10-Q 1 towr-20180930x10q.htm FORM 10-Q 20180930 10Q Q3

 

 



 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 



 

 



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended September 30, 2018

OR



 

 



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from ____________________ to_____________________

 

Commission file number 001-34903

 

TOWER INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

 



 

Delaware

27-3679414

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

17672 Laurel Park Drive North Suite 400 E

48152

Livonia, Michigan

(Zip Code)

(Address of principal executive offices)

 

 

(248) 675-6000

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

 

Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit such files).

 

Yes No

 

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



 

 

 

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer  

Smaller Reporting Company 

Emerging growth company 

 

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



 

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12(b)-2 of the Securities and Exchange Act).

 

Yes No

As of October 22, 2018, there were 20,606,736 shares of the registrant’s common stock, $0.01 par value per share, outstanding.



 



 

 


 



Tower International, Inc. and Subsidiaries

Form 10-Q

 

Table of Contents

 



 

 

 

 

 

 

Page

 

 

 

 

PART I.  Financial Information

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited):

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017

1

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017

2

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017

3

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

4

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

 

Item 4.

 

Controls and Procedures

38

 

 

 

 

PART II.  Other Information

 

 

 

 

 

Item 1A.

 

Risk Factors

39

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

 

Item 6.

 

Exhibits

40

 

 

 

 

Signatures

 

 

41



 

 

 


 

PART 1 — FINANCIAL INFORMATION

ITEM 1. Financial Statements.

TOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data - unaudited)

 









 

 

 

 

 

 



 

September 30,

 

December 31,



 

2018

 

2017



 

 

 

 

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,744 

 

$

123,688 

Accounts receivable, net of allowance of $1,387 and $1,385

 

 

280,973 

 

 

239,319 

Inventories (Note 4)

 

 

93,655 

 

 

78,745 

Assets held for sale (Note 5)

 

 

28,686 

 

 

44,250 

Prepaid tooling, notes receivable, and other

 

 

48,212 

 

 

78,481 

 Total current assets

 

 

499,270 

 

 

564,483 



 

 

 

 

 

 

Property, plant, and equipment, net

 

 

547,127 

 

 

535,272 

Goodwill (Note 7)

 

 

62,164 

 

 

63,665 

Deferred tax asset

 

 

74,410 

 

 

83,035 

Other assets, net

 

 

27,809 

 

 

13,642 

 Total assets

 

$

1,210,780 

 

$

1,260,097 



 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Short-term debt and current maturities of capital lease obligations (Note 9)

 

$

23,136 

 

$

42,048 

Accounts payable

 

 

303,016 

 

 

323,271 

Accrued liabilities

 

 

121,532 

 

 

113,949 

Liabilities held for sale (Note 5)

 

 

12,667 

 

 

17,336 

 Total current liabilities

 

 

460,351 

 

 

496,604 



 

 

 

 

 

 

Long-term debt, net of current maturities (Note 9)

 

 

294,300 

 

 

344,738 

Deferred tax liability

 

 

4,629 

 

 

4,807 

Pension liability (Note 12)

 

 

39,749 

 

 

47,813 

Other non-current liabilities

 

 

93,843 

 

 

96,263 

 Total non-current liabilities

 

 

432,521 

 

 

493,621 

 Total liabilities

 

 

892,872 

 

 

990,225 



 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Preferred stock, $0.01 par value, 50,000,000 authorized and 0 issued and outstanding

 

$

 -

 

$

 -

Common stock, $0.01 par value, 350,000,000 authorized, 22,400,074 issued and 20,606,736

 

 

 

 

 

 

 outstanding at September 30, 2018, and 22,317,671 issued and 20,542,397 outstanding at

 

 

 

 

 

 

 December 31, 2017

 

 

224 

 

 

223 

 Additional paid in capital

 

 

346,915 

 

 

344,153 

 Treasury stock, at cost, 1,793,338 and 1,775,274 shares as of September 30, 2018

 

 

 

 

 

 

 December 31, 2017

 

 

(36,882)

 

 

(36,408)

Retained earnings

 

 

80,711 

 

 

29,712 

Accumulated other comprehensive loss (Note 13)

 

 

(73,060)

 

 

(67,808)

Total Tower International, Inc.'s stockholders' equity

 

 

317,908 

 

 

269,872 



 

 

 

 

 

 

 Total liabilities and stockholders' equity

 

$

1,210,780 

 

$

1,260,097 



 

 

 

 

 

 



 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

1

 


 



 

 

TOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share amounts - unaudited)

 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

Revenues (Note 3)

 

$

524,566 

 

$

462,372 

 

$

1,644,079 

 

$

1,449,887 

Cost of sales

 

 

462,941 

 

 

404,332 

 

 

1,458,549 

 

 

1,274,429 

Gross profit

 

 

61,625 

 

 

58,040 

 

 

185,530 

 

 

175,458 

Selling, general, and administrative expenses

 

 

29,954 

 

 

29,667 

 

 

93,057 

 

 

87,899 

Amortization expense (Note 7)

 

 

110 

 

 

117 

 

 

330 

 

 

333 

Restructuring and asset impairment charges, net (Note 8)

 

 

491 

 

 

1,131 

 

 

2,308 

 

 

8,379 

Operating income

 

 

31,070 

 

 

27,125 

 

 

89,835 

 

 

78,847 

Interest expense

 

 

6,048 

 

 

5,673 

 

 

16,465 

 

 

7,933 

Interest income

 

 

93 

 

 

64 

 

 

362 

 

 

197 

Net periodic benefit income (Note 12)

 

 

558 

 

 

713 

 

 

1,675 

 

 

1,671 

Other expense

 

 

 -

 

 

 -

 

 

977 

 

 

575 

Income before provision for income taxes and income from discontinued operations

 

 

25,673 

 

 

22,229 

 

 

74,430 

 

 

72,207 

Provision for income taxes (Note 11)

 

 

3,996 

 

 

8,002 

 

 

14,602 

 

 

22,170 

Income from continuing operations

 

 

21,677 

 

 

14,227 

 

 

59,828 

 

 

50,037 

Income from discontinued operations, net of tax (Note 5)

 

 

903 

 

 

704 

 

 

2,428 

 

 

1,565 

Net income

 

 

22,580 

 

 

14,931 

 

 

62,256 

 

 

51,602 

Less: Net income attributable to the noncontrolling interests

 

 

 -

 

 

 -

 

 

 -

 

 

110 

Net income attributable to Tower International, Inc.

 

$

22,580 

 

$

14,931 

 

$

62,256 

 

$

51,492 



 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic shares outstanding

 

 

20,605,168 

 

 

20,522,001 

 

 

20,586,599 

 

 

20,485,722 

Weighted average diluted shares outstanding

 

 

21,035,802 

 

 

20,787,405 

 

 

20,991,606 

 

 

20,804,441 



 

 

 

 

 

 

 

 

 

 

 

 

Basic income per share attributable to Tower International, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

Income per share from continuing operations (Note 14)

 

$

1.05 

 

$

0.69 

 

$

2.91 

 

$

2.44 

Income per share from discontinued operations (Note 14)

 

 

0.04 

 

 

0.03 

 

 

0.12 

 

 

0.08 

Income per share (Note 14)

 

 

1.10 

 

 

0.73 

 

 

3.02 

 

 

2.51 



 

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share attributable to Tower International, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

Income per share from continuing operations (Note 14)

 

$

1.03 

 

$

0.68 

 

$

2.85 

 

$

2.40 

Income per share from discontinued operations (Note 14)

 

 

0.04 

 

 

0.03 

 

 

0.12 

 

 

0.08 

Income per share (Note 14)

 

 

1.07 

 

 

0.72 

 

 

2.97 

 

 

2.48 



 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.12 

 

$

0.11 

 

$

0.36 

 

$

0.33 



 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 



2

 


 

 

 

TOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands - unaudited)

 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

Net income

 

$

22,580 

 

$

14,931 

 

$

62,256 

 

$

51,602 

Other comprehensive income / (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax expense / (benefit) of $0.1 million, ($2.6 million), $1.5 million, and ($8.5 million)

 

 

(2,212)

 

 

6,578 

 

 

(12,349)

 

 

19,867 

Unrealized gain / (loss) on qualifying cash flow hedge, net of tax expense / (benefit) of $0.5 million, ($0.8 million), $2.4 million, and ($3.6 million)

 

 

1,374 

 

 

(1,283)

 

 

7,097 

 

 

(5,896)

Other comprehensive income / (loss), net of tax

 

 

(838)

 

 

5,295 

 

 

(5,252)

 

 

13,971 

  Comprehensive income

 

 

21,742 

 

 

20,226 

 

 

57,004 

 

 

65,573 

  Less: Comprehensive income attributable to noncontrolling interests

 

 

 -

 

 

 -

 

 

 -

 

 

162 

Comprehensive income attributable to Tower International, Inc.

 

$

21,742 

 

$

20,226 

 

$

57,004 

 

$

65,411 



 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3

 


 

 

TOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands - unaudited)







 

 

 

 

 

 



 

Nine Months Ended September 30,



 

2018

 

2017



 

 

 

 

 

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

62,256 

 

$

51,602 

Less: Income from discontinued operations, net of tax

 

 

2,428 

 

 

1,565 

Income from continuing operations

 

 

59,828 

 

 

50,037 



 

 

 

 

 

 

Adjustments required to reconcile income from continuing operations to net

 

 

 

 

 

 

cash provided by continuing operating activities:

 

 

 

 

 

 

Deferred income tax provision

 

 

9,334 

 

 

15,367 

Depreciation and amortization

 

 

62,485 

 

 

54,853 

Non-cash share-based compensation

 

 

2,512 

 

 

1,657 

Pension income, net of contributions

 

 

(8,063)

 

 

(9,906)

Change in working capital and other operating items

 

 

(50,484)

 

 

(76,095)

Net cash provided by continuing operating activities

 

$

75,612 

 

$

35,913 



 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Cash disbursed for purchases of property, plant, and equipment, net

 

$

(93,765)

 

$

(76,687)

Proceeds from disposition of joint venture, net

 

 

4,314 

 

 

15,944 

Net proceeds from sale of property, plant, and equipment

 

 

14,883 

 

 

 -

Net cash used in investing activities

 

$

(74,568)

 

$

(60,743)



 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from borrowings

 

$

137,696 

 

$

535,926 

Repayments of borrowings

 

 

(156,423)

 

 

(522,029)

Voluntary repayments on Term Loan Credit Facility

 

 

(50,000)

 

 

 -

Debt financing costs

 

 

 -

 

 

(4,747)

Original issuance discount

 

 

 -

 

 

(1,808)

Dividend payment to Tower shareholders

 

 

(7,409)

 

 

(6,756)

Proceeds from stock options exercised

 

 

251 

 

 

1,094 

Purchase of treasury stock

 

 

(474)

 

 

(763)

Net cash provided by / (used in) continuing financing activities

 

$

(76,359)

 

$

917 



 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

Net cash from / (used in) discontinued operating activities

 

$

7,327 

 

$

(322)

Net cash used in discontinued investing activities

 

 

(2,771)

 

 

(1,251)

Net cash from / (used in) discontinued financing activities

 

 

(2,642)

 

 

1,137 

Net cash from / (used in) discontinued operations

 

$

1,914 

 

$

(436)



 

 

 

 

 

 

Effect of exchange rate changes on continuing cash and cash equivalents

 

$

(2,543)

 

$

5,158 



 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

$

(75,944)

 

$

(19,191)



 

 

 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

Beginning of period

 

$

123,688 

 

$

62,788 



 

 

 

 

 

 

End of period

 

$

47,744 

 

$

43,597 



 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

15,998 

 

$

16,842 

Income taxes paid

 

 

6,011 

 

 

5,265 

Non-cash Investing Activities:

 

 

 

 

 

 

Capital expenditures in liabilities for purchases of property, plant, and equipment

 

$

16,030 

 

$

13,877 



The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.



4

 


 



 

TOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1. Organization and Basis of Presentation

 

Tower International, Inc. and its subsidiaries (collectively referred to as the “Company” or “Tower International”), is a leading integrated global manufacturer of engineered automotive structural metal components and assemblies, primarily serving original equipment manufacturers (“OEMs”), including Ford, Volkswagen Group, Fiat-Chrysler, Volvo, Nissan, Daimler, Toyota, BMW, and Honda. Products include body structures, assemblies and other chassis structures, and lower vehicle systems and suspension components for small and large cars, crossovers, pickups, and sport utility vehicles (“SUVs”).  The Company has strategically located production facilities in the United States, Germany, Belgium, Slovakia, Italy, Poland, Mexico, and the Czech Republic, supported by engineering and sales locations in the United States, Germany, Italy, Japan, China and India.

 

The accompanying Condensed Consolidated Financial Statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The information furnished in the Condensed Consolidated Financial Statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of such financial statements. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the SEC. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these Condensed Consolidated Financial Statements should be read in conjunction with the audited year-end financial statements and the notes thereto included in the most recent Annual Report on Form 10-K filed by the Company with the SEC. The interim results for the periods presented may not be indicative of the Company’s actual annual results.

 

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of the Company and all subsidiaries over which the Company exercises control. All intercompany transactions and balances have been eliminated upon consolidation.

 

Note 2. New Accounting Pronouncements



Recently Adopted



Revenue Recognition 

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU outlines a single comprehensive model for entities to utilize to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that will be received in exchange for the goods and services. Additional disclosures are also required to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In 2016, the FASB issued ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12, and ASU No. 2016-20, all of which amend the implementation guidance and illustrations in the new revenue standard.

The Company implemented the new standard effective January 1, 2018 using the modified retrospective approach. Implementation of the standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements as the Company’s method for recognizing revenue subsequent to the implementation of Accounting Standard Codification (“ASC”) No. 606 does not vary significantly from its revenue recognition practices under the prior revenue standard. The Company has included the additional disclosures required by the ASUs above (See Note 3 of the Condensed Consolidated Financial Statements).



Retirement Benefits

On March 10, 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU is designed to increase the transparency and usefulness of information about defined benefit costs for pension plans and other post-retirement benefit plans presented in employer financial statements. Effective October 1, 2006, the Company’s pension plan was frozen and the Company ceased accruing any additional benefits. The Company adopted the new standard effective January 1, 2018 and applied the guidance retrospectively, as required. As a result of adoption, the Company’s net periodic pension cost and net periodic postretirement benefit cost are reported within net periodic benefit income on the Condensed Consolidated Statement of Operations. The Company has included the disclosures required by ASU No. 2017-07.



5

 


 

Hedge Accounting

On August 28, 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. This ASU is designed to better align hedge accounting with an organization’s risk management activities in the financial statements. In addition, this ASU simplifies the application of hedge accounting guidance in areas where practice issues exist. The Company early adopted this ASU as of January 1, 2018. Upon adoption, the Company recorded a cumulative effect adjustment of $5.1 million and corresponding tax effect adjustment of $1.3 million to Accumulated Other Comprehensive Income (“AOCI”) from accumulated earnings. This adjustment is intended to ensure that the resulting AOCI balance represents the cumulative change in the hedging instruments’ fair value since hedge inception, less any amounts that should have been recognized in earnings under this ASU. Going forward, the earnings effect of the hedged items will be recorded in the same line item in the Condensed Consolidated Statements of Operations in which the earnings effect of the hedged item is reported when the hedged item affects earnings.



Pending Adoption



Leases

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases. This ASU introduces a lessee model that brings most leases on the balance sheet. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize an ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as financing or operating, with balance sheet classification affecting the pattern and classification of expense recognition in the income statement. 

  

This ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company expects to adopt the new standard on its effective date. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the Condensed Consolidated Financial Statements, with certain practical expedients available.

  

The Company expects that this standard will have a material effect on its Condensed Consolidated Financial Statements. The Company is currently evaluating significant contracts and assessing the potential impacts. Based on the assessments performed thus far, the Company believes that it has certain manufacturing equipment leases currently classified as operating leases that will be classified as finance leases under the new standard. As of September 30, 2018 and December 31, 2017, the Company estimates that the ROU asset and liability associated with these leases would be approximately $143 million and $72 million, respectively. This estimate is based upon the present value of the remaining minimum lease payments for equipment that is subject to lease agreements as of September 30, 2018 and December 31, 2017.

  

In addition, the Company has numerous real estate and equipment leases currently classified as operating leases that the Company believes will continue to be classified as operating leases under the new standard. The Company expects that the ROU assets and liabilities associated with these leases will be material, but has not yet quantified the total balance sheet impact for these leases.



Goodwill Impairment

On January 26, 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test, and is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. Early adoption of the ASU is allowed for all entities beginning with any goodwill impairment test occurring and performed after January 1, 2017. The Company does not expect a material financial statement impact related to the adoption of this ASU.



Stock Compensation 

On June 20, 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. This ASU simplifies the accounting for share based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. This ASU is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company does not expect a material financial statement impact related to the adoption of this ASU.



Fair Value Measurement

On August 28, 2018, the FASB issued ASU No. 2018-13,  Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements. This ASU is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. The Company does not expect a material financial statement impact related to the adoption of this ASU.



Retirement Benefits

On August 28, 2018, the FASB issued ASU No. 2018-14,  Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU modifies the disclosure requirements related to defined benefit pension or other postretirement benefit plans. This ASU is effective for annual and interim

6

 


 

periods beginning after December 15, 2020 and early adoption is permitted. The Company does not expect a material financial statement impact related to the adoption of this ASU.



Note 3. Revenue



On January 1, 2018, the Company adopted FASB ASC No. 606, Revenue from Contracts with Customers, using the modified retrospective method as applied to customer contracts that were not completed as of January 1, 2018. As a result, financial information for reporting periods beginning on or after January 1, 2018 are presented in accordance with FASB ASC No. 606, while comparative financial information has not been adjusted and continues to be reported in accordance with the Company’s revenue recognition policies prior to the adoption of FASB ASC No. 606.



The Company enters into contracts with its customers that create enforceable rights and obligations. Each such contract requires the Company to supply products for specific vehicle programs. The Company has determined that each unit produced represents a separate performance obligation. The Company satisfies its performance obligations and recognizes revenue at a point in time when the customer has obtained control of the unit. Determining when control transfers requires management to make judgments that affect the timing of revenue recognized. The Company has determined that control has transferred when its products are shipped to its customers because the Company has a present right to payment at that time, legal title and risk of loss have passed to the customer and the customer is able to direct the use of, and obtain substantially all of the benefits from, the products. Invoices are generated upon shipment to the customer and are based on contractually agreed upon unit prices. The Company has payment terms with its customers that generally require payment within 30 to 60 days of invoice date. FASB ASC No. 606 provides a practical expedient that allows companies to exclude from the transaction price any amounts collected from customers for all sales (and other similar) taxes. We do not include sales and other taxes in our transaction price and thus do not recognize these amounts as revenue. Shipping and handling costs are accounted for as fulfillment costs and are included in cost of sales.



It is common for the Company to negotiate pricing with its customers on an annual basis which can result in price adjustments over the program lives or other variable consideration adjustments. Based on extensive historical experience, the Company has concluded its estimate of variable consideration is not constrained. Therefore the Company accrues for these items using the most likely amount method in accordance with FASB ASC No. 606-10-32 and records adjustments to revenue throughout the year as negotiations progress and are finalized. In certain cases, the Company provides lump sum payments to its customers that are directly related to awarded programs. These payments are expected to be recovered over the life of the associated program; therefore, the Company capitalizes these payments and amortizes them into revenue over the life of the associated program. 



The Company participates in certain of its customers’ steel repurchase programs, under which it purchases steel directly from a customer’s designated steel supplier, for use in manufacturing products for that customer. The Company takes delivery and title to such steel and bears the risk of loss and obsolescence. The Company invoices its customers based upon annually negotiated selling prices, which inherently include a component for steel under such repurchase programs. Under guidance provided in FASB ASC No. 606-10-55, Principal versus Agent Considerations, the Company has risks and rewards of a principal and therefore, for sales transactions in which the Company participates in a customer’s steel resale program, revenue is recognized on a gross basis for the entire amount of the sales, including the component for purchases under that customer’s steel resale program. The purchases through customer resale programs have buffered the impact of price swings associated with the procurement of these metals. The remainder of the Company’s steel and aluminum purchasing requirements are met through contracts with mills, in which the Company negotiates its own price and seeks to pass through price increases and decreases to the Company’s customers. 



The Company enters into agreements to produce products for its customers at the beginning of a given vehicle program’s life. Once such agreements are entered into by the Company, it is obligated to fulfill the customers’ purchasing requirements for the entire production period of the vehicle programs, which range from three to ten years, and generally, the Company has no provisions to terminate such contracts. These contracts may be terminated by the Company’s customers at any time. Historically, terminations of these contracts have been minimal.  



Additionally, the Company monitors the aging of uncollected billings and adjusts its accounts receivable allowance on a quarterly basis, as necessary, based upon its evaluation of the probability of collection. The adjustments made by the Company due to the write-off of uncollectible amounts have been immaterial for all periods presented. At September 30, 2018 and December 31, 2017 the Company’s accounts receivable, net of allowances, were $281 million and $239.3 million, respectively. The Company did not have any material unbilled or deferred revenue recorded on the Condensed Consolidated Balance Sheet as of September 30, 2018, or December 31, 2017.



For the three and nine months ended September 30, 2018, revenue recognized from performance obligations related to prior periods (for example, due to changes in transaction price) was not material.



Revenue expected to be recognized in any future period related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less or contracts where revenue is recognized as invoiced, is not material.



7

 


 



See Note 16 for disaggregation of revenue by reportable segment. The following table summarizes the Company’s vehicle platform mix as a percent of revenues by segment for the three months ended September 30, 2018:







 

 

 

 

 

 



 

North America

 

Europe

 

Consolidated

SUV (sport-utility vehicles)

 

54% 

 

27% 

 

46% 

Pickup

 

28% 

 

0% 

 

21% 

Small Car

 

2% 

 

36% 

 

11% 

Van

 

4% 

 

22% 

 

9% 

Large Car

 

7% 

 

9% 

 

7% 

MPV (multi-purpose vehicles)

 

1% 

 

1% 

 

1% 

All Other

 

4% 

 

5% 

 

5% 



 

100% 

 

100% 

 

100% 



The following table summarizes the Company’s vehicle platform mix as a percent of revenues by segment for the nine months ended September 30, 2018:







 

 

 

 

 

 



 

North America

 

Europe

 

Consolidated

SUV (sport-utility vehicles)

 

54% 

 

25% 

 

45% 

Pickup

 

28% 

 

0% 

 

20% 

Small Car

 

3% 

 

37% 

 

13% 

Van

 

4% 

 

22% 

 

9% 

Large Car

 

7% 

 

8% 

 

7% 

MPV (multi-purpose vehicles)

 

1% 

 

1% 

 

2% 

All Other

 

3% 

 

7% 

 

4% 



 

100% 

 

100% 

 

100% 





Note 4. Inventories

 

Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method. Maintenance, repair, and non-productive inventory, which are considered consumables, are expensed when acquired and included in the Condensed Consolidated Statements of Operations as cost of sales. Inventories consist of the following (in thousands):

 





 

 

 

 

 

 



 

September 30, 2018

 

December 31, 2017

Raw materials

 

$

45,438 

 

$

33,929 

Work in process

 

 

18,116 

 

 

16,112 

Finished goods

 

 

30,101 

 

 

28,704 

  Total inventory

 

$

93,655 

 

$

78,745 







 

Note 5. Discontinued Operations and Assets Held for Sale

 

The Company’s Board of Directors has approved a plan to sell the Company’s remaining business operations in Brazil and China. At September 30, 2018,  the Chinese business operations have been sold and the Brazilian business operation is considered held for sale in accordance with FASB ASC No. 360, Property, Plant, and Equipment, and presented as discontinued operations in the Condensed Consolidated Financial Statements, in accordance with FASB ASC No. 205, Discontinued Operations. At December 31, 2017, both of the Brazilian and Chinese business operations were held for sale and presented as discontinued operations.

 

8

 


 

The following table discloses select financial information of the discontinued operations of the Company’s Brazilian and Chinese business operations (in thousands):

 





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2018

 

2017

 

2018

 

2017

Revenues

 

$

13,047 

 

$

14,597 

 

$

42,158 

 

$

63,373 

Loss from sale of Wuhu discontinued operation

 

 

 -

 

 

 -

 

 

 -

 

 

(2,596)

Income from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

1,242 

 

 

1,199 

 

 

3,127 

 

 

4,867 

Provision for income taxes

 

 

339 

 

 

495 

 

 

699 

 

 

706 

Income from discontinued operations

 

$

903 

 

$

704 

 

$

2,428 

 

$

1,565 



 

 

 

 

 

 

 

 

 

 

 

 

 

China Joint Ventures

In October of 2016, the Company entered into an agreement to sell its joint venture in Wuhu, China: Tower Automotive Company, Ltd (“Wuhu”). The sale agreement provided for the purchase of the Company’s equity in the joint venture for approximately $21 million, net of tax. The Company received proceeds of $4.5 million in the fourth quarter of 2016. On May 9, 2017, the Company completed the sale of its equity interest in Wuhu. During the second quarter of 2017, the Company received total net proceeds of $15.9 million related to the sale, which resulted in a total sales price that was less than the carrying value of the net assets of Wuhu. In addition, the Company incurred certain transaction related costs; therefore, a net loss of $2.6 million was recorded in the second quarter of 2017.

Also, in October of 2016, the Company entered into an agreement to sell its joint venture in Ningbo, China: Tower DIT Automotive Products Co., Ltd (“Ningbo”). The sale agreement provided for purchase of the Company’s equity in the joint venture for approximately $4 million, net of tax. The Company completed the sale of Ningbo during the second quarter of 2018 and received proceeds of $4.3 million, net of tax.

Wuhu and Ningbo have been presented as discontinued operations in the Company’s Consolidated Financial Statements, in accordance with FASB ASC No. 205.



Brazil Operations

The Company’s Board of Directors has approved a plan to sell the Company’s remaining business operations in Brazil. At September 30, 2018, the remaining Brazilian business operations are considered held for sale in accordance with FASB ASC No. 360 and presented as discontinued operations in the Consolidated Financial Statements, in accordance with FASB ASC No. 205.



The assets and liabilities held for sale are recorded at the lower of carrying value or fair value less costs to sell and are summarized by category in the following table (in thousands):

 





 

 

 

 

 

 



 

September 30, 2018

 

December 31, 2017



 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets

 

$

18,785 

 

$

24,024 

Property, plant, and equipment, net

 

 

23,418 

 

 

29,239 

Other assets, net

 

 

1,483 

 

 

9,387 

Fair value adjustment

 

 

(15,000)

 

 

(18,400)

Total assets held for sale

 

$

28,686 

 

$

44,250 



 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Short-term debt and current maturities of capital lease obligations

 

$

598 

 

$

1,129 

Accounts payable

 

 

9,701 

 

 

11,877 

Total current liabilities

 

 

10,299 

 

 

13,006 



 

 

 

 

 

 

Long-term debt, net of current maturities

 

 

600 

 

 

1,223 

Other non-current liabilities

 

 

1,768 

 

 

3,107 

Total non-current liabilities

 

 

2,368 

 

 

4,330 

Total liabilities held for sale

 

$

12,667 

 

$

17,336 





9

 


 





Note 6. Tooling

 

Tooling represents costs incurred by the Company in the development of new tooling used in the manufacture of the Company’s products. All pre-production tooling costs incurred for tools that the Company will not own and that will be used in producing products supplied under long-term supply agreements are expensed as incurred, unless the supply agreement provides the Company with the noncancellable right to use the tools or the reimbursement of such costs is contractually guaranteed by the customer. Generally, the customer agrees to reimburse the Company for certain of its tooling costs at the time the customer awards a contract to the Company.

 

When the part for which tooling has been developed reaches a production-ready status, the Company is reimbursed by its customer for the cost of the tooling, at which time the tooling becomes the property of the customer. The Company has certain other tooling costs related to tools the Company has the contractual right to use during the life of the supply arrangement, which are capitalized and amortized over the life of the related product program. Customer-owned tooling is included in the Condensed Consolidated Balance Sheets in prepaid tooling, notes receivable, and other, while Company-owned and other tooling is included in other assets, net.



The components of capitalized tooling costs are as follows (in thousands):





 

 

 

 

 

 



 

September 30, 2018

 

December 31, 2017

Customer-owned tooling, net

 

$

33,454 

 

$

63,456 

Company-owned tooling

 

 

327 

 

 

277 

Total tooling, net

 

$

33,781 

 

$

63,733 





Note 7. Goodwill and Other Intangible Assets

 

Goodwill

The change in the carrying amount of goodwill is set forth below by reportable segment and on a consolidated basis (in thousands):

 





 

 

 

 

 

 

 

 

 



 

Europe

 

North America

 

Consolidated

Balance at December 31, 2017

 

$

56,241 

 

$

7,424 

 

$

63,665 

Currency translation adjustment

 

 

(1,865)

 

 

364 

 

 

(1,501)

Balance at September 30, 2018

 

$

54,376 

 

$

7,788 

 

$

62,164 

 

Intangibles

In the North America segment, an intangible asset of $3.6 million related to customer relationships was recorded in 2015, as part of the acquisition of a facility in Mexico. This intangible asset has a definite life and will be amortized on a straight-line basis over seven years, the estimated life of the related asset, which approximates the recognition of related revenues.

 

The Company incurred amortization expense of $0.1 million and $0.3 million for the three and nine months ended September 30, 2018, respectively. The Company incurred amortization expense of $0.1 million and $0.3 million for the three and nine months ended September 30, 2017, respectively.



Note 8. Restructuring and Asset Impairment Charges

 

As of September 30, 2018, the Company has executed various restructuring plans and may execute additional plans in the future to reduce corporate overhead, to realign manufacturing capacity to prevailing global automotive production levels, and to improve the utilization of remaining facilities. Estimates of restructuring charges are based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially recorded. Accordingly, the Company may record revisions of previous estimates by adjusting previously established reserves.

 

Restructuring and Asset Impairment Charges

Net restructuring and asset impairment charges for each of the Company’s segments include the following (in thousands):

 





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2018

 

2017

 

2018

 

2017

Europe

 

$

398 

 

$

199 

 

$

1,326 

 

$

943 

North America

 

 

93 

 

 

932 

 

 

982 

 

 

7,436 

Consolidated

 

$

491 

 

$

1,131 

 

$

2,308 

 

$

8,379 

10

 


 

   

The following table sets forth the Company’s net restructuring and asset impairment charges by type for the periods presented (in thousands):

 





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2018

 

2017

 

2018

 

2017

Employee termination costs

 

$

473 

 

$

690 

 

$

2,207 

 

$

7,557 

Other exit costs

 

 

18 

 

 

441 

 

 

101 

 

 

822 

Total restructuring expense

 

$

491 

 

$

1,131 

 

$

2,308 

 

$

8,379 

 

The charges incurred during the nine months ended September 30, 2018 and 2017 related primarily to the following actions:

 

2018 Actions

During the three and nine months ended September 30, 2018, the charges incurred in the North America and Europe segments related to severance charges and ongoing maintenance expense of facilities closed as a result of prior actions. During the second quarter of 2018, the Company amended the lease agreements related to closed facilities which resulted in a $0.3 million adjustment to the liability previously recorded. As a result of these amendments, the Company will no longer record material restructuring expense related to closed facilities.



2017 Actions

During the three and nine months ended September 30, 2017, the charges incurred in the North America and Europe segments related to severance charges to reduce corporate overhead and ongoing maintenance expense of facilities closed as a result of prior actions.



Restructuring Reserve

The table below summarizes the activity in the restructuring reserve by segment, reflected in accrued liabilities and other non-current liabilities, for the above-mentioned actions through September 30, 2018 (in thousands):

 





 

 

 

 

 

 

 

 

 



 

Europe

 

North America

 

Consolidated

Balance at December 31, 2017

 

$

977 

 

$

4,070 

 

$

5,047 

Payments

 

 

(1,806)

 

 

(4,179)

 

 

(5,985)

Increase in liability

 

 

1,326 

 

 

881 

 

 

2,207 

Balance at September 30, 2018

 

$

497 

 

$

772 

 

$

1,269 

 

Except as disclosed in the table above, the Company does not anticipate incurring additional material cash charges associated with the actions described above. The changes in the restructuring reserve set forth in the table above do not agree with the restructuring charges for the period, as certain items are expensed as incurred related to the actions described.

 

The restructuring reserve decreased during the nine months ended September 30, 2018, reflecting primarily payments related to prior accruals and 2018 restructuring actions, offset partially by accruals for severance.

 

During the nine months ended September 30, 2018, the Company incurred payments in Europe of $1.8 million and in North America of $4.2 million related to prior accruals and 2018 restructuring actions described above.



11

 


 



Note 9. Debt

 

Short-Term Debt

Short-term debt consists of the following (in thousands): 





 

 

 

 

 

 



 

September 30, 2018

 

December 31, 2017

Current maturities of debts (excluding capital leases)

 

$

23,136 

 

$

36,500 

Current maturities of capital leases

 

 

 -

 

 

5,548 

Total short-term debt

 

$

23,136 

 

$

42,048 



Long-Term Debt

Long-term debt consists of the following (in thousands):

 





 

 

 

 

 

 



 

September 30, 2018

 

December 31, 2017

Term Loan Credit Facility (net of discount of $1,731 and $2,288)

 

$

304,346 

 

$

356,501 

Amended Revolving Credit Facility

 

 

 -

 

 

 -

Other foreign subsidiary indebtedness

 

 

19,521 

 

 

32,885 

Debt issue costs

 

 

(6,431)

 

 

(8,148)

Total debt

 

 

317,436 

 

 

381,238 

Less: Current maturities of debts (excluding capital leases)

 

 

(23,136)

 

 

(36,500)

Total long-term debt

 

$

294,300 

 

$

344,738 

 

Term Loan Credit Facility



On March 7, 2017, the Company amended the Term Loan Credit Agreement by entering into the Third Refinancing Term Loan Amendment and Restatement Agreement (“Third Term Loan Amendment”), pursuant to which, among other things, the outstanding term loans under the Term Loan Credit Agreement were refinanced in full. There were no additional borrowings associated with this refinancing. The aggregate principal amount of $358.9 million was outstanding under the Term Loan Credit Agreement upon amendment. The maturity date of the Term Loan Credit Facility is March 7, 2024 and the Term Loans bear interest at (i) the Alternate Base Rate plus a margin of 1.75% or (ii) the Adjusted LIBO Rate (calculated by multiplying the applicable LIBOR rate by a statutory reserve rate) plus a margin of 2.75%.



The Term Loan Borrower’s obligations under the Term Loan Credit Facility are guaranteed by the Company on an unsecured basis and guaranteed by Term Loan Holdco and certain of the Company's other direct and indirect domestic subsidiaries on a secured basis (the “Subsidiary Guarantors”). The Term Loan Credit Facility is secured by (i) a first priority security interest in certain assets of the Term Loan Borrower and the Subsidiary Guarantors, other than, inter alia, accounts, chattel paper, inventory, cash deposit accounts, securities accounts, machinery, equipment and real property and all contract rights, and records and proceeds relating to the foregoing and (ii) on a second priority basis to all other assets of the Term Loan Borrower and the Subsidiary Guarantor which have been pledged on a first priority basis to the agent for the benefit of the lenders under the Amended Revolving Credit Facility described below.



The Term Loan Credit Agreement includes customary covenants applicable to certain of the Company’s subsidiaries and includes customary events of default and amounts due thereunder may be accelerated upon the occurrence of an event of default.



On July 27, 2018, the Company made a $50 million voluntary repayment on its Term Loan Credit Facility. In connection with this prepayment, the Company accelerated the amortization of the original issue discount and the associated debt issue costs by $1 million.



As of September 30, 2018, the outstanding principal balance of the Term Loan Credit Facility was $304.3 million (net of a $1.7 million original issue discount) and the effective interest rate was 4.875% per annum.

 

Amended Revolving Credit Facility



On March 7, 2017, the Company entered into a Fourth Amended and Restated Revolving Credit and Guaranty Agreement (“Fourth Amended Revolving Credit Facility Agreement”), by and among Tower Automotive Holdings USA, LLC, the Company, Tower Automotive Holdings I, LLC, Tower Automotive Holdings II(a), LLC, the subsidiary guarantors named therein, the financial institutions from time to time party thereto as Lenders, and JPMorgan Chase Bank, N.A. as Issuing Lender, as Swing Line Lender, and as Administrative Agent for the Lenders. The Fourth Amended Revolving Credit Facility Agreement amended and restated, in its entirety, the Third Amended Revolving Credit Facility Agreement, dated as of September 17, 2014, by and among Tower Automotive Holdings USA, LLC (“the Borrower”), its domestic affiliate and domestic subsidiary guarantors named therein, and the lenders party thereto, and the Agent.

 

12

 


 

The Fourth Amended Revolving Credit Facility Agreement provides for a cash flow revolving credit facility in the aggregate amount of up to $200 million. The Fourth Amended Revolving Credit Facility Agreement also provides for the issuance of letters of credit in an aggregate amount not to exceed $30 million, provided that the total amount of credit (inclusive of revolving loans and letters of credit) extended under the Fourth Amended Revolving Credit Facility Agreement is subject to an overall cap, on any date, of $200 million. The Company may request the issuance of Letters of Credit denominated in Dollars or Euros. The expiration date for the Amended Revolving Credit Facility is March 7, 2022.

 

Advances under the Amended Revolving Credit Facility bear interest at an alternate base rate plus a base rate margin or LIBOR plus a Eurodollar margin. The applicable margins are determined by the Company’s Total Net Leverage Ratio (as defined in the Fourth Amended Revolving Credit Facility Agreement). As of September 30, 2018, the applicable margins were 2.25% per annum for LIBOR based borrowings and 1.25% per annum for base rate borrowings. The Company will pay a commitment fee at a rate equal to 0.50% per annum on the average daily unused total revolving credit commitment.

 

The Amended Revolving Credit Facility is guaranteed by the Company on an unsecured basis and is guaranteed by certain of the Company’s other direct and indirect domestic subsidiaries on a secured basis. The Amended Revolving Credit Facility is secured (i) by a first priority security interest in certain assets of the Borrower and the Subsidiary Guarantors, including accounts, inventory, chattel paper, cash, deposit accounts, securities accounts, machinery, equipment and real property and all contract rights, and records and proceeds relating to the foregoing and (ii) on a second priority basis to all other assets of the Borrower and the Subsidiary Guarantors. The Borrower’s and each Subsidiary Guarantor’s pledge of such assets as security for the obligations under the Amended Revolving Credit Facility is evidenced by a Revolving Credit Security Agreement dated as of March 17, 2017, among the Borrower, the guarantors party thereto, and the Agent.



The Fourth Amended Revolving Credit Facility Agreement contains customary covenants applicable to certain of the Company’s subsidiaries and includes customary events of default and amounts due there under may be accelerated upon the occurrence of an event of default.

 

As of September 30, 2018, there was $191.8 million of unutilized borrowing availability under the Amended Revolving Credit Facility. At that date, there were no borrowings and $8.2 million of letters of credit outstanding under the Amended Revolving Credit Facility.



Other Foreign Subsidiary Indebtedness



As of September 30, 2018, other foreign subsidiary indebtedness of $19.5 million consisted of receivables factoring in Europe.



The change in foreign subsidiary indebtedness from December 31, 2017 to September 30, 2018 is explained by the following (in thousands):







 

 

 



 

 

 



 

Europe

Balance at December 31, 2017

 

$

32,885 

Change in borrowings on credit facilities, net

 

 

(12,274)

Foreign exchange impact

 

 

(1,090)

Balance at September 30, 2018

 

$

19,521 



Generally, borrowings of foreign subsidiaries are made under credit agreements with commercial lenders and are used to fund working capital and other operating requirements.



As of September 30, 2018, the receivables factoring facilities balance available to the Company was $19.5 million (€16.8 million), of which the entire amount was drawn. These are uncommitted, demand facilities which are subject to termination at the discretion of the banks and bear interest rates based on the average three month EURIBOR plus a spread ranging from 2.50% to 3.00%. The effective annual interest rates as of September 30, 2018 ranged from 2.18% to 2.68%, with a weighted average interest rate of 2.52% per annum. Any receivables factoring under these facilities is with recourse and is secured by the accounts receivable factored. These receivables factoring transactions are recorded in the Company’s Condensed Consolidated Balance Sheets in short-term debt and current maturities of capital lease obligations.



As of September 30, 2018,  the secured line of credit balance available to the Company was $10.2 million (€8.8 million), of which no borrowings were outstanding. The facility bears an interest rate based on the EURIBOR plus a spread of 1.15% and matures in October 2018. The Company expects to renew the facility under similar terms. The facilities are secured by certain accounts receivable related to customer-owned tooling, real estate, and other assets, and are subject to negotiated prepayments upon the receipt of funds from completed customer projects. 

 

As of September 30, 2018, the Company’s European subsidiaries had an asset-based revolving credit facility balance available to the Company of $40.6 million (€35 million), of which no borrowings were outstanding. Advances under this facility bear interest at the three month EURIBOR plus a margin or at EONIA plus a margin. The applicable margin is determined by the Company's total net leverage ratio as defined in the debt agreement. The applicable margin as of September 30, 2018 was 1.95%. The Company is required to pay a commitment fee at a rate equal to 0.6825% per annum on the average daily unused total revolving credit commitment. This facility has a maturity date of November 2022. Availability on the credit facility is determined based upon the appraised value of certain machinery, equipment, and real estate, subject to a borrowing base availability limitation and customary covenants.

 

13

 


 

Covenants

As of September 30, 2018, the Company was in compliance with the financial covenants that govern its credit agreements.



Capital Leases

The Company had capital lease obligations of $0 and $5.5 million as of September 30, 2018 and December 31, 2017, respectively. These obligations are presented within short-term debt and current maturities of capital lease obligations in the Condensed Consolidated Balance Sheets.

 

The Company’s capital lease obligation as of December 31, 2017 related to a manufacturing facility in Europe. The original term of the capital lease ended on March 31, 2018 and the Company completed the purchase of the facility utilizing the end of the lease term purchase option during the second quarter of 2018.



Debt Issue Costs

The Company had debt issuance costs, net of amortization, of $6.4 million and $8.2 million as of September 30, 2018 and December 31, 2017, respectively. These amounts are reflected in the Condensed Consolidated Balance Sheets as a direct deduction from long-term debt, net of current maturities.

 

The Company incurred interest expense related to the amortization of debt issue costs of $1 million and $1.8 million during the three and nine months ended September 30, 2018, respectively. The Company incurred interest expense related to the amortization of debt issue costs of $0.5 million and $1.8 million during the three and nine months ended September 30, 2017, respectively.



Note 10. Derivative Financial Instruments

 

The Company’s derivative financial instruments include interest rate and cross currency swaps. The Company does not enter into derivative financial instruments for trading or speculative purposes. On an on-going basis, the Company monitors counterparty credit ratings. The Company considers credit non-performance risk to be low because the Company enters into agreements with commercial institutions that have at least an S&P, or equivalent, investment grade credit rating. On October 17, 2014, the Company entered into a $200 million variable rate to fixed rate interest rate swap for a portion of the Company’s Term Loan and a €157.1 million cross currency swap based on the U.S. dollar / Euro exchange spot rate of $1.2733 which was the prevailing rate at the time of the transaction. The maturity date for both swap instruments was April 16, 2020. During the year ended December 31, 2015, the Company reduced the notional amount of the interest rate swap from $200 million to $186.1 million and increased the notional amount on the cross currency swap from €157.1 million to €178 million.

 

On March 7, 2017, the Company amended the variable rate to fixed rate interest rate swap, for a portion of the Company’s Term Loan. The U.S. dollar notional amount remained the same at $186.1 million, the fixed interest rate was changed from 5.09% to 5.628% per annum, and the maturity date was extended from April 16, 2020 to March 7, 2024.



Also on March 7, 2017, the Company amended the cross currency swap which hedges its net investment in Europe, based on the U.S. dollar / Euro exchange spot rate of $1.04795. The Euro notional amount remained the same at €178 million, the interest rate was lowered from 3.40% to 2.85%, and the maturity date was extended from April 16, 2020 to March 7, 2024.



Both swaps were amended and restated in conjunction with the March 7, 2017 amendment to the Company’s Term Loan Credit Agreement.



On August 31, 2017, the Company amended certain of its variable rate to fixed rate interest rate swaps, for a portion of the Company’s Term Loan. The U.S. dollar notional amount remained the same at $186.1 million, the fixed interest rate was changed from 5.628% to 5.878% per annum for certain swaps, and the maturity date remained at March 7, 2024. The fair value of the swap will fluctuate with changes in interest rates. This amendment was considered a termination event per FASB ASC No. 815, Derivatives and Hedging; therefore, the balance within AOCI will be frozen and recognized in results of operations over the remaining term of the hedged transaction. As of September 30, 2018, $6.2 million was recorded in AOCI, and $0.3 million and $0.8 million were recognized in interest expense during the three and nine months ended September 30, 2018, respectively.



At September 30, 2018 and December 31, 2017, the U.S. dollar / Euro exchange spot rate was $1.1612 and $1.2009, respectively. The following amounts were recorded in the Condensed Consolidated Balance Sheets as being payable to counterparties under FASB ASC No. 815 (in thousands):

 





 

 

 

 

 

 

 

 



 

Location

 

September 30, 2018

 

December 31, 2017

Cross currency swap

 

Other non-current liabilities

 

$

25,054 

 

$

27,001 

Interest rate swap

 

Other non-current liabilities

 

 

1,284 

 

 

8,918 



14

 


 

All derivative instruments are recorded at fair value. Effectiveness for net investment and cash flow hedges is initially assessed at the inception of the hedging relationship and on a quarterly basis thereafter. The change in fair value of the hedging instruments are recorded in other comprehensive income. The earnings effect of the hedged items is recorded in the Condensed Consolidated Statements of Operations as interest expense when the hedged item affects earnings. The cross currency swap qualifies as a net investment hedge of the Company’s European subsidiaries. The interest rate swap qualifies as a cash flow hedge of the interest payments related to the Company’s Term Loan. Prior to March 7, 2017, the Company had not accounted for the interest rate swap as a cash flow hedge, and all changes in fair value were recognized in the Condensed Consolidated Statements of Operations as interest expense, net.

 

The following table presents the deferred gain / (loss) reported in AOCI at September 30, 2018 and December 31, 2017 (in thousands):

 





 

 

 

 

 

 



 

Deferred gain in AOCI



 

September 30, 2018

 

December 31, 2017

Cross currency swap

 

$

15,948 

 

$

9,849 

Interest rate swap

 

 

1,922 

 

 

(7,537)

Total

 

$

17,870 

 

$

2,312 



The following table presents the total amounts reported in interest expense (income) in the Condensed Consolidated Statement of Operations and the effects of hedging on those line items:







 

 

 

 

 

 

 

 

 

 



 

 

 

 

Three Months Ended

 

Nine Months Ended



 

 

 

September 30, 2018

 

September 30, 2018

 

Interest expense