Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  ___________________________________ 
FORM 10-Q
  ___________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
or
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number: 001-36127
   ______________________________
COOPER-STANDARD HOLDINGS INC.
(Exact name of registrant as specified in its charter)
   ______________________________
Delaware
 
20-1945088
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
39550 Orchard Hill Place Drive
Novi, Michigan 48375
(Address of principal executive offices)
(Zip Code)
(248) 596-5900
(Registrant’s telephone number, including area code)
 ______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of October 26, 2018 there were 17,774,669 shares of the registrant’s common stock, $0.001 par value, outstanding.




COOPER-STANDARD HOLDINGS INC.
Form 10-Q
For the period ended September 30, 2018
 
 
 
Page
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 2.
Item 5.
Item 6.


2



PART I — FINANCIAL INFORMATION
Item 1.         Financial Statements
COOPER-STANDARD HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME
(Unaudited)
(Dollar amounts in thousands except per share amounts) 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Sales
$
861,653

 
$
869,016

 
$
2,757,306

 
$
2,680,212

Cost of products sold
741,998

 
718,207

 
2,315,406

 
2,187,213

Gross profit
119,655

 
150,809

 
441,900

 
492,999

Selling, administration & engineering expenses
82,134

 
87,791

 
238,913

 
260,360

Amortization of intangibles
3,791

 
3,432

 
10,596

 
10,563

Gain on sale of land
(10,714
)
 

 
(10,714
)
 

Impairment charges

 

 

 
4,270

Restructuring charges
2,703

 
9,909

 
19,841

 
28,220

Operating profit
41,741

 
49,677

 
183,264

 
189,586

Interest expense, net of interest income
(9,983
)
 
(10,256
)
 
(29,756
)
 
(31,788
)
Equity in earnings of affiliates
1,413

 
660

 
4,348

 
3,735

Loss on refinancing and extinguishment of debt

 

 
(770
)
 
(1,020
)
Other expense, net
(1,697
)
 
(6,785
)
 
(3,973
)
 
(10,643
)
Income before income taxes
31,474

 
33,296

 
153,113

 
149,870

Income tax expense (benefit)
(1,190
)
 
7,838

 
19,831

 
40,258

Net income
32,664

 
25,458

 
133,282

 
109,612

Net income attributable to noncontrolling interests
(508
)
 
(818
)
 
(2,457
)
 
(2,810
)
Net income attributable to Cooper-Standard Holdings Inc.
$
32,156

 
$
24,640

 
$
130,825

 
$
106,802

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.80

 
$
1.39

 
$
7.29

 
$
6.01

Diluted
$
1.77

 
$
1.32

 
$
7.13

 
$
5.67

The accompanying notes are an integral part of these financial statements.


3



COOPER-STANDARD HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollar amounts in thousands) 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
32,664

 
$
25,458

 
$
133,282

 
$
109,612

Other comprehensive income (loss):
 
 
 
 
 
 
 
Currency translation adjustment
(15,715
)
 
16,535

 
(41,277
)
 
41,204

Benefit plan liabilities adjustment, net of tax
656

 
3,963

 
4,914

 
1,235

Fair value change of derivatives, net of tax
1,481

 
(966
)
 
1,871

 
617

Other comprehensive income (loss), net of tax
(13,578
)
 
19,532

 
(34,492
)
 
43,056

Comprehensive income
19,086

 
44,990

 
98,790

 
152,668

Comprehensive (income) loss attributable to noncontrolling interests
584

 
(1,306
)
 
(704
)
 
(3,891
)
Comprehensive income attributable to Cooper-Standard Holdings Inc.
$
19,670

 
$
43,684

 
$
98,086

 
$
148,777

The accompanying notes are an integral part of these financial statements.


4



COOPER-STANDARD HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except share amounts)
 
 
September 30, 2018
 
December 31, 2017
 
(unaudited)
 

Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
282,357

 
$
515,952

Accounts receivable, net
462,619

 
494,049

Tooling receivable
134,072

 
112,561

Inventories
182,743

 
170,196

Prepaid expenses
37,221

 
33,205

Other current assets
86,547

 
100,778

Assets held for sale
120,940

 

Total current assets
1,306,499

 
1,426,741

Property, plant and equipment, net
966,581

 
952,178

Goodwill
183,698

 
171,852

Intangible assets, net
91,393

 
69,091

Other assets
111,753

 
105,786

Total assets
$
2,659,924

 
$
2,725,648

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Debt payable within one year
$
36,947

 
$
34,921

Accounts payable
452,197

 
523,296

Payroll liabilities
108,111

 
123,090

Accrued liabilities
109,915

 
145,650

Liabilities held for sale
75,044

 

Total current liabilities
782,214

 
826,957

Long-term debt
727,183

 
723,325

Pension benefits
130,646

 
180,173

Postretirement benefits other than pensions
53,030

 
61,921

Other liabilities
55,696

 
78,183

Total liabilities
1,748,769

 
1,870,559

7% Cumulative participating convertible preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding

 

Equity:
 
 
 
Common stock, $0.001 par value, 190,000,000 shares authorized; 19,840,438 shares issued and 17,774,629 shares outstanding as of September 30, 2018, and 19,920,805 shares issued and 17,914,599 outstanding as of December 31, 2017
18

 
18

Additional paid-in capital
510,349

 
512,815

Retained earnings
609,962

 
511,367

Accumulated other comprehensive loss
(239,009
)
 
(197,631
)
Total Cooper-Standard Holdings Inc. equity
881,320

 
826,569

Noncontrolling interests
29,835

 
28,520

Total equity
911,155

 
855,089

Total liabilities and equity
$
2,659,924

 
$
2,725,648

The accompanying notes are an integral part of these financial statements.

5



COOPER-STANDARD HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
(Dollar amounts in thousands except share amounts)

 
Total Equity
 
Common Shares
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Cooper-Standard Holdings Inc. Equity
 
Noncontrolling Interests
 
Total Equity
Balance as of December 31, 2017
17,914,599

 
$
18

 
$
512,815

 
$
511,367

 
$
(197,631
)
 
$
826,569

 
$
28,520

 
$
855,089

Repurchase of common stock
(327,788
)
 

 
(8,088
)
 
(35,437
)
 

 
(43,525
)
 

 
(43,525
)
Cumulative effect of change in accounting principle

 

 

 
8,639

 
(8,639
)
 

 

 

Share-based compensation, net
187,818

 

 
8,304

 
(5,432
)
 

 
2,872

 

 
2,872

Purchase of noncontrolling interest

 

 
(2,682
)
 

 

 
(2,682
)
 
312

 
(2,370
)
Contribution from noncontrolling interests

 

 

 

 

 

 
299

 
299

Net income

 

 

 
130,825

 

 
130,825

 
2,457

 
133,282

Other comprehensive income (loss)

 

 

 

 
(32,739
)
 
(32,739
)
 
(1,753
)
 
(34,492
)
Balance as of September 30, 2018
17,774,629

 
$
18

 
$
510,349

 
$
609,962

 
$
(239,009
)
 
$
881,320

 
$
29,835

 
$
911,155

The accompanying notes are an integral part of these financial statements.
 

6



COOPER-STANDARD HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollar amounts in thousands)
 
 
Nine Months Ended September 30,
 
2018
 
2017
Operating Activities:
 
 
 
Net income
$
133,282

 
$
109,612

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
98,675

 
88,850

Amortization of intangibles
10,596

 
10,563

Gain on sale of land
(10,714
)
 

Impairment charges

 
4,270

Share-based compensation expense
14,117

 
19,006

Equity in earnings of affiliates, net of dividends related to earnings
160

 
1,647

Loss on refinancing and extinguishment of debt
770

 
1,020

Other
8,666

 
14,706

Changes in operating assets and liabilities
(177,548
)
 
(144,584
)
Net cash provided by operating activities
78,004

 
105,090

Investing activities:
 
 
 
Capital expenditures
(160,088
)
 
(137,446
)
Acquisition of businesses, net of cash acquired
(98,673
)
 
(478
)
Proceeds from sale of fixed assets and other
8,173

 
1,236

Net cash used in investing activities
(250,588
)
 
(136,688
)
Financing activities:
 
 
 
Principal payments on long-term debt
(2,928
)
 
(15,616
)
Increase in short-term debt, net
3,554

 
6,070

Purchase of noncontrolling interests
(2,450
)
 

Repurchase of common stock
(43,525
)
 
(30,680
)
Proceeds from exercise of warrants

 
836

Taxes withheld and paid on employees' share-based payment awards
(11,571
)
 
(11,949
)
Other
(88
)
 
(795
)
Net cash used in financing activities
(57,008
)
 
(52,134
)
Effects of exchange rate changes on cash, cash equivalents and restricted cash
(3,045
)
 
(22,836
)
Changes in cash, cash equivalents and restricted cash
(232,637
)
 
(106,568
)
Cash, cash equivalents and restricted cash at beginning of period
518,461

 
482,979

Cash, cash equivalents and restricted cash at end of period
$
285,824

 
$
376,411

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheet:
 
Balance as of
 
September 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
282,357

 
$
515,952

Restricted cash included in other current assets
614

 
88

Restricted cash included in other assets
2,853

 
2,421

Total cash, cash equivalents and restricted cash shown in the statement of cash flows
$
285,824

 
$
518,461

The accompanying notes are an integral part of these financial statements.

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)


1. Overview
Basis of Presentation
Cooper-Standard Holdings Inc. (together with its consolidated subsidiaries, the “Company” or “Cooper Standard”), through its wholly-owned subsidiary, Cooper-Standard Automotive Inc. (“CSA U.S.”), is a leading manufacturer of sealing, fuel and brake delivery, fluid transfer, and anti-vibration systems. The Company’s products are primarily for use in passenger vehicles and light trucks that are manufactured by global automotive original equipment manufacturers (“OEMs”) and replacement markets. The Company conducts substantially all of its activities through its subsidiaries.
Subsequent to the end of the Company's third quarter, on November 2, 2018, the Company entered into a definitive agreement to divest the anti-vibration systems product line. See Note 3. Acquisitions and Divestitures and Note 4. Assets Held for Sale.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial information and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Annual Report”), as filed with the SEC. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. These financial statements include all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation of the financial position and results of operations of the Company. The operating results for the interim period ended September 30, 2018 are not necessarily indicative of results for the full year. In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.
The Company’s financial statements for the three and nine months ended September 30, 2017 have been recast to reflect the effects of the adoption of Accounting Standards Update (“ASU”) 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, and ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, both of which were adopted in the first quarter of 2018. The financial statement line items affected due to the adoption of ASU 2017-07 were cost of products sold, selling, administration & engineering expenses and other expense, net. The financial statement line items affected due to the adoption of ASU 2016-18 were cash flows from operating activities and beginning and ending cash, cash equivalents and restricted cash. Amounts included in restricted cash are maintained to meet local regulatory requirements in Europe and Korea in support of employee related programs.
2. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
The Company adopted the following ASU during the three months ended September 30, 2018:
Standard
Description
Impact
Effective Date
ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting

Simplifies the accounting for nonemployee share-based payments by aligning the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. A modified retrospective transition approach is required. Early adoption is permitted, but no earlier than an entity’s adoption of Topic 606.
No impact
January 1, 2019 (early adopted as of September 30, 2018)
The Company adopted the following ASU during the nine months ended September 30, 2018:
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, and all related amendments using the modified retrospective method applied to contracts that were not completed at the date of initial application. The new standard replaced existing revenue recognition guidance with a five-step

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

model and additional financial statement disclosures. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
The Company did not recognize a cumulative effect adjustment to the opening balance of retained earnings because net income was not impacted upon adoption. However, the cumulative effect of the changes made to the Company’s consolidated January 1, 2018 balance sheet were as follows:
 
Balance as of December 31, 2017
 
Adjustments due to adoption of ASC 606
 
Balance as of January 1, 2018
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Accounts receivable, net
$
494,049

 
$
(4,604
)
 
$
489,445

Other current assets
$
100,778

 
$
4,604

 
$
105,382

The new standard primarily impacted how the Company accounts for unbilled receivables associated with variable pricing arrangements, now recognized as contract assets. Before adoption, the Company recognized such amounts in accounts receivable. In accordance with the modified retrospective adoption method, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The following table summarizes the impact of adopting the new standard on the Company’s consolidated balance sheet as of September 30, 2018.
 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change
Higher / (Lower)
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Accounts receivable, net
$
462,619

 
$
465,468

 
$
(2,849
)
Other current assets
$
86,547

 
$
83,698

 
$
2,849



9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

Recently Issued Accounting Pronouncements
The Company considered the recently issued accounting pronouncement summarized as follows, which will have a material impact on its consolidated financial statements or disclosures:
Standard
Description
Impact
Effective Date
ASU 2016-02, Leases (Topic 842)
Requires lessees to recognize right-of-use assets and lease liabilities for all leases (except for short-term leases). The standard also requires additional disclosures to help financial statement users better understand the amount, timing and uncertainty of cash flows arising from lease transactions. Several ASUs have been issued since the issuance of ASU 2016-02. These ASUs are intended to promote a more consistent interpretation and application of the principles outlined in the standard and provide an additional transition method. A modified retrospective transition approach is required with certain practical expedients available.
The Company continues to perform a comprehensive evaluation on the impacts of adopting this standard and believes this standard will primarily result in a material increase in right-of-use assets and lease liabilities on its consolidated balance sheet and will not have a material impact on its consolidated income statement or statement of cash flows. The Company is progressing in its implementation of lease administration software and continues to assess the impact to our systems, processes, accounting policies and internal controls. While the Company's evaluation is ongoing, the impact on existing processes, controls, and information systems is expected to be significant. The Company will adopt the guidance effective January 1, 2019 using the modified retrospective method whereby the cumulative effect of adopting the standard is recognized in equity at the date of initial application. The Company continues to analyze all of the practical expedients and plans to elect the package of practical expedients on existing leases as of the effective date and not elect the hindsight practical expedient.
January 1, 2019
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement

This amendment modifies the disclosure requirements for ASC Topic 820 by removing and modifying existing disclosure requirements as well as adding new disclosures.

The Company is undertaking a comprehensive evaluation of the impacts of adopting this standard and expects this standard will primarily result in additional quantitative disclosures for Level 3 fair value measurements.
January 1, 2020

ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans

This amendment modifies the disclosure requirements for ASC Topic 815 by removing and modifying existing disclosure requirements as well as adding new disclosures.


The Company is undertaking a comprehensive evaluation of the impacts of adopting this standard and expects this standard will primarily result in additional pension disclosures while also removing certain disclosures. Specifically, the weighted-average interest crediting rate for our cash balance plan and if needed, an explanation for significant gains and losses related to changes in the benefit obligation for the period will be added while accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year and the effects of a one-percentage-point change in the assumed health care cost trend rate will be removed.
December 31, 2020

3. Acquisitions and Divestitures
AMI Acquisition
In the first quarter of 2018, the Company finalized its purchase of 100% equity interest of the China fuel and brake business of AMI Industries (“AMI China”) for cash consideration of $3,900. This acquisition directly aligns with the Company’s growth strategy by expanding the Company’s fuel and brake business. The results of operations of AMI China are included in the Company’s condensed consolidated financial statements from the date of acquisition, February 1, 2018, and

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

reported within the Asia Pacific segment. The pro forma effect of this acquisition would not materially impact the Company’s reported results for any periods presented, and as a result no pro forma information has been presented. This acquisition was accounted for as a business combination, with the total purchase price allocated using information available. The fair value of identifiable assets acquired and liabilities assumed exceeded the fair value of the consideration transferred by an immaterial amount.
INOAC Acquisition
Also in the first quarter of 2018, the Company purchased the remaining 49% equity interest of Cooper-Standard INOAC Pte. Ltd., a fluid transfer systems joint venture, at a purchase price of $2,450. This acquisition was accounted for as an equity transaction. Subsequent to the transaction, the Company owns 100% of the equity interests of Cooper-Standard INOAC Pte. Ltd.
Lauren Acquisition
On August 1, 2018, the Company acquired the assets and liabilities of Lauren Manufacturing and Lauren Plastics, extruders and molders of organic, silicone, thermoplastic and engineered polymer products with expertise in sealing solutions, to further expand the Company’s Industrial and Specialty Group and non-automotive and adjacent markets. The base purchase price of the acquisition was $92,700, subject to certain adjustments. The results of operations of Lauren Manufacturing and Lauren Plastics are included in the Company’s condensed consolidated financial statements from the date of acquisition and reported within the North America segment. The pro forma effect of this acquisition would not materially impact the Company’s reported results for any periods presented, and as a result no pro forma information has been presented. This acquisition was accounted for as a business combination, with the total purchase price allocated on a preliminary basis which is subject to change as the Company continues its review during the measurement period.
The following table summarizes the estimated fair value of Lauren assets acquired and liabilities assumed at the date of acquisition:
 
 
August 1, 2018
Accounts receivable
 
$
11,092

Inventories
 
7,566

Prepaid expenses and other
 
365

Property, plant, and equipment
 
22,956

Goodwill
 
27,149

Intangible assets
 
34,910

Total assets acquired
 
$
104,038

 
 
 
Accounts payable
 
$
4,565

Other current liabilities
 
2,260

Other liabilities
 
4,673

Total liabilities assumed
 
11,498

Net assets acquired
 
$
92,540

Accounts receivable, prepaid expenses, 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 margin. Raw material inventory was recorded at historical carrying value as such value approximates the replacement cost. The Company has estimated the fair value of property, plant and equipment, intangibles and other liabilities based upon third party valuations, management's estimates, available information and reasonable assumptions. Goodwill represents the excess of the acquisition price over the fair value of the identifiable assets acquired and liabilities assumed.
Subsequent Events
On October 31, 2018, the Company acquired 80.1% of LS Mtron’s automotive parts business. Through the acquisition of the injection molding system and automotive parts supplier, the Company further expands its core product offerings and strategic footprint in the Asia Pacific segment. The base purchase price was approximately $25,100.

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

On November 1, 2018, the Company acquired Hutchings Automotive Products, LLC, a North American supplier of high quality fluid carrying products for automotive powertrain and coolant systems applications. The base purchase price was approximately $41,600.
On November 2, 2018, the Company entered into a definitive agreement to divest its anti-vibration systems product line. The expected sale price is approximately $265,500, subject to certain adjustments. See Note 4. Assets Held for Sale.
4. Assets Held for Sale
In the third quarter of 2018, management approved a plan to sell the anti-vibration systems (“AVS”) product line within its North America, Europe and Asia Pacific segments.  The Company expects to sell the business within one year from management's approval of the plan. The business and its associated assets and liabilities met the criteria for presentation as held for sale as of September 1, 2018, and as such the assets and liabilities associated with the transaction are separately classified as held for sale in the condensed consolidated balance sheet as of September 30, 2018 and depreciation of long-lived assets ceased. The planned divestiture did not meet the criteria for presentation as a discontinued operation.
Subsequent to the end of the Company's third quarter, on November 2, 2018, the Company entered into a definitive agreement to divest the AVS product line. The expected sale price is approximately $265,500, subject to certain adjustments. The planned divestiture of the AVS product line is expected to close in the first half of 2019 and is subject to customary closing conditions, including regulatory and third-party approvals.

The major classes of assets and liabilities held for sale were as follows:

 
 
September 30, 2018
Accounts receivable, net
 
$
52,636

Tooling receivable
 
3,396

Inventories
 
16,369

Prepaid expenses
 
1,848

Other current assets
 
1,709

Property, plant and equipment, net
 
28,266

Goodwill
 
13,500

Other assets
 
3,216

Total assets held for sale
 
$
120,940

 
 
 
Accounts payable
 
$
42,112

Payroll liabilities
 
7,285

Accrued liabilities
 
1,416

Pension benefits
 
15,628

Postretirement benefits other than pensions
 
8,391

Other liabilities
 
212

Total liabilities related to assets held for sale
 
$
75,044

5. Revenue
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, which was adopted on January 1, 2018 using the modified retrospective method.
Revenue by customer group for the three months ended September 30, 2018 was as follows:

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

 
North America
 
Europe
 
Asia Pacific
 
South America
 
Consolidated
Automotive
$
441,142

 
$
201,885

 
$
136,147

 
$
25,466

 
$
804,640

Commercial
5,926

 
7,693

 
4

 
101

 
13,724

Other
24,485

 
18,754

 
4

 
46

 
43,289

Revenue
$
471,553

 
$
228,332

 
$
136,155

 
$
25,613

 
$
861,653


Revenue by customer group for the nine months ended September 30, 2018 was as follows:
 
North America
 
Europe
 
Asia Pacific
 
South America
 
Consolidated
Automotive
$
1,395,263

 
$
710,197

 
$
433,309

 
$
75,328

 
$
2,614,097

Commercial
17,025

 
26,830

 
11

 
341

 
44,207

Other
36,051

 
62,830

 
4

 
117

 
99,002

Revenue
$
1,448,339

 
$
799,857

 
$
433,324

 
$
75,786

 
$
2,757,306

The automotive group consists of sales to automotive OEMs and automotive suppliers, while the commercial group represents sales to OEMs of on- and off-highway commercial equipment and vehicles. The other customer group includes sales related to specialty and adjacent markets.
Substantially all the Company’s revenues are generated from sealing, fuel and brake delivery, fluid transfer and anti-vibration systems for use in passenger vehicles and light trucks manufactured by global OEMs.
A summary of the Company’s products is as follows:
Product Line
 
Description
Sealing Systems
 
Protect vehicle interiors from weather, dust and noise intrusion for improved driving experience; provide aesthetic and functional class-A exterior surface treatment
Fuel & Brake Delivery Systems
 
Sense, deliver and control fluids to fuel and brake systems
Fluid Transfer Systems
 
Sense, deliver and control fluids and vapors for optimal powertrain & HVAC
operation
Anti-Vibration Systems
 
Control and isolate vibration and noise in the vehicle to improve ride and
handling
Revenue by product line for the three months ended September 30, 2018 was as follows:
 
North America
 
Europe
 
Asia Pacific
 
South America
 
Consolidated
Sealing systems
$
149,074

 
$
142,342

 
$
107,940

 
$
19,398

 
$
418,754

Fuel and brake delivery systems
136,903

 
31,752

 
22,044

 
6,122

 
196,821

Fluid transfer systems
104,058

 
19,642

 
4,309

 
93

 
128,102

Anti-vibration systems
63,563

 
15,328

 
1,862

 

 
80,753

Other
17,955

 
19,268

 

 

 
37,223

Consolidated
$
471,553

 
$
228,332

 
$
136,155

 
$
25,613

 
$
861,653


Revenue by product line for the nine months ended September 30, 2018 was as follows:

13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

 
North America
 
Europe
 
Asia Pacific
 
South America
 
Consolidated
Sealing systems
$
487,757

 
$
502,431

 
$
342,314

 
$
56,786

 
$
1,389,288

Fuel and brake delivery systems
415,012

 
107,366

 
68,373

 
18,698

 
609,449

Fluid transfer systems
331,226

 
65,706

 
15,965

 
302

 
413,199

Anti-vibration systems
195,835

 
57,077

 
6,672

 

 
259,584

Other
18,509

 
67,277

 

 

 
85,786

Consolidated
$
1,448,339

 
$
799,857

 
$
433,324

 
$
75,786

 
$
2,757,306

Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. The Company has one major performance obligation category: manufactured parts.
A contract’s transaction price is allocated to each distinct performance obligation and recognized when the performance obligation is satisfied. It is not unusual for the Company’s contracts to include multiple performance obligations. For such contracts, the Company generally allocates the contract’s transaction price to each performance obligation based on the purchase order or other arranged pricing.
The Company recognizes revenue at a point in time, generally when products are shipped or delivered. The point at which revenue is recognized often depends on the shipping terms.
The Company usually enters agreements with customers to produce products at the beginning of a vehicle’s life. Blanket purchase orders received from customers and related documents generally establish the annual terms, including pricing, related to a vehicle model. Although purchase orders do not usually specify quantities, fulfillment of customers’ purchasing requirements can be the Company’s obligation for the entire production life of the vehicle. These agreements generally may be terminated by the Company’s customer at any time, but such cancellations have historically been minimal. Customers typically pay for parts based on customary business practices with payment terms generally between 30 and 90 days. The Company has no significant financing arrangements with customers.
The Company applies the optional exemption to forgo disclosing information about its remaining performance obligations because its contracts usually have an original expected duration of one year or less. It also applies an accounting policy to treat shipping and handling costs that are incurred after revenue is recognizable as a fulfillment activity by expensing such costs as incurred, instead of as a separate performance obligation. This is consistent with the Company’s historical accounting practices. The Company has chosen to present revenue net of sales and other similar taxes, which is also consistent with its historical accounting practices.
Contract Estimates
The amount of revenue recognized is usually based on the purchase order price and adjusted for variable consideration, including pricing concessions. The Company accrues for pricing concessions by reducing revenue as products are shipped or delivered. The accruals are based on historical experience, anticipated performance and management’s best judgment. The Company also generally has ongoing adjustments to customer pricing arrangements based on the content and cost of its products. Such pricing accruals are adjusted as they are settled with customers. Customer returns are usually related to quality or shipment issues and are recorded as a reduction of revenue. The Company generally does not recognize significant return obligations due to their infrequent nature.
Contract Balances
The Company’s contract assets consist of unbilled amounts associated with variable pricing arrangements in its Asia Pacific region. Once pricing is finalized, contract assets are transferred to accounts receivable. As a result, the timing of revenue recognition and billings, as well as changes in foreign exchange rates, will impact contract assets on an ongoing basis. Changes during the nine month period ended September 30, 2018 were not materially impacted by any other factors.
The Company’s contract liabilities consist of advance payments received and due from customers. Net contract assets (liabilities) consisted of the following:

14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

 
 
September 30, 2018
 
January 1, 2018
 
Change
Contract assets
 
$
2,849

 
$
4,604

 
$
(1,755
)
Contract liabilities
 
(646
)
 

 
(646
)
Net contract assets (liabilities)
 
$
2,203


$
4,604


$
(2,401
)
Other
The Company provides assurance-type warranties to its customers. Such warranties provide customers with assurance that the related product will function as intended and complies with any agreed-upon specifications, and are recognized in costs of products sold.
6. Restructuring
On an ongoing basis, the Company evaluates its business and objectives to ensure that it is properly configured and sized based on changing market conditions. Accordingly, the Company has implemented several restructuring initiatives, including closure or consolidation of facilities throughout the world and the reorganization of its operating structure.
In January 2015, the Company announced its intention to further restructure its European manufacturing footprint based on anticipated market demands. This initiative is expected to be substantially complete by December 31, 2018. The estimated cost of this initiative is $121,000 to $125,000, of which approximately $113,500 has been incurred to date. The Company expects to incur total employee separation costs (as defined below) of approximately $61,000 to $63,000, other related exit costs of approximately $59,000 to $61,000 and non-cash asset impairments related to restructuring activities of approximately $500.
The Company’s restructuring charges consist of severance, retention and outplacement services, and severance-related postemployment benefits (collectively, “employee separation costs”), other related exit costs and asset impairments related to restructuring activities.
Restructuring expense by segment for the three and nine months ended September 30, 2018 and 2017 was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
North America
$
830

 
$
2,503

 
$
3,831

 
$
3,320

Europe
1,212

 
6,236

 
14,465

 
22,341

Asia Pacific
606

 
1,170

 
1,375

 
2,559

South America
55

 

 
170

 

Total
$
2,703

 
$
9,909

 
$
19,841

 
$
28,220

Restructuring activity for the nine months ended September 30, 2018 was as follows:
 
Employee Separation Costs
 
Other Exit Costs
 
Total
Balance as of December 31, 2017
$
15,091

 
$
7,244

 
$
22,335

Expense
13,118

 
6,723

 
19,841

Cash payments
(20,591
)
 
(10,585
)
 
(31,176
)
Foreign exchange translation and other
(521
)
 
(102
)
 
(623
)
Balance as of September 30, 2018
$
7,097

 
$
3,280

 
$
10,377


15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

7. Inventories
Inventories consist of the following:
 
September 30, 2018
 
December 31, 2017
Finished goods
$
51,551

 
$
47,613

Work in process
42,854

 
35,455

Raw materials and supplies
88,338

 
87,128

 
$
182,743

 
$
170,196

8. Property, Plant and Equipment
Property, plant and equipment consists of the following:
 
September 30, 2018
 
December 31, 2017
Land and improvements
$
68,793

 
$
73,419

Buildings and improvements
282,815

 
305,231

Machinery and equipment
1,049,711

 
1,022,279

Construction in progress
227,654

 
198,358

 
1,628,973

 
1,599,287

Accumulated depreciation
(662,392
)
 
(647,109
)
Property, plant and equipment, net
$
966,581

 
$
952,178

During the three months ended September 30, 2018, the Company realized a gain on sale of land of $10,714 in its Europe segment. The net book value of the land was $5,446. The sale of land was contemplated in conjunction with our restructuring plan.
Impairment of Long-Lived Assets
Due to the Company’s decision to divest two of its inactive European sites, the Company recorded non-cash asset impairment charges of $4,270 in the nine months ended September 30, 2017. Fair value was determined based on current real estate market conditions.
9. Goodwill and Intangible Assets
Goodwill
Changes in the carrying amount of goodwill by reportable operating segment for the nine months ended September 30, 2018 were as follows:
 
North America
 
Europe
 
Asia Pacific
 
Total
Balance as of December 31, 2017
$
122,395

 
$
12,454

 
$
37,003

 
$
171,852

Acquisitions
27,784

 

 

 
27,784

Reclassified as held for sale
(12,015
)
 

 
(1,485
)
 
(13,500
)
Foreign exchange translation
(96
)
 
(392
)
 
(1,950
)
 
(2,438
)
Balance as of September 30, 2018
$
138,068

 
$
12,062

 
$
33,568

 
$
183,698

Goodwill is tested for impairment by reporting unit annually or more frequently if events or circumstances indicate that an impairment may exist. There were no indicators of potential impairment during the nine months ended September 30, 2018.

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

Intangible Assets
Intangible assets and accumulated amortization balances as of September 30, 2018 and December 31, 2017 were as follows:
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
145,362

 
$
(95,690
)
 
$
49,672

Developed technology
2,783

 
(2,783
)
 

Other
45,183

 
(3,462
)
 
41,721

Balance as of September 30, 2018
$
193,328

 
$
(101,935
)
 
$
91,393

 
 
 
 
 
 
Customer relationships
$
135,927

 
$
(86,342
)
 
$
49,585

Developed technology
2,893

 
(2,893
)
 

Other
22,298

 
(2,792
)
 
19,506

Balance as of December 31, 2017
$
161,118

 
$
(92,027
)
 
$
69,091


On August 1, 2018, the Company acquired intangible assets of $34,910 with a weighted average useful life of 14.3 years as a result of the Lauren Acquisition. This consisted of $24,000 of supply agreements, $850 of license agreements and $10,060 of customer relationships. Amortization expense totaled $426 for the three months ended September 30, 2018. Estimated amortization expense for each of the next five years is $2,600 in each of the years 2019 through 2021, $2,500 for 2022, and $2,300 for 2023.
10. Debt
A summary of outstanding debt as of September 30, 2018 and December 31, 2017 is as follows:
 
September 30, 2018
 
December 31, 2017
Senior Notes
$
394,220

 
$
393,684

Term Loan
329,091

 
330,781

Other borrowings
40,819

 
33,781

Total debt
764,130

 
758,246

Less current portion
(36,947
)
 
(34,921
)
Total long-term debt
$
727,183

 
$
723,325

5.625% Senior Notes due 2026
In November 2016, the Company issued $400,000 aggregate principal amount of its 5.625% Senior Notes due 2026 (the “Senior Notes”). The Senior Notes mature on November 15, 2026. Interest on the Senior Notes is payable semi-annually in arrears in cash on May 15 and November 15 of each year.
Debt issuance costs related to the Senior Notes are amortized into interest expense over the term of the Senior Notes. As of September 30, 2018 and December 31, 2017, the Company had $5,780 and $6,316 of unamortized debt issuance costs, respectively, related to the Senior Notes, which are presented as direct deductions from the principal balance in the condensed consolidated balance sheets.
Term Loan Facility
Also in November 2016, the Company entered into Amendment No. 1 to its senior term loan facility (“Term Loan Facility”), which provides for loans in an aggregate principal amount of $340,000. Subject to certain conditions, the Term Loan Facility, without the consent of the then-existing lenders (but subject to the receipt of commitments), may be expanded (or a new term loan or revolving facility added) by an amount that will not cause the consolidated secured net debt ratio to exceed 2.25 to 1.00 plus $400,000 plus any voluntary prepayments, including the ABL Facility (as defined below) to the extent commitments are reduced, not funded from proceeds of long-term indebtedness. The Term Loan Facility matures on November 2, 2023, unless earlier terminated.

17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

On May 2, 2017, the Company entered into Amendment No. 2 to the Term Loan Facility to modify the interest rate. Subsequently, on March 6, 2018, the Company entered into Amendment No. 3 to the Term Loan Facility to further modify the interest rate. In accordance with this amendment, borrowings under the Term Loan Facility bear interest, at the Company’s option, at either (1) with respect to Eurodollar rate loans, the greater of the applicable Eurodollar rate and 0.75% plus 2.0% per annum, or (2) with respect to base rate loans, the base rate, (which is the highest of the then current federal funds rate plus 0.5%, the prime rate most recently announced by the administrative agent under the term loan, and the one-month Eurodollar rate plus 1.0%) plus 1.0% per annum. As a result of the Amendment No. 3, the Company recognized a loss on refinancing and extinguishment of debt of $770 in the nine months ended September 30, 2018, which was due to the partial write off of new and unamortized debt issuance costs and unamortized original issue discount.
As of September 30, 2018 and December 31, 2017, the Company had $3,014 and $3,537 of unamortized debt issuance costs, respectively, and $1,944 and $2,281 of unamortized original issue discount, respectively, related to the Term Loan Facility, which are presented as direct deductions from the principal balance in the condensed consolidated balance sheets. Both the debt issuance costs and the original issue discount are amortized into interest expense over the term of the Term Loan Facility.
ABL Facility
In November 2016, the Company entered into a $210,000 Third Amended and Restated Loan Agreement of its senior asset-based revolving credit facility (“ABL Facility”).
The ABL Facility provides for an aggregate revolving loan availability of up to $210,000, subject to borrowing base availability, including a $100,000 letter of credit sub-facility and a $25,000 swing line sub-facility. The ABL Facility also provides for an uncommitted $100,000 incremental loan facility, for a potential total ABL Facility of $310,000, if requested by the borrowers under the ABL Facility and the lenders agree to fund such increase. No consent of any lender is required to effect any such increase, except for those participating in the increase. As of September 30, 2018, there were no borrowings under the ABL Facility, and subject to borrowing base availability, the Company had $205,173 in availability, less outstanding letters of credit of $7,484.
Any borrowings under our ABL Facility will mature, and the commitments of the lenders under our ABL Facility will terminate, on November 2, 2021.
As of September 30, 2018 and December 31, 2017, the Company had $1,104 and $1,373, respectively, of unamortized debt issuance costs related to the ABL Facility, which are presented in other assets in the condensed consolidated balance sheets.
Debt Covenants
The Company was in compliance with all covenants of the Senior Notes, Term Loan Facility and ABL Facility, as of September 30, 2018.
Other
Other borrowings reflect borrowings under capital leases and local bank lines.
11. Fair Value Measurements and Financial Instruments
Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy is utilized, which prioritizes the inputs used in measuring fair value as follows:
Level 1:
Observable inputs such as quoted prices in active markets;
Level 2:
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

Items Measured at Fair Value on a Recurring Basis
Estimates of the fair value of foreign currency and interest rate derivative instruments are determined using exchange traded prices and rates. The Company also considers the risk of non-performance in the estimation of fair value, and includes an adjustment for non-performance risk in the measure of fair value of derivative instruments. In certain instances where market data is not available, the Company uses management judgment to develop assumptions that are used to determine fair value. Fair value measurements and the fair value hierarchy level for the Company’s assets and liabilities measured or disclosed at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 were as follows:
 
September 30, 2018
 
December 31, 2017
 
Input
Forward foreign exchange contracts - other current assets
$
1,054

 
$
761

 
Level 2
Forward foreign exchange contracts - accrued liabilities
(221
)
 
(2,363
)
 
Level 2
Interest rate swaps - accrued liabilities

 
(515
)
 
Level 2
Items Measured at Fair Value on a Nonrecurring Basis
In addition to items that are measured at fair value on a recurring basis, the Company measures certain assets and liabilities at fair value on a nonrecurring basis, which are not included in the table above. As these nonrecurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy. For further information on assets and liabilities measured at fair value on a nonrecurring basis see Note 3. “Acquisitions and Divestitures” and Note 8. “Property, Plant and Equipment.”
Items Not Carried at Fair Value
Fair values of the Company’s Senior Notes and Term Loan Facility were as follows:
 
September 30, 2018
 
December 31, 2017
Aggregate fair value
$
727,879

 
$
749,463

Aggregate carrying value (1)
734,050

 
736,600

(1) Excludes unamortized debt issuance costs and unamortized original issue discount.
Fair values were based on quoted market prices and are classified within Level 1 of the fair value hierarchy.
Derivative Instruments and Hedging Activities
The Company is exposed to fluctuations in foreign currency exchange rates, interest rates and commodity prices. The Company enters into derivative instruments primarily to hedge portions of its forecasted foreign currency denominated cash flows and designates these derivative instruments as cash flow hedges in order to qualify for hedge accounting. Gains or losses on derivative instruments resulting from hedge ineffectiveness are reported in earnings.
The Company formally documents its hedge relationships, including the identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the cash flow hedges. The Company also formally assesses whether a cash flow hedge is highly effective in offsetting changes in the cash flows of the hedged item. Derivatives are recorded at fair value in other current assets, other assets, accrued liabilities and other long-term liabilities. For a cash flow hedge, the effective portion of the change in fair value of the derivative is recorded in accumulated other comprehensive income (loss) (“AOCI”) in the condensed consolidated balance sheet and reclassified into earnings when the underlying hedged transaction is realized. The realized gains and losses are recorded on the same line as the hedged transaction in the consolidated statements of net income.
The Company is exposed to credit risk in the event of nonperformance by its counterparties on its derivative financial instruments. The Company mitigates this credit risk exposure by entering into agreements directly with major financial institutions with high credit standards that are expected to fully satisfy their obligations under the contracts.
Cash Flow Hedges
Forward Foreign Exchange Contracts - The Company uses forward contracts to mitigate the potential volatility to earnings and cash flow arising from changes in currency exchange rates that impact the Company’s foreign currency transactions. The principal currencies hedged by the Company include various European currencies, the Canadian Dollar, the Mexican Peso, and the Brazilian Real. As of September 30, 2018, the notional amount of these contracts was $45,531 and consisted of hedges of transactions up to June 2019.

19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

Interest rate swaps - The Company has historically used interest rate swap contracts to manage cash flow variability associated with its variable rate Term Loan Facility. The interest rate swap contract, which fixes the interest payments of variable rate debt instruments, is used to manage exposure to fluctuations in interest rates. As of September 30, 2018, the interest rate swap contract reached maturity and was settled.
Pretax amounts related to the Company’s cash flow hedges that were recognized in other comprehensive income (loss) (“OCI”) were as follows:
 
Gain (Loss) Recognized in OCI
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Forward foreign exchange contracts
$
2,253

 
$
(763
)
 
$
3,413

 
$
1,860

Interest rate swaps

 
22

 
443

 
(27
)
Total
$
2,253

 
$
(741
)
 
$
3,856

 
$
1,833

Pretax amounts related to the Company’s cash flow hedges that were reclassified from AOCI were as follows:
 
 
 
Gain (Loss) Reclassified from AOCI to Income (Effective Portion)
 
Gain (Loss) Reclassified from AOCI to Income (Ineffective Portion)
 
 
 
Three Months Ended September 30,
 
Classification
 
2018
 
2017
 
2018
 
2017
Forward foreign exchange contracts
Cost of products sold
 
$
370

 
$
915

 
$

 
$

Interest rate swaps
Interest expense, net of interest income
 
31

 
(570
)
 

 
107

Total
 
 
$
401

 
$
345

 
$

 
$
107

 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss) Reclassified from AOCI to Income (Effective Portion)
 
Gain (Loss) Reclassified from AOCI to Income (Ineffective Portion)
 
 
 
Nine Months Ended September 30,
 
Classification
 
2018
 
2017
 
2018
 
2017
Forward foreign exchange contracts
Cost of products sold
 
$
1,000

 
$
2,371

 
$

 
$

Interest rate swaps
Interest expense, net of interest income
 
(162
)
 
(2,048
)
 
209

 
284

Total
 
 
$
838

 
$
323

 
$
209

 
$
284

12. Accounts Receivable Factoring
As a part of its working capital management, the Company previously sold certain receivables through third-party financial institutions in on- and off-balance sheet arrangements. In December 2017, the Company completed the transition from multiple factoring providers to a pan-European program under a single third-party financial institution (the “Factor”). The amount sold varies each month based on the amount of underlying receivables and cash flow needs of the Company. These are permitted transactions under the Company’s credit agreements governing the ABL Facility and Term Loan Facility and the indenture governing the Senior Notes. Costs incurred on the sale of receivables are recorded in other expense, net and interest expense, net of interest income in the condensed consolidated statements of net income. The sale of receivables under this contract is considered an off-balance sheet arrangement to the Company and is accounted for as a true sale and is excluded from accounts receivable in the consolidated balance sheet.
Amounts outstanding under receivable transfer agreements entered into by various locations as of the period end were as follows:
 
September 30, 2018
 
December 31, 2017
Off-balance sheet arrangements
$
94,004

 
$
96,588


20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

Accounts receivable factored and related costs throughout the period were as follows:
 
Off-Balance Sheet Arrangements
 
On-Balance Sheet Arrangements
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Accounts receivable factored
$
149,136

 
$
98,244

 
$
518,808

 
$
390,354

 
$

 
$
6,326

 
$

 
$
20,432

Costs
348

 
452

 
1,065

 
1,517

 

 
29

 

 
74

The Company continues to service sold receivables and acts as collection agent for the Factor. As of September 30, 2018 and December 31, 2017, cash collections on behalf of the Factor that have yet to be remitted were $19,892 and $36,248, respectively, and are reflected in cash and cash equivalents in the condensed consolidated balance sheet.
13. Pension and Postretirement Benefits Other Than Pensions
The components of net periodic benefit (income) cost for the Company’s defined benefit plans and other postretirement benefit plans were as follows:
 
 Pension Benefits
 
Three Months Ended September 30,
 
2018
 
2017
 
 U.S.
 
 Non-U.S.
 
 U.S.
 
 Non-U.S.
Service cost
$
213

 
$
1,039

 
$
204

 
$
1,018

Interest cost
2,706

 
1,031

 
2,925

 
1,140

Expected return on plan assets
(4,355
)
 
(625
)
 
(4,003
)
 
(694
)
Amortization of prior service cost and actuarial loss
601

 
652

 
468

 
760

Settlement

 

 

 
5,717

Net periodic benefit (income) cost
$
(835
)
 
$
2,097

 
$
(406
)
 
$
7,941

 
 
 
 
 
 
 
 
 
 Pension Benefits
 
Nine Months Ended September 30,
 
2018
 
2017
 
 U.S.
 
 Non-U.S.
 
 U.S.
 
 Non-U.S.
Service cost
$
639

 
$
3,200

 
$
612

 
$
2,926

Interest cost
8,118

 
3,151

 
8,775

 
3,268

Expected return on plan assets
(13,063
)
 
(1,890
)
 
(12,009
)
 
(2,001
)
Amortization of prior service cost and actuarial loss
1,803

 
2,008

 
1,404

 
2,171

Settlement

 

 

 
5,717

Net periodic benefit (income) cost
$
(2,503
)
 
$
6,469

 
$
(1,218
)
 
$
12,081

 

21

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

 
 Other Postretirement Benefits
 
Three Months Ended September 30,
 
2018
 
2017
 
 U.S.
 
 Non-U.S.
 
 U.S.
 
 Non-U.S.
Service cost
$
77

 
$
123

 
$
79

 
$
110

Interest cost
299

 
195

 
324

 
179

Amortization of prior service credit and actuarial gain
(418
)
 
77

 
(479
)
 
(4
)
Other
2

 

 
1

 

Net periodic benefit (income) cost
$
(40
)
 
$
395

 
$
(75
)
 
$
285

 
 
 
 
 
 
 
 
 
 Other Postretirement Benefits
 
Nine Months Ended September 30,
 
2018
 
2017
 
 U.S.
 
 Non-U.S.
 
 U.S.
 
 Non-U.S.
Service cost
$
231

 
$
373

 
$
237

 
$
316

Interest cost
899

 
591

 
972

 
516

Amortization of prior service credit and actuarial gain
(1,254
)
 
231

 
(1,437
)
 
(12
)
Other
4

 

 
3

 

Net periodic benefit (income) cost
$
(120
)
 
$
1,195

 
$
(225
)
 
$
820

The Company adopted ASU 2017-07 during the first quarter of 2018. As a result, the service cost component of net periodic benefit (income) cost is included in cost of products sold and selling, administrative and engineering expenses in the condensed consolidated statements of net income. All other components of net periodic benefit (income) cost are included in other expense, net in the condensed consolidated statements of net income for all periods presented.
Contributions
The Company made a discretionary contribution of $15,000 to its U.S. pension plan in the three months ended September 30, 2018.
14. Other Expense, Net
The components of other expense, net were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Foreign currency losses
$
(1,184
)
 
$
(1,455
)
 
$
(2,893
)
 
$
(4,033
)
Components of net periodic benefit cost other than service cost
(165
)
 
(6,334
)
 
(598
)
 
(7,367
)
Losses on sales of receivables
(348
)
 
(221
)
 
(1,065
)
 
(781
)
Miscellaneous income

 
1,225

 
583

 
1,538

Other expense, net
$
(1,697
)
 
$
(6,785
)
 
$
(3,973
)
 
$
(10,643
)
15. Income Taxes
The Company determines its effective tax rate each quarter based upon its estimated annual effective tax rate. The Company records the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year where no tax benefit can be recognized are excluded from the estimated annual effective tax rate.

22

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

Income tax expense, income before income taxes and the corresponding effective tax rate for the three and nine months ended September 30, 2018 and 2017, were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Income tax expense (benefit)
$
(1,190
)
 
$
7,838

 
$
19,831

 
$
40,258

Income before income taxes
31,474

 
33,296

 
153,113

 
149,870

Effective tax rate
(4
)%
 
24
%
 
13
%
 
27
%
The effective tax rate for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017 was lower primarily due to the lower U.S. statutory rate and benefits recorded from adjustments to provisional amounts recorded as a result of the U.S. Tax Cuts and Jobs Act in the three and nine months ended September 30, 2018. The income tax rate for the three and nine months ended September 30, 2018 and 2017 varies from statutory rates primarily due to adjustments to provisional amounts recorded as a result of the U.S. Tax Cuts and Jobs Act, tax credits, the impact of income taxes on foreign earnings taxed at rates varying from the U.S. statutory rate, the inability to record a tax benefit for pre-tax losses in certain foreign jurisdictions to the extent not offset by other categories of income, income tax incentives, excess tax benefits related to share-based compensation and other permanent items. Further, the Company’s current and future provision for income taxes may be impacted by the recognition of valuation allowances in certain countries. The Company intends to maintain these valuation allowances until it is more likely than not that the deferred tax assets will be realized.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Act”) was enacted into law. The Act reduces the U.S. federal corporate tax rate from 35% to 21% and requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously deferred. Additional changes potentially impacting the Company include limitations on the deductibility of executive compensation and new taxes on certain foreign sourced earnings. Staff Accounting Bulletin 118 allows the Company to record provisional amounts and reflect changes to such amounts through income tax expense during the one-year measurement period following enactment. All amounts recorded by the Company for the impact of the Act have been recorded provisionally beginning in the period ended December 31, 2017. As discussed further below, during the three and nine months ended September 30, 2018, the Company recognized benefits of $7,070 to the provisional amounts recorded at December 31, 2017 and included these adjustments as a component of income tax expense from continuing operations. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. The Company’s estimates may also be affected as future guidance is issued. These changes could be material to income tax expense.
The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, and recorded a benefit of $2,875 for the U.S. federal tax rate change in the period ending December 31, 2017. Upon further analysis of certain aspects of the Act and refinement of the Company’s calculations, the Company adjusted its provisional amount by recording a benefit of $3,062 during the three and nine months ended September 30, 2018, which is included as a component of income tax expense from continuing operations. The Company continues to analyze and refine its calculations related to the remeasurement of these balances and consider the amounts provisional while completing its analysis during the one-year measurement period following enactment. In addition, the Company early adopted ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits entities to reclassify the tax effects stranded in accumulated other comprehensive income as a result of the Act to retained earnings. The adoption resulted in the reclassification of $8,639 from accumulated other comprehensive loss to retained earnings.
A one-time transition tax based on the Company’s total post-1986 earnings and profits (E&P) which it had deferred from U.S. income taxes under previous U.S. law was recorded on a provisional basis in the amount of $32,533 in the period ended December 31, 2017. Upon further analysis of certain aspects of the Act and refinement of the Company’s calculations during the three and nine months ended September 30, 2018, the Company recorded a benefit decreasing the provisional amount by $4,008, which is included as a component of income tax expense from continuing operations. The Company continues to analyze and refine its calculations related to the remeasurement of these balances and consider the amounts provisional while completing its analysis during the one-year measurement period following enactment.
As of September 30, 2018, the Company made its best estimate of the annual effective tax rate (“EAETR”) for the full year of 2018. The Company continues to examine the potential impact of certain provisions of the Act that could affect its 2018 EAETR, including the provisions related to global intangible low-taxed income (“GILTI”), foreign derived intangible income (“FDII”) and the base erosion and anti-abuse tax (“BEAT”). Accordingly, the Company’s 2018 tax expense could be impacted

23

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

as additional analysis is completed. The Company has elected to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred and expects to incur tax for the year ended December 31, 2018.
16. Net Income Per Share Attributable to Cooper-Standard Holdings Inc.
Basic net income per share attributable to Cooper-Standard Holdings Inc. was computed by dividing net income attributable to Cooper-Standard Holdings Inc. by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share attributable to Cooper-Standard Holdings Inc. was computed using the treasury stock method by dividing diluted net income available to Cooper-Standard Holdings Inc. by the weighted average number of shares of common stock outstanding, including the dilutive effect of common stock equivalents, using the average share price during the period.
Information used to compute basic and diluted net income per share attributable to Cooper-Standard Holdings Inc. was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income attributable to Cooper-Standard Holdings Inc.
$
32,156

 
$
24,640

 
$
130,825

 
$
106,802

Diluted net income available to Cooper-Standard Holdings Inc. common stockholders
$
32,156

 
$
24,640

 
$
130,825

 
$
106,802

 
 
 
 
 
 
 
 
Basic weighted average shares of common stock outstanding
17,828,358

 
17,703,660

 
17,939,544

 
17,769,808

Dilutive effect of common stock equivalents
380,810

 
976,858

 
409,072

 
1,068,479

Diluted weighted average shares of common stock outstanding
18,209,168

 
18,680,518

 
18,348,616

 
18,838,287

 
 
 
 
 
 
 
 
Basic net income per share attributable to Cooper-Standard Holdings Inc.
$
1.80

 
$
1.39

 
$
7.29

 
$
6.01

 
 
 
 
 
 
 
 
Diluted net income per share attributable to Cooper-Standard Holdings Inc.
$
1.77

 
$
1.32

 
$
7.13

 
$
5.67


24

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

17. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component, net of related tax, were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
 
Balance at beginning of period
$
(120,386
)
 
$
(119,405
)
 
$
(95,485
)
 
$
(143,481
)
 
Other comprehensive income (loss) before reclassifications
(14,623
)
(1) 
16,047

(1) 
(39,524
)
(1) 
40,123

(1) 
Balance at end of period
$
(135,009
)
 
$
(103,358
)
 
$
(135,009
)
 
$
(103,358
)
 
Benefit plan liabilities
 
 
 
 
 
 
 
 
Balance at beginning of period
$
(105,060
)
 
$
(100,340
)
 
$
(100,749
)
 
$
(97,612
)
 
Other comprehensive income (loss) before reclassifications
(6
)
(2) 
(1,714
)
(2) 
1,784

(2) 
(5,428
)
(2) 
Amounts reclassified from accumulated other comprehensive income (loss)
662

(3) 
5,677

(4) 
(5,439
)
(5) 
6,663

(6) 
Balance at end of period
$
(104,404
)
 
$
(96,377
)
 
$
(104,404
)
 
$
(96,377
)
 
Fair value change of derivatives
 
 
 
 
 
 
 
 
Balance at beginning of period
$
(1,077
)
 
$
113

 
$
(1,397
)
 
$
(1,470
)
 
Other comprehensive income (loss) before reclassifications
1,736

(7) 
(619
)
(7) 
2,638

(7) 
1,242

(7) 
Amounts reclassified from accumulated other comprehensive income (loss)
(255
)
(8) 
(347
)
(8) 
(837
)
(8) 
(625
)
(8) 
Balance at end of period
$
404

 
$
(853
)
 
$
404

 
$
(853
)
 
Accumulated other comprehensive income (loss), ending balance
$
(239,009
)
 
$
(200,588
)
 
$
(239,009
)
 
$
(200,588
)
 
(1)
Includes other comprehensive income (loss) related to intra-entity foreign currency balances that are of a long-term investment nature of $(473) and $4,314 for the three months ended September 30, 2018 and 2017, respectively, and $(10,713) and $10,484 for the nine months ended September 30, 2018 and 2017, respectively.
(2)
Net of tax expense (benefit) of $(97) and $(130) for the three months ended September 30, 2018 and 2017, respectively, and $8,628 and $(189) for the nine months ended September 30, 2018 and 2017, respectively.
(3)
Includes actuarial losses of $995, offset by prior service credits of $85, net of tax of $248. See Note 13.
(4)
Includes losses related to the U.K. pension settlement of $6,288, actuarial losses of $901, offset by prior service credits of $84, net of tax of $1,428. See Note 13.
(5)
Includes the effect of the adoption of ASU 2018-02 of $8,569 and the amortization of prior service credits of $244, offset by curtailment loss of $1,123 and the amortization of actuarial losses of $2,981, net of tax of $730. See Note 13.
(6)
Includes losses related to the U.K. pension settlement of $6,288, actuarial losses of $2,443, offset by prior service credits of $248, net of tax of $1,820. See Note 13.
(7)
Net of tax expense (benefit) of $517 and $(122) for the three months ended September 30, 2018 and 2017, respectively, and $1,218 and $591 for the nine months ended September 30, 2018 and 2017, respectively. See Note 11.
(8)
Net of tax expense (benefit) of $146 and $105 for the three months ended September 30, 2018 and 2017, respectively, and $280 and $(18) for the nine months ended September 30, 2018 and 2017, respectively. Includes the effect of the adoption of ASU 2018-02 of $70 for the nine months ended September 30, 2018. See Note 11.
18. Common Stock
Share Repurchase Program
In June 2018, the Company entered into an accelerated share repurchase ("ASR") agreement with a third-party financial institution to repurchase the Company's common stock. Under the ASR agreement, the Company made an up-front payment of $35,000 and received an initial delivery of 207,193 shares in the second quarter of 2018. The repurchase was completed in the third quarter of 2018 when the Company received an additional 51,092 shares. A total of 258,285 shares were repurchased at a weighted average purchase price of $135.51 per share during the nine months ended September 30, 2018 under the ASR agreement.


25

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

In addition to the repurchase under the ASR agreement, during the nine months ended September 30, 2018, the Company repurchased 69,503 shares of its common stock at an average purchase price of $122.64 per share, excluding commissions, for a total cost of $8,524.
Also in June 2018, the Company’s Board of Directors approved a new common stock repurchase program (the “2018 Program”) authorizing the Company to repurchase, in the aggregate, up to $150,000 of its outstanding common stock. Under the 2018 Program, repurchases may be made on the open market, through private transactions, accelerated share repurchases, round lot or block transactions on the New York Stock Exchange or otherwise, as determined by the Company’s management and in accordance with prevailing market conditions and federal securities laws and regulations. The 2018 Program, which is effective in November 2018, replaces the prior $125,000 authorization to repurchase shares approved by the board in March 2016 (the “2016 Program”). As of September 30, 2018, the Company had approximately $1,700 of repurchase authorization remaining under the 2016 Program.
During the nine months ended September 30, 2017, the Company repurchased 306,072 shares at an average purchase price of $102.76 per share, excluding commissions, for a total cost of $31,452, of which $30,680 was settled in cash during the quarter.
19. Share-Based Compensation
The Company’s long-term incentive plans allow for the grant of various types of share-based awards to key employees and directors of the Company and its affiliates. The Company generally awards grants on an annual basis.
In February 2018, the Company granted Restricted Stock Units (“RSUs”), Performance Units (“PUs”) and stock options. The RSUs cliff vest after three years, the PUs cliff vest at the end of their three-year performance period, and the stock options vest ratably over three years. The number of PUs that will vest depends on the Company’s achievement of target performance goals related to the Company’s return on invested capital (“ROIC”), which may range from 0% to 200% of the target award amount. The grant-date fair value of the RSUs and PUs was determined using the closing price of the Company’s common stock on the date of grant. The grant-date fair value of the stock options was determined using the Black-Scholes option pricing model.
During the nine months ended September 30, 2018 and 2017, the Company paid $13,279 and $4,296 of cash to settle PUs that vested in February 2018 and February 2017, respectively.
Share-based compensation expense was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
PUs
$
506

 
$
4,327

 
$
3,885

 
$
9,171

RSUs
2,467

 
2,052

 
7,776

 
6,896

Stock options
802

 
933

 
2,456

 
2,939

Total
$
3,775

 
$
7,312

 
$
14,117

 
$
19,006

20. Related Party Transactions
A summary of the material related party transactions with affiliates accounted for under the equity method was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Sales(1)
$
7,222

 
$
8,288

 
$
23,302

 
$
26,124

Purchases(1)
204

 
186

 
614

 
580

Dividends received(2)
239

 

 
4,747

 
5,382

(1) Relates to transactions with Nishikawa Cooper LLC (“NISCO”)
(2) From NISCO and Nishikawa Tachaplalert Cooper Ltd. inclusive of any gross up of dividend related to withholding tax
Amounts receivable from NISCO and Sujan Cooper Standard AVS Private Limited as of September 30, 2018 and December 31, 2017 were $6,547 and $3,109, respectively.

26

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollar amounts in thousands except per share and share amounts)

21. Commitments and Contingencies
The Company is periodically involved in claims, litigation and various legal matters that arise in the ordinary course of business. The Company accrues for litigation exposure when it is probable that future costs will be incurred and such costs can be reasonably estimated. Any resulting adjustments, which could be material, are recorded in the period the adjustments are identified. As of September 30, 2018, the Company does not believe that there is a reasonable possibility that any material loss exceeding the amounts already recognized for claims, litigation and various legal matters, if any, has been incurred. However, the ultimate resolutions of these proceedings and matters are inherently unpredictable. As such, the Company’s financial condition, results of operations or cash flows could be adversely affected in any particular period by the unfavorable resolution of one or more of these proceedings or matters.
In addition, the Company conducts and monitors environmental investigations and remedial actions at certain locations. As of September 30, 2018 and December 31, 2017, the undiscounted reserve for environmental investigation and remediation was approximately $6,359 and $7,363, respectively. The Company does not believe that the environmental liabilities associated with its current and former properties will have a material adverse impact on its financial condition, results of operations or cash flows; however, no assurances can be given in this regard.
22. Segment Reporting
The Company has determined that it operates in four reportable segments: North America, Europe, Asia Pacific and South America. The Company’s principal products within each of these segments are sealing, fuel and brake delivery, fluid transfer, and anti-vibration systems. The Company evaluates segment performance based on segment profit before tax. The results of each segment include certain allocations for general, administrative, interest, and other shared costs.
Certain financial information on the Company’s reportable segments was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Sales to external customers
 
 
 
 
 
 
 
North America
$
471,553