Table of Contents13. Derivative Instruments and Hedging Activities
Interest Rate Swaps — During 2006, the Company entered into interest rate swap contracts to manage cash flow fluctuations of variable rate debt due to changes in market interest rates. Interest rate swap contracts which fix the interest payments of certain variable rate debt instruments or fix the market rate component of anticipated fixed rate debt instruments are accounted for as cash flow hedges.
The Company formally documents its hedge relationships, including the identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the cash flow hedges. The Company also formally assesses whether a cash flow hedge is highly effective in offsetting changes in the cash flows of the hedged item. The changes in the cash flows of the interest rate swap contracts are expected to exactly offset the changes in cash flows attributed to the fluctuations in the variable rate debt.
As of March 31, 2007, interest rate swap contracts representing $272,773 of notional amount were outstanding with maturity dates of December, 2010 through December, 2011. These contracts modify the variable rate characteristics of the Company’s variable rate debt instruments, which are generally set at three-month USD LIBOR rates or Canadian Dollar Bankers Acceptance Rates. Of the above amount $246,870 of notional amount pertains to the swap of USD denominated debt fixed at 5.764% and $25,903 pertains to Canadian dollar denominated debt fixed at 4.91%. The fair market value of all outstanding interest rate swap contracts is subject to changes in value due to changes in interest rates. As of March 31, 2007, the fair market value of $(9,417) of these swaps were recorded in other long-term liabilities and the same amount of net losses were recorded in accumulated other comprehensive income (loss).
Forward foreign exchange contracts — The Company uses forward foreign exchange contracts to reduce the effect of fluctuations in foreign exchange rates on Term Loan B, a U.S. dollar denominated obligation of our Canadian subsidiary, the Euro portion of our Term Loan D, and short-term foreign currency denominated intercompany transactions. Gains and losses on the derivative instruments are intended to offset gains and losses on the hedged transaction in an effort to reduce the earnings volatility resulting from fluctuations in foreign exchange rates. The currencies hedged by these arrangements are the Canadian Dollar, Euro and Brazilian Real. Losses of $119 related to these contracts were recorded in other expense during the quarter ended March 31, 2007.
The Company also uses forward foreign exchange contracts to hedge the Mexican peso to reduce the effect of fluctuations in foreign exchange rates on a portion of the forecasted operating expenses of our Mexican facilities. These contracts are designated as cash flow hedges. As of March 31, 2007, forward foreign exchange contracts representing $10,681 of notional amount were outstanding with maturities of less than twelve months and the fair market value of these contracts was approximately $123.
Commodity price hedges — The Company has exposure to the prices of commodities in the procurement of certain raw materials. The primary purpose of the Company’s commodity price hedging activities is to manage the volatility associated with these forecasted purchases. The Company primarily utilizes forward contracts with maturities of less than 24 months, which qualify as cash flow hedges. These instruments are intended to offset the effect of changes in commodity prices on forecasted inventory purchases. As of March 31, 2007, commodity contracts representing $1,291 of notional amount were outstanding with a fair market value of approximately $19.
14. Acquisition
On March 31, 2007 the Company completed its purchase of the Automotive Components Holdings’ fuel rail manufacturing operations at its El Jarudo, Mexico plant for $10,616, subject to adjustments for the difference between inventory valuation, certain prepaid items, and capital expenditures under certain programs and target amounts. Under the sales agreement, Automotive Components Holdings, LLC, transferred ownership of its equity interest in Manufactura El Jarudo, S. de R.L. de C.V. to Cooper-Standard along with its related U.S. assets.
18
Table of ContentsThe El Jarudo operation is a North American maquiladora plant and employs approximately 450 people. It was part of Automotive Components Holdings, LLC, a Ford-managed temporary company formed in October 2005.
15. Subsequent Event
On April 13, 2007, the Company announced the planned closure of a manufacturing facility located in Mexico. The closure is expected to be completed in the second quarter of 2007. As a result of this closure, the Company will record severance and other exit costs in the financial results as they are incurred.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (‘‘MD&A’’) presents information related to the condensed consolidated results of operations of the Company, including the impact of restructuring costs on the Company’s results, a discussion of the past results and future outlook of each of the Company’s segments, and information concerning both the liquidity and capital resources of the Company. The following discussion and analysis, which should be read in conjunction with our condensed consolidated financial statements and the notes included elsewhere in this report, contains certain forward-looking statements relating to anticipated future financial conditions and operating results of the Company and its current business plans. In the future, the financial condition and operating results of the Company could differ materially from those discussed herein and its current busi ness plans could be altered in response to market conditions and other factors beyond the Company’s control. Important factors that could cause or contribute to such differences or changes include those discussed elsewhere in this report (see ‘‘Forward-Looking Statements’’) and in our most recently filed annual report on Form 10-K (see Item 1A. Risk Factors).
Business Environment and Outlook
Our business is greatly affected by the automotive build rates in North America and Europe. New vehicle demand is driven by macro-economic and other factors such as interest rates, manufacturer and dealer sales incentives, fuel prices, consumer confidence, and employment and income growth trends. According to CSM Worldwide, light vehicle production in North America is expected to be 15.2 million units in 2007, which is down from 15.3 million units in 2006. European production levels in 2007 are expected to be 21.1 million units as compared to 20.4 million units in 2006. Light vehicle production in South America is expected to increase to 3.3 million vehicles in 2007 from 3.0 million vehicles in 2006.
In the first quarter of 2007, our business was negatively impacted by decreased OEM production volumes on certain platforms in North America. According to CSM Worldwide, actual North America light vehicle production volume was 3.8 million units, as compared to 4.1 million units, respectively, for the first quarter of 2007 and 2006. Additionally, we continued to experience significant pricing pressure from our customers as well as significant increases in certain raw material prices, especially steel-based components, synthetic rubber, and other compounding materials. Our contracts typically do not allow us to pass these price increases on to our customers. These negative impacts were partially offset by cost savings and restructuring initiatives, and favorable foreign currency translation.
According to CSM Worldwide, North America and Europe light vehicle production in the second quarter of 2007 is estimated at 4.1 million and 5.6 million units, respectively, which is relatively flat for North America and a 0.2 million unit increase for Europe compared to the second quarter of 2006. We expect that our performance in 2007 will be impacted by changes in light vehicle production volumes, customer pricing pressures, and the cost of raw materials.
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Table of ContentsCondensed Consolidated Results of Operations
(dollar amounts in thousands)
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![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
| ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | Three months ended March 31, |
| ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 2006 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 2007 |
Sales | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 540,371 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 576,261 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Cost of products sold | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 453,676 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 482,784 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Gross profit | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 86,695 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 93,477 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Selling, administration, & engineering expenses | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 48,836 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 48,720 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Amortization of intangibles | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 7,508 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 7,809 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Restructuring | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 2,223 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 4,743 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Operating profit | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 28,128 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 32,205 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Interest expense, net of interest income | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | (20,267 | ) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | (21,844 | ) |
Equity earnings | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 949 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 332 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Other expense | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | (957 | ) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | (1,242 | ) |
Income before income taxes | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 7,853 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 9,451 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Provision for income tax expense | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 2,371 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 4,777 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Net income | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 5,482 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 4,674 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
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Three Months Ended March 31, 2007 Compared with Three Months Ended March 31, 2006
Sales: Consolidated sales increased $35.9 million, or 6.6%, in the first quarter of 2007. This increase resulted primarily from the full quarter impact of the FHS acquisition and favorable foreign exchange ($13.0 million). Although sales in North America were down for the quarter ended March 31, 2007 compared to the quarter ended March 31, 2006, sales in Europe and Brazil increased in 2007 compared to 2006. These favorable items were partially offset by customer price concessions.
Gross Profit: Gross profit increased $6.8 million to $93.5 million (approximately 16.2% of sales) in the first quarter of 2007 as compared to $86.7 million (approximately 16.0% of sales) in the first quarter of 2006. This increase resulted primarily from increased volume and the favorable impact of various cost saving initiatives. In addition, as a result of the acquisition of FHS, cost of products sold was increased by $2.1 million during the first quarter of 2006 due to the liquidation of the inventory fair value adjustment. Such positive items were partially offset by customer price concessions.
Selling, Administration, and Engineering: Selling, administration, and engineering expenses of $48.7 million in the first quarter of 2007 were relatively flat compared to the first quarter of 2006.
Amortization of Intangibles: Amortization of intangibles increased $0.3 million in the first quarter of 2007 as compared to the first quarter of 2006 due to a full quarter of amortization of FHS intangible assets being recorded in the first quarter of 2007.
Interest Expense, net: The increase in interest expense of $1.6 million in the first quarter of 2007 resulted primarily from increased indebtedness used to finance the acquisition of FHS and higher interest expense related to variable rate debt.
Other Expense: Other expense increased $0.3 million in the first quarter of 2007 due primarily to a $0.5 million increase in foreign exchange losses offset by a $0.2 million decrease in minority interest expense.
Provision for Income Tax Expense (Benefit): Our effective tax rate increased from 30.2% in 2006 to 50.5% in 2007 due primarily to valuation allowances recorded on tax benefits generated in the U.S. Changes in the distribution of income between U.S. and foreign sources also have an impact on the effective tax rate.
20
Table of ContentsSegment Results of Operations
(dollar amounts in thousands)
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| ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | Three Months Ended March 31, |
| ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 2006 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 2007 |
Sales to external customers | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Body & Chassis | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 300,070 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 303,509 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Fluid | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 240,301 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 272,752 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Consolidated | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 540,371 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 576,261 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Segment profit | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Body & Chassis | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 1,594 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 5,804 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Fluid | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 6,259 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 3,647 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Income before income taxes | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 7,853 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 9,451 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
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Three Months Ended March 31, 2007 Compared with Three Months Ended March 31, 2006
Body & Chassis: Sales increased $3.4 million, or 1.1%, primarily due to favorable foreign exchange ($5.6 million) and higher unit sales volume, partially offset by customer price concessions. Segment profit increased by $4.2 million, primarily due to the favorable impact of various cost savings initiatives partially offset by customer price concessions and increased restructuring costs ($2.3 million).
Fluid: Sales increased $32.5 million, or 13.5%, primarily due to FHS and favorable foreign exchange ($7.5 million) partially offset by customer price concessions. Segment profit decreased by $2.6 million, primarily due to customer price concessions and increased interest costs on indebtedness used to finance the acquisition of FHS.
Restructuring
We continually evaluate alternatives in an effort to align our business with the changing needs of our customers and lower the operating cost of our Company. This may include the realignment of our existing manufacturing capacity, facility closures, or similar actions. See the Notes to the condensed consolidated financial statements for discussion of restructuring activities during the three months ended March 31, 2006 and 2007.
Liquidity and Capital Resources
Operating Activities: Cash provided by operations in the first quarter of 2007 was $42.3 million as compared to cash used in operations of $1.9 million in the first quarter of 2006. This change was primarily the result of changes in other working capital components. Working capital decreased by $47.4 million, due primarily to increased accounts payable partially offset by increased accounts receivable. We anticipate that cash flows from operations for the next twelve months will be positive and will exceed our projected capital expenditures and working capital needs.
Investing Activities: Cash used in investing activities, primarily consisting of acquisition cost of $10.6 million related to the acquisition of El Jarudo and capital spending of $17.6 million, was $28.1 million in the first quarter of 2007, as compared to $225.3 million in the first quarter of 2006, which primarily consisted of acquisition costs of $209.8 million related to the acquisition of FHS and $15.6 million of capital spending. We anticipate that we will spend approximately $90 million on capital expenditures in the year ending December 31, 2007.
Financing Activities: Cash used in financing activities in the first quarter of 2007 was $19.5 million, which consisted primarily of normal debt payments and voluntary prepayments on our term loans, as compared to cash provided by financing activities of $207.5 million in the first quarter of 2006, which consisted primarily of proceeds from issuance of acquisition-related debt of $214.9 million, partially offset by payment of $4.8 million of debt issuance costs and $2.8 million principal payments on long-term debt.
21
Table of ContentsThe Company is significantly leveraged. As of March 31, 2007, we had outstanding $1,037.2 million in aggregate indebtedness, with an additional $108.6 million of borrowing capacity available under our revolving credit facility (after giving effect to $16.4 million of outstanding letters of credit). Our future liquidity requirements will likely be significant, primarily due to debt service obligations. Future debt service obligations will include required prepayments from annual excess cash flows, as defined, under our senior credit agreement, which would be due five days after filing of our Form 10-K or in connection with specific transactions, such as certain asset sales and the incurrence of debt not permitted under the senior credit agreement.
Our compliance with certain of the covenants contained in the indentures governing the notes and in our senior credit agreement is determined based on financial ratios that are derived using our reported EBITDA, as adjusted for unusual items and certain other contingencies described in those agreements. The breach of such covenants in our senior credit agreement could result in a default under that agreement and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a default under our indentures. Additionally, under our debt agreements, our ability to engage in activities such as incurring additional indebtedness, making investments, and paying dividends is also partially tied to similar financial ratios. We refer to EBITDA as adjusted under the indentures as Indentures EBITDA and EBITDA as adjusted under the senior credit agreement as Consolidated EBITDA.
We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Indentures EBITDA are appropriate to provide additional information to investors to demonstrate compliance with our financing covenants. However, EBITDA and Indentures EBITDA are not recognized terms under GAAP and do not purport to be alternatives to net income as a measure of operating performance. Additionally, EBITDA and Indentures EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as interest payments, tax payments, debt service requirements, and capital expenditures. Because not all companies use identical calculations, these presentations of EBITDA and Indentures EBITDA may not be comparable to similarly titled measures of other companies.
The adjustments to EBITDA in determining covenant compliance under the credit agreement are generally similar to those made under the indentures.
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![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
| ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | Three Months Ended March 31, |
| ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 2006 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 2007 |
Net income | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 5.5 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 4.7 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Provision for income tax expense | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 2.4 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 4.8 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Interest expense, net of interest income | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 20.3 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 21.8 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Depreciation and amortization | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 32.4 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 29.9 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
EBITDA | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 60.6 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 61.2 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Restructuring | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 2.2 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 4.7 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Foreign exchange loss(1) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 0.1 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | (0.3 | ) |
Inventory write-up(2) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 2.1 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | — | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
| ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 65.0 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 65.6 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Pro Forma adjustments related to FHS(3) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 4.4 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | — | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Equity earnings in joint venture(4) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | — | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | — | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Indentures EBITDA | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 69.4 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | $ | 65.6 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
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(1) | Unrealized foreign exchange loss on indebtedness related to 2004 Acquisition. |
(2) | A write-up of inventory to fair value at the date of the acquisition. |
(3) | Pro Forma adjustments to FHS’s reported EBITDA for the period from January 1, 2006 to Feburuay 6, 2006. |
(4) | The Company’s share of earnings in one of its joint ventures less cash dividends received from the joint venture. |
22
Table of ContentsOur covenant levels and ratios for the four quarters ended March 31, 2007 are as follows:
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| ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | Covenant Level at March 31, 2007 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | Covenant Thresholds |
Senior Credit Facilities | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | |
Minimum Consolidated EBITDA to cash interest ratio | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 2.9 to 1.0 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ≥ 2.7 to 1.0 |
Maximum net debt to Consolidated EBITDA ratio | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 4.0 to 1.0 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ≤ 4.3 to 1.0 |
Indentures | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | |
Consolidated Coverage Ratio | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 3.0 to 1.0 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ≥ 2.7 to 1.0 |
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Recent Accounting Pronouncements
See Note 1 to the condensed consolidated financial statements included elsewhere in this Form 10-Q.
Forward-Looking Statements
This report includes what the Company believes are ‘‘forward-looking statements’’ as that term is defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends, and other information that is not historical information. When used in this report, the words ‘‘estimates,’’ ‘‘expects,’’ ‘‘anticipates,’’ ‘‘projects,’’ ‘‘plans,’’ ‘‘intends,’’ ‘‘believes,’’ ‘‘forecasts,’’ or future or conditional verbs, such as ‘‘will,’’ ‘‘should,’’ ‘‘could, &lsq uo;‘ or ‘‘may,’’ and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management’s examination of historical operating trends and data are based upon our current expectations and various assumptions. Our expectations, beliefs, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, we cannot assure you that these expectations, beliefs, and projections will be achieved.
Such risks, uncertainties, and other important factors include, among others: our substantial leverage; limitations on flexibility in operating our business contained in our debt agreements; our dependence on the automotive industry; availability and cost of raw materials; our dependence on certain major customers; competition in our industry; sovereign and other risks related to our conducting operations outside the United States; the uncertainty of our ability to achieve expected cost reduction savings; our exposure to product liability and warranty claims; labor conditions; our vulnerability to rising interest rates; our ability to meet our customers’ needs for new and improved products in a timely manner; our ability to attract and retain key personnel; the possibility that our owners’ interests will conflict with yours; our recent status as a stand-alone company; our legal rights to our intellectual property portfolio; our underfunded pension pl ans; environmental and other regulation; and the possibility that our acquisition strategy will not be successful. There may be other factors that may cause our actual results to differ materially from the forward-looking statements.
All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. We undertake no obligation to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.
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Table of ContentsItem 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate and Currency Exchange Risk
We are exposed to fluctuations in interest rates and currency exchange rates. We actively monitor our exposure to risk from changes in foreign currency exchange rates and interest rates through the use of derivative financial instruments in accordance with management’s guidelines. We do not enter into derivative instruments for trading purposes
As of March 31, 2007, we had $497.0 million of variable rate debt. A 1% increase in the average interest rate would increase future interest expense by approximately $2.2 million per year, after considering the effects of the interest rate swap contracts, which were used to manage cash flow fluctuations of certain variable rate debt due to changes in market interest rates. Interest rate swap contracts which fix the interest payments of certain variable rate debt instruments or fix the market rate component of anticipated fixed rate debt instruments are accounted for as cash flow hedges.
As of March 31, 2007, interest rate swap contracts representing $272.8 million of notional amount were outstanding with maturity dates of December, 2010 through December, 2011. These contracts modify the variable rate characteristics of the Company’s variable rate debt instruments, which are generally set at three-month USD LIBOR rates or Canadian Dollar Bankers Acceptance Rates. Of the above amount $246.9 million of notional amount pertains to the swap of USD denominated debt fixed at 5.764% and $25.9 million pertains to Canadian dollar denominated debt fixed at 4.91%. The fair market value of all outstanding interest rate swap contracts is subject to changes in value due to changes in interest rates. As of March 31, 2007, the fair market value of $(9.4) million of these swaps were recorded in other long-term liabilities and the same amount of net losses were recorded in accumulated other comprehensive income (loss).
The Company uses forward foreign exchange contracts to reduce the effect of fluctuations in foreign exchange rates on Term Loan B, a U.S. dollar denominated obligation of our Canadian subsidiary, the Euro portion of our Term Loan D and short-term, foreign currency denominated intercompany transactions. Gains and losses on the derivative instruments are intended to offset gains and losses on the hedged transaction in an effort to reduce the earnings volatility resulting from fluctuations in foreign exchange rates. The currencies hedged by these arrangements are the Canadian Dollar, Euro and Brazilian Real.
The Company also uses forward foreign exchange contracts to hedge the Mexican peso to reduce the effect of fluctuations in foreign exchange rates on a portion of the forecasted operating expenses of our Mexican facilities. As of March 31, 2007, forward foreign exchange contracts representing $10.7 million of notional amount were outstanding with maturities of less than twelve months and the fair market value of these contracts was approximately $0.1million. A 10% strengthening of the U.S. dollar relative to the Mexican peso would result in a decrease of $1.0 million in the fair market value of these contracts. A 10% weakening of the U.S. dollar relative to the Mexican peso would result in an increase of $1.2 million in the fair market value of these contracts.
The Company has exposure to the prices of commodities in the procurement of certain raw materials. The primary purpose of the Company’s commodity price hedging activities is to manage the volatility associated with these forecasted purchases. The Company primarily utilizes forward contracts with maturities of less than 24 months. These instruments are intended to offset the effect of changes in commodity prices on forecasted inventory purchases. As of March 31, 2007, commodity contracts representing $1.3 million of notional amount were outstanding with a fair market value of approximately $0 million. A 10% change in the equivalent commodity price would result in a change of $0.1 million in the fair market value of these contracts.
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Table of ContentsItem 4. Controls and Procedures.
Based on their evaluation as of March 31, 2007, our principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined by Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 (the ‘‘Exchange Act’’)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II — OTHER INFORMATION
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Item 1. | Legal Proceedings. |
The Company is periodically involved in claims, litigation and various legal matters that arise in the ordinary course of business. In addition, the Company conducts and monitors environmental investigations and remedial actions at certain locations. Each of these matters is subject to various uncertainties, and some of these matters may be resolved unfavorably with respect to the Company. A reserve estimate is established for each matter and updated as additional information becomes available. We do not believe that the ultimate resolution of any of these matters will have a material adverse effect on our financial condition, results of operations, or cash flows.
Item 6. Exhibits
The exhibits listed on the ‘‘Index to Exhibits’’ are filed with this Form 10-Q or incorporated by reference as set forth below.
INDEX TO EXHIBITS
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![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) |
Exhibit No. | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | Description of Exhibit |
![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 31 | .1* | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | Certification of James S. McElya, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 31 | .2* | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | Certification of Allen J. Campbell, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 32 | .1* | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | Certification of James S. McElya, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | 32 | .2* | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | Certification of Allen J. Campbell, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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.
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| ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | COOPER-STANDARD HOLDINGS INC. |
May 14, 2007 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | /s/ James S. McElya |
Date | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | James S. McElya Chief Executive Officer and Director (Principal Executive Officer) |
May 14, 2007 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | /s/ Allen J. Campbell |
Date | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | Allen J. Campbell Chief Financial Officer (Principal Financial Officer) |
May 14, 2007 | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | /s/ Helen T. Yantz |
Date | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | ![](https://capedge.com/proxy/10-Q/0000950136-07-003471/spacer.gif) | Helen T. Yantz Controller (Principal Accounting Officer) |
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