News Column

REMY INTERNATIONAL, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

July 30, 2014

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



The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013.

Executive Overview

Our Business

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



Our principal products for both light and commercial vehicles include:

new starters and alternators;

remanufactured starters and alternators;

hybrid electric motors; and

multi-line products (primarily remanufactured), including steering gears,

constant velocity (CV) axles, and brake calipers.

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



Financial Results

Net sales of $299.3 million for the second quarter of 2014 increased 6.0% from $282.3 million for the same period in 2013 driven primarily by increased volume and mix of $19.9 million, including $8.5 million in second quarter sales from the acquisition of USA Industries, and favorable foreign currency translation of $4.1 million. These increases in net sales were partially offset by negative pricing impact of $7.1 million. Operating income was $22.1 million during the second quarter of 2014, an increase of $2.0 million over the same period of 2013. The increase was primarily a result of lower restructuring costs in 2014, partially offset by $1.0 million of finished goods inventory step-up and $0.3 million in amortization due to purchase accounting related to the USA Industries acquisition for the three months ended June 30, 2014. Net income was $10.0 million during the second quarter of 2014, a decrease of $1.5 million over the same period in 2013. The decrease in net income was primarily driven by higher interest as a result of the impact of our undesignated interest rate swap and income tax expense. 29

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During the quarter, we were recognized by Hino Motors Manufacturing USA, a Toyota Group company, for outstanding performance as a supplier partner. To receive this award, a supplier must achieve an annual record of zero plant rejections on products shipped to Hino Motors Manufacturing USA.

Acquisition of United Starters and Alternators Industries, Inc.

On January 13, 2014, we acquired substantially all of the assets of USA Industries pursuant to the terms and conditions of the Asset Purchase Agreement, effective as of January 13, 2014. USA Industries is a leading North American distributor of premium quality remanufactured and new alternators, starters, CV axles and disc brake calipers for the light-duty aftermarket. In connection with the closing of the transaction, the assets were placed in Remy USA Industries, L.L.C., a wholly-owned subsidiary of the Company. USA Industries' operating results are consolidated beginning January 13, 2014. As of June 30, 2014, the preliminary purchase price was $40.2 million, consisting of $38.7 million in cash and $1.5 million cash held in escrow.



Recent Trends and Conditions

General economic conditions

According to IHS Global Insight, global light duty vehicle production was up 2% and global medium and heavy duty vehicle production decreased 2% during the second quarter of 2014 as compared to the same period in 2013. The increase in light duty vehicle production was driven primarily by an 11% increase in China production, a 4% increase in North America production, a 1% increase in Europe production and a 1% increase in Korea production. These increases were offset by a 25% decline in South America production. The decrease in global medium and heavy duty production was primarily a result of a 11% decrease in South America production, a 6% decrease in Korea, and a 4% decrease in China, offset by a 6% increase in North American production and a 6% increase in Europe. The global automotive industry remains susceptible to uncertain economic conditions that could adversely impact consumer demand for vehicles. Weather can affect aftermarket sales of starters and alternators. Extreme cold can damage starters and extreme heat can increase alternator failures. In both cases, this extreme weather can stimulate sales of aftermarket starters and alternators. In early 2014, the Midwest and Northeast United States experienced severe cold weather which we believe had a positive impact on our results of operations.



Pricing pressures from customers

Pressure from our customers to reduce prices is characteristic of the automotive supply industry. We anticipate the impact of our pricing to be in the range of 1% to 3% consistent with prior years. Due to the competitive nature of the business, revised terms with customers may impact our ongoing profitability. We have taken and expect to continue to take steps to improve operating efficiencies and minimize or resist price reductions. As a result, we may choose to no longer continue programs with certain customers due to unacceptable competitive pricing or terms. While these decisions impact net sales and operating income in the short term, we believe this operating discipline will help to maximize the long-term profitability of the Company.



Material and commodity price fluctuations

Overall commodity price fluctuation is an ongoing concern for our business and has been an operational and financial focus. We have pass-through pricing agreements with a number of our customers that reduce our exposure to metals price volatility. Where metals price volatility is not covered by customer agreements, we utilize hedging instruments where appropriate, particularly related to copper, and consider their cost and their effectiveness. Average copper prices were lower for the quarter ended June 30, 2014 than for the same period in 2013. In our remanufacturing operations, our principal inputs are cores, approximately 90% of which we receive in exchange for remanufactured units. Cores are used starters or alternators that customers exchange when they purchase new products. If usable, we refurbish these cores into a remanufactured product that we sell to our aftermarket customers. When we are required to purchase cores rather than receiving them in exchange for remanufactured units, we are affected by market pricing of cores. The cost of cores fluctuates based on a number of factors, including supply and demand and the underlying value of the commodities that the cores contain. 30

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Foreign currencies

During the first six months of 2014, approximately 35% of our net sales were transacted outside the United States. The functional currency of our foreign operations is generally the local currency, while our financial statements are presented in U.S. dollars. Foreign exchange has an unfavorable impact on net sales when the U.S. dollar is relatively strong as compared with foreign currencies and a favorable impact on net sales when the U.S. dollar is relatively weak as compared with foreign currencies. While we employ financial instruments to hedge certain exposures related to transactions from fluctuations in foreign currency exchange rates, these hedging actions do not entirely insulate us from currency effects and such programs may not always be available to us at economically reasonable costs. During the first six months of 2014, we experienced a negative impact from foreign currency effects on our reported earnings in U.S. dollars compared to the first six months of 2013, primarily resulting from the results denominated in other currencies, mainly the Mexican Peso, South Korean Won, Brazilian Real and the Euro.



Operation efficiency efforts

In general, our long-term objectives are geared toward profitably growing our business, expanding our innovative technologies, winning new contracts, generating cash and strengthening our market position. On an ongoing basis, we evaluate our competitive position and determine what actions may be required to maintain and improve that position. We continue to focus on investing appropriate levels of capital to support anticipated expansion in significant growth markets, such as China. We continued to incur start-up costs associated with our manufacturing and engineering facility in Wuhan, China which began production in the second quarter of 2013. These investments are critical as they position us to benefit from expected long-term growth opportunities. We believe that a continued focus on research, development and engineering activities is critical to maintaining our leadership position in the industry and meeting our long-term objectives. As a result, we continue our commitment to invest in facilities and infrastructure in order to support new business awards and achieve our long-term growth plans. Although we believe that we have established a firm foundation for profitability, we continue to evaluate our global manufacturing and supply chain to further streamline our operations. We have completed the transfer of production from our Mezokovesd, Hungary plant to our other facilities in Hungary, Mexico and Korea and substantially completed the closure of our Mezokovesd, Hungary plant. In addition, during 2014, we consolidated our Mexico operations to better manage our cost structure.



Non-U.S. GAAP measurements - Adjusted EBITDA

Adjusted EBITDA is not a measure of performance defined in accordance with accounting principles generally accepted in the United States (U.S. GAAP). We use adjusted EBITDA as a supplement to our U.S. GAAP results in evaluating our business. Other companies in our industry define adjusted EBITDA differently from us and, as a result, our measure is not comparable to similarly titled measures used by other companies in our industry. We define adjusted EBITDA as net income attributable to common stockholders before interest expense-net, income tax expense, depreciation and amortization, stock-based compensation expense, net income attributable to noncontrolling interest, restructuring, other charges and other impairment charges, loss on extinguishment of debt and refinancing fees, executive officer separation cost, certain purchase accounting finished goods inventory step-up costs and other adjustments as set forth in the reconciliations provided below. Adjusted EBITDA is one of the key factors upon which we assess performance. As an analytical tool, adjusted EBITDA assists us in comparing our performance over various reporting periods on a consistent basis because it excludes items that we do not believe reflect our ongoing operating performance. Adjusted EBITDA should not be considered as an alternative to net income as an indicator of our performance, as an alternative to net cash provided by operating activities as a measure of liquidity, or as an alternative to any other measure prescribed by U.S. GAAP. There are limitations to using non-U.S. GAAP measures such as adjusted EBITDA. Although we believe that adjusted EBITDA may make an evaluation of our operating performance more consistent because it removes items that do not reflect our ongoing operations, adjusted EBITDA excludes certain financial information that some may consider important in evaluating our performance. 31

-------------------------------------------------------------------------------- The following table sets forth a reconciliation of adjusted EBITDA to its most directly comparable U.S. GAAP measure, net income attributable to common stockholders: Three months ended June 30, Six months ended June 30, (In thousands) 2014 2013 2014 2013 Net income attributable to common stockholders $ 9,956$ 11,368$ 19,423$ 12,648 Adjustments: Interest expense-net 5,390 3,731 11,026 10,068 Income tax expense 6,792 4,963 12,503 6,675 Depreciation and amortization 10,161 8,809 18,816 17,022 Stock-based compensation expense 1,342 1,749 2,561 3,246 Net income attributable to noncontrolling interest - 96 - 659 Restructuring and other charges 79 2,128 393 2,809 Loss on extinguishment of debt and refinancing fees - - - 4,256 Executive officer separation - - - 7,000 Purchase accounting finished goods inventory step-up 965 - 3,474 - Other 49 368 49 104 Total adjustments 24,778 21,844 48,822 51,839 Adjusted EBITDA $ 34,734$ 33,212$ 68,245$ 64,487 32

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Results of operations

The following table presents our consolidated results of operations for the three months ended June 30, 2014 compared to the three months ended June 30, 2013: Three months ended June 30, Increase/ % Increase/ (In thousands) 2014 2013 (Decrease) (Decrease) Net sales $ 299,293$ 282,349$ 16,944 6.0 % Cost of goods sold 241,147 227,648 13,499 5.9 % Gross profit 58,146 54,701 3,445 6.3 % Selling, general, and administrative expenses 35,929 32,415 3,514 10.8 % Restructuring and other charges 79 2,128 (2,049 ) (96.3 )% Operating income 22,138 20,158 1,980 9.8 % Interest expense-net 5,390 3,731 1,659 44.5 % Income before income taxes 16,748 16,427 321 2.0 % Income tax expense 6,792 4,963 1,829 36.9 % Net income 9,956 11,464 (1,508 ) (13.2 )% Less net income attributable to noncontrolling interest - 96 (96 ) (100.0 )% Net income attributable to common stockholders $ 9,956$ 11,368$ (1,412 ) (12.4 )% Net sales Net sales increased by $16.9 million, or 6.0%, to $299.3 million for the three months ended June 30, 2014, from $282.3 million for the same period in 2013. The increase in net sales was driven by increased volume and mix of $19.9 million, including $8.5 million in second quarter sales from the acquisition of USA Industries, and favorable foreign currency translation of $4.1 million. These increases in net sales were partially offset by negative pricing impact of $7.1 million. Net sales of new starters and alternators to OEMs in the three months ended June 30, 2014 decreased in light vehicle products which was offset by an increase in commercial vehicle products. Net sales of light vehicle starters and alternators to OEMs were $92.2 million in the three months ended June 30, 2014, a $3.5 million, or 3.7%, decrease compared to $95.7 million in the same period in 2013. These reductions are mainly driven by the end of certain North American programs offset by new programs and growth in China. Net sales of commercial vehicle starters and alternators were $80.3 million in the three months ended June 30, 2014, a $8.2 million, or 11.4%, increase compared to $72.1 million in the same period in 2013 driven primarily by higher volumes. We also sold $3.5 million of hybrid electric motors to OEMs in the three months ended June 30, 2014, as compared to $4.5 million in the same period in 2013. Net sales of light vehicle products to aftermarket customers were $91.9 million in the three months ended June 30, 2014, a $10.8 million, or 13.3% increase from $81.1 million in the same period in 2013. The increase is primarily a result of sales from the USA Industries acquisition and higher volumes as we experienced strong orders from our retail customers during the quarter. Net sales of starters and alternators for commercial vehicles to aftermarket customers were $16.2 million in the second quarter of 2014, a decrease of $1.6 million, or 9.0% from $17.8 million in the second quarter of 2013. Net sales of remanufactured locomotive power trains and multi-line products, which consist of a small volume of remanufactured steering gears and brake calipers that we sell in the United States and Europe, to aftermarket customers, were $15.3 million in the three months ended June 30, 2014, a $4.1 million, or 36.6% increase from the same period in 2013 primarily driven by the sales of the USA Industries acquisition. 33

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Cost of goods sold

Cost of goods sold primarily represents materials, labor and overhead production costs associated with our products and production facilities. Cost of goods sold was $241.1 million in the three months ended June 30, 2014 and $227.6 million in the three months ended June 30, 2013, an increase of $13.5 million, or 5.9%. The increase was mainly due to higher sales volumes. During the three months ended June 30, 2014, we recognized approximately $1.0 million related to the step-up of finished goods inventory and $0.3 million in amortization expense associated with the USA Industries acquisition. Cost of goods sold as a percentage of net sales remained consistent during the three months ended June 30, 2014 compared to the same period of 2013 at 80.6%.



Gross profit

As a result of the above changes in net sales and cost of goods sold, gross profit as a percentage of net sales remained consistent at 19.4% for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.

Selling, general and administrative expenses

For the three months ended June 30, 2014, selling, general and administrative expenses was $35.9 million, which represents an increase of $3.5 million, or 10.8%, from $32.4 million for the three months ended June 30, 2013. The increase was primarily related to the additional selling, general and administrative expenses associated with the USA Industries acquisition, as well as, increased legal and professional fees and consulting fees associated with certain strategic initiatives in the three months ended June 30, 2014.



Restructuring and other charges

Restructuring and other charges decreased by $2.0 million, to $0.1 million for the three months ended June 30, 2014 compared to $2.1 million for the same period in 2013. The decrease in restructuring expense for the three months ended June 30, 2014 primarily related to the closure of our Mezokovesd, Hungary in 2013 resulting in limited restructuring costs in the quarter ended June 30, 2014.



Interest expense-net

Interest expense-net increased by $1.7 million to $5.4 million for the three months ended June 30, 2014 from $3.7 million in the same period in 2013. The increase was primarily driven by unfavorable changes in the valuation of our undesignated interest rate swap contracts of $2.0 million.



Income tax expense

Income tax expense increased by $1.8 million to $6.8 million for the three months ended June 30, 2014 from $5.0 million for the same period in 2013. The increase is primarily driven by changes in the effective tax rate due to the effect of foreign taxable income, valuation allowance utilization in certain foreign jurisdictions, and tax credits recognized in the quarter ended June 30, 2013.



Net income attributable to common stockholders

Our net income attributable to common stockholders for the three months ended June 30, 2014 was $10.0 million as compared to $11.4 million for the three months ended June 30, 2013, for the reasons described above. In addition, there was no income attributable to the noncontrolling interest during the three months ended June 30, 2014 due to our June 2013 acquisition of the remaining 49% noncontrolling ownership interest of our Chinese joint venture, Remy Hubei Electric Co. Ltd. 34

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The following table presents our consolidated results of operations for the six months ended June 30, 2014 compared to the six months ended June 30, 2013:

Six months ended June 30, Increase/ % Increase/ (In thousands) 2014 2013 (Decrease) (Decrease) Net sales $ 599,587$ 564,076$ 35,511 6.3 % Cost of goods sold 486,974 454,396 32,578 7.2 % Gross profit 112,613 109,680 2,933 2.7 % Selling, general, and administrative expenses 69,268 72,565 (3,297 ) (4.5 )% Restructuring and other charges 393 2,809 (2,416 ) (86.0 )% Operating income 42,952 34,306 8,646 25.2 % Interest expense-net 11,026 10,068 958 9.5 % Loss on extinguishment of debt and refinancing fees - 4,256 (4,256 ) (100.0 )% Income before income taxes 31,926 19,982 11,944 59.8 % Income tax expense 12,503 6,675 5,828 87.3 % Net income 19,423 13,307 6,116 46.0 % Less net income attributable to noncontrolling interest - 659 (659 ) (100.0 )% Net income attributable to common stockholders $ 19,423$ 12,648$ 6,775 53.6 % Net sales Net sales increased by $35.5 million, or 6.3%, to $599.6 million for the six months ended June 30, 2014, from $564.1 million for the same period in 2013. The increase in net sales was driven by increased volume and mix of $41.3 million, including $16.5 million in sales from the acquisition of USA Industries, and favorable foreign currency translation of $4.7 million. These increases in net sales were partially offset by negative pricing impact of $10.5 million. Net sales of new starters and alternators to OEMs in the six months ended June 30, 2014 decreased in light vehicle products which was offset by an increase in commercial vehicle products. Net sales of light vehicle starters and alternators to OEMs were $181.4 million in the six months ended June 30, 2014, a $11.3 million, or 5.9%, decrease compared to $192.7 million in the same period in 2013. These reductions are mainly driven by the end of certain North American programs offset by new programs and growth in China. Net sales of commercial vehicle starters and alternators were $153.1 million in the six months ended June 30, 2014, a $17.2 million, or 12.7%, increase compared to $135.9 million in the same period in 2013 driven primarily by higher volumes due to the severe cold weather in early 2014. We also sold $7.4 million of hybrid electric motors to OEMs in the six months ended June 30, 2014, as compared to $10.5 million in the same period in 2013. Net sales of light vehicle products to aftermarket customers were $193.0 million in the six months ended June 30, 2014, a $26.3 million, or 15.8% increase from $166.7 million in the same period in 2013. The increase is primarily a result of sales from the USA Industries acquisition and higher volumes as we experienced strong orders from our retail customers during the six month period. Net sales of starters and alternators for commercial vehicles to aftermarket customers were $33.9 million in the six months ended June 30, 2014, a decrease of $3.3 million, or 8.9% from $37.2 million in the same period in 2013. Net sales of remanufactured locomotive power trains and multi-line products, which consist of a small volume of remanufactured steering gears and brake calipers that we sell in the United States and Europe, to aftermarket customers, were $30.8 million in the six months ended June 30, 2014, a $9.7 million, or 46.0% increase from the same period in 2013 primarily driven by the sales of the USA Industries acquisition. 35

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Cost of goods sold

Cost of goods sold primarily represents materials, labor and overhead production costs associated with our products and production facilities. Cost of goods sold was $487.0 million in the six months ended June 30, 2014 and $454.4 million in the six months ended June 30, 2013, an increase of $32.6 million, or 7.2%. The increase was mainly due to higher sales volumes. During the six months ended June 30, 2014, we recognized approximately $3.5 million related to the step-up of finished goods inventory and $0.6 million in amortization expense associated with the USA Industries acquisition. As a result, cost of goods sold as a percentage of net sales slightly increased during the six months ended June 30, 2014 to 81.2%, from 80.6% in 2013.



Gross profit

As a result of the above changes in net sales and cost of goods sold, gross profit as a percentage of net sales decreased slightly to 18.8% for the six months ended June 30, 2014 as compared to 19.4% for the six months ended June 30, 2013.

Selling, general and administrative expenses

For the six months ended June 30, 2014, selling, general and administrative expenses, or SG&A, was $69.3 million, which represents a decrease of $3.3 million, or 4.5%, from selling, general and administrative expenses of $72.6 million for the six months ended June 30, 2013. The decrease was primarily related to a one-time charge representing a $7.0 million lump sum cash payment made to our former President and Chief Executive Officer pursuant to the terms of a Transition, Noncompetition and Release Agreement effective February 28, 2013. This was partially offset by an increase in selling, general and administrative expenses associated with the USA Industries acquisition, as well as, increased legal and professional fees and consulting fees associated with certain strategic initiatives in the six months ended June 30, 2014.



Restructuring and other charges

Restructuring and other charges decreased by $2.4 million, to $0.4 million for the six months ended June 30, 2014 compared to $2.8 million for the same period in 2013. The decrease in restructuring expense for the six months ended June 30, 2014 primarily related to the closure of our Mezokovesd, Hungary in 2013 resulting in limited restructuring costs in the quarter ended June 30, 2014.



Interest expense-net

Interest expense-net increased by $0.9 million to $11.0 million for the six months ended June 30, 2014 from $10.1 million in the same period in 2013. The increase was primarily driven by unfavorable changes in the valuation of our undesignated interest rate swap contracts of $2.4 million, partially offset by a decrease in our interest rate on debt from 6.25% through March 5, 2013 to 4.25% in 2013 due to the refinancing of the Term B loan.



Loss on extinguishment of debt and refinancing fees

During the six months ended June 30, 2014, no amounts were recorded for loss on extinguishment of debt and refinancing fees. During the six months ended June 30, 2013, loss on extinguishment of debt and refinancing fees of $4.3 million was related to the refinancing of our Term B Loan syndication.



Income tax expense

Income tax expense increased by $5.8 million to $12.5 million for the six months ended June 30, 2014 from $6.7 million for the same period in 2013. The increase is primarily driven by the increase in income before income taxes in 2014 compared to the same period in 2013.



Net income attributable to common stockholders

Our net income attributable to common stockholders for the six months ended June 30, 2014 was $19.4 million as compared to $12.6 million for the six months ended June 30, 2013, for the reasons described above. In addition, there was no income attributable to the noncontrolling interest during the six months ended June 30, 2014 due to our June 36

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2013 acquisition of the remaining 49% noncontrolling ownership interest of our Chinese joint venture, Remy Hubei Electric Co. Ltd.

Liquidity and capital resources

Our cash requirements generally consist of working capital, capital expenditures, research and development programs, debt service and dividends. Our primary sources of liquidity are cash flows generated from operations and the various borrowing and factoring arrangements described below, including our revolving credit facility. We actively manage our working capital and associated cash requirements and continually seek more effective use of cash. We believe that cash generated from operations, together with the amounts available under financing arrangements discussed below, as well as cash on hand, will be adequate to meet our liquidity requirements for at least the next twelve months. If we make a large acquisition or engage in certain other strategic transactions, we may need to enter into additional borrowing arrangements or obtain additional equity capital. No assurance can be given that such funds would be available to us at such time. As of June 30, 2014, we had cash and cash equivalents on hand of $56.2 million representing a $58.7 million decrease compared to the $114.9 million cash and cash equivalents on hand as of December 31, 2013. Total liquidity as of June 30, 2014, including cash on hand, availability under the ABL First Amendment, and availability under short-term debt credit facilities, was $152.5 million.



On May 9, 2014, Standard and Poors (S&P) upgraded our corporate credit rating from B+ to BB- on improved financial metrics.

Cash flows

The following table shows the components of our cash flows for the periods presented: Six months ended June 30, (In thousands) 2014 2013



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

$ 40,684 $



31,678

Changes in operating assets and liabilities (44,746 ) (41,618 ) Operating activities (4,062 ) (9,940 ) Investing activities (51,617 ) (12,936 ) Financing activities (4,674 ) (25,331 )



Cash flows-Operating activities

Cash used in operating activities was $4.1 million versus $9.9 million for the six months ended June 30, 2014 and 2013, respectively. The increase in operating cash flows from 2013 was primarily a result of the increase in net income as discussed above. Operating cash flows were increased by approximately $44.7 million as a result of extended vendor payment terms, as well as mix of purchases increasing our days payable outstanding during the six months ended June 30, 2014. In addition, higher cash collection from customers due to higher net sales of $16.9 million in 2014 increased operating cash flows period over period. These positive cash flows were offset by a $42.8 million decrease in operating cash flows driven primarily by the mix of sales in geographic regions with longer payment terms and timing of amounts factored during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. Additionally, we experienced a decrease in operating cash outflows for expenditures on inventory replenishment of approximately $18.6 million in 2014 to support the increased sales levels. Cash payments related to our incentive compensation plans were lower by $7.2 million during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. The decrease was primarily related to a one- 37 -------------------------------------------------------------------------------- time $7.0 million lump sum cash payment for executive separation costs incurred in 2013. Cash payments for restructuring charges were $3.7 million lower due to the nature and timing of restructuring actions. Cash paid for interest for the six months ended June 30, 2014 was $9.8 million as compared to $11.2 million for the six months ended June 30, 2013, a decrease of $1.4 million. Cash payments were lower primarily due to the refinancing of our Amended and Restated Term B Loan Credit Agreement on March 5, 2013. Cash paid for taxes for the six months ended June 30, 2014 was $9.3 million, compared to $4.2 million for the six months ended June 30, 2013, an increase of $5.1 million. The reason for the increase was primarily due to higher foreign cash payments as a result of higher foreign income before taxes in 2014.



Cash flows-Investing activities

Cash used in investing activities for the six months ended June 30, 2014 was $51.6 million representing a $38.7 million increase over the $12.9 million cash used in investing activities for the six months ended June 30, 2013. The increase was primarily due to $40.1 million in net cash disbursements related to the USA Industries acquisition.



Cash flows-Financing activities

Cash used in financing activities for the six months ended June 30, 2014 was $4.7 million, compared to cash provided by financing activities of $25.3 million for the six months ended June 30, 2013. During the six months ended June 30, 2014, we paid $6.5 million in quarterly cash dividends to our common stockholders, as declared by our Board of Directors, which was consistent with quarterly cash dividends paid in the prior year period. We also repurchased $2.5 million of our common stock to satisfy tax withholding obligations of participants under our stock-based compensation programs during the six months ended June 30, 2014, as compared to $1.2 million during the six months ended June 30, 2013. In connection with the vesting of restricted stock grants during the first quarter of 2014, we also recognized an excess tax benefit of $1.1 million, compared to no excess tax benefit recorded in the first six months of 2013. The increase in short-term debt proceeds was related to borrowings on our revolving credit facilities. In March 2014, we entered into a revolving credit facility in China with one bank for $10.0 million of which $4.9 million was borrowed and remained outstanding at June 30, 2014. We also borrowed and repaid $4.2 million on the Asset-Based Revolving Credit Facility during the six months ended June 30, 2014. These borrowings were for funding our China operations and for general corporate working capital purposes.



In 2013, we refinanced our $287.0 million Term B Loan with an Amended and Restated Term B Loan Credit Agreement and received $299.3 million in proceeds, which was offset by deferred financing fees of $3.4 million.

As previously discussed, we acquired the remaining 49% noncontrolling ownership interest of our Chinese joint venture, Remy Hubei Electric Co. Ltd. ("REH") for $14.6 million, consisting of cash payment of $8.1 million and dividends declared and subsequently paid to the noncontrolling interest holder in excess of their ownership percentage of $6.5 million.



Debt and Capital Structure

First Amendment to ABL Revolver Credit Agreement

On March 5, 2013, we entered into a First Amendment to our existing ABL Revolver Credit Agreement ("ABL First Amendment") to extend the maturity date of the Asset-Based Revolving Credit Facility ("ABL") from December 17, 2015 to September 5, 2018 and reduce the borrowing rate. The ABL First Amendment bears an interest rate to a defined Base Rate plus 0.50%-1.00% per year or, at our election, at an applicable LIBOR Rate plus 1.50%-2.00% per year and is paid monthly. The ABL First Amendment maintains the current availability at $95,000,000, but may be increased, under certain circumstances, by $20,000,000. The ABL First Amendment is secured by substantially all domestic accounts receivable and inventory. At June 30, 2014, the ABL First Amendment balance was zero. Based upon the collateral supporting the ABL First Amendment, the amount borrowed, and the outstanding letters of credit of $14,035,000, there was additional availability for borrowing of $79,646,000 on June 30, 2014. We will incur an unused commitment fee of 0.375% on the unused amount of commitments under the ABL First Amendment. 38

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Amended and Restated Term B Loan Credit Agreement

On March 5, 2013, we entered into a $300,000,000 Amended and Restated Term B Loan Credit Agreement ("Amended and Restated Term B Loan") to refinance the existing $286,978,000 Term B Loan, extend the maturity from December 17, 2016 to March 5, 2020, and reduce the borrowing rate. The Amended and Restated Term B Loan bears an interest rate consisting of LIBOR (subject to a floor of 1.25%) plus 3.00% per year with an original issue discount of $750,000. The Amended and Restated Term B Loan also contains an option to increase the borrowing provided certain conditions are satisfied, including maintaining a maximum leverage ratio. The Amended and Restated Term B Loan is secured by a first priority lien on the stock of our subsidiaries and substantially all domestic assets other than accounts receivable and inventory pledged to the ABL First Amendment. Principal payments in the amount of $750,000 are due at the end of each calendar quarter with termination and final payment no later than March 5, 2020. The Amended and Restated Term B Loan is subject to an excess cash calculation which may require the payment of additional principal on an annual basis. At June 30, 2014, the average borrowing rate, including the impact of the interest rate swaps, was 4.25%. See Note 12 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for a description of our revolving credit facility and for more details on the ABL First Amendment and Amended and Restated Term B Loan. Under normal working capital utilization of liquidity, portions of the amounts drawn under our credit facilities typically are paid back throughout the month as cash from customers is received. We could then draw upon such facilities again for working capital purposes in the same or succeeding months. The agreement that governs our senior secured revolving credit facility contains a number of covenants, including financial covenants, that would impact our ability to borrow on the facility if not met. These covenants include restrictive covenants that restrict, among other things, the ability to incur additional indebtedness and pay cash dividends on our common stock. The facility also includes customary events of default, including breach of covenant and cross-defaults to certain other debt. As of June 30, 2014, we were in compliance with all of our covenants.



Non-U.S. borrowing arrangements

At June 30, 2014, our subsidiaries outside the U.S. also had various uncommitted credit facilities, of which $16.7 million was not utilized. We expect that these additional facilities will be drawn on from time to time for normal working capital purposes and to fund capital expenditures in support of operations and planned expansions in certain regions. See Note 12 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for a description of our short term debt. For further description of our outstanding debt, see Note 12 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report. Factoring agreements We have also entered into factoring agreements with various domestic and European financial institutions to sell our accounts receivable under nonrecourse agreements. These transactions are accounted for as a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivables to the buyers. We do not service any factored accounts after the factoring has occurred. See Note 4 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for a description of our factoring arrangements. 39 --------------------------------------------------------------------------------



Contractual obligations

There were no material changes in our contractual obligations during the six months ended June 30, 2014 from what was previously described in our Annual Report on Form 10-K for the year ended December 31, 2013, other than related to the leases discussed below. As a result of facility lease renewals in Mexico and facility leases we acquired in connection with the January 2014USA Industries acquisition, cash payments under our operating lease arrangements have changed from what was previously described in our Annual Report on Form 10-K for the year ended December 31, 2013. In Mexico, we amended our existing operating lease at our Piedras Negras facility, which requires total minimum lease payments of $1.0 million through 2015. We also entered into a new operating lease for our Mexico OE facility, which requires total minimum lease payments of $3.7 million through 2017. In connection with the USA Industries acquisition, we acquired operating leases for facilities in Texas, California, and New York, which require future cash payments of $2.5 million over the remaining lease terms through 2018.



Contingencies

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



Off-Balance sheet arrangements

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

Accounting pronouncements

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



Critical accounting policies and estimates

Our accounting policies require management to make significant estimates and assumptions using information available at the time the estimates are made. Actual amounts could differ significantly from these estimates. See Note 2 to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report for a summary of the significant accounting policies and methods used in the preparation of our unaudited condensed consolidated financial statements. A detailed description of our significant accounting policies is included in Note 2 to our audited consolidated financial statements included in our Annual Report for Form 10-K for the year ended December 31, 2013. There have been no significant changes in our critical accounting policies and estimates during the six months ended June 30, 2014.


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