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EX-32.2 - EXHIBIT 32.2 - Tower International, Inc.towr-20170630xex32_2.htm
EX-32.1 - EXHIBIT 32.1 - Tower International, Inc.towr-20170630xex32_1.htm
EX-31.2 - EXHIBIT 31.2 - Tower International, Inc.towr-20170630xex31_2.htm
EX-31.1 - EXHIBIT 31.1 - Tower International, Inc.towr-20170630xex31_1.htm

 

 



 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 



 

 



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



For the quarterly period ended June 30, 2017

OR



 

 



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



For the transition period from ____________________ to_____________________

 

Commission file number 001-34903

 

TOWER INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

 



 

Delaware

27-3679414

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

17672 Laurel Park Drive North Suite 400 E

48152

Livonia, Michigan

(Zip Code)

(Address of principal executive offices)

 

 

(248) 675-6000

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

Yes No

 

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

 

Yes No

 

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



 

 

 

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer  (Do not check if a smaller reporting company)

Smaller Reporting Company 

Emerging growth company 

 

 



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



 

 

 

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

 

Yes No

As of July 21, 2017, there were 20,521,093 shares of the registrant’s common stock, $0.01 par value per share, outstanding.



 



 

 


 



Tower International, Inc. and Subsidiaries

Form 10-Q

 

Table of Contents

 



 

 

 

 

 

 

Page

 

 

 

 

PART I.  Financial Information

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited):

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016

1

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016

2

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016

3

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016

4

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

 

Item 2.

 

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

22

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

 

Item 4.

 

Controls and Procedures

35

 

 

 

 

PART II.  Other Information

 

 

 

 

 

Item 1A.

 

Risk Factors

36

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

 

Item 6.

 

Exhibits

37

 

 

 

 

Signatures

 

 

38



 

 

 


 

PART 1 — FINANCIAL INFORMATION

ITEM 1. Financial Statements.

TOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data - unaudited)

 









 

 

 

 

 

 



 

June 30,

 

December 31,



 

2017

 

2016



 

 

 

 

ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$

54,794 

 

$

62,788 

Accounts receivable, net of allowance of $1,298 and $961

 

 

253,139 

 

 

178,251 

Inventories (Note 3)

 

 

74,965 

 

 

71,710 

Assets held for sale (Note 4)

 

 

42,699 

 

 

102,252 

Prepaid tooling, notes receivable, and other

 

 

136,054 

 

 

103,023 

 Total current assets

 

 

561,651 

 

 

518,024 



 

 

 

 

 

 

Property, plant, and equipment, net

 

 

495,840 

 

 

465,569 

Goodwill (Note 6)

 

 

61,669 

 

 

56,383 

Deferred tax asset

 

 

116,917 

 

 

112,645 

Other assets, net

 

 

10,464 

 

 

9,902 

 Total assets

 

$

1,246,541 

 

$

1,162,523 



 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Short-term debt and current maturities of capital lease obligations (Note 8)

 

$

51,024 

 

$

34,211 

Accounts payable

 

 

273,623 

 

 

258,129 

Accrued liabilities

 

 

125,648 

 

 

114,079 

Liabilities held for sale (Note 4)

 

 

16,909 

 

 

53,310 

 Total current liabilities

 

 

467,204 

 

 

459,729 



 

 

 

 

 

 

Long-term debt, net of current maturities (Note 8)

 

 

375,562 

 

 

351,232 

Obligations under capital leases, net of current maturities (Note 8)

 

 

 -

 

 

4,863 

Deferred tax liability

 

 

5,354 

 

 

5,594 

Pension liability (Note 11)

 

 

56,777 

 

 

61,627 

Other non-current liabilities

 

 

86,443 

 

 

65,539 

 Total non-current liabilities

 

 

524,136 

 

 

488,855 

 Total liabilities

 

 

991,340 

 

 

948,584 

Commitments and contingencies (Note 17)

 

 

 

 

 

 



 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Tower International, Inc.'s stockholders' equity

 

 

 

 

 

 

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

 

$

 -

 

$

 -

 Common stock, $0.01 par value, 350,000,000 authorized, 22,296,347 issued and 20,521,093

 

 

 

 

 

 

 outstanding at June 30, 2017, and 22,107,402 issued and 20,359,131 outstanding at

 

 

 

 

 

 

 December 31, 2016

 

 

223 

 

 

221 

 Additional paid in capital

 

 

342,773 

 

 

340,623 

 Treasury stock, at cost, 1,775,254 and 1,748,271 shares as of June 30, 2017 and December 31, 2016

 

 

(36,407)

 

 

(35,645)

 Accumulated surplus / (deficit)

 

 

23,371 

 

 

(14,021)

 Accumulated other comprehensive loss (Note 12)

 

 

(74,759)

 

 

(83,383)

 Total Tower International, Inc.'s stockholders' equity

 

 

255,201 

 

 

207,795 

Noncontrolling interests in subsidiaries (Note 12)

 

 

 -

 

 

6,144 

 Total stockholders' equity

 

 

255,201 

 

 

213,939 

 Total liabilities and stockholders' equity

 

$

1,246,541 

 

$

1,162,523 



 

 

 

 

 

 



 

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

1

 


 



 

 

TOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

Revenues

 

$

489,925 

 

$

505,131 

 

$

987,515 

 

$

994,325 

Cost of sales

 

 

428,328 

 

 

442,989 

 

 

869,139 

 

 

875,094 

Gross profit

 

 

61,597 

 

 

62,142 

 

 

118,376 

 

 

119,231 

Selling, general, and administrative expenses

 

 

29,007 

 

 

32,050 

 

 

58,232 

 

 

64,902 

Amortization expense (Note 6)

 

 

113 

 

 

116 

 

 

216 

 

 

232 

Restructuring and asset impairment charges, net (Note 7)

 

 

3,337 

 

 

840 

 

 

7,248 

 

 

1,586 

Operating income

 

 

29,140 

 

 

29,136 

 

 

52,680 

 

 

52,511 

Interest expense

 

 

1,807 

 

 

4,987 

 

 

2,260 

 

 

12,569 

Interest income

 

 

86 

 

 

40 

 

 

133 

 

 

68 

Other expense

 

 

 -

 

 

2,905 

 

 

575 

 

 

6,481 

Income before provision for income taxes, and income / (loss) from discontinued operations

 

 

27,419 

 

 

21,284 

 

 

49,978 

 

 

33,529 

Provision for income taxes (Note 10)

 

 

7,672 

 

 

6,015 

 

 

14,168 

 

 

9,531 

Income from continuing operations

 

 

19,747 

 

 

15,269 

 

 

35,810 

 

 

23,998 

Income / (loss) from discontinued operations, net of tax (Note 4)

 

 

(489)

 

 

(20,021)

 

 

861 

 

 

(20,366)

Net income / (loss)

 

 

19,258 

 

 

(4,752)

 

 

36,671 

 

 

3,632 

Less: Net income attributable to the noncontrolling interests

 

 

42 

 

 

89 

 

 

110 

 

 

95 

Net income / (loss) attributable to Tower International, Inc.

 

$

19,216 

 

$

(4,841)

 

$

36,561 

 

$

3,537 



 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic shares outstanding

 

 

20,508,890 

 

 

21,164,505 

 

 

20,467,281 

 

 

21,145,588 

Weighted average diluted shares outstanding

 

 

20,805,931 

 

 

21,489,161 

 

 

20,813,100 

 

 

21,469,818 



 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Income per share from continuing operations (Note 13)

 

$

0.96 

 

$

0.72 

 

$

1.74 

 

$

1.13 

Income / (loss) per share from discontinued operations (Note 13)

 

 

(0.02)

 

 

(0.95)

 

 

0.04 

 

 

(0.96)

Income / (loss) per share (Note 13)

 

 

0.94 

 

 

(0.23)

 

 

1.79 

 

 

0.17 



 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Income per share from continuing operations (Note 13)

 

$

0.95 

 

$

0.71 

 

$

1.72 

 

$

1.11 

Income / (loss) per share from discontinued operations (Note 13)

 

 

(0.02)

 

 

(0.93)

 

 

0.04 

 

 

(0.95)

Income / (loss) per share (Note 13)

 

 

0.92 

 

 

(0.23)

 

 

1.76 

 

 

0.16 



 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per share

 

$

0.11 

 

$

0.10 

 

$

0.22 

 

$

0.20 



 

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

 



2

 


 

 

 

TOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands - unaudited)

 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

Net income / (loss)

 

$

19,258 

 

$

(4,752)

 

$

36,671 

 

$

3,632 

Other comprehensive income / (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax expense / (benefit) of ($5.0 million), $2.1 million, ($5.9 million), and ($1 million)

 

 

7,407 

 

 

(1,953)

 

 

13,289 

 

 

6,444 

Unrealized gain / (loss) on qualifying cash flow hedge, net of tax expense / (benefit) of ($0.3 million), $0 million, ($2.8 million), and $0 million

 

 

(539)

 

 

 -

 

 

(4,613)

 

 

 -

Other comprehensive income / (loss), net of tax

 

 

6,868 

 

 

(1,953)

 

 

8,676 

 

 

6,444 

  Comprehensive income / (loss)

 

 

26,126 

 

 

(6,705)

 

 

45,347 

 

 

10,076 

  Less: Comprehensive income / (loss) attributable to noncontrolling interests

 

 

42 

 

 

(118)

 

 

162 

 

 

(98)

Comprehensive income / (loss) attributable to Tower International, Inc.

 

$

26,084 

 

$

(6,587)

 

$

45,185 

 

$

10,174 



 

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

3

 


 

 

TOWER INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands - unaudited)







 

 

 

 

 

 



 

Six Months Ended June 30,



 

2017

 

2016



 

 

 

 

 

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

36,671 

 

$

3,632 

Less: Income / (loss) from discontinued operations, net of tax

 

 

861 

 

 

(20,366)

    Income from continuing operations

 

 

35,810 

 

 

23,998 



 

 

 

 

 

 

Adjustments required to reconcile income from continuing operations to net

 

 

 

 

 

 

cash provided by / (used in) continuing operating activities:

 

 

 

 

 

 

Deferred income tax provision

 

 

9,965 

 

 

8,116 

Depreciation and amortization

 

 

36,532 

 

 

35,483 

Non-cash share-based compensation

 

 

1,098 

 

 

1,034 

Pension income, net of contributions

 

 

(4,851)

 

 

(4,467)

Change in working capital and other operating items

 

 

(88,794)

 

 

(41,769)

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

 

$

(10,240)

 

$

22,395 



 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

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

 

$

(44,161)

 

$

(60,926)

Proceeds from disposition of joint venture, net

 

 

15,944 

 

 

 -

Net cash used in continuing investing activities

 

$

(28,217)

 

$

(60,926)



 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from borrowings

 

$

373,853 

 

$

295,904 

Repayments of borrowings

 

 

(336,032)

 

 

(272,437)

Repayments on Term Loan Credit Facility

 

 

 -

 

 

(50,000)

Original issuance discount

 

 

(1,808)

 

 

 -

Debt financing costs

 

 

(4,747)

 

 

 -

Dividend payment to Tower stockholders

 

 

(4,498)

 

 

(4,229)

Proceeds from stock options exercised

 

 

1,052 

 

 

25 

Purchase of treasury stock

 

 

(762)

 

 

(621)

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

 

$

27,058 

 

$

(31,358)



 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

Net cash from discontinued operating activities

 

$

74 

 

$

3,074 

Net cash used in discontinued investing activities

 

 

(1,010)

 

 

(1,907)

Net cash from / (used in) discontinued financing activities

 

 

920 

 

 

(2,635)

        Net cash used in discontinued operations

 

$

(16)

 

$

(1,468)



 

 

 

 

 

 

Effect of exchange rate changes on continuing cash and cash equivalents

 

$

3,421 

 

$

1,540 



 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

$

(7,994)

 

$

(69,817)



 

 

 

 

 

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

Beginning of period

 

$

62,788 

 

$

121,594 



 

 

 

 

 

 

End of period

 

$

54,794 

 

$

51,777 



 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

11,817 

 

$

9,699 

Income taxes paid

 

 

3,598 

 

 

2,182 

Non-cash Investing Activities:

 

 

 

 

 

 

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

 

$

17,912 

 

$

20,327 



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



4

 


 



 

TOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1. Organization and Basis of Presentation

 

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

 

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

 

Principles of Consolidation

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



 

Note 2. New Accounting Pronouncements



Retirement Benefits

On March 10, 2017, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU is designed to increase the transparency and usefulness of information about defined benefit costs for pension plans and other post-retirement benefit plans presented in employer financial statements. This ASU is effective for interim and annual periods after December 15, 2017. Early adoption is allowed, and requires that the guidance be applied retrospectively to all prior periods. Effective October 1, 2006, the Company’s pension plan was frozen and the Company ceased accruing any additional benefits; as such, the Company does not expect a material financial statement impact related to the adoption of this ASU.

Stock Compensation

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods therein. Upon adoption in the first quarter of 2017, the Company recorded a cumulative adjustment for previously unrecognized tax benefits to accumulated surplus of approximately $5.3 million.

Revenue Recognition

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU outlines a single comprehensive model for entities to utilize to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that will be received in exchange for the goods and services. Additional disclosures will also be required to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date of this standards update to fiscal years beginning after December 15, 2017, with early adoption permitted on the original effective date of fiscal years beginning after December 15, 2016. In 2016, the FASB issued ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-11, and ASU 2016-12, all of which amend the implementation guidance and illustrations in the Board’s new revenue standard.

5

 


 

The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company currently expects to adopt the new revenue standards in its first quarter of 2018 utilizing the full retrospective transition method. The Company does not expect the adoption of the new revenue standards to have a material impact on its consolidated financial statements, but is still evaluating certain contracts with customers related to the development of tooling used in the manufacture of our products.

Leases

In February 2016, the FASB issued ASU No. 2016-02, Lease Accounting. This ASU introduces a lessee model that brings most leases on the balance sheet. Further, the standard also aligns certain of the underlying principles of the new lessor model with those in ASU No. 2014-09. This new ASU on leases is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating significant contracts and assessing any impact to the Consolidated Financial Statements.



Note 3. Inventories

 

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

 





 

 

 

 

 

 



 

June 30, 2017

 

December 31, 2016

Raw materials

 

$

33,632 

 

$

31,993 

Work in process

 

 

15,598 

 

 

14,721 

Finished goods

 

 

25,735 

 

 

24,996 

  Total inventory

 

$

74,965 

 

$

71,710 











 

Note 4. Discontinued Operations and Assets Held for Sale

 

During the second quarter of 2016, the Company’s Board of Directors approved a plan to sell the Company’s remaining business operations in Brazil and China. At June 30, 2017, the Brazilian business operation and one Chinese joint venture are considered held for sale in accordance with FASB Accounting Standard Codification (“ASC”) No. 360, Property, Plant, and Equipment, and presented as discontinued operations in the Condensed Consolidated Financial Statements, in accordance with FASB ASC No. 205, Discontinued Operations. At December 31, 2016, both of the Brazilian and Chinese business operations were held for sale and presented as discontinued operations.

 

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

 





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2017

 

2016

 

2017

 

2016

Revenues

 

$

18,820 

 

$

27,781 

 

$

48,776 

 

$

50,083 

Loss from sale of Wuhu discontinued operation

 

 

(2,596)

 

 

 -

 

 

(2,596)

 

 

 -

Income / (loss) from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Income / (loss) before provision for income taxes and

 

 

 

 

 

 

 

 

 

 

 

 

  equity in income / (loss) of joint venture

 

 

1,839 

 

 

(19,226)

 

 

3,668 

 

 

(19,384)

Provision / (benefit) for income taxes

 

 

(268)

 

 

795 

 

 

211 

 

 

982 

Income / (loss) from discontinued operations

 

$

(489)

 

$

(20,021)

 

$

861 

 

$

(20,366)



 

 

 

 

 

 

 

 

 

 

 

 

 

Sale of China Joint Ventures

In October of 2016, the Company entered into an agreement to sell its joint venture in Wuhu, China: Tower Automotive (“Wuhu”) Company, Ltd. The initial sale agreement provided for the purchase of the Company’s equity in the joint venture for approximately $21 million, net of tax. The Company received proceeds of $4.5 million in the fourth quarter of 2016. On May 9, 2017, the Company completed the sale of its equity interest in Wuhu. During the three months ended June 30, 2017, the Company received total net proceeds of $15.9 million related to the sale, which resulted in a total sales price that was less than the carrying value of the net assets of Wuhu. In addition, the Company incurred certain transaction related costs; therefore, a net loss of $2.6 million was recorded during the period ended June 30, 2017.

6

 


 

As of June 30, 2017, all proceeds from the transaction were received. Wuhu has been presented as discontinued operations in our Consolidated Financial Statements, in accordance with FASB ASC No. 205, Discontinued Operations. 

Also, in October of 2016, the Company entered into an agreement to sell its joint venture in Ningbo, China: Tower (“Ningbo”) DIT Automotive Products Co., Ltd. The agreement is subject to Chinese government approval. The sale agreement provided for purchase of the Company’s equity in the joint venture for approximately $4 million, net of tax. The Company anticipates that this transaction will close in the fourth quarter of 2017.

Discontinued Brazil Operation

During the second quarter of 2016, the Company’s Board of Directors approved a plan to sell the Company’s remaining business operations in Brazil. During the second quarter of 2016, the Company recorded a fair value adjustment of $15 million that represents the cumulative translation adjustment related to Brazil. 



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

 





 

 

 

 

 

 



 

June 30, 2017

 

December 31, 2016



 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets

 

$

23,036 

 

$

59,137 

Property, plant, and equipment, net

 

 

28,372 

 

 

47,640 

Other assets, net

 

 

9,391 

 

 

13,575 

Fair value adjustment

 

 

(18,100)

 

 

(18,100)

Total assets held for sale

 

$

42,699 

 

$

102,252 



 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Short-term debt and current maturities of capital lease obligations

 

$

1,283 

 

$

2,792 

Accounts payable

 

 

11,980 

 

 

43,661 

Total current liabilities

 

 

13,263 

 

 

46,453 



 

 

 

 

 

 

Long-term debt, net of current maturities

 

 

1,751 

 

 

2,393 

Other non-current liabilities

 

 

1,895 

 

 

4,464 

Total non-current liabilities

 

 

3,646 

 

 

6,857 

Total liabilities held for sale

 

$

16,909 

 

$

53,310 



 

 

Note 5. Tooling

 

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

 

After the part for which tooling has been developed reaches a production-ready status, the Company is reimbursed by its customer for the cost of the tooling, at which time the tooling becomes the property of the customer. Any gain recognized, which is defined as the excess of reimbursement over cost, is amortized over the life of the program. If estimated costs are expected to be in excess of reimbursement, a loss is recorded in the period in which the loss is estimated. Customer-owned tooling is included in the Condensed Consolidated Balance Sheets in prepaid tooling, notes receivable, and other. At June 30, 2017 and December 31, 2016, the Company had an asset related to customer-owned tooling of $119 million and $87.9 million, respectively.

7

 


 



Note 6. Goodwill and Other Intangible Assets

 

Goodwill

 

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

 





 

 

 

 

 

 

 

 

 



 

Europe

 

North America

 

Consolidated

Balance at December 31, 2016

 

$

49,293 

 

$

7,090 

 

$

56,383 

Currency translation adjustment

 

 

4,249 

 

 

1,037 

 

 

5,286 

Balance at June 30, 2017

 

$

53,542 

 

$

8,127 

 

$

61,669 

 

Intangibles

 

In the North America segment, an intangible asset of $3.5 million related to customer relationships was recorded in 2015, as part of the acquisition of a facility in Mexico. This intangible asset has a definite life and will be amortized on a straight-line basis over seven years, the estimated life of the related asset, which approximates the recognition of related revenues.

 

The Company incurred amortization expense of $0.1 million and $0.2 million for the three and six months ended June 30, 2017, respectively. The Company incurred amortization expense of $0.1 million and $0.2 million for the three and six months ended June 30, 2016, respectively.



 

Note 7. Restructuring and Asset Impairment Charges

 

As of June 30, 2017, the Company has executed various restructuring plans and may execute additional plans in the future to reduce corporate overhead, to realign manufacturing capacity to prevailing global automotive production levels, and to improve the utilization of remaining facilities. Estimates of restructuring charges are based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially recorded. Accordingly, the Company may record revisions of previous estimates by adjusting previously established reserves.

 

Restructuring and Asset Impairment Charges

 

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

 





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2017

 

2016

 

2017

 

2016

Europe

 

$

616 

 

$

117 

 

$

744 

 

$

117 

North America

 

 

2,721 

 

 

723 

 

 

6,504 

 

 

1,469 

Consolidated

 

$

3,337 

 

$

840 

 

$

7,248 

 

$

1,586 

   

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

 





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2017

 

2016

 

2017

 

2016

Employee termination costs

 

$

3,172 

 

$

117 

 

$

6,867 

 

$

117 

Other exit costs

 

 

165 

 

 

723 

 

 

381 

 

 

1,469 

Total restructuring expense

 

$

3,337 

 

$

840 

 

$

7,248 

 

$

1,586 

 

The charges incurred during the six months ended June 30, 2017 and 2016 related primarily to the following actions:

 

2017 Actions

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



2016 Actions

During the three and six months ended June 30, 2016, the charges incurred in the North America and Europe segments related to ongoing maintenance expense of facilities closed as a result of prior actions and severance charges to reduce fixed costs.

8

 


 

Restructuring Reserve

 

The table below summarizes the activity in the restructuring reserve by segment, reflected in accrued liabilities and other non-current liabilities, for the above-mentioned actions through June 30, 2017 (in thousands):

 





 

 

 

 

 

 

 

 

 



 

Europe

 

North America

 

Consolidated

Balance at December 31, 2016

 

$

92 

 

$

197 

 

$

289 

Payments

 

 

(480)

 

 

(1,884)

 

 

(2,364)

Increase in liability

 

 

744 

 

 

6,123 

 

 

6,867 

Balance at June 30, 2017

 

$

356 

 

$

4,436 

 

$

4,792 

 

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

 

The restructuring reserve increased during the six months ended June 30, 2017, reflecting primarily accruals for severance, offset partially by payments related to 2017 restructuring actions and prior accruals.

 

During the six months ended June 30, 2017, the Company incurred payments in Europe of $0.5 million and in North America of $1.9 million related to prior accruals and 2017 restructuring actions described above.



Note 8. Debt

 

Short-Term Debt

 

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

 





 

 

 

 

 

 



 

June 30, 2017

 

December 31, 2016

Current maturities of debts (excluding capital leases)

 

$

45,234 

 

$

33,277 

Current maturities of capital leases

 

 

5,790 

 

 

934 

Total short-term debt

 

$

51,024 

 

$

34,211 

 

Long-Term Debt

 

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

 





 

 

 

 

 

 



 

June 30, 2017

 

December 31, 2016

Term Loan Credit Facility (net of discount of $2,471 and $827)

 

$

358,125 

 

$

361,798 

Amended Revolving Credit Facility

 

 

30,000 

 

 

 -

Other foreign subsidiary indebtedness

 

 

41,619 

 

 

28,777 

Debt issue costs

 

 

(8,948)

 

 

(6,066)

Total debt

 

 

420,796 

 

 

384,509 

Less: Current maturities of debts (excluding capital leases)

 

 

(45,234)

 

 

(33,277)

Total long-term debt

 

$

375,562 

 

$

351,232 

 

Term Loan Credit Facility

 



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

9

 


 

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

 

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

 

As of June 30, 2017, the outstanding principal balance of the Term Loan Credit Facility was $358.1 million (net of a $2.5 million original issue discount) and the effective interest rate was 3.875% per annum.

 

Amended Revolving Credit Facility

 



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

 

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

 

Advances under the Amended Revolving Credit Facility bear interest at an alternate base rate plus a base rate margin or LIBOR plus a Eurodollar margin. The applicable margins are determined by the Company’s Total Net Leverage Ratio (as defined in the Fourth Amended Revolving Credit Facility Agreement). As of June 30, 2017, the applicable margins were 2.50% per annum for LIBOR based borrowings and 1.50% per annum for base rate borrowings, resulting in a weighted average interest rate of 3.98%. The Company will pay a commitment fee at a rate equal to 0.50% per annum on the average daily unused total revolving credit commitment.

 

The Amended Revolving Credit Facility is guaranteed by the Company on an unsecured basis and is guaranteed by certain of the Company’s other direct and indirect domestic subsidiaries on a secured basis. The Amended Revolving Credit Facility is secured (i) by a first priority security interest in certain assets of the Borrower and the Subsidiary Guarantors, including accounts, inventory, chattel paper, cash, deposit accounts, securities accounts, machinery, equipment and real property and all contract rights, and records and proceeds relating to the foregoing and (ii) on a second priority basis to all other assets of the Borrower and the Subsidiary Guarantors.

 

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

 

As of June 30, 2017, there was $161 million of unutilized borrowing availability under the Amended Revolving Credit Facility.  At that date, there were $30 million of borrowings and $9 million of letters of credit outstanding under the Amended Revolving Credit Facility.



Other Foreign Subsidiary Indebtedness

 



As of June 30, 2017, other foreign subsidiary indebtedness of $41.6 million consisted primarily of receivables factoring in Europe of $31.3 million, other indebtedness in Europe of $6.3 million, and $4 million of indebtedness outstanding on a secured credit line.



The change in foreign subsidiary indebtedness from December 31, 2016 to June 30, 2017 is explained by the following (in thousands):

 





 

 

 



 

Europe

Balance at December 31, 2016

 

$

28,777 

Maturities of indebtedness

 

 

(714)

Change in borrowings on credit facilities, net

 

 

11,076 

Foreign exchange impact

 

 

2,480 

Balance at June 30, 2017

 

$

41,619 

 

10

 


 

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



As of June 30, 2017, the receivables factoring facilities balance available to the Company was $31.3 million (€27.4 million), of which the entire amount was drawn. These are uncommitted, demand facilities which are subject to termination at the discretion of the banks and bear interest rates based on the average three month EURIBOR plus a spread ranging from 2.50% to 3.00%. The effective annual interest rates as of June 30, 2017 ranged from 2.17% to 2.67%, with a weighted average interest rate of 2.48% per annum. Any receivables factoring under these facilities is with recourse and is secured by the accounts receivable factored. These receivables factoring transactions are recorded in the Company’s Condensed Consolidated Balance Sheets in short-term debt and current maturities of capital lease obligations.



As of June 30, 2017, the Company’s European subsidiaries had borrowings of $6.3 million (€5.5 million), which had an annual interest rate of 6.25% and matures in November 2017. This term loan is secured by certain machinery and equipment.

 

As of June 30, 2017, the secured line of credit balance available to the Company was $9 million (€7.9 million), of which $4 million in borrowings were outstanding. The facility bears an interest rate based on the EURIBOR plus a spread of 1.9% and matures in October 2017. The effective annual interest rate as of June 30, 2017 was 1.9% per annum. The facilities are secured by certain accounts receivable related to customer-owned tooling, real estate, and other assets, and are subject to negotiated prepayments upon the receipt of funds from completed customer projects. 

 

As of June 30, 2017, the Company’s European subsidiaries had an asset-based revolving credit facility balance available to the Company of $33.6 million, of which no borrowings were outstanding. This facility bears an interest rate based upon one month LIBOR plus a margin of 4.00%, or base rate plus a margin of 3.00%, and matures in October 2017. Availability on the credit facility is determined based upon the appraised value of certain machinery, equipment, and real estate, subject to a borrowing base availability limitation and customary covenants.

 

Covenants

 

As of June 30, 2017, the Company was in compliance with the financial covenants that govern its credit agreements.

 

Capital Leases

   

The Company had the following capital lease obligations, which expire in March 2018, as of the dates presented (in thousands):

 





 

 

 

 

 

 



 

June 30, 2017

 

December 31, 2016

Current maturities of capital leases

 

$

5,790 

 

$

934 

Non-current maturities of capital leases

 

 

 -

 

 

4,863 

Total capital leases

 

$

5,790 

 

$

5,797 

 

Debt Issue Costs

 

The Company had debt issuance costs, net of amortization, of $8.9 million and $6.1 million as of June 30, 2017 and December 31, 2016, respectively. These amounts are reflected in the Condensed Consolidated Balance Sheets as a direct deduction from long-term debt, net of current maturities.

 

The Company incurred interest expense related to the amortization of debt issue costs of $0.5 million and $1.3 million during the three and six months ended June 30, 2017, respectively. The Company incurred interest expense related to the amortization of debt issue costs of $0.5 million and $1.5 million during the three and six months ended June 30, 2016, respectively.

 



Note 9. Derivative Financial Instruments

 

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

 

On March 7, 2017, the Company amended the $200 million variable rate to fixed rate interest rate swap, for a portion of the Company’s Term Loan, entered into on October 17, 2014. The U.S. dollar notional amount remained the same at $186.1 million, the fixed interest rate was changed from 5.09% to 5.628% per annum, and the maturity date was extended from April 16, 2020 to March 7, 2024. The fair value of the swap will fluctuate with changes in interest rates.



11

 


 

Also on March 7, 2017, the Company amended the cross currency swap, entered into on January 23, 2015, into a new cross currency swap, to hedge its net investment in Europe, based on the U.S. dollar / Euro exchange spot rate of $1.04795. The Euro notional amount remained the same at €178 million, the interest rate was lowered from 3.40% to 2.85%, and the maturity date was extended from April 16, 2020 to March 7, 2024.



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



At June 30, 2017 and December 31, 2016, the U.S. dollar / Euro exchange spot rate was $1.1419 and $1.0516, respectively. The following amounts were recorded in the Condensed Consolidated Balance Sheets as being payable to counterparties under FASB ASC No. 815, Derivatives and Hedging (in thousands):

 





 

 

 

 

 

 

 

 



 

Location

 

June 30, 2017

 

December 31, 2016

Cross currency swap

 

Other non-current liabilities

 

$

13,804 

 

$

4,993 

Interest rate swap

 

Other non-current liabilities

 

 

9,543 

 

 

2,451 

 

All derivative instruments are recorded at fair value. Effectiveness for net investment and cash flow hedges is initially assessed at the inception of the hedging relationship and on a quarterly basis thereafter. To the extent that derivative instruments are deemed to be effective, changes in the fair value of derivatives are recognized in the Condensed Consolidated Balance Sheets as accumulated other comprehensive income (“AOCI”), and to the extent they are ineffective or were not designated as part of a hedge transaction, they are recorded in the Condensed Consolidated Statements of Operations as interest expense, net. The cross currency swap qualifies as a net investment hedge of the Company’s European subsidiaries. The interest rate swap qualifies as a cash flow hedge of the interest payments related to the Company’s Term Loan. In all previous periods, the Company had not accounted for the interest rate swap as a cash flow hedge, and all changes in fair value were recognized in the Condensed Consolidated Statements of Operations as interest expense, net.

 

The following table presents the deferred gain / (loss) reported in AOCI at June 30, 2017 and December 31, 2016 (in thousands):

 





 

 

 

 

 

 



 

Deferred gain in AOCI



 

June 30, 2017

 

December 31, 2016

Cross currency swap

 

$

20,324 

 

$

35,699 

Interest rate swap

 

 

(7,441)

 

 

 -

Total

 

$

12,883 

 

$

35,699 



Derivative instruments held during the period resulted in the following (income) / expense recorded in income (in thousands):

 





 

 

 

 

 

 

 

 

 

 

 

 



 

(Income) / expense recognized

 

(Income) / expense recognized



 

(ineffective portion)

 

(ineffective portion)



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2017

 

2016

 

2017

 

2016

Cross currency swap

 

$

(2,573)

 

$

(601)

 

$

(6,563)

 

$

(629)

Interest rate swap

 

 

(57)

 

 

957 

 

 

(349)

 

 

3,411 

Total

 

$

(2,630)

 

$

356 

 

$

(6,912)

 

$

2,782 











Note 10. Income Taxes

During the three months ended June 30, 2017, the Company recorded income tax expense of $7.7 million on $27.4 million of pre-tax profit from continuing operations – for a worldwide effective tax rate of 28.1%.  Included in the $7.7 million of worldwide tax expense was $5.6 million of deferred tax expense attributable to U.S. operations.



During the three months ended June 30, 2016, the Company recorded income tax expense of $6 million on $21.3 million of pre-tax profit from continuing operations – for a worldwide effective tax rate of 28.2%.  Included in the $6 million of worldwide tax expense was $5.5 million of deferred tax expense attributable to U.S. operations.



During the six months ended June 30, 2017, the Company recorded income tax expense of $14.2 million on $50 million of pre-tax profit from continuing operations – for a worldwide effective tax rate of 28.4%. Included in the $14.2 million of worldwide tax expense was $10.8 million of deferred tax expense attributable to U.S. operations.



During the six months ended June 30, 2016, the Company recorded income tax expense of $9.5 million on $33.5 million of pre-tax profit from continuing operations – for a worldwide effective tax rate of 28.3%. Included in the $9.5 million of worldwide tax expense was $7.8 million of deferred tax expense attributable to U.S. operations. 

12

 


 







Note 11. Retirement Plans

 

The Company sponsors a pension and various other postretirement benefit plans for its employees. Each plan serves a defined group of employees and has varying levels of Company contributions. The Company’s contributions to certain plans may be required by the terms of the Company’s collective bargaining agreements.

 

The following tables provide the components of net periodic pension benefit cost and other post-retirement benefit cost (in thousands):

 





 

 

 

 

 

 

 

 

 

 

 

 



 

Pension Benefits

 

Other Benefits



 

Three Months Ended June 30,

 

Three Months Ended June 30,



 

2017

 

2016

 

2017

 

2016

Service cost

 

$

 

$

 

$

 

$

Interest cost

 

 

1,924 

 

 

1,947 

 

 

136 

 

 

136 

Expected return on plan assets (a)

 

 

(2,555)

 

 

(2,546)

 

 

 -

 

 

 -

Amortization of prior service credit

 

 

(24)

 

 

(24)

 

 

33 

 

 

33 

Net periodic benefit cost / (income)

 

$

(650)

 

$

(617)

 

$

171 

 

$

171 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Pension Benefits

 

Other Benefits



 

Six Months Ended June 30,

 

Six Months Ended June 30,



 

2017

 

2016

 

2017

 

2016

Service cost

 

$

10 

 

$

12 

 

$

 

$

Interest cost

 

 

3,848 

 

 

3,894 

 

 

272 

 

 

272 

Expected return on plan assets (a)

 

 

(5,110)

 

 

(5,092)

 

 

 -

 

 

 -

Amortization of prior service credit

 

 

(48)

 

 

(48)

 

 

66 

 

 

66 

Net periodic benefit cost / (income)

 

$

(1,300)

 

$

(1,234)

 

$

342 

 

$

342 



(a)Expected rate of return on plan assets is 7.40% for 2017 and was 7.40% for 2016

 

The Company expects its minimum pension funding requirements to be $8.8 million during 2017. During the three and six months ended June 30, 2017, the Company made contributions of $1.9 million and $3.6 million, respectively.



Additionally, during the three and six months ended June 30, 2017, the Company contributed $1.5 million and $3.1 million, respectively, to its defined contribution retirement plans.



 



13

 


 

Note 12. Stockholders’ Equity and Noncontrolling Interests

 

The table below provides a reconciliation of the carrying amount of total stockholders’ equity, including stockholders’ equity attributable to Tower International, Inc. (“Tower”) and equity attributable to the noncontrolling interests (“NCI”) (in thousands):

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Six Months Ended June 30,



 

2017

 

2016



 

Tower

 

NCI

 

Total

 

Tower

 

NCI

 

Total

Stockholders' equity beginning balance

 

$

207,795 

 

$

6,144 

 

$

213,939 

 

$

197,495 

 

$

9,224 

 

$

206,719 

Net income

 

 

36,561 

 

 

110 

 

 

36,671 

 

 

3,537 

 

 

95 

 

 

3,632 

Other comprehensive income / (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

13,237 

 

 

52 

 

 

13,289 

 

 

6,637 

 

 

(193)

 

 

6,444 

Unrealized loss on qualifying cash flow hedge

 

 

(4,613)

 

 

 -

 

 

(4,613)

 

 

 -

 

 

 -

 

 

 -

 Total comprehensive income

 

 

45,185 

 

 

162 

 

 

45,347 

 

 

10,174 

 

 

(98)

 

 

10,076 

Vesting of RSUs

 

 

 

 

 -

 

 

 

 

 

 

 -

 

 

Treasury stock

 

 

(762)

 

 

 -

 

 

(762)

 

 

(621)

 

 

 -

 

 

(621)

Share based compensation expense

 

 

1,098 

 

 

 -

 

 

1,098 

 

 

1,034 

 

 

 -

 

 

1,034 

Proceeds from stock options exercised

 

 

1,052 

 

 

 -

 

 

1,052 

 

 

25 

 

 

 -

 

 

25 

Dividend paid

 

 

(4,498)

 

 

 -

 

 

(4,498)

 

 

(4,229)

 

 

 -

 

 

(4,229)

Cumulative effect of the adoption of ASU No. 2016-09

 

 

5,329 

 

 

 -

 

 

5,329 

 

 

 -

 

 

 -

 

 

 -

Noncontrolling interest sold

 

 

 -

 

 

(6,306)

 

 

(6,306)

 

 

 -

 

 

 -

 

 

 -

Noncontrolling interest dividends - Wuhu

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,164)

 

 

(2,164)

Stockholders' equity ending balance

 

$

255,201 

 

$

 -

 

$

255,201 

 

$

203,879 

 

$

6,962 

 

$

210,841 

 

On June 17, 2016, the Company announced its Board of Directors’ authorization to repurchase up to $100 million of the Company’s issued and outstanding common stock from time to time in the open market, or in privately negotiated transactions. The Company expects to fund such repurchases from cash flow from operations, cash on hand, asset dispositions, and borrowings under its revolving credit facility. During the year ended December 31, 2016, the Company repurchased a total of 829,648 shares of common stock at an aggregate cost of $18.9 million under this repurchase program. During the six months ended June 30, 2017, no shares have been repurchased under this repurchase program.



The following table presents the components of accumulated other comprehensive loss (in thousands):

 





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

As of June 30, 2017

 

As of December 31, 2016

 

Change

Foreign currency translation adjustments, net of tax of $4.2 million and $10.1 million

 

$

(31,174)

 

$

(44,411)

 

$

13,237 

Defined benefit plans, net of tax of $14.2 million and $14.2 million

 

 

(38,972)

 

 

(38,972)

 

 

 -

Unrealized loss on qualifying cash flow hedge, net of tax (benefit) of ($2.8 million) and $0 million

 

 

(4,613)

 

 

 -

 

 

(4,613)

Accumulated other comprehensive loss

 

$

(74,759)

 

$

(83,383)

 

$

8,624 



The following table presents the changes in accumulated other comprehensive loss by component (in thousands) for the three months ended June 30, 2017:

 





 

 

 

 

 

 

 

 

 

 

 

 



 

  Unrealized loss on

 

 

 

 

Foreign Currency

 

 

 



 

Qualifying cash flow

 

Defined Benefit

 

Translation

 

 

 



 

Hedge, Net of Tax

 

Plan, Net of Tax

 

Adjustments

 

Total

Balance at March 31, 2017

 

$

(4,074)

 

$

(38,972)

 

$

(38,581)

 

$

(81,627)

Other comprehensive income before reclassification

 

 

(539)

 

 

 -

 

 

7,407 

 

 

6,868 

Net current-period other comprehensive income

 

 

(539)

 

 

 -

 

 

7,407 

 

 

6,868 

Balance at June 30, 2017

 

$

(4,613)

 

$

(38,972)

 

$

(31,174)

 

$

(74,759)

 

14

 


 

The following table presents the changes in accumulated other comprehensive loss by component (in thousands) for the three months ended June 30, 2016:

 





 

 

 

 

 

 

 

 

 



 

 

 

 

Foreign Currency

 

 

 



 

Defined Benefit

 

Translation

 

 

 



 

Plan, Net of Tax

 

Adjustments

 

Total

Balance at March 31, 2016

 

$

(40,002)

 

$

(32,107)

 

$

(72,109)

Other comprehensive loss before reclassification

 

 

 -

 

 

(1,746)

 

 

(1,746)

Net current-period other comprehensive loss

 

 

 -

 

 

(1,746)

 

 

(1,746)

Balance at June 30, 2016

 

$

(40,002)

 

$

(33,853)

 

$

(73,855)

  

The following table presents the changes in accumulated other comprehensive loss by component (in thousands) for the six months ended June 30, 2017:









 

 

 

 

 

 

 

 

 

 

 

 



 

Unrealized loss on

 

 

 

 

Foreign Currency

 

 

 



 

Qualifying cash flow

 

Defined Benefit

 

Translation

 

 

 



 

Hedge, Net of Tax

 

Plan, Net of Tax

 

Adjustments

 

Total

Balance at December 31, 2016

 

$

 -

 

$

(38,972)

 

$

(44,411)

 

$

(83,383)

Other comprehensive income before reclassification

 

 

(4,613)

 

 

 -

 

 

13,237 

 

 

8,624 

Net current-period other comprehensive income

 

 

(4,613)

 

 

 -

 

 

13,237 

 

 

8,624 

Balance at June 30, 2017

 

$

(4,613)

 

$

(38,972)

 

$

(31,174)

 

$

(74,759)



The following table presents the changes in accumulated other comprehensive loss by component (in thousands) for the six months ended June 30, 2016:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

Foreign Currency

 

 

 



 

Defined Benefit

 

Translation

 

 

 



 

Plan, Net of Tax

 

Adjustments

 

Total

Balance at December 31, 2015

 

$

(40,002)

 

$

(40,490)

 

$

(80,492)

Other comprehensive loss before reclassification

 

 

 -

 

 

6,637 

 

 

6,637 

Net current-period other comprehensive loss

 

 

 -

 

 

6,637 

 

 

6,637 

Balance at June 30, 2016

 

$

(40,002)

 

$

(33,853)

 

$

(73,855)











 

Note 13. Earnings per Share (“EPS”)

 

Basic earnings per share is calculated by dividing the net income attributable to Tower International, Inc. by the weighted average number of common shares outstanding.

 

The share count for diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effects of dilutive common stock equivalents (“CSEs”) outstanding during the period. CSEs, which are securities that may entitle the holder to obtain common stock, include outstanding stock options and restricted stock units. When the average price of the common stock during the period exceeds the exercise price of a stock option, the options are considered potentially dilutive CSEs. When there is a loss from continuing operations, potentially dilutive shares are excluded from the computation of earnings per share, as their effect would be anti-dilutive.

 

The Company included the effects of all dilutive shares for the three and six months ended June 30, 2017 and June 30, 2016.

15

 


 

A summary of the information used to compute basic and diluted net income per share attributable to Tower International, Inc. is shown below (in thousands – except share and per share amounts):

 





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2017

 

2016

 

2017

 

2016

Income from continuing operations

 

$

19,747 

 

$

15,269 

 

$

35,810 

 

$

23,998 

Income / (loss) from discontinued operations, net of tax

 

 

(489)

 

 

(20,021)

 

 

861 

 

 

(20,366)

Net income / (loss)

 

 

19,258 

 

 

(4,752)

 

 

36,671 

 

 

3,632 

Less: Net income attributable to the noncontrolling interests

 

 

42 

 

 

89 

 

 

110 

 

 

95 

Net income / (loss) attributable to Tower International, Inc.

 

$

19,216 

 

$

(4,841)

 

$

36,561 

 

$

3,537 



 

 

 

 

 

 

 

 

 

 

 

 

Basic income / (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.96 

 

$

0.72 

 

$

1.74 

 

$

1.13 

Discontinued operations

 

 

(0.02)

 

 

(0.95)

 

 

0.04 

 

 

(0.96)

Net income / (loss) attributable to Tower International, Inc.

 

 

0.94 

 

 

(0.23)

 

 

1.79 

 

 

0.17 

Basic weighted average shares outstanding

 

 

20,508,890 

 

 

21,164,505 

 

 

20,467,281 

 

 

21,145,588 



 

 

 

 

 

 

 

 

 

 

 

 

Diluted income / (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.95 

 

$

0.71 

 

$

1.72 

 

$

1.11 

Discontinued operations

 

 

(0.02)

 

 

(0.93)

 

 

0.04 

 

 

(0.95)

Net income / (loss) attributable to Tower International, Inc.

 

 

0.92 

 

 

(0.23)

 

 

1.76 

 

 

0.16 

Diluted weighted average shares outstanding

 

 

20,805,931 

 

 

21,489,161 

 

 

20,813,100 

 

 

21,469,818 













Note 14. Share-Based and Long-Term Compensation

 

Share-Based Compensation

 

2010 Equity Incentive Plan (“the Plan”)

 

The Company adopted an equity incentive plan in connection with its 2010 initial public offering that allows for the grant of stock options, restricted stock awards, other equity-based awards, and certain cash-based awards to be made pursuant to the Plan. The eligibility requirements and terms governing the allocation of any common stock and the receipt of other consideration under the Plan are determined by the Board of Directors and/or its Compensation Committee.

 

At June 30, 2017, 799,059 shares were available for future grants of options and other types of awards under the Plan.



The following table summarizes the Company’s award activity during the six months ended June 30, 2017:

 





 

 

 

 

 

 

 

 

 

 



 

Options

 

Restricted Stock Units



 

 

 

Weighted

 

 

 

Weighted



 

 

 

Average

 

 

 

Average Grant 

Outstanding at:

 

Shares

 

Exercise Price

 

Shares

 

Date Fair Value

December 31, 2016

 

474,468 

 

$

12.18 

 

213,522 

 

$

24.77 

Granted

 

 -

 

 

 -

 

104,449 

 

 

27.43 

Options exercised or RSUs issued

 

(87,527)

 

 

12.05 

 

(101,418)

 

 

24.99 

Forfeited

 

 -

 

 

 -

 

(2,279)

 

 

24.16 

June 30, 2017

 

386,941 

 

$

12.21 

 

214,274 

 

$

26.32 

 

Stock Options

 

The exercise price of each stock option equals the market price of the Company’s common stock on the grant date. Compensation expense is recorded at the grant date fair value and is recognized on a straight-line basis over the applicable vesting periods. The Company’s stock options generally vest over three years, with a maximum term of ten years.

 

The Company calculates the weighted average grant date fair value of each option granted using a Black-Scholes valuation model. During the three and six months ended June 30, 2017 and 2016 the Company did not recognize any expense relating to the options as all of the expense associated with these options had been fully recognized in previous periods.

 

16

 


 

As of June 30, 2017, the Company had an aggregate of 386,941 stock options that had been granted, but had not yet been exercised. As of June 30, 2017, the remaining average contractual life for these options is approximately four years. During the six months ended June 30, 2017, 87,527 options were exercised, which had an aggregate intrinsic value of $1.4 million. As of June 30, 2017, 386,941 stock options were exercisable, which had an aggregate intrinsic value of $4 million. During the six months ended June 30, 2017, no stock options were granted, forfeited, or expired.

 

Restricted Stock Units (“RSUs”)

 

The grant date fair value of each RSU equals the market price of the Company’s common stock on its date of grant. Compensation expense is recorded at the grant date fair value, less an estimated forfeiture amount, and is recognized on a straight-line basis over the applicable vesting periods. The Company’s RSUs generally vest over a three year period.

 

During the three and six months ended June 30, 2017, the Company recognized expense relating to the RSUs of $0.6 million and $1.1 million, respectively. During the three and six months ended June 30, 2016, the Company recognized expense relating to the RSUs of $0.5 million and $1 million, respectively. As of June 30, 2017, the Company had $3.3 million of unrecognized compensation expense associated with these RSUs, which will be amortized on a straight-line basis over the next 16 months, on a weighted average basis.

 

As of June 30, 2017, the Company had an aggregate of 214,274 RSUs that had been granted, but had not yet vested. During the six months ended June 30, 2017, 104,449 RSUs were granted and 2,279 RSUs were forfeited.

 

During the first six months of 2017, a total of 101,418 RSUs vested, resulting in the issuance of 101,418 shares. The fair value of these shares was $2.8 million. This total was reduced by shares repurchased to provide payment for certain individual’s minimum statutory withholding tax. After offsets for withholding taxes, a total of 74,435 shares of common stock were issued. The Company paid $0.8 million to acquire 26,983 vested shares to cover the minimum statutory withholding taxes.



Long-Term Compensation



Amended and Restated CEO Employment Agreement



On July 28, 2014, Mark M. Malcolm, the Company’s former President and Chief Executive Officer, entered into an amended and restated employment agreement (the “Agreement”), by which Mr. Malcolm’s employment was extended through December 31, 2016 (the “Retirement Date”). Mr. Malcolm retired from the Company on the Retirement Date. The Agreement provided for a $3 million transition bonus, for the successful delivery to Tower’s board of directors of a comprehensive chief executive officer succession and transition plan, and a $3 million retention bonus. These bonus awards will be paid in cash on July 14, 2017, and fall under the guidance of FASB ASC No. 450, Contingencies.  

During the three and six months ended June 30, 2017, the Company recorded expense of $0.1 million and $0.2 million related to these awards, respectively. During the three and six months ended June 30, 2016, the Company recorded income of $0.7 million and expense of $0.1 million related to these awards, respectively.



As of June 30, 2017, the Company has a liability of $6.2 million related to these awards. This liability is presented in the Condensed Consolidated Balance Sheets as other current liabilities.



 

Performance Award Agreements



Under the provisions of the 2010 Equity Incentive Plan, the Company grants certain awards annually in March pursuant to Performance Award Agreements to approximately 80 executives. These awards are designed to provide the executives with an incentive to participate in the long-term success and growth of the Company. The Performance Award Agreements provide for cash-based awards that vest upon payment. Pursuant to meeting the performance conditions set forth in the Performance Award Agreements, each award will be paid three years after it is granted. These awards are also subject to payment upon a change in control or termination of employment, if certain criteria are met. These awards represent unfunded, unsecured obligations of the Company.

 

2014 and 2015 Awards



One half of the awards granted in 2014 and 2015 were based upon the Company's Adjusted EPS Growth Rate, which is defined as the Company’s cumulative Adjusted EPS for the performance period of the awards, stated in terms of a percentage growth rate. The Company's EPS was and will be adjusted to exclude the effect of unusual, and/or nonrecurring items and then was and will be divided by the number of fiscal years in the specified period, stated in terms of a percentage growth rate. The other half of the awards are based upon the Company's percentile ranking of total shareholder return, compared to a peer group of companies, for the performance period.



Pursuant to meeting the performance conditions set forth in the Performance Award Agreements, the awards granted in 2014 were paid in the first quarter of 2017. The performance period of the awards granted in 2015, is January 1, 2015 through December 31, 2017.

 

17

 


 



2016 and 2017 Awards



One half of the awards granted in 2016 and 2017 will be based upon the Company’s Adjusted EBIT Growth Rate, which is defined as the Company’s cumulative Adjusted EBIT (earnings before interest and taxes) for the performance period of the awards, stated in terms of a percentage growth rate. The Company's EBIT will be adjusted to exclude the effect of extraordinary, unusual, and/or nonrecurring items and then will be divided by the number of fiscal years in the specified period, stated in terms of a percentage growth rate. The other half of the awards will be based upon the Company's percentile ranking of total shareholder return, compared to a peer group of companies, for the performance period.

 

The performance period of the awards granted in 2016 is January 1, 2016 through December 31, 2018. The performance period of the awards granted in 2017 is January 1, 2017 through December 31, 2019.



During the three and six months ended June 30, 2017, the Company recorded expense related to all performance awards of $0.9 million and $1.3 million, respectively. During the three and six months ended June 30, 2016, the Company recorded expense related to all performance awards of $1.7 million and $3.6 million, respectively. At June 30, 2017, the Company had a liability of $5.1 million related to these awards, of which $3.3 million is payable in March 2018 and is presented as other current liabilities in the Condensed Consolidated Balance Sheet, while the remaining $1.8 million is presented as other non-current liabilities in the Condensed Consolidated Balance Sheet.

 



Note 15. Segment Information



The Company defines its operating segments as components of its business where separate financial information is available. The Company’s operating segments are routinely evaluated by management. The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer.

 

The Company produces engineered structural metal components and assemblies primarily serving the global automotive industry. The Company’s operations have similar economic characteristics and share fundamental characteristics, including the nature of the products, production processes, margins, customers, and distribution channels. The Company’s products include body structures stampings, chassis structures (including frames), and complex welded assemblies for small and large cars, crossovers, pickups, and SUVs. The Company is comprised of two operating and reportable segments: Europe and North America. In periods prior to the second quarter of 2016, the Company was comprised of four operating segments: Europe, China, North America, and South America. These operating segments were aggregated into two reportable segments. The International segment consisted of Europe and China and the Americas segment consisted of North America and South America. The Company’s remaining operations in China and Brazil are currently presented as discontinued operations, the former International segment only contains Europe, and the former Americas segment only contains North America.

 

The Company measures segment operating performance based on Adjusted EBITDA. The Company uses segment Adjusted EBITDA as the basis for the CODM to evaluate the performance of each of the Company’s reportable segments.

18

 


 





The following is a summary of select data for each of the Company’s reportable segments (in thousands):

 





 

 

 

 

 

 

 

 

 



 

Europe

 

North America

 

Total

Three Months Ended June 30, 2017:

 

 

 

 

 

 

 

 

 

Revenues

 

$

160,229 

 

$

329,696 

 

$

489,925 

Adjusted EBITDA

 

 

13,628 

 

 

39,616 

 

 

53,244 

Capital Expenditures

 

 

5,581 

 

 

14,671 

 

 

20,252 

Total Assets (a)

 

 

520,469 

 

 

726,072 

 

 

1,246,541 



 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2016:

 

 

 

 

 

 

 

 

 

Revenues

 

$

175,044 

 

$

330,087 

 

$

505,131 

Adjusted EBITDA

 

 

13,708 

 

 

36,550 

 

 

50,258 

Capital Expenditures

 

 

10,644 

 

 

24,586 

 

 

35,230 

Total Assets (a)

 

 

456,484 

 

 

766,554 

 

 

1,223,038 



 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017:

 

 

 

 

 

 

 

 

 

Revenues

 

$

320,381 

 

 

667,134 

 

 

987,515 

Adjusted EBITDA

 

 

24,800 

 

 

74,648 

 

 

99,448 

Capital Expenditures

 

 

12,551 

 

 

31,610 

 

 

44,161 



 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2016:

 

 

 

 

 

 

 

 

 

Revenues

 

$

336,142 

 

 

658,183 

 

 

994,325 

Adjusted EBITDA

 

 

25,202 

 

 

70,151 

 

 

95,353 

Capital Expenditures

 

 

26,288 

 

 

34,638 

 

 

60,926 

 

(a)As of June 30, 2017 and 2016, total assets include assets held for sale.

 

Inter-segment sales are not significant for any period presented.

 

The following is a reconciliation of Adjusted EBITDA to income before provision for income taxes, and income / (loss) from discontinued operations (in thousands): 







 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2017

 

2016

 

2017

 

2016

Adjusted EBITDA

 

$

53,244 

 

$

50,258 

 

$

99,448 

 

$

95,353 

Restructuring and asset impairment charges, net

 

 

(3,337)

 

 

(840)

 

 

(7,248)

 

 

(1,586)

Depreciation and amortization

 

 

(18,766)

 

 

(18,207)

 

 

(36,532)

 

 

(35,483)

Acquisition costs and other

 

 

(109)

 

 

(154)

 

 

(184)

 

 

(178)

Long-term compensation expense

 

 

(1,892)

 

 

(1,921)

 

 

(2,804)

 

 

(5,595)

Interest expense, net

 

 

(1,721)

 

 

(4,947)

 

 

(2,127)

 

 

(12,501)

Other expense (b)(c)

 

 

 -

 

 

(2,905)

 

 

(575)

 

 

(6,481)

Income before provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

and income / (loss) from discontinued operations

 

$

27,419 

 

$

21,284 

 

$

49,978 

 

$

33,529 



 



(b)Represents costs incurred during the six months ended June 30, 2017, to support the refinancing of the Company’s term debt. 

(c)Represents costs incurred during the three and six months ended June 30, 2016, to support the investigation into the potential sale of the Company’s European operations, which is no longer being considered.







Note 16. Fair Value of Financial Instruments

 

FASB ASC No. 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants, at the measurement date under current market conditions (an exit price). The exit price is based upon the amount that the holder of the asset or liability would receive or need to pay in an actual transaction or in a hypothetical transaction if an actual transaction does not exist, at the measurement date. In some circumstances, the entry and exit price may be the same; however, they are conceptually different.



19

 


 

Fair value is generally determined based upon quoted market prices in active markets for identical assets or liabilities. If quoted market prices are not available, we use valuation techniques that place greater reliance on observable inputs and less reliance on unobservable inputs. In measuring fair value, we may make adjustments for risks and uncertainties, if a market participant would include such an adjustment in its pricing.

 

FASB ASC No. 820 establishes a fair value hierarchy that distinguishes between assumptions based upon market data, referred to as observable inputs, and the Company’s assumptions, referred to as unobservable inputs. Determining where an asset or liability falls within that hierarchy depends on the lowest level input that is significant to the fair value measurement as a whole. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. The hierarchy consists of three broad levels as follows:

 



 

 

 

Level 1:

Quoted market prices in active markets for identical assets and liabilities;

 

 

 

 

Level 2:

Inputs, other than Level 1 inputs, that are either directly or indirectly observable; and

 

 

 

 

Level 3:

Unobservable inputs developed using estimates and assumptions that reflect those that market participants would use.

 

At June 30, 2017, the carrying value and estimated fair value of the Company’s total debt was $429.7 million and $430.6 million, respectively. At December 31, 2016, the carrying value and estimated fair value of the Company’s total debt was $390.6 million and $394.2 million, respectively. The majority of the Company’s debt at June 30, 2017 and December 31, 2016 was comprised of the Term Loan Credit Facility, which can be traded between financial institutions. Accordingly, this debt has been classified as Level 2. The fair value was determined based upon quoted values. The remainder of the Company’s debt, primarily consisting of foreign subsidiary indebtedness, is asset-backed and is classified as Level 3. As this debt carries variable rates and minimal credit risk, the book value approximates the fair values.

 

The Company has foreign currency exchange hedges and an interest rate swap that were measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016. These instruments are recorded in other non-current liabilities in the Company’s Condensed Consolidated Balance Sheets and the fair value is measured using Level 2 observable inputs such as foreign currency exchange rates, swap rates, cross currency basis swap spreads and interest rate spreads. At June 30, 2017, the foreign currency exchange hedge (net investment hedge of the Company’s European subsidiaries) and the interest rate swap had liability fair values of $13.8 million and $9.5 million, respectively.

 

There were no nonrecurring items that occurred during the six months ended June 30, 2017 that required the re-measurement of fair value.

 

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short maturity of these instruments.

 



Note 17. Commitments and Contingencies

 

Operating Leases

The Company leases office space, manufacturing space, and certain equipment under non-cancellable lease agreements, which require the Company to pay maintenance, insurance, taxes, and other expenses, in addition to rental payments. The Company has entered into leasing commitments with lease terms expiring between the years 2018 and 2026. The Company has options to extend the terms of certain leases in future periods. The properties covered under these leases include manufacturing and office equipment and facilities. Rent expense for all operating leases totaled $5.9 million and $11.7 million during the three and six months ended June 30, 2017. Rent expense for all operating leases totaled $6.1 million and $11.9 million during the three and six months ended June 30, 2016, respectively.    



Future minimum operating lease payments at June 30, 2017 are as follows (in thousands):







 

 

Year

Operating Leases

2017

$

12,785 

2018

 

36,786 

2019

 

33,789 

2020

 

26,276 

2021

 

21,379 

Thereafter

 

41,489 

Total future lease payments

$

172,504 

20

 


 

Environmental Matters

The Company owns properties which have been affected by environmental releases. The Company is actively involved in investigation and/or remediation at several of these locations.

 

Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. The established liability for environmental matters is based upon management’s best estimates, on an undiscounted basis, of expected investigation/ remediation costs related to environmental contamination. It is possible that actual costs associated with these matters will exceed the environmental reserves established by the Company. Inherent uncertainties exist in the estimates, primarily due to unknown environmental conditions, changing governmental regulations, and legal standards regarding liability and evolving technologies for handling site remediation and restoration. At June 30, 2017 and December 31, 2016, the Company had $1.4 million accrued for environmental matters.

 

Contingent Matters 

The Company will establish an accrual for matters in which losses are probable and can be reasonably estimated. These types of matters may involve additional claims that, if granted, could require the Company to pay penalties or make other expenditures in amounts that will not be estimable at the time of discovery of the matter. In these cases, a liability will be recorded at the low end of the range if no amount within the range is a better estimate in accordance with FASB ASC No. 450, Accounting for Contingencies.

 

Litigation

The Company is subject to various legal actions and claims incidental to its business, including potential lawsuits with customers or suppliers. Litigation is subject to many uncertainties and the outcome of individual litigated matters is not probable or estimable. After discussions with counsel litigating these matters, it is the opinion of management that the outcome of such matters will not have a material impact on the Company’s financial position, results of operations, or cash flows.









21

 


 

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

 

Company Overview

 

We are a leading global manufacturer of engineered automotive structural metal components and assemblies primarily serving original equipment manufacturers (“OEMs”). We offer our automotive customers a broad product portfolio, supplying body-structure stampings, frame and other chassis structures, and complex welded assemblies, for small and large cars, crossovers, pickups, and sport utility vehicles. Our products are manufactured at 23 facilities strategically located near our customers in North America and Europe. We support our manufacturing operations through six engineering and sales locations around the world. Our products are offered on a diverse mix of vehicle platforms, reflecting the balanced portfolio approach of our business model and the breadth of our product capabilities. We supply products to approximately 130 vehicle models globally to 11 of the 12 largest OEMs based on 2016 production volumes.

 

We believe that our engineering, manufacturing, and program management capabilities, our competitive cost, our financial discipline, and our colleague engagement position us for long-term success.

 

Recent Trends

Production Volumes

During the first quarter of 2017, industry production volumes increased slightly from 2016 in North America and in Europe; however, second quarter production volumes were lower than 2016. According to IHS, full year industry production in 2017 is projected to increase in Europe and decrease slightly in North America.



European Steel Prices

For 2017, steel prices increased in our European operations. If this trend continues, we expect that our revenues will be positively impacted by approximately $35 million for the year ended December 31, 2017 for recovery of the steel price increases. However, we do not expect this increase in revenue to have a material impact on earnings due to the higher steel costs.

 

Factors Affecting our Industry, Revenues, and Expenses

For information regarding factors that affect our industry, revenues, and expenses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Adjusted EBITDA

We use the term Adjusted EBITDA throughout this report. We define Adjusted EBITDA as net income / (loss) before interest, taxes, depreciation, amortization, restructuring items, and other adjustments described in the reconciliations provided in this report. Adjusted EBITDA is not a measure of performance defined in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”). We use Adjusted EBITDA as a supplement to our GAAP results in evaluating our business.

 

Adjusted EBITDA is included in this Report because it is one of the principal factors upon which our management assesses performance. Our Chief Executive Officer measures the performance of our segments on the basis of Adjusted EBITDA. 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 core operating performance.

 

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

 

Adjusted EBITDA should not be considered as an alternative to net income / (loss) as an indicator of our performance, as an alternative to net cash provided by operating activities as a measure of liquidity, or as an alternative to any other measure prescribed by GAAP. There are limitations to using non-GAAP measures such as Adjusted EBITDA. Although we believe that Adjusted EBITDA may make an evaluation of our operating performance more consistent because it removes items that do not reflect our core operations, other companies in our industry may define Adjusted EBITDA differently than we do and, as a result, it may not be comparable to similarly titled measures used by other companies in our industry, and Adjusted EBITDA excludes certain financial information that some may consider important in evaluating our performance.

  

We compensate for these limitations by providing disclosure of the differences between Adjusted EBITDA and GAAP results, including a reconciliation of Adjusted EBITDA to GAAP results, to enable investors to perform their own analysis of our operating results. For a reconciliation of consolidated Adjusted EBITDA to its most directly comparable GAAP measure, net income / (loss), see “Results of Operations” below.

 

Because of these limitations, Adjusted EBITDA should not be considered as a measure of the income generated by our business or discretionary cash available to us to invest in the growth of our business. Our management compensates for these limitations by analyzing both our GAAP results and Adjusted EBITDA.

22

 


 

 

Results of Operations—Three Months Ended June 30, 2017 Compared with the Three Months Ended June 30, 2016

 

The following table presents production volumes in specified regions, according to the IHS July 2017 issue, for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 (in millions of units produced):

 





 

 

 

 

 

 



 

Europe

 

 

North America

 

Three Months Ended June 30, 2017

 

5.72

 

 

4.46

 

Three Months Ended June 30, 2016

 

5.90

 

 

4.60

 

Decrease

 

(0.18)

 

 

(0.14)

 

Percentage change

 

(3.1)%

 

 

(3.0)%

 



The following table presents select financial information for the three months ended June 30, 2017 and 2016 (in millions):

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Europe

 

North America

 

Consolidated



 

Three Months Ended June 30,

 

Three Months Ended June 30,

 

Three Months Ended June 30,



 

2017

 

2016

 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

160.2 

 

$

175.0 

 

$

329.7 

 

$

330.1 

 

$

489.9 

 

$

505.1 

Cost of sales

 

 

143.1 

 

 

157.9 

 

 

285.2 

 

 

285.1 

 

 

428.3 

 

 

443.0 

Gross profit

 

 

17.1 

 

 

17.1 

 

 

44.5 

 

 

45.0 

 

 

61.6 

 

 

62.1 

Selling, general, and administrative expenses

 

 

9.4 

 

 

10.1 

 

 

19.6 

 

 

22.0 

 

 

29.0 

 

 

32.1 

Amortization expense

 

 

 -

 

 

 -

 

 

0.1 

 

 

0.1 

 

 

0.1 

 

 

0.1 

Restructuring and asset impairment charges, net

 

 

0.6 

 

 

0.1 

 

 

2.7 

 

 

0.7 

 

 

3.3 

 

 

0.8 

Operating income

 

$

7.1 

 

$

6.9 

 

$

22.0 

 

$

22.2 

 

 

29.1 

 

 

29.1 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.7 

 

 

4.9 

Other expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 -

 

 

2.9 

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.7 

 

 

6.0 

Loss from discontinued operations, net of tax

 

 

 

 

 

 

 

 

 

 

 

(0.5)

 

 

(20.0)

Noncontrolling interest, net of taxes

 

 

 

 

 

 

 

 

 

 

 

 -

 

 

0.1 

  Net income / (loss) attributable to Tower International, Inc.

 

 

 

 

 

 

 

 

 

 

$

19.2 

 

$

(4.8)

 

Comparison of Periods – GAAP Analysis of Consolidated Results

 

Revenues

Total revenues decreased during the three months ended June 30, 2017 by $15.2 million, or 3.0%, from the three months ended June 30, 2016, reflecting lower volume ($8.2 million), unfavorable foreign exchange ($4.6 million), and unfavorable pricing ($2.4 million).



Gross Profit

When we analyze our total gross profit, we separately categorize external factors—volume, product mix, and foreign exchange—from all other factors that impact gross profit, which we refer to as “other factors”. When we refer to “mix” we are referring to the relative composition of revenues and profitability of the products we sell in any given period. When we refer to “pricing and economics” we are referring to (i) the impact of adjustments in the pricing of particular products, which we refer to as product pricing; (ii) the impact of steel price changes, taking into account the component of our product pricing attributable to steel, the cost of steel included in our cost of sales, and the amounts recovered on the sale of offal, which in total we refer to as the net steel impact; and (iii) the impact of inflation and changes in operating costs, such as labor, utilities, and fuel, which we refer to as economics.

 

Total gross profit decreased by $0.5 million, or 0.8%, from the three months ended June 30, 2016 to the three months ended June 30, 2017, but our gross profit margin increased from 12.3% during the 2016 period to 12.6% during the 2017 period. Gross profit was negatively impacted by unfavorable foreign exchange ($0.9 million), excluding the impact on depreciation, and lower volume ($0.1 million). All other factors were net favorable ($0.5 million). Favorable efficiencies ($7.6 million) were offset partially by unfavorable pricing and economics ($2.7 million) and unfavorable launch costs ($2 million).



Total gross profit was affected by an increase in the depreciation included in cost of sales from $17.1 million during the three months ended June 30, 2016 to $17.9 million during the three months ended June 30, 2017, reflecting primarily higher depreciation due to increased levels of capital spending in 2016 and 2017.



Selling, General, and Administrative Expenses (“SG&A”) 

Total SG&A decreased $3.1 million, or 9.7%, from the three months ended June 30, 2016, reflecting primarily lower compensation costs, favorable foreign exchange, and lower depreciation.

23

 


 



Restructuring and Asset Impairment Expense 

Total restructuring expense increased $2.5 million, from the three months ended June 30, 2016, which reflects the charges incurred in the North America and Europe segments related to severance charges to reduce corporate overhead during the second quarter of 2017.



Interest Expense, net    

Interest expense, net, decreased $3.2 million, or 65.3%, from the three months ended June 30, 2016, reflecting primarily favorable non-cash mark-to-market changes of $3 million on our derivative financial instruments.

Other Expense

Other expense decreased $2.9 million from the three months ended June 30, 2016, reflecting the non-recurrence of costs incurred during the three months ended June 30, 2016 to support the potential sale of Tower Europe, which is no longer being considered.



Provision for Income Taxes

Income tax expense from continued operations increased $1.7 million from the three months ended June 30, 2016, primarily attributable to $6.1 million of higher worldwide income earned during the quarter. A significant portion of the total worldwide expense recorded in the quarter is U.S. non-cash, deferred income tax expense. We continue to utilize existing U.S. deferred tax assets, primarily net operating loss carryforwards, which results in immaterial cash taxes on U.S book income.



Loss from Discontinued Operations

During the second quarter of 2016, the Company’s Board of Directors approved a plan to sell the Company’s remaining business operations in Brazil and China. At June 30, 2017, the Brazilian business operation and one Chinese joint venture are considered held for sale in accordance with FASB ASC No. 360, Property, Plant, and Equipment, and presented as discontinued operations in the Condensed Consolidated Financial Statements, in accordance with FASB ASC No. 205, Discontinued Operations. At December 31, 2016, both the Brazilian and Chinese business operations were held for sale and presented as discontinued operations.



On May 9, 2017, we completed the sale of our equity interest in our Wuhu joint venture. In conjunction with the sale, we recorded a loss of $2.6 million.

 

The Company recorded loss from discontinued operations, net of tax, of $0.5 million during the three months ended June 30, 2017, as compared with a loss of $20 million for the three months ended June 30, 2016. During the second quarter of 2016, we recorded a fair value adjustment of $18.1 million. Of that amount, $15 million represents the cumulative translation adjustment related to Brazil and $3.1 million reflects a fair value adjustment to the Ningbo joint venture in China.

Comparison of Periods—Non-GAAP Analysis of Adjusted EBITDA

A reconciliation of Adjusted EBITDA to net income attributable to Tower International, Inc. for the periods presented is set forth below (in millions):

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Europe

 

North America

 

Consolidated



 

Three Months Ended June 30,

 

Three Months Ended June 30,

 

Three Months Ended June 30,



 

2017

 

2016

 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

13.6 

 

$

13.7 

 

$

39.6 

 

$

36.6 

 

$

53.2 

 

$

50.3 

Intercompany charges

 

 

1.9 

 

 

0.6 

 

 

(1.9)

 

 

(0.6)

 

 

 -

 

 

 -

Restructuring and asset impairments

 

 

(0.6)

 

 

(0.1)

 

 

(2.7)

 

 

(0.7)

 

 

(3.3)

 

 

(0.8)

Depreciation and amortization

 

 

(7.6)

 

 

(7.0)

 

 

(11.2)

 

 

(11.2)

 

 

(18.8)

 

 

(18.2)

Acquisition costs and other

 

 

(0.2)

 

 

(0.3)

 

 

0.1 

 

 

 -

 

 

(0.1)

 

 

(0.3)

Long-term compensation (a)

 

 

 -

 

 

 -

 

 

(1.9)

 

 

(1.9)

 

 

(1.9)

 

 

(1.9)

  Operating income

 

$

7.1 

 

$

6.9 

 

$

22.0 

 

$

22.2 

 

 

29.1 

 

 

29.1 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1.7)

 

 

(4.9)

Other expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 -

 

 

(2.9)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7.7)

 

 

(6.0)

Loss from discontinued operations, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.5)

 

 

(20.0)

Noncontrolling interest, net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 -

 

 

(0.1)

  Net income / (loss) attributable to Tower International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

$

19.2 

 

$

(4.8)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





(a)

Represents the compensation expense related to stock options, restricted stock units, and accruals from certain compensation programs intended to benefit our long-term success and growth. The compensation charges are incurred during the applicable vesting periods of each program.

24

 


 



The following table presents revenues (a GAAP measure) and Adjusted EBITDA (a non-GAAP measure) for the three months ended June 30, 2017 and 2016 (in millions), as well as an explanation of variances:

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Europe

 

North America

 

Consolidated



 

 

 

 

Adjusted

 

 

 

 

Adjusted

 

 

 

 

Adjusted



 

Revenues

 

EBITDA(b)

 

Revenues

 

EBITDA(b)

 

Revenues

 

EBITDA(b)

Three Months Ended June 30, 2017 results

 

$

160.2 

 

$

13.6 

 

$

329.7 

 

$

39.6 

 

$

489.9 

 

$

53.2 

Three Months Ended June 30, 2016 results

 

 

175.0 

 

 

13.7 

 

 

330.1 

 

 

36.6 

 

 

505.1 

 

 

50.3 

Variance

 

$

(14.8)

 

$

(0.1)

 

$

(0.4)

 

$

3.0 

 

$

(15.2)

 

$

2.9 

Variance attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume and mix

 

$

(7.1)

 

$

(1.6)

 

$

(1.1)

 

$

1.5 

 

$

(8.2)

 

$

(0.1)

Foreign exchange

 

 

(4.6)

 

 

(0.6)

 

 

 -

 

 

 -

 

 

(4.6)

 

 

(0.6)

Pricing and economics

 

 

(3.1)

 

 

(2.2)

 

 

0.7 

 

 

(0.3)

 

 

(2.4)

 

 

(2.5)

Efficiencies

 

 

 -

 

 

3.0 

 

 

 -

 

 

4.6 

 

 

 -

 

 

7.6 

Selling, general, and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses and other items (c)

 

 

 -

 

 

1.3 

 

 

 -

 

 

(2.8)

 

 

 -

 

 

(1.5)

Total

 

$

(14.8)

 

$

(0.1)

 

$

(0.4)

 

$

3.0 

 

$

(15.2)

 

$

2.9 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





(b) We have presented a reconciliation of Adjusted EBITDA to net income / (loss) attributable to Tower International, Inc. above.

(c) When we refer to “selling, general, and administrative expenses and other items”, the “other items” refer to (i) savings which we generate after implementing restructuring actions, (ii) the costs associated with launching new products, and (iii) one-time items which may include reimbursement of costs.

 

Adjusted EBITDA

When we analyze Adjusted EBITDA, we separately categorize external factors—volume, product mix, and foreign exchange—and all other factors which impact Adjusted EBITDA, which we refer to as “other factors.”

 

Consolidated Company: Consolidated Adjusted EBITDA increased by $2.9 million, or 5.8%, from the three months ended June 30, 2016, despite unfavorable foreign exchange ($0.6 million) and unfavorable volume ($0.1 million). All other factors were net favorable ($3.6 million). Favorable efficiencies ($7.6 million) were offset partially by unfavorable pricing and economics ($2.5 million), principally product pricing and labor costs, and unfavorable SG&A expenses and other items ($1.5 million)

 

Europe Segment: In our Europe segment, Adjusted EBITDA decreased by $0.1 million, or 0.7%, from the three months ended June 30, 2016 reflecting lower volume ($1.6 million) and unfavorable foreign exchange ($0.6 million). All other factors were net favorable ($2.1 million). Favorable efficiencies ($3 million) and favorable SG&A expenses and other items ($1.3 million), were offset partially by unfavorable pricing and economics ($2.2 million), principally product pricing and labor costs.





North America Segment: In our North America segment, Adjusted EBITDA increased by $3 million, or 8.2%, from the three months ended June 30, 2016 reflecting favorable mix ($1.5 million). All other factors were net favorable ($1.5 million). Favorable efficiencies ($4.6 million) were offset partially by unfavorable pricing and economics ($0.3 million), principally product pricing and labor costs, and unfavorable SG&A expenses and other items ($2.8 million). SG&A expenses and other items reflect primarily higher launch costs.





Results of Operations—Six Months Ended June 30, 2017 Compared with the Six Months Ended June 30, 2016

The following table presents production volumes in specified regions, according to the IHS July 2017 issue, for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 (in millions of units produced):







 

 

 

 

 

 



 

Europe

 

 

North America

 

Six Months Ended June 30, 2017

 

11.57

 

 

8.99

 

Six Months Ended June 30, 2016

 

11.43

 

 

9.06

 

Increase / (Decrease)

 

0.14

 

 

(0.07)

 

Percentage change

 

1.2%

 

 

(0.7)%

 



According to IHS, full year 2017 vehicle production is expected to decrease when compared to 2016 in North America by 2.1% and increase in Europe by 2.8%.

25

 


 

The following table presents select financial information for the six months ended June 30, 2017 and 2016 (in millions):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Europe

 

 

North America

 

Consolidated



 

Six Months Ended June 30,

 

 

Six Months Ended June 30,

 

Six Months Ended June 30,



 

2017

 

2016

 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

320.4 

 

$

336.1 

 

$

667.1 

 

$

658.2 

 

$

987.5 

 

$

994.3 

Cost of sales

 

 

287.3 

 

 

303.3 

 

 

581.8 

 

 

571.8 

 

 

869.1 

 

 

875.1 

Gross profit

 

 

33.1 

 

 

32.8 

 

 

85.3 

 

 

86.4 

 

 

118.4 

 

 

119.2 

Selling, general, and administrative expenses

 

 

19.4 

 

 

20.1 

 

 

38.8 

 

 

44.8 

 

 

58.2 

 

 

64.9 

Amortization expense

 

 

 -

 

 

 -

 

 

0.2 

 

 

0.2 

 

 

0.2 

 

 

0.2 

Restructuring and asset impairment charges, net

 

 

0.7 

 

 

0.1 

 

 

6.5 

 

 

1.5 

 

 

7.2 

 

 

1.6 

Operating income

 

$

13.0 

 

$

12.6 

 

$

39.8 

 

$

39.9 

 

 

52.7 

 

 

52.5 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.1 

 

 

12.5 

Other expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.6 

 

 

6.5 

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14.2 

 

 

9.5 

Income / (loss) from discontinued operations, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.9 

 

 

(20.4)

Noncontrolling interest, net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.1 

 

 

0.1 

Net income attributable to Tower International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

$

36.6 

 

$

3.5 



Comparison of Periods – GAAP Analysis of Consolidated Results



Revenues

Total revenues decreased during the six months ended June 30, 2017 by $6.8 million, or 0.7%, from the six months ended June 30, 2016 reflecting unfavorable pricing ($15.2 million) and unfavorable foreign exchange ($10.4 million), offset partially by higher volume ($18.8 million).



Gross Profit

Total gross profit decreased by $0.8 million, or 0.7%, from the six months ended June 30, 2016 to the six months ended June 30, 2017 and our gross profit margin remained consistent from 12.0% during the 2016 period to 12.0% during the 2017 period. The gross profit was positively impacted by higher volume ($5.5 million), offset partially by unfavorable foreign exchange ($1.8 million), excluding the impact on depreciation. All other factors were net unfavorable ($4.5 million). Cost of sales was negatively impacted by unfavorable pricing and economics ($10.6 million) and unfavorable non-recurring items, primarily the timing of commercial and vendor settlements, which were offset by favorable efficiencies ($16.6 million).



Total gross profit was negatively affected by an increase in the depreciation included in cost of sales from $33.2 million during the six months ended June 30, 2016 to $34.8 million during the six months ended June 30, 2017, reflecting primarily higher depreciation due to increased levels of capital spending in 2016 and 2017.

Selling, General, and Administrative Expense

Total SG&A decreased $6.7 million, or 10.3%, from the six months ended June 30, 2016, reflecting primarily lower long-term incentive compensation costs, lower compensation costs, favorable foreign exchange, and lower depreciation.



Interest Expense, net    

Interest expense, net, decreased $10.4 million, or 83.2%, from the six months ended period ended June 30, 2016 reflecting primarily favorable non-cash mark-to-market changes of $9.7 million on our derivative financial instruments.



Other Expense

Other expense decreased $5.9 million from the six months ended June 30, 2016, reflecting the non-recurrence of costs incurred during the six month period ended June 30, 2016 to support the potential sale of Tower Europe, which is no longer being considered.



Provision for Income Taxes

Income tax expense from continued operations increased $4.7 million from the six months ended June 30, 2016, primarily attributable to $16.5 million of higher worldwide income earned during the first half of 2017. A significant portion of the total worldwide expense recorded in the first half of the year is U.S. non-cash, deferred income tax expense. We continue to utilize existing U.S. deferred tax assets, primarily net operating loss carryforwards, which results in immaterial cash taxes on U.S book income. We believe the utilization of loss carryforwards and other tax attributes will continue to eliminate our material U.S. cash tax liability until 2020 under current U.S. tax law.  

26

 


 

Income / (Loss) from Discontinued Operations

As noted above, during the second quarter of 2016, the Company’s Board of Directors approved a plan to sell the Company’s remaining business operations in Brazil and China. At June 30, 2017, the Brazilian business operation and one Chinese joint venture are considered held for sale. At December 31, 2016, both the Brazilian and Chinese business operations were held for sale and presented as discontinued operations.



On May 9, 2017, we completed the sale of our equity interest in our Tower Automotive (Wuhu) Company Ltd. joint venture (“Wuhu”). In conjunction with the sale, we recorded a loss on the sale of $2.6 million.



The Company recorded income from discontinued operations, net of tax, of $0.9 million during the six months ended June 30, 2017, as compared with a loss of $20.4 million for the six months ended June 30, 2016. During the second quarter of 2016, we recorded a fair value adjustment of $18.1 million. Of that amount, $15 million represents the cumulative translation adjustment related to Brazil and $3.1 million reflects a fair value adjustment to the Ningbo joint venture in China.



For the six months ended June 30, 2017, the discontinued operations included results from an operation in Brazil and two of our China joint ventures (Wuhu & Ningbo). As noted above, Wuhu was sold in the second quarter of 2017.



Comparison of Periods—Non-GAAP Analysis of Adjusted EBITDA



A reconciliation of Adjusted EBITDA to net income attributable to Tower International, Inc. for the periods presented is set forth below (in millions):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Europe

 

North America

 

Consolidated



 

Six Months Ended June 30,

 

Six Months Ended June 30,

 

Six Months Ended June 30,



 

2017

 

2016

 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

24.8 

 

$

25.2 

 

$

74.6 

 

$

70.2 

 

$

99.4 

 

$

95.4 

Intercompany charges

 

 

3.9 

 

 

2.2 

 

 

(3.9)

 

 

(2.2)

 

 

 -

 

 

 -

Restructuring and asset impairment charges, net

 

 

(0.7)

 

 

(0.1)

 

 

(6.5)

 

 

(1.5)

 

 

(7.2)

 

 

(1.6)

Depreciation and amortization

 

 

(14.5)

 

 

(13.8)

 

 

(22.0)

 

 

(21.7)

 

 

(36.5)

 

 

(35.5)

Acquisition costs and other

 

 

 -

 

 

(0.3)

 

 

(0.1)

 

 

 -

 

 

(0.1)

 

 

(0.3)

Long-term compensation (d)

 

 

(0.5)

 

 

(0.6)

 

 

(2.3)

 

 

(4.9)

 

 

(2.8)

 

 

(5.5)

  Operating income

 

$

13.0 

 

$

12.6 

 

$

39.8 

 

$

39.9 

 

 

52.7 

 

 

52.5 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2.1)

 

 

(12.5)

Other expense (e)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.6)

 

 

(6.5)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14.2)

 

 

(9.5)

Income / (loss) from discontinued operations, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.9 

 

 

(20.4)

Noncontrolling interest, net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.1)

 

 

(0.1)

  Net income attributable to Tower International, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

$

36.6 

 

$

3.5 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





(d)

Represents the compensation expense related to stock options, restricted stock units, accruals from one-time CEO compensation awards, and certain compensation programs intended to benefit our long-term success and growth. The compensation charges are incurred during the applicable vesting periods of each program.

(e)

In 2016, represents costs incurred to support the potential sale of Tower Europe, which is no longer being considered.

27

 


 



The following table presents revenues (a GAAP measure) and Adjusted EBITDA (a non-GAAP measure) for the six months ended June 30, 2017 and 2016 (in millions), as well as an explanation of variances: 















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Europe

 

North America

 

Consolidated



 

 

 

 

Adjusted

 

 

 

 

Adjusted

 

 

 

 

Adjusted



 

Revenues

 

EBITDA(f)

 

Revenues

 

EBITDA(f)

 

Revenues

 

EBITDA(f)

Six Months Ended June 30, 2017 results

 

$

320.4 

 

$

24.8 

 

$

667.1 

 

$

74.6 

 

$

987.5 

 

$

99.4 

Six Months Ended June 30, 2016 results

 

 

336.1 

 

 

25.2 

 

 

658.2 

 

 

70.2 

 

 

994.3 

 

 

95.4 

Variance

 

$

(15.7)

 

$

(0.4)

 

$

8.9 

 

$

4.4 

 

$

(6.8)

 

$

4.0 

Variance attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume and mix

 

$

3.1 

 

$

(0.3)

 

$

15.7 

 

$

5.8 

 

$

18.8 

 

$

5.5 

Foreign exchange

 

 

(10.4)

 

 

(1.0)

 

 

 -

 

 

 -

 

 

(10.4)

 

 

(1.0)

Pricing and economics

 

 

(8.4)

 

 

(4.5)

 

 

(6.8)

 

 

(5.7)

 

 

(15.2)

 

 

(10.2)

Efficiencies

 

 

 -

 

 

6.0 

 

 

 -

 

 

10.6 

 

 

 -

 

 

16.6 

Selling, general, and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses and other items (g)

 

 

 -

 

 

(0.6)

 

 

 -

 

 

(6.3)

 

 

 -

 

 

(6.9)

Total

 

$

(15.7)

 

$

(0.4)

 

$

8.9 

 

$

4.4 

 

$

(6.8)

 

$

4.0 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(f)

We have presented a reconciliation of Adjusted EBITDA to net income / (loss) attributable to Tower International, Inc. above.

(g)

When we refer to “selling, general, and administrative expenses and other items”, the “other items” refer to (i) savings which we generate after implementing restructuring actions, (ii) the costs associated with launching new products, and (iii) one-time items which may include reimbursement of costs.



Adjusted EBITDA

Consolidated Company: Consolidated Adjusted EBITDA increased by $4 million, or 4.2%, from the six months ended June 30, 2016, reflecting higher volume ($5.5 million), which was offset partially by unfavorable foreign exchange ($1 million). All other factors were net unfavorable ($0.5 million). Favorable efficiencies ($16.6 million) were offset by unfavorable pricing and economics ($10.2 million) and unfavorable SG&A expenses and other items ($6.9 million).



Europe Segment: In our Europe segment, Adjusted EBITDA decreased by $0.4 million, or 1.6%, from the six months ended June 30, 2016, reflecting unfavorable foreign exchange ($1 million) and unfavorable mix ($0.5 million), offset partially by higher volume ($0.2 million). All other factors were net favorable ($0.9 million). Favorable efficiencies ($6 million) were offset partially by unfavorable pricing and economics ($4.5 million), principally product pricing and labor costs, and unfavorable SG&A expenses and other items ($0.6 million).



North America Segment: In our North America segment, Adjusted EBITDA increased by $4.4 million, or 6.3%, from the six months ended June 30, 2016, reflecting higher volume ($5.8 million). All other factors were net unfavorable ($1.3 million). Unfavorable SG&A expenses and other items ($6.3 million), primarily the timing of commercial and vendor settlements, and unfavorable pricing and economics ($5.7 million), principally product pricing and labor costs, were offset partially by favorable efficiencies ($10.6 million).



 

Restructuring

The following table sets forth our net restructuring and asset impairment charges by type for the periods presented (in millions): 



 





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended June 30,

 

Six Months Ended June 30,



 

2017

 

2016

 

2017

 

2016

Employee termination costs

 

$

3.2 

 

$

0.1 

 

$

6.8 

 

$

0.1 

Other exit costs

 

 

0.1 

 

 

0.7 

 

 

0.4 

 

 

1.5 

Total restructuring charges, net

 

$

3.3 

 

$

0.8 

 

$

7.2 

 

$

1.6 



28

 


 



We restructure our global operations in an effort to align our capacity with demand and to reduce our costs. Restructuring costs include employee termination benefits and other incremental costs resulting from restructuring activities. These incremental costs principally include equipment and personnel relocation costs. Restructuring costs are recognized in our Condensed Consolidated Financial Statements in accordance with FASB ASC No. 420, Exit or Disposal Obligations, and are presented in our Condensed Consolidated Statement of Operations as restructuring and asset impairment charges, net. We believe the restructuring actions discussed below will help our efficiency and results of operations on a going forward basis.



The charges incurred in our North America segment during the three and six months ended June 30, 2017 related to severance charges to reduce corporate overhead and ongoing maintenance expense of facilities closed as a result of prior actions. The charges incurred in our Europe segment for the three and six months ended June 30, 2017 related to severance charges in Europe to reduce fixed costs.

 

We expect to continue to incur additional restructuring expense in 2017 related primarily to previously announced restructuring actions; however, we do not anticipate any additional expense that will be significant, with respect to previously announced actions. We may engage in new actions if business conditions warrant further actions.

 

Liquidity and Capital Resources

 

General

We generally expect to fund expenditures for operations, administrative expenses, capital expenditures, dividend payments, and debt service obligations with internally generated funds from operations and we generally expect to satisfy working capital needs from time-to-time with borrowings under our revolving credit facility or cash on hand. As of June 30, 2017, we had available liquidity of approximately $254 million, which we believe is adequate to fund our working capital requirements for at least the next twelve months. We believe that we will be able to meet our debt service obligations and fund operating requirements for at least the next twelve months with cash flow from operations, cash on hand, potential operating lease arrangements, and borrowings under our revolving credit facility.

 

On June 17, 2016, we announced our Board of Directors’ authorization to repurchase up to $100 million of the Company’s issued and outstanding common stock from time to time in the open market, or in privately negotiated transactions. We expect to fund such repurchases from cash flow from operations, cash on hand, asset dispositions, and borrowings under our revolving credit facility. To date, the Company repurchased a total of 829,648 shares of common stock at an aggregate cost of $18.9 million, of which all repurchases occurred during the year ended December 31, 2016.

 

Cash Flows and Working Capital

The following table shows the components of our cash flows from continuing operations for the periods presented (in millions):

 





 

 

 

 

 

 



 

Six Months Ended June 30,



 

2017

 

2016

Net cash provided by / (used in):

 

 

 

 

 

 

Operating activities

 

$

(10.2)

 

$

22.4 

Investing activities

 

 

(28.2)

 

 

(60.9)

Financing activities

 

 

27.1 

 

 

(31.4)

 

Net Cash Provided by / (Used in) Operating Activities

Net cash used in operating activities was $10.2 million during the six months ended June 30, 2017, compared to $22.4 million generated during the six months ended June 30, 2016. The $32.6 million increase of cash used was attributable primarily to the unfavorable fluctuation in working capital items, which included timing of customer payments and negative customer-owned tooling.

  

Net Cash Used in Investing Activities

Net cash utilized in investing activities was $28.2 million during the six months ended June 30, 2017, compared to $60.9 million during the six months ended June 30, 2016. The $32.7 million decrease in cash utilized was attributable primarily to decreased capital expenditures and proceeds received from sale of our Chinese joint venture.

 

Net Cash Provided by / (Used in) Financing Activities

Net cash generated in financing activities was $27.1 million during the six months ended June 30, 2017, compared to $31.4 million utilized during the six months ended June 30, 2016. This $58.5 million increase was attributable primarily to the non-recurrence of a $50 million repayment on the Term Loan Credit Facility during the first quarter of 2016 and by higher borrowings on the revolver in 2017.

 

29

 


 



Working Capital

We manage our working capital by monitoring key metrics principally associated with inventory, accounts receivable, and accounts payable. Our quarterly average inventory days on hand decreased to 16 days during the second quarter of 2017 from 17 days during the fourth quarter of 2016; however, our inventory levels increased from $71.7 million at December 31, 2016 to $75 million at June 30, 2017, primarily due to the ramp up of production on recently awarded business.

 

Our accounts receivable balance increased from $178.3 million as of December 31, 2016 to $253.1 million as of June 30, 2017. The increase reflects the timing of customer payments consistent with normal seasonality.

 

Our accounts payable balance increased from $258.1 million as of December 31, 2016 to $273.6 million as of June 30, 2017. The change reflects primarily the increase of trade accounts payable, resulting from the matching of terms with our customers and vendors, and the timing of payments related to capital expenditures and customer-owned tooling.

 

Our working capital usage is seasonal in nature. During the first half of the year, production and sales typically increase substantially, which causes our working capital to increase because our accounts receivable and inventory increase. In addition, we make our annual incentive bonus plan payments during the second quarter. In the second half of the year, production and sales typically decline as a result of scheduled customer shutdowns. The lower production and sales generally result in a reduction of accounts receivables and inventory, which decreases our working capital.

 

Our working capital is also impacted by our net position in regard to tooling owned by our customers. Tooling costs represent costs incurred by us in the development of new tooling used in the manufacture of our products. Generally, when a customer awards a contract to us, the customer agrees to reimburse us for certain of our tooling costs. As the tooling is developed, we experience cash outflows because we bear the costs and we typically do not receive reimbursement from our customers until the manufacture of the particular program commences. This timing delay causes our working capital to fluctuate between periods due to the timing of the cash inflows and outflows. We define our net tooling position as tooling in progress (see note 5) plus accounts receivable related to tooling less accounts payable related to tooling. During the first half of 2017 our net tooling position increased by $27 million from $77 million at December 31, 2016 to $104 million at June 30, 2017. This increase reflects increased net spending on recently awarded programs. We expect the balance of customer-owned tooling will decrease during the second half of the year, as reimbursements from customers are expected to significantly exceed additional spending on customer-owned tooling.

 

On June 30, 2017 and December 31, 2016 we had  working capital balances of $68.7 million and $9.4 million, respectively. This increase is related primarily to the increase of our net tooling position.

 

Sources and Uses of Liquidity

Our available liquidity at June 30, 2017 was $254.4 million, which consisted of $54.8 million of cash on hand, and unutilized borrowing availability under our U.S. and foreign credit facilities of $161 million and $38.6 million, respectively. A portion of our cash balance is located at foreign subsidiaries and is presently being used to fund operations at and investment in those locations. As of December 31, 2016 we had available liquidity of $292.2 million.

 

As of June 30, 2017, we had short-term debt, excluding capital leases, of $45.2 million, of which $31.3 million related to receivables factoring in Europe, $6.3 million related to other borrowings in Europe, $4 million related to indebtedness under a secured credit line in Europe, and $3.6 million related to current maturities of our Term Loan Credit Facility. On March 7, 2017, the Company amended the Term Loan Credit Agreement by entering into the Third Refinancing Term Loan Amendment and Additional Term Loan Amendment (“Third Term Loan Amendment”), pursuant to which, among other things, the outstanding term loans under the Term Loan Credit Agreement were refinanced in full. There were no additional borrowings associated with this refinancing. The receivables factoring in Europe consists of uncommitted demand facilities, which are subject to termination at the discretion of the banks, although we have not experienced any terminations by the banks.

  

Pursuant to the Board of Directors’ declaration on October 16, 2015, the Company commenced payment of a quarterly dividend of $0.10 per common share. This dividend was raised to $0.11 per common share on October 21, 2016. During the three and six months ended June 30, 2017, the Company paid dividends of $2.3 million and $4.5 million, respectively.

On June 17, 2016, the Company announced its Board of Directors’ authorization to repurchase up to $100 million of the Company’s issued and outstanding common stock from time to time in the open market, or in privately negotiated transactions. As of June 30, 2017, 829,648 shares have been purchased under the Repurchase Program with no additional shares being purchased under that program during the six months ended June 30, 2017. 

30

 


 

Free Cash Flow

Free cash flow is a non-GAAP measure. Free cash flow is defined as cash provided by continuing operating activities less cash disbursed for purchases of property, plant, and equipment. We believe this metric provides useful information to our investors because management regularly reviews this metric as an important indicator of how much cash is generated by our normal business operations, net of capital expenditures, and makes decisions based upon them. Management also views this metric as a measure of cash available to reduce debt and grow the business. Free cash flow is calculated as follows (in millions):

 





 

 

 

 

 

 



 

Six Months Ended June 30,



 

2017

 

2016

Net cash provided by continuing operating activities

 

$

(10.2)

 

$

22.4 

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

 

 

(44.2)

 

 

(60.9)

Free cash flow (1)

 

$

(54.4)

 

$

(38.5)

  

(1)Net cash disbursed for customer-owned tooling is included in free cash flow. Net cash disbursed for customer-owned tooling during the six months ended June 30, 2017 and 2016 was $26.9 million and $20.8 million, respectively.



Free cash flow was negative $54.4 million during the six months ended June 30, 2017, compared to negative $38.5 million during the six months ended June 30, 2016. The $15.9 million difference in free cash flow reflects primarily an unfavorable fluctuation in working capital items which included customer-owned tooling.



Debt

As of June 30, 2017, we had outstanding indebtedness, excluding capital lease obligations and net of debt issue cost, of approximately $420.8 million, which consisted of the following:

 

.9

 

 



$358.1 million (net of a $2.5 million original issue discount) indebtedness outstanding under our Term Loan Credit Facility



$30 million indebtedness outstanding under our Amended Credit Revolving Facility



$41.6 million of foreign subsidiary indebtedness



Less $8.9 million of debt issue costs netted against our indebtedness

 

Term Loan Credit Facility

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

  

Our Term Loan Credit Facility contains customary covenants applicable to certain of our subsidiaries, including a financial covenant (the “Total Net Leverage Ratio”) based on the ratio of Total Net Debt to Consolidated EBITDA (each as defined in the Term Loan Credit Agreement). As of the last day of each fiscal quarter, we are required to maintain a Total Net Leverage Ratio of not more than 3.75 to 1.00 on a rolling four quarter basis. Our financial condition and liquidity would be adversely impacted by the violation of any of our covenants.

 

Amended Revolving Credit Facility

On March 7, 2017,  we entered into a Fourth Amended and Restated Revolving Credit and Guaranty Agreement (“Fourth Amended Revolving Credit Facility Agreement”), by and among Tower Automotive Holdings USA, LLC, the Company, Tower Automotive Holdings I, LLC, Tower Automotive Holdings II(a), LLC, the subsidiary guarantors named therein, the financial institutions from time to time party thereto as Lenders, and JPMorgan Chase Bank, N.A. as Issuing Lender, as Swing Line Lender, and as Administrative Agent for the Lenders.



31

 


 



The Fourth Amended Revolving Credit Facility Agreement amended and restated, in its entirety, the Third Amended Revolving Credit Facility Agreement, dated as of September 17, 2014, by and among the Borrower, its domestic affiliate and domestic subsidiary guarantors named therein, and the lenders party thereto, and the Agent. The Fourth Amended Revolving Credit Facility Agreement provides for a cash flow revolving credit facility (the “Amended Revolving Credit Facility”) in the aggregate amount of up to $200 million. The Fourth Amended Revolving Credit Facility Agreement also provides for the issuance of letters of credit in an aggregate amount not to exceed $30 million, provided that the total amount of credit (inclusive of revolving loans and letters of credit) extended under the Fourth Amended Revolving Credit Facility Agreement is subject to an overall cap, on any date, of $200 million. We may request the issuance of Letters of Credit denominated in Dollars or Euros. As of June 30, 2017, we had $30 million of borrowings outstanding under our Amended Revolving Credit Facility and $9 million of letters of credit outstanding under the Fourth Amended Revolving Credit Facility Agreement. Thus, we could have borrowed an additional $161 million under the Fourth Amended Revolving Credit Facility Agreement as of June 30, 2017, calculated as follows (in millions):

  





 

 

 

Total Revolving Credit Commitment

 

$

200.0 

Borrowings on Amended Revolving Credit Facility

 

 

(30.0)

Letter of credit outstanding

 

 

(9.0)

Availability on Fourth Amended Revolving Credit Facility Agreement

 

$

161.0 

 

Advances under the Amended Revolving Credit Facility bear interest at an alternate base rate plus a base rate margin or LIBOR plus a Eurodollar margin. The applicable margins are determined by the Company’s Total Net Leverage Ratio (as defined in the Fourth Amended Revolving Credit Facility Agreement). As of June 30, 2017, the applicable margins were 1.50% per annum and 2.50% per annum for base rate and LIBOR based borrowings, respectively, resulting in a weighted average interest rate of 3.98%. Borrowings outstanding under our Amended Revolving Credit Facility may vary significantly from time to time, depending on our cash needs at any given time. Our Amended Revolving Credit Facility matures on March 7, 2022.



Our Amended Revolving Credit Facility Agreement contains customary covenants applicable to certain of our subsidiaries, including financial maintenance covenant ratios requiring the Borrower and the Guarantors to maintain a ratio, as of the last day of any fiscal quarter, of (i) consolidated adjusted EBITDA to consolidated interest charges of not less than 2.75 to 1.00 on a rolling four quarter basis; and (ii) total net debt to consolidated adjusted EBITDA not to exceed 3.50 to 1.00 on a rolling four quarter basis.

 

As of June 30, 2017, we were in compliance with the financial covenants that govern our credit agreements.



Foreign Subsidiary Indebtedness

Our foreign subsidiary indebtedness consists primarily of borrowings in Europe, receivables factoring and credit line in Europe, which is described above.

 

Capital and Operating Leases

We maintain capital leases primarily for a manufacturing facility and certain manufacturing equipment. We have several operating leases, including leases for office and manufacturing facilities, as well as certain equipment, with lease terms expiring between the years 2018 and 2026. As of June 30, 2017, our total future operating lease payments amounts to $172.5 million and the present value of minimum lease payments under our capital leases amounted to $5.8 million. See Note 17 of the notes to the Company’s Condensed Consolidated Financial Statements.



As of December 31, 2016, our total future operating lease payments amounted to $162.9 million and the present value of minimum lease payments under our capital leases amounted to $5.8 million. The decrease in total future operating lease payments between December 31, 2016 and June 30, 2017 principally reflects rental payments on leases for manufacturing facilities and equipment.

 

Off-Balance Sheet Obligations

In addition to the operating leases described above, our off-balance sheet obligations consist of obligations under our Fourth Amended Revolving Credit Facility. As of June 30, 2017, letters of credit outstanding were $9 million under the Fourth Amended Revolving Credit Facility.

 

Net Debt

Net debt is a non-GAAP measure that represents total debt less cash and cash equivalents. We regard net debt as a useful measure of our outstanding debt obligations. Our use of the term “net debt” should not be understood to mean that we will use any cash on hand to repay debt. Net debt is calculated as follows (in millions):

 





 

 

 

 

 

 



 

As of June 30, 2017

 

As of December 31, 2016

Total debt, including capital leases and net of debt issue costs

 

$

426.6 

 

$

390.3 

Less: Cash and cash equivalents

 

 

(54.8)

 

 

(62.8)

Net debt

 

$

371.8 

 

$

327.5 

 

As of June 30, 2017, our net debt was $371.8 million, compared to $327.5 million as of December 31, 2016. The $44.3 million change reflects primarily negative free cash flow for the period and costs related to our debt refinancing, offset partially by proceeds received from the sale of our joint venture in China.

32

 


 



Disclosure Regarding Forward-Looking Statements

This report contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements relating to trends in the operations, financial results, business and products of our Company, and anticipated production trends. The forward-looking statements can be identified by words such as “anticipate”, “believe”, “plan”, “estimate”, “expect”, “intend”, “project”, and other similar expressions and statements regarding our intent, belief, current plans, or expectations. Our forward looking statements also include, without limitation, statements regarding our anticipated future financial condition, operating results, free cash flows, net debt leverage, Adjusted EBITDA, and business and financing plans and models. Forward-looking statements are made as of the date of this report and are based upon management’s current expectations and beliefs concerning future developments and their potential effects on us. Such forward-looking statements are not guarantees of future performance. The following important factors, as well as those important factors described elsewhere in this report or in our Annual Report on Form 10-K for the year ended December 31, 2016, could cause our actual results to differ materially from estimates or expectations reflected in such forward-looking statements:

 



 

 



global automobile production volumes;



 



 

 



the financial condition of our customers and suppliers;







 

 



our ability to make scheduled payments of principal or interest on our indebtedness and comply with the covenants and restrictions contained in the instruments governing our indebtedness;







 

 



our ability to refinance our indebtedness;



  



 

 



risks associated with non-U.S. operations, including foreign exchange risks and economic uncertainty in some regions;



 



 

 



any increase in the expense and funding requirements of our pension and postretirement benefits;



 



 

 



our customers’ ability to obtain equity and debt financing for their businesses;



 



 

 



our dependence on our large customers;



 



 

 



pricing pressure from our customers;



 



 

 



our ability to integrate acquired businesses;



 



 

 



risks associated with business divestitures including volatility in the capital markets, the capacity of potential bidders to finance transactions and the difficulty of predicting the outcome of negotiations; and



 



 

 



costs or liabilities related to environmental and safety regulations.

 

Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

This report also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent parties that are contained in this report and, accordingly, we cannot assure you of the accuracy or completeness of such data. In addition, projections, assumptions, and estimates of our future performance and the future performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk.

33

 


 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Market risk is the potential loss arising from adverse changes in market rates and prices. We are exposed to market risk throughout the normal course of our business operations due to our purchases of steel, our sales of scrap steel, our ongoing investing and financing activities, and our exposure to foreign currency exchange rates. We have established policies and procedures to govern our management of market risks.

 

Commodity Pricing Risk

Steel is the primary raw material that we use. We purchase a portion of our steel from certain of our customers through various OEM resale programs. The purchases through customer resale programs have buffered the impact of price swings associated with the procurement of steel. The remainder of our steel purchasing requirements is met through contracts with steel mills. At times, we may be unable to either avoid increases in steel prices or pass through any price increases to our customers. We refer to the “net steel impact” as the combination of the change in steel prices that are reflected in the price of our products, the change in the cost to procure steel from the mill, and the change in our recovery of offal. Our strategy is to be economically neutral to steel pricing by having these factors offset each other. While we strive to achieve a neutral net steel impact, we are not always successful in achieving that goal, in large part due to timing differences. The timing of a change in the price of steel may occur in separate periods and if a change occurs, that change may have a disproportionate effect, within any fiscal period, on our product pricing. Depending upon when a steel price change or offal price change occurs, that change may have a disproportionate effect, within any particular fiscal period, on our product pricing, our steel costs and the results of our sales of offal. Net imbalances in any one particular fiscal period may be reversed in a subsequent fiscal period, although we cannot provide assurances that, or when, these reversals will occur. Over the past several years, we have not experienced a material net impact from these factors.



Interest Rate Risk

At June 30, 2017, we had total debt, excluding capital leases, of $420.8 million (net of a $2.5 million discount and $8.9 million of debt issue cost), consisting of variable rate debt of $228.5 million (54%) and fixed rate debt of $192.3 million (46%), taking into account our $186.1 million variable rate to fixed rate swap. Assuming no changes in the monthly average variable rate debt levels of $242.5 million for the six months ended June 30, 2017, we estimate that a hypothetical change of 100 basis points in the LIBOR and alternative base rate would not have a significant impact on interest expense due to the LIBOR floor in our Term Loan.

 

On March 7, 2017, the Company amended the variable rate to fixed rate interest rate swap, for a portion of the Company’s Term Loan, entered into on October 17, 2014. The U.S. dollar notional amount remained the same at $186.1 million, the fixed interest rate was changed from 5.09% to 5.628% per annum, and the maturity date was extended from April 16, 2020 to March 7, 2024. The fair value of the swap will fluctuate with changes in interest rates.

Foreign Exchange Risk

 A significant portion of our revenues is derived from manufacturing operations in Europe. The results of operations and financial condition of our non-United States businesses are principally measured in their respective local currency and translated into U.S. dollars. The effects of foreign currency fluctuations in Europe are mitigated by the fact that expenses are generally incurred in the same currency in which revenues are generated, since we strive to manufacture our products in close proximity to our customers. Nevertheless, the reported income of our foreign subsidiaries will be higher or lower depending on a weakening or strengthening of the U.S. dollar against the respective foreign currencies.

 

Assets located in our foreign facilities are translated into U.S. dollars at foreign currency exchange rates in effect as of the end of each reporting period. The effect of such translations is reflected as a separate component of consolidated stockholders’ equity. As a result, our consolidated stockholders’ equity will fluctuate, depending upon the weakening or strengthening of the U.S. dollar against the respective foreign currencies.

 

Our strategy for managing currency risk relies primarily upon conducting business in a foreign country in that country’s currency. We may, from time to time, also participate in hedging programs intended to reduce our exposure to currency fluctuations. We believe that the effect of a 100 basis point movement in foreign currency rates against the U.S. dollar would not have materially impacted the results of our operations, our cash flows, or our stockholders’ equity for the six months ended June  30, 2017.

 

On March 7, 2017, the Company amended the cross currency swap, entered into on January 23, 2015, and into a new cross currency swap, to hedge its net investment in Europe, based on the U.S. dollar / Euro exchange spot rate of $1.04795. The Euro notional amount remained the same at $178 million, the interest rate was lowered from 3.40% to 2.85%, and the maturity date was extended from April 16, 2020 to March 7, 2024.

 

Inflation

Over time, we may experience a rise in inflationary pressures impacting certain commodities, such as petroleum-based products, ferrous metals, base metals, and certain chemicals. Additionally, because we purchase various types of equipment, raw materials, and component parts from our suppliers, we may be adversely impacted by their inability to adequately mitigate inflationary, industry, or economic pressures. The overall condition of our supply base may possibly lead to delivery delays, production issues, or delivery of non-conforming products by our suppliers in the future. As such, we continue to monitor our vendor base for the best sources of supply and we continue to work with those vendors and customers to mitigate the impact of inflationary pressures.

34

 


 





Item 4. Controls  and Procedures.

 

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), management, with the participation of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2017. Based upon that evaluation, the CEO and the CFO have concluded that, as of June 30, 2017, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

There has not been any change in our internal control over financial reporting that occurred during the quarter ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

35

 


 

 

PART II — OTHER INFORMATION

 

Item 1A. Risk Factors.

 

There have been no material changes in our risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.

 

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

 

Purchases of Equity Securities



The following table presents information regarding shares of our common stock repurchased during each month in the quarter ended June 30, 2017.





 





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Total Number of

 

 

 



 

 

 

 

 

 

Shares (or Units)

 

Dollar Value of



 

 

 

Weighted

 

Purchased as Part 

 

Shares that May



 

Total Number of 

 

Average Price

 

of Publicly

 

Yet Be Purchased



 

Shares (or Units)

 

Paid per Share 

 

Announced Plan

 

Under Plan or

Period

 

Purchased

 

(or Unit) (1)

 

or Program

 

Program (2)

April 1 to April 30, 2017

 

33 

 

$

27.97 

 

 -

 

$

81,056,732 

May 1 to May 31, 2017

 

 -

 

$

 -

 

 -

 

$

81,056,732 

June 1 to June 30, 2017

 

 -

 

$

 -

 

 -

 

$

81,056,732 

Total

 

33 

 

$

 -

 

 -

 

 

 

 

(1)The weighted average price paid for shares of common stock includes commissions paid.

(2)This column includes the approximate dollar value of shares that remain authorized for repurchase under the Company’s Repurchase Program announced on June 17, 2016. Subject to applicable legal restrictions, shares may be repurchased in open market transactions, privately negotiated transactions, or in such other manner as shall be determined by the Chief Executive Officer, the Chief Financial Officer (the “Proper Officers”), or their designee. The timing, manner, price, and amount of repurchases will be determined at the Proper Officer’s discretion and the Repurchase Program shall terminate on the earlier of (i) the first date on which a total of $100 million of the Company’s shares of common stock shall have been purchased and (ii) such other date as shall be determined by the Company’s Board of Directors.

(3)These shares were purchased in connection with the vesting of restricted stock units. See Note 14 of the notes to the Company’s Condensed Consolidated Financial Statements.



36

 


 





Item 6. Exhibits.



31.1

Rule 13a-14(a) Certification of the Chief Executive Officer

 

 

31.2

Rule 13a-14(a) Certification of the Chief Financial Officer

 

 

32.1

Section 1350 Certification of the Chief Executive Officer *

 

 

32.2

Section 1350 Certification of the Chief Financial Officer *

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Scheme Document

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

__________________________

*Furnished, not filed





37

 


 

 

 

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.



 



 

 

 

Tower International, Inc.

 

 

 

 

 

 

Date:  July  26, 2017

/s/ Jeffrey Kersten

 

 

Jeffrey Kersten

 

 

Chief Financial Officer

 





 



  

38