Filed Pursuant to
Rule 424(b)(3)
File No. 333-150500PROSPECTUS
$200,000,000 7% Senior Notes due 2012
$350,000,000 83/8% Senior Subordinated Notes due 2014The 7% senior notes due 2012 were issued in exchange for the 7% senior notes due 2012 originally issued on December 23, 2004. The 83/8% senior subordinated notes due 2014 were issued in exchange for the 83/8% senior subordinated notes due 2014 originally issued on December 23, 2004.
The senior notes will mature on December 15, 2012 and the senior subordinated notes will mature on December 15, 2014.
Cooper-Standard Automotive Inc. may redeem some or all of the senior notes at any time prior to December 15, 2008 and some or all of the senior subordinated notes at any time prior to December 15, 2009, in each case, at a price equal to 100% of the principal amount of the notes, plus a ‘‘make-whole’’ premium. Thereafter, Cooper-Standard Automotive Inc. may redeem some or all of the senior notes and some or all of the senior subordinated notes, in each case, at the redemption prices described in this prospectus.
The senior notes are Cooper-Standard Automotive Inc.’s unsecured obligations and rank equally with all of Cooper-Standard Automotive Inc.’s existing and future senior obligations and senior to Cooper-Standard Automotive Inc.’s subordinated indebtedness. The senior subordinated notes are Cooper-Standard Automotive Inc.’s unsecured senior subordinated obligations and are subordinated to all of its existing and future senior indebtedness including the senior notes. The notes are effectively subordinated to Cooper-Standard Automotive Inc.’s existing and future secured indebtedness to the extent of the assets securing that indebtedness. The notes are guaranteed by Cooper-Standard Holdings Inc., our parent company, and Cooper-Standard Automotive Inc.’s direct and indirect domestic subsidiaries that guarantee its obligations under the senior credit facilities. These guarantees are unsecured and, with respect to the senior notes, rank equally with all existing and future senior obligations of the guarantors and, with respect to the senior subordinated notes, are subordinated to all existing and future senior obligations of the guarantors. The guarantees are effectively subordinated to existing and future secured indebtedness of the guarantors to the extent of the assets securing that indebtedness.
See ‘‘Risk Factors’’ beginning on page 12 for a discussion of certain risks that you should consider in connection with an investment in the notes.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the notes or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
This prospectus has been prepared for and will be used by Goldman, Sachs & Co. in connection with offers and sales of the notes in market-making transactions. These transactions may occur in the open market or may be privately negotiated at prices related to prevailing market prices at the time of sales or at negotiated prices. Goldman, Sachs & Co. may act as principal or agent in these transactions. We will not receive any proceeds of such sales.
Goldman, Sachs & Co.
The date of this prospectus is May 12, 2008
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. The prospectus may be used only for the purposes for which it has been published and no person has been authorized to give any information not contained herein. If you receive any other information, you should not rely on it. Goldman, Sachs & Co. is not making an offer of these securities in any state where the offer is not permitted.
TABLE OF CONTENTS
Some market data and other statistical information used throughout this prospectus is based on data available from CSM Worldwide, an independent market research firm. Other data are based on our good faith estimates, which are derived from our review of internal surveys, as well as third party sources. Although we believe all of these third party sources are reliable, we have not independently verified the information and cannot guarantee its accuracy and completeness. To the extent that we have been unable to obtain information from third party sources, we have expressed our belief on the basis of our own internal analyses and estimates of our and our competitors’ products and capabilities. The principal shareholders of Cooper-Standard Holdings Inc.’s, our parent company, are affiliates of The Cypress Group L.L.C. and GS Capital Partners 2000, L.P., whom we refer to as our ‘‘Sponsors.’’ Each of the Sponsors, including their respective affiliates, currently owns approximately 49.2% of the equity of Cooper-Standard Holdings Inc. See ‘‘Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.’’
i
SUMMARY
This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you in making your investment decision. You should read this entire prospectus, including the financial data and related notes and section entitled ‘‘Risk Factors,’’ before making an investment decision. As used in this prospectus, the terms ‘‘we,’’ ‘‘us’’ ‘‘Cooper-Standard’’ and the ‘‘Company’’ all refer to Cooper-Standard Automotive Inc., its subsidiaries and Cooper-Standard Holdings Inc., its parent, on a consolidated basis, unless the context requires otherwise.
We are a leading global manufacturer of fluid handling, body sealing, and noise, vibration and harshness control (‘‘NVH’’) components, systems, subsystems, and modules, primarily for use in passenger vehicles and light trucks for global original equipment manufacturers (‘‘OEMs’’) and replacement markets. Cooper-Standard Holdings Inc. conducts substantially all of its activities through its subsidiaries. Our principal executive offices are located at 39550 Orchard Hill Place Drive, Novi, Michigan 48375, and its telephone number is (248) 596-5900. We also maintain a website at www.cooperstandard.com, which is not a part of this prospectus.
We believe that we are the largest global producer of body sealing systems, one of the two largest North American producers in the NVH control business, and the second largest global producer of the types of fluid handling products that we manufacture. Approximately 80% of our sales in 2007 were to automotive original equipment manufacturers (‘‘OEMs’’), including Ford, General Motors, Chrysler (collectively, the ‘‘Detroit 3’’), Audi, BMW, Fiat, Honda, Mercedes Benz, Porsche, PSA Peugeot Citroën, Renault/Nissan, Toyota, and Volkswagen. The remaining 20% of our 2007 sales were primarily to Tier I and Tier II automotive suppliers. In 2007, our products were found in 19 of the 20 top-selling models in North America and in 17 of the 20 top-selling models in Europe.
We operate in 69 manufacturing locations and nine design, engineering, and administrative locations in 18 countries around the world.
Our net sales have grown from $1.8 billion for the year ended December 31, 2005, to $2.5 billion for the year ended December 31, 2007. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Company Overview.’’
Acquisition History
On December 23, 2004, Cooper-Standard Holdings Inc. acquired the automotive segment of Cooper Tire & Rubber Company (the ‘‘2004 Acquisition’’) and began operating the business on a stand-alone basis primarily through its principal operating subsidiary, Cooper-Standard Automotive Inc. See ‘‘Notes to Consolidated Financial Statements’’ (especially Notes 8 and 17, respectively) for further descriptions of the Senior Notes, Senior Subordinated Notes, and Senior Credit Facilities and of the equity contributions relating to the 2004 Acquisition.
In July 2005, the Company acquired Gates Corporation’s Enfriamientos de Automoviles manufacturing operations in Atlacomulco, Mexico (the ‘‘Atlacomulco business’’). The Atlacomulco business manufactures low pressure heating and cooling hose, principally for the OEM automotive market.
In February 2006, the Company acquired the automotive fluid handling systems business of ITT Industries, Inc. (‘‘FHS’’ or the ‘‘FHS business’’). See ‘‘Notes to Consolidated Financial Statements’’ (especially Note 3).
In March 2007, the Company acquired Automotive Components Holdings’ El Jarudo manufacturing operations located in Juarez, Mexico (the ‘‘El Jarudo business’’). The El Jarudo business manufactures automotive fuel rails.
In August 2007, the Company completed the acquisition of nine Metzeler Automotive Profile Systems sealing systems operations in Germany, Italy, Poland, Belarus, and Belgium, and a joint
1
venture interest in China (‘‘MAPS’’ or the ‘‘MAPS business’’) from Automotive Sealing Systems S.A. (‘‘ASSSA’’). See ‘‘Notes to Consolidated Financial Statements’’ (especially Note 3).
In December 2007, the Company acquired the 74% joint venture interest of ASSSA in Metzeler Automotive Profiles India Private Limited (‘‘MAP India’’), a leading manufacturer of automotive sealing products in India. See ‘‘Notes to Consolidated Financial Statements’’ (especially Note 3).
Strategy:
We intend to build on our position as one of the world’s leading automotive suppliers of body sealing, NVH control and fluid handling components and systems by focusing on the following key strategic areas:
Strengthening relationships with the Detroit 3 and expanding relationships with other OEMs
We plan to strengthen our leading positions with the Detroit 3 while aggressively pursuing additional business opportunities with New American Manufacturers (‘‘NAMs’’) and European and Asian OEMs. The Detroit 3 are long established, highly valued customers with revenue streams spread among all platform categories, including cars, light trucks, and SUVs. However, we believe NAMs and European and Asian OEMs will provide significant opportunities to further grow our business, especially as Asian OEMs have been rapidly penetrating North American and European markets, and Asian markets are relatively young and growing at a higher rate than other automotive markets. In particular, China’s light vehicle market is projected to grow at an 11% compound annual growth rate (‘‘CAGR’’) between 2007 and 2012, according to CSM Worldwide estimates, which will make it the world’s fastest growing market.
To further strengthen our customer relationships, we plan to continue to focus on our program management capabilities, engineering excellence, and customer service, and to utilize our technological and design capabilities to enhance the value we offer our customers. We will continue to seek customer feedback with respect to quality manufacturing, design and engineering, delivery, and after-sales support in an effort to provide the highest level of customer service and responsiveness. We believe our efforts have been successful to date and we continue to be awarded content on the Detroit 3’s most important platforms. We have also achieved several recent successes with other OEMs, such as Nissan, Toyota, Honda, Audi, and Volkswagen. Further, our acquisition of MAPS diversified our customer base with significant new volume with key customers such as Fiat, BMW, Daimler and Volkswagen Group. In Asia, and particularly in China, we have been successful in entering new markets and are developing a substantial manufacturing and marketing presence to serve local OEMs and to follow our customers as they expand into these markets. We operate eight manufacturing locations in China, which provide products and services to both Chinese OEMs and our traditional customers.
Targeting high-volume vehicle platforms and increasing content per vehicle
We intend to target high-volume platforms and to maximize the amount of content we provide to each platform. We expect that high-volume platforms will allow us to efficiently gain market share, create greater economies of scale, and provide more opportunities to realize cost savings from our Lean initiatives program, an internally developed program intended to optimize manufacturing by eliminating waste, controlling cost and enhancing productivity. Supplying OEMs’ high-volume platforms is increasingly important because OEMs are using fewer platforms to cover a greater number of vehicle models. Maximizing content-per-vehicle is important not only to increase revenue per vehicle, but also to increase our relative importance to the platform and strengthen our customer relationships with the OEMs as they continue to consolidate their supplier base.
By leveraging our extensive product portfolio and providing superior customer service and product innovations, we have been and expect to continue to be successful in winning significant business on high-volume platforms.
2
Developing new modular solutions and other value-added products
We believe that significant opportunities exist to grow our current portfolio of products, including components as well as complete sub-systems, modules, and assemblies, by continuing to design, develop, and launch new products that distinguish us from our competitors. As a leader in design, engineering, and technical capabilities, we are able to focus on improving products, developing new technologies, and implementing more efficient processes in each of our product lines. Our body sealing products, which are part of our body & chassis product portfolio, are visible to vehicle passengers and can enhance the vehicle’s aesthetic appeal, in addition to creating a barrier to wind, precipitation, dust, and noise. Our noise, vibration and harshness control products, which are also part of our body & chassis products, are a fundamental part of the driving experience and can be important to the vehicle quality. Our fluid handling modules and sub-systems are designed to increase functionality and decrease cost to the OEM, which can be the deciding factor in winning new business.
To remain a leader in new product innovation, we will continue to invest in research and development and to focus on new technologies, materials, and designs. We believe that extensive use of Design for Six Sigma and other development strategies and techniques has led to some of our most successful recent product innovations, including our ESP Thermoplastic Glassruns (body & chassis), a proprietary plastics-to-aluminum overmolding process (fluid handling), and our Truck Tuff Hydromounts (body & chassis). Examples of successful modular innovations include engine cooling systems, fuel and brake systems, and exhaust gas recirculation modules in our fluid handling product category, and Daylight Opening Modules in our body & chassis category.
Selectively pursuing complementary acquisitions and alliances
We intend to selectively pursue acquisitions, joint ventures, and technology alliances to enhance our customer base, geographic penetration, market diversity, scale, and technology. Consolidation is an industry trend and is encouraged by OEMs’ desire for fewer supplier relationships. We believe joint ventures allow us to penetrate new markets with less relative risk and capital investment. Technology alliances are important because they are an effective way to share development costs, best-practices, and specialized knowledge.
We believe we have a strong platform for growth through acquisitions based on our past integration successes, experienced management team, global presence, and operational excellence. We also operate through several successful joint ventures and technical alliances, including those with Nishikawa Rubber Company, Zhejiang Saiyang Seal Products Co., Ltd. (‘‘Saiyang Sealing’’), Guyoung Technology Co. Ltd. (‘‘Guyoung’’), Hubei Jingda Precision Steel Tube Industry Co., Ltd. (‘‘Jingda’’), Shanghai Automotive Industry Corporation (‘‘SAIC’’) and Toyoda Gosei Co., Ltd. (‘‘Toyoda Gosei’’).
In July of 2005, we acquired the Atlacomulco business. The business manufactures low pressure heating and cooling hose, principally for the OEM automotive market.
In February of 2006, we furthered our strategy by acquiring the FHS business. We believe that the FHS acquisition has allowed us to provide a more complete line of fluid management solutions for new vehicle platforms, diversified our customer base, and secured our position as the second largest global fluid handling systems supplier in the automotive industry.
In March of 2007, we acquired the El Jarudo business. The business is located in Juarez, Mexico and is a producer of automotive fuel rails.
In August of 2007, we acquired the MAPS business, including nine sealing systems operations in Germany, Italy, Poland, Belarus, and Belgium, and a joint venture interest in China. MAPS is a leader in Europe in the development and manufacture of complete automotive body sealing systems.
In December of 2007, we completed the acquisition of a 74% joint venture interest in MAP India, a leading manufacturer of automotive sealing products in India.
3
Expanding our footprint in Asia
While we have, through new facilities, acquisitions, and joint ventures, significantly expanded our presence in Asia, particularly China and India, we believe that significant opportunities for growth exist in this fast-growing market. We will continue to evaluate opportunities that enable us to establish or expand our design, technology and commercial support operations in that region and enhance our ability to serve current and future customers.
Focusing on operational excellence and cost structure
We will continue to intensely focus on the efficiency of our manufacturing operations and on opportunities to reduce our cost structure. Although the automotive supply sector is highly competitive, we believe that we have been able to maintain strong operating margins due in part to our ability to constantly improve our manufacturing processes and to selectively relocate or close facilities. Our primary areas of focus are:
Further exploring non-transportation applications for products and technology
While the automotive industry will continue to be our core business, we have recently begun exploring new industries in which we can apply our expertise and manufacture new products utilizing our existing facilities and capabilities. As a leader in the development and manufacture of equipment using rubber, metals and extruded materials, we believe there may be opportunities in other sectors requiring the use of these materials.
Cooper-Standard Automotive Inc. is an Ohio corporation. Our principal executive offices are located at 39550 Orchard Hill Place Drive, Novi, Michigan 48375. Our telephone number is (248) 596-5900. We also maintain a website at www.cooperstandard.com, which is not a part of this prospectus.
4
Table of ContentsThe Notes
The summary below describes the principal terms of the notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. The ‘‘Description of the Notes’’ section of this prospectus contains a more detailed description of the terms and conditions of the notes.
5
Table of Contents6
Table of Contents7
Table of Contents8
Table of Contents9
SELECTED HISTORICAL FINANCIAL DATA
The selected financial data referred to as the Successor data as of and for the years ended December 31, 2007, 2006 and 2005, and as of December 31, 2004 and for the period from December 24, 2004 to December 31, 2004, have been derived from the consolidated audited financial statements of Cooper-Standard Holdings Inc. and its subsidiaries which have been audited by Ernst & Young LLP, independent registered public accountants.
The selected financial data referred to as the Predecessor financial data as of December 31, 2003 and for the period from January 1, 2004 to December 23, 2004 and the year ended December 31, 2003 have been derived from the combined audited financial statements of the automotive segment of Cooper Tire, which have been audited by Ernst & Young LLP, independent registered public accountants. The information reflects our business as it historically operated within Cooper Tire, and includes certain assets and liabilities that we did not acquire or assume as part of the 2004 Acquisition. Also, on December 23, 2004, Cooper-Standard Holdings Inc., which prior to the 2004 Acquisition never had any independent operations, purchased the automotive business represented in the historical Predecessor financial statements. As a result of applying the required purchase accounting rules to the 2004 Acquisition and accounting for the assets and liabilities that were not assumed in the 2004 Acquisition, our financial statements for the period following the acquisition were significantly affected. The application of purchase accounting rules required us to revalue our assets and liabilities, which resulted in different accounting bases being applied in different periods. As a result, historical combined financial data included in this prospectus in Predecessor statements may not reflect what our actual financial position, results of operations, and cash flows would have been had we operated as a separate, stand-alone company as of and for those periods presented.
The audited consolidated financial statements as of December 31, 2005, 2006 and 2007 are included elsewhere in this prospectus. See ‘‘Financial Statements.’’
You should read the following data in conjunction with ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and the consolidated financial statements of our parent, Cooper-Standard Holdings Inc., and its subsidiaries included elsewhere in this prospectus (in millions).
2004 to
December 23,
2004
2004 to
December 31,
2004
December 31,
2005
December 31,
2006
December 31,
2007 Statement of operations10
2004 to
December 23,
2004
2004 to
December 31,
2004
December 31,
2005
December 31,
2006
December 31,
2007 Statement of cash flows data11
Risk Factors
Risk Factors
You should carefully consider the following risk factors and all other information contained in this prospectus. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us.
Risks Relating to Our Leverage
Our substantial leverage could harm our business by limiting our available cash and our access to additional capital and, to the extent of our variable rate indebtedness, exposes us to interest rate risk.
We are highly leveraged. As of December 31, 2007, our total consolidated indebtedness was $1,140.2 million. Our leverage increased upon the closing of our acquisition of MAPS, because we financed part of the acquisition with an incremental term loan under the Second Amendment to the Credit Agreement.
Our high degree of leverage could have important consequences, including:
Our cash paid for interest for the year ended December 31, 2007 was $87.6 million, which excludes the amortization of $4.9 million of debt issuance costs. At December 31, 2007, we had $554.3 million of debt with floating interest rates, including $270.3 million managed by the use of interest rate swap contracts to convert the variable rate characteristic to fixed rate. If interest rates increase, assuming no principal repayments or use of financial derivatives, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash available for servicing our indebtedness, including the notes, would decrease. After considering the effects of certain interest rate swap contracts we entered into during 2007, a 1% increase in the average interest rate of our variable rate indebtedness would increase future interest expense by approximately $2.8 million per year.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
The senior credit agreement and the indentures under which the notes were issued contain a number of significant covenants that, among other things, restrict our ability to:
12
In addition, under the senior credit agreement, we are required to satisfy specified financial ratios and tests. Our ability to comply with those provisions may be affected by events beyond our control, and may limit our ability to comply with those required ratios and tests.
Risks Relating to Our Business
We are highly dependent on the automotive industry.
Our customers are automobile manufacturers and their suppliers whose production volumes are dependent upon general economic conditions and the level of consumer spending. The volume of global vehicle production has fluctuated considerably from year to year, and such fluctuations may give rise to fluctuations in the demand for our products. Demand for new vehicles fluctuates in response to overall economic conditions and is particularly sensitive to changes in interest rates, consumer confidence, and fuel costs. In addition, to the extent our production volumes have been positively impacted by OEM new vehicle sales incentives, these sales incentives may not be sustained or may cease to favorably impact our sales. If any of these or other factors leads to a decline in new vehicle production, our results of operations could be materially adversely affected. Further, to the extent that the financial condition of any of our largest customers deteriorates or results in bankruptcy, our financial position and operating results could be materially adversely affected.
Increasing competitiveness in the automotive industry has also led OEMs to pressure us to lower prices we charge for our products. Price reductions have impacted our sales and profit margins. If we are not able to offset price reductions through improved operating efficiencies and reduced expenditures, price reductions may have a material adverse effect on our results of operations.
Increasing costs for or reduced availability of manufactured components and raw materials may adversely affect our profitability.
The principal raw materials we purchase include fabricated metal-based components, synthetic rubber, carbon black, and natural rubber. Raw materials comprise the largest component of our costs, representing approximately 49% of our total costs during the year ended December 31, 2007. A significant increase in the price of these items could materially increase our operating costs and materially and adversely affect our profit margins because it is generally difficult to pass through these increased costs to our customers. For example, we have experienced significant price increases in our raw steel and steel-related component purchases as a result of increased global demand. Our largest single raw material purchase is steel, and it comprised approximately 11% of our total material costs during the year ended December 31, 2007.
Because we purchase various types of raw materials and manufactured components, we may be materially and adversely affected by the failure of our suppliers of those materials to perform as expected. This non-performance may consist of delivery delays or failures caused by production issues or delivery of non-conforming products. The risk of non-performance may also result from the insolvency or bankruptcy of one or more of our suppliers. Our suppliers’ ability to supply products to us is also subject to a number of risks, including availability of raw materials, such as steel and natural rubber, destruction of their facilities, or work stoppages. In addition, our failure to promptly pay, or
13
order sufficient quantities of inventory from our suppliers may increase the cost of products we purchase or may lead to suppliers refusing to sell products to us at all. Our efforts to protect against and to minimize these risks may not always be effective.
Our business would be materially and adversely affected if we lost a significant portion of business from any of our largest customers.
For the year ended December 31, 2007, approximately 27%, 20%, and 8% of our sales were to Ford, General Motors, and Chrysler, respectively. To compete effectively, we must continue to satisfy these and other customers’ pricing, service, technology, and increasingly stringent quality and reliability requirements. Additionally, our revenues may be affected by decreases in these three manufacturers’ businesses or market shares. The market shares of these customers have declined in recent years and may continue to decline in the future. We cannot provide any assurance that we will be able to maintain or increase our sales to these or any other customers. The loss of, or significant reduction in purchases by, one of these major customers or the loss of all of the contracts relating to certain major platforms of one of these customers could materially and adversely affect our results of operations.
We could be adversely affected if we are unable to continue to compete successfully in the highly competitive automotive parts industry.
The automotive parts industry is highly competitive. We face numerous competitors in each of the product lines we serve. In general, there are three or more significant competitors for most of the products offered by our company and numerous smaller competitors. We also face increased competition for certain of our products from suppliers producing in lower-cost countries such as Korea and China, especially for certain lower-technology noise, vibration and harshness control products that have physical characteristics that make long-distance shipping more feasible and economical. We may not be able to continue to compete favorably and increased competition in our markets may have a material adverse effect on our business.
We are subject to other risks associated with our non-U.S. operations.
We have significant manufacturing operations outside the United States, including joint ventures and other alliances. Our operations are located in 18 countries and we export to several other countries. In 2007, approximately 66% of our net sales originated outside the United States. Risks are inherent in international operations, including:
These and other factors may have a material adverse effect on our international operations or on our business, results of operations, and financial condition. For example, we are faced with potential difficulties in staffing and managing local operations and we have to design local solutions to manage credit risks of local customers and distributors. Also, the cost and complexity of streamlining operations in certain European countries is greater than would be the case in the United States, due primarily to labor laws in those countries that can make reducing employment levels more time-consuming and expensive than in the United States. Our flexibility in our foreign operations can also be somewhat limited by agreements we have entered into with our foreign joint venture partners.
Our overall success as a global business depends, in part, upon our ability to succeed in differing economic, social, and political conditions. We may not continue to succeed in developing and implementing policies and strategies that are effective in each location where we do business, and failure to do so could harm our business, results of operations, and financial condition.
14
Our sales outside the United States expose us to currency risks. During times of a strengthening U.S. dollar, at a constant level of business, our reported international sales and earnings will be reduced because the local currency will translate into fewer U.S. dollars. In addition to currency translation risks, we incur a currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from the currency in which it receives revenues. Given the volatility of exchange rates, we may not be able to manage our currency transaction and/or translation risks effectively, or volatility in currency exchange rates may have a material adverse effect on our financial condition or results of operations.
Our lean manufacturing and other cost savings plans may not be effective.
Our operations strategy includes cutting costs by reducing product errors, inventory levels, operator motion, overproduction, and waiting while fostering the increased flow of material, information, and communication. The cost savings that we anticipate from these initiatives may not be achieved on schedule or at the level anticipated by management. If we are unable to realize these anticipated savings, our operating results and financial condition may be adversely affected. Moreover, the implementation of cost saving plans and facilities integration may disrupt our operations and performance.
We may incur material losses and costs as a result of product liability and warranty and recall claims that may be brought against us.
We may be exposed to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury and/or property damage. Accordingly, we could experience material warranty or product liability losses in the future and incur significant costs to defend these claims.
In addition, if any of our products are, or are alleged to be, defective, we may be required to participate in a recall of that product if the defect or the alleged defect relates to automotive safety. Our costs associated with providing product warranties could be material. Product liability, warranty, and recall costs may have a material adverse effect on our business, results of operations, and financial condition.
Work stoppages or similar difficulties could disrupt our operations.
As of December 31, 2007, approximately 44% of our employees were represented by unions, and approximately 16% of our employees were union represented employees located in the United States. It is possible that our workforce will become more unionized in the future. A work stoppage at one or more of our plants may have a material adverse effect on our business. Collective bargaining agreements at three of our North American facilities are due to expire in 2008, and we will be engaged in negotiations with unions at these facilities with respect to new contracts. Unionization activities could also increase our costs, which could have an adverse effect on our profitability.
We may be subject to work stoppages and may be, affected by other labor disputes. Additionally, a work stoppage at one or more of our customers or our customers’ suppliers could adversely affect our operations if an alternative source of supply were not readily available. Stoppages by employees of our customers also could result in reduced demand for our products and have material adverse effect on our business.
Our success depends in part on our development of improved products, and our efforts may fail to meet the needs of customers on a timely or cost-effective basis.
Our continued success depends on our ability to maintain advanced technological capabilities, machinery, and knowledge necessary to adapt to changing market demands as well as to develop and commercialize innovative products. We may not be able to develop new products as successfully as in the past or be able to keep pace with technological developments by our competitors and the industry generally. In addition, we may develop specific technologies and capabilities in anticipation of customers’ demands for new innovations and technologies. If such demand does not materialize, we
15
may be unable to recover the costs incurred in such programs. If we are unable to recover these costs or if any such programs do not progress as expected, our business, financial condition, or results of operations could be materially adversely affected.
Our ability to operate our company effectively could be impaired if we fail to attract and retain key personnel.
Our ability to operate our business and implement our strategies depends, in part, on the efforts of our executive officers and other key employees. In addition, our future success will depend on, among other factors, our ability to attract and retain other qualified personnel, particularly research and development engineers and technical sales professionals. The loss of the services of any of our key employees or the failure to attract or retain other qualified personnel could have a material adverse effect on our business or business prospects.
Our Sponsors may have conflicts of interest with us in the future.
Our Sponsors beneficially own approximately 98.5% of the outstanding shares of our common stock. Additionally, we have entered into a stockholders’ agreement with the Sponsors that grants them certain preemptive rights to purchase additional equity and rights to designate members of our Board of Directors. As a result, our Sponsors have control over our decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of stockholders regardless of whether or not other stockholders or noteholders believe that any such transactions are in their own best interests.
Additionally, our Sponsors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsors may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. So long as our Sponsors continue to own a significant amount of the outstanding shares of our common stock, even if such amount is less than 50%, they will continue to be able to strongly influence or effectively control our decisions.
Our intellectual property portfolio is subject to legal challenges.
We have developed and actively pursue developing proprietary technology in the automotive industry and rely on intellectual property laws and a number of patents in many jurisdictions to protect such technology. However, we may be unable to prevent third parties from using our intellectual property without authorization. If we had to litigate to protect these rights, any proceedings could be costly, and we may not prevail. We also face increasing exposure to the claims of others for infringement of intellectual property rights. We may have material intellectual property claims asserted against us in the future and could incur significant costs or losses related to such claims.
Our pension plans are currently underfunded and we may have to make cash payments to the plans, reducing the cash available for our business.
We sponsor various pension plans worldwide that are underfunded and will require cash payments. Additionally, if the performance of the assets in our pension plans does not meet our expectations, or if other actuarial assumptions are modified, our required contributions may be higher than we expect. If our cash flow from operations is insufficient to fund our worldwide pension liability, we may be forced to reduce or delay capital expenditures, seek additional capital, or seek to restructure or refinance our indebtedness.
As of December 31, 2007, our $256.0 million projected benefit obligation (‘‘PBO’’) for U.S. pension benefit obligations exceeded the fair value of the relevant plans’ assets, which totaled $225.0 million, by $31.0 million. Additionally, the international employees’ plans’ PBO exceeded plan assets by approximately $80.4 million at December 31, 2007. The PBO for other postretirement benefits (‘‘OPEB’’) was $80.9 million at December 31, 2007. Our estimated funding requirement for
16
pensions and OPEB during 2008 is approximately $37.0 million. Net periodic pension costs for U.S. and international plans, including pension benefits and OPEB, were $24.8 million and $19.1 million for the years ended December 31, 2006 and 2007, respectively. See ‘‘Notes to Consolidated Financial Statements’’ (especially Notes 9 and 10).
We are subject to a broad range of environmental, health, and safety laws and regulations, which could adversely affect our business and results of operations.
We are subject to a broad range of federal, state, and local environmental and occupational safety and health laws and regulations in the United States and other countries, including those governing emissions to air, discharges to water, noise and odor emissions; the generation, handling, storage, transportation, treatment, and disposal of waste materials; the cleanup of contaminated properties; and human health and safety. We may incur substantial costs associated with hazardous substance contamination or exposure, including cleanup costs, fines, and civil or criminal sanctions, third party property or natural resource damage, or personal injury claims, or costs to upgrade or replace existing equipment, as a result of violations of or liabilities under environmental laws or non-compliance with environmental permits required at our locations. In addition, many of our current and former facilities are located on properties with long histories of industrial or commercial operations and some of these properties have been subject to certain environmental investigations and remediation activities. Because some environmental laws (such as the Comprehensive Environmental Response, Compensation and Liability Act) can impose liability for the entire cost of cleanup upon any of the current or former owners or operators, retroactively and regardless of fault, we could become liable for investigating or remediating contamination at these or other properties (including offsite locations). We may not always be in complete compliance with all applicable requirements of environmental law or regulation, and we may incur material costs or liabilities in connection with such requirements. In addition, new environmental requirements or changes to existing requirements, or in their enforcement, could have a material adverse effect on our business, results of operations, and financial condition. We have made and will continue to make expenditures to comply with environmental requirements. While our costs to defend and settle claims arising under environmental laws in the past have not been material, such costs may be material in the future. For more information about our environmental compliance and potential environmental liabilities, see ‘‘Our Business—Environmental.’’
If our acquisition strategy is not successful, we may not achieve our growth and profit objectives.
We may selectively pursue complementary acquisitions in the future as part of our growth strategy. While we will evaluate business opportunities on a regular basis, we may not be successful in identifying any attractive acquisitions. We may not have, or be able to raise on acceptable terms, sufficient financial resources to make acquisitions. In addition, any acquisitions we make will be subject to all of the risks inherent in an acquisition strategy, including integrating financial and operational reporting systems; establishing satisfactory budgetary and other financial controls; funding increased capital needs and overhead expenses; obtaining management personnel required for expanded operations; and funding cash flow shortages that may occur if anticipated sales and revenues are not realized or are delayed, whether by general economic or market conditions or unforeseen internal difficulties.
Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.’’
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, seek additional capital, or seek to restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and
17
resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. The senior credit facilities and the indentures under which the senior notes and the senior subordinated notes were issued restrict our ability to use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair and proceeds that we do receive may not be adequate to meet any debt service obligations then due.
Despite our current leverage, we may still be able to incur substantially more debt. This could further exacerbate the risks that we and our subsidiaries face.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Our revolving credit facilities provide commitments of up to $125.0 million, of which $101.0 million was available for future borrowings as of December 31, 2007.
Risks Relating to the Notes
Your right to receive payments on each series of notes is effectively junior to those lenders who have a security interest in our assets.
Our obligations under the notes and our guarantors’ obligations under their guarantees of the notes are unsecured, but our obligations under our senior credit facilities and each guarantor’s obligations under their respective guarantees of the senior credit facilities are secured by a security interest in substantially all of our domestic tangible and intangible assets and a portion of the stock of certain of our non-U.S. subsidiaries. In addition, obligations of our Canadian subsidiary borrower under the senior credit facilities are guaranteed by our wholly-owned Canadian subsidiaries and secured by substantially all of those Canadian subsidiaries’ tangible and intangible assets. If we are declared bankrupt or insolvent, or if we default under our senior credit facilities, the lenders could declare all of the funds borrowed thereunder, together with accrued interest, immediately due and payable. If we were unable to repay such indebtedness, the lenders could foreclose on the pledged assets to the exclusion of holders of the exchange notes, even if an event of default exists under the indentures under which the notes will be issued. Furthermore, if the lenders foreclose and sell the pledged equity interests in any subsidiary guarantor under the notes, then that guarantor will be released from its guarantee of the exchange notes automatically and immediately upon such sale. In any such event, because the notes will not be secured by any of our assets or the equity interests in subsidiary guarantors, it is possible that there would be no assets remaining from which your claims could be satisfied or, if any assets remained, they might be insufficient to satisfy your claims fully. See ‘‘Description of Other Indebtedness.’’
As of December 31, 2007, we had $609.7 million of senior secured indebtedness. Additionally, all borrowings under our $125 million revolving credit facilities will be senior secured indebtedness. The indentures permit the incurrence of substantial additional indebtedness by us and our restricted subsidiaries in the future, including secured indebtedness.
Claims of noteholders are structurally subordinate to claims of creditors of all of our non-U.S. subsidiaries because they do not guarantee the notes.
The notes are not guaranteed by any of our non-U.S. subsidiaries or our U.S. subsidiaries that are not wholly-owned. Accordingly, claims of holders of the notes are structurally subordinate to the claims of creditors of these non-guarantor subsidiaries, including trade creditors. All obligations of our non-guarantor subsidiaries will have to be satisfied before any of the assets of such subsidiaries would be available for distribution, upon a liquidation or otherwise, to us or a guarantor of the notes.
As of December 31, 2007, our non-guarantor subsidiaries had total indebtedness of approximately $55.0 million (excluding non-guarantor subsidiaries’ intercompany liabilities, our non-U.S. indebtedness under our senior credit facilities and guarantees of our non-U.S. indebtedness under our senior credit facilities).
Based on our historical records, our non-guarantor subsidiaries accounted for $1,435.8 million, or 57.2%, of our net sales (excluding non-guarantor subsidiaries’ intercompany sales to Cooper-Standard
18
Automotive Inc. and the guarantors of $28.5 million) for the year ended December 31, 2007, and $1,334.3 million, or 61.7%, of our assets and $613.8 million, or 32.4%, of our liabilities as of December 31, 2007, excluding all intercompany assets and liabilities.
We also have joint ventures and subsidiaries in which we own less than 100% of the equity so that, in addition to the structurally senior claims of creditors of those entities, the equity interests of our joint venture partners or other shareholders in any dividend or other distribution made by these entities would need to be satisfied on a proportionate basis with us. These joint ventures and less than wholly-owned subsidiaries may also be subject to restrictions on their ability to distribute cash to us in their financing or other agreements and, as a result, we may not be able to access their cash flow to service our debt obligations, including in respect of the notes.
Your right to receive payments on the senior subordinated notes will be junior to all of Cooper-Standard Automotive Inc.’s and the guarantors’ senior indebtedness, including Cooper-Standard Automotive Inc.’s and the guarantors’ obligations under the senior credit facilities, the senior notes and other existing and future senior debt.
The senior subordinated notes are general unsecured obligations that are junior in right of payment to all our existing and future senior indebtedness, including the senior credit facilities. The senior subordinated guarantees are general unsecured obligations of the guarantors that are junior in right of payment to all of the applicable guarantor’s existing and future senior indebtedness, including the applicable guarantor’s guarantee of the senior credit facilities and the senior notes.
Cooper-Standard Automotive Inc. and the guarantors may not pay principal, premium, if any, interest or other amounts on account of the senior subordinated notes or the senior subordinated guarantees in the event of a payment default or certain other defaults in respect of certain of our senior indebtedness, including debt under the senior credit facilities and the senior notes, unless the senior indebtedness has been paid in full in cash or cash equivalents or the default has been cured or waived. In addition, in the event of certain other defaults with respect to the senior indebtedness, Cooper-Standard Automotive Inc. or the guarantors may not be permitted to pay any amount on account of the senior subordinated notes or the applicable senior subordinated guarantees for a designated period of time.
Because of the subordination provisions in the senior subordinated notes and the senior subordinated guarantees, in the event of a bankruptcy, liquidation or dissolution of Cooper-Standard Automotive Inc. or any guarantor, Cooper-Standard Automotive Inc.’s or the guarantor’s assets will not be available to pay obligations under the senior subordinated notes or the applicable senior subordinated guarantee until Cooper-Standard Automotive Inc. or the guarantor has made all payments on its respective senior indebtedness. Cooper-Standard Automotive Inc. and the guarantors may not have sufficient assets after all these payments have been made to make any payments on the senior subordinated notes or the applicable senior subordinated guarantee, including payments of principal or interest when due.
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the notes.
Any default under the agreements governing our indebtedness, including a default under our senior credit facilities that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including our senior credit facilities), we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our revolving credit facilities could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against
19
our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to seek to obtain waivers from the required lenders under our senior credit facilities to avoid being in default. If we breach our covenants under our senior credit facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our senior credit facilities, the lenders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. See ‘‘Description of Other Indebtedness—Senior Credit Facilities’’ and ‘‘Description of the Notes.’’
Cooper-Standard Automotive Inc. may not be able to repurchase the notes upon a change of control.
Upon the occurrence of specific kinds of change of control events, Cooper-Standard Automotive Inc. will be required to offer to repurchase all outstanding notes at 101% of their principal amount, plus accrued and unpaid interest, unless such notes have been previously called for redemption. We may not have sufficient financial resources to purchase all of the notes that are tendered upon a change of control offer. The occurrence of a change of control could also constitute an event of default under our senior credit facilities. Our bank lenders may have the right to prohibit any such purchase or redemption, in which event we will seek to obtain waivers from the required lenders under the senior credit facilities, but may not be able to do so. See ‘‘Description of the Notes—Change of Control.’’
Your ability to transfer the notes may be limited by the absence of an active trading market, and there is no assurance that any active trading market will develop for the notes.
We have not and do not intend to apply for a listing of the notes on a securities exchange or on any automated dealer quotation system. There is currently no established market for the notes and we cannot assure you as to the liquidity of markets that may develop for the notes, your ability to sell the notes or the price at which you would be able to sell the notes. If such markets were to exist, the notes could trade at prices that may be lower than their principal amount or purchase price depending on many factors, including prevailing interest rates, the market for similar notes, our financial and operating performance and other factors. No one is obligated to make a market with respect to the notes and any market making with respect to the notes may be discontinued at any time without notice. In addition, such market making activity may be limited during the pendency of the exchange offer or the effectiveness of a shelf registration statement in lieu thereof. Therefore, we cannot assure you that an active market for the notes will develop or, if developed, that it will continue. Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the notes. The market, if any, for the notes may experience similar disruptions and any such disruptions may adversely affect the prices at which you may sell your notes.
20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes ‘‘forward-looking statements’’ within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. 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 and, in particular, appear under ‘‘Summary,’’ ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and ‘‘Our Business.’’ When used in this prospectus, the words ‘‘estimates,’’ ‘‘expects,’’ ‘‘anticipates,’’ ‘‘projects,’’ ‘‘plans,’’ ‘‘intends,’’ ‘‘believes,’’ ‘‘forecasts,’’ or future or conditional verbs, such as ‘‘will,’’ ‘‘should,’’ ‘‘could’’ 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.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus or incorporated by reference in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this prospectus are set forth in this prospectus or incorporated by reference in this prospectus, including under ‘‘Risk Factors.’’
As stated elsewhere in this prospectus, 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; our conducting operations outside the United States; the uncertainty of our ability to achieve expected Lean 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 new status as a stand-alone company; our legal rights to our intellectual property portfolio; our underfunded pension plans; 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 prospectus and are expressly qualified in their entirety by the cautionary statements included in this prospectus. 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.
21
RATIO OF EARNINGS TO FIXED CHARGES
December 23,
December 31,For purposes of calculating the ratio of earnings to fixed charges, earnings represents earnings from continuing operations before income taxes, less income from equity method investments, plus minority interest expense and fixed charges. Fixed charges include interest expense and the portion of operating rental expense which management believes is representative of the interest component of rent expense (assumed to be 33%). Our fixed charges exceeded our earnings by $119.6 million during the period ended December 31, 2007. Our fixed charges exceeded our earnings by $15.0 million during the period ended December 31, 2006. Our fixed charges exceeded our earnings by $6.3 million during the period from December 24, 2004 to December 31, 2004.
USE OF PROCEEDS
This prospectus is delivered in connection with the sale of notes by Goldman, Sachs & Co. in market-making transactions. We will not receive any of the proceeds from such transactions.
22
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis of our financial condition and results of operations cover periods subsequent to the 2004 Transaction. You should read the following discussion together with the sections entitled ‘‘Risk Factors,’’ ‘‘Selected Historical Financial Data’’ in the ‘‘Summary,’’ and the historical combined financial statements of Cooper-Standard included elsewhere in this prospectus.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this prospectus. The following discussion of our financial condition and results of operations contains certain forward-looking statements relating to our anticipated future financial condition and operating results and our current business plans. In the future, our financial condition and operating results could differ materially from those discussed herein and our current business plans could be altered in response to market conditions and other factors beyond our control. Important factors that could cause or contribute to such differences or changes include those discussed elsewhere in this prospectus. See ‘‘Special Note Regarding Forward-Looking Statements’’ and ‘‘Risk Factors.’’
Basis of Presentation
Prior to the 2004 Acquisition, the automotive segment of Cooper Tire & Rubber Company (referred to as the ‘‘Predecessor’’) did not operate as a stand-alone business, but as a reportable business segment of Cooper Tire & Rubber Company (‘‘Cooper Tire’’). The financial information of the Predecessor represents the combined results of operations and cash flows of the automotive business segment of Cooper Tire and reflects the historical basis of accounting without any application of purchase accounting for the 2004 Acquisition. The financial information of the Company following the 2004 Acquisition (referred to as the ‘‘Successor’’) included in this prospectus represents our consolidated financial position as of December 31, 2006 and 2007 and our consolidated results of operations and cash flows for the years ended December 31, 2005, 2006 and 2007 and reflects the application of purchase accounting.
Company Overview
We design, manufacture, and sell body sealing, NVH control and fluid handling components, systems, subsystems, and modules for use in passenger vehicles and light trucks manufactured by global OEMs. In 2007, approximately 80% of our sales consisted of original equipment sold directly to the OEMs for installation on new vehicles. The remaining 20% of our sales were primarily to Tier I and Tier II suppliers. Accordingly, sales of our products are directly affected by the annual vehicle production of OEMs, and in particular the production levels of the vehicles for which we provide specific parts. In most cases, our products are custom designed and engineered for a specific vehicle platform. Our sales and product development personnel frequently work directly with the OEMs’ engineering departments in the design and development of our various products.
Although each OEM may emphasize different requirements as the primary criteria for judging its suppliers, we believe success as an automotive supplier generally requires outstanding performance with respect to price, quality, service, performance, design and engineering capabilities, innovation, and timely delivery. As such, we believe our continued commitment to investment in our engineering and design capability, including enhanced computerized software design capabilities, is important to future success, and many of our present initiatives are designed to enhance these capabilities. To remain competitive we must also consistently achieve cost savings; we believe we will continue to be successful in our efforts to improve our engineering, design and manufacturing processes, and implement our Lean initiatives.
Our OEM sales are generally based upon purchase orders issued by the OEMs and as such we do not have a backlog of orders at any point in time. Once selected to supply products for a particular platform, we typically supply those products for the platform life, which is normally six to eight years, although there is no guarantee that this will occur. In addition, when we are the incumbent supplier to a given platform, we believe we have an advantage in winning the redesign or replacement platform.
23
We provide parts to virtually every major global OEM for use on a multitude of different platforms. However, we generate a significant portion of our sales from the Detroit 3. For the year ended December 31, 2007, our sales to the global operations of Ford, General Motors, and Chrysler comprised approximately 27%, 20%, and 8% of our net sales, respectively. Significant reduction of our sales to or the loss of any one of these customers or any significant reduction in these customers’ market shares could have a material adverse effect on our financial results.
While approximately 61% of sales are generated in North America, we maintain sales offices in strategic locations throughout the world to provide support and service to our global OEM customers. We continue to expand internationally. In July 2005, we purchased the Atlacomulco hose manufacturing business in Mexico. In the fourth quarter of 2005, we purchased a 20% equity interest in Korea-based Guyoung, a supplier to Korean automotive OEMs, and entered into a Cooperation Agreement with Guyoung in order to expand the customer base of both companies worldwide. In February 2006, we acquired the FHS business and included automotive fluid handling business and facilities in Europe, Asia, Mexico, and Australia. In November 2006, we entered into a joint venture agreement with Jingda. This joint venture, known as Cooper-Standard Jingda Automotive Co., Ltd, sells and provides technical support and after-sale service for fluid handling systems, including brake and fuel lines, steering systems, cooling and heating systems and emission control devices. In March of 2007, we completed the acquisition of the El Jarudo business. This business is located in Juarez, Mexico and is a producer of automotive fuel rails. In 2007, a new sealing manufacturing facility was constructed in Poland. This expansion positions us for continued growth in Eastern Europe and is also part of our strategy to selectively relocate facilities to lower cost countries. In August of 2007, we completed the acquisition of MAPS, including nine sealing systems operations in Germany, Italy, Poland, Belarus, and Belgium, and a joint venture interest in China. In December of 2007, we completed the acquisition of a 74% joint venture interest in MAP India, a leading manufacturer of automotive sealing products in India.
Historically, our operations in Canada and Western Europe have not presented materially different risks or problems from those we have encountered in the United States, although the cost and complexity of streamlining operations in certain European countries is greater than would be the case in the United States. This is due primarily to labor laws in those countries that can make reducing employment levels more time-consuming and expensive than in the United States. We believe the risks of conducting business in less developed markets, including Brazil, Mexico, Poland, Czech Republic, China, Korea, Belarus and India are sometimes greater than in the U.S., Canadian, and Western European markets. This is due to the potential for currency volatility, high interest, inflation rates, and the general political and economic instability that are associated with these markets.
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 14.4 million units in 2008 as compared to 15.1 million units in 2007. European production levels in 2008 are expected to be 22.0 million units as compared to 21.7 million units in 2007. Light vehicle production in South America is expected to increase to 4.0 million units in 2008 from 3.6 million units in 2007. Asia Pacific production levels in 2008 are expected to be 28.6 million units as compared to 26.5 million units in 2007.
Competition in the automotive supplier industry is intense and has increased in recent years as OEMs have demonstrated a preference for stronger relationships with fewer suppliers. There are typically three or more significant competitors and numerous smaller competitors for most of the products we produce, and competition can always arise from new sources. For example, certain of our products have experienced new competition from lower cost imports from Korea and China. We continue to address this challenge with a combination of North American cost reductions and our own Asian sourcing.
24
Pricing pressure is also prevalent as competition for market share among U.S.-based OEMs, has reduced the overall profitability of the industry and resulted in continued pressure on suppliers for price concessions. The market shares of the Detroit 3, which are our three largest customers, have declined in recent years and may continue to decline in the future. This pricing pressure along with current higher material costs will continue to drive our focus on implementing Lean initiatives to achieve cost savings and selectively consolidate and relocate facilities to optimize our cost structure.
Another trend affecting our business is the global expansion of our customers. Consolidation among the OEMs in recent years has resulted in a smaller number of very large global customers that increasingly require their suppliers to serve them on a global basis. We have expanded our business globally and believe we have the size, geographic breadth, and resources to actively participate in this trend. We have accomplished this via a combination of organic growth, acquisitions and joint ventures, which we believe have ensured that we provide the same high levels of quality, service, and design and engineering support that we provide in our domestic markets.
Lastly, OEMs have shifted some research and development, design, and testing responsibility to suppliers, while at the same time shortening new product cycle times. To remain competitive, suppliers must have state-of-the-art engineering and design capabilities and must be able to continuously improve their engineering, design, and manufacturing processes to effectively service the customer. Suppliers are increasingly expected to collaborate on or assume the product design and development of key automotive components, and to provide value added solutions under more stringent time frames.
In the year ended December 31, 2007, our business was negatively impacted by reduced OEM production volumes on certain platforms in North America. According to CSM Worldwide, actual North America and Europe light vehicle production volumes for the year ended December 31, 2007 were 15.1 million and 21.7 million units, respectively, as compared to 15.3 million and 20.4 million units, respectively, for the year ended December 31, 2006. Additionally, we continued to experience significant pricing pressure from our customers as well as significant increases in certain raw material prices, especially oil based components, synthetic rubber, and other compounding materials. Our contracts typically do not allow us to pass these price increases on to our customers, although we have had some success incorporating these increases into some commercial negotiations. These negative impacts were partially offset by favorable foreign currency translation. Our performance in 2007 has been, and will continue to be, impacted by changes in light vehicle production volumes, platform mix, customer pricing pressures, and the cost of raw materials.
25
Results of Operations
Year ended December 31, 2007 Compared to Year Ended December 31, 2006
Net Sales: Our net sales increased from $2,164.3 million in 2006 to $2,511.2 million in 2007, an increase of $346.9 million, or 16.0%. The increase resulted primarily from the acquisition of MAPS and El Jarudo, favorable foreign exchange rates ($86.9 million) and higher unit sales volume partially offset by customer price concessions. In North America, our sales increased by $67.0 million primarily due to the acquisition of El Jarudo and $20.2 million of favorable foreign currency translation, partially offset by lower unit sales volumes and customer price concessions. In our international operations, a sales increase of $279.9 million was attributable to a combination of factors including the acquisition of MAPS, $66.7 million favorable impact of foreign currency translation and higher unit sales volumes partially offset by customer price concessions.
Gross Profit: Gross profit increased $64.9 million to 15.8% of sales in 2007, as compared to 15.4% of sales in 2006. This increase resulted primarily from the acquisition of MAPS and El Jarudo combined with the favorable impact of various cost saving initiatives and favorable foreign exchange rates, partially offset by customer price concessions and increased material costs.
Operating Profit (Loss): Operating loss in 2007 was $29.6 million compared to an operating profit reported in 2006, of $64.3 million. This decrease is primarily due to the impairment charges of $146.4 million and an increase in selling, administration and engineering expenses primarily due to the acquisitions of MAPS and El Jarudo, partially offset by gross profit increase of $64.9 million.
Impairment Charges: In 2007 we recorded a goodwill impairment charge of $142.9 million and write off charges of $3.5 million related to certain intangible assets within the North America Fluid reporting unit of our Fluid segment. These charges result from a recent and projected decline in anticipated production volumes and a change in the production mix for certain key platforms in North America since the 2004 acquisition as well as the impact of recent increases in material costs and customer price concessions in North America. In 2006, as a result of operating results in the Body & Chassis reportable segment, we recorded a goodwill impairment charge of $7.5 million and impairment charges of $5.8 million related to certain developed technology intangible assets. The impairment was recognized in our NVH segment in 2006. During 2007 we revised our segments and the NVH segment was combined with the Sealing segment to create the Body & Chassis segment.
Interest Expense, net: Interest expense increased by $2.4 million in 2007, primarily due to increased indebtedness resulting from the acquisition of MAPS and amortization of issuance costs associated with such borrowings.
26
Other Income (Expense): Other expense was $1.1 million in 2007 as a result of foreign currency losses of $0.5 million and minority interest expense of $0.6 million. Other income of $7.0 million in 2006 was primarily a result of a $4.1 million net gain related to the purchase of Senior Subordinated Notes, foreign exchange gains of $3.8 million, offset by a minority interest loss of $0.9 million.
Provision for Income Tax Expense (Benefit): Income taxes changed from a benefit of $7.2 million for an effective rate 46.2% in 2006 to an income tax expense of $32.9 million for an effective rate of (27.9%) in 2007. Tax expense in 2007 is primarily a result of the nondeductible nature of the goodwill impairment charge; valuation allowances recorded on tax losses and credits generated in the U.S.; tax rate changes enacted during 2007 in the Czech Republic, Canada, Germany, Spain and the United Kingdom resulting in additional expense related to the impact of deferred taxes recorded in those jurisdictions; the distribution of income between the U.S. and foreign sources; and other non-recurring discrete items. In 2006, the Company provided a benefit for net operating losses in the U.S. until that point when deferred tax assets exceeded the related liabilities and the recoverability was no longer assured beyond a reasonable doubt.
Year ended December 31, 2006 Compared to Year Ended December 31, 2005
Net Sales: Our net sales increased from $1,827.4 million in 2005 to $2,164.3 million in 2006, an increase of $336.8 million, or 18.4%. The increase resulted primarily from the acquisition of FHS and favorable foreign exchange rates ($36.5 million), partially offset by lower unit sales volumes in North America and customer price concessions. In North America, our sales increased by $209.7 million primarily due to the acquisition of FHS and $21.7 million of favorable foreign currency translation, partially offset by lower unit sales volumes and customer price concessions. In our international operations, a sales increase of $127.1 million was attributable to the acquisition of FHS and $14.8 million favorable impact of foreign currency translation, partially offset by lower unit sales volumes on certain platforms and customer price concessions.
Gross Profit: Gross profit increased $55.1 million to 15.4% of sales in 2006, as compared to 15.2% of sales in 2005. This increase resulted primarily from the acquisition of FHS combined with the favorable impact of various cost saving initiatives, partially offset by customer price concessions and increased material costs.
Operating Profit: Operating profit in 2006 was $12.0 million lower than the operating profit reported in 2005, decreasing from $76.3 million to $64.3 million. This is primarily due to impairment of Body & Chassis segment ($13.2 million), increased restructuring costs ($20.9 million) and amortization of intangibles ($2.9 million), as well as increased selling, administration, and engineering expenses ($30.0 million). Such items were partially offset by gross profit increase of $55.1 million. Selling, administration, and engineering expenses were higher in 2006 by 17.7%, primarily due to the inclusion of FHS, partially offset by cost savings and restructuring initiatives.
Amortization of Intangibles: Amortization increased by $2.9 million in 2006 due to the amortization of intangible assets recorded as a result of the acquisition of FHS.
Impairment Charges: As a result of declining operating results in our Body & Chassis reportable segment, we recorded a goodwill impairment charge of $7.5 million and impairment charges of $5.8 million related to Body & Chassis developed technology intangible assets. The impairment was recognized in our NVH segment in 2006. During 2007 we revised our segments and the NVH segment was combined with the Sealing segment to create the Body & Chassis segment.
Interest Expense, net: Interest expense increased by $20.6 million in 2006, primarily due to indebtedness used to finance the acquisition of FHS and amortization of issuance costs associated with such borrowings.
Other Income (Expense): Other income was $7.0 million in 2006 as compared to an expense of $1.3 million in 2005. This was primarily due to a $4.1 million net gain related to the purchase of Senior Subordinated Notes and the increased foreign exchange gain of $3.9 million.
Provision for Income Tax Expense (Benefit): Our effective tax rate changed from an expense of 21.2% in 2005 to a benefit of 46.2% in 2006 due primarily to the mix of earnings between jurisdictions
27
in which tax benefits on taxable losses can be realized and jurisdictions in which they can not be realized and the benefit of tax credits.
Segment Results of Operations
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Body & Chassis: Sales increased $217.2 million, or 19.7%, primarily due to the acquisition of MAPS, higher sales volumes and favorable foreign exchange ($47.6 million), partially offset by customer price concessions. Segment profit increased by $60.1 million as the result of favorable impact of various cost savings initiatives and the acquisition of MAPS, partially offset by higher raw material costs and customer price concessions.
Fluid: Sales increased $125.8 million, or 13.0%, primarily due to the acquisition of El Jarudo, the full year impact of the FHS acquisition, higher sales volumes, and favorable foreign exchange ($37.5 million), partially offset by customer price concessions. Segment profit decreased by $157.1 million as the result of impairment charges related to goodwill in the North America reporting unit ($142.9 million), and intangible assets ($3.5 million), customer price concessions, higher raw material costs, and increased restructuring costs ($4.3 million). Such items were partially offset by the inclusion of El Jarudo, favorable foreign exchange, and the favorable impact of various cost savings initiatives.
Asia Pacific: Sales increased $3.8 million, or 4.1%, primarily due to favorable foreign exchange ($1.8 million) and higher sales volume, partially offset by customer price concessions. Segment loss increased by $5.4 million as a result of start up related costs for operations in this region, partially offset by the favorable impact of various cost savings initiatives.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Body & Chassis: Sales decreased $43.6 million, or 3.8%, primarily due to lower sales volumes and customer price concessions, partially offset by favorable foreign exchange ($28.6 million). Segment loss increased by $18.5 million as the result of higher raw material costs, customer price concessions, lower sales volumes, increased restructuring of ($16.7 million) and impairment of goodwill ($7.5 million) and developed technology ($5.8 million), partially offset by the favorable impact of various cost savings initiatives.
Fluid: Sales increased $382.3 million, or 64.9%, primarily due to the acquisition of FHS, higher sales volumes, and favorable foreign exchange ($5.1 million), partially offset by customer price
28
concessions. Segment profit decreased by $3.0 million as the result of increased restructuring costs ($4.4 million), and amortization of intangible assets recorded as a result of the acquisition of FHS ($2.0 million). Such items are partially offset by the inclusion of FHS, favorable foreign exchange, and the favorable impact of various cost savings initiatives.
Asia Pacific: Sales decreased $1.8 million, or 2.0%, primarily due to lower sales volume, partially offset by favorable foreign exchange ($2.8 million). Segment loss increased by $5.4 million as the result of customer price concessions, partially offset by the favorable impact of various cost savings initiatives.
Off-Balance Sheet Arrangements
We have provided a guarantee of a portion of the bank loans made to NISCO, our joint venture with Nishikawa Rubber Company. This debt guarantee is required of the partners by the joint-venture agreement and serves to support the credit-worthiness of NISCO. On July 1, 2003, NISCO entered into an additional bank loan with the joint venture partners each guaranteeing an equal portion of the amount borrowed. In accordance with FASB Interpretation No. 45, ‘‘Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,’’ guarantees meeting the characteristics described in the Interpretation are required to be recorded at fair value. Our maximum exposure under the guarantee arrangements at December 31, 2007 was $0.5 million.
As of December 31, 2007 we had no other material off-balance sheet arrangements.
Liquidity and Capital Resources
Operating Activities: Cash flow provided by operations was $185.4 million in 2007, which included $9.9 million of changes in operating assets and liabilities. Cash flow provided by operations was $135.9 million in 2006, which included $2.4 million of changes in operating assets and liabilities. 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 was $260.0 million in 2007, which primarily consisted of acquisition cost of $158.7 million related to the acquisitions of El Jarudo, MAPS, and MAP India, capital spending of $107.3 million, less $4.8 million received from a sale leaseback transaction. This compared to $281.8 million in 2006, which primarily consisted of acquisition cost of $201.6 million related to the acquisition of FHS, capital spending of $82.9 million, reduced by $7.7 million received from NISCO as return on capital. We anticipate that we will spend approximately $125.0 million on capital expenditures in 2008.
Financing Activities: Net cash provided by financing activities totaled $55.0 million in 2007 as compared to net cash provided by financing activities of $147.6 million in 2006. The 2007 cash provided by financing activities was primarily comprised of proceeds from issuance of acquisition-related debt of $60.0 million, proceeds from issuance of stock of $30.0 million and a net increase of short term debt of $6.2 million, partially offset by normal debt repayments and voluntary prepayments on our term loans of $37.6 million and $3.1 million of debt issuance costs. The 2006 cash flow provided by financing activities was primarily comprised of proceeds from issuance of acquisition-related debt of $214.9 million, partially offset by normal debt payments and voluntary prepayments on our term loans of $46.8 million, the repurchase of a portion of the Senior Subordinated Notes for $14.9 million and $4.3 million of debt issuance costs.
Since the consummation of the 2004 Acquisition, we have been significantly leveraged. As of December 31, 2007, we have $1,140.2 million outstanding in aggregate indebtedness, with an additional $100.9 million of borrowing capacity available under our revolving credit facilities (after giving effect to $24.1 million of outstanding letters of credit). Our future liquidity requirements will likely be significant, primarily due to debt service obligations. Future debt service obligations may include required prepayments from annual excess cash flows, as defined, under our senior credit agreement commencing with the year ended December 31, 2008, which would be due 5 days after the
29
filing of our Form 10-K each year, or in connection with specific transactions, such as certain asset sales and the incurrence of debt not permitted under the senior credit agreement.
Senior Credit Facilities. Our senior credit facilities consist of revolving credit facilities and term loan facilities. Our revolving credit facilities provide for loans in a total principal amount of up to $125.0 million with a maturity of 2010. The senior credit facilities include a Term Loan A facility of the Canadian dollar equivalent of $51.3 million with a maturity of 2010, a Term Loan B facility of $115.0 million with a maturity of December 2011 and a Term Loan C facility of $185.0 million with a maturity of December 2011. The term loans were used to fund the 2004 Acquisition. As described below the Company also has a Term Loan D and Term Loan E facility.
The borrowings under the senior credit facilities denominated in US dollars bear interest at a rate equal to an applicable margin plus, at our or the Canadian Borrower’s option, as applicable, either (a) a base rate determined by reference to the higher of (1) the prime rate of Deutsche Bank Trust Company Americas (or another bank of recognized standing reasonably selected by Deutsche Bank Trust Company Americas) and (2) the federal funds rate plus 0.5% or (b) LIBOR rate determined by reference to the costs of funds for deposits in US dollars for the interest period relevant to such borrowing adjusted for certain additional costs. Borrowings under the senior credit facilities denominated in Canadian dollars bear interest at a rate equal to an applicable margin plus, at the Canadian Borrower’s option, either (a) an adjusted Canadian prime rate determined by reference to the higher of (1) the prime rate of Deutsche Bank AG, Canada Branch for commercial loans made in Canada in Canadian dollars and (2) the average rate per annum for Canadian dollar bankers’ acceptances having a term of 30 days that appears of Reuters Screen CDOR Page plus 0.75% or (b) bankers’ acceptances rate determined by reference to the average discount rate on bankers’ acceptances as quoted on Reuters Screen CDOR Page or as quoted by certain Canadian reference lenders.
In addition to paying interest on outstanding principal under the senior credit facilities, we are required to pay a commitment fee to the lenders under the revolving credit facilities in respect of the unutilized commitments thereunder at a rate equal to 0.50% per annum. We also pay customary letter of credit fees.
The Term Loan B facility and the Term Loan C facility amortize each year in an amount equal to 1% per annum in equal quarterly installments for the first six years and nine months, with the remaining amount payable on the date that is seven years from the date of the closing of the senior credit facilities. During 2007 we made voluntary prepayments totaling $15.0 million on the Term Loan B facility and $7.0 million on the Term Loan C facility. The Term Loan A facility amortizes in equal quarterly installments of C$1.538 million in 2005 and 2006, C$2.308 million in 2007 and 2008, and C$3.846 million in 2009 and 2010.
On February 6, 2006, in conjunction with the closing of the FHS acquisition, we amended our Senior Credit Facilities and closed on Term Loan D with a notional amount of $215.0 million. The amount of the additional term loan was based on the purchase price of the acquisition and anticipated transaction costs. Term Loan D matures on December 23, 2011 and carries terms and conditions similar to those found in the remainder of our Term B and C Facilities. Term Loan D was structured as two tranches, $190.0 million borrowed in U.S. dollars, and €20.7 million borrowed in Euros. The financing was split between currencies to take into consideration the value of the European assets acquired in the FHS transaction.
The Senior Credit Facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability, and the ability of our subsidiaries, to sell assets; incur additional indebtedness or issue preferred stock; repay other indebtedness (including the notes); pay certain dividends and distributions or repurchase our capital stock; create liens on assets; make investments, loans, or advances; make certain acquisitions; engage in mergers or consolidations; enter into sale and leaseback transactions; engage in certain transactions with affiliates; amend certain material agreements governing our indebtedness, including the notes; and change the business conducted by us and our subsidiaries.
30
On July 26, 2007, we entered into the Second Amendment to the Credit Agreement (the ‘‘Amendment’’), among Holdings, the Company, Cooper-Standard Automotive Canada Limited, a corporation organized under the laws of Ontario, Cooper-Standard International Holdings BV, a corporation organized under the laws of the Netherlands, the lenders party thereto, Deutsche Bank Trust Company Americas, as administrative agent, Lehman Commercial Paper Inc., as syndication agent, and Goldman Sachs Credit Partners, L.P., UBS Securities LLC and The Bank of Nova Scotia, as co-documentation agents. The Amendment permitted the MAPS acquisition and allows us to borrow up to €65.0 million through an incremental term loan under the Credit Agreement (as amended) to provide a portion of the funding necessary for the MAPS Acquisition and to pay related fees and expenses. The Amendment also expands the dual currency borrowing sub limit under the Revolving Credit Agreement to $35.0 million and adds Cooper-Standard International Holdings BV as a permitted borrower under this sub limit. The amendment includes other changes which increase our financial and operating flexibility, including amended financial covenants, expanded debt and investment baskets, and the ability to include the results of our non-consolidated joint ventures in the covenant calculations, among other things.
To finance part of the MAPS acquisition we borrowed €44.0 million under the Amendment discussed above. This borrowing was combined with the Euro tranche of the Term Loan D to create Term Loan E and as of December 31, 2007 had an outstanding balance of €64.1 million. We also borrowed $10.0 million under the Primary Revolving Credit Agreement, which was repaid in its entirety by September 30, 2007. In addition we borrowed €15.0 million under the dual-currency sub limit of the revolver, which was repaid in its entirety as of December 31, 2007.
Senior Notes and Senior Subordinated Notes
Our outstanding 7% Senior Notes due 2012 (the ‘‘Senior Notes’’) were issued under an Indenture, dated December 23, 2004 (the ‘‘Senior Indenture’’). Our 83/8% Senior Subordinated Notes (the ‘‘Senior Subordinated Notes’’) were also issued under an Indenture, dated December 23, 2004 (the ‘‘Subordinated Indenture’’ and, together with the Senior Indenture, the ‘‘Indentures’’). During 2006 we repurchased $19.5 million notional amount of our Senior Subordinated Notes for $14.9 million.
Interest on the Senior Notes accrues at the rate of 7% per annum and is payable semiannually in arrears on June 15 and December 15, commencing on June 15, 2005. The Company makes each interest payment to the holders of record of the Senior Notes on the immediately preceding June 1 and December 1.
Interest on the Senior Subordinated Notes accrues at the rate of 83/8% per annum and is payable semiannually in arrears on June 15 and December 15, commencing on June 15, 2005. The Company makes each interest payment to the holders of record of the Senior Subordinated Notes on the immediately preceding June 1 and December 1.
The indebtedness evidenced by the Senior Notes (a) is unsecured senior indebtedness of the Company, (b) ranks pari passu in right of payment with all existing and future senior indebtedness of the Company, and (c) is senior in right of payment to all existing and future Subordinated Obligations (as used in respect of the Senior Notes) of the Company. The Senior Notes are also effectively subordinated to all secured indebtedness and other liabilities (including trade payables) of the Company to the extent of the value of the assets securing such indebtedness, and to all indebtedness of its Subsidiaries (other than the subsidiaries that guarantee the Senior Notes).
The Indebtedness evidenced by the Senior Subordinated Notes is unsecured senior subordinated indebtedness of the Company, is subordinated in right of payment, as set forth in the Subordinated Indenture, to the prior payment in full in cash or temporary cash investments when due of all existing and future senior indebtedness of the Company, including the Company’s obligations under the Senior Notes and the Credit Agreement, ranks pari passu in right of payment with all existing and future senior subordinated indebtedness of the Company, and is senior in right of payment to all existing and future Subordinated Obligations (as used in respect of the Senior Subordinated Notes) of the Company. The Senior Subordinated Notes are also effectively subordinated to any secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness, and
31
to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries (other than the subsidiaries that guarantee the Senior Subordinated Notes).
Under each Indenture, upon the occurrence of any ‘‘change of control’’ (as defined in each Indenture), unless the Company has exercised its right to redeem all of the outstanding Notes of each holder of Notes of the applicable series shall have the right to require that the Company repurchase such noteholder’s Notes of such series at a purchase price in cash equal to 101% of the principal amount thereof on the date of purchase plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of the applicable Noteholders of record on the relevant record date to receive interest due on the relevant interest payment date). The change of control purchase feature of the Notes may in certain circumstances make more difficult or discourage a sale or takeover of the Company and, thus, the removal of incumbent management.
The Credit Agreement provides that the occurrence of certain change of control events with respect to us would constitute a default thereunder. The Company, its directors, officers, employees or affiliates may, from time-to-time, purchase or sell Senior Notes or Senior Subordinated Notes on the open market, subject to limits as specified in the credit agreement and, with respect to purchases of senior subordinated notes, limits in the senior notes indenture.
The Indentures governing the Senior Notes and Senior Subordinated Notes limit our (and most or all of our subsidiaries’) ability to:
Subject to certain exceptions, the Indentures governing the Senior Notes and Senior Subordinated Notes permit us and our restricted subsidiaries to incur additional indebtedness, including secured indebtedness.
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 limited, with exceptions that are either partially tied to similar financial ratios (in the case of the notes indentures) or are based on negotiated carveouts and baskets (in the case of the credit agreement). 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 Consolidated EBITDA are appropriate to provide additional information to investors to demonstrate compliance with our financing covenants. However, EBITDA and Consolidated 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 Consolidated 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 Consolidated EBITDA may not be comparable to similarly titled measures of other companies.
32
The following table reconciles net income to EBITDA and pro forma Indentures EBITDA under the credit agreement (dollars in millions):
December 31,
2005
December 31,
2006
December 31,
2007 Net income (loss)33
(11) Pro forma adjustments to MAPS reported EBITDA for the period from January 1, 2007 to August 31, 2007. (12) Pro forma adjustments to MAP India reported EBITDA for the period from January 1, 2007 to December 27, 2007. (13) The Company’s share of EBITDA in its joint ventures, net of equity earnings.Our covenant levels and ratios for the four quarters ended December 31, 2007 are as follows:
December 31,
2007
Thresholds Senior Credit FacilitiesIn addition, under the terms of our Credit Agreement, we are required to repay a portion of our credit facilities by a certain percentage, based on our leverage ratio, of our excess cash flow commencing with the year ended December 31, 2008. As a result, as of December 31, 2007, we did not have to make any additional mandatory repayment.
Working capital
Historically we have not generally experienced difficulties in collecting our accounts receivable because most of our customers are large, well-capitalized automobile manufacturers. We believe that we currently have a strong working capital position. As of December 31, 2007, we have net cash of $40.9 million. Our additional borrowing capacity through use of our senior credit facilities with our bank group and other bank lines is $100.9 million (after giving effect to $24.1 million of outstanding letters of credit).
Available cash and contractual commitments
The following table summarizes our contractual cash obligations at December 31, 2007. Our contractual cash obligations consist of legal commitments requiring us to make fixed or determinable cash payments, regardless of the contractual requirements of the vendor to provide future goods or services. Except as disclosed, this table does not include information on our recurring purchase of materials for use in production, as our raw materials purchase contracts typically do not meet this definition because they do not require fixed or minimum quantities.
1 year
5 YearsIn addition to our contractual obligations and commitments set forth in the table above, the Company has employment arrangements with certain key executives that provide for continuity of
34
management. These arrangements include payments of multiples of annual salary, certain incentives, and continuation of benefits upon the occurrence of specified events in a manner that is believed to be consistent with comparable companies.
We also have minimum funding requirements with respect our pension obligations. We expect to make cash contributions of approximately $33.0 million to our domestic and foreign pension plan asset portfolios in 2008. Our minimum funding requirements after 2008 will depend on several factors, including the investment performance of our retirement plans and prevailing interest rates. Our funding obligations may also be affected by changes in applicable legal requirements. We also have payments due with respect to our postretirement benefit obligations. We do not prefund our postretirement benefit obligations. Rather, payments are made as costs are incurred by covered retirees. We expect other postretirement benefit net payments to be approximately $4.0 million in 2008.
We may be required to make significant cash outlays to our unrecognized tax benefits. However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits of $4.2 million as of December 31, 2007, have been excluded from the contractual obligations table above. For further information related to unrecognized tax benefits, see Note 11, ‘‘Income taxes’’, to the consolidated financial statements.
Excluded from the contractual obligation table are open purchase orders at December 31, 2007 for raw materials and supplies used in the normal course of business, supply contracts with customers, distribution agreements, joint venture agreements, and other contracts without express funding requirements.
Raw Materials and Manufactured Components
The principal raw materials for our business include fabricated metal-based components, oil based components, synthetic rubber, carbon black, and natural rubber. We manage the procurement of our raw materials to assure supply and to obtain the most favorable pricing. For natural rubber, procurement is managed by buying in advance of production requirements and by buying in the spot market. For other principal materials, procurement arrangements include short-term supply agreements that may contain formula-based pricing based on commodity indices. These arrangements provide quantities needed to satisfy normal manufacturing demands. We believe we have adequate sources for the supply of raw materials and components for our products with suppliers located around the world. We often use offshore suppliers for machined components, metal stampings, castings, and other labor-intensive, economically freighted products.
Seasonal Trends
Sales to automotive customers are lowest during the months prior to model changeovers and during assembly plant shutdowns. These typically result in lower sales volumes during July, August, and December.
Restructuring
2005 Initiatives
In 2005, we implemented a restructuring strategy and announced the closure of two manufacturing facilities in the United States and the decision to exit certain businesses within and outside the U.S. Both of the closures are substantially complete as of December 31, 2007, but we will continue to incur costs until the facilities are sold.
35
During the year ended December 31, 2007, we recorded total costs of $5.6 million related to the previously announced U.S. closures and workforce reductions in Europe. These costs consisted of severance, asset impairment, and other exit costs of $1.8 million, $0.6 million and $3.2 million, respectively. The following table summarizes the activity for this initiative during the year ended December 31, 2007:
Separation
Costs
Costs
Impairments2006 Initiatives
In May 2006, we implemented a restructuring action and announced the closure of a manufacturing facility located in Canada and the transfer of related production to other facilities in North America. The closure was essentially complete as of December 31, 2007 at a total cost of $3.8 million. The following table summarizes the activity for this initiative during the year ended December 31, 2007:
Separation
Costs
Costs
ImpairmentsEuropean Initiatives
In 2006, we implemented a European restructuring initiative, which addressed the operations of our non-strategic facilities. The initiative includes the closure of a manufacturing facility, terminations, and the transfer of production to other facilities in Europe and North America. The initiative is expected to be completed in 2008 at an estimated total cost of approximately $19.4 million. We recorded severance, asset impairment and other exit costs of $6.3 million, $0.1 million and $6.8 million, respectively, during the year ended December 31, 2007. The following table summarizes the activity for this initiative during the year ended December 31, 2007:
Separation
Costs
Costs
ImpairmentsFHS Acquisition Initiatives
In connection with the acquisition of FHS, we formalized a restructuring plan to address the redundant positions created by the consolidation of the businesses. In connection with this restructuring plan, we announced the closure of several manufacturing facilities located in North America, Europe, and Asia and the transfer of related production to other facilities. The closures are expected to be completed in 2008 at an estimated total cost of approximately $19.0 million, including
36
costs recorded through purchase accounting. As a result of this initiative, we recorded certain severance and other exit costs of $11.8 million and $0.7 million, respectively, through purchase accounting. The following table summarizes the activity for this initiative during the year ended December 31, 2007:
Separation
Costs
Costs
Impairments2007 Initiatives
In May 2007, we implemented a restructuring action and announced the closure of a manufacturing facility located in Mexico and the transfer of related production to other facilities in North America. The closure was substantially complete as of December 31, 2007. The estimated total cost of this closure is expected to be approximately $1.2 million, as we will continue to incur costs until the facility is sold. The following table summarizes the activity for this initiative during the year ended December 31, 2007:
Separation
Costs
Costs
ImpairmentsPurchase Accounting
Acquisition of MAPS
The acquisition of MAPS was accounted for under the purchase method of accounting, in accordance with Financial Accounting Standards Board (‘‘FASB’’) Statement of Financial Accounting Standards No. 141, ‘‘Business Combinations’’ (‘‘SFAS 141’’). Accordingly, the assets purchased and liabilities assumed were included in the Company’s consolidated balance sheet as of December 31, 2007. The operating results of the MAPS entities were included in the consolidated results of operations from the date of acquisition. The following summarizes the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. This allocation may change materially in the future as additional information becomes available, such as settlement of the working capital adjustment and final third party valuations of certain assets and liabilities.
37
Cash and cash equivalents, accounts receivable, other current assets, accounts payable, and other current liabilities were stated at historical carrying values which management believes approximates fair value given the short-term nature of these assets and liabilities. Inventories were recorded at fair value which is estimated for finished goods and work-in-process based upon the expected selling price less costs to complete, selling, and disposal costs, and a normal profit to the buyer. Raw material inventory was recorded at carrying value as such value approximates the replacement cost. Tooling in process, which is included in other assets, was recorded at fair value which is based upon expected selling price less costs to complete. Our pension obligations have been recorded in the allocation of purchase price at the projected benefit obligation less plan assets at fair market value, based on computations made by independent actuaries. Deferred income taxes have been provided in the consolidated balance sheet based on our estimates of the tax versus book basis of the assets acquired and liabilities assumed, adjusted to estimated fair values. Management has estimated the fair value of property, plant, and equipment, intangibles and other long-lived assets based upon financial estimates and projections prepared in conjunction with the transaction. These estimates are subject to change in future periods as the valuations are finalized.
The initial analysis determined that the estimated value assigned to all assets and liabilities assumed exceeded the acquisition price. Accordingly, an adjustment to reduce the value of long-lived assets was recorded in accordance with SFAS No. 141 and no goodwill was recorded related to this transaction as of December 31, 2007.
Critical Accounting Policies and Estimates
Our accounting policies are more fully described in Note 2, ‘‘Significant Accounting Policies,’’ to the combined financial statements. Application of these accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies, the following may involve a higher degree of judgment or estimation than other accounting policies.
Pre-Production Costs Related to Long Term Supply Arrangements. Costs for molds, dies, and other tools owned by us to produce products under long-term supply arrangements are recorded at
38
cost in property, plant, and equipment and amortized over the lesser of three years or the term of the related supply agreement. The amount capitalized was $8.0 million and $8.8 million at December 31, 2006 and 2007, respectively. Costs incurred during the engineering and design phase of customer-owned tooling projects are expensed as incurred unless a contractual arrangement for reimbursement by the customer exists. Reimbursable tooling costs included in other assets was $4.4 million and $8.9 million at December 31, 2006 and 2007, respectively. Development costs for tools owned by the customer that meet EITF 99-5 requirement are recorded in accounts receivable in the accompanying combined balance sheets if considered a receivable in the next twelve months. At December 31, 2006 and 2007, $45.9 million and $73.6 million, respectively, was included in accounts receivable for customer-owned tooling of which $27.1 million and $39.0 million, respectively, was not yet invoiced to the customer.
Goodwill. In connection with the 2004 Acquisition and other acquisitions since 2004 as described in Note 3, we have applied the provisions of SFAS No. 141, Business Combination. Goodwill, which represents the excess of cost over the fair value of the net assets of the businesses acquired, was approximately $435.6 million and $290.6 million as of December 31, 2006 and 2007, respectively.
Goodwill is not amortized but is tested annually for impairment. We evaluate each reporting unit’s fair value versus its carrying value annually or more frequently if events or changes in circumstances indicate that the carrying value may exceed the fair value of the reporting unit. Estimated fair values are based on the cash flows projected in the reporting units’ strategic plans and long-range planning forecasts discounted at a risk-adjusted rate of return. While we believe our estimates of fair value are reasonable based upon current information and assumptions about future results, changes in our businesses, the markets for our products, the economic environment and numerous other factors could significantly alter our fair value estimates and result in future impairment of recorded goodwill. We are subject to financial statement risk in the event that goodwill becomes impaired. If the carrying value exceeds the fair value, an impairment loss is measured and recognized. We conduct our annual impairment testing as of October 1st of each year.
During 2007, our North America Fluid reporting unit experienced operating results that were below our previous expectations, primarily as a result of a recent and projected decline in vehicle production volumes, a change in the production mix for certain key platforms in North America since the 2004 Acquisition, the impact of recent increases in material costs, and price concessions to customers. Due to these factors, the calculated fair value of our North America Fluid reporting unit was less than book value. As a result, we recorded a goodwill impairment charge of $142.9 million related to this reporting unit.
Long-lived assets — We monitor our long-lived assets for impairment indicators on an ongoing basis in accordance with SFAS No. 144, ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets.’’ If impairment indicators exist, we perform the required analysis by comparing the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values. If the net book value exceeds the undiscounted cash flows, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived assets. Fair value is estimated based upon either discounted cash flow analyses or estimated salvage values. Cash flows are estimated using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments, as well as assumptions related to discount rates. Change in economic or operating conditions impacting these estimates and assumptions could result in the impairment of long-lived assets.
We recorded impairment charges related to certain intangible assets within our North America Fluid reporting unit of $3.5 million in the year ended December 31, 2007.
Restructuring-Related Reserves. Specific accruals have been recorded in connection with restructuring our businesses, as well as the integration of acquired businesses. These accruals include estimates principally related to employee separation costs, the closure and/or consolidation of facilities, contractual obligations, and the valuation of certain assets. Actual amounts recognized could differ from the original estimates.
39
Restructuring-related reserves are reviewed on a quarterly basis and changes to plans are appropriately recognized when identified. Changes to plans associated with the restructuring of existing businesses are generally recognized as employee separation and plant phaseout costs in the period the change occurs. Under EITF 95-3, ‘‘Recognition of Liabilities in Connection with a Purchase Business Combination,’’ changes to plans associated with the integration of an acquired business are recognized as an adjustment to the acquired business’ original purchase price (goodwill) if recorded within one year of the acquisition. After one year, a reduction of goodwill is recorded if the actual costs incurred are less than the original reserve. More than one year subsequent to an acquisition, if the actual costs incurred exceed the original reserve, the excess is recognized in current year operations as an employee separation and plant phaseout cost. For additional discussion, please refer to Note 4 to the Consolidated Financial Statements.
Revenue Recognition and Sales Commitments. We generally enter into agreements with our customers to produce products at the beginning of a vehicle’s life. Although such agreements do not generally provide for minimum quantities, once we enter into such agreements, fulfillment of our customers’ purchasing requirements can be our obligation for an extended period or the entire production life of the vehicle. These agreements generally may be terminated by our customer at any time. Historically, terminations of these agreements have been minimal. In certain limited instances, we may be committed under existing agreements to supply products to our customers at selling prices which are not sufficient to cover the direct cost to produce such products. In such situations, we recognize losses as they are incurred.
We receive blanket purchase orders from many of our customers on an annual basis. Generally, such purchase orders and related documents set forth the annual terms, including pricing, related to a particular vehicle model. Such purchase orders generally do not specify quantities. We recognize revenue based on the pricing terms included in our annual purchase orders as our products are shipped to our customers. As part of certain agreements, we are asked to provide our customers with annual cost reductions. We accrue for such amounts as a reduction of revenue as our products are shipped to our customers. In addition, we generally have ongoing adjustments to our pricing arrangements with our customers based on the related content and cost of our products. Such pricing accruals are adjusted as they are settled with our customers.
Amounts billed to customers related to shipping and handling are included in net sales in our consolidated statements of operations. Shipping and handling costs are included in cost of sales in our consolidated statements of operations.
Income Taxes. In determining the provision for income taxes for financial statement purposes, we make estimates and judgments which affect our evaluation of the carrying value of our deferred tax assets as well as our calculation of certain tax liabilities. In accordance with SFAS No. 109, Accounting for Income Taxes, we evaluate the carrying value of our deferred tax assets on a quarterly basis. In completing this evaluation, we consider all available positive and negative evidence. Such evidence includes historical operating results, the existence of cumulative losses in the most recent fiscal years, expectations for future pretax operating income, the time period over which our temporary differences will reverse, and the implementation of feasible and prudent tax planning strategies. Deferred tax assets are reduced by a valuation allowance if, based on the weight of this evidence, it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized in future periods.
During the 4th quarter of 2006, due to our recent operating performance in the United States and current industry conditions, we assessed, based upon all available evidence, and concluded that it was more likely than not that we would not realize our U.S. deferred tax assets. As a result, in the fourth quarter of 2006, we recorded a $0.3 million full valuation allowance on our net U.S. deferred tax asset. During 2007 we continued to incur losses in the United States for which no tax benefit was recorded. During 2007, our U.S. valuation allowance increased by $35.9 million, primarily related to permanent tax benefits for certain tax positions and operating losses incurred in the United States during 2007.
At December 31, 2007, deferred tax assets for net operating loss and tax credit carry-forwards of $162.0 million were reduced by a valuation allowance of $129.0 million. These deferred tax assets
40
relate principally to net operating loss carry-forwards in the U.S and our subsidiaries in the United Kingdom, France, Brazil, and Spain. They also relate to Special Economic Zone Credits in Poland, U.S foreign tax credits, research and development tax credits, state net operating losses, and state tax credits. Some of these can be utilized indefinitely, while others expire from 2008 through 2027. We intend to maintain these allowances until it is more likely than not that the deferred tax assets will be realized. Adjustments to pre-acquisition valuation allowances will be offset to goodwill through December 31, 2008. Effective January 1, 2009, with the adoption of SFAS No. 141(R) the benefit of the reversal of the valuation allowances on pre-acquisition contingencies will be included as a component of income tax expense. Adjustments in post-acquisition valuation allowances will be offset to future tax provision.
On January 1, 2007, we adopted the provisions of FASB Interpretation (‘‘FIN’’) No. 48, ‘‘Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.’’ FIN 48 clarifies the accounting for uncertainty in income taxes by establishing minimum standards for the recognition and measurement of tax positions taken or expected to be taken in a tax return. Under the requirements of FIN 48, we must review all of our tax positions and make a determination as to whether its position is more-likely-than-not to be sustained upon examination by regulatory authorities. If a tax position meets the more-likely-than-not standard, then the related tax benefit is measured based on a cumulative probability analysis of the amount that is more-likely-than-not to be realized upon ultimate settlement or disposition of the underlying issue.
We recognized the cumulative impact of the adoption of FIN 48 as a $0.2 million increase to our liability for unrecognized tax benefits with a corresponding reduction to January 1, 2007 retained earnings (deficit) balance.
In addition, the calculation of our tax benefits and liabilities includes uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize tax benefits and liabilities based on our estimate of whether, and the extent to which additional taxes will be due. We adjust these liabilities based on changing facts and circumstances; however, due to the complexity of some of these uncertainties and the impact of any tax audits, the ultimate resolutions may be materially different from our estimated liabilities. For further information, related to income taxes, see Note 11 to the consolidated financial statements.
Pensions and postretirement benefits other than pensions. Included in our results of operations are significant pension and post-retirement benefit costs, which are measured using actuarial valuations. Inherent in these valuations are key assumptions, including assumptions about discount rates and expected returns on plan assets. These assumptions are updated at the beginning of each fiscal year. We are required to consider current market conditions, including changes in interest rates, in making these assumptions. Changes in pension and post-retirement benefit costs may occur in the future due to changes in these assumptions. Our net pension and post-retirement benefit costs were approximately $12.6 million and $6.5 million, respectively, during fiscal 2007.
To develop our discount rate, we considered the available yields on high-quality, fixed-income investments with maturities corresponding to our benefit obligations. To develop our expected return on plan assets, we considered historical long-term asset return experience, the expected investment portfolio mix of plan assets and an estimate of long-term investment returns. To develop our expected portfolio mix of plan assets, we considered the duration of the plan liabilities and gave more weight to equity positions, including both public and private equity investments, than to fixed-income securities. Holding all other assumptions constant, a 0.25 percentage point increase or decrease in the discount rate would have decreased or increased the fiscal 2007 net pension expense by approximately $0.5 million. Likewise, a 0.25 percentage point increase or decrease in the expected return on plan assets would have increased or decreased the fiscal 2007 net pension cost by approximately $0.9 million.
Market conditions and interest rates significantly affect the future assets and liabilities of our pension and post-retirement plans. It is difficult to predict these factors due to highly volatile market conditions. Holding all other assumptions constant, a 0.25 percentage point decrease or increase in the
41
discount rate would have increased or decreased the minimum pension liability by approximately $4.0 million as of December 31, 2007.
The rate of increase in medical costs assumed for the next five years was held constant with prior years to reflect both actual experience and projected expectations. The health care cost trend rate assumption has a significant effect on the amounts reported. Only certain employees hired are eligible to participate in our company’s subsidized post-retirement plan.
The general funding policy is to contribute amounts deductible for U.S. federal income tax purposes or amounts required by local statute.
Derivative financial instruments. We utilize derivative financial instruments to reduce foreign currency exchange, interest rate and commodity price risks. We have established policies and procedures for risk assessment and the approval, reporting, and monitoring of derivative financial instrument activities. On the date the derivative is established, we designate the derivative as either a fair value hedge, a cash flow hedge, or a net investment hedge in accordance with its established policy. We do not enter into financial instruments for trading or speculative purposes.
Use of Estimates. The preparation of the consolidated financial statements in conformity with the accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. During 2007, there were no material changes in the methods or policies used to establish estimates and assumptions. Generally, matters subject to estimation and judgment include amounts related to accounts receivable realization, inventory obsolescence, asset impairments, useful lives of intangible and fixed assets, unsettled pricing discussions with customers and suppliers, restructuring accruals, deferred tax asset valuation allowances and income taxes, pension and other post retirement benefit plan assumptions, accruals related to litigation, warranty and environmental remediation costs and self-insurance accruals. Actual results may differ from estimates provided.
Quantitative and Qualitative Disclosures About Market 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. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Derivative financial instruments’’ and ‘‘Notes to Consolidated Financial Statements’’ (especially Note 19).
As of December 31, 2007, we had $554.3 million of variable rate debt. A 1% increase in the average interest rate would increase future interest expense by approximately $2.8 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 December 31, 2007, interest rate swap contracts representing $270.3 million of notional amount were outstanding with maturity dates of December, 2010 through December, 2011. These contracts modify the variable rate characteristics of our variable rate debt instruments, which are generally set at three-month USD LIBOR rates or Canadian Dollar Bankers Acceptance Rates. Of the above amount, $245.0 million of notional amount pertains to the swap of USD denominated debt fixed at 5.8% and $25.3 million pertains to Canadian dollar denominated debt fixed at 4.9%. These contracts convert variable rate obligations into fixed rate obligations with a weighted average interest rate of 5.7%. 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 December 31, 2007, the fair market value of these swaps was $(16.3) million and the same amount of net losses were recorded in accumulated other comprehensive income (loss). During 2007 losses of $1.2 million related to the interest rate swap contracts were reclassified from accumulated other comprehensive income (loss) into earnings. We
42
expect approximately $3.8 million of losses recorded in accumulated other comprehensive gain (loss) to be reclassified into earnings during the year ended December 31, 2008.
As part of the MAPS acquisition we acquired an interest rate swap contract that was previously entered into to manage the cash flow fluctuations of variable rate debt. This contract modifies the variable rate characteristics of its variable rate debt instrument, which is set at six-month Euribor rates. As of December 31, 2007 the contract had a notional amount of €10.0 outstanding at a fixed rate of 4.14% with a maturity date of September 2013. As of December 31, 2007 the interest rate swap had a market value of $0.2 million.
We also used 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 portion of our Euro Term Loan E 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 we hedge under these arrangements are the Canadian Dollar, Euro and the Brazilian Real.
We also used 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 December 31, 2007, forward foreign exchange contracts representing $5.5 million of notional amount were outstanding with maturities of less than twelve months and the fair market value of these contracts was approximately $0.1 million. A 10% strengthening of the U.S. dollar relative to the Mexican peso would result in a decrease of $0.5 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 $0.6 million in the fair market value of these contracts.
We also used forward foreign exchange contracts to hedge the Canadian dollar to reduce the effect of fluctuations in foreign exchange rates on a portion of the forecasted material purchases of our Canadian facilities. As of December 31, 2007, forward foreign exchange contracts representing $9.9 million of notional amount were outstanding with maturities of less than twelve months and the fair market value of these contracts was approximately $(0.1) million. A 10% strengthening of the U.S. dollar relative to the Canadian dollar would result in an increase of $1.0 million in the fair market value of these contracts. A 10% weakening of the U.S. dollar relative to the Canadian dollar would result in a decrease of $1.0 million in the fair market value of these contracts.
During 2007 gains of $0.4 million related to the Mexican and Canadian forward foreign exchange contracts were reclassified from accumulated other comprehensive income (loss) into earnings. The amount to be reclassified in 2008 is not expected to be material.
We also have exposure to the prices of commodities in the procurement of certain raw materials. The primary purpose of our commodity price hedging activities is to manage the volatility associated with these forecasted purchases. We primarily utilize 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 December 31, 2007, commodity contracts representing $6.0 million of notional amount were outstanding with a fair market value of approximately $(0.5) million. A 10% change in the equivalent commodity price would result in a change of $0.5 million in the fair market value of these contracts. During 2007 losses of $0.2 million were reclassified from accumulated other comprehensive income (loss) into earnings. We expect approximately $0.5 million of losses recorded in accumulated other comprehensive income (loss) to be reclassified into earnings during the year ended December 31, 2008.
43
OUR BUSINESS
Cooper-Standard provides innovative solutions to the automotive industry. We are a leading global manufacturer of fluid handling, body sealing, and noise, vibration and harshness control (‘‘NVH’’) components, systems, subsystems, and modules, primarily for use in passenger vehicles and light trucks for global original equipment manufacturers (‘‘OEMs’’) and replacement markets. The Company conducts substantially all of its activities through its subsidiaries. Our principal executive offices are located at 39550 Orchard Hill Place Drive, Novi, Michigan 48375, and its telephone number is (248) 596-5900. We also maintain a website at www.cooperstandard.com, which is not a part of this prospectus.
We believe that we are the largest global producer of body sealing systems, one of the two largest North American producers in the NVH control business, and the second largest global producer of the types of fluid handling products that we manufacture. Approximately 80% of our sales in 2007 were to automotive original equipment manufacturers (‘‘OEMs’’), including Ford, General Motors, Chrysler (collectively, the ‘‘Detroit 3’’), Audi, BMW, Fiat, Honda, Mercedes Benz, Porsche, PSA Peugeot Citroën, Renault/Nissan, Toyota, and Volkswagen. The remaining 20% of our 2007 sales were primarily to Tier I and Tier II automotive suppliers. In 2007, our products were found in 19 of the 20 top-selling models in North America and in 17 of the 20 top-selling models in Europe.
We operate in 69 manufacturing locations and nine design, engineering, and administrative locations in 18 countries around the world. The Company’s global locations, and the number of facilities in each country with more than one facility, are as follows:
44
Our net sales have grown from $1.8 billion for the year ended December 31, 2005, to $2.5 billion for the year ended December 31, 2007. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Company Overview.’’
Acquisition History
On December 23, 2004, Cooper-Standard Holdings Inc. acquired the automotive segment of Cooper Tire & Rubber Company (the ‘‘2004 Acquisition’’) and began operating the business on a stand-alone basis primarily through its principal operating subsidiary, Cooper-Standard Automotive Inc. See ‘‘Notes to Consolidated Financial Statements’’ (especially Notes 8 and 17, respectively) for further descriptions of the Senior Notes, Senior Subordinated Notes, and Senior Credit Facilities and of the equity contributions relating to the 2004 Acquisition.
In July 2005, the Company acquired Gates Corporation’s Enfriamientos de Automoviles manufacturing operations in Atlacomulco, Mexico (the ‘‘Atlacomulco business’’). The Atlacomulco business manufactures low pressure heating and cooling hose, principally for the OEM automotive market.
In February 2006, the Company acquired the automotive fluid handling systems business of ITT Industries, Inc. (‘‘FHS’’ or the ‘‘FHS business’’). See ‘‘Notes to Consolidated Financial Statements’’ (especially Note 3).
In March 2007, the Company acquired Automotive Components Holdings’ El Jarudo manufacturing operations located in Juarez, Mexico (the ‘‘El Jarudo business’’). The El Jarudo business manufactures automotive fuel rails.
In August 2007, the Company completed the acquisition of nine Metzeler Automotive Profile Systems sealing systems operations in Germany, Italy, Poland, Belarus, and Belgium, and a joint venture interest in China (‘‘MAPS’’ or the ‘‘MAPS business’’) from Automotive Sealing Systems S.A. (‘‘ASSSA’’). See ‘‘Notes to Consolidated Financial Statements’’ (especially Note 3).
In December 2007, the Company acquired the 74% joint venture interest of ASSSA in Metzeler Automotive Profiles India Private Limited (‘‘MAP India’’), a leading manufacturer of automotive sealing products in India. See ‘‘Notes to Consolidated Financial Statements’’ (especially Note 3).
Strategy:
We intend to build on our position as one of the world’s leading automotive suppliers of body sealing, NVH control and fluid handling components and systems by focusing on the following key strategic areas:
Strengthening relationships with the Detroit 3 and expanding relationships with other OEMs
We plan to strengthen our leading positions with the Detroit 3 while aggressively pursuing additional business opportunities with New American Manufacturers (‘‘NAMs’’) and European and
45
Asian OEMs. The Detroit 3 are long established, highly valued customers with revenue streams spread among all platform categories, including cars, light trucks, and SUVs. However, we believe NAMs and European and Asian OEMs will provide significant opportunities to further grow our business, especially as Asian OEMs have been rapidly penetrating North American and European markets, and Asian markets are relatively young and growing at a higher rate than other automotive markets. In particular, China’s light vehicle market is projected to grow at an 11% compound annual growth rate (‘‘CAGR’’) between 2007 and 2012, according to CSM Worldwide estimates, which will make it the world’s fastest growing market.
To further strengthen our customer relationships, we plan to continue to focus on our program management capabilities, engineering excellence, and customer service, and to utilize our technological and design capabilities to enhance the value we offer our customers. We will continue to seek customer feedback with respect to quality manufacturing, design and engineering, delivery, and after-sales support in an effort to provide the highest level of customer service and responsiveness. We believe our efforts have been successful to date and we continue to be awarded content on the Detroit 3’s most important platforms. We have also achieved several recent successes with other OEMs, such as Nissan, Toyota, Honda, Audi, and Volkswagen. Further, our acquisition of MAPS diversified our customer base with significant new volume with key customers such as Fiat, BMW, Daimler and Volkswagen Group. In Asia, and particularly in China, we have been successful in entering new markets and are developing a substantial manufacturing and marketing presence to serve local OEMs and to follow our customers as they expand into these markets. We operate eight manufacturing locations in China, which provide products and services to both Chinese OEMs and our traditional customers.
Targeting high-volume vehicle platforms and increasing content per vehicle
We intend to target high-volume platforms and to maximize the amount of content we provide to each platform. We expect that high-volume platforms will allow us to efficiently gain market share, create greater economies of scale, and provide more opportunities to realize cost savings from our Lean initiatives program, an internally developed program intended to optimize manufacturing by eliminating waste, controlling cost and enhancing productivity. Supplying OEMs’ high-volume platforms is increasingly important because OEMs are using fewer platforms to cover a greater number of vehicle models. Maximizing content-per-vehicle is important not only to increase revenue per vehicle, but also to increase our relative importance to the platform and strengthen our customer relationships with the OEMs as they continue to consolidate their supplier base.
By leveraging our extensive product portfolio and providing superior customer service and product innovations, we have been and expect to continue to be successful in winning significant business on high-volume platforms.
Developing new modular solutions and other value-added products
We believe that significant opportunities exist to grow our current portfolio of products, including components as well as complete sub-systems, modules, and assemblies, by continuing to design, develop, and launch new products that distinguish us from our competitors. As a leader in design, engineering, and technical capabilities, we are able to focus on improving products, developing new technologies, and implementing more efficient processes in each of our product lines. Our body sealing products, which are part of our body & chassis product portfolio, are visible to vehicle passengers and can enhance the vehicle’s aesthetic appeal, in addition to creating a barrier to wind, precipitation, dust, and noise. Our noise, vibration and harshness control products, which are also part of our body & chassis products, are a fundamental part of the driving experience and can be important to the vehicle quality. Our fluid handling modules and sub-systems are designed to increase functionality and decrease cost to the OEM, which can be the deciding factor in winning new business.
To remain a leader in new product innovation, we will continue to invest in research and development and to focus on new technologies, materials, and designs. We believe that extensive use of Design for Six Sigma and other development strategies and techniques has led to some of our most
46
successful recent product innovations, including our ESP Thermoplastic Glassruns (body & chassis), a proprietary plastics-to-aluminum overmolding process (fluid handling), and our Truck Tuff Hydromounts (body & chassis). Examples of successful modular innovations include engine cooling systems, fuel and brake systems, and exhaust gas recirculation modules in our fluid handling product category, and Daylight Opening Modules in our body & chassis category.
Selectively pursuing complementary acquisitions and alliances
We intend to selectively pursue acquisitions, joint ventures, and technology alliances to enhance our customer base, geographic penetration, market diversity, scale, and technology. Consolidation is an industry trend and is encouraged by OEMs’ desire for fewer supplier relationships. We believe joint ventures allow us to penetrate new markets with less relative risk and capital investment. Technology alliances are important because they are an effective way to share development costs, best-practices, and specialized knowledge.
We believe we have a strong platform for growth through acquisitions based on our past integration successes, experienced management team, global presence, and operational excellence. We also operate through several successful joint ventures and technical alliances, including those with Nishikawa Rubber Company, Zhejiang Saiyang Seal Products Co., Ltd. (‘‘Saiyang Sealing’’), Guyoung Technology Co. Ltd. (‘‘Guyoung’’), Hubei Jingda Precision Steel Tube Industry Co., Ltd. (‘‘Jingda’’), Shanghai Automotive Industry Corporation (‘‘SAIC’’) and Toyoda Gosei Co., Ltd. (‘‘Toyoda Gosei’’).
In July of 2005, we acquired the Atlacomulco business. The business manufactures low pressure heating and cooling hose, principally for the OEM automotive market.
In February of 2006, we furthered our strategy by acquiring the FHS business. We believe that the FHS acquisition has allowed us to provide a more complete line of fluid management solutions for new vehicle platforms, diversified our customer base, and secured our position as the second largest global fluid handling systems supplier in the automotive industry.
In March of 2007, we acquired the El Jarudo business. The business is located in Juarez, Mexico and is a producer of automotive fuel rails.
In August of 2007, we acquired the MAPS business, including nine sealing systems operations in Germany, Italy, Poland, Belarus, and Belgium, and a joint venture interest in China. MAPS is a leader in Europe in the development and manufacture of complete automotive body sealing systems.
In December of 2007, we completed the acquisition of a 74% joint venture interest in MAP India, a leading manufacturer of automotive sealing products in India.
Expanding our footprint in Asia
While we have, through new facilities, acquisitions, and joint ventures, significantly expanded our presence in Asia, particularly China and India, we believe that significant opportunities for growth exist in this fast-growing market. We will continue to evaluate opportunities that enable us to establish or expand our design, technology and commercial support operations in that region and enhance our ability to serve current and future customers.
Focusing on operational excellence and cost structure
We will continue to intensely focus on the efficiency of our manufacturing operations and on opportunities to reduce our cost structure. Although the automotive supply sector is highly competitive, we believe that we have been able to maintain strong operating margins due in part to our ability to constantly improve our manufacturing processes and to selectively relocate or close facilities. Our primary areas of focus are:
47
Further exploring non-transportation applications for products and technology
While the automotive industry will continue to be our core business, we have recently begun exploring new industries in which we can apply our expertise and manufacture new products utilizing our existing facilities and capabilities. As a leader in the development and manufacture of equipment using rubber, metals and extruded materials, we believe there may be opportunities in other sectors requiring the use of these materials.
Products:
We supply a diverse range of products on a global basis to a broad group of customers. For the year ended December 31, 2007, body & chassis and fluid handling products accounted for 55% and 45%, of net sales, respectively. For the year ended December 31, 2006, body & chassis and fluid handling products accounted for 53% and 47% of net sales, respectively. Our top ten platforms by sales accounted for nearly 40% of net sales in 2007, with the remainder derived from a multitude of platforms, composed of a diversity of sport-utility, light truck, and various classes of sedans and other vehicles. For information related to our reportable segments, please refer to Note 18 to the Consolidated Financial Statements.
Our principal product lines are described below:
Body & Chassis Products
We are a leading global supplier of body & chassis products. Body & chassis products consist of body sealing systems and components that protect vehicle interiors from weather, dust, and noise intrusion and NVH control systems and components that control and isolate noise vibration in a vehicle to improve ride and handling. For the years ended December 31, 2007 and 2006, we generated approximately 55% and 53%, respectively of total revenue before corporate eliminations from the sale of body & chassis products.
We believe we are the largest provider of body sealing products in the world based on sales. We have an extensive product offering and believe we are known for exceptional quality and strong design and technical capabilities, including advanced skills in adhesives, mixing, and plastics technology. Our products are found on some of the world’s top-selling platforms, including the Ford F-Series, GMT900 (Silverado/Tahoe/Yukon), General Motors’ GMX 211 (Impala), and Ford B Car (Fiesta/Fusion).
Our body sealing products are comprised of manufactured EPDM (synthetic rubber) and TPE (thermoplastic elastomer) seals to provide environmental closure to the hood, trunk, and interior of vehicles. These products are highly engineered and are developed and manufactured with regard to aesthetic, performance, and durability requirements. The typical production process involves mixing of rubber/plastic compounds, extrusion (supported with metal and woven wire carriers or unsupported),
48
cutting, notching, forming, injection molding, and assembly. Below is a description of the major body sealing products produced:
As a result of our global presence, patented technologies and engineering capabilities, as well as our strong relationships with the global OEMs, we believe we are positioned for future growth and product expansion. We are currently developing additional system integration opportunities, particularly in window regulators, plastics, door components, and exterior trim.
We have expertise in nearly every aspect of automotive sealing technology, including adhesives, exterior coatings, corner molding, and rubber extrusion techniques, and have been a leader in the use of plastic applications, with a dedicated facility in Spartanburg, South Carolina that primarily produces plastic weathersealing components. This expertise has helped provide us with an entry with Japanese manufacturers, such as Nissan, in the use of TPE inner belt lines that their traditional suppliers have been unable to offer as competitively. We have been an early adopter of thermoplastic elastomers, which provide a lightweight, cost-effective alternative to rubber seals in some applications. We are a leader in the application of plastic supported glassrun systems through engineered stretched plastic and patent-protected daylight opening systems, which often provide cost savings, reduction of assembly time, and performance improvement. To further our capabilities, we exchange plastics technology with Nishikawa Rubber Company, one of our joint venture partners, and are currently cooperating on the development of a protected ‘‘blown sponge plastic’’ process as well as other innovative plastic applications with our customers. We are also currently collaborating on several customer-funded, advanced engineering projects with Ford and General Motors.
To grow our customer base, we intend to continue to strengthen our relationship with the Detroit 3 and are aggressively targeting other OEMs, particularly NAMs and European and Asian OEMs. Over the past two years we have secured business from Toyota, Nissan, Honda, and Audi.
49
Further, our acquisition of the MAPS business diversified our customer base with the addition of customers such as Fiat, BMW, Daimler, Volkswagen Group and several India and Chinese OEMs. We intend to continue to develop new customer relationships by forming new strategic alliances and building on our existing joint ventures and long standing relationships. We own 50% of Nishikawa Standard Company (‘‘NISCO’’), a joint venture with Nishikawa Rubber Company; 89% of Cooper Saiyang Wuhu Automotive Co., Ltd., a joint venture with Saiyang Sealing in Wuhu, China; 47.5% of Shanghai SAIC-Metzeler Sealing Systems Co. Ltd., a joint venture with SAIC which also owns 47.5%; and 74% of MAP India, a joint venture with Toyoda Gosei. We believe our strong Asian presence in rapidly expanding markets gives us the base and the abilities to engineer and deliver weathersealing products not enjoyed by our competition. These relationships and engineering and design capabilities have helped us to provide content on some of the world’s top-selling platforms.
We believe we are one of the two largest providers of noise, vibration and harshness control products in North America based on sales. We provide a comprehensive line of powertrain and suspension products and active noise and vibration cancellation systems. We are a leader in engineering, design, testing, and rubber-to-metal bonding technology, and provide superior integrated customer service and problem-solving capabilities.
Noise vibration control products include various engine and body mounts, dampers, isolators, and other equipment. Engine mounts secure and isolate vehicle powertrain noise, vibration, and harshness from the uni-body or frame. Body and cradle mounts enable isolation of the cabin from the vehicle frame, reducing noise, vibration, and harshness, and are manufactured with a variety of materials, such as natural rubber and butyl. Tuned dampers are designed to reduce specific vibration issues, such as for the steering wheel and column, exhaust system, and internal driveshaft.
We believe we are one of the market leaders in developing breakthrough innovations in noise vibration control products and continue to make significant investment in our ability to deliver advanced technologies. We developed the popular Truck Tuff hydromounts for light trucks and sport utility vehicles. We believe that the Truck Tuff hydromount design was critical to our being awarded the contract to supply the engine mounting system on the new Ford F-Series, which Ford claims to be
50
the smoothest, quietest truck on the market. We also recently developed ENVIsys, an advanced electronic system for the active control of noise and vibration for commercial applications. ENVIsys products have a wide variety of potential applications, including aircraft, rail, heavy truck, automotive, and mining equipment.
We believe these engineering and design capabilities, combined with intense focus on quality and customer service, have led to strong customer relationships and a growing customer base. In addition to strengthening our relationships with the Detroit 3, we target NAMs and Asian expansion opportunities. In North America, we continue to target NAMs and have recently been awarded new business with Toyota and Hyundai. In China, we are pursuing plans to expand our development facilities to couple with our manufacturing operations, and in Korea, we are pursuing expansion via joint venture partnerships.
Fluid Handling Products
We are a leading global supplier of subsystems and components that direct, control, measure, and transport fluids and vapors throughout a vehicle. We believe we are the second largest global provider of the types of fluid handling products we manufacture. We offer an extensive product portfolio and are positioned to serve OEMs around the world. We believe we have a reputation for superior technical support, product quality, rapid response capabilities, innovative solutions to design problems, and outstanding prototype capabilities. Our products are found on some of the world’s top-selling platforms, including the Ford F-Series, General Motors GMT800/900 (includes Yukon, Tahoe, Sierra, and Silverado), and Ford B Car (Fiesta/Fusion). For the years ended December 31, 2007 and 2006, we generated approximately 45% and 47%, respectively, of total revenue before corporate eliminations from the sale of fluid handling products.
Our products are principally found in four major vehicle systems: heating and cooling; fuel and brake; emissions; and power management, which includes power steering and power roof lines. These products, particularly fuel and brake components, are critical to the safe and reliable functioning of the vehicle. Our fluid handling systems include assemblies for various heating and cooling and fluid and vapor management systems and subsystems. Individual components include quick connects, hoses, couplings, coolers, valves, tubing, thermostats, and similar products. Below is a description of the major products that we produce within each category:
51
Heated PCV valvesTo increase sales of fluid handling products, we intend to continue to capitalize on recent brake, fuel, and exhaust gas recirculation (‘‘EGR’’) product successes in Europe and North America; develop new complete module and assembly solutions, aimed at building a reputation as a ‘‘tube and hose integrator;’’ and create product improvements that provide greater functionality at a lower cost to the customer. We plan to continue to invest in research and development to support these efforts and focus on advanced materials, innovative processes and product design and development driven by Design for Six Sigma. Advanced EGR valves, tubes, and cooler products have become critical components in regions where environmental regulations are stringent, such as in Europe, and for heavy truck platforms in the United States. For products such as rubber hose, steel tubing, and nylon tubing, innovations in advanced materials have led to the development of superior components. We also have in-house tube manufacturing and coating capabilities in North America, Europe and Asia, allowing us to maintain a competitive edge over smaller fabricators.
We believe these engineering and design capabilities, combined with intense focus on quality and customer service, have led to strong customer relationships and a growing customer base. We are targeting an increasing market share with NAMs and European and Asian OEMs, especially in China. In 2006, we finalized two joint venture agreements with Jingda, one of the largest tube manufacturers in China. In addition to pursuing business directly from NAMs, we partner with Tier I suppliers, such as Denso and Calsonic, to help build relationships. We have also experienced success targeting high-volume programs where a substantial degree of complexity, engineering interaction, and design support are required, and which also serve to strengthen customer relationships.
Supplies and Raw Materials
The principal raw materials for our business include fabricated metal-based components, synthetic rubber, carbon black, and natural rubber. We manage the procurement of our raw materials to assure supply and to obtain favorable pricing. For natural rubber, procurement is managed by both buying forward of production requirements and buying in the spot market. For other materials, procurement arrangements may contain formula-based pricing linked to commodity indices. These arrangements provide quantities needed to satisfy normal manufacturing demands. We believe we have adequate sources for the supply of raw materials and components for our products with suppliers located around the world. We often use offshore suppliers for machined components, metal stampings, castings, and labor-intensive, economically freighted products.
Patents and Trademarks
We believe one of our competitive advantages is our track record of technological innovation. We hold nearly 800 patents in key product technologies, such as Daylight Opening Modules, Engineered Stretched Plastics, Low Fuel Permeation Nylon Tubing, Quick Connect Fluid Couplings, as well as core process methods, such as molding, joining, and coating. We consider these patents to be of value and seek to protect our rights throughout the world against infringement. While in the aggregate these
52
patents are important to our business, we do not believe that the loss or termination of any one of them would materially affect our company. We continue to seek patent protection for our new products. Our patents will continue to be amortized over the next five to twelve years.
We also have license and technology sharing agreements with Nishikawa Rubber Company for sales, marketing, and engineering services on certain body sealing products we sell. Under those agreements, each party pays for services provided by the other and royalties on certain products for which the other party provides design or development services.
We own or have licensed several trademarks that are registered in many countries, enabling us to protect and market our products worldwide. During 2006, we purchased the right to use our current name from Cooper Tire.
Seasonality
Sales to automotive customers are lowest during the months prior to model changeovers and during assembly plant shutdowns. These typically result in lower sales volumes during July, August, and December. During these periods of lower sales volumes, profit performance is lower, but working capital improves due to continuing collection of accounts receivable.
Competition
We believe that the principal competitive factors in our industry are price, quality, service, performance, design and engineering capabilities, innovation, and timely delivery. We believe that our capabilities in these core competencies are integral to our position as a market leader in each of our product lines. In body & chassis products we compete with Toyoda Gosei; Delphi; Trelleborg; Tokai; Vibracoustic; Paulstra and Hutchinson, among others. In fluid handling products, we compete with TI Automotive, Mark IV Automotive, Martinrea, and numerous manufacturers of hoses.
Industry Overview
The automotive industry is one of the world’s largest and most competitive. The industry is mature in North America and Europe, with vehicle sales primarily driven by general economic conditions. In recent years, significant consolidation among OEMs, combined with globalization, has led to major shifts in market share positions and greater pressure on profit margins.
These developments have also led to a more competitive environment for automotive suppliers. The automotive supply industry is generally characterized by high barriers to entry, significant start-up costs, and long-standing customer relationships. The primary criteria by which OEMs judge automotive suppliers include price, quality, service, performance, design and engineering capabilities, innovation, and timely delivery.
The industry is experiencing significant growth of vehicle production in Asia, especially in China and India as these economies expand.
Customers
We are a leading supplier to the Detroit 3 in each of our product categories and are increasing our presence with NAMs and European and Asian OEMs. During the year ended December 31, 2007, approximately 27%, 20%, and 8% of our sales were to Ford, General Motors, and Chrysler, respectively, as compared to 29%, 25%, and 10% for the year ended December 31, 2006, respectively. Chrysler sales for the year ended December 31, 2006 include sales to Daimler. Sales to Ford include sales to OEMs owned by Ford, such as Volvo, Jaguar, and Land Rover. Our other major customers include Renault/Nissan, PSA Peugeot Citroën, and Volkswagen. We also sell products to Visteon/ACH, Toyota, Porsche, and through NISCO, Honda. Our business with any given customer is typically split among several contracts for different parts on a number of platforms. Our recent MAPS acquisitions have added significant volume with Fiat, BMW, Daimler, Volkswagen/Audi and various Indian and Chinese OEMs.
53
Research and Development
We operate nine design, engineering, and administration facilities throughout the world and employ 665 research and development personnel, some of whom reside at our customers’ facilities. We utilize Design for Six Sigma and other methodologies that emphasize manufacturability and quality. We are aggressively expanding our capabilities with new systems for Computer Aided Design, Computer Aided Engineering, vehicle testing, and rapid prototyping. We spend significantly each year to maintain and enhance our technical centers, enabling us to quickly and effectively respond to customer demands. We spent $65.6 million, $74.8 million, and $77.2 million in 2005, 2006, and 2007, respectively, on research and development.
Joint Ventures and Strategic Alliances
Joint ventures represent an important part of our business, both operationally and strategically. We have used joint ventures to enter into new geographic markets such as China, Korea, and India, to acquire new customers, and to develop new technologies. In entering new geographic markets, teaming with a local partner can reduce capital investment by leveraging pre-existing infrastructure. In addition, local partners in these markets can provide knowledge and insight into local practices and access to local suppliers of raw materials and components. In North America, joint ventures have proven valuable in establishing new relationships with NAMs. For example, we were awarded significant new business with Honda through our NISCO joint venture. In 2005, we acquired a 20% equity interest in and expanded our technical alliance with Guyoung, a Korean supplier of metal stampings, which recently built a manufacturing facility in Alabama that services Hyundai. In 2006, we finalized two joint venture agreements with Jingda, one of the largest tube manufacturers in China to expand our presence in that country. As part of the acquisition of the MAPS business in 2007, we acquired a 47.5% equity interest in Shanghai SAIC-Metzeler Sealing Systems Co. Ltd., a joint venture with SAIC, which also owns a 47.5% equity interest, and Shanghai Qinpu Zhaotun Collective Asset Management Company, which owns the remaining 5% equity interest. This joint venture business is the leading manufacturer of automotive sealing products in China. Also in 2007, we acquired a 74% equity interest in MAP India, a joint venture with Toyoda Gosei Co., Ltd., which owns the remaining 26% equity interest. MAP India is a leading manufacturer of automotive sealing products in India.
Geographic Information
In 2007, we generated approximately 61% of net sales in North America, 31% in Europe, 5% in South America, and 3% in Asia/Pacific. Approximately 15% of our revenues were generated from our Canadian operations.
In 2006, we generated approximately 67% of net sales in North America, 24% in Europe, 4% in South America, and 5% in Asia/Pacific. Approximately 18% of our revenues were generated from our Canadian operations.
Employees
We maintain good relations with both our union and non-union employees and, in the past ten years, have not experienced any major work stoppages. We will be negotiating some of our domestic and international union agreements which are due to expire in the next twelve months. As of December 31, 2007, approximately 44% of our employees were represented by unions, and approximately 16% of our employees were union represented employees located in the United States.
As of December 31, 2007, we had 21,123 full-time and temporary employees.
Environmental
We are subject to a broad range of federal, state, and local environmental and occupational safety and health laws and regulations in the United States and other countries, including those governing emissions to air; discharges to water; noise, and odor emissions; the generation, handling, storage,
54
transportation, treatment, and disposal of waste materials; the cleanup of contaminated properties; and human health and safety. For example, as an owner and operator of real property or a generator of hazardous substances, we may be subject to environmental cleanup liability, regardless of fault, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act or analogous laws, as well as to claims for harm to health or property or for natural resource damages arising out of contamination or exposure to hazardous substances. Several of our properties have been the subject of remediation activities to address historic contamination. In general, we believe we are in substantial compliance with the requirements under such laws and regulations and our continued compliance is not expected to have a material adverse effect on our financial condition or the results of our operations. We expect that additional requirements with respect to environmental matters will be imposed in the future. Our expense and capital expenditures for environmental matters at our facilities have not been material in the past, nor are expected to be in the future.
MANAGEMENT
Directors, and Executive Officers and Corporate Governance
The following table sets forth information about our current directors, executive officers and other named officers.
James S. McElya is our Chairman of the Board of Directors and Chief Executive Officer, a position he has held since September 2006. He served as President and Chief Executive Officer from the date of the 2004 Acquisition to September 2006. He has been a director of the Company since the 2004 Acquisition. He was the President of Cooper-Standard and a Corporate Vice President of Cooper Tire from June 2000 until the 2004 Acquisition. Mr. McElya has over 32 years of automotive experience and was previously President of Siebe Automotive Worldwide, a division of Invensys, PLC. Mr. McElya spent 22 years with Handy & Harman in various executive management positions, including President, Handy & Harman Automotive, and Corporate Vice President and Officer of the parent company. Mr. McElya is the immediate past Chairman and current member of the Board of Directors of the Original Equipment Supplier Association, and a member of the Boards of the Motor & Equipment Manufacturers Association and the National Alliance for Accessible Golf.
Edward A. Hasler is our President and Chief Operating Officer, a position he has held since September 2006. He was the President, Global Sealing Systems from the date of the 2004 Acquisition to September 2006. He was the President of the Global Sealing Systems Division and a Corporate Vice President of Cooper Tire from 2003 until the 2004 Acquisition. Mr. Hasler was employed from 2000 to 2001 in Germany as Managing Director, Europe for GDX Corporation. Prior to joining GDX, Mr. Hasler had been with Cooper Tire for nearly 15 years. At Cooper Tire, Mr. Hasler held several senior posts including Vice President, Operations; and Vice President, Controller. He has both an MBA and a BS in Business Administration.
55
Allen J. Campbell is our Chief Financial Officer, a position he has held since the 2004 Acquisition in December 2004. He was Vice President, Finance from 1999 to 2003 and Vice President, Asian Operations of Cooper-Standard Automotive Group from 2003 until the 2004 Acquisition. Mr. Campbell has eight years of automotive experience and has held various executive positions in the industry. Prior to this position, Mr. Campbell was with The Dow Chemical Company for 18 years and held executive finance positions for both US and Canadian operations. Mr. Campbell is a Certified Public Accountant and received his MBA in Finance from Xavier University.
Keith D. Stephenson is our President, Global Body & Chassis Systems, a position he has held since June of 2007. Mr. Stephenson was Chief Development Officer at Boler Company from January 2004 until October 2006. Prior to this position and through 1985, Mr. Stephenson held various senior positions at Hendrickson, a division of Boler Company, including President of International Operations, Senior Vice President of Global Business Operations and President of the Truck Systems Group.
Michael C. Verwilst is our President, Global Fluid Systems, a position he has held since June of 2007. Mr. Verwilst joined the Company in 2003 as the Vice President, Strategic Planning and Business Development. Prior to joining the Company, Mr. Verwilst was a principal with Corporate Improvement Partners from 2001 to 2003. Mr. Verwilst held many executive positions with Federal-Mogul Corporation from 1978 to 2001, including Senior Vice President of Powertrain Systems and Vice President & General Manager of Powertrain Systems – Americas.
S.A. (Tony) Johnson is the Lead Director for our Board of Directors, a position he has held since September 2006. He served as our Non-Executive Chairman from the date of the 2004 Acquisition in December 2004 to September 2006. Mr. Johnson is the founder of Hidden Creek Industries, a private industrial management company based in Minneapolis. Prior to forming Hidden Creek, Mr. Johnson served from 1986 to 1989 as President and Chief Operating Officer of Pentair, Inc., a diversified industrial company. From 1981 to 1985, Mr. Johnson was President and Chief Executive Officer of Onan Corp., a diversified manufacturer of electrical generating equipment and engines for commercial, defense and industrial markets. Mr. Johnson also currently serves as director of Commercial Vehicles Group Inc., a supplier of truck cab components to the Class 8 truck market. Mr. Johnson served as a director of Dura Automotive Systems, Inc., a manufacturer of mechanical assemblies and integrated systems for the automotive industry, from 1990 to 2004, serving as its Chairman from 1990 to 2003; and also served as Chairman and a director of Automotive Industries Holding, Inc., a supplier of automotive interior trim components, from May 1990 until its sale to Lear Corporation in August 1995.
Gerald J. Cardinale has been a director of the Company since the 2004 Acquisition in December 2004. Mr. Cardinale is a Managing Director in the Principal Investment Area at Goldman Sachs & Co. He joined Goldman Sachs in 1992 and became a Managing Director in 2002. He serves on the Boards of Directors of Alliance Films Holdings, Inc., Sensus Metering Systems Inc., Clearwire Holdings, Inc., Cequel Communications, LLC, CSI Entertainment, CW Media Holdings, Inc., Yankees Entertainment & Sports (YES) Network and Fiberlink Communications. Mr. Cardinale received an Honors B.A. from Harvard University and an M.Phil in Politics from Oxford University where he was a Rhodes Scholar.
Gary L. Convis has been a director of the Company since 2007. Mr. Convis was named Chief Executive Officer of Dana Corporation in April of 2008. Mr. Convis retired in 2007 as the Chairman of Toyota Motor Manufacturing, Kentucky (TMMK), a position he held since 2006. Mr. Convis had previously served as President of TMMK since 2001. He also was a Managing Officer of Toyota Motor Corporation and Executive Vice President of Toyota Engineering and Manufacturing North America (TEMA), from 2003 until his retirement in 2007. Prior to serving in these roles, Mr. Convis spent 16 years at New United Motor Manufacturing, Inc., a joint venture between General Motors Corporation and Toyota. Mr. Convis also spent more than 20 years in various roles with General Motors and Ford Motor Company. Mr. Convis serves on the Boards of Directors of Dana Holding Corporation, Compass Automotive Group, Inc., Oorja Protonics and Achates Power LLC.
56
Jack Daly has been a director of the Company since the 2004 Acquisition in December 2004. Mr. Daly is a Managing Director in the Principal Investment Area of Goldman Sachs, where he has worked since 2000. From 1998 to 2000, he was a member of the Investment Banking Division of Goldman Sachs. From 1991 to 1997, Mr. Daly was a Senior Instructor of Mechanical & Aerospace Engineering at Case Western Reserve University. Mr. Daly currently serves as a director of Clearwire Holdings, Inc., Hawker Beechcraft Corporation, Euramax Corporation and McJunkin Redman Corporation. He earned a B.S. and M.S. in Engineering from Case Western Reserve University and an M.B.A. from the Wharton School of Business.
Leo F. Mullin has been a director of the Company since May 2005. Since September 2004, he has been a Senior Advisor on a part-time basis to Goldman Sachs Capital Partners. Mr. Mullin served as President and Chief Executive Officer of Delta Air Lines from 1997 to 1999, as Chairman and Chief Executive Officer from 1999 to December 31, 2003 and as Chairman until his retirement on April 30, 2004. Previously, he served as Vice Chairman of Unicom Corporation and its principal subsidiary, Commonwealth Edison Company, from 1995 to 1997. He was an executive at First Chicago Corporation from 1981 to 1995, serving as that company’s President and Chief Operating Officer from 1993 to 1995. Mr. Mullin is a director of Johnson & Johnson Corporation, Ace Limited and the privately held companies, Euramax Corporation, Educational Management Corporation, Hawker Beechcraft Corporation and Alltel Corporation.
James A. Stern has been a director of the Company since May 2007. Mr. Stern is the Chairman and founder of Cypress Advisors Inc. since 1994. Prior to this Mr. Stern had a 20 year career at Lehman Brothers. Joining as an associate in 1974, Mr. Stern advanced to Managing Director in 1982, Co-head of Investment Banking in 1988 and Head of Merchant Banking in 1989. Mr. Stern received his degree in Civil Engineering from Tufts University and a MBA from Harvard. Mr. Stern currently serves on the Boards of Directors of Lear Corporation and Affinia Group Inc., and is the Chairman of the board of trustees of Tufts University.
Kenneth L. Way has been a director of the Company since the 2004 Acquisition in December 2004. Mr. Way is the former Chairman and CEO of Lear Corporation. Mr. Way had been affiliated with Lear Corporation and its predecessor companies for 37 years in various engineering, manufacturing and general management capacities. Mr. Way is also a director of WESCO International, Inc., Comerica, Inc. and CMS Energy Corporation.
Committees of the Board of Directors
Our Board of Directors currently has an executive committee, an audit committee, and a compensation committee.
Executive Committee
Our executive committee currently consists of four members, which include Mr. Johnson, Mr. McElya, any director who is a nominee of The Cypress Group L.L.C. (currently Mr. Stern) and any director who is a nominee of GS Capital Partners 2000, L.P. (currently either Mr. Cardinale, Mr. Daly, or Mr. Mullin). Mr. Johnson serves as the chairman of the Executive Committee. The Executive Committee has the authority to discharge all functions of the Board of Directors in the management of our business during the interim between meetings of the Board of Directors.
Audit Committee
Our audit committee currently consists of Messrs. Way and Daly. Mr. Way serves as the chairman of the audit committee. The Board of Directors has determined that the Company has at least one ‘‘audit committee financial expert’’ (as defined in Item 401(d)(5) of Regulation S-K), Mr. Way, serving on the Audit Committee. Mr. Way is ‘‘independent’’ as defined in the listing standards of the NASDAQ Stock Market. The audit committee is responsible for (i) reviewing and discussing with management and our independent auditors our annual audited financial statements and quarterly financial statements and any audit issues and management’s response; (ii) reviewing and discussing
57
with management and our independent auditors our financial reporting and accounting standards and principles and significant changes in such standards and principles or their application; (iii) reviewing and discussing with management and our independent auditors our internal system of financial controls and disclosure controls and our risk assessment and management policies and activities; (iv) reviewing and evaluating the independence, qualifications, and performance of our independent auditors; (v) reviewing our legal compliance and ethics programs and investigating matters relating to management’s integrity, including adherence to standards of business conduct established in our policies; and (vi) taking such actions as may be required or permitted under applicable law to be taken by an audit committee on behalf of us and our Board of Directors.
Compensation Committee
Our compensation committee currently consists of Messrs. Johnson and Daly. Mr. Johnson serves as the chairman of the compensation committee. The compensation committee is responsible for (i) the review and approval of corporate goals, objectives and other criteria relevant to the compensation of the Chief Executive Officer and other executive officers; (ii) the evaluation of the performance of the Chief Executive Officer and other executive officers and the determination and approval of their compensation; (iii) the review and approval of executive compensation programs; (iv) the review of director compensation and director and officer indemnification and insurance matters; (v) the review and approval of contracts and transactions with executive officers; (vi) the review and approval of equity-based compensation plans and awards made pursuant to such plans; (vii) the approval, review and oversight of employee benefit plans of the Company, including the delegation of responsibility for such programs to the executive officers of the Company; and (viii) taking such actions as may be required or permitted under applicable law to be taken by a compensation committee on behalf of us and our Board of Directors.
Other Matters Concerning Directors
Securities and Exchange Commission regulations require the Company to describe certain legal proceedings, including bankruptcy and insolvency filings involving directors of the Company or companies of which a director was an executive officer. Mr. Mullin served as the Chief Executive Officer of Delta Air Lines, Inc. from 1997 through December 2003 and as its Chairman of the Board from 1999 through April 2004. Delta Air Lines filed for protection under Chapter 11 of the United States Bankruptcy Code in September 2005.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics Policy that applies to all directors, officers, and employees of the Company and its subsidiaries, including our chief executive officer, our chief financial officer and our controller. The Code of Business Conduct and Ethics Policy is available on our website at www.cooperstandard.com. We will also post on our website any amendment to, or waiver from, a provision of our policies that applies to our chief executive officer, chief financial officer, or controller, and that relates to any of the following elements of these policies: honest and ethical conduct; disclosure in reports or documents filed by the Company with the SEC and in other public communications; compliance with applicable laws, rules and regulations; prompt internal reporting of code violations; and accountability for adherence to the policies.
58
Executive Compensation
Compensation Discussion and Analysis
Executive Summary
This Compensation Discussion and Analysis describes the key principles and material elements of our compensation policies for the ‘‘Named Executive Officers’’ identified in the ‘‘Executive Officer Compensation’’ section. Much of what is discussed below, however, applies generally to our executives and is not limited to the Named Executive Officers.
The Compensation Committee, with the assistance of independent executive compensation consultants, meets throughout the year to review executive compensation elements. In reviewing elements of compensation, we place considerable emphasis on performance-based compensation to ensure executives are compensated for our annual and long-term results. Performance-based components of compensation include annual bonuses tied to annual adjusted EBITDA results, long-term incentive plan awards pertaining to three year performance periods, a stock incentive plan and a management stock purchase plan. In 2007, our management stock purchase program became effective, allowing matching of stock units by the Company for deferred compensation allocated to Company stock units by executives. We believe that this element of compensation will further tie executive compensation to our long-term performance.
Compensation Philosophy and Objectives
The objective of our compensation program is to link executive compensation to our performance in a manner that accomplishes the following:
The program rewards sustained enterprise value growth through incentives that are based on the achievement of performance objectives over varying time periods. As detailed below, our incentive programs emphasize specific Company or group-wide objectives over subjective, individual goals. Discretionary features of these programs allow for the recognition of achievements which the objective performance criteria do not fully measure but which further our key strategies. Base salary is designed, in general, to be near the median of the range applicable to companies deemed comparable to us and performance-based compensation is designed to provide opportunities above median levels in the industries in which we compete for executives.
Processes Relating to Executive Compensation
In May 2006, our Board of Directors established the Compensation Committee (the ‘‘Committee’’) to assist in discharging the Board’s responsibilities relating to the compensation of our directors and executive officers and the oversight of compensation plans, policies and benefit programs. From the time of the 2004 Acquisition until the establishment of the Committee, the Board had performed these functions largely through its Chairman and certain designated directors. Our human resources executives and professionals support the Committee (and previously the Board) in its work. In evaluating and determining the salary and incentive compensation of senior executives who report to our Chief Executive Officer and Chief Operating Officer, the Committee receives information from our Chief Operating Officer and recommendations from the Chief Executive Officer. The Committee as a whole, following discussions with the Chief Executive Officer, meets privately and determines the salary and incentive compensation of the Chief Executive Officer. Executives whose compensation is under consideration are not present during the Committee’s review meetings. The considerations, criteria and procedures applicable to these determinations are discussed under ‘‘Executive Compensation Components.’’
59
Total Compensation Review
In 2007, as in 2006, the Committee engaged Towers Perrin to assess the market competitiveness of our executive compensation program with particular focus on total direct compensation, which is comprised of base salary, annual incentive award opportunities, long-term incentive award opportunities, executive perquisites other than core health and welfare benefits, and executive severance and change-in-control benefits. Towers Perrin compared our programs in these areas with those of two comparator groups: a group of eleven automotive suppliers selected on the basis of annual sales (ranging from $907 million to $12.4 billion, with a median of $5.0 billion) and a group of 50 companies from various industrial segments also selected on the basis of annual sales (ranging from $290 million to $10.7 billion, with a median of $2.7 billion), as follows:
Automotive Supplier Revenue-Based Comparator Group
Broad Industrial Comparator Group
Due to the large range in annual sales in the comparator groups, regression analysis was used to normalize the survey results for us. Premiums or discounts to the market compensation data were also applied to create duty specific market data for individual officer positions where our officers had different assigned duties than similarly titled officers in the comparator groups.
Results of Compensation Review
The Committee reviewed the report of Towers Perrin with the Chief Executive Officer and other members of executive management. The Committee considered the Towers Perrin report in evaluating the total compensation of senior management, but did not target any percentile level among the comparator groups used in the report in determining the appropriate level of each element of compensation for the executive leadership team. The Committee also took into account distinctions between our equity-based incentive compensation programs and those offered by many of the
60
companies in the comparator groups arising out of the fact that our stock is not publicly traded as is the case with many of the comparator group companies. In this connection, the Committee reviewed the impact of the management stock purchase program implemented in December 2006 which allows for the deferral and allocation of base and incentive compensation into stock units eligible for Company matching (described under ‘‘Executive Compensation Components—Management Stock Purchase Plan’’). Taking into account the above, the survey data generally reaffirmed that compensation of the executive leadership team was in accordance with our overall compensation strategy.
Executive Compensation Components
The elements of compensation available to our executives are:
Base Salary
Our executives are paid a base salary that is determined prior to or at the beginning of each fiscal year or upon changes in roles or positions within the Company. The Committee determines the salary of the Chief Executive Officer and, upon the recommendations of the Chief Executive Officer and Chief Operating Officer, the salaries of the executives who report to the Chief Executive Officer and the Chief Operating Officer. The salaries of other executives are determined by the executives to whom they report, upon consultation with the Chief Executive Officer and the Chief Operating Officer. Our policy is to pay base salaries that are competitive in the markets in which we compete for executives and that take into account the responsibilities and contributions of each executive. The base salary provides executives with a regular stream of income.
Bonus
Prior to or early in the fiscal year, the Committee establishes performance targets on which the annual incentive bonuses payable to senior executives with respect to that year will be based. The targets are generally set in terms of our adjusted EBITDA as a whole or, in the case of executives with responsibility for a division, the adjusted EBITDA of that division. Adjusted EBITDA is calculated in a manner similar to that applied with respect to the performance-based covenants under our Senior Credit Facilities and Indentures. ‘‘Adjusted EBITDA’’ (referred to as ‘‘Consolidated EBITDA’’ in the Senior Credit Facilities) is consolidated net income plus the sum of i) consolidated interest expense; ii) consolidated income tax expense; iii) any non-cash charges, losses or expenses; iv) most non-recurring fees, cash charges and other cash expenses; v) non-specified restructuring charges limited to 7.5% of consolidated EBITDA; vi) non-recurring fees, expenses or charges related to professional or financial advisory, financing, underwriting and other similar services related to equity offerings, investments, acquisitions, divestitures or recapitalizations; vii) extraordinary charges or losses; ix) losses related to discontinued operations; x) losses in respect of business or asset dispositions outside the ordinary course; and xi) non-recurring restructuring charges related to the integration of businesses acquired in certain acquisition transactions, subject to certain restrictions. For the complete definition of adjusted EBITDA see the Second Amendment to Credit Agreement dated July 26, 2007 attached as Exhibit 10.1 to Cooper-Standard Holdings Inc.’s Form 8-K filed August 1, 2007. Additional adjustments are sometimes made for extraordinary events upon approval of the Compensation Committee. We deem Adjusted EBITDA to be an appropriate objective measurement of the financial performance of the Company or division for that year. For each executive, a bonus amount payable upon achievement of the established performance target is established by the Committee (or, in the case of executives other than the Chief Executive Officer and those who report directly to him or to the Chief Operating Officer, by the individual to whom such executive reports). In the first quarter following the end of the fiscal year to which the bonus applies, the Committee determines whether, and to what extent, the applicable performance targets were achieved based on our financial results for the fiscal year. The Committee may take into account special circumstances and adjust applicable performance targets and bonuses. The annual incentive bonus is designed to focus the executive leadership team on the achievement of strong financial performance over a one-year period.
61
Based on the business plan of the Company approved by the Board of Directors for 2007, the Committee established specific Adjusted EBITDA performance levels for 2007 corresponding to ‘‘target’’, ‘‘threshold’’ and ‘‘superior performance’’ bonus payment amounts also established by the Committee. All the named executive officers’ bonuses were based on the performance of the Company as a whole. For all Named Executive Officers, the Compensation Committee established the following: the threshold Adjusted EBITDA level was set at $236,927,000 for a pay-out of 50% of the respective executives’ bonus percentage; the target Adjusted EBITDA level was set at $263,797,000 for a pay-out of 100% of the respective executives’ bonus percentage; and the ‘‘superior performance’’ Adjusted EBITDA level was set at $290,667,000 for a pay-out of 200% of the respective executives’ bonus percentage. The superior performance EBITDA level was deemed to represent a goal unlikely of achievement based on the assumptions underlying the business plan, except upon performance on the part of the executive leadership team and employees of the Company substantially exceeding expectations. Incentive bonus awards are determined on a linear basis for Adjusted EBITDA attainment falling (1) between the ‘‘threshold’’ and ‘‘target’’ levels, or (2) between the ‘‘target’’ and ‘‘superior performance’’ levels.
The Compensation Committee or the Board of Directors may also award special, one-time bonuses to executives to recognize and encourage specific achievements deemed to further one or more of the strategic goals of the Company. For example, in 2007, the Compensation Committee approved a special bonus of $37,500 for each member of the executive leadership team in recognition of the team’s efforts in successfully completing the acquisition of certain Metzler Automotive Profile Systems (MAPS) sealing systems businesses in August 2007, while managing the business in a difficult environment.
Long Term Incentive Compensation
We have a Long Term Incentive Plan (‘‘LTIP’’) which provides for the granting by the Committee of performance-based awards to executive officers covering performance periods of one year or longer. Awards are normally granted in the first quarter of each year; however, interim grants may be made in the case of new hires or promotions. At the time awards are granted, the Committee establishes performance targets and a payment scale which determines payout amounts at different levels of performance. After the end of the performance period, the Committee determines whether, and to what extent, performance targets have been achieved and the amount of any awards that have been earned. Award amounts are subject to discretionary adjustment by the Committee (they may be adjusted downward up to 80% or upward up to 150%). If a participant engages in ‘‘inimical conduct,’’ meaning an action or omission contrary to the best interest of the Company, before payment of an award is made, the payment is subject to forfeit. LTIP awards are designed to focus the executive leadership team on strong, sustained cash generation and have therefore been based on the achievement of operating cash flow objectives for the Company as a whole, generally over three-year performance periods.
In general, performance periods are three years in duration, although following the 2004 Acquisition, the Board of Directors approved pro rata LTIP awards payable with respect to a one-year performance period ending December 31, 2005 and a two-year performance period ending December 31, 2006 to compensate for the discontinued participation of Company executives in the Cooper Tire & Rubber Company Long Term Incentive Plan as of the closing date of the 2004 Acquisition. At the time LTIP awards are granted, the Committee establishes a target award amount for each executive which represents the amount the executive will receive at the conclusion of the applicable performance period if performance targets are exactly met during the period. Target award amounts are based on the level of responsibility of the executive and other performance-based factors. Target award amounts pertaining to LTIP awards for the three-year performance periods ending December 31, 2007 and 2008 were increased by the Committee in 2007 subject to the condition that grantees defer the amount of the increase and allocate it to an investment in Company stock units under our Management Stock Purchase Plan, which was established in December 2006 and is described below.
62
Since the 2004 Acquisition, LTIP awards have been based on the achievement of operating cash generation goals. Based on the business plan of the Company, the Committee establishes specific operating cash flow targets for the Company as a whole on an annual basis. The ‘‘target’’ performance level represents what the Committee deems to be good operating cash flow performance for the year which is reasonably capable of achievement at a high level of performance on the part of the executive leadership team and the employees of the Company, based on the assumptions and business conditions on which the business plan of the Company is based. LTIP awards for the three-year performance period ending December 31, 2007 were based on the achievement of operating cash flow targets for the years ending December 2005, 2006 and 2007. The target operating cash flow for 2005 was established at $110,100,000, for 2006 at $119,500,000 and for 2007 at $108,200,000.
At the end of each LTIP performance period, the Committee determines the extent to which the Company’s mean average operating cash flow performance during the performance period met the mean average of the annual operating cash flow targets established by the Committee during the period. Subject to the right of the Committee to make adjustments under the plan, LTIP award payouts are determined in accordance with the following:
Target Opportunity Less than 90% of mean targetStock Incentive Plan
Effective as of the closing of the 2004 Acquisition, we established the 2004 Cooper-Standard Holdings Inc. Stock Incentive Plan, which permits the granting of non-qualified and incentive stock options and other stock-based awards to employees and directors. As of December 31, 2007, we had 423,615 shares of common stock reserved for issuance under the plan, including outstanding options granted to certain executives to purchase 212,615 shares of common stock at a price of $100 per share, which was determined to be fair market value at the time of the grant. Options are exercisable for ten years, subject to earlier expiration for reasons such as termination of employment. Shares of common stock acquired upon exercise of options under the plan are subject to restrictions on transfer.
Most of the option grants to executives were made upon the closing of the 2004 Acquisition or in the first year thereafter. One-half of the options granted to executives in this initial period vest on a time basis at a rate of 20% per year over five years; the remaining one-half vest on a performance basis at a rate of 20% per year that Company performance targets are reached for five years or 100% after eight years, with certain acceleration provisions. The same principles apply in the case of the options granted after the initial option grants, except that only the last three years of the five-year period are taken into account, and vesting occurs in increments of 33% rather than 20%. The performance-based options vest based on the achievement by the Company of annual Adjusted EBITDA targets. The 2006 annual Adjusted EBITDA target was $257,200,000 and the 2007 annual Adjusted EBITDA target was $307,000,000 excluding a restructuring charge for a planned closure of a facility. Although the Committee or the Board is authorized to grant options at any time, the Committee or the Board have not granted options on an annual or other regular or prescribed basis. The Committee considers Stock Incentive Plan options to be a key element of executive compensation that directly aligns the interests of the executive leadership team with those of stockholders and emphasizes sustained growth of enterprise value as a performance objective.
Management Stock Purchase Plan
We maintain a nonqualified Deferred Compensation Plan which allows eligible executives and directors to defer base pay, bonus payments and long-term incentive pay and have it allocated on a
63
pre-tax basis to various investment alternatives and ultimately distributed to the executive at a designated time in the future. In December 2006, a new plan feature referred to as the ‘‘Management Stock Purchase Plan’’ was established which provides participants the opportunity to ‘‘purchase’’ Company stock units with income deferred under the deferred compensation plan at a price based on the fair value of the common stock determined on a semi-annual basis by the Committee. Purchased stock units are matched by the Company at year-end on a one-for-one basis, subject to an annual aggregate cap for all executives of $1,500,000 worth of matching units or 15,000 matching units, whichever is less. The Committee can increase the cap in any year. If the matching units are over-subscribed in a given year, participants receive a pro rata number of matching units based on the amount of stock units the participant purchased that year through deferrals. Matching units vest ratably over a three-year period, and may vest earlier upon a participant’s death, disability, retirement or termination by the company without cause or by the participant for good reason. Matching units also become 100% vested upon the occurrence of a change in control of the Company for participants who are employed with the Company immediately prior to such change in control. Stock units are distributed to participants in the form of actual shares of the Company’s common stock, subject to restrictions on transfer, at a time in the future designated by the participant (though at its sole discretion, we may pay purchased units out in cash – matching units are always distributed in shares of common stock). Participants were eligible to defer and allocate portions of their base salary, bonuses and long term incentive plan payments for 2007 and bonuses and long-term incentive plan payments for performance period ending December 31, 2006 but which were paid in March of 2007, to stock units. Matching stock units were awarded as of December 31, 2007. A variety of other deemed fixed income and equity investment options are also available under this plan (which mirror the investment options available under our qualified 401(k) plans), though deferrals allocated to such options are not matched. Timing and form of payment are elected each year with respect to deferrals made for that year. Executives may elect to receive payment beginning either at separation from service or at an otherwise specified date (generally at least three years after the year in which the deferrals are made). The form payable for a given year’s deferral account can be any of the following: (i) single lump sum; (ii) annual installments for five years; (iii) annual installments for ten years; (iv) a specified percentage of the account paid as a lump sum, and the remainder paid in either five annual installments or ten annual installments. The Committee considers the Management Stock Purchase Plan as an important component of its incentive-based compensation program which, like the Stock Incentive Plan, aligns the interests of management with those of stockholders and emphasizes the sustained growth of enterprise value. The Management Stock Purchase Plan is available to a broader group of executives than those who currently hold options under the Stock Incentive Plan.
Retirement Plan Benefits
The Named Executive Officers participate in our qualified defined benefit retirement plan, our qualified defined contribution investment savings plan and our nonqualified supplementary benefit plan. Benefits under these plans provide executives with an income source during their retirement years, and reward executives for long service to the Company. We believe that our retirement plans are generally competitive in the industries in which we compete for executives and assist us in attracting and retaining a high caliber executive leadership team.
Defined Benefit Retirement Plans
The Cooper-Standard Automotive Inc. Salaried Retirement Plan (‘‘CSA Retirement Plan’’) is a defined benefit plan that covers all non-union employees in the United States, including the Named Executive Officers. The CSA Retirement Plan is funded by Company contributions only. There are two types of benefits under the plan, a cash balance benefit and a final average pay benefit. There are two separate ‘‘grandfathered’’ final average pay formulas in the plan, but only one of those formulas applies for purposes of the Named Executive Officers whose benefits are governed by final average pay provisions, so that formula is described herein. The final average pay benefit was closed effective January 1, 2002 with respect to any participant who was not at least 40 years of age and had at least 15 years of earned service as of that date.
64
The cash balance portion of the CSA Retirement Plan states benefits in the form of a hypothetical account established for each participant which is increased by two components, a pay credit equal to a stated percentage of his or her compensation (as defined more specifically below under ‘‘Determination of Benefits under Plans’’) each year, and an earnings credit equal to the interest rate paid on 30-year Treasury bonds times the hypothetical account balance. The final average pay benefit provides benefits stated as an annuity equal to 1.5% times average compensation (the highest five of the last ten years, as further described below in ‘‘Determination of Benefits under Plans’’) times years of service. This final average pay benefit is payable on an unreduced basis at age 62 or upon attainment of age 55 with 30 years of service.
We maintain the Cooper-Standard Automotive Inc. Nonqualified Supplementary Benefit Plan (the ‘‘Supplementary Benefit Plan’’) for the benefit of certain employees (those who are members of a select group of highly-compensated executive employees, including the Named Executive Officers). The Supplementary Benefit Plan provides for an additional pension benefit that is designed to compensate for any reduced benefits under the CSA Retirement Plan due to limits imposed by the Internal Revenue Code of 1986, as amended (the ‘‘Internal Revenue Code’’). The Supplementary Benefit Plan is also designed to provide Mr. McElya a final average pay benefit as if he were eligible for the benefits described under ‘‘Final Average Pay Design’’ below. For cash balance participants, the Supplementary Benefit Plan also provides for an enhanced pay credit as further described under the heading ‘‘Determination of Benefits Under Plans’’ below.
Defined Contribution Retirement Plans
The Cooper-Standard Automotive Inc. Investment Savings Plan (the ‘‘CSA Savings Plan’’) is a tax-qualified 401(k) retirement savings plan pursuant to which all U.S. non-union employees, including the Named Executive Officers, may contribute the lesser of up to 50% of ‘‘Compensation’’ (which includes the same compensation as that described below under ‘‘Cash Balance Design’’, except that retention bonuses are excluded) or the limit prescribed by the Internal Revenue Code (though we impose lower deferral percentage limits on highly-compensated employees). The Company matches 40% of employee contributions up to 5% of Compensation, with a maximum matching contribution of 2% of Compensation. The Company may make discretionary matching contributions depending upon annual financial performance. Matching contributions are 100% vested after the employee has 3 years of service. Employee contributions are always 100% vested.
The Supplementary Benefit Plan also provides for an additional nonqualified employer matching contribution which (1) makes up for any Company contributions to the CSA Savings Plan that were not permitted to be made due to limitations under the Internal Revenue Code and (2) provides a nonqualified employer matching contribution which, when combined with the qualified savings plan match, provides for a total employer matching contribution of 6% of Compensation (without regard to qualified plan limits prescribed by the Internal Revenue Code).
Determination of Benefits under Plans
Benefits under the CSA Retirement Plan and the nonqualified defined benefit portion of the Supplementary Benefit Plan are governed by either a cash balance design or a final average pay design.
Cash Balance Design. Annual pay credits are added to a participant’s cash balance account at the end of each year, based on the participant’s compensation for the year and the sum of the participant’s age and service as of the beginning of that year. Compensation used as the basis for pay credits (‘‘Compensation’’) includes all compensation reported as wages for federal income tax purposes excluding employer contributions to a plan of deferred compensation, income attributable to stock options (including income attributable to any disqualifying dispositions thereof), director fees, sales awards, relocation bonuses, signing bonuses, lump-sum severance payments, suggestion system awards, tuition reimbursement, payment upon the exercise of stock appreciation rights or in lieu of the exercise of stock options, imputed income (such as, but not limited to, group term life insurance that is reported as taxable income), benefits accruing or payable under nonqualified retirement plans,
65
expatriate income, and other amounts that are either excludable or deductible from income in whole or in part for federal income tax purposes, or that represent payments pursuant to a program of benefits or deferred compensation, whether or not qualified under the Internal Revenue Code. Annual pay credits are provided as follows:
Applicable Percentage*
Applicable Percentage** Up to 35Annual interest credits are also added to a participant’s cash balance account each year. This credit is calculated by multiplying the cash balance account as of the end of the prior year by an interest rate that is equal to the annual yield statistic for 30-year U.S. Treasury securities for the month of October of the prior year.
Benefits fully vest upon 5 years of service, with no benefits vested for less than 5 years of service. Service is measured based on an elapsed time basis from date of hire. The 5 year vesting requirement changes to 3 years in 2008.
Normal retirement age is age 65 with 5 years of service. The normal retirement benefit is defined as a monthly life annuity amount that is actuarially equivalent to the cash balance account projected to normal retirement age with interest credits. For participants whose prior final average pay accrued benefits were frozen and converted to an opening account balance at January 1, 2002 when the cash balance design was implemented, an additional amount is added to the normal retirement benefit based on the difference between (i) the frozen age 65 accrued benefit at January 1, 2002 and (ii) a hypothetical age 65 life annuity amount that is actuarially equivalent to the January 1, 2002 opening cash balance account projected to normal retirement age with interest credits only.
Benefits are payable at termination either in the form of a lump sum or an annuity (the default form and time under the nonqualified plan is a lump sum at separation from service). The lump sum is equal to the cash balance account value at the time of distribution (plus an additional amount, if applicable, associated with the procedure described above for those who had an opening account balance established as of January 1, 2002). The immediate annuity payable is the actuarial equivalent of the normal retirement annuity benefit as described above, except in the event of early retirement, as described below.
Eligibility for early retirement is satisfied with attainment of either (i) age 62 with 10 years of service, or (ii) age 55 with 15 years of service. To the extent these age and service conditions are satisfied, the annuity form of benefit available is based on reducing the normal retirement benefit by 0.6% per month up to 36 months, and 0.4% for each additional month up to 84 months, by which age at retirement precedes age 65.
The normal form of annuity is a single life annuity for non-married participants and a reduced joint life annuity with a 50% survivor benefit for married participants. Other optional forms are available on a reduced basis as well.
66
Final Average Pay Design. The following highlights the basic operation of the final average pay design features of the CSA Retirement Plan and the Supplementary Benefit Plan.
The annual retirement benefit, payable as a life annuity at age 65, is equal to 1.5% multiplied by final average pay multiplied by years of service, where final average pay is determined by taking the average of the highest five calendar years of compensation within the last ten calendar years, excluding the year in which termination occurs. Compensation is determined on the same basis as that applicable to the Cash Balance Design, except lump sum severance and signing bonuses are not excluded. Benefits associated with pay in excess of qualified plan limitations are provided by the Supplementary Benefit Plan, and benefits associated with pay up to qualified plan limits are provided by the CSA Retirement Plan.
Benefits fully vest upon 5 years of service, with no benefits vested for less than 5 years of service. Service is measured based on an elapsed time basis from date of hire. The 5 year vesting requirement changes to 3 years in 2008.
Benefits are payable as an annuity at retirement. The normal form of annuity is a single life annuity for non-married participants or a reduced joint life annuity with a 50% survivor benefit for married participants. Other optional forms are available on a reduced basis as well.
Eligibility for early retirement is satisfied with attainment of either (i) age 62 with 10 years of service, or (ii) age 55 with 15 years of service. The annuity form of benefit available is based on reducing the normal retirement benefit by 0.4% per month by which age at retirement precedes age 62. In addition, there is no reduction in any event if a participant has attained age 55 with 30 years of service.
Termination and Change in Control Benefits
Our Named Executive Officers receive certain benefits under their employment agreements upon certain termination of employment events, including following a change in control of the Company. These benefits, described in detail under ‘‘Terms Applicable to Payments Upon Termination of Employment’’ below, are intended to ensure that the executive leadership team is able to objectively evaluate potential change in control transactions by addressing the potential personal impact of such transactions on our executives.
Health Benefits
We provide our executives with health and welfare benefits under our Health & Well-Being Benefit Plan that is made available generally to our salaried employees. The Health & Well-Being Benefit Plan is a flexible plan which permits participants to choose among various co-pay options and available benefits, including medical, prescription drug, dental, long-term disability and life insurance and other benefits, depending on the needs of the participant and his or her dependents. These benefits help us remain competitive in attracting and retaining a high caliber management team.
Perquisites
We provide each of our senior executives with a vehicle for business and personal use through our vehicle lease program or through a vehicle allowance. We also reimburse senior executives the cost of tax preparation and financial planning services up to a maximum of $3,000 per year. In 2007, we paid the costs of apartments in the area of our headquarters for one executive whose primary residence was in another state. The Committee regards the level of such perquisites to be modest and of benefit to the Company in attracting and retaining a high caliber management team.
Effect of Accounting and Tax Treatment on Compensation Decisions
In the review and establishment of our compensation programs, we consider the anticipated accounting and tax implications to itself and its executives. Section 162(m) of the Internal Revenue Code limits the deductibility of compensation paid to executives in excess of $1,000,000 in a year, other than performance-based compensation meeting certain requirements. The Compensation
67
Committee considers the anticipated tax treatment to the Company of compensation paid to executives; however, there may be instances where the Committee may conclude that it is appropriate to exceed the limitation on deductibility under Section 162(m) to ensure that executive officers are compensated in a manner that is consistent with our overall compensation philosophy and objectives and which the Committee believes to be in the best interests of the Company.
Executive Officer Compensation
Set forth below is information regarding compensation for services to the Company in all capacities of the following executive officers of the Company (the ‘‘Named Executive Officers’’) during the year ended December 31, 2007: (i) our Chief Executive Officer; (ii) our Chief Financial Officer; (iii) the three most highly compensated executive officers other than the Chief Executive Officer and Chief Financial Officer who were serving as executive officers at December 31, 2007; and also (iv) our former Vice President, Corporate Human Resources whose employment with the Company terminated effective December 31, 2007 and who was one of the three most highly compensated executive officers other than the Chief Executive Officer and Chief Financial officer who served as an executive officer during the year ended December 31, 2007.
Summary Compensation Table
Principal Position (a)
(b)
(c)
(d)
Awards(4)
(e)
Awards(5)
(f)
Incentive
Plan
Compensation(6)
(g)
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings(7)
(h)
Compensation
(i)
(j) James S. McElya,68
discretionary bonus awarded by the Board of Directors of the Company in 2007 and 2006. Incentive cash compensation earned during the fiscal year based on pre-established criteria approved by the Compensation Committee under the Company’s incentive bonus program and Long Term Incentive Plan is reported in column (g). (4) The amount shown in column (e) represents the compensation cost associated with Company matching units under the Management Stock Purchase Plan as determined in accordance with FAS 123(R). See Note 17 of the Company’s financial statements for 2007 for the assumptions made in determining FAS 123(R) values. There can be no assurance that the FAS 123(R) value will ever be realized. Description of the Management Stock Purchase Plan is found under Executive Compensation Components. (5) The amount shown in column (f) represents the compensation costs of stock option awards granted in 2007 for financial reporting purposes under FAS 123(R). See Note 17 of the Company’s financial statements for 2007 for the assumptions made in determining FAS 123(R) values. There can be no assurance that the FAS123(R) value will ever be realized. (6) The amount shown in column (g) represents: for 2007: the sum of: (i) bonus payments for 2007 under the Company’s annual incentive bonus program of, for Mr. McElya, $1,052,300; for Mr. Campbell, $321,880; for Mr. Hasler, $495,200; for Mr. Beard, $293,716; for Mr. Verwilst, $263,137; and for Mr. Phillips, $241,410 and (ii) payments under the Company’s Long Term Incentive Plan for the performance period ending December 31, 2007 of, for Mr. McElya, $404,093; for Mr. Campbell, $239,717; for Mr. Hasler, $342,452; for Mr. Beard, $239,717; for Mr. Verwilst, $136,981; and for Mr. Phillips, $136,981; and for 2006: the sum of: (i) bonus payments for 2006 under the Company’s annual incentive bonus program of, for Mr. McElya, $756,522; for Mr. Campbell, $213,292; for Mr. Hasler, $405,151; for Mr. Beard, $187,808; for Mr. Verwilst, $175,182; and for Mr. Phillips $169,035; and (ii) payments under the Company’s Long Term Incentive Plan for the performance period ending December 31, 2006 of, for Mr. McElya, $111,108; for Mr. Campbell, $69,443; for Mr. Hasler, $69,443; for Mr. Beard, $69,443; for Mr. Verwilst, $46,295; and for Mr. Phillips, $46,295. (7) The amount shown in column (h) represents for each Named Executive Officer the sum of the aggregate change in the actuarial present value of accumulated benefits under all defined benefit and actuarial pension plans (qualified and non-qualified, including supplemental plans) from the plan measurement date used for financial statement reporting purposes with respect to the prior completed fiscal year to the plan measurement date used for financial statement reporting purposes with respect to the covered fiscal year. (8) The amount shown in column (i) represents matching Company contributions under the qualified 401(k) CSA Investment Savings Plan and nonqualified defined contribution portion of the Supplementary Benefit Plan (totaling $105,250); the cost of Company-paid personal travel; the cost of Company-paid tax preparation and financial planning services; the cost of a Company-provided vehicle; and life insurance premiums paid by the Company. (9) The amount shown in column (i) represents matching company contributions under the qualified 401(k) CSA Savings Plan and nonqualified defined contribution portion of the Supplementary Benefit Plan (totaling $79,171); the cost of a Company-provided apartment; the cost of Company-paid personal travel; the cost of Company-paid tax preparation and financial planning services; the cost of a Company-provided vehicle; and life insurance premiums paid by the Company. (10) The amount shown in column (i) represents matching Company contributions under the qualified 401(k) CSA Investment Savings Plan and nonqualified defined contribution portion of the Supplementary Benefit Plan (totaling $43,153); the cost of a Company-provided apartment; the cost of Company-paid tax preparation and financial planning services; the cost of a Company-provided vehicle; and life insurance premiums paid by the Company.69
(11) The amount shown in column (i) represents matching company contributions under the qualified 401(k) CSA Savings Plan and nonqualified defined contribution portion of the Supplementary Benefit Plan (totaling $32,419); the cost of a Company-provided apartment; the cost of Company-paid tax preparation and financial planning services; the cost of a Company-provided vehicle; and life insurance premiums paid by the Company. (12) The amount shown in column (i) represents matching Company contributions under the qualified 401(k) CSA Investment Savings Plan and nonqualified defined contribution portion of the Supplementary Benefit Plan (totaling $60,726); and life insurance premiums paid by the Company. (13) The amount shown in column (i) represents matching company contributions under the qualified 401(k) CSA Savings Plan and nonqualified defined contribution portion of the Supplementary Benefit Plan (totaling $37,821); and life insurance premiums paid by the Company. (14) The amount shown in column (i) represents matching Company contributions under the qualified 401(k) CSA Investment Savings Plan and nonqualified defined contribution portion of the Supplementary Benefit Plan (totaling $39,568); the cost of Company-paid tax preparation and financial planning services; the cost of a Company-provided vehicle; and life insurance premiums paid by the Company. (15) The amount shown in column (i) represents matching company contributions under the qualified 401(k) CSA Savings Plan and nonqualified defined contribution portion of the Supplementary Benefit Plan (totaling $30,111); the cost of Company-paid tax preparation and financial planning services; the cost of a Company-provided vehicle; and life insurance premiums paid by the Company. (16) The amount shown in column (i) represents matching Company contributions under the qualified 401(k) CSA Investment Savings Plan and nonqualified defined contribution portion of the Supplementary Benefit Plan (totaling $35,079); the cost of Company-paid tax preparation and financial planning services; the cost of a Company-provided vehicle; and life insurance premiums paid by the Company. (17) The amount shown in column (i) represents matching company contributions under the qualified 401(k) CSA Savings Plan and nonqualified defined contribution portion of the Supplementary Benefit Plan (totaling $26,827); the cost of Company-paid tax preparation and financial planning services; the cost of a Company-provided vehicle; and life insurance premiums paid by the Company. (18) Of the 2,111 options granted to Mr. Phillips on March 15, 2007, 656 options vested prior to Mr. Phillips’s termination of employment, effective December 31, 2007. The remaining 1,455 options were forfeited. (19) Mr. Phillips’s employment terminated effective December 31, 2007. The amount shown in column (i) represents matching Company contributions under the qualified 401(k) CSA Investment Savings Plan and nonqualified defined contribution portion of the Supplementary Benefit Plan (totaling $33,141); the cost of Company-paid tax preparation and financial planning services; the cost of a Company-provided vehicle; life insurance premiums paid by the Company; and the amount of the compensation payable to Mr. Phillips upon the termination of his employment that was the responsibility of the Company ($1,087,618). (20) The amount shown in column (i) represents matching Company contributions under the qualified 401(k) CSA Savings Plan and nonqualified defined contribution portion of the Supplementary Benefit Plan (totaling $26,024); the cost of Company-paid tax preparation and financial planning services; the cost of a Company-provided vehicle; and life insurance premiums paid by the Company.70
(21) The percentages of total compensation in 2007 that were attributable to base salary and total bonus (the amounts identified in columns (d) and (g)) were as follows: Mr. McElya, base salary 25.4%, bonus 44.7%; for Mr. Campbell, base salary 27.3%, bonus 40.9%; for Mr. Hasler, base salary 21.4%, bonus 37.4%; for Mr. Beard, base salary 27.6%, bonus 43.2%; Mr. Verwilst, base salary 28.6%, bonus 38.4%; Mr. Phillips, base salary 11.9%, bonus 16.5%. (22) The percentages of total compensation in 2006 that were attributable to base salary and total bonus (the amounts identified in columns (d) and (g)) were as follows: Mr. McElya, base salary 35.0%, bonus 40.2%; for Mr. Campbell, base salary 44.1%, bonus 42.3%; for Mr. Hasler, base salary 33.4%, bonus 42.4%; for Mr. Beard, base salary 46.8%, bonus 41.1%; Mr. Verwilst, base salary 44.8%, bonus 42.7%; Mr. Phillips, base salary 44.1%, bonus 42.5%.Non-Equity Incentive Plan Compensation — Annual Incentive Bonus
For 2007, the Committee established an annual incentive bonus target amount for each member of the executive leadership team based on a percentage of base salary. With respect to the Named Executive Officers, the percentage was 100% for Mr. McElya, 80% for Mr. Hasler and 65% for Messrs. Campbell, Beard, Verwilst and Phillips. The annual incentive bonus target amounts are based on the levels of responsibility of the executives and other performance-based factors. Incentive bonus amounts actually paid for 2007 performance are set forth in footnote (6) under column (g) of the above Summary Compensation Table.
2007 Grants of Plan-Based Awards
The following table sets forth information regarding plan-based awards made to the Named Executive Officers during 2007 that provide for possible future payouts.
(b)
Under Non-Equity
Incentive Plan Awards(1)
Stock
Awards:
Number of
Shares of
Stock or
Units (#)(6)
(i)
Option
Awards;
Number of
Securities
Underlying
Options (#)(4)
(j)
or Base
Price of
Option
Awards
($/sh)
(k)
Fair Value
of Stock
and
Option
Awards
($)(7)
(l)
(c)
(d)
(e) James S. McElya71
column (g) of the Summary Compensation Table do not pertain to the 2007 LTIP Awards; they reflect payments under a 2005 LTIP award granted by the Compensation Committee under the Long Term Incentive Plan based on the performance period beginning January 1, 2005 and ending December 31, 2007. (2) Mr. Phillips’ employment with the Company terminated as of December 31, 2007. He is not eligible for future payouts under non-equity incentive plan awards payable with respect to performance periods ending after 2007. (3) The 2007 LTIP does not provide for a maximum payout; the amount of the payout increases by 10% for each 1% increase in the actual level of achievement above the target level. (4) The amounts shown in column (j) represent the stock option awards granted March 15, 2007 under the 2004 Cooper-Standard Holdings Inc. Stock Incentive Plan. (5) Due to Mr. Phillips’ employment terminating as of December 31, 2007, he vested in 656 options and forfeited 1,455 options. (6) Represents total stock units awarded under the Management Stock Purchase Plan on December 31, 2007. See Management Stock Purchase Plan under the Executive Compensation Components section for more information about the determination of awards under this plan. (7) See Note 17 of the Notes to Consolidated Financial Statements for 2007 for the assumptions made in determining FAS 123(R) values.Outstanding Equity Awards at 2007 Fiscal Year-End
The following table sets forth information concerning outstanding stock option awards and stock units under the Management Stock Purchase Plan held by the Named Executive Officers at December 31, 2007, including the number of shares underlying both exercisable and unexercisable portions of each stock option as well as the exercise price and expiration date of each outstanding option.
Securities
Underlying
Unexercised
Options (#)
Exercisable(2)
(b)
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)(3)
(d)
Exercise
Price
(e)
Expiration
Date(4)
(f)
Shares or
Units of Stock
That Have Not
Vested (#)
(g)
of Shares or
Units of
Stock That
Have Not
Vested(11)
(h) James S. McElya72
Company’s common stock: for Mr. McElya, 13,417 shares time-based and 10,453 shares performance-based; for Mr. Campbell, 7,081 shares time-based and 5,551 shares performance-based; for Mr. Hasler, 8,280 shares time-based and 6,531 shares performance-based; for Mr. Beard, 7,380 shares time-based and 5,750 shares performance-based; for Mr. Verwilst, 5,718 shares time-based and 4,486 shares performance-based; for Mr. Phillips, 5,718 shares time-based and 4,486 shares performance-based. (3) Represents outstanding time-based options and performance-based options which have not been earned or vested and were unexercisable as of December 31, 2007 with respect to the following number of shares of the Company’s common stock: for Mr. McElya, 8,945 shares time-based and 11,908 shares performance-based; for Mr. Campbell, 5,218 shares time-based and 6,748 shares performance-based; for Mr. Hasler, 6,720 shares time-based and 8,469 shares performance-based; for Mr. Beard, 4,919 shares time-based and 6,549 shares performance-based; for Mr. Verwilst, 4,282 shares time-based and 5,514 shares performance-based. (4) Options expire on the earliest to occur of: (i) the tenth anniversary of the date of grant; (ii) the first anniversary of the date of the optionee’s termination of employment due to death, disability, retirement at normal retirement age or the sale by the Company (not constituting a change of control) of the business in which the optionee was employed; (iii) 90 days following the date of the optionee’s termination of employment without cause (or for reasons other than those described in (ii)); or (iv) on the date of the optionee’s termination of Employment for cause. Mr. Phillips employment with the Company terminated on December 31, 2007. (5) Represents 2,367 stock units granted on December 31, 2007 through the Company match under the Management Stock Purchase Plan. These matching units vest ratably over a three year period beginning on December 31, 2008. Description of Management Stock Purchase Plan is found in Executive Compensation Components. (6) Represents 1,869 stock units granted on December 31, 2007 through the Company match under the Management Stock Purchase Plan. These matching units vest ratably over a three year period beginning on December 31, 2008. Description of Management Stock Purchase Plan is found in Executive Compensation Components. (7) Represents 3,469 stock units granted on December 31, 2007 through the Company match under the Management Stock Purchase Plan. These matching units vest ratably over a three year period beginning on December 31, 2008. Description of Management Stock Purchase Plan is found in Executive Compensation Components. (8) Represents 1,752 stock units granted on December 31, 2007 through the Company match under the Management Stock Purchase Plan. These matching units vest ratably over a three year period beginning on December 31, 2008. Description of Management Stock Purchase Plan is found in Executive Compensation Components. (9) Represents 1,459 stock units granted on December 31, 2007 through the Company match under the Management Stock Purchase Plan. These matching units vest ratably over a three year period beginning on December 31, 2008. Description of Management Stock Purchase Plan is found in Executive Compensation Components. (10) Mr. Phillips terminated employment on December 31, 2007 and his matching units under the Management Stock Purchase Plan were immediately vested as of that date. See Option Exercises and Stock Vested table. (11) The values in column (h) equal the total number of matching stock units under the Management Stock Purchase Plan for each Named Executive Officer multiplied by the value of Company common stock as of December 31, 2007, which was $120.73
2007 Option Exercises and Stock Vested
The following table sets forth certain information regarding stock-based awards that vested during 2007 for our Named Executive Officers. No stock options were exercised by our Named Executive Officers in 2007.
Shares Acquired
on Exercise (#)
(b)
Realized on
Exercise($)
(c)
Shares Acquired
on Vesting (#)
(d)
Realized
on Vesting ($)
(e) James S. McElya2007 Pension Benefits
The following table sets forth the actuarial present value of each Named Executive Officer’s accumulated benefit under the CSA Retirement Plan and the non-qualified defined benefit portion of the Supplementary Benefit Plan as described in ‘‘Retirement Plan Benefits’’ under the Executive Compensation Components section, assuming benefits are paid at normal retirement age or the earliest retirement age at which participants receive unreduced benefits, based on current levels of compensation. The table also shows the number of years of credited service under each plan, computed as of the same pension plan measurement date used in the Company’s audited financial statements for the year ended December 31, 2007.
Credited Service
(#) (c)
Accumulated
Benefit(1) ($) (d)
During Last
Fiscal Year
($) (e) James S. McElya74
(2) Messrs. McElya, Campbell, Beard, Verwilst, and Phillips are covered under the cash balance design for purposes of the qualified CSA Retirement Plan. (3) Mr. McElya receives two types of defined benefit under the Supplementary Benefit Plan. He receives a non-qualified cash balance benefit determined under usual terms. In addition, he receives a benefit determined under the final average pay design, offset by the annuity-equivalent of his qualified and nonqualified cash balance benefits. Because the final average pay design includes an unreduced feature upon attainment of age 62 and 10 years of service, which the executive would be eligible for, he was assumed to retire at age 62. (4) Mr. McElya is granted four years of additional service in the Supplementary Benefit Plan to compensate for lost (non-vested) benefits accrued with his previous employer prior to joining the Company in January 2000. (5) Messrs. Campbell, Beard, Verwilst, and Phillips are covered under the cash balance design for purposes of the non-qualified Supplementary Benefit Plan. (6) Mr. Hasler is covered under the final average pay design for both the qualified CSA Retirement Plan and the non-qualified Supplementary Benefit Plan. Because the final average pay design includes an unreduced feature upon attainment of age 62 and 10 years of service, which the executive would be eligible for, he was assumed to retire at age 62. (7) Mr. Verwilst has not met the 5 year vesting requirement. (8) Mr. Phillips’s employment terminated on December 31, 2007. The figures above are equal to his actual cash balance values under each plan as of December 31, 2007. Mr. Phillips has not yet made a final election for distribution of these benefits.2007 Nonqualified Deferred Compensation
The following table sets forth annual executive and company contributions under non-qualified deferred compensation provisions of the Executive Deferred Compensation Plan and the non-qualified defined contribution portion of the Supplementary Benefit Plan, as well each Named Executive Officer’s withdrawals, earnings and fiscal-year end balances in those plans.
Contributions in
Last FY(1) (b)
Contributions in
Last FY(2) (c)
Earnings in
Last FY (d)
Withdrawals/
Distributions
(e)
Balance at
Last FY End
(f) James S. McElya75
(3) Amount to be paid out in 2008 to Mr. Phillips attributable to his nonqualified defined contribution balance in the Supplementary Benefit Plan plus his balance in the Executive Deferred Compensation Plan.Potential Payments Upon Termination or Change in Control
The Named Executive Officers have entered into employment agreements which provide for certain benefits upon termination of employment, including termination following a change in control as defined in the Cooper-Standard Automotive Inc. Change of Control Severance Pay Plan (the ‘‘Change in Control Plan’’). The table below shows estimates of the value of compensation that would be payable to each Named Executive Officer upon termination of employment under certain circumstances. As indicated in the table, compensation upon termination of employment varies depending on the circumstances of the termination and whether or not it occurred following a change in control. Amounts presented in the table are calculated as if the employment of the executive terminated effective December 31, 2007. Payments due to any one of the Named Executive Officers upon actual termination of employment can only be determined at the time of termination. There can be no assurance that an actual termination or change in control would produce the same or similar results as those described below if it were to occur on any other date and if the actual circumstances at the time of termination.
Amounts accrued under the normal terms of our pension and deferred compensation plans are not included in this table. Information concerning pension benefits and deferred compensation disclosures is presented under ‘‘2007 Pension Benefits’’ and ‘‘2007 Nonqualified Deferred Compensation,’’ respectively. Similarly, information concerning vested equity awards is not included in the table, and is presented under ‘‘Outstanding Equity Awards at 2007 Fiscal Year End.’’
Payment(1)
Enhancement(2)
Services(4)
Vesting of
Equity
Awards(5)
