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”). Including both wholly owned subsidiaries and majority owned subsidiaries, 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 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
Retirement Benefits
On March 10, 2017, the FASB issued
Accounting Standard Update (“ASU”) No. 2017-07
, Improving the Presentation of Net Periodic Pens
ion 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.
This ASU is effective
for
interim and annual periods after December 15, 2017. Early adoption is allowed, and requires that the guidance be applied retrospectively to all prior periods.
Effective October 1, 2006, the
Company’s pension p
lan was frozen and the Company ceased accruing any additional benefits; as such, the Company does not expect a material financial statement impact related to the adoption of this ASU.
Stock Compensation
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which simplifies several aspects of the accounting for employee share-based payment transactions. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods therein. Upon adoption in the first quarter of 2017, the Company recorded a cumulative adjustment for previously unrecognized tax benefits to retained earnings of approximately $5.3 million.
Revenue Recognition
On May 28, 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
. 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 will also be required to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date of this standards update to fiscal years beginning after December 15, 2017, with early adoption permitted on the original effective date of fiscal years beginning after December 15, 2016. In 2016, the FASB issued ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-11, and ASU 2016-12, all of which amend the implementation guidance and illustrations in the Board’s new revenue standard.
The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company currently expects to adopt the new revenue standards in its first quarter of 2018 utilizing the full retrospective transition method. The Company does not expect the adoption of the new revenue standards to have a material impact on its consolidated financial statements, but we are still evaluating certain contracts with customers related to the development of tooling used in the manufacture of our products.
Leases
In February 2016, the FASB issued ASU No. 2016-02
, Lease Accounting
. This ASU introduces a lessee model that brings most leases on the balance sheet. Further, the standard also aligns certain of the underlying principles of the new lessor model with those in ASU 2014-09. This new ASU on leases is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating significant contracts and assessing any impact to the Consolidated Financial Statements.
Note 3. 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):
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Raw materials
|
|
$
|
34,598
|
|
$
|
31,993
|
Work in process
|
|
|
17,769
|
|
|
14,721
|
Finished goods
|
|
|
23,125
|
|
|
24,996
|
Total inventory
|
|
$
|
75,492
|
|
$
|
71,710
|
Note 4. Discontinued Operations and Assets Held for Sale
During the second quarter of 2016, the Company’s Board of Directors approved a plan to sell the Company’s remaining business operations in Brazil and China. At March 31, 2017
and December 31, 2016
, all of the Brazilian and Chinese business operations are 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
.
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 March 31,
|
|
|
|
2017
|
|
2016
|
|
Revenues
|
|
$
|
29,956
|
|
$
|
22,302
|
|
Income / (loss) from discontinued operations:
|
|
|
|
|
|
|
|
Income / (loss) before provision for income taxes and
|
|
|
|
|
|
|
|
equity in income / (loss) of joint venture
|
|
|
1,829
|
|
|
(158)
|
|
Provision for income taxes
|
|
|
479
|
|
|
187
|
|
Equity in income / (loss) of joint venture, net of tax
|
|
|
-
|
|
|
-
|
|
Income (loss) from discontinued operations
|
|
$
|
1,350
|
|
$
|
(345)
|
|
|
|
|
|
|
|
|
|
Sale of China Joint Ventures
In October of 2016, the Company ente
red into agreements
to sell its two remaining joint ventures in China: Tower Automotive (“Wuhu”) Company, Ltd. and Tower (“Ningbo”) DIT Automotive Products Co., Ltd. The sale agreements provided for purchase of the Company’s equity in the joint ventures for approximately
$25
million, net of tax. Both agreements are subject to Chinese government approval. The Company received proceeds of
$4.5
million from these sales in
the fourth quarter of 2016;
the remainder is expected to be received during 2017. No material gain or loss on sale is expected to be recorded
beyond
the impairment loss of
$3.1
million recorded in the period ended June 30, 2016 related to Ningbo.
Sale of Brazil Facility
On December 21, 2015, the Company sold one of its two operations in Brazil. Net cash proceeds from this sale were
$9.5
million. During the second quarter of 2016, the Company’s Board of Directors approved a plan to sell the Company’s remaining business operations in Brazil.
During t
he second quarter of 2016, the C
ompany recorded a fair value adjustment of
$15
million that represents the cumulative translation adjustment related to Brazil.
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):
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
$
|
56,519
|
|
$
|
59,137
|
Property, plant, and equipment, net
|
|
|
47,979
|
|
|
47,640
|
Other assets, net
|
|
|
13,784
|
|
|
13,575
|
Fair value adjustment
|
|
|
(18,100)
|
|
|
(18,100)
|
Total assets held for sale
|
|
$
|
100,182
|
|
$
|
102,252
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
Short-term debt and current maturities of capital lease obligations
|
|
$
|
3,889
|
|
$
|
2,792
|
Accounts payable
|
|
|
37,538
|
|
|
43,661
|
Total current liabilities
|
|
|
41,427
|
|
|
46,453
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
|
2,155
|
|
|
2,393
|
Other non-current liabilities
|
|
|
4,712
|
|
|
4,464
|
Total non-current liabilities
|
|
|
6,867
|
|
|
6,857
|
Total liabilities held for sale
|
|
$
|
48,294
|
|
$
|
53,310
|
Note 5. 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.
After 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
.
Any gain recognized, which is defined as the excess of reimbursement over cost, is amortized over the life of the program. If estimated costs are expected to be in excess of reimbursement, a loss is recorded in the period in which the loss is estimated.
Customer-owned tooling is included in the Condensed Consolidated Balance Sheets in prepaid tooling, notes receivable, and other
. At March 31, 2017 and December 31, 2016, the Company had an asset related to customer-funded tooling of
$117.7
million and
$87.9
million, respectively.
Note 6. 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, 2016
|
|
$
|
49,293
|
|
$
|
7,090
|
|
$
|
56,383
|
Currency translation adjustment
|
|
|
636
|
|
|
742
|
|
|
1,378
|
Balance at March 31, 2017
|
|
$
|
49,929
|
|
$
|
7,832
|
|
$
|
57,761
|
Intangibles
In the North America segment, an intangible asset of
$3.5
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 for the three months ended March 31, 2017 and 2016.
Note 7. Restructuring and Asset Impairment Charges
As of March 31, 2017, 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 March 31,
|
|
|
|
2017
|
|
2016
|
|
Europe
|
|
$
|
128
|
|
$
|
-
|
|
North America
|
|
|
3,783
|
|
|
746
|
|
Consolidated
|
|
$
|
3,911
|
|
$
|
746
|
|
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 March 31,
|
|
|
|
2017
|
|
2016
|
|
Employee termination costs
|
|
$
|
3,695
|
|
$
|
-
|
|
Other exit costs
|
|
|
216
|
|
|
746
|
|
Total restructuring expense
|
|
$
|
3,911
|
|
$
|
746
|
|
The charges incurred during the three months ended March 31, 2017 and 2016 related primarily to the following actions:
2017 Actions
During the three months ended March 31, 2017, the charges incurred in the North America segment related to severance charges to reduce corporate overhead and ongoing maintenance expense of facilities closed as a result of prior actions. The charges incurred in the Europe segment related to severance charges to reduce fixed costs.
2016 Actions
During the three months ended March 31, 2016, the charges incurred in the Americas segment related to ongoing maintenance expense of facilities closed as a result of prior actions and severance charges to reduce fixed costs.
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 March 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
North America
|
|
Consolidated
|
Balance at December 31, 2016
|
|
$
|
92
|
|
$
|
197
|
|
$
|
289
|
Payments
|
|
|
(122)
|
|
|
(1,208)
|
|
|
(1,330)
|
Increase in liability
|
|
|
128
|
|
|
3,567
|
|
|
3,695
|
Balance at March 31, 2017
|
|
$
|
98
|
|
$
|
2,556
|
|
$
|
2,654
|
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 increased during the three months ended March 31, 2017, reflecting primarily accruals for severance, offset partially by
payments of other exit costs related to prior accruals.
During the three months ended March 31, 2017, the Company incurred payments related to prior accruals in Europe of $0.1 million and in North America of $1.2 million.
Note 8. Debt
Short-Term Debt
Short-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Current maturities of debts (excluding capital leases)
|
|
$
|
34,101
|
|
$
|
33,277
|
Current maturities of capital leases
|
|
|
5,634
|
|
|
934
|
Total short-term debt
|
|
$
|
39,735
|
|
$
|
34,211
|
Long-Term Debt
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Term Loan Credit Facility (net of discount of
$2,563
and
$827
)
|
|
$
|
358,937
|
|
$
|
361,798
|
Amended Revolving Credit Facility
|
|
|
44,000
|
|
|
-
|
Other foreign subsidiary indebtedness
|
|
|
30,486
|
|
|
28,777
|
Debt issue costs
|
|
|
(9,415)
|
|
|
(6,066)
|
Total debt
|
|
|
424,008
|
|
|
384,509
|
Less: Current maturities of debts (excluding capital leases)
|
|
|
(34,101)
|
|
|
(33,277)
|
Total long-term debt
|
|
$
|
389,907
|
|
$
|
351,232
|
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 borrowing
s
associated with this refinancing. The aggregate principal amount of
$358.9
million is outstanding under the Term Loan Credit Agreement. 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 there under may be accelerated upon the occurrence of an event of default.
As of March 31, 2017, the outstanding principal balance of the Term Loan Credit Facility was $358.9 million (net of a $2.
6
million original issue discount) and the effective interest rate was
3.63%
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.
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 March 31, 2017, the applicable margins were
2.50%
per annum for LIBOR based borrowings and
1.50%
per annum for base rate borrowings, resulting in a weighted average interest rate of
4.05%
. 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 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 March 31, 2017, there was
$147
million of unutilized borrowing availability under the Amended Revolving Credit Facility. At that date, there were
$44
million of borrowings and
$9
million of letters of credit outstanding under the Amended Revolving Credit Facility.
Other Foreign Subsidiary Indebtedness
As of March 31, 2017, other foreign subsidiary indebtedness of $30.5 million consisted primarily of receivables factoring in Europe of
$22.1
million and other indebtedness in Europe of
$6.2
million of term debt and
$2.2
million of indebtedness outstanding on a secured credit line.
The change in foreign subsidiary indebtedness from December 31, 2016 to March 31, 2017 is explained by the following (in thousands):
|
|
|
|
|
|
Europe
|
Balance at December 31, 2016
|
|
$
|
28,777
|
Maturities of indebtedness
|
|
|
(333)
|
Change in borrowings on credit facilities, net
|
|
|
1,670
|
Foreign exchange impact
|
|
|
372
|
Balance at March 31, 2017
|
|
$
|
30,486
|
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 March 31, 2017, the receivables factoring facilities balance available to the Company was
$22.1
million (€
20.8
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 March 31, 2017 ranged from
2.17%
to
2.67%
, with a weighted average interest rate of
2.46%
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 March 31, 2017, the Company’s European subsidiaries had borrowings of
$6.2
million (
€5.8
million), which had an annual interest rate of
6.25%
and matures in
November 2017
. This term loan is secured by certain machinery and equipment.
As of March 31, 2017,
the secured
line of credit balance available to the
Company
was
$9.2
million (€
8.6
million)
, of which
$2.2
million borrowings were outstanding
. The facility bears an interest rate based on the EURIBOR plus a spread of
1.9%
and
matures in
October 2017
. The effective annual interest rate as of March 31, 2017 was
1.9%
per annum.
The facilities are secured by certain accounts receivable related to customer funded tooling, real estate, and other assets, and are subject to negotiated prepayments upon the receipt of funds from completed customer projects.
As of March 31, 2017, the Company’s European subsidiaries had an asset-based revolving credit facility balance available to the Company of
$30.8
million, of which
no
borrowings were outstanding. This facility bears an interest rate based upon one month LIBOR plus
a margin of
4.00%
, or base rate plus
a margin of
3.00%
,
and matu
res in
October 2017
. 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.
Covenants
As of March 31, 2017,
the Company was in compliance with the financial covenants that govern its credit agreements.
Capital Leases
The Company had the following capital lease obligations as of the dates presented (in thousands). These capital lease obligations expire in March 2018:
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Current maturities of capital leases
|
|
$
|
5,634
|
|
$
|
934
|
Non-current maturities of capital leases
|
|
|
-
|
|
|
4,863
|
Total capital leases
|
|
$
|
5,634
|
|
$
|
5,797
|
Debt Issue Costs
The Company had debt issuance costs, net of amortization, of
$9.4
million and
$6.1
million as of March 31, 2017 and December 31, 2016, 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
$0.8
million and
$1.1
million during the three months ended March 31, 2017 and March 31, 2016, respectively.
Note 9. 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
.
On March 7, 2017, the Company amended the $200 million variable rate to fixed rate interest rate swap, for a portion of the Company’s Term Loan, entered into on October 17, 2014. The U.S. dollar notional amount remained the same at
$186.1
million, the fixed interest rate was changed from
5.09%
to
5.6
28%
per annum, and the maturity date was extended from
April 16, 2020
to
March 7, 2024
. The fair value of the swap will fluctuate with changes in interest rates.
Also on March 7, 2017, the Company amended the cross currency swap, entered into on January 23, 2015, and into a new cross currency swap, to hedge 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.
At March 31, 2017 and December 31, 2016, the U.S. dollar / Euro exchange spot rate was
$1.0683
and
$1.0516
, respectively. The following amounts were recorded in the Condensed Consolidated Balance Sheets as being payable to counterparties under FASB ASC No. 815,
Derivatives and Hedging
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
March 31, 2017
|
|
December 31, 2016
|
Cross currency swap
|
|
Other non-current liabilities
|
|
$
|
3,310
|
|
$
|
4,993
|
Interest rate swap
|
|
Other non-current liabilities
|
|
|
8,731
|
|
|
2,451
|
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. To the extent that derivative instruments are deemed to be effective, changes in the fair value of derivatives are recognized in the Condensed Consolidated Balance Sheets as accumulated other comprehensive income (“AOCI”), and to the extent they are ineffective or were not designated as part of a hedge transaction, they are recorded in the Condensed Consolidated Statements of Operations as interest expense, net. 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. In all previous periods, the Company had not accounted for the interest rate swap as a cash flow hedge, as
all
such 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 March 31, 2017 and December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
Deferred gain in AOCI
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Cross currency swap
|
|
$
|
33,391
|
|
$
|
35,699
|
Interest rate swap
|
|
|
(6,572)
|
|
|
-
|
Total
|
|
$
|
26,819
|
|
$
|
35,699
|
Derivative instruments held during the period resulted in the following (income) / expense recorded in income (in thousands):
|
|
|
|
|
|
|
|
|
|
(Income) / expense recognized
|
|
|
|
(ineffective portion)
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
Cross currency swap
|
|
$
|
(3,990)
|
|
$
|
(28)
|
|
Interest rate swap
|
|
|
(292)
|
|
|
2,455
|
|
Total
|
|
$
|
(4,282)
|
|
$
|
2,427
|
|
Note 10. Income Taxes
During the three months ended March 31, 2017, the Company recorded income tax expense of $6.5 million on $22.6 million of pre-tax profit from continuing operations – for a consolidated effective tax rate of
28.8%
. Included in the $6.5 million of consolidated tax expense was
$5.3
million of deferred tax expense
attributable to U.S. operations.
During the three months ended March 31, 2016, the Company recorded income tax expense of $3.5 million on $12.2 million of pre-tax profit from continuing operations – for a consolidated effective tax rate of
28.6%
. Included in the $3.5 million of consolidated tax expense was
$2.3
million of deferred income tax expe
nse attributable to U.S. profits
.
Note 11. Retirement Plans
The Company sponsors a pension and various other postretirement benefit plans for its employees. Each plan serves a defined group of employees and has varying levels of Company contributions. The Company’s contributions to certain plans may be required by the terms of the Company’s collective bargaining agreements.
The following tables provide the components of net periodic pension benefit cost and other post-retirement benefit cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
Three Months Ended March 31,
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
|
$
|
5
|
|
$
|
6
|
|
$
|
2
|
|
$
|
2
|
Interest cost
|
|
|
1,924
|
|
|
1,947
|
|
|
136
|
|
|
136
|
Expected return on plan assets (a)
|
|
|
(2,555)
|
|
|
(2,546)
|
|
|
-
|
|
|
-
|
Amortization of prior service credit
|
|
|
(24)
|
|
|
(24)
|
|
|
33
|
|
|
33
|
Net periodic benefit cost / (income)
|
|
$
|
(650)
|
|
$
|
(617)
|
|
$
|
171
|
|
$
|
171
|
(a)
Expected rate of return on plan assets is
7.40%
for 2017 and was
7.40%
for 2016
The Company expects its minimum pension funding requirements to be
$8.8
million during 2017. During the three months ended March 31, 2017, the Company made contributions of
$1.7
million.
Additionally, during the three months ended March 31, 2017, the Company
contributed
$1.5
million
, to its defined contribution retirement plans.
Note 12. Stockholders’ Equity and Noncontrolling Interests
The table below provides a reconciliation of the carrying amount of total stockholders’ equity, including stockholders’ equity attributable to Tower International, Inc. (“Tower”) and equity attributable to the noncontrolling interests (“NCI”) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
|
Tower
|
|
NCI
|
|
Total
|
|
Tower
|
|
NCI
|
|
Total
|
Stockholders' equity beginning balance
|
|
$
|
207,795
|
|
$
|
6,144
|
|
$
|
213,939
|
|
$
|
197,495
|
|
$
|
9,224
|
|
$
|
206,719
|
Net income
|
|
|
17,345
|
|
|
68
|
|
|
17,413
|
|
|
8,378
|
|
|
6
|
|
|
8,384
|
Other comprehensive income / (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
5,830
|
|
|
52
|
|
|
5,882
|
|
|
8,383
|
|
|
14
|
|
|
8,397
|
Unrealized loss on qualifying cash flow hedge
|
|
|
(4,074)
|
|
|
-
|
|
|
(4,074)
|
|
|
-
|
|
|
-
|
|
|
-
|
Total comprehensive income
|
|
|
19,101
|
|
|
120
|
|
|
19,221
|
|
|
16,761
|
|
|
20
|
|
|
16,781
|
Vesting of RSUs
|
|
|
2
|
|
|
-
|
|
|
2
|
|
|
1
|
|
|
-
|
|
|
1
|
Treasury stock
|
|
|
(761)
|
|
|
-
|
|
|
(761)
|
|
|
(622)
|
|
|
-
|
|
|
(622)
|
Share based compensation expense
|
|
|
499
|
|
|
-
|
|
|
499
|
|
|
529
|
|
|
-
|
|
|
529
|
Proceeds from stock options exercised
|
|
|
938
|
|
|
-
|
|
|
938
|
|
|
-
|
|
|
-
|
|
|
-
|
Dividend paid
|
|
|
(2,242)
|
|
|
-
|
|
|
(2,242)
|
|
|
(2,111)
|
|
|
-
|
|
|
(2,111)
|
Cumulative effect of the adoption of ASU No. 2016-09
|
|
|
5,329
|
|
|
-
|
|
|
5,329
|
|
|
-
|
|
|
-
|
|
|
-
|
Noncontrolling interest dividends - Wuhu
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,164)
|
|
|
(2,164)
|
Stockholders' equity ending balance
|
|
$
|
230,661
|
|
$
|
6,264
|
|
$
|
236,925
|
|
$
|
212,053
|
|
$
|
7,080
|
|
$
|
219,133
|
On June 17, 2016, the Compa
ny announced it
s Board of Directors’ authorization to repurchase up to
$100
million of the Company’s issued and outstanding common stock from time to time in the open market, or in privately negotiated transactions. The Company expects to fund such repurchases from cash flow from operations, cash on hand, asset dispositions, and borrowings under its revolving credit facility. Through March 31, 2017, the Company repurchased a total of
829,648
shares of common stock at an aggregate cost of
$18.9
million under this repurchase program.
The following table presents the components of accumulated other comprehensive loss (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
As of December 31, 2016
|
|
Change
|
Foreign currency translation adjustments, net of tax of
$9.2
million and
$10.1
million
|
|
$
|
(38,581)
|
|
$
|
(44,411)
|
|
$
|
5,830
|
Defined benefit plans, net of tax of
$14.2
million and
$14.2
million
|
|
|
(38,972)
|
|
|
(38,972)
|
|
|
-
|
Unrealized loss on qualifying cash flow hedge, net of tax (benefit) of (
$2.5
million), and $0 million
|
|
|
(4,074)
|
|
|
-
|
|
|
(4,074)
|
Accumulated other comprehensive loss
|
|
$
|
(81,627)
|
|
$
|
(83,383)
|
|
$
|
1,756
|
The following table presents the changes in accumulated other comprehensive loss by component (in thousands) for the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on
|
|
|
|
|
Foreign Currency
|
|
|
|
|
|
Qualifying cash flow
|
|
Defined Benefit
|
|
Translation
|
|
|
|
|
|
Hedge, Net of Tax
|
|
Plan, Net of Tax
|
|
Adjustments
|
|
Total
|
Balance at December 31, 2016
|
|
$
|
-
|
|
$
|
(38,972)
|
|
$
|
(44,411)
|
|
$
|
(83,383)
|
Other comprehensive income before reclassification
|
|
|
(4,074)
|
|
|
-
|
|
|
5,830
|
|
|
1,756
|
Net current-period other comprehensive income
|
|
|
(4,074)
|
|
|
-
|
|
|
5,830
|
|
|
1,756
|
Balance at March 31, 2017
|
|
$
|
(4,074)
|
|
$
|
(38,972)
|
|
$
|
(38,581)
|
|
$
|
(81,627)
|
The following table presents the changes in accumulated other comprehensive loss by component (in thousands) for the three months ended March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
|
|
|
|
Defined Benefit
|
|
Translation
|
|
|
|
|
|
Plan, Net of Tax
|
|
Adjustments
|
|
Total
|
Balance at December 31, 2015
|
|
$
|
(40,002)
|
|
$
|
(40,490)
|
|
$
|
(80,492)
|
Other comprehensive loss before reclassification
|
|
|
-
|
|
|
8,383
|
|
|
8,383
|
Net current-period other comprehensive loss
|
|
|
-
|
|
|
8,383
|
|
|
8,383
|
Balance at March 31, 2016
|
|
$
|
(40,002)
|
|
$
|
(32,107)
|
|
$
|
(72,109)
|
The Company did not reclassify any material items out of accumulated other comprehensive loss during the three months ended March 31, 2017 or March 31, 2016, respectively.
Note 13. Earnings per Share (“EPS”)
Basic earnings per share is calculated by dividing the net income attributable to Tower International, Inc. by the weighted average number of common shares outstanding.
The share count for diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effects of dilutive common stock equivalents (“CSEs”) outstanding during the period. CSEs, which are securities that may entitle the holder to obtain common stock, include outstanding stock options and restricted stock units. When the average price of the common stock during the period exceeds the exercise price of a stock option, the options are considered potentially dilutive CSEs. When there is a loss from continuing operations, potentially dilutive shares are excluded from the computation of earnings per share, as their effect would be anti-dilutive.
The Company included the effects of all dilutive shares for the three months ended March 31, 2017 and March 31, 2016.
A summary of the information used to compute basic and diluted net income per share attributable to Tower International, Inc. is shown below (in thousands – except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
Income from continuing operations
|
|
$
|
16,063
|
|
$
|
8,729
|
|
Income / (loss) from discontinued operations, net of tax
|
|
|
1,350
|
|
|
(345)
|
|
Net income
|
|
|
17,413
|
|
|
8,384
|
|
Less: Net income attributable to the noncontrolling interests
|
|
|
68
|
|
|
6
|
|
Net income attributable to Tower International, Inc.
|
|
$
|
17,345
|
|
$
|
8,378
|
|
|
|
|
|
|
|
|
|
Basic income / (loss) per share:
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.78
|
|
$
|
0.41
|
|
Discontinued operations
|
|
|
0.07
|
|
|
(0.02)
|
|
Net income attributable to Tower International, Inc.
|
|
|
0.85
|
|
|
0.40
|
|
Basic weighted average shares outstanding
|
|
|
20,425,216
|
|
|
21,126,462
|
|
|
|
|
|
|
|
|
|
Diluted income / (loss) per share:
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.77
|
|
$
|
0.41
|
|
Discontinued operations
|
|
|
0.06
|
|
|
(0.02)
|
|
Net income attributable to Tower International, Inc.
|
|
|
0.83
|
|
|
0.39
|
|
Diluted weighted average shares outstanding
|
|
|
20,820,457
|
|
|
21,444,570
|
|
Note 14. Share-Based and Long-Term Compensation
Share-Based Compensation
2010 Equity Incentive Plan (“the Plan”)
The Company adopted an equity incentive plan in connection with its 2010 initial public offering that allows for the grant of stock options, restricted stock awards, other equity-based awards, and certain cash-based awards to be made pursuant to the Plan. The eligibility requirements and terms governing the allocation of any common stock and the receipt of other consideration under the Plan are determined by the Board of Directors and/or its Compensation Committee.
At March 31, 2017,
800,732
shares were available for future grants of options and other types of awards under the Plan.
The following table summarizes the Company’s award activity during the three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Restricted Stock Units
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Average Grant
|
Outstanding at:
|
|
Shares
|
|
Exercise Price
|
|
Shares
|
|
Date Fair Value
|
December 31, 2016
|
|
474,468
|
|
$
|
12.18
|
|
213,522
|
|
$
|
24.77
|
Granted
|
|
-
|
|
|
-
|
|
100,750
|
|
|
28.20
|
Options exercised or RSUs issued
|
|
(77,567)
|
|
|
12.09
|
|
(80,112)
|
|
|
24.93
|
Forfeited
|
|
-
|
|
|
-
|
|
(253)
|
|
|
24.16
|
March 31, 2017
|
|
396,901
|
|
$
|
12.20
|
|
233,907
|
|
$
|
26.19
|
Stock Options
The exercise price of each stock option equals the market price of the Company’s common stock on the grant date. Compensation expense is recorded at the grant date fair value and is recognized on a straight-line basis over the applicable vesting periods. The Company’s stock options generally vest over
three
years, with a maximum term of
ten
years.
The Company calculates the weighted average grant date fair value of each option granted using a
Black-Scholes valuation model
. During the three months ended March 31, 2017 and 2016 the Company did
no
t recognize any expense relating to the options.
The Company did
no
t recognize any tax benefit related to the compensation expense during any of the periods presented.
All of the expense associated with these options had been fully recognized in previous periods.
As of March 31, 2017, the Company had an aggregate of 396,901 stock options that had been granted, but had not yet been exercised. As of March 31, 2017, the remaining average contractual life for these options is approximately
4.5
years. During the three months ended March 31, 2017,
77,567
options were exercised, which had an aggregate intrinsic value of
$1.2
million. As of March 31, 2017,
396,901
stock options were exercisable, which had an aggregate intrinsic value of
$5.9
million. During the three months ended March 31, 2017, no stock options were granted, forfeited, or expired.
Restricted Stock Units (“RSUs”)
The grant date fair value of each RSU equals the market price of the Company’s common stock on its date of grant. Compensation expense is recorded at the grant date fair value, less an estimated forfeiture amount, and is recognized on a straight-line basis over the applicable vesting periods. The Company’s RSUs generally vest over a
three
year period.
During the three months ended March 31, 2017 and 2016, the Company recognized expense relating to the RSUs of
$0.5
million and
$0.5
million, respectively. As of March 31, 2017, the Company had
$3.3
million of unrecognized compensation expense associated with these RSUs, which will be amortized on a straight-line basis over the next
17
months, on a weighted average basis.
As of March 31, 2017, the Company had an aggregate of 233,907 RSUs that had been granted, but had not yet vested. During the three months ended March 31, 2017,
100,750
RSUs were granted and 253 RSUs were forfeited.
During the first three months of 2017, a total of
80,112
RSUs vested, resulting in the issuance of 80,112 shares. The fair value of these shares was
$2.3
million. This total was reduced by shares repurchased to provide payment for certain individual’s minimum statutory withholding tax. After offsets for withholding taxes, a total of
53,162
shares of common stock were issued. The Company paid
$0.
8
million to acquire
26,950
vested shares to cover the minimum statutory withholding taxes.
Long-Term Compensation
Amended and Restated CEO Employment Agreement
On July 28, 2014, Mark M. Malcolm, the Company’s former President and Chief Executive Officer, entered into an amended and restated employment agreement (the “Agreement”), by which Mr. Malcolm’s employment was extended through December 31, 2016 (the “Retirement Date”).
Mr. Malcolm retired from the Company on the Retirement Date. The Agreement provided for a $3 million transition bonus, for the successful delivery to Tower’s board of directors of a comprehensive chief executive officer succession and transition plan, and a $3 million retention bonus. These bonus awards will be paid in cash on July 14, 2017, and fall under the guidance of FASB ASC No. 450,
Contingencies
. Per ASC No. 450, which provides that a liability should be recorded when a future event is both probable and the amount of the commitment is reasonably estimable.
During the three months ended March 31, 2017 and 2016, the Company recorded expense of
$0.1
million and
$0.8
million related to these awards, respectively. At March 31, 2017, the Company had a liability of
$6.1
million related to these awards. This liability is presented in the Condensed Consolidated Balance Sheets as other current liabilities.
Performance Award Agreements
Under the provisions of the 2010 Equity Incentive Plan, the Company grants certain awards annually in March pursuant to Performance Award Agreements to approximately 80 executives. These awards are designed to provide the executives with an incentive to participate in the long-term success and growth of the Company. The Performance Award Agreements provide for cash-based awards that vest upon payment. Pursuant to meeting the performance conditions set forth in the Performance Award Agreements, each award will be paid
three
years after it is granted. These awards are also subject to payment upon a change in control or termination of employment, if certain criteria are met. These awards represent unfunded, unsecured obligations of the Company.
2014 and 2015 Awards
One half of the awards
granted in 2014 and 2015 were
based upon the Company's Adjusted EPS Growth Rate, which is defined as the Company’s cumulative Adjusted EPS for the performance period of the awards, stated in terms of a percentage growth rate. The Company's EPS was and will be adjusted to exclude the effect of unusual, and/or nonrecurring items and then was and will be divided by the number of fiscal years in the specified period, stated in terms of a percentage growth rate. The other half of the awards
are
based upon the Company's percentile ranking of total shareholder return, compared to a peer group of companies, for the performance period.
Pursuant to meeting the performance conditions set forth in the Performance Award Agreements, the awards granted in 2014 were paid in the first quarter of 2017. The performance period of the awards granted in 2015, is January 1, 2015 through December 31, 2017.
2016 and 2017 Awards
One half of the awards granted in 2016 and 2017 will be based upon the Company’s Adjusted EBIT Growth Rate, which is defined as the Company’s cumulative Adjusted EBIT (earnings before interest and taxes) for the performance period of the awards, stated in terms of a percentage growth rate. The Company's EBIT will be adjusted to exclude the effect of extraordinary, unusual, and/or nonrecurring items and then will be divided by the number of fiscal years in the specified period, stated in terms of a percentage growth rate. The other half of the awards will be based upon the Company's percentile ranking of total shareholder return, compared to a peer group of companies, for the performance period.
The performance period of the awards granted in 2016 is January 1, 2016 through December 31, 2018. The performance period of the awards granted in 2017 is January 1, 2017 through December 31, 2019.
During the three months ended March 31, 2017 and 2016, the Company recorded expense related to all performance awards of
$0.4
million and
$1.9
million, respectively. At March 31, 2017, the Company had a liability of
$4.2
million related to these awards, of which
$3
million is payable in March 2018 and is presented as other current liabilities in the Condensed Consolidated Balance Sheet, while the remaining
$1.2
million is presented as other non-current liabilities in the Condensed Consolidated Balance Sheet.
Note 15. Segment Information
The Company defines its operating segments as components of its business where separate financial information is available. The Company’s operating segments are routinely evaluated by management. The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer.
The Company produces engineered structural metal components and assemblies primarily serving the global automotive industry. The Company’s operations have similar economic characteristics and share fundamental characteristics, including the nature of the products, production processes, margins, customers, and distribution channels. The Company’s products include body structures stampings, chassis structures (including frames), and complex welded assemblies for small and large cars, crossovers, pickups, and SUVs. The Company is comprised of two
operating
and
reportable
segments: Europe and North America.
. In periods prior to the second quarter of 2016, the Company was comprised of four operating segments: Europe, China, North America, and South America. These operating segments were aggregated into two reportable segments. The International segment consisted of Europe and China and the Americas segment consisted of North America and South America. The Company’s remaining operations in China and Brazil are currently considered as Discontinued Operations, the former International segment only contains Europe, and the former Americas segment only contains North America.
The Company measures segment operating performance based on Adjusted EBITDA. The Company uses segment Adjusted EBITDA as the basis for the CODM to evaluate the performance of each of the Company’s reportable segments.
The following is a summary of select data for each of the Company’s reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
North America
|
|
Total
|
Three Months Ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
160,152
|
|
$
|
337,438
|
|
$
|
497,590
|
Adjusted EBITDA
|
|
|
11,172
|
|
|
35,032
|
|
|
46,204
|
Capital Expenditures
|
|
|
6,970
|
|
|
16,939
|
|
|
23,909
|
Total Assets (a)
|
|
|
496,425
|
|
|
749,283
|
|
|
1,245,708
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
161,118
|
|
$
|
328,076
|
|
$
|
489,194
|
Adjusted EBITDA
|
|
|
11,518
|
|
|
33,577
|
|
|
45,095
|
Capital Expenditures
|
|
|
15,644
|
|
|
10,052
|
|
|
25,696
|
Total Assets (a)
|
|
|
514,502
|
|
|
709,050
|
|
|
1,223,552
|
(a)
As of March 31, 2017 and 2016, total assets include assets held for sale
Inter-segment sales are not significant for any period presented.
The following is a reconciliation of Adjusted EBITDA to income before provision for income taxes, and income / (loss) from discontinued operations (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
Adjusted EBITDA
|
|
$
|
46,204
|
|
$
|
45,095
|
|
Restructuring and asset impairment charges, net
|
|
|
(3,911)
|
|
|
(746)
|
|
Depreciation and amortization
|
|
|
(17,766)
|
|
|
(17,276)
|
|
Acquisition costs and other
|
|
|
(75)
|
|
|
(116)
|
|
Long-term compensation expense
|
|
|
(912)
|
|
|
(3,582)
|
|
Interest expense, net
|
|
|
(406)
|
|
|
(7,554)
|
|
Other expense (a)(b)
|
|
|
(575)
|
|
|
(3,576)
|
|
Income before provision for income taxes
|
|
|
|
|
|
|
|
and income / (loss) from discontinued operations
|
|
$
|
22,559
|
|
$
|
12,245
|
|
(a)
Represents costs incurred during the three month period ended March 31, 2017, to support the refinancing of our term debt.
(b)
Represents costs incurred during the three month period ended March 31, 2016, to support the investigation into the potential sale of Tower Europe, which is no longer being considered.
Note 16. Fair Value of Financial Instruments
FASB ASC No. 820,
Fair Value Measurements,
defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants, at the measurement date under current market conditions (an exit price). The exit price is based upon the amount that the holder of the asset or liability would receive or need to pay in an actual transaction or in a hypothetical transaction if an actual transaction does not exist, at the measurement date. In some circumstances, the entry and exit price may be the same; however, they are conceptually different.
Fair value is generally determined based upon quoted market prices in active markets for identical assets or liabilities. If quoted market prices are not available, we use valuation techniques that place greater reliance on observable inputs and less reliance on unobservable inputs. In measuring fair value, we may make adjustments for risks and uncertainties, if a market participant would include such an adjustment in its pricing.
FASB ASC No. 820 establishes a fair value hierarchy that distinguishes between assumptions based upon market data, referred to as observable inputs, and the Company’s assumptions, referred to as unobservable inputs. Determining where an asset or liability falls within that hierarchy depends on the lowest level input that is significant to the fair value measurement as a whole. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. The hierarchy consists of three broad levels as follows:
|
|
|
|
Level 1:
|
Quoted market prices in active markets for identical assets and liabilities;
|
|
|
|
|
Level 2:
|
Inputs, other than Level 1 inputs, that are either directly or indirectly observable; and
|
|
|
|
|
Level 3:
|
Unobservable inputs developed using estimates and assumptions that reflect those that market participants would use.
|
At March 31, 2017, the carrying value and estimated fair value of the Company’s total debt was
$433.4
million and
$431.6
million, respectively. At December 31, 2016, the carrying value and estimated fair value of the Company’s total debt was
$390.6
million and
$394.2
million, respectively. The majority of the Company’s debt at March 31, 2017 and December 31, 2016 was comprised of the Term Loan Credit Facility, which can be traded between financial institutions. Accordingly, this debt has been classified as Level 2. The fair value was determined based upon quoted values. The remainder of the Company’s debt, primarily consisting of foreign subsidiary indebtedness, is asset-backed and is classified as Level 3. As this debt carries variable rates and minimal credit risk, the book values approximate the fair values.
The Company has foreign currency exchange hedges and an interest rate swap that were measured at fair value on a recurring basis at March 31, 2017 and December 31, 2016. These instruments are recorded in other non-current liabilities in the Company’s Condensed Consolidated Balance Sheets and the fair value is measured using Level 2 observable inputs such as foreign currency exchange rates, swap rates, cross currency basis swap spreads and interest rate spreads. At March 31, 2017, the foreign currency exchange hedge (net investment hedge of the Company’s European subsidiaries) and the interest rate swap had liability fair values of
$3.3
million and
$8.7
million, respectively.
There were no nonrecurring items that occurred during the three months ended March 31, 2017 that required the re-measurement of fair value.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short maturity of these instruments.
Note 17. Commitments and Contingencies
Operating Leases
The Company leases office space, manufacturing space, and certain equipment under non-cancellable lease agreements, which require the Company to pay maintenance, insurance, taxes, and other expenses, in addition to rental payments. The Company has entered into leasing commitments with lease terms expiring between the years 2018 and 2026. The Company has options to extend the terms of certain leases in future periods. The properties covered under these leases include manufacturing and office equipment and facilities. Rent expense for all operating leases totalled
$5.8
million and
$5.9
million during the three months ended March 31, 2017, and 2016 respectively.
Future minimum operating lease
payments
at March 31, 2017 are as follows (in thousands):
|
|
|
Year
|
|
Operating Leases
|
2017
|
|
$ 18,595
|
2018
|
|
32,934
|
2019
|
|
29,778
|
2020
|
|
22,541
|
2021
|
|
17,690
|
Thereafter
|
|
35,208
|
Total future lease payments
|
|
$ 156,746
|
Environmental Matters
The Company owns properties which have been affected by environmental releases. The Company is actively involved in investigation and/or remediation at several of these locations.
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. The established liability for environmental matters is based upon management’s best estimates, on an undiscounted basis, of expected investigation/ remediation costs related to environmental contamination. It is possible that actual costs associated with these matters will exceed the environmental reserves established by the Company. Inherent uncertainties exist in the estimates, primarily due to unknown environmental conditions, changing governmental regulations, and legal standards regarding liability and evolving technologies for handling site remediation and restoration. At March 31, 2017 and December 31, 2016, the Company had
$1.4
million accrued for environmental matters.
Contingent Matters
The Company will establish an accrual for matters in which losses are probable and can be reasonably estimated. These types of matters may involve additional claims that, if granted, could require the Company to pay penalties or make other expenditures in amounts that will not be estimable at the time of discovery of the matter. In these cases, a liability will be recorded at the low end of the range if no amount within the range is a better estimate in accordance with FASB ASC No. 450,
Accounting for Contingencies
.
Litigation
The Company is subject to various legal actions and claims incidental to its business, including potential lawsuits with customers or suppliers. Litigation is subject to many uncertainties and the outcome of individual litigated matters is not probable or estimable. After discussions with counsel litigating these matters, it is the opinion of management that the outcome of such matters will not have a material impact on the Company’s financial position, results of operations, or cash flows.