Attached files

file filename
EX-10.4 - EXHIBIT 10.4 FORM OF TRANSACTION CONTINUITY AWARD LETTER - REMY INTERNATIONAL, INC.ex-104form_ofxtransactionx.htm
EX-10.2 - EXHIBIT 10.2 KRALL EMPLOYMENT AGREEMENT AMENDMENT NO. 1 - REMY INTERNATIONAL, INC.ex-102bdkrall_amendmentxno.htm
EX-31.1 - EXHIBIT 31.1 Q2 2015 PEO 302 CERTIFICATION - REMY INTERNATIONAL, INC.ex-311xq22015peosox302cert.htm
EX-31.2 - EXHIBIT 31.2 Q2 2015 PFO SOX 302 CERTIFICATION - REMY INTERNATIONAL, INC.ex-312xq22015pfosox302cert.htm
EX-32.2 - EXHIBIT 32.2 Q2 2015 PFO SOX 906 CERTIFICATION - REMY INTERNATIONAL, INC.ex-322xq22015pfosox906cert.htm
EX-10.1 - EXHIBIT 10.1 POLEN EMPLOYMENT AGREEMENT AMENDMENT NO. 1 - REMY INTERNATIONAL, INC.ex-101bvpolen_amendmentxno.htm
EX-32.1 - EXHIBIT 32.1 Q2 2015 PEO SOX 906 CERTIFICATION - REMY INTERNATIONAL, INC.ex-321xq22015peosox906cert.htm
EX-10.3 - EXHIBIT 10.3 VANDENBERGH EMPLOYMENT AGREEMENT AMENDMENT NO. 1 - REMY INTERNATIONAL, INC.ex-103avandenbergh_amendme.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 
 
Form 10-Q

 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended June 30, 2015
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from          to          .
 

Commission File No. 001-13683
 
Remy International, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
47-1744351
(State or other jurisdiction
of incorporation or organization) 
 
(I.R.S. Employer
Identification Number)

 
600 Corporation Drive, Pendleton, IN 46064
(Address of principal executive offices, including zip code)
 
 
(765) 778-6499
(Registrant's telephone number, including area code)
 
 
Not applicable
(Former name, former address or 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x     No o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No x
As of July 29, 2015, there were 31,802,084 shares of the Registrant's common stock outstanding.
 





Table of contents
 



1


PART I - Financial Information
Item 1. Financial Statements
Remy International, Inc.
Consolidated balance sheets
 
June 30,


December 31,

(In thousands, except share information)
2015


2014

Assets:
 (unaudited)



Current assets:
 


 

Cash and cash equivalents
$
102,446


$
84,885

Trade accounts receivable (less allowances of $1,973 and $1,519)
228,821


210,356

Other receivables
13,970


16,692

Inventories
191,777


164,143

Deferred income taxes
35,715


42,308

Prepaid expenses and other current assets
12,713


11,865

Total current assets
585,442


530,249







Property, plant and equipment
231,665


226,073

Less accumulated depreciation and amortization
(75,225
)

(61,615
)
Property, plant and equipment, net
156,440


164,458






Deferred financing costs, net of amortization
1,341


1,471

Goodwill
263,491


259,586

Intangibles, net
279,877


298,023

Other noncurrent assets
47,844


65,309

Total assets
$
1,334,435


$
1,319,096





Liabilities and Equity:
 

 
Current liabilities:
 

 
Short-term debt
$
5,793


$
7,761

Current maturities of long-term debt
3,489


3,509

Accounts payable
183,797


177,333

Accrued interest
121


94

Accrued restructuring
420


331

Other current liabilities and accrued expenses
113,607


128,509

Total current liabilities
307,227


317,537







Long-term debt, net of current maturities
340,191


298,295

Postretirement benefits other than pensions
1,378


1,484

Accrued pension benefits
33,310


34,267

Deferred income taxes
49,683


54,783

Other noncurrent liabilities
26,992


26,483







Equity:
 


 

Common stock, Par value of $0.0001; 31,811,724 shares outstanding at June 30, 2015, and 32,201,086 shares outstanding at December 31, 2014
3


3

Treasury stock, at cost; 634,064 treasury shares at June 30, 2015, and no treasury shares at December 31, 2014
(11,062
)


Additional paid-in capital
598,115


595,627

Retained earnings
8,972



Accumulated other comprehensive loss
(20,374
)

(9,383
)
Total Remy International, Inc. stockholders' equity
575,654


586,247

Total liabilities and equity
$
1,334,435


$
1,319,096

See accompanying notes to unaudited condensed consolidated financial statements.


2


Remy International, Inc.
Consolidated statements of operations
(Unaudited)
 

Three months ended June 30,
 
 
Six months ended June 30,
 
(In thousands, except per share amounts)
2015


2014

 
2015


2014

Net sales
$
271,997


$
302,910

 
$
575,408

 
$
608,915

Cost of goods sold
237,151


252,913

 
478,560

 
512,567

Gross profit
34,846


49,997

 
96,848

 
96,348

Selling, general, and administrative expenses
30,906


35,890

 
64,326

 
68,821

Restructuring and other charges
371


79

 
444

 
393

Operating income
3,569


14,028

 
32,078

 
27,134

Interest expense–net
4,123


5,337

 
9,134

 
10,591

Income (loss) before income taxes
(554
)

8,691

 
22,944

 
16,543

Income tax expense
396


3,661

 
7,324

 
6,569

Net income (loss)
$
(950
)

$
5,030


$
15,620


$
9,974







 
 
 
 
Basic earnings (loss) per share:
 


 

 
 
 
 
Earnings (loss) per share
$
(0.03
)

$
0.16

 
$
0.49

 
$
0.31

Weighted average shares outstanding
31,674


31,787

 
31,759

 
31,720

Diluted earnings (loss) per share:





 


 


Earnings (loss) per share
$
(0.03
)

$
0.16

 
$
0.49

 
$
0.31

Weighted average shares outstanding
31,674

 
31,866

 
31,842

 
31,844

Dividends declared per common share
$
0.11

 
$
0.10

 
$
0.21

 
$
0.20

See accompanying notes to unaudited condensed consolidated financial statements.

















3


Remy International, Inc.
Consolidated statements of comprehensive income (loss)
(Unaudited)
 
Three months ended June 30,
 
 
Six months ended June 30,
 
(In thousands)
2015


2014

 
2015


2014

Net income (loss)
$
(950
)

$
5,030


$
15,620


$
9,974

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(910
)
 
5,644

 
(8,903
)
 
6,441

Currency forward contracts, net of tax
(1,161
)
 
2,136

 
(344
)
 
614

Commodity contracts, net of tax
(306
)
 
1,856

 
(1,226
)
 
264

Interest rate swap contract, net of tax
76

 
(410
)
 
(353
)
 
(691
)
Employee benefit plans, net of tax
(85
)
 
(139
)
 
(165
)
 
(502
)
Total other comprehensive income (loss), net of tax
(2,386
)
 
9,087

 
(10,991
)
 
6,126

Comprehensive income (loss)
$
(3,336
)
 
$
14,117

 
$
4,629

 
$
16,100

See accompanying notes to unaudited condensed consolidated financial statements.































4


Remy International, Inc.
Consolidated statements of cash flows
(Unaudited)
 
Six months ended June 30,
 
(In thousands)
2015


2014

Cash flows from operating activities:



Net income
$
15,620


$
9,974

Adjustments to reconcile net income to cash provided by (used in) operating activities:





Depreciation and amortization
36,031


36,664

Stock-based compensation
2,325


2,561

Deferred income taxes
1,020


(5,192
)
Accrued pension and postretirement benefits, net
(1,119
)

(2,123
)
Restructuring and other charges
444


393

Cash payments for restructuring charges
(355
)

(1,266
)
Other
1,602


263

Changes in operating assets and liabilities, net of restructuring charges:



 

Accounts receivable
(11,357
)

(39,230
)
Inventories
(16,936
)

(13,998
)
Accounts payable
4,865


19,939

Other current assets and liabilities, net
(19,913
)

979

Other noncurrent assets and liabilities, net
16,105


(12,908
)
Net cash provided by (used in) operating activities
28,332


(3,944
)




Cash flows from investing activities:



Purchases of property, plant and equipment
(10,412
)

(11,830
)
Net proceeds on sale of assets
29


80

Acquisition of Maval Manufacturing, Inc.
(22,000
)


Acquisition of USA Industries, Inc., net of cash acquired of $109


(40,070
)
Net cash used in investing activities
(32,383
)

(51,820
)






Cash flows from financing activities:



 

Change in short-term debt
(1,904
)

4,930

Proceeds from borrowings on Asset-Based Revolving Credit Facility
155,750



Payments made on Asset-Based Revolving Credit Facility
(112,150
)


Payments made on long-term debt, including capital leases
(1,756
)

(1,693
)
Dividend payments on common stock
(6,800
)

(6,548
)
Purchase of treasury stock
(11,062
)

(2,505
)
Other
1,634


1,227

Net cash provided by (used in) financing activities
23,712


(4,589
)






Effect of exchange rate changes on cash and cash equivalents
(2,100
)

1,619

Net increase (decrease) in cash and cash equivalents
17,561


(58,734
)
Cash and cash equivalents at beginning of period
84,885


114,884

Cash and cash equivalents at end of period
$
102,446


$
56,150

Supplemental disclosure information:
 


 

Cash paid for income taxes, net of refunds received
$
6,004


$
9,251

Cash paid for interest expense
8,835


9,779

Noncash investing and financing activities:
 


 

Purchases of property, plant and equipment in accounts payable
1,808


2,816

See accompanying notes to unaudited condensed consolidated financial statements.


5


Remy International, Inc.
Notes to unaudited condensed consolidated financial statements

1. Description of the business

Business

Remy International, Inc. (together with its subsidiaries are collectively referred to as “we”, “our”, “us”, "Remy", or the “Company”) is a leading global vehicular parts designer, manufacturer, remanufacturer, marketer and distributor of aftermarket and original equipment electrical components for automobiles, light trucks, heavy-duty trucks and other vehicles. We sell our products worldwide primarily under the "Delco Remy", "Remy", "World Wide Automotive", "USA Industries", and "Maval" brand names and our customers' widely recognized private label brand names. Our products include new and remanufactured, light-duty and heavy-duty starters and alternators for both original equipment and aftermarket applications, hybrid power technology, and multi-line products, such as constant velocity ("CV") axles, disc brake calipers, and steering gears. These products are principally sold or distributed to original equipment manufacturers (“OEMs”) for both original equipment manufacture and aftermarket operations, as well as to warehouse distributors and retail automotive parts chains. We sell our products principally in North America, Europe, South America and Asia.

We are one of the largest producers in the world of remanufactured starters and alternators for the aftermarket. Our remanufacturing operations obtain failed products, commonly known as cores, from our customers as returns. These cores are an essential material needed for the remanufacturing operations. We have expanded our operations to become a low cost, global manufacturer and remanufacturer with a more balanced business mix between the aftermarket and the original equipment market, especially for commercial vehicle applications.

BorgWarner Transaction

On July 12, 2015, we entered into an Agreement and Plan of Merger ("Merger Agreement") with BorgWarner Inc. ("BorgWarner") and Band Merger Sub, Inc., a wholly owned subsidiary of BorgWarner (“Merger Sub”) pursuant to which it is expected that we will merge with and into Merger Sub, with the Company surviving the merger as a wholly-owned subsidiary of BorgWarner (the "BorgWarner Transaction"). The Merger Agreement provides that at the effective time of the merger, if it occurs, each of the outstanding shares of Remy common stock (other than certain shares owned by BorgWarner, Merger Sub, Remy or any subsidiary of BorgWarner, Merger Sub or Remy, and shares that are owned by Remy stockholders who have perfected and not withdrawn a demand for appraisal rights pursuant to Delaware law) will be cancelled and converted into $29.50 in cash, without interest.

The consummation of the BorgWarner Transaction is subject to the satisfaction or waiver of specified closing conditions, including (i) the approval of the Merger Agreement by stockholders representing a majority of our outstanding shares of common stock, (ii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (iii) the making or obtaining of any filings, authorizations, consents or approvals regarding the Merger Agreement required pursuant to Antitrust Laws (as defined in the Merger Agreement) in Austria, Germany, China, Korea and Mexico and the termination or expiration of any applicable waiting period thereunder and (iv) other customary closing conditions, including (a) the accuracy of each party’s representations and warranties (subject to customary materiality qualifiers), (b) each party’s compliance with its agreements and covenants contained in the Merger Agreement and (c) the absence of any law, ordinance, rule, regulation, order, judgment or decree being in effect that restrains or enjoins, or otherwise prohibits or makes illegal, the consummation of the BorgWarner Transaction.

The Merger Agreement may be terminated by us or BorgWarner under certain circumstances. In some of those circumstances, we may be required to pay BorgWarner a termination fee of $28,313,000 (or in certain limited circumstances, a lower termination fee of $14,156,000) in connection with the termination of the Merger Agreement. Assuming the timely satisfaction of closing conditions, the BorgWarner Transaction is expected to close during the fourth quarter of 2015.



6


Spin-off and Merger Transactions

On August 14, 2012, Fidelity National Special Opportunities, Inc., (now known as Fidelity National Financial Ventures, LLC., or "FNFV"), a wholly-owned subsidiary of Fidelity National Financial, Inc. ("FNF"), a leading provider of title insurance, mortgage services and restaurant and diversified services, increased its ownership position in Remy Holdings, Inc. ("Old Remy") (formerly known as Remy International, Inc.), above 50% (the "Acquisition"). As a result, FNF began consolidating Old Remy's financial results in the third quarter of 2012.

On September 7, 2014, we entered into agreements for a transaction (the "Spin-off Transaction") with FNF. On December 31, 2014, the Spin-off Transaction was completed pursuant to the merger agreement, which was approved by Old Remy's stockholders at a special meeting of stockholders held on the same date. The Spin-off Transaction in effect resulted in the indirect distribution of the shares of common stock of Old Remy that were held by FNF to the holders of its FNFV tracking stock.

In the Spin-off Transaction, FNFV contributed all of the 16,342,508 shares of Old Remy's common stock that FNFV owned and a small subsidiary, Fidelity National Technology Imaging ("Imaging"), into a newly-formed subsidiary ("New Remy"). New Remy was then distributed to FNFV shareholders. Immediately following the distribution of New Remy to FNFV shareholders, New Remy and Old Remy each engaged in stock-for-stock mergers with subsidiaries of a new publicly-traded holding company, New Remy Holdco Corp. ("New Holdco"). The Spin-off Transaction in effect resulted in New Holdco becoming the new public parent of Old Remy. Effective upon the closing of the Spin-off Transaction on December 31, 2014, New Holdco changed its name to "Remy International, Inc." and its shares were listed, and on January 2, 2015 began trading, on NASDAQ under the trading symbol "REMY", which was the same trading symbol used by Old Remy. Old Remy changed its name from "Remy International, Inc." to "Remy Holdings, Inc."

During the six months ended June 30, 2015, Imaging received $1,400,000 from FNF as part of a working capital adjustment in accordance with the Merger Agreement, which was previously included in other receivables at December 31, 2014.

2. Summary of significant accounting policies

Interim condensed consolidated financial statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information. Accordingly, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. These statements include all adjustments (consisting of normal recurring adjustments) that our management believes are necessary to present fairly our financial position, results of operations, and cash flows. We believe that the disclosures are adequate to make the information presented not misleading when read in conjunction with our audited consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2014.

Operating results for the interim periods presented in this report are not necessarily indicative of the results that may be expected for any future interim period or for the full year.

Use of estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the year. Actual results could differ from these estimates.

Trade accounts receivable and allowance for doubtful accounts

Trade accounts receivable is stated at net realizable value, which approximates fair value. Substantially all of our trade accounts receivable are due from customers in the original equipment and aftermarket automotive industries, both domestically and internationally. Trade accounts receivable includes notes receivable of $38,917,000 and $38,541,000 as of June 30, 2015 and December 31, 2014, respectively. Trade accounts receivable is reduced by an allowance for amounts that are expected to become uncollectible in the future and for disputed items. We perform periodic credit


7


evaluations of our customers' financial condition and generally do not require collateral. We maintain allowances for doubtful customer accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is developed based on several factors including customers' credit quality, historical write-off experience and any known specific issues or disputes which exist as of the balance sheet date. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Warranty

We provide certain warranties relating to quality and performance of our products. An allowance for the estimated future cost of product warranties and other defective product returns is based on management's estimate of product failure rates and customer eligibility and is recorded as a component of cost of goods sold. If these factors differ from management's estimates, revisions to the estimated warranty liability may be required. The specific terms and conditions of the warranties vary depending upon the customer and the product sold.

Earnings per share

Basic earnings per share is calculated by dividing net earnings by the weighted average shares outstanding during the period and assumed the additional 272,851 shares issued in respect of the contribution of Imaging were outstanding for the entire period under common control, or August 2012 through December 31, 2014. Diluted earnings per share is based on the weighted average number of shares outstanding plus the assumed issuance of common shares and related adjustment to net income attributable to common stockholders related to all potentially dilutive securities.

For the three months ended June 30, 2015, in applying the treasury stock method, equivalent shares of unvested restricted stock and stock options of 65,390 shares were anti-dilutive and excluded from the diluted calculation. For the three months ended June 30, 2014, in applying the treasury stock method, equivalent shares of unvested restricted stock and stock options of 78,525 shares were included in the weighted average shares outstanding in the diluted calculation. Anti-dilutive stock options of 555,428 and 273,723 were excluded from the calculation of dilutive earnings per share for the three months ended June 30, 2015 and 2014, respectively.

For the six months ended June 30, 2015 and 2014, in applying the treasury stock method, equivalent shares of unvested restricted stock and stock options of 83,670 and 124,502 shares, respectively, were included in the weighted average shares outstanding in the diluted calculation. Anti-dilutive stock options of 462,371 and 299,612 were excluded from the calculation of dilutive earnings per share for the six months ended June 30, 2015 and 2014, respectively.

New accounting pronouncements

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory to simplify the guidance on the subsequent measurement of inventory, excluding inventory measured using last-in, first out or the retail inventory method. Under the new standard, inventory should be at the lower of cost and net realizable value. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2016 with early adoption permitted. We are evaluating the effect this guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

In April 2015, the FASB issued ASU 2015-03, Interest- Imputation of Interest (Simplifying the Presentation of Debt Issuance Costs). This update changes the presentation of debt issuance costs in financial statements. Under ASU 2015-03, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the debt issuance costs is reported as interest expense. This update is effective for annual and interim periods beginning after December 15, 2015, which will require us to adopt these provisions in the first quarter of 2016. Early application is permitted for financial statements that have not been previously issued. Entities would be permitted to apply this update retrospectively to all prior periods for which a balance sheet is presented. We are evaluating the effect this guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance to clarify the customer’s accounting for fees paid in a cloud computing arrangement. If a cloud computing arrangement


8


includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software license. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance is effective for annual and interim periods beginning after December 15, 2015. Early application is permitted. We are evaluating the effect this guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This update was originally effective for annual and interim periods beginning after December 15, 2016, however, in July 2015 the FASB voted to defer the effective date to annual and interim periods beginning after December 15, 2017. Early application is permitted but not before the original effective date. This update permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect this guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

3. Fair value measurements

FASB ASC Topic 820, Fair Value Measurements and Disclosures, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, FASB ASC Topic 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

An asset's or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used maximize the use of observable inputs and minimize the use of unobservable inputs.

Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques noted in FASB ASC Topic 820:

A.
Market approach:    Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
B.
Cost approach:    Amount that would be required to replace the service capacity of an asset (replacement cost).
C.
Income approach:    Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).



9


Assets and liabilities remeasured and disclosed at fair value on a recurring basis as of June 30, 2015 and December 31, 2014, are set forth in the table below:

 
As of June 30, 2015
 
As of December 31, 2014
(In thousands)
Asset/
(liability)

Level 2

Valuation
technique
 
Asset/
(liability)

Level 2

Valuation
technique
Interest rate swap contracts
$
(4,114
)
$
(4,114
)
C
 
$
(2,848
)
$
(2,848
)
C
Foreign exchange contracts
(7,877
)
(7,877
)
C
 
(7,339
)
(7,339
)
C
Commodity contracts
(5,317
)
(5,317
)
C
 
(4,088
)
(4,088
)
C

We calculate the fair value of our interest rate swap contracts, commodity contracts and foreign currency contracts using quoted interest rate curves, quoted commodity forward rates and quoted currency forward rates. For contracts which, when aggregated by counterparty, are in a liability position, the discount rates are adjusted by the credit spread that market participants would apply if buying these contracts from our counterparties.
 

In addition to items that are measured at fair value on a recurring basis, we also have assets and liabilities that are measured at fair value on a nonrecurring basis. As these assets and liabilities are not measured at fair value on a recurring basis, they are not included in the tables above. Assets and liabilities that are measured at fair value on a nonrecurring basis include long-lived assets (see Note 7) and certain assets acquired in business acquisitions (see Note 20). We have determined that the fair value measurements included in each of these assets and liabilities rely primarily on our assumptions as observable inputs are not available. As such, we have determined that each of these fair value measurements reside within Level 3 of the fair value hierarchy.

4. Financial instruments

Foreign currency risk

We manufacture and sell our products primarily in North America, South America, Asia, Europe and Africa. As a result our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which we manufacture and sell our products. We generally try to use natural hedges within our foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, we consider managing certain aspects of our foreign currency activities through the use of foreign exchange contracts. We primarily utilize forward exchange contracts with maturities generally within eighteen months to hedge against currency rate fluctuations, and are designated as hedges.

As of June 30, 2015 and December 31, 2014, we had the following outstanding foreign currency contracts that were entered into to hedge forecasted purchases and revenues, respectively:
(In thousands)
Currency denomination 
 
 
June 30,

 
December 31,

Foreign currency contract
2015

 
2014

South Korean Won
$
66,720

 
$
82,907

Mexican Peso
$
56,271

 
$
69,625

Brazilian Real
$
2,526

 
$
12,318

Hungarian Forint
13,785

 
12,646

Great Britain Pound
£

 
£
300


Accumulated unrealized net losses of $(5,006,000) and $(4,662,000) were recorded in accumulated other comprehensive income (loss) (AOCI) as of June 30, 2015 and December 31, 2014, respectively. As of June 30, 2015, losses of $(5,002,000) are expected to be reclassified to the consolidated statement of operations within the next twelve months. Any ineffectiveness during the six months ended June 30, 2015 and 2014, respectively, was immaterial.



10


Interest rate risk

On March 27, 2013, we terminated our undesignated Term B Loan interest rate swap and transferred the value into a new undesignated interest rate swap agreement of $72,000,000 of the outstanding principal loan balance under which we swap a variable LIBOR rate with a floor of 1.25% to a fixed rate of 4.045% with an effective date of December 30, 2016 and expiration date of December 31, 2019. The notional value of this interest rate swap is $72,000,000, and is reduced by $187,500 quarterly from the effective date. Due to the significant value of the terminated swaps which were transferred into this new swap, this interest rate swap is an undesignated hedge and changes in the fair value are recorded as interest expense-net in the accompanying consolidated statements of operations.

On March 27, 2013, we also entered into a designated interest rate swap agreement for $72,000,000 of the outstanding principal balance of our long term debt. Under the terms of the new interest rate swap agreement, we swap a variable LIBOR rate with a floor of 1.25% to a fixed rate of 2.75% with an effective date of December 30, 2016 and expiration date of December 31, 2019. The notional value of this interest rate swap is $72,000,000, and is reduced by $187,500 quarterly from the effective date. This interest rate swap has been designated as a cash flow hedging instrument. Accumulated unrealized losses of $(863,000) and $(282,000), excluding the tax effect, were recorded in accumulated other comprehensive income (loss) (AOCI) as of June 30, 2015, and December 31, 2014, respectively. As of June 30, 2015, no gains are expected to be reclassified to the consolidated statement of operations within the next twelve months. Any ineffectiveness during the three month periods ended June 30, 2015 and 2014, respectively, was immaterial.

The interest rate swaps reduce our overall interest rate risk. However, due to the remaining outstanding borrowings on the Amended and Restated Term B Loan and other borrowing facilities that continue to have variable interest rates, management believes that interest rate risk to us could be material if there are significant adverse changes in interest rates.

Commodity price risk

Our production processes are dependent upon the supply of certain components whose raw materials are exposed to price fluctuations on the open market. The primary purpose of our commodity price forward contract activity is to manage the volatility associated with forecasted purchases. We monitor our commodity price risk exposures regularly to maximize the overall effectiveness of our commodity forward contracts. The principal raw material hedged is copper. Forward contracts are used to mitigate commodity price risk associated with raw materials, generally related to purchases forecast for up to twenty-four months in the future. Additionally, we purchase certain commodities during the normal course of business which result in physical delivery and are excluded from hedge accounting.

We had thirty-four commodity price hedge contracts outstanding at June 30, 2015, and thirty-seven commodity price hedge contracts outstanding at December 31, 2014, with combined notional quantities of 8,966 and 8,196 metric tons of copper, respectively. These contracts mature within the next eighteen months. These contracts were designated as cash flow hedging instruments. Accumulated unrealized losses of $(5,259,000) and $(4,092,000), excluding the tax effect, were recorded in AOCI as of June 30, 2015 and December 31, 2014, respectively. As of June 30, 2015, pre-tax losses of $(4,875,000) are expected to be reclassified to the accompanying consolidated statement of operations within the next 12 months. Any ineffectiveness during the six months ended June 30, 2015 and 2014, respectively, was immaterial.

Other

We present our derivative positions and any related material collateral under master netting agreements on a gross basis. We have entered into International Swaps and Derivatives Association agreements with each of its significant derivative counterparties. These agreements provide bilateral netting and offsetting of accounts that are in a liability position with those that are in an asset position. These agreements do not require us to maintain a minimum credit rating in order to be in compliance with the terms of the agreements and do not contain any margin call provisions or collateral requirements that could be triggered by derivative instruments in a net liability position. As of June 30, 2015, we have not posted any collateral to support derivatives in a liability position.

For derivatives designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. Unrealized gains and losses associated with ineffective hedges, determined using the change in fair value method, are recognized in the accompanying consolidated statements of operations. Derivative gains and losses


11


included in AOCI for effective hedges are reclassified into the accompanying consolidated statements of operations upon recognition of the hedged transaction.

Any derivative instrument designated initially, but no longer effective as a hedge, or initially not effective as a hedge, is recorded at fair value and the related gains and losses are recognized in the accompanying consolidated statements of operations. Our undesignated hedges are primarily our interest rate swaps whose fair value at inception of the instrument due to the rollover of existing interest rate swaps resulted in ineffectiveness. The following table discloses the fair values and balance sheet locations of our derivative instruments:

 
Asset derivatives  
 
Liability derivatives 
 
(In thousands)
Balance sheet location
June 30, 2015

 
December 31, 2014

Balance sheet location
June 30, 2015

 
December 31, 2014

Derivatives designated as hedging instruments:
 

 
 

 
 

 
 

Commodity contracts
Prepaid expenses and
other current assets
$

 
$

Other current liabilities
and accrued expenses
$
4,925

 
$
3,515

Commodity contracts
Other noncurrent assets
56

 

Other noncurrent liabilities
448

 
573

Foreign currency contracts
Prepaid expenses and
other current assets
424

 
869

Other current liabilities
and accrued expenses
7,749

 
7,316

Foreign currency contracts
Other noncurrent assets

 

Other noncurrent liabilities
552

 
892

Interest rate swap contracts
Other noncurrent assets

 

Other noncurrent liabilities
863

 
282

Total derivatives designated as hedging instruments
$
480

 
$
869

 
$
14,537

 
$
12,578

Derivatives not designated as hedging instruments:
 

 
 

 
 

 
 

Interest rate swap contracts
Other noncurrent assets
$

 
$

Other noncurrent liabilities
$
3,251

 
$
2,566

Total derivatives not designated as hedging instruments
$

 
$

 
$
3,251

 
$
2,566



12


 The following tables disclose the effect of our derivative instruments on the accompanying consolidated statement of operations for the three months ended June 30, 2015 (in thousands): 

Derivatives designated as cash flow hedging instruments
Amount of gain (loss) recognized in OCI on derivatives (effective portion)

Location of gain (loss) reclassified from AOCI into income (effective portion)
Amount of gain (loss) reclassified from AOCI into income (effective portion)

Location of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
Amount of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)

Commodity contracts
$
(1,776
)
Cost of goods sold
$
(1,273
)
Cost of goods sold
$
(23
)
Foreign currency contracts
(2,946
)
Cost of goods sold
(1,483
)
Cost of goods sold

Interest rate swap contracts
124

Interest expense–net

Interest expense–net

 
$
(4,598
)
 
$
(2,756
)
 
$
(23
)
 
Derivatives not designated as hedging instruments
Location of gain (loss) recognized in income on derivatives
Amount of gain (loss) recognized in income on derivatives

Interest rate swap
Interest expense–net
$
105


The following tables disclose the effect of our derivative instruments on the accompanying consolidated statement of operations for the three months ended June 30, 2014 (in thousands):  

Derivatives designated as cash flow hedging instruments
Amount of gain (loss) recognized in OCI on derivatives (effective portion)

Location of gain (loss) reclassified from AOCI into income (effective portion)
Amount of gain (loss) reclassified from AOCI into income (effective portion)

Location of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
Amount of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)

Commodity contracts
$
1,784

Cost of goods sold
$
(1,262
)
Cost of goods sold
$
22

Foreign currency contracts
3,909

Cost of goods sold
1,512

Cost of goods sold

Interest rate swap contracts
(672
)
Interest expense–net

Interest expense–net

 
$
5,021

 
$
250

 
$
22

Derivatives not designated as hedging instruments
Location of gain (loss) recognized in income on derivatives
Amount of gain (loss) recognized in income on derivatives

Interest rate swap contracts
Interest expense–net
$
(656
)



13


 The following tables disclose the effect of our derivative instruments on the accompanying consolidated statement of operations for the six months ended June 30, 2015 (in thousands): 

Derivatives designated as cash flow hedging instruments
Amount of gain (loss) recognized in OCI on derivatives (effective portion)

Location of gain (loss) reclassified from AOCI into income (effective portion)
Amount of gain (loss) reclassified from AOCI into income (effective portion)

Location of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
Amount of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)

Commodity contracts
$
(3,699
)
Cost of goods sold
$
(2,532
)
Cost of goods sold
$
(42
)
Foreign currency contracts
(2,913
)
Cost of goods sold
(2,684
)
Cost of goods sold

Interest rate swap contracts
(580
)
Interest expense–net

Interest expense–net

 
$
(7,192
)
 
$
(5,216
)
 
$
(42
)
 
Derivatives not designated as hedging instruments
Location of gain (loss) recognized in income on derivatives
Amount of gain (loss) recognized in income on derivatives

Interest rate swap
Interest expense–net
$
(685
)

The following tables disclose the effect of our derivative instruments on the accompanying consolidated statement of operations for the six months ended June 30, 2014 (in thousands):  

Derivatives designated as cash flow hedging instruments
Amount of gain (loss) recognized in OCI on derivatives (effective portion)

Location of gain (loss) reclassified from AOCI into income (effective portion)
Amount of gain (loss) reclassified from AOCI into income (effective portion)

Location of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
Amount of gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)

Commodity contracts
$
(1,777
)
Cost of goods sold
$
(2,324
)
Cost of goods sold
$
(15
)
Foreign currency contracts
2,784

Cost of goods sold
2,409

Cost of goods sold

Interest rate swap contracts
(1,134
)
Interest expense–net

Interest expense–net

 
$
(127
)
 
$
85

 
$
(15
)
Derivatives not designated as hedging instruments
Location of gain (loss) recognized in income on derivatives
Amount of gain (loss) recognized in income on derivatives

Interest rate swap contracts
Interest expense–net
$
(1,333
)


14



Concentrations of credit risk

Financial instruments, which potentially subject us to concentrations of credit risk, consist primarily of accounts receivable and cash investments. We require placement of cash in financial institutions evaluated as highly creditworthy. Our customer base includes global light and commercial vehicle manufacturers and a large number of retailers, distributors and installers of automotive aftermarket parts. Our credit evaluation process and the geographical dispersion of sales transactions help to mitigate credit risk concentration.

Accounts receivable factoring arrangements

We have entered into factoring agreements with various U.S. and European financial institutions to sell our accounts receivable under nonrecourse agreements. These are treated as a sale. The transactions are accounted for as a reduction in accounts receivable as the agreements transfer effective control over and risk related to the receivables to the buyers. We do not service any domestic accounts after the factoring has occurred. We do not have any servicing assets or liabilities. We utilize factoring arrangements as an integral part of financing for us. The cost of factoring such accounts receivable is reflected in the accompanying consolidated statements of operations as interest expense-net with other financing costs. The cost of factoring such accounts receivable for the three months ended June 30, 2015 and 2014 was $673,000 and $1,292,000, respectively. The cost of factoring such accounts receivable for the six months ended June 30, 2015 and 2014 was $1,436,000 and $2,546,000, respectively. Gross amounts factored under these facilities as of June 30, 2015 and December 31, 2014 were $175,055,000 and $229,696,000, respectively. Any change in the availability of these factoring arrangements could have a material adverse effect on our financial condition.

5. Inventories

Net inventories consisted of the following:

 
June 30,

 
 December 31,

(In thousands)
2015

 
2014

Raw materials
$
58,041

 
$
46,049

Core inventory
36,845

 
36,034

Work-in-process
9,363

 
7,827

Finished goods
87,528

 
74,233

 
$
191,777

 
$
164,143


Raw materials also include materials consumed in the manufacturing and remanufacturing process, but not directly incorporated into the finished products.

6. Property, plant and equipment

Depreciation and amortization expense of property, plant, and equipment for the six months ended June 30, 2015 and 2014 was $12,721,000 and $13,384,000, respectively.



15


7. Goodwill and other intangible assets

The following table represents the carrying value of other intangible assets:
 
 
As of June 30, 2015
 
As of December 31, 2014
(In thousands)
Carrying
value

 
Accumulated
amortization

 
Net

 
Carrying
value

 
Accumulated
amortization

 
Net

Definite-life intangibles:
 
 
 
 
 
 
 
 
 
 
 
Intellectual property
$
28,628

 
$
3,905

 
$
24,723

 
$
27,833

 
$
2,980

 
$
24,853

Customer relationships
210,270

 
61,508

 
148,762

 
206,960

 
50,558

 
156,402

Customer contract
81,516

 
61,901

 
19,615

 
93,642

 
63,285

 
30,357

Trade names
500

 
33

 
467

 

 

 

Lease intangible
420

 
320

 
100

 
420

 
219

 
201

Total
321,334

 
127,667

 
193,667

 
328,855

 
117,042

 
211,813

Indefinite-life intangibles:
 

 
 

 
 
 
 

 
 

 
 
Trade names
86,210

 

 
86,210

 
86,210

 

 
86,210

Intangible assets, net
$
407,544

 
$
127,667

 
$
279,877

 
$
415,065

 
$
117,042

 
$
298,023

Goodwill
$
263,491

 
$

 
$
263,491

 
$
259,586

 
$

 
$
259,586


Definite-lived intangible assets are being amortized to reflect the pattern of economic benefit consumed.

We perform impairment testing annually or more frequently when events or circumstances indicate that the carrying amount of the above intangibles may be impaired.

On March 1, 2015, we completed our previously announced acquisition of substantially all assets of Maval Manufacturing, Inc. pursuant to the terms and conditions of a definitive agreement. See Note 20 for further information. As a result of the acquisition, we assigned preliminary values to all assets and liabilities acquired, including the customer relationships intangible of $3,310,000 with a useful life of 10 years, $500,000 to value the Maval trade name with a useful life of 5 years, and $3,905,000 to goodwill in the preliminary purchase price allocation during the six months ended June 30, 2015

Trade names were valued based on the relief of royalty approach. This method allocates value based on what the Company would be willing to pay as a royalty to a third-party owner of the intellectual property or trade name in order to exploit the economic benefits. Customer relationships were valued using an excess earnings approach after considering a fair return on fixed assets, working capital, trade names, intellectual property, and assembled workforce. 

During the six months ended June 30, 2015, we had intellectual property additions of $795,000 which were related to patent defense and filing costs. The weighted average useful life of these intellectual property intangibles was 15 years as of June 30, 2015.

During the six months ended June 30, 2015, we had customer contract intangible additions of approximately $726,000, with a weighted average useful life of 4.3 years based on the estimated useful life of the contracts.

8. Other noncurrent assets

Other noncurrent assets primarily consisted of core return rights of $21,453,000 and noncurrent deferred tax assets of $12,159,000 as of June 30, 2015. Other noncurrent assets primarily consisted of core return rights of $38,940,000 and noncurrent deferred tax assets of $12,028,000 as of December 31, 2014.



16


9. Other current liabilities and accrued expenses

Other current liabilities and accrued expenses consisted of the following:
 
June 30,

 
December 31,

(In thousands)
2015

 
2014

Accrued warranty
$
25,805

 
$
22,583

Accrued wages and benefits
16,486

 
18,784

Current portion of customer obligations
1,576

 
2,234

Rebates, stocklifts, discounts and returns
16,092

 
20,282

Current deferred revenue
796

 
865

Other
52,852

 
63,761

 
$
113,607

 
$
128,509


Changes to our current and noncurrent accrued warranty were as follows:
 
Three months ended June 30,
 
 
Six months ended June 30,
 
(In thousands)
2015


2014

 
2015


2014

Balance at beginning of period
$
27,711

 
$
32,489

 
$
26,012

 
$
30,781

Provision for warranty
11,328

 
9,047

 
21,892

 
21,218

Payments and charges against the accrual
(9,748
)
 
(11,709
)
 
(18,973
)
 
(23,535
)
Increased warranty accruals due to business acquisitions (Note 20)

 

 
360

 
1,363

Balance at end of period
$
29,291

 
$
29,827

 
$
29,291

 
$
29,827


10. Other noncurrent liabilities

Other noncurrent liabilities consisted of the following:
 
June 30,

 
December 31,

(In thousands)
2015

 
2014

Noncurrent deferred revenue
$
3,590

 
$
3,967

Other
23,402

 
22,516

 
$
26,992

 
$
26,483


11.
Restructuring and other charges

Total restructuring and other charges of $444,000 were recorded for the six months ended June 30, 2015. These charges consisted of $205,000 of employee termination benefits and $239,000 of other exit costs. Total restructuring and other charges of $393,000 were recorded during the six months ended June 30, 2014. These charges consisted of $230,000 of employee termination benefits and $163,000 of other exit costs. The charges in both periods were primarily related to the closure of our Mezokovesd, Hungary plant and restructuring actions in our North American operations.



17


The following table summarizes the activity in our accrual for restructuring and other charges for the three and six month periods ended June 30, (in thousands):
2015
Termination
benefits

 
Exit
costs

 
Total

Accrual at December 31, 2014
$
259

 
$
72

 
$
331

Provision
15

 
58

 
73

Payments
(54
)
 
(73
)
 
(127
)
Accrued at March 31, 2015
$
220

 
$
57

 
$
277

Provision
190

 
181

 
371

Payments
(33
)
 
(195
)
 
(228
)
Accrual at June 30, 2015
$
377

 
$
43

 
$
420

 
2014
Termination
benefits

 
Exit
costs

 
Total

Accrual at December 31, 2013
$
981

 
$
45

 
$
1,026

Provision
228

 
86

 
314

Payments
(950
)
 
(106
)
 
(1,056
)
Accrued at March 31, 2014
$
259

 
$
25

 
$
284

Provision
2

 
77

 
79

Payments
(113
)
 
(97
)
 
(210
)
Accrual at June 30, 2014
$
148

 
$
5

 
$
153


Significant components of restructuring and other charges were as follows (in thousands):
 
Total
expected
costs

 
Expense incurred in  
 
Estimated
future
expense

 
Six months ended June 30, 2015

 
Twelve
months ended
December 31,
2014

 
Twelve
months ended
December 31,
2013

 
 
 
 
 
2014 Activities
 
 
 
 
 
 
 
 
 
Severance
$
1,347

 
$
205

 
$
1,066

 
$

 
$
76

Exit costs
1,111

 
161

 
950

 

 

 
$
2,458

 
$
366

 
$
2,016

 
$

 
$
76

2013 Activities
 

 
 

 
 

 
 

 
 

Severance
$
1,976

 
$

 
$
220

 
$
1,756

 
$

Exit costs
696

 

 
4

 
692

 

 
$
2,672

 
$

 
$
224

 
$
2,448

 
$

2012 Activities
 

 
 

 
 

 
 

 
 

Severance
$
4,533

 
$

 
$

 
$
795

 
$

Exit costs
1,633

 
78

 
267

 
823

 
54

Other charges
1,687

 

 

 

 

 
$
7,853

 
$
78

 
$
267

 
$
1,618

 
$
54




18


12. Debt

Borrowings under long-term debt arrangements, net of discounts, consisted of the following:
 
June 30,

 
December 31,

(In thousands)
2015

 
2014

Asset-Based Revolving Credit Facility- Maturity date of September 5, 2018
$
43,600

 
$

Term B Loan, as Amended and Restated - Maturity date of March 5, 2020
292,173

 
293,637

Total Senior Credit Facility and Notes
335,773

 
293,637

Capital leases and other obligations
7,907

 
8,167

Less current maturities
(3,489
)
 
(3,509
)
Long-term debt less current maturities
$
340,191

 
$
298,295


On December 31, 2014, in connection with the completion of the Spin-off Transaction, Remy International, Inc. and certain subsidiaries entered into a Second Amendment to the Asset-Based Revolving Credit Facility (“ABL Facility”) and a Second Amendment and Restatement of the Term B Loan Credit Agreement (“Term B Loan”) (collectively, the “Amendments”).

The Amendments permitted the Spin-off Transaction to occur, added New Remy Holdco Corp. and New Remy Corp. as guarantors of the obligations under the foregoing credit facilities, and made conforming changes to reflect the effects of the Spin-off Transaction. There are no other changes that materially modify the foregoing credit facilities.

The ABL Facility bears an interest rate to a defined Base Rate plus 0.50%-1.00% per year or, at our election, at an applicable LIBOR Rate plus 1.50%-2.00% per year and is paid monthly. The ABL Facility maintains the current availability at $95,000,000, but may be increased, under certain circumstances, by $20,000,000. The ABL Facility is secured by substantially all domestic accounts receivable and inventory. At June 30, 2015, the ABL Facility balance was $43,600,000. Based upon the collateral supporting the ABL Facility, the amount borrowed, and the outstanding letters of credit of $2,310,000, there was additional availability for borrowing of $46,146,000 on June 30, 2015. We will incur an unused commitment fee of 0.375% on the unused amount of commitments under the ABL Facility.

The Term B Loan bears an interest rate consisting of LIBOR (subject to a floor of 1.25%) plus 3.00% per year with an original issue discount of $750,000. The Term B Loan also contains an option to increase the borrowing provided certain conditions are satisfied, including maintaining a maximum leverage ratio. The Term B Loan is secured by a first priority lien on the stock of our subsidiaries and substantially all domestic assets other than accounts receivable and inventory pledged to the ABL Facility. Principal payments in the amount of $750,000 are due at the end of each calendar quarter with termination and final payment no later than March 5, 2020. The Term B Loan is subject to an excess cash calculation which may require the payment of additional principal on an annual basis. At June 30, 2015, the average borrowing rate, including the impact of the interest rate swaps, was 4.25%.

On March 5, 2013, we entered into a First Amendment to our existing Asset-Based Revolving Credit Facility ("ABL First Amendment") to extend the maturity date of the Asset-Based Revolving Credit Facility from December 17, 2015 to September 5, 2018 and reduce the borrowing rate. On March 5, 2013, we entered into a $300,000,000 Amended and Restated Term B Loan Credit Agreement ("Amended and Restated Term B Loan") to refinance the existing $286,978,000 Term B Loan, extend the maturity from December 17, 2016 to March 5, 2020, and reduce the borrowing rate.

As of June 30, 2015, the estimated fair value of our Term B Loan was $294,512,000, which was $2,339,000 more than the carrying value. As of December 31, 2014, the estimated fair value of our Term B Loan was $290,693,000, which was $2,944,000 less than the carrying value. The Level 2 fair market values are based on established market prices as of June 30, 2015 and December 31, 2014. The fair value estimates do not necessarily reflect the values we could realize in the current markets. Because of their short-term nature or variable interest rate, we believe the carrying value for short-term debt and the revolving credit agreement closely approximates their fair value.

All of our credit agreements contain various covenants and representations that are customary for transactions of this nature. We were in compliance with all covenants as of June 30, 2015. The credit agreements contain various restrictive covenants, which include, among other things: (i) a maximum leverage ratio; (ii) a minimum interest coverage ratio; (iii) mandatory prepayments upon certain asset sales and debt issuances; and (iv) limitations on the payment of


19


dividends in excess of a specified amount. The term loan also includes events of default customary for a facility of this type, including a cross-default provision under which the lenders may declare the loan in default if we (i) fail to make a payment when due under any debt having a principal amount greater than $5.0 million or (ii) breach any other covenant in any such debt as a result of which the holders of such debt are permitted to accelerate its maturity.

Short-term debt

We have revolving credit facilities with three Korean banks with a total facility amount of approximately $11,565,000 of which $1,779,000 was borrowed at an average interest rate of 2.61% at June 30, 2015. In Hungary, there is one revolving credit facility with one bank for a total credit facility of $1,038,000 of which $1,014,000 was borrowed at an average interest rate of 2.1% at June 30, 2015. In China there is a revolving credit facility with one bank for a total credit facility of $10,000,000 of which $3,000,000 was borrowed at an average interest rate of 2.04% at June 30, 2015.

Capital leases and other obligations

Capital leases have been capitalized using nominal interest rates ranging from 4.0% to 15.1% as determined by the dates we entered into the leases. We had assets under capital leases of approximately $2,593,000 at June 30, 2015 and approximately $2,810,000 at December 31, 2014, net of accumulated amortization.

On December 29, 2014, we entered into a leaseback financing arrangement with an independent third party involving the sale of a distribution facility with a net book value of approximately $11,207,000 at June 30, 2015 and $11,855,000 at December 31, 2014. We continue to maintain the facility on our books and have included the proceeds from the sale of the facility as a financing obligation totaling $5,800,000 bearing an implied interest rate of 6.5%.

13. Stockholders' equity

Common stock and preferred stock

In connection with the Spin-off Transaction closing on December 31, 2014, we amended our Amended and Restated Certificate of Incorporation, which is substantially identical to Old Remy's Amended and Restated Certificate of Incorporation in effect immediately prior to the closing of the Spin-off Transaction. The rights of stockholders after the closing of the Spin-off Transaction, as a matter of state law and under the relevant organizational documents, are fundamentally the same as the rights of stockholders that were in effect immediately prior to the consummation of the Spin-off Transaction.

Under the Amended and Restated Certificate of Incorporation, the Company is authorized to issue 280,000,000 shares, consisting of 240,000,000 shares of common stock, par value $0.0001 per share, and 40,000,000 shares of preferred stock, par value $0.0001 per share. As of June 30, 2015, there were 31,811,724 common stock shares outstanding and no preferred stock shares outstanding.

The holders of common stock are entitled to one vote on all matters properly submitted on which the common stockholders are entitled to vote.

Share Repurchase Program

On February 18, 2015, the Board of Directors approved a share repurchase program, effective February 23, 2015, under which we may repurchase up to $100,000,000 of our outstanding common stock shares. Purchases may be made from time to time in the open market at prevailing prices or in privately negotiated transactions through February 28, 2018. During the three months ended June 30, 2015, we paid approximately $9,932,000 in repurchases of our common stock (447,725 shares at an average purchase price of $22.18 per share, excluding commission costs). As of June 30, 2015, the amount remaining under the Board's share repurchase authorization was $90,068,000. The Merger Agreement entered into in connection with the BorgWarner Transaction generally prohibits us from making further repurchases of our common stock.



20


Treasury stock

During the six months ended June 30, 2015, we withheld 47,772 shares at cost, or $1,130,000, to satisfy tax obligations for vesting of restricted stock shares and exercises of stock options granted to our employees under the Remy International, Inc. Omnibus Incentive Plan, or "Omnibus Incentive Plan". In addition, 117,457 shares were forfeited and returned to treasury stock during the six months ended June 30, 2015 for no value pursuant to the Omnibus Incentive Plan.

During the six months ended June 30, 2014, we withheld 114,291 shares at cost, or $2,505,000, to satisfy tax obligations for vesting of restricted stock shares and exercises of stock options granted to our employees under the Omnibus Incentive Plan. In addition, 74,892 shares were forfeited and returned to treasury stock during the six months ended June 30, 2014 for no value pursuant to the Omnibus Incentive Plan.

Dividend payments

Our Board of Directors declared quarterly cash dividends of ten cents ($0.10) per share in February 2015 and eleven cents ($0.11) per share in April 2015. Cash dividends paid during the six months ended June 30, 2015 were $6,800,000, which also included accrued cash dividends paid on restricted stock vestings.  As of June 30, 2015, a dividend payable of $114,000 was recorded for unvested restricted stock and is payable upon vesting. 

On July 30, 2015, our Board of Directors declared a quarterly cash dividend of eleven cents ($0.11) per share, payable on August 28, 2015, to stockholders of record as of August 14, 2015.

14. Reclassifications out of accumulated other comprehensive income (loss)

The following table discloses the changes in each component of accumulated other comprehensive income, net of tax for the three and six months ended June 30, 2015 (in thousands):

 
 
Foreign currency translation adjustment

 
Unrealized gains (losses) on currency hedges

 
Unrealized gains (losses) on commodity hedges

 
Interest rate swaps

 
Employee benefit plan adjustment

 
Accumulated other comprehensive income (loss)

Balances at December 31, 2014
 
$
1,590

 
$
(4,662
)
 
$
(1,955
)
 
$
(172
)
 
$
(4,184
)
 
$
(9,383
)
Other comprehensive income (loss) before reclassifications
 
(7,993
)
 
(82
)
 
(1,698
)
 
(429
)
 
(105
)
 
(10,307
)
Amounts reclassified from accumulated other comprehensive income (loss)
 

 
899

 
778

 

 
25

 
1,702

Balances at March 31, 2015
 
$
(6,403
)
 
$
(3,845
)
 
$
(2,875
)
 
$
(601
)
 
$
(4,264
)
 
$
(17,988
)
Other comprehensive income (loss) before reclassifications
 
(910
)
 
(2,295
)
 
(1,096
)
 
76

 
(110
)
 
(4,335
)
Amounts reclassified from accumulated other comprehensive income (loss)
 

 
1,134

 
790

 

 
25

 
1,949

Balances at June 30, 2015
 
$
(7,313
)
 
$
(5,006
)
 
$
(3,181
)
 
$
(525
)
 
$
(4,349
)
 
$
(20,374
)



21


The following table discloses the changes in each component of accumulated other comprehensive income, net of tax for the three and six months ended June 30, 2014 (in thousands):

 
 
Foreign currency translation adjustment

 
Unrealized gains (losses) on currency hedges

 
Unrealized gains (losses) on commodity hedges

 
Interest rate swaps

 
Employee benefit plan adjustment

 
Accumulated other comprehensive income (loss)

Balances at December 31, 2013
 
$
9,441

 
$
2,753

 
$
(1,776
)
 
$
886

 
$
7,866

 
$
19,170

Other comprehensive income (loss) before reclassifications
 
797

 
(886
)
 
(2,264
)
 
(281
)
 
(463
)
 
(3,097
)
Amounts reclassified from accumulated other comprehensive income (loss)
 

 
(636
)
 
672

 

 
100

 
136

Balances at March 31, 2014
 
$
10,238

 
$
1,231

 
$
(3,368
)
 
$
605

 
$
7,503

 
$
16,209

Other comprehensive income (loss) before reclassifications
 
5,644

 
3,298

 
1,101

 
(410
)
 
(241
)
 
9,392

Amounts reclassified from accumulated other comprehensive income (loss)
 

 
(1,162
)
 
755

 

 
102

 
(305
)
Balances at June 30, 2014
 
$
15,882

 
$
3,367

 
$
(1,512
)
 
$
195

 
$
7,364

 
$
25,296


The following table discloses the effect of reclassifications of accumulated other comprehensive income on the accompanying consolidated statement of operations (in thousands):

Details about Accumulated Other Comprehensive Income (Loss) Components
 
Three months ended June 30,
 
 
Affected Line Item in the Statement Where Net Income is Presented
 
2015


2014

 
Gains (losses) on cash flow hedges:
 
 
 
 
 
 
Foreign currency contracts
 
$
(1,483
)
 
$
1,512

 
Cost of goods sold
Commodity contracts
 
(1,296
)
 
(1,240
)
 
Cost of goods sold
 
 
(2,779
)
 
272

 
Total before tax
 
 
855

 
135

 
Tax benefit (expense)
 
 
$
(1,924
)
 
$
407

 
Net of tax
 
 
 
 
 
 
 
Amortization of employee benefit plan costs:
 
 
 
 
 
 
Prior service costs
 
$

 
$

 
Selling, general and administrative expenses
Net actuarial loss
 
(29
)
 
(167
)
 
Selling, general and administrative expenses
 
 
(29
)
 
(167
)
 
Total before tax
 
 
4

 
65

 
Tax benefit (expense)
 
 
$
(25
)
 
$
(102
)
 
Net of tax
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(1,949
)
 
$
305

 
Net of tax



22


The following table discloses the effect of reclassifications of accumulated other comprehensive income on the accompanying consolidated statement of operations (in thousands):

Details about Accumulated Other Comprehensive Income (Loss) Components
 
Six months ended June 30,
 
 
Affected Line Item in the Statement Where Net Income is Presented
 
2015


2014

 
Gains (losses) on cash flow hedges:
 
 
 
 
 
 
Foreign currency contracts
 
$
(2,684
)
 
$
2,409

 
Cost of goods sold
Commodity contracts
 
(2,574
)
 
(2,339
)
 
Cost of goods sold
 
 
(5,258
)
 
70

 
Total before tax
 
 
1,657

 
301

 
Tax benefit (expense)
 
 
$
(3,601
)
 
$
371

 
Net of tax
 
 
 
 
 
 
 
Amortization of employee benefit plan costs:
 
 
 
 
 
 
Prior service costs
 
$

 
$

 
Selling, general and administrative expenses
Net actuarial loss
 
(58
)
 
(331
)
 
Selling, general and administrative expenses
 
 
(58
)
 
(331
)
 
Total before tax
 
 
8

 
129

 
Tax benefit (expense)
 
 
$
(50
)
 
$
(202
)
 
Net of tax
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(3,651
)
 
$
169

 
Net of tax

15. Income taxes

We compute on a quarterly basis an estimated annual effective tax rate considering ordinary income and related income tax expense. Ordinary income refers to income (loss) before income tax expense excluding significant, unusual, or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs. Other items included in income tax expense in the periods in which they occur include the cumulative effect of changes in tax laws or rates, foreign exchange gains and losses, adjustments to uncertain tax positions, and adjustments to our valuation allowance due to changes in judgment regarding the realizability of deferred tax assets in future years.

The effective income tax rate for the three and six months ended June 30, 2015 and 2014, differs from the U.S. federal income tax rate primarily due to the effect of foreign taxable income, tax credits, and permanent items.

Income Taxes - Bilateral Advance Pricing Agreement
 
As previously disclosed, the Company has applied for a bilateral Advance Pricing Agreement ("APA") between  the U.S. and South Korea, covering the tax years 2007 through 2014.  The Korean and U.S. tax authorities met in July 2015, and have tentatively agreed on the terms of the APA, subject to additional review and approvals by the respective tax authorities and the Company.  The terms of the agreement are not disclosed to the Company until agreements are finalized. However some limited information has been provided which the Company is currently reviewing and analyzing the impacts.  While final adjustments have not been determined by either the U.S. or South Korea tax authorities, a final agreement may result in income tax expense of up to $20,000,000 and cash outflow of up to $44,000,000.



23


16. Employee benefit plans

The components of expense for our pension plans were as follows (in thousands):
 
 
Three months ended June 30,
 
 
Six months ended June 30,
 
Components of expense
2015


2014

 
2015


2014

Service costs
$
325

 
$
289

 
$
650

 
$
565

Interest costs
762

 
755

 
1,524

 
1,507

Expected return on plan assets
(761
)
 
(768
)
 
(1,522
)
 
(1,534
)
Recognized net actuarial loss (gain)
53

 
(147
)
 
106

 
(291
)
Net periodic pension cost
$
379

 
$
129

 
$
758

 
$
247


Cash flows

We contributed $1,695,000 and $1,809,000 to our pension plans during the six months ended June 30, 2015 and 2014, respectively. We expect to contribute a total of $2,041,000 to our U.S. pension plans and $2,004,000 to our international pension plans in 2015.

17.
Stock-based compensation

Omnibus Incentive Plan

The Omnibus Incentive Plan, which is stockholder-approved, became effective on October 27, 2010, was amended on March 24, 2011 and permits our Compensation Committee of the Board of Directors to grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and other cash or share based awards to our employees and non-employee directors. Actual participation, as well as the terms of the awards to those participants, is determined by the Compensation Committee. The maximum number of shares authorized that may be delivered pursuant to awards under the Omnibus Incentive Plan was 5,500,000. As of June 30, 2015, there were 2,790,000 shares available to be issued under the Omnibus Incentive Plan.

On February 23, 2015, executive officers and other key employees received restricted stock awards of 150,280 common shares with a weighted average grant date value of $23.01, based on the closing price of our common stock on the respective grant date as reported on the NASDAQ Stock Market. These awards are 50% time-based and 50% performance-based. The time-based restricted shares vest equally over a three-year period and one-third of the performance-based restricted shares will be available to vest for each of the calendar years 2015, 2016 and 2017 based on a target operating income for each of the years. Also on February 23, 2015, we granted an additional time-based restricted stock award of 22,816 common shares which will vest 100% on the first anniversary of the grant date. Additionally, executive officers and other key employees were granted 305,753 stock option awards which vest equally over a three-year period with a term of seven years and a weighted average exercise price of $23.01.

On March 6, 2015, an additional time-based restricted stock award of 15,000 common shares was granted with a grant date value of $22.62 based on the closing price of our common stock on the grant date as reported on the NASDAQ Stock Market. This award will vest 100% on the third anniversary of the grant date.

In May 2015, additional new hire restricted stock awards of 30,558 common shares (including performance shares) were granted with a weighted average grant date value of $21.76 based on the closing price of our common stock on the respective grant dates as reported on the NASDAQ Stock Market. These awards have the same terms and conditions as the awards granted on February 23, 2015 as discussed above. Also in May 2015, we granted new hires 64,980 stock option awards which vest equally over a three-year period with a term of seven years and a weighted average exercise price of $21.76.

Also on February 23, 2015, our Board of Directors received restricted stock awards of 22,815 common shares and stock option awards of 46,418 common shares. One-half of the restricted stock shares and stock options granted to the Board of Directors vest at each anniversary of the grant date. Restricted stock granted to the Board of Directors were valued at $23.01, which was the closing price of our common stock on the grant date as reported on the NASDAQ


24


Stock Market. Stock options granted to the Board of Directors have a term of seven years and an exercise price of $23.01.

We estimated the grant date fair value of all stock options granted during the six months ended June 30, 2015 using the Black-Scholes valuation model. The weighted average valuation per share was $4.78 based on the following assumptions: Risk-free interest rate: 1.41%, Dividend Yield: 1.78%, Expected Volatility: 27.94% and Expected Term: 4.5 years.

Shares issued upon exercise of stock options were 7,036 and 2,397 during the six months ended June 30, 2015 and 2014, respectively.

Noncash compensation expense related to all types of awards was recognized for the three and six months ended June 30, 2015 and 2014 as follows:

 
Three months ended June 30,
 
 
Six months ended June 30,
 
(In thousands)
2015


2014

 
2015


2014

Stock-based compensation expense
$
1,009

 
$
1,342

 
$
2,325

 
$
2,561


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

18. Business segment and geographical information

We manage our business and operate in a single reportable business segment.

We are a multi-national corporation with operations in many countries, including the United States, Canada, Mexico, Brazil, China, Hungary, South Korea, United Kingdom, Belgium and Tunisia. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets where we distribute our products. Our operating results are exposed to changes in exchange rates between the U.S. dollar and non-U.S. currencies. Exposure to variability in foreign currency exchange rates is managed primarily through the use of natural hedges, whereby funding obligations and assets are both denominated in the local currency, and through selective currency hedges. From time to time, we enter into exchange agreements to manage our exposure arising from fluctuating exchange rates related to specific transactions. Refer to Note 4. Sales are attributed to geographic locations based on the point of sale.

Information about our net sales by region was as follows:

 
Three months ended June 30,
 
 
Six months ended June 30,
 
(In thousands)
2015


2014

 
2015


2014

Net sales to external customers:
 
 
 
 
 
 
 
United States
$
171,422

 
$
196,509

 
$
375,930

 
$
401,127

Europe
18,107

 
22,788

 
37,870

 
45,863

Other Americas
9,300

 
11,857

 
18,109

 
22,737

Asia
73,168

 
71,756

 
143,499

 
139,188

Total net sales
$
271,997

 
$
302,910

 
$
575,408

 
$
608,915




25


19. Other commitments and contingencies

We are party to various legal actions and administrative proceedings and subject to various claims, including those relating to commercial transactions, product liability, safety, health, taxes, environmental and other matters. We believe that none of such actions, other than those discussed below, depart from customary litigation arising in the ordinary course of business. We review these matters on an ongoing basis and follow the provisions of FASB ASC Topic 450, Contingencies, when making accrual and disclosure decisions. For legal proceedings where it has been determined that a loss is both probable and reasonably estimable, a liability has been recorded in our accompanying consolidated financial statements. For legal proceedings where it has been determined that a loss is either probable but the amount or range of loss is not reasonably estimable, or reasonably possible, we provide disclosure with respect to the matter.

Actual losses may materially differ from the amounts recorded and the ultimate outcomes of our pending cases are generally not yet determinable. At present we do not believe that the ultimate resolution of currently pending legal proceedings, either individually or in the aggregate, will have a material adverse effect on our financial condition. However, litigation matters are inherently uncertain, and we cannot currently quantify our ultimate liability for unresolved litigation matters. As a result, it is possible that such liability could materially affect our consolidated financial position or our results of operations or cash flows for an individual reporting period.
 
Remy Componentes S. de R.L. de C.V. vs. Corporativo Industrial y Empresarial Lorva, S.A. de C.V. ("Lorva")

In December 2012, Lorva, a former vendor, filed a judicial claim against Old Remy in the Fourth District federal court in San Luis Potosi, Mexico requesting the rescission of two alleged operational service contracts. We filed a timely response in the Fourth District Court in January 2013. The collection of evidence and witness testimony concluded in the civil case, and the parties filed their written closing argument briefs in the fourth quarter of 2013. In March 2014, the first instance sentence was issued by the Fourth District Court determining Lorva has the right to rescind both contracts and collect the benefit sought in the amount of approximately $17,380,000 for liquidated damages and outstanding invoices. In April 2014, we filed an appeal of this ruling in the Unitary Tribunal in San Luis Potosi, Mexico. On October 2, 2014, the Unitary Tribunal in San Luis Potosi, Mexico ruled on the appeal, reducing the March 2014 lower Fourth District Court award from $17,380,000 to payment of invoices and amounts due of $121,000 plus Lorva's costs and attorney fees. Both Lorva and Old Remy filed a timely appeal of this ruling in the 4th Collegiate Tribunal in San Luis Potosi, Mexico in October 2014. In February 2015, the 4th Collegiate Tribunal sent instructions to the Unitary Tribunal to consider the evidence presented that supports Remy's allegation that the contract is fraudulent and rule on that evidence. In March 2015, the Unitary Tribunal reissued the same judgment as in their prior October 2014 ruling, as a result, Remy filed an appeal with the 4th Collegiate Tribunal in April 2015. We believe it is probable that we should prevail on final appeal based on legal arguments and the facts of this case. As of June 30, 2015, we continue to maintain an immaterial accrual related to this matter.

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

In March 2011, Tecnomatic filed a lawsuit against Remy International, Inc., its Mexican subsidiaries and two other entities alleging breach of contract and the misappropriation of trade secrets, and requested damages of $110,000,000. On September 11, 2014, we announced entry into a Settlement Agreement and Mutual General Release (the "Agreement") to settle all disputes that existed among us and Tecnomatic. In addition, we entered into a cross licensing arrangement of certain patents with Tecnomatic. The value of the patents received from Tecnomatic was approximately $13,930,000. Pursuant to the Agreement and the cross licensing arrangement, we paid to Tecnomatic a $16,000,000 cash payment in September 2014 and paid a $16,000,000 cash payment during the six months ended June 30, 2015.

20. Acquisition

Acquisition of Maval Manufacturing, Inc.

On February 19, 2015, we announced that we entered into a definitive agreement to acquire substantially all of the assets of Maval Manufacturing, Inc., a manufacturer, remanufacturer, and distributor of steering systems, components, and specialty products to the automotive service, original equipment power sports, and off-road specialty vehicle markets. The transaction closed effective March 1, 2015. In connection with the closing of the transaction, the assets were placed in Maval Industries, L.L.C. ("Maval"), a wholly-owned subsidiary of the Company. The results of operations of Maval have been included in our consolidated results of operations since the acquisition date.



26


Preliminary purchase price was $22,000,000, consisting of $18,700,000 in cash and $3,300,000 cash held in escrow. The initial purchase price allocation based on their fair values as of the acquisition date was as follows:
Trade accounts receivable
 
$
8,011

Inventories
 
14,065

Prepaid expenses and other current assets
 
25

Property, plant and equipment
 
1,764

Goodwill
 
3,905

Intangible assets
 
3,810

Other noncurrent assets
 
22

Total assets acquired
 
$
31,602

 
 
 
Accounts payable
 
$
6,674

Other current liabilities and accrued expenses
 
2,928

Total liabilities acquired
 
$
9,602

Net assets acquired
 
$
22,000


Goodwill of $3,905,000, which is deductible for tax purposes, has been recorded based on the amount of the purchase price that exceeds the fair value of the net assets acquired. The purchase price allocation is preliminary as of June 30, 2015 as we finalize our valuation of long lived assets and any contingent liabilities.

For the three months ended June 30, 2015, we recognized customer relationships and trade name amortization of $108,000, which was included in cost of goods sold in the accompanying consolidated statement of operations.

For the six months ended June 30, 2015, we recognized a finished goods inventory step-up of $587,000 and customer relationships and trade name amortization of $144,000, which was included in cost of goods sold in the accompanying consolidated statement of operations.



27


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, hopes, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results could vary materially from those forward-looking statements contained herein due to many factors, including, but not limited to: future financial results and liquidity, development of new products and services, the effect of competitive products or pricing, the effect of commodity and raw material prices, the impact of supply chain cost management initiatives, restructuring risks, customs duty claims, litigation uncertainties and warranty claims, conditions in the automotive industry, foreign currency fluctuations, costs related to re-sourcing and outsourcing products, the effect of economic conditions, and other risks identified in the “Special note regarding forward-looking statements”, “Risk Factors” and other sections of the Company's previously filed most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect the Company.  We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events and/or otherwise, except as may be required by law.

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014.

Executive Overview

Our Business

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

Our principal products for both light and commercial vehicles include:

new starters and alternators;
remanufactured starters and alternators;
hybrid electric motors; and
multi-line products (primarily remanufactured), including steering gears, constant velocity (CV) axles, and brake calipers.

We sell our new starters, alternators and hybrid electric motors to U.S. and non-U.S. OEMs for factory installation on new vehicles. We sell remanufactured and new products to aftermarket customers, mainly retailers in North America, warehouse distributors in North America and Europe, and OEMs globally for the original equipment service ("OES"), market. We sell a small volume of remanufactured locomotive power assemblies in North America.

BorgWarner Transaction

On July 12, 2015, we entered into an Agreement and Plan of Merger ("Merger Agreement") with BorgWarner Inc. ("BorgWarner") and Band Merger Sub, Inc., a wholly owned subsidiary of BorgWarner (“Merger Sub”) pursuant to which it is expected that we will merge with and into Merger Sub, with the Company surviving the merger as a wholly-owned subsidiary of BorgWarner (the "BorgWarner Transaction"). The Merger Agreement provides that at the effective time of the merger, if it occurs, each of the outstanding shares of Remy common stock (other than certain shares owned by BorgWarner, Merger Sub, Remy or any subsidiary of BorgWarner, Merger Sub or Remy, and shares that are owned by Remy stockholders who have perfected and not withdrawn a demand for appraisal rights pursuant to Delaware law) will be cancelled and converted into $29.50 in cash, without interest.



28


The consummation of the BorgWarner Transaction is subject to the satisfaction or waiver of certain customary closing conditions, including, among others, the approval of the Merger Agreement by stockholders representing a majority of our outstanding shares of common stock and the receipt of antitrust and other regulatory clearances in the U.S., Austria, Germany, China, Korea and Mexico. The Merger Agreement also contains certain termination rights by us and BorgWarner. The Merger Agreement may be terminated by us or BorgWarner under certain circumstances. In some of those circumstances, we may be required to pay BorgWarner a termination fee of $28,313,000 (or in certain limited circumstances, a lower termination fee of $14,156,000) in connection with the termination of the Merger Agreement. Assuming the timely satisfaction of closing conditions, the BorgWarner Transaction is expected to close during the fourth quarter of 2015.

Financial Results

Net sales of $272.0 million for the second quarter of 2015 decreased 10.2% from $302.9 million for the same period in 2014 driven primarily by decreased volume and mix of $28.4 million, a negative pricing impact of $2.9 million, and unfavorable foreign currency translation of $9.2 million. The net sales decrease was partially offset by $9.7 million in second quarter sales of Maval Industries, L.L.C. ("Maval"), which we acquired in March of 2015. We had operating income of $3.6 million during the second quarter of 2015, a decrease of $10.5 million compared to operating income of $14.0 million during the same period in 2014 primarily due a decrease in volume and mix of $8.5 million, negative pricing impact of $2.9 million and negative foreign currency impacts of $1.2 million. These decreases in operating income were partially offset by reductions in selling, general and administrative costs of $5.0 million, which was primarily due to reduced SG&A headcount and lower incentive compensation expense as well as lower legal and professional fees expense.

Acquisition of Maval Manufacturing, Inc.

On February 19, 2015, we announced that we entered into a definitive agreement to acquire substantially all assets of Maval Manufacturing, Inc., a manufacturer, remanufacturer, and distributor of steering systems, components, and specialty products to the automotive service, original equipment power sports, and off-road specialty vehicle markets. Maval adds a new product line that is complimentary to our existing portfolio of products. The transaction closed effective March 1, 2015. In connection with the closing of the transaction, the assets were placed in Maval Industries, L.L.C., a wholly-owned subsidiary of the Company. The results of operations of Maval have been included in our consolidated results of operations since the acquisition date. As of June 30, 2015, the preliminary purchase price was $22.0 million, consisting of $18.7 million in cash and $3.3 million cash held in escrow.

Recent Trends and Conditions

General economic conditions

According to IHS Global Insight, global light duty vehicle production was down by 1% and global medium and heavy duty vehicle production was up 0.5% during the second quarter of 2015 as compared to the same period in 2014. The decrease in light duty vehicle production was driven primarily by a 16% decrease in South America production and a 2% decrease in Europe production. These decreases were partially offset by a 5% increase in China production and a 2% increase in North America production. The increase in global medium and heavy duty production was driven primarily by a 10% increase in North America production and a 1% increase in Korea production offset by an 11% decrease in South America production, a 3% decline in China production and a 3% decline in Europe production. The global automotive industry remains susceptible to uncertain economic conditions that could adversely impact consumer demand for vehicles.

Weather can affect aftermarket sales of starters and alternators. Extreme cold can damage starters and extreme heat can increase alternator failures. In both cases, this extreme weather can stimulate sales of aftermarket starters and alternators. In early 2014, the Northeast United States experienced severe cold weather which we believe had a positive impact on our results of operations.



29


Pricing pressures from customers

Pressure from our customers to reduce prices is characteristic of the automotive supply industry. Due to the competitive nature of the business, revised terms with customers may impact our ongoing profitability. We anticipate the impact of our pricing to be in the range of 1% to 3% consistent with prior years. We have taken and expect to continue to take steps to improve operating efficiencies and minimize or resist price reductions. We intend to maintain a disciplined approach to customer program pricing and may choose to exit programs with certain customers to protect our margins and cash flow. As a result, we may choose to no longer continue programs with certain customers due to unacceptable competitive pricing or terms. To this end, we have chosen not to meet the demands of a major aftermarket customer due to the negative pricing and working capital impact. While these decisions impact net sales and operating income in the short term, we believe this operating discipline will help to maximize the long-term profitability of the Company. Sales to this customer were $87.7 million for the year ended December 31, 2014. Upon expiration of the contract in January 2015, we invoiced the customer $41.5 million for the sale of cores that were reflected in core right of return in other noncurrent assets as of December 31, 2014, partially offsetting the expected reduction in sales in 2015. We collected a majority of this amount during the first quarter of 2015. Despite this likely reduction, this action will have a positive impact on our net income and cash position in 2015.

Material and commodity price fluctuations

Overall commodity price fluctuation is an ongoing concern for our business and has been an operational and financial focus. We have pass-through pricing agreements with a number of our customers that reduce our exposure to metals price volatility. Where metals price volatility is not covered by customer agreements, we utilize hedging instruments where appropriate, particularly related to copper, and consider their cost and their effectiveness. Average copper prices were lower for the quarter and six month periods ended June 30, 2015 than for the same periods in 2014.

In our remanufacturing operations, our principal inputs are cores, approximately 90% of which we receive in exchange for remanufactured units. Cores are used starters, alternators, or other multi-line products that customers exchange when they purchase new products. If usable, we refurbish these cores into a remanufactured product that we sell to our aftermarket customers. When we are required to purchase cores rather than receiving them in exchange for remanufactured units, we are affected by market pricing of cores. The cost of cores fluctuates based on a number of factors, including supply and demand and the underlying value of the commodities that the cores contain.

Foreign currencies

During the first six months of 2015, approximately 35% of our net sales were transacted outside the United States. The functional currency of our foreign operations is generally the local currency, while our financial statements are presented in U.S. dollars. Foreign exchange has an unfavorable impact on net sales when the U.S. dollar is relatively strong as compared with foreign currencies and a favorable impact on net sales when the U.S. dollar is relatively weak as compared with foreign currencies. While we employ financial instruments to hedge certain exposures related to transactions from fluctuations in foreign currency exchange rates, these hedging actions do not entirely insulate us from currency effects and such programs may not always be available to us at economically reasonable costs. During the first six months of 2015, we experienced a $3.4 million negative impact from foreign currency effects on our reported earnings in U.S. dollars compared to the first six months of 2014, primarily resulting from the results denominated in other currencies, mainly the Mexican Peso and Brazilian Real, offset by benefits to our reported earnings for results denominated in the the Euro and South Korean Won.

Operation efficiency efforts

In general, our long-term objectives are geared toward profitably growing our business, expanding our innovative technologies, winning new contracts, generating cash and strengthening our market position. On an ongoing basis, we evaluate our competitive position and determine what actions may be required to maintain and improve that position.

We believe that a continued focus on research, development and engineering activities is critical to maintaining our leadership position in the industry and meeting our long-term objectives. As a result, we continue our commitment to invest in facilities and infrastructure in order to support new business awards and achieve our long-term growth plans.

Although we believe that we have established a firm foundation for profitability, we continue to evaluate our global manufacturing and supply chain to further streamline our operations. We have completed the transfer of production from our Mezokovesd, Hungary plant to our other facilities in Hungary, Mexico and Korea and substantially completed


30


the closure of our Mezokovesd, Hungary plant. In addition, during 2014, we consolidated our Mexico operations and announced the planned closure of our operations in New York, obtained from the USA Industries acquisition, to better manage our cost structure.

Income Taxes - Bilateral Advance Pricing Agreement

As previously disclosed, the Company has applied for a bilateral Advance Pricing Agreement ("APA") between the U.S. and South Korea, covering the tax years 2007 through 2014.  The Korean and U.S. tax authorities met in July 2015, and have tentatively agreed on the terms of the APA, subject to additional review and approvals by the respective tax authorities and the Company.  The terms of the agreement are not disclosed to the Company until agreements are finalized. However some limited information has been provided which the Company is currently reviewing and analyzing the impacts.  While final adjustments have not been determined by either the U.S. or South Korea tax authorities, a final agreement may result in income tax expense of up to $20 million and cash outflow of up to $44 million.

Non-U.S. GAAP measurements - Adjusted EBITDA

Adjusted EBITDA is not a measure of performance defined in accordance with accounting principles generally accepted in the United States (U.S. GAAP). We use adjusted EBITDA as a supplement to our U.S. GAAP results in evaluating our business. Other companies in our industry define adjusted EBITDA differently from us and, as a result, our measure is not comparable to similarly titled measures used by other companies in our industry.

We define adjusted EBITDA as net income (loss) attributable to common stockholders before interest expense–net, income tax expense, depreciation and amortization, stock-based compensation expense, restructuring, other charges and other impairment charges, certain purchase accounting finished goods inventory step-up costs, litigation settlements and related legal fees, acquisition related costs, and other adjustments as set forth in the reconciliations provided below. All periods presented conform to this definition.

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

Adjusted EBITDA should not be considered as an alternative to net income (loss) as an indicator of our performance, as an alternative to net cash provided by operating activities as a measure of liquidity, or as an alternative to any other measure prescribed by U.S. GAAP. There are limitations to using non-U.S. GAAP measures such as adjusted EBITDA. Although we believe that adjusted EBITDA may make an evaluation of our operating performance more consistent because it removes items that do not reflect our ongoing operations, adjusted EBITDA excludes certain financial information that some may consider important in evaluating our performance.



31


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

Three months ended June 30,
 
 
Six months ended June 30,
 
 (In thousands)
2015


2014

 
2015


2014


 
 
 
 
 
Net income (loss)
$
(950
)

$
5,030

 
$
15,620


$
9,974

Adjustments:



 
 
 
 
Interest expense–net
4,123


5,337

 
9,134


10,591

Income tax expense
396


3,661

 
7,324


6,569

Depreciation and amortization
18,994


18,607

 
36,031


36,664

Stock-based compensation expense
1,009


1,342

 
2,325


2,561

Restructuring and other charges
371


79

 
444


393

Litigation settlements and related legal fees


1,587

 


2,324

Acquisition related costs
1,175




1,271



Purchase accounting finished goods inventory step-up

 
965

 
587


3,474

Other nonrecurring adjustments (a)
411


57

 
(21,492
)

54

Total adjustments
26,479


31,635

 
35,624

 
62,630

Adjusted EBITDA
$
25,529


$
36,665

 
$
51,244

 
$
72,604

(a) Represents the elimination of the $22.0 million net impact of one-time core settlements with customers in Q1 2015 and (gain)/loss on sale of fixed assets in both periods.


32


Results of operations

The following table presents our consolidated results of operations for the three months ended June 30, 2015 compared to the three months ended June 30, 2014:
Three months ended June 30,
 
 
Increase/ (Decrease)
 
% Increase/ (Decrease)

(In thousands)
2015


2014

 
Net sales
$
271,997


$
302,910

 
$
(30,913
)
 
(10.2
)%
Cost of goods sold
237,151


252,913

 
(15,762
)
 
(6.2
)%
Gross profit
34,846


49,997

 
(15,151
)
 
(30.3
)%
Selling, general, and administrative expenses
30,906


35,890

 
(4,984
)
 
(13.9
)%
Restructuring and other charges
371


79

 
292

 
369.6
 %
Operating income
3,569


14,028

 
(10,459
)
 
(74.6
)%
Interest expense–net
4,123


5,337

 
(1,214
)
 
(22.7
)%
Income (loss) before income taxes
(554
)

8,691

 
(9,245
)
 
(106.4
)%
Income tax expense
396


3,661

 
(3,265
)
 
(89.2
)%
Net income (loss)
$
(950
)

$
5,030

 
$
(5,980
)
 
(118.9
)%

Net sales

Net sales decreased by $30.9 million, or 10.2%, to $272.0 million for the three months ended June 30, 2015, from $302.9 million for the same period in 2014. The decrease in net sales was driven by decreased volume and mix of $28.4 million, a negative pricing impact of $2.9 million, and unfavorable foreign currency translation of $9.2 million. The net sales decrease was partially offset by $9.7 million in second quarter sales of Maval, which we acquired in March 2015.

Net sales of new starters and alternators to OEMs in the three months ended June 30, 2015 decreased in light vehicle and commercial vehicle products. Net sales of light vehicle starters and alternators to OEMs were $91.1 million in the three months ended June 30, 2015, a $1.0 million, or 1.1%, decrease compared to $92.1 million in the same period in 2014. These reductions are mainly driven by the end of certain North American programs and softening demand in North America and China, offset by new programs and growth in Hyundai. Net sales of commercial vehicle starters and alternators were $47.2 million in the three months ended June 30, 2015, a $3.6 million, or 7.1%, decrease compared to $50.8 million in the same period in 2014. We also sold $3.0 million of hybrid electric motors to OEMs in the three months ended June 30, 2015, as compared to $3.5 million in the same period in 2014.

Net sales of light vehicle rotating electrical products to aftermarket customers were $62.3 million in the three months ended June 30, 2015, a $36.4 million, or 36.9% decrease from $98.7 million in the same period in 2014. The decrease is primarily a result of loss of business with an aftermarket customer, a program with an aftermarket retailer and lower European sales. Net sales of starters and alternators for commercial vehicles to aftermarket customers were $49.3 million in the three months ended June 30, 2015, a increase of $3.6 million, or 7.9% from $45.7 million in the same period in 2014.

Net sales of remanufactured locomotive power trains and multi-line products, which consist of a small volume of remanufactured steering gears, axles, and brake calipers that we sell in the United States and Europe to aftermarket customers, were $17.7 million in the three months ended June 30, 2015, a $8.1 million, or 84.4% increase from the same period in 2014 as sales from the Maval acquisition of $9.7 million and increased locomotive sales of $0.7 million offset reductions in European sales of multi-line products primarily due to foreign exchange.



33


Cost of goods sold

Cost of goods sold primarily represents materials, labor and overhead production costs associated with our products and production facilities. Cost of goods sold was $237.2 million in the three months ended June 30, 2015 and $252.9 million in the three months ended June 30, 2014, a decrease of $15.8 million, or 6.2%. The decrease was mainly due to lower volumes with customers. In addition, we did not record any purchase accounting adjustments related to the step-up of finished goods inventory associated with the Maval acquisition during the three months ended June 30, 2015, as compared to $1.0 million related to the USA Industries acquisition in the three months ended June 30, 2014. Cost of goods sold as a percentage of net sales increased during the three months ended June 30, 2015 to 87.2%, from 83.5% in 2014.

Gross profit

As a result of the above changes in net sales and cost of goods sold, gross profit as a percentage of net sales decreased to 12.8% for the three months ended June 30, 2015 as compared to 16.5% for the three months ended June 30, 2014.

Selling, general and administrative expenses

For the three months ended June 30, 2015, selling, general and administrative expenses, or SG&A, was $30.9 million, which represents a decrease of $5.0 million, or 13.9%, from selling, general and administrative expenses of $35.9 million for the three months ended June 30, 2014. The decrease was primarily related to reduced SG&A headcount and lower incentive compensation expense as well as lower legal and professional fees expense despite $1.2 million of expenses for outside legal and financial advisory fees associated with the Maval acquisition and BorgWarner Transaction recorded in the three months ended June 30, 2015.
  
Restructuring and other charges

Restructuring and other charges increased by $0.3 million, to $0.4 million for the three months ended June 30, 2015 compared to $0.1 million for the same period in 2014. The restructuring charges in both periods related to ongoing restructuring actions in our Mezokovesd, Hungary facility and other operational restructuring efforts in our North American operations.

Interest expense–net

Interest expense–net decreased by $1.2 million to $4.1 million for the three months ended June 30, 2015 from $5.3 million in the same period in 2014. The decrease was primarily driven by favorable changes in the valuation of our undesignated interest rate swap contracts of $0.7 million and a $0.6 million decrease in interest expense associated with lower factored receivables. These decreases were offset by higher interest expense of $0.2 due to borrowings on our Asset-Based Revolving Credit Facility.

Income tax expense

Income tax expense decreased by $3.3 million to $0.4 million for the three months ended June 30, 2015 from $3.7 million for the same period in 2014. The decrease is primarily driven by lower income before income taxes.

Net income (loss)

Our net loss for the three months ended June 30, 2015 was approximately $1.0 million as compared to net income of $5.0 million for the three months ended June 30, 2014, for the reasons described above.


34


The following table presents our consolidated results of operations for the six months ended June 30, 2015 compared to the six months ended June 30, 2014:
Six months ended June 30,
 
 
Increase/ (Decrease)
 
% Increase/ (Decrease)

(In thousands)
2015


2014

 
 
 
 
 
 
 
 
 
Net sales
$
575,408

 
$
608,915

 
$
(33,507
)
 
(5.5
)%
Cost of goods sold
478,560

 
512,567

 
(34,007
)
 
(6.6
)%
Gross profit
96,848

 
96,348

 
500

 
0.5
 %
Selling, general, and administrative expenses
64,326

 
68,821

 
(4,495
)
 
(6.5
)%
Restructuring and other charges
444

 
393

 
51

 
13.0
 %
Operating income
32,078

 
27,134

 
4,944

 
18.2
 %
Interest expense–net
9,134

 
10,591

 
(1,457
)
 
(13.8
)%
Income before income taxes
22,944

 
16,543

 
6,401

 
38.7
 %
Income tax expense
7,324

 
6,569

 
755

 
11.5
 %
Net income
$
15,620

 
$
9,974

 
$
5,646

 
56.6
 %

Net sales

Net sales decreased by $33.5 million, or 5.5%, to $575.4 million for the six months ended June 30, 2015, from $608.9 million for the same period in 2014. The decrease in net sales was driven by decreased volume and mix of $18.0 million, excluding the impact of an expiration of customer contract, a negative pricing impact of $4.2 million, and unfavorable foreign currency translation of $15.8 million. The net sales decrease was partially offset by a one time settlement of cores with a customer whose contract expired in January 2015. The net impact for this customer was a decrease of $9.1 million in sales period over period. In addition, we had $13.7 million in sales from Maval, which we acquired in March of 2015.
  
Net sales of new starters and alternators to OEMs in the six months ended June 30, 2015 decreased in light vehicle products which was offset by an increase in commercial vehicle products. Net sales of light vehicle starters and alternators to OEMs were $176.5 million in the six months ended June 30, 2015, a $5.3 million, or 2.9%, decrease compared to $181.8 million in the same period in 2014. These reductions are mainly driven by the end of certain North American programs and softening demand in North America and China, offset by new programs and growth in Hyundai. Net sales of commercial vehicle starters and alternators were $94.4 million in the six months ended June 30, 2015, a $2.5 million, or 2.6%, decrease compared to $96.9 million in the same period in 2014. We also sold $5.6 million of hybrid electric motors to OEMs in the six months ended June 30, 2015, as compared to $7.4 million in the same period in 2014.

Net sales of light vehicle rotating electrical products to aftermarket customers were $169.5 million in the six months ended June 30, 2015, a $31.9 million, or 15.8% decrease from $201.4 million in the same period in 2014. The decrease is primarily a result of the loss of business with an aftermarket customer, a program with an aftermarket retailer and lower European sales. Net sales of starters and alternators for commercial vehicles to aftermarket customers were $95.5 million in the six months ended June 30, 2015, an increase of $4.8 million, or 5.3% from $90.7 million in the same period in 2014.

Net sales of remanufactured locomotive power trains and multi-line products, which consist of a small volume of remanufactured steering gears, axles, and brake calipers that we sell in the United States and Europe to aftermarket customers, were $31.7 million in the six months ended June 30, 2015, a $7.1 million, or 28.9% increase from the same period in 2014 as sales of the Maval acquisition of $13.7 million and increased locomotive sales of $1.9 million offset reductions in European sales of multi-line products primarily due to foreign exchange.



35


Cost of goods sold

Cost of goods sold primarily represents materials, labor and overhead production costs associated with our products and production facilities. Cost of goods sold was $478.6 million in the six months ended June 30, 2015 and $512.6 million in the six months ended June 30, 2014, a decrease of $34.0 million, or 6.6%. The decrease was mainly due to lower sales volumes, excluding one time settlements of cores with customers. The core settlements in the six months ended June 30, 2015 resulted in a 2.7% increase in margins during the six months ended June 30, 2015. In addition, we also recorded $0.6 million related to the step-up of finished goods inventory associated with the Maval acquisition during the six months ended June 30, 2015, as compared to $3.5 million related to the USA Industries acquisition in the six months ended June 30, 2014. As a result, cost of goods sold as a percentage of net sales decreased during the six months ended June 30, 2015 to 83.2%, from 84.2% in 2014.

Gross profit

As a result of the above changes in net sales and cost of goods sold, gross profit as a percentage of net sales increased to 16.8% for the six months ended June 30, 2015 as compared to 15.8% for the six months ended June 30, 2014.

Selling, general and administrative expenses

For the six months ended June 30, 2015, selling, general and administrative expenses, or SG&A, was $64.3 million, which represents an decrease of $4.5 million, or 6.5%, from selling, general and administrative expenses of $68.8 million for the six months ended June 30, 2014. The decrease was primarily related to reduced SG&A headcount and lower incentive compensation expense as well as lower legal and professional fees expense offset by additional SG&A expenses associated with the Maval acquisition and BorgWarner Transaction.
  
Restructuring and other charges

Restructuring and other charges decreased by $0.1 million, to $0.4 million for the six months ended June 30, 2015 compared to $0.4 million for the same period in 2014. The restructuring charges in both periods related to ongoing restructuring actions in our Mezokovesd, Hungary facility and other operational restructuring efforts in our North American operations.

Interest expense–net

Interest expense–net decreased by $1.5 million to $9.1 million for the six months ended June 30, 2015 from $10.6 million in the same period in 2014. The decrease was primarily driven by a $1.1 million decrease in interest expense associated with lower factored receivables and favorable changes in the valuation of our undesignated interest rate swap contracts of $0.6 million. These decreases were partially offset by $0.3 million in interest expense on our Asset-Based Revolving Credit Facility.

Income tax expense

Income tax expense increased by $0.8 million to $7.3 million for the six months ended June 30, 2015 from $6.6 million for the same period in 2014. The increase is primarily driven by the increase in income before taxes of $6.4 million.

Net income

Our net income for the six months ended June 30, 2015 was $15.6 million as compared to $10.0 million for the six months ended June 30, 2014, for the reasons described above.



36


Liquidity and capital resources

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

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

As of June 30, 2015, we had cash and cash equivalents on hand of $102.4 million of which $97.1 million was held by our subsidiaries outside of the U.S. Cash held by these subsidiaries is used to fund foreign operational activities and future investments. If these funds were repatriated to the U.S., we would be required to provide for U.S. federal and state income tax, foreign income tax, and foreign withholding taxes. We have not provided for such taxes as it is our intention that those funds are permanently reinvested outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

Total liquidity as of June 30, 2015, including cash on hand, availability under the ABL Facility, and availability under short-term debt credit facilities, was $165.4 million.

Cash flows

The following table shows the components of our cash flows for the periods presented:
 
Six months ended June 30,
 
 (In thousands)
2015

 
2014

 
 
 
 
Net cash provided by (used in):
 
 
 
Operating activities before changes in operating assets and liabilities
$
55,568

 
$
41,274

Changes in operating assets and liabilities
(27,236
)
 
(45,218
)
Operating activities
28,332

 
(3,944
)
Investing activities
(32,383
)
 
(51,820
)
Financing activities
23,712

 
(4,589
)

Cash flows-Operating activities

Cash provided by operating activities was $28.3 million versus cash used in operations of $3.9 million for the six months ended June 30, 2015 and 2014, respectively. The increase in operating cash flows from 2014 was primarily a result of the higher net income as discussed above.

Operating cash flows were increased primarily due to the collection of $40.5 million related to a core settlement in connection with a contract expiration in the three months ended March 31, 2015. We experienced a decrease in operating cash outflows for expenditures on inventory replenishment of approximately $26.2 million in 2015 to due to the decreased sales levels.  Operating cash flows decreased by approximately $13.8 million as a result of extended vendor payment terms in 2014, as compared to our mix of purchases slightly increasing our days payable outstanding during the  six months ended June 30, 2015.  The reduction in sales and collection of payments from customers resulted in a decrease in cash flows from operations of $13.0 million during the  six months ended June 30, 2015 as compared to the six month ended June 30, 2014. Cash payments for restructuring charges were $0.9 million lower in the six months ended June 30, 2015 due to the nature and timing of restructuring actions. Additionally, we paid $4.6 million less in payments on warranty claims in the six months ended June 30, 2015 as compared to the payments made in the same period in 2014. We also made a final $16.0 million payment in March 2015 related to the previously announced litigation settlement.



37


Cash paid for interest for the six months ended June 30, 2015 was $8.8 million as compared to $9.8 million for the six months ended June 30, 2014, a decrease of $0.9 million. Cash payments were lower primarily due to lower accounts receivable factoring during 2015, partially offset by higher interest payments on our Asset-Based Revolving Credit Facility.

Cash paid for taxes for the six months ended June 30, 2015 was $6.0 million, compared to $9.3 million for the six months ended June 30, 2014, a decrease of $3.2 million. The reason for the decrease was primarily due to lower foreign cash payments as a result of lower foreign taxable income and tax credits in 2015.

Cash flows-Investing activities

Cash used in investing activities for the six months ended June 30, 2015 was $32.4 million representing a $19.4 million decrease compared to the $51.8 million cash used in investing activities for the six months ended June 30, 2014. During first quarter of 2015, we completed our acquisition of Maval for $22.0 million in cash. During the first quarter of 2014, we completed our acquisition of USA Industries for approximately $40.1 million, net of cash acquired.
 
Cash flows-Financing activities

Cash provided by financing activities for the six months ended June 30, 2015 was $23.7 million, compared to cash used in financing activities of $4.6 million for the six months ended June 30, 2014. During the six months ended June 30, 2015, we paid $6.8 million in quarterly cash dividends to our common stockholders as compared to $6.5 million during the same period in 2014. During the second quarter of 2015, our Board of Directors increased the quarterly cash dividend per share by 10% to $0.11 per share. In addition, we repurchased $11.1 million of our common stock during the first half of 2015, as compared to $2.5 million during the six months ended June 30, 2014. Repurchases in both periods included shares to satisfy tax withholding obligations of participants under our stock-based compensation programs. Also during the six months ended June 30, 2015, we paid $9.9 million in repurchases of our common stock under our Board approved share repurchase program. In connection with the vesting of restricted stock grants during the first half of 2015, we also recognized an excess tax benefit of $0.1 million, compared to a $1.1 million excess tax benefit recorded in the same period in 2014. During the six months ended June 30, 2015, we received $1.4 million from FNF as part of a working capital adjustment in accordance with the Merger Agreement.

During the six months ended June 30, 2015, we borrowed $155.8 million and also repaid $112.2 million on our Asset-Based Revolving Credit Facility. The proceeds on the borrowings were used for general corporate working capital purposes including a $16.0 million payment related to a previously announced litigation settlement. In addition, we funded the acquisition of Maval through borrowings under the Asset-Based Revolving Credit Facility. The change in short-term debt during the six months ended June 30, 2015 was due to borrowings and repayments on our revolving credit facilities. During the six months ended June 30, 2015, we borrowed $1.0 million on our revolving credit facility in Hungary to fund general corporate purposes. We also repaid $2.9 million on our revolving credit facility in China during the six months ended June 30, 2015.

Financing arrangements

Our primary financing facilities are an Asset-Based Revolving Credit Facility (the "ABL Facility") and a Term B Loan (the "Term B Loan").

Asset-Based Revolving Credit Facility

The ABL Facility bears an interest rate to a defined Base Rate plus 0.50%-1.00% per year or, at our election, at an applicable LIBOR Rate plus 1.50%-2.00% per year and is paid monthly. The ABL Facility maintains the current availability at $95,000,000, but may be increased, with the consent of lenders, by $20,000,000. The ABL Facility is secured by substantially all domestic accounts receivable and inventory. At June 30, 2015, the ABL Facility balance was $43,600,000. Based upon the collateral supporting the ABL Facility, the amount borrowed, and the outstanding letters of credit of $2,310,000, there was additional availability for borrowing of $46,146,000. We will incur an unused commitment fee of 0.375% on the unused amount of commitments under the ABL Facility. The ABL Facility expires September 5, 2018.



38


Term B Loan

The Term B Loan bears an interest rate consisting of LIBOR (subject to a floor of 1.25%) plus 3.00% per year with an original issue discount of $750,000. The Term B Loan also contains an option to increase the borrowing provided certain conditions are satisfied, including maintaining a maximum leverage ratio. The Term B Loan is secured by a first priority lien on the stock of our subsidiaries and substantially all domestic assets other than accounts receivable and inventory pledged to the ABL Facility. The outstanding principal balance of the Term B Loan was $292,500,000 as of June 30, 2015. Principal payments in the amount of $750,000 are due at the end of each calendar quarter with termination and final payment no later than March 5, 2020. The Term B Loan is subject to an excess cash calculation which may require the payment of additional principal on an annual basis. At June 30, 2015, the average borrowing rate, including the impact of the interest rate swaps, was 4.25%.

Both the ABL Facility and the Term B Loan contain various covenants and representations that are customary for transactions of this nature. We are in compliance with all covenants as of June 30, 2015. The credit agreements contain various restrictive covenants, which include, among other things: (i) a maximum leverage ratio; (ii) a minimum interest coverage ratio; (iii) mandatory prepayments upon certain asset sales and debt issuances; and (iv) limitations on the payment of dividends in excess of a specified amount. The credit agreements also includes events of default customary for a facilities of these types, including a cross-default provision under which the lenders may declare the loan in default if we (i) fail to make a payment when due under any debt having a principal amount greater than $5 million or (ii) breach any other covenant in any such debt as a result of which the holders of such debt are permitted to accelerate its maturity.

See Note 12 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for a description of and for more details on the ABL Facility and the Term B Loan.

Under normal working capital utilization of liquidity, portions of the amounts drawn under our credit facilities typically are paid back throughout the month as cash from customers is received. We could then draw upon such facilities again for working capital purposes in the same or succeeding months.

Non-U.S. borrowing arrangements

At June 30, 2015, our subsidiaries outside the U.S. also had various uncommitted credit facilities, of which $16.8 million was not utilized. We expect that these additional facilities will be drawn on from time to time for normal working capital purposes and to fund capital expenditures in support of operations and planned expansions in certain regions. See Note 12 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for a description of our short term debt.

Factoring agreements

We have also entered into factoring agreements with various U.S., Korean and European financial institutions to sell our accounts receivable under nonrecourse agreements. These transactions are accounted for as a reduction in accounts receivable because the agreements transfer effective control over, and risk related to, the receivables to the buyers. We do not service any factored accounts after the factoring has occurred. We utilize factoring arrangements as an integral part of our financing. See Note 4 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for a description of our factoring arrangements.

Share Repurchase Program

On February 18, 2015, our Board of Directors approved a share repurchase program, effective February 23, 2015, under which we may repurchase up to $100.0 million of our outstanding common stock shares. Purchases may be made from time to time in the open market at prevailing prices or in privately negotiated transactions through February 28, 2018. During the three months ended June 30, 2015, we paid $9.9 million in repurchases of our common stock (447,725 shares at an average purchase price of $22.18 per share, excluding commission costs). As of June 30, 2015, the amount remaining under the Board's share repurchase authorization was $90.1 million. The Merger Agreement entered into in connection with the BorgWarner Transaction generally prohibits us from making further repurchases of our common stock.



39


Contractual obligations

There were no material changes in our contractual obligations during the six months ended June 30, 2015 from what was previously described in our Annual Report on Form 10-K for the year ended December 31, 2014 other than related to the borrowings against our ABL Facility discussed above and leases described below.

In connection with the Maval acquisition, we acquired operating leases for two facilities in Twinsburg, Ohio, which require future cash payments of $1.3 million over the remaining lease terms through 2018. In addition, we entered into a lease for our Peru, Indiana facility which requires future cash payments of $1.2 million over the remaining lease terms through 2022.

Contingencies

Information concerning contingencies are contained in Note 19 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report is incorporated herein by reference.

Off-Balance sheet arrangements

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

Accounting pronouncements

For a discussion of certain adopted or pending accounting pronouncements, see Note 2 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report, which is incorporated herein by reference.

Critical accounting policies and estimates

Our accounting policies require management to make significant estimates and assumptions using information available at the time the estimates are made. Actual amounts could differ significantly from these estimates. See Note 2 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for a summary of the significant accounting policies and methods used in the preparation of our unaudited condensed consolidated financial statements. A detailed description of our significant accounting policies is included in Note 2 to our audited consolidated financial statements included in our Annual Report for Form 10-K for the year ended December 31, 2014. There have been no significant changes in our critical accounting policies and estimates during the six months ended June 30, 2015.



40


Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the quantitative and qualitative information about our market risks from those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the U.S. Securities and Exchange Commission on March 2, 2015.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the supervision and participation of our President and Chief Executive Officer (principal executive officer) and our Senior Vice President and Chief Financial Officer (principal financial officer), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of June 30, 2015. Based on that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of June 30, 2015.

Changes in Internal Controls

There have not been any changes in our internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. On March 1, 2015, the Company completed its acquisition of Maval and is currently integrating Maval into its operations, compliance programs, and internal control processes. As permitted by SEC rules and regulations, the Company has excluded Maval from management's evaluation of internal control over financial reporting as of June 30, 2015.

PART II - Other Information
Item 1. Legal Proceedings
 The information concerning the legal proceedings involving the Company contained in Note 19 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report is incorporated herein by reference.

Item 1A. Risk Factors

We face a number of significant risks and uncertainties in connection with our operations. Our business, results of operations and financial condition could be materially adversely affected by these risk factors. There have been no material changes to risk factors previously reported in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the U.S. Securities and Exchange Commission on March 2, 2015, other than the risk factors related to the Transaction with Borg Warner as noted below:

The BorgWarner Transaction is subject to a number of conditions precedent, including stockholder approval and the expiration of applicable waiting periods and the receipt of approvals, consents or clearances from domestic and foreign regulatory authorities, that, if not obtained or not obtained in a timely manner, could delay or prevent completion of the BorgWarner Transaction.

The BorgWarner Transaction is subject to a number of conditions precedent.

Among other things, the Merger Agreement for the BorgWarner Transaction must be adopted by the affirmative vote of a majority of our stockholders. While the Company intends to call a special meeting of stockholders to consider and vote on the BorgWarner Transaction, stockholders could seek to enjoin the meeting. Even if such stockholders meeting is ultimately held, there is no guarantee that the Company’s stockholders will approve the BorgWarner Transaction by the requisite vote at such meeting, or at all.

In addition, before the BorgWarner Transaction may be completed, any waiting period (or extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) muat have been expired or terminated, and any filings, authorizations, consents or approvals regarding the BorgWarner Transaction required pursuant to antitrust laws (as defined in the Merger Agreement) in Austria, China, Germany, South Korea and Mexico must be made or


41


obtained and any applicable waiting periods under such laws must have expired or been terminated. There can be no assurance that all of the regulatory approvals described above, or any other regulatory approvals that might be required to consummate the BorgWarner Transaction, will be obtained and, if obtained, there can be no assurance as to the timing of any approvals, ability to obtain the approvals on satisfactory terms or the absence of any litigation challenging such approvals. At any time before or after the completion of the BorgWarner Transaction (and notwithstanding the termination of the waiting period under the HSR Act), the U.S. Department of Justice, Federal Trade Commission or any state or non-U.S. governmental entity could take such action, under antitrust laws or otherwise, as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the completion of the BorgWarner Transaction and seeking the divestiture of substantial assets of the Company or BorgWarner. Private parties may also seek to take legal action under antitrust laws under certain circumstances.

The termination of the BorgWarner Transaction could negatively impact Remy.

If the BorgWarner Transaction is not completed for any reason, Remy may be adversely affected and would be subject to a number of risks, including the following:

Remy may experience negative reactions from the financial markets, including negative impacts on its stock price;

Remy may experience negative reactions from its stockholders, customers, suppliers, and employees; and

Remy will be required to pay certain costs relating to the BorgWarner Transaction, whether or not the BorgWarner Transaction is completed, including, in some cases, a termination fee.

The merger agreement for the BorgWarner Transaction restricts the operation of Remy’s business

Under the merger agreement for the BorgWarner Transaction, Remy is subject to restrictions on its business activities and must generally operate its business in the ordinary course consistent with past practice (subject to certain exceptions). These restrictions could restrict Remy’s ability to, or prevent Remy from, pursuing attractive business opportunities (if any) that arise prior to the completion of the BorgWarner Transaction.

The BorgWarner Transaction may impair our ability to attract and retain qualified employees

Uncertainty over the effects of the BorgWarner Transaction may make it more difficult to attract and retain qualified employees.

The BorgWarner Transaction may divert management attention from our business

Matters relating to the BorgWarner Transaction (including integration planning) will require substantial commitments of time and resources by Remy management, which would otherwise have been devoted to day-to-day operations and may negatively impact our business, and could otherwise disrupt out business.

The BorgWarner Transaction may interfere with our relationships with customers, suppliers and other business partners

Uncertainty over the effects of the BorgWarner Transaction may make it more difficult to maintain relationships with existing, and enter into relationships with new, customers, suppliers, vendors, licensors, licensees and other business partners.





42


Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

A summary of our share repurchases during the quarter ended June 30, 2015 is shown below:
Period
 
Total number of shares purchased(1)
 
Average price paid per share(2)
 
Total number of shares purchased as part of publicly announced plans or programs(3)
 
Maximum number (or approximate dollar value) of shares that may yet by purchased under the plans or programs(3)
4/1/2015 - 4/30/2015
 

 
$

 

 
$
100,000,000

5/1/2015 - 5/31/2015
 
447,725

 
22.18

 
447,725

 
90,068,000

6/1/2015 - 6/30/2015
 

 

 

 
90,068,000

Total
 
447,725

 
$
22.18

 
447,725

 
$
90,068,000


(1)
Shares purchased during the quarter ended June 30, 2015 were in connection with our share repurchase program as discussed below. There were no shares of common stock withheld to satisfy employee payroll tax withholding for restricted stock vesting distributions.

(2)
Average price paid per share excludes broker commission costs.

(3)
On February 18, 2015, our Board of Directors approved a share repurchase program, effective February 23, 2015, under which we may repurchase up to $100,000,000 of our outstanding common stock shares. Purchases may be made from time to time in the open market at prevailing prices or in privately negotiated transactions through February 28, 2018. The Merger Agreement entered into in connection with the BorgWarner Transaction generally prohibits us from making further repurchases of our common stock.



43


Item 6.    Exhibits

Exhibit Index
 
 
Incorporated by reference
 
Exhibit
Number
Description
Form
Exhibit
Filing Date
Filed herewith
2.1
Agreement and Plan of Merger, dated as of July 12, 2015, among Remy International, Inc., BorgWarner Inc. and Band Merger Sub, Inc. The registrant agrees to furnish supplementally to the U.S. Securities and Exchange Commission a copy of any omitted schedule or exhibit upon the request of the SEC in accordance with Item 601(b)(2) of Regulation S-K.
8-K
2.1
7/13/2015
 
3.1
Certificate of Correction of Amended and Restated Certificate of Incorporation
10-Q
EX-3.1
5/6/2015
 
3.2
Restated Certificate of Incorporation
10-Q
EX-3.2
5/6/2015
 
3.3
Second Amended and Restated Bylaws, as currently in effect
8-K
EX-3.3
2/4/2015
 
*10.1
Employment Agreement, effective as of May 1, 2015, by and between Remy International, Inc. and Victor A. Polen
8-K
EX-10.1
5/1/2015
 
*10.1(b)
Amendment No. 1 to the Employment Agreement dated as of May 1, 2015 by and between Remy International, Inc. and Victor A. Polen effective as of July 12, 2015
 
 
 
X
*10.2
Employment Agreement, effective as of April 1, 2015, by and between Remy International, Inc. and David G. Krall
10-Q
EX-10.4
5/6/2015
 
*10.2(b)
Amendment No. 1 to the Employment Agreement dated as of April 1, 2015 by and between Remy International, Inc. and David G. Krall effective as of July 12, 2015
 
 
 
X
*10.3
Amendment No. 1 to the Employment Agreement dated as of February 20, 2015 by and between Remy International, Inc. and Albert E. VanDenBergh effective as of July 12, 2015
 
 
 
X
*10.4
Form of Transaction Continuity Award Letter
 
 
 
X
*10.5
Form of Indemnification Agreement
8-K
10.2
7/13/2015
 
*10.6
Remy International, Inc. Employee Stock Purchase Plan, as approved by stockholders on June 10, 2015
DEF 14A
Annex A
4/30/2015
 
*10.7
Remy International, Inc. Annual Incentive Bonus Plan, as approved by stockholders on June 10, 2015
DEF 14A
Annex B
4/30/2015
 
*10.8
Voting and Support Agreement, dated as of July 12, 2015, among H Partners Management, LLC, H Partners, LP, H Partners Capital, LLC, P H Partners Ltd., H Offshore Fund Ltd., Rehan Jaffer, BorgWarner Inc. and Remy International, Inc.
8-K
10.1
7/13/2015
 
31.1
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
X
31.2
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
X
32.1
Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
 
 
 
X
32.2
Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
 
 
 
X
101.INS
XBRL Instance Document
 
 
 
X
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
 
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
X
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
X

* Indicates a management contract or compensatory plan or arrangement.




44


 
SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    
 
 
Remy International, Inc.
 
 
(Registrant)
 
 
 
Date: August 3, 2015
 
By: /s/ Albert E. VanDenBergh
 
 
Albert E. VanDenBergh
 
 
Senior Vice President and Chief Financial Officer
 
 
(Principal Financial Officer)
 
 
 
 
 
 



45