marketing and distribution of non-discretionary, rotating electrical components for light and commercial vehicles for original equipment manufacturers, or OEMs, and the aftermarket. We sell our products worldwide primarily under our well-recognized “Delco Remy,” “Remy” and “World Wide Automotive” brand names, as well as our customers’ well-recognized private label brand names. For the year ended December 31, 2010, we generated net sales of $1.1 billion, net income attributable to Remy International, Inc. (before preferred stock dividends) of $16.9 million and adjusted EBITDA of $140.1 million, representing 12.7% of our 2010 net sales.

Our principal products include starter motors, alternators and hybrid electric motors. Our starters and alternators are used globally in light vehicle, commercial vehicle, industrial, construction and agricultural applications. We also design, develop and manufacture hybrid electric motors that are used in both light and commercial vehicles. These include both pure electric applications as well as hybrid applications, where our electric motors are combined with traditional gasoline or diesel propulsion systems. While the market for these systems is in early stages of development, our technology and capabilities are ideally suited for this growing product category.

We design and market products suited for both light and commercial vehicle applications. Our light vehicle products continue to evolve to meet the technological demands of increasing vehicle electrical loads, improved fuel efficiency, reduced weight and lowered electrical and mechanical noise. Commercial vehicle applications are generally more demanding and require highly engineered and durable starters and alternators.

We sell new starters, alternators and hybrid electric motors to U.S. and non-U.S. OEMs for factory installation on new vehicles. We sell remanufactured and new starters and alternators to aftermarket customers, mainly retailers in North America, warehouse distributors in North America and Europe and OEMs globally for the original equipment service, or OES, market. As a leading remanufacturer, we obtain used starters and alternators, which we refer to as cores, that we disassemble, clean, combine with new subcomponents and reassemble into saleable, finished products, which are tested to meet OEM requirements.

We have captured leading positions in many key markets by leveraging our global reach and established customer relationships. Based on production volume, we hold the number 1 position in the North American market for commercial vehicle starters and alternators and light vehicle aftermarket starters and alternators. We are the leading non-OEM producer of hybrid electric motors in North America. We maintain the number 3 position in the European aftermarket for remanufactured starters and alternators. We hold the number 1 position in South Korea for light vehicle starters, the number 2 position in South Korea for commercial vehicle starters and the number 3 position in China for light vehicle alternators, all of which are key growth markets.

 

LOGO

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We believe there are benefits to serving both original equipment, or OE, and aftermarket customers. Our OE business is driven primarily by new vehicle production. Aftermarket demand is more stable given that our aftermarket products are used for non-discretionary repairs . We believe aftermarket demand increases in periods of decreasing OEM sales volumes as customers look to extend the service lives of their existing vehicles by purchasing aftermarket replacement parts rather than new vehicles. This increased aftermarket demand partially mitigates the variability of our net sales. Our aftermarket and remanufacturing knowledge regarding product reliability allows us to regularly update and enhance new product specifications in our OE and new-build aftermarket businesses. Our expertise in OE product design allows us to bring components to the aftermarket quickly and efficiently, which enhances our brands, giving us a competitive advantage.

We operate a global, low-cost manufacturing and sourcing network capable of producing technology-driven products. Our 13 primary manufacturing and remanufacturing facilities are located in seven countries, including Mexico, Brazil, Hungary, Tunisia, South Korea and China. We have only two manufacturing facilities in the United States, which support a portion of our hybrid electric motor assembly and our locomotive remanufacturing operations. Neither of these two U.S. manufacturing facilities is unionized. Our low-cost strategy results in direct labor costs of less than 2% of net sales. Our global network of manufacturing facilities employs common tools and processes to drive efficiency improvements and reduce waste. We can shift capacity between operations to minimize costs to adapt to changes in demand, raw material costs and exchange and transportation rates. Because of our established presence and available capacity throughout the world, we are well-positioned for growth with minimal incremental investment .

We sell our products globally through an extensive distribution and logistics network. We employ a direct sales force that develops and maintains sales relationships directly with global OEMs, global OE dealer networks, commercial vehicle fleets, North American retailers and warehouse distributors around the world. We have a broad customer base, as illustrated below.

 

LOGO

  LOGO   LOGO

We enhance our technology and expand our product lines by investing in new product development and ongoing research. Our OE customers continue to increase their requirements for power, durability and reliability, as well as for increased fuel-efficiency and mechanical and electrical noise reduction. We have over 325 engineers focused on application, design and manufacturing. These engineers work in close collaboration with customers and have a thorough understanding of product application. Our engineering efforts are designed to create value through innovation, new product features and aggressive cost control. For the past three years, we have invested $52.1 million to support both product and manufacturing process improvements. Our 110 years of expertise in rotating electrical components has led to the development of our hybrid electric motor capabilities, as a natural extension of our products. We have invested approximately $55.8 million since 2001 in these efforts, including our industry-

 

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leading High Voltage Hairpin, or HVH, electric motor technology, light vehicle hybrid electric motor and the electric motors included in the Allison Transmission Hybrid Drive System. The U.S. Department of Energy, or the DOE, awarded us a grant in 2009 pursuant to which it agreed to match up to $60.2 million of eligible expenditures we make through 2012 for the commercialization of hybrid electric motor technology. Our prior experience in manufacturing process development has provided us with significant, proprietary know-how in hybrid electric motor manufacturing.

We are well-positioned for strong and stable growth, both organically and through opportunistic acquisitions, due to our balanced portfolio of products, strong brand name, focus on new technologies, strategic global footprint and market expertise. These strengths have contributed to our solid operating margins and cash flow profile. Since 2007, our margins have improved significantly as a result of our ongoing productivity initiatives, which included capacity and workforce realignments, the implementation of lean manufacturing principles and the expansion of global purchasing initiatives. Recently, we completed a series of financial transactions focused on improving the strength and flexibility of our capital structure, including a debt refinancing and stockholder rights offering. As a result of these transactions, we extended our debt maturities, reduced our future interest payments and accessed substantial liquidity to execute our strategic plans. Our strengthened balance sheet now provides us with greater ability to reinvest in our business and pursue growth opportunities.

Our industry

Original equipment market

Light and commercial vehicle production trends.    Our OE business is influenced by trends in the light vehicle, commercial vehicle, construction and industrial markets. Common applications include passenger cars and light trucks, delivery vans, transit busses, over-the-road trucks, military vehicles, bulldozers and track-type vehicles, mining equipment, tractors and recreational vehicles. Due to the global economic crisis that began in late 2007, vehicle production declined in 2008 and 2009 and has only recently begun to recover in 2010. Construction activity and demand for discretionary purchases, such as recreational and sport vehicles, declined with the broader economy and have only recently shown some improvement. Global demand and price increases for commodity metals have improved sales of our heavy-duty products for mining equipment.

According to IHS Global Insight, global light vehicle production declined 15.5%, from 71.0 million units in 2007 to 60.0 million units in 2009. Over the same period, North American production declined 43.0% from 15.0 million units to 8.6 million units, and European production declined 24.4% from 22.3 million units to 16.8 million units. The decline in global commercial vehicle production was at 25.6%, from 3.0 million units in 2007 to 2.3 million units in 2009. North American production declined 48.5%, from 421,000 units to 217,000 units, and European production declined 62.3% from 718,000 units to 270,000 units, during this period.

During 2010, light and commercial vehicle OEMs and their suppliers benefitted from a general improvement in economic conditions and consumer demand, despite the continuing high level of unemployment. OEMs raised global light vehicle production levels by 24.3%, from 60.0 million units in 2009 to 74.2 million units in 2010, in response to both increased sales volumes as well as the production requirements associated with replenishing low vehicle inventory levels. From 2009 to 2010, North American light vehicle production grew 39.1%, from 8.6 million units to

 

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11.9 million units, while European production recovered 15.5%, from 16.8 million units to 19.5 million units. The recovery was also seen in commercial vehicles, with North American production growing 16.8% from 217,000 units to 254,000 units, while European production rose 46.3% from 270,000 units to 395,000 units.

According to IHS Global Insight, light vehicle production in North America is forecast to grow from 2010 to 2015 at a compound annual growth rate, or CAGR, of 7.0%, reaching 16.7 million units in 2015. European light vehicle production is forecast to grow more modestly from 2010 to 2015 at a CAGR of 3.5%, reaching 23.2 million units by 2015. Commercial vehicle growth is expected to significantly outpace the recovery in the light vehicle market, with North American production forecast to grow from 2010 to 2015 at a CAGR of 15.8%, reaching 527,000 units by 2015. In Europe, commercial vehicle production is forecast to grow from 2010 to 2015 at a CAGR of 14.9%, reaching 791,000 units by 2015.

LOGO

Data source: IHS Global Insight

Note: Rest of world includes Africa and Middle East

LOGO

Data source: IHS Global Insight

Demand for alternators.    Overall electrical power requirements have risen as OEMs introduce additional electronics in new vehicles, such as new safety, control, communication and entertainment features and emission control technology in heavy vehicles. We believe OEMs will continue to demand more efficient, more powerful yet durable alternators as electronic vehicle content continues to grow.

 

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OE platform standardization and globalization.    Increasingly, OEMs are requiring that their suppliers establish global production capabilities to meet their needs in local markets as they expand internationally and increase platform standardization. We believe our proximity to customer production will be increasingly valuable.

Aftermarket

Aftermarket demand is based on the need for replacement vehicle parts. Vehicle parts may need to be replaced due to age or failure based on the level of usage and the overall quality and durability of the original part. However, improvements in product quality generally lower the replacement rate for aftermarket products. The aftermarket in mature markets differs from that in growing markets. In North America and Europe, there is a well-established aftermarket, with numerous distribution channels for replacement parts. In the U.S. market, there has also been a growing trend for retail distributors to work directly with installers. However, in growing markets, such as China, parts are generally repaired in individual repair shops. There is potential for significant growth as these markets mature.

Growing global vehicle population.    According to J.D. Power and Associates, the global vehicle population in 2010 was nearly 1.1 billion and is expected to grow at a CAGR of 3.2% from 2010 to 2015. In the United States, the vehicle population is expected to grow at a CAGR of 1.4% from 2010 to 2015 and reach 280.5 million by 2015, according to J.D. Power and Associates. We expect a growing vehicle population to support long-term aftermarket demand by increasing the total addressable market for aftermarket parts.

Increase in average age of light vehicles.    According to Frost & Sullivan, the average light vehicle age in the United States was 9.2 years in 2007 and is forecast to grow to 10.0 years by 2015. We believe the use of aftermarket products will increase as the average light vehicle age continues to rise.

 

LOGO   LOGO
Data source: J.D. Power and Associates   Data source: Frost & Sullivan

 

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Increasing annual miles driven in the United States. Miles driven have increased at a CAGR of 1.7% since 1990, according to the Department of Transportation, rising every year except for 2008, when the combination of rising fuel costs and the severe economic recession significantly reduced miles driven for both light and commercial vehicles. We expect miles driven will return to historic growth rates to the extent the general economic outlook continues to improve. As maintenance requirements and demand for aftermarket products are strongly correlated with levels of vehicle usage, we believe an increase in miles driven will support higher demand for aftermarket parts.

LOGO

Data source: Department of Transportation

Growth of retail channel distributors.    Auto parts retailers sell parts primarily to the so-called “do it yourself,” or DIY, market. Consumers who purchase parts from the DIY channel generally install parts into their vehicles themselves. In most cases, this is a cheaper alternative than having the repair performed by a professional installer. The second market is the professional installer market, commonly known as the “do it for me” market. This market is served by traditional warehouse distributors, retail chains and the dealer networks. Generally, the consumer in this channel is a professional parts installer. However, large national retailers have increased their efforts to sell to installers and to other smaller middlemen. This change in approach has increased the retailers’ market share in the “do it for me” market and hence overall.

Increasing service standards.    We believe that retail chains generally prefer to deal with large, national suppliers capable of meeting their increasingly complex service requirements. The needs of these retail chains are becoming more complex as increased vehicle longevity and broader product catalogs have caused stock-keeping unit, or SKU, proliferation. This complexity has made inventory management, category management and merchandising increasingly important to ensure that customers have sufficient quantities of the right product available at the right time and place.

Increasing use of remanufactured parts for OE warranty and extended service programs.    The use of remanufactured components for warranty and extended service repairs has increased in recent years as OEMs have offered extended coverage and dealers have begun to provide extended service plans and warranties on used vehicles. OEMs have sought to reduce warranty and extended service costs by using remanufactured components, which generally meet OEM requirements.

Quality and durability enhancements.    The durability of new and remanufactured starters and alternators has increased over time and continues to increase. We expect increasing service lives to decrease the replacement rates for those items.

 

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Hybrid electric motors

Hybrid electric vehicles use technologies that combine traditional gasoline or diesel propulsion systems with electric motors to reduce emissions and be more fuel efficient. The electric motors used in hybrid vehicles can also be used to provide propulsion for electric-only vehicles. Fuel prices, emission standards and government legislation influence the demand for hybrid electric motors. For instance, the U.S. Environmental Protection Agency and the Department of Transportation’s National Highway Traffic Safety Administration have issued a joint rule and announced further initiatives that require and will impose increasing standards to reduce greenhouse gas emissions and improve fuel efficiency. We believe corporations with large distribution operations will continue to add hybrid vehicles to their fleets as part of their corporate responsibility initiatives focused on reducing fuel consumption and pollution. We also believe programs like these will continue to support demand for hybrid electric motors across all vehicle classes.

As oil prices hit an all-time high in 2008, the average fuel used per light vehicle in the United States hit a ten-year low. Continued volatility of, and the potential for higher, fuel costs in the future may have a positive impact on demand for hybrid electric motors as consumers seek more energy-efficient solutions.

Our competitive strengths

We believe the following competitive strengths enable us to compete effectively in our industry:

Leading market position and strong brand recognition.    Based on production volume, we hold the number 1 position in the North American market for commercial vehicle starters and alternators and light vehicle aftermarket starters and alternators. We are the leading non-OEM producer of hybrid electric motors in North America. We maintain the number 3 position in the European aftermarket for remanufactured starters and alternators. We hold the number 1 position in South Korea for light vehicle starters, the number 2 position in South Korea for commercial vehicle starters and the number 3 position in China for light vehicle alternators, all of which are key growth markets. Our leading market position was established through 100 years of experience delivering superior service, quality and product innovation under our well-recognized brand names, “Delco Remy,” “Remy” and “World Wide Automotive.” In recent years, we have received a number of awards in recognition of our merits, including Daimler Master of Quality in 2009 and 2010, CAT SQEP Silver Status in 2010, Cummins Xian Excellent Customer Support in 2009 and 2010, MAN Commercial Excellence in 2010, MAN Latin America Supplier Award in 2009, Alliance Silver Supplier Award in 2010, Frost & Sullivan Company of the Year in 2010 and Bumper to Bumper Silver Status Award in 2009.

Well-balanced revenue base and end-market exposure.    We have a diverse portfolio of revenue sources with OE and aftermarket products that serve both light and commercial vehicle applications. Our five largest light vehicle OE platforms represented only 7% of our total 2010 net sales. This balance can help us mitigate the inherent cyclicality of demand in any one channel or end-market. We offer our products on a diverse mix of OE vehicle platforms, reflecting the balanced portfolio approach of our business model and the breadth of our product capabilities. In 2010, we supplied OE products for 17 of the 73 North American-built automotive platforms, or approximately 3 million vehicles. Our mix is more diverse in our commercial vehicle business, with vehicles for transportation, mining, construction, military and power generation applications. We believe our overall diversification provides us with an opportunity to participate in an economic recovery without being overly exposed to any single market.

 

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Innovative, technology-driven product offerings.    We are committed to product and manufacturing innovation to improve quality, efficiency and cost for our customers. Our starters address customer requirements for high-power and reliability, while our alternators address the growing demand for high-output and high-efficiency performance. Recently, we developed several commercial vehicle starters and alternators with superior efficiency for higher fuel economy, significantly improved reliability and higher output to support exhaust gas after-treatment required to reduce engine emissions. For automotive applications, we recently launched a lower-cost, high-performance starter and a series of quiet, high-efficiency alternators with reduced electrical and mechanical noise. We also continue to lead in the production of hybrid electric motors, providing high-output, custom designs for standardized platforms. Our HVH electric motor technology, which we continue to introduce into automotive, agricultural, military and specialty markets, is the industry leader in power density. Our technology position is reinforced by our intellectual property portfolio with over 300 issued and pending patents.

Leading non-OEM manufacturer of hybrid electric motors.    Our expansion into hybrid electric motors was a natural evolution of our capabilities in rotating electrical components. We have produced nearly 100,000 hybrid electric motor units for vehicles that are on the road today, including GM sport utility vehicles, or SUVs, Daimler’s Mercedes ML450, BMW X6 models and transit bus applications with Allison Transmission. This gives us the largest installed capacity of any non-OEM hybrid electric motor producer. With an emphasis on medium-duty and specialty applications, we have been investing in hybrid electric motors and manufacturing capabilities since 2001 when we initiated our first hybrid electric motor program for bus applications. Since 2001, we have invested approximately $55.8 million in product and manufacturing capabilities to become a leading provider of high-quality hybrid electric motors. Since 2006, we estimate that our products have demonstrated over 1 billion miles of proven reliability as measured by a near zero-defect performance. Our hybrid electric motors provide the highest power density and peak performance, outperforming models produced by major competitors. To support future growth, we have developed annual manufacturing capacity of over 100,000 units and are the largest non-OEM producer in North America and one of the largest in the world. This installed capacity can support increased production volumes should market demand continue to grow, and we believe the current market trends for hybrid electric motor demand will remain positive if fuel prices increase and governments continue to implement regulations that will drive demand. The DOE awarded us a matching grant for $60.2 million in April 2010, allowing us to accelerate the standardization and commercialization of our HVH electric motor technology. The grant will reimburse 50% of certain capital expenditures, labor, subcontract and other allowable costs and will be valuable in expanding our capabilities in the hybrid electric motor market.

Global, low-cost manufacturing, distribution and supply-chain.    We have restructured our manufacturing to eliminate under-utilized capacity and shifted from high-cost to low-cost regions throughout the world including Brazil, China, Hungary, Mexico, South Korea and Tunisia. Our manufacturing capabilities lower costs and address the OEMs’ engineering requirements. We are well-positioned for continued growth and protected by significant barriers to entry from suppliers who cannot support OEMs on a global scale. We conduct no manufacturing activity in the United States, with the exception of hybrid electric motors and our locomotive power assembly remanufacturing business.

 

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Strong operating margins and cash flow profile.    We believe our operating margins and cash flow from operations are strong relative to our industry peers. This provides financial flexibility and enables us to reinvest capital in our business for growth. In 2010, net cash provided by operating activities was $73.9 million. Our base business, other than our hybrid electric motors, requires low levels of capital expenditures of approximately 1% to 2% of our net sales.

Accomplished management team with track record of improving financial performance.    Our management team, led by industry veteran, CEO John H. Weber, has implemented a number of strategic, operational and financial restructuring initiatives to reposition us for potential profitable growth. Key accomplishments since the start of 2007 have included:

 

 

realigning our manufacturing to low-cost regions;

 

 

reducing headcount by 27% from 7,800 to 5,700;

 

 

executing the turnaround of our European operations;

 

 

winning numerous aftermarket customers in both Europe and North America;

 

 

securing global platform wins, including with GM, Hyundai, Daimler, Caterpillar and Allison Transmission;

 

 

developing an industry-leading hybrid electric motor platform; and

 

 

increasing our operating margins from (4.5)% in 2006 to 9.6% in 2010.

Our strategy

It is our goal to be the leading global manufacturer and remanufacturer of starters and alternators, yielding superior financial returns. Further, we seek to be a leading participant in the growing production and use of hybrid electric motors. We believe the competitive strengths described above provide us with significant opportunities for future growth in our industry. Our strategies for capitalizing on these opportunities include the following:

Build upon market-leading positions in commercial vehicle products.    We seek to use our strength in producing durable, high-output starters and alternators for commercial vehicles to increase our market share and capitalize on the growing OE demand for these components over the next few years. We intend to use our know-how in rotating electrical components and strong relationships to continue to build our leading market share in the growing aftermarket for commercial vehicle parts. As the largest supplier of commercial vehicle OE and aftermarket starters and alternators to the North American market, we believe we are well-positioned to supply whichever customers ultimately become the global leaders in commercial vehicle hybrid electric motor applications.

Expand manufacturing for growth markets in Asia and South America.    We have a significant presence in high-growth markets such as China, South Korea and Brazil and are committed to further investment in these regions. We have both wholly owned and joint venture operations in China. China produces more commercial diesel engines and vehicles than any other country in the world. We are further investing in commercial vehicle production capacity in this market in response to the expanding demand for components used by on-road, construction, agriculture and off-road vehicles. We continue to build a strong position in South Korea, where we have developed our production capacity and engineering capabilities near Hyundai’s technical center. We are well-positioned in Brazil, a recognized industry base for growth in South America.

 

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Continue to invest in hybrid electric motors for commercial vehicles.    We are committed to grow in the hybrid electric motor market. We are the leading non-OEM producer of hybrid electric motors in North America. We intend to focus primarily on the commercial vehicle segment, which includes trucks, buses, off-road equipment and military vehicles, where power density and peak power are the primary considerations. With an emphasis on medium and specialty applications, we have over 50 vehicle projects in various stages of development. We have signed a long-term agreement with Allison Transmission to develop and supply motors for their integrated hybrid transmission systems for commercial vehicles. Allison Transmission is expected to begin production of this product by the end of 2012. We have created a competitive advantage through our manufacturing capacity and intellectual property portfolio.

Leverage benefits of having both an OE and aftermarket presence.    Our aftermarket business has access to the latest technology developed by our OE business. As a result, we are able to provide our aftermarket customers with new products faster than competitors. Our aftermarket presence provides our OE business with useful knowledge regarding long-term product performance and durability. We use this aftermarket knowledge to regularly update and enhance new product offerings in our OE business.

Provide value-added services that enhance customer performance.    We provide our aftermarket customers with valuable category management services that strengthen our customer relationships and provide both of us with a competitive advantage. Our Remy Optimized Inventory and Vendor Managed Inventory programs support customer growth and product category profitability. These services are enhanced by our knowledge of OEM product design and durability. These services have become integral to several of our customers’ overall procurement practices. These services have enabled us to increase our customer retention and expand product sales.

Selectively pursue strategic partnerships and acquisitions.    We will selectively pursue strategic partnerships and acquisitions that leverage our core competencies. We believe there are significant opportunities in this fragmented industry. We have demonstrated our ability to rationalize and integrate operations and realize cost savings. We believe our balance sheet, combined with the proceeds from this offering, gives us the flexibility to support this strategy.

Products

We produce a broad range of new starters and alternators for both light and commercial vehicles. We also manufacture electric traction motors used for electric and hybrid vehicle applications. We produce a diverse array of remanufactured starters and alternators as well. Finally, we remanufacture power assemblies for locomotive diesel engines, and also sell a small amount of remanufactured steering gear and brake calipers for light vehicles in Europe.

New starters

We produce the most powerful and widest range of starters in the industry, with global applications ranging from small cars to industrial engines and the largest mining trucks and locomotives. We make two types of starters: traditional straight drive starters and more technologically advanced gear reduction starters. Gear reduction starters offer greater output at lower weight than comparable straight drive designs. Reduced component weight is extremely important to OEMs, as total vehicle weight is a critical factor for fuel economy. Straight drive starters are used to produce the high torque and power required to start very large displacement engines used in off-highway trucks, tanks and locomotives.

 

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Light vehicles

Our starter products for light vehicle applications offer greater power output in lighter packages for vehicles that are designed to meet increasingly more stringent fuel economy regulations. For example, we recently launched a redesigned automotive starter that produces more power with 14% less weight than our previous design. We also sell new starters for a wide range of light vehicle models for use as replacement products.

Commercial vehicles

We manufacture a broad range of heavy-duty starters for use primarily with large diesel engines. Our standard units cover a very wide range of torque and speed requirements. Our commercial vehicle product development for starters has focused on generating more power, torque and life, while reducing size. OEMs are designing engines for more starts per day as anti-idling legislation requires trucks to shut down while loading/unloading freight or stopped for driver downtime. We have developed a patented technology which offers the longest service life as measured by the number of starts and highest output power to drive faster starts. We have also recently launched a fully sealed starter for very harsh environments. This starter is well suited for off-highway and military applications. Our portfolio has been recently revamped to cover the market demand for a higher number of starts and larger engines in North America while also meeting the needs of smaller displacement engines typically used in Europe and Asia.

New alternators

Light vehicles

We offer an extensive range of alternator products for light vehicles designed to cover most output requirements for standard and high-efficiency, low noise units. This diverse portfolio provides proven new parts for OEMs globally, as well as for use as replacement parts.

Commercial vehicles

The increased use of electricity-powered components in commercial vehicles, including in connection with technologies designed to reduce engine emissions, is resulting in higher electrical load requirements. Our new product offerings include high-output alternators designed to meet these increasing load demands. These industry changes are also resulting in higher under-hood temperatures and increased vibration. Our products are designed to operate at higher temperature and provide increased durability. We have developed high temperature heavy-duty alternators that satisfy the standard portion of the market where price is a critical buying factor. We recently launched a new unit which is 10% smaller and operates at significantly higher temperature (125ºC) than any other unit on the market. Our experience in designing alternators for both light vehicles and commercial vehicles enables us to apply advances made in one vehicle class to others and generates a volume benefit by the ability to share internal components across vehicle classes.

Hybrid electric motors

We also make electric traction motors for electric and hybrid vehicle applications, which we refer to as our hybrid electric motors. In a hybrid vehicle application, our electric traction motor is combined with a gasoline or diesel propulsion system to assist in powering the vehicle. Our

 

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motors have been used in hybrid bus transmissions since 2002 and on automotive applications since 2007 for GM and 2008 for Daimler and BMW hybrid vehicles. Our patented winding processes in conjunction with a permanent magnet design deliver the highest power density in the industry. This technology provides the basis of our standard platform, allowing commercial and specialty vehicle applications to utilize a common design, create competitive scale and reduce cost. Our design approach is to use a common core, packaged and adjusted to provide a tunable output range, for electric vehicles, delivery vans, on-highway trucks, off-highway equipment and transit buses. Our hybrid electric product technology has proven beneficial to our more standard products. The patented winding process is now used on several new high-output alternator designs to improve power density and thermal efficiency. In 2010, our net sales of hybrid electric motors were $38.2 million.

Some light vehicles use a “start/stop” technology, in which the engine automatically shuts down while the vehicle is stopped rather than idling, and then a power source assists the engine in restarting when the vehicle departs. This approach, which is sometimes referred to as “mild hybrid,” helps meet strict fuel efficiency and CO2 emission regulations. In this design, a separate hybrid electric motor does not power the vehicle. We have developed a starter-based start/stop product that we will launch with Hyundai later this year. In small displacement engines, like those in wide use in light vehicles in Asia, the alternator can be used as the “mild hybrid” power source rather than a starter. Since 2007, we have produced an alternator-based start/stop system (often referred to as a belt-driven alternator/starter or BAS) for Chery which debuted its hybrid electric vehicle at the Beijing Olympics in 2008.

Remanufactured products

We offer a diverse array of remanufactured starters and alternators for light vehicles. These products include substantially all makes and models of domestic and imported starters and alternators. For commercial vehicles, our remanufactured starters and alternators are predominantly products that we originally manufactured. We also remanufacture power assemblies for locomotive diesel engines and sell a small amount of remanufactured steering gear and brake calipers for light vehicles in Europe.

Starter and alternator technology continues to evolve. We can introduce new models of remanufactured starters and alternators faster than others because we have often made the original product that is being remanufactured. We also bring our knowledge of advances in technology to bear in remanufacturing products originally made by others.

Customers and distribution channels

OEMs

Our OEM customers include a broad range of global light vehicle producers around the world. GM is our largest OEM customer for light vehicle products, evenly split between North America and the rest of world. In 2010, GM represented 23% of our net sales across all product lines. Hyundai is our fastest growing OEM customer. It is gaining market share globally, and we have been gaining market share within Hyundai. Other notable light vehicle customers include Daimler, DPCA (Dongfeng Peugeot Citroen Automotive), BYD and Geely. Our goal is to expand our customer base and grow with customers who are growing, including Hyundai and other Asian customers.

 

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Principal commercial vehicle OEM customers include Navistar, Daimler, Cummins, Caterpillar, MAN, Mack and Volvo Trucks. This mix provides a balance between on-highway trucks and off-highway applications. We also have very strong brand recognition and traditional relationships with the leading operators of commercial vehicle fleets, including Penske Truck Leasing, Ryder System, J.B. Hunt, Waste Management, C.R. England, Schneider and Conway. These fleets will often specify Delco Remy parts as required equipment on their new vehicle purchases from OEMs, and will in many cases purchase upgrades that we offer for increased durability and longer service life as premium options. A key focus of our marketing efforts in commercial vehicle products for OEMs is securing orders for upgrades, which help us generate profits. Currently, our commercial vehicle OEM sales are primarily in North and South America, although we have a growing share in Asia and Europe that we are seeking to expand.

We focus primarily on the commercial vehicle segment, which includes trucks, buses, off-road equipment and military vehicles, where power density and peak power are the primary consideration. We have over 50 vehicle projects in various stages of development, with an emphasis on medium and heavy-duty applications. We have entered into an agreement with Allison Transmission under which we are their exclusive partner for their production of a hybrid transmission for medium-duty vehicles, with production planned to begin by the end of 2012. In 2011, we will supply hybrid electric motors for a taxi cab produced and sold in China. We aim for a balance between global OEMs, transmission makers, systems integrators and specialty vehicle manufacturers.

Aftermarket

We are the leading North American rotating electrical supplier to aftermarket customers. We sell both remanufactured and new light vehicle and commercial vehicle starters and alternators into the aftermarket in the United States, Canada, Mexico and Europe, and aftermarket commercial vehicle starters and alternators in Brazil. In North America, we primarily sell our aftermarket products to automotive parts retailers, including the three largest retail companies in the United States and the largest in Canada. We also supply warehouse distributors, where we are the preferred supplier of some of the largest buying groups, OES customers, and other smaller middlemen (sometimes called “jobbers”) who distribute parts to installers. We sell substantially more remanufactured units than new units. This mix is consistent with sales in the aftermarket overall.

Auto parts retailers sell parts primarily to the DIY market. Consumers who purchase parts from the DIY channel generally install parts into their vehicles themselves. In most cases, this is a cheaper alternative than having the repair performed by a professional installer. The second market is the professional installer market, commonly known as the “do it for me” market. This market is served by traditional warehouse distributors, retail chains and the dealer networks. Generally, the consumer in this channel is a professional parts installer. However, large national retailers have increased their efforts to sell to installers and to other smaller middlemen. This change in approach has increased the retailers’ market share in the “do it for me” market and hence overall. We are well-positioned to participate in the retailers’ growth given our strong relationships with large retailers.

Our primary customers in the aftermarket for commercial vehicle parts are OE dealer networks, independent warehouse distributors and leased truck service groups. Our relationships with trucking fleets also benefit our aftermarket sales, as the fleet operators will often specify that Delco Remy products be used both for initial installation and for subsequent replacements.

 

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In Europe, we principally sell aftermarket products through the warehouse distribution channel. Retail distribution is less well-developed in Europe than in North America.

Our locomotive assemblies are sold predominantly to Caterpillar’s Electro-Motive Diesel (EMD) division. Our net sales of remanufactured power assemblies in 2010 were $23.7 million.

Our current level of service to our aftermarket customers for starters and alternators in North America fulfills 98% of all customer orders within the time frame requested by the customer, a high availability rate for our industry.

Sales and distribution

We have an extensive global distribution and logistics network. We employ a direct sales force that develops and maintains sales relationships with our OEM, retail, warehouse distributor and other aftermarket customers, as well as with major North American truck fleet operators. These sales efforts are supplemented by a network of field service engineers and product service engineers. We also use representative agencies to service aftermarket customers in some cases.

Manufacturing and facilities

We operate a global, low-cost manufacturing and sourcing network capable of producing technology-driven products. Our 13 primary manufacturing and remanufacturing facilities are located in seven countries, including Brazil, China, Hungary, Mexico, South Korea and Tunisia. There are only two manufacturing facilities in the United States, which support a portion of our hybrid electric motor assembly and our locomotive power assembly remanufacturing operations. Neither of these two U.S. manufacturing facilities is unionized. Our low-cost strategy results in direct labor costs of less than 2% of net sales. Our global network of manufacturing facilities employs common tools and processes to drive efficiency improvements and reduce waste. We can shift capacity between operations to minimize cost to adapt to changes in demand, raw material costs and exchange and transportation rates. Because of our established presence and available capacity throughout the world, we are well-positioned for growth with minimal incremental investment.

We have seven manufacturing facilities making new products for OE/OES customers, two in Mexico, and one in each of Brazil, China, Hungary and South Korea and Anderson, Indiana. These modern facilities utilize a flexible cell-based manufacturing approach for production lines for improved flexibility and efficiency in both low- and high-volume production runs. Each operation within a cell is optimized to ensure one-piece flow and other lean operational concepts. Cell manufacturing allows us to match production output better to variable customer requirements while reducing inventory and improving quality. The effectiveness of our approach was tested and proven in the recent market downturn and subsequent recovery.

Our recently awarded $60.2 million matching grant from the U.S. Department of Energy will assist us in accelerating the commercialization of hybrid electric motors. Under the grant, we are required to build additional manufacturing capacity for hybrid electric motors in the United States. We are developing our plans for this use of the grant funds, including site selection.

We produce our remanufactured starters and alternators for sale in North America in three facilities in Mexico. For Europe, our remanufactured starters and alternators are made in factories in Tunisia and Hungary. We source our new products for aftermarket sales through third parties, primarily in Asia and from our own manufacturing operations. Our distribution,

 

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engineering and administration facilities for these products are in Edmond, Oklahoma for North America and in Brussels for Europe. We conduct no manufacturing in the United States for products sold to our aftermarket customers other than for locomotive power assemblies, which are remanufactured in Peru, Indiana and Winnipeg, Canada.

In our remanufacturing operations, we obtain used starters, alternators and locomotive power assemblies, commonly known as cores, and use them to produce remanufactured products. Most cores are obtained from our customers, who generally deliver us a core for each remanufactured product we sell them. Their end customers in turn deliver their used starter or alternator to the vendor as part of the purchase of the replacement part. We buy approximately 10% of the cores we use from secondary market vendors.

We have recently restructured our remanufacturing process, with a focus on process consolidation and improvement. For example, we have redesigned our North American core return and processing operations and moved them to a Mexico site, and we have reengineered the distribution and logistics processes. These improvements were designed to improve the cost of the overall operation and achieve a high level of service to the customer. Our current level of service to our aftermarket customers for starters and alternators in North America fulfills 98% of all customer orders within the time frame requested by the customer, a high availability rate for our industry.

When we receive cores, we sort them by make and model. During remanufacturing, we disassemble the cores into their component parts. We then thoroughly clean, test and refurbish those components that can be incorporated into remanufactured products. We then reassemble remanufactured parts into a finished product. We conduct in-process inspection and testing at various stages of the remanufacturing process. We then inspect each finished product which is tested to meet OEM requirements.

In all our operations, we use frequent communication meetings at all levels of the organization to provide training and instruction, as well as to assure a cohesive, focused effort toward common goals which has proven to be a key element of our recent success. All of our manufacturing facilities are TS certified (a quality and process certification that is a prerequisite for supplying most OEMs), operated globally without a single lost time accident in 2010 and received numerous supplier quality and performance awards, including from Daimler, Cummins, Caterpillar, MAN and DPCA.

Engineering and development

Our engineering staff works both independently and with OEM and aftermarket customers to design new products, improve performance and technical features of existing products and develop methods to lower manufacturing costs. We have over 325 engineers focused on design, application and manufacturing. These engineers work in close collaboration with customers and have a thorough understanding of our product application. Our engineering efforts are designed to create value through innovation, new product features and aggressive cost control. Over the past three years, we have invested $53.1 million to support both product and manufacturing process improvements.

Our expertise in rotating electrical components led to the development of our hybrid electric motor capabilities as a natural extension of our products. We have invested approximately $55.8 million since 2001 in these efforts, including our industry-leading High Voltage Hairpin, or

 

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HVH, electric motor technology, light vehicle hybrid electric motor and the electric motors included in the Allison Transmission Hybrid Drive System. Our HVH electric motor technology is the industry leader in power density. We are applying it in automotive, agricultural, military and specialty markets. The U.S. DOE awarded us a grant in 2009, pursuant to which it agreed to match up to $60.2 million eligible expenditures we make through 2012 for the commercialization of electric hybrid motor technology. Our prior investment in manufacturing process development has provided us with significant, proprietary know-how in hybrid electric motor manufacturing.

We spent $17.5 million in 2010, $11.7 million in 2009 and $22.9 million in 2008 on research and development activities, including program engineering. Customer funded research and development expenses were $0.2 million, $1.7 million and $6.7 million for 2010, 2009 and 2008, respectively. We expect our research and development expenditures in 2011 to be approximately $32.0 million, excluding customer-funded research and grant reimbursement.

Competition

The automotive components market is highly competitive. Most OEMs and aftermarket customers source the parts that we sell from a limited number of suppliers. We principally compete for new OEM business both at the beginning of the development of new platforms and upon the redesign of existing platforms. New-platform development generally begins two to five years before those models are marketed to the public. Once a supplier has been designated to supply parts for a new program, an OEM usually will continue to purchase those parts from the designated producer for the life of the program, although not necessarily for a redesign. In the aftermarket, many retailers and warehouse distributors purchase starters and alternators from only one or two suppliers, under contracts that run for up to five years. When contracts are up for renewal, competitors tend to bid very aggressively to replace the incumbent supplier, although the cost of switching from the incumbent tends to mitigate this competition.

Our customers typically evaluate us and other suppliers based on many criteria such as quality, price/cost competitiveness, product performance, reliability and timeliness of delivery, new product and technology development capability, excellence and flexibility in operations, degree of global and local presence, effectiveness of customer service and overall management capability. We compete with a number of companies that supply vehicle manufacturers throughout the world. In the light vehicle market, our principal competitors include BBB Industries, Bosch, Denso, Hitachi, Mitsubishi, Motorcar Parts of America and Valeo. In the commercial vehicle market, our competitors include Bosch, Denso, Mitsubishi and Prestolite.

Patents, licenses and trademarks

We have an intellectual property portfolio that includes over 300 issued and pending patents in the United States and foreign countries. While we believe this intellectual property in the aggregate is important to our competitive position, no single patent or patent application is material to us.

We own the “Remy” and “World Wide Automotive” trademarks. Pursuant to a trademark license agreement between us and GM, GM granted us an exclusive license to use the “Delco Remy” trademark on and in connection with automotive starters and heavy-duty starters and alternators. This license is extendable indefinitely at our option upon payment of a fixed $100,000 annual licensing fee to GM. The “Remy” and “Delco Remy” trademarks are registered

 

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in the United States, Canada and Mexico and in most major markets worldwide. GM has agreed with us that, upon our request, GM will register the “Delco Remy” trademark in any jurisdiction where it is not currently registered.

Purchased materials

We continually aim to reduce input material and component costs and streamline our supply chain. Our global sourcing strategy is designed to ensure the desired quality and the lowest delivered cost of our required inputs. Our strategy focuses on local material sourcing and the development of standardized processes in freight and logistics that result in the lowest total cost for our global operations.

Principal purchased materials for our business include aluminum castings, gray and ductile iron castings, armatures, solenoids, copper wire, electronics, steel shafts, forgings, bearings, commutators, magnets and carbon brushes. All of these materials are presently readily available from multiple suppliers. We do not foresee difficulty in obtaining adequate inventory supplies. We generally follow the industry practice of passing on to our original equipment customers a portion of the costs or benefits of fluctuation in copper, steel and aluminum prices. Approximately [    ]% of copper, [    ]% of aluminum and [    ]% of steel pounds purchased are for customers with metals pass-through or sharing clauses within their contracts. Of the remaining portion of our copper exposure, we generally purchase hedges for a significant portion and also have a natural hedge in copper, aluminum and steel scrap recovered in our remanufacturing operations. In general, we do not hedge our aluminum and steel exposures. For high volume materials, we typically purchase a portion of our raw materials through multiple-year contracts with price adjustments allowed for changes in metals prices and currency exchange rates.

Foreign operations

Information about our foreign operations is set forth in tables relating to geographic information in Note 21 to our consolidated financial statements included in this prospectus.

 

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Properties

Our world headquarters is located at 600 Corporation Drive, Pendleton, Indiana 46064. We lease our headquarters. As of December 31, 2010 we had a total of 28 facilities in 11 countries. The following table sets forth certain information regarding these facilities.

 

Location    Number of
facilities
     Use    Owned/leased
 

United States

        

Anderson, IN

     1       Engineering/Manufacturing    Leased

Edmond, OK

     1       Warehouse/Engineering    Owned

Laredo, TX

     1       Warehouse    Leased

Pendleton, IN

     1       Engineering/Headquarters    Leased

Peru, IN

     1      

Manufacturing/Warehouse/
Engineering

   Leased

Taylorsville, MS

     1       Warehouse    Leased

Troy, MI

     1       Office    Leased

Winchester, VA

     1       Office    Leased

Europe

        

Heist Op Den Berg, Belgium

     1       Warehouse/Office    Leased

Mezokovesd, Hungary

     1       Engineering/Manufacturing    Owned

Miskolc, Hungary

     1       Engineering/Manufacturing    Owned

Swidnica, Poland

     1       Office    Leased

Burntwood, United Kingdom

     1       Warehouse    Leased

Brazil

        

Brusque

     1       Engineering/Manufacturing    Leased

Sao Paulo

     1       Office    Leased

Canada

        

Mississauga

     1       Warehouse    Leased

Winnipeg

     1       Manufacturing/Warehouse    Owned/Leased

China

        

Jingzhou City(1)

     1       Engineering/Manufacturing    Leased

Shanghai

     1       Office    Leased

Mexico

        

Matehuala

     1       Manufacturing/Office    Leased

Piedras Negras

     1      

Manufacturing/Warehouse/Office

   Leased

San Luis Potosi

     3       Engineering/Manufacturing/
Warehouse/Office
   Leased

South Korea

        

Kyungsangnam

     1       Manufacturing/Warehouse    Owned

Dae-Gu

     1       Engineering/Office    Leased

Seoul

     1       Office    Leased

Tunisia

        

Jemmal

     1       Manufacturing    Leased
              

Total

     28         
 

 

(1)   We operate both our wholly owned subsidiary and our joint venture out of this facility.

 

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Employees

As of December 31, 2010, we employed 5,717 people, of which 1,453 were salaried and administrative employees and 4,264 were hourly employees. 830 of our employees are based in the United States. 3,026 of our employees globally are primarily represented by trade unions.

As of December 31, 2010, there were multiple unions outside the United States in which our employees could participate. For the following unions, actual membership is voluntary for employees and is confidential information which is not available to us:

 

 

in the United Kingdom, we have a Recognition & Consultation Agreement with the Unite Union;

 

 

in Belgium, we have a Recognition & Consultation Agreement with Algemeen Christelijk Vakverbond, which is a section of the Metal Workers Union;

 

 

in Tunisia, we have a Recognition & Consultation Agreement with the Union Général des Travailleurs Tunisiens;

 

 

in Miskolc, Hungary, we have a Recognition & Negotiating Agreement with Alternátor-Starter Felújító Szakszervezet; and

 

 

in Mezokovesd, Hungary, we have a Recognition & Negotiating Agreement with Vasas Szakszervezet.

As of December 31, 2010, 1,281 of our hourly employees at Remy Remanufacturing de Mexico were affiliated with the Confederacion Regional Obrera Mexicana. These agreements have an annual term that ends on January 31, 2012.

As of December 31, 2010, 682 hourly employees at Remy Componentes S de R.L. de C.V. were affiliated with Sindicato Industrial Estatal de Trabajadores de Productos de Acero, Cobre, Manufacturas Metalicas, Conexos y Similares del Estado de San Luis Potosi, C.R.O.M, the Confederacion Regional Obrera Mexicana. Agreements with the union have a one-year term, and the terms of the current agreements end in February 2012.

As of December 31, 2010, 505 of our hourly workers at the Piedras Negras facility in Mexico were affiliated with Confederacion Revolucionaria de Obreros y Campesinos, lo. de Mayo. Agreements with the union have a one-year term, and the terms of the current agreements end in March 2012.

As of December 31, 2010, 46 hourly employees at Remy Korea were affiliated with the Metal Workers Union of Korea. Agreements with the union have a one-year term, and the terms of the current agreements end in April 2011.

As of December 31, 2010, 142 employees of Remy Brasil, consisting of 46 hourly workers and 96 salaried workers, were affiliated with Sindicato dos Trabalhadores nas Indústrias Metalúrgicas, Mecânicas e de Material Elétrico de Brusque. Agreements with the union have a one-year term, and the terms of the current agreements end May 2011.

As of December 31, 2010, 222 salaried and hourly members at Remy Electricals Hubei in China were affiliated with the REH Labour union committee. There is no official agreement between the parties.

 

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As of December 31, 2010, 148 of our hourly workers in Oklahoma were affiliated with the United Food and Commercial Workers Union, Local 1000, Dallas. The terms of the current agreements end on March 1, 2014.

We are not aware of any current efforts to organize the employees in our other facilities. Efforts to organize labor unions at facilities that are not currently unionized may be commenced at any time. We believe that our relations with our employees are satisfactory.

History

On July 31, 1994, our predecessor purchased substantially all of the assets, other than facilities, of the Delco Remy division of GM in a leveraged buyout. The specific business activities purchased were engaged in the design, manufacture, remanufacture and sale of starters and alternators, among other things, for light and commercial vehicles. The predecessors to these businesses first started their operations nearly 100 years ago. When we first separated from GM in 1994, we sold a substantial majority of our products to GM. Over the years, we have substantially diversified our revenue base.

On October 8, 2007, our predecessor, Remy Worldwide Holdings, Inc., and its domestic subsidiaries, filed voluntary petitions under a prepackaged arrangement for relief under Chapter 11 of the U.S. Bankruptcy Code. The petitions were filed in the U.S. Bankruptcy Court for the District of Delaware, and this proceeding was administered under Case No. 07-11481 (KJC). During bankruptcy, our predecessor operated its business as debtors-in-possession under the jurisdiction of the bankruptcy court and in accordance with the Bankruptcy Code and orders of the Bankruptcy Court. Our subsidiaries in Canada, Europe, Asia Pacific, Mexico and Brazil were not included in the filings. On November 20, 2007, the Bankruptcy Court confirmed the proposed plan of reorganization pursuant to the Bankruptcy Code, and we emerged from bankruptcy protection on December 6, 2007, the effective date of the plan of reorganization.

The plan of reorganization generally provided for the full payment or reinstatement of allowed administrative claims, priority claims and secured claims. The plan provided for the issuance, by us, of new equity and debt securities to our and our predecessor’s creditors in full satisfaction of allowed unsecured claims. Further, our current supply agreement with GM has been in effect since July 31, 2007 when it was renegotiated in connection with our Chapter 11 proceeding.

GM and certain of its direct and indirect subsidiaries filed on June 1, 2009 for protection under Chapter 11 of the U.S. Bankruptcy Code. On July 10, 2009, a substantial portion of GM began operations under a new corporate legal structure, called new GM, which acquired substantially all of the assets of the pre-bankruptcy GM. Under this process, we received payment on substantially all amounts invoiced at the time GM filed for bankruptcy and we entered into a Cure Agreement in which new GM assumed all principal contracts under which we conduct our business with them.

Environmental regulation

Our facilities and operations are subject to a wide variety of federal, state, local and foreign environmental laws, regulations, ordinances and directives. These laws, regulations, ordinances and directives, which we collectively refer to as environmental laws, include those related to air emissions, wastewater discharges, chemical and hazardous material, substance and waste management, treatment, storage or disposal, restriction on use of certain hazardous materials and the investigation and remediation of contamination. These environmental laws also require us to obtain permits for some of our operations from governmental authorities. These authorities

 

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can modify or revoke our permits and can enforce compliance through fines and injunctions. Our operations also are governed by laws relating to workplace safety and worker health, primarily the Occupational Safety and Health Act, its implementing regulations and analogous state laws and regulations, and foreign counterparts to these laws and regulations, which we refer to as employee safety laws. The nature of our operations exposes us to the risk of liabilities or claims with respect to environmental and employee safety laws.

We believe that the future cost of complying with existing environmental laws (or liability for known environmental claims) and employee safety laws will not have a material adverse effect on our business, financial condition and results of operations. However, future events, such as the enactment of new laws, changes in existing environmental laws and employee safety laws, or their interpretation, or the discovery of presently unknown conditions, may give rise to additional compliance costs or liabilities. For example, in January 2011, the U.S. Environmental Protection Agency began regulating greenhouse gas emissions from certain mobile and stationary sources pursuant to the Clean Air Act. Future legislative and regulatory initiatives concerning climate change or the reduction of greenhouse gas emissions could affect our business (including indirect impacts of regulation on business trends, such as customer demand), financial condition and results of operations. In addition, future international initiatives concerning climate change or greenhouse gas emissions could give rise to additional compliance costs or liabilities.

Certain environmental laws hold current and former owners or operators of land or businesses liable for their own, and as to current owners or operators only, for previous owners’ or operators’, releases of hazardous substances or wastes, and for releases at third-party waste disposal sites. Because of the nature of our operations, the long history of industrial uses at some of our facilities, the operations of predecessor owners or operators of certain of the businesses and the use, production and release of hazardous substances or wastes at these sites, we could become liable under environmental laws for investigation and cleanup of contaminated sites. Some of our current or former facilities have experienced in the past or are currently undergoing some level of regulatory scrutiny or investigation or remediation activities, and are, or may become, subject to further regulatory inspections, future requests for investigation or liability for past practices. For example, see “—Legal Proceedings—Grissom Air Force Base environmental matter.”

Legal proceedings

In the ordinary course of business, we are party to various pending and threatened legal actions and administrative proceedings related to our operations. We believe that no such matters, other than those discussed below, depart from customary litigation or other claims incidental to our business. Although the ultimate outcome of any legal matter cannot be predicted with certainty, we believe that the ultimate liability, if any, in excess of amounts already provided for in our financial statements in respect of all such matters will not have a material adverse effect on our financial position.

Remy, Inc. vs. Tecnomatic S.p.A.

On September 12, 2008, Remy International, Inc. filed suit against Tecnomatic in the U.S. District Court, Southern District of Indiana, Indianapolis Division for the amount of $7 million (Civil Action No.: 1:08-CV-1227-SEB-JMS), titled Remy, Inc. vs. Tecnomatic S.p.A., for breach of contract, among other claims, with respect to a machine Tecnomatic manufactured for Remy to build stators. On December 9, 2008, Tecnomatic filed a counterclaim in the amount of $0.1 million. The case is set for trial in July 2011.

 

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We were notified on March 9, 2011 that Tecnomatic has filed a lawsuit in U.S. District Court, N.D. of Illinois, against Remy International, Inc., its Mexican subsidiaries and two other entities. The complaint alleges breach of confidentiality agreement, misrepresentation and misappropriation of technology and requests damages of $110 million. We believe this action is without merit and an attempt to push us to settle the prior case.

Oakley vs. Remy International, Inc.

In 2009, we elected to terminate our retiree medical program and modify our retiree life insurance coverage. On November 4, 2009, certain retirees filed a purported class action lawsuit in the U.S. District Court for the Middle District of Tennessee, Nashville Division (Civil Action No.: 2:09cv107), titled Douglas Oakley, et al. v. Remy International, Inc., challenging our right to terminate such coverage provided to retirees who were members of the United Auto Workers union and their spouses. On April 1, 2010, this case was moved to the U.S. District Court, Southern District of Indiana, Indianapolis Division. We filed a declaratory judgment action against plaintiffs to confirm our authority to modify retiree medical coverage. We continue to deny liability and intend to vigorously defend this action.

Grissom Air Force Base environmental matter

We have been involved in settlement negotiations with the U.S. Department of Justice concerning a claim for reimbursement from us of up to 50% of past and future cleanup costs in connection with a former facility we leased on the Grissom Air Force Base. We believe this matter is likely to be settled in the near future with the entry of a Consent Decree in the U.S. District Court for the Northern District of Indiana South Bend Division (captioned United States of America v. Western Reman Industrial, Inc.) pursuant to which we would be required to pay $300,000 to the United States Air Force for response costs. The Consent Decree was lodged with the court on January 10, 2011, and a Motion to Enter the Proposed Consent Decree was filed on March 17, 2011 by the United States on behalf of the United States Air Force. We recorded an environmental liability accrual for this contingency. We continue to evaluate the accrual each quarter based on new developments and information until this matter is finally settled upon entry of the Consent Decree.

Alternator recall

In the first quarter of 2010, Remy learned of a potential component deficiency in a limited number of its alternator products sold for a brief period of time after December 31, 2009. The root cause was tracked to a potential defect in a third party-supplied subcomponent that could, in certain cases on specific vehicle applications, result in a fire. We are unaware of any injuries associated with this issue to date. We notified the National Highway Traffic Safety Administration, or NHTSA, of the issue and conducted a voluntary campaign to recover the potentially affected units, and we have continued to report our progress to NHTSA in quarterly reports. We sold approximately 30,000 units that included the potentially defective component and are aware of a total of approximately 12 thermal incidents in connection with these units. We initiated these actions as part of a proactive effort to contain all potential products and promote consumer safety, and we have been able to recover approximately 80% of the suspect units to date. As a result of this issue, we incurred $4.6 million in certain costs and customer reimbursement obligations during the year ended December 31, 2010. See “Risk factors—We may incur material losses and costs as a result of product liability and warranty claims, litigation and other disputes and claims.”

 

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Management

Our executive officers and the members of our board of directors as of the date of this prospectus are as follows:

 

Name    Age    Positions held
 

John H. Weber

   54    President, Chief Executive Officer and Director

William P. Foley, II

   66    Director and Chairman of the Board

Alan L. Stinson

   65    Director and Chairman of the Audit and Compensation Committees

Brent B. Bickett

   46    Director

Lawrence F. Hagenbuch

   44    Director

Stephen Magee

   63    Director

Norman Stout

   53    Director

Fred Knechtel

   50    Senior Vice President and Chief Financial Officer

John J. Pittas

   55    Senior Vice President of Remy International, Inc. and President of Remy Inc.

Jesus Sanchez

   58    Senior Vice President of Remy International, Inc. and President of Remy Power Products

Philippe James

   60    Vice President and Managing Director, Europe

Gerald T. Mills

   59    Senior Vice President and Chief Human Resources Officer
 

Set forth below is a brief description of the business experience of each of our executive officers and the members of the board of directors.

John H. Weber.    Mr. Weber was elected as our Chief Executive Officer and Director in January 2006. Prior to joining us, Mr. Weber served as President, Chief Executive Officer and Director of EaglePicher since July 2001. Prior to that, he had executive positions with GE, Allied Signal, McKinsey, Honeywell, Vickers and Shell. Mr. Weber holds an M.B.A. from Harvard University and a Bachelor of Applied Science in mechanical engineering from the University of Toronto.

William P. Foley, II.    Mr. Foley has served as chairman of our board of directors since December 7, 2007. Mr. Foley has served as executive chairman of the board of directors for Fidelity National Financial, Inc., or FNF, a Fortune 500 company, since October 2006, and prior to that, as chairman of the board of its predecessor company since 1984. Mr. Foley also served as CEO of FNF from 1984 until May 2007. Mr. Foley also serves as chairman of Fidelity National Information Services, part of the S&P 500. Mr. Foley also served as the chairman of Lender Processing Services, Inc., which was previously part of FNF, from July 2008 until March 2009, and, within the past five years, has served as a director of Florida Rock Industries, Inc. and CKE Restaurants, Inc. Mr. Foley’s qualifications to serve on our board include his 26 years as a director and executive officer of FNF, his experience as a board member and executive officer of public and private companies in a wide variety of industries, and his strong track record of building and maintaining stockholder value and successfully negotiating and implementing mergers and acquisitions.

 

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Alan L. Stinson.    Mr. Stinson has served on our board of directors since December 7, 2007, as audit committee chairman since 2008, and as compensation committee chairman since 2010. Mr. Stinson is an Executive Vice President of FNF and he has served in that position since October 2010. Previously, Mr. Stinson served as Chief Executive Officer of FNF from May 2007 to October 2010, and as Co-Chief Operating Officer from October 2006 until May 2007. Mr. Stinson joined FNF in October 1998 as Executive Vice President, Financial Operations and served as Executive Vice President and Chief Financial Officer of FNF from January 1999 until November 2006. Mr. Stinson was also named Chief Operating Officer of FNF in February 2006. Mr. Stinson has responsibility for accounting governance and oversight for the family of FNF companies and is a member of the boards of directors of several underwriters for Fidelity National Title Group. Mr. Stinson provides our board with significant experience in accounting and executive leadership.

Brent B. Bickett.    Mr. Bickett has served on our board of directors since December 7, 2007, and currently serves on the Audit Committee and the Compensation Committee. Mr. Bickett is Executive Vice President, Corporate Finance of FNF. He joined FNF in 1999 as a Senior Vice President, Corporate Finance and has served as an executive officer of FNF since that time. Mr. Bickett has primary responsibility for all merger and acquisition activities and strategic initiatives for the Fidelity family of companies, and he directs efforts to evaluate, structure and negotiate corporate acquisitions, strategic partnerships and investment opportunities to maximize value for the Fidelity stockholders and operating subsidiaries. Mr. Bickett brings these experiences to our board as we continue to develop and implement our strategic initiatives.

Lawrence F. Hagenbuch.    Mr. Hagenbuch has served on our board of directors since November 18, 2008, and is currently the Executive Vice President and CFO for the Ameriforge Group Inc. Prior to Ameriforge Group, Mr. Hagenbuch has served in senior management positions for SunTx Capital Partners, AlixPartners, Magic Tilt Trailers, and American National Can. Mr. Hagenbuch has extensive experience in supply chain, operational and profitability improvements, and through his background as a consultant and in senior management roles at various companies, he brings to our board considerable experience in implementing lean manufacturing discipline and in creating innovative business and marketing strategies.

Stephen Magee.    Mr. Magee has served on our board of directors since December 7, 2007. He is also a member of the board of directors and the chairman of the audit committee of J.B. Poindexter & Co. Mr. Magee has served on the board of J.B. Poindexter since the company was formed in 1988, as Treasurer from 1988 to 2001, and as CFO from 1994 to 2001. Mr. Magee brings over 35 years of experience in leadership roles with a manufacturing company, and even more years of experience in senior management roles in various other industries. Along with his experience, he brings to our board an entrepreneurial mindset with business acquisition and divestiture experience.

Norman Stout.    Mr. Stout has served on our board of directors since December 7, 2007, and currently serves on the Audit and Compensation Committees. Mr. Stout currently serves as chairman of the board of Hypercom Corporation and serves as director of Mitel Networks Corporation. From August 2010 to November 2010, Mr. Stout served as interim CEO of EF Technologies. He previously served as executive chairman of Hypercom from December 2007 until August 2009. Mr. Stout was appointed CEO and a member of the board of directors of Inter-Tel, Inc. in February 2006. Following the acquisition of Inter-Tel by Mitel Networks Corporation in August 2007, Mr. Stout served as CEO of Mitel USA until June 2008. Mr. Stout had been with Inter-Tel since June 1998, and had served as Chief Strategy Officer and Chief Administrative

 

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Officer prior to becoming CEO. Mr. Stout brings to our board over 20 years of experience in senior management positions concentrating on strategic business growth and maximizing profitability.

Fred Knechtel.    Mr. Knechtel joined Remy in November 2009. Prior to joining us, Mr. Knechtel was CFO at Stanley Bostitch, a $550 million division of Stanley Works since 2007. From 2005 to 2007, Mr. Knechtel was Chief Financial Officer and Controller of DuPont Teijin Films - NA. His prior work experience includes financial positions with Northrop Grumman, Stern Stewart and Millennium Chemicals. Mr. Knechtel holds a B.E. in mechanical engineering from Stony Brook University and an M.B.A. in finance from Hofstra University.

John J. Pittas.    Mr. Pittas joined our company in 2006 as President of Remy Power Products, and was appointed as Senior Vice President and President of Remy Inc. in 2008. Prior to this, he served as president of the Wolverine Specialty Materials division of EaglePicher Automotive. Throughout his career, Mr. Pittas has held progressive positions with Honeywell, UOP and ARI Technologies, and has extensive experience in manufacturing leadership, customer service, sales, technical support and process engineering, including international market development and Six Sigma and other productivity program implementation.

Jesus Sanchez.    Mr. Sanchez joined our company in 2008 as Senior Vice President and President of Remy Power Products. Prior to joining us, Mr. Sanchez was with ArvinMeritor for 15 years, serving as Managing Director of the Light Vehicle Aftermarket in Europe since 2000 and in South Africa since 2003. Mr. Sanchez holds a B.S. in mechanical engineering from Marquette University.

Philippe James.    Mr. James joined us in 2006 after serving as a consultant on a variety of automotive assignments throughout Europe. Prior to that, he was the Vice President and General Manager at Honeywell Automotive and Cables Pirelli S.A., respectively. Additionally, Mr. James has over 20 years of experience in various sales and marketing roles with Corning Glass France and Compagnie Europeenne D’Accumulateurs. Mr. James holds a degree from Institut Supérieur du Commerce de Paris.

Gerald T. Mills.    Mr. Mills joined our company in 2006 after serving as Vice President of Human Resources at NVR Inc. Previously he had served four years as the Senior Vice President of Human Resources for EaglePicher 28 years with Owens Corning. Mr. Mills holds an M.S. in human resources and a B.A. in political science from Miami University.

Each of Messrs. Weber, Pittas, James and Mills was an officer of our predecessor, Remy Worldwide Holdings, Inc., when it filed for bankruptcy protection in 2007. Mr. Weber held the position of Chief Executive Officer of EaglePicher until January 2005, and Mr. Mills held the position of Senior Vice President, Human Resources, of EaglePicher until August 2005. EaglePicher and certain of its affiliates filed for bankruptcy in April 2005.

Messrs. Foley, Stinson and Bickett are currently serving on our board pursuant to designation rights granted to FNF pursuant to our certificate of incorporation. These rights will terminate upon completion of this offering. Further, Mr. Magee is currently serving on our board as the designee of another stockholder, Ore Hill Partners LLC, which will have no right to designate a director following completion of this offering.

 

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The board

Our directors will be divided into three classes of approximately equal size and serve for staggered three-year terms. At each annual meeting of stockholders, directors will be elected to succeed the class of directors whose term has expired. The term for Class I directors, which will initially consist of             ,             and             , will expire at the 2012 annual meeting. The term for Class II directors, which will initially consist of             ,             and             , will expire at the 2013 annual meeting. The term for Class III directors, which will initially consist of             ,             and             , will expire at the 2014 annual meeting. Our director nominees will be allocated to classes upon their election to the board of directors.

Committees of the board

Following the offering, the standing committees of our board of directors will include the audit committee, the nominating and corporate governance committee, and the compensation committee. These committees are described below. Our board of directors may also establish various other committees to assist it in its responsibilities.

Audit committee

The initial members of our audit committee following this offering will be Mr. Stinson,             and             , and              will serve as the initial chairperson of this committee. This committee will be primarily concerned with the accuracy and effectiveness of the audits of our financial statements by our internal audit staff and by our independent auditors. This committee is responsible for assisting the board of directors’ oversight of:

 

 

the quality and integrity of our financial statements and related disclosure;

 

our compliance with legal and regulatory requirements;

 

the independent auditor’s qualifications and independence; and

 

the performance of our internal audit function and independent auditor.

The rules of the [            ] require that each issuer have an audit committee of at least three members, and that one independent director (as defined in those rules) be appointed to the audit committee at the time of listing, one within 90 days after listing and the third within one year after listing. We expect to appoint at least three independent directors to our audit committee effective as of our listing.

Our board of directors has determined that Mr. Stinson, the former CEO of FNF, is an audit committee financial expert as defined under applicable rules of the Securities and Exchange Commission. Our board of directors believes that its remaining audit committee members are financially literate and are capable of analyzing and evaluating the Company’s financial statements.

Nominating and corporate governance committee.

The initial members of our audit committee following this offering will be             ,              and             , and              will serve as the initial chairperson of this committee. This committee’s responsibilities will include the selection of potential candidates for our board of directors and the development and annual review of our governance principles.

 

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Compensation committee

The initial members of our audit committee following this offering will be             ,              and             , and              will serve as the initial chairperson of this committee. This committee will have two primary responsibilities:

 

 

to monitor our management resources, structure, succession planning, development and selection process as well as the performance of key executives; and

 

 

to review and approve executive compensation and broad-based and incentive compensation plans.

We intend to appoint independent directors (as defined in the applicable [            ] listing rules) to serve on the compensation committee and the nominating and corporate governance committee as soon as practicable, but in any event within the time period prescribed by the listing rules.

Compensation committee interlocks and insider participation

Alan L. Stinson, chairman, and Norman Stout served on our compensation committee in 2010. During 2010, none of our executive officers served as a director or member of the compensation committee of any other entity that had any executive officer who served on our board of directors or compensation committee.

Code of business conduct and ethics

Our board has adopted a code of business conduct and ethics that is applicable to our employees, directors and officers, in accordance with the corporate governance rules of the [            ]. A waiver of any provisions of this code may be made only by our board and will be publicly disclosed as required by applicable U.S. federal securities laws and the corporate governance rules of the [            ].

Corporate governance guidelines

Our board has adopted corporate governance guidelines in accordance with the corporate governance rules of the [            ].

 

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Executive compensation

Compensation discussion and analysis

In this compensation discussion and analysis, we discuss our named executive officers’ compensation, including the objectives of our compensation programs and the rationale for each element of compensation. Our named executive officers in 2010 were:

 

 

John H. Weber, our President, Chief Executive Officer and Director;

 

Fred Knechtel, our Senior Vice President and Chief Financial Officer;

 

John J. Pittas, our Senior Vice President and the President of Remy Inc.;

 

Jesus Sanchez, our Senior Vice President and the President of Remy Power Products; and

 

Gerald T. Mills, our Senior Vice President and Chief Human Resources Officer.

The Compensation Committee of our board of directors administers our executive compensation program. The members of the Compensation Committee in 2010 were Alan L. Stinson, chairman, and Norman Stout. Brent Bickett became a member of the Compensation Committee on February 2, 2011. The Compensation Committee has responsibility for establishing our compensation philosophy, setting compensation for our Chief Executive Officer and reviewing and approving compensation for our other named executive officers, upon the recommendation of our Chief Executive Officer.

The Compensation Committee believes that our compensation program should attract and retain individuals who hold key leadership positions and motivate those leaders to perform in the interest of promoting our sustainable global profitable growth in order to create value and satisfaction for our stockholders, customers, and employees. Our named executive officers’ 2010 compensation consisted of base salary and an annual incentive for 2010. In 2010, our named executive officers earned previously granted performance-based cash incentives relating to the period of 2008 to 2010, which were the only long-term cash-based incentives awarded to them during the three-year period. Our named executive officers also vested in a portion of previously granted restricted stock that vests over a five-year period. These awards were related to our emergence from bankruptcy and the promoting of Mr. Pittas and hiring of Mr. Sanchez, as discussed below. We also provide our named executive officers other benefits consistent with those provided to other salaried employees, and some very limited benefits beyond those normally provided to salaried employees.

The period following our emergence from bankruptcy was a critical time. To retain our executives and to attract new, valuable and skilled executives, we knew we had to provide significant incentive opportunities tied to challenging, but obtainable, short-term and long-term goals. We thought cash-based incentive compensation would be more effective than stock-based compensation given the illiquidity of our stock. Consequently, a large portion of the compensation that was earned by our named executive officers in 2010 is attributable to prior compensation plans developed to address the unique challenges we faced when emerging from bankruptcy. This is reflected in the tables that follow.

In 2007, we established base salary levels, annual incentive opportunities and long-term incentive opportunities for Messrs. Weber, Pittas and Mills. Except with respect to Mr. Pittas, whose compensation levels we increased in connection with his 2008 promotion, these compensation levels remained in effect until the executives’ employment agreements expired in 2010. We established Messrs. Knechtel’s and Sanchez’s base salary levels, annual incentive opportunities and long-term incentive opportunities in connection with their hiring in November 2009 and May 2008, respectively.

 

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Between 2008 and 2010, our named executive officers’ incentive-based compensation consisted primarily of performance-based cash incentives tied to our attainment of key financial objectives. Starting in 2011, our approach to compensating our named executive officers is different. Annual salary levels are not expected to change significantly, but annual cash incentive opportunities will be significantly lower than previous levels and we will provide more long-term incentives through stock-based awards rather than cash. The following table compares our named executive officers’ 2010 base salaries, target annual incentive opportunities and target long-term incentive opportunities as compared to those amounts for 2011. The 2011 amounts reflect amounts we agreed to and that are set forth in the named executive officers’ employment agreements that we entered into with them in August 2010. Actual compensation provided to and earned by our named executive officers in 2011 and future years may be different than what is reflected in this table. We may provide one-time stock-based awards following our initial public offering, which would be in addition to the amounts shown below.

 

     Base salary     Target annual incentive
opportunity
    Target long-term
incentive opportunity
 
Name   2010(1)     2011(2)     2010     2011(3)    

2011

(% of
salary)

    2010(4)     2011(5)  
   

John H. Weber

  $ 906,250      $ 950,000      $ 2,400,000      $ 1,425,000        150%      $ 4,000,000      $ 3,000,000   

Fred Knechtel

    270,833        300,000        250,000        180,000        60%        250,000 (6)      600,000   

John J. Pittas

    422,500        440,000        650,000        308,000        70%        1,200,000        1,250,000   

Jesus Sanchez

    313,333        325,000        305,000        227,500        70%        500,000 (6)      1,250,000   

Gerald T. Mills

    375,000        375,000        400,020        206,250        55%        660,000        600,000   
   

 

(1)   Reflects total base salary earned in 2010 as shown in the Summary Compensation Table.

 

(2)   Reflects new base salary levels established effective August 1, 2010.

 

(3)   Reflects target incentive opportunity for 2011, based on the executive’s current base salary.

 

(4)   Reflects target incentive opportunity under the Three-Year Plan, which is discussed below. The target opportunity is based on performance over the period from 2008 to 2010, and was the only long-term cash-based incentive awarded to the named executive officers during the three-year period. The amount shown in the Summary Compensation Table reflects the entire amount earned over the three-year period, not an annualized portion of the total award.

 

(5)   Reflects the dollar value of the target long-term incentive opportunity for 2011. The 2011 grant is in the form of restricted stock with performance and service based vesting conditions.

 

(6)   Messrs. Knechtel’s and Sanchez’s target opportunities under the Three-Year Plan were proportionately adjusted to reflect the fact that they were not employed by us during the entire three-year performance period that the incentive covered.

Role of executive officers and compensation consultant in compensation decisions

The allocation of our named executive officers’ compensation among the various components, and determinations regarding compensation levels and opportunities, is not formulaic. It reflects the Compensation Committee’s business judgment, which is influenced by a number of objective and subjective considerations, including consideration of how other companies compensate their named executive officers as reflected in marketplace data provided by the Compensation Committee’s compensation consultant, judgments about the relative amounts of regularly paid fixed compensation and variable stock-based and cash-based incentives that are needed to attract and retain talented and experienced executive officers, subjective judgments about the relative skills, experience, and past performance of the named executive officers and their roles and responsibilities within the organization, and judgments about the extent to which the named executive officers can impact the company-wide performance and creation of long-term stockholder value. Further discussion of the specific objectives behind each of the components of our named executive officers’ compensation is below.

 

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The Compensation Committee receives assistance from our corporate human resources department with respect to historical data, and may, from time to time, solicit advice from outside consultants in determining marketplace compensation amounts, standards and trends. Our Chief Executive Officer makes recommendations to the Compensation Committee with respect to the other named executive officers’ compensation. The Compensation Committee makes the final determination on the compensation of the Chief Executive Officer and his direct reports. The Compensation Committee also has the authority to solicit advice from legal, compensation, accounting or other consultants as it deems necessary.

In 2010, the Compensation Committee engaged Strategic Compensation Group, an independent compensation consultant, to provide market data on executive compensation levels and advice on incentive design considerations. In connection with this engagement, the Compensation Committee instructed Strategic Compensation Group to provide general advice on compensation trends and alternatives as well as specific design recommendations and compensation levels. Strategic Compensation Group was selected by and reports directly to the Compensation Committee, receives compensation only for services related to executive compensation issues, and neither it nor any affiliated company provides any other services to us.

Elements of compensation earned by our named executive officers in 2010

Base salary

We intend for the named executive officers’ base salaries to provide a level of assured, regularly-paid, cash compensation. The named executive officers’ base salary levels are set forth in their employment agreements. The agreements specify that their base salary levels may not be decreased. Other than with respect to Mr. Mills, the Compensation Committee determined to increase our named executive officers’ salaries when entering into new employment agreements in 2010. In approving an increase for Messrs. Weber and Pittas, the Compensation Committee considered that they had not received a salary increase in over two years and that it was appropriate to raise their salaries in order to reward them and to encourage retention. In approving Mr. Sanchez’s increase, the Compensation Committee noted that his salary was below the market and an increase was warranted due to his performance and to encourage retention. With respect to Mr. Knechtel, the Compensation Committee believed that a raise in salary that was a higher percentage than the other named executive officers was necessary because his salary was set lower than the level of the other named executive officers when he was hired in November 2009. At his prior employer, Mr. Knechtel was the Chief Financial Officer of a division, and, upon being hired by us, was serving as Chief Financial Officer of a company group for the first time in his career. The Compensation Committee believed it was appropriate initially to set his salary at this lower rate, and then review his performance continually. The significant raise in 2010 was intended to bring his salary more in line with the level of the other named executive officers and with that of our prior Chief Financial Officer. With respect to Mr. Mills, the Compensation Committee believed that his salary was at an appropriate level for an executive in his position and, accordingly, did not adjust it.

Annual incentive plan

Through an annual incentive plan, we provide our named executive officers with the opportunity to earn annual cash payments based upon achievement of specific objectives established in the first quarter of each year. The performance goals under the annual incentives are intended to focus our named executive officers on attainment of annual, objectively determinable business

 

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objectives. The annual incentive program plays an important role in our approach to total compensation. It motivates participants to focus on improving our performance on key financial measures during the year, and it requires that we achieve defined, objectively determinable goals before participants become eligible for an incentive payout.

In the first quarter of each year, the Compensation Committee establishes the performance measures, the weightings between the measures, threshold, target and maximum goals for each measure, and the annual incentive amounts that will be earned by each named executive officer depending on the extent to which the performance goals are achieved. We selected adjusted EBITDA and working capital turns as the 2010 performance measures in order to focus our named executive officers on profitability and the efficient use of cash. The adjusted EBITDA measure we used for the annual incentives is based on adjusted EBITDA as described previously in this prospectus, but with additional adjustments. In the following discussion, we refer to this adjusted EBITDA measure as “incentive plan adjusted EBITDA.” The adjustments made in calculating the corporate and business unit incentive plan adjusted EBITDA are discussed below. To calculate working capital turns, we take the average monthly sales based on three months of sales for the applicable quarter, and annualize that average. We then divide the annualized results by the working capital for the last month in the applicable quarter, which we refer to as the “current month.” The current month working capital is an amount equal to the sum of (x) accounts receivables, notes receivables and inventory; less (y) accounts payable and notes payable. The working capital turns calculation for 2010 was the average of the calculation described above for each of the four quarters. Messrs. Weber’s, Knechtel’s and Mills’ entire incentive is based on our company’s incentive plan adjusted EBITDA and working capital turns, which we refer to as the “corporate” incentive, while Messrs. Pittas’ and Sanchez’s incentive is based 80% on the incentive plan adjusted EBITDA and working capital turns of their business units, and 20% on the corporate incentive. The corporate and business unit 2010 incentive was based 90% on incentive plan adjusted EBITDA and 10% on working capital turns.

The 2010 corporate incentive plan adjusted EBITDA and working capital turns thresholds, targets and results under the annual incentive plan were as follows:

 

Incentive Plan Adjusted EBITDA

    Working capital turns  
Threshold   Target     Maximum     Adjusted
result
    Threshold     Target     Maximum     Result  
   

$91,800,000

  $ 108,000,000      $ 124,200,000      $ 142,884,000        2.323        2.612        2.650        3.104   
   

The 2010 incentive plan adjusted EBITDA and working capital turns thresholds, targets and results for our Remy Inc. operations segment, which is Mr. Pittas’ business unit, were as follows:

 

Incentive Plan Adjusted EBITDA

    Working capital turns  
Threshold   Target     Maximum     Adjusted
result
    Threshold     Target     Maximum     Result  
   

$53,635,000

  $ 63,100,000      $ 72,565,000      $ 92,359,000        6.754        7.514        7.723        8.430   
   

The 2010 incentive plan adjusted EBITDA and working capital turns thresholds, targets and results for Remy Power Products, which is Mr. Sanchez’s business unit, were as follows:

 

Incentive Plan Adjusted EBITDA

     Working Capital Turns  
Threshold    Target      Maximum      Adjusted
result
     Threshold      Target      Maximum      Result  
   

$42,500,000

   $ 50,000,000       $ 57,500,000       $ 65,670,000         1.056         1.089         1.094         1.212   
   

 

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The tables above reflect the incentive plan adjusted EBITDA results, which were calculated with adjustments to offset the impact of necessary, but unbudgeted, strategic decisions because we do not think our named executive officers’ compensation should be impacted by events that do not reflect the underlying operating performance of the business. The adjustments were one-time adjustments for items that were not included in our annual operating plan. We adjusted actual corporate adjusted EBITDA results to reflect the effect of the 2010 rights offering which closed in January 2011, a legacy environmental accrual, costs of an unplanned inventory write off, and costs for consultants to analyze aftermarket pricing dynamics in our industry, to manage negotiations related to a project in China, and to provide a strategic analysis of the China aftermarket. We adjusted our actual Remy Inc. operations adjusted EBITDA results to reflect costs for a consultant to provide a strategic analysis of the China aftermarket. We adjusted our actual Remy Power Products adjusted EBITDA results to reflect costs for consultants to analyze aftermarket pricing dynamics in our industry and the China market. All of the adjustments were approved by our Audit Committee and then the board of directors.

The incentive plan adjusted EBITDA and working capital turns threshold, target and maximum levels were chosen based upon our business plan for 2010 as approved by the board of directors. The threshold, target and maximum payment opportunities under our annual incentive plan and the amount of our named executive officers’ 2010 incentive awards based on the 2010 performance results are all reflected in the table below. The Compensation Committee retained discretion to increase or decrease the named executive officers’ actual payout by 25%; however, no adjustments were made with respect to the 2010 annual incentive payouts.

 

Name    Threshold      Target      Maximum      2010
Incentive
earned
 
   

John H. Weber

   $ 1,200,000       $ 2,400,000       $ 3,600,000       $ 3,600,000   

Fred Knechtel

   $ 125,000       $ 250,000       $ 375,000       $ 375,000   

John J. Pittas

   $ 325,000       $ 650,000       $ 975,000       $ 975,000   

Jesus Sanchez

   $ 152,500       $ 305,000       $ 457,500       $ 457,500   

Gerald T. Mills

   $ 200,010       $ 400,020       $ 600,030       $ 600,030   
   

Messrs. Weber’s and Mills’ target opportunities for 2010, as set forth in their employment agreements, reflected the same annual target opportunity that was agreed upon with our primary bondholder upon our emergence from bankruptcy in 2007. Mr. Pittas’ target opportunity for 2010 reflects the target that was established upon his promotion in 2008, which was increased from the target that was agreed upon with our primary bondholder in 2007 to a level that our Chief Executive Officer and Chief Human Resources Officer, with Compensation Committee approval, believed was appropriate to reflect his new responsibilities. Mr. Knechtel’s 2010 incentive opportunity was established when he joined us in 2009. Mr. Sanchez’s target annual incentive opportunity was established when he joined us in 2008 and remained at that level until 2010 when it was increased from $275,000 to $305,000, 100% of his annual salary level. We increased Mr. Sanchez’s target annual incentive opportunity in 2010 because we believed that Mr. Sanchez demonstrated strong leadership abilities and we wanted to ensure that we retain him.

When we entered into new employment agreements in 2010 with our named executive officers, we established new, lower target incentive opportunities for 2011 and future years. These are described in the narrative description of the agreements that follows the Grants of Plan-Based Awards Table. The 2011 amounts, which are based on a percentage of the named executive

 

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officer’s salary rather than a set dollar amount, will be much less than the 2010 targets. The reason for the decrease is that, as discussed above, we intend to make more of our named executive officers’ compensation stock-based in 2011 than it was in 2010. Therefore, the portion of our named executive officers’ compensation that is represented by the annual cash incentive will be less in 2011 than the portion was in 2010.

2008 – 2010 Long-term incentive awards (Three-Year Plan)

In connection with our emergence from bankruptcy in 2007, we established a long-term incentive plan, which we refer to as the “Three-Year Plan.” The Three-Year Plan was intended to focus our named executive officers on achieving our adjusted EBITDA goals for 2008, 2009 and 2010 and to establish Remy as a viable independent organization.

The awards under the Three-year Plan were earned upon the attainment of cumulative adjusted EBITDA objectives established by our board of directors relating to the three-year period beginning January 1, 2008 and ending December 31, 2010. The adjusted EBITDA goals were based upon our operating plan that was originally established prior to 2008 for each of the years covered. The goals were then updated each year to match any updates made to our annual operating plan. To determine the amount earned, cumulative incentive plan adjusted EBITDA was calculated at the end of the three-year period. If the threshold goal was achieved, the named executive officers earned 50% of their target incentives. If the target goal was achieved, the named executive officers earned 100% of their target incentives. If the maximum goal was achieved, the named executive officers earned 150% of their target incentives. For performance between these levels, payouts were determined by interpolation. The percentages of our operating plan that constituted threshold, target and maximum levels were negotiated with our primary bondholder at the time of our bankruptcy.

The threshold cumulative three-year goal was $255.7 million, which was 85% of the cumulative three-year adjusted EBITDA target in our operating plan. The target goal was $300.3 million, which was 100% of the cumulative three-year adjusted EBITDA target in our operating plan. The maximum goal was $344.9 million, which was 115% of the cumulative three-year adjusted EBITDA target in our operating plan. The actual incentive plan adjusted EBITDA achieved during the three-year period was $339.7 million, or 144.1% of the target. The incentives earned by our named executive officers with respect to these awards, which equaled 144.1% of their target opportunity, were approved by the Compensation Committee and are reflected in the summary compensation table under the heading Non-Equity Incentive Plan Compensation. To determine the amounts earned, each year’s adjusted EBITDA results were adjusted in the same manner as was done when calculating incentive plan adjusted EBITDA in the annual incentive plan. Each year, the adjustments were approved by our Audit Committee and then the board of directors. For 2010, the adjustments were the same as described above for the corporate incentive under the annual incentive plan. The 2009 and 2008 adjustments were the same as made for the corporate incentive under the annual incentive plans in those years. For 2009, the adjustments were for the recovery of insurance proceeds in a settlement, a one-time sale of inventory, a one-time settlement, and costs for auditors and tax advisors related to accounting for a one-time transaction, research and accounting treatment for reclassification of expenses, forward tax planning, advice regarding research and development tax credits and services in connection with the Mexico organizational structure. For 2008, the adjustments were for expenses formerly allocated to a subsidiary that was sold, cost of accounting services related to a change in accounting classification of factored receivables and the amortization of customer contracts and costs for a tax consultant for forward tax planning.

 

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Each of our named executive officers was assigned a target opportunity under the Three-Year Plan, which is described in the narrative description of the employment agreements that follows the Grants of Plan Based Awards table. The targets for Messrs. Weber, Mills and Pittas were agreed to with our then primary bondholder at the time of our emergence from Bankruptcy. When Mr. Pittas was promoted in February 2008, his target opportunity was adjusted upwards to reflect his new role with us and his responsibility for a business unit that had twice the revenue of the business unit he headed before being promoted. When Messrs. Knechtel and Sanchez were hired, their target opportunities were determined by our Chief Executive Officer and Chief Human Resources Officer, and approved by the Compensation Committee, based upon their view of the appropriate target opportunity for an executive in their position, but prorated since they were not employed by us during the entire three-year period of the plan.

The plan provided that the named executive officers would become 100% vested in any incentive earned under this plan on December 31, 2010, provided they were not terminated by us for cause, and they did not resign without good reason, before that date. If a named executive officer’s employment had terminated for any reason other than by us for cause or by the executive for good reason, he would have received a pro-rated portion of his incentive based on actual results and the portion of the three-year period that he was employed. The incentives are payable in two equal installments. The first half was paid by March 15, 2011, and the second half will be paid in March 2012, or earlier upon a change in control.

Equity awards

In connection with our emergence from Bankruptcy on December 6, 2007, Messrs. Weber, Pittas and Mills received restricted stock awards of 297,368 shares of Remy common stock, in the aggregate, at no cost to them. The size of the stock grants was negotiated with our primary bondholder at the time of our emergence from Bankruptcy. Upon his promotion, Mr. Pittas subsequently received an additional award of 17,895 shares of restricted stock to reflect his new role with us and the greater responsibilities that came with that role. Mr. Sanchez received an award of 25,000 shares of restricted stock, which was negotiated with him at the time of his hiring, and reflected our Chief Executive Officer’s and Chief Human Resource Officer’s judgment of an appropriate grant level that would serve as an incentive for him to join us. This award was approved by the Compensation Committee. Mr. Knechtel was not granted restricted stock upon his hiring because he joined us late in 2009. The awards will vest in 12% increments on each of the first three anniversaries of the grant date, and in 32% increments on each of the fourth and fifth anniversaries, based upon continuation of employment, or earlier upon a change in control, except that Mr. Pittas’ subsequent award vests on the same vesting schedule as his December 6, 2007 grant rather than on anniversaries of its grant date.

Deferred compensation plans

Our named executive officers are eligible to participate in our Deferred Compensation Plan, which we refer to as our DCP. This plan is intended to help to attract and retain employees by providing them with the opportunity to defer receipt of their compensation and plan for retirement taking into consideration that our named executive officers do not participate in any tax-qualified defined benefit pension plan. The DCP allows eligible employees to defer receipt of portions of their base salary and annual incentive awards and to receive matching company contributions which cannot be provided under our qualified savings plan, due to limitations under the Internal Revenue Code of 1986. In March 2011, the Compensation Committee terminated the matching company contributions effective April 1, 2011.

 

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Supplemental executive retirement plan

Our Chief Executive Officer, in accordance with the terms of his employment agreement, participates in the Supplemental Executive Retirement Plan, or the SERP, which is a nonqualified plan. The intent of the SERP is to provide additional retirement benefits to our Chief Executive Officer, and it was agreed to when he originally entered into an employment agreement with us in 2006. Our Chief Executive Officer is fully vested in the SERP and is the only active employee in the SERP.

Employment agreements

We entered into employment agreements with our named executive officers effective as of August 1, 2010, to replace their existing agreements which would all have expired at the end of 2010. The employment agreements are discussed in more detail in the narrative that follows the Grants of Plan Based Awards table and in the Potential Payments Upon Termination or a Change in Control section.

The employment agreements include higher salaries for the named executive officers than they previously had, other than with respect to Mr. Mills. The rationale for these salary increases is discussed above. The employment agreements include the existing target opportunities under the annual incentive plan and the Three-Year Plan, and included new annual targets for 2011 and future years. To ensure that the named executive officers are protected against the loss of their positions in certain circumstances, their employment agreements include severance provisions. The Compensation Committee believes that it is in the best interests of our company and our stockholders to offer such protection to executive officers because we compete for executive talent in a highly competitive market in which companies routinely offer similar benefits to senior executives.

Mr. Mills’ agreement provides that if he remains continuously employed with us through September 2011, all previously granted stock and any future grants of stock granted prior to December 31, 2011 will vest in accordance with their original vesting schedules even if he is no longer employed, as long as he continues to make himself available at no additional compensation through the vesting date to perform consulting services on a limited basis. The provision is conditioned on his not violating any of the confidentiality, non-competition and non-solicitation provisions of the agreement. The rationale for the provision is that we felt we needed to ensure that he remain with us through the critical period surrounding this offering.

Perquisites and other personal benefits

Employment agreements in effect prior to July 31, 2010 had provisions for supplemental living allowances for Messrs. Mills, Sanchez, Knechtel and Pittas. Under the new employment agreements, only Mr. Mills and Mr. Sanchez receive after tax, monthly payments of one thousand dollars ($1,000) and two thousand three hundred dollars ($2,300), respectively. The payments are intended to cover miscellaneous expenses incurred by them in connection with working at their respective locations which were not in the same geographic area as their primary residence and to avoid substantial relocation costs.

See the table under the caption entitled “—Summary compensation table—All other compensation” for amounts paid in 2010, designated as “Supplemental Living Allowance.”

 

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Use of marketplace data in compensation decisions

Although marketplace compensation data does not drive our compensation decisions, we do consider it. We considered marketplace data provided by Strategic Compensation Group in 2010 when establishing the compensation terms in the new employment agreements, including our named executive officers’ salaries for 2010 and target incentive opportunity levels for 2011 and future years. The data served as a point of reference for the Compensation Committee’s determinations in connection with the new employment agreements, but the committee ultimately made compensation decisions based on a subjective assessment of the totality of the executive’s experience, performance and value to Remy, and it did not target any particular percentile of the data.

The data consisted of a general executive compensation survey on over 800 companies prepared by Towers Perrin, to which we applied a formula contained in the survey that allows for the adjustment of the survey’s compensation amounts to take into account differences in revenue between the survey companies and us; a general executive compensation survey on over 3,000 companies prepared by Kenexa called CompAnalyst Executive, with a specific focus on companies with revenue between $800 million and $1.3 billion; and a custom comparator group of 13 companies that were selected, with our input, by Strategic Compensation Group, which ranged in revenue size from $419 million to $1.9 billion. The customized group of 13 companies is from the following industries: auto parts and equipment, aerospace, heavy truck and machinery, and electrical components and equipment. The companies in the customized comparator group were:

 

• AAR Corp.

  

• Sunpower Corp.

• Accuride Corp.

  

• Superior Industries Intl.

• Belden Inc.

  

• Transdigm Group Inc.

• Curtiss-Wright Corp.

  

• Wabco Holdings Inc.

• Enersys Inc.

  

• Wabtec Corp.

• Federal Signal Corp.

  

• Woodward Governor Co.

• Hexcel Corp.

  

Tax implications of executive compensation

Section 162(m) of the Internal Revenue Code limits to $1 million per year the federal income tax deduction available to companies with publicly traded stock for compensation paid for any fiscal year to the corporation’s Chief Executive Officer and the three other most highly compensated executive officers as of the end of the fiscal year, other than the Chief Financial Officer. The Compensation Committee intends to consider section 162(m) when structuring and approving incentive awards when this provision applies to us in the future. In certain situations, however, the Compensation Committee may approve compensation that does not meet section 162(m)’s requirements.

Accounting implications of executive compensation

For our cash awards, we follow the principles set forth in ASC 710, Compensation—General, pursuant to which we recognize a compensation expense ratably over the requisite service period, resulting in an accrued liability at the full eligibility date equal to the then present value of all of the future benefits expected to be paid.

We recognize compensation expense of all stock-based awards pursuant to the principles set forth in ASC 718, Compensation—Stock Compensation. Consequently, we record a compensation expense in our financial statements over the requisite service period for equity-based awards granted.

 

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New plans adopted for 2011 and future years

Omnibus incentive plan

In October 2010, the board of directors approved a new stock incentive plan called the Remy International Inc. Omnibus Incentive Plan, which we refer to as the omnibus incentive plan. The omnibus incentive plan was amended as of March 24, 2011. The following describes the omnibus incentive plan as amended.

The omnibus incentive plan permits us to grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other cash or share based awards. Our employees, directors and consultants are eligible to participate. Actual participation, as well as the terms of the awards to those participants, will be determined by the Compensation Committee or other committee that the board of directors selects.

Subject to adjustment pursuant to the anti-dilution provisions of the plan, the omnibus incentive plan provides that the maximum number of shares of our common stock that may be delivered pursuant to awards under the plan is 5,500,000. Awards of restricted stock in respect of 1,084,544 shares have been granted under the omnibus incentive plan, which leaves 4,415,456 shares available for future awards. Subject to adjustment pursuant to the anti-dilution provisions of the plan, the omnibus incentive plan contains the following limitations of awards under the plan: the maximum number of our shares with respect to which stock options may be granted to any participant in any fiscal year is 3,500,000 shares; the maximum number of stock appreciation rights that may be granted to any participant in any fiscal year is 3,500,000 shares; the maximum number of our shares of restricted stock that may be granted to any participant in any fiscal year is 3,500,000 shares; the maximum number of our shares with respect to which restricted stock units may be granted to any participant in any fiscal year is 3,500,000 shares; the maximum number of our shares with respect to which performance shares may be granted to any participant in any fiscal year is 3,500,000 shares; the maximum amount of compensation that may be paid with respect to performance units awarded to any participant in any fiscal year is $4,000,000 or a number of shares having a fair market value not in excess of that amount; the maximum amount of compensation that may be paid with respect to other awards awarded to any participant in any fiscal year is $4,000,000 or a number of shares having a fair market value not in excess of that amount; and the maximum dividend or dividend equivalent that may be paid to any participant in any fiscal year is $4,000,000.

The committee that administers the plan may specify that the attaining of performance measures will determine the degree of granting, vesting and/or payout with respect to awards that the committee intends to qualify for the performance-based exception from the tax deductibility limitations of section 162(m) of the Internal Revenue Code. If the committee determines to grant these types of performance-based awards, it may grant them subject to the attainment of the following performance measures: earnings per share, EBITDAR, economic value created, market share (actual or targeted growth), net income (before or after taxes), operating income, adjusted net income after capital charge, return on assets (actual or targeted growth), return on capital (actual or targeted growth), return on equity (actual or targeted growth), return on investment (actual or targeted growth), revenue (actual or targeted growth), cash flow, operating margin, share price, share price growth, total stockholder return, and strategic business criteria consisting of one or more objectives based on meeting specified market penetration goals, productivity measures, geographic business expansion goals, cost targets, customer satisfaction or employee

 

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satisfaction goals, goals relating to merger synergies, management of employment practices and employee benefits, or supervision of litigation and information technology, and goals relating to acquisitions or divestitures of Subsidiaries and/or other affiliates or joint ventures. The targeted level or levels of performance with respect to the performance measures may be established at such levels and on such terms as the committee administering the plan may determine, in its discretion, including in absolute terms, as a goal relative to performance in prior periods, or as a goal compared to the performance of one or more comparable companies or an index covering multiple companies. Awards (including any related dividends or dividend equivalents) that are not intended to qualify for the performance-based exception under section 162(m) may be based on these or such other performance measures as the committee may determine. Achievement of performance goals in respect of awards intended to qualify under the performance-based exception will be measured over a performance period, and the goals will be established not later than 90 days after the beginning of the performance period or, if less than 90 days, the number of days that is equal to 25% of the relevant performance period applicable to the award. The committee administering the plan will have the discretion to adjust the determinations of the degree of attainment of the pre-established performance goals; provided, however, that awards that are designed to qualify for the performance-based exception may not be adjusted upward (the committee may, in its discretion, adjust those awards downward).

Annual incentive plan

Under the 2011 annual incentive plan, which applies to the annual cash incentives for 2011, employees selected by the board of directors and/or our senior management are eligible to participate. For the portion of a participant’s incentive that is based upon the performance of our company, the performance objective is based 80% on our incentive plan adjusted EBITDA and 20% on our cash flow from operations (adding back capital expenditures and interest expense). For the portion of a participant’s incentive that is based upon the performance of the participant’s business unit, the performance objective is based 80% on the business unit’s incentive plan adjusted EBITDA and 20% on the business unit’s cash flow from operations (adding back capital expenditures and interest expense). The board of directors has discretion to adjust the results under the plan. The 2011 annual incentive plan does not specify maximum incentives that may be paid to a participant.

In March 2011, the Compensation Committee approved a new annual incentive plan for 2012 and future years, under which employees selected by the Compensation Committee are eligible to participate. The Compensation Committee will establish the performance objective or objectives each year for the participants’ awards, which will be based upon one or more of the following performance measures: earnings per share, EBITDAR, economic value created, market share (actual or targeted growth), net income (before or after taxes), operating income, adjusted net income after capital charge, return on assets (actual or targeted growth), return on capital (actual or targeted growth), return on equity (actual or targeted growth), return on investment (actual or targeted growth), revenue (actual or targeted growth), cash flow, operating margin, share price, share price growth, total stockholder return, inventory or capital turn, and strategic business criteria consisting of one or more objectives based on meeting specified market penetration goals, productivity measures, geographic business expansion goals, cost targets, customer satisfaction or employee satisfaction goals, goals relating to merger synergies, management of employment practices and employee benefits, or supervision of litigation and information technology, and goals relating to acquisitions or divestitures of subsidiaries and/or other affiliates or joint ventures. The targeted level or levels of performance with respect to such performance measures may be established at such levels and on such terms as the Compensation

 

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Committee may determine, in its discretion, including in absolute terms, as a goal relative to performance in prior periods, or as a goal compared to the performance of one or more comparable companies or an index covering multiple companies. The Compensation Committee will have discretion to adjust the amount of any incentive award that would otherwise be payable to a participant; provided, however, that incentive awards which would be subject to section 162(m) of the Internal Revenue Code may not be adjusted upward, although the Compensation Committee may, in its discretion, adjust those incentive awards downward. Awards that are not intended to qualify for the performance-based compensation exception to section 162(m) of the Internal Revenue Code may be based on these or such other performance measures as the Compensation Committee may determine. The maximum incentive award that may be paid under the new annual incentive plan to a participant during any fiscal year is $4,000,000.

Summary compensation table

The following Summary Compensation Table includes all base salary, incentives and other compensation earned by our named executive officers in 2010:

 

Name and
principal position
  Year     Salary(1)     Non-equity
incentive plan
compensation –
2010 annual
incentive(2)
    Non-equity
incentive plan
compensation –
long-term
incentive(3)
    Total non-equity
incentive plan
compensation(4)
    Change in
pension value
and
non-qualified
deferred
compensation
earnings(5)
    All other
compensation(6)
    Total  
   

John H. Weber,

President, Chief Executive Officer and Director

    2010      $ 906,250      $ 3,600,000      $ 5,764,960      $ 9,364,960      $ 251,078      $ 150,282      $ 10,672,570   

Fred Knechtel,

Senior Vice President and Chief Financial Officer

    2010        270,833        375,000        360,310        735,310               53,164        1,059,307   

John J. Pittas,

Senior Vice President and President of Remy Inc.

    2010        422,500        975,000        1,729,488        2,704,488               41,912        3,168,900   

Jesus Sanchez,

Senior Vice President and President of Remy Power Products

    2010        313,333        457,500        720,620        1,178,120               50,578        1,542,031   

Gerald T. Mills,

Senior Vice President and Chief Human Resources Officer

    2010        375,000        600,030        951,218        1,551,248               51,144        1,977,392   
   

 

(1)   Amounts shown are not reduced to reflect the named executive officers’ elections, if any, to defer receipt of salary, if any, into our qualified savings plan or deferred compensation plans.

 

(2)   Represents amounts earned in 2010 under the annual incentive plan.

 

(3)   Represents amounts earned in 2010 with respect to the three-year period from 2008 to 2010 under the Three-Year Plan.

 

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(4)   Represents the total of the prior two columns.

 

(5)   Represents the change in the actuarial present value of the accumulated pension benefit under the SERP during the year for Mr. Weber.

 

(6)   Refer to the table below under “—All other compensation.”

All other compensation

The table below shows the components of “All other compensation” for the named executive officers for 2010.

 

Compensation   John H. Weber     Fred Knechtel     John J. Pittas     Jesus Sanchez     Gerald T. Mills  
   

Supplemental Living Allowance(1)

           29,254        7,000        12,480        11,051   

Tax Gross-ups for Living Allowance(1)

           13,421        3,065        3,642        5,136   

Qualified Savings Plan Matching Contributions

    9,800        7,989        9,800        9,800        9,800   

DCP Matching Contributions(2)

    140,482        2,500        22,047        24,656        25,157   
       

Total

    150,282        53,164        41,912        50,578        51,144   
   

 

(1)   See discussion of supplemental living allowance under the heading “Perquisite and other personal benefits” for description of supplemental living allowances.

 

(2)   DCP matching contributions are also reflected in the “Nonqualified deferred compensation plan” below.

Grants of plan-based awards table

The following table sets forth information concerning plan-based awards granted during the 2010 fiscal year to our named executive officers.

 

      Estimated possible payouts under
non-equity incentive plan awards
 
Name(1)    Threshold
($)
     Target
($)
     Maximum
($)
 
   

John H. Weber

     1,200,000         2,400,000         3,600,000   

Fred Knechtel

     125,000         250,000         375,000   

John J. Pittas

     325,000         650,000         975,000   

Jesus Sanchez

     152,500         305,000         457,500   

Gerald T. Mills

     200,010         400,020         600,030   
   

 

(1)   Amounts shown in the table reflect awards granted under the annual incentive plan.

As discussed in the Compensation Discussion and Analysis and as reflected in the named executive officers’ employment agreements, beginning in 2011, annual cash incentive opportunities will be significantly lower than they were in 2010.

Narrative discussion for summary compensation table and grants of plan-based awards table

Employment agreements

We have entered into employment agreements with our named executive officers. Additional information regarding post-termination benefits provided under these employment agreements

 

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can be found in the Potential Payments upon Termination or a Change in Control section. The following descriptions are based on the terms of the agreements as of December 31, 2010.

John H. Weber

We entered into an amended and restated employment agreement with Mr. Weber effective as of August 1, 2010, under which he serves as our Chief Executive Officer and President and a member of our board of directors. The employment agreement’s term began on the effective date and continues until December 31, 2013, with a provision for automatic one-year extensions unless either party provides timely notice that the term should not be extended. Mr. Weber’s minimum annual salary is $950,000 per year, with an annual incentive target of $2,400,000 for 2010, and not less than 150% of his base salary in future years, which would equal $1,425,000 for 2011 based upon his salary as of December 31, 2010. The agreement provides that Mr. Weber will be eligible for a target long-term incentive under our Three-Year Plan of $4,000,000, payable depending upon financial performance during the three year period that began January 1, 2008 and ended on December 31, 2010. The agreement further provides that he will be eligible to participate in our SERP and our stock incentive plans, and that for 2011 and each year thereafter he will receive an annual equity or cash long-term incentive grant valued by the board of directors at $3,000,000 or another amount determined by the board of directors. In 2011, the form of this long-term incentive grant will be restricted stock.

Fred Knechtel

We entered into an amended and restated employment agreement with Mr. Knechtel effective as of August 1, 2010, under which he serves as our Senior Vice President and Chief Financial Officer. The employment agreement’s term began on the effective date and continues until December 31, 2013, with a provision for automatic one-year extensions unless either party provides timely notice that the term should not be extended. Mr. Knechtel’s minimum annual salary is $300,000 per year, with an annual incentive target of $250,000 for 2010, and not less than 60% of his base salary in future years, which would equal $180,000 for 2011 based upon his salary as of December 31, 2010. The agreement provides that Mr. Knechtel will be eligible for a target long-term incentive under our Three-Year Plan of $250,000, payable depending upon financial performance during the three year period that began January 1, 2008 and ended on December 31, 2010. The agreement further provides that he will be eligible to participate in our stock incentive plans, and that for 2011 and each year thereafter he will receive an annual equity or cash long-term incentive grant valued by the board of directors at $600,000 or another amount determined by the board of directors. In 2011, the form of this long-term incentive grant will be restricted stock.

John J. Pittas

We entered into an amended and restated employment agreement with Mr. Pittas effective as of August 1, 2010, under which he serves as President of Remy, Inc. The employment agreement’s term began on the effective date and continues until December 31, 2013, with a provision for automatic one-year extensions unless either party provides timely notice that the term should not be extended. Mr. Pittas’ minimum annual salary is $440,000 per year, with an annual incentive target of $650,000 for 2010, and not less than 70% of his base salary in future years, which would equal $308,000 for 2011 based upon his salary as of December 31, 2010. The agreement provides that Mr. Pittas will be eligible for a target long-term incentive under our Three-Year Plan of

 

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$1,200,000, payable depending upon financial performance during the three-year period that began January 1, 2008 and ended on December 31, 2010. The agreement further provides that he will be eligible to participate in our stock incentive plans, and that for 2011 and each year thereafter he will receive an annual equity or cash long-term incentive grant valued by the board of directors at $1,250,000 or another amount determined by the board of directors. In 2011, the form of this long-term incentive grant will be restricted stock.

Jesus Sanchez

We entered into an amended and restated employment agreement with Mr. Sanchez effective as of August 1, 2010, under which he serves as our Senior Vice President and President of Remy Power Products. The employment agreement’s term began on the effective date and continues until December 31, 2013, with a provision for automatic one-year extensions unless either party provides timely notice that the term should not be extended. Mr. Sanchez’s minimum annual salary is $325,000 per year, with an annual incentive target of $305,000 for 2010, and not less than 70% of his base salary in future years, which would equal $227,500 for 2011 based upon his salary as of December 31, 2010. The agreement provides that Mr. Sanchez will be eligible for a target long-term incentive under our Three-Year Plan of $500,000, payable depending upon financial performance during the three-year period that began January 1, 2008 and ended on December 31, 2010. The agreement further provides that he will be eligible to participate in our stock incentive plans, and that for 2011 and each year thereafter he will receive an annual equity or cash long-term incentive grant valued by the board of directors at $1,250,000 or another amount determined by the board of directors. In 2011, the form of this long-term incentive grant will be restricted stock. Under the agreement, Mr. Sanchez will be entitled to a monthly reimbursement of $2,300 for miscellaneous business-related expenses incurred by him in connection with his working at the location of our Oklahoma offices.

Gerald T. Mills

We entered into an amended and restated employment agreement with Mr. Mills effective as of August 1, 2010, under which he serves as our Senior Vice President and Chief Human Resources Officer. The employment agreement’s term began on the effective date and continues until December 31, 2013, with a provision for automatic one-year extensions unless either party provides timely notice that the term should not be extended. Mr. Mills’ minimum annual salary is $375,000 per year, with an annual incentive target of $400,020 for 2010, and not less than 55% of his base salary in future years, which would equal $206,250 for 2011 based upon his salary as of December 31, 2010. So long as Mr. Mills remains continuously employed by us through December 31, 2011, he will be eligible to receive the earned 2011 annual incentive payment even if he is not employed on the date it is paid, provided that he has not violated the terms of his employment agreement, including his confidentiality and non-competition covenants. The agreement provides that Mr. Mills will be eligible for a target long-term incentive under our Three-Year Plan of $660,000, payable depending upon financial performance during the three-year period that began January 1, 2008 and ended on December 31, 2010. The agreement further provides that he will be eligible to participate in our stock incentive plans, and that for 2011 and each year thereafter he will receive an annual equity or cash long-term incentive grant valued by the board of directors at $600,000 or another amount determined by the board of directors. In 2011, the form of this long-term incentive grant will be restricted stock. If Mr. Mills remains continuously employed with us through September 2011, all stock granted prior to December 31, 2011 will continue to vest with its applicable vesting schedule even if Mr. Mills is not employed

 

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by us so long as he continues to make himself available to performance consulting services to us at no additional compensation and he does not violate the terms of the employment agreement, including his confidentiality and noncompetition covenants. Under the agreement, Mr. Mills will be entitled to a monthly reimbursement of $1,000 for miscellaneous business-related expenses incurred by him in connection with his working at the location of our offices.

Outstanding equity awards at fiscal year end

The following table shows information regarding unvested stock awards held by our named executive officers as of December 31, 2010. We have not granted any stock options to our named executive officers.

 

Name    Date of grant      Number of shares
or units of stock
that have not
vested(1)
     Market value of
shares or units of
stock that have
not vested(2)
 
   

John H. Weber

     12/07/07         134,737       $ 1,263,833   

Fred Knechtel

                       

John J. Pittas

     12/07/07         33,347         312,795   
     2/1/08         11,453         107,427   

Jesus Sanchez

     5/5/08         19,000         178,220   

Gerald T. Mills

     12/07/07         22,232         208,536   
   

 

(1)   Restricted vests at 12% on each of the first three anniversaries of the grant date, and 32% each on the fourth and fifth anniversaries, based upon continuation of employment with the company, or earlier upon a change in control, except that Mr. Pittas’ February 2008 grant vests on the same dates and in the same proportions of his December 2007 grant rather than on anniversaries of its grant date. Accelerated vesting is discussed in more detail below under the section entitled “Potential payments upon termination or a change in control.”

 

(2)   To calculate the market value as of December 31, 2010, we use the computed fair value of our common stock as of November 23, 2010 of $9.38 per share which was determined by an independent appraiser.

Stock vested

The following table sets forth information concerning each vesting of stock, including restricted stock, during the fiscal year ended December 31, 2010 for each of our named executive officers on an aggregated basis.

 

Name    Number of shares
acquired on
vesting
     Value realized
on vesting
 
   

John H. Weber

     25,263       $ 236,967   

Fred Knechtel

     —           —     

John J. Pittas

     8,400         78,792   

Jesus Sanchez

     3,000         13,050   

Gerald T. Mills

     4,168         39,096   
   

 

(1)   The value of the shares vested in the table above is based on the fair value established as of November 23, 2010 of $9.38 per share, except for Mr. Sanchez’s shares which vested on May 15, 2010, and were valued at the fair value at that time of $4.35 per share.

 

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Pension benefits

The following table sets forth information concerning the Supplemental Executive Retirement Plan, or the SERP, that our Chief Executive Officer participates in. Our Chief Executive Officer is the only active employee that participates in the SERP.

 

Name   Plan name   Number of
years of
credited
service
    Present value of
accumulated
benefit
    Payments
during last
fiscal year
 
   

John H. Weber

 

Supplemental Executive Retirement Plan

    9      $ 2,262,728      $   
   

The actuarial present value of the accumulated pension benefits in the SERP was determined using a discount rate assumption for 2010 of 5.41% and assumed retirement at age 62.

Under the terms of the SERP, Mr. Weber is entitled to a supplemental retirement benefit equal to 50% of his final average compensation at retirement, death or his “voluntary termination,” which the plan defines as Mr. Weber’s termination of employment before age 62 that is mutually acceptable to him and our Compensation Committee, with the amount payable each year for ten years. If Mr. Weber retires on or after attaining age 62, he will be entitled to receive his supplemental retirement benefit payable in quarterly installments beginning as of the calendar quarter following his retirement. If Mr. Weber has a voluntary termination (other than for “cause”), on or before he turns 62, he will be entitled to his supplemental retirement benefit payable in quarterly installments beginning as of the calendar quarter following the date he turns 62. If Mr. Weber retires on or after attaining age 55 with at least five years of service, but before turning 62, he would be entitled to his supplemental retirement benefit payable in quarterly installments beginning as of the calendar quarter following his termination date, but reduced based on the table below, or he could elect to delay payment until age 62 and receive an unreduced amount if the delay complies with section 409A of the Internal Revenue Code. If he begins to receive payment prior to attaining age 62, the benefit will be reduced by multiplying the benefit determined as of his termination of employment by the “early retirement factor” set forth below:

 

Payment starting age    Early retirement
factor
 
   

55

     0.500   

56

     0.580   

57

     0.660   

58

     0.740   

59

     0.820   

60

     0.900   

61

     0.950   

62 or older

     1.00   
   

Mr. Weber is vested in his supplemental retirement benefit. He would forfeit the benefit, however, if he is terminated by us for cause. He would also forfeit the benefit if, after termination of employment, he engages in an activity that would constitute “cause” if he were still employed or if he competes with us in the 36-month period following his termination of employment. Under the SERP, “cause” means conviction for a felony or conviction for a lesser crime or offense involving the property of us or an affiliated employer, engaging in conduct that

 

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has caused demonstrable and material injury to us or an affiliated employer, or uncured gross dereliction of duties or other gross misconduct; the disclosure of our confidential information.

Non-qualified deferred compensation

The following table sets forth information with respect to the named executive officers’ accounts under the Deferred Compensation Plan.

 

Name    Executive
contributions in
last fiscal year
     Contributions
by us in last
fiscal year(1)
    

Aggregate
earnings
in last
fiscal

year

     Aggregate
withdrawals /
distributions
     Aggregate
balance at
last fiscal
year end
 
   

John H. Weber

   $ 175,602       $ 140,482       $ 55,463       $       $ 686,394   

Fred Knechtel

     3,125         2,500         161                 5,786   

John J. Pittas

     27,559         22,047         16,765                 141,161   

Jesus Sanchez

     30,820         24,656         11,405                 122,403   

Gerald T. Mills

     31,446         25,157         13,769                 145,453   
   

 

(1)   Contributions by us are also included in the All Other Compensation column in the Summary Compensation Table.

The DCP allows eligible employees to defer receipt of portions of their base salary and annual incentive awards and to receive employer contributions which cannot be provided under our qualified savings plan due to limitations under the Internal Revenue Code. Eligible employees can generally defer up to 50% of base salary and up to 90% of annual incentive compensation to the extent such contributions cannot be made to our qualified savings plan as a result of these limitations. The deferrals must be made in 5% increments. The DCP provides that we make matching contributions in an amount equal to the matching contribution amount that would have been made under the qualified savings plan had the compensation deferred under the DCP been deferred under the qualified savings plan. These matching contributions are equal to 100% of the first 3% of compensation deferred, and 50% of the next 2% of compensation deferred. In March 2011, the Compensation Committee terminated the matching company contributions effective April 1, 2011. While the DCP is unfunded, each participant directs both their deferrals and our contributions into investment options that are intended to mirror the investment options available in the qualified savings plan. As of each valuation date, the amount of the participant’s deferred compensation including our matching contributions is adjusted to reflect the appreciation and/or depreciation in the value of the investment alternative selected. The participants are fully vested in the DCP.

Potential payments upon termination or a change in control

The following narrative explains the potential payments and benefits that we are obligated to pay upon a termination of a named executive officer’s employment or upon a change in control. The table reflects the estimated value of the benefits and payments that would be triggered in the various termination or change in control scenarios identified, other than (i) any accrued benefits that may be due as of the date of such termination (such as any accrued salary, reimbursement for unreimbursed business expenses and employee benefits that the executive may be entitled to under employment benefit plans), and (ii) any benefits available generally to salaried employees of the company. If a named executive officer is terminated for “cause,” or if the executive terminates employment without “good reason,” as defined below, our only obligation to the executive shall be payment of any accrued obligations. The table contains dollar amounts estimated for each termination or change in control scenario, assuming a termination

 

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date or change in control date of December 31, 2010, and utilizes the computed market value of Company common stock as of November 23, 2010 of $9.38 per share.

Potential payments under the employment agreements

As discussed above, we have entered into employment agreements with our named executive officers. The agreements contain provisions for the payment of severance benefits following certain termination events. Below is a summary of the payments and benefits our named executive officers would receive in connection with various employment termination scenarios. Under the employment agreement, in addition to any accrued benefits, our named executive officers are generally entitled to the following upon a termination of employment by us for a reason other than “cause,” “death” or “disability” or by the executive for “good reason” (each as defined below).

 

 

The executive will be paid a prorated portion of his annual incentive based upon the actual incentive that would have been earned by the executive for the year in which his termination date occurs.

 

 

The executive will be paid a lump sum payment of 100% (200% for Mr. Weber) of the sum of (a) the employee’s annual base salary, and (b) the higher of (i) the highest of the annual incentive paid in the three calendar years prior to the date of termination, or (ii) the target annual incentive for the year of termination. This benefit is to be paid no later than 60 days following the date of termination.

 

 

So long as the executive pays the full monthly COBRA premiums, he will be entitled to continued medical and dental coverage for him and his dependents until the earlier of (i) two years after his termination date and (ii) the date he is first eligible for medical and dental coverage with a subsequent employer. The executive will be paid a lump sum payment equal to 24 months of COBRA premiums no later than 65 days following the date of termination based on the level of coverage in effect on the date of termination.

 

 

As long as the executive pays the full monthly premiums for COBRA coverage, we will continue to provide medical and dental insurance coverage for up to two years following the date of termination.

Under the employment agreement, upon a termination of employment by the us on account of “death” or “disability,” our named executive officers are generally entitled to receive a lump-sum payment of the annual incentive awarded for the year of termination, not less than the target incentive set for that year, pro-rated for the portion of the year prior to the date of termination. The payment will be made no later than 2 1/2 months after the calendar year end.

The employment agreements define the following terms:

“Cause” generally means:

 

 

the employee engages in gross misconduct or gross negligence in the performance of the employee’s material duties for the company

 

 

the employee embezzles assets of the company

 

 

the employee is convicted of or enters a plea of guilty or nolo contendere to a felony or misdemeanor involving moral turpitude

 

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the employee’s breach of any of the restrictive covenants set forth in the employment agreement;

 

 

the employee willfully and materially fails to follow the lawful and reasonable instructions of the Chief Executive Officer (or in the case of Mr. Weber, the board) or

 

 

the employee becomes barred or prohibited by the U.S. Securities and Exchange Commission or other regulatory body from holding his position with the company and the situation is not cured within 30 days after receipt of notice.

“Disability” is based upon the employee’s entitlement to long-term disability benefits under the company’s long-term disability plan or policy in effect on the date of termination.

“Good Reason” generally means an occurrence of any of the following events:

 

 

a material adverse change in the employee’s position or title, or managerial authority, duties or responsibilities or the conditions under which those duties or responsibilities are performed

 

 

a material adverse change in the position to which the employee reports or a material diminution in the managerial authority, duties or responsibility of the person in that position

 

 

a material diminution in the employee’s annual base salary or annual incentive opportunity, except in connection with a corporate officer salary decrease or

 

 

notice of non-renewal of the employee’s agreement by the company or a material breach by the company of any of its obligations under the employment agreement.

Each named executive officer’s employment agreement includes an indefinite confidentiality provision and a noncompetition and non-solicitation provision for a term of one year following the termination of the executive’s employment for any reason other than termination by us without cause. The agreements also provide that we are entitled to damages and to obtain an injunction or decree of specific performance. The Compensation Committee can condition the right of the employee to receive an incentive award upon performance of these provisions. The failure by any party to insist on strict adherence to any term of the agreement will not be considered a waiver of that right or any other right under the agreement.

Each named executive officer’s employment agreement also provides that, if payments or benefits to be provided to the executive in connection with his termination of employment would be subject to the excise tax under section 4999 of the Internal Revenue Code, the executive may elect to reduce any payments or benefits to an amount equal to one dollar less than the amount that would be considered a parachute payment under section 280G of the Internal Revenue Code. The agreements do not provide for any excise tax gross-up payments.

Potential acceleration of restricted stock awards

In addition to the post-termination rights and obligations set forth in the employment agreements of our named executive officers, our restricted stock grants provide for the potential acceleration of vesting and/or payment of equity awards in connection with a change in control or certain terminations of employment. The grants of restricted stock fully vest upon a “change in control” of the company. Upon a termination of employment without “cause” or a resignation for “good reason,” or a termination of employment due to the executive’s death or “disability,” the shares that would have vested had the executive remained employed through the vesting

 

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date occurring in the calendar year in which the termination occurs and through the vesting date in the next calendar year will vest as of the date of termination of employment. The terms “cause,” “good reason,” and “disability” are defined in the named executive officers’ employment agreements. The term “change in control” means the occurrence of any of the following events:

 

 

we sell, convey or dispose of, by means of any transaction or series of transactions, all or substantially all the assets of the company, which includes assets accounting for 51% or more of the sales of the company and its subsidiaries taken as a whole during the immediately preceding twelve month period;

 

 

the merger or consolidation of the company with or into another “person” (as defined below) or the merger of another person with or into the company, by means of any transaction or series of transactions, other than a merger or consolidation transaction immediately following which (A) securities issued in such transaction and in all other merger or consolidation transactions after the date the company’s Series A Preferred Stock is issued, which we refer to as “merger issuance voting stock,” represented in the aggregate less than a majority of the total voting power of the “voting stock” (as defined below) of the surviving person in the merger or consolidation transaction immediately following the transaction and (b) the holders of securities representing the total voting power of the voting stock of the surviving person in the merger or consolidation transaction (other than merger issuance voting stock) hold such securities (other than merger issuance voting stock) immediately after such transaction and in the same proportion as before the transaction;

 

 

any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) other than (A) a person consisting of one or more “permitted holders” (as defined below) (or a person in which permitted holders hold a majority of the aggregate number of shares held by such person), (B) an underwriter of equity securities in a public offering or (C) a person pursuing a drag-along sale pursuant to the terms of the certificate of incorporation of the company, is or becomes beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except such person shall be deemed to have “beneficial ownership” of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of a majority of the total voting power of the our voting stock; provided, however, that such other person shall be deemed to beneficially own any voting stock of a specified person held by a parent entity, if such other person is the beneficial owner, directly or indirectly, of more than a majority of the voting power of the voting stock of such parent entity; or

 

 

at any time (A) that the company or any successor by merger or consolidation is a public reporting company under the Securities Exchange Act of 1934 with its common stock listed on a national securities exchange or (B) after a registration statement covering shares of common stock filed pursuant to a demand registration under the registration rights agreement entered into in connection with the plan of reorganization has become effective, individuals who on the effective date our plan of reorganization constituted the board of directors (together with any new directors whose election by such board of directors or whose nomination for election by the stockholders of the company was made pursuant to special nomination rights provided under the company’s or such successor’s certificate of incorporation or a stockholders agreement between the company or such successor and such stockholder or stockholders or was approved by a vote of a majority of the directors of the company or such successor then still in office who were either directors on the effective date of our plan of reorganization or

 

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whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the board of directors then in office.

Notwithstanding the foregoing definition, no change in control shall occur due solely to the restructuring of the company’s debt obligations. Other than for purposes of the third bullet point above, “person” means any individual, corporation, limited liability company, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. “Permitted holders” means each noteholder party to that certain Plan Support Agreement, dated as of June 15, 2007, as the same may have been amended, modified and supplemented, and any affiliates of such noteholders. “Voting stock” means the capital stock of any person that is at the time entitled to vote in the election of the board of directors of such person.

Potential payments under the SERP

If Mr. Weber’s employment were terminated on December 31, 2010 due to his death or disability, as defined below, he would be entitled to his supplemental retirement benefit equal to 50% of his final average compensation, payable in quarterly installments over ten years. In the event of disability, the payments would begin as of the calendar quarter following the date of his termination of employment. In the event of his death, the payments would begin as soon as administratively feasible after his death. Under the SERP, “disability” means a determination by the Social Security Administration that Mr. Weber is totally disabled in accordance with the Social Security Act. The amounts payable to Mr. Weber if his employment terminated for any other reason would commence at age 62 and are disclosed in the Pension Benefits table, above.

 

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Potential payments

The following table reflects the estimated value of the benefits and payments that would be triggered in the various termination scenarios identified or upon a change in control without termination:

 

Named executive officer   Termination
by us for a
reason other
than cause,
death or
disability or
by the
employee for
good reason
    Termination
by us for a
reason other
than cause,
death or
disability or
by the
employee for
good reason
in connection
with a
change in
control
    Change in
control
without
termination
    Termination
due to
death
    Termination
due to
disability
 
   

John H. Weber

         

Cash severance payment(1)

  $ 6,700,000      $ 6,700,000      $      $      $   

2010 annual incentive(2)

    3,600,000        3,600,000               3,600,000        3,600,000   

Benefits and payments(3)

                                  

Acceleration of restricted stock(4)

    631,915        1,263,832        1,263,832      &